If we were to compare the developments in UK pensions in 2010 to a football match, it might be described as a classic game of two halves – with the half time whistle being blown a little early in May for the General Election.

Unlike most football games, there was a new coalition referee for the second-half who decided that some of the goals in the first half were under review. If fans were feeling a little cheated at this point, they soon got over it as the second half began with a flurry of events, announcements, consultations, surveys, opinions, discussions, guidance, strikes and so on – I even recall someone saying at a meeting in June that they were unable to offer an opinion on the market because they had been on holiday for a week.

With so much having happened in 2010, and as we begin the countdown to Christmas and the New Year, we thought it might be useful to look back, sort the fact from the fiction and offer a post match summary of what actually happened.

Please let us know if we have missed anything out, what’s affected you most or what is likely to go down as the big story of 2010 in years to come – there’s plenty to choose from.

A new Government
In the first four months of the year, under Gordon Brown’s leadership, the DWP published regulations for Automatic Enrolment and National Employment Savings Trust (NEST) and confirmed that the option to contract out of the additional State Pension into a Defined Contribution pension scheme would be abolished from 6 April 2012.

But did it all matter when, after 6 days of uncomfortable behind-the-scenes negotiations, the Labour Government was replaced by the newly formed Conservative and Lib Deb Coalition on 12th May.

With the new government came a new lineup under David Cameron: George Osborne as the Chancellor of the Exchequer, Iain Duncan Smith as Secretary of State for Work & Pensions and Steve Webb as Minister for Pensions.

Some strong statements and intentions followed soon afterwards. IDS was first up with his vision for improving the quality of life by phasing out the default retirement age, ending compulsory annuitisation at age 75 and, from April 2011, the Basic State Pension was to rise by the minimum of prices, earnings or 2.5%, whichever is higher. He also committed to making automatic enrolment and increased pension saving a reality.

Next it was George Osborne with the first Budget of the Coalition Government on 22nd June, which included a number of announcements on pensions:

• Pensions Indexation. From April 2011, the Consumer Prices Index (CPI) will be used for the indexation of all benefits, tax credits and public service pensions.
• State Pensions and Benefits. From April 2011, the basic State Pension will be uprated by the higher of earnings, prices or 2.5 per cent. CPI will be used as the measure of prices but the basic State Pension will be uprated by the equivalent of RPI in April 2011.
• State Pension Age. The Government will review the date at which the State Pension Age rises to 66.
• Pensions Tax Relief. The Government will restrict pensions tax relief through an approach involving reform of existing allowances, principally of a significantly reduced annual allowance in the range of £30,000 to £45,000.
• Public Service Pensions. An independent commission chaired by John Hutton, formerly Secretary of State for Work and Pensions, will undertake a fundamental structural review of public service pension provision by Budget 2011.
• Default Retirement Age. The Government will consult shortly on how it will quickly phase out the Default Retirement Age from April 2011.

Two days later, reviews were announced into the timing of the State Pension Age rise to 66 and how best to implement auto-enrolment.

We all caught our breath for a few months and then, in October, the Government announced that, from April 2011, the annual allowance for tax privileged pension saving will be £50,000 and from April 2012 the lifetime allowance will be £1.5million.

Soon after, the outcome of the independent review into auto-enrolment was published and, separately, the Government announced that the State Pension age would rise from 65 to 66 between December 2018 and April 2020 for both men and women.

The Pensions Regulator flexes its muscles
Bill Galvin became the new chief executive of tPR from 17 May, replacing Tony Hobman, after five years in charge.

Soon after, guidance was issued on record keeping, monitoring employer support, multi-employer schemes and winding-up. Consultations were launched on transfer incentives and single equality schemes.

From June to September tPR used its powers of enforcement, handing out the first Contribution Notice to the Bonas Group Pension Scheme and a Financial Support Direction to companies connected with the Nortel Group and Lehman Brothers Group.

After four years of operating the Trustee Register, tPR changed the way it assesses the conditions for registration. From 51 firms at the start of the year, it is expected that this number will be considerably less by the year-end.

and the PPF was busy too
January and November saw the PPF unveil not one but two Purple books as a revamp took place and those schemes currently in the assessment period were removed.

June was the month the PPF issued new guidance to actuaries completing section 143 valuations and in October a new formula was proposed for calculating the pension protection levy from 2012/13 onwards.

Finally, as the year approached its end, the first scheme (the Paterson Printing Pension Scheme) successfully transferred through the new Assess & Pay Programme, just under 18 months after the company went insolvent.

How 2010 is shaping up – end of year financials
As we write, the pound is up 4.5% in the year against the Euro and down 3.5% against the dollar, the FTSE 100 sits around the 5750 mark, up 6% on the year, and the benchmark government bond yield has hardly moved compared to a year ago. Wouldn’t it be great if these relatively moderate movements were the result of a number of small predictable steps in one direction throughout the year and we knew what was going to happen next year? If only it was that easy when we agreed our recovery plans.

No doubt many of us will end the year by looking to the future. Will 2011 be the year that EU regulation imposes further funding requirements on defined benefit schemes? How will the rpi/cpi debate play out? Will new rules allow early access to 25% of our pensions savings if we fall ill? How about an ETV mis-selling scandal? Like 2010, a lot could happen. Please let us know what your predictions and concerns might be.

But before you become too paralysed with fear about potential hyper-inflation, the break-up of the European Union, winning the Ashes or never hosting the World Cup, you may wish to consider the words of Mark Twain: “I’ve been through some terrible things in my life, some of which actually happened”.

With Seasonal Best Wishes,
Brian Spence and the team at Spence & Partners

Posted in: Blog
Tags: Legislation, Pensions Regulator, Politics, PPF

Northern Ireland is an excellent place to employ skilled and highly qualified graduates – Spence & Partners have, since the firm was founded in Northern Ireland in 2000, built a reputation for actuarial quality and innovation.

Major consulting firm Mercer have announced a major investment funded by  £450,000 of public money from InvestNI, Northern Ireland’s business development agency to, according to the Belfast Telegraph, provide almost 50 actuarial back-office jobs supporting Mercer’s European business and supporting annual salaries of over £1million.

New employment locally is always great news.

However good this news however I hope that this type of investment will create long term employment and skills in the Province.

Spence & Partners was formed during 2000 by a group of ex-Mercer consultants and whilst not wishing to blow our own trumpet we have developed alongside our sister company, independent trustee, Dalriada Trustees, a UK wide business with £4.5 million turnover and we employ over 50 people in the UK (many of whom are in our office in Belfast).  We too have enjoyed some support from InvestNI, albeit a much more modest figure than Mercer, and we are particularly grateful for their assistance in funding development of a document management system in 2009/10.

Our profits have been in the main reinvested in innovation and the development of our business.

On a slightly cautious note it is less than two years that Mercer closed their pensions administration unit in Belfast with the loss of about 10 jobs, several of whom we were privileged to be able to employ after they were made redundant.  Inward investment can be great but jobs, particularly back-office jobs can also be transferred elsewhere as industries and business models change.

However we welcome this announcement.

Hopefully this investment will provide jobs for some of  the first students graduating with a BSc in Actuarial Science and Risk Management from The Queen’s University of Belfast.  Spence & Partners have taken two students a year in recent years on placement during their degree course and we look forward to employing some graduates in future years.  A big change from the days when we would bemoan the lack of Northern Ireland graduates with actuarial or other financial services qualifications.

Hopefully Mercer will provide the Province with skilled people some of whom will wish, in time, to be involved in actuarial work beyond the back office.

Maybe some of them will eventually start their own firms like we did.  I hope in time some of the more ambitious of them will join Spence & Partners, where albeit on a tiny scale compared with Mercer Belfast is the Joint (with Glasgow) World HQ, not the European back office.

Hopefully other actuarial employers will join Mercer and Spence & Partners in seeing Belfast as a great place to be located.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

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Notes on the Pensions Regulator’s draft Guidance on Transfer Incentives by actuaries Spence & Partners and professional trustees Dalriada Trustees Limited.

Posted in: Blog
Tags: DB to DC Pension transfers, DB to DC Transfers, Enhanced Transfer Exercises, Pensions Regulator, Transfer Values

At the end of July by the Department of Work and Pensions published a consultation document entitled  ”Abolition of contracting-out on a defined contribution basis: consultation on draft consequential legislation.”

Hidden within the document (it takes some finding) and then cross referencing  the Contracting-out (Transfer and Transfer Payments) Regulations 1996 (what would we do without Pendragon Perspective!) and it becomes clear – no transfers of GMPs or of post 1997 contracted-out rights will be permitted from DB pension schemes to either occupational DC pension schemes or to personal pensions from 6 April 2012.

Who saw that coming?  The vast majority of DB pension rights are now locked into the DB pensions funding regime until the last member dies, a regulated buy-out is transacted or the sponsor goes bust.

Deferred pension scheme members who may have been thinking for some time about transferring to a personal pension will need to make their mind up soon.  There is a minority of people who would be well advised to take transfers, for example some of those in poor health or without dependents.  Schemes will undoubtedly have to deal with an increased incidence of transfer requests for 18 months and virtually none thereafter.

The whole new industry that has developed around transfer incentives will come to an end.  From the point of view maximising individual choice this is not a good development but there are a number of practitioners who have advised employers to conduct enhanced transfer value exercises in a manner that will in all likelihood result in many of those members who have been advised to transfer coming to regret the advice they have received.

The Pension Regulator’s recent consultation on the subject seemed a rather limp response to some very poor practices on the part of some advisers but maybe this latest announcement goes some way to explaining why.  If the Pensions Regulator and the Financial Services Authority cannot regulate Enhanced Transfer Value Exercises (and certainly over the last few years it is clear that they have failed to do so) then banning transfers seems a logical step.  Whilst we understand the move by the new Pensions Minister Steve Webb, it is a pity that the price of this regulatory failure is to deprive the minority of people who could gain by transferring of that option. It is a price worth paying to protect the majority from the detriment caused by the predatory and harmful practices that have developed.

The whole area of calculating transfer value equivalents to DB benefits has been fraught with difficulty – the mis-selling of the late 1980s and early 1990s having been improved on by some firms only a little in more recent years.

There does however seem to be a high chance of a firesale over the next 18 months as individuals take a final look at their affairs and decide once and for all on whether to transfer out to a personal pension or DC scheme and as employers contemplate making a final and best offer to incentivise deferred members to take their liabilities and leave the scheme.  Hopefully employers and trustees will take the proposed new Guidance from the Pensions Regulator to heart and conduct these exercises in an appropriate manner.  The appointment of an independent trustee in such cases to eliminate conflicts of interest would be good start.

We have argued several times that transfer incentives properly conducted are a legitimate and proper technique for employers to manage their liabilities and at the same time would be happy to advise any employers looking to achieve a fair win/win result in the limited time that now appears to be available or indeed any trustees seeking to meet the demanding new expectations of the Regulator.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Posted in: Blog
Tags: Contracting-out, DB to DC Transfers, Enhanced Transfer Exercises, FInancial Services Authority, GMPs, Liability Reshaping, Pensions Regulator, Transfer Incentives, Transfer Values

I have a dilemma.  In late 2009 we bought a new house in the Mourne Mountains with a wood pellet boiler with the promise of low heating bills and endless hot water.

Prior to this I had lived almost a half century without knowing what an auger is and with fuel either on tap or at worst at the end of a phone.

With 14 days lead in time turning to 21 in snow and efficiency only achieved with much cleaning and maintenance, it is clear that the unhedged downside risks of wood pellets are too painful to contemplate on an ongoing basis (such as returning home to a cold house after a weekend away).

It just struck me how similar the options are to those facing pension scheme trustees.

Replacing the wood pellet boiler means “fire and forget” like buy-out or full matching.  Seems like an expensive option on the face of it but little or no maintenance.

Or

Trust in wood pellets to deliver returns without too bumpy a ride (equities): high maintenance but with the promise of low costs in the long run.  You can even have an automated GSM text sent to tell you when the boiler has failed (any chance of including this in a fiduciary management mandate)?

Or

Hedge my bets.  Go for the benefits of wood pellets but buy an oil boiler as back-up – bit like LDI.  Still got the maintenance and the potential upside but the maintenance cost is steep.

My logical head says oil but one can become strangely attached to a wood pellet boiler.  Nice piece of technology that you can understand.  Wood pellets go in one end and a hot bath at the other.  A bit like many companies are attached to the idea of running a pension scheme and investing in risky investments even when the maths is against them and the risks just aren’t worth taking.

There is of course also the ethical aspect, the long term impact on climate change and the smug “carbon neutral” boast but that is another subject in itself.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Posted in: Blog
Tags: Investment, Trusteeship

Both the Faculty of Actuaries in Scotland and the Institute of Actuaries have achieved the necessary majority votes from their members for merger of the two bodies to go ahead.

The new merged body will be named the Institute and Faculty of Actuaries.  The process has taken some years and there have been two previous failed attempts.

We really hope that the Profession will put this rather introspective period behind it and concentrate on the development of actuarial solutions to the problems they are facing.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Posted in: Blog
Tags: Actuarial

Pension scheme trustees, even most professional trustees tend to concentrate on the “big” issues like investment, the actuarial funding position of the scheme and the employer convenant.  This is right and proper but the attention given to pensions administration may suffer as a consequence.  Relative to actuarial swings and roundabouts pensions administration costs are small.

Nevertheless the cost of administration and achieving compliance with more and more onerous regulations is an area where trustees do need to ensure that they are getting value for money.

We have had a lot of hits on our website for a simple pension administration cost calculator devised by Sean Browes which allows trustees or employers to benchmark pensions administration costs.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Posted in: Blog
Tags: Administration, Pensions Administration

Whilst the Labour Government have gone through a succession of Pensions Ministers, a constant for many years for actuaries and pensions consultants has been the Shadow Pensions Minister Nigel Waterston.

I have heard Mr Waterston speak a couple of times this year at the Association of Consulting Actuaries conference and at an election briefing organised by the Pensions Policy Institute.  He certainly knew his stuff and clearly had lots of pensions industry contacts and extensive knowledge.

He lost his seat in the election though despite the swing to the Conservatives.  He was subject to criticism by fellow Conservatives for not appearing to enjoy mixing with the ordinary voter.  Must be difficult to be a deep expert in a specialist field whilst retaining broader electoral appeal.  I dare say he should pick up a non executive job or consultancy position or two in the industry if he wants to.

Meanwhile Liberal Democrat pensions spokesman Steve Webb was returned safely to Parliament.  Talks of a coalition raise the novel possibility of having a Pensions Minister with experience and understanding of the subject.  The Labour Government had this for a very short time in 1997/1998 with Frank Field but he had radical ideas and did not last long.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Posted in: Blog
Tags: Pensions, Pensions Policy, Politics

As a firm including Northern Ireland actuaries we surely be justified for feeling left out in the cold again by the new Joint Proposal to merge the Faculty of Actuaries in Scotland and the Institute of Actuaries.

If the proposals are accepted a Scottish constituency will be created primarily for actuaries in Scotland (which we have a very defintite interest in too!), as will a Scottish Board to promote the Actuarial Profession in Scotland.  The Scottish Board will be able to draw on a £500,000 endowment.

Despite Northern Ireland having a government to which power is devolved to a much greater extent than in Scotland it receives relatively little attention from the Actuarial Profession.  I am not aware that there is any contact to speak of between the Actuarial Profession and the main political parties and there have been instances of problems with Northern Ireland legislation not being subject to some of the scrutiny that it might have been.

It is disappointing but not altogether surprising to see nothing in the revised merger proposals to address this.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Posted in: Blog
Tags: Actuarial, Actuarial Profession, Actuaries in Northern Ireland