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.

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.

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.

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.

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.

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.

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

Actuaries and pensions lawyers up and down the UK are earning good fees providing opinions on the vexed subject of equalisation after Angela Eagle’s welcome announcement.  GMP Equalisation continues to be consigned to the “too difficult” tray with prevarication along the lines

…this is an impossible task

…the government’s view is not binding

…trustees should wait for government guidance on how to equalise

For example, and not wishing to single them out, the otherwise esteemed actuaries Lane Clark & Peacock say “The industry has been asking for this for 20 years and not yet received a response.” Well actually no that is not true – we have not been asking, we know what equal means and have done since primary school.

On the other hand as Richard Bryant points out in his excellent Blog Prudential are not completing documentation for annuities on wind-up where there are post 1990 GMPs.  Prudential seem to get it – gender equality has been a requirement since 1990 and however much the industry may complain it will have to be addressed.

As my colleague David Davison has written recently on GMP Equalisation – this is not a complicated issue and in my earlier article I set out the practical steps for trustees needed to bring about the equalisation of GMPs.

Equal means equal and any modern pensions payroll system should be able to accommodate this.  If trustees have accurate historic data and good administration software it is a relatively simple spreadsheet calculation.  If not then there may be approximations required to ensure inequalities are eliminated and these approximations may add to the liabilities which is part of the price to be paid for poor data.

Posted in: Blog
Tags: Actuarial, Administration, Data, GMP Equalisation, Trusteeship

We had an enthusiastic internal meeting today about how to deal with Angela Eagle’s welcome clarification about equal treatment (pensions consultants actually get a buzz out of dealing with complex problems like this).

Many of Spence & Partners’ team felt that Read more »

Posted in: Blog
Tags: Actuarial, Administration, Trusteeship

It has seemed obvious to us for many years that trustees and actuaries would eventually be required to end inequality within occupational pension schemes resulting from guaranteed minimum pensions (GMPs) accrued since 17 May 1990.

The Government’s statement by Angela Eagle on Thursday 28th January is an extremely welcome and sensible step. There is undoubtedly some detail to work through for individual schemes but at least now hopefully the industry can get on with it.

Spence & Partners have extensive experience as actuaries and as independent trustees of implementing practical methods of equalising GMPs.

Stand back though for the roars of anguish from the industry!

Posted in: Blog
Tags: Actuarial, Legislation, Pensions, Professional Trustees