Nearly 30 pension funds have filed claims at the High Court seeking damages from Henderson Global Investors over claims it took too much risk with one of its funds, the Henderson PFI Secondary Fund II, when it used the majority of the fund’s assets to buy John Laing, a firm with a large pension deficit.

The fund subsequently lost 2/3rds of its value, not least because of the pension scheme deficit. Now I’m not seeking to comment on this case specifically and indeed Henderson’s have signalled they “will vigorously defend these proceedings” but more on some wider pension related implications.

I would have expected that at least when conducting due diligence on the investment Henderson would at least have been aware of the existence of a defined benefit pension liability Read more »

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Tags: FRS17, Investment

Many leading charities will be reeling from the recent announcement from The Pensions Trust that they face significant shortfalls in a pension scheme which they had originally believed to be a defined contribution arrangement. The Growth Plan 3 (“GP3”), which for many charities was seen as a safe haven for fixed contributions and the provision of members AVC savings has now allegedly been impacted by the high court judgement recently handed down on the Bridge Trustees case and resulting legislation expected to be forthcoming from the Department of Work & Pensions (“DWP”).

This will undoubtedly be unwelcome news and cause major problems for around 500-600 organisations participating in GP3. Read more »

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I was kindly introduced to the word scotoma last week. The dictionary definition is ‘a mental blind spot; inability to understand or perceive certain matters.’ I would have found it difficult to find a better word to describe the on-going debate, and I use that word very loosely in this case, in respect of public sector pensions culminating in the strikes on 30th November.

Things have been moving at such a speed it’s hard to keep up and to pick out the fact from the rhetoric. The week of the strike began with a bit of school yard name calling as trade union Unite issued their “Dossier of hypocrisy” exposing the extent of cabinet minister’s pension entitlements. All that did was make the case that those particular public sector pensions need to be reformed as much as, if not more than, all the rest.

Unite then did its best to drag us back to the seventies and Citizen Smiths’s already outdated class war rhetoric by suggesting that “what they don’t support is a cabinet of millionaires” attacking their members pension benefits. So presumably it is happy with the long list of commentators who aren’t millionaires suggesting it might be a good idea to have a sensible discussion about sustainable pensions in both the public and private sector, which has to include some significant reforms in the public sector? Or possibly not. Read more »

Posted in: Blog
Tags: Actuarial, Pensions, Pensions Reform, Public Sector Pensions

A little tale of everyday folk and how sharing and best intentions may not always achieve the results you expect……………..

Peter, Graham, Phil and Rachel have just started their arts course at University in London and are sharing a house. Being arts students they have a lot of spare time on their hands. One evening, after a hard day staring out of the window, they’re in the pub (unusual for students I know!!) and Graham mentions he really needs a car for a part-time job he has on the other side of the city, and can’t get there easily using public transport because of the timing but he can’t afford it with all his other bills. Read more »

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Tags: Defined Contribution, Pension Funding, Pensions

As charities face continuing issues with their defined benefit pension provision I’d viewed the consultation on the Section 75 regulations with some degree of optimism in the hope that there might at last be a recognition that unconnected organisations participating in multi-employer schemes might at last be viewed as a special case. Indeed pensions minister Steve Webb responded to some of my comments in a recent Pensions Week article by referring to the consultation.

Unfortunately the focus of the consultation is very much on connected organisations and centred around the impact of corporate activity and misses the specific issues faced by third sector employers entirely.  Schemes are being forced to operate with one hand tied behind their backs and participants offered less flexibility than would be the case if they had their own scheme leading them to make decisions which are undoubtedly against their long terms financial interests.

Our full response to the consultation can be found here and it is to be hoped that the scope of the consultation can be widened and this inconsistency dealt with.

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Tags: Charities, Regulation, Section 75

I noticed the announcement last week that the Scottish Federation of Housing Associations Pension Scheme (“SFHAPS”) has been renamed the Scottish Housing Association Pension Scheme (“SHAPS”).

I’m sure the strategic removal of the “F” from the acronym will re-assure members about why their pension scheme unding has allen from just below eighty-ive percent to less than sixty-ive percent in 3 years and less than ifty percent on the PP(F) basis!!

Is the move a result of SFHA no longer wishing to have its name associated with the plan in the same way that the Scottish Council for Voluntary Organisations took a similar decision? It is perhaps worth noting that shortly after the SCVO Final Salary Pension Scheme became the SVSPS the decision was made to close the scheme from April 2010?

Is this an example of a bit of deckchair re-shuffling on the Titanic? The problems associated with this scheme, and indeed many others in The Pensions Trust armada, are well documented in this blog . It doesn’t appear to be a happy ship and undoubtedly the removal of an aberrant letter comes up well short o the undamental ix required!

I may be being a tad acetious but the situation is ar rom lippant!!

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Tags: Pension Funding, Scottish Federation of Housing Associations (SFHA) Pension Scheme, Third Sector

I’ve seen a number of exercises recently which have looked to model potential scheme mortality costs in relation to the quality of health of the scheme membership. The rationale is that certain employers may have a workforce which is likely to be in poorer health and therefore have a lower life expectancy than might be assumed as ‘standard’. This can then be used as a basis to adjust the mortality assumptions and therefore reduce liabilities, deficit and ultimately costs.

Whilst the results of these exercises are often illuminating I would seek to add a note of caution to the process and those considering such a review need to consider the positives and negatives.

Clearly this is only one method of assessing scheme specific longevity. If the process is adopted using a sampling approach then clearly there could be something of a sampling risk with results being skewed purely by those actually selected for the sample. The greater the sample size the greater the accuracy but the higher the likely cost. Even with a comprehensive sample request it is unlikely that you would achieve a full response so there will be some sampling risk involved.

An alternative method would be to employ a post code assessment basis and for larger schemes this may provide a more cost effective and accurate method of estimation.

There also needs to be some weighting applied to the results. Scheme liabilities are not evenly spread across a membership so positive or negative movements are likely to be more relevant the greater the liability of any individual member. It is likely that, on average, larger liabilities are likely to be held by individuals with better than average life expectancy.

In previous blogs we have also provided details on our research in to the “small scheme effect” which shows that the smaller the scheme the greater the random impact of longevity. For small schemes a member dying a long time before their expected date or living a long time after it is likely to be much more significant than the impaired life impact across the scheme. The larger the scheme the closer it is likely to mirror standard longevity tables – it’s selecting the table and estimating the likely improvement which is likely to be relevant. In this case again post code assessments are likely to be more relevant.

There is also a concern that actually securing benefits using impaired life annuities may actually have negative rather than positive consequences particularly the greater the timescale which elapses from using the impaired life annuity and ultimately buying out the remaining benefits. A considerable timescale would mean that the scheme is losing out on a potential windfall from an early death which is likely to be much greater than that derived from the discounted purchase price of the impaired life annuity.

If impaired life annuities are used at a point close to ultimate buyout there must be a question if the ultimate buyout insurer will not make some adjustment to the buyout price to reflect the fact that only those lives who are likely to live longer remain in the scheme, thereby out-weighing any gain achieved via the use of impaired life annuities.

There may well be a place for the use of exercises such as these but potentially only as part of a wider ranging liability management review which considers other potential solutions such as enhanced transfer exercises, pension swaps or early retirement exercises to identify the relative value of an impaired life review. All this just reflects one simple fact – longevity assumptions are just assumptions and highly unlikely to be borne out in reality on average and certainly not at an individual level.

Posted in: Blog
Tags: Accounting, Actuarial, Longevity, Mortality

It is interesting to note, as we await the content of Lord Hutton’s report on public sector pensions, the amount of speculative material that is being produced on the subject.  It is already possible to discern that views and arguments are becoming to polarised and we have even had suggestions of a National strike over the matter.

Deputy PM Nick Clegg summarised the problem as a consequence of  the persistent under-estimatation of the value of the pensions promise  due to inappropriate funding methodologies and increasing longevity which in turn have given rise to insufficient contribution rates over an extended period of time.

A helpful contribution to the debate Read more »

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Tags: Pensions Reform, Public Sector

Professional Pensions reported my concerns about the promotion of defined benefit schemes to 3rd sector employers and my view that any such promotion which failed to ensure that the employer fully understood the attendant risks and uncertainties, was irresponsible and totally inappropriate. This elicited some interesting responses and I wanted to thank everyone for their comments on this important issue. There did seem to be a bit of confusion however, which I wanted to clear up.

My comments are clearly focused on DB provision in the third sector. Stephen Nichols, the Chief Executive of the Pensions Trust, was given a 2 page platform and a video to share his views on “Saving DB” and I thought it completely fair and balanced of PP to carry an alternative view and I thank them for that. Other senior staff within TPT have espoused similar views recently around DB so it wasn’t unreasonable to assume it was something of a ‘house view.’ The Trust is a highly regarded and respected organisation marketing primarily defined benefit pension scheme services to third sector employers and I was concerned that some of these employers may accept such a suggestion as being right for them and I wanted to ensure that they were totally aware of the risks involved.

In my experience of advising 3rd sector organisations they are ill-equipped to deal with defined benefit pension arrangements and certainly with ‘multi-employer’ DB arrangements where there is a supplementary risk that the strong will be required to pay for the weak as well as for themselves. The funding position of TPT schemes is not unique, you only have to consider schemes like PNPF and MNOPF to name but two, but their target market is. One respondent accused me of having a binary view and perhaps I do – DB Schemes should be left to organisations who can afford the contributions now and in the future and can deal with the volatility of liabilities and costs. Is anyone seriously contesting that view?

There is an unfortunate legacy of pension debt in the sector and I for one would not want to see it increased. It cannot be in anyone’s interest for employers to be building up pension liabilities which dwarf the value of their organisation and which they have little, if any, chance of ever being able to afford.  Pension debt is being cited as one of the major issues holding back the sector.

It’s all very well to encourage people to participate with attractive initial contributions but can they afford it when contributions rise or if their circumstances change in the future. I love the car analogy in a couple of comments. The problem is that people have been sold a ‘Bristol Fighter T’ on the promise that it will cost the same as a Mini and then watched the costs inexorably rise with limited room to manoeuvre in terms of an exit strategy.

There needs to be a focus within the sector on dealing with the DB debt legacy and recognising where it is inappropriate for organisations either to begin to build up DB liabilities or, indeed, to continue to do so. This issue needs to be addressed. There are encouraging signs from the local government sector, for example, that the problem is finally being recognised. As a strong employer, the local authority and by default council tax payers, should not have to act as a lender of last resort to small organisations with a legacy DB debt. Local government schemes have taken steps to make it more difficult for such organisations to participate and implemented tiered contribution structures reflecting risk. They have also made sure that those who do sign up for their schemes are aware of the liabilities they are accruing. Indeed, they have gone further and are taking steps to give those who recognise the problem and take responsible steps to try to address it reasonable funding and exit options. These are certainly steps which TPT could valuably learn from.

To clarify a couple of other points. I don’t believe I promoted a DC only future or indeed suggested that I considered NEST to be the answer. The vast majority of organisations I deal with would be very happy to provide contributions at an attractive level up to those provided by DB to provide their staff with valuable retirement benefits provided they are not inherently volatile.

Somewhat ironically given some of the comments neither I nor indeed my firm, provide defined contribution services for clients but purely advise on the defined benefit legacy. That however does not mean I am unaware of the issues and consequently I’m unable to accept  Stephen’s  assertions that DB is simpler and cheaper and can be provided for the same money and risk as DC. Perhaps I am not quite as conflicted in terms of future pension provision as others involved in the debate.

If one employer who is ill-suited to DB provision picks up this discussion and makes an alternative more appropriate selection then I can ask for no more.

PS: Thanks for the suggestion re the Avatar.

Posted in: Blog
Tags: Charities, Defined Contribution, Pension Funding, Third Sector