The term nanny state was probably coined by the Conservative British MP Iain Macleod who referred to “what I like to call the nanny state” in his column “Quoodle” in the December 3, 1965, edition of The Spectator.

I’m not sure when nanny took on the slightly pejorative sense of an interfering busybody dispensing unwanted advice and meddling where they have no business to meddle, as opposed to the the all singing, all dancing and not entirely unattractive Mary Poppins, spreading order where once there was chaos, joy where once there was sorrow and Dick van Dyck were once there were cockneys.

So if the concept of a nanny is slightly schizophrenic so too are my feelings towards the nanny state.

I like to strike the pose of a Libertarian (and indeed in my wilder imaginings, a Libertine), bridling with a righteous fury when I hear news of some interfering busybody or other lambasting the over 65’s for having a second glass of sherry of an evening, or suggesting that we should embrace the travesty of food without salt.

We have these do-gooders in the pensions sphere as well, as a recent article in the Sunday Times makes clear. The article states that: Read more »

Posted in: Blog
Tags: Politics, Retirement, Tax

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.

Posted in: Blog
Tags: Charities, Regulation, Section 75

I recently had a need to review the Regulator’s Guidance on Incentive Exercises which was updated in December 2010. While on the face of it the principles are not too different to the original guidance I thought it worth re-iterating a few of the main points.

An Incentive Exercise (formerly known as an Inducement Exercise) is where an offer is made by an employer to a Defined Benefit scheme’s members to transfer out or amend benefits, usually in return for some form of financial incentive, with the intention of reducing liabilities or risk in the scheme.

These exercises remain a viable starting point for any company tackling the funding levels of a Defined Benefit (DB) scheme and, as long as they are dealt with in accordance with the Regulators guidance and with the input of the Scheme’s Trustees, offer an attractive alternative to many members if pitched at the right level.

The Pensions Regulator tells Trustees Read more »

Posted in: Blog
Tags: Pension Funding, Pensions Regulator, Transfer Incentives, Transfer Values

On Monday 27th June Spence & Partners and it’s sister company independent trustee Dalriada Trustees had the pleasure of sponsoring an event held by Queen’s University Management School to celebrate the first graduates from the Actuarial Science and Risk Management degree programme.

Spence & Partner’s is now embarking on its third year of sponsoring placement students from the programme and has an objective of being viewed as the actuarial employer of choice in Northern Ireland. Read more »

Posted in: Blog
Tags: Actuarial, Actuaries in Northern Ireland, Queen's University

The writing hand of Mervyn King must be feeling the strain of the inflationary pressures in the UK’s economy. For six quarters in a row, the Bank of England Governor has found himself in the position of having to draft a letter to Chancellor George Osbourne to explain why the Government inflation target has been missed. It may be unfair to blame Mr King as many think that the Chancellor’s target is unrealistically low, including Mr Osbourne himself who seems to accept high inflation as a reality we have to live with for the time being.

High inflation is not always bad – it can encourage economy-boosting spending and more private investment in companies as many investors see stocks and shares as a better option than cash. Unfortunately, it also provides a lot of instability in the economy and the world of pensions. Over the last year, inflation has been the biggest issue on our radar, not least because of the contentious legislation to determine pension valuations based on Consumer Price Index (CPI) rather than the previous gauge of Retail Price Index (RPI) being introduced in the UK.

The recent announcement that CPI rose by 4.5 per cent over the last year compared with an increase in RPI of 5.2 per cent will have a direct economic impact on many pensioners. Those with pensions linked to RPI would gain by almost one per cent each year compared to those with pensions linked to CPI.  Assuming these inflationary rises continued at their present rates, the income of a pensioner currently earning £10,000 each year would rise to just over £16,600 per annum in ten years time under RPI compared with around £15,500 per annum under CPI.

Inflation as it impacts on pensioners is generally accepted to be currently relatively higher as the ‘basket of goods’ includes many items which have increased more rapidly recently, such as food and fuel costs. These tend to represent a greater proportion of income spend for a pensioner whereas other areas of expenditure which have been more stable or reduced.

The current high levels of inflation are highlighting the controversy over the move from RPI to CPI. We have already seen many public sector union leaders calling for a judicial review on this decision and the private sector is not exempt from this either. British Airways have seen three trustees of the pension fund in April resign because of the move from RPI to CPI. 

Future movements in CPI are very difficult to predict.  Even over recent years, there have been a number of occasions that CPI has exceeded RPI so it can therefore not be ruled out that CPI could on occasion give rise to higher increases than are currently paid under RPI.  The basket of goods for CPI could also change – if, for example, housing costs are included, this could substantially close the current gap between it and RPI.

Looking at the impact of inflation from a different perspective, it can also have a roller-coaster effect on pension scheme payments and funding levels.  Inflation caps on pension increases are often overlooked.  Pensions may become significantly devalued if this cap applies for an extended period (irrespective of whether the inflation measure is CPI or RPI). Pension increases are generally capped at a maximum of 5% per annum, and so with inflation at its current level, capping at the 5% level would currently apply under RPI and remain a distinct possibility for the future.

While it would be bad news for pensioners and possibly the wider economy, a run of higher inflation is actually likely to improve scheme funding. Providing the actual inflation level exceeds any cap that a scheme has in place, it will be providing its members below inflation increases which, assuming investment returns do keep pace with inflation, will improve the overall funding of the scheme. The worst possible scenario for scheme funding is likely to be in a period of deflation whereby they would need to effectively pay out increases in excess of inflation and reduce scheme funding.

Perhaps the fine balancing act and the cause and effect implications of rising inflation explain the apparent willingness of the Bank of England and the Government to live with this situation, at least in the short term. However, the longer Mervyn King is required to pen an inflation letter to the Chancellor, the greater impact this will have on UK pensioners.

This article featured in the Scotsman on 24th June 2011.

Posted in: Blog, Media, Media Releases
Tags: inflation, Legislation, Pensions, Retirement, RPI to CPI

Yesterday, the International Accounting Standards Board (IASB) confirmed the much-trailed changes to accounting for pension benefits in accordance with IAS 19. The changes will be effective for accounting years commencing 1 January 2013, though earlier adoption is encouraged.

IAS 19 applies to all UK (and EU) listed Companies, though can be adopted by non-listed companies. The main UK pension accounting standards, FRS 17, is effectively being replaced from 2012, so these changes will generally also affect non-listed companies.

The main changes are as follows:

• The replacement of the expected return on assets element of the profit and loss charge by a credit linked to the discount rate used to measure the liabilities. Therefore given that an interest charge already applies to the liabilities, the final result on the P&L account will effectively be an interest charge (credit) on the plan deficit (surplus); and
• Companies which partially recognise actuarial “experience” in the profit and loss account will either need to fully recognise year on year experience or alter the accounting method to recognise experience gains and losses via the Statement of Recognised Gains and Losses (STRGL).

Further disclosures will also be required in relation to the characteristics of defined benefit plans and the risks which plan sponsors are exposed to by operating these plans.

So, what does this mean?

The main conclusion is that, all else being equal, Company profits will be reduced. It has recently been estimated that the replacement of the expected return credit could reduce UK Company profits by £10 billion per annum.

Where full recognition of actuarial experience is adopted, the profits or losses arising from defined benefit pension schemes will be significantly more volatile.

It has also been argued that the changes will lead to a move away from equity investments by defined benefit pension schemes as holding equities is no longer “rewarded” on the P&L.

However, many within the pensions industry often over-dramatise the attention paid to disclosed pension accounting figures in the profit and loss account. I agree with the views that most analysts already set-aside any windfalls on the P&L associated with the pension scheme, particularly when brought about by the current expected return on assets credit.

It will interesting to see if the changes do hasten a move away from equity investment by schemes. There is already a trend to de-risk and I see this continuing, but doubt whether the major driver will be these accounting changes. More likely, it will driven by trustees and employers who are less willing to be exposed to the risk of volatile funding levels and greater uncertainty in future funding costs.

Posted in: Blog
Tags: Accounting, Actuarial, FRS17, IAS19

I’ve  never had an “ology”, but always fancied one. So I thought I’d have a go at futurology. Futurology is the study of possible, probable, or preferable futures for society and the worldviews that underlie them. There is a debate as to whether this discipline is an art or a science, or just a bit of fun indulged in by the weekend supplements on the Sunday closest to New Year’s Eve.

Obviously there is a spectrum in futurology.  I’d tend not to invest too much faith in those futurologists who cite their predictions as being the result of channeling Thrag, a 9,000 year old lizard-being from the planet Zoltar. But some approaches have a slightly more reputable pedigree , and are essentially the statistical collection and analysis of past and present trends with the goal of accurately extrapolating future trends. When they put it like that, it almost sounds like being an actuary!

So if I apply my ology to the pensions field what might I divine?

Well, what about past and current trends? Recently, Scottish Widows published their seventh annual report on the state of retirement savings across the nation.

The most damning statistic is not a new one – 20% of those surveyed are saving nothing for retirement in 2011, a slight improvement from 21% in 2010.  Also, the survey concludes that just over half of those surveyed are assessed as making enough provision for their retirement.  Somewhat worryingly, the threshold for qualifying as being adequately prepared for retirement, according to the study  is setting aside 12% of pay (including employer contributions) – I don’t think there would be many in the actuarial or financial advisory sector that would conclude that 12% of pay is enough.

The UK does not seem to fare well in retirement savings stakes versus other developed economies – the survey refers to a recent Chartered Insurance Institute report which estimated that the UK Retirement savings gap at £9 trillion.

There is some encouragement to be had relating to the impact of auto enrolment and NEST, with only 11% of those surveyed saying they will opt out rather than be automatically enrolled, so the future trend may be for more retirement saving but at a level, 8% in aggregate, that is unlikely to make a real difference to most people.

A proposal which has generally been welcomed in pension circles is the introduction of a flat rate state pension of £140 per week (in current terms).  I see one of the main positives of this proposal as being that additional savings would be rewarded and not offset against some state benefits as is currently the case.
Indeed, I attended the Actuarial Profession’s annual conference last week and Pensions Minister Steve Webb stated this aspect as a significant advantage of the flat rate pension system.  However, the survey suggests that there is a significant communications and financial education  challenge in convincing the wider public that the flat rate pension system will reward savings, as only 18% of those surveyed stated that the system would lead to them saving more.

The survey also details a high level of expectation on employers to engage in the retirement savings process.  70% believe an employer should provide access to and contribute to a pension arrangement.  More surprisingly, some 40% believe that employers offering a pension scheme should offer a full advice service.  My experience is that the number of employers offering such a service would be significantly less than this level.

Together with moves by the Pensions Regulator to encourage employer engagement in Defined Contribution arrangements and facilitate access for staff to open market options at retirement, it should now be an important consideration for employers to effectively communicate the benefits of retirement savings and also assist with retirement planning for members approaching retirement age.

Finally, to get another angle on the public view on retirement savings I consulted the comments section of the BBC website’s reporting of this story.  At last check, the story had attracted a staggering 327 comments, which at least shows that the public seems to be engaged on the topic of pensions at the moment.  However, comments such as,

“Saving – might as well spend it.”
“most people distrust pensions”
“Don’t bother with pensions – they are unsafe and unprotected.”,

illustrate that trust and belief in retirement savings is still far short of the level required to encourage the general public to engage in the process.  That, for me, is the biggest challenge facing the industry, and indeed our wider society, and a challenge which seems to be getting harder rather than easier over recent years. Financial education needs to be a priority for the UK, and our industry is well placed to play its part, but the Government also has a leading role to play.

So what sort of future do we want?  A future where all our citizens have a meaningful income and standard of living in retirement? Or, in extremis, a dystopian, ageist future in which the state provides for retirement but can only do so by permanently “retiring” everyone reaching a particular age?  I’m afraid, based on the current evidence that, unless we can change society’s behaviour radically, our future is more likely to resemble Logan’s Run than Utopia.

Posted in: Blog
Tags: NEST, Retirement

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!!

Posted in: Blog
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