Archive for January 2010

Brian Spence

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!

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.  Dalriada provides professional trustee services and Spence & Partners can provide support to employers in appointing an independent trustee.  Brian has written a series of articles on appointing an independent trustee.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Brian Spence

The former Chairman of The Pensions Advisory Service (TPAS) is quoted as saying that TPAS is in danger of being “dumped or carved up” whereas Government Minister Angela Eagle states that TPAS has embarked on a “modernisation and efficiency programme.”

Members of trust based pension schemes have trustees to protect their interests (increasingly schemes have professional trustees)  backed by legions of advisers and with the might of the Pensions Regulator behind them if necessary.   Trust based schemes are also required to have their own Internal Disputes Resolution Procedure. Usually complaints are resolved either informally or through the Scheme’s disputes procedure. If a member is unhappy with the final decision of the trustees, which is often subject to an internal appeals process as well, their complaint can go to the Pensions Ombudsman.

In contract based schemes there is the provider’s complaints procedure, the Financial Services Authority and the Financial Services Ombudsman.

In the last resort pension scheme members also have recourse to the Courts.

The question is does the taxpayer really need TPAS at all?

Pensions issues are complex detailed and the more difficult issues can often only be resolved with the assistance of highly skilled pensions lawyers and actuaries. Many TPAS advisors are well intentioned but are often volunteers with a busy day job.

Can TPAS really actually add much value to the work of all the professionals involved?

TPAS advisers are meant to be neutral arbiters and not in any sense a member’s “champion” and the majority appear to understand this. However, on occasion, particularly where the issues involved are complex and outside the particular area of expertise of the adviser, they can be more of a hindrance than a help (and arguably add significantly to the professional fees involved in resolving an issue).

If there is a problem with the quality of governance then the root cause should be dealt with and the Pensions Regulator has made great strides in this area.

Is TPAS a sensible use of public money at all in these straitened times? We think not.

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.  Dalriada provides professional trustee services and Spence & Partners can provide support to employers in appointing an independent trustee.  Brian has written a series of articles on appointing an independent trustee.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Neil Copeland

What possible connection can Kevin Spacey fans have with various employers and former members associated with the Pilots National Pension Fund (“the PNPF”) – the industry-wide pension scheme for UK marine pilots?

If you haven’t seen Spacey’s performance in the Usual Suspects, and want to avoid a plot spoiler, look away now.

The connection is that slightly queasy feeling cinema goers got when, in the final scenes of the Usual Suspects, they realised that Verbal Kint, Spacey’s mild mannered con man with a pronounced limp, is actually Keyser Soze, a seemingly omnipotent psychopathic criminal mastermind who had been a foreboding presence throughout the film. Without a limp. Indeed up to that point they were probably unsure as to whether Keyser Soze was even real, or just a mythic bogey man figure used to keep recalcitrant criminals in line. One reality was overturned and a new much less pleasant one substituted in its place.

There are likely to be a few employers and former members associated with the PNPF who are starting to get a similar feeling in their stomachs.

The case is extremely complex. The scheme was established in 1971 and, according to the FT Article on the case, has a £285m actuarial deficit, a shortfall which, not surprisingly, the trustees are trying to make good. Nothing unusual about a scheme with an actuarial deficit but it’s who is ultimately responsible for this deficit that throws up some unique issues in this case. HM Revenue & Customs provided a concession to pilots, who were generally self-employed, to participate in this occupational scheme and it is these members who account for a significant proportion of the scheme liabilities.

Eversheds head of pensions litigation, Giles Orton, who is involved with the case said “The court is having to grapple with complex questions on the application of scheme specific funding and employer debt legislation and the scheme’s power of amendment.” Having provided advice to a number of bodies who participate in PNPF and read the scheme documents, there do not appear to be any specific provisions in the PNPF rules to deal with deficits, or indeed surpluses, and while the trustee has some power to adjust contributions the power is relatively limited. The trustee does have the power to amend the rules although only, it appears, to a limited extent.

The big questions the High Court will have to deal with is whether the trustees have the power to amend the scheme to increase contributions and which “employers” (including those members who were self employed) are liable for these increased contributions. Could the employers who still participate with employed staff in the Scheme be liable to fund the deficiency as a whole even though they only account for a relatively small proportion of the liabilities? Would this be fair? Would it be fair that a current generation be required to pay for a previous generations benefits – anyone see any parallels with state pensions here? Could the trustee pursue the individual members who were self employed and if so on what financial basis?

Undoubtedly this case has a number of very specific issues related to the rules of the PNPF, but it does raise a number of more general points. Final salary scheme costs are wholly unknown and we do not know what circumstances will arise in the future. Is it fair that promises are made by people who ultimately may not be those required to make good on them? Multi-employer last man standing arrangements expose employers to an additional significant risk. Participating employers in these schemes need to be fully aware of the terms under which they participate and take appropriate professional advice. There are a large number of industry wide and other multi-employer schemes out there who will have similar issues to those of the trustees of the PNPF, in terms of fairness of cost across past and present employers and members.

If,  as the lawyer representing the trustee suggests, any of the decisions of the court could have wider application, there is the real possibility that there will  be a number of former employers associated with such schemes going about their business unaware that an actuarial Keyser Soze has them in his sights.

 This case is one to watch.

Neil Copeland

Unite has launched an intemperate attack on the Lib Dems, generally considered a fairly inoffensive bunch, for having the impudence to raise the issue of Public sector pension costs.

Contained in Unite’s press release is one of the more bizarre claims I’ve come across in any recent discussion of pension matters – “the current level of public sector pension provision is self-funding i.e. the money needed is covered by the contributions made by employers and employees.”

If we leave aside the myriad of objections that an actuary might have to this sweeping statement, this ignores, as only the public sector can, the fact that the only real source of revenue it has is the tax-payer. “Employer” contributions are taxpayer funded as are “Employee” contributions paid out of tax funded salaries. Many in the private sector despair at this sort of ill thought out logic, having seen their employers struggling in recent years to deal with the harsh realities of escalating pension costs.

It also ignores the fact that many public sector pensions schemes are provided on a pay as you go basis and are not funded at all. I guess Unite’s argument is true if you accept the premise that taxpayers are an unlimited source of tax revenues and can be soaked indefinitely in future years to meet the costs. And, yes, I know that public sector workers are taxpayers too, but that’s just a case of robbing Peter to pay Peter, which makes even less sense than robbing him to pay Paul. No private sector company would be allowed to approach pension provision for its employees in such a reckless manner.

For all the same reasons that have affected final salary pensions in the private sector, the costs associated with public sector final salary arrangements have increased significantly in recent years, to the point where they are unsustainable for the future – see previous blogs.

Even Gordon Brown has now conceded that there will have to be significant cuts in public sector spending in the future to meet the Governments targets for deficit reduction, regardless of who wins the next election. Reform of public sector pensions is one way of reducing the level of cuts which will be required in frontline services and staff, if the Government’s deficit reduction targets are to be achieved.

Unite seems to believe that raising this profoundly important question is a thought-crime associated only with “right wing myth makers” and that it should not be a matter of concern to democratically elected representatives ultimately responsible to the electorate. This seems perilously close to applying Godwin’s Law, which states that as an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1, to the legitimate debate on public sector pensions.

We need a reasoned debate on the reform of public sector pensions and to focus on the real issues at hand, rather than indulging in playground name calling.

Alan Collins

If, like myself, the prospect of trawling through the 2009 Purple Book published by the Pensions Regulator and the Pension Protection Fund (the PPF) is a research step too far, you will most likely have turned to the Executive Summary.

Being short of time, I was then less than pleased to see the Executive Summary running to around 10 pages.

So having now briefly digested the aforementioned the following provides my executive summary of the Executive Summary –

– the end date for the reporting period was 31 March 2009 (the nadir of recent pension scheme funding dates with the combination of low gilt yields and pre-bounce equity markets).

– 37 percent of scheme members were members of open schemes at 31 March 2009, down from 44 percent at 31 March 2008;

– Aggregate Technical Provisions funding levels fell to 70.3 percent at 31 March 2009, representing a total shortfall of £329 billion;

– the level of corporate liquidations in Q3 2009 was over 50 percent higher than at the low-point in 2007, though not as severe as in the recession of the early 90s;

– average allocation in equity fell from 53.6 percent oto 46.4 percent (this may of course be due to the fall in equity values rather than any “tactical” shift);

– there was a marked rise in the long-term risk to the PPF between March 2008 and June 2009, as measured by the PPF’s Long-Term Risk Model;

– PPF expects to collect £651 million for the 2008/9 year. The average levy paid is unchanged at 0.08 percent of scheme assets.

– 564 schemes had their levy 2008/9 capped (it will no doubt be interesting to see how this figure changes in due given the reduction in the cap to 0.5% of scheme assets for 2010/11);

– the total number of contingent assets in place has risen by 30 percent from 452 in 2008/9 to 587 for 2009/10;

– Liability Driven Investment (LDI) strategies continued to take root. The National Association of Pension Funds (NAPF) survey data indicated that 26 percent of schemes had implemented an LDI strategy by 2009 up from 23 percent in 2008; and

– to end on a subject dear to our hearts here at Spence and Partners Limited as specialists in managing schemes during PPF assessment periods (and our sister company Dalriada Trustees Limited), there were 240 schemes (covering 201,000 members) in the PPF assessment period as at 31 March 2009. Also in the year to 31 March 2009, the PPF paid out a total of £37.6 million in compensation payments to eligible members.

Finally for a brief update of subsequent events (from a corporate perspective, though same could be said for scheme funding) –

While we spent late 2008 telling companies your FRS/IAS is not going to be as bad as you think (thanks in most part to sky-high corporate bond yields), we are now in the process of telling the same individuals the exact opposite. “Surely the funding level must be better this year?” – “Err, No” (thanks to higher expectations for long-term inflation and a correction in bond yields have more than offset the equity bounce in most cases). Further details of this were set in in an earlier article on the current state of play for accounting under FRS17 and IAS19.

David Davison

Alan Collins has become the latest recruit to leading actuary and pensions administrator Spence & Partners. Alan, a qualified Scheme Actuary, joined the actuarial team in Glasgow from Mercer HR Consulting on January 5.

This further strengthens the team following the appointment of Ian Campbell as Actuarial Director in May 2009 as reported at:

Brian Spence, managing director of Spence & Partners, said: ”This is a great appointment and we are really pleased to have Alan on board. His broad experience and enthusiasm will add quality and depth to our actuarial team and provide invaluable support to our graduate recruits and part-qualified actuaries, as well as creating a skilled new resource for our clients. We are all really looking forward to working with him.”

Alan is a graduate of the University of Glasgow, where he attained an M.Sci First Class in mathematics and physics and the University of Edinburgh, where he attained a post graduate diploma in financial mathematics. Alan qualified as an actuary in December 2006 and obtained his practising certificate in November 2008.

Alan has particular expertise in buy-outs/buy-ins, accounting for pension costs, risk reduction exercises and mergers and acquisitions.

For further information please contact David Davison at consulting actuaries Spence & Partners on 0141 331 1004.

Spence & Partners are a firm of Actuaries, Consultants and Pensions Administrators with offices in Glasgow, London and Belfast and experience of operating pension schemes in England & Wales, Scotland, Northern Ireland and Ireland.

Issued on behalf of Spence & Partners by Karen Milne at Blueprint Media tel 0141 353 1515
Date:   January 2010

Brian Spence

Q.   Every time I open the paper I see another company pension scheme is closing. I am worried that our may be next. How easy is it for my employer to close the scheme to new or existing members, and what as a members should we be monitoring?

Firms cannot any longer have an open-ended commitment to final salary pensions, especially in the environment where deficits narrow or widen almost on a daily basis.

But closing a final-salary pension scheme is not an easy or uncomplicated option. Read more »

Greig McGuinness

From 1 December 2009 additional regulations (The Registered Pension Schemes (Authorised Payments) Regulations 2009) came into force regarding the commutation of trivial benefits from occupational pension schemes. The main aim was to provide members and trustees with a means of settling extremely trivial benefits in a number of circumstances where it would be either cost prohibitive or extremely difficult (if not impossible) to provide pension benefits. Read more »

David Davison

As I stood with hundreds of other sheep at 6.00am this morning waiting to board my favourite low cost airline a number of thoughts struck me:

1. How good we British are at queuing and shuffling
2. How there is now even a class system in airline queues
3. What a great job my PA had done in getting me a really cheap flight before I tripled the cost by having to re-book last minute as a result of an unexpected change to my meeting arrangements
4. For how much of my day will I be relying on something that was bought for the lowest possible price

Now undoubtedly the last point is the most worrying when you’re just about to set foot on something that’s going to career along at hundreds of miles per hour thousands of miles above the ground but it was probably more related to a bit of work I was contemplating doing when I finally reached my pen (I mean seat!!).

Whilst some strategic cost cutting to win a bit of pensions work is possibly not quite as fraught with danger as airline travel (although BA might disagree!!) it will invariably have a similar impact on quality in the end and an outcome not dissimilar to my experience with number 3 above, namely having to pay considerably more in the end to fix what I thought I’d got for a bargain to start with.

We’ve written a lot in this blog about the cost/quality relationship in pensions administration, (“Pensions administration – the devil is in the data“) and the lack of value placed on scheme record keeping and hopefully there’ll be a drive for value and suitability, not just a continuing downward pressure on cost. Otherwise when you really need to find some quality it might not be there.

But then all in all who cares – as I got a window seat!!

David Davison

Vorsprung Durch Pension

Clearly the rise of pensioner power means something completely different in Germany than it did to me. There’s me thinking about how continually improving life expectancy is increasing the power of the ‘grey electorate’ and the value of the ‘grey pound’ with resultant concerns about how we meet the economic and social challenges this brings. Pensioners in Germany however are already resorting to more direct action.

Apparently, as reported in Times Online, a financial adviser was attacked and tortured by a group of pensioners after the value of their investments fell by around $3.6m as a result of the financial crisis.

It’d certainly make you think twice about advising on an ETV exercise or a change of investment strategy if you thought you were going to get hit by a zimmer frame and chair leg, bundled in the boot of a car and driven 400 miles and then locked in a cellar for 4 days!! The FSA and Pension Regulator don’t seem quite so threatening!!

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