Archive for February 2010

Ian Campbell

What is your pension worth?

This year is likely to bring more unwelcome news for members of company pension schemes and finance directors grappling with accounting disclosures. In fact, that is a bit of an understatement.

Improving world stock market returns in 2009 will have helped the asset side of the pension balance sheet, particularly for those pension schemes with a meaningful equity exposure, albeit it has been a bit of a volatile ride. This may have given some finance direction a false sense of optimism. Read more »

David Davison

A major new accounting standard says your pension liabilities need not be valued by an independent actuary. So does this pave the way for companies to carry out their own valuations? Our guest contributor, David McBain of Johnston Carmichael, Chartered Accountants and Business Advisers, investigates. Fortunately he is concluding there is still a role for actuaries!

Defined benefit pension schemes are something of an irritant to finance directors. Annual valuations of the assets and liabilities are required and the resultant deficits (and occasional surpluses) introduce a high degree of volatility to the annual accounts. Pages of disclosures also result, many of which are largely unintelligible to the average reader.

So it’s little wonder that the same FDs will be hoping to find some simplification in the new International Financial Reporting Standard for Smaller Entities (IFRSSME). But will they find it?
Read more »

Neil Copeland

S&P – to be clear, Standard & Poors, not Spence & Partners – has downgraded BT’s credit rating as a result of concerns over how it is proposing to manage its pension deficit.

S&P credit analyst Michael O’Brien comments:

“We consider that such payments could constrain the financial flexibility of the group over the medium to long term in terms of shareholder returns and capital expenditures, or from a strategic perspective as the intensely competitive telecoms industry environment evolves.”

“We also believe that such payments, while reducing the pension deficit year on year, will not be sufficient to reduce BT’s pension- and lease-adjusted leverage in the short term closer to a level of 3x, which we would deem more appropriate for the rating.”

The Pensions Regulator has also expressed concerns about BT’s funding proposals.

BT may have congratulated itself on negotiating a lower short term deficit contribution than might otherwise have been the case, and would probably not wish to see the negotiation categorised as a “victory” for one side or the other. However, having seen a 4.4% fall in his share price, Sir Michael Rake will clearly empathise with Pyrrhus, king of Epirus, who nearly said “”If we are victorious in one more battle with the trustees, we shall be utterly ruined.”

Neil Copeland

“There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency”

Well said, that man! That man being David Norgrove, chair of the Pensions Regulator.

So why have we seen two such failures in a week? Both HJ Berry, a Preston based cabinet maker, and the Readers Digest suffered insolvency, ostensibly due to an inability to fund their pension scheme deficits. I haven’t seen any comment on the Regulator’s role, if any, in the HJ Berry case but it appears from press reports that the Regulator vetoed a deal that was acceptable to the employers, trustees and the Pension Protection Fund in the case of the Readers Digest. I can only conclude that neither business was deemed “otherwise viable” by the Regulator but a representative of Moore Stephens, the administrator, sounded confident on 5Live last night that there was a viable, profitable Readers Digest business to be bought by someone. Though I guess it was his job to sound positive.

Whilst the details of the proposed deal aren’t known, the broad outline appears similar to other deals we have seen accepted in the past by the Regulator, with an equity stake being taken by the trustees.

We have advised on cases where having satisfied very stringent conditions and following lengthy discussions with all parties, the Regulator has given clearance to an insolvent restructure of the business, with the pension scheme being left behind in the old company to ultimately fall into the PPF. This clearance was not, and should not be, easily granted.

It would appear that the Regulator is becoming more reluctant to sanction such deals, even as a last resort – and in fairness to David Norgrove he has stated quite clearly that the Regulator does not consider that it has an obligation to maintain employment.

However if you compare the likely outcomes of the Readers Digest case with a sanctioned insolvent restructure, with appropriate safeguards for the trustees and/or PPF, they will be little different other than the preservation of jobs in the sanctioned restructure. Whilst the Regulator may not consider that it has an obligation to the employees of Readers Digest to preserve their jobs, if all other outcomes are broadly the same, then it is difficult to understand why the Regulator did not clear the proposed deal.

Clearly the Regulator has to guard against unscrupulous employers simply contriving circumstances to allow them to dump their pension liabilities on the PPF, and it may see sanctioning such deals as distorting the market and unfair to a firm’s competitors, but such arguments are likely to be of cold comfort to Readers Digest employees facing a very uncertain future.

The latest news is that the Regulator has not ruled out pursuing the US parent over pension funding. The Regulator could in theory seek to issue a Financial Support Direction (FSD) against the US parent. It has been loathe to use its powers in this area, even against UK employers. It has been suggested that the Regulator is concerned that courts could overturn FSDs, considerably reducing the size of the stick that the Regulator can wield. It must be even less certain that a US court would support the enforcement of an FSD on a US company.

David Davison

Chancellor Alistair Darling slipped another gem in to his pre-budget report which will further hasten the demise of already beleaguered final salary pension schemes as reported in Times Online

How is any lay person expected to keep up with all this? The level of complexity which needs to be understood is just mind boggling. Having just returned from a trustee meeting covering revisions to actuarial assumptions, trivial commutations  and anti-forestalling it was all I could do to keep the attendees from throwing themselves out of a 3rd floor window – and  for once I don’t think that was down to my presentational style!!

You’ve got to think that high earning directors who have effectively been persuaded to keep their schemes running to ensure their own benefits will shortly have absolutely no reason to do so.

David Davison

So Robin Ellison has launched the U Party  with the objective of getting pension provision back up the political agenda. Given that he’s running a totally virtual election campaign the policy of decriminalising drugs will get the website hit level up and I can only hope that having arrived on the site the happy googlers take the time to look at some of the common sense proposals on pensions Robin is advocating.

It’s hard to disagree with his statement that “we have a dysfunctional state pension system, a dysfunctional private pension system and a dysfunctional tax system.”

We have more complexity in our system than anyone could manage and decisions taken “on the hoof” for short term populist objectives without thinking through the medium to long term implications – the main reason we’re already leaving our children and grandchildren a legacy of quite mind-boggling debt.

I’m all in favour of anything that can promote a rational debate on the future of pensions and the wider social implications and can only wish this venture well. I could almost be persuaded to provide more direct support but I think Robins chances in Hampstead are slightly higher than mine might be in Lanarkshire!!

Sean Browes

Why reinvent the wheel?

If, as industry figures increasingly tend to show, defined contribution(DC)  pension schemes are the way forward and defined benefit (DB) schemes are going to continue to wither on the vine, then it is time for some radical thinking about what the future should look like.

The marketplace is awash with new ideas and the government is falling over itself to come up with new initiatives, but the question has to be asked: why re-invent the wheel? Read more »

Neil Copeland

Interesting article on re the difficulties being experienced by the Church of England in relation to funding its final salary pension liabilities.

It’s not surprising that a body such as the Church of England appears to place greater store in faith than in reason. What is surprising is that it appears to be placing its faith in equities and Mammon, the false god of riches and avarice.

Actuaries will tell you that equities provide a poor match for pension scheme liabilities and we have blogged previously on the risks for both employers and trustees on relying too heavily on equities to save the day. Clearly they can have a part to play, but for the trustees of the Church of England Scheme, unless they are satisfied that the Church will be around at all times to underwrite the Scheme (okay, so it has been around since the time of Henry VIII which suggests a greater longevity than the average employer) this is a relatively high risk strategy.

According to Professional Pensions the Church of England does also appear to be taking some steps to try and address the liability side of the equation, and isn’t relying on blind faith alone. It is proposing to:

  • Contract the Clergy Scheme into the state second pension
  • Reduce the full pension from the Clergy pension scheme from two-thirds of National Minimum Stipend (NMS) to half of NMS for future service;
  • Limit the annual increase in the pensionable stipend to price inflation (RPI);
  • Chang the pension age for future service from 65 to 68; and
  • Move, again for future service, the accrual period for full pension from 40 to 43 years.

Whilst moving things in the right direction evidence from the private sector suggests that such limited reforms rarely deliver the desired results and more fundamental change is required to address the risks posed to any employer by a final salary pension scheme.

Employers need to understand that they can be proactive in managing their schemes’ liabilities and they have a range of options available to them  in dealing with their final salary schemes – which means they don’t have to rely on divine intervention.

David Davison

In earlier posts we addressed the issue of GMP equalisation.  Just to be clear – eliminating inequalities as a result of GMPs is not complicated or difficult or indeed costly when considering a member with a new pension coming into payment or a transfer value being quoted unless you are operating:

  • Administration software that is not capable to making a monthly comparison between the benefit paid to a male member and on the other hand the benefit that would have been payable to a female comparator.  Our P3 pension administration software is capable of handling this.


  • Actuarial software that projects only to the point of retirement and then applies an annuity factor. By definition an annuity factor cannot capture potential cross over between a male say and his female comparator.

We have developed our own in-house actuarial software that can handle this.

There are however two areas which can present genuine challenges:

(1) The period that has elapsed since the Barber Judgement on 17 May 1990. The data required to be able to identify underpayments is often difficult and in some cases impossible to obtain. In theory you need to be able to reconstruct a set of pension payments back to retirement and a comparator set of cash flows for a notional female to identify cumulative underpayments. This should act as a further spur to trustees to grasp the nettle and sort out their data.

(2) When annuitising (e.g. on buy-out or buy-in) the annuity providers cannot currently take on board equalised benefits because they do not have the systems to support this. For this reason in some recent cases where we have been involved we have used workarounds and made a broad brush allowance for GMP equalisation.

We do not think the Government is going to come forward with a single particular method. Any such method would not fit all schemes and would inevitably result in some members getting a higher benefit than “equality” would require. Schemes that have inadequate data or who are unwilling or unable to fix their inadequate software will have to adopt a “method” which will inevitably have a cost associated or they could appoint administrators and actuaries with the capacity to deal with the problem.

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