Archive for April 2010

Ian Campbell

Complete and accurate pension scheme data is an essential ingredient for effective management by trustees and corporate sponsors. Otherwise there is a serious risk that incorrect benefits will be paid and the company and trustees will not be in full control of the funding position. This article focuses on occupational defined benefit schemes but many of the principles also apply to defined contribution arrangements.

Inadequate data issues often come to the fore when pension schemes are winding up or Read more »

Greig McGuinness

I was recently reviewing a set of accounts from a partly PPF bound scheme with both final salary and money purchase sections. Just to complicate matters the money purchase section was contracted out on a GMP basis prior to 6th April 1997 (i.e. it has a Defined Benefit underpin); oh and a couple of the money purchase members had their annuities purchased in the Trustees’ name when they retired. This all leads to some fun and games when you try to segregate the membership and assets.

It’s relatively straightforward if you stick with the terminology final salary and money purchase. A final salary member is always a final salary member and a money purchase member is always a money purchase member and therefore money purchase section assets, are always money purchase section assets but, is a defined contribution member always a defined contribution member?

So many people, myself included, at times use the terms final salary & defined benefit and money purchase & defined contribution as though they are interchangeable which is not always the case and can lead to confusion. Final salary pension schemes are the very definition of defined benefits however, although money purchase schemes tend to be defined contribution, this is not always the case. Up until the beginning of this century KPMG and the Pensions Trust had money purchase schemes where a specific contribution level would purchase a specific deferred pension, and there are a multitude of pure money purchase schemes that look like defined contribution but have a capital guarantee where your individual fund value is guaranteed to be no less that your contributions which makes it a defined benefit.

Does this really matter? Am I just being a pedant? The answers are yes and maybe a little.  A pension scheme that looks to be money purchase but has a defined element has all the governance requirements and risks of a final salary scheme; they need actuarial involvement (including triennial valuations), pay PPF risk based levies and have the same company accounts reporting requirements as final salary schemes.

In the particular scheme I was looking at we have the position where members have accrued benefits in the money purchase section on a defined contribution basis but when they retired the annuity was purchased in the Trustees’ name. So although the liability is completely matched by the investment, they are scheme pensioners with a defined benefit i.e. they are a pensioner of the money purchase section but also a defined benefit pensioner.

As for the GMP underpin members, this is where quantum theory comes in; the PPF will only recognise them as defined benefit members (at least for compensation purposes) if their fund values are insufficient to purchase annuities that will cover their GMP. Therefore as with the fabled cat you don’t know what they are until you do the test, until then (depending on your quantum school) they are either both DC and DB, or neither.

Neil Copeland

Thomas Aquinas apparently spent a large part of his life pondering the number of angels that could dance on the point of a needle. He also , apparently, could gravely debate whether Christ was or was not a hermaphrodite and, most crucially of all, whether or not there are excrements in Paradise.

Speaking of interesting digressions, this brings me to actuarial mortality assumptions and, in particular, the question of the most appropriate mortality assumptions to use for a particular valuation for a particular scheme.

I always think the key thing to bear in mind is that whatever assumption is chosen it will be wrong.

For example, I suspect any of the tables currently in use ignore the impact on mortality of future trends of Global Warming (or more likely Global Cooling, at least in the short term, as we appear to be 10 years into a cooling trend, although as with all statistics it depends on your starting point). Actually, Global Cooling is potentially a greater risk to humanity than Global Warming as a few degrees of Global Warming are projected to result in a net increase in food production (statistically at least, which I find tends to be shorthand for “not much better than guessing wildly”), whereas Global Cooling much more quickly results in a net reduction in food productivity, with dire consequences for the teeming millions.

But hey, the polar bears will be all right, which is the main thing, I guess.

Obviously if warming were to continue beyond a few degrees this would start to have a negative impact on food production also. And result in malaria in Notting Hill – such a development would be of great help to many final salary pension schemes. However, given the recent lessons of SARS, Avian Flu and Swine Flu, such schemes probably can’t rely on a Global pandemic to solve their mortality problems.

The good news is that,  in the long run, Malthus may eventually be proved correct. Studies of animal populations that grow at a rate greater than the potential food supply generally see catastrophic reductions over a very short period. Eventually.

And have the actuaries considered the risk of a meteorite strike? A direct hit in the greater London area would do wonders for the BT Scheme’s deficit. Just in case you think I’m being facetious, which of course I am, below is a summary of a news story that reports that such a strike is probable, statistically speaking. Eventually.

The story reported that a 13 year old whizkid from Germany corrected NASA scientists on the probability of a asteroid called Apophis striking earth. While NASA scientists took the probability calculations (which are far from easy) and estimated that there was a 1 in 45,000 chance of strike; the boy’s findings showed the chances to be 1 in 450. NASA scientists concluded that he was actually right since they had not considered the possibility of the asteroid striking with satellites , something that the 13 year old did.

Slightly disappointingly, NASA subsequently refuted this element of the story and claimed it had faith in its original calculations.

However, both NASA and the 13 year old agree that if the asteroid does collide with Earth, the resultant shockwaves would create huge tsunami waves, destroying both coastlines and inland areas, while creating a thick cloud of dust that would darken the skies indefinitely.

So what have we learned from our digressions  into climatology, demography and astronomy?

Well firstly, even 1 in 45,000 isn’t  a particularly comforting probability when it comes to possible armageddon and the extinction of human life. By some estimates the mass of the earth increases by about 40,000 tonnes a year due to extraterrestrial bits and pieces striking it. These are obviously pretty small meteorites, but conversely that’s an awful lot of actual collisions. It only needs one big one, and if it comes, Bruce Willis and Billy Bob Thornton probably aren’t going to be able to help.

Secondly, sometimes it’s worth getting an alternative view, but not necessarily from a 13 year old. Notwithstanding the uncertainty attaching to climate change and meteors, it’s important for trustees and employers to understand, as far as is possible, the latest thinking on mortality and how it is likely to develop in future.

Thirdly, it should be apparent from the above that the uncertainty inherent in final salary schemes poses real risks for many businesses. Also whilst attention to detail is important you shouldn’t lose sight of the big picture. The good news is that you can be pro-active in taking steps to manage and reduce the risks.

And finally, whilst I haven’t specifically quantified the direct effect of such a meteor impact on rates of mortality, I presume you can draw your own conclusions.

Neil Copeland

Pension Scheme Equalisation. It’s been a long and winding road from Barber to Dubery and Foster Wheeler, with the occasional cul de sac along the way. But most of us thought we had arrived at a clear understanding as to what was required to achieve equalisation of retirement ages. Many schemes revisited their approach in light of recent case law and a significant number of these were advised that they needed to take remedial action because the original attempt at equalisation had been defective.

Ducks. Read more »

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