Archive for May 2010

Brian Spence

Both the Faculty of Actuaries in Scotland and the Institute of Actuaries have achieved the necessary majority votes from their members for merger of the two bodies to go ahead.

The new merged body will be named the Institute and Faculty of Actuaries.  The process has taken some years and there have been two previous failed attempts.

We really hope that the Profession will put this rather introspective period behind it and concentrate on the development of actuarial solutions to the problems they are facing.

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.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

David Davison

Rarely a day goes by without some press comment on the use of Enhanced Transfer Value Exercises as a legitimate (or not!!) form of final salary pension scheme de-risking. So we thought we’d get some informed comment from someone who actually has experience advising members on these exercises. Our guest contributor, Matthew Smith, is a highly experienced and qualified financial adviser, with leading Independent Financial Advisers Argyle Consulting, who has carried out a number of these exercises and outlines here what he considers are the real issues and choices members face.

(Argyle Consulting Limited is a leading firm of Independent Financial Advisers based in Scotland.)

Sponsoring final salary schemes is a pretty thankless business, and with a limited number of options open to employers to manage liabilities, an Enhanced Transfer Value (ETV) exercise conducted in an open and professional manner with employer funded IFA advice, remains an option worthy of serious consideration.

This is despite the entirely valid opprobrium heaped by the Pensions Regulator (among others) on some reported exercises that have bordered on sharp practice by employers at best.

Apart from the criticism of patently poor procedural conduct, there’s an undercurrent of hand wringing which seems to based on 1) that members need to be protected from themselves (and the big bad employer!) and 2) that there’s no way Joe Average can really understand or assess the value of the guarantees they are giving up.

It’s certainly not an IFA appetite for reckless endangerment which is encouraging members out of schemes.  The pensions review of the 90’s may be a fading memory, but final salary transfers remain the highest risk business an IFA can conduct from a regulatory, reputational and business survival perspective.  Get it wrong and you won’t be around for long!

As an IFA it’s meeting the personal objectives of the individual, not the protection of the many that gives a different starting point to our view, ever mindful of the fact that all transfer advice must start from the FSA stance that it is not in a member’s best interests to give up any guarantees.

But if the prevailing message from regulators is ‘beware of employers bearing gifts’ which right thinking member would take such an offer anyway, and why?  How can these exercises be done effectively for the employer, with proper governance and protections, and be balanced and not misleading to members?

Despite what the actuarial modelling might forecast about the value of the guarantees implicit in a final salary pension promise, each member places an entirely different ‘value’ on the real benefit of these guarantees to them, depending on their personal circumstances.

A few (real life) examples that can be taken in conjunction with a fair transfer offer and sensible critical yield would include early access, for example, the redundant employee in his 50’s who has been unable to find another employment and has used his lump sum to fund a business start-up.

Members do tend to underestimate their own life expectancy but the single member who is not in robust health is another example where a transfer giving up dependents pensions and possible increases can make sense.  Conversely the married member with a large pension entitlement from their spouse may feel no need of the guarantees or dependents benefits.

The reality is most members who decide to transfer with the benefit of balanced professional advice make an entirely rational decision on the basis of control of funds and greater immediate or future access flexibility.  Retirement is changing and pension entitlements for many deferred members are small and inflexible in relation to their other earnings, assets and entitlements, and are valued as such.

Much of the unease seems to be that somebody out there is duping Joe Average into thinking he’ll get a better pension on the basis that it’s an enhanced offer, rather than the reality which is that members in properly conducted exercises are making an informed choice to opt to transfer out of schemes in most cases for greater flexibility and control.

It’s not all about the numbers, and members are quite capable of making the value judgement, as long as a sophisticated professional adviser is explaining the issues to them in a way they can understand.

For employers thinking of spending the money on an ETV exercise our advice would be:

1) Make a fair offer, this is not a cheap option and setting enhanced transfer values that don’t get past the first base of a low critical yield to allow members to have a chance to transfer is a waste of everyone’s time.  Don’t offer cash, it’s difficult to assess its real value and could be regarded as an unfair inducement.

2) Engage with and appoint an IFA firm that has the relevant depth of technical experience, staff with the right qualifications, a robust process, and crucially the individual member communication skills to engage members at a high level on what can be a complex decision.  This will be critical to the success of any exercise and also to help reassure your trustees.

3) The employer needs to fund properly for the communications and member advice, and allow the member sufficient time with the adviser for decisions to be made. Members won’t transfer if the advice is generic or feels impersonal.

Sponsoring employers should not shy away from considering the merits of an ETV exercise, but the involvement of an experienced professional IFA practice at an early stage is critical to ensure it is money well spent.

David Davison

I read my colleague Val Hartley’s blog on post code mortality with great interest and it raises a number of important questions such as:

If you run a DB scheme in one of the areas in the first table (or indeed anywhere above the average mortality rating of 10%) and are using standard mortality tables you could well be placing a higher value on the pension liabilities disclosed in your accounts than might be necessary.

Another colleague, Ian Campbell, highlighted in his blog on FRS17, how companies were likely to see a rise in liabilities and deficits when preparing figures in 2010 and experience is proving him to be correct with numerous organisations concerned about the results they are seeing. Often, in the past, companies FRS17 figures have been provided by what is, in effect, the trustees’ adviser, and presented to companies as a fait accompli. However companies are increasingly seeking an independent view on their disclosures and the assumptions used.

Mortality is one of the key assumptions in any actuarial assessment of pension scheme liabilities and it can be worthwhile, and surprisingly cost effective, even for smaller schemes, to obtain a specific post code mortality assessment. Whilst not perfect, a scheme specific mortality rating will provide support for a specific level of mortality assumptions to be used in calculations. This, in turn will give you a better estimate of your liabilities. There is scope within FRS17 to adopt mortality assumptions more specifically aligned to a particular company’s circumstances which can have a material impact on the deficit ultimately disclosed.

The key point is don’t just accept what you’ve been provided with – a bit of digging and a second opinion may prove valuable.

David Davison

Recently attended an excellent pension conference hosted by Baker Tilly in the wonderfully opulent surroundings of the Banqueting House in Whitehall Place. A high tech voting system, video screens and a procession of the great and the good (or just those who could attend) helped the attendees focus their minds on the major pension issues with which we’re faced.

The highlights of the day for me were a humorous exchange between Robin Ellison and Peter Haskins over whose fault the pensions crisis was (a slight points victory to Robin on that one) and Robin having to admit that he hadn’t managed to get approval for the new 4th force in politics, the U Party , in time for the general election – but at least it’ll be ready for the next one in 6 months time!!

There was some consensus on the need for future change focussed on:-

• Reform of the state pension with the removal of the means test
• A better balance of provision between public and private sector
• Scrap NEST – Steve Mingle’s presentation was excellent
• Consider increasing state pension retirement age and linking it to mortality

Other areas considered included the move to a single regulator with a greater focus on policing abuse and less on producing regulation, a focus on scheme data quality, a minimum standard of regulation for professional trustees, the use of liability management exercises by employers and a need for much higher quality communication material.

There was even some agreement that perhaps contract based solutions were not a panacea for DC pensions but that trust based solutions may be making a comeback.

All lead me to the conclusion – pensions are dead, long live pensions!!

Valerie Hartley

I recently came across some bizarre yet interesting reading from a study carried out at end of last year which looked at geographical differences in mortality. The study looked at how mortality varied by postcode.

The study highlights the worst, or “shortest lived”, towns, and the best or “longest lived” towns. The differences are such that some of the shortest lived towns should probably carry a Government health warning!

The study, carried out by Towers Watson ranked localities across the UK. A score of ten, the UK average, means that actuaries expect ten in every thousand males aged 65 to die in the next 12 months. The higher the score, the more deaths expected. The study showed that the ten ‘shortest-lived’ towns are as follows:-

Town Mortality Rating
Kilbirnie, Ayrshire 15.4
Bootle, Merseyside 15.3
Lochgelly, Fife 15.3
Kyle, Ross-shire 15.1
Queenborough, Kent 15.1
Arisaig, Inverness-shire 14.8
Castlederg, Co Tyrone 14.8
Cumnock, Ayrshire 14.8
Mayport, Cumbria 14.8
Sanquar, Dumfriesshire 14.8

Kilbirnie, the least healthy place in the UK to live, has a mortality rating of 15.4%. Its population of approximately 8,000 people are served by no fewer than 3 firms of Funeral Directors!! This means that there are more firms of Funeral Directors than Banks or Grocery Stores in the town. Sorry to break this news to you, Kilbirnie residents!

What this means is that a 65 year old Kilbirnie male will live on average a further 17 years – 3 years fewer than the national average and 8 years fewer than people in postcode areas identified as the longest-lived postcodes; or to put it another way a male aged 65 living in Kilbirnie is more than twice as likely to die within the next 12 months than a person living in one of the healthier towns. Grim?

At the other end of the spectrum, the ten ‘longest-lived’ towns are as follows:-

Town Mortality Rating
Montacute, Somerset 6.4
Brockenhurst, Hampshire 6.7
Aldeburgh, Suffolk 6.8
Church Stretton, Shropshire 6.8
Colyton, Devon 6.9
Lyme Regis, Dorset 6.9
Lymington, Hampshire 6.9
Budleigh Salterton, Devon 7
Hinton St George, Somerset 7
Verwood, Dorset 7

If you take Montactute as an example, a male aged 65 can expect to live 25 more years! As unbelievable as it may seem, residents have been known to live in the town to a grand old age of 106! Whether this is a good thing or not, is a question for the residents of Montacute.

Obviously Kilbirnie, the place itself, is not the cause of these excess deaths. It’s clear that there are other factors which such as the populations general health & wellbeing, lifestyle, diet, perhaps education, occupation (stress) and wealth/poverty but to name a few.

Equally, there is nothing magical about a certain postcode that ensures longer life. However, the Mortality Map, does show a clear North-South split with people in Scotland and the industrial North East and North West of England tending to be shorter-lived, whereas people in East Anglia, the South East and South West, with exception of Cornwall, generally living longer.

Research suggests that mortality is linked to socio-economic factors rather than geography – the old industrial heartlands having a higher proportion of the population in “lower” socio-economic groups.

However the significance to individuals is that many pension providers, notably L&G, Aviva and Prudential, take into account postcode location when pricing annuities.

Therefore if you are a resident of Montacute looking to purchase an annuity you are going to get a much poorer deal than the average because of your postcode. Perhaps it’s time to check out a move to Kilbirnie in search of a better annuity rate!

Brian Spence

Pension scheme trustees, even most professional trustees tend to concentrate on the “big” issues like investment, the actuarial funding position of the scheme and the employer convenant.  This is right and proper but the attention given to pensions administration may suffer as a consequence.  Relative to actuarial swings and roundabouts pensions administration costs are small.

Nevertheless the cost of administration and achieving compliance with more and more onerous regulations is an area where trustees do need to ensure that they are getting value for money.

We have had a lot of hits on our website for a simple pension administration cost calculator devised by Sean Browes which allows trustees or employers to benchmark pensions administration costs.

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.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Brian Spence

Whilst the Labour Government have gone through a succession of Pensions Ministers, a constant for many years for actuaries and pensions consultants has been the Shadow Pensions Minister Nigel Waterston.

I have heard Mr Waterston speak a couple of times this year at the Association of Consulting Actuaries conference and at an election briefing organised by the Pensions Policy Institute.  He certainly knew his stuff and clearly had lots of pensions industry contacts and extensive knowledge.

He lost his seat in the election though despite the swing to the Conservatives.  He was subject to criticism by fellow Conservatives for not appearing to enjoy mixing with the ordinary voter.  Must be difficult to be a deep expert in a specialist field whilst retaining broader electoral appeal.  I dare say he should pick up a non executive job or consultancy position or two in the industry if he wants to.

Meanwhile Liberal Democrat pensions spokesman Steve Webb was returned safely to Parliament.  Talks of a coalition raise the novel possibility of having a Pensions Minister with experience and understanding of the subject.  The Labour Government had this for a very short time in 1997/1998 with Frank Field but he had radical ideas and did not last long.

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.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

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