Archive for October 2010

Alan Collins

Following the recommendations of the Pensions Commission in 2006, the previous Government proposed the introduction of the National Employment Savings Trust (NEST), to address the lack of pension provision for employees who do not have access to workplace pension schemes.

From the perspective of employers, a major issue surrounding NEST is the likely cost of implementing the scheme, especially the associated administrative costs. An independent review has been carried out into the proposals for NEST – Making Auto Enrolment Work, which seeks to address the question as to whether the cost to employers imposed by NEST is necessary and proportionate.

Prior to the review, the proposed structure for NEST had the following key features:

  • Every business with at least one eligible employee must comply with the regulations.
  • An eligible employee is one who earns enough to pay National Insurance contributions.
  • All eligible employees must be enrolled immediately in the workplace pension scheme.
  • Employees are to be enrolled automatically, without need for application forms
  • Contributions are calculated from qualifying earnings (earnings in excess of the National Insurance Primary Threshold, currently £5,035 per annum, which include variable items such as overtime payments and bonuses).
  • Will be introduced in stages, commencing with employees of large companies, commencing in October 2012.
  • Minimum employer contributions commence at 1% of qualifying earnings from 2012 rising to 3% by 2017.
  • Minimum employee contributions commence at 1% of qualifying earnings from 2012 rising to 5% by 2017.

After consultation with business and the pensions industry, the authors of the report made the following key recommendations (which the new Government has welcomed).

  • Every business with at least one eligible employee must still comply with the regulations.
  • Contribution levels and phasing of contributions remain unchanged.
  • The earnings threshold at which an employee is automatically enrolled is increased to be equal to the personal allowance for income tax (currently £7,475 per annum). The threshold at which contributions are payable remains the National Insurance primary threshold.
  • An optional waiting period of three months should be introduced before an eligible employee is automatically enrolled. However, employees may choose to opt in at any time, and the company would then need to pay contributions.
  • The system by which employers can certify that their defined contribution schemes meet the required contribution levels should be simplified.
  • Further de-regulation measures should be introduced to ease the administrative burden on employers.
  • The current cap on contributions (£3,600 per annum) and ban on transfers in and out of NEST is to be reviewed in 2017.

The impact of the recommendations is to reduce the number of eligible employees by around 1 million, which will reduce the costs associated with NEST, especially for companies with a high proportion of low-paid workers. Further simplification and cost reduction is achieved by simplifying the certification process for businesses with current defined contribution schemes and by reducing the number of short-term employees who would be automatically enrolled. Clearly, the proposals surrounding NEST will continue to cause displeasure amongst small employers. There also continues to be a risk that contributions are levelled down in existing schemes to match the minimum requirements of NEST.

Employees may also choose to opt-out of their employer’s scheme. However, employers are not permitted to induce employees to opt out of pension schemes, and a company which did so would be fined from £1,000 to £5,000 (depending on the number of employees).

Please contact us for further information or visit the NEST website.

Ian Conlon

About four years ago I was instructed to act in a divorce case for the spouse of a serving senior police officer. The CETV as quoted was approximately £750k and the first task was to satisfy myself that the accrued pension benefits and CETV had been calculated correctly. As the officer had already completed 25 years service the CETV should have reflected the value of benefits payable from age 50. I recall the shock at discovering that the CETV had incorrectly been calculated on the basis that benefits would come into payment at age 60 and that the correct CETV was around £1.25m.

Ok, so that was some time ago, I had assumed that such major issues would have been sorted out by now. So I was really quite taken aback when searching on the internet for some specific details in relation to the Firefighters’ Scheme when I came across a Firefighters’ Pension Scheme Circular from June 2010 which highlighted this exact issue. According to the circular, the pension administration system which they use had been applying the incorrect factors for calculating CETVs for divorce in situations where the member had attained age 50 and had completed 25 years service.

It may well be the case that the scheme administrators were aware of this issue for some time and were manually calculating these CETV requests, however the Circular does start with the words “It has come to our attention” which certainly raises the possibility that past CETVs have been calculated incorrectly and have possibly also led to the incorrect calculation of Pension Credits and/or Pension Debits resulting from a Pension Sharing Order.

Given that the issue relates to those aged over 50, the pension benefits in such scenario will be fairly material so a pensions expert should have been involved who would have picked up on any incorrect CETV of this magnitude. The position could be difficult if a materially incorrect CETV has not been spotted! It does certainly highlight the need for professional support where defined benefit pension benefits are involved.

David Davison

In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats!!

The Government has announced a huge cull of quangos in a move it says is aimed at improving accountability as well as meeting deficit reduction objectives. Whilst I don’t expect this particular cull to result in the establishment of quango farms in the home counties, it may well have equally unintended consequences as I doubt what could be very significant pensions implications have been properly considered. These implications may well threaten the future solvency of some organisations not directly mentioned, and only loosely connected, and dwarf any potential financial savings expected. Read more »

Neil Copeland

 “We are discreet sheep; we wait to see how the drove is going, and then go with the drove.” So wrote Mark Twain.

This quote came back to me as a succession of lawyers responded to my request for advice for trustees on the impact of the ministerial “statement of intent”, as it is referred to by m’learned friends, made on 12 July 2010 this year. The statement  confirmed that the move to use CPI as the measure of price inflation applied to the private as well as the public sector and would take effect from 2011. As we have commented previously this has the potential to have a significant impact on schemes.

“Wait and see” seems to be the slightly ovine consensus view of the legal profession on the CPI/RPI question.

Now “wait and see” can be a completely valid response to certain situations and one can always point to situations where one or other of the protagonists would have benefited, with hindsight, from a “wait and see” approach. No one is going to dispute that Lord Cardigan, and indeed the whole Light Brigade, would have been better served had they waited to see whether or not they fully understood Lord Raglan’s order before commencing their magnificent but doomed assault on the Russian guns.   And clearly, the goalie in the attached video link should have waited to see where the ball eventually ended up before celebrating his tremendous “save”.  (It really is worth sticking with it, past the tacky Panasonic ad!)

But I’m left puzzled by what we are waiting to see as regards CPI/RPI – I fear it may be the Emperor’s new clothes.

Let’s focus on revaluation, the increases which are to apply to a members benefits between the date their pensionable service ends and their normal retirement date. To keep things simple let’s forget about contracting out and GMPs.

The factors used to revalue a members non-GMP benefits are set out in annual Occupational Pension (Revaluation) Orders (“Revaluation Orders”). These Revaluation Orders are made under Schedule 3 to the Pension Schemes Act 1993 (“the Act”). Paragraph 2 (4) of the Act states the following:

“The Secretary of State may estimate the percentage increase mentioned in sub-paragraph (3)(a) in such manner as he thinks fit.”

So it would appear that no primary legislation is necessary in order for the minister to use CPI for Revaluation Orders. In fact the minister would appear pretty much able to use whatever he likes. From what I have read there is no intention to apply CPI retrospectively, a concern expressed by some commentators.

The Revaluation Orders are published in mid-December each year and are applied for the following calendar year, So trustees, are required to use the factors derived from the Revaluation Order published in mid-December 2010 for deferred members retiring from 1 January 2011 onward.

Essentially all the annual December Revaluation Order does is apply an increase to the previously used factors. If the minister is true to his word, and I can think of no reason why he wouldn’t be, in December 2010 he will uprate the factors to be used for 2011 by CPI rather than RPI. I suppose there is a chance that he will not actually use CPI in December, but I think this is extremely unlikely, given that CPI will be used in the public sector and the unions, whilst not exactly welcoming the change, have used it to argue that public sector pensions are made more affordable.

So the question that trustees need answered is:

If the minister uses CPI to derive the uprated factors published in the December 2010 Revaluation Order, can I use these to revalue deferred pensions in my scheme?

Trustees do not need to wait until the Revaluation Order is published to see what the answer to this question is. Clearly the question posed above has only 2 possible answers “yes” or “no”. If the answer is “yes” then I believe the trustees can carry on as present and rely on the statutory orders – there has been no amendment to the scheme rules, or members benefits, nor is there any need for one.

If the answer is “no”, as it will be in some cases, such as those schemes which have hard coded RPI into the rules, then leaving this question until the Revaluation Order is published in December will leave very little time to decide what the trustees need to do if they can’t simply use the statutory order. Especially when you factor in Christmas and New Year holidays. They are going to have to know how they will administer their schemes from 1st January 2011.  Trustees will either have to specify a scheme specific set of revaluation factors or, if possible, amend the scheme. There does seem to be an expectation, though I’m not sure how well founded it is, that the Government will announce some sort of overriding legislation to allow schemes that cannot automatically benefit from the announced change to implement it by means of some simplified approach. But this shouldn’t prevent trustees seeking to understand what their position is at this time.

I wouldn’t usually recommend trustees take advice from a mafia don, at least not unless they had duly appointed him under  Section 47 of the Pensions Act 1995, but I am reminded of John Gotti, the New York crime boss who quoted an old Italian proverb to the effect that “E’ meglio vivere un giorno da leone che cent’anni da pecora”, usually translated as, “It is better to live one day as a lion than a hundred years as a sheep”.

 Trustees, roar a little!  Ask your legal advisers the above question – and tell them you’d rather not “wait and see”.

David Davison


Recent experience has suggested to me that many third sector bodies are missing out on perfectly viable out-sourced engagements because they are not adopting an effective approach to dealing with the associated pension risks.


With considerable pressure on public finances it seems inevitable that there will be a move to out-source increasing amounts of public services to the private sector. This undoubtedly represents a very significant opportunity for the third sector as their skills and specialisms would make them a very attractive home for many of these services.  However, organisations should not be attracted to the bright lights without having a full understanding of the risks and pitfalls which might await them.

Read more »

Neil Copeland

Trustees may soon get the chance to experience an aspect of the celebrity lifestyle enjoyed by the likes of  Robert Downey Jr, Paris Hilton and Kiefer Sutherland – by ending up in jail.

The Pensions Act 2004 did an excellent job of absolving pension scheme advisers of responsibility for most aspects of managing and operating a Final Salary pension scheme and placed that responsibility fairly and squarely on the shoulders, or any other exposed part, of the trustees.

Deciding what assumptions should be used to value your technical provisions? Why would you possibly make that the reponsibility of a highly qualified actuary who spends much of his working life focussed on precisely that issue when you can make it the reponsibility of the trustee instead?

Need transfer advice regulated? Why would you possibly make that the responsibility of the Financial Services Authority, when you can make it the responsibility of the trustee instead?

The old joke, which like many jokes was perceived to conceal a kernel of truth, was that as a trustee, you could be incompetent, as long as you were honest.

How times have  changed! The list of legislative breaches for which trustees can be, at worst, fined or, at best, chastised for is lengthy, and, as the FT reports, lengthening.

The latest wizard idea out of Europe is to produce regulations which mean trustees could face unlimited fines or up to two years in prison for accidental breaches of rules aimed at preventing investment in the sponsoring employer. Now in reality the circumstances where this could come about are unlikely. But not impossible.

Thankfully the  Department for Work and Pensions said that it has been made clear that the Pensions Regulator will not pursue trustees for what are clearly inadvertent breaches. So that’s all right then. Though presumably its the Pensions Regulator who gets to decide whether the breach was inadvertent or not.

When you recall that legislation aimed at preventing terrorist atrocities on the streets of the UK has been used to  try to catch people leaving unwanted items outside charity shops, it does not inspire confidence that laws will not be misued.

As we have blogged previously it is difficult to understand why any lay person would put themselves forward to perform what is, increasingly, a thankless task which leaves people open to criticism from members, employers and regulators. Equally it is increasingly difficult to see that the Regulators expectations of trustees can be reasonably met by individuals who are trying to hold down their day job as well. I feel increasingly sorry for the many honest and dilligent trustees that I work with in terms of the breadth of knowledge and understanding they need to maintain to perform a role which they took on from the best of motives.

Clearly “professional trusteeship” is an idea whose time has come. However, as we have noted previously, there is currently no barrier to any Tom, Dick or Harry setting themselves up as a “Professional” trustee and holding themselves out as offering that service. Whilst final salary pension schemes have been regulated almost out of existsence, professional trusteeship is that rare thing in the modern world, a vitally important profession which would benefit from some more regulation of its practitioners.

David Davison

The publication of John Hutton’s long awaited interim report in to the future of public sector pensions was not surprisingly met with some comment bordering on hysteria in certain quarters and some degree of entrenchment as various parties sought to lay out their stall for the future. The report provides a balanced and well thought through assessment of the position we find ourselves in with public sector pension provision and an initial consideration of what options might exist to provide a more sustainable solution for the future. In my view it needs to be viewed dispassionately (difficult I know!!) and without the level of rhetoric which has already begun to appear. Read more »

Rebecca Lavender

Our sister company, independent trustee Dalriada Trustees Limited have launched a new website at

The site will include regular blog articles written from the perspective of a leading UK independent trustee entitled Diary of an Independent Trustee.  Dalriada has a national network of independent trustee representatives in the United Kingdom and Ireland drawn from a variety of backgrounds.

In the first article in the Blog Brian Spence begins a series of articles on choosing an independent trustee.

Brian Spence

Northern Ireland is an excellent place to employ skilled and highly qualified graduates – Spence & Partners have, since the firm was founded in Northern Ireland in 2000, built a reputation for actuarial quality and innovation.

Major consulting firm Mercer have announced a major investment funded by  £450,000 of public money from InvestNI, Northern Ireland’s business development agency to, according to the Belfast Telegraph, provide almost 50 actuarial back-office jobs supporting Mercer’s European business and supporting annual salaries of over £1million.

New employment locally is always great news.

However good this news however I hope that this type of investment will create long term employment and skills in the Province.

Spence & Partners was formed during 2000 by a group of ex-Mercer consultants and whilst not wishing to blow our own trumpet we have developed alongside our sister company, independent trustee, Dalriada Trustees, a UK wide business with £4.5 million turnover and we employ over 50 people in the UK (many of whom are in our office in Belfast).  We too have enjoyed some support from InvestNI, albeit a much more modest figure than Mercer, and we are particularly grateful for their assistance in funding development of a document management system in 2009/10.

Our profits have been in the main reinvested in innovation and the development of our business.

On a slightly cautious note it is less than two years that Mercer closed their pensions administration unit in Belfast with the loss of about 10 jobs, several of whom we were privileged to be able to employ after they were made redundant.  Inward investment can be great but jobs, particularly back-office jobs can also be transferred elsewhere as industries and business models change.

However we welcome this announcement.

Hopefully this investment will provide jobs for some of  the first students graduating with a BSc in Actuarial Science and Risk Management from The Queen’s University of Belfast.  Spence & Partners have taken two students a year in recent years on placement during their degree course and we look forward to employing some graduates in future years.  A big change from the days when we would bemoan the lack of Northern Ireland graduates with actuarial or other financial services qualifications.

Hopefully Mercer will provide the Province with skilled people some of whom will wish, in time, to be involved in actuarial work beyond the back office.

Maybe some of them will eventually start their own firms like we did.  I hope in time some of the more ambitious of them will join Spence & Partners, where albeit on a tiny scale compared with Mercer Belfast is the Joint (with Glasgow) World HQ, not the European back office.

Hopefully other actuarial employers will join Mercer and Spence & Partners in seeing Belfast as a great place to be located.

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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