Archive for November 2010

Neil Copeland

I’m thinking of founding Administrators Anonymous. A bit like Alcoholics Anonymous but for those trying to wean themselves off final salary pension schemes.

My Doctor did once ask me if I had a problem with alcohol but I explained to her that, on the contrary, I really quite liked it. However, I did come across an article about Alcoholics Anonymous the other day, as you do, which quoted the Serenity Prayer and was immediately struck by the latter’s applicability to pension scheme trustees.

For those of you not familiar with the prayer, they key part is reproduced below.

Grant me the serenity;
To accept the things I cannot change;
The courage, to change the things I can;
And the wisdom, to know the difference.

It seems to me that trustees and employers spend inordinate amounts of time and money on having actuaries and consultants run all sorts of models with all sorts of assumptions, fretting about risks over which they have no control. For example, neither trustees, employers nor their advisers have any real control over future investment returns, future inflation, future legislation, future life expectancy or the future security of sovereign debt. I’m not suggesting for one minute that trustees should blithely ignore these risks – clearly they need to assess and understand them – however, trustees seem to be less engaged with at least one serious risk over which they do have control and which they can change.

Data.

Trustees – serenity, acceptance, courage and wisdom are needed here and needed now! We’ve blogged on the consequences of poor data before, but to recap, without accurate data all the actual valuations and investment strategies you can think of are seriously flawed. Incorrect or missing data impacts on all key areas of scheme management. If your data is poor, that funding plan that you’ve agonised over with the employer isn’t worth the paper it’s written on.

So I’ve come up with a 12 step programme to help trustees cope with their data problems based on the principles that have helped alcoholics, gamblers and sex addicts successfully confront their various demons over the years.

DISCLAIMER No inferences about my personal proclivities should be drawn from the entirely random set of addictions noted in the previous sentence.

12 Step Programmes invariably invoke a higher power for assistance, which in this particular context, is clearly Spence & Partners. Bearing that in mind, the 12 Step Programme for trustees struggling with data demons would look something like this:

  1. Admit to yourselves and Spence & Partners that you have a problem
  2. Believe that Spence & Partners can restore your data to an acceptable level
  3. Make a decision to turn your data over to Spence & Partners
  4. Make a searching and fearless inventory of your data and its shortcomings
  5. Admit to Spence & Partners, to yourselves, and to your current administrator the exact nature of your data problems.
  6. Be entirely ready to have Spence & Partners remove all these defects in your data.
  7. Humbly ask Spence & Partners to remove your data shortcomings.
  8. Make a list of all members harmed by your incorrect data in the past and be willing to make amends to them all.
  9. Make direct amends to such members wherever possible.
  10. Continue to review and maintain your data and when you find it is wrong promptly admit it and correct it.
  11. Through monitoring and review continue to improve your data, seeking guidance where necessary from Spence & Partners
  12. Having realised as the result of these steps that your data was deficient in the past , tell others about the tremendous change worked by Spence & Partners on your data quality, and see what other areas Spence & Partners can help you in

As always with these self help programmes, Step 1 is the most difficult, but you will feel so much better about yourself for having taken it.

There is a serious point to this – there usually is to my ramblings but sometimes it is extremely well hidden. Trustees and administrators (and, whisper it quietly, despite the 12 Step Programme outlined above the latter doesn’t have to be Spence & Partners) need to engage and have an honest discussion about scheme data and how it can be improved. It’s no longer an option to sweep this under the carpet. For a more considered assessment of how trustees can really take control of their data and comply with the Pensions Regulator’s guidance in this area see our previous blogs on the matter or contact my colleague Mark Johnson or I to discuss our Pensions Data Service .

And finally, a couple of hydrogen atoms walk into a bar. The first says, “I think I’ve lost an electron.” The second says, “Are you sure?” The first says, “Yes, I’m positive…”

Alan Collins

I was in attendance on Friday at the first presidential address to the newly formed Institute and Faculty of Actuaries.

Mr Bowie’s speech was upbeat and set out an exciting vision for the future direction of the Profession. He was right to talk up the skill set that an actuary has to offer the wider business community, and reinforced that these skills are uniquely combined with a desire to act in the public interest and perform the role of a “trusted advisor”.

Innovation is not necessarily something we actuaries are renowned for, but the address included some promising signs. Tales of actuaries branching out into other areas such as banking, risk management and even electricity pricing were intriguing and should be pursued with vigour by the Profession. Spence & Partners will also look at the new Chartered Enterprise Risk Actuary (CERA) qualification with interest and see what the attainment of these skills could bring to our business.

All good, positive stuff, but my concern is: Who’s listening?

My reason for being in London was, in part, to meet up with three financial/pensions journalists. Not one was aware that the presidential address was taking place that day, and at least one did not recall who the Profession’s president actually was. Not a good start!

Rarely do we hear from the Profession on matters of great public interest, such as the ongoing debates around the ageing population and public sector pensions or the much talked about “inflation switch” from RPI to CPI. This void is filled by bodies such as the Pensions Policy Institute or the Office for National Statistics or even one-man bands such as Ros Altmann or John Ralfe. I long for the day that the Profession has the confidence to make its voice heard on important issues and fully support initiatives to make this happen.

On Friday, like most events at the Profession, I still qualified as “the young man sitting at the back”. This is a fairly worrying indictment of the Profession’s lack of engagement with younger members once the exams have been completed.

From the outside, I have always felt that the Profession has had the manoeuvrability of an oil-tanker when it comes to adapting to a fast-changing business environment – council for this, committee for that, with no clear agenda or purpose. Like Mr Bowie, I hope the recent merger of the Faculty and Institute can be a catalyst for change.

To sum up Friday’s event, I am confident that his message in the address was the right one, but am concerned that it was being delivered to the wrong audience (or worse still, no audience at all).

Alan Collins

Open market option for all?

I read with interest the guidance to individuals with money purchase benefits published on 2 November by the Pensions Regulator (tPR) and echo comments from Pensions Minister Steve Webb that “choices we make at retirement are amongst the most important of our lives” and “shopping around can provide better value for money and significantly boost retirement income”, and those from tPR’s acting Chief Executive Bill Galvin who has stated that “members could miss out on a higher retirement income because they are not well-supported in making good choices”.

The engagement of the Pensions Regulator in the education process within occupational defined contribution schemes is welcome, and emphasis has rightly been given to the potential benefits to members of obtaining independent financial advice. In particular, the guidance should act as a reminder to Trustees of schemes which provide both defined benefits and money purchase benefits that the members with money purchase benefits deserve due care and attention.

However, the guidance appears to be in stark contrast to the regulatory approach and pending legislation governing defined benefit arrangements, particularly those containing contracted-out rights. The “presumption of guilt” surrounding transferring benefits out of a defined benefit arrangement, and the potential end to the ability to transfer contracted out rights from defined benefit to money purchase arrangements in 2012, would seem to be at odds with the ethos of encouraging members to make choices which best suit their own circumstances.

For example, the value contained in some defined benefits (such as a prescribed level of pension increases or spouse’s pensions where the member is single or where the spouse already has a substantial pension), could be used to provide alternative benefits which are more suited to the needs of the individual concerned. Also the value of a money purchase pension pot can be retained on the death of the member, whereas this event may cause the value of a defined benefit to be significantly eroded .

I would therefore ask that members of defined benefit arrangements continue to be afforded the same opportunities to exercise their “Open Market Option” in the future.

Alan Collins

The UK Accounting Standards Board (ASB) has commenced a consultation exercise on the FRS 17 accounting treatment of changing the inflation measure for future pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI). It is generally accepted that a change to CPI from RPI will reduce the value of pension scheme liabilities, possibly by upwards of 10 per cent.

The ASB’s Urgent Issues Task Force (UITF) correctly steers away from the precise implications of the government announcements and concentrates on the accounting implications of any changes that may occur.

In my view, Read more »

Alan Collins

Estimating life expectancy is an important part of an actuary’s job. Last month’s Office of National Statistics (ONS) report on the issue of life expectancy certainly brought a real focus to this important aspect of our role and, as a man who lives in one of the lowest ranked areas for longevity in the UK, it also cast a bit of an unwelcome shadow over my day.

Confronted by headlines such as ‘Scotland the Grave’ and ‘Increase in North-South Life Expectancy Divide’, the Scottish media highlighted how the recently published ONS survey showed how the average UK man will live until he is 77.9, compared with only 75.4 years in Scotland. The comparable figures for women are 82.0 and 80.1 respectively.

Somewhat worryingly for me, the average male in Glasgow will die aged 71.1 years. Unsurprisingly, given the health issues that continue to plague many parts of this city, this is the lowest for any area in UK. This is in sharp contrast to Kensington and Chelsea where the average man can expect to live for 84.4 years, exposing a staggering gap of over 13 years in life expectancy between two regions of the same country.

There are important lessons in the ONS study for actuaries, as well as for sponsoring employers and trustees of defined benefit schemes. For defined benefit arrangements, it is the scheme (and ultimately the sponsoring employer) who is exposed to the risk of how long each member lives. The longer each member lives, the longer a pension will need to be provided for and hence the cost of providing the pension increases.

The study reinforces the need to consider and manage the risks associated with life expectancy on a scheme-by-scheme basis. For each additional year of life expectancy, the reserves required – and the ultimate cost of the scheme – increase by around three per cent. So taking the extremes above, the reserving requirements could vary by up to 40 per cent!

However, we need to be careful on drawing conclusions from this study on two fronts. Firstly, members of pension schemes tend to live a lot longer than those with no pension provision – which gives me some personal comfort in relation to the above statistics. This is borne out of many studies on life expectancy by insurance companies and by analysing data from self-administered pension schemes. Currently, most pension schemes assume that current pensioners will live into their mid-late eighties and that future pensioners will live into their nineties.

Secondly, in my view – and this is where views in the actuarial profession differ – it is not geography but socio-demographic factors that matter where life expectancy is concerned. If geography alone was a significant factor, why would the gap in life expectancy between neighbouring areas such as Glasgow and East Dunbartonshire be over seven years, whereas the gap between Glasgow and Manchester is less than three years and only around four years between Glasgow and areas in London? This point was summed up by Duncan McNeil, Labour MSP for Greenock and Inverclyde, who said: “someone in my community can expect to live around 10 years less than someone else who lives just minutes along the road in a better-off area.”

This is why analysis at a postcode level is so important, where life expectancy is considered on a street by street basis. This is the most effective and accurate current method for assessing life expectancy for most pension schemes. I would urge trustees of schemes and sponsoring employers to ensure this area is given appropriate attention and that a postcode analysis is carried out at least every three years to coincide with the formal valuation of a scheme’s funding level. The only reason for departing from this is if your scheme is large enough to conduct its own mortality study. However, this would only apply to schemes with thousands or even tens of thousands of pensioner members.

Before I get completely morose about the ONS report and the implied implications on a Glaswegian male like myself, I can take some comfort that there are other factors at play in determining what ultimately accounts for the number of innings we are likely to be on this earth. It is important that these are also accounted for on a wider scale for those of us who manage pension schemes to ensure we have the appropriate funding levels in place.

Ian Conlon

I recently prepared a report in relation to pension on divorce where the husband was retired and in receipt of a pension from the BT Pension Scheme. The pension scheme member’s wife was over age 60 so was in a position to draw the proceeds of a pension share immediately. The CETV was a multiple of approximately 20 times the pension, so for a pension of £20,000 per annum, the CETV would be approximately £400,000.

I estimated that, if the pension scheme allowed the Pension Credit to remain within the scheme, then the ex-spouse would receive a pension of around £10,000 per annum from a 50% Pension Share. However, as the scheme insists that the ex-spouse takes the proceeds of the Pension Credit externally, then the ex spouse could expect to purchase an annuity providing an income of around £6,600 per annum (increasing in line with price inflation as per the scheme benefit). So the result of applying a Pension Sharing Order of 50% was an immediate loss of joint income of around £3,400 per annum, with this loss increasing over time in line with price inflation, equivalent to a 17% reduction in overall income (or profit to the pension scheme depending on your perspective).

An Attachment Order was considered but the cost of insuring against the risk of the husband dying before the wife ruled this option out. Both parties needed an income stream so offsetting was not an option. The only way of maintaining the value of the pension assets was to remain married! Also not an option!!

At the same time in a parallel universe the Pensions Regulator is telling scheme trustees that, if an employer wishes to provide an enhancement to encourage pension scheme members to transfer out, then the trustees should start from the presumption that transferring out of a defined benefit pension scheme is not in a member’s interests. So, in the case where the trustees make the decision, how can they come to the view that it is appropriate to force the ex-spouse to transfer his or her benefits out of the scheme? Are trustees looking after members interests in this case?

This is a far from uncommon scenario; those who receive benefits from a Pension Sharing Order are the only group of beneficiaries associated with occupational pension schemes who lack any level of meaningful protection. Pension scheme trustees should be challenged as to the rationale for their approach given that retaining the benefits within the scheme adds no extra liability.

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