Archive for August 2018

Ciaran Harris

Trustees and sponsors of defined benefit (“DB”) schemes could be forgiven for assuming that the only way was up for life expectancies of their scheme members. For decades, mortality rates had been significantly improving. In the context of DB schemes, this generally resulted in more costly benefit provision for sponsoring employers.

The Continuous Mortality Investigation (“CMI”) then introduced their 2016 mortality improvement tables which showed a slow down in mortality improvements and therefore a reduction in life expectancy in comparison to previous years. Was this a blip? The 2017 tables have shown the same slow down. Perhaps one of the biggest indicators that this is the ‘new norm’ is the PPF consulting to revise their s143/s179 guidance to reflect updated mortality assumptions.

In relation to DB pension schemes, what might this affect?

  1. If insurers adopt the most up to date assumptions for mortality, then the cost of insuring benefits is likely to reduce. It may be a good time for sponsoring employers to consider this option if they are already close to being able to secure benefits.
  2. The size of cash equivalent transfer values will fall if calculations are updated to reflect new mortality assumptions. Anyone considering a transfer or within a guarantee period may want to consider this.
  3. The size of the scheme’s technical provisions will likely fall if the trustees decide to adopt the most up to date mortality assumptions in the scheme’s triennial valuation.
  4. Accounting deficits may reduce.

In terms of potential impact, the life expectancy of a 65 year old male based on the CMI 2014 improvement tables is around 22.9 years. Fast forward to the CMI 2017 model and the corresponding male life expectancy has fallen by 3.5% (with a similar reduction for females). The changes are even more pronounced when considering life expectancies for individuals not reaching 65 for 20 years which fall by around 5% – 6%. The impact on liabilities is a reduction of around 3% – 8%.

Trustees should consider if triennial valuations should reflect the most up to date tables and therefore a reduction in life expectancy. This will reduce liabilities all other things being equal.

Employers should consider the impact on insurer company pricing, accounting disclosures and transfer value exercises and should speak to an advisor to ensure optimum timing for any transactions or employer sponsored exercises.

Vineet Sood

Following the Competition & Markets Authority (‘CMA’) review of the Investment Consultancy Market, on 18 July 2018, it has provisionally proposed some changes that it believes will improve competition and help trustees gain more information to make more informed choices, and get a better deal from investment consultancy and fiduciary management services.

The CMA has proposed the following key changes, which has consulted on before making any final decisions:

  • Mandatory tendering for moving into fiduciary management. For those who already have it, but did not tender, they must also do so within five years.
  • Mandatory warnings when selling fiduciary management.
  • The Pensions Regulator to provide new and improved guidance for pension schemes when tendering for investment consulting or fiduciary management services.
  • Better information on fees (for fiduciary management only) and standardised performance reporting (both advisory and fiduciary management).
  • Trustees will be required to set their investment consultant strategic objectives and firms must report against these.
  • Regulation of investment consulting and fiduciary management services by the FCA.

These changes are a good way to encourage more competition and ensure that trustees have access to better information when making choices.

In particular, the mandatory requirement for a tender of fiduciary management services will reduce the competitive advantage that investment consultancies have. They will also need to provide explicit warnings that they are marketing their own fiduciary offering, and that others are available.

The unintended consequence of this regulation maybe that investment consultancies with a fiduciary management service will be reluctant to offer fiduciary management services, if there is a risk of losing the client, given the significant set up costs incurred when onboarding a client. However, this should encourage these firms to improve the quality of their service in order to ensure they have the best chance of retaining clients that consider fiduciary management.

Those firms that already provide fiduciary manager reviews are at an advantage as they have expertise to scale up this side of the business, but those not previously involved may consider this as an opportunity for adding new services.

From a trustee’s perspective, it should help to give them a better understanding of the fiduciary management market in order to make a more informed decision when choosing a fiduciary manager. However, the cost of running such an exercise can be expensive and at the moment and there are only a handful of firms that offer a review of fiduciary managers. Therefore, it may prove challenging for some schemes that have a limited budget. The CMA should consider this before any details are made final as it could force some schemes to rule out fiduciary management altogether, on the grounds of cost of conducting a review of different providers, even if it could be the best option for them.

Greater guidance from The Pensions Regulator is welcomed to help trustees make more informed decisions when tendering for investment or fiduciary management services. We believe that this will be helpful to trustees in getting the most out of the tender process, especially for smaller schemes who may have limited experience of running such exercises.

Our view on better transparency on fees charged by fiduciary managers is that, it will help trustees understand what they are paying for to assess value for money but also could allow comparison between different providers to be easier. This could form a good basis of negotiation for trustees. The requirement to standardise reporting of performance should help trustees to make easier comparisons of consultancies and fiduciary managers.

The requirement for trustees to set objectives for investment consultants will mean there is a measureable approach when assessing the performance of the investment services that are provided. This now gives trustees a good way to assess the performance of their investment advisor to see if they are doing a good job, and potentially makes it easier to make comparisons between advisers. The Pensions Regulator will have responsibility for setting guidance on objective setting and we are supportive of this, to encourage investment consultants to improve the quality of the services they provide.

The CMA consultation on these proposals closed on 24 August 2018 and the deadline for its final report is 13 March 2019.

Overall, we are supportive of the CMA’s drive to increase competition as well as increasing the level of transparency among investment consultants and fiduciary managers, in order to provide pension schemes with better outcomes. However, this will need to balanced with a sensible approach and avoid any unintended consequences for pension schemes.



Angela Burns

Liability management



Employers have chosen to manage their defined benefit pension liabilities using liability management exercises for a number if years now but these exercises have recently been given a fresh impetus through the introduction of pension freedoms which has given individuals much more flexibility in how to take their benefits from Defined Contribution schemes.

Below is a transcript from the video above.

Liability management exercises involve offering defined benefit pension scheme members various options in relation to their pension benefits.  These options include:

  • Transferring benefits to an alternative defined contribution arrangement;
  • Taking benefits as a cash lump sum, subject to regulatory limits;
  • Changing how pensions increase in payment.

The sponsor objective in conducting a liability management exercise is two-fold:

  1. Discharging liabilities via transfer values and lump sums is often less costly than the ‘on-going’ cost of providing benefits, or the cost of securing benefits with an insurer – therefore the cost of providing benefits is reduced on exercise of these options. Risk is also reduced if pension increases are swapped for a higher initial pension;
  2. Providing members with a greater choice over how they take their retirement income all carried out in a controlled environment. Individuals can choose options that best suit their needs (see my previous blog on what drives people to transfer for some issues that individuals may consider).

A liability management exercise, if run correctly, can therefore be a win-win for both the employer and scheme members.

So if you are an employer and you are considering providing your membership with OPTIONS – what do you need to think about?


Can you afford to incentivise the options available to improve attractiveness and aid take up?  Consider the cost of the exercise and whether or not you can afford this.  If it’s unaffordable at this time can you implement ‘business as usual’ practices to get a similar result over a period of time? For example providing transfer value statements along with retirement packs, or writing to members to remind them of their options?

Possible impact

An initial feasibility study helps to identify the potential impact, the cost of enhancements (if these are affordable) and any concentrated liabilities.  It is useful to carry this out prior to implementation.

Target membership

Using the results of the feasibility study you can target your exercise to ensure the maximum cost/benefit ratio.

Independent advice

If you are offering incentives then you must provide members with Independent Financial Advice (paid for by the employer).  There are a very limited number of IFA’s with the qualifications and authorisations to conduct this very specialist advice so ensure you choose an IFA that has the relevant experience.  Initial screening can help control costs as only those individuals who would be suitable to receive full advice with the associated costs would make it through the screening process.


Ensure you appoint an advisor with a strong track record of project managing successful liability management exercises.  Advising multiple individuals over a relatively short timescale is a complex process and it must be managed by an experienced professional.

Needs of membership

Consider the needs of your membership throughout the process – what will get them engaged in the exercise?  Are written communications enough or will access to a website, specific member presentations and a dedicated hotline aid engagement and understanding?

Sound communications

Ensure that all communications are engaging and jargon free.  Defined Benefit pensions are complex and it is important that individuals understand the options that are being made available to them and their implications.

This area is very highly regulated by the FCA and tPR has provided useful guidance which needs to be followed to compliantly conduct any exercise.

Angela Burns

There have been huge increases in the numbers of individuals taking transfer values from their defined benefit pension schemes over recent years. This has been driven by numerous factors, one of which being all time low interest rates, giving us record high transfer values. Individuals have been seeing multiples upwards of 30 times pension in many cases, which when added to the increased flexibility now available, is proving a mixture all too difficult to resist.

With the Bank of England raising interest rates for only the second time in a decade (up 0.25% p.a. from 0.50% p.a. to 0.75% p.a.), having been stuck at 0.5% for over nine years, this change is likely to have an negative impact.

Gilt yields rising results in liabilities falling, all other things being equal, so we are likely to see a reduction in transfer values. At this stage the impact is likely to be relatively modest with a 0.25% p.a. increase in gilt yields reducing a £150,000 transfer for a 45 year old by about £10,000 and for a 60 year old by about £5,000.

Such a change means that the amount transferred needs to return a lot more to be able to match, or improve on the benefits offered by the scheme. This change is likely to see the investment return needed to match or improve on the benefits increase by around 0.5% p.a. for the 45 year old and by 1.0% p.a. for the 60 year old.

The investment return required in the period until retirement (also knows as the critical yield or in recent parlance ‘personalised discount rate’) is often seen as a benchmark which needs to be reached before an adviser can even consider if a wider discussion on transferring benefits is even possible. So lower transfer values, which result in higher critical yields, is likely to mean that fewer people reach the threshold and so many more stay with their existing scheme.

For employers incentivising staff to transfer through the use of enhanced transfer values, lower transfer values will mean that higher top-ups are required to reach an attractive level, placing a greater cash requirement on the employer and therefore making exercises less attractive. Alternatively, retaining the same top-up value may result in a lower take-up.

As the transfer value basis in some schemes may not react immediately to changes in gilt yields this may provide individuals with a short window of time before any changes are made. In addition, individuals who are currently within their transfer guarantee period may be keener to have their transfer value processed within the guarantee window, to ensure they take advantage of a higher value than would be likely to be available post the guarantee, given the gilt yields rise.

Further rate rises may be on the horizon. We don’t have a crystal ball to see what will happen in the future, however, current perceived wisdom seems to be that rates will slowly rise over time on the basis that they can’t possibly stay this low. However, this has been the general belief since around 2009! Some think we have entered a ‘new norm’ where rates are unlikely to rise materially.

Individuals and sponsors should take care when considering transfer values or transfer exercises as gilt yield increases can materially affect the ‘real’ monetary value of any transfer, with timing now increasingly important.

David Davison

In an earlier Bulletin ‘A Landmark Judgement’ I provided some information on the welcome news that the Government had thankfully lost a case in the High Court which would have forced LGPS Funds in England and Wales to invest their assets (£263Bn in 2017) in accordance with UK foreign and defence policy.

Unfortunately my relief that common sense had prevailed on this issue was misplaced as on 6 June the Court of Appeal overturned the High Court ruling forcing schemes to comply with government policy, all this despite numerous warnings from pension experts about the negative impact and increase in pension scheme costs such a decision could have.

This whole saga started back in 2016 with the Government introducing legal guidance as it was concerned pension schemes could be taking actions which might “give mixed messages abroad, undermine community cohesion in the UK, and could negatively impact on the UK defence industry.”

The policy was successfully challenged by the Palestine Solidarity Campaign and an individual scheme member in 2017 when the High Court ruled it unlawful.

The whole approach smacks of state intervention and interferes with the ability of pension schemes to take decisions wholly in the interests of the members of the scheme. The Appeal ruling also seems to contradict proposed policy to require trustees of pension funds with 100 or more members to show how they have considered environmental, social and governance factors in their investment decisions.

The Government has refuted that its objective is to make pension schemes invest in line with government policy and has commented that it is not seeking to direct schemes investment decisions but despite the assurances the legal position seems to contradict this view.

It’s hard to see how the ruling won’t lead to schemes having to review policy resulting in increased complexity and additional costs which will be wholly unwelcome and not adding any value to scheme members.

Watch this space!

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