Archive for February 2020

Hugh Nolan

A new report by Professor Sir Michael Marmot for the Institute of Health Equity not only highlights the stalling of increases in UK life expectancy generally since 2010 but actually also identifies a FALL in life expectancy for women in the poorest areas. The report suggests that austerity has had an impact, which seems a natural conclusion even if it isn’t quite proven definitively yet. There is a well-established link between poverty and early death and people in deprived areas continue to die sooner than their more affluent peers – and this gap could widen if the current trend continues.

However, there is a contrary view that the current slowdown is just a trough in the long-term trend that offsets the peak improvements we saw in the first decade of this millennium. The Office of National Statistics (ONS) released statistics on global longevity back in August 2019 that showed a significant slowdown in longevity improvements in Germany, Spain, Sweden and Portugal and a complete stalling in the USA so we’re definitely not alone. At the same time, Japan has had sluggish increases in longevity for some time and only recently saw improvements start to accelerate again, which is perhaps understandable given that they have been leading the way with the highest longevity in the world. In the UK, we may lag behind France, the Netherlands, Spain and Italy on life expectancy but we’re still ahead of the USA, Poland and Russia, so it’s not all bad news.

Personally, I believe that there is some truth in both views, with the negative impact of austerity exacerbating the effect of natural fluctuations over time. As far as pension schemes are concerned, it’s important to assess the latest data available and consider how relevant it is for the particular scheme in question. Most importantly, we should think about what we’ll do when it inevitably turns out that our best projections are wrong!

Matt Masters

Retirement is a familiar part of our social universe. Historically, however, retirement was anything but common. Looking at more recent history, we can see this.  For example, the UK’s Old Age Pension was only introduced on 1 January 1909, to around 500,000 people over the age of 70. By contrast, one in five people, or around 13 million, are now claiming the State pension (and aren’t having to wait until age 70 to do so!)

Somewhat ominously, the number of people in the UK of State Pension Age or older as a percentage of the working age population is projected to increase. Back in 1901, there were 10 pensioners for every 100 people working. This has now increased to 28 pensioners and, owing to the increase in life expectancy and lower birth rates, is expected to continue to increase, to around 37 pensioners by 2040. 

As a result, the Government is expected to spend an ever-increasing amount of the country’s GDP on pensions and related benefits. Whether this is sustainable has yet to be seen.

The differentials

A suitable retirement income can mean different things to different people. Will it provide an acceptable standard of living? Does it have an inbuilt level of inflation protection? Is it guaranteed to pay out until death? Is it flexible enough to change as needs change or to meet spikes in expenditure?

Different people, and different groups of people, will be affected differently. Some, like Jeroen van der Veer, former chief executive of Royal Dutch Shell, are unlikely to have to worry. He is sitting on one of the UK’s biggest pensions, of some £1.3 million each year.

The 15+ million Baby Boomers, now aged between 55 and 74, are likely to reach retirement with relatively high levels of Defined Benefit (“DB”) provision compared to the younger generations and have higher State Pension entitlement. They are also more likely to have other sources of income and housing equity.

The 13+ million Generation Xers, now aged between 40 and 54, will reach retirement with lower levels of DB entitlement than the Baby Boomers and more Defined Contribution (“DC”) savings. They will also receive less income proportionally from State pensions (owing to the effect of working patterns on their State pension entitlements), are more likely to reach retirement in rented accommodation, more likely to need to provide care, and less likely to have other savings to draw on.

Different economic climates have put upward pressure on the cost of living (predominantly accommodation), and downward pressure on inflation adjusted wage growth, meaning that younger groups are earning less, and housing is more expensive. In addition, the 17+ million Millennials, now aged between 20 and 39, are the least likely to have a DB entitlement (but will have greater DC savings than the Generation Xers as a result of automatic enrolment). They are also most likely to work casually or be self-employed (with the greatest impact on their State pension entitlements).

Individual responsibility

While many people view the Government’s key role as providing a safety net to those most in need (including, traditionally, the elderly), there is a clear move towards passing responsibility back to the individual, as witnessed by automatic enrolment. This is, in part, a response to the financial pressures the Government is facing over the coming decades. 

As a general rule, there are certain things individuals can look to do to help make retirement more comfortable:

If eligible, join the company’s pension scheme.

Members benefit from employer contributions as well as the Government’s tax relief to boost pension savings.

Start early. 

While retirement might seem like a lifetime away, it will benefit in the long run to save now and spend later. For younger people, the money saved now will grow through investments. For older people, there is still a benefit from tax-relief on personal contributions.

Saving a little extra can make a big difference.

The cost of living can make it hard to find money to save. Whether it’s a pay rise, a bonus, or money that can be freed up by spending less somewhere else, it’s always worth thinking about paying a little more into a pension.

Work longer, giving your pension time to build.

Government statistics suggest more than a million people are working beyond State Pension Age. Some because they enjoy it. Others out of necessity. Either way, it means more time for money to grow whilst not depleting retirement savings.

Graeme Riddoch

Driving change

I did an all too frequent commute to London this morning. Firstly, I drove to the station. I’ve just had Apple Carplay fitted, which lets me mirror and control my phone’s apps. I needed a bit of energy so “Siri play Queen” (that gives my age away).

In bongs a WhatsApp from my wife. “Siri read WhatsApp”, my hands gripping the steering wheel all the while. Voice recognition has come a long way of late. I remember a less sophisticated system transcribed my name, Graeme Riddoch, as ‘dangerous burglar’!

Technology is improving all the time; it’s fast becoming the way we work, rest and play.

Playing at techno god


Having reached the station car park I would previously have been scuttling around looking for change for a parking ticket. But not now, as I opened the parking app using facial recognition rather than a password. Passwords are one of the main reasons that people give up on technology. 

The app spotted me with the GPS function. Car park 2? Yes. One day parking? Yes. Click and done.

Obviously, my train ticket was on an app and I swished through the barrier like a techno god.

Demanding more


I wasn’t doing any of this a couple of years ago. Perhaps the technology wasn’t there – or maybe I hadn’t spotted it. However, once you start using some of these toys and they work, you create an expectation for yourself that all services will work that way too.

One of the biggest drivers of change is the adoption of smartphones and how they are used. The Deloitte 2019 Mobile Consumer Survey finds that 90% of 44-55 year olds and 80% of 55-75 year olds own a smart phone. It’s also the case that smartphones are now the way that most people access the internet.

When was the last time you went out without your phone?

Putting it all together suggests that if you want to get the attention of your customers and deliver a first class service you had better not ignore the smartphone.

Pushing the buttons


Where do we start with passwords? A world of pain. Enough said…

The current generation of phones offer biometric login. Once you have logged into an app for the first time, you then use your thumb print or facial recognition. The pain is gone and the app is readily accessible.

Mobile phones must increasingly form part of an engagement strategy between businesses and consumers. More than three-quarters (79%) of people use their smartphone for reading email; a higher percentage than those who use it for making calls. (Source Email Monday)

Having said that there’s also research showing that people are increasingly deleting e-mails without even opening them. 

So, what about sending messages via push notifications? Retail Dive found that push notifications tend to be opened more than e-mails.

Unengaging


And so to the world of pensions, and in particular defined benefit pensions. Largely paper based, unengaging, and with any web activity largely website based rather than through smart phones.

Getting a decent service that members will want to use on a mobile platform is difficult.

One issue is our old friend poor data quality. The next is the administration technology itself. The ways that modern consumers want to use data were never dreamed of when most of the current technology for defined benefits was built.

But what if…

  • Members could view their benefits and transfer value in real time.
  • Update their details.
  • Receive ‘push’ messages that they would read immediately.
  • Even complete all their retirement options online if ID validation can be cracked.

And that would be just the start. There’s lots of technology across other sectors that could make a real difference to members. We just need to get started!

Angela Burns

This guide is intended to be a useful reference for companies preparing their 31 December 2019 pensions accounting disclosures, whether under FRS 102 or IAS 19.

In this guide, we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.

With the wealth of corporate advisory experience available at Spence, we are well placed to provide you with guidance in how to best manage your pension scheme liabilities.

The implications of the recent developments should be considered to help you avoid any surprises. Spence can help guide companies through these complexities. We have a proven track record in navigating to the best outcomes for our clients.

We would be happy to discuss the options available to you in reaction to the market trends discussed above, including:

  • How to lock in asset gains.
  • Decrease future risk.
  • Reduce funding level volatility.

To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, at angela_burns@spenceandpartners.co.uk or by telephone on 0141 331 9984.

Alan Collins

Following the clear result of the December 2019 UK general election, 2020 was always going to be a big year for the pensions regulatory landscape. With the Pension Schemes Bill working its way through parliament, The Pensions Regulator has also set out its vision for the remainder of the year. I look at some of these areas below.

Revised Funding Code for Defined Benefit (DB) Schemes


Consultation on the revised funding code will commence in March (on the principles of funding, with the detail to follow in a further consultation late in the year).

The two main pillars of the new code are likely to be risk management and long-term funding. Previous statements from the Regulator have encouraged schemes to set long-term “secondary” funding objectives and contingency planning. I would expect the code to give greater clarity to these objectives and turn them into “must haves” not “nice to haves”.

The new code will contain two routes for schemes to follow. The “fast-track” route will set out certain conditions which, if met, will avoid the regulatory scrutiny of the “bespoke” route. I would expect the fast-track conditions will relate to areas such as strength of funding target, investment strategy and length of recovery period. The big question for me will be how many schemes will be able to follow the fast-track route? If the conditions are too onerous, then it may not do much to reduce the Regulator’s workload.

Consolidation – clarity on DC schemes, caution on DB schemes


The future of occupational Defined Contribution (DC) schemes is clear. Further consolidation is inevitable and has widespread support. The days of small to medium DC schemes, and DC sections of hybrid schemes, are numbered.

However, there is less clarity (or should that be Clara-ty) when it comes to DB consolidation and DB superfunds. While supportive of the principles of DB consolidation, the Regulator is “concerned” about separating schemes from their sponsors and the lack of an authorisation regime.

DB consolidation will continue, especially in schemes with the same sponsors (or sponsors in the same group) and with “traditional” consolidators. However, to me, the first deal with the new consolidators does not look any closer than it did this time last year.

Pension scheme governance – “No” to Professional Trustees for every scheme


The big question on the recent consultation into the “Future of trusteeship and governance” was whether or not it should become mandatory in due course for each scheme to engage a professional trustee. The answer for now is “no”, but the Regulator has confirmed its support for professional trusteeship accreditation and an industry code for sole trusteeship. 

Following the consultation, the Regulator will also be establishing and leading an industry working group with the aim of improving diversity and inclusion on trustee boards. Further consultation will also follow on changes to the Trustee Knowledge and Understanding code, leading to updates to the Trustee Toolkit in due course.

John Wilson

Brexit – what happens next?

If you stayed up late on 31 January you would have witnessed the UK finally leaving the EU. A moment of history, indeed, but right now it may feel that not much has changed.

The Withdrawal Agreement (WA) came into force immediately, but several features of UK membership of the EU will be maintained during the so-called ‘transition period’ provided for by the WA (technically, this is not a transition period but rather a period of negotiation over a trade deal).

The legal basis for negotiations between the UK and EU will now be based on the same procedures applied for negotiations with other ‘third countries’ (under Article 218 of the Treaty on the Functioning of the EU).

The ‘transition’ period has been devised as ‘breathing space’ for the UK and the EU to try and negotiate a new relationship. It will last only until the end of this year (31 December 2020); theoretically, it could be extended but the UK Government has legislated to stop itself from seeking an extension.

For the remainder of 2020:

  • most EU rules will continue to apply to the UK;
  • the UK will still be part of the EU single market and customs union;
  • existing trade arrangements and rules for travelling within the EU will continue to apply;
  • the jurisdiction of the Court of Justice of the EU will continue as before; and
  • the UK will continue to pay into the EU budget.

The UK, however, can no longer take part in EU decision-making and is no longer represented in the EU institutions. UK representatives can participate in meetings of EU bodies where discussions are relevant to the UK, but they will not have a vote.

There are other arrangements that cease to apply straight away too; for example, UK citizens resident in EU Member States will lose the right to vote and stand in local and European elections.

Also, the EU will be able to exclude the UK from EU activities where participation would grant the UK access to certain security-related sensitive information. However, the EU Common Foreign and Security Policy will continue to apply to the UK.

The EU’s international agreements still apply to the UK during the transition period, but the UK is now permitted to negotiate and ratify new international agreements with non-EU countries provided that these do not come into force before the end of the transition period.

Beyond transition


As things stand, the above arrangements will end on 31 December 2020, but with some areas of the UK-EU relationship still covered by the WA, including rights of EU citizens living in the UK and UK citizens living in the EU at the end of the transition period; together with aspects of Northern Ireland’s relationship with the EU.

The nature of arrangements for other aspects of UK-EU relationship will depend on what is agreed in the next 322 days (sounds like a lot of time, but remember how long it took to get to this point!).

From a financial services perspective, subject to the planned UK / EU free trade agreement being successfully negotiated (and covering financial services in line with political declaration), the prospective arrangements will entail:

  • the free trade agreement;
  • the regulatory regime (largely) of the ‘host’ state;
  • benefits of any EU/UK ‘equivalence’ decisions; and
  • measures, if any, to smooth the impact of exit from the single market.
KEY POINTS FOR SPONSORS AND TRUSTEES
Most EU pensions law has already been incorporated into UK legislation and any changes will require further UK legislation, and the appropriate Parliamentary processes that precede it.
In the meantime, any concerns over investment strategy, sponsoring employer covenant and the resultant impact for scheme funding should be monitored as part of a scheme’s ‘integrated risk management’ (IRM).

Want to know more?


This blog is based on a Commons Library Insight article. For more comprehensive information, click on the links below.

Brendan McLean

Coronavirus and volatility

Stock markets reached all-time highs at the beginning of 2020; then came Coronavirus which caused panic selling in most asset classes due to the adverse impact it could have on businesses and the global economy.

The following week the panic seemed to be over, with some major equity markets rallying. This was particularly evident in the US which posted record highs again, driven by strong quarterly earnings and growth projections from the world’s largest companies, in addition to strong US job creation.

It is impossible to predict the full affect Coronavirus may have on the world economy. The World Health Organization has declared the epidemic a public health emergency, so Coronavirus could still cause markets to decline. The future outcome is unknown.

Highs and lows

What I find most interesting is the volatility it has caused. One example is Tesla, the electric vehicle manufacturer, which saw its shares increase by around 115% in 2020 only to fall by 15% in one day – its worst day ever. The sudden decline was driven by reports that Coronavirus would impact production and deliveries at its factory in China. This highlights the increasingly volatile market.

For bond issuers, 2020 also started off well, with the highest issuance of US high yield debt in a decade at $37bn – until Coronavirus fears saw investors pull $2.9bn out of high yield funds. One high profile US high yield ETF saw its asset base shrink by 7% in a single day – a rapid increase in volatility.

One to watch

The recent bout of volatility may be a sign of things to come for 2020. Trustees need to avoid making decisions based on short-term events and focus instead on their long-term investment strategy.

Alan Collins

Most occupational pension schemes must provide a regular, usually annual, scheme return to The Pensions Regulator (TPR), containing prescribed information that, in part, depends on the type of scheme (DB, DC or Hybrid).

TPR typically issues a scheme return notice in December for DB schemes, and July for DC schemes.

Online process

Schemes must submit their forms using TPR’s online service, Exchange; trustees can access the online form only within the period during which they are obliged to complete it. Trustees must file a scheme return by the date stated on the notice. This will be at least 28 days after the date the notice was issued but, in practice, TPR aims to give six weeks to complete the scheme return. That said, it cannot offer any extension to the deadline.

The information required in a scheme return is summarised on the TPR’s website, together with a checklist showing any recent additions to the return.

If trustees fail to provide a scheme return, they may be liable for a civil penalty of up to £5,000 in the case of an individual and up to £50,000 in other cases.

Additional requirements

  • From 2018, scheme returns needed to include common and conditional (now known as ‘scheme-specific’) data scores. Common data is the basic information all schemes need to uniquely identify individual members. Scheme-specific data is member data that trustees require to enable them to administer their particular scheme.
  • From 2019, trustees submitting DC returns will be asked to confirm when they last measured their scheme’s common data and scheme-specific data. This question has been included to allow TPR to track progress of schemes as they incorporate the record-keeping standards.

If TPR has concerns that its record-keeping standards are not being met, it may engage with individual schemes. If trustees fail to demonstrate they are taking “appropriate steps” to improve records, TPR may take action.

Data in the spotlight

So, in addition to other developments where quality of pension scheme data will be under the spotlight, such as pensions dashboards and addressing inequalities arising from Guaranteed Minimum Pensions, scheme returns are another example of why, when it comes to ‘dirty data’, there is increasingly no place to hide.

Andrew Kerrin

Welcome to our latest Quarterly Report, which focuses on the key pension issues and industry developments in the last three months of 2019.

After almost three years of political debate and uncertainty, the UK is now entering a new era outside of the EU. As our investment report highlights, there was relief that a ‘no deal’ Brexit was avoided at the end of 2019, but schemes should continue to monitor their investment strategy throughout 2020.

Higher standards of governance, administration and a focus on data will remain high on the agenda this year, as evidenced in our articles on the Pensions Ombudsman and The Pensions Regulator.  

Looking to the future, we summarise the main points of the Pension Schemes Bill (CDC schemes, new TPR powers and the Dashboard). Trustees should also be aware of changes required to their Statement of Investment Principles later this year, affecting both content and disclosure.

Our report also features news of the latest HMRC bulletins, the PPF levy for 2020/2021, mortality trends and the issue of ‘greenwashing’ in relation to ESG.

We have highlighted any action sponsors and trustees may need to take. Please contact your usual consultant if you need more details on any of the topics featured in this report or have any questions.

Click on image above or this link to download.

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