Archive for May 2020

John Wilson

Whilst the Pension Schemes Bill 2019/2020 does not appear to have progressed since its Committee Stage in the House of Lords on 4 March, there has been activity in the background that provides an indicative direction of travel for the Bill. This activity pre-dates the Covid-19 pandemic, but the current crisis is unlikely to change any of the following developments.

Payment of dividends versus Deficit Recovery Contributions

Despite calls to the contrary, the Government’s position is that it is not appropriate for the Bill to provide for The Pensions Regulator (TPR) to oversee or approve the payment of dividends. Provided the funding plan is meeting the scheme’s needs, it is envisaged that there is likely to be no need for TPR to intervene in the payment of dividends. Some good news for businesses as the ‘stay home’ message is replaced by ‘stay alert’.  

Central repository of SIPs

There is an initiative to develop a central index of statements of investment principles (SIPs). DWP and TPR have now identified a possible mechanism by which the web addresses where schemes SIPs and other documents are published could be collected and then published online. TPR’s scheme return is being explored as a collection mechanism.

The initiative could also be extended to Chair Statements and Implementation Statements. With the introduction of Statements of Strategy for DB schemes proposed in the Bill, it seems that, whatever the governance question is, the answer is a Statement!

TPR powers

In response to several questions and many concerns on the new penalties and sanctions under the Pension Schemes Bill, the government refuses to budge and still believes that the right balance has been struck between increased deterrents and protections for members, whilst minimising negative impacts on industry.

Dashboards

As expected, there will be a staged approach to ‘on boarding’. Nevertheless, the Bill ensures that regulations can capture all occupational and personal pension schemes, including legacy private pensions and private pensions not covered by the auto-enrolment requirements.

Dashboard providers will be brought within the FCA’s existing regulatory framework.

Transfer rights

As regards proposals to amend statutory transfer rights and to introduce a requirement to establish a ‘genuine employment link’ before taking a transfer, it is envisaged that regulations will contain relevant measures on evidence (including payslips and bank statements covering a three-month period).

It is also intended that regulations will include a condition requiring trustees of the ceding scheme to request information from the employer of the receiving scheme to evidence that the employer employs the member and participates in the scheme.

All steps in the right direction for combatting ‘pension scams’, which have reportedly increased during the pandemic.

Pension Schemes Commission

Finally, the debates on the Bill included the possibility of a Pension Schemes Commission. The government is non-committal, simply stating that such a commission is not the only way to identify options and recommendations for the future of pension schemes’ policy; nor is it the only way to engage with stakeholders.

I am not planning to hold my breath on the introduction of a new ‘Turner Commission’!

Angela Burns

At the time of writing there has been a confirmed 34,800 deaths from Covid-19 in the UK, with around 246,000 confirmed live cases.

I recently attended a Webinar run by Prudential (The Impact of Covid-19 on Future Higher-Age Mortality) which had some interesting insights into the current situation and its future impact. 

Covid-19 is a global pandemic that has drastically changed our way of life. 

  • As individuals, we are wondering where the end point will be so that we can resume some form of normality and see our friends and family.
  • As pensions professionals, we are trying to understand this disease in detail to form a view on whether it will significantly affect rates of mortality and hence the ultimate cost of pension provision.
  • For schemes seeking an insurance solution (buy-in/buy-out), we are also trying to understand if it will significantly affect predictions about future mortality, and therefore impact on insurance premiums.

A recent bulletin produced by the CMI confirmed 56,000 to 63,000 registered deaths above what would be expected at this time of year based on ‘standard’ mortality tables. The CMI has confirmed increases of 58%, 116% and 144% (over what would be ‘expected’) in week 18, 17 and 16 of the pandemic respectively. If individuals die sooner than expected, then pension payments cease earlier, and the cost of provision is lower.

How will this impact scheme funding?

Actuarial valuations are carried out every three years. It is unlikely that a new valuation would be commissioned (out-with the three-year cycle) to simply allow for the effect of Covid-19. What we will likely see is a lower liability than expected, on average, at the next actuarial valuation, all other things being equal, as benefits have ceased earlier than expected due to Covid-19 deaths. The impact will be greater for younger deaths, with any liability ‘gain’ reducing as the member ages and nears their ‘expected’ date of death.  

There are around 10m members of defined benefit schemes in the UK and so the numbers of deaths at this point is relatively small in proportion. Given that most Covid-19 deaths are individuals age 65 and over, the average impact is also expected to be small. Schemes with a working-class population may see a larger than average impact as deaths are higher for lower socio-economic groups. However, the impact is still expected to be minor on average.

What should we assume going forward?

At this stage, the future impact of Covid-19 is unknown. It could ‘burn out’ (where the surviving population are strong enough to resist it), we could develop a vaccine, or it could continue to come in waves like the seasonal flu. The latter may result in an increase in long-term mortality rates, with the former resulting in reversion to ‘pre Covid-19’ mortality, or even a reduction in mortality rates to allow for anti-selection (where the remaining population are considered ‘healthier’ than the pre Covid-19 population). It is very early to estimate the long-term impact and data is being analysed every day as it is received. Overall, I don’t think we have any reason at present to be making drastic changes to our funding plans.

Angela Burns

GMP-E and LBG-3

GMP-E and LBG-3: The third Lloyds Bank pension schemes hearing and implications for past transfers-out

The third hearing in the Lloyds Bank GMP equalisation case started on 4 May and finished this week.

A number of questions are being addressed, but fundamentally this case seeks to answer the question – “where an ‘inadequate’ transfer is paid out, what is the effect of this omission?” i.e., what should be done about transfers that did not include an uplift for GMP inequality and, if something needs to be done, who pays for it? Potentially 15,000 transfers in scope just for the Lloyds schemes!

Arguments were submitted on behalf of the Bank, the trustee and the representative member. Here is a brief summary of the submissions on behalf of these different stakeholders.

Members

For the members of the Lloyds Bank pension schemes, it was argued that the transfer value is an element of consideration of the contract of employment and relieving the Bank from liability for an inadequate transfer would breach the principle of equal pay.

The transferring scheme is, therefore, responsible for top-ups in respect of members who have transferred out but did not, at the time, get a ‘GMP equalised’ transfer.

Bank

On behalf of Lloyds Bank, it is submitted that the Bank is relieved of any duty because of the ‘Coloroll’ judgment where it was held –

“…in the event of the transfer of pension rights from one occupational scheme to another owing to a worker’s change of job, the second scheme is obliged, on the worker reaching retirement age, to increase the benefits it undertook to pay him when accepting the transfer so as to eliminate the effects, contrary to Article 119, suffered by the worker in consequence of the inadequacy of the capital transferred, this being due in turn to the discriminatory treatment suffered under the first scheme, and it must do so in relation to benefits payable in respect of periods of service subsequent to 17 May 1990.”

So, if a member brought in a transfer value of £100,000 and it should have been £102,500 then it is the receiving scheme that is on the hook (subject to any indemnities it may have asked for) and the receiving scheme must treat the member as having brought in £102,500.

Trustee

The Trustee in this case is ‘largely’ neutral and just wants to know what to do, if anything. But, it is not completely agnostic.

The Trustee agrees that the obligation moves to the receiving scheme. And this, it is argued, applies whether that scheme is DB or DC, because ‘transfer credits’ provided in return for a transfer can always be DC, even on a DB to DB scheme transfer.

Comment

When this judgment is published, given the depth of the submissions in the case, we should learn about the entire CETV process and the legal effect of a transfer under both domestic and EU law. Lessons should extend far beyond just the key issue mentioned in the introduction to this article.

Whilst the judgment may be a few months away, it is worth noting that the judge (Morgan LJ) found the idea of liabilities being imposed on a person not responsible for wrongdoing (i.e. the receiving scheme) to be “baffling”.

A hint of what is to come?

Graeme Riddoch

Walking through town just before lockdown began (seems a long time ago now!) I was struck by the number of empty shop units. A sign of the times and a trend to online retail. I was dropping some shoes in to be re-soled, not something I could ever imagine doing with an online service.

But, in fact, there’s so much more we can do online than ever before – and it seems so easy! As an example, I recently bought a pair of prescription spectacles online. A friend had just done it, so I gave it a try. I did have some doubts, however, as I have varifocals, which are very tricky to get right.

I downloaded the app, which prompted me to take a selfie, then superimpose different glasses – it was actually quite a fun process! I selected four that I liked and a few days later they arrived. I tried them on and one looked good, so I updated the app with my choice.

Then I took a photograph of my prescription on the app and paid my money. The glasses were at least half the price of my regular optician and a full refund was available within 30 days if I wasn’t happy. So, I thought, why not give it a go?

About a week later they turned up and were perfect. Glad I didn’t go to Specsavers!

Changing behaviours

So, what’s that got to do with getting my shoes resoled? Well, buying varifocals online made me focus on the fact that a lot of consumer behaviour is driven by ease of access and ease of processing. We’re finding out right now which retailers are good and which have a lot still to learn. In Timpsons, I paid for the repair with my Starling Bank debit card. “Ah” said the chap serving me “I’m with them, great aren’t they great? “

Starling is one of a breed of new start up banks, Monzo is another example. The only way to access is by using a phone app, not even a website. It’s big with the kids; having said that I’m 58 and signed up last year and the chap in Timpsons looked to be around my age.

Recent research shows that smartphones and apps are now the way that most of us access the internet. The 2019 Deloitte Mobile Survey shows that smartphone ownership is now 80% in the age 55-75 age group.

Starling’s application process is just so easy. Download the app, take a photo of your driving licence, record a selfie – that’s it. No need to take a passport, utility bill and an application form into a branch. The process took me about two minutes.

The technology behind it is now being adopted in a number of places. It’s very secure and in some cases more robust than traditional ways of verifying IDs.

Members are real people

So, in the pensions world, what lessons can we learn to help us engage better with members?

  • Firstly, consumers are expecting more and more of their service providers. We continually talk about members as if they are some sort of alien life form. The pensions industry offers a consumer service; scheme members are real people like the rest of us. The more they do on-line the more they expect to do on-line.
  • Secondly, age is increasingly less of a predictor of how people engage with services and technology.
  • Thirdly, there’s a lot of noise in the pensions industry at the moment about getting people engaged. So, how about a pension phone app that you can register for with a photo of your driving licence and a selfie? Passwords and two factor authentication, which  can be real barriers to engagement, are consigned to history. Instead, logins can use the phone’s biometrics, thumb print or facial recognition.

We can make pension engagement a reality – for everyone!

Anyway back to where I started. It cost me a trip into town and £65 to re-sole a pair of shoes. A trip to the shops right now would be very welcome, but using an app could be even better!

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