Archive for July 2020

Andrew Kerrin

Over the last three months we have experienced an unprecedented degree of uncertainty in our lives.  The question, “What’s coming next?” has been a frequent utterance, with very few (if any) sure answers being provided.  Gaining a grasp of what we will be doing next week, never mind next month, has often been difficult and unsettling.

Set against our uncertain, pandemic themed, world, the pensions industry now seems stable and straightforward by comparison – a testament indeed to the strange times in which we now live!  So, let us look to the main issues that occurred over the last quarter and then ask what is coming up next in our industry, in the knowledge that there are still events that we can respond to and plan for with more certainty.  That should make for a pleasant change from the ambiguity that has become our norm.

Spence have compiled our latest report, highlighting any actions that trustees and sponsors of pension schemes may need to take in the near future.  As you’d expect, the Covid-19 pandemic takes a prominent role in the report, including an update on the latest guidance from the Pension Regulator (TPR). However the report also looks beyond the pandemic, addressing important developments, such as the lightning-paced enactment of the Corporate Insolvency and Governance Act 2020, TPR’s recently issued Annual Funding Statement, the latest on legal sagas involving the Hampshire judgment and RPI/CPI substitution, and our own effort to answer that question, “what’s coming up next?”.

As always, we hope that this quarterly report can be of assistance. From everyone at Spence, we hope you continue to stay safe and enjoy the read.

Angela Burns

The subject of defined benefit (DB) transfer values has always been controversial. The pensions freedoms introduced in 2015 made DB transfers more acceptable but there is still some uncertainty about whether or not individuals choosing to transfer are making the right decision. 

The current climate creates some positive and negative aspects of transferring defined benefits for each of the parties involved.


Transfer values are at an all-time high, valued at 40-50 times the pension being transferred (in comparison to 25 times in the past). An article by XPS confirmed that transfer values ‘rose to record highs during June, which means a transfer will be increasingly tempting’. Pension scheme members are likely to get good value on transfers, with low interest rates and high inflation. 

An important consideration will be how to invest the money in the new arrangement, to minimise risk. There is significant market volatility as a result of Covid-19 and members may easily lose any ‘value’ from a high transfer if the funds are invested in assets that then lose value. Financial advice is more important than ever.

Members may have a number of pressures in the current environment and wish to access funds quickly or look to maximise available funds. This could make them more susceptible than ever to pension scams.


It is, therefore, important that trustees monitor transfer requests and carry out due diligence on any transfer requests.

Trustees also have to consider scheme funding. If Covid-19 has reduced funding levels then it may be appropriate to commission an insufficiency report to reduce transfer values and ensure members are getting no more than their share of scheme funds.

Market volatility has resulted in unstable funding levels. In times of extreme volatility trustees may wish to utilise the three-month legislative window for issuing transfer values to ensure these are not being issued when abnormally high, which will impact on funding and equal treatment.

The Pensions Regulator has advised trustees to issue additional warnings to members at this time – to advise that a transfer may not be in their best interests and that they think carefully before making a decision. These warnings aim to help avoid the scenario where members fall foul to scams, and/or make detrimental financial decisions in the current climate.

Communication is key

Overall, it is important that trustees communicate with members to ensure that they understand the legal ways in which they can access their benefits, should they need to do so. If a member would like to consider a transfer value, giving access to paid financial advice can streamline the process although this may not always be available/affordable. It is worth noting that from 6 April 2017, legislation was amended to introduce a statutory exemption of £500 in a tax year for relevant pensions advice provided to employees. Under this exemption, if an employer provides pensions advice to its employees, or pays or reimburses the costs of pensions advice incurred by the employee, the cost of this advice can be exempt from Income Tax.

Trustees should also have access to daily funding levels to check funding in times of volatility and make decisions in a timely manner. Online member applications are also helpful to give members access to real time information on their benefits and options.

It is worth stressing again that more than ever, communication is key to ensuring members are aware of their options and are able to make well considered decisions.

John Wilson

In the recent case of Carr v Thales Pension Trustees Ltd, the High Court affirmed a Pensions Ombudsman determination on the interpretation of a pension scheme rule relating to pension increases.

The Ombudsman had upheld a member’s complaint, determining that the Retail Prices Index (RPI) had been hard-coded in the rules as the measure of price inflation for increasing pensions in payment. There was nothing in the scheme rules to modify or qualify the term “retail prices index” or the 5% scheme cap on indexation. So, despite the company wanting to change the measure of price inflation in line with the consumer price index, the Ombudsman found that these should be given their ordinary and natural meaning.

On appeal, the High Court held that a “natural and ordinary” reading of the scheme rule gave primacy to the limb that provided for increases to be in line with the RPI.

Even more recently, in Arup & Partners International Ltd v Trustees of the Arup UK Pension Scheme, the principal employer of the Arup pension scheme sought declarations from the High Court on the measure of price inflation for pension increases.

The pension scheme rules provided that the trustees could adjust pension increase calculations if the composition of the Retail Prices Index changed or if RPI was “replaced by another similar index”. The employer argued that RPI had been ‘functionally’ replaced since the Consumer Prices Index (CPI) and Consumer Prices Index, including Housing (CPIH), had come to be regarded as the main measure of inflation for use by pension schemes.

The High Court held, however, that on the true construction of the relevant rule, RPI was “replaced” only if it was discontinued and another similar index was introduced or declared by the responsible body to be in its place. The scheme rule in question did not contemplate any form of ‘functional’ replacement.

It could be you …

These cases demonstrate that the correct measure of price inflation for pension increases continues to be a scheme rules ‘lottery’. There have been nine reported court cases since CPI replaced RPI for State and public sector pensions – only two have resulted in a change to the way that pensions are increased.

On a different, but still price inflation related note, the High Court has been more receptive when asked to correct a mistake in scheme rules. In Univar UK Ltd v Smith and others, the High Court granted rectification of rules regarding inflation-linked pension increases for the defined-benefit section of the Univar Company Pension Scheme. References to an increase calculated using the Retail Prices Index, incorrectly added on a rules rewrite, will be replaced by increases based on the Consumer Prices Index. Had rectification not been granted, it was estimated that that the oversight would increase scheme funding costs by around £23 million!

The ongoing government consultation on reform of the RPI Methodology (where it is recommended that the publication of RPI should cease) could be a ‘game-changer’, but any reform may be up to ten years away. In the meantime, it seems inevitable that further cases relating to the interpretation of pension scheme increase rules will end up before the courts even though past cases suggest that attempts to reduce the rate at which pensions are increased are, in most cases, unlikely to succeed.

Brendan McLean

Unless you have a reliable crystal ball, there are many aspects of the future which are currently highly uncertain. One element of investing, however, is now clearer. Generating future income from assets will be extremely challenging and the result will see investors being pushed into riskier areas of the capital markets.  

Historically, investors could rely on bonds for income. But with central banks reducing interest rates to record lows, to fight the economic effects of Covid-19, yields of government debts have plummeted. Since the start of 2020, UK 10-year gilts yields have declined from (an already low) 0.82% to 0.19%. However, we could see yields fall even further with Japan’s 10-year yield only 0.02% and Germany’s -0.42%. 

At the same time as low interest rates being bad for investors seeking income, there is the additional challenge of attempting to predict how long these conditions might last. The US central bank has forecasted to keep rates at 0.25% until 2022 and will likely only marginally increase them when it does. Having said this, it’s worth noting that Japan has kept its rates at close to 0% since the 1990s, demonstrating that countries can support a low rate environment for an extended period of time.  

Bonds provide investors with income but they also offer another key component of portfolio construction in the form of diversification, which acts as a hedge against equity risk. However, with such low yields available, investors needing to hit a return or income target will struggle and will be forced to look elsewhere. 

Income generation 

There are two ways investors can generate more income in a low yield environment: 

  1. Take additional credit risk by lending to riskier companies.  
  1. Extend duration by lending for longer periods. 

Taking additional credit risk could involve allocating to high yield bonds. However, these are generally highly corrected to equities in periods of market stress, which is when investors need the fixed income diversification benefit. Due to Covid-19 and its economic implications some commenters are saying 10% of the high yield market could default, which is a significant risk to investors. 

The problem with extending duration is that with interest rates at already historic lows they have more room to increase and cause losses. This asymmetric risk profile means extending duration has more downside risk than upside. 

An alternative solution would be to allocate to Multi-Asset Credit funds. These funds take a highly diversified approach, investing across the credit universe, and can adjust their duration depending on market conditions. These strategies aim to provide low correlation to the wider fixed income market and are an attractive solution for pension schemes. 

Trustees will need to work with their advisors to ensure their asset allocation remains suitable and  also that income needs are met in light of the low yielding environment, which may be with us for some time. 

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 June 2020 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 or by telephone on 0141 331 9984.

Colin Wheeler

For many in the UK, 2016 will be remembered as the year we voted to leave the EU, and end a relationship dating back to the 1970s.

For many in the pensions industry, we may choose instead to remember 2016 for something completely different; the year when contracting out ceased after almost 50 years.

Two completely separate events, but the period since 2016 is not without similarities. While the Government has become exasperated with the dither and delay over Brexit, and we still do not have clarity over whether we leave with a deal or no deal, pension scheme administrators have spent that time attempting to reconcile liabilities with NISPI (a section of the National Insurance Contributions Office) and, after many promises of “they’re coming soon”, final data cuts from NISPI have now started to arrive.

When the process of reconciliation began back in 2016, and in many cases earlier than this, none of us really thought that it would still be bubbling away in 2020. Even now, we are not left with what one could consider to be a fully reconciled position. We never pretended it would be easy, but what we have faced has tested the most patient of us, and some will have been beaten into submission!

Promises were made

The industry has been promised these final data cuts for the best part of a year now. After all the hard work invested in the preceding years, we might be entitled to think it would be a routine process to agree them and move on. What we are in fact seeing is quite different, with data being provided which is at odds with what we had previously agreed, and which NISPI are advising should be handled with care. It may yet prove easier to strike that trade deal than to fully complete a reconciliation.

Across the industry there is a sense of disappointment at how this has all played out. Administrators are now in a position where they are having to verify GMPs provided in the final data cut using HMRC’s own online checker. This is already throwing up more inconsistencies than one would have expected. Even schemes which thought they had fully reconciled already are finding that the final data received does not reflect what they had previously been advised. 

Have we wasted our time?

Most scheme administrators would have been working on the basis that, moving forward, they would have a GMP recorded which was fully reconciled and could be relied upon in calculations. The reality seems to be that in many cases the process of settling a member’s benefits will include running the online GMP checker to make sure the correct GMP is going into payment. Had we known this all along, I’m sure we would have taken a different approach to the reconciliation process.

Where the final data from NISPI contains members that you do not believe are in your scheme, there is no way of challenging this, so trustees may be faced with again having to decide if their records are more accurate than those of NISPI. Do they really want to engage administrators, and potentially lawyers, in further work and advice on what to accept, not to mention the further costs? A pragmatic approach may be to follow the guidance issued by PASA when having to make decisions on these “stalemate” cases.

Many schemes already have plans in place, or at least under discussion, to initially rectify, and to then equalise GMPs. Both of these processes are underpinned by schemes having confidence that they are holding the correct GMP data, which makes the final data cuts of even more significance. And taking things one step further, eventual buy out of benefits with an insurer is the end game for all schemes, when insurers will look for evidence that GMPs were fully reconciled back to NISPI records.

So, while it remains a real possibility that the UK’s negotiations with their EU counterparts may result in No Deal as soon as the end of 2020, it would appear that the process of reconciling and agreeing GMPs will roll on for some time longer. Where member’s benefits are concerned, we do not have the pensions equivalent of No Deal as an option.

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