Archive for August 2020

David Davison

Until quite recently I was blissfully unaware that common sense was regional, at least where LGPS is concerned.

Through advising third sector bodies in LGPS across the UK I get the chance to see variations in practice, good and bad. It is quite startling how widespread these variations are given everyone is working from broadly the same set of regulations but, unfortunately in some key areas good practice is hard to find.

A good example is in the divergence of practice in relation to how funds manage exit debts. Firstly, at a regional level, Regulation is in place in Scotland which provides funds with the option to suspend a cessation debt, which is a freedom not currently in statute in England & Wales. As per my previous Bulletin it is, however being consulted upon, though very, very, very slowly.

Fortunately, a number of funds can see the common sense in making pragmatic arrangements to deal with exits, recognising that it cannot be in anyone’s interests for admitted bodies to be accruing liabilities which ultimately they will be unable to afford. This is not only bad for scheme funding but I would also question if funds are properly discharging their responsibilities in relation to other employers, by exposing them to this level of unwarranted risk.

Some funds are issuing options papers which outline all of the options including a ‘suspension’ along with supporting details, which allows employers to make an informed choice. This seems like a sensible approach for all concerned.

Whilst ceasing further accrual can be seen by the admitted bodies as a desirable outcome in responsibly managing risk, something equally well recognised across all other DB provision in the UK, unfortunately this simple truth does not seem quite as obvious to some funds. They instead are taking a King Canute approach and just trying to avoid the rising tides around them and expressing the view that they couldn’t possibly do anything pragmatic without the specific Regulation being in place to allow them to act in a sensible way. They are much happier to see employers continue to build liabilities beyond their means, as recognised by the employers, rather than take steps to deal with the issue.

What I find interesting is how quickly action was taken to address a flaw in regulation around the treatment of surpluses, as this had a negative impact on funds’ finances, but we seem to be in an interminable loop of consultation on exits without any sign of implementation.

We’ve already witnessed numerous insolvencies directly as a result of LGPS pension participation (and indeed in other schemes such as Plumbing Pensions with similar legislation), and against a background of Covid-19 the outlook doesn’t get any more promising.

To those enlightened souls out there taking a pragmatic approach to this issue, I salute you. To everyone else including MHCLG, please get your finger out!

Matt Masters

I need to declare an interest. I’m a Scheme Actuary. I like to believe that I always provide a great service to my clients. But, how do I know it is always the service that they require?

I’m proud to be part of a profession that sets the highest professional standards of honesty and integrity. It goes without saying that your Scheme Actuary will be technically proficient, but is that enough? 

Question time

Even if they are getting the answers they want to hear, Trustees should feel able to challenge their Scheme Actuary. It is important to question the advice they receive so that they can satisfy themselves that their Scheme Actuary is genuinely giving the best advice for the specific needs of the scheme? Is your Scheme Actuary willing to have difficult conversations when required?

If your scheme has an Independent Trustee, they will be well placed to comment on the Scheme Actuary’s performance. They will have a view from across the wider industry, meeting Scheme Actuaries from many different firms with many different viewpoints and opinions. This will afford them a unique opportunity to compare and contrast different styles and approaches to similar issues as those encountered by your scheme. 

Is the same advice being given on different schemes, when perhaps a difference in approach is justified? Is there a current “flavour of the month” or latest “sales push” that can be seen?

My experience suggests that this is not uncommon in the industry and also, that there is a tendency to put less experienced Scheme Actuaries onto smaller pension schemes. Often, it is these very schemes where tricky issues arise and a more experienced head is needed

Rising to the challenge

Nobody gets it right all the time. Scheme Actuaries should be able to accept challenges and consider alternatives that might change or enhance their original advice and better suit the particular scenarios of your scheme. Challenge is healthy and might lead to more tailored advice to achieve better outcomes for your scheme members.

More than ever, a Scheme Actuary needs to be not only technically accomplished, but also an expert communicator. This is not easy when dealing with technical subject matter, and various different legislative and client specific requirements. But it is eminently possible if trustees and their Scheme Actuary engage in open and regular dialogue about the issues facing the scheme and the best way of resolving these.

Graeme Riddoch

I hit my favourite café for a half price coffee this morning. Eating out to help out in my own small way. As usual I was presented with a QR code to scan. That took me to a web page where I logged my name and phone number for tracing purposes.

QR codes have been around since the 1960s; as we come out of lockdown they seem to be everywhere. QR stands for Quick Response. Essentially, it’s a type of barcode which, when read by your smartphone camera will take you directly to a website, video or an app, without the need to type in a fiddly web address.

Old age thinking …

We’re now using QR codes to take DB members to our pensions app. It’s a simple experience. Open the camera, point it at the code and it takes you to the Apple App Store or Google Play.

I showed it to a trustee about six months ago. “Our members won’t use that” he said. Unfortunately, that’s an all too common reaction to new technology in the DB pensions arena. The membership demographic is older, the trustees are often older and they hold the perception that it’s only 20-year olds who use smartphones and apps.

Right now, if a DB scheme member wants to order food at a restaurant, they are probably using QR codes to access the menu! There is no doubt that the current pandemic has accelerated certain trends; one in particularly is the move to online.

Why wouldn’t DB members want the same sort of experience from their pension scheme as the one they can get from the retail and hospitality sectors, or indeed other financial services?

Alistair McQueen, Head of Savings & Retirement at Aviva, picked up on this issue recently on Twitter, further discussed in Henry Tapper’s excellent blog. The fact that 76% of people now bank online is clear evidence that there is both the appetite and capacity to transact digitally.

Breaking down barriers …

I’d go further. The Deloitte Digital Survey (UK edition, Deloitte Mobile Consumer Survey 2019) shows that in the 45-65 age group smartphone ownership is around 80%. Apps are now the way that most people access the internet.

Some trustees may be reluctant to adopt new technology but it could be argued that they have a duty to ensure that they do not act to the detriment of their members and are not the first barrier to better digital engagement.

The next barrier to getting members online is the registration process. Two factor authentication and remembering passwords are often cited as problematic. Experience shows that if you make something easy people will use it. For example, the QR code used to get to the app store is personalised like a password. That means a much quicker and easier process to register for the first time. In our initial testing, 99% of people successfully used the QR code to register.

Designing an app for smartphones means that we can work with their inbuilt security features, such as fingerprint and facial recognition. Once registered, a customer can access the pensions app like any other app on their phone.

From stone age to digital age to engage …

We are in the customer testing stage of the app which allows members to manage their benefits from their smartphone. Everything is possible, from a change of address to viewing benefits, to retiring. Initial feedback is that it gives members what they need in the way they want it.

The other benefit is the potential cost saving to the scheme. Our modelling suggests that as much as a 30% saving in administration cost is possible. Some or all of that could be passed onto the scheme. But only if we can get trustees to realise that “their members will engage”.

John Wilson

The Finance Act 2020 received Royal Assent on 22 July[1]. It has only one explicit pensions measure: Section 22, which reforms, from 6 April 2020, the Tapered Annual Allowance (TAA)  – see below for more detail.

As a reminder, the Lifetime Allowance has also changed from the same date and now stands at £1,073,100 (previously, £1,055,000).

Reform of the TAA

Following an increase in the ‘threshold income’ and ‘adjusted income’[2], those individuals with a threshold income of between £110,000 and £200,000 and adjusted income of between £150,000 and £240,000 will no longer be impacted by the TAA. However, for individuals who do continue to be affected, the minimum TAA will be £4,000 (previously, £10,000).

This measure will affect an estimated 250,000 individuals who, before 6 April 2020, were impacted by the TAA. This figure is made up of:

  • individuals who no longer fit the criteria as they now fall below either one or both of the thresholds,
  • those who are still impacted by the taper but are entitled to make more tax relievable pension contributions, and
  • individuals who will be impacted by the reduced minimum TAA.

Technical Detail

  • The threshold income, which is broadly net income before tax (excluding pension contributions), is increased from £110,000 to £200,000.
  • The adjusted income, which is broadly net income plus pension accrual, is increased from £150,000 to £240,000.
  • The minimum TAA is decreased from £10,000 to £4,000. So, someone affected could have a TAA of between £4,000 and £40,000.
  • The measure will have effect for the tax year 2020/2021 and for benefits accrued on or after 6 April 2020.

The government introduced the TAA from 6 April 2016 for those with incomes of over £150,000. The TAA is triggered when both the threshold income and the adjusted income exceeds their designated limits. The £40,000 annual allowance is reduced by £1 for every £2 that the adjusted income exceeds £150,000, to a minimum annual allowance of £10,000.


[1] https://www.legislation.gov.uk/ukpga/2020/14/contents/enacted

[2] https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm057100

Matt Masters

We are now more than four months into something that has had one of the biggest impacts on our way of life in living memory. There is no clear historical precedent for the nature and scale of Covid-19. Nonetheless, previous pandemics and other crises can offer clues as to what to expect, both in terms of the potential impact on lives as well as on the wider economy. 

Two lessons of note:

  • There is a trade-off between economic stability and public health and safety. The more short-term economic pain people are willing to endure, the more lives will be saved; and 
  • Disasters often create permanent change, with the most affected areas of a country or an economy taking potentially years to recover.

So what does this mean for pension schemes?

We are starting to see differentiation between countries in their responses to Covid-19, with the Euro area and Japan fairing relatively well in virus control, the US and Latin America being less successful, with Canada and the UK somewhere in the middle. 

Nevertheless, based on the performance of Western stock markets over the past 100 years, market declines of the size recently seen typically take around two years to recover from (my colleague, James Sweetnam, wrote an excellent article in June 2020 looking at how long it takes to recover from a bear market). 

Whether you see this as good or bad news depends on your investment horizon. If you have a longer-term perspective, like many pension schemes, then a two or three-year hiatus need not be particularly unsettling. 

Ultimately, the aim of the game is to pay members their benefits over the long term, so panicking or making short-term decisions is likely to be counter-productive. Instead, speak with your advisers and focus on ensuring the right long-term investment and funding strategies are in place.  

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