Posts by Angela

Angela Burns

At the time of writing, on 29 March 2019 the UK will exit the European Union with or without a deal.

It is not possible to guess what will happen in the coming months and how markets will react. For Trustees with defined benefit pension schemes it’s an uncertain time.

The risks that Brexit poses are not new – they are the same risks that pension schemes face every day. Brexit just provides an increased chance of unlikely events.

So how should Trustees prepare?

In December 2015 the Pensions Regulator introduced guidance for Integrated Risk Management confirming that Trustees should consider risk at a holistic level. The three main areas of risk are ‘Funding’, ‘Covenant’ and ‘Investment’. Trustees should consider the main risks faced by the scheme across all three areas and more importantly how they interact. Trustees should also have in place contingency plans setting out actions that will be undertaken to limit the impact of risks should they materialise.

Brexit is effectively a ‘test’ of how well Trustees have implemented the Pensions Regulator’s proposals. A Trustee board with a robust IRM framework will be well placed to deal proactively with risks as they emerge.

It is important during times of volatility that Trustees have access to timely and accurate information to make quick, informed decisions. Trustees should ensure that their advisors are well placed to provide regular information in the lead up to, and after the 29 March 2019. Any delays in information provision will add to risk exposure.

Trustees should also have access to scenario analysis tools to determine the impact of certain events – for example a 1% p.a. fall in gilt yields. This will allow the Trustees to specify more robust and accurate actions when considering contingency plans.

Trustees with valuation dates on or around 29 March 2019 should consider the potential impact of this and may decide that the valuation date should be moved. In my view, there is sufficient flexibility in the funding regime to take a long term view on funding, and taking a snap shot of the funding position at a single point in time should not drive funding decisions.

In times of volatility, Trustees should monitor transfer value requests and any other member events where actuarial factors are used. If, for example, extremely low gilt yields result in high transfer values, the Trustees may choose to delay the provision of transfer values to see if the low gilt yield environment persists.

Trustees should also consider any employer exercises offering member options and when these options may be exercised.

Trustees may wish to disinvest funds in advance to allow for any ‘known’ payments on or around March to avoid disinvesting in inopportune conditions.

From an actuarial perspective planning is key, and a good IRM framework should result in quicker decision making.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 September 2018 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.

Pensions Accounting Newsletter Quarterly Update – Q3 2018

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

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?

Outlay

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.

Operation

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.

Angela Burns

We all face decisions every day – what to have for dinner, whether or not to go to the gym – but how many of these decisions materially affect the quality of our future?  Imagine having to make decisions that do materially affect your future without having sufficient information and understanding?

Studies have shown that around 40% of adults cannot understand basic mathematics.  Yet pension professionals expect to be able to talk about annuities, cash commutation and income drawdown with an understanding audience.

Are we doing enough to support individuals at retirement?

In the defined benefit landscape (yet more jargon) individuals have a number of complex decisions to make at retirement.

  • Do I exchange pension for cash? The rate at which this can be done will determine how valuable (or not) this benefit is (as well as how long you will live) – are individuals mathematically minded enough to understand this?  I expect not.
  • When should I draw retirement benefits and from which arrangement– how do individuals assess value?
  • Would a transfer to a defined contribution arrangement make sense to access new flexibilities in this area? There are lots of points to consider (see my recent article on ‘What Drives People to Transfer?’) and the decision is not a simple one – although the requirement for individuals to take financial advice for transfers above £30,000 provides a helpful structure.
  • Finally, many schemes are now trying to provide more flexibility at retirement (pension increase exchanges, partial transfers etc) but with this comes added complexity, jargon and choice.

Many of these decisions are one-off choices which can’t be re-visited, and decision taken at one point in time may not be the most suitable at another.  How do we help people make the best decisions about their retirement options?

Ultimately individuals will need help to make informed decisions. At the simplest end, this could be via communication provided in an accessible way.  For more straight-forward choices, decision trees or financial guidance may be enough to achieve the right result.

For others the complexity of their pension arrangements or indeed their personal circumstances may require experienced financial advice.  So how do individuals access this advice and avoid falling into the hands of the unscrupulous?  Individuals need to be much more questioning of any offers they receive.  Often a pension is the largest asset an individual may have, individuals therefore have to  be sure who to trust – a professional glossy website does not always mean the appropriate due diligence is being carried out.

At the most basic level individuals can use the www.unbiased.co.uk  website to find financial advisers in their area. Recommendations from friends and colleagues can help as can support from employers and pension scheme trustees.

There is a material risk that bamboozled with options, individuals may just chose the simplest option which may not be the most valuable. There is undoubtedly a place for support through employers and pension schemes providing security and validation. This can give access to quality advisors and a straight through process that makes it easy for individuals to make informed decisions. There is also great potential to better use technology to get key information out there in an accessible way.

Thankfully, the market does seem to be reacting to this need with member engagement packages coming onto the scene.  Depending on providers, individuals can have online access to information when and where they need it and access educational tools such as videos to explain key options.  This can then be linked to access to reputable, experienced financial advisors, overall resulting in a more supported straight through process.

I expect this will be the norm in the years to come and I am hopeful that the result is better informed individuals, and better decisions at retirement.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 June 2018 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.

Download your report

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

Angela Burns

You would have to have been living on the moon over the past few months not to have seen the huge amount of press about pension transfers. Reading it you would be lead to believe that all individuals are gullible idiots and that all financial advisers are scurrilous rogues. Whilst undoubtedly there may be some who fit in to these categories it is far from all. So what is actually driving individuals to consider transferring their defined benefit pot to something with a much less certain outcome?

There is no doubt from my experience that individuals have a more unhealthy pessimism about their life expectancy than statistics would justify and a greater sense of expectation about how they can manage money than experience would suggest.

A starting premise for financial advisers when providing transfer advice is to begin with the assumption that it is not in the individuals best interests to transfer out of a defined benefit arrangement. However with more than 100,000 people having transferred out of DB schemes over the last year (according to Royal London), £10.6bn transferred in the first quarter of 2018 and no sign of a slow down – why has transfer activity increased so significantly in recent years?

Pension Freedoms

Undoubtedly the pension freedoms and choice introduced in April 2015 are the single greatest reason for the increase in transfer activity.  On transferring liabilities to a defined contribution scheme, individuals can access a range of flexibilities including:

  • Purchasing an income (always available but no longer a requirement)
  • Taking their fund as cash subject to tax charges
  • Entering into a drawdown arrangement whereby an income can be taken each year and the fund remains invested

There are also changes to death benefits whereby residual funds pass to dependants tax free on death before age 75 (previously taxed at 55%).

With this in mind, many individuals have looked to access these flexibilities.  Individuals may also feel that they get better value from transferring if:

  • They are single and would not benefit from a spouse pension on death from a defined benefit arrangement. Transferring to a defined contribution scheme means they can access the full value of their accrued benefits with nothing lost on death;
  • They are in ill health and have a lower life expectancy where greater value can be derived over a shorter term.

If an individual already has sufficient pension savings elsewhere or their spouse has material savings, then transferring part of a defined benefit to a defined contribution arrangement could provide a fund that can be taken more flexibly facilitating early retirement, a new career or even a release of early value to children or grand children.

Releasing funds to deal with debt may be more attractive than securing long term income and for those in financial hardship and accessing pension savings via a defined contribution arrangement may be their only option.

Shape of benefits

The provision of a set income increasing by a fixed rate with a spouse benefit may not provide an individual with the shape of benefits they may need or want. The ability to take more income early to facilitate early retirement for example,  and lead a lifestyle in the earlier years of retirement may be a strong driver.

Value for money

With interest rates still at very low levels and inflation relatively high, transfer values are much higher than they might have been historically and as a result, are being seen as good value.  Multiples of 30-40 times the individual’s pension are not unheard of.

Discharging pension scheme liabilities via transfer values is a lower cost option for employers and as such incentivised employer sponsored transfer exercises are still prevalent in the industry.  Individuals may view a transfer value already set at an attractive level but with a further enhancement, as too attractive to turn down.

Overall the perception that transfer values are now providing good value for money is resulting in more individuals now considering this as an option.

Risk

Finally, individuals in a defined benefit scheme with a high risk sponsor may feel that remaining in the scheme presents a risk.

Some individuals may also feel that they can manage their money better and invest their defined contribution fund in such a way that they get more at retirement.

Ultimately the decision is a highly complex one hence the requirement for anyone with a transfer value about £30,000 to receive independent financial advice is a sensible one. There are a huge amount of issues that should be considered and individuals should do what is right for them based on their own circumstances. Without this expert guidance people may make decisions which are unsuitable based upon inappropriate, misleading or indeed no information which may ultimately lead to bad outcomes.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 31 March 2018 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.

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.

Angela Burns

The period for responding to the Financial Conduct Authority’s (“FCA”) consultation on pension redress has ended with replies having to be submitted by 10 June 2017.  The FCA is expected to issue a response in Autumn 2017.

So how did we respond….what did Spence think was the correct way to calculate pension redress payments? Read more »

Angela Burns

For many Trustees and employers, reaching the point where you can secure your pension liabilities with an insurer seems like an impossible task.

The Pensions Regulator publishes ‘Scheme Funding Statistics’ each year based on various ‘tranches’ of pension schemes. As at May 2015, the average buy-out funding level was 58% for schemes with a valuation date between September 2012 and September 2013.

For the majority of schemes , the path to buyout is not an easy one but it is important to understand that there are measures you can take to move towards this goal.

I have set out below our ‘five steps to buy-out’ Read more »

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