Posts by Angela

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?

Angela Burns

Markets have been extremely volatile in recent weeks primarily due to Covid-19.  Many countries are in lock down and a sharp eurozone recession could be on the horizon.

Many employers will be approaching their year-end with accounting figures to be produced at 31 March 2020 and will be worried about what recent market movements can mean for accounting figures.  Markets are fluctuating daily, but current conditions could actually see an improvement in the accounting position for many schemes.

The table below sets out how various economic indicators have changed since 31 March 2019

  31 March 2019 18 March 2020
iBoxx >15 Corporate Bond Index 2.35% p.a. 3.00% p.a.
Bank of England 20-year Implied inflation3.65% p.a. 3.00% p.a.*
Bank of England 20-year nominal spot yield1.60% p.a. 1.30% p.a.*
FTSE All Share Total Return Index 7235.16 5213.67

*estimate based on gilt yield movements

Gilts yields have fallen since 31 March 2019 from 1.60% p.a. to around 1.30% p.a. (although the figure was as low as 0.5% p.a. only a week or so ago).

However, credit spreads have increased dramatically, and the result is that corporate bond yields (on which accounting valuations are based) have increased by around 0.65% p.a. (and have effectively doubled over the last week or so)

Inflation has decreased by 0.65% p.a. and has been much more stable than the gilt or corporate bond yields.

Overall, for schemes with inflation linked benefits, accounting liabilities as at 31 March 2020 (if market conditions are unchanged from now) will have reduced, all other things being equal.

The overall funding position will also depend on how assets have performed.  Schemes with high equity exposure will have seen a significant drop in asset values with the FTSE All Share Total Return Index falling by almost 30%. 

Schemes with Liability Driven Investment (LDI) are likely to see an increase in asset values due to the significant falls in gilt yields (albeit these returns are very volatile).  Well hedged schemes (against gilt yield movements) may therefore see a material improvement in their position.

The table below sets out our broad estimated position for a sample scheme assuming different investment strategies.

31 March 2019 Accounting Position

Assets:                 £30m

Liabilities:            £35m (50% linked to inflation movements)

Deficit:                 £5m      

Investment strategy 1:   30% LDI, 20% Corporate Bonds, 25% equity, 25% diversified growth

Investment strategy 2:   75% equity, 15% corporate bonds, 15% gilts

Estimated position at 16 March 2020

  31 March 2019 Actual 31 March 2020 Estimated Investment Strategy 1 31 March 2020 Estimated Investment Strategy 2
Assets £30m £27m £24m
Liabilities £35m £29m £29m
Deficit (£5m) (£2m) (£5m)

As you can see from the table, we expect that schemes with a high proportion of hedging and a more conservative investment strategy will have an improved accounting position based on current market conditions.  Schemes with a high-risk strategy and lower proportion of hedging may still be in a similar position to last year despite huge falls in asset values.

Please speak to your usual Spence contact if you have any queries or would like some preliminary figures in advance of your year end.

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.

Angela Burns

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

Angela Burns

In our last update we provided a summary of the GMP equalisation ruling in the Lloyds Banking Group court case that has required all pension schemes to equalise guaranteed minimum pensions.

Our update was very much ‘wait and see’ as a number of points had still to be clarified. 

There are still a number of outstanding issues but there has also been positive movement in some areas.

The formation of the GMP Equalisation Working Group

The first guidance from the GMP Equalisation Working Group has been issued.

Contrary to previous updates, the working party guidance has more of a ‘get things moving’ feel to it.  The path for equalising GMP’s seems a bit clearer although there are still a number of outstanding issues to be clarified.

The guidance sets out a summary of the requirements of GMP equalisation and includes some helpful worked examples on each permissible method for equalising GMP’s.

There were some interesting comments in the guidance surrounding previously raised issues:

  • De minimis cases – the guidance states that it expects most Trustees would not apply a de minimis amount, as the work required to determine the amount is comparable to the work required to calculate and pay the uplift;
  • No further liability cases  – the guidance suggests Trustees should write to members to determine if contact can be made, prior to agreeing that no calculations should be carried out;
  • Lack of opportunity cases – where members have lost out on an opportunity as a result of having unequalised benefits (for example retiring early) it will not be possible to compensate for this.

The GMP Equalisation Working Group will produce further guidance on:

  • the availability of data to carry out the exercise;
    • impacted transactions;
    • tax issues (alongside HMRC guidance);
    • reconciliation and rectification of GMP’s.

Issues still to be clarified

The following issues have still to be clarified:

  • There will be a further instalment of the Lloyds court case to determine if transferred out benefits have to be considered in equalisation projects;
  • HMRC are producing guidance on how uplifts should be treated for tax purposes.

Actions for Trustees

The guidance expects that most schemes won’t implement a solution until the tax implications are fully understood.  However, Trustees should be speaking to their advisers about:

  • An appropriate methodology given their schemes circumstances;
  • Availability of data and GMP reconciliation (bearing in mind that further guidance will be released);
  • Understanding the Trust Deed and Rules and any forfeiture rules.
Angela Burns

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

Angela Burns

The Financial Conduct Authority (FCA) recently produced the results of its DB transfer survey in which it stated it was ‘concerned and disappointed’ at the amount of DB transfers. A statement which, I imagine, is based on the assumption that transfers are not always in the member’s best interests, and a belief that a high number of transfers means that incorrect decisions are being made.

Transfer values can be extremely beneficial for individuals given the right circumstances. Recent low yields will also have made transfer values attractive.

It has been a requirement for some time that individuals have to obtain independent financial advice before transferring amounts over £30,000. This should have helped manage the risk of dubious decision making. However, the concern now is that financial advice is not meeting the mark and poor decisions are being made right, left and centre.

The FCA is working to combat advisers that are not providing advice of the expected standard. They are writing to firms where a potential for harm has been identified, to set out expectations for transfer advice and actions the firm should take to improve the quality of their advice.

This is a great project to tighten up standards across the industry. I expect, however, that it could be a slow process.

Trustees can also take measures now to protect members’ interests by giving them a route to quality financial advice rather than having them rely on the powers of Google. ‘At Retirement’ platforms can be used to ensure individuals are:

  • aware of their options under the scheme
  • understand these options, and
  • have a straight through process to a trusted adviser to provide them with quality, well-considered advice.

This should also help to protect pension scheme members against pension scams which are becoming more complex and imaginative in every iteration.

The issue has to be tackled both from an industry perspective and a scheme perspective to ensure good outcomes for all. An excess of poor financial advice may result in a repeat of the mis selling scandal. It is important that trustees and IFAs make sure they are not in the firing line.

Angela Burns

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

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.

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