Posts by Angela

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.

Members

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.

Trustees

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.

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 angela_burns@spenceandpartners.co.uk or by telephone on 0141 331 9984.

Angela Burns

An employer perspective

Many employers will be in the process of consulting on 31 March 2020 actuarial valuations.

As part of the valuation process the Trustees must consult with the employer.  The Trustees will engage with the employer in relation to the assumptions to use in the valuation, and on the contributions to be agreed as part of any Recovery Plan.

The current climate is likely to impact on these discussions in a number of areas:

  • The funding position given market conditions as at 31 March 2020;
  • The covenant of the Employer and short-term cashflow.

Funding position

Funding positions as at 31 March 2020 are likely to be variable.

Interest rates have fallen by around 1% p.a. since 31 March 2017 which will increase liabilities by around 20% depending on the maturity of the scheme.  Inflation has also fallen by around 0.6% p.a. which will reduce liabilities, all other things being equal.  The impact will depend on the level of inflation linked benefits in the scheme.  Considering both effects, schemes are likely to see increased liabilities, with schemes with fixed benefits impacted more.

The deficit position will also be impacted by how scheme assets have performed.  The position will be highly dependent on the individual investments held.  Growth assets may be broadly neutral – performing well until early 2020 then falling sharply due to Covid-19.  Bonds will have performed well – any schemes with hedging in place will have seen the value of this in recent months.

Schemes may have also seen positive experience since the previous valuation.  Inflation may well have been lower than assumed over the period.  The impact of member events, such as taking a Pension Commencement Lump Sum on retirement, will have more of an impact due to the low interest rate environment.

Overall, on a like for like basis with the previous valuation, deficits are likely to have increased for schemes with fixed benefits and no hedging in place, and decreased for schemes with inflation linked benefits and high levels of hedging.

When considering assumption setting at 31 March 2020, we would expect to see updated mortality assumptions based on the most recently available information.  We would also encourage consideration of future expected returns and how these may have changed given the current environment – for example has the equity risk premium increased and if so should a like-for-like ‘gilts plus’ basis have a higher outperformance assumption?  It is important that prudence is not compounded.  We would also look for recovery plans to allow for best-estimate returns on scheme assets where this is appropriate.

Covenant/Cash Constraints

The Pensions Regulator generally expects to see a similar level of contributions agreed as in previous years, with good reasoning if contributions have to reduce.  The best support for a pension scheme is a strong employer.  Employers can negotiate on the level and timing of contributions payable and, as a result of Covid-19, can request a deferral of contributions to ensure the ongoing viability of the business.

Trustees are likely to request cashflow forecasts and management accounts to show the need for any reduction/deferral.  Employers should be aware that less contributions now means more contributions later.

What should employers consider when agreeing valuations?

It is important that employers take their own professional advice, in particular in relation to setting the assumptions.  There is a range of acceptable assumptions and ensuring these are set at the appropriate level should help with affordability.

It is important that as well as agreeing the valuation, employers consider a long-term view – what is the ultimate goal and what is the plan to get there? Advisers can help with strategy and journey plans and give employers some direction and control over the pension scheme.

There is 15 months to complete the valuation process.  We would expect that the majority of valuations are completed well within this window.

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.

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