Posts by David

David Davison

David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers
David Davison

It is amazing how quickly time flies. It seems like only yesterday that Scottish Housing Associations were absorbing the bad news about the funding position of the Scottish Housing Associations’ Pension Scheme (SHAPS) in late 2013 and getting used to their new higher contributions from 2014. Associations have now just received communication containing the initial results of the September 2015 valuation.

The great news, apparently, is that the ongoing funding deficit has reduced from £304m to £198m, representing an improvement in the funding position from 56% to 76%. The improvement has been attributed to a combination of investment performance, additional contributions and other experience. If this information is confirmed in the formal valuation it could all result in a reduction of the term of the deficit contributions of about five and a half years. This is all great news, isn’t it?

For those of you of an accepting nature then it is job done, issue parked and you would appear to be able to continue to fill your boots with defined benefit accrual without material concerns.  However, if you are of a slightly more sceptical disposition, perhaps built up over many years experience, you may want to dig a little deeper…

It is initially interesting to consider the backdrop of the results. The scheme ‘de-risked’ at the last valuation, investing in lower risk stocks which might have expected a lower return. The results demonstrate that the asset performance has been positive, so credit where credit is due on that front. The difficulty for the Scheme is that the investment return consistently needs to run very fast to keep up with the ever increasing level of liabilities and some difficult underlying membership and longevity issues that the scheme has to deal with, but more on that later.

On the liability side, the position is a bit more intriguing, and more difficult to assess, as unfortunately the report does not incorporate any of the underlying assumptions actually used (the assumptions were disclosed in the Trust’s presentation to employers in November 2015). The report suggests that over the period the value of the liabilities has increased by £112m from £698m to £790m, before changes in market conditions are allowed for.

In the table below I have shown the key changes in assumptions on a “like for like” basis, and their impact on the value of the liabilities.


So, we add £160 million to the £790 million to get an overall value of the liabilities of £950 million – easy, right?   No, this is where things take a sharp turn in a different direction.

Instead of adopting “like for like” assumptions, the Trust have decided that the Scheme no longer needs to hold as much assets to pay future benefits.

The report gives some explanation around this issue:-
“The fall in government bond yields between the 2012 and 2015 valuations together with the low interest rates, has led to a lower rate of discount adopted to calculate the present value of the future payments. This results in a higher value of liabilities.” Ah, so my assumption was right!

“However, the Committee has adopted valuation assumptions reflecting its overall view of the aggregate financial strength (the covenant) of the SHAPS employers. The assessment permitted the Committee to view with more confidence the long-term strength of the sector and therefore apply marginally less prudence to the assumption that investment returns would be realised.” Ah, so in other words we are going to change our approach and adopt a lower funding target (by assuming that investment returns are going to be relatively higher than before)…

OK, I accept that assumptions can change and this will alter the value of the liabilities.  Where I really, really struggle is with the claim that the Trust is applying “marginally less prudence”.  Marginally less – what 1%, 2% maybe?  No, the Trust is applying about 15% less prudence.  I don’t need to go scurrying for the latest Oxford English to realise that a 15% change is hardly marginal.

Since I first became involved in this Scheme, I have been worried about the lack of prudence in the actuarial assumptions.  The 2012 valuation increased the prudence in the assumptions and I welcomed this as a move in the right direction.  The 2015 results smack of a move back to the bad old days of crossing fingers and hoping everything will be OK.  This is how the Scheme got into such trouble in the first place and I urge the Trust to reconsider, even if it means participants paying deficit contributions for a longer period.

As a scheme sponsor, what I would want to know is, if we started with the funding principles agreed at the 2012 valuation, with no change in method, what would the results have been (i.e. confirmation of something around my £960 million figure)? I would also want to see the figures on a solvency basis, as this would provide for a more consistent and objective assessment of the Scheme’s liabilities.

From an employer future cost perspective I would also want to understand the likely impact of the increasing move towards defined contribution for employers and employees, likely to result in an increased average age of DB members. What sort of impact might this have on scheme funding over time?

Employers should also be considering the likely impact on their costs and liabilities of:

  1. the introduction of revised state benefits resulting in the abolition of contracting-out from 31 March 2016. The removal of these NI deductions will increase net contribution costs by 1.4% of band earnings for employees and 3.4% for employers.
  2. the proposed changes to the living wage could also have a negative impact on the funding costs for the scheme as lower earners salaries may increase more rapidly than projected and even employers who have made the move to defined contribution are not immune to this as the Scheme retains the link to future salary for active employees.
  3. the disclosure of these deficit amounts on balance sheet for the first time in 2016 which will make the issue much more visible than previously was the case.

Once all this information is available then its relevance to each employer can be assessed and organisations can decide if they’re happy with their future strategy or if some greater clarity is required.

David Davison

Many charities participate in pension schemes that are contracted-out. Participants in local government pension schemes, multi-employer schemes such as those run by the Pensions Trust, USS and many others will be impacted, as well as those charities running their own defined benefit schemes.

So what’s happening? Contracting-out of the second state pension will be abolished from 6 April 2016, to coincide with the introduction of the new state pension. This will increase the national insurance contributions (NIC) required from employers currently offering a contracted-out scheme, as well increasing the contributions required from employees. Employers will see an increase in contributions of 3.4% of band earnings (earnings between £5,824 and £43,004 for the 2016/17 tax year) on their pensionable payroll and employees an increase of 1.4% of band earnings. Read more »

David Davison

It is that time of year where it is traditional to reflect on the last twelve months and look forward to the year ahead. It would be nice to say that is has been a relatively calm year in the world of pensions. However, I think we can all agree, that despite the slow start, 2015 was a bit of a pensions whirlwind.

This year, it was up to me to take a closer look at the impact 2015 has had on your pension schemes, from pensions liberation and DB to DC transfers, to budget announcements and court case proceedings.

For your convenience we’ve created this short update, highlighting everything you need to know, and how these events could affect your scheme. Download your copy of ‘2015 – A review of the year’ here.

David Davison

The article below appeared in Pensions Expert on 23 November 2015, in the Informed Comment section of the publication.

The Chancellor George Osborne’s recent announcement that the Government’s objective to see the living wage increase to £9.00 by 2020 will have had many charity finance directors scratching their heads and wondering where the extra income is going to come from to fund this.

I suspect however that many will not as yet have got around to considering the pensions impact of the change, which for some will be very significant. Read more »

David Davison

Changes in Pensions

David Davison this week presented at the CFG Risk Conference on Changes in Pensions.  With the new Government in place, the way we view pensions is changing. There are now opportunities to transform pension plans into more flexible and attractive benefits for employees, whilst reducing the costs and risks of pension provision for employers.

This session explored the practicalities of how this works, giving useful tips on how to make the most of pensions and also highlighted new issues to be aware of. You can view the slides here – CFG Presentation London November 2015 [Read-Only].


David Davison

A change in practice by local government pension scheme Lothian Pension Fund (‘LPF’) outlined in a recent Bulletin has finally looked to rectify a long standing anomaly with pension schemes of this type.

Many charities joined LGPS as a result of outsourced arrangements from local authorities or other public bodies. These arrangements resulted in the transfer of staff from the local authority and allowed these staff to continue their pension provision.

Unfortunately Funds were unable to segregate the service for these individuals between the two employing bodies which meant that the later employer, usually a charity, inherited all the liabilities. Read more »

David Davison

Spence & Partners, the UK pension actuaries and administration specialists, today shared their concerns that more charities will become trapped in multi-employer pension schemes with damaging liabilities unless government amends Section 75 legislation.

In March of this year, the Department for Work and Pensions (DWP) were seeking views on the operation of the employer debt regime for non-associated multi-employer defined benefit schemes in a call for evidence which closed in May. As of yet no proposals have been made and the DWP website warns that it was published under the Coalition government and therefore might not be a priority for the current regime. Read more »

David Davison

The Pensions Regulator has produced 65 pages of guidance for pension scheme trustees and sponsors on assessing and monitoring the employer covenant. We have provided some generic guidance via the attached link – TPR’s guidance on assessing and monitoring the employer covenant.

Helpfully in Appendix B and C from pages 54 onwards there is specific guidance for not for profit organisations. The key recommendation is that commercial operations and donations need to be considered independently with the guidance providing examples where donation income represents a low and high proportion of overall income. Read more »

David Davison

Spence & Partners latest blog for Pension Funds Online –

Many charities participating in local government pension schemes (LGPS) have been increasingly frustrated by the lack of recognition of the issues they face by the schemes and indeed the Department for Communities and Local Government (DCLG) who oversee them.

The issues are not new but there remains an element of denial and finger pointing and it’s very easy to see how charities could be frustrated. Read more »

David Davison

In March 2015 the Department for Work & Pensions launched a call for evidence on ‘Section 75 Employer Debt in Non-Associated Multi-Employer Defined Benefit Pension Schemes’. This is a once in a generation opportunity for charities to influence government to get legislation which is seriously damaging charities financial viability. I therefore would urge charities who participate in schemes of this type to make their views known to the DWP. I’ve included  a link to an article I’ve written on Civil Society Online and our response to the Consultation which should hopefully help charities with their responses. The consultation closes on 22nd May 2015 so not much time left.