Christmas is allegedly the season to be jolly so it seems to
be an appropriate time of year to remember the good things about the UK pension
scene. There are a lot of them!
Firstly, there are currently well over 10 million members of
Defined Benefit (DB) schemes in the UK private sector. This includes 1.3
million people who are still accruing benefits, not to mention all those in the
public sector. The private sector is currently paying over 4 million pensions
regularly and in full. Despite the impact of the credit crunch, low interest
rates and increased longevity, these DB schemes are now estimated to be funded
at 73% of the full cost of buying guaranteed benefits from an insurance
company, up from 60% in 2006.
There are still inevitably some corporate failures where
members have to rely on the Pension Protection Fund (PPF) for their benefits.
There are less than 250,000 who have had to do so since the PPF started in 2005
though and their payments from the PPF are well-protected, with £6.7 billion
reserves and an estimated probability of 91% of meeting their funding target.
The PPF is funded by a levy on the other schemes and the total levy fell last
year to £541 million, some way below the £725 million that the PPF was able to
pay out. That’s a wonderful improvement from the bad old days when members
could lose their pensions entirely if their employer went bust.
On the Defined Contribution (DC) side, auto-enrolment has
been a huge success too. The statistics at the end of November 2018 showed that
9,958,000 people have been auto-enrolled into pension schemes, which is a
massive number of new savers who won’t be solely reliant on the State pension
when they retire. That’s particularly important when the State pension itself
is under huge pressure due to an ageing population and austerity and it again
shows the advantages of personal pension saving.
Finally, the pension industry keeps trying to improve the
regulatory landscape to get the best results. Successive Governments have
decimated DB schemes with excessive regulation and, more significantly, by
imposing additional financial obligations on schemes retrospectively. We have
been lobbying for years for more flexibility and it’s great to see that the
Royal Mail and Communications Workers Union have got support from the DWP and
politicians to try a new Collective DC arrangement. This isn’t a magical
solution to the pensions issue but it has a lot of merit and it’s great to see
the industry trying to make the best of a very muddled legislative background.
We’re very proud at Spence to be part of the industry that has delivered these opportunities for millions of people to have a better quality of retirement. The real stars of the industry though are still the sponsoring employers who have paid most of the money needed over the years for their staff to get decent pensions. We also need to recognise the diligent efforts and hard work from trustees, who give up their time and wrestle with the complexities of pension regulations to get the best outcomes for their schemes and members.
Well done everyone and a Merry Christmas to you all.
Something must be done! So says the work and Pensions Select Committee chaired by Frank Field MP in the wake of high profile cases like Carillion and BHS. Knee jerk reactions in Parliament rarely lead to the best laws and I suspect that this habitual problem will only be exacerbated with laws made while everyone is distracted by Brexit. What are the chances of the Government actually improving the pension’s landscape?
Well, firstly, there are some changes that can be made which are at least harmless in principle and may even do some good. It’s hard to find a compelling reason to argue against strengthening penalties for wilful or grossly reckless behaviour by trustees and employers, for example. On the other hand it’s only ever been a tiny minority of schemes that have suffered from such behaviour so it’s unlikely that making it a criminal offence will improve things much. There’s also the likely unintended consequence that some diligent trustees will be prompted to err too much on the side of caution rather than run any risk at all of being accused of recklessness.
The problem is that the Select Committee is extrapolating to the wrong conclusion. The Pensions Regulator had been involved with Carillion before it collapsed, but had still not managed to avoid the current problems arising for its pension schemes. The dilemma was though that Carillion was already struggling and the Trustees and the Regulator were in an invidious position. They could have encouraged (or even tried to force) the employer to pay higher contributions at the expense of dividends. If so, that could well have driven investors away and led to a collapse sooner. With the benefit of hindsight the Committee is convinced that the decisions made were wrong, but who really knows what would have happened otherwise. In any event, the problems at Carillion were with the company itself and the pension scheme was just collateral damage. Companies will always be at the risk of going bust and it’s unrealistic to insist on full solvency funding for every scheme at all times just in case it happens to be one of the unlucky ones. Perhaps we just need to be honest about the fact that sometimes bad things happen and it’s not always possible to completely protect people.
Secondly, I happen to have liked the practical way that the Regulator worked in the good old days. They encouraged trustees to do the right thing and explained when they were getting it wrong, only using their formal powers as a last resort. Sometimes they got it wrong but mostly the Regulator found a good balance in a difficult area. Now that something “must be done”, the Regulator has used its enforcement powers in 22% more cases in the second quarter of 2018 than in the first quarter. Have there really been 8,000 more cases where the Regulator needed to step in or are we just seeing a reaction to the unfair criticism for past performance?
Finally, there is definitely a bright side. The Regulator has historically been slightly nervous about using some of its existing powers even when they are clearly justified, possibly due to a fear of being over-ruled later. In the latest quarterly report, the Regulator has used its information gathering powers 31 times, taken action against 25 schemes for failing to submit an annual return and appointed 162 trustees to protect member benefits. The Regulator also exercised powers for the first time ever under the Proceeds of Crime Act 2002, Section 10 of the Pensions Act 1995 and the Computer Misuse Act 1990 (which by my reckoning has been in force for 28 years so far). That certainly seems to support the claim that the Regulator already had more powers if it wanted to use them!
In particular, the Section 10 fine of £25,000 for the Trustees who had failed to produce two actuarial valuations is a welcome wake-up call to the handful of trustees and employers who behave badly. However, I still hope (and expect) that the Regulator will limit the toughest stance to those that deserve it and continue to support hard-working and dedicated trustees to do their best – without leaving them terrified of being sent to jail or the poor house if they ever make an honest mistake or things go wrong for their scheme.
At the end of 2017, a survey by the Society of Pension Professionals (SPP) found that 79% of its members felt that the UK pensions system was unfair to young people. Frankly, I wonder what the 15% of SPP members who disagreed were thinking, especially the 3% who strongly disagreed with this fairly obvious statement of fact. Perhaps they just pressed the wrong voting button accidentally…
Let’s look at the State pension first. The Office of Budget Responsibility (OBR) has forecast an increase in the cost of the State pension from 5.0% of GDP to 7.1% of GDP over the next 45 years. This forecast assumes no change to current pension policy, so includes allowance for planned rises in State Pension Age (SPA). The extra cost of £700 each year for every household in the UK seems unlikely to be affordable so my guess is that further reductions will be necessary to balance the budget. The triple lock on pension increases alone is expected to add over 1% of GDP to the cost of the State pension within 50 years. I imagine the new voters hoping for Jeremy Corbyn to be Prime Minister may be voting for more generous pensions for the current generation of retirees than they can realistically expect to get themselves.
Moving on to private sector pensions, there were 3,500 Defined Benefit (DB) schemes open to new members in 2006 but only 700 left in 2016. Over the same period, the number of employees earning DB benefits fell from 3.6 million to 1.3 million. The Institute and Faculty of Actuaries (IFOA) says that a private sector worker born in the 1960s is almost four times as likely to have a DB pension as one born in the early 80s.
The typical rule of thumb used to be that a DB scheme might cost 15% of salary, with the employer bearing two-thirds of the cost. Recent analysis shows that the surviving DB schemes are costing 22.7% on average, with only a quarter of this cost met by employees. That means that employers with DB schemes are on average paying five times as much as those with Defined Contribution (DC) schemes, where the average employer contribution rate is only 3.2% (with employees paying an average 1.0% too).
In fairness, these DC contribution rates are distorted by new Auto-Enrolment (AE) schemes and the average DC contribution from employers in 2012 was 6.6%, still only just over a third of the corresponding rate for DB schemes. Employers in AE schemes are also going to be forced to make higher contributions, with the minimum rate having increased to 2% in April and due to rise again to 3% in 2019. Meanwhile, employees will have to pay 5% contributions, meaning that they are paying more than half the cost overall, while DB members still only pay a quarter of the cost of a much higher benefit.
The Government is perfectly aware of this issue (which is much wider than pensions) and has made some efforts to address it. The policy to increase SPA as people live longer is unpopular but has been defended to date, albeit slightly weakly, and Theresa May’s manifesto admission that the triple lock would go was a massive vote loser. Several kites have been flown about intergenerational taxes but none have met with anything other than resistance. The public aren’t thinking about affordability or fairness over the coming decades and a Parliament only lasts for five years, so can we really blame the politicians for letting the unfairness drift on?
The world is a very uncertain place at the moment and strangely that might mean a period of relative stability for UK pension regulations. The main reason for optimism about such stability is simply that Parliament will have to focus so heavily on Brexit issues that there will be no time for another Pensions Act any time soon. The second reason is that there doesn’t seem to be any real appetite for any major change, despite the loud shouting from various parties on many, many sides. Read more »
The Government recently announced that the State Pension Age will increase to 68 in 2037 – seven years earlier then planned. This may seem odd given current news about longevity improvements slowing down but it actually makes perfect sense.
The first State Pension in the UK was introduced in 1908 and paid the 25% of people who reached age 70 for an average of 9 years. The Basic State Pension came in from 1948 and allowed people to retire at 65, with a life expectancy of 12 years. But, by 2014 this had risen to 21 years (for men) so it’s no wonder that something had to give. Read more »
Spence & Partners, the UK actuaries and consultants, has moved their Manchester office due to expansion. The company opened their Manchester office in 2015, with Chris Roberts relocating to develop the presence. This year, the team is growing to three front-line consultants and has moved to larger premises, remaining in the same street just across the road, at 82 King Street.
Hugh Nolan, Director at Spence commented: “We have seen an increased interest in our services across the North of England since setting up our Manchester office in 2015 and we have had to expand in response to this extra demand. I look forward to welcoming our new team members as we continue to grow our business in the area.”
With ever more people falling into the “Just About Managing” category as inflation increases faster than many pay packets, pension saving is likely to feel the pinch. Employees and employers both need clear and simple guidance on the choices to get the best outcomes.
In the infamous Jam Experiment (the psychological study rather than the jazz quintet of the same name), ten times as many customers bought some jam when offered a choice of six flavours rather than 24. Similarly, sales of Head & Shoulders went up 10% when the brand range reduced from 26 to 15 varieties. What on earth was Mr Heinz thinking when he decided to advertise a whopping 57 varieties? He could have taken over the whole world if he’d stuck to plain old baked beans in tomato sauce!
One of the authors of the Jam Experiment (lyengar) turned her hand to pensions later, finding that US plans offering just two investment options had a 75% take up rate – falling to 61% where they had 59 choices, which is even more than Mr Heinz. Back in 1999, Baber and Odean found that the least active traders got an 18.5% return compared to 11.4% for the most active traders. The average investor who switched stocks lost out by 3% over the following 12 months. Nowadays few people would object to a return of 11.4% but we’d all definitely want to get a little bit extra if it’s available given the current low expectations of future returns. Read more »
Once upon a time, there was a Scheme Actuary. He was very proud of his profession and his reputation as a prudent man of business. Trustees all across the land admired and respected him and queued up to follow his advice, for they all understood how clever and learned he was. Besides, the wise old King passed a law requiring them to appoint a Scheme Actuary so they had to have one anyway…
One day the actuary was counting out the gold coins in a pension scheme and a tiny fragment chipped off one and flew straight into his eye. From that day on, he could only see pensions through a gilt lens and his peripheral vision vanished altogether. However, nobody in the Kingdom knew about this incident, and everyone still trusted the Grand Vizier (surely “actuary”?) when he demanded a mountain of gold from every farmer, so he could look after all their cows should they go bankrupt… which many promptly did, since they didn’t all have a spare mountain of gold lying around.
Of course this is just a fairy tale and couldn’t happen in real life. Or could it? In fact, a similar story happens every day in pensions – albeit not as extreme or (hopefully) amusing. Read more »
So apparently we’re all living longer than ever before and the Government’s solution to keep State pensions affordable is to make everyone retire later. That’s all well and good if your job is easy and you can keep doing it until you’re 67 or 70 (so MPs and Scheme Actuaries will be fine, thankyou very much) but it’s not so practical in many occupations where the physical demands are much higher. In fact, recent research reveals that 12% of people within five years of State Pension Age are too ill or disabled to work. According to the TUC’s report “Postponing the pension: are we all working longer?”, only half of people aged 60 to 64 are economically active. The half that aren’t earning does include the lucky folk who have been able to choose to take early retirement but it also includes those who have been made redundant or are unable to find a job, as well as those too sick, so it’s a safe bet to say that far more than one in eight people in this age range are unable to work. Read more »
So the country has spoken in a momentous and slightly surprising result! We now enter a period of extreme uncertainty while we wait to see what happens next. Markets don’t like uncertainty and we’ve already seen sterling fall to levels last seen 30 years ago but there is no need to panic. Our legal framework today remains exactly the same as it was yesterday and we have some time to decide what changes we’ll make and watch how negotiations go.
As far as pension schemes go, we can take comfort from the fact that funding is a long term proposition and we can afford to avoid any knee-jerk reactions. There may also be some opportunities for funding levels to increase, especially if we see a rise in gilt yields (which may be needed to attract international money into the UK coffers). Trustees can potentially take advantage of the expected volatility in markets to reach their investment objectives. Setting clear targets in advance and monitoring market movements will allow schemes to trigger investment switches whenever market conditions are favourable, locking in improvements as they happen without needing extensive discussions that lead to missed chances. Read more »