Posts by Rachel

Rachel Graham

The Pensions Regulator (TPR) has now issued their 2018 annual funding statement (“the Statement”) for defined benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2017 to 21 September 2018.

As per the 2017 Statement, TPR outline the ‘appropriate action’ they expect trustees to take with regards to funding. The recommended actions depend on the strength of the employer covenant and the funding characteristics of the scheme in question.  This can be a helpful tool for Trustees undertaking valuations, giving a list of issues to consider and potential action to take.

The Statement puts a particular focus on the need for Trustees to negotiate robustly with employers to ensure pension schemes are being treated fairly.  TPR are “concerned about the growing disparity between dividend growth and stable deficit reduction payments”.  TPR notes that Trustees should monitor ‘covenant leakage’ (i.e. value leaving the business) and decide if the overall covenant strength is affected.  If it is felt there is a change in the covenant, funding and investment decisions should be revisited to ensure an appropriate level of risk in the funding plan.

The Statement goes on to advise Trustees to monitor transfer activity and to consider the potential impact on scheme funding.  If Trustees decide to make an allowance for transfer activity in the funding plan then this should be based on evidence, monitored over time and a contingency plan put in place should experience not be as expected.

The Statement also touches on the uncertainty of Brexit and encourages a collaborative approach to be taken between trustees and employers in order to understand the potential impact of Brexit on the scheme and employer.

The Statement makes a number of references, explicitly and inexplicitly, to TPRs Integrated Risk Management guidance and stresses the importance of having sufficient contingency plans in place should things not turn out as expected. TPR are clear that they will taker a tougher approach to trustees who fail to act in the best interest of members, and as part of their risk assessment approach, TPR will question schemes’ funding and investment strategies if they do not believe they are appropriate.

In our view, it is becoming more and more important for Trustees to have access to information quickly and efficiently to ensure that monitoring can be carried out and contingency plans implemented where required.  TPR are also taking a tougher view on late valuations again supporting the need for efficient valuation processes.  We welcome this approach and hope that Trustees and employers are challenging advisors to meet these requirements.

Rachel Graham

The Pensions Regulator (TPR) has now issued their 2017 annual funding statement (“the Statement”) for defined benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2016 to 21 September 2017. The statement focuses on the longer-term and emphasises some key principles from the TPR’s Code of Practice 3 for funding DB pension schemes, and their supporting guidance on integrated risk management (“IRM”), investments and employer covenant. These are all areas in which Spence & Partners Ltd (“Spence”) has the necessary expertise to assist trustees meet TPR’s requirements.

Schemes with 2017 valuations will be affected differently by market conditions. Generally, TPR expects that scheme liability values will have increased since their 2014 valuations and despite most major asset classes having performed well, this does not fully compensate the increase in liabilities and most schemes are therefore likely to have larger funding deficits than expected.

Spence’s Head of Investment Simon Cohen has provided investment advice to a number of scheme trustees. We have seen that schemes which have adopted interest rate risk hedging are in a better funding position than those schemes that did not over the last three years. The Statement refers to TPR’s investment guidance published recently which sets out what TPR expects of trustees when setting their investment strategy. Spence can assist trustees set an appropriate strategy for their schemes. This is very important as TPR will intervene and engage with schemes where they believe the scheme’s investment strategy is inappropriate or too risky.

Spence’s unique in-house actuarial and administration software, Mantle, has proven to be a useful tool for trustees when considering the impact of the extent to which changing market conditions impacts the level of risk in their schemes. Mantle has the functionality to illustrate how sensitive a scheme’s funding level is to the valuation assumptions used. This gives trustees and employers a much better understanding of how funding, investment and employer covenant strength interact, and assists trustees in making better scheme funding decisions, taking into consideration the longer-term impact of those decisions. Mantle can also be used as an ongoing risk management tool, trustees have direct access to their scheme on Mantle and can check the scheme’s funding level on a daily basis to determine if the scheme appears on track to meeting its long term funding objective.

TPR outline the ‘appropriate action’ they expect trustees to take with regards to funding; this is dependent on the strength of their scheme’s employer covenant. Spence provide scheme actuary services to a number of private pension schemes and have vast experience supporting trustees and employer in recovery plan discussions. Whether trustees wish to reduce or continue with the current pace of scheme funding, or whether higher contributions are required now, Spence’s actuarial team can provide the analysis and advice trustees and employers need during funding discussions, whilst considering employer covenant strength and the investments the scheme has.

The Statement specifically focuses on the expectations of trustees of stressed schemes. Spence can assist trustees in fully evidencing that they have taken the measures appropriate for their scheme, for example Spence can assist with the following services which TPR mention in their statement;

•    employer covenant analysis
•    scheme closure to accrual
•    scheme wind up services

The Statement can be thought of as a good practice guide for trustees. The continuing uncertainty over future economic conditions highlights the importance of effective risk management and collaborative working between trustees, employers and advisers. Trustees should regularly monitor risks and all schemes should have contingency plans in place in the event a downside risk materialises, in order to prepare to recover their funding level and mitigate against any further downside events.

Rachel Graham

The result of the EU referendum on 23 June 2016 was a surprise for many of us. It was difficult to predict the detrimental impact on gilt yields which occurred in the weeks following the result! With many UK pension schemes invested in gilts, the historically low gilt yields which resulted has led to pension schemes being faced with significantly higher liabilities. Transfer values for deferred members of DB schemes have also increased. A transfer value is a best estimate of the cost of providing the benefits to the member in the scheme and these too are calculated with reference to gilt yields.

Trustees may be concerned if their scheme experiences an increase in transfer value requests post Brexit. Trustees are ultimately responsible for the security of benefits of ALL members- those who wish to transfer and those who remain in the scheme. Read more »

Rachel Graham

The Pensions Regulator (TPR) has now issued their 2016 annual funding statement (“the Statement”) primarily aimed at Defined Benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2015 to 21 September 2016. The statement emphasises some key principles from their Code of Practice 3 for funding DB pension schemes, namely the expectation that trustees take an integrated approach to risk management and the importance of collaborative working between trustees, employers and advisers.

The Statement sets out TPR’s expected position of DB pension schemes with valuation dates in the period 22 September 2015 to 21 September 2016. TPR expects these schemes will have experienced most major asset classes having performed well over the period since their last triennial actuarial valuation. However, returns for some asset classes have been relatively flat or negative in the last 12 months.

TPR’s modelling suggests scheme liabilities are likely to have grown at a faster rate than their assets since their last valuation; this is as a result of the volatility in market yields and expectations for interest rates and inflation. This is expected to lead to funding strategies based on lower expected investment returns from most asset classes than in their last valuation. Trustees are advised to consider with their advisers their longer term view of risk and returns and how this is inter-related to their funding plans.

As a result, TPR expects most schemes will have a larger than expected deficit at their valuation date. Depending on the scheme valuation date and their hedging strategy – scheme deficits are estimated to be in the region of 20-35% higher than they previously were. TPR expects that this will lead to changes to existing recovery plans for which trustees and employers will need to assess the associated risks and ensure it is consistent with their risk tolerance and their other risk management plans. TPR’s analysis of sponsoring employers suggests that if a scheme chooses to maintain their existing recovery period end date following their valuation then the median increase in deficit repair contributions (DRCs) is  expected to be in the region of 75-100%. This may or may not be affordable to sponsors and will depend on a number of factors such as the sponsor’s future plans for sustainable growth and strength of the sponsor covenant. TPR expects trustees to seek higher contributions where there is sufficient employer affordability .

Worryingly, around 45-50% of schemes are expected to need to increase DRCs by more than 100% in order to keep the same recovery plan end date. Where the current recovery plan period can not be maintained other adjustments will be required in order to put an appropriate recovery plan in place; for example by extending the recovery plan length. The trustees and employers would need to consider the potential impact of taking on this additional risk.

TPR also outlines recent developments affecting valuation assumptions. This includes;

  • reduced longevity under the 2015 version of the Continuous Mortality Investigation model (CMI2015). Being based on the most up to date analysis, this may be proposed by the scheme actuary. Perhaps surprisingly, TPR is advising some caution and suggesting trustees liaise with their advisers to understand the effects if this reduction to life expectancies is reversed in future.
  • emphasis on valuation assumptions being evidence based. TPR believes that there is very little evidence which would support trustees adjusting their assumptions regarding transfer take ups in light of ‘pension freedoms’ but it may be appropriate in some cases to take some account of this.
  • appropriately setting contribution rates for future accrual in light of reduced expectations for future returns.

TPR’s proportionate approach to risk management is evident throughout the Statement. Trustees are encouraged to understand their scheme’s exposure to risk across covenant, funding and investment and put in place an integrated strategy to manage these risks. Additional practical guidance from TPR on setting an investment strategy is promised later this year and will be welcomed by trustees.

Rachel Graham

The Pensions Regulator (TPR) have recently issued guidance for defined benefit (DB) schemes on how to assess and monitor the employer covenant (“the guidance”). This guidance aims to provide trustees and employers of DB occupational pension schemes with detailed good practice guidance to assist with their duties in the process of employer covenant assessment. This guidance will be welcomed by DB scheme trustees as to quote my colleague Richard Smith’s June 2015 blog “What drives your Employer Covenant?“, “…assessing the strength of a company and then monitoring the way that changes is no easy task”.

In July 2014 the TPR issued its revised Code of Practice 3: Funding Defined Benefits (“COP”) which identified three key areas of risk DB schemes face and how these risks interrelate;

1. Employer Covenant Risk

2. Investment Risk

3. Funding Risk.

Read more »

Rachel Graham

Having heard quite a lot of positive feedback regarding the Future Influencer events from my colleagues, Spence’s recent event on Thursday 21 May was my opportunity to finally find out what all of the fuss was about! One of Waterloo’s Alice in Wonderland inspired rooms was the venue for the event. From the giant Alice figurine which greeted us at the entrance to the miniature elevator in the corridor; this venue has to be seen to be believed.

Following some delicious sausage and bacon breakfast rolls (I bypassed the healthier option of yoghurt and granola), Spence’s Christopher Shortt kicked off the event presenting on The Power of Automation. Christopher’s detail on the process of automation and issues faced in the short and long term prompted his question to the audience of what the biggest factor scheme’s considering automation have to consider? Of course, it is the cost involved, and Christopher highlighted how the benefit from automation in the long term should certainly outweigh the short term cost involved. Spence’s in-house administration and actuarial automated system, Mantle was then the topic of conversation as the Future Influencers were keen to find out how user friendly the system was to the layman and also how the system could possibly deal with uncertainties such as discretionary pension increases. Click here to view Chris’s presentation. Read more »

Rachel Graham

My name is Rachel Graham, I am currently a 3rd year student at Queens University Belfast studying for a BSc in Actuarial Science, a four year degree course, with the third year spent in an actuarial working environment. Having studied Actuarial Mathematics and Actuarial Modelling in my second year at Queens I was keen to gain a better insight into the pension side of actuarial work during my placement year. Read more »

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