Making Sense of Pensions

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.


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.


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.


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.


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?

Graeme Riddoch

Walking through town just before lockdown began (seems a long time ago now!) I was struck by the number of empty shop units. A sign of the times and a trend to online retail. I was dropping some shoes in to be re-soled, not something I could ever imagine doing with an online service.

But, in fact, there’s so much more we can do online than ever before – and it seems so easy! As an example, I recently bought a pair of prescription spectacles online. A friend had just done it, so I gave it a try. I did have some doubts, however, as I have varifocals, which are very tricky to get right.

I downloaded the app, which prompted me to take a selfie, then superimpose different glasses – it was actually quite a fun process! I selected four that I liked and a few days later they arrived. I tried them on and one looked good, so I updated the app with my choice.

Then I took a photograph of my prescription on the app and paid my money. The glasses were at least half the price of my regular optician and a full refund was available within 30 days if I wasn’t happy. So, I thought, why not give it a go?

About a week later they turned up and were perfect. Glad I didn’t go to Specsavers!

Changing behaviours

So, what’s that got to do with getting my shoes resoled? Well, buying varifocals online made me focus on the fact that a lot of consumer behaviour is driven by ease of access and ease of processing. We’re finding out right now which retailers are good and which have a lot still to learn. In Timpsons, I paid for the repair with my Starling Bank debit card. “Ah” said the chap serving me “I’m with them, great aren’t they great? “

Starling is one of a breed of new start up banks, Monzo is another example. The only way to access is by using a phone app, not even a website. It’s big with the kids; having said that I’m 58 and signed up last year and the chap in Timpsons looked to be around my age.

Recent research shows that smartphones and apps are now the way that most of us access the internet. The 2019 Deloitte Mobile Survey shows that smartphone ownership is now 80% in the age 55-75 age group.

Starling’s application process is just so easy. Download the app, take a photo of your driving licence, record a selfie – that’s it. No need to take a passport, utility bill and an application form into a branch. The process took me about two minutes.

The technology behind it is now being adopted in a number of places. It’s very secure and in some cases more robust than traditional ways of verifying IDs.

Members are real people

So, in the pensions world, what lessons can we learn to help us engage better with members?

  • Firstly, consumers are expecting more and more of their service providers. We continually talk about members as if they are some sort of alien life form. The pensions industry offers a consumer service; scheme members are real people like the rest of us. The more they do on-line the more they expect to do on-line.
  • Secondly, age is increasingly less of a predictor of how people engage with services and technology.
  • Thirdly, there’s a lot of noise in the pensions industry at the moment about getting people engaged. So, how about a pension phone app that you can register for with a photo of your driving licence and a selfie? Passwords and two factor authentication, which  can be real barriers to engagement, are consigned to history. Instead, logins can use the phone’s biometrics, thumb print or facial recognition.

We can make pension engagement a reality – for everyone!

Anyway back to where I started. It cost me a trip into town and £65 to re-sole a pair of shoes. A trip to the shops right now would be very welcome, but using an app could be even better!

John Wilson

The 2020 Annual Funding Statement (AFS) from The Pensions Regulator (TPR) was published today (Thursday, 30 April) and is particularly relevant to schemes with valuation dates between 22 September 2019 and 21 September 2020 (so-called Tranche 15, or T15 valuations), as well as schemes undergoing significant changes that require a review of their funding and risk strategies.

The AFS sets out specific guidance on how to approach the valuation under current conditions, what TPR expect from trustees and employers, and what they can expect from TPR. TPR appreciate these are very “challenging times”. However, they expect all T15 valuations to fully incorporate the principles in the current DB code of practice and associated guidance.

The messaging builds on TPR’s Covid-19 guidance, repeating it in parts. The overarching theme is that, more than ever, trustees and employers need to work collaboratively.

The AFS contains some practical guidance on some scheme specific issues:

  • post valuation experience
  • changing valuation effective date
  • calculating technical provisions
  • recovery plan length
  • treatment of shareholders

As with the 2019 Statement, the 2020 AFS includes a helpful table setting out key risks and actions for employers and trustees.

We welcome the publication of the latest AFS which, understandably was issued a bit later than in previous years.

Whilst, for many pension schemes, there is understandably considerable focus on the short term, the longer term and, in particular, getting back on course to longer-term objectives, remains key. Many of the aspects previously outlined in TPR’s scheme funding consultation, such as the increasing importance on the role scheme maturity has to play and the “Fast Track and Bespoke” approaches, are still expected to come into force (albeit some of the parameters may necessarily have to change to allow for different market conditions).

In the meantime, TPR continue to expect trustees to focus on the integrated management of three broad areas of risk: the ability of the employer to support the scheme, the investment risks, and the scheme’s funding plans.

Brendan McLean

Diversified Growth Funds (DGF) are an easy way for investors to access a broad range of asset classes through one fund – ranging from equities and real estate to emerging market bonds. This diversification provides investors with exposure to various return drivers which can improve risk adjusted returns over the long term.

DGFs also come in a range of different styles, from highly dynamic absolute return funds to passive multi-asset funds. Within defined benefit pension schemes, DGFs are often sold as providing equity-like returns with lower volatility over the long term.

In recent years, DGFs have not lived up to this aforementioned return promise. This is primarily due to the fact that equities have seen huge increases and many DGFs have not kept up the pace of positive returns. However, investors see DGFs as more than just a vehicle for high returns, as they like to believe that their DGF will be better able to control risks and protect capital when markets crash, as they did in Q1 2020 or Q4 2018.

This was proved true over Q1 2020, when the average DGF return was -11% with global equities in pound sterling posting -16%. Absolute return type DGFs were better able to preserve capital and on average were only down 2% over the quarter. This is a good result, but it is expected due to their low beta allocation. The lack of protection from some DGFs during Q1 is due to the broad market selloffs with almost every asset declining in value; even more defensive assets such as investment grade corporate bonds declined. However, in Q4 2018 global equities declined -11% while the average DGF return was -5%, demonstrating that DGFs can protect on the downside.

The range of returns for DGFs is broad. While the average performance has been below expectations, they can still offer investors access to a range of diversified assets which is important for long-term diversification and returns.

Andrew Kerrin

For longer than we care to remember, our quarterly reports have seemed to focus on Brexit, or the lack of progress on pensions policies as a result of Brexit.  How distant those times now feel.  Yet, despite these even more uncertain times we find ourselves in, it is important to remember that at the end of the Covid-19 pandemic – and there will be an end – there will still be pension schemes, members, taxes, regulations and investments.  So, let us continue to look forward, continue to plan, continue to take action, and continue to influence those things that we can control.

Spence have summarised the main issues across our industry in this report, highlighting any actions that trustees and sponsors may need to take.  Clearly there is a focus on the impact Covid-19 is having on pension schemes, with articles addressing the latest guidance for trustees from the Pension Regulator and the investment market’s reaction.

Beyond the pandemic, the report also looks to other important matters, such as the progress of the Pensions Bill through the legislative process, the latest on the goliath GMP Equalisation issue and a summary of the Chancellor’s latest Budget, to name a few.

As always, we hope that this quarterly report can be of assistance and makes your lives that little bit easier, in these, the strangest of times. From everyone at Spence, stay safe and enjoy the read.

Click on the image on the right or this link to download.

Hugh Nolan

Pensions aren’t anyway near the main concern for most people at the moment, with the industry having proved pretty robust in the face of a global pandemic that can only be described as unprecedented. A lot of schemes had investment strategies in place that have largely mitigated the impacts of incredible volatility in markets and stocks that have fallen by over a third. Administrators have managed to keep paying pensioners reliably and promptly every month. Even the quasi-Governmental Regulator has responded positively to the situation, with a pragmatic and sensible approach that recognises the difficulties faced by many sponsoring employers and allows even more flexibility than usual.

But there is often a sting in the tail for pension schemes. Some schemes had deliberately adopted a policy of investing in growth assets like equities as their only hope of removing sizeable deficits. Sponsoring employers who had been struggling to meet the rising financial demands of their schemes over the years had to rely on investment returns to remove this millstone from their necks. Such schemes may have seen material falls in their funding levels that make a difficult situation seem completely impossible now.

My message to these schemes is simple. Don’t give up hope! Although nothing can be absolutely guaranteed, I am confident that markets will eventually recover most of their losses from the last couple of months. I’m sure there will have been a real hit from the pandemic in the final analysis and GDP in Q2 will be absolutely dire but current predictions are that the economy can rebound strongly later in the year. It took a couple of years for normal service to be resumed after the credit crunch and could take even longer after the virus crisis. However, there is every chance that we will get back to normality soon enough for most pension schemes to get through to the other side safely, even in very challenging circumstances.

My colleague Simon Cohen, our Head of Investment Consulting, has obviously been watching market developments closely and continually reminds me not to panic about the falls we have seen. Pension scheme funding is a long-term venture and the extreme volatility we have seen recently is just a specific example of what we always knew could (and probably would) happen from time to time. Actuarial valuations can allow for an expected bounce in the markets at some point and longer recovery periods can be agreed where needed. Investment strategies can implement trigger points to derisk portfolios when market opportunities present themselves. Members can be reassured that their pensions are well protected, with funds held separate from the employer, with companies still committed to funding the schemes and with the PPF lifeboat in the background. Trustees can be supported and helped to keep making the decisions that are best for the schemes, however difficult those decisions may seem just at the moment.

Some people may wish they’d taken more control of their pension schemes before the pandemic hit us. It’s never too late to take positive action though and there are still ways to plan for the future with a degree of optimism. As they say, the best time to plant a tree is 20 years ago and the second best time to plant one is right now!

Stay safe everyone and we’ll see you on the other side.

David Davison

Finally at the end of February 2020 the results were published on the consultation on LGPS Reform for England & Wales, which ended 31 July 2019, and it’s a bit of a mixed bag.

Valuation Cycle

It is proposed to move the local fund valuation cycle from 3 years to 4 years to link with the Government scheme valuation. With this change it is proposed to provide funds with the power to undertake interim valuation and a widening of the power to amend employers’ contribution rates. What unfortunately has not been proposed is a strengthening of the communication requirements on Funds to ensure that admitted bodies are aware of their funding position more regularly over this lengthened period.

Dealing with ‘Tier 3’ employers

In terms of seeking to help funds provide additional options for employers looking to exit the response states “Current regulations require that when the last active member of an employer leaves the scheme, the employer must pay a lump sum exit payment calculated on a full buy-out basis.” This is fundamentally incorrect and is a misunderstanding also commonly held by LGPS Funds. Regulation 64 specifies that Funds must obtain “an actuarial valuation at the exit date”. It neither specifies that this must be done on a buy-out basis, or even that when carried out that it has to be enforced. It is the Funds, and their actuarial advisers, who chose to enforce this exit on a buy-out type basis but it is not actually stipulated.

The response makes the proposal “to introduce ‘deferred employer’ status that would allow funds to defer the triggering of an exit payment for certain employers who have a sufficiently strong covenant. Whilst this arrangement remains in place, deferred employers would continue to pay contributions to the fund on an on-going basis.” Whilst at a high level the proposal is welcome it is deficient in a number of key areas:-

  • As part of our response to the consultation we highlighted specific experience of the introduction of similar provisions in Scottish LGPS in 2018. The revised Regulations were effectively ignored by Funds and has resulted in SPPA having to issue further consultation to see how the changes could be better implemented. The proposals made effectively replicate the Scottish wording without making any attempt to look to learn from their adverse experience.
  • Helpfully the response does recognise that “some smaller and less financially robust employers are finding the current exit payment in LGPS onerous” and that “rather than protecting the interests of members, it may mean employers continue to accrue liabilities that they cannot afford.” It can also mean they are “driven out of business.” This is certainly becoming a much more common occurrence and is likely to continue apace over months and years as admission bodies closed to new entrants gradually reach a point where they have no active members.

However, worryingly, the response then does not specifically deal with this referring to employers with a “sufficiently strong covenant”. How would this be defined? What would happen for those employers who do not meet this classification? The response wholly ignores that employers with a weak covenant only option is to continue to accrue further liabilities without a solution which is neither in their interests, the Fund as a whole and other employers in the Fund.

There continues to be no recognition of the risk of future accrual and the strain that puts on Funds and other employers and that there needs to be compromise for weaker covenants to reach an amicable solution.

  • There is a proposal that consideration is given to whether a maximum funding time limit of perhaps 3 years is considered. This is frankly ridiculous as the vast majority would struggle to pay cessation debts over even a 10 year term and much longer repayment terms need to be considered. For example, in Scotland, Strathclyde Pension Fund and Lothian Pension Fund are considering terms of up to 20 years. I would be interested to know what specific research has been carried out to consider if 3 years is affordable? None I suspect.
  • There is little recognition that S75 deferred status being used (or more rather not being used) in private sector multi-employer schemes is very different to what is likely to be needed on LGPS schemes as the background is completely different. The overall covenant for LGPS schemes is much stronger as more employers have public sector backing and the distribution of liabilities much more widely distributed with small charities representing a tiny fraction of overall liabilities and therefore small changes in deficit amounts making a negligible impact on the overall Fund value at risk. Most importantly also it is much less likely that LGPS will ever close to future accrual so being able to fund over a long period of time is much more palatable.
  • The issue of legacy liabilities which has seen admission bodies assume material amounts of historic benefits for ex public sector staff has been completely ignored.
  • The seemingly endless round of consultation on ‘Tier 3’ employers looks to continue as the SAB have commissioned AON to look at funding, legal and administrative issues. Surely after all this time there can’t be key individuals within Funds who don’t understand the issues and options. But no, lets rehash them all again with a view to the SAB making some recommendations to the Secretary of State later in the year.  A bit more fiddling while Rome burns!

Thankfully there are signs that some Funds are adopting a more pro-active approach even ahead of Regulatory change recognising that they need to do so in order to better deal with the issues. Unfortunately not all are quite so enlightened, choosing to wait for ‘chapter & verse’ when the consultation already confirms that the Ministry is not intending “to legislate for every aspect” but to provide a more flexible framework lead by Funds.

I can only hope we’re finally nearing the end of the ‘consultation’ and will soon move into something that looks more like implementation as demand is already high and only likely to increase.

Brendan McLean

The Retail Price Index (RPI) plays a significant role on both the asset and liability side of a pension scheme and any changes to the Index will have a far-reaching impact. Therefore, trustees need to take note of the recently proposed reforms to RPI.

What are the reforms?

In September last year, Sajid Javid, then Chancellor of the Exchequer, confirmed a public consultation would be held on the implementation of the UK Statistics Authority’s proposed reforms to RPI, with a specific focus on aligning it to the Consumer Price Index including Housing costs (“CPIH”).

These changes are proposed to take effect from 2030, however, to be considered as part of the public consultation, this date could be brought forward to 2025.

What impact will this have on pension schemes?

The impact of the reforms relates to the fact that the method of calculation is different for RPI and CPIH, which results in CPIH being lower by approximately 1% on average (this is sometimes referred to as the “formula effect” or “wedge”). This means that any instrument that has payments with a linkage to RPI, index-linked gilts for example, will see a reduction in those payments, thereby reducing the value of the instrument.

An individual’s pension or annuity, where payment increases are linked to RPI, would also see a reduction in the future expected cash flows.

Pension schemes will see the following effects:

  • If a scheme has RPI linked benefits, the total liability of the scheme can be expected to reduce.
  • Where schemes have hedged CPI linked liabilities using RPI linked assets, a loss can be expected (it is not uncommon for CPI linked liabilities to be hedged using RPI linked assets due to the fact that CPI linked assets are much less common).

The net position will be different for each individual scheme – action can be taken now to reduce the risk/impact of the proposed reforms, though the markets already seem to be pricing in some of the expected effects.

Further developments

There are many aspects of the reforms which are still undecided, and, as a result, leave the potential impact uncertain:

  • Possible compensation to those holding index-linked gilts (Insight Investment has estimated the potential loss to gilt investors at around £90 billion).
  • The date at which the reforms will be implemented.
  • What other related indices will be affected.

Once the exact nature of the reforms is finalised, the impact will be easier to assess. However, given the length of time until implementation, there is scope for further changes. Trustees and other affected parties should keep updated on developments and maintain a dialogue with their investment consultant to ensure the correct measures are put in place.

Meanwhile, schemes should at least be aware of any mismatch on assets intended to hedge inflation risk and trustees should satisfy themselves that they remain comfortable with the overall risk profile of their investment strategy.

David Davison

With most charities in LGPS having to disclose their pension funding position in their accounts at 31 March 2020, the recent turmoil in the markets is likely to be causing concern, particularly for those with limited balance sheet surplus. 

The FTSE 100 has fallen by over 30% since March 2019. While this does not directly reflect the impact on individual funds it is a good proxy for the change in growth assets over the year.

A ‘flight to safety’ will have increased the value of government bonds.  However, a widening of credit spreads will have reduced the value of corporate bonds. 

Overall, depending on the investment strategy employed by the fund, asset values may be down with Funds with very little hedging likely to see a significant fall in asset values.

The deficit recorded in your accounts also depends on the value placed on your liabilities, and at the moment there is some good news on that front.  Widening credit spreads have increased corporate bond yields and they are now higher than they were in March 2019.  Inflation has also fallen.  Both of these factors will reduce the value places on liabilities.

At time of writing therefore charities may see an improvement in their position in comparison to last year.  The position is highly volatile however and Is changing significantly every day.

If you are concerned about the figure likely to be placed on your balance sheet there are steps you can take to help manage this.

What is not universally known is that it is the Directors /Charity Trustees who have responsibility for setting the FRS disclosure assumptions and not the Fund actuary.  You can therefore chose to use a different set of assumptions if those are more suitable for you and bearing in mind that one set of global assumptions issued by the Fund actuary can’t be specific to each employer, this is probably something worth considering, especially if your balance sheet position is important.

You may well be surprised by just how much of a difference small changes in the assumptions can make to your liabilities and therefore your deficit and balance sheet position.

I would therefore encourage employers already disclosing an LGPS pension liability to consider the assumptions used and whether or not they are appropriate.

The table below shows the potential impact of varying the assumptions used to calculate the FRS 102 liability.  Please note this will vary for each scheme and the figures below are provided as an example only (based on a scheme with a duration of approximately 20 years).

Change in assumption Change in liability
+0.1% p.a. discount rate -2%
-0.1% p.a. inflation -2%
-0.5% p.a. salary increases -1%

Indicative results showing the impact on deficit and balance sheet position based on the above changes to the assumptions are shown below.

‘Standard’ assumptions £000 Organisation specific assumptions £000
Assets 2,000 2,000
Liabilities 3,000 2,850
Deficit 1,000 850

So, for this illustrative example, a change of around 5% in the liabilities as in this case could reduce the deficit by around 18% and improve the balance sheet position by £150,000.

Therefore, you can see that for organisations participating in LGPS, it is well worth considering the use of bespoke assumptions, particularly if you are looking to manage your balance sheet. If you would like an indication of how changes could have impacted your 2019 disclosures, please let me know and we would be happy to provide these.

If you are looking to incorporate non standard assumptions, you need to consider this now as Funds usually require some advance notice that a different process will be used. We provide this service for many of our clients so don’t hesitate to contact us if you need more information.

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