Making Sense of Pensions

Mike Crowe

I am sure that with the many aspects of Brexit that are occupying the minds of businesses around the country the impact on the company pension scheme might not be high up on the list for the sponsoring employer. Whilst I have every sympathy for this view it would be remiss of me not to suggest that companies don’t lose sight of this and to engage with their trustees for whom this is a very real issue.

Let me start with a question. If you asked your trustees what was the top risk on their scheme risk register what would they say? If it is not “Brexit” then ask them again until they get the right answer. (Yes, I gave you a hint there.) The current economic uncertainty caused by Brexit highlights the need for an effective integrated risk management framework for pension schemes. It is important that your trustees understand the risks that the scheme faces and that they are actively engaging with you. Effective contingency planning is key and that planning is needed now.

But, as the events of November 2018 have shown, no one knows what 29 March 2019 will bring or indeed who will be leading the discussions, so how can I plan? Will there be a deal? If there is a deal what will it look like – a hard Brexit, a soft Brexit or something in between? Maybe no Brexit at all? Will the date or the transition period be extended? All valid points, but, as I was always told, you hope for the best but prepare for the worst. So with that in mind what do you need to discuss with the trustees?

Employer Covenant

The impact that Brexit will have on the business of a sponsoring employer is critically important to the trustees. Conversations should be taking place so that trustees and their covenant advisers can understand the impact on the sponsoring employers business prospects given the uncertain economic climate and potential shifts in currency or other markets  which may impact on their support for schemes – either in terms of DB funding or contributions to DC pots. This is something that you will be very aware of for your business and open and honest dialogue with your trustees will allow them to effectively assess risk and plan.

Actuarial Assumptions

The impact of Brexit should be taken into account in setting assumptions for actuarial valuations and agreeing recovery plans. To enable the trustees to assess the impact on planned contributions to the scheme, they need to understand the impact of Brexit negotiation outcomes on the cashflows of the business.

The funding levels of DB schemes need to be reviewed as continuing low interest rates and quantitative easing means DB liabilities remain high. New market conditions will raise questions about whether the scheme’s valuation is still current. The funding level and the associated risk it poses to the employer needs to be considered and ways of mitigating this risk need to be discussed.

Buy out prices for DB schemes may be more attractive and trustees may be checking with the scheme’s advisers whether now is the time to remove some risk from the scheme.

For a sponsoring employer this is all relevant and relevant now. Being an active part of the process is crucial not just for the scheme but for your business too.

Investments

Trustees will need to consider whether the scheme’s investment strategy is still appropriate for current market conditions and take advice from their investment advisers. For a DC scheme, they will need to check to see if the default fund is suitably diversified so as to protect members from any shock to the UK or European economy. A check should be carried out to see whether there has been an impact on the value of collateral that the scheme posts or receives under derivative contracts. The scheme might need to post extra margin, or ask their counterparties to do so.

It will be some time before there is clarity on how Brexit affects schemes’ investments, contingent assets and investment yields in other countries – both EU and non EU. Trustees need to keep this under review.

Trustees will also need to check that their fund managers have a Brexit plan. They should.

Scheme members may well be worried about security of their pensions in the run up to 29 March 2019 and beyond.  It is imperative that you and the trustees prepare for whatever 29 March 2019 brings. As far as you can, protect the scheme and the members from the impact of Brexit. Communication will be key both with your trustees and your employees to manage the uncertainty that Brexit

David Davison

What pointers does the SHPS Valuation provide for employers in SHAPS

In early October the results of the Social Housing Pension Scheme (‘SHPS’) actuarial valuation at 30 September 2017 were published and are available here. I’ve provided a full commentary on the impact and options for employers in the scheme here.

Given that the SHPS results are 12 months ahead of those in the Scottish Housing Associations Pension Scheme (‘SHAPS’) which are due at 30 September 2018 I wanted to consider if the results would provide a good barometer for what Scottish RSL’s might expect when they get their results next year.

The SHAPS scheme is much smaller than SHPS with a smaller number of employers but the two schemes do share many similarities in terms of employer covenant, trusteeship and investment methodology so the results should certainly identify trends.

If we start with the actuarial valuation assumptions for SHPS and SHAPS these are shown in the table below.

Assumption SHPS Valuation

30 September 2014

SHAPS Valuation

30 September 2015

SHPS Valuation

30 September 2017

(Equivalent basis)

Price Inflation RPI – 3.1%

CPI – 2.2%

RPI – 3.1%

CPI – 2.2%

RPI Curve (3.4%)

RPI Curve less 0.9% (2.5%)

Discount rate

Pre-retirement

– Post-retirement

 

5.9%

3.3%

 

5.7%

3.1%

 

Gilt Curve plus 2.4% (4.2%)

Gilt Curve plus 0.45% (2.25%)

Pensionable earnings growth (annual) 4.2% 3.7% CPI+1% (3.5%)

You can immediately see that the SHAPS assumptions at 30 September 2015 are very similar to those adopted by SHPS in 2014 with only a slight reduction in the discount rate pre and post retirement from 5.9% and 3.3% to 5.7% and 3.1% respectively and a salary increase assumption of 3.7% versus 4.2% to reflect different market conditions. The inflation assumptions were identical.

The changes to the SHPS valuation assumptions reflects changes in market conditions and a strengthening of the assumptions being used and these changes accounted for almost all of the identified deficit.

In a commentary I wrote on the 2015 SHAPS Valuation results I expressed some surprise/shock at the funding assumptions used. At a time when all the market indices were indicating a reduction in gilt yields the trustees decided to increase the discount rate used pre retirement from 5.3% p.a. in 2012 to 5.7% p.a. in 2015. This was apparently to reflect a strengthening in employer covenant. This decision had the effect of reducing the scheme liabilities and therefore the on-going deficit by around £100m. This would have been positive news for the employers but was this improvement real or some funding smoke and mirrors. Comparing the on-going deficit in 2012 of £304m to a cessation deficit of £732m compared to an on-going deficit of £198m in 2015 and a cessation deficit of £937m highlighted the change in funding prudence. My expressed concern was that this approach may result in additional future prudence and therefore increased future deficit contributions being required.

Given the similarities in the covenant strength and investment / funding approach across both schemes it does not seem unreasonable to assume that a similar methodology will be applied to the SHAPS valuation, though this would be something of a backtrack from the 2015 position.

If the trustees are adopting the same commitment “to both security and affordability” how can they not apply a consistent basis which would result in a materially higher deficit amount? If they do employers may reasonably question the approach taken in 2015.

We do not have the exact details of the SHPS change but from the information provided it looks like the discount rate has been reduced by 0.6% p.a. which alone could increase liabilities by around 5%. There may also be a further increase in liabilities to move the SHAPS assumptions in line with SHPS which could further increase the scheme deficit. Given that, as an example, the pre-retirement discount rate assumption in the SHPS valuation reduced from 5.9% to 4.2% this could be very material.

Like SHPS, SHAPS has deficit contributions based on proportion of salary and proportion of liabilities and a move to simplify contributions similar to SHPS could be attractive to the scheme. Whilst in my view the setting of contributions based purely on share of liabilities is a fairer distribution of cost it will mean that that there are some winners and losers in terms of contributions with potentially small numbers of employers seeing very material increases as a result of any change.

What would also be concerning for employers would be how the conversion from the existing funding basis with contributions reducing over the next few years to a level basis costed as a share of liabilities, similar to SHPS, would result in very material increases in future contributions and a linked increase in FRS102 accounting deficits just at the point where the scheme is promoting a move to a full FRS102 disclosure basis.

In terms of future service contributions the position may be less dramatic in SHAPS than in SHPS. Contributions increased materially at the 2015 SHAPS valuation to 27.1% p.a. for Final Salary 60th benefits and 25.8% p.a. for CARE 60th benefits. Both these figures include 0.7% p.a. death-in-service costs and reduced by 2% where employers offer DB to new entrants. These contributions are in my view more reflective of the costs of buying benefits and compare reasonably with the new SHPS rates. I would however still expect some increase to future service rates in SHAPS to reflect current market conditions, maturing scheme membership and costs being shared over a smaller membership population.

Given the more the material re-distribution of members in SHAPS away from DB I suspect we could also see an increase in on-going scheme expenses similar to that in SHPS.

Based on the above therefore I think it’s wholly reasonable to assume that SHAPS employers can expect similar bad news when they receive their results in 2019 as SHPS employers are currently dealing with. There could be something of a ‘triple whammy’ with negative movements in market conditions, a strengthening of valuation assumptions and increases in operational costs.

With DB membership numbers continuing to fall (now only around 1,000 compared to the 3,500 participating in 2012), only around 1/3rd of employers open to new DB members and huge increases in DC membership the scheme shape is changing. Any further increases in SHAPS contributions is likely to further hasten exits from DB and there must come a point where there will need to be a serious discussion about the future of the DB section of the scheme. Employers may also be once again questioning the approach adopted in 2015.

David Davison

The results of the Social Housing Pension Scheme (‘SHPS’) actuarial valuation at 30 September 2017 have been published and are available here. With new contributions due to be implemented from April 2019 RSL’s will need to consider their options and take any required decisions in the very short term.

The headlines from the SHPS Valuation are:-

  • The funding level has improved to 75% (from 70% as at 30 September 2014) but the monetary deficit has increased from £1.323Bn to £1.522Bn. While assets increased from £3.123Bn to £4.553Bn over the period (i.e. 46%) liabilities increased from £4.446Bn to £6.075Bn (i.e. 37%). A huge driver in the increase in liabilities, and therefore monetary deficit, was some material changes in the key valuation assumptions as shown in the table below:-
Assumption 30 September 2014
Valuation
% p.a.
30 September 2017
Valuation
% p.a.
Price Inflation RPI – 3.1%

CPI – 2.2%

RPI Curve – equivalent to 3.4%

RPI Curve less 0.9% – equivalent to 2.5%

Discount rate

– Pre-retirement

– Post-retirement

 

5.9%

3.3%

 

Gilt Curve plus 2.4% – equivalent to 4.2%

Gilt Curve plus 0.45% – equivalent to 2.25%

Pensionable earnings growth (annual) 4.2% CPI+1% – equivalent to 3.5%

 

  • The changes have been as a result of two main factors:
    • Changes in market conditions over the period (a reduction in gilt yields and an increase in the markets expectation of inflation);
    • A change in the assumptions used to value the liabilities (less allowance is being made for expected returns in the pre-retirement discount rate and inflation looks to have also increase by more than pure market movements, the assumptions have also been updated for recent improvements in mortality)
  • The effect of these changes has been to increased the liabilities by £1.395Bn. So effectively the vast majority of the scheme deficit is accounted for by these two factors.
  • As a result of the increased monetary deficit, increased deficit contributions will be required from 1 April 2019. Total contributions will increase by £14m from £147m to £161m in April 2019 with contributions then rising by 2% per annum to 30 September 2026. This means that by April 2026 contributions will be around £180m per annum. What may have been missed by many however is that the existing contributions were to begin to reduce from next year tailing off to 2025 however this will not now happen so contributions in the last year could be as much as £100m more than under the previous funding plan. The option was there to look to extend the funding plan to retain existing contributions or smooth increases but this hasn’t been pursued.
  • Historic deficit contributions had been set based on a combination of pensionable salaries and share of scheme liabilities however all future deficit contributions from April 2019 will be paid based on share of liabilities. Whilst undoubtedly fairer, particularly where there is a mix of open and closed scheme accrual, as in this scheme, but the change could result in very large fluctuations in contributions for a number of employers.
  • Clearly the new higher contributions will have a negative impact on the FRS102 accounting disclosures, which are likely to be changing from 2019 from a net present value calculation to a full disclosure, so there could be a material balance sheet implications for scheme employers.
  • Future service contributions (i.e. the cost to buy more benefits) have increased by around 32% across the Board. Final salary 60th contribution s are up from 20.6% p.a. to 27.2% p.a. and CARE 60th contributions are up from 16.7% p.a. to 22.1% p.a. These are really material increases and it wouldn’t be unreasonable to wonder if historic contributions had been under-estimated, particularly when you see the cost of similar accrual in other Final Salary / CARE schemes.
  • Scheme expenses have increased from £1,800 per employer plus £70 per member pa to £1,900 per employer and £75 per member so a 5.6% and 7.1% increase respectively. I suspect this is not only inflationary but also a reflection of falling membership in the DB section and the need for TPT to recoup costs over a smaller membership base.

The direction of travel is seeing more and more RSL’s move to DC provision and away from DB and it’s easy to imagine that these changes will further encourage that move. It will be interesting to see the full valuation report when available to see how the membership profile has changed over the 3 year period.

So what can employers do?

  • In terms of deficit contributions not a great deal!! There is an appeals process where if contributions are deemed unaffordable this can be raised with the Scheme Trustees. However time to pursue this is short as appeals need to be in by 30 November 2018. If not pursued, or unsuccessful, then employers just have to find the money for the deficit contributions.
  • For future service contributions employers have a few more options:-They can just accept the increases as proposed
    • They can pass all or a proportion of the increases on to members. With member contributions in the final salary 60th option already at 10.3% then potentially increasing this to something up to either 13.6% or 16.9% must be unwelcome and really raises the question if this remains a viable option. In addition to the above if the membership is closed to new entrants an additional 1.1% of salary applies.
    • Employers could move to a lower DB accrual basis. The total cost of the final salary 80th option is now 20.5% in comparison to the 20.6% which previously applied to the final salary 60th option. A move to CARE 80th would have total contributions of 16.7% with the reduction potentially available to help fund the increased deficit contributions. Clearly remaining in the DB option, even at a lower accrual rate, does continue to build DB liabilities, though at a slower rate.
    • Employers could move to the DC Option within the scheme. Employer and employee contributions could be set at a fixed monetary amount at, above or below the level currently being paid. DB accrual would cease for these staff thereby limiting liabilities. This move could be for new staff only or for all staff.
    • Historically it has almost entirely been the case that new DC contributions would be arranged via the SHPS scheme primarily to avoid a cessation debt trigger on the DB liabilities. The relevant Section 75 legislation was amended in April 2018 which would allow DB accrual to be ceased without an automatic S75 debt trigger however at this stage it is unclear how TPT might provide access to this option and so this would have to be explored in more detail.
    • Employers could also consider setting up their own scheme or if they have a scheme already in place look at moving their assets and liabilities to that. Such an option is likely to be complex and potentially costly though, particularly for larger SHPS participants, is well worth considering as it does potentially increase the options available.
  • Clearly it’s likely any of the above changes would require communication with staff as a minimum and potentially consultation.
  • Employers need to be aware and manage any revised balance sheet impact.

Revised deficit contributions are applicable from April 2019 and future service contributions from July so employers will need to understand how the changes specifically impact on them and then consider what strategy they want to employ. Once a strategy is set they’ll need to consult with staff if there are any changes to contributions and/or benefits. This process will all have to be addressed in a relatively short period so engagement with the scheme and advisers in the short term will be necessary.

Andrew Kerrin

In my down time – between working in the Spence actuarial department, studying for actuarial exams, chasing after my four and two year olds – I am partial to spending some time managing… my fantasy football team.

Having witnessed another terrible weekend of results for my team, my mind turned back to reality and to the third Quarterly Update of 2018.  Thankfully the topics we have selected for this report carry far more promise and relevance than my football selections:

  • The first name on the Quarterly Update team sheet is a mainstay of recent selections. An unpredictable, volatile, yet entirely unavoidable choice for the Q3 team – Brexit.  No update would be complete without it!
  • On the wing, we have a summary of the British Airways judgement – a case that keeps running and running, with no sign of tiring out, until it reaches the final (at the Supreme Court).
  • Bringing older, wiser and more experienced traits to the report, we have an article on the recent trends in Longevity.
  • Providing a cool head in defence, an article summarising the G4S case that brought clarity on what is a “frozen” scheme.
  • In midfield, we have the European leader, organising all members of the team, with great communication skills – a summary of the member communication requirements from the IORP II European Directive.
  • Whilst up front, we have the most honest of finishers, who won’t try to win a penalty by scamming the referee – an update on the ScamSmart
  • STOP PRESS: The imminent Lloyds judgement mentioned in this edition of our Quarterly Update has been published today and confirms the requirement to equalise Guaranteed Minimum
    Pensions (GMPs).   See more inside our report.

So, although I couldn’t deliver a winning fantasy football selection this week (again), I am happy to be able to deliver the Quarterly Update for the third quarter of 2018.

To download this report, click here .

As always we love to get feedback from you. If you like what we do please tell us – it’s nice to get great feedback. If you would like things included, excluded or done differently please drop us a line too. The report is to help you, so help us tailor it to your needs.

And … if you find that you do have time to keep up with things, why not follow us on Twitter @SpencePartners and keep up to date as you go along.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 September 2018 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.

Pensions Accounting Newsletter Quarterly Update – Q3 2018

To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, or by telephone on 0141 331 9984.

Shola Salako

Member Communication

Communication is never easy, even when what is to be communicated is simple.

There are many ways we manage to say the wrong things at the wrong time to the wrong people.

Imagine then trying to tell people about pensions.

There’s an argument that the Industry itself has led the way in the confusion.

Members ask simple questions, such as,

What do I get when I retire?

Why should I be in a Pension Scheme?

These are simple questions with complicated answers.   Who is answering these questions?

We have helpdesks, sometimes backlog and labyrinth style automated systems which do not help.

We forget people are driven by their emotions so will make decisions based on how they feel.

How do we communicate effectively & efficiently?

We need to build relationships with our members, to enable us to understand their views regarding this valuable benefit and make it easier for them to trust us.

Member nominated trustees know the members and are a useful way of keeping in touch with Trustees. Are we using member nominated trustees to their full potential?

We should consider other ways to build relationships with members. This in a world increasingly made up of deferred and pensioner members with limited engagement from the employer.

Why answer one question at a time when you can answer a thousand?

Trustees might consider making a video of them speaking about the scheme.

Have a weekly or monthly blog, a podcast, so there’s no vacuum, monitor websites visits, web forums, emails etc.as more use is made of social media.

Tell stories, there are many stories from the industry. The stories can show case how pensions and lifetime savings touch the lives of ordinary people.  Introduce personalities; tell stories of how pensions has changed people’s lives.

Lets think like a newsroom.   What are people talking about then look at it through the mirror of our industry.

Even if we say just a little, or that we will report back on a trending news item. We will update you later; it’s around using language that builds trust.  Such language allows us as Trustees to get closer to our members.  It sets the tone that we are part of a partnership.

Instead of saying “we assist”, “we notify”, “we consider”, let’s say, “we help” “we tell”, “we think carefully”.   Seek to use language that combines empathy with trust.

Communication is never easy, however we as an industry can work on making it simple.

David Davison

In June 2018 the Scottish Local Government Pension Scheme Advisory Board launched a consultation on the future structure of the Scottish LGPS. The Board’s consultation sets out four options for the future structure of pension funds in Scotland. The review provides excellent background for all LGPS in the UK as the range of scheme sizes provides a microcosm in which to review the options presented more widely.

There are 11 Scottish Funds with total assets of around £42Bn and liabilities of about £55Bn. Scheme sizes range from the largest, Strathclyde Pension Fund, with around £20Bn of assets and 210,000 members to the smallest, Orkney Islands, with only £335m of assets and just over 3,600 members. The four options being explored along with the key considerations are shown below.

  1. Retain the existing structure

Retaining the status quo is likely to mean that inefficiencies will remain as most funds will not achieve the benefits of scale such as improved bargaining power, access to greater resources and reduced duplication of efforts in administration, governance, spending on advisers and fund management. Larger funds are also likely to be able to better access infrastructure investments. Maintain the existing approach is therefore likely to mean that costs per member are likely to be higher than necessary.

A potential negative would be the loss of local input and oversight and the regional diversification of resource such as staff as it may be difficult to access specialist staff in a single location. However the existing structure does potentially also create a key person risk as there is less available resource to cover key roles as well as budgetary and staff risk due to other competing local priorities..

Clearly any savings made or improvements achieved would need to outweigh any initial transition costs but all research to date would tend to support a move away from the status quo.

  1. Promote co-operation in investing and administration

There have already been some examples of collaboration particularly in the investment area and around procurement. This approach would allow the current governance structure to continue, allowing for continued local oversight, although requiring some sharing of control. There would also have to be some adaptation of governance.

Approaches to date seem to have been relatively informal which results in a degree of uncertainty over their future persistence so a more formal structure may be of value to assist with planning as well as the distribution of costs and returns. To date this sort of co-operation has been pretty limited despite its obvious benefits which would suggest that without strong vision and direction it will remain  something of an outlier. I can’t help feeling that greater structure and compulsion is needed to really drive change.

  1. Pool investments

This option would see all assets pooled in one or more asset pools managed centrally on behalf of a number of Funds. Schemes would retain their governance, administration and back office functions and continue to appoint and manage their advisers. This is very similar to the approach currently being adopted in England and Wales.

A single pool would double the asset size to about £42Bn over the largest Fund which has assets of just under £20Bn. At this size it would be of a similar size to 3 of the English pools and larger than the 3 others.

Fund assets and liabilities would still be allocated in the same way to ensure specific employer responsibility for liabilities.

A move of this type would be likely to result in lower cost investing though subject to some initial cost increases to manage a transition. It would also be likely to mean that the asset pool was of a significant enough size that more of the investment and administrative tasks could be undertaken in house.

From a governance perspective each Pension Committee would retain responsibility for asset allocation and managing the legislative structure however day to day investment management would be delegated to the pool. Each Fund would also maintain its Pension Board.

As has been shown in England and Wales this approach is very achievable and its hard to deny the value so would seem to be a minimum required step.

  1. Merge funds in to one or more funds

This option would see the creation of a Scottish ‘superfund’ which would manage all LGPS benefits in Scotland. Such a move would benefit from the asset pooling advantage s in 3 above but also allow for merging of the administrative and governance functions.

Such a move, whilst ultimately desirable from a cost and consistency perspective is not without its challenges. Each of the Schemes is funded at a different level and there would have to be a recognition of this and a mechanism to resolve it to ensure there was not a cross subsidy between different regions and even potentially employers. There would also have to be clarity in terms of governance, priorities and costs. There are also political drivers as well as a need to ensure that the right level of resource is available to the new consolidated scheme.

None of these challenges however are insurmountable and really just need commitment to achieve the objective and a clear plan to do so over a reasonable timescale.

The Funds all provide consistent benefits based upon a single regulatory framework. Consolidation would remove regional variations and inconsistency. Legacy arrangements would have to be clearly documented and honoured but future practice could be implemented on a wholly fair and consistent basis. Undoubtedly given the size distribution of schemes in Scotland a number of them would be likely to benefit from cost savings and improved governance very quickly. Market buying power in terms of services would be improved and greater investment possible in staff, technology and scheme communications.

Conclusion

Research carried out by Deloitte in 2011 suggested that costs per member in Scotland compared favourably with funds in England and Wales and that a single operating model and common administration system may have a greater benefit than formal administration mergers though research by APG concluded that administration costs decline with larger funds and certainly this seems to be the model being employed across UK defined contribution businesses.

It also needs to be considered that the number of employers participating in LGPS in Scotland is falling so less resources are needed and greater consistency of practice can be achieved. In addition with greater employer consolidation there will undoubtedly be increased demand for larger employers to have all benefits consolidated in a single fund rather than across multiple schemes.

In addition the benefits of having a single scheme which is not accountable to a local authority and can operate in an autonomous way based on its agreed priorities should provide greater flexibility in staff terms and conditions and therefore provide the opportunity to attract a much higher calibre of staff.

There are clear benefits which can be achieved through investment pooling and even further benefits through a consolidated single scheme for Scotland – it just needs vision and commitment to achieve them.

Hugh Nolan

The Pension Regulator’s Powers

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.

David Davison

If you’re one of the lucky admitted bodies who benefit from a council or other guarantee for your LGPS membership then this is likely to mean that you are currently disclosing a much more negative position on your balance sheet than actually should be the case.

In most cases transferee admitted bodies, and community admission bodies with guarantees, benefit from preferential exit terms should they leave the Fund, with the debt payable on exit calculated on an on-going basis (as per that used to calculate Fund contributions) rather than the more stringent cessation basis. This is good news of course as it means the likelihood of having a large debt on exit is much lower.

However, there is no correlation between the assumptions used in the calculation of the on-going funding position and those used when compiling the FRS 102 disclosures for company accounts. Under FRS 102 the discount rate must be set in line with the yield available on high quality corporate bonds. At the moment, corporate bond yields are low and so the discount rate used in the FRS 102 calculations is likely to be much lower than that used for the on-going funding basis, resulting in higher liabilities and a much larger deficit (all other things being equal), which therefore reduces balance sheet value.

I recently witnessed an example of this where, on an on-going basis, the organisation was in surplus but on the FRS 102 basis the organisation had a £100,000 deficit. The organisation had a guarantor and so was able to exit the Fund at any point paying off any on-going funding deficit (which in this case was nil). The FRS 102 deficit cannot be correct in this case as the worst case scenario is the on-going position. This meant that the charities balance sheet was £100,000 worse than it should have been, which, for the charity in question, was very material.

A further difficulty from a disclosure perspective are the recent changes to UK wide LGPS Regulation which now permit the return of surplus on exit from schemes. To date where a surplus has existed this has been discounted and a net neutral position assumed as any surplus could not be recovered. This however is no longer the case and the position will vary depending upon whether the organisation has a guarantee and whether their ultimate exit position is based upon an on-going or cessation position.

The disclosure position has therefore become much more complex and employers need to be considering their position well in advance of their company year end to leave enough time to take any remedial steps necessary. So if you have a guarantee or are very well funded on your exit basis, discuss this with your auditor. It may be possible to add a note to the accounts to provide greater clarity or better still, update your accounts with disclosures on a basis more consistent with the value of the liabilities actually owned.

Ciaran Harris

Trustees and sponsors of defined benefit (“DB”) schemes could be forgiven for assuming that the only way was up for life expectancies of their scheme members. For decades, mortality rates had been significantly improving. In the context of DB schemes, this generally resulted in more costly benefit provision for sponsoring employers.

The Continuous Mortality Investigation (“CMI”) then introduced their 2016 mortality improvement tables which showed a slow down in mortality improvements and therefore a reduction in life expectancy in comparison to previous years. Was this a blip? The 2017 tables have shown the same slow down. Perhaps one of the biggest indicators that this is the ‘new norm’ is the PPF consulting to revise their s143/s179 guidance to reflect updated mortality assumptions.

In relation to DB pension schemes, what might this affect?

  1. If insurers adopt the most up to date assumptions for mortality, then the cost of insuring benefits is likely to reduce. It may be a good time for sponsoring employers to consider this option if they are already close to being able to secure benefits.
  2. The size of cash equivalent transfer values will fall if calculations are updated to reflect new mortality assumptions. Anyone considering a transfer or within a guarantee period may want to consider this.
  3. The size of the scheme’s technical provisions will likely fall if the trustees decide to adopt the most up to date mortality assumptions in the scheme’s triennial valuation.
  4. Accounting deficits may reduce.

In terms of potential impact, the life expectancy of a 65 year old male based on the CMI 2014 improvement tables is around 22.9 years. Fast forward to the CMI 2017 model and the corresponding male life expectancy has fallen by 3.5% (with a similar reduction for females). The changes are even more pronounced when considering life expectancies for individuals not reaching 65 for 20 years which fall by around 5% – 6%. The impact on liabilities is a reduction of around 3% – 8%.

Trustees should consider if triennial valuations should reflect the most up to date tables and therefore a reduction in life expectancy. This will reduce liabilities all other things being equal.

Employers should consider the impact on insurer company pricing, accounting disclosures and transfer value exercises and should speak to an advisor to ensure optimum timing for any transactions or employer sponsored exercises.

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