Making Sense of Pensions

Graeme Riddoch

I hit my favourite café for a half price coffee this morning. Eating out to help out in my own small way. As usual I was presented with a QR code to scan. That took me to a web page where I logged my name and phone number for tracing purposes.

QR codes have been around since the 1960s; as we come out of lockdown they seem to be everywhere. QR stands for Quick Response. Essentially, it’s a type of barcode which, when read by your smartphone camera will take you directly to a website, video or an app, without the need to type in a fiddly web address.

Old age thinking …

We’re now using QR codes to take DB members to our pensions app. It’s a simple experience. Open the camera, point it at the code and it takes you to the Apple App Store or Google Play.

I showed it to a trustee about six months ago. “Our members won’t use that” he said. Unfortunately, that’s an all too common reaction to new technology in the DB pensions arena. The membership demographic is older, the trustees are often older and they hold the perception that it’s only 20-year olds who use smartphones and apps.

Right now, if a DB scheme member wants to order food at a restaurant, they are probably using QR codes to access the menu! There is no doubt that the current pandemic has accelerated certain trends; one in particularly is the move to online.

Why wouldn’t DB members want the same sort of experience from their pension scheme as the one they can get from the retail and hospitality sectors, or indeed other financial services?

Alistair McQueen, Head of Savings & Retirement at Aviva, picked up on this issue recently on Twitter, further discussed in Henry Tapper’s excellent blog. The fact that 76% of people now bank online is clear evidence that there is both the appetite and capacity to transact digitally.

Breaking down barriers …

I’d go further. The Deloitte Digital Survey (UK edition, Deloitte Mobile Consumer Survey 2019) shows that in the 45-65 age group smartphone ownership is around 80%. Apps are now the way that most people access the internet.

Some trustees may be reluctant to adopt new technology but it could be argued that they have a duty to ensure that they do not act to the detriment of their members and are not the first barrier to better digital engagement.

The next barrier to getting members online is the registration process. Two factor authentication and remembering passwords are often cited as problematic. Experience shows that if you make something easy people will use it. For example, the QR code used to get to the app store is personalised like a password. That means a much quicker and easier process to register for the first time. In our initial testing, 99% of people successfully used the QR code to register.

Designing an app for smartphones means that we can work with their inbuilt security features, such as fingerprint and facial recognition. Once registered, a customer can access the pensions app like any other app on their phone.

From stone age to digital age to engage …

We are in the customer testing stage of the app which allows members to manage their benefits from their smartphone. Everything is possible, from a change of address to viewing benefits, to retiring. Initial feedback is that it gives members what they need in the way they want it.

The other benefit is the potential cost saving to the scheme. Our modelling suggests that as much as a 30% saving in administration cost is possible. Some or all of that could be passed onto the scheme. But only if we can get trustees to realise that “their members will engage”.

Matt Masters

We are now more than four months into something that has had one of the biggest impacts on our way of life in living memory. There is no clear historical precedent for the nature and scale of Covid-19. Nonetheless, previous pandemics and other crises can offer clues as to what to expect, both in terms of the potential impact on lives as well as on the wider economy. 

Two lessons of note:

  • There is a trade-off between economic stability and public health and safety. The more short-term economic pain people are willing to endure, the more lives will be saved; and 
  • Disasters often create permanent change, with the most affected areas of a country or an economy taking potentially years to recover.

So what does this mean for pension schemes?

We are starting to see differentiation between countries in their responses to Covid-19, with the Euro area and Japan fairing relatively well in virus control, the US and Latin America being less successful, with Canada and the UK somewhere in the middle. 

Nevertheless, based on the performance of Western stock markets over the past 100 years, market declines of the size recently seen typically take around two years to recover from (my colleague, James Sweetnam, wrote an excellent article in June 2020 looking at how long it takes to recover from a bear market). 

Whether you see this as good or bad news depends on your investment horizon. If you have a longer-term perspective, like many pension schemes, then a two or three-year hiatus need not be particularly unsettling. 

Ultimately, the aim of the game is to pay members their benefits over the long term, so panicking or making short-term decisions is likely to be counter-productive. Instead, speak with your advisers and focus on ensuring the right long-term investment and funding strategies are in place.  

Andrew Kerrin

Over the last three months we have experienced an unprecedented degree of uncertainty in our lives.  The question, “What’s coming next?” has been a frequent utterance, with very few (if any) sure answers being provided.  Gaining a grasp of what we will be doing next week, never mind next month, has often been difficult and unsettling.

Set against our uncertain, pandemic themed, world, the pensions industry now seems stable and straightforward by comparison – a testament indeed to the strange times in which we now live!  So, let us look to the main issues that occurred over the last quarter and then ask what is coming up next in our industry, in the knowledge that there are still events that we can respond to and plan for with more certainty.  That should make for a pleasant change from the ambiguity that has become our norm.

Spence have compiled our latest report, highlighting any actions that trustees and sponsors of pension schemes may need to take in the near future.  As you’d expect, the Covid-19 pandemic takes a prominent role in the report, including an update on the latest guidance from the Pension Regulator (TPR). However the report also looks beyond the pandemic, addressing important developments, such as the lightning-paced enactment of the Corporate Insolvency and Governance Act 2020, TPR’s recently issued Annual Funding Statement, the latest on legal sagas involving the Hampshire judgment and RPI/CPI substitution, and our own effort to answer that question, “what’s coming up next?”.

As always, we hope that this quarterly report can be of assistance. From everyone at Spence, we hope you continue to stay safe and enjoy the read.

Angela Burns

The subject of defined benefit (DB) transfer values has always been controversial. The pensions freedoms introduced in 2015 made DB transfers more acceptable but there is still some uncertainty about whether or not individuals choosing to transfer are making the right decision. 

The current climate creates some positive and negative aspects of transferring defined benefits for each of the parties involved.


Transfer values are at an all-time high, valued at 40-50 times the pension being transferred (in comparison to 25 times in the past). An article by XPS confirmed that transfer values ‘rose to record highs during June, which means a transfer will be increasingly tempting’. Pension scheme members are likely to get good value on transfers, with low interest rates and high inflation. 

An important consideration will be how to invest the money in the new arrangement, to minimise risk. There is significant market volatility as a result of Covid-19 and members may easily lose any ‘value’ from a high transfer if the funds are invested in assets that then lose value. Financial advice is more important than ever.

Members may have a number of pressures in the current environment and wish to access funds quickly or look to maximise available funds. This could make them more susceptible than ever to pension scams.


It is, therefore, important that trustees monitor transfer requests and carry out due diligence on any transfer requests.

Trustees also have to consider scheme funding. If Covid-19 has reduced funding levels then it may be appropriate to commission an insufficiency report to reduce transfer values and ensure members are getting no more than their share of scheme funds.

Market volatility has resulted in unstable funding levels. In times of extreme volatility trustees may wish to utilise the three-month legislative window for issuing transfer values to ensure these are not being issued when abnormally high, which will impact on funding and equal treatment.

The Pensions Regulator has advised trustees to issue additional warnings to members at this time – to advise that a transfer may not be in their best interests and that they think carefully before making a decision. These warnings aim to help avoid the scenario where members fall foul to scams, and/or make detrimental financial decisions in the current climate.

Communication is key

Overall, it is important that trustees communicate with members to ensure that they understand the legal ways in which they can access their benefits, should they need to do so. If a member would like to consider a transfer value, giving access to paid financial advice can streamline the process although this may not always be available/affordable. It is worth noting that from 6 April 2017, legislation was amended to introduce a statutory exemption of £500 in a tax year for relevant pensions advice provided to employees. Under this exemption, if an employer provides pensions advice to its employees, or pays or reimburses the costs of pensions advice incurred by the employee, the cost of this advice can be exempt from Income Tax.

Trustees should also have access to daily funding levels to check funding in times of volatility and make decisions in a timely manner. Online member applications are also helpful to give members access to real time information on their benefits and options.

It is worth stressing again that more than ever, communication is key to ensuring members are aware of their options and are able to make well considered decisions.

Brendan McLean

Unless you have a reliable crystal ball, there are many aspects of the future which are currently highly uncertain. One element of investing, however, is now clearer. Generating future income from assets will be extremely challenging and the result will see investors being pushed into riskier areas of the capital markets.  

Historically, investors could rely on bonds for income. But with central banks reducing interest rates to record lows, to fight the economic effects of Covid-19, yields of government debts have plummeted. Since the start of 2020, UK 10-year gilts yields have declined from (an already low) 0.82% to 0.19%. However, we could see yields fall even further with Japan’s 10-year yield only 0.02% and Germany’s -0.42%. 

At the same time as low interest rates being bad for investors seeking income, there is the additional challenge of attempting to predict how long these conditions might last. The US central bank has forecasted to keep rates at 0.25% until 2022 and will likely only marginally increase them when it does. Having said this, it’s worth noting that Japan has kept its rates at close to 0% since the 1990s, demonstrating that countries can support a low rate environment for an extended period of time.  

Bonds provide investors with income but they also offer another key component of portfolio construction in the form of diversification, which acts as a hedge against equity risk. However, with such low yields available, investors needing to hit a return or income target will struggle and will be forced to look elsewhere. 

Income generation 

There are two ways investors can generate more income in a low yield environment: 

  1. Take additional credit risk by lending to riskier companies.  
  1. Extend duration by lending for longer periods. 

Taking additional credit risk could involve allocating to high yield bonds. However, these are generally highly corrected to equities in periods of market stress, which is when investors need the fixed income diversification benefit. Due to Covid-19 and its economic implications some commenters are saying 10% of the high yield market could default, which is a significant risk to investors. 

The problem with extending duration is that with interest rates at already historic lows they have more room to increase and cause losses. This asymmetric risk profile means extending duration has more downside risk than upside. 

An alternative solution would be to allocate to Multi-Asset Credit funds. These funds take a highly diversified approach, investing across the credit universe, and can adjust their duration depending on market conditions. These strategies aim to provide low correlation to the wider fixed income market and are an attractive solution for pension schemes. 

Trustees will need to work with their advisors to ensure their asset allocation remains suitable and  also that income needs are met in light of the low yielding environment, which may be with us for some time. 

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 June 2020 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.

With the wealth of corporate advisory experience available at Spence, we are well placed to provide you with guidance in how to best manage your pension scheme liabilities.

The implications of the recent developments should be considered to help you avoid any surprises. Spence can help guide companies through these complexities. We have a proven track record in navigating to the best outcomes for our clients.

We would be happy to discuss the options available to you in reaction to the market trends discussed above, including:

  • How to lock in asset gains.
  • Decrease future risk.
  • Reduce funding level volatility.

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

Colin Wheeler

For many in the UK, 2016 will be remembered as the year we voted to leave the EU, and end a relationship dating back to the 1970s.

For many in the pensions industry, we may choose instead to remember 2016 for something completely different; the year when contracting out ceased after almost 50 years.

Two completely separate events, but the period since 2016 is not without similarities. While the Government has become exasperated with the dither and delay over Brexit, and we still do not have clarity over whether we leave with a deal or no deal, pension scheme administrators have spent that time attempting to reconcile liabilities with NISPI (a section of the National Insurance Contributions Office) and, after many promises of “they’re coming soon”, final data cuts from NISPI have now started to arrive.

When the process of reconciliation began back in 2016, and in many cases earlier than this, none of us really thought that it would still be bubbling away in 2020. Even now, we are not left with what one could consider to be a fully reconciled position. We never pretended it would be easy, but what we have faced has tested the most patient of us, and some will have been beaten into submission!

Promises were made

The industry has been promised these final data cuts for the best part of a year now. After all the hard work invested in the preceding years, we might be entitled to think it would be a routine process to agree them and move on. What we are in fact seeing is quite different, with data being provided which is at odds with what we had previously agreed, and which NISPI are advising should be handled with care. It may yet prove easier to strike that trade deal than to fully complete a reconciliation.

Across the industry there is a sense of disappointment at how this has all played out. Administrators are now in a position where they are having to verify GMPs provided in the final data cut using HMRC’s own online checker. This is already throwing up more inconsistencies than one would have expected. Even schemes which thought they had fully reconciled already are finding that the final data received does not reflect what they had previously been advised. 

Have we wasted our time?

Most scheme administrators would have been working on the basis that, moving forward, they would have a GMP recorded which was fully reconciled and could be relied upon in calculations. The reality seems to be that in many cases the process of settling a member’s benefits will include running the online GMP checker to make sure the correct GMP is going into payment. Had we known this all along, I’m sure we would have taken a different approach to the reconciliation process.

Where the final data from NISPI contains members that you do not believe are in your scheme, there is no way of challenging this, so trustees may be faced with again having to decide if their records are more accurate than those of NISPI. Do they really want to engage administrators, and potentially lawyers, in further work and advice on what to accept, not to mention the further costs? A pragmatic approach may be to follow the guidance issued by PASA when having to make decisions on these “stalemate” cases.

Many schemes already have plans in place, or at least under discussion, to initially rectify, and to then equalise GMPs. Both of these processes are underpinned by schemes having confidence that they are holding the correct GMP data, which makes the final data cuts of even more significance. And taking things one step further, eventual buy out of benefits with an insurer is the end game for all schemes, when insurers will look for evidence that GMPs were fully reconciled back to NISPI records.

So, while it remains a real possibility that the UK’s negotiations with their EU counterparts may result in No Deal as soon as the end of 2020, it would appear that the process of reconciling and agreeing GMPs will roll on for some time longer. Where member’s benefits are concerned, we do not have the pensions equivalent of No Deal as an option.

Simon Cohen

It had all started to look so good in the investment markets.  Having fallen significantly, most markets had rallied strongly with equities in the US actually up for the year, having been 20-25% lower (during March).  In fact, the NASDAQ briefly hit an all-time high.  Long-dated gilt yields also rose slightly, hitting the heady heights of 0.8% at one point, still very low but not at the levels of 0.3% achieved in March, when market turmoil was at its greatest.

This all seemed a bit strange to me and many economists.  We are about to enter potentially the biggest recession that we have ever suffered, yet some markets are at all-time highs.  In fact, the day that it was announced that the UK had contracted by a massive 20%, the FTSE rose by over 1%.  The markets seemed to be pricing in a “V” shaped recovery, and I, like many others, am not convinced.

After a sharp fall on 11 June, the NASDAQ is now back at an all-time high.  UK long-term gilt yields remain very volatile and are currently sitting at around 0.7%.

What does all this mean for pension schemes?

During the market turmoil, many pension schemes had seen their funding levels hit by the “double whammy” of falling growth markets and falling interest rates (leading to higher liabilities).  Their funding levels had on average fallen by about 5-10%. 

With the market recovery, they will have seen funding levels improve.  They are still unlikely to be back to where they were.  For two reasons, firstly if a funding level falls by 10%, the level needs to rise by at least 11% to get back to where it was.  Also, albeit markets had rallied, many markets were not back to the levels where they used to be. 

What should pension schemes be doing?  

My view is that pension schemes should be taking the opportunity to de-risk their investment strategies if they can afford to do so, whilst the markets are still  positive.  They should try to do this quickly.  However, in implementing this they need to be careful.  They should spread their trades across a few tranches as market volatility has picked up a little and they wouldn’t want to trade on the “wrong day”.  This means there is a fine balancing act between getting the trades implemented quickly, but also avoiding dealing on the wrong day by spreading the trades.  Even if pension schemes are not in a position to de-risk, I think trustees should be keeping a close eye on the markets and be ready for a stormier time in future.

James Sweetnam

“All good things must come to an end”, “What goes up, must come down” – a bear market is the stock market’s answer to investors’ dreams of everlasting asset growth. But how long does it take to recover after the market hits rock bottom?

A bear market is defined as a peak-to-trough fall in the value of assets (a “drawdown”) of 20% or more. Since the end of WWII there have been eleven bear markets recorded on S&P 500, the US stock market, on average occurring after every 5.3 years of growth.

The 11 years from the lows of the 2008 Global Financial Crisis (GFC) crash, to the all-time highs before the COVID-19 pandemic hit, was the longest period of continuous stock market growth since WWII.

So, if we have a long-term investment time horizon, it is safe to assume that there will be a few significant setbacks along the way. To determine the extent to which a 20%+ drawdown will stunt the growth of a pool of equity investments, we look below at the statistics on bear market duration, severity and recovery.

Table 1: Market cycles – a summary of market cycles since WWII ranked on size, in terms of bear market, followed by a recovery, followed by a further period of growth before the next bear market.

  • Graph 1 above shows the relationship between the bear market duration (the amount of time the market was in a downtrend) and the recovery period (time to get back to pre-bear market levels). The  amount of time a market is trending down and the amount of time to recover do not seem to be strongly correlated.
  • Graph 2 shows there is a similar lack of relationship between the length of a bear market and its severity. A long period of falling assets does not necessarily mean they fell by a large amount, and vice versa. In other words, historically, the bear market duration has not had a significant effect on the other characteristics of a bear market.
  • However, Graph 3, plotting the relationship between the severity of a bear market and the recovery time, shows a more distinct trend; the size of a bear market is correlated to the amount of time to recovery. Even when you look pre-WWII at the stock market crash of 1929, the precursor to the great depression, the trend holds. The 83% decline in the S&P 500 took 151 months (nearly 13 years) to recover from.

So, when looking at historic bear market recovery periods, a pretty good indicator has been the size of the mountain to climb to get back to previous levels. A “snap recovery” is possible for minor drawdowns, the 3-month recovery from a 27% drawdown in 1980 is the best evidence of this. However, larger bear markets are associated with deeper problems in financial markets, and can take significantly longer from which to recover.


In an ideal world, an investor would enter the market at the start of a bull market, remain invested until just before the start of a bear market, disinvest into bonds or cash until all the damage has been done and then reinvest. This is of course impossible to do. However, many investors often do the opposite – when the markets have been going up for a while they invest, and when markets fall, they lose confidence and disinvest, missing out on gains and locking in losses.

Trustees should keep this in mind in times such as these, where the S&P 500 fell 34% from 19 February to 23 March 2020. History would suggest that this level of losses takes between one and two years to claw back. This certainly feels like a long time to go without making progress towards goals, however, panicking and disinvesting now would mean missing out on the recovery and extending the amount of time until goals are reached.

As the conditions that caused markets to decline start to stabilise, so will investor confidence. Investors will stop seeing the stock market as a risk not worth taking, and start to see the value that presents itself after a significant market correction. Confidence will slowly creep back as the recovery gets going and, after a while, those that withdrew will start to return. Positive sentiment will snowball and the market will revert back to reasonable levels. Inevitably, when positive sentiment eventually reaches excess levels, the market will correct itself once again and hence the market cycle continues.

Even accounting for the inevitable bear markets, investing assets in the stock market is still a good way to protect against inflation and grow assets over time. While remaining invested is easy as the gains come in, doing so when they are not is hard, but just as important.   

Angela Burns

An employer perspective

Many employers will be in the process of consulting on 31 March 2020 actuarial valuations.

As part of the valuation process the Trustees must consult with the employer.  The Trustees will engage with the employer in relation to the assumptions to use in the valuation, and on the contributions to be agreed as part of any Recovery Plan.

The current climate is likely to impact on these discussions in a number of areas:

  • The funding position given market conditions as at 31 March 2020;
  • The covenant of the Employer and short-term cashflow.

Funding position

Funding positions as at 31 March 2020 are likely to be variable.

Interest rates have fallen by around 1% p.a. since 31 March 2017 which will increase liabilities by around 20% depending on the maturity of the scheme.  Inflation has also fallen by around 0.6% p.a. which will reduce liabilities, all other things being equal.  The impact will depend on the level of inflation linked benefits in the scheme.  Considering both effects, schemes are likely to see increased liabilities, with schemes with fixed benefits impacted more.

The deficit position will also be impacted by how scheme assets have performed.  The position will be highly dependent on the individual investments held.  Growth assets may be broadly neutral – performing well until early 2020 then falling sharply due to Covid-19.  Bonds will have performed well – any schemes with hedging in place will have seen the value of this in recent months.

Schemes may have also seen positive experience since the previous valuation.  Inflation may well have been lower than assumed over the period.  The impact of member events, such as taking a Pension Commencement Lump Sum on retirement, will have more of an impact due to the low interest rate environment.

Overall, on a like for like basis with the previous valuation, deficits are likely to have increased for schemes with fixed benefits and no hedging in place, and decreased for schemes with inflation linked benefits and high levels of hedging.

When considering assumption setting at 31 March 2020, we would expect to see updated mortality assumptions based on the most recently available information.  We would also encourage consideration of future expected returns and how these may have changed given the current environment – for example has the equity risk premium increased and if so should a like-for-like ‘gilts plus’ basis have a higher outperformance assumption?  It is important that prudence is not compounded.  We would also look for recovery plans to allow for best-estimate returns on scheme assets where this is appropriate.

Covenant/Cash Constraints

The Pensions Regulator generally expects to see a similar level of contributions agreed as in previous years, with good reasoning if contributions have to reduce.  The best support for a pension scheme is a strong employer.  Employers can negotiate on the level and timing of contributions payable and, as a result of Covid-19, can request a deferral of contributions to ensure the ongoing viability of the business.

Trustees are likely to request cashflow forecasts and management accounts to show the need for any reduction/deferral.  Employers should be aware that less contributions now means more contributions later.

What should employers consider when agreeing valuations?

It is important that employers take their own professional advice, in particular in relation to setting the assumptions.  There is a range of acceptable assumptions and ensuring these are set at the appropriate level should help with affordability.

It is important that as well as agreeing the valuation, employers consider a long-term view – what is the ultimate goal and what is the plan to get there? Advisers can help with strategy and journey plans and give employers some direction and control over the pension scheme.

There is 15 months to complete the valuation process.  We would expect that the majority of valuations are completed well within this window.

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