Making Sense of Pensions

Angela Burns

This guide is intended to be a useful reference for companies preparing their 31 December 2019 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.

Alan Collins

Following the clear result of the December 2019 UK general election, 2020 was always going to be a big year for the pensions regulatory landscape. With the Pension Schemes Bill working its way through parliament, The Pensions Regulator has also set out its vision for the remainder of the year. I look at some of these areas below.

Revised Funding Code for Defined Benefit (DB) Schemes

Consultation on the revised funding code will commence in March (on the principles of funding, with the detail to follow in a further consultation late in the year).

The two main pillars of the new code are likely to be risk management and long-term funding. Previous statements from the Regulator have encouraged schemes to set long-term “secondary” funding objectives and contingency planning. I would expect the code to give greater clarity to these objectives and turn them into “must haves” not “nice to haves”.

The new code will contain two routes for schemes to follow. The “fast-track” route will set out certain conditions which, if met, will avoid the regulatory scrutiny of the “bespoke” route. I would expect the fast-track conditions will relate to areas such as strength of funding target, investment strategy and length of recovery period. The big question for me will be how many schemes will be able to follow the fast-track route? If the conditions are too onerous, then it may not do much to reduce the Regulator’s workload.

Consolidation – clarity on DC schemes, caution on DB schemes

The future of occupational Defined Contribution (DC) schemes is clear. Further consolidation is inevitable and has widespread support. The days of small to medium DC schemes, and DC sections of hybrid schemes, are numbered.

However, there is less clarity (or should that be Clara-ty) when it comes to DB consolidation and DB superfunds. While supportive of the principles of DB consolidation, the Regulator is “concerned” about separating schemes from their sponsors and the lack of an authorisation regime.

DB consolidation will continue, especially in schemes with the same sponsors (or sponsors in the same group) and with “traditional” consolidators. However, to me, the first deal with the new consolidators does not look any closer than it did this time last year.

Pension scheme governance – “No” to Professional Trustees for every scheme

The big question on the recent consultation into the “Future of trusteeship and governance” was whether or not it should become mandatory in due course for each scheme to engage a professional trustee. The answer for now is “no”, but the Regulator has confirmed its support for professional trusteeship accreditation and an industry code for sole trusteeship. 

Following the consultation, the Regulator will also be establishing and leading an industry working group with the aim of improving diversity and inclusion on trustee boards. Further consultation will also follow on changes to the Trustee Knowledge and Understanding code, leading to updates to the Trustee Toolkit in due course.

Brendan McLean

Coronavirus and volatility

Stock markets reached all-time highs at the beginning of 2020; then came Coronavirus which caused panic selling in most asset classes due to the adverse impact it could have on businesses and the global economy.

The following week the panic seemed to be over, with some major equity markets rallying. This was particularly evident in the US which posted record highs again, driven by strong quarterly earnings and growth projections from the world’s largest companies, in addition to strong US job creation.

It is impossible to predict the full affect Coronavirus may have on the world economy. The World Health Organization has declared the epidemic a public health emergency, so Coronavirus could still cause markets to decline. The future outcome is unknown.

Highs and lows

What I find most interesting is the volatility it has caused. One example is Tesla, the electric vehicle manufacturer, which saw its shares increase by around 115% in 2020 only to fall by 15% in one day – its worst day ever. The sudden decline was driven by reports that Coronavirus would impact production and deliveries at its factory in China. This highlights the increasingly volatile market.

For bond issuers, 2020 also started off well, with the highest issuance of US high yield debt in a decade at $37bn – until Coronavirus fears saw investors pull $2.9bn out of high yield funds. One high profile US high yield ETF saw its asset base shrink by 7% in a single day – a rapid increase in volatility.

One to watch

The recent bout of volatility may be a sign of things to come for 2020. Trustees need to avoid making decisions based on short-term events and focus instead on their long-term investment strategy.

Alan Collins

Most occupational pension schemes must provide a regular, usually annual, scheme return to The Pensions Regulator (TPR), containing prescribed information that, in part, depends on the type of scheme (DB, DC or Hybrid).

TPR typically issues a scheme return notice in December for DB schemes, and July for DC schemes.

Online process

Schemes must submit their forms using TPR’s online service, Exchange; trustees can access the online form only within the period during which they are obliged to complete it. Trustees must file a scheme return by the date stated on the notice. This will be at least 28 days after the date the notice was issued but, in practice, TPR aims to give six weeks to complete the scheme return. That said, it cannot offer any extension to the deadline.

The information required in a scheme return is summarised on the TPR’s website, together with a checklist showing any recent additions to the return.

If trustees fail to provide a scheme return, they may be liable for a civil penalty of up to £5,000 in the case of an individual and up to £50,000 in other cases.

Additional requirements

  • From 2018, scheme returns needed to include common and conditional (now known as ‘scheme-specific’) data scores. Common data is the basic information all schemes need to uniquely identify individual members. Scheme-specific data is member data that trustees require to enable them to administer their particular scheme.
  • From 2019, trustees submitting DC returns will be asked to confirm when they last measured their scheme’s common data and scheme-specific data. This question has been included to allow TPR to track progress of schemes as they incorporate the record-keeping standards.

If TPR has concerns that its record-keeping standards are not being met, it may engage with individual schemes. If trustees fail to demonstrate they are taking “appropriate steps” to improve records, TPR may take action.

Data in the spotlight

So, in addition to other developments where quality of pension scheme data will be under the spotlight, such as pensions dashboards and addressing inequalities arising from Guaranteed Minimum Pensions, scheme returns are another example of why, when it comes to ‘dirty data’, there is increasingly no place to hide.

Andrew Kerrin

Welcome to our latest Quarterly Report, which focuses on the key pension issues and industry developments in the last three months of 2019.

After almost three years of political debate and uncertainty, the UK is now entering a new era outside of the EU. As our investment report highlights, there was relief that a ‘no deal’ Brexit was avoided at the end of 2019, but schemes should continue to monitor their investment strategy throughout 2020.

Higher standards of governance, administration and a focus on data will remain high on the agenda this year, as evidenced in our articles on the Pensions Ombudsman and The Pensions Regulator.  

Looking to the future, we summarise the main points of the Pension Schemes Bill (CDC schemes, new TPR powers and the Dashboard). Trustees should also be aware of changes required to their Statement of Investment Principles later this year, affecting both content and disclosure.

Our report also features news of the latest HMRC bulletins, the PPF levy for 2020/2021, mortality trends and the issue of ‘greenwashing’ in relation to ESG.

We have highlighted any action sponsors and trustees may need to take. Please contact your usual consultant if you need more details on any of the topics featured in this report or have any questions.

Click on image above or this link to download.

John Wilson

B-Day has (almost) arrived

It has been nearly three years since the then Prime Minister gave the European Council formal notice of the UK’s intention to leave the EU.

We are all familiar with key events that have unfolded since then, not least the acrimony, polarisation of society and ugly scenes in the UK Parliament all of which were comprehensively covered by television, radio, newspapers and social media.

However, all said and done, it now looks as though Brexit will actually happen and that the UK will subsequently cease to be a EU member state.

Assuming that a ‘no-deal’ Brexit is avoided, a post-Brexit transition period will run from exit day until 31 December 2020, and could be further extended. During that period, most EU law will continue to apply to the UK and so it will look as feel, in many regards, as though the UK is still part of the EU.

The Withdrawal Agreement Bill has now been approved by Parliament and the Queen and has been signed by the EU Commission and Council; the European Parliament is expected to vote for it on Wednesday 29 January. It will amend the European Union (Withdrawal) Act 2018 (EUWA) to save the effect of most of the European Communities Act 1972 for the duration of the transition period, and will create the new body of retained EU law at the end of the transition period.

At the end of the transition period, the withdrawal agreement will address the future UK-EU relationship.

If the event of the UK and EU failing to conclude a withdrawal agreement, the UK will still leave the EU. However it will do so without an agreement or a transition period. EU law will stop applying to the UK on exit day.

In either scenario, what are the short-term implications for pensions?

The answer, at least from a legal perspective, is ‘not much’.

Most EU pensions law has already been incorporated into UK legislation and any changes will require further UK legislation, and the appropriate Parliamentary processes that precede it.

We may, over time, see divergence between UK and EU pensions law but, except perhaps for those few employers operating cross-border pension schemes, legally it will be business as usual.

There is less certainty from the perspectives of pension scheme investments and employer covenants.

Financial and economic volatility, the degree of which could be dependent on how the UK leaves the EU (see above), could be a major issue, but will be very scheme specific. Investment strategy, sponsoring employer covenant and the resultant impact for scheme funding should be considered as part of a scheme’s ‘integrated risk management’ (IRM).

Finally, some thought may also need to be given to operational issues where, for example, schemes pay pensions to EU ex-pats after the UK ceases to be a member state. The expectation, however, is that these pensioners will continue to receive their retirement incomes without interruption.

In the meantime, The Pensions Regulator has set out the areas it expects trustees to focus on in order to prepare their schemes for Brexit and all trustees should be familiar with this guidance:

Hugh Nolan

As we head into the brave new world of 2020 with a strong majority Government that has every chance of seeing all its policies implemented during its five-year fixed term, it seems a good time to review the WASPI (Women Against State Pension Inequality) situation to see whether Jeremy Corbyn’s Labour Party had a point about compensating the 1950s women who saw the age at which they can take their State Pension (“State Pension Age” or “SPA”) increased.

Background to SPA equalisation

The Pensions Act 1995 laid down gradual increases in SPA for women between 2010 and 2020, with the objective of eventually equalising their historic retirement age of 60 with the (then) SPA of 65 for men. That was a slower process than the 15 years recommended by the Turner Commission and the ten years recommended by Saga and seemed long enough to give those affected a chance to plan ahead (provided, of course, they knew about the change…).

Occupational schemes faced with the equalisation issue following the Barber judgment were only able to make changes to normal pension ages for pensionable service from 17 May 1990 onwards but the SPA was amended retrospectively. This is undoubtedly a bit harsh but it is understandable that Parliament took that approach. It is arguably justified by the drive for equality, intergenerational fairness, the need for a sustainable State Pension and the pressure on public finances – especially with an ageing population and an increasing dependency ratio with fewer workers relative to pensioners. At least the women affected had 15 years or more to adjust to the change.

Accelerated programme

However, the Pensions Act 2011 accelerated the change from 63 to 65, so this happened from 2016-2018 rather than 2016-2020 as originally planned. There were concessionary transitional arrangements to limit the impact of this later change so that no woman saw an extra increase of more than 18 months in her SPA compared to the Pensions Act 1995 timetable. That does, however, mean that many women saw an additional delay of 18 months in receiving their State Pension, with only 7 years’ notice (if they were even aware of the change at that point). SPA for both men and women is now increasing to 66 from October 2020 and then on to 67 by 2028, with a further rise to 68 currently on the statute books for 2044-2046.

WASPI women want to be compensated for the change in their SPA to 65, citing long-standing inequality with men in other areas and a lack of notice as justification for retaining the more generous retirement age. I have a lot of sympathy for the inequality that women have suffered over the years (and continue to suffer) but I can’t see that as a compelling reason to give them a better pension than men. I’d rather see society address the underlying inequality. In any event, it’s true that women live longer than men on average so the same State Pension is typically worth more for a woman than a man.

The danger of assumptions

I have less sympathy for the argument that women weren’t given enough notice for the original change from 60 to 65. The Department for Work and Pensions (DWP) ran an advertising campaign and wrote literally millions of letters advising women of the SPA changes, though naturally some weren’t safely received for various reasons (or weren’t understood and remembered). I realise that I may be rather complacent about how widespread the news was disseminated as an industry insider. But the key point for me is that none of the affected women would have had any quote whatsoever or any other official information based on an SPA of 60 from 1995 onwards. WASPI women may have been under the impression that they’d be allowed to retire at age 60 like their mothers and grandmothers had, but that was simply wrong.

Although it’s an understandable misunderstanding, I think this apparent belief in an SPA of 60 was an unjustified assumption, particularly for those who had received letters notifying them of the changes. I wouldn’t want to see people being compensated for an unreasonable expectation and I haven’t seen any convincing case put forward as to why women could reasonably expect to retire at age 60 or make plans and decisions on that basis without checking at any point in the previous decade or two. Even if I were convinced that women had good cause to think their SPA was still 60, I would question how they could plan properly for retirement without knowing what pension they’d be entitled to and I’d challenge how they could know that without asking. In fairness though, the WASPI women aren’t the only people who blithely expect their State Pension to be adequate for retirement without knowing what it actually is.

Sympathy in equal measure

So, I am left with the view that the increase in the SPA from 60 to 65 for women was reasonable and that an extended period of notice was given for the change. My remaining sympathy is for those women who relied on their mistaken belief of an earlier SPA and took irrevocable decisions based on that belief, where I could easily be persuaded that they deserve special treatment even if their financial hardship arose from their own misunderstanding. On balance, I believe that the Labour Party election commitment to compensate all the affected women was misguided.

There are undoubtedly many moving stories of personal circumstances that tug the heartstrings, setting out the difficulties caused in individual cases by the SPA of 65 for women. There are WASPI women who have been unable to carry on working past age 60 due to illness or who have been unable to find (decent) jobs after being made redundant. There are others who have died shortly after retirement having paid into the system for up to 50 years, who could have had the benefit of a few years of retirement and pension if they’d been allowed to retire at age 60. Some have had to apply for Job Seekers Allowance, having to justify their ongoing search for employment after a lifetime of contributing. The harsh reality though is that there are similar stories for men too. If we want equality (and I do), then any sympathy for people prevented from retiring before age 65 should be for men as well for women and for those born in the 1960s (or whenever) as well as those in the 1950s.

Sting in the tale

That said, I take a completely different view about the accelerated timetable set out in the Pensions Act 2011. Those changes were introduced at relatively short notice and were a pure cost-saving measure rather than a way of achieving equality, which was already in hand. Women affected by this change had to wait up to 18 months extra to retire, or use any private pension savings to bridge the gap to their new retirement age. The transitional arrangements recognised that the notice given was too short and mitigated the effect of the change but I can’t understand why it’s any more acceptable in principle to make women wait an extra 18 months at short notice than two years? Frankly, the women affected here were being completely ripped off in the name of austerity. Parliament may have been entitled to make the change as a matter of law (in the same way that State pension increases were changed from RPI to CPI in 2011) but it doesn’t seem ethically correct to disproportionately penalise this specific group of people, who had been disadvantaged over a lifetime of unequal treatment and were already in the process of having one of their few positive inequalities gradually removed.

If I were King for a day, I’d compensate the WASPI women for the change made in 2011, simply by paying them the pension they missed out on for the months of delayed retirement. I doubt if the Courts will insist on that in any WASPI appeal to last year’s unsuccessful action against the changes,  but I still think it would be morally right and the cost would be modest relative to the Labour pledge. In practice, Boris Johnson could do this if he wanted but will surely be tempted to let sleeping dogs lie in the expectation that it won’t hurt him in the next election any more than it did this time. I’d encourage Labour and the WASPI women to lobby for a reversal of the 2011 provisions rather than keep fighting the losing battle about the original 1995 changes. While the Tories might just be prepared to give something (and will have to if the Parliamentary and Health Service Ombudsman finds in its delayed investigation that there has been maladministration), they’re unlikely to open the can of worms if all it gets them is a continued kicking in the press for not going fully “Back to 60”.

[1] Mr S, PO-21607

Brendan McLean

2019 reflections

The year began negatively with many commentators predicting poor returns. This was mainly because 2018 was a particularly poor year for assets. Deutsche Bank said 93% of assets were down in 2018 – worse than during the Great Depression – and December 2018 was the lowest performing month since the 2008 financial crisis for global equities. In Q4 2018, Brent crude oil fell by 35% due to rising crude inventories and increased production, in addition to fears that global growth may be slowing.

The main causes of the large declines in 2018 were: US central bank increasing interest rates, a slowdown in Eurozone business confidence, tightening global liquidity due to the withdrawal of quantitative easing, and weaker Chinese growth.  There were also rising geopolitical concerns including Brexit, Italian politics, US political gridlock, and the ongoing trade conflict between the US and China.

Key features from 2019 were the liquidity issues affecting Neil Woodford’s flagship fund, the Woodford Equity Income Fund, H2O Asset Management and the M&G property fund. As investors continue to hunt in riskier, illiquid parts of the investment universe (due to the decreasing yields available), I would not be surprised if similar events occurred this year.

Environmental, social and governance issues (ESG) became more important in 2019 as trustees faced new requirements to document the way in which they take account of ESG issues in their Statement of Investment Principles (SIPs). This resulted in a frantic push from asset managers to make their funds meet the relevant standards. Suddenly every fund became an ESG focused fund, which going forward is likely to result in a degree of ‘greenwashing’. There will be additional ESG requirements in place from October 2020 so trustees should prepare to spend more time on this area.

2020 predictions

2020 has certainly begun differently to 2019, mainly because 2019 was a fantastic year for assets. It would have been hard to lose money with equities and bonds both going up. Global equities increased by 22% – even a 60:40 equity bond fund would have increased by 20%. Commentators have been claiming that 2020 will be a good year, but I wonder how influenced they are by the joy of 2019.

Nevertheless, there are reasons to be optimistic about 2020. Due to the large Conservative majority in the House of Commons, progress on Brexit will hopefully be made and years of uncertainly should come to an end. There has also been progress on the US/China trade war. In the USA strong real wage growth, low debt levels and rising house prices means the US consumer, the key driver of the economy, is more likely to keep spending, which could prolong the economic cycle and be supportive for assets.

However, bonds and some equity markets do appear expensive by historical standards. There is a high level of global debt and the increased tension between the USA and Iran could very quickly escalate. This means that asset values are susceptible to any type of global shock.

To reduce the effects of such a shock, investors should aim to be highly diversified, allocating not only to the traditional asset classes of bonds and equities, but also alternative asset classes such as infrastructure, commodities, emerging market debt, structured finance, and currency.

Matt Masters

As we say goodbye to the 2010s and welcome the 2020s, we look back at some of the big themes that emerged in Defined Benefit (DB) pensions over the past decade.

Low interest rate environment

Much has been written about low interest rates, might they be here to stay and whether or not the UK is in the grip of a Japan-like environment? Regardless of the answers to these questions, it has certainly made the cost of securing pension income much more expensive, resulting in, amongst other things, significantly increased liabilities for final salary pension schemes.

This has led to an increasingly polarised position for DB schemes, with those who hedged interest rate risk early on now sitting relatively pretty, and those who did not now finding themselves continuing to stare at deficits, despite record contributions and one of the longest equity market bull runs in history.

While the low interest rate environment has led to a corresponding re-rating of asset prices, driving some of the unprecedented returns seen over the decade, perhaps more importantly it means lower expected returns looking forward. Consequently, pension schemes are having to keep their investment strategies under review, with many choosing to look at more esoteric investment classes and the merits of a fiduciary approach. 

A decade of returns

It was the decade of the equity bull market, with the US S&P 500 index up 28.9% in 2019, its best for some years, contributing to a 190% gain over the decade. This was led by stocks such as Netflix (up over 4,000%) and Apple (up over 850%).

Closer to home it was a decade of mixed performance. While the Total Return on the FTSE 100 was 104% (equating to an annualised return of around 7.4%), JD Sports, who weren’t even in the FTSE 100 index at the start of the decade, ended the period as the top performer, with £1,000 invested in January 2010 worth £33,700 at the end of December 2019.

By contrast, Tesco, with its accounting scandal, numerous profit warnings, and with the challenge from the German discounters, was the worst-performing FTSE 100 share over the decade, giving a negative total return of 21.6%. More generally, the banks and energy stocks largely seemed to have a tough time in the 2010s.

The rise of member options and de-risking

The number of DB schemes moving inexorably closer to the “end game” has increased substantially, with many putting in place strategies designed to move them into a position to fully secure all benefits as soon as reasonably possible.

While this may remain many years away for some, a focus on member options has come to the fore. Along with the now regulated incentive exercises, this can perhaps most clearly be seen by the change in options available at retirement. Beside the traditional retirement options of “pension; or tax-free cash sum and lower pension” are further choices, commonly a transfer value or partial transfer value, or an option to exchange pension increases for additional pension.

In addition, the buy-out market has continued to grow rapidly, with the second five years of the decade seeing some five times the level of activity from the first five years, with transactions peaking in 2019 at around £35bn. And, while the headlines suggest a focus on multi-billion pound deals, there remains competitive pricing for those smaller schemes who are genuinely ready to transact.

Pension freedoms

A look back over the past ten years wouldn’t be complete without mention of pension freedoms. The popularity of the member options mentioned above was turbocharged by George Osborne’s shock Budget announcement of 2014. Gone was the requirement to take an annuity with your Defined Contribution (DC) pot, replaced with the “freedom and choice” to do what you want with it, whether to buy the much talked about Lamborghini or not. 

With this change came a substantial increase in transfer value quotation requests, particularly from DB members over the age of 55 curious to explore their options. Indeed, this activity has led to a substantial increases in the amount transferred from DB schemes, to an annual amount in excess of £20bn. While seen as a win-win-win (a win for members, who are able to take greater control over their retirement planning; a win for pension schemes trustees, who see a consequent improvement in the funding position for their remaining members; and a win for pension scheme sponsors, who see a reduction in their buy-out liability), DB pension transfers could represent another “mis-selling scandal”, if not conducted properly.


While pensions are reassuringly long-term in nature, the rate of change in legislation and market developments can often seem to stand in stark contrast. The coming decade promises continued evolution and change, not least with a new Pensions Bill expected imminently, a “stronger, tougher regulator”, GMP equalisation to grapple with, the potential alignment of RPI with CPI, the possible rise of commercial consolidators and the implications of Brexit to come!

Brendan McLean

The liquidity mismatch

Once again, the liquidity of daily dealt funds has made headline news.

Back in June 2019, Neil Woodford’s flagship fund, the Woodford Equity Income Fund, stopped taking redemption requests and will now be wound up, which has prevented 300,000 investors from accessing their investments.

More recently, in December 2019, M&G suspended dealing on its £2.5bn property fund due to £1bn of redemptions in a 12 month period, and the difficulty the firm has had in selling assets to meet all of its redemption requests.

These high profile cases highlight the problem of liquidity mismatch. Both funds offered daily dealing, which enables investors to buy and sell units in the fund each day. However, as the underlying assets cannot be sold at such quick pace, the funds were forced to suspend redemptions while assets were liquidated to meet the withdrawals.

One issue with the M&G property fund is that it had a high retail investor base. This class of investors has historically been quick to move money around at the slightest hint of ‘trouble’. Normally, defined benefit pension schemes will invest into ‘institutional only’ property funds, which makes redemption requests more stable and the funds less likely to be suspended.

Systemic risk

The Bank of England (BoE) has said that the issue of liquidity mismatch has the potential to become a systemic risk – this highlights the seriousness of the issue.  This risk being realised would potentially see similar funds suspended; this contagion effect was reflected following the M&G announcement, as investors started selling other property funds.

To combat the issue of liquidity mismatch and to protect investors, the BoE and the Financial Conduct Authority (FCA) are considering making daily redemptions of property funds incur a financial penalty. This is aimed at preventing large withdrawals and aligning redemption periods with the length of time it takes to sell underlying assets at a fair price.

In September 2019, the FCA announced new rules requiring property funds to suspend dealing if there is uncertainty over the value of 20% of their assets. This may see more property funds being suspended, which could damage investor confidence in the asset class and discourage investors from allocating to open-end property funds. Fund managers will likely respond to the new rules by holding a high cash balance, which will result in lower returns.

It is encouraging that both the BoE and the FCA recognise the importance of liquidity. In my view, the measures may create additional risks and potentially sacrifice returns, however, liquidity mismatch is a serious issue for investors and I am glad more efforts are being made to stop it.

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