Making Sense of Pensions

Alan Collins

In the current challenging times on so many fronts, thinking about/writing about actuarial valuations leads me to ask “so what” from time to time and you may well feel the same.

However, if not, then hopefully the following will give some useful reminders / pointers for sponsors and trustees with an actuarial valuation due in the coming weeks and months.

  • Unless schemes are already very well-funded and very well protected against interest rate movements and have low levels of growth/equity assets, their funding level will have taken a hit over recent weeks. The degree of the hit will be dictated by the levels of exposure in these areas. My experience is seeing schemes which are broadly unaffected (perhaps still 1%-2% down) to seeing with funding levels falling by 15% or more since around mid-February.
  • For open schemes, even those that are well funded, current market conditions will result in higher expected costs of benefit accrual. This is primarily due to lower interest rates / lower long-term rates of expected investment return. For a typical final salary or Career Average Revalued Earnings (CARE) scheme, it could increase costs by 5% of salary or more. Unless other action is taken, this increased cost will fall on company sponsors.
  • Given the above, I think it is very important to know where you stand – technology is available now such that all trustees and sponsors should be able to ascertain their funding positions on an up-to-date basis. Peter Drucker’s famous saying of “what gets measured, gets managed” has never been truer than today.
  • As legislation stands, actuarial valuation dates must be no more than 3 years apart. So, you will not be able to defer the effective date of your valuation. I assume it is pretty unlikely that schemes will want to bring valuation dates forward to now unless there is a requirement/very good reason to do so.
  • So, your results need to be measured at the valuation date. However, crucially, any resulting funding recovery plan does not. A recovery plan (and schedule of contributions) can take account of changing (and hopefully improving) market conditions during the 15-month period in which valuations need to be completed. I have seen this occur several times now e.g. valuations which took place shortly after the credit crunch in late 2007/early 2008 and those which took place shortly after the EU Referendum vote in 2016, showed much better positions by the time they were due to be signed off.
  • Reducing risk may mean selling some assets at a price below the peak they reached just a few weeks/months ago. However, if doing so can move you towards your ultimate goal more effectively, then it will be the best thing to do. Over the early 2000s, I saw many trustees miss out on de-risking opportunities while they hung on for market to “return” to pre-crash levels.

Overall, managing a defined benefit pension scheme remains a long-term enterprise. I hope this bump in the road, like several others before, is overcome quickly. My key messages are keep thinking and planning for the long-term, keep up to date with what is happening (with the scheme and your sponsor) and continue to look to reduce risk gradually over time when you can. 

David Davison

In mid 2018 the LGPS (Scotland) Regulations were amended (as outlined in Bulletin 21 – Hope Springs Eternal to introduce the concept of a suspension of the cessation debt when an employer exits a Fund. This brought a welcome and much needed option to assist admission bodies, many of whom are charities, in better managing their LGPS liabilities.

Unfortunately to date Funds have chosen not to utilise this additional flexibility through the adoption of alternative solutions in some cases but primarily by choosing to just ignore the change and carry on as previously.

In January SPPA issued a consultation to identify who had used the new provisions and how often, and to consider what changes might be needed to Regulation to have Funds more frequently utilise them. It also asked for suggestions about what other measures could be considered to add additional flexibility to the exit process.

Here is a link to our submission which looks to make some practical proposals how a more consistent, equitable and flexible approach could be adopted. We would hope to engage further with SPPA and the Funds to provide any additional support necessary to reach mutually beneficial solutions.

Brian Spence

Preparing for Covid-19

Like many businesses in the UK at the moment, we are developing and taking appropriate measures to ensure the wellbeing of staff and our ability to continue to supply services to our clients.

Business Continuity Plan

We are taking action to ensure that our business continuity plan supports our clients, and is ready for use when it might become necessary.  Our Plan is reviewed regularly in the normal course of business and since late January we have been making arrangements to allow us to respond to the escalating risk posed by Covid-19.

With offices in seven cities across the UK, we are well placed to serve our pension scheme clients.  A large proportion of our 170 members of staff regularly work from home on an occasional or regular basis.  Over the past week, we have taken steps to ensure that all members of staff can work from home if needed.  We have run full tests of our Plan, including simultaneous full closure of all offices, in order that we are prepared for any and all eventualities.

We expect that under most presently foreseeable contingencies, we will be able to fully support all services to our clients including administration, actuarial, pensions payroll, treasury and investment management services.

Our business continuity team is currently meeting twice a week to monitor the evolving situation, and will communicate any action necessary to our staff.

We have confirmed that all of the suppliers who have access to our offices, and therefore come into contact with our team, will guarantee sick pay for their employees, should they need to self-isolate.

Working Patterns of our Members of Staff

We are encouraging our team to take a safe and pragmatic approach.  We want to minimise the risk of them catching the virus, and so have asked all members of staff to consider working from home unless they have a particular need to travel, and to not travel unnecessarily for work purposes. 

We are continually reviewing arrangements for external meetings. We have an excellent platform in Microsoft Teams for managing remote meetings with or without video and we would encourage our clients to make full use of this to reduce the level of personal contact arising from meetings.

We have also identified a small team who can attend our administration offices in Belfast or Glasgow by walking or driving to work, rather than using public transport. This is in order that we can continue to maintain access to incoming post, and scan any relevant correspondence for onward digital processing and to arrange outgoing post.

Technology Supporting Remote Working

Our business has been essentially paperless since 2009. Our IT infrastructure is entirely cloud based so we have no physical servers. We use a combination of Microsoft online software (e.g. Office 365) and applications hosted on Microsoft Azure. Our telephony is on Microsoft Teams and is fully cloud based.

Our main pensions administration and actuarial software Mantle is hosted on the Google Compute and Amazon Web Services cloud platforms.

Paying Pension Scheme Members

Apart from a small number of members who prefer to be paid by cheque, our entire payment process is online in the cloud with all payments raised and approved in Mantle.

For those members who continue to be paid using cheques, we have written to them to ask them to approve a mandate to allow us to pay them by bank transfer instead. Clearly cheque payments are a particular area of risk in certain scenarios but we will do our best to continue to support this very small group of members.

Monitoring of Scheme Investments

We use a number of technology platforms to ensure that we are monitoring individual pension scheme investments and wider investment markets.

We will monitor the impact of market changes on our clients’ schemes and continue to advise any appropriate action on an individual basis.

A key platform we use is Mobius Life. We have been in close contact with them in relation to their own business continuity planning and testing.


We will continue to update you on our preparedness, the fluctuations in investment markets and the general position on your pension scheme as the situation develops. 

Please do continue to contact us as normal if you have any questions at all.

Matt Masters


Cash Commutation [Noun / kæʃ kɒmjʊˈteɪʃən]. The right that a beneficiary has to exchange one type of income for another. More commonly referred to as a Tax-Free Cash Sum (“TFCS”). 


As interest rates have fallen and life expectancy has increased Cash Commutation Factors (“CCFs”) have inexorably risen. But have they increased at the same rate as the cost of providing the underlying pension? 

In the 1970s, members were expected to live perhaps fifteen years in retirement, with pensions that were level in payment, at a time when investment returns were high. Now, by contrast, members are expected to live perhaps twenty five years in retirement, will have at least half their pension increasing in payment, and future investment returns are forecast to be considerably lower. 

Overarching Requirements

“Acting in the best interests of scheme members” is frequently taken as the key “rule of thumb” to be followed by trustees, if not an overarching requirement. However, this misses the point.

Trustees’ paramount duty is to the terms of the Trust Deed. Insofar as member options are concerned, trustees do not have a duty to maximise the amount payable. Rather, they need to make sure they are exercising their powers properly, acting fairly and in good faith. 

And this is really where the rubber hits the road. The Trust Deed will outline who sets the CCFs and, effectively, what they are able to take into account in determining them. Frequently, the Trust Deed will refer to factors being “actuarially equivalent” or “reasonable”, but these are not the same thing.

So what is reasonable to take into account in determining CCFs?

The answer to this question is one of ongoing discussion within the pensions industry and, as ever, the answer is nuanced. For example:

  • Is it appropriate to choose unisex factors? And should these reflect the number of males and females in the scheme? 
  • Should factors reflect the pension increases that would have been provided (and is it okay to look at an average increase rate, for simplicity)? And where pension increases are not known in advance (for example, where they move in line with inflation) what allowance should be made for this?
  • Should factors reflect the funding position of the scheme (is it right to pay out a “full” TFCS when the scheme is underfunded)?
  • Is it right to take account of member-specific features (for example, the likely life expectancy of someone in ill-heath)? Or should we look at the mortality experience of the scheme as a whole?
  • To what extent should factors reflect underlying market conditions (what if underlying market conditions are artificially low -or high- for example as a result of quantitative easing)? Do we need to believe in the permanency of any change in market conditions before aligning our CCFs with them?
  • How often should we review factors? Should they change each month, like Transfer Values, or should they be retained for a longer period, to enable members to plan for their retirement? And what about the very long term and inter-generational fairness? Can we legitimately persist with factors that are considered unreasonable to avoid the excessive administrative cost that comes with frequent changes?
  • Does it matter if CCFs don’t reflect fair value? After all, members can always vote with their feet and not take their TFCS. Indeed, in this age of ‘freedom and choice’, members may well have the alternative of taking cash from their Defined Contribution pension pots.
  • Can we look at what every other scheme is doing? Provided we’re in the middle of the herd we’re safe, right?

So what should trustees do? 

Importantly, as we noted earlier, the starting point is the Trust Deed. However, I would suggest there are a few “must do’s” beyond that.

Clear communication is key. Personally, I would like to see members encouraged to take advice when it comes to taking their TFCS. Indeed, legislation already requires this for Transfer Values in excess of £30,000.

It’s also important for CCFs to be reviewed regularly. For example, the Pension Protection Fund review their factors annually. But why not treat the TFCS more like a Transfer Value, where it can vary each month (and could be fixed at, say, six months prior to retirement, to enable members to plan)?

Hugh Nolan

A new report by Professor Sir Michael Marmot for the Institute of Health Equity not only highlights the stalling of increases in UK life expectancy generally since 2010 but actually also identifies a FALL in life expectancy for women in the poorest areas. The report suggests that austerity has had an impact, which seems a natural conclusion even if it isn’t quite proven definitively yet. There is a well-established link between poverty and early death and people in deprived areas continue to die sooner than their more affluent peers – and this gap could widen if the current trend continues.

However, there is a contrary view that the current slowdown is just a trough in the long-term trend that offsets the peak improvements we saw in the first decade of this millennium. The Office of National Statistics (ONS) released statistics on global longevity back in August 2019 that showed a significant slowdown in longevity improvements in Germany, Spain, Sweden and Portugal and a complete stalling in the USA so we’re definitely not alone. At the same time, Japan has had sluggish increases in longevity for some time and only recently saw improvements start to accelerate again, which is perhaps understandable given that they have been leading the way with the highest longevity in the world. In the UK, we may lag behind France, the Netherlands, Spain and Italy on life expectancy but we’re still ahead of the USA, Poland and Russia, so it’s not all bad news.

Personally, I believe that there is some truth in both views, with the negative impact of austerity exacerbating the effect of natural fluctuations over time. As far as pension schemes are concerned, it’s important to assess the latest data available and consider how relevant it is for the particular scheme in question. Most importantly, we should think about what we’ll do when it inevitably turns out that our best projections are wrong!

Matt Masters

Retirement is a familiar part of our social universe. Historically, however, retirement was anything but common. Looking at more recent history, we can see this.  For example, the UK’s Old Age Pension was only introduced on 1 January 1909, to around 500,000 people over the age of 70. By contrast, one in five people, or around 13 million, are now claiming the State pension (and aren’t having to wait until age 70 to do so!)

Somewhat ominously, the number of people in the UK of State Pension Age or older as a percentage of the working age population is projected to increase. Back in 1901, there were 10 pensioners for every 100 people working. This has now increased to 28 pensioners and, owing to the increase in life expectancy and lower birth rates, is expected to continue to increase, to around 37 pensioners by 2040. 

As a result, the Government is expected to spend an ever-increasing amount of the country’s GDP on pensions and related benefits. Whether this is sustainable has yet to be seen.

The differentials

A suitable retirement income can mean different things to different people. Will it provide an acceptable standard of living? Does it have an inbuilt level of inflation protection? Is it guaranteed to pay out until death? Is it flexible enough to change as needs change or to meet spikes in expenditure?

Different people, and different groups of people, will be affected differently. Some, like Jeroen van der Veer, former chief executive of Royal Dutch Shell, are unlikely to have to worry. He is sitting on one of the UK’s biggest pensions, of some £1.3 million each year.

The 15+ million Baby Boomers, now aged between 55 and 74, are likely to reach retirement with relatively high levels of Defined Benefit (“DB”) provision compared to the younger generations and have higher State Pension entitlement. They are also more likely to have other sources of income and housing equity.

The 13+ million Generation Xers, now aged between 40 and 54, will reach retirement with lower levels of DB entitlement than the Baby Boomers and more Defined Contribution (“DC”) savings. They will also receive less income proportionally from State pensions (owing to the effect of working patterns on their State pension entitlements), are more likely to reach retirement in rented accommodation, more likely to need to provide care, and less likely to have other savings to draw on.

Different economic climates have put upward pressure on the cost of living (predominantly accommodation), and downward pressure on inflation adjusted wage growth, meaning that younger groups are earning less, and housing is more expensive. In addition, the 17+ million Millennials, now aged between 20 and 39, are the least likely to have a DB entitlement (but will have greater DC savings than the Generation Xers as a result of automatic enrolment). They are also most likely to work casually or be self-employed (with the greatest impact on their State pension entitlements).

Individual responsibility

While many people view the Government’s key role as providing a safety net to those most in need (including, traditionally, the elderly), there is a clear move towards passing responsibility back to the individual, as witnessed by automatic enrolment. This is, in part, a response to the financial pressures the Government is facing over the coming decades. 

As a general rule, there are certain things individuals can look to do to help make retirement more comfortable:

If eligible, join the company’s pension scheme.

Members benefit from employer contributions as well as the Government’s tax relief to boost pension savings.

Start early. 

While retirement might seem like a lifetime away, it will benefit in the long run to save now and spend later. For younger people, the money saved now will grow through investments. For older people, there is still a benefit from tax-relief on personal contributions.

Saving a little extra can make a big difference.

The cost of living can make it hard to find money to save. Whether it’s a pay rise, a bonus, or money that can be freed up by spending less somewhere else, it’s always worth thinking about paying a little more into a pension.

Work longer, giving your pension time to build.

Government statistics suggest more than a million people are working beyond State Pension Age. Some because they enjoy it. Others out of necessity. Either way, it means more time for money to grow whilst not depleting retirement savings.

Graeme Riddoch

Driving change

I did an all too frequent commute to London this morning. Firstly, I drove to the station. I’ve just had Apple Carplay fitted, which lets me mirror and control my phone’s apps. I needed a bit of energy so “Siri play Queen” (that gives my age away).

In bongs a WhatsApp from my wife. “Siri read WhatsApp”, my hands gripping the steering wheel all the while. Voice recognition has come a long way of late. I remember a less sophisticated system transcribed my name, Graeme Riddoch, as ‘dangerous burglar’!

Technology is improving all the time; it’s fast becoming the way we work, rest and play.

Playing at techno god

Having reached the station car park I would previously have been scuttling around looking for change for a parking ticket. But not now, as I opened the parking app using facial recognition rather than a password. Passwords are one of the main reasons that people give up on technology. 

The app spotted me with the GPS function. Car park 2? Yes. One day parking? Yes. Click and done.

Obviously, my train ticket was on an app and I swished through the barrier like a techno god.

Demanding more

I wasn’t doing any of this a couple of years ago. Perhaps the technology wasn’t there – or maybe I hadn’t spotted it. However, once you start using some of these toys and they work, you create an expectation for yourself that all services will work that way too.

One of the biggest drivers of change is the adoption of smartphones and how they are used. The Deloitte 2019 Mobile Consumer Survey finds that 90% of 44-55 year olds and 80% of 55-75 year olds own a smart phone. It’s also the case that smartphones are now the way that most people access the internet.

When was the last time you went out without your phone?

Putting it all together suggests that if you want to get the attention of your customers and deliver a first class service you had better not ignore the smartphone.

Pushing the buttons

Where do we start with passwords? A world of pain. Enough said…

The current generation of phones offer biometric login. Once you have logged into an app for the first time, you then use your thumb print or facial recognition. The pain is gone and the app is readily accessible.

Mobile phones must increasingly form part of an engagement strategy between businesses and consumers. More than three-quarters (79%) of people use their smartphone for reading email; a higher percentage than those who use it for making calls. (Source Email Monday)

Having said that there’s also research showing that people are increasingly deleting e-mails without even opening them. 

So, what about sending messages via push notifications? Retail Dive found that push notifications tend to be opened more than e-mails.


And so to the world of pensions, and in particular defined benefit pensions. Largely paper based, unengaging, and with any web activity largely website based rather than through smart phones.

Getting a decent service that members will want to use on a mobile platform is difficult.

One issue is our old friend poor data quality. The next is the administration technology itself. The ways that modern consumers want to use data were never dreamed of when most of the current technology for defined benefits was built.

But what if…

  • Members could view their benefits and transfer value in real time.
  • Update their details.
  • Receive ‘push’ messages that they would read immediately.
  • Even complete all their retirement options online if ID validation can be cracked.

And that would be just the start. There’s lots of technology across other sectors that could make a real difference to members. We just need to get started!

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.