Making Sense of Pensions

Ciaran Harris

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

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

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

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

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

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

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

Vineet Sood

Following the Competition & Markets Authority (‘CMA’) review of the Investment Consultancy Market, on 18 July 2018, it has provisionally proposed some changes that it believes will improve competition and help trustees gain more information to make more informed choices, and get a better deal from investment consultancy and fiduciary management services.

The CMA has proposed the following key changes, which has consulted on before making any final decisions:

  • Mandatory tendering for moving into fiduciary management. For those who already have it, but did not tender, they must also do so within five years.
  • Mandatory warnings when selling fiduciary management.
  • The Pensions Regulator to provide new and improved guidance for pension schemes when tendering for investment consulting or fiduciary management services.
  • Better information on fees (for fiduciary management only) and standardised performance reporting (both advisory and fiduciary management).
  • Trustees will be required to set their investment consultant strategic objectives and firms must report against these.
  • Regulation of investment consulting and fiduciary management services by the FCA.

These changes are a good way to encourage more competition and ensure that trustees have access to better information when making choices.

In particular, the mandatory requirement for a tender of fiduciary management services will reduce the competitive advantage that investment consultancies have. They will also need to provide explicit warnings that they are marketing their own fiduciary offering, and that others are available.

The unintended consequence of this regulation maybe that investment consultancies with a fiduciary management service will be reluctant to offer fiduciary management services, if there is a risk of losing the client, given the significant set up costs incurred when onboarding a client. However, this should encourage these firms to improve the quality of their service in order to ensure they have the best chance of retaining clients that consider fiduciary management.

Those firms that already provide fiduciary manager reviews are at an advantage as they have expertise to scale up this side of the business, but those not previously involved may consider this as an opportunity for adding new services.

From a trustee’s perspective, it should help to give them a better understanding of the fiduciary management market in order to make a more informed decision when choosing a fiduciary manager. However, the cost of running such an exercise can be expensive and at the moment and there are only a handful of firms that offer a review of fiduciary managers. Therefore, it may prove challenging for some schemes that have a limited budget. The CMA should consider this before any details are made final as it could force some schemes to rule out fiduciary management altogether, on the grounds of cost of conducting a review of different providers, even if it could be the best option for them.

Greater guidance from The Pensions Regulator is welcomed to help trustees make more informed decisions when tendering for investment or fiduciary management services. We believe that this will be helpful to trustees in getting the most out of the tender process, especially for smaller schemes who may have limited experience of running such exercises.

Our view on better transparency on fees charged by fiduciary managers is that, it will help trustees understand what they are paying for to assess value for money but also could allow comparison between different providers to be easier. This could form a good basis of negotiation for trustees. The requirement to standardise reporting of performance should help trustees to make easier comparisons of consultancies and fiduciary managers.

The requirement for trustees to set objectives for investment consultants will mean there is a measureable approach when assessing the performance of the investment services that are provided. This now gives trustees a good way to assess the performance of their investment advisor to see if they are doing a good job, and potentially makes it easier to make comparisons between advisers. The Pensions Regulator will have responsibility for setting guidance on objective setting and we are supportive of this, to encourage investment consultants to improve the quality of the services they provide.

The CMA consultation on these proposals closed on 24 August 2018 and the deadline for its final report is 13 March 2019.

Overall, we are supportive of the CMA’s drive to increase competition as well as increasing the level of transparency among investment consultants and fiduciary managers, in order to provide pension schemes with better outcomes. However, this will need to balanced with a sensible approach and avoid any unintended consequences for pension schemes.



Angela Burns

Liability management



Employers have chosen to manage their defined benefit pension liabilities using liability management exercises for a number if years now but these exercises have recently been given a fresh impetus through the introduction of pension freedoms which has given individuals much more flexibility in how to take their benefits from Defined Contribution schemes.

Below is a transcript from the video above.

Liability management exercises involve offering defined benefit pension scheme members various options in relation to their pension benefits.  These options include:

  • Transferring benefits to an alternative defined contribution arrangement;
  • Taking benefits as a cash lump sum, subject to regulatory limits;
  • Changing how pensions increase in payment.

The sponsor objective in conducting a liability management exercise is two-fold:

  1. Discharging liabilities via transfer values and lump sums is often less costly than the ‘on-going’ cost of providing benefits, or the cost of securing benefits with an insurer – therefore the cost of providing benefits is reduced on exercise of these options. Risk is also reduced if pension increases are swapped for a higher initial pension;
  2. Providing members with a greater choice over how they take their retirement income all carried out in a controlled environment. Individuals can choose options that best suit their needs (see my previous blog on what drives people to transfer for some issues that individuals may consider).

A liability management exercise, if run correctly, can therefore be a win-win for both the employer and scheme members.

So if you are an employer and you are considering providing your membership with OPTIONS – what do you need to think about?


Can you afford to incentivise the options available to improve attractiveness and aid take up?  Consider the cost of the exercise and whether or not you can afford this.  If it’s unaffordable at this time can you implement ‘business as usual’ practices to get a similar result over a period of time? For example providing transfer value statements along with retirement packs, or writing to members to remind them of their options?

Possible impact

An initial feasibility study helps to identify the potential impact, the cost of enhancements (if these are affordable) and any concentrated liabilities.  It is useful to carry this out prior to implementation.

Target membership

Using the results of the feasibility study you can target your exercise to ensure the maximum cost/benefit ratio.

Independent advice

If you are offering incentives then you must provide members with Independent Financial Advice (paid for by the employer).  There are a very limited number of IFA’s with the qualifications and authorisations to conduct this very specialist advice so ensure you choose an IFA that has the relevant experience.  Initial screening can help control costs as only those individuals who would be suitable to receive full advice with the associated costs would make it through the screening process.


Ensure you appoint an advisor with a strong track record of project managing successful liability management exercises.  Advising multiple individuals over a relatively short timescale is a complex process and it must be managed by an experienced professional.

Needs of membership

Consider the needs of your membership throughout the process – what will get them engaged in the exercise?  Are written communications enough or will access to a website, specific member presentations and a dedicated hotline aid engagement and understanding?

Sound communications

Ensure that all communications are engaging and jargon free.  Defined Benefit pensions are complex and it is important that individuals understand the options that are being made available to them and their implications.

This area is very highly regulated by the FCA and tPR has provided useful guidance which needs to be followed to compliantly conduct any exercise.

Angela Burns

There have been huge increases in the numbers of individuals taking transfer values from their defined benefit pension schemes over recent years. This has been driven by numerous factors, one of which being all time low interest rates, giving us record high transfer values. Individuals have been seeing multiples upwards of 30 times pension in many cases, which when added to the increased flexibility now available, is proving a mixture all too difficult to resist.

With the Bank of England raising interest rates for only the second time in a decade (up 0.25% p.a. from 0.50% p.a. to 0.75% p.a.), having been stuck at 0.5% for over nine years, this change is likely to have an negative impact.

Gilt yields rising results in liabilities falling, all other things being equal, so we are likely to see a reduction in transfer values. At this stage the impact is likely to be relatively modest with a 0.25% p.a. increase in gilt yields reducing a £150,000 transfer for a 45 year old by about £10,000 and for a 60 year old by about £5,000.

Such a change means that the amount transferred needs to return a lot more to be able to match, or improve on the benefits offered by the scheme. This change is likely to see the investment return needed to match or improve on the benefits increase by around 0.5% p.a. for the 45 year old and by 1.0% p.a. for the 60 year old.

The investment return required in the period until retirement (also knows as the critical yield or in recent parlance ‘personalised discount rate’) is often seen as a benchmark which needs to be reached before an adviser can even consider if a wider discussion on transferring benefits is even possible. So lower transfer values, which result in higher critical yields, is likely to mean that fewer people reach the threshold and so many more stay with their existing scheme.

For employers incentivising staff to transfer through the use of enhanced transfer values, lower transfer values will mean that higher top-ups are required to reach an attractive level, placing a greater cash requirement on the employer and therefore making exercises less attractive. Alternatively, retaining the same top-up value may result in a lower take-up.

As the transfer value basis in some schemes may not react immediately to changes in gilt yields this may provide individuals with a short window of time before any changes are made. In addition, individuals who are currently within their transfer guarantee period may be keener to have their transfer value processed within the guarantee window, to ensure they take advantage of a higher value than would be likely to be available post the guarantee, given the gilt yields rise.

Further rate rises may be on the horizon. We don’t have a crystal ball to see what will happen in the future, however, current perceived wisdom seems to be that rates will slowly rise over time on the basis that they can’t possibly stay this low. However, this has been the general belief since around 2009! Some think we have entered a ‘new norm’ where rates are unlikely to rise materially.

Individuals and sponsors should take care when considering transfer values or transfer exercises as gilt yield increases can materially affect the ‘real’ monetary value of any transfer, with timing now increasingly important.

David Davison

In an earlier Bulletin ‘A Landmark Judgement’ I provided some information on the welcome news that the Government had thankfully lost a case in the High Court which would have forced LGPS Funds in England and Wales to invest their assets (£263Bn in 2017) in accordance with UK foreign and defence policy.

Unfortunately my relief that common sense had prevailed on this issue was misplaced as on 6 June the Court of Appeal overturned the High Court ruling forcing schemes to comply with government policy, all this despite numerous warnings from pension experts about the negative impact and increase in pension scheme costs such a decision could have.

This whole saga started back in 2016 with the Government introducing legal guidance as it was concerned pension schemes could be taking actions which might “give mixed messages abroad, undermine community cohesion in the UK, and could negatively impact on the UK defence industry.”

The policy was successfully challenged by the Palestine Solidarity Campaign and an individual scheme member in 2017 when the High Court ruled it unlawful.

The whole approach smacks of state intervention and interferes with the ability of pension schemes to take decisions wholly in the interests of the members of the scheme. The Appeal ruling also seems to contradict proposed policy to require trustees of pension funds with 100 or more members to show how they have considered environmental, social and governance factors in their investment decisions.

The Government has refuted that its objective is to make pension schemes invest in line with government policy and has commented that it is not seeking to direct schemes investment decisions but despite the assurances the legal position seems to contradict this view.

It’s hard to see how the ruling won’t lead to schemes having to review policy resulting in increased complexity and additional costs which will be wholly unwelcome and not adding any value to scheme members.

Watch this space!

Andrew Kerrin

“Time flies like an arrow – but fruit flies like a banana.” Just a personal favourite line (often attributed to Groucho Marx) that popped into my mind when sitting down to introduce Spence & Partners latest Quarterly Update. It seems like only last week that I was searching for words to introduce our first report of 2018!

Having taken aim at the topics that hit the headlines over the last quarter, marking with an arrow those of most interest, we have fired them into a neat summary for your consideration. We hope you enjoy reading this compilation, that it helps you pass the time, and who knows, might help you avoid a banana skin or two.

This quarter we have a wide variety of tasty morsels for you to digest, including a summary of the potentially far-reaching opinion from the Advocate General in Hampshire v PPF, a discussion of the main cyber security issues for trustees coming from the Regulator’s recent practice note, to a bite-sized rundown of the key legislative changes that hit the pensions industry back in April.

Enjoy your latest Quarterly Update – I hope you agree that our selection has hit the bullseye and our efforts have been fruitful!

To download this report click here or on the image above.

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

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

Angela Burns

We all face decisions every day – what to have for dinner, whether or not to go to the gym – but how many of these decisions materially affect the quality of our future?  Imagine having to make decisions that do materially affect your future without having sufficient information and understanding?

Studies have shown that around 40% of adults cannot understand basic mathematics.  Yet pension professionals expect to be able to talk about annuities, cash commutation and income drawdown with an understanding audience.

Are we doing enough to support individuals at retirement?

In the defined benefit landscape (yet more jargon) individuals have a number of complex decisions to make at retirement.

  • Do I exchange pension for cash? The rate at which this can be done will determine how valuable (or not) this benefit is (as well as how long you will live) – are individuals mathematically minded enough to understand this?  I expect not.
  • When should I draw retirement benefits and from which arrangement– how do individuals assess value?
  • Would a transfer to a defined contribution arrangement make sense to access new flexibilities in this area? There are lots of points to consider (see my recent article on ‘What Drives People to Transfer?’) and the decision is not a simple one – although the requirement for individuals to take financial advice for transfers above £30,000 provides a helpful structure.
  • Finally, many schemes are now trying to provide more flexibility at retirement (pension increase exchanges, partial transfers etc) but with this comes added complexity, jargon and choice.

Many of these decisions are one-off choices which can’t be re-visited, and decision taken at one point in time may not be the most suitable at another.  How do we help people make the best decisions about their retirement options?

Ultimately individuals will need help to make informed decisions. At the simplest end, this could be via communication provided in an accessible way.  For more straight-forward choices, decision trees or financial guidance may be enough to achieve the right result.

For others the complexity of their pension arrangements or indeed their personal circumstances may require experienced financial advice.  So how do individuals access this advice and avoid falling into the hands of the unscrupulous?  Individuals need to be much more questioning of any offers they receive.  Often a pension is the largest asset an individual may have, individuals therefore have to  be sure who to trust – a professional glossy website does not always mean the appropriate due diligence is being carried out.

At the most basic level individuals can use the  website to find financial advisers in their area. Recommendations from friends and colleagues can help as can support from employers and pension scheme trustees.

There is a material risk that bamboozled with options, individuals may just chose the simplest option which may not be the most valuable. There is undoubtedly a place for support through employers and pension schemes providing security and validation. This can give access to quality advisors and a straight through process that makes it easy for individuals to make informed decisions. There is also great potential to better use technology to get key information out there in an accessible way.

Thankfully, the market does seem to be reacting to this need with member engagement packages coming onto the scene.  Depending on providers, individuals can have online access to information when and where they need it and access educational tools such as videos to explain key options.  This can then be linked to access to reputable, experienced financial advisors, overall resulting in a more supported straight through process.

I expect this will be the norm in the years to come and I am hopeful that the result is better informed individuals, and better decisions at retirement.

Mike Crowe

Whilst we have seen a number of cases coming through the Courts that have had a pensions element to them I wanted to concentrate on one that I had looked at before. This is the Court of Appeal decision in British Airways plc v Airways Pension Scheme Trustee Ltd [2018] EWCA Civ 1533 (5 July 2018). Back in 2017, I wrote a blog for our sister company Dalriada Trustees’ website, and I looked at the original decision which the Court decided in favour of the Trustee ( The facts of the case and the learning points for trustees are set out in this blog.

The issues (and the costs) involved always meant that this case was going to be appealed and earlier this month we had the outcome. As is sometimes the case when two heavyweights step into the legal ring there was a split decision with the majority of Judges eventually finding in favour of British Airways and the original decision was reversed. What this meant was that the Court of Appeal found that the decision of the Trustee of the Airways Pension Scheme to exercise its unilateral power of amendment to introduce a new trustee power to provide discretionary pension increases was invalid. In reading the judgement (at 39 pages a lot easier read than the original 164 page decision) a couple of points stood out. In paragraph 102 Lewison LJ noted

“… the function of the trustees is to manage and administer the scheme; not to design it. The general power that is given to them is limited to a power to do all acts which are either incidental or conducive to that management and administration.”

In paragraph 121 Peter Jackson LJ said

“… there is nothing to suggest that the power of amendment was intended to give the trustees the right to remodel the balance of powers between themselves and the employer”

Now it is always difficult to highlight only two points of interest in a complex case (which relies on the facts) but it struck me that these two points in particular indicated the attitude of the Court to the exercise of a unilateral power by trustees and what their parameters should be. Indeed, the balance of power between trustees and employers is very much a fine balance.

Trustees have to be cognisant of their powers and duties and take care in exercising them properly ensuring the “… journey itself is permitted… “ [paragraph 122], especially in the area of discretionary increases. If trustees are unsure then they may need to take legal advice and I am sure their legal advisers will be taking this case into account. If they don’t then I am sure the lawyers for employers will.

It should be noted that the Court of Appeal granted the Trustee permission to appeal to the Supreme Court and I would be very surprised if this did not happen.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 June 2018 pensions accounting disclosures, whether under FRS 102 or IAS 19.

In this guide we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.

Download your report

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