Making Sense of Pensions

David Davison

From April 2005, most members of final salary schemes, and their families, will be able to sleep that bit more peacefully at night, secure in the knowledge that the level of protection from their pension benefits has increased substantially.

That comforting blanket of security comes courtesy of a couple of legislative changes: recently passed legislation making it more difficult for solvent employers to rid themselves of their final salary pension schemes without securing the full entitlement of members, and the introduction of the Pension Protection Fund which will provide a high degree of protection should employers become insolvent. Read more »

Brian Spence

In business terms you always used to know when you’d arrived. A company parking space, the key to the executive toilet, first class travel and a seat on the trustee board of the company pension scheme. How times have changed.

You’d have needed to be living on a desert island to have escaped the mass of press comment surrounding what has now become one of the key issues, not only in the pensions arena, but also on the corporate agenda. The Pensions Act 2004 (“the Act”) received Royal Assent on 18 th November 2004. It extends to 325 sections and 13 schedules with more regulation and guidance to follow. It will begin to take effect from April 2005 and whilst the legal position of trustees remains unchanged the Act will define the role of a trustee more closely. Read more »

Brian Spence

A rare audit qualification relating to FRS 17, the financial reporting standard on pensions, at the UK subsidiary of the US drugs group Merck, recently raised a few eyebrows within the accountancy and actuarial professions.

In the accounts, the auditor, PwC, qualified its report on the basis that they believed that the company had used an inappropriate discount rate in valuing the pension scheme liabilities. Rather than Merck’s discount rate of 6.0 per cent, PwC suggested that a more appropriate rate would have been in the range of 5.25 to 5.75 per cent. The auditor took the view that, in the absence of an actuarial calculation using a more appropriate discount factor, it was unable to quantify the extent of the understatement of the pension liabilities. Read more »

Brian Spence

The thought of starting up a new actuarial consultancy has probably crossed the minds of quite a few actuaries over the years. However, taking the next step and developing a successful business is the real challenge. New ventures (as compared to an established consultancy) have to have much greater focus on developing new clients. Working with a small team means that all key personnel will inevitably have to take a major role in generating new business. This can be quite alien to many actuaries who have spent their working lives providing services to clients who have been “delivered” to them.

There are many hurdles to overcome and existing acumen needs probably to be enhanced with not only new business skills but also new resources in order to make a success of a new start up. Read more »

David Davison

Delaying decision-making to a later date is something that most company directors have probably spent much of their working lives battling against but, nevertheless, as the end of their own careers approach, it may be in many senior executives’ best interests to embrace this alien strategy, at least insofar as their pension arrangements are concerned.

Company directors and senior employees who are due to take benefits, or who opt to defer drawing any planned pension benefits until, after April 2006 could reap a financial reward as a result of the Governments pensions simplification legislation. Read more »

Brian Spence

The words ‘simple’ and ‘pension’ rarely sit well together. Indeed it is the government’s view that it is the level of complexity inherent in buying a pension which prevents people from saving adequately for their retirement.

Whilst there is undoubtedly some truth in this, it is far from the whole story. Pensions just aren’t ‘sexy’ and, at a time when young people in particular have other drains on their finances, such as mortgages, and when many have suffered from poor investment returns, pensions tend to take a back seat. Read more »

Brian Spence

Regularly ridiculed by many a wannabe stand-up as socially dysfunctional number-crunchers seeking refuge from all the glamour and glitz that is the world of accountancy, actuaries have found themselves the brunt of many a witticism reflecting their somewhat stuffy reputation for some time now but, in the words of Bob Dylan, ‘the times they are a changin”.

With actuaries now assuming a much more prominent role across a greater number of areas of corporate life than ever before, there’s probably never been a more exciting time to be involved in the profession. Read more »

Brian Spence

Jack Nicholson in ‘A Few Good Men’ famously said of Tom Cruise, ‘you can’t handle the truth’. Nicholson might not have had FRS17 in mind at the time, but his accusation could be made against those many companies, trade unions and pension advisers who clamoured to give voice to their disgruntlement over the recent introduction of accounting standard FRS17 – they detest it because they can’t handle the truth.

FRS17 was borne out of a need to address the predicament created by the then prevalent discounting of pension scheme liabilities, based on the erroneous assumption that equities would continue to deliver a healthy level of return for years ahead. Of course, as we now know, recent years have seen interest rates continue to fall while, simultaneously, the equity market suffered a marked slump. Read more »

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