Posts Tagged ‘Actuarial’

Brian Spence

Actuaries and pensions lawyers up and down the UK are earning good fees providing opinions on the vexed subject of equalisation after Angela Eagle’s welcome announcement.  GMP Equalisation continues to be consigned to the “too difficult” tray with prevarication along the lines

…this is an impossible task

…the government’s view is not binding

…trustees should wait for government guidance on how to equalise

For example, and not wishing to single them out, the otherwise esteemed actuaries Lane Clark & Peacock say “The industry has been asking for this for 20 years and not yet received a response.” Well actually no that is not true – we have not been asking, we know what equal means and have done since primary school.

On the other hand as Richard Bryant points out in his excellent Blog Prudential are not completing documentation for annuities on wind-up where there are post 1990 GMPs.  Prudential seem to get it – gender equality has been a requirement since 1990 and however much the industry may complain it will have to be addressed.

As my colleague David Davison has written recently on GMP Equalisation – this is not a complicated issue and in my earlier article I set out the practical steps for trustees needed to bring about the equalisation of GMPs.

Equal means equal and any modern pensions payroll system should be able to accommodate this.  If trustees have accurate historic data and good administration software it is a relatively simple spreadsheet calculation.  If not then there may be approximations required to ensure inequalities are eliminated and these approximations may add to the liabilities which is part of the price to be paid for poor data.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Neil Copeland

S&P – to be clear, Standard & Poors, not Spence & Partners – has downgraded BT’s credit rating as a result of concerns over how it is proposing to manage its pension deficit.

S&P credit analyst Michael O’Brien comments:

“We consider that such payments could constrain the financial flexibility of the group over the medium to long term in terms of shareholder returns and capital expenditures, or from a strategic perspective as the intensely competitive telecoms industry environment evolves.”

“We also believe that such payments, while reducing the pension deficit year on year, will not be sufficient to reduce BT’s pension- and lease-adjusted leverage in the short term closer to a level of 3x, which we would deem more appropriate for the rating.”

The Pensions Regulator has also expressed concerns about BT’s funding proposals.

BT may have congratulated itself on negotiating a lower short term deficit contribution than might otherwise have been the case, and would probably not wish to see the negotiation categorised as a “victory” for one side or the other. However, having seen a 4.4% fall in his share price, Sir Michael Rake will clearly empathise with Pyrrhus, king of Epirus, who nearly said “”If we are victorious in one more battle with the trustees, we shall be utterly ruined.”

David Davison

Chancellor Alistair Darling slipped another gem in to his pre-budget report which will further hasten the demise of already beleaguered final salary pension schemes as reported in Times Online

How is any lay person expected to keep up with all this? The level of complexity which needs to be understood is just mind boggling. Having just returned from a trustee meeting covering revisions to actuarial assumptions, trivial commutations  and anti-forestalling it was all I could do to keep the attendees from throwing themselves out of a 3rd floor window – and  for once I don’t think that was down to my presentational style!!

You’ve got to think that high earning directors who have effectively been persuaded to keep their schemes running to ensure their own benefits will shortly have absolutely no reason to do so.

Neil Copeland

Interesting article on re the difficulties being experienced by the Church of England in relation to funding its final salary pension liabilities.

It’s not surprising that a body such as the Church of England appears to place greater store in faith than in reason. What is surprising is that it appears to be placing its faith in equities and Mammon, the false god of riches and avarice.

Actuaries will tell you that equities provide a poor match for pension scheme liabilities and we have blogged previously on the risks for both employers and trustees on relying too heavily on equities to save the day. Clearly they can have a part to play, but for the trustees of the Church of England Scheme, unless they are satisfied that the Church will be around at all times to underwrite the Scheme (okay, so it has been around since the time of Henry VIII which suggests a greater longevity than the average employer) this is a relatively high risk strategy.

According to Professional Pensions the Church of England does also appear to be taking some steps to try and address the liability side of the equation, and isn’t relying on blind faith alone. It is proposing to:

  • Contract the Clergy Scheme into the state second pension
  • Reduce the full pension from the Clergy pension scheme from two-thirds of National Minimum Stipend (NMS) to half of NMS for future service;
  • Limit the annual increase in the pensionable stipend to price inflation (RPI);
  • Chang the pension age for future service from 65 to 68; and
  • Move, again for future service, the accrual period for full pension from 40 to 43 years.

Whilst moving things in the right direction evidence from the private sector suggests that such limited reforms rarely deliver the desired results and more fundamental change is required to address the risks posed to any employer by a final salary pension scheme.

Employers need to understand that they can be proactive in managing their schemes’ liabilities and they have a range of options available to them  in dealing with their final salary schemes – which means they don’t have to rely on divine intervention.

David Davison

In earlier posts we addressed the issue of GMP equalisation.  Just to be clear – eliminating inequalities as a result of GMPs is not complicated or difficult or indeed costly when considering a member with a new pension coming into payment or a transfer value being quoted unless you are operating:

  • Administration software that is not capable to making a monthly comparison between the benefit paid to a male member and on the other hand the benefit that would have been payable to a female comparator.  Our P3 pension administration software is capable of handling this.


  • Actuarial software that projects only to the point of retirement and then applies an annuity factor. By definition an annuity factor cannot capture potential cross over between a male say and his female comparator.

We have developed our own in-house actuarial software that can handle this.

There are however two areas which can present genuine challenges:

(1) The period that has elapsed since the Barber Judgement on 17 May 1990. The data required to be able to identify underpayments is often difficult and in some cases impossible to obtain. In theory you need to be able to reconstruct a set of pension payments back to retirement and a comparator set of cash flows for a notional female to identify cumulative underpayments. This should act as a further spur to trustees to grasp the nettle and sort out their data.

(2) When annuitising (e.g. on buy-out or buy-in) the annuity providers cannot currently take on board equalised benefits because they do not have the systems to support this. For this reason in some recent cases where we have been involved we have used workarounds and made a broad brush allowance for GMP equalisation.

We do not think the Government is going to come forward with a single particular method. Any such method would not fit all schemes and would inevitably result in some members getting a higher benefit than “equality” would require. Schemes that have inadequate data or who are unwilling or unable to fix their inadequate software will have to adopt a “method” which will inevitably have a cost associated or they could appoint administrators and actuaries with the capacity to deal with the problem.

Neil Copeland

I misread the headline on and initially thought that Basil Fawlty was causing problems for UK banks and their pension schemes. Something to do with Europe, apparently. Was the manager from Barcelona, perhaps, or had Basil upset the Germans again by mentioning the war?

But no, it was the Basel Commission on Banking Supervision. The BCBS. Typical of the Swiss to come up with an acronym that doesn’t sound the slightest bit rude.

Anyway, the BCBS has published proposals for the treatment of defined benefit pension schemes which, UK bankers say, would unfairly penalise their capital positions. One proposal put forward means that banks would have to deduct their entire pension deficit from their core tier one capital, rather than the next five years’ contributions as is the case now. This, the bankers contend, could constrain dividend payments and lending.

One banker is quoted as describing the proposal thus “It is turbo-charged pro-cyclicality”. I have no idea what that means, and I’m not sure the banker does either, but, as we’ve seen with credit default swaps, lack of knowledge and understanding is not seen as a barrier in the banking world.

Whilst it’s difficult, in the current climate, to feel empathy with those responsible for bringing the world financial system to the brink of collapse, the pain will not be spread evenly and the measure will have a disproportionate impact on UK based banks. According to the article, most US banks do not provide defined benefit pension schemes and most continental European banks have not historically run pension deficits.

This proposal therefore means that the UK banks final salary pension schemes have the potential to impact on the wider UK economy and individual borrowers and savers. A further competitive disadvantage for UK plc as it struggles to emerge from recession.

This again highlights the many, and occasionally unexpected, risks faced by businesses operating this type of scheme. It also highlights the risk posed by the mooted EU wide regulatory body  and the difficulties it will face in squaring divergent national interests and economic characteristics.

So, that’s two egg mayonnaise, a prawn Goebbels, a Hermann Goering, and four Colditz salads.

Neil Copeland

Let me ask you a question. You’re the chairman of a leading airline. The maintenance staff have told you that to be fit for purpose your aircraft needs to be completely taken apart and reassembled. If you don’t do this the maintenance staff advise you that they can’t be certain that everything will carry on working as advertised and there is a good chance that one of the wings might fall off.

Do you:

a) Authorise the maintenance staff to take the aircraft apart and reassemble it
b) Wait for the wing to fall off, then fix it

Option b) is likely to be a much costlier job if the wing falls off while the plane is airborne.

Clearly airlines would only ever opt for option a), but it would appear that many trustees have been content to adopt option b) in relation to pension scheme data.

Everybody in the industry is aware that the standard of pension scheme data is generally poor, but until recently there has been an ostrich like mentality about addressing the issue, with many heads buried in a virtual Sahara of sand. Just remember which part of your body is most exposed in this scenario.

We have commented on this point in our earlier blog Pension Scheme Data Pass me a Shovel

The Pensions Regulator’s latest consultation on record keeping makes it clear that it considers poor scheme data as useful as a plane with no wings. And no engines. And a gaping hole in the side. It’s also clear that trustees are going to be required to address their data issues more effectively.

The Regulator has actually suggested that trustees might want to fix their data previously. It appears seriously miffed at the underwhelming response from trustees to this suggestion.

So now, the Regulator proposes to set targets for the accuracy of the common data which schemes must hold. The Regulator also proposes to review performance of schemes. Where schemes fail to have adequate plans in place to resolve data issues, the Regulator will require them to improve. My background is in Pensions Administration (so I empathise with the aircraft maintenance guys) and I couldn’t agree more with the Regulator’s view of the central importance of data to pension schemes. The Regulator notes that cost remains a significant barrier to trustees voluntarily taking the action they know is necessary to identify and rectify their data issues. The Regulator clearly sees this as a false economy, and an unconvincing reason for inaction.

Accurate data is a prerequisite to paying the right benefit to the right person at the right time – this is a bit of a cliché, but has become so only because it simply and succinctly expresses the raison d’etre of a pension scheme. As data also underpins actuarial valuations, its accuracy is important in ensuring the correct liabilities are being valued. Accurate data held in a well maintained data base hasn’t been valued much by trustees and employers previously, hopefully that will change, not just because the Regulator has decided to get its stick out, but because it actually is what all trustees should want for their schemes as of right.

Some people may have been attracted to this article by the suggestion that it might explain why planes fly. That’s what is popularly known as a tease. I’m not an engineer and don’t understand how a big chunk of metal can stay up in the sky. Slightly alarmingly, if this article from the Straight Dope  is to be believed, the engineers aren’t entirely sure either.

Ian Campbell

The draft Financial Assistance Scheme (Miscellaneous Amendments ) Regulations 2010 were laid before Parliament on 20 January and this was followed up on 28 January with consultative documents on draft guidance which amongst other areas sets out a proposed actuarial valuation process for pension schemes eligible for the Financial Assistance Scheme (FAS) and which will transfer assets to the government – these are referred to as FAS2 schemes. This guidance takes into account earlier consultation in the period 2 April to 15 May last year and a webinair for actuaries with speakers from the Pension Protection Fund.

Broadly the draft guidance sets out a mechanism for determining if members of FAS2 schemes should receive higher benefits than standard FAS compensation.

As mentioned in our earlier blog, “How pension schemes will be valued for admission into the Financial Assistance Scheme“, the PPF is proposing that the FAS2 actuarial valuation calculations will include equalisation of Guaranteed Minimum Pensions.

The current draft guidance does not differ materially from that issued last year and from the processes presented in the webinair; we believe that it is therefore unlikely that there will be many changes in the final guidance which we anticipate coming on stream by the middle of this year.

The PPF have built onto some the S143 actuarial valuation principles for schemes going through assessment but there are a substantial number of material differences. One area of similarity is that data has to be cleansed before the actuary is instructed to proceed and the actuary has to be satisfied with the quality of the data.

Spence and Partners have extensive experience of carrying out S143 valuations including data cleansing, and we are gearing up to adapt our professional skills for FAS2 schemes.

Alan Collins

At Spence and Partners and Dalriada Trustees Limited, we have long been espousing the value of good recording keeping in relation to pension scheme administration, particularly in our call for action in relation to pension scheme data.

We therefore strongly welcome today’s consultation from the Pensions Regulator (TPR) entitled “Record-keeping: measuring member data“.  We endorse the view that “Trustees and those responsible for administering workplace pensions will need to improve standards of record keeping”.

I was certainly less surprised than TPR by the fact that only 19% of schemes surveyed had checked that they had all the fundamental common data and that over half of the surveyed schemes were missing more than one item of fundamental data.  My experience would indicate lower “success” rates than this.

We further support the proposal for TPR to set, monitor and enforce target levels of accuracy for the common data that schemes must hold and will be interested to see how this area develops.

We note further that TPR intends to work closely with the Financial Service Authority to monitor record keeping in contract based schemes.

Finally, we look forward to further developments in this area and would encourage all trustees to look out for and undertake the soon to be published e-learning module on this subject.

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