Posts Tagged ‘Corporate’

Neil Copeland

1988 and all that

1988. Lawrie Sanchez scored the winner as the Wimbledon Crazy Gang beat the then League Champions Liverpool in the FA Cup final, Phil Collins topped the charts with A Groovy Kind of Love and teenage boys everywhere were confused by their adolescent hormones generating an unhealthy interest in a cartoon Rabbit called Jessica. It was indeed the best of times and it was indeed the worst of times.

The Tories were in power, then as now, and believed in individual freedom and individual choice. You could choose to buy your council house, choose to get on your bike and, thanks to a reform introduced that year, choose not to join your employers pension scheme and instead take out a bright new shiny personal pension. Read more »

Alan Collins

With recent market turmoil sending scheme funding levels tumbling, pensions present a potential Pandora’s Box for even the most enlightened Finance Director.

In this month’s issue of CA Magazine (pg. 56) Alan Collins, head of employer advisory services at pension actuaries Spence & Partners suggests 10 key questions that Finance Directors should be asking themselves about their defined benefit schemes and some guidance on each of these key issues.
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My name is Daniel Melarkey and I’m a student at The Queen’s University of Belfast currently studying for my BSc in Actuarial Science and Risk Management. As part of my studies I have to complete one year in an industry placement, I was lucky enough to secure this placement at Spence & Partners. I encountered the company through the university placement office and a careers fair at the university.

Spence & Partners was a business I immediately identified as one I would like to work for. The company was a perfect size in that it was big enough that there would be plenty of interesting work and a variety of clients to interact with, but not so big that I would get stuck working in only one department, or doing only one task during my placement year.

I have to say that through the first 6 months of my placement here I have had many opportunities to engage with the business practice areas ,and I’ve definitely found the company size a huge advantage. I have been given a massive amount of freedom, respect and trust at times to go and really get stuck in to things myself. The company has some fantastic business developments in the pipeline and I’ve been welcomed with open arms into new and interesting projects; I’ve been given great opportunities to take my learning into my own hands. It really has been a case where I’ve been getting out of it what I’ve put into it, and I’ve learned skills and abilities in areas I never thought conceivable before starting the placement as a result.

I have been involved with work in every area of the business; gaining great insight into how a company in the financial industry typically operates day to day, whether it be an accounting process, business development, actuarial practice, administration practice or software development – the range in this insight is really fantastic and has given me a confidence where I am now comfortable in tackling any task coming my way.

Further to this, the people here are a fantastic bunch: greatly skilled, helpful, respectful, and there are no egos! Right from the bottom of the company structure to the top everyone makes time for you and have no qualms with lending a hand whatever the situation. I, and the other placement student even got the opportunity to complete a research project for Brian Spence himself within the first few months of our placement – what an opportunity!

Overall Spence & Partners is a fantastic place to work and learn, and it has been a great opportunity for me, giving me some of the skills essential for my final year of university and life beyond.

Browse our website and take a look at our careers page to find out more about working for or with Spence & Partners.

Alan Collins

I came across an interesting panel discussion in the current issue of Engaged Investor Magazine, where a number of industry experts were asked for their views on developments in pension scheme de-risking. My views on the questions addressed are as follows:

Q1 – Many companies are not able to carry out full buyout in one go. What multi-layered approaches can they take to de-risk their schemes?

The most important first step is for the employer and trustees to agree a common goal for the scheme. In almost all cases (especially closed schemes), the ultimate goal should be to secure all benefits with an insurance company and wind-up the scheme.

An agreed, transparent objective will then set the path towards the ultimate goal. There are many alternative partial de-risking measures that can be taken, most of which can work in parallel. These include employer led exercises such as:

  • a transfer exercise, offering members the opportunity to transfer their scheme benefits to an alternative arrangement via an incentive in the form of an increased transfer value, or sometimes a cash payment; or
  • a pension increase swap exercise, where members give up future pension increases in return for a higher initial pension.

These exercises can generate significant savings to the employer relative to the ultimate cost of buyout. They are unlikely to generate significant immediate savings on ongoing funding costs or FRS 17, though they do contribute to reducing the risk profile of the scheme.

These exercises can be run in tandem with providing opportunities to members to retire early from the scheme, which can generate savings on cash commutation and also insurers prefer the “certainty” of pensioners rather than deferred members. In conjunction with the company, the trustees can also move towards a lower risk investment strategy, using bonds or LDI type investments, and also consider partial insurance such as pensioner buy-ins. I would caution that for schemes with young pensioners or where the pensioner group makes up a small proportion of the liabilities, it may not be efficient to use significant resources of the scheme to obtain insurance covering only a small portion of the liabilities. There are also opportunities developing in the market to enter into a staged buyout process with insurers, where the terms are agreed up front but the whole premium is not required at the outset.

Nor should the trustees overlook the potential for non-cash funding, such as parental guarantees, contingent assets or “asset-sharing” with the company, such as the whisky-bond deal completed by Diageo .

Q2 – In what ways did trustees’ de-risking choices change during 2010?

The choices remained broadly unchanged, though it was a year of massive change in defined benefit pensions, particularly on the legislative front. The single largest issue was Steve Webb’s RPI/CPI summer bombshell, which is expected to have a significant effect on pension scheme funding. Most schemes are expected to see a reduction in liabilities of between 5-15% depending on the nature of the scheme rules.

This meant that larger exercises tended to be shelved as trustees waited for the full impact of the change in inflation measure to come through. I would say the introduction of innovative non-cash funding solutions and the focus by trustees on obtaining enforceable security was the other main development in de-risking.

The emergence of longevity swaps was supposed to be the big-ticket item for 2010, but this remains the preserve on the very largest of schemes and I don’t see that changing any time soon.

Q3 – What early steps, such as data cleansing, communications and legal considerations, should be undertaken before entering into a de-risking activity?

The quality of pension scheme data can be highly variable. It can be held in multiple formats, for very long periods of time and is often subject to major change (e.g. after mergers, systems migrations, legislative changes). When entering a liability management exercise and moving ultimately towards winding-up a scheme, every effort must be made to ensure that members have the correct pension entitlement. The key message on data is that full and accurate data will reduce the cost of staff communication and liability management exercises as well as ultimately buying annuities as it helps to reduce underwriters’ pricing for uncertainty.

The communication process is also vital, both between the employer/trustees and the member. Possibly even more important is the communication between a financial advisor and the member during an employer’s de-risking exercise.

The need for proper legal input almost goes without saying, but the emergence of the RPI/CPI issue and continued problems with sex equalisation and other scheme amendments, mean that assistance from your friendly pensions lawyer is a necessity, not a luxury.

Alan Collins

Warning – your actuary could be overstating your FRS 17 liabilities by up to 10% or possibly even more!!

The maturity or ‘term’ of your pension scheme is becoming increasingly important in setting assumptions for actuarial valuations and hence determining the value of the liabilities. In particular, FRS 17 states that scheme liabilities should be discounted at “the current rate of return on a high quality corporate bond (generally accepted to be AA rated bonds) of equivalent currency (£) and term to the scheme liabilities”.

So what about the term? This is the interesting, though unfortunately slightly technical bit!! Until a few years ago bond discount rates were generally unadjusted for term in FRS 17 calculations. The liabilities were therefore wrongly assumed to be of the same term as the maturity of the bond index (usually 12-13 years). Pension schemes are normally of a much longer term nature, from around 20 to 30 years on average. Between 2006 and 2008 where long term interest rates were unusually lower than short term rates, there was a significant push by audit firms for schemes to discount the liabilities using these lower rates – this significantly pushed up the magnitude of FRS 17 liabilities.

Recent movements in the shape of the interest rate yield curve mean that medium to long-term interest rates are now significantly higher than the rates implied by the AA index. For those firms already using a “yield curve” approach to assumption setting, the discount rate appropriate for FRS 17 will now be higher than the index yield and so FRS 17 liabilities will reduce, all else being equal (assuming the auditor agrees of course!!). It may no longer be appropriate to continue using the unadjusted bond index value as the discount rate, as this would currently overstate the pension scheme liabilities. All very easy for me to say you might think but what does this mean?

I estimate that for an average scheme, adopting a yield curve approach now could increase the FRS 17 discount rate by up to 0.5% per annum (or even more at very long terms), which would reduce FRS 17 liabilities by around 10%. So, if you receive FRS 17 assumptions advice or disclosures which stick rigidly to the AA bond index for setting the FRS 17 discount rate, you may wish to ask your advisor to reconsider, or seek separate actuarial advice.

For further information on FRS 17 assumption setting or other matters surrounding your scheme, please contact myself or any other member of the actuarial team at Spence & Partners.

Rebecca Lavender

Leading actuary, Spence & Partners, has today launched its new on-line Pension & Divorce support service as part of its industry leading website. The pages have been designed to provide a simple guide for individuals and their professional advisers through this complex and technical area. The site includes:-

  • A simple step by step guide through the key issues.
  • A unique on-line calculator which allows individuals to get an estimate of what their (or their spouses) pension may be worth covering both pensions in payment and prospective pensions.
  • Case study examples highlighting key issues
  • Useful document downloads to help obtain the information individuals will need.
  • A link to our popular blog which will be regularly updated with topical comment.
  • Access to a lawyer and financial adviser search facility
  • A link to a life expectancy calculator to assist the clients financial adviser deal with likely future cash flow requirements.

Spence & Partners Director David Davison commented “ We hope this new service will provide useful support for individuals struggling with this difficult and complex issue and will evolve in to a useful forum to ask questions and obtain the information people need. We believe the calculator on the site will prove particularly popular as it is often difficult for individuals to get a feel for just how significant pension assets might be and also for lawyers to get indicative figures for clients with pensions in payment and this facility will deal with both of those issues.”

David Davison

A major new accounting standard says your pension liabilities need not be valued by an independent actuary. So does this pave the way for companies to carry out their own valuations? Our guest contributor, David McBain of Johnston Carmichael, Chartered Accountants and Business Advisers, investigates. Fortunately he is concluding there is still a role for actuaries!

Defined benefit pension schemes are something of an irritant to finance directors. Annual valuations of the assets and liabilities are required and the resultant deficits (and occasional surpluses) introduce a high degree of volatility to the annual accounts. Pages of disclosures also result, many of which are largely unintelligible to the average reader.

So it’s little wonder that the same FDs will be hoping to find some simplification in the new International Financial Reporting Standard for Smaller Entities (IFRSSME). But will they find it?
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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.”

Neil Copeland

“There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency”

Well said, that man! That man being David Norgrove, chair of the Pensions Regulator.

So why have we seen two such failures in a week? Both HJ Berry, a Preston based cabinet maker, and the Readers Digest suffered insolvency, ostensibly due to an inability to fund their pension scheme deficits. I haven’t seen any comment on the Regulator’s role, if any, in the HJ Berry case but it appears from press reports that the Regulator vetoed a deal that was acceptable to the employers, trustees and the Pension Protection Fund in the case of the Readers Digest. I can only conclude that neither business was deemed “otherwise viable” by the Regulator but a representative of Moore Stephens, the administrator, sounded confident on 5Live last night that there was a viable, profitable Readers Digest business to be bought by someone. Though I guess it was his job to sound positive.

Whilst the details of the proposed deal aren’t known, the broad outline appears similar to other deals we have seen accepted in the past by the Regulator, with an equity stake being taken by the trustees.

We have advised on cases where having satisfied very stringent conditions and following lengthy discussions with all parties, the Regulator has given clearance to an insolvent restructure of the business, with the pension scheme being left behind in the old company to ultimately fall into the PPF. This clearance was not, and should not be, easily granted.

It would appear that the Regulator is becoming more reluctant to sanction such deals, even as a last resort – and in fairness to David Norgrove he has stated quite clearly that the Regulator does not consider that it has an obligation to maintain employment.

However if you compare the likely outcomes of the Readers Digest case with a sanctioned insolvent restructure, with appropriate safeguards for the trustees and/or PPF, they will be little different other than the preservation of jobs in the sanctioned restructure. Whilst the Regulator may not consider that it has an obligation to the employees of Readers Digest to preserve their jobs, if all other outcomes are broadly the same, then it is difficult to understand why the Regulator did not clear the proposed deal.

Clearly the Regulator has to guard against unscrupulous employers simply contriving circumstances to allow them to dump their pension liabilities on the PPF, and it may see sanctioning such deals as distorting the market and unfair to a firm’s competitors, but such arguments are likely to be of cold comfort to Readers Digest employees facing a very uncertain future.

The latest news is that the Regulator has not ruled out pursuing the US parent over pension funding. The Regulator could in theory seek to issue a Financial Support Direction (FSD) against the US parent. It has been loathe to use its powers in this area, even against UK employers. It has been suggested that the Regulator is concerned that courts could overturn FSDs, considerably reducing the size of the stick that the Regulator can wield. It must be even less certain that a US court would support the enforcement of an FSD on a US company.

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