Christmas is allegedly the season to be jolly so it seems to
be an appropriate time of year to remember the good things about the UK pension
scene. There are a lot of them!
Firstly, there are currently well over 10 million members of
Defined Benefit (DB) schemes in the UK private sector. This includes 1.3
million people who are still accruing benefits, not to mention all those in the
public sector. The private sector is currently paying over 4 million pensions
regularly and in full. Despite the impact of the credit crunch, low interest
rates and increased longevity, these DB schemes are now estimated to be funded
at 73% of the full cost of buying guaranteed benefits from an insurance
company, up from 60% in 2006.
There are still inevitably some corporate failures where
members have to rely on the Pension Protection Fund (PPF) for their benefits.
There are less than 250,000 who have had to do so since the PPF started in 2005
though and their payments from the PPF are well-protected, with £6.7 billion
reserves and an estimated probability of 91% of meeting their funding target.
The PPF is funded by a levy on the other schemes and the total levy fell last
year to £541 million, some way below the £725 million that the PPF was able to
pay out. That’s a wonderful improvement from the bad old days when members
could lose their pensions entirely if their employer went bust.
On the Defined Contribution (DC) side, auto-enrolment has
been a huge success too. The statistics at the end of November 2018 showed that
9,958,000 people have been auto-enrolled into pension schemes, which is a
massive number of new savers who won’t be solely reliant on the State pension
when they retire. That’s particularly important when the State pension itself
is under huge pressure due to an ageing population and austerity and it again
shows the advantages of personal pension saving.
Finally, the pension industry keeps trying to improve the
regulatory landscape to get the best results. Successive Governments have
decimated DB schemes with excessive regulation and, more significantly, by
imposing additional financial obligations on schemes retrospectively. We have
been lobbying for years for more flexibility and it’s great to see that the
Royal Mail and Communications Workers Union have got support from the DWP and
politicians to try a new Collective DC arrangement. This isn’t a magical
solution to the pensions issue but it has a lot of merit and it’s great to see
the industry trying to make the best of a very muddled legislative background.
We’re very proud at Spence to be part of the industry that has delivered these opportunities for millions of people to have a better quality of retirement. The real stars of the industry though are still the sponsoring employers who have paid most of the money needed over the years for their staff to get decent pensions. We also need to recognise the diligent efforts and hard work from trustees, who give up their time and wrestle with the complexities of pension regulations to get the best outcomes for their schemes and members.
Well done everyone and a Merry Christmas to you all.
Nearly 2 years ago I bought a new mobile phone. At the time, I was very pleased with the deal that I had signed up to – reasonably priced, a sensible allowance for calls, texts and data, and all the features and apps that I wanted, and it looked good too! However, over time the package has started to lose its lustre, as the mobile phone market has evolved with more flexible contracts, competitive deals, speedier apps, larger data storage and more modern-looking handsets. In addition, many new apps are not compatible with my phone. As well as changes in the marketplace, my own priorities and wish list have moved on as well. What was right for me then isn’t right for me now.
Parallels can be drawn with the defined contribution pension market. Many companies set up DC pension schemes a number of years ago on a “set and forget” basis. Frustrated with the onerous governance responsibilities and volatile costs associated with defined benefit, DC was a breath of fresh air – the sponsor could carry out appropriate due diligence, choose the product that was right for them, then hand over all ongoing management responsibilities to the insurance company or trustees. All they then had to do was write a cheque each month to pay for the contributions. Often, an IFA was in place to give ongoing support in exchange for commission and access to the membership (i.e. for no material employer fee). Read more »
Last time, I wrote about the latest mortality projections from the Continuous Mortality Investigation (“CMI”) and the effect this could have on pension scheme liabilities and that it may provide some relief for trustees and sponsoring employers. I then began to cover how mortality affects members of Defined Contribution (“DC”) schemes. This blog covers these issues in more detail.
In DC schemes, members pay contributions towards their own personal fund at retirement, referred to as the “accumulation” phase. When the member retires, they use that fund to finance their retirement, in pretty much whatever way they choose (i.e. the “decumulation” phase). The growing trend towards this process has prompted a joint paper by three actuarial bodies (the Australian Actuaries Institute, the Institute and Faculty of Actuaries and the American Academy of Actuaries), on the issue of longevity risk (“the Joint Paper”). Read more »
Over the past few weeks there have been some publications in the field of mortality that make for interesting reading. In this blog, I am going to focus on the Continuous Mortality Investigation (CMI) producing their latest mortality projections – which, quite surprisingly, showed that mortality rates were higher in 2015 than 2014.
In figures, because that’s what we actuaries like, 2015 mortality improvements are estimated to be around 2.3% p.a. lower for 18-102 year olds and around 3.2% p.a. lower for 65-102 year olds.
So, the 2015 figures alone show a slight reversal in the continual improvement in mortality seen over recent years, and highlight the slowdown in the rate of mortality improvements. We have seen this in previous versions of the CMI mortality projection model, with new models producing lower life expectancies than the previous iteration being the norm in recent years. Looking at the four year period from 2011 to 2015, average annual mortality improvements using the CMI model are estimated to be around 0.3% p.a. for the 18-102 age group and 0.1% p.a. for the 65-102 age group. Therefore, average life expectancy is estimated to have increased by around 3-4 months over the whole of the period between 2011 and 2015. In comparison, in the period from 2000 to 2011, life expectancy increased by around 3 months each year. This emphasises the potential slowdown in mortality improvements shown by the CMI model. Read more »
On the run up to Pensions Freedom Day the focus has been on “how many members will transfer from a Defined Benefit (DB) Scheme to a Defined Contribution (DC) Scheme” or “how many members will take their full fund as a one off cash sum”. That day has now come and gone and it’s time to start focusing on the future for DC members.
Prior to the 2014 budget, members of DC arrangements could take 25% of their pot tax free on retirement and use the remaining pot to buy an annuity. The majority of members (up to 80%) did not consciously make any investment decisions and their funds were fully invested in the default fund. Members simply left the default fund to do the rest and hope for the best when they reached retirement. Read more »
As a business specialising in employee benefits, it should be a given that our internal pension scheme is run to a high standard. Like many new generation companies without Defined Benefit legacies, our company scheme was set up as a Group Personal Pension (GPP). A potential problem with GPPs is that they can quite easily sit at the side and can continue to operate with minimal engagement from the Employer.
When auto enrolment requirements were announced, an internal group was established to guide our scheme through the process. As part of this review, the business looked closely at the needs of employees and their engagement with the GPP. This resulted in the commencement of our own internal DC Governance Committee. The committee would have key responsibilities in improving employee engagement with the scheme and monitoring performance.
I volunteered to join the committee as I was interested in representing the interests of my colleagues and developing my own knowledge of workplace pension arrangements. The Committee is approaching its first birthday which would seem the ideal time to share my 6 key lessons learned: Read more »
In the run up to 6 April 2015, the focus has been on defined contribution (DC) members and the new flexible options available to them. This focus has now begun to swing to the (potentially significant) number of defined benefit (DB) members who will seek to transfer their rights in order to take advantage of these new flexibilities.
To this end, trustees of DB schemes must ensure that their adminstrators have taken the necessary steps to prepare accordingly and to take into consideration any impact on transfer-related Service Level Agreements.
Recent press items suggest that we are about to see an avalanche of transfer activity descend upon DB pension schemes. Read more »
Following the horrendous suffering of WWI the French were determined never again to be invaded by Germany. There was a tremendous focus on fortifying the Franco-German border. A tremendous focus on building a line of concrete fortifications, obstacles, and weapons installations between themselves and the Germans. A tremendous focus on building the impregnable Maginot Line. In 1940 the German Army simply drove around it in their tanks and conquered France in about 6 weeks. Via Belgium.
Such is the folly of focusing on the wrong thing.
There has been a lot of worthy stuff going on around DC pensions of late. Regulatory guidance, upping governance, capping charges, auto-enrolment and, especially, pension freedom. Master trusts have a lovely new, shiny, impregnable assurance framework. You don’t have to hand your money to an insurance company any more. Read more »
(Spence & Partners latest blog for Pension Funds Online )
Last week I had the pleasure of chairing a session at the annual conference of the Association of Consulting Actuaries. I had high hopes for an interesting and interactive session, and was not disappointed. The slot was entitled “Current issues in corporate pensions” and you don’t need to work in the industry to know that we are currently experiencing some pretty momentous issues in the corporate pensions space.
The speakers had rather optimistically chosen six topics to cover in their hour-long slot. I say rather optimistically, as we only had time to cover about half of them. Listening to the presentation and the subsequent debate, I was struck by the sheer scale of the challenges that lie ahead for the unwary employer over the coming months. Read more »
On Wednesday evening I attended one of the NAPF’s PensionsConnection events focussing on the management of DC schemes. We were served up the usual treat of insightful speakers and good audience participation. And impeccable timing too – both the DWP Command Paper (government response to ‘Better Workplace Pensions: Putting Savers’ Interests First’) and the FCA’s final rules for Independent Governance Committees were issued earlier in the day.
The meeting focussed upon one particular aspect of the new Trust Based DC scheme Regulations which are due to come into force in two months time: the requirement that DC trustees consider the degree to which their scheme demonstrates and delivers ‘value for money’. We heard about the many difficulties involved in such an assessment – not least the fact that a large slice of the assessment will involve subjective analysis. It was noted that DWP and TPR have left the actual mechanics of this to the industry to solve. Trustees’ advisers should have a central role to play in providing relative scheme assessments to help provide various benchmarks. But in summary, all agreed that this one area alone was destined to involve significant time and expense. Read more »