Posts Tagged ‘Pensions’

Hugh Nolan

Pensions aren’t anyway near the main concern for most people at the moment, with the industry having proved pretty robust in the face of a global pandemic that can only be described as unprecedented. A lot of schemes had investment strategies in place that have largely mitigated the impacts of incredible volatility in markets and stocks that have fallen by over a third. Administrators have managed to keep paying pensioners reliably and promptly every month. Even the quasi-Governmental Regulator has responded positively to the situation, with a pragmatic and sensible approach that recognises the difficulties faced by many sponsoring employers and allows even more flexibility than usual.

But there is often a sting in the tail for pension schemes. Some schemes had deliberately adopted a policy of investing in growth assets like equities as their only hope of removing sizeable deficits. Sponsoring employers who had been struggling to meet the rising financial demands of their schemes over the years had to rely on investment returns to remove this millstone from their necks. Such schemes may have seen material falls in their funding levels that make a difficult situation seem completely impossible now.

My message to these schemes is simple. Don’t give up hope! Although nothing can be absolutely guaranteed, I am confident that markets will eventually recover most of their losses from the last couple of months. I’m sure there will have been a real hit from the pandemic in the final analysis and GDP in Q2 will be absolutely dire but current predictions are that the economy can rebound strongly later in the year. It took a couple of years for normal service to be resumed after the credit crunch and could take even longer after the virus crisis. However, there is every chance that we will get back to normality soon enough for most pension schemes to get through to the other side safely, even in very challenging circumstances.

My colleague Simon Cohen, our Head of Investment Consulting, has obviously been watching market developments closely and continually reminds me not to panic about the falls we have seen. Pension scheme funding is a long-term venture and the extreme volatility we have seen recently is just a specific example of what we always knew could (and probably would) happen from time to time. Actuarial valuations can allow for an expected bounce in the markets at some point and longer recovery periods can be agreed where needed. Investment strategies can implement trigger points to derisk portfolios when market opportunities present themselves. Members can be reassured that their pensions are well protected, with funds held separate from the employer, with companies still committed to funding the schemes and with the PPF lifeboat in the background. Trustees can be supported and helped to keep making the decisions that are best for the schemes, however difficult those decisions may seem just at the moment.

Some people may wish they’d taken more control of their pension schemes before the pandemic hit us. It’s never too late to take positive action though and there are still ways to plan for the future with a degree of optimism. As they say, the best time to plant a tree is 20 years ago and the second best time to plant one is right now!

Stay safe everyone and we’ll see you on the other side.

Hugh Nolan

A new report by Professor Sir Michael Marmot for the Institute of Health Equity not only highlights the stalling of increases in UK life expectancy generally since 2010 but actually also identifies a FALL in life expectancy for women in the poorest areas. The report suggests that austerity has had an impact, which seems a natural conclusion even if it isn’t quite proven definitively yet. There is a well-established link between poverty and early death and people in deprived areas continue to die sooner than their more affluent peers – and this gap could widen if the current trend continues.

However, there is a contrary view that the current slowdown is just a trough in the long-term trend that offsets the peak improvements we saw in the first decade of this millennium. The Office of National Statistics (ONS) released statistics on global longevity back in August 2019 that showed a significant slowdown in longevity improvements in Germany, Spain, Sweden and Portugal and a complete stalling in the USA so we’re definitely not alone. At the same time, Japan has had sluggish increases in longevity for some time and only recently saw improvements start to accelerate again, which is perhaps understandable given that they have been leading the way with the highest longevity in the world. In the UK, we may lag behind France, the Netherlands, Spain and Italy on life expectancy but we’re still ahead of the USA, Poland and Russia, so it’s not all bad news.

Personally, I believe that there is some truth in both views, with the negative impact of austerity exacerbating the effect of natural fluctuations over time. As far as pension schemes are concerned, it’s important to assess the latest data available and consider how relevant it is for the particular scheme in question. Most importantly, we should think about what we’ll do when it inevitably turns out that our best projections are wrong!

John Wilson

Brexit – what happens next?

If you stayed up late on 31 January you would have witnessed the UK finally leaving the EU. A moment of history, indeed, but right now it may feel that not much has changed.

The Withdrawal Agreement (WA) came into force immediately, but several features of UK membership of the EU will be maintained during the so-called ‘transition period’ provided for by the WA (technically, this is not a transition period but rather a period of negotiation over a trade deal).

The legal basis for negotiations between the UK and EU will now be based on the same procedures applied for negotiations with other ‘third countries’ (under Article 218 of the Treaty on the Functioning of the EU).

The ‘transition’ period has been devised as ‘breathing space’ for the UK and the EU to try and negotiate a new relationship. It will last only until the end of this year (31 December 2020); theoretically, it could be extended but the UK Government has legislated to stop itself from seeking an extension.

For the remainder of 2020:

  • most EU rules will continue to apply to the UK;
  • the UK will still be part of the EU single market and customs union;
  • existing trade arrangements and rules for travelling within the EU will continue to apply;
  • the jurisdiction of the Court of Justice of the EU will continue as before; and
  • the UK will continue to pay into the EU budget.

The UK, however, can no longer take part in EU decision-making and is no longer represented in the EU institutions. UK representatives can participate in meetings of EU bodies where discussions are relevant to the UK, but they will not have a vote.

There are other arrangements that cease to apply straight away too; for example, UK citizens resident in EU Member States will lose the right to vote and stand in local and European elections.

Also, the EU will be able to exclude the UK from EU activities where participation would grant the UK access to certain security-related sensitive information. However, the EU Common Foreign and Security Policy will continue to apply to the UK.

The EU’s international agreements still apply to the UK during the transition period, but the UK is now permitted to negotiate and ratify new international agreements with non-EU countries provided that these do not come into force before the end of the transition period.

Beyond transition


As things stand, the above arrangements will end on 31 December 2020, but with some areas of the UK-EU relationship still covered by the WA, including rights of EU citizens living in the UK and UK citizens living in the EU at the end of the transition period; together with aspects of Northern Ireland’s relationship with the EU.

The nature of arrangements for other aspects of UK-EU relationship will depend on what is agreed in the next 322 days (sounds like a lot of time, but remember how long it took to get to this point!).

From a financial services perspective, subject to the planned UK / EU free trade agreement being successfully negotiated (and covering financial services in line with political declaration), the prospective arrangements will entail:

  • the free trade agreement;
  • the regulatory regime (largely) of the ‘host’ state;
  • benefits of any EU/UK ‘equivalence’ decisions; and
  • measures, if any, to smooth the impact of exit from the single market.
KEY POINTS FOR SPONSORS AND TRUSTEES
Most EU pensions law has already been incorporated into UK legislation and any changes will require further UK legislation, and the appropriate Parliamentary processes that precede it.
In the meantime, any concerns over investment strategy, sponsoring employer covenant and the resultant impact for scheme funding should be monitored as part of a scheme’s ‘integrated risk management’ (IRM).

Want to know more?


This blog is based on a Commons Library Insight article. For more comprehensive information, click on the links below.

John Wilson

On 19 December 2019, the Queen’s Speech was delivered to both Houses of Parliament. It sets out the Government’s legislative priorities for the 2019-20 parliamentary session.

Background briefing notes include details of the reintroduced Pension Schemes Bill, which was first announced in the last Queen’s Speech in October 2019 but fell with the dissolution of Parliament earlier this month.

The following measures are included in the Bill (all substantive proposals were in the original version too):

  • New powers for the Regulator. These include ‘lengthy jail terms on the table for reckless bosses who plunder people’s pensions pots’.
  • Scheme funding. Measures regarding Defined Benefit (DB) scheme funding, including additional Regulator powers.
  • Collective defined contribution schemes. A new pension scheme design to give greater choice for employers and enable people to adequately save for retirement and better predict their income in later life.
  • Pensions dashboards. Establishing the framework for the creation of pension scheme dashboards that will “allow people to access their information from most pensions schemes in one place online for the first time”. The Pensions Regulator will have the power to ensure schemes provide information to populate the dashboards.
  • Scheme transfers. Revisions to the rules to help combat pension scams.
  • Pension Protection Fund (PPF) compensation. Changes to compensation rules to ensure the regime works as originally intended and to respond to the decision in Beaton v The Board of the Pension Protection Fund [2017]. It will be interesting to see if there is further tweaking in light of this week’s decision of the Court of Justice of the European Union in the Bauer case.

A draft of the Bill has yet to be published but, for further information, see –

https://www.gov.uk/government/publications/queens-speech-december-2019-background-briefing-notes.

Employers and trustees may want to start discussion with advisers on the prospective changes to the scheme funding regime. Employers should be aware of the Regulator’s new ‘moral hazard’ powers which, even now, could impact on the nature and timing of corporate activity.

Andrew Kerrin

Welcome to our third Quarterly Update for 2019. We’ve only just said goodbye to British Summer Time, we thought we’d be saying hello to the post-Brexit era, but instead we’ll be wrapping tinsel around our polling cards as we head out to vote in the upcoming General Election. Anyone for a surprise Christmas gift?

You would be forgiven for thinking that there is no other news, and hoping that extensions, flextensions and even political tensions would melt away in the snows of winter … but regardless, the pensions world continues to turn and we’ve compiled our list of topical pension articles from the last quarter.

Inside you’ll find details of the new CMA requirements for trustees to engage with investment consultants and fiduciary managers and an update on your favourite subject (next to Brexit!) – GMP Equalisation. We also look at the ‘legacy’ that is RPI and the anticipated move to CPI. Should there be a professional trustee on every scheme? We look at both sides of the debate. And as if that’s not enough, we’ve got an investment market update, news from the Pension Scams Industry Group and PRAG, a summary of the TPR and PPF Report and Accounts and information on changes to Data Subject Access Requests (DSARs).   

You can’t vote for your favourite, but we do hope that you enjoy reading our take on the latest industry news.

Click on image above or this link to download.

Alan Collins

20 years in pensions

Last week, I passed through the ‘20 years in pensions’ landmark. Year 21 is as busy as ever, but I did find some time to pause for some reflection.

1999 was my first year in a ‘proper job’. It was the year when people waited to party like Prince predicted back in 1982. It was the year when businesses were fixated by the impending doom of the Millennium Bug, which after greater preparation, pretty much came to nothing (see GDPR). In 1999, Scotland had recently qualified for a major football tournament and suffered its first of many glorious failures in attempting to qualify for Euro 2000. Ah, the days of glorious failure instead of just plain old failure.

I started work in Towers Perrin’s North of England Office (St Albans!) and so my quest for the actuarial fellowship qualification commenced. In the financial world of 1999, the Bank of England base rate was 5.0% a year (no I haven’t missed the decimal point). Long-term interest rates were expected to average at 4.5% a year for the next 20 years.

So, if you were to borrow £1,000 for 20 years back in 1999, you would be expected to pay back £2,412 i.e. £1,412 of interest. Today, the amount to pay back would only be around £1,220 i.e. only £220 on interest of around 1% a year.

The late-90s pensions industry was adapting to the post-Maxwell world of the Pensions Act 1995 (PA95) and the soon to be forgotten Minimum Funding Requirement (MFR). Amongst a raft of legislation, PA95 introduced mandatory pension in payment increases and enshrined in law the protection of pension benefits built up in the past.

It was also a time-period when it was becoming clear that the actuarial profession had significantly underestimated life expectancy. This was (and still is) another significant factor in past pension promises costing more than had been expected.

My years in pensions have sped past, now finding my home at Spence for almost ten years now. Fellowship of the actuarial profession eventually came in 2006 and I have been proud to advise many pension scheme trustees as their Scheme Actuary since 2008. I have seen the sad, but inevitable, demise of final salary pension schemes for most members. As such, my job in the main involves helping trustees and sponsors deliver the past benefits that have been built up.

To end this reflection, I mused about the most significant turning points in the pensions industry over my time. Several came to mind, but I would plump for the introduction of full buyout solvency debts on sponsoring employers and the introduction of the Pension Protection Fund (PPF).

From what I recall, the introduction of full buyout debt sort of snuck up on sponsoring employers. Of course, the vast majority want to provide full pensions for all members. However, with the huge challenges and costs of pension schemes, how many would turn back the clock and wind-up schemes with lower obligations? Very many, I am sure.

The mere existence of the PPF is often cause for celebration and rightly so. In the fifteen years since it opened its doors, it has given shelter to around 250,000 members and undoubtedly provided them with a much better financial outcome than would otherwise have been the case. So, to the next 20 years.

What will happen? Don’t ask me, I’m an actuary!

David Davison

The more I read about defined benefit (DB) consolidation, the more it appears to have a key parallel to Brexit, namely: everyone seems to have a different expectation of the outcome.

The DWP’s White Paper “Protecting Defined Benefit Schemes” was published in March and followed up last year’s Green Paper with further proposals on the benefits of consolidation.

There are multiple consolidation options. Each will have a different impact and will be complicated to achieve.

The suggestion is that bigger is better. Having larger schemes reduces cost and improves governance. Interestingly, however, the 2017 Purple Book suggests that smaller schemes (i.e. those with less than 100 members) are on average better funded than those with more members.

So, in considering consolidation, what options are possible, what are their potential benefits and what might be the associated considerations?

Investment consolidation

The potential to consolidate investments seems relatively simple, can reduce costs and provide schemes with access to a greater level of investment choice.

Access to investment platforms can provide cost and administrative benefits even without wholesale changes to underlying governance or administration.

Governance consolidation

Consolidating governance, for example, in the form of sole ‘professional’ trusteeship also seems to present schemes with a straight-forward path to governance improvements and can be achieved without upheaval to the schemes’ delivery services.

Going beyond the above there is further potential, but the benefit improvements are much less certain based upon the specific circumstances of each scheme and employer.

Operational consolidation

There may be operational opportunities to merge key scheme services such as administration and actuarial.

It’s far from clear cut, however, that such a move will result in cost savings.

There is little evidence that the provision of services within a DB Master Trust are provided at a materially lower cost unless some form of benefit consolidation can be achieved.

In addition, the likely scheme time horizon will have a huge bearing on the cost effectiveness of any move given the inevitable set-up costs of a service change. If, for example, the time horizon to buyout is within 5-10 years then annual savings may not outweigh initial transition costs.

Any move to a DB Master Trust must be reviewed in terms of flexibility. Such a move will require a scheme to fit within the DB Master Trust model where any pricing improvements which can be achieved are done so via some form of standardisation.

The timing of valuations or the approach to administration may not be something that suits all schemes or employers.

What is the Master Trust approach to employer covenant, member communication and benefit options and is any approach outside the norm likely to incur additional costs which may negate any savings?

This will be an important initial consideration as in my experience these schemes are much easier to join than they are to exit.

Benefit consolidation

This is even more problematic.

Converting one scheme benefit basis to another has long been fraught with difficulty given that ultimately a guarantee will have to be provided that members will be no worse off.

This will undoubtedly result in up-front costs that again have to be considered against any savings which can be made in future.

There have been calls for Government to standardise benefits to make consolidation easier, but it remains to be seen how this can be achieved.

Ultimately a Scheme Actuary will have to sign-off any benefit conversion to confirm that the change does not detrimentally impact on members’ accrued benefits, which is far from an easy hurdle to get over.

It is also difficult to envisage how consolidation can happen for schemes with unequal funding levels, as trustees would surely seek a “levelling-up” of funding. This has been an issue which has undoubtedly slowed the pace of consolidation in Local Government Pension Schemes (LGPS).

There must also be a concern that close links to key personnel in a scheme sponsor who can provide valuable insight from an employer covenant and operational perspective could be lost through consolidation.

Are ‘Superfunds’ the answer?

There have been proposals that a middle way between own-scheme funding and buying-out with an insurer may be possible.

This would be via what have become known as ‘Superfunds’ which would consolidate scheme benefits from multiple schemes. The suggestion is that sponsors would benefit from lower costs than that required to fund a buyout.

Proponents have been quick to highlight that any transfer in to Superfunds would need to be fully assessed by Trustees as being in members’ interests and that any agreement is likely to result in accelerated employer contributions over those paid under a funding plan in order to gain access.

An initial entrant to the market has suggested that revised legislation is not required as their scheme is just the same as any other occupational pension scheme and could run under existing regulation.

This, however, differs from proposals put forward by the Pensions and Lifetime Savings Association (PLSA) where it was expected revisions to the regulatory framework would be required.

Clearly we are at a very early stage in terms of this potential solution and it is likely to evolve over the coming months. Undoubtedly questions remain over this approach, particularly around the break in the link to the sponsoring employer and therefore the strength of the employer debt security.

Industry unconvinced by consolidation

The Association of Consulting Actuaries’ Pensions Trends Survey 2017 suggested that only 16% of sponsors would consider consolidation and only 32% thought that potential cost savings were real.

That would seem to suggest there are real concerns about how successful any consolidation might be and a high level of scepticism that promised improvements can be achieved.

It is interesting that LGPS schemes where the benefit basis is the same have primarily gone for investment consolidation. This may well be a first step, but where funds have merged for delivery services the impact in the end-user experience has been patchy.

There are undoubtedly efficiencies and opportunities for improved investment and governance available through some form of consolidation, however, the extent will be very much based on individual circumstances and requirements.

Those in favour of much greater reform certainly have a lot of convincing to do.

This article originally appeared in CA Today on the ICAS website here – on the 19th May

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