Posts Tagged ‘Public Sector Pensions’

David Davison

I’d been asked to draft some thoughts on the current, and likely future, state of public sector pensions for The Scotsman which I did in an article on the 4th April- Time Turned on Pension Attitude. Not surprisingly (well it was of little surprise to me at least) that the article received a prompt rebuttal from a leading trade unionist, Dave Watson of Unison, denying that any problem exists with public sector pensions – Contrary to Popular Belief Pension Costs are Falling.

This is undoubtedly the problem with raising the spectre of public sector pensions as it completely polarises opinion between those affected and those who are not and raises strong emotions on both sides. I could feel the irked indignation from Mr Watson in every keystroke. Read more »

Greig McGuinness

After much deliberation Unions and Government appear to have reached agreement on the future benefit basis for the Local Government Pension Scheme in England and Wales. As a result, the average government worker will now receive a higher pension with no requirement for additional contributions, although they will not get their hands on it until a few years later than originally anticipated. Read more »

John Griffin

None of the above has had a great press recently.

Take Diane Abbott – if you dare.  Diane was this country’s first black woman MP and has a reputation of being a bit of a maverick – in other words, she often says things worth listening to and doesn’t always toe the party line.  Given that she’s been an MP for almost 25 years it was surprising that she made a bit of a faux pas recently by claiming that “white people” liked to play “divide and rule”.  Read more »

Brian Spence

Our pensions review of 2011

A New Year and in January developments in de-risking throughout 2010 were discussed. How would 2011 fare in comparison?

February hosted a long and sometimes confusing conversation about PIPs. Turns out it’s simple,……… honestly!

In a busy month of March we aired our opinions and gave a spring clean to these pieces:

Help for schools and colleges showed we are no fools in April with some guidance on FRS17 disclosures.

The joys of spring were not abound in May as we lost an “f” in pensions. There never was one?  I think you’ll ind……..

Inflation and its effects were being discussed in June as another quarter sees the inflation targets go by unachieved. On a more positive note the Actuarial Profession was inflated with a new influx of talented graduates from Queen’s University. We were there to welcome them to the industry and indeed are nurturing some of that talent within our business today.

Individuality was the theme of July’s hot topics. Section 75 Regulations fail to recognise the plight of the unattached charitable organisations among multi employer schemes. And, as tPR guidance on Incentive Exercises suggests trustees start with the view that they will not be in the members’ interests, we ask just how much trustees should assume all members have the same needs?

In August we tried to make sense of babysitting pensioners and whether they were truly responsible enough to take care of their own finances.

September brought another egg to the NEST in the form of NOW Pensions as a rival. All good sport or will it be rotten?

November saw us pushing the limits of data management. Are Trustees using all the tools at their disposal to  improve their data and meet tPR’s  deadline?

December and we are back to de-risking and not much festive cheer. We feature our article in the Actuarial Post.

David Davison

I was kindly introduced to the word scotoma last week. The dictionary definition is ‘a mental blind spot; inability to understand or perceive certain matters.’ I would have found it difficult to find a better word to describe the on-going debate, and I use that word very loosely in this case, in respect of public sector pensions culminating in the strikes on 30th November.

Things have been moving at such a speed it’s hard to keep up and to pick out the fact from the rhetoric. The week of the strike began with a bit of school yard name calling as trade union Unite issued their “Dossier of hypocrisy” exposing the extent of cabinet minister’s pension entitlements. All that did was make the case that those particular public sector pensions need to be reformed as much as, if not more than, all the rest. Read more »

David Davison

In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats!!

The Government has announced a huge cull of quangos in a move it says is aimed at improving accountability as well as meeting deficit reduction objectives. Whilst I don’t expect this particular cull to result in the establishment of quango farms in the home counties, it may well have equally unintended consequences as I doubt what could be very significant pensions implications have been properly considered. These implications may well threaten the future solvency of some organisations not directly mentioned, and only loosely connected, and dwarf any potential financial savings expected. Read more »

David Davison

The publication of John Hutton’s long awaited interim report in to the future of public sector pensions was not surprisingly met with some comment bordering on hysteria in certain quarters and some degree of entrenchment as various parties sought to lay out their stall for the future. The report provides a balanced and well thought through assessment of the position we find ourselves in with public sector pension provision and an initial consideration of what options might exist to provide a more sustainable solution for the future. In my view it needs to be viewed dispassionately (difficult I know!!) and without the level of rhetoric which has already begun to appear. Read more »

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.

Ian Conlon

As a result of Government proposals to change the way public sector pensions increase, thousands of divorcing couples may be unable to finalise the financial aspects of their divorce according to a leading pensions consultant.

Government plans mean many pension schemes in both the private and public sector will not be in a position to implement pension sharing orders or even to issue transfer value statements.

“This is a very disappointing state of affairs” said Ian Conlon, Pensions and Divorce expert at Spence & Partners, Consulting Actuaries. “Peoples’ lives move on and they should be able to sort out their affairs and I am afraid this is an unintended consequence of government pension policy.”

The proposals announced by the Chancellor of the Exchequer, George Osborne, in the June 2010 budget state the Government’s intention to link future increases in public sector pensions to changes in the Consumer Prices Index (CPI) instead of increasing in line with the annual change in the Retail Prices Index (RPI).

Over a period of time it is expected that CPI will be lower than RPI and all public sector Cash Equivalent Transfer Values (CETVs) will reduce to take account of this, a reduction that could be around 20% or more in some cases.

As a result, it is understood that most if not all, public sector schemes have already stopped quoting CETVs and it is likely that this delay will continue until further guidance is published. This, in turn, will mean pension sharing orders issued will not be implemented until the position is clearer, and for those in the midst of divorce proceedings, whose calculations are put on hold, it could mean a considerable increase in costs.

Ian Conlon added: “Divorce proceedings are expensive and stressful enough without a log-jam of cases building up while pensions administrators, lawyers and actuaries debate the legal issues and amend software to deal with the changes.”

“Whilst a degree of uncertainty may remain, it may well be attractive for some parties to proceed having been provided with an estimate of the impact of the change.

“Here at Spence & Partners we have developed specific software which can help divorcing parties and their legal advisers with an estimate of the likely impact of the change and the potential change in value of a pension share which was in the process of being agreed which we believe we will be helpful in many cases”.

ENDS

For further information please contact Ian Conlon (07718 365129), Brian Spence (07802 403013), Rebecca McDonald (0141 331 1004) or email us at divorce@spenceandpartners.co.uk

Spence & Partners are a firm of Actuaries, Consultants and Pensions Administrators with offices in Glasgow, London and Belfast and experience of operating pension schemes in England & Wales, Scotland, Northern Ireland and Ireland.

Visit www.spenceandpartners.co.uk

Note:

In the June 2010 budget the Chancellor of the Exchequer announced the Government’s intention for future increases to public sector pensions to be linked to changes in the Consumer Prices Index (CPI). To date, such pensions were increased in line with the annual change in the Retail Prices Index (RPI).

The Pensions Minister subsequently issued a statement on 8 July confirming that the Government also intends to use CPI for determining statutory minimum pension increases which apply to private sector pension schemes.

Over longer periods of time it is expected that CPI will be lower than RPI. All public sector Cash Equivalent Transfer Values (CETVs) will reduce to take account of this; the position with private sector pension schemes is more complicated and the impact will depend upon the specific scheme rules. In the case of a member of a public sector pension scheme, the reduction in their CETV could be as much as 20% or more.

As this is such a material change, we understand that most, if not all public sector schemes have stopped quoting CETVs and it is likely that they will defer the implementation of pension shares on divorce until revised factors are in place. This will delay divorce proceedings and may increase costs for those in the process whose calculations are put on hold.

Spence & Partners Ltd have developed specific software which can provide divorcing parties and their legal advisers with an estimate of the likely impact of the change in the level of increases on the CETV, and the potential impact on the value of the pension share on divorce which was in the process of being agreed. Whilst a degree of uncertainty may remain, it may well be attractive for some parties to proceed having been provided with an estimate of the impact of the change.

David Davison

The reality of the Irish Budget at the end of 2009 was much better than the expectation as many of the ‘rumoured’ changes to pension provision failed to materialise as the Irish Government sought to plug close to a 12% deficit in their GDP. What was announced was:-

  • Final salary provision would be ended for all new public sector staff from 2011 when a new CARE Scheme would be introduced.
  • Retirement ages would be increased from 65 to 66 with future increases linked to state pension age.
  • An announcement that pension increases being linked to CPI rather than earnings was actively under consideration.

The public sector therefore bore the brunt of the changes with the private sector remaining relatively unscathed. The move to CARE will over time produce cost savings although with a recruitment freeze in the public sector these are unlikely to be seen in the short term. The decision to move from final salary to CARE may also encourage a similar move in the private sector. I also await the impact of the proposals on industrial relations with interest.

It’s unlikely these changes will be the end of it however. Whilst not changed in this budget the taxation of ‘tax free’ lump sums and pension contributions was firmly on the future agenda with the current status quo considered unsustainable, especially as a taxation commission had proposed taxing lump sums in excess of 200,000 Euro.

The size of the Irish market also means it is difficult for it to benefit from economies of scale, something which could be addressed by more flexible financial practices throughout the EU and an increase in the number of industry wide schemes – although as commented previously in this blog the ownership / responsibility issues these types of arrangement present are difficult to overcome other than on a DC basis.
Whilst suffering from similar high level financial economic and public sector pension issues as the UK the market is much smaller which limits options however the trends are inescapable.

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