The period for responding to the Financial Conduct Authority’s (“FCA”) consultation on pension redress has ended with replies having to be submitted by 10 June 2017. The FCA is expected to issue a response in Autumn 2017.
So how did we respond….what did Spence think was the correct way to calculate pension redress payments?
Overall, we agreed with many of the proposals put forward by the FCA with an overriding requirement that the methodology had to be simple. We welcomed changes that simplified the calculations such as how to allow for expenses prior to retirement and how to allow for the fact that individuals may take a tax free cash sum at retirement.
We deviated in one main area – we do not believe that the level of redress should mirror insurer pricing, primarily because individuals no longer have to purchase an annuity at retirement (and are clearly not doing so). Allowing for insurer pricing provides individuals with an excessive level of redress that is not reflective of the cost of providing the benefit in the DB arrangement.
We felt there should be an allowance for the inflation risk premium in deriving the inflation assumption. Index linked gilt prices continue to be impacted by under supply/over demand in the market, artificially increasing inflation assumptions that are based on market prices. This is even more apparent in the current environment where demand for index-linked gilts remains high and inflation assumptions have continued to increase. Our view is that there should be an allowance for the inflation risk premium, this should be market related, and it should be provided each quarter with the updated financial assumptions.
Finally, we have a different view on appropriate mortality assumptions. The FCA has suggested a mortality basis in line with that used by insurers in pricing annuity contracts. However the individuals considered are (or have been) members of defined benefit pension schemes. We believe that tables based on the experience of Self Administered Pension Schemes (SAPS) would be more appropriate to reflect the expected mortality of these individuals. We also believe that the most up to date experience from the CMI should be adopted for mortality improvements i.e. the 2016 CMI tables. Overall this would result in lower life expectancies and lower redress payments, and would reflect our view that the level of redress should not reflect insurer pricing.
We await the results of the consultation with interest.
For many Trustees and employers, reaching the point where you can secure your pension liabilities with an insurer seems like an impossible task.
The Pensions Regulator publishes ‘Scheme Funding Statistics’ each year based on various ‘tranches’ of pension schemes. As at May 2015, the average buy-out funding level was 58% for schemes with a valuation date between September 2012 and September 2013.
For the majority of schemes , the path to buyout is not an easy one but it is important to understand that there are measures you can take to move towards this goal.
I have set out below our ‘five steps to buy-out’ Read more »
FRS 102 has come into effect for accounting periods beginning on or after 1 January 2015. This is the latest in a series of articles on the implications and you can access previous articles here.
Under FRS 17, if employer’s participating in non-segregated multi-employer schemes are unable to separate out their own assets and liabilities, they can account for their scheme on a defined contribution basis by recording the contributions paid in the P&L and taking no recognition of any deficit that may exist. Under FRS 102 this option is no longer available and employers will now have to disclose a deficit in their balance sheet equal to the net present value (‘NPV’) of their future deficit contributions. Read more »
Financial Reporting Standard 102 (FRS 102) has now replaced FRS 17 as the main financial reporting standard in the UK and Ireland. It is important that you understand the changes, how they affect you and the options available to you to manage any impact accordingly. Spence has put together a handy summary to help you do that – just click the option that applies to you and get in touch if you would like any further assistance.
I already disclose my defined benefit pension obligations under FRS 17
I have never disclosed my defined benefit pension obligations before
With the introduction of new UK Generally Accepted Accounting Practice (UK GAAP), and subsequently, the introduction of Financial Reporting Standard 102 (which replaces Financial Reporting Standard 17 as the financial reporting standard in the UK and Ireland) we ask employers to consider the impact this may have on their P&L and balance sheet, and note some actions employers can take to limit this impact.
The most significant change under new UK GAAP for defined benefit pension schemes is in relation to non-segregated multi-employer arrangements where employers are unable to identify their share of the assets and liabilities in the Scheme. Under old UK GAAP (and hence FRS 17) there was a exemption that allowed employers in this position to account for their pension costs on a defined contribution basis, by recording the contributions paid to the scheme in the profit and loss account. No account had to be taken of any pension deficit that may have existed at that date. Read more »
Spence & Partners latest blog for Pension Funds Online –
Chancellor George Osbourne announced his Summer Budget on 8 July with a number of key developments for the pensions industry.
The main one being that the annual allowance will be reduced from April 2016 for individuals with income, including their own and their employer’s pension contributions of more than GBP 150,000.
The Chancellor also launched a consultation requesting industry views on reforming pensions tax relief. Read more »
Spence & Partners latest blog for Pensions Funds Online –
The Pensions Regulator implemented a revised version of Code of Practice 3 for funding defined benefit pension schemes.
The Code has been updated to take account of the Regulators new statutory objective to minimise impact on the sustainable growth of the employer, and recognises that a strong, ongoing employer alongside an appropriate funding plan is the best support for a scheme.
The revised Code is less prescriptive and more principles based and as such leaves room for interpretation. There is no longer scope for a ‘one size fits all’ approach where schemes will avoid the scrutiny of the Regulator provided they do not hit certain ‘triggers’.
In this new landscape, funding a scheme can be thought of in a similar way to buying a suit: Read more »
The Pensions Regulator (“the Regulator”) has recently implemented a revised version of Code of Practice 3 (“the Code”) for funding defined benefit pension schemes.
The Code has been updated to take account of the Regulators new statutory objective to minimise impact on the sustainable growth of the employer. The code recognises that a strong, ongoing employer alongside an appropriate funding plan is the best support for a well-governed scheme.
The revised Code is less prescriptive and more principles based and as such leaves scope for interpretation. There is no longer a ‘one size fits all’ approach where schemes will avoid the scrutiny of the Regulator provided they do not hit certain ‘triggers’. Each funding plan will be and should be unique to that scheme, and the circumstances of the sponsoring employer. Read more »
I recently presented at a ‘Future Influencer’ breakfast seminar hosted by Spence & Partners, on Financial Reporting Standard 102 (FRS102) and its effect on accounting for pension costs.
Under the current regime, listed Companies have to account for their pension liabilities under International Accounting Standard 19 (IAS19). Unlisted Companies can choose to account for their pension costs under either Financial Reporting Standard 17 (FRS17) or IAS19.
FRS102 introduces amendments to both FRS17 and IAS19 which will have an effect on the profit disclosed in Company accounts, and the final balance sheet position.
The main changes are as follows:
- There is no longer an exemption for Companies participating in multi-employer Schemes with non-segregated assets Read more »