Posts by David

David Davison

David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers
David Davison

Beware, beware, beware!!

Charities rightly have a reputation for adopting a more paternalistic attitude towards staff than is generally the case, and I’m sure they would be concerned if it was felt that their actions were exposing staff to unnecessary risk. However, the approach taken to retirement benefits could in many cases be inadvertently doing exactly that.

Charity employers make a commitment to help staff fund for their retirement provision throughout their working life. They closely monitor contributions, look to ensure that the scheme they provide offers staff the best choice and benefits possible, and that they have access to information and advice when they need it. However, coming up to and at retirement, just when members have accumulated their largest benefit, and have the most difficult decisions to take about their retirement, and when they are at their most vulnerable to scammers and unscrupulous individuals, is the point at which little, if any, support is available.

I was struck by a recent case highlighted by the Pensions Regulator (the full press release and related notices can be found here) where £16 million was invested, and this was made up of transfers from other, reputable schemes, the value was reduced to approximately £991,000. This is all before any tax penalties are considered in respect of liberation payments. Any return to members is likely to be a tiny fraction of the transfer value they paid in. Assets had disappeared in a myriad of suspect investments and those affected have been consigned to a retirement considerably less comfortable than the one they might have expected.

The statistics are frightening. According to research carried out by Citizens Advice:-

  • 10.9m pensions consumers received unsolicited contact since April 2015;
  • 8.4m consumers were offered unsolicited pension advice/reviews in the last year;
  • Action Fraud – in first six months of Pension Freedoms the average pensioner affected by pension fraud lost £163,000;
  • The average consumer has difficulty in spotting scam offers.

Nobody knows exactly how much has been lost to pensions fraud, but some estimate it could be as high as £3bn.

Recent research published by Retirement Advantage has shown that 35% of savers over 55 years old have been targeted by scammers offering free pension reviews, or investment opportunities.

This is an increase from figures released in June 2015, showing that one in five people over 50 had been approached by would-be scammers. As the people being approached here are over 55, this is not about pension so-called liberation, it’s about separating individuals from their retirement pots.

The Pension Regulator press release outlined classic elements of scam behaviour including:

  • Potential scheme members were cold called and text messaged by introducers, who were paid on commission for the introduction.
  • Without their knowledge, members’ funds were invested in exotic sounding, unregulated investments overseas, such as tree plantations in Fiji, a Brazilian teak plantation land and fund shares based in the Cayman Islands.
  • The scheme appeared to have been a vehicle for pension liberation and that the trustees were aware of this. TPR found that some scheme members (below the age of 55) received cash advances or loans via introducers with, in at least one case, a scheme member receiving a loan directly from the scheme assets.

Never has the old adage “if it seems too good to be true it probably is” been more apt.

So, what should employers be looking to do to protect staff from these unscrupulous individuals?

People need to be made aware of the risks and what to look out for. Snake oil salesmen promising guaranteed returns and buy now while stocks last investments are unlikely to be genuine. The illusion of high growth with the promise of low risk in a time of low inflation and interest rates is unachievable.

A good start as a minimum would be to supply all staff with a copy of the Pension Regulator’s Guide on what individuals should be on the look out for. Charities could supply this to staff via e-mail or letter, or it could be included as part of an annual update. Additionally employers could ensure that any staff presentations from your pension provider / independent financial adviser on pensions include some warnings about scams. It is also certainly well worth considering having access to an independent financial adviser available for staff, as they reach retirement age.

In addition, we need to stop the scammers getting hold of the money and, if you can’t stop people giving it away, you need to save people from themselves. All hail the Nanny State!

In August the Department for Work and Pensions (DWP) / HM Treasury published “Pension Scams: consultation response.”

The response suggests:-

  • a ban on cold calling in relation to pensions, to help stop fraudsters contacting individuals;
  • limiting the statutory right to transfer to some occupational pension schemes;
  • making it harder for fraudsters to open pension schemes.

This is excellent news, however, it is nothing more than a statement of intent at this stage and will remain so, until legislation in enacted. In this regard, rather worryingly, in the consultation response it does say that “the government will bring forward legislation when Parliamentary time allows.” Given the parliamentary timetable is currently congested with Brexit issues, I have a concern that many more people will be exposed to risk before this legislation is enacted, making remedial action in the interim all the more pressing.

Hopefully the simple steps I’ve suggested here will keep more people out of the clutches of the scammers, and have their pension savings protected to provide for the safe and comfortable retirement they were always intended for.

David Davison

As Frank Field, Chair of the Parliamentary Work & Pensions Committee, writes to the Trustees of USS, the Pension Regulator and ministers about the record deficit position the Scheme now finds itself in, I wanted to consider if the Scheme is a victim of circumstance or are there any lessons to be learned. Read more »

David Davison

In an earlier bulletin, I looked at why the current basis of cessation for admitted bodies in LGPS was causing problems and how the inconsistency of approaches taken by Funds meant that organisations struggled to understand their obligations and what steps were open to them to address the issues they face.  You can read the bulletin entitled ‘An alternative approach to cessation’ here.

In some work undertaken over the last few months I’ve identified that some Funding Strategy Statements (‘FSS’) revised over the last couple of years seem to suggest that some Funds are taking tentative steps to try to address the situation. Read more »

David Davison

I’m often asked to explain why contractors have finished up with a substantial bill payable to an LGPS at the end of an out-sourced contract. I’ve therefore compiled this very simplistic worked example to highlight the issues contractors face. The figures are for representative purposes only and are not intended to be either detailed or LGPS liability specific. Read more »

David Davison

In my last bulletin I outlined the issues that charities are likely to face should they look to exit an LGPS. The cessation debt is calculated by the Fund Actuary in most cases using a least risk approach based on Gilts. For many employers in LGPS the dramatic reduction in gilt yields over the last 10 years has resulted in very significant increases in applicable cessation debts.

Based on the table above an admitted body with a cessation debt of a few £100,000 10 years ago could well now have a debt well in to the £millions.

This I believe highlights a fundamental flaw in the cessation approach adopted in LGPS. In a private sector standalone or segmented multi-employer scheme to manage risk it could be agreed that no further benefits would be accrued. The trustees and employer could then agree to continue to fund the scheme on an on-going basis only deciding to buyout / secure the liabilities when market conditions, and the scheme and employer financial position, merited it. Read more »

David Davison

We are delighted at Spence to be able to support a further two publications launched over the last week.

  • The 4th Edition of Charity Finance Group (‘CFG’) “Navigating the Charity Pensions Maze” was published in London on Thursday 23rd March. Spence were pleased to sponsor this invaluable publication and our Director and Head of our Charities Practice, David Davison, provided technical input on the Guide content. The Guide contains an excellent section on “Navigating the Local Government Scheme” compiled by leading legal firm Charles Russell Speechlys. This covers the benefits and risks of membership and provides a list of helpful questions charities should be asking about their participation. The CFG accompanying blog can be found here.
  • Leading representative body the Pension & Long Term Savings Association (‘PLSA’), formerly the NAPF, have launched the third of their guides covering Best Practice for Employers in LGPS with David Davison again providing technical input on the content. This was launched on the 28th March and a link to the launch information can be found here.

We believe these documents, and those published previously, will provide an excellent resource for charity trustees and senior personnel to assist them in dealing with the issues associated with LGPS membership.

David Davison

An Amicable Divorce

The question I’m asked about most often is about the cost of exiting a LGPS, as for most charities the costs can come as a bit of a surprise. One organisation I worked with recently had a small surplus at their last actuarial review and in their accounts, but when a couple of their staff left unexpectedly they were immediately hit with a bill from the fund in excess of £500,000, pretty much wiping out all their assets and placing them on the brink of insolvency. So what do you need to know?

Should you run out of active members in your LGPS fund (and not be in a position to add any new ones, for example if you have a closed agreement or a local authority contract has come to an end) under the LGPS Regulations the fund must commission the Fund Actuary to complete a cessation valuation. Whilst the Regulations do not prescribe how this calculation should be carried out, the actuaries undertaking the calculation will use very prudent ‘least risk’ assumptions based on gilt yields. This will result in liabilities being much higher than is the case on either a funding or accounting measure. Often this is the first point that an admitted body may be aware of this liability, as unfortunately numerous funds still do not provide organisations with an annual estimate of the potential cessation debt.

The conservative approach taken reflects that once an organisation exits an LGPS, the fund cannot pursue them for any extra money if the cost of providing members’ benefits is higher than expected. The fund therefore wants to make sure that there is a minimal risk that other employers in the fund would be responsible for paying for any of these exiting liabilities. As such the approach is a protection for all. However, what has been called in to question more recently is whether the basis adopted is reasonable, and indeed suitable in all circumstances. What is clear however, is that there is a great reluctance on the part of the funds to change, not surprisingly.

Whilst the approach to calculating a cessation debt across Funds, and across the various fund actuaries, tends to be consistent, the circumstances in which it applies can vary significantly. For example, some funds offer public sector out-sourcers ‘pass through’ protection, which means that any cessation debt is calculated on the much lower on-going funding basis. Other funds recognise where the last employer has inherited significant liabilities from a public sector body, and will account for these by ensuring that the public sector body picks up their fair share. Unfortunately, though the vast majority of funds do not.

Some funds are prepared to negotiate around the cessation amount payable, subject to affordability and the term of any repayment. However, in most circumstances these negotiations need to be conducted in advance of any formal debt trigger / calculation.

Admitted bodies therefore need to be aware of their situation and look to plan for it, as far in advance as possible, as allowing a cessation event to just happen could have catastrophic implications for the charity.

In my next bulletin I’ll consider why change should be considered.

David Davison

They always say that sequels are never as good – well here’s a publication that well and truly proves that adage wrong.  This fourth edition has taken over nine months to compile and provides over 50 pages of invaluable information, compiled by industry experts, which will hopefully allow finance directors, HR managers and CEO’s to find information on the issues which affect their charity and therefore help them get the most from their pension provision.    

I am delighted to have been able to contribute to, and indeed sponsor, the publication of “Navigating the Charity Pensions Maze” produced by Charity Finance Group (CFG) having provided input in the area of Section 75 debts in non-associated multi-employer defined benefit schemes, and providing our experience on how the problems can be addressed.  We believe that this document will provide charities with an invaluable reference guide to the complex pension issues they face.

Read more »

David Davison

Fortunately my expectations for the Green Paper published last week weren’t high which was good as at least I didn’t have to deal with crushing disappointment. I did have some hopes that after a myriad of working parties and consultation on Section 75 and multi-employer schemes over the last few years, that expectant charities at last may see some revelation on an issue that has been dogging the sector for well over a decade. There was indeed a revelation, of sorts! It was just that they needed more consultation!! How could anyone not understand the issues here? The problem isn’t about lack of understanding of the issues, but about lack of will to do something about them.

The commentary on multi-employer DB schemes is contained in paragraphs 400-407 in the ‘Consolidation of Schemes’ section, which is somewhat ironic given that most of the necessary change for multi-employer schemes results in anything but consolidation!!

In point 405 there is one tantalising comment, namely “We intend to consult on a new option employers can consider to manage the employer debt in these circumstances.” Ah, what could this be, and why was it not actually in the Green Paper?

My greater concern is that at the end of the Consolidation section there are three key questions posed in relation to multi-employer schemes:- Read more »

David Davison

Many charities participating in local government pension schemes (‘LGPS’) have been increasingly frustrated by the lack of recognition of the issues they face by the schemes they participate in and, indeed, from Department of Communities and Local Government (‘DCLG’) who oversee them. The issues are not new but there remains an element of denial and finger pointing, and it’s very easy to see how charities could be understandably frustrated.

I often experience a feeling amongst charitable admitted bodies that Councils and LGPS encouraged them to join Funds, without ensuring independent advice was sought or providing any risk warnings about the step they were taking, and have now just abandoned them to their fate. Whilst, to a great extent, the problem has been capped over recent years as admission to Funds has become much more rigorous, this unfortunately does nothing for all those employers admitted before that stable door was closed.

For those employers, LGPS have sat on their hands allowing organisations to continue to accrue liabilities even when they clearly couldn’t afford to do so, and without providing the flexibility to address the issue. Many charities I’m aware of have approached LGPS over many years looking to stop accrual, and arrange a payment plan and were just provided with pay up or keep participating as options. Now, as funding positions have deteriorated and funding costs have increased these same schemes are pointing fingers at these same trapped charities for their inability to be able to continue to participate.

For many charities there is also a growing recognition that Councils have adeptly transferred historic past service liabilities in £millions to them, due to LGPS inability to segregate service between employers and without making employers aware of the impact. This has been hugely expensive for charities and DCLG and LGPS continue to try to ignore this issue and sweep it under the carpet. Indeed, LGPS continue to do this with unsuspecting Academies being a prime example.

A limited number of Funds and Local Authorities have sought to deal with the issues however, the response has been at best patchy and has lacked any level of standardised practice. Indeed these ore enlightened approaches attract a “nothing to do with me” response when raised with pension managers from Funds not employing them and for many admitted bodies they are completely unaware of the alternative options explored and implemented elsewhere. A lack of consistency of approach also means that each exercise needs to be looked at on an individual basis, adding complexity and professional adviser costs when helping charities through the maze.

The Shadow Scheme Advisory Board (SSAB), which was established to encourage best practice, increase transparency and coordinate technical and standards issues for LGPS as well as providing recommendations to Government for future regulation commissioned a report from PWC as part of its deficit management project kicked off in summer 2014.

The report was published in July 2015 and the key recommendations which will be of specific interest for admitted bodies are:

  • More flexibility on when exit debts are triggered. The proposals suggest that debts would not be automatically triggered by the exit of the last member. The paper recognises that some minor changes to regulation will be required.
  • Establishing a maximum level of prudence when calculating exit payments. Currently Schemes tend to use a gilts basis to calculate the exit cost despite schemes not investing assets in this way. This effectively means that employers paying a cessation debt are cross funding other employers who remain. This is recognised as inequitable and is also a discouraging factor for charities wishing to look at an exit. This proposal would effectively reduce cessation debts for those looking to exit the Scheme, for many to a point which may be affordable.
  • Flexible exit arrangements. These could include continuing to pay contributions on an on-going basis for a prescribed period and for employers to pay their cessation debts over a much longer period. This would be extremely welcome flexibility for many small employers and is a more consistent approach with that adopted in the private sector.
  • Employer exit on weaker terms. It is recognised that, in some circumstances, it could be in the interests of the Fund, the remaining employers and the admitted body to allow them to exit on weaker terms and small charities are cited specifically as an example.

These items certainly reflect much of the commentary supplied by charity representative bodies, charity advisers and charities themselves although at this stage they haven’t fully addressed issues around the transition of prior local government liabilities to charities but it is hugely helpful to charities’ positions and it has been a welcome addition to the debate, especially given that it comes from such a reputable source.

Unfortunately however, it has disappeared in to something of a black hole, possibly overtaken by other more pressing global events. The proposals however need to be addressed by the SSAB and implemented by Government and LGPS as quickly as possible. The issues faced have been created by local government, LGPS and the admitted bodies and there needs to be a commitment to co-operatively finding solutions, and a desire to do it soon. Charities need to be vocal with their Funds and local authorities about the issues they face and get them to look to address them positively. Charities should also be working collectively and in conjunction with their representative bodies to make sure their voices are heard.

Page 1 of 1512345...10...Last »