Posts by David

David Davison

David Davison

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

As a participant in LGPS you will have been contracted out of the state second tier pension scheme. This means that you as an employer and those members participating will be paying lower rate national insurance contributions.

However, you’ll probably have noticed that you’re not doing this any more!! This is because contracting-out of the second state pension was abolished from 6 April 2016, to coincide with the introduction of the new single tier state pension. This will have increased the national insurance contributions (NIC) required from employers currently in LGPS, as well increasing the contributions required from employees. Employers will see an increase in contributions of 3.4% of band earnings (earnings between £5,824 and £43,004 for the 2016/17 tax year) on their pensionable payroll and employees an increase of 1.4% of band earnings.

Clearly organisations need to budget for these increased costs and make sure staff are aware of the changes, especially as given the low level of salary increases in the sector at the moment, staff may actually notice a reduction in their salary. In LGPS you have no option other than just to pay the increased costs and maintain the level of benefits provided.

Organisations in these schemes may also see some additional correspondence from their provider, and possibly some linked additional work, as they seek to reconcile their GMP information and communicate with members on the impact of the changes.

David Davison

It’s often difficult for charities to access up to date technical information. Local Government Pension Schemes provide a myriad of information but it tends not to be focussed on charities. Over the last couple of week there have been some really helpful information published which could be of benefit to charities struggling with the management of their LGPS Pension:-

  • In conjunction with Charity Finance Group (‘CFG’) leading legal firm Charles Russell Speechlys has produced an LGPS Charity briefing. The guide outlines the risks and options for charities considering joining LGPS, and the problems faced by those considering exiting. The CFG accompanying blog can be found here.
  • Leading representative body Pension & Long term Savings Association (‘PLSA’), formerly the NAPF, have launched the first two guides in a series covering charities in LGPS. These cover:

More guides are on the way from PLSA over the next few months to assist LGPS participants with managing their continued participation in LGPS, and also options for those considering an exit. CFG are also re-launching their ‘Charity Pensions Maze’ publication which contains a wealth of helpful information. More information to follow on these when available.

David Davison

Recognising the many difficulties charities who participate in Local Government Pension Schemes face, a series of really helpful guides have been published over the last few weeks:-

Read more »

David Davison

It is amazing how quickly time flies. It seems like only yesterday that Scottish Housing Associations were absorbing the bad news about the funding position of the Scottish Housing Associations’ Pension Scheme (SHAPS) in late 2013 and getting used to their new higher contributions from 2014. Associations have now just received communication containing the initial results of the September 2015 valuation.

The great news, apparently, is that the ongoing funding deficit has reduced from £304m to £198m, representing an improvement in the funding position from 56% to 76%. The improvement has been attributed to a combination of investment performance, additional contributions and other experience. If this information is confirmed in the formal valuation it could all result in a reduction of the term of the deficit contributions of about five and a half years. This is all great news, isn’t it?

For those of you of an accepting nature then it is job done, issue parked and you would appear to be able to continue to fill your boots with defined benefit accrual without material concerns.  However, if you are of a slightly more sceptical disposition, perhaps built up over many years experience, you may want to dig a little deeper…

It is initially interesting to consider the backdrop of the results. The scheme ‘de-risked’ at the last valuation, investing in lower risk stocks which might have expected a lower return. The results demonstrate that the asset performance has been positive, so credit where credit is due on that front. The difficulty for the Scheme is that the investment return consistently needs to run very fast to keep up with the ever increasing level of liabilities and some difficult underlying membership and longevity issues that the scheme has to deal with, but more on that later.

On the liability side, the position is a bit more intriguing, and more difficult to assess, as unfortunately the report does not incorporate any of the underlying assumptions actually used (the assumptions were disclosed in the Trust’s presentation to employers in November 2015). The report suggests that over the period the value of the liabilities has increased by £112m from £698m to £790m, before changes in market conditions are allowed for.

In the table below I have shown the key changes in assumptions on a “like for like” basis, and their impact on the value of the liabilities.

SHAPS Table

So, we add £160 million to the £790 million to get an overall value of the liabilities of £950 million – easy, right?   No, this is where things take a sharp turn in a different direction.

Instead of adopting “like for like” assumptions, the Trust have decided that the Scheme no longer needs to hold as much assets to pay future benefits.

The report gives some explanation around this issue:-
“The fall in government bond yields between the 2012 and 2015 valuations together with the low interest rates, has led to a lower rate of discount adopted to calculate the present value of the future payments. This results in a higher value of liabilities.” Ah, so my assumption was right!

“However, the Committee has adopted valuation assumptions reflecting its overall view of the aggregate financial strength (the covenant) of the SHAPS employers. The assessment permitted the Committee to view with more confidence the long-term strength of the sector and therefore apply marginally less prudence to the assumption that investment returns would be realised.” Ah, so in other words we are going to change our approach and adopt a lower funding target (by assuming that investment returns are going to be relatively higher than before)…

OK, I accept that assumptions can change and this will alter the value of the liabilities.  Where I really, really struggle is with the claim that the Trust is applying “marginally less prudence”.  Marginally less – what 1%, 2% maybe?  No, the Trust is applying about 15% less prudence.  I don’t need to go scurrying for the latest Oxford English to realise that a 15% change is hardly marginal.

Since I first became involved in this Scheme, I have been worried about the lack of prudence in the actuarial assumptions.  The 2012 valuation increased the prudence in the assumptions and I welcomed this as a move in the right direction.  The 2015 results smack of a move back to the bad old days of crossing fingers and hoping everything will be OK.  This is how the Scheme got into such trouble in the first place and I urge the Trust to reconsider, even if it means participants paying deficit contributions for a longer period.

As a scheme sponsor, what I would want to know is, if we started with the funding principles agreed at the 2012 valuation, with no change in method, what would the results have been (i.e. confirmation of something around my £960 million figure)? I would also want to see the figures on a solvency basis, as this would provide for a more consistent and objective assessment of the Scheme’s liabilities.

From an employer future cost perspective I would also want to understand the likely impact of the increasing move towards defined contribution for employers and employees, likely to result in an increased average age of DB members. What sort of impact might this have on scheme funding over time?

Employers should also be considering the likely impact on their costs and liabilities of:

  1. the introduction of revised state benefits resulting in the abolition of contracting-out from 31 March 2016. The removal of these NI deductions will increase net contribution costs by 1.4% of band earnings for employees and 3.4% for employers.
  2. the proposed changes to the living wage could also have a negative impact on the funding costs for the scheme as lower earners salaries may increase more rapidly than projected and even employers who have made the move to defined contribution are not immune to this as the Scheme retains the link to future salary for active employees.
  3. the disclosure of these deficit amounts on balance sheet for the first time in 2016 which will make the issue much more visible than previously was the case.

Once all this information is available then its relevance to each employer can be assessed and organisations can decide if they’re happy with their future strategy or if some greater clarity is required.

David Davison

Many charities participate in pension schemes that are contracted-out. Participants in local government pension schemes, multi-employer schemes such as those run by the Pensions Trust, USS and many others will be impacted, as well as those charities running their own defined benefit schemes.

So what’s happening? Contracting-out of the second state pension will be abolished from 6 April 2016, to coincide with the introduction of the new state pension. This will increase the national insurance contributions (NIC) required from employers currently offering a contracted-out scheme, as well increasing the contributions required from employees. Employers will see an increase in contributions of 3.4% of band earnings (earnings between £5,824 and £43,004 for the 2016/17 tax year) on their pensionable payroll and employees an increase of 1.4% of band earnings. Read more »

David Davison

It is that time of year where it is traditional to reflect on the last twelve months and look forward to the year ahead. It would be nice to say that is has been a relatively calm year in the world of pensions. However, I think we can all agree, that despite the slow start, 2015 was a bit of a pensions whirlwind.

This year, it was up to me to take a closer look at the impact 2015 has had on your pension schemes, from pensions liberation and DB to DC transfers, to budget announcements and court case proceedings.

For your convenience we’ve created this short update, highlighting everything you need to know, and how these events could affect your scheme. Download your copy of ‘2015 – A review of the year’ here.

David Davison

The article below appeared in Pensions Expert on 23 November 2015, in the Informed Comment section of the publication.

The Chancellor George Osborne’s recent announcement that the Government’s objective to see the living wage increase to £9.00 by 2020 will have had many charity finance directors scratching their heads and wondering where the extra income is going to come from to fund this.

I suspect however that many will not as yet have got around to considering the pensions impact of the change, which for some will be very significant. Read more »

David Davison

Changes in Pensions

David Davison this week presented at the CFG Risk Conference on Changes in Pensions.  With the new Government in place, the way we view pensions is changing. There are now opportunities to transform pension plans into more flexible and attractive benefits for employees, whilst reducing the costs and risks of pension provision for employers.

This session explored the practicalities of how this works, giving useful tips on how to make the most of pensions and also highlighted new issues to be aware of. You can view the slides here – CFG Presentation London November 2015 [Read-Only].

 

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