With ever more people falling into the “Just About Managing” category as inflation increases faster than many pay packets, pension saving is likely to feel the pinch. Employees and employers both need clear and simple guidance on the choices to get the best outcomes.
In the infamous Jam Experiment (the psychological study rather than the jazz quintet of the same name), ten times as many customers bought some jam when offered a choice of six flavours rather than 24. Similarly, sales of Head & Shoulders went up 10% when the brand range reduced from 26 to 15 varieties. What on earth was Mr Heinz thinking when he decided to advertise a whopping 57 varieties? He could have taken over the whole world if he’d stuck to plain old baked beans in tomato sauce!
One of the authors of the Jam Experiment (lyengar) turned her hand to pensions later, finding that US plans offering just two investment options had a 75% take up rate – falling to 61% where they had 59 choices, which is even more than Mr Heinz. Back in 1999, Baber and Odean found that the least active traders got an 18.5% return compared to 11.4% for the most active traders. The average investor who switched stocks lost out by 3% over the following 12 months. Nowadays few people would object to a return of 11.4% but we’d all definitely want to get a little bit extra if it’s available given the current low expectations of future returns. Read more »
Once upon a time, there was a Scheme Actuary. He was very proud of his profession and his reputation as a prudent man of business. Trustees all across the land admired and respected him and queued up to follow his advice, for they all understood how clever and learned he was. Besides, the wise old King passed a law requiring them to appoint a Scheme Actuary so they had to have one anyway…
One day the actuary was counting out the gold coins in a pension scheme and a tiny fragment chipped off one and flew straight into his eye. From that day on, he could only see pensions through a gilt lens and his peripheral vision vanished altogether. However, nobody in the Kingdom knew about this incident, and everyone still trusted the Grand Vizier (surely “actuary”?) when he demanded a mountain of gold from every farmer, so he could look after all their cows should they go bankrupt… which many promptly did, since they didn’t all have a spare mountain of gold lying around.
Of course this is just a fairy tale and couldn’t happen in real life. Or could it? In fact, a similar story happens every day in pensions – albeit not as extreme or (hopefully) amusing. Read more »
So apparently we’re all living longer than ever before and the Government’s solution to keep State pensions affordable is to make everyone retire later. That’s all well and good if your job is easy and you can keep doing it until you’re 67 or 70 (so MPs and Scheme Actuaries will be fine, thankyou very much) but it’s not so practical in many occupations where the physical demands are much higher. In fact, recent research reveals that 12% of people within five years of State Pension Age are too ill or disabled to work. According to the TUC’s report “Postponing the pension: are we all working longer?”, only half of people aged 60 to 64 are economically active. The half that aren’t earning does include the lucky folk who have been able to choose to take early retirement but it also includes those who have been made redundant or are unable to find a job, as well as those too sick, so it’s a safe bet to say that far more than one in eight people in this age range are unable to work. Read more »
So the country has spoken in a momentous and slightly surprising result! We now enter a period of extreme uncertainty while we wait to see what happens next. Markets don’t like uncertainty and we’ve already seen sterling fall to levels last seen 30 years ago but there is no need to panic. Our legal framework today remains exactly the same as it was yesterday and we have some time to decide what changes we’ll make and watch how negotiations go.
As far as pension schemes go, we can take comfort from the fact that funding is a long term proposition and we can afford to avoid any knee-jerk reactions. There may also be some opportunities for funding levels to increase, especially if we see a rise in gilt yields (which may be needed to attract international money into the UK coffers). Trustees can potentially take advantage of the expected volatility in markets to reach their investment objectives. Setting clear targets in advance and monitoring market movements will allow schemes to trigger investment switches whenever market conditions are favourable, locking in improvements as they happen without needing extensive discussions that lead to missed chances. Read more »
Spence & Partners latest blog for Pension Funds Online:
The Pensions Regulator’s annual funding statement for 2016 includes the following comments about the latest mortality projections available:
“The 2015 version of the Continuous Mortality Investigation model (CMI2015) produces life expectancies that are lower than the 2014 version. We would consider it reasonable for trustees who use data from the CMI, to update to CMI2015 if they wish. However they should consider with their advisers what the effects would be if this reduction is reversed in the coming years. The CMI model is driven by assumptions, one of which is the single long-term improvement rate, and we would consider it unlikely to be appropriate to make any changes to this assumption until it is clearer that recent experience is indicative of being a trend over the longer term.” Read more »
Spence and Partners welcomes the Annual funding statement issued by The Pensions Regulator. Of the three key outcomes, Spence is broadly supportive of the TPR’s position on two, but disagrees with the view on mortality projections.
Hugh Nolan, Director at Spence, commented: “The Regulator has quite rightly highlighted a concern that many schemes fail to submit their scheme valuation by the statutory deadline, despite having 15 months after the effective date to do so. Modern technology gives trustees the opportunity to get their first results from the Scheme Actuary far faster than is usually the case, as well as modelling alternative assumptions quickly and cheaply. If the actuarial figures are available promptly, trustees and employers can start their negotiations sooner and avoid unnecessary time pressure leading to extra costs and rushed decisions. As we’ve seen in the last few days with BHS, schemes that fail to submit their valuation on time leave themselves open to criticism, irrespective of any mitigating factors.
Nolan went on to say: “The Regulator’s detailed and helpful analysis recognises that schemes are facing even more challenging deficits than expected. Many deficits will be higher now than at the last valuation, even though employers have been pumping money in. Fortunately corporate profits seem to be rising generally so many employers will be able to increase contributions where needed. Sadly though, not all scheme sponsors are enjoying the same increase in their profit level and it is the trustees of those schemes that will particularly need the right advice to get the right outcome.
“The one area where our view differs from the Regulator is the use of the latest mortality projections. The Regulator’s statement seems somewhat reluctant in acknowledging that it is reasonable for trustees to update to CMI2015. Obviously the key requirement for trustees is to fund prudently and we can understand the Regulator being slightly nervous about this reduction in liability values. However, reckless conservatism can be dangerous. It seems only fair that we should take account of the latest information available when it suggests we might be over-reserving, since we would certainly do so if the evidence pointed the other way.”
Spence & Partners, the UK actuaries and consultants, today urged trustees to take more
proactive steps in order to avoid the kind of market volatility that caused BHS and TATA to struggle*.
Simon Cohen, Head of Investment Consulting at Spence, commented: “Volatile markets present both opportunities and threats for pension schemes. In order for them to present an opportunity, schemes must monitor their funding level more actively in order to be able to take prompt action to lock-in investment gains and reduce future volatility. Schemes should assess their risks and take control of a strategy to achieve the ultimate goal of paying all benefits to members in full without bankrupting the employer in the process.” Read more »