Posts by Richard

Richard Smith

Richard Smith

Experienced pensions actuary and expert in accounting for pension costs, liability management exercises, dealing with the pensions issues arising from M&A activity and scheme funding.
Richard Smith

At the risk of showing both my age and my teenage self’s film preferences, I have to confess I enjoyed a bit of Bill & Ted and their musical adventures through time. One of the scenes I recall from the second film was an evil Easter Bunny, pursuing our terrified heroes through the underworld. It was incongruous how a loveable character could be portrayed in such a scary manner. But what’s that got to do with pensions accounting?

Back in November I wrote a blog about my expectations for accounting disclosures for companies reporting at the calendar year-end. Many recent events have proved the foolishness of attempting to predict the future, but (unfortunately perhaps in this case) taking an educated guess at the broad size of upcoming accounting deficits was fairly straightforward back then. Sadly, it made uncomfortable reading, and I predicted that pensions deficits would be an unpleasant surprise in the FD’s Christmas stocking.

Read more »

Richard Smith

There have been a plethora of news articles in recent weeks commenting on the sharp increase in the levels of transfer values available from defined benefit pension schemes. Whilst these values have dropped back from their peak, they still remain substantially higher than they had ever been previously to this. The sometimes eye-watering sums on offer are now tempting even the most prudent to consider cashing out their benefits. However, some commentators are warning members against losing the longevity protection provided by a DB scheme and taking on all the investment risk themselves. What are members to do?

Subject to a few exceptions, anyone who is a member of a funded defined benefit pension scheme and has not yet started to draw their benefits, has the right to “transfer out” their pension and pay the cash value into another pension scheme. Doing this gives members much more flexibility in how they take their pension – increasing the cash available (even potentially taking it all as one large cash sum), re-shaping the benefits to release more value in the early years of retirement, and could also lead to significant increases in survivor benefits if the member were to die early. Read more »

Richard Smith

If nothing else, 2016 has shown us that predicting the outcome of future events is a mug’s game. If we can learn one thing from the likes of Brexit, Donald Trump, and Leicester City, it is to expect the unexpected. As such, it was with some trepidation I accepted the challenge to pen a short blog on what I expect to see from the Chancellor’s Autumn Statement next week.

Due to the proximity of the “Autumn” Statement to the festive season, I’m going to take some artistic licence and predict a visit from Aladdin’s Genie of the Lamp, who will offer me three wishes for what I would like to see in Mr Hammond’s first Statement. Bear with me, it doesn’t sound as unlikely as certain other events that have happened! What would I wish for….??

1. No tinkering with the pensions tax system. As attractive as it might be as a target for raising some much-needed revenue for the Exchequer, now is not the time for tinkering. Pensions are already far too complicated, and any changes will just add unwelcome complexity to a tax system that is already creaking and few people understand. As a nation, we need to be encouraging saving and shifting the goalposts just doesn’t help.

2. Do something to help (those members of pension schemes run by) distressed employers. There is a growing clamour in the industry about the impending problem of distressed employers – those 1000 companies who are sitting on schemes they have no realistic chance of funding. Do we just sit and wait for these companies to fail and their pension schemes to fall into the PPF, with benefit cuts for members and job losses for employees, or can something be done to help both the members and the sponsors? This is a very difficult problem to resolve, and not one for which there is a magic bullet, but a number of ideas have been floated over recent months. The Government is there to make difficult decisions – there is a danger that if something isn’t done soon they may run out of time on this one.

3. Improve the investment opportunities on offer. Providing more investment in income-generating infrastructure projects, as well as providing a government guarantee for the early years of such investments (which are traditionally the riskiest period). Allow mayors to issue “city bonds” so that pension schemes can invest in local projects. Issue more long dated index linked bonds – there is huge demand and at current yields what’s not to like for the Government?

So there you have it. I’m sure that come Wednesday Mr Hammond will have some very different policies to the above. It might be too late to put the genie back in the bottle for defined benefit pension schemes, but there’s plenty that can be done to improve the UK’s long term savings arena.

Richard Smith

With 31 December being the most common date for corporates to have their year-end, Finance Directors will soon be turning their minds to their annual accounts. After a number of years of falling yields and growing deficits, they might be hoping for a Christmas present of an easing of the pensions problem, particularly if they have read recent headlines around improving pension scheme funding levels

Whilst there is still some time before the year-end, and (as the US election has recently reminded us) anything can happen, we will aim to give sponsoring employers advance warning (unfortunately this wording is chosen deliberately) of what they can expect come the year-end. Read more »

Richard Smith

Nearly 2 years ago I bought a new mobile phone.  At the time, I was very pleased with the deal that I had signed up to – reasonably priced, a sensible allowance for calls, texts and data, and all the features and apps that I wanted, and it looked good too! However, over time the package has started to lose its lustre, as the mobile phone market has evolved with more flexible contracts, competitive deals, speedier apps, larger data storage and more modern-looking handsets.  In addition, many new apps are not compatible with my phone.  As well as changes in the marketplace, my own priorities and wish list have moved on as well. What was right for me then isn’t right for me now.

Parallels can be drawn with the defined contribution pension market. Many companies set up DC pension schemes a number of years ago on a “set and forget” basis. Frustrated with the onerous governance responsibilities and volatile costs associated with defined benefit, DC was a breath of fresh air – the sponsor could carry out appropriate due diligence, choose the product that was right for them, then hand over all ongoing management responsibilities to the insurance company or trustees. All they then had to do was write a cheque each month to pay for the contributions.  Often, an IFA was in place to give ongoing support in exchange for commission and access to the membership (i.e. for no material employer fee). Read more »

Richard Smith

Spence & Partners latest blog for Pension Funds Online

Following the Chancellor’s recent announcement on the creation of the new Lifetime ISA the industry found itself asking whether the UK is just one generation away from the death of pensions.

The introduction of the Lifetime ISA (LISA) provides an attractive new savings opportunity but only for the under 40s – yes, the Government is allowed to be age discriminatory even if businesses aren’t.

However, at what cost?

Will the younger generation, faced with a choice between a flexible ISA-style product with a government-funded bonus and locking their savings away in a vehicle they don’t understand, leave pension saving to “more mature” workers?

The under 40s now have a complex decision to make when deciding where to save their hard earned money. They will have to balance a number of competing factors, and there is a clear need for guidance to help them navigate through the maze.

LISAs will provide savers with substantial flexibility, and for basic rate taxpayers the tax benefits are likely to be better than a pension (a bonus equivalent to basic rate tax relief on the way in, and tax-free on the way out).

It is true that the LISA annual allowance is just one tenth of that in a pension, but that is likely to be an issue only for a few.

For higher rate taxpayers LISA’s tax benefits are less generous than pensions, but the additional flexibility on offer might still attract contributions away from pensions and into LISAs.

Countering this is the issue of employer contributions.

How much “free cash” would an employee sacrifice by choosing a personal LISA over an employer-funded pension, and is this worth the additional flexibility?

For some people, the attraction of not locking their money away will outweigh the financial benefits of doing so, for many this will be the primary driver in making their decision to choose LISAs over pensions.

Younger workers now have a choice to make between pensions, LISAs, ISAs, help-to-buy ISAs and normal savings.

Each of these have different rules, but only one has the benefit of employer contributions.

It seems odd that, just as the Government is pushing through auto-enrolment legislation, it introduces a new product that will discourage millions of people from saving into a pension.

The issues are complex. From a purely financial perspective, for some the “right answer” will be LISAs, whereas others will be better off investing in pensions.

Some people will carefully consider all the issues and reach a conclusion one way or the other, however, many people will end up making the wrong decision if all the facts and clear, easily-accessible guidance is not made available.

The need for effective guidance and advice has never been so strong – the question now is whether we are all up for the challenge?

Richard Smith

Spence & Partners asks whether the UK is just one generation away from the death of pensions, thanks to the Chancellor’s announcement on the creation of the new Lifetime ISA.

Richard Smith, Head of Corporate Advisory Services, Spence said: “On the face of it, in yesterday’s Budget the Chancellor made very few changes to pensions taxation. Setting aside for now the increased bill for employers in public sector pension schemes, there was little “new news” to affect existing pension schemes.

“The introduction of the Lifetime ISA provides an attractive new savings opportunity but only for the under 40s – yes the Government is allowed to be age discriminatory even if businesses aren’t. However, at what cost? Will the younger generation, faced with a choice between a flexible ISA-style product with a government-funded bonus and locking their savings away in a vehicle they don’t understand, leave pension saving to the “more mature” workers? Are we now just one generation away from the death of pensions?

“Yesterday’s announcement has introduced yet more complexity to the savings decisions facing younger workers. They now have a choice to make between pensions, LISAs, ISAs, help-to-buy ISAs and normal savings. Each of these have different rules, but only one has the benefit of employer contributions. It seems odd that, just as the Government is pushing through auto-enrolment legislation, it introduces a new product that will discourage millions of people from saving into a pension.

“The need for effective guidance and advice has never been so strong – the question now is whether we are all up for the challenge?”

Richard Smith

Spence & Partners today said that no matter whether the UK votes to stay in or leave the EU in the upcoming EU Referendum, there will be many implications for pensions.

Richard Smith, Head of Employer Services said: “The EU Referendum represents a once in a generation chance for the UK to shape its relationship with the EU and also the direction of future legislation with wide ranging impacts on all of our lives. Pensions are not immune from this – the upcoming EU referendum could significantly affect investment markets and pension schemes both in the UK and in Europe.

“The impact will be felt regardless of the outcome – pre-vote uncertainty in itself over the result will inevitably cause a lot of volatility in the markets. In the event of an exit vote, the aftermath would likely continue in the short to medium term as the markets adjust and the country gets to grip with the impact of having to renegotiate freedoms of movement and trade. While we may not see any immediate changes to pensions, it would certainly give more freedom for the UK to make changes in the future.”

Spence predicts that the four key aspects of pensions that will be impacted are:

  • Scheme Funding – With an impending referendum, economists expect gilt yields to become more volatile due to concerns over the stability of the EU economy. In the event of an exit vote, returns on UK equities would lag behind their EU & Global peers. In addition, the value of sterling could fall leading to increased short term inflation. This would be good or bad news for a scheme depending on where it was invested. Uncertainty may also provide opportunities that pension schemes can take advantage of through careful monitoring of their investments and effective governance.
  • Money Purchase Schemes – Members of money purchase schemes may find that the value of their pot is volatile as the EU Referendum approaches. Those approaching retirement will also be exposed to the risk of volatile gilt prices if they wish to purchase an annuity on retirement. However, if gilt yields increase as they are expected to in the event of a Brexit, then such members may subsequently be able to purchase more income with their pension pots. This is an area where it will be key for DC members to take advice. Instability in annuity rates caused by volatile gilt yields may provide a further boost to drawdown products until markets settle down.
  • Sponsor Covenant – Trustees of Schemes whose sponsors are heavily exposed to the EU either through exports, or through subsidies will need to take a lot of care around the time of the referendum and also following an exit vote. Even the threat of ‘Brexit’ may cause EU businesses to look to find suppliers within the EU to reduce their risk of a UK exit. The effect of this is likely to be offset slightly by the predicted fall in the value of Sterling should the UK leave the EU. If this were to happen, it would make UK exports cheaper for EU countries and with the right agreements in place may help to improve trade. Conversely, net importers from the EU may see a relatively more expensive Euro eat into their profits.
  • Cross Border Schemes – One of the more obvious areas where an exit from the EU would have an impact is on cross border schemes between the UK and the EU. Currently under EU legislation there are very stringent requirements that cross border schemes must be fully funded at all times. A vote to leave the EU could make the UK an attractive place for any multinational with sites in the EU and the UK to base their pension scheme.

Richard Smith added: “In recent years, we have seen constant change in the pensions landscape, and with the upcoming EU referendum the only thing we can be sure of is that these changes are set to continue regardless of whether we vote to leave or remain in the EU.”

Richard Smith

Spence & Partners latest blog for Pension Funds Online

It’s been 7 months since the new pensions freedom flexibilities came into effect, completely re-drawing the landscape of retirement savings. During that period, around £5Bn of cash has been withdrawn from the pensions system, both from cashing in small pots and drawing income out of larger ones. However, with an average “cash-in” value of around £15,000, Lamborghini dealers are still waiting to join the party.

Concerns about profligate retirees blowing their retirement savings have so far not come to pass, with general feedback from the industry that people tend to be quite sensible in the decisions they are taking over their retirement income. This is not particularly surprising – it seems a little unlikely that someone who has saved all their working life would suddenly spend the lot as soon as it become accessible; hard-working savers deserve more credit than that. Read more »

Richard Smith

FRS102 An Employers Guide

FRS 102 – a quick recap

You may think I am a bit late to the party to be releasing a guide for Financial Reporting Standard 102 (FRS102) and its effect on accounting for pension costs, given that the first edition of the new standard was released in March 2013, and subsequently updated in August 2014.

However, as FRS102 only came into play from 1 January 2015 and we are now approaching the end of the transition year in which companies are required to restate the prior year’s disclosure under this new standard, many companies will only now be thinking about this in earnest for the first time, and so I believe there is no better time to consider the similarities and differences with the previous standard, FRS17. Read more »

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