Making Sense of Pensions

Hugh Nolan

The Government recently announced that the State Pension Age will increase to 68 in 2037 – seven years earlier then planned. This may seem odd given current news about longevity improvements slowing down but it actually makes perfect sense.

The first State Pension in the UK was introduced in 1908 and paid the 25% of people who reached age 70 for an average of 9 years. The Basic State Pension came in from 1948 and allowed people to retire at 65, with a life expectancy of 12 years. But, by 2014 this had risen to 21 years (for men) so it’s no wonder that something had to give. Read more »

Gino Rocco

The Supreme Court has provided some welcome clarification on how a person’s rights or interests in a pension arrangement should be treated as matrimonial property in divorce cases.

Facts

The facts of the case are that Mr McDonald, who was the respondent in the case, was a member of the British Coal Staff Superannuation Scheme (the “Scheme”).

Mrs McDonald sought a pension sharing order from the Scottish Courts on her divorce from Mr McDonald, on the basis that his pension forms part of the matrimonial property which is taken into account in the financial settlement. 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 »

Andrew Kerrin

On this summer lunchtime in July, as blue skies backdrop the birds flying by the Spence office windows, and tourists bustle by on the streets below, I’ve found myself looking for inspiration for an introduction for this quarter’s pension update. Yet, I needn’t have looked far. Classic lyrics from The Byrds, that have been stuck in my head for a few days now, might just do the trick. Read more »

Andrew Kerrin

“If Mr Walker was married to a woman, or, indeed, if he married a woman in the future, she would be entitled on his death to the pension provided by the scheme to a surviving spouse.  When the claim was issued, the value of that “spouse’s pension” was about £45,700 per annum.  As things stand at present, Mr Walker’s husband will be entitled to a pension of about £1,000 per annum (the statutory guaranteed minimum).”

This is how the Supreme Court judgement described the situation in which Mr Walker found himself, in relation to his membership of Innospec’s DB scheme.  How did this happen?  Ironically it was the anti discrimination provision in the Equal Treatment Framework Directive, coupled with scheme rules, that allowed this disparity to occur in respect of same sex survivors’ pensions. 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 »

Angela Burns

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? Read more »

Rachel Graham

The Pensions Regulator (TPR) has now issued their 2017 annual funding statement (“the Statement”) for defined benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2016 to 21 September 2017. The statement focuses on the longer-term and emphasises some key principles from the TPR’s Code of Practice 3 for funding DB pension schemes, and their supporting guidance on integrated risk management (“IRM”), investments and employer covenant. These are all areas in which Spence & Partners Ltd (“Spence”) has the necessary expertise to assist trustees meet TPR’s requirements.

Schemes with 2017 valuations will be affected differently by market conditions. Generally, TPR expects that scheme liability values will have increased since their 2014 valuations and despite most major asset classes having performed well, this does not fully compensate the increase in liabilities and most schemes are therefore likely to have larger funding deficits than expected.

Spence’s Head of Investment Simon Cohen has provided investment advice to a number of scheme trustees. We have seen that schemes which have adopted interest rate risk hedging are in a better funding position than those schemes that did not over the last three years. The Statement refers to TPR’s investment guidance published recently which sets out what TPR expects of trustees when setting their investment strategy. Spence can assist trustees set an appropriate strategy for their schemes. This is very important as TPR will intervene and engage with schemes where they believe the scheme’s investment strategy is inappropriate or too risky.

Spence’s unique in-house actuarial and administration software, Mantle, has proven to be a useful tool for trustees when considering the impact of the extent to which changing market conditions impacts the level of risk in their schemes. Mantle has the functionality to illustrate how sensitive a scheme’s funding level is to the valuation assumptions used. This gives trustees and employers a much better understanding of how funding, investment and employer covenant strength interact, and assists trustees in making better scheme funding decisions, taking into consideration the longer-term impact of those decisions. Mantle can also be used as an ongoing risk management tool, trustees have direct access to their scheme on Mantle and can check the scheme’s funding level on a daily basis to determine if the scheme appears on track to meeting its long term funding objective.

TPR outline the ‘appropriate action’ they expect trustees to take with regards to funding; this is dependent on the strength of their scheme’s employer covenant. Spence provide scheme actuary services to a number of private pension schemes and have vast experience supporting trustees and employer in recovery plan discussions. Whether trustees wish to reduce or continue with the current pace of scheme funding, or whether higher contributions are required now, Spence’s actuarial team can provide the analysis and advice trustees and employers need during funding discussions, whilst considering employer covenant strength and the investments the scheme has.

The Statement specifically focuses on the expectations of trustees of stressed schemes. Spence can assist trustees in fully evidencing that they have taken the measures appropriate for their scheme, for example Spence can assist with the following services which TPR mention in their statement;

•    employer covenant analysis
•    scheme closure to accrual
•    scheme wind up services

The Statement can be thought of as a good practice guide for trustees. The continuing uncertainty over future economic conditions highlights the importance of effective risk management and collaborative working between trustees, employers and advisers. Trustees should regularly monitor risks and all schemes should have contingency plans in place in the event a downside risk materialises, in order to prepare to recover their funding level and mitigate against any further downside events.

Simon Cohen

You can see the headlines at the moment – FTSE hits an all-time high, DOW hits all-time highs, and the DAX joins in as well.  Add to that the VIX index (a market indicator of volatility), is at lows.

You wouldn’t be the first to think that global economies are growing strongly and corporate profitability is rising fast… there is nothing to worry about.

However, there are always two sides to every story, and I have my worries (especially being a glass-half-empty kind of person).  Read more »

Alan Collins

Spence & Partners latest blog for Pensions Expert:

Back in the day, actuarial valuation results contained an element of surprise. The actuary would be sent the data, it would be processed, the numbers would be crunched and many months later, the results would appear.

There was often limited fore-knowledge among the recipients, be that trustees or the sponsoring employers, about what the results would show.

An actuarial valuation was a lengthy, time-consuming process, which is one of the main reasons why a valuation was only deemed necessary once every three years, and why the timescale for completion was set at 12 months and later extended to 15 months. Read more »

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