Making Sense of Pensions

Chris Roberts

From previous blogs, I have made it clear that Auto-Enrolment was in urgent need of a firm hand.  With the abject failure to strongly police Stakeholder, I have watched the regulatory position with interest.

The recent high profile case of Swindon Town FC (the Robins) has brought this sharply into focus.  Whilst not every case merits (or gets) this level of attention, there have been 6,746 separate cases of regulator intervention in auto-enrolment cases to 31st December 2015.  These range from over 1,000 fixed penalty notices being served (at £400 each), to 21 inspections of premises taking place (the tanks very much on the lawn).  With 100,000 employers enrolling each month, these numbers are going to increase significantly as we work through the micro-employer enrolment process. Read more »

Angela Burns

For many Trustees and employers, reaching the point where you can secure your pension liabilities with an insurer seems like an impossible task.

The Pensions Regulator publishes ‘Scheme Funding Statistics’ each year based on various ‘tranches’ of pension schemes. As at May 2015, the average buy-out funding level was 58% for schemes with a valuation date between September 2012 and September 2013.

For the majority of schemes , the path to buyout is not an easy one but it is important to understand that there are measures you can take to move towards this goal.

I have set out below our ‘five steps to buy-out’ Read more »

Neil Buchanan

Our latest report details market movements over the 3 month period to 31 March 2016, and how this impacts the key financial assumptions required for determining pension liabilities under FRS102 or IAS19.

Major asset classes have performed reasonably well during Q1 of 2016. While equities had a shaky start to the year, they have bounced back to levels similar to those at the end of 2015. Corporate bonds and gilts have also experienced positive returns over the period. However, it is not all good news as it is likely that any investment gains will be more than offset by increases in schemes’ liabilities (as a result of lower bond yields), resulting in lower funding levels. To help draw attention to the practical implications, the effect of these market conditions have been illustrated on a typical pension scheme.

Finally, we also review recent developments in the arena of pensions accounting, highlighting issues that may be of interest.

Click here to download your Pensions Accounting Update now.

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?

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.


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.

Neil Copeland

I wouldn’t try to claim supernatural power’s of prophecy, but my review of the year way back in December 2014 did ponder whether the changes announced to pensions and ISAs in the budget that year were a harbinger of the demise of personal pensions.  LISA may just have delivered them a fatal blow and confirmed my crystal ball was in particularly good working order when I wrote that blog.

Personal pensions may not have been killed outright by LISA, but in the eyes of the under 40’s they must be staggering blood stained towards their final resting place, coughing up tar-black bile and generally just looking very unattractive. Read more »

Matthew Leathem

Nothing ever slows down in the world of pensions, from the launch of FRS102 to the end of contracting out, there’s a lot going on.

So, to help keep you in the loop we’ve been monitoring industry changes and trends from the last quarter and condensed the information into a snappy report for you to download. This update briefly summarises everything you need to know, and clearly sets out the actions you need to take. Saving you hours of scouring through multiple reports, press releases, blogs and articles.

Some key updates to keep an eye out for are:

  • A summary of the Chancellor’s Autumn Statement
  • How the upcoming changes to LTA and AA will affect you
  • An update on the effect of Pension freedoms so far and the introduction of a Secondary Annuity Market in the future
  • Changes to the PPF levy determination for 2016/2017

Download your Pension Quarterly Update here.

Gillian Lister

The Pensions Regulator (tPR) shows concern over smaller employees leaving auto-enrolment too late.

It is now over 3 years since the auto-enrolment requirements were first introduced and the first employers staged. These large employers are approaching their first automatic re- enrolment date in 2016. Certainly, most signs so far have been positive. The National Audit Office’s October 2015 report examining the implementation of the auto-enrolment reforms highlighted among other points that the degree of employer compliance has been higher than expected, with 99% of employers submitting a declaration of compliance to the tPR. Read more »

Helen Toner

The Pension Protection Fund (“PPF”) published the final rules for the 2016/17 PPF Levy on 17 December 2015. As expected, the rules for 2016/17 are substantially the same as 2015/16 reflecting the PPF’s desire to maintain stability of methodology.

Following feedback, the PPF have made some slight technical changes relating to the 2016/17 levy: Read more »