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 »
The result of the EU referendum on 23 June 2016 was a surprise for many of us. It was difficult to predict the detrimental impact on gilt yields which occurred in the weeks following the result! With many UK pension schemes invested in gilts, the historically low gilt yields which resulted has led to pension schemes being faced with significantly higher liabilities. Transfer values for deferred members of DB schemes have also increased. A transfer value is a best estimate of the cost of providing the benefits to the member in the scheme and these too are calculated with reference to gilt yields.
Trustees may be concerned if their scheme experiences an increase in transfer value requests post Brexit. Trustees are ultimately responsible for the security of benefits of ALL members- those who wish to transfer and those who remain in the scheme. Read more »
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 »
Last time, I wrote about the latest mortality projections from the Continuous Mortality Investigation (“CMI”) and the effect this could have on pension scheme liabilities and that it may provide some relief for trustees and sponsoring employers. I then began to cover how mortality affects members of Defined Contribution (“DC”) schemes. This blog covers these issues in more detail.
In DC schemes, members pay contributions towards their own personal fund at retirement, referred to as the “accumulation” phase. When the member retires, they use that fund to finance their retirement, in pretty much whatever way they choose (i.e. the “decumulation” phase). The growing trend towards this process has prompted a joint paper by three actuarial bodies (the Australian Actuaries Institute, the Institute and Faculty of Actuaries and the American Academy of Actuaries), on the issue of longevity risk (“the Joint Paper”). Read more »
Over the past few weeks there have been some publications in the field of mortality that make for interesting reading. In this blog, I am going to focus on the Continuous Mortality Investigation (CMI) producing their latest mortality projections – which, quite surprisingly, showed that mortality rates were higher in 2015 than 2014.
In figures, because that’s what we actuaries like, 2015 mortality improvements are estimated to be around 2.3% p.a. lower for 18-102 year olds and around 3.2% p.a. lower for 65-102 year olds.
So, the 2015 figures alone show a slight reversal in the continual improvement in mortality seen over recent years, and highlight the slowdown in the rate of mortality improvements. We have seen this in previous versions of the CMI mortality projection model, with new models producing lower life expectancies than the previous iteration being the norm in recent years. Looking at the four year period from 2011 to 2015, average annual mortality improvements using the CMI model are estimated to be around 0.3% p.a. for the 18-102 age group and 0.1% p.a. for the 65-102 age group. Therefore, average life expectancy is estimated to have increased by around 3-4 months over the whole of the period between 2011 and 2015. In comparison, in the period from 2000 to 2011, life expectancy increased by around 3 months each year. This emphasises the potential slowdown in mortality improvements shown by the CMI model. Read more »
The Pensions Regulator (TPR) have recently issued guidance for defined benefit (DB) schemes on how to assess and monitor the employer covenant (“the guidance”). This guidance aims to provide trustees and employers of DB occupational pension schemes with detailed good practice guidance to assist with their duties in the process of employer covenant assessment. This guidance will be welcomed by DB scheme trustees as to quote my colleague Richard Smith’s June 2015 blog “What drives your Employer Covenant?“, “…assessing the strength of a company and then monitoring the way that changes is no easy task”.
In July 2014 the TPR issued its revised Code of Practice 3: Funding Defined Benefits (“COP”) which identified three key areas of risk DB schemes face and how these risks interrelate;
1. Employer Covenant Risk
2. Investment Risk
3. Funding Risk.
Read more »
Spence & Partners, the UK pension actuaries and administration specialists, today announced their appointment by Northampton-based Wintle Heating and Plumbing Retirement Benefits Scheme for their award-winning, fully-integrated DB scheme management service – ‘The Spence Approach’. Services to the 40-member, £5 million Scheme will include actuarial, consultancy, administration, payroll, treasury and accounting functions.
Alan Collins, Head of Spence’s Trustee Advisory Practice said: “Our appointment by Wintle complements our growing client base in the south of England. During the appointment process we were able to demonstrate to the Trustees and the Company how we will work with them to develop and implement clear long-term strategic objectives and focus our time on solving the challenges relating to defined benefit scheme funding.” Read more »
Spence & Partners, the UK pensions actuaries and administration specialists, today advised that defined benefit (DB) trustees need to gear up to use the power they can now have at the touch of a button.
Alan Collins, Head of Trustee Advisory Services at Spence & Partners, commented: “With Pensions Freedom Day capturing the headlines, it would be easy to think that DB schemes have been left behind. But actually the development of technology in the past year has been such that trustees now have the potential to operate their schemes in a much more effective and efficient way.
“With the right system, trustees can now have daily valuation figures and actuarial analytics based on live administration data, daily asset feeds from investment managers and projected future cashflow information at their finger tips. The days of waiting for actuaries to provide complex reports and calculations are over – it is up to trustees to ensure they have the right processes and structure in place to use up to date information and speed up their decision making.” Read more »
In addition to various sporting celebrities, now unemployed Top Gear presenters and several car manufacturers, I also “follow” a few notable people on Twitter, one of which is the Chancellor of the Exchequer, George Osborne.
On the date of writing this blog, George Osborne tweeted “Our plan for working people gets another boost today with good news for family budgets – Inflation at zero for a second month in a row”. Remembering that this is election time and politicians are doing everything possible to endear themselves to the public (roll out the usual baby photos and visits to schools), the first half of this tweet has been written to do exactly this. I do however have some scepticism about inflationary figures being quoted as it is unlikely that my unique “basket of goods” will stack up with those components which are used to determine CPI. (It would be quite an achievement if it did, as most of the time I don’t know what I am going to put in my shopping trolley until I am walking up and down the various isles of my chosen supermarket!) Read more »
Last month I had the pleasure of attending a session with Charles Stanley Pan Asset, for a seminar entitled “Can pension schemes cut risk and cost without sacrificing investment performance”. The slots were covered by two speakers, John Redwood of Charles Stanley Pan Asset and our very own Alan Collins, Director & Head of Trustee Advisory Services.
What struck me at the sessions was the challenges ahead for Trustees of Defined Benefit (DB) Schemes in relation to funding, investment risk and cost. However, thankfully, I did see a potential light at the end of the tunnel.
What we’re dealing with now
Interest rates have fallen significantly over the past year. For schemes with un-hedged investments, funding levels will have plummeted. Similarly, inflation is low and schemes with fixed increases and un-hedged investments will be hit hardest.
The number of DB schemes in deficit on a S179 basis averaged 1,500 in January 2007 rising to over 4,000 at the peak of the credit crunch in 2009. The current estimate for 2015 is well over 5,000! Surely this trend can’t continue…..can we let it? Read more »