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.
Spence & Partners, the UK actuaries and consultants, today announced their appointment by The LS Starrett Company Limited Retirement Benefits Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’. Services to the 475 member, £25 million Scheme will include actuarial, investment and pension scheme administration.
Alan Collins, Head of Trustee Advisory Services at Spence commented: “In a post-Brexit environment trustees are looking for greater scheme transparency and a more joined-up approach to funding, investment and governance. Our Mantle® system allows schemes to make informed decisions around their funding at any point in time, based upon the live administration and investment data – what we see they see. Trustees are no longer looking in the rearview mirror; instead they can be fully responsive to funding opportunities that will benefit the scheme. Ultimately, we are giving trustees and sponsors of all schemes levels of analysis and advice that is usually reserved for schemes with much larger budgets. We are very pleased to be working with LS Starrett and the Trustees.” Read more »
The UK has made its choice, and has voted to leave the EU. What does that mean today for occupational pension schemes? In the wake of the result on 23 June 2016, significant market volatility ensued. With the yields on UK Government bonds falling, the majority of schemes will have experienced an increase in liabilities. However, the impact on funding will depend on a scheme’s investment strategy.
We therefore posed some of the questions which you may want answered to our own Chief Investment Officer, Simon Cohen. Read more »
Spence & Partners latest blog for Pension Funds Online
I believe that clients should be using and taking more advantage of their investment consultant. I see clients paying for actuarial valuations, reviewing actuarial factors and other matters but generally not making full use of their investment consultant. Clients legally have to do a valuation or other compliance work, but often see investment work as something that is secondary to this. For example, there is not a legal requirement to carry out an investment strategy review like there is for a triennial valuation, it is just considered best practice, so sometimes one isn’t carried out.
I sometimes see cases of trustees who haven’t reviewed their investment strategy in over 10 years and their Statement of Investment Principles in a similar period of time. Read more »
Spence & Partners, the UK actuaries and consultants, today urged schemes to review any strategy that contains allocation to Diversified Growth Funds (DGFs).
Simon Cohen, Head of Investment at Spence & Partners, commented: “DGFs are a pretty common part of an allocation strategy for smaller schemes, as they allow them exposure to lots of different asset classes they wouldn’t ordinarily get access to due to issues of scale. However, schemes should be careful when investing in them – yes, they are less volatile and have somewhat protected schemes against the fall in equity markets at various points in time, but schemes need equity. DGFs aren’t a direct equity replacement and shouldn’t be treated as such – and, of late, their performance has been particularly disappointing too. Read more »
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 »
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 »
Following the recent investigation by Friends of the Earth Scotland which found that the Scottish Parliament pension fund invests £3.2 million of its funds into tobacco, weapons and fossil fuels, I began to think about socially responsible investment and how it can impact pension funds.
I’ve always been quite sceptical about ethical investment for a number of reasons, mainly the question “What is ethical investment?” It’s a very subjective question, and many people will draw a different line about what they consider to be ethical or unethical. Tobacco was one of the sectors mentioned by Friends of the Earth Scotland in their investigation; it’s easy to see how different people can be on either side of the argument. There’s also the issue that restricting investment in these sectors prevents a fund from investing in a number of well established and stable companies – it seems that this would be detrimental to the performance of the fund. However… Read more »
On 25 November 2014 a revised version of The Statement of Recommended Practice (SORP), Financial Reports of Pension Schemes was released. This was due to the Financial Reporting Council (FRC) issuing FRS102, the Financial Reporting Standard applicable in the UK and Ireland.
The revised SORP will apply to accounting periods beginning on or after 1 January 2015.
The most significant changes surround the following areas; Read more »
Spence & Partners, the UK pensions actuaries and administration specialists, today said that The Pensions Regulator’s (TPR) new Code of Practice will mean advisers will have to go further in their efforts to advise trustees, by collaborating to present big picture advice and refining their processes and use of technology to deliver cost effective monitoring solutions.
Marian Elliott, Head of Trustee Advisory Services at Spence, commented: “By putting the covenant at the centre of the scheme’s decision making, the Code is essentially crystalising current best practice and encouraging trustees to adopt an integrated approach to risk management. This decision making and planning structure makes complete sense, as the covenant is the main driver of risk in the pension scheme. Investments can underperform, life expectancy can increase, the funding position can worsen – but the only circumstance in which members don’t get their full benefits is if the company can’t weather this negative experience.
“There will certainly be challenges in some sectors however. For trustees of smaller schemes, where budget and time to spend on governance is constrained, the requirement to obtain detailed covenant advice or to carry out asset liability modeling or stress test their strategies may mean they are spending more in this area. This is a good thing though, as the spend on advice to implement and monitor a sensible, coordinated approach to risk taking is far more valuable than spending too much on number-crunching ‘compliance’ work.
“For trustees of schemes with weaker sponsors, there will be a need to justify any investment risk taken or put in place contingency measures, which may result in more prudent investment strategies and higher deficit figures – leading to increased reliance on sponsor contributions for already weak employers. This will be a really difficult, but important, balance for trustees to strike.”
Elliott continued: “Whilst the Code is relatively lengthy, we would urge trustees to engage with this. It is absolutely the right way to think about risk management and should result in better outcomes for members and a better understanding from trustees and sponsors of the issues they need to overcome in order to get their scheme to a fully funded position. There is also no reason why the Code should present any difficulty for trustees, as with the right advice this integrated approach shouldn’t result in significant additional cost – and will almost certainly help make their decision making and monitoring processes a lot clearer.”