It is now over twelve months since the Pensions Regulator (tPR) published its Guidance on Record Keeping. The guidance emphasises the importance that tPR places on scheme data quality. For many in the industry, this publication merely confirmed what they already knew – that the member records for most schemes were in poor health, but very little was being done to tackle the problem.

With this guidance tPR did more than just mention the elephant in the room, they shouted about it for all to hear and addressed a warning to those who thought that they could continue to ignore that pesky pachyderm. The message was clear: scheme member data needs to be audited and brought up to a prescribed standard before December 2012. Read more »

I recently had a need to review the Regulator’s Guidance on Incentive Exercises which was updated in December 2010. While on the face of it the principles are not too different to the original guidance I thought it worth re-iterating a few of the main points.

An Incentive Exercise (formerly known as an Inducement Exercise) is where an offer is made by an employer to a Defined Benefit scheme’s members to transfer out or amend benefits, usually in return for some form of financial incentive, with the intention of reducing liabilities or risk in the scheme.

These exercises remain a viable starting point for any company tackling the funding levels of a Defined Benefit (DB) scheme and, as long as they are dealt with in accordance with the Regulators guidance and with the input of the Scheme’s Trustees, offer an attractive alternative to many members if pitched at the right level.

The Pensions Regulator tells Trustees Read more »

If we were to compare the developments in UK pensions in 2010 to a football match, it might be described as a classic game of two halves – with the half time whistle being blown a little early in May for the General Election.

Unlike most football games, there was a new coalition referee for the second-half who decided that some of the goals in the first half were under review. If fans were feeling a little cheated at this point, they soon got over it as the second half began with a flurry of events, announcements, consultations, surveys, opinions, discussions, guidance, strikes and so on – I even recall someone saying at a meeting in June that they were unable to offer an opinion on the market because they had been on holiday for a week.

With so much having happened in 2010, and as we begin the countdown to Christmas and the New Year, we thought it might be useful to look back, sort the fact from the fiction and offer a post match summary of what actually happened.

Please let us know if we have missed anything out, what’s affected you most or what is likely to go down as the big story of 2010 in years to come – there’s plenty to choose from.

A new Government
In the first four months of the year, under Gordon Brown’s leadership, the DWP published regulations for Automatic Enrolment and National Employment Savings Trust (NEST) and confirmed that the option to contract out of the additional State Pension into a Defined Contribution pension scheme would be abolished from 6 April 2012.

But did it all matter when, after 6 days of uncomfortable behind-the-scenes negotiations, the Labour Government was replaced by the newly formed Conservative and Lib Deb Coalition on 12th May.

With the new government came a new lineup under David Cameron: George Osborne as the Chancellor of the Exchequer, Iain Duncan Smith as Secretary of State for Work & Pensions and Steve Webb as Minister for Pensions.

Some strong statements and intentions followed soon afterwards. IDS was first up with his vision for improving the quality of life by phasing out the default retirement age, ending compulsory annuitisation at age 75 and, from April 2011, the Basic State Pension was to rise by the minimum of prices, earnings or 2.5%, whichever is higher. He also committed to making automatic enrolment and increased pension saving a reality.

Next it was George Osborne with the first Budget of the Coalition Government on 22nd June, which included a number of announcements on pensions:

• Pensions Indexation. From April 2011, the Consumer Prices Index (CPI) will be used for the indexation of all benefits, tax credits and public service pensions.
• State Pensions and Benefits. From April 2011, the basic State Pension will be uprated by the higher of earnings, prices or 2.5 per cent. CPI will be used as the measure of prices but the basic State Pension will be uprated by the equivalent of RPI in April 2011.
• State Pension Age. The Government will review the date at which the State Pension Age rises to 66.
• Pensions Tax Relief. The Government will restrict pensions tax relief through an approach involving reform of existing allowances, principally of a significantly reduced annual allowance in the range of £30,000 to £45,000.
• Public Service Pensions. An independent commission chaired by John Hutton, formerly Secretary of State for Work and Pensions, will undertake a fundamental structural review of public service pension provision by Budget 2011.
• Default Retirement Age. The Government will consult shortly on how it will quickly phase out the Default Retirement Age from April 2011.

Two days later, reviews were announced into the timing of the State Pension Age rise to 66 and how best to implement auto-enrolment.

We all caught our breath for a few months and then, in October, the Government announced that, from April 2011, the annual allowance for tax privileged pension saving will be £50,000 and from April 2012 the lifetime allowance will be £1.5million.

Soon after, the outcome of the independent review into auto-enrolment was published and, separately, the Government announced that the State Pension age would rise from 65 to 66 between December 2018 and April 2020 for both men and women.

The Pensions Regulator flexes its muscles
Bill Galvin became the new chief executive of tPR from 17 May, replacing Tony Hobman, after five years in charge.

Soon after, guidance was issued on record keeping, monitoring employer support, multi-employer schemes and winding-up. Consultations were launched on transfer incentives and single equality schemes.

From June to September tPR used its powers of enforcement, handing out the first Contribution Notice to the Bonas Group Pension Scheme and a Financial Support Direction to companies connected with the Nortel Group and Lehman Brothers Group.

After four years of operating the Trustee Register, tPR changed the way it assesses the conditions for registration. From 51 firms at the start of the year, it is expected that this number will be considerably less by the year-end.

and the PPF was busy too
January and November saw the PPF unveil not one but two Purple books as a revamp took place and those schemes currently in the assessment period were removed.

June was the month the PPF issued new guidance to actuaries completing section 143 valuations and in October a new formula was proposed for calculating the pension protection levy from 2012/13 onwards.

Finally, as the year approached its end, the first scheme (the Paterson Printing Pension Scheme) successfully transferred through the new Assess & Pay Programme, just under 18 months after the company went insolvent.

How 2010 is shaping up – end of year financials
As we write, the pound is up 4.5% in the year against the Euro and down 3.5% against the dollar, the FTSE 100 sits around the 5750 mark, up 6% on the year, and the benchmark government bond yield has hardly moved compared to a year ago. Wouldn’t it be great if these relatively moderate movements were the result of a number of small predictable steps in one direction throughout the year and we knew what was going to happen next year? If only it was that easy when we agreed our recovery plans.

No doubt many of us will end the year by looking to the future. Will 2011 be the year that EU regulation imposes further funding requirements on defined benefit schemes? How will the rpi/cpi debate play out? Will new rules allow early access to 25% of our pensions savings if we fall ill? How about an ETV mis-selling scandal? Like 2010, a lot could happen. Please let us know what your predictions and concerns might be.

But before you become too paralysed with fear about potential hyper-inflation, the break-up of the European Union, winning the Ashes or never hosting the World Cup, you may wish to consider the words of Mark Twain: “I’ve been through some terrible things in my life, some of which actually happened”.

With Seasonal Best Wishes,
Brian Spence and the team at Spence & Partners

‘Ello, I wish to register a complaint.  Much like Monty Python’s famous Norwegian Blue parrot, private sector defined benefit pension schemes are dead.  They are not resting, stunned or even pining for the fjords – they’re stone dead.

I therefore believe the calls by the UK pensions industry to shield defined benefit pension schemes from the effects of Solvency II are somewhat misplaced.  If the only reason for not adopting Solvency II is to prevent the further closures of such schemes, then these calls do not stand up to scrutiny.  Schemes have been closing rapidly under the existing regime and will continue to do so irrespective of European legislation.

Many employers overburdened by regulation and the dawning realisation of the real cost of pension guarantees have called time on defined benefit provision. The adoption of Solvency II may well further hasten this inevitable demise. For a large number of schemes, accepting this now will be a good thing in the long run.

The closure of schemes leaves two main issues: (1) should defined benefits constitute a cast-iron promise to beneficiaries and (2) how do we best close the funding gaps to ensure all liabilities are met?

The magnitude of UK defined benefit obligations have grown over time, often beyond the sponsors’ control. Layer upon layer of legislation, primarily relating to guaranteed indexation, has left employers to fund obligations which were not present or intended when schemes were first set up.  In effect, this has hindered the private sector from delivering pensions which can be guaranteed.

Beneficiaries certainly believe a promise is a promise and fully expect employers to stand behind their obligations irrespective of the above problems.  This feeling is heightened by the fact that fewer and fewer beneficiaries have an ongoing mutual interest in the prospects of the sponsor. However, by allowing measures which rely so heavily on employers, it is also clear that the UK funding regime has never been set up in a way to match the understanding of the beneficiaries.  It is a structure based on hope rather than expectation.

As integration across member states continues and the workforce in the EU becomes increasingly mobile, I would expect that benefit promises made by companies in all EU states will face harmonised regulation and enforcement. UK residents who end up working in other EU states would fully expect benefit promises to be honoured just as our European counterparts would surely expect the same protection working in the UK.

The expectation of benefit promises being honoured seems to make it inevitable that there will be levelling up of pension legislation across the EU, whether by Solvency II or other means.

The National Association of Pension Funds claims that the UK system already provides a strong level of protection for its members through the employer covenant, The Pensions Regulator (tPR) and the Pension Protection Fund. While the current regime is undoubtedly more robust, any inference that the existence of the PPF is a justification for a lower funding target should be discounted.

In support of this view, the Association of Consulting Actuaries believes that the current directive with its requirement for the prudent funding of technical provisions is providing ‘an appropriate balance between protecting members’ benefits and keeping the cost to employers at an affordable level’.  While balance is appropriate, I believe it would be a mistake to retain a lower funding target because it is all that can be afforded in the short-medium term.  It is much better to aim for the right target, even if it is going to take longer to get there.

As well as possible directives on Solvency II, there are a number of additional factors which support stronger funding targets such as the views of the Accounting Standards Board; the ultimate legal obligation on employers is already set at buyout; and the dominance of solvency levels in pension related discussions during mergers & acquisitions, where FRS and technical provisions are cast aside.

For all but the very largest of schemes, the only realistic end game is to buy out all of the remaining benefits with an insurance company as soon as it is affordable and efficient to do so.  In the meantime, the need for employer flexibility and the reluctance of tPR to accept very long-term recovery plans have lead to the adoption of weaker funding targets which rely on the ethereal employer covenant.  However this is the system we must work within at the moment.

Whichever way we end up reserving for and funding schemes, the UK pensions industry needs to face up to the fact that its biggest task is dealing with legacy deficits and not propagating the virtues of future benefit accrual.  The private sector defined benefit experiment has failed and the best that can be done is to ensure that current obligations to members are met. It is time to admit that the parrot is truly dead.

I’m thinking of founding Administrators Anonymous. A bit like Alcoholics Anonymous but for those trying to wean themselves off final salary pension schemes.

My Doctor did once ask me if I had a problem with alcohol but I explained to her that, on the contrary, I really quite liked it. However, I did come across an article about Alcoholics Anonymous the other day, as you do, which quoted the Serenity Prayer and was immediately struck by the latter’s applicability to pension scheme trustees.

For those of you not familiar with the prayer, they key part is reproduced below.

Grant me the serenity;
To accept the things I cannot change;
The courage, to change the things I can;
And the wisdom, to know the difference.

It seems to me that trustees and employers spend inordinate amounts of time and money on having actuaries and consultants run all sorts of models with all sorts of assumptions, fretting about risks over which they have no control. For example, neither trustees, employers nor their advisers have any real control over future investment returns, future inflation, future legislation, future life expectancy or the future security of sovereign debt. I’m not suggesting for one minute that trustees should blithely ignore these risks – clearly they need to assess and understand them – however, trustees seem to be less engaged with at least one serious risk over which they do have control and which they can change.

Data.

Trustees – serenity, acceptance, courage and wisdom are needed here and needed now! We’ve blogged on the consequences of poor data before, but to recap, without accurate data all the actual valuations and investment strategies you can think of are seriously flawed. Incorrect or missing data impacts on all key areas of scheme management. If your data is poor, that funding plan that you’ve agonised over with the employer isn’t worth the paper it’s written on.

So I’ve come up with a 12 step programme to help trustees cope with their data problems based on the principles that have helped alcoholics, gamblers and sex addicts successfully confront their various demons over the years.

DISCLAIMER No inferences about my personal proclivities should be drawn from the entirely random set of addictions noted in the previous sentence.

12 Step Programmes invariably invoke a higher power for assistance, which in this particular context, is clearly Spence & Partners. Bearing that in mind, the 12 Step Programme for trustees struggling with data demons would look something like this:

1. Admit to yourselves and Spence & Partners that you have a problem
2. Believe that Spence & Partners can restore your data to an acceptable level
3. Make a decision to turn your data over to Spence & Partners
4. Make a searching and fearless inventory of your data and its shortcomings
5. Admit to Spence & Partners, to yourselves, and to your current administrator the exact nature of your data problems.
6. Be entirely ready to have Spence & Partners remove all these defects in your data.
7. Humbly ask Spence & Partners to remove your data shortcomings.
8. Make a list of all members harmed by your incorrect data in the past and be willing to make amends to them all.
9. Make direct amends to such members wherever possible.
10. Continue to review and maintain your data and when you find it is wrong promptly admit it and correct it.
11. Through monitoring and review continue to improve your data, seeking guidance where necessary from Spence & Partners
12. Having realised as the result of these steps that your data was deficient in the past , tell others about the tremendous change worked by Spence & Partners on your data quality, and see what other areas Spence & Partners can help you in

As always with these self help programmes, Step 1 is the most difficult, but you will feel so much better about yourself for having taken it.

There is a serious point to this – there usually is to my ramblings but sometimes it is extremely well hidden. Trustees and administrators (and, whisper it quietly, despite the 12 Step Programme outlined above the latter doesn’t have to be Spence & Partners) need to engage and have an honest discussion about scheme data and how it can be improved. It’s no longer an option to sweep this under the carpet. For a more considered assessment of how trustees can really take control of their data and comply with the Pensions Regulator’s guidance in this area see our previous blogs on the matter or contact my colleague Mark Johnson or I to discuss our Pensions Data Service .

And finally, a couple of hydrogen atoms walk into a bar. The first says, “I think I’ve lost an electron.” The second says, “Are you sure?” The first says, “Yes, I’m positive…”

I read with interest the guidance to individuals with money purchase benefits published on 2 November by the Pensions Regulator (tPR) and echo comments from Pensions Minister Steve Webb that “choices we make at retirement are amongst the most important of our lives” and “shopping around can provide better value for money and significantly boost retirement income”, and those from tPR’s acting Chief Executive Bill Galvin who has stated that “members could miss out on a higher retirement income because they are not well-supported in making good choices”.

The engagement of the Pensions Regulator in the education process within occupational defined contribution schemes is welcome, and emphasis has rightly been given to the potential benefits to members of obtaining independent financial advice. In particular, the guidance should act as a reminder to Trustees of schemes which provide both defined benefits and money purchase benefits that the members with money purchase benefits deserve due care and attention.

However, the guidance appears to be in stark contrast to the regulatory approach and pending legislation governing defined benefit arrangements, particularly those containing contracted-out rights. The “presumption of guilt” surrounding transferring benefits out of a defined benefit arrangement, and the potential end to the ability to transfer contracted out rights from defined benefit to money purchase arrangements in 2012, would seem to be at odds with the ethos of encouraging members to make choices which best suit their own circumstances.

For example, the value contained in some defined benefits (such as a prescribed level of pension increases or spouse’s pensions where the member is single or where the spouse already has a substantial pension), could be used to provide alternative benefits which are more suited to the needs of the individual concerned. Also the value of a money purchase pension pot can be retained on the death of the member, whereas this event may cause the value of a defined benefit to be significantly eroded .

I would therefore ask that members of defined benefit arrangements continue to be afforded the same opportunities to exercise their “Open Market Option” in the future.

Trustees may soon get the chance to experience an aspect of the celebrity lifestyle enjoyed by the likes of  Robert Downey Jr, Paris Hilton and Kiefer Sutherland – by ending up in jail.

The Pensions Act 2004 did an excellent job of absolving pension scheme advisers of responsibility for most aspects of managing and operating a Final Salary pension scheme and placed that responsibility fairly and squarely on the shoulders, or any other exposed part, of the trustees.

Deciding what assumptions should be used to value your technical provisions? Why would you possibly make that the reponsibility of a highly qualified actuary who spends much of his working life focussed on precisely that issue when you can make it the reponsibility of the trustee instead?

Need transfer advice regulated? Why would you possibly make that the responsibility of the Financial Services Authority, when you can make it the responsibility of the trustee instead?

The old joke, which like many jokes was perceived to conceal a kernel of truth, was that as a trustee, you could be incompetent, as long as you were honest.

How times have  changed! The list of legislative breaches for which trustees can be, at worst, fined or, at best, chastised for is lengthy, and, as the FT reports, lengthening.

The latest wizard idea out of Europe is to produce regulations which mean trustees could face unlimited fines or up to two years in prison for accidental breaches of rules aimed at preventing investment in the sponsoring employer. Now in reality the circumstances where this could come about are unlikely. But not impossible.

Thankfully the  Department for Work and Pensions said that it has been made clear that the Pensions Regulator will not pursue trustees for what are clearly inadvertent breaches. So that’s all right then. Though presumably its the Pensions Regulator who gets to decide whether the breach was inadvertent or not.

When you recall that legislation aimed at preventing terrorist atrocities on the streets of the UK has been used to  try to catch people leaving unwanted items outside charity shops, it does not inspire confidence that laws will not be misued.

As we have blogged previously it is difficult to understand why any lay person would put themselves forward to perform what is, increasingly, a thankless task which leaves people open to criticism from members, employers and regulators. Equally it is increasingly difficult to see that the Regulators expectations of trustees can be reasonably met by individuals who are trying to hold down their day job as well. I feel increasingly sorry for the many honest and dilligent trustees that I work with in terms of the breadth of knowledge and understanding they need to maintain to perform a role which they took on from the best of motives.

Clearly “professional trusteeship” is an idea whose time has come. However, as we have noted previously, there is currently no barrier to any Tom, Dick or Harry setting themselves up as a “Professional” trustee and holding themselves out as offering that service. Whilst final salary pension schemes have been regulated almost out of existsence, professional trusteeship is that rare thing in the modern world, a vitally important profession which would benefit from some more regulation of its practitioners.

Many years ago an old auntie used to tell me to be careful who I pointed the finger of blame at, as only one finger would point at them and the other three would point at me. Wise words indeed – and possibly something that the Pension Regulator should pay some heed to when making pronouncements.
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As those of you who know their French medieval history will recall, Arnaud Amalric was the Abbot of Citeaux at the time of the supression of the Cathar heresy in the Languedoc. The French Catholic king of the time, with the blessing of the Pope, had launched the Albigensian Crusade , aimed at exterminating the heretics. Because the Cathars had for many years lived happily amongst their Catholic neighbours, the crusaders were presented with a problem – how can we tell the “good” Catholics from the “bad” Cathars before we exterminate them?

This is where Arnaud comes in. Arnaud was what we would call in morden parlance, a pragmatist. He was with the crusaders beseiging Beziers, presumably to provide spiritual and moral guidance. Beziers had a mixed Cathar/Catholic population. When asked by his military colleagues for some guidance as to how they could distinguish the religious adherence of Beziers’ inhabitants in the forthcoming massacre and therefore avoid killing their “good” co-religionists, Arnaud came up with a splendidly pragmatic  response – “Kill them all, the Lord will recognise His own.”

Now don’t get me wrong, generally I see pragmatism as a virtue, but I’m not entirely convinced that, in this case, the end justified the means.

Equally, I am unconvinced that the effective banning of Contracted out DB to DC transfers hidden in the regulations regarding the abolition of DC Contracting-out is entirely justified.

The Government’s approach here seems akin to that of Arnaud. The proposed ban is clearly about a failure of regulation. There are many legitimate scenarios where transferring from a Contracted-out DB scheme to a DC arrangement of some sort makes sense for individuals, given their particular circumstances. Given this, and the fact the the Government will not have sat down with any individuals to ascertain what is or isn’t in their interests, killing all Contracted-out DB to DC transfers seems as overzealous now as Arnaud’s response all those years ago.

So rather than a medieval approach to the issue of transfers and regulatory concerns about protecting members from themselves, can we  have some proper regulation?

By this I emphatically don’t mean the recent consultation document issued by the Pensions Regulator on incentive exercises. It has always been my view that transfer advice is regulated by the FSA and trustees should not be forced to provide a figleaf for any regulatory failings in this area – see our other blogs on this point.

Having said that I think that the guidance around the trustees’ role in this area seems to have completely missed the point that trustees do indeed have a legitimate existing role in the process which could help resolve some of the concerns voiced. It is already the trustees responsibility to set scheme transfer values. The Regulator in its guidance in this area suggests that these can be a ‘best estimate’ of the value needed to replicate the benefits being given up by the member. So setting the transfer value basis for a Scheme rests squarely with the trustees.

If trustees and the Regulator have concerns about members losing out as a result of transfers, even where these are topped up to the full transfer value provided by the Scheme, or beyond, then clearly part of the problem must be the trustees’ transfer value basis.

In my opinion the biggest and best contribution trustees can make to the whole transfer value debate is to make sure that their transfer value basis genuinely reflects the value of members’ benefits.

Obviously this is yet another area where there is a potential for conflicts of interest – some trustees might be tempted to set weak transfer value bases with a view to facillitating positive communication in employer sponsored transfer exercises. A 20% “enhancement” to a weak scheme transfer value could well be less than 100% of a “fair” transfer value and mislead members into thinking that they are getting something “extra”. This is properly an area for scrutiny by the Pensions Regulator and another argument for the appointment of a professional trustee to any Scheme where potentially contentious issues are to be addressed.

This may raise the bar for transfer value exercises by increasing the amounts of any top ups required from the employer – but surely this is a good thing? Transfer exercises would then – quite rightly – be difficult to do “on the cheap” as disclosure requirements would mean that the full transfer value has to be disclosed to the member and any attempt to “incentivise” members’ to transfer out at a level below this would be very apparent to them.

I have to ask if this would not be a simpler and more joined-up solution than a blanket ban by stealth, which appears to be where we are heading?