This week, F&C investments published their 2013 Independent Trustee Survey.  Over 100 Independent Trustees gave their views on a number of issues that effect pension schemes in the 21^st century.

One of the key questions posed was “what is the biggest challenge facing lay Trustees”? Just over a third cited insufficient knowledge; a third cited increased regulatory demands while a further third just said they had insufficient time to fulfil their role as a Trustee.

Perhaps as a result of these views there has been an increase in professional Trustees being appointed, a fact that does not probably surprise anyone within the industry. Nearly half of the respondents said that the rise in regulatory demands have led to this increase. Again a fact that is not surprising if you take a moment to reflect on the changes that have been made in the past 5 years and the constant overhauls that have been made to pensions by successive governments. Read more »

Spence & Partners latest blog for Pension Funds Online –

In 2000, the result of an experiment designed to examine consumers’ reaction to choice was published in the Journal of Personality and Social Psychology. The experiment was conducted in a Californian grocery store, where researchers set up a sampling table with a display of jams. On the first weekend, they set out 24 different jams for people to taste; and on the next, they set out just six.

The results were staggering. Whilst more shoppers stopped at the display when there were 24 jams, only 3% of those who stopped went on to buy a pot. When there were six jams on display fewer shoppers stopped, but 30% of those who tried a jam made a purchase. Similar results have been found in other experiments since.

It seems that too much choice can be demotivating and the same effect can be seen in the investment industry. Read more »

When working with charities on their pension provision I’m constantly reminded of the old joke about the man stopping and asking for directions in Ireland and being told “Well sur, if you’re trying to get there I wouldn’t be wanting to start from here!” This feeling of being a bit lost and not quite sure where to turn is an all too consistent theme.

So in terms of developing a suitable strategy for the future what should charity trustees be looking at? Read more »

Dissecting The Pensions Regulator’s latest funding statement, and encouraging trustees to use the tools at their disposal in my latest blog for Pensions Funds Online –

Now that the nonsense of ‘smoothed’ discount rates has rightly been consigned to Actuarial Room 101, trustees and advisers are turning to face the challenges of funding valuations in the current difficult economic environment. Deficits are up (yes, I know markets are up, but liabilities have generally gone up faster) and employers’ cash reserves are probably down.

So what do we do now? Read more »

The hallmark of good pension scheme governance is a pension fund whose affairs are managed robustly, seamlessly and effectively, with appropriate controls, free of abuse and with due regard for the law.

Just as medical check-ups make sense for the human body, occupational pension schemes, both Defined Benefit (DB) and Defined Contribution (DC) also need regular Read more »

GMP, Guaranteed Minimum Pension, the great invention to irritate pension administrators and make our lives more complicated than they have to be. Now you could be forgiven for expecting that following a couple of rounds of “simplification” and the cessation of GMP accrual from 1997 that GMP would be a problem of the past, with the number of non-retired members with a GMP element to their benefits gradually dwindling year by year.

Alas, just as we thought everyone had forgotten about Angela Eagle’s announcement last January, out come the DWP with proposed legislation and methodology for the equalisation of GMP. We could debate as to whether there is a legal requirement under European Law to equalise GMP at all, with some arguments against including GMP merely being a benefit underpin or that it is a quasi state benefit and therefore exempt.

My own opinion would be that there should be no Read more »

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’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…”

 “We are discreet sheep; we wait to see how the drove is going, and then go with the drove.” So wrote Mark Twain.

This quote came back to me as a succession of lawyers responded to my request for advice for trustees on the impact of the ministerial “statement of intent”, as it is referred to by m’learned friends, made on 12 July 2010 this year. The statement  confirmed that the move to use CPI as the measure of price inflation applied to the private as well as the public sector and would take effect from 2011. As we have commented previously this has the potential to have a significant impact on schemes.

“Wait and see” seems to be the slightly ovine consensus view of the legal profession on the CPI/RPI question.

Now “wait and see” can be a completely valid response to certain situations and one can always point to situations where one or other of the protagonists would have benefited, with hindsight, from a “wait and see” approach. No one is going to dispute that Lord Cardigan, and indeed the whole Light Brigade, would have been better served had they waited to see whether or not they fully understood Lord Raglan’s order before commencing their magnificent but doomed assault on the Russian guns.   And clearly, the goalie in the attached video link should have waited to see where the ball eventually ended up before celebrating his tremendous “save”.  (It really is worth sticking with it, past the tacky Panasonic ad!)

But I’m left puzzled by what we are waiting to see as regards CPI/RPI – I fear it may be the Emperor’s new clothes.

Let’s focus on revaluation, the increases which are to apply to a members benefits between the date their pensionable service ends and their normal retirement date. To keep things simple let’s forget about contracting out and GMPs.

The factors used to revalue a members non-GMP benefits are set out in annual Occupational Pension (Revaluation) Orders (“Revaluation Orders”). These Revaluation Orders are made under Schedule 3 to the Pension Schemes Act 1993 (“the Act”). Paragraph 2 (4) of the Act states the following:

“The Secretary of State may estimate the percentage increase mentioned in sub-paragraph (3)(a) in such manner as he thinks fit.”

So it would appear that no primary legislation is necessary in order for the minister to use CPI for Revaluation Orders. In fact the minister would appear pretty much able to use whatever he likes. From what I have read there is no intention to apply CPI retrospectively, a concern expressed by some commentators.

The Revaluation Orders are published in mid-December each year and are applied for the following calendar year, So trustees, are required to use the factors derived from the Revaluation Order published in mid-December 2010 for deferred members retiring from 1 January 2011 onward.

Essentially all the annual December Revaluation Order does is apply an increase to the previously used factors. If the minister is true to his word, and I can think of no reason why he wouldn’t be, in December 2010 he will uprate the factors to be used for 2011 by CPI rather than RPI. I suppose there is a chance that he will not actually use CPI in December, but I think this is extremely unlikely, given that CPI will be used in the public sector and the unions, whilst not exactly welcoming the change, have used it to argue that public sector pensions are made more affordable.

So the question that trustees need answered is:

If the minister uses CPI to derive the uprated factors published in the December 2010 Revaluation Order, can I use these to revalue deferred pensions in my scheme?

Trustees do not need to wait until the Revaluation Order is published to see what the answer to this question is. Clearly the question posed above has only 2 possible answers “yes” or “no”. If the answer is “yes” then I believe the trustees can carry on as present and rely on the statutory orders – there has been no amendment to the scheme rules, or members benefits, nor is there any need for one.

If the answer is “no”, as it will be in some cases, such as those schemes which have hard coded RPI into the rules, then leaving this question until the Revaluation Order is published in December will leave very little time to decide what the trustees need to do if they can’t simply use the statutory order. Especially when you factor in Christmas and New Year holidays. They are going to have to know how they will administer their schemes from 1^st January 2011.  Trustees will either have to specify a scheme specific set of revaluation factors or, if possible, amend the scheme. There does seem to be an expectation, though I’m not sure how well founded it is, that the Government will announce some sort of overriding legislation to allow schemes that cannot automatically benefit from the announced change to implement it by means of some simplified approach. But this shouldn’t prevent trustees seeking to understand what their position is at this time.

I wouldn’t usually recommend trustees take advice from a mafia don, at least not unless they had duly appointed him under  Section 47 of the Pensions Act 1995, but I am reminded of John Gotti, the New York crime boss who quoted an old Italian proverb to the effect that “E’ meglio vivere un giorno da leone che cent’anni da pecora”, usually translated as, “It is better to live one day as a lion than a hundred years as a sheep”.

 Trustees, roar a little!  Ask your legal advisers the above question – and tell them you’d rather not “wait and see”.