Spence & Partners latest blog for Pension Funds Online:
The Pensions Regulator’s annual funding statement for 2016 includes the following comments about the latest mortality projections available:
“The 2015 version of the Continuous Mortality Investigation model (CMI2015) produces life expectancies that are lower than the 2014 version. We would consider it reasonable for trustees who use data from the CMI, to update to CMI2015 if they wish. However they should consider with their advisers what the effects would be if this reduction is reversed in the coming years. The CMI model is driven by assumptions, one of which is the single long-term improvement rate, and we would consider it unlikely to be appropriate to make any changes to this assumption until it is clearer that recent experience is indicative of being a trend over the longer term.” 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 »
The Pensions Regulator (TPR) has now issued their 2016 annual funding statement (“the Statement”) primarily aimed at Defined Benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2015 to 21 September 2016. The statement emphasises some key principles from their Code of Practice 3 for funding DB pension schemes, namely the expectation that trustees take an integrated approach to risk management and the importance of collaborative working between trustees, employers and advisers.
The Statement sets out TPR’s expected position of DB pension schemes with valuation dates in the period 22 September 2015 to 21 September 2016. TPR expects these schemes will have experienced most major asset classes having performed well over the period since their last triennial actuarial valuation. However, returns for some asset classes have been relatively flat or negative in the last 12 months.
TPR’s modelling suggests scheme liabilities are likely to have grown at a faster rate than their assets since their last valuation; this is as a result of the volatility in market yields and expectations for interest rates and inflation. This is expected to lead to funding strategies based on lower expected investment returns from most asset classes than in their last valuation. Trustees are advised to consider with their advisers their longer term view of risk and returns and how this is inter-related to their funding plans.
As a result, TPR expects most schemes will have a larger than expected deficit at their valuation date. Depending on the scheme valuation date and their hedging strategy – scheme deficits are estimated to be in the region of 20-35% higher than they previously were. TPR expects that this will lead to changes to existing recovery plans for which trustees and employers will need to assess the associated risks and ensure it is consistent with their risk tolerance and their other risk management plans. TPR’s analysis of sponsoring employers suggests that if a scheme chooses to maintain their existing recovery period end date following their valuation then the median increase in deficit repair contributions (DRCs) is expected to be in the region of 75-100%. This may or may not be affordable to sponsors and will depend on a number of factors such as the sponsor’s future plans for sustainable growth and strength of the sponsor covenant. TPR expects trustees to seek higher contributions where there is sufficient employer affordability .
Worryingly, around 45-50% of schemes are expected to need to increase DRCs by more than 100% in order to keep the same recovery plan end date. Where the current recovery plan period can not be maintained other adjustments will be required in order to put an appropriate recovery plan in place; for example by extending the recovery plan length. The trustees and employers would need to consider the potential impact of taking on this additional risk.
TPR also outlines recent developments affecting valuation assumptions. This includes;
- reduced longevity under the 2015 version of the Continuous Mortality Investigation model (CMI2015). Being based on the most up to date analysis, this may be proposed by the scheme actuary. Perhaps surprisingly, TPR is advising some caution and suggesting trustees liaise with their advisers to understand the effects if this reduction to life expectancies is reversed in future.
- emphasis on valuation assumptions being evidence based. TPR believes that there is very little evidence which would support trustees adjusting their assumptions regarding transfer take ups in light of ‘pension freedoms’ but it may be appropriate in some cases to take some account of this.
- appropriately setting contribution rates for future accrual in light of reduced expectations for future returns.
TPR’s proportionate approach to risk management is evident throughout the Statement. Trustees are encouraged to understand their scheme’s exposure to risk across covenant, funding and investment and put in place an integrated strategy to manage these risks. Additional practical guidance from TPR on setting an investment strategy is promised later this year and will be welcomed by trustees.
Spence and Partners welcomes the Annual funding statement issued by The Pensions Regulator. Of the three key outcomes, Spence is broadly supportive of the TPR’s position on two, but disagrees with the view on mortality projections.
Hugh Nolan, Director at Spence, commented: “The Regulator has quite rightly highlighted a concern that many schemes fail to submit their scheme valuation by the statutory deadline, despite having 15 months after the effective date to do so. Modern technology gives trustees the opportunity to get their first results from the Scheme Actuary far faster than is usually the case, as well as modelling alternative assumptions quickly and cheaply. If the actuarial figures are available promptly, trustees and employers can start their negotiations sooner and avoid unnecessary time pressure leading to extra costs and rushed decisions. As we’ve seen in the last few days with BHS, schemes that fail to submit their valuation on time leave themselves open to criticism, irrespective of any mitigating factors.
Nolan went on to say: “The Regulator’s detailed and helpful analysis recognises that schemes are facing even more challenging deficits than expected. Many deficits will be higher now than at the last valuation, even though employers have been pumping money in. Fortunately corporate profits seem to be rising generally so many employers will be able to increase contributions where needed. Sadly though, not all scheme sponsors are enjoying the same increase in their profit level and it is the trustees of those schemes that will particularly need the right advice to get the right outcome.
“The one area where our view differs from the Regulator is the use of the latest mortality projections. The Regulator’s statement seems somewhat reluctant in acknowledging that it is reasonable for trustees to update to CMI2015. Obviously the key requirement for trustees is to fund prudently and we can understand the Regulator being slightly nervous about this reduction in liability values. However, reckless conservatism can be dangerous. It seems only fair that we should take account of the latest information available when it suggests we might be over-reserving, since we would certainly do so if the evidence pointed the other way.”
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 »
Spence & Partners, the UK actuaries and consultants, today announced their appointment by Simons Group Limited Pensions & Life Assurance Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’. Services to the 450 member, £25 million Scheme will include actuarial, investment and pension scheme administration.
Alan Collins, Head of Trustee Advisory Services at Spence commented: “The Pensions Regulator’s Integrated Risk Management (IRM) guidance encourages trustees to make joined-up decisions around funding, investment and governance. Most schemes face three key issues when trying to do this – systems, data and monitoring. 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. Read more »
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 »