Archive for December 2017

Alan Collins

My initial thought was to sum up the last year by describing it as being one where there was quite a lot of talk but very little action.  A sort of “Have I Not Got News For You” if you like.

Having reviewed matters further, I reminded myself of a number of issues that caught the headlines for justifiable reasons. There is also promise of some big stories as we look into 2018 and beyond.

Firstly, the quiet, quiet bit.

The political landscape was always going to be dominated by Brexit and so it came to pass. Things were “spiced up” when Theresa May called a snap election which took place on 8 June – her powers of predicting the future certainly made actuaries feel better about themselves. At least we can be fairly certain 2018 will be an election-free zone (if not, I imagine Brenda from Bristol will have something to say about it).

All the Brexit-ing gave rise to a pretty much pension-free political agenda.

The recommendations from the Work and Pension Committee’s BHS pensions review were converted into a damp squib of a Green Paper. Even the low-hanging fruit of allowing schemes to more easily adopt Consumer Price Inflation was not progressed.  I can imagine the Paper has since been gathering dust on a far-away shelve in the deepest recesses of the never going to happen cupboard.

The much-heralded cold-calling ban has been put into cold storage. First announced in September 2016, it had been expected that firms would be prohibited from making unsolicited sales calls on pension matters in an attempt to combat the prevalence of scams.   However, the packed parliamentary agenda prompted the government to announce that legislation will be delayed until 2020.

There was hardly a mention of pensions in Chancellor Hammond’s November budget. This was generally welcomed by an industry that has grown tired of tedious tinkering.

At the more technical end of the spectrum, the long-running saga of VAT on pension scheme fees finally drew to a close. The end result was….just leave it the same as you have all been doing, but with some possible extended areas for reclaiming VAT on investment services.  The problem was that, despite the industry being on tenderhooks for three years and with only eight weeks to go until the deadline for implementation, the HMRC forgot to tell anyone of the decision.

The Work and Pensions Committee strode forward again recently to announce an inquiry into Collective Defined Contribution schemes. After the early death of “Defined Ambition”, the industry is fairly split on this – many, like myself are in the “never going to happen” brigade while others sit in the “give innovation a chance” camp.

Now for the bang…

The standout legal judgment for 2017 was Walker vs Innospec, where the previous limitation of spouse’s benefits for same-sex partners to periods of service on or after 5 December 2005 was ruled to be illegal. The law is now clear and schemes are taking action where necessary to redress matters.

My inbox has been flooded this year raising questions about my “GDPR Readiness”. For the few of you who haven’t heard, GDPR stands for General Data Protection Regulations, which come into force on 25 May 2018 and is ramping up the level of scrutiny on the processing and treatment of personal data.  The implementation of GDPR is very much more stick than carrot, with fines for non-compliance and breaches being much higher than the current laws provide.  So, I have been getting ever more conversant in the language of legitimate interest, privacy notices, data mapping and subject access requests.  Much work has been done in this area and there will be plenty more of it in the coming months.

Despite the concerted and collaborative efforts of the industry’s “big three” (Willis Towers Watson, Aon and Mercer), the Competition and Markets Authority launched an investigation into the market relating to investment consulting advice for pension schemes. The probe, which will determine “if there are any market features which prevent, restrict or distort competition”, is expected to report back in 2019.

The year is ending with a flurry of consolidation in the advisory market. Firstly, Broadstone purchased Mitchell Consulting and their sister company 2020 Trustees Limited.  Then, the recently floated Xafinity deepened and raided their “war-chest” by purchasing the administration, actuarial and investment businesses of Punter Southall.  In the pension equivalent of a “player plus cash” deal, HR Trustees headed off in other direction to merge with PSITL.

So, an interesting end to the year with plenty of room for speculation on might come about in 2018. I can hope for a better balance between talk and action, but I fear the continued domination of Brexit is still likely to lead to more quiet than bang for pensions.

Matthew Leathem

The European Insurance and Occupational Pensions Authority (“EIOPA”) released the results of their Europe wide Occupational Pensions Stress Test last week.

The results show that pension scheme deficits can have a detrimental impact on the economy as a whole when companies’ future growth prospects are restricted by the level of contributions that they need to pay to schemes to plug their deficits. Businesses can fail as a result, bringing unemployment.
In this situation, it is also likely that members will not receive their full benefit entitlement in retirement.

What do the results of the stress test tell us?

The UK was one of three countries that showed a funding deficit on their current funding basis. It was also the worst performing country when measured using EIOPA’s common balance sheet approach, a method that broadly measures the ability of the scheme to sustain itself. The UK also fared the worst under the stressed scenario. This showed a funding level of just 45% for UK schemes.

EIOPA estimates that sponsors would only be able to cover 80%-90% of this deficit, meaning that the remaining 10%-20% of the deficit would fall on the PPF and the reductions in the level of benefits that members receive under the PPF than their scheme.

The report also highlighted the size of deficits relative to scheme sponsors. For 25% of schemes, the estimate of value of contributions required by the sponsor in the balance sheet exceeds 42% of the sponsors’ market value. This rises to 66% when the stresses are applied. For many schemes, the value placed on sponsor support in the balance sheet is greater than the sponsors’ market value as a business.
Such high level of contributions required would likely place a huge strain on scheme sponsors. This could affect their ability to continue to trade and when considered on a national basis could have a detrimental impact on economic growth and employment.

How do we plug this deficit?

There is no magic solution to fixing the UK’s pension funding shortfall. It will likely be a long process that will take into account a number of factors including scheme funding, investment and sponsor covenant within an integrated risk management framework.

The most important of these factors is to ensure that the trustee board has the expertise to be able to monitor and understand the funding position of the scheme.

There are a number of key take-away points for trustees:

  1. Ensure that you monitor your scheme’s funding level closely. These can be used to enhance your understanding of your scheme’s funding volatility.
  2. Trustees should work closely with the sponsors of their schemes to develop funding plans that will ensure the security of members’ benefits and minimise the impact on the sponsors business.
  3. It is important to take care when setting and reviewing your scheme’s investment strategy. Techniques such as stress testing and stochastic modelling can be used to assess how robust the strategy is under adverse market conditions.
  4. Make sure to review governance procedures regularly to ensure that decision making is effective and allows the scheme to react quickly to a volatile and changing market.
  5. Trustees can consider other options to secure members’ benefits such as securing benefits with an insurance company. Alternatively, they can look at options that can provide members more flexibility to take their benefits whilst removing risk from the scheme. This may include giving members the option to transfer their benefits prior to retirement so they can avail of flexible drawdown options.
Brian Spence

Complete the jigsaw to reveal a new Christmas themed Spence logo. The timer will start from the moment you click on the first piece and will stop when you have all the pieces in place.

Good luck, it’s just for fun but if you complete it in under 1 minute you are doing well!

Alan Collins

The 2017 Purple Book, the Pension Protection Fund’s stat-fest on DB pensions, has landed.

The document, can be accessed here.

The main headlines for me are as follows:

  • The transition of schemes from “closed to new members” to “closed to future accrual” is continuing – if the trends continue, more schemes will be closed to accrual than closed to new entrants by 2018 or 2019. The number of fully open schemes is relatively stable (but only accounts for 12% of schemes);
  • The funding levels of schemes (as measured on a S179 basis and a buyout basis) rose over the year to 31 March 2017, in spite of significant market turbulence which occurred around the EU Referendum Vote in June 2016;
  • The average length of recovery periods for valuations submitted to the Regulator dropped slightly, from eight years to seven and a half years;
  • The average insolvency rate of companies who sponsor DB schemes is around 0.3% a year – this has been relatively stable over recent years having dropped from around 0.8% in 2013/14). So, if you are a member of a scheme, your employer is (on average) significantly less likely to become insolvent than was the case four or five years ago;
  • Asset allocations to equity and property are relatively stable. There is a modest switch from cash and “other investments” to “bonds”.
    • I have a hunch some of this may be a re-classification of assets rather than a sign of strategic shift towards bonds.
    • The relative steadiness of allocations indicates little evidence of asset allocation changes during a year which contained some shocks.
    • It will be interesting to see if there is a greater shift towards bonds in 2017/18 as funding levels have improved and as there may have been some profit-taking from equity stocks. I suspect those hoping to have seen “peak bond” will be disappointed.
  • The number of schemes in assessment for PPF entry has continued its steady decline, both in terms of the total number of schemes and as a percentage of the DB universe. 78 schemes were in assessment during 2017/18 (around 1.4% of the total number of schemes); and
  • There is a large concentration of liabilities for schemes in assessment (around 80%) amongst schemes whose liabilities exceed £100m.
Page 1 of 11