Archive for March 2018

David Davison

The Security Obsession

In an earlier bulletin entitled ‘The Cessation Plot thickens’ I highlighted something of an anomaly in LGPS practice around security which I’d like to explore a bit further.

Firstly, I will consider an example of an admitted body looking to close off to accrual to better manage risk. Prior to doing this let’s assume that the organisation has £1m of accrued liabilities and £800,000 of assets covering them so a deficit of £200,000. The organisation is building further liabilities of £50,000 a year. Contributions for these new liabilities are £20,000 a year so each year the net position is worsening by £30,000 (excluding any investment return).

As an active employer the Fund has not taken any security so the Fund and therefore other participating employers are exposed to additional risk as liabilities continue to build.

If the admitted body was permitted to close to future accrual of benefits the accrued benefits are no worse pre and post the change (they will likely be lower afterwards if the link to salary on past benefits is removed), so why should security be required when none was previously in place. In addition a proportion of the contributions which were being used to build additional benefits in the Fund could be used to pay down the existing benefits rather than build up new ones. Let’s assume some of the £20,000 is needed to buy replacement benefits in another scheme so only £15,000 is available as a contribution. This will therefore reduce the deficit over time thereby reducing the risk to the Fund. This can only be good for all concerned and further supportive of the view that no security is needed.

So, why is there an obsession for Funds to get access to security on scheme change? It’s probably because they’re using it as an excuse to do so! A bit of a reality check is needed.

It’s potentially reasonable for Funds to look for security if some additional flexibility is being offered, such as access to a higher risk investment fund where the deficit risk could increase but without this the default position should be that additional security should not be necessary.

So if you’re being pushed for security by a Fund you may need to ask a few more questions, especially as any arrangement of this type is likely to be time consuming and expensive to arrange.

In my view there should be clear and consistent guidelines which Funds employ in relation to the provision of security. Some Funds are adopting a more pragmatic and indeed enlightened approach to the issue of security and it can only be hoped that others will begin to follow suit, especially if admitted bodies ask the right questions.

Brendan McLean

The annual Pensions and Lifetime Savings Association (PLSA) conference in Edinburgh brought together leaders of the pension industry from trustees to investment managers, and addresses the biggest challenges faced by the industry with the aid of key guest speakers and expert knowledge.

This year’s focus was on cost transparency, regulation, and diversity, and below are some of my personal highlights.

Gaining the public’s trust again

The pension industry gaining more public trust was a key theme of the conference, with reference to a focus on cost transparency. Costs are an obviously important issue for investors; however I feel there should be concentration on the best value manager, not the cheapest.

Remembering the financial crisis

Nick Clegg, former Deputy Prime Minster in the years of the financial crisis, was one of the key speakers and discussed the notion that people are already starting to forget the way that imbalances, exposures, and liabilities can brew in a financial system, as during the 2007/8 financial crisis, if left unchecked. I believe he was making reference to senior members of systemically important firms (such as banks) having left their businesses or retired from work, leaving people who did not experience the crisis in their previous positions in charge.

The impact of advances in technology

Advances in technology were also alluded to – firms now have access to blockchain technology to help reduce costs trading (although this isn’t yet widely used), however there is concern with this in that firms will need to share information which will probably cause a greater delay than getting the technology.

Ethical investing

Ethical/impact investing was mentioned often. Ethical investments are not just about ethical investing, but also about reducing the risk in a portfolio – for example, challenges facing tobacco firms due to increased regulation will reduce sales and therefore share price. Ethical investing is more aligned with long-term investing, allocating to things such as renewable energy.

Asset bubble

A panel discussion was held on asset bubbles because of equity markets being at all time highs. It was debated that given the high valuations of equities it would not be unimaginable for the US equity markets to halve in value based on P/E ratios, and counter-argued that other valuation techniques don’t consider them to be overvalued at all. I struggle to see the where the growth in equites will come from given the rise of interest rates in the US.

If you would like to discuss any of the topics or issues raised above you can get in touch with me by phone on 020 3794 0193 or email I’d love to hear from you.

 

David Davison

As the government announces changes to pensions regulations, David Davison explains what these mean for charities.

They say that good things come to those who wait but I suppose that depends on how long you have to wait. I’m certainly delighted after around 10 years of campaigning that it looks like finally the section 75 regulations relating to multi-employer defined benefit pension schemes (MEDBS), which have so negatively impacted on charities over many years, are to be revised.

The problem which many charities in these schemes faced was that the further build up of benefits could not be stopped without triggering an unaffordable cessation debt, therefore charities were trapped in schemes forced to continue to fund for ever rising liabilities as they couldn’t afford to exit. This was wholly inconsistent with the options available in other UK defined benefit pension schemes.

At the end of February, the Department for Work and Pensions (DWP) issued the The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018 with the expectation that these new regulations will be in place from 6 April 2018.

Key proposals

The regulations are a response to consultation carried out In April 2017 and the proposals comment on the findings of the consultation and how the government has chosen to respond.

The key proposal is the introduction of the Deferred Debt Arrangement (DDA). This will allow employers in MEDBS, whose only change is to cease to employ active members in a scheme, to retain an on-going commitment to the scheme rather than a cessation debt automatically being triggered.

It is envisaged that future contributions would be set on an on-going and not cessation basis similar to what would be the position in a standalone scheme or in the event that the scheme as a whole ceased accrual. This should offer charities really significant additional flexibility allowing them to control risk in an affordable way while focusing resource on paying down liabilities already built up rather than building further amounts.

In entering in to a DDA employers would continue to have all the same funding and administration obligations to the scheme as was the case prior to the agreement which will protect member benefits and indeed other employers.

‘The devil will be in the detail’

I don’t for a minute expect this to be the end of the story as we of course need to see how things play out in practice. As is ever the case, the devil will be in the detail, and we need to see how individual schemes react to the new flexibility and whether they seek to embrace it or look to put up barriers to implementing it.

There undoubtedly seems to be widespread consensus that change in this area is long overdue and along with these changes we’ll shortly witness similar changes to Local Government Pension Scheme (LGPS) regulation in Scotland and a review of Tier 3 employers in LGPS in England and Wales which will hopefully result in increased flexibility in these schemes as well.

Undoubtedly however this is a huge step forward and one can only hope the opportunity will be embraced by scheme trustees and employers alike.

If you want to discuss any issue raised in this article please feel free to get in touch. You can email me on david_davison@spenceandpartners.co.uk or give me a call on 0141 331 9942

This article was original publish on Civil Society website. You can read the original article here.

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