Archive for July 2018

Andrew Kerrin

“Time flies like an arrow – but fruit flies like a banana.” Just a personal favourite line (often attributed to Groucho Marx) that popped into my mind when sitting down to introduce Spence & Partners latest Quarterly Update. It seems like only last week that I was searching for words to introduce our first report of 2018!

Having taken aim at the topics that hit the headlines over the last quarter, marking with an arrow those of most interest, we have fired them into a neat summary for your consideration. We hope you enjoy reading this compilation, that it helps you pass the time, and who knows, might help you avoid a banana skin or two.

This quarter we have a wide variety of tasty morsels for you to digest, including a summary of the potentially far-reaching opinion from the Advocate General in Hampshire v PPF, a discussion of the main cyber security issues for trustees coming from the Regulator’s recent practice note, to a bite-sized rundown of the key legislative changes that hit the pensions industry back in April.

Enjoy your latest Quarterly Update – I hope you agree that our selection has hit the bullseye and our efforts have been fruitful!

To download this report click here or on the image above.

As always we love to get feedback from you. If you like what we do please tell us – it’s nice to get great feedback. If you would like things included, excluded or done differently please drop us a line too. The report is to help you, so help us tailor it to your needs.

And … if you find that you do have time to keep up with things, why not follow us on Twitter @SpencePartners and keep up to date as you go along.

Angela Burns

We all face decisions every day – what to have for dinner, whether or not to go to the gym – but how many of these decisions materially affect the quality of our future?  Imagine having to make decisions that do materially affect your future without having sufficient information and understanding?

Studies have shown that around 40% of adults cannot understand basic mathematics.  Yet pension professionals expect to be able to talk about annuities, cash commutation and income drawdown with an understanding audience.

Are we doing enough to support individuals at retirement?

In the defined benefit landscape (yet more jargon) individuals have a number of complex decisions to make at retirement.

  • Do I exchange pension for cash? The rate at which this can be done will determine how valuable (or not) this benefit is (as well as how long you will live) – are individuals mathematically minded enough to understand this?  I expect not.
  • When should I draw retirement benefits and from which arrangement– how do individuals assess value?
  • Would a transfer to a defined contribution arrangement make sense to access new flexibilities in this area? There are lots of points to consider (see my recent article on ‘What Drives People to Transfer?’) and the decision is not a simple one – although the requirement for individuals to take financial advice for transfers above £30,000 provides a helpful structure.
  • Finally, many schemes are now trying to provide more flexibility at retirement (pension increase exchanges, partial transfers etc) but with this comes added complexity, jargon and choice.

Many of these decisions are one-off choices which can’t be re-visited, and decision taken at one point in time may not be the most suitable at another.  How do we help people make the best decisions about their retirement options?

Ultimately individuals will need help to make informed decisions. At the simplest end, this could be via communication provided in an accessible way.  For more straight-forward choices, decision trees or financial guidance may be enough to achieve the right result.

For others the complexity of their pension arrangements or indeed their personal circumstances may require experienced financial advice.  So how do individuals access this advice and avoid falling into the hands of the unscrupulous?  Individuals need to be much more questioning of any offers they receive.  Often a pension is the largest asset an individual may have, individuals therefore have to  be sure who to trust – a professional glossy website does not always mean the appropriate due diligence is being carried out.

At the most basic level individuals can use the www.unbiased.co.uk  website to find financial advisers in their area. Recommendations from friends and colleagues can help as can support from employers and pension scheme trustees.

There is a material risk that bamboozled with options, individuals may just chose the simplest option which may not be the most valuable. There is undoubtedly a place for support through employers and pension schemes providing security and validation. This can give access to quality advisors and a straight through process that makes it easy for individuals to make informed decisions. There is also great potential to better use technology to get key information out there in an accessible way.

Thankfully, the market does seem to be reacting to this need with member engagement packages coming onto the scene.  Depending on providers, individuals can have online access to information when and where they need it and access educational tools such as videos to explain key options.  This can then be linked to access to reputable, experienced financial advisors, overall resulting in a more supported straight through process.

I expect this will be the norm in the years to come and I am hopeful that the result is better informed individuals, and better decisions at retirement.

Mike Crowe

Whilst we have seen a number of cases coming through the Courts that have had a pensions element to them I wanted to concentrate on one that I had looked at before. This is the Court of Appeal decision in British Airways plc v Airways Pension Scheme Trustee Ltd [2018] EWCA Civ 1533 (5 July 2018). Back in 2017, I wrote a blog for our sister company Dalriada Trustees’ website, and I looked at the original decision which the Court decided in favour of the Trustee (https://dalriadatrustees.co.uk/archives/british-airways-v-aps-trustees-ltd-a-flight-of-fancy-for-trustees/). The facts of the case and the learning points for trustees are set out in this blog.

The issues (and the costs) involved always meant that this case was going to be appealed and earlier this month we had the outcome. As is sometimes the case when two heavyweights step into the legal ring there was a split decision with the majority of Judges eventually finding in favour of British Airways and the original decision was reversed. What this meant was that the Court of Appeal found that the decision of the Trustee of the Airways Pension Scheme to exercise its unilateral power of amendment to introduce a new trustee power to provide discretionary pension increases was invalid. In reading the judgement (at 39 pages a lot easier read than the original 164 page decision) a couple of points stood out. In paragraph 102 Lewison LJ noted

“… the function of the trustees is to manage and administer the scheme; not to design it. The general power that is given to them is limited to a power to do all acts which are either incidental or conducive to that management and administration.”

In paragraph 121 Peter Jackson LJ said

“… there is nothing to suggest that the power of amendment was intended to give the trustees the right to remodel the balance of powers between themselves and the employer”

Now it is always difficult to highlight only two points of interest in a complex case (which relies on the facts) but it struck me that these two points in particular indicated the attitude of the Court to the exercise of a unilateral power by trustees and what their parameters should be. Indeed, the balance of power between trustees and employers is very much a fine balance.

Trustees have to be cognisant of their powers and duties and take care in exercising them properly ensuring the “… journey itself is permitted… “ [paragraph 122], especially in the area of discretionary increases. If trustees are unsure then they may need to take legal advice and I am sure their legal advisers will be taking this case into account. If they don’t then I am sure the lawyers for employers will.

It should be noted that the Court of Appeal granted the Trustee permission to appeal to the Supreme Court and I would be very surprised if this did not happen.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 June 2018 pensions accounting disclosures, whether under FRS 102 or IAS 19.

In this guide we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.

Download your report

To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, or by telephone on 0141 331 9984.

Susan McFarlane

Spence & Partners, the UK actuaries and consultants, today announced their appointment by the North of England Zoological Society Superannuation Fund Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’*.  Services to the 260 member, £23 million Scheme will include actuarial, investment and pension scheme administration.

Alan Collins, Head of Trustee Advisory Services at Spence commented: “Scheme funding levels have improved over recent years, so it is crucial for trustees and advisers to work collaboratively to capitalise on the market opportunities that this presents, and to work to improve the security of benefits for members.  I have great confidence that the services we offer will assist all parties in achieving their goals.

This is an exciting and strategic appointment for Spence, as it demonstrates our growing strength in the North West of England and also shows our continued strength in providing services to the not-for-profit sector.

We are very pleased to be working with the Trustees going forward.”

Tom Owen, Trustee for the North of England Zoological Society Superannuation Fund Scheme commented: “We look for the personal touch, we like to build relationships and find people where we think we can work well with them, particularly in a complex area like pensions.  It was important how our members would relate to the company appointed, and on the investment side how the Trustees would work with the company’s investment advisors.  We were clear that Spence & Partners would be a great fit for us on both counts.  One member called me on ‘day one’ with Spence to say that she was very impressed. She used to work directly for me, so I know this was genuine feedback.”

 

David Davison

On Friday 25th May 2018 new LGPS (Scotland) Regulations 2018 were published and came into effect from 1 June 2018. The Regulations are a result of a long and in depth consultation process focused on trying to assist with the difficulties faced by community admitted bodies (‘CAB’s), mostly charities, participating in these schemes. Charities are often trapped in LGPS unable to afford the contributions to stay in or the cessation debt which would be imposed to exit. The current approach offers CAB’s with only a threatening cliff edge and is inflexible, inconsistent and does not reflect the approach adopted across stand-alone or segmented schemes.

The new Regulations do indeed add some flexibility in a couple of key areas:-

  • The addition of the option for the administering authority (‘AA’) and the employer to agree a ‘suspension notice’ which would defer an employers requirement to pay a cessation debt. The employer would still be required to pay on-going contributions to the Fund as set by the AA. There is not really any specific guidance provided how such an agreement can be reached, which is a bit of a double edged sword. It does not therefore restrict the authority in terms of the approach it can take but as a result leaves the way open for a lot of interpretation. It is to be hoped that AA’s apply this flexibility pragmatically to arrive at reasonable outcomes for both parties.
  • The recognition that if an employer is over-funded then on exit they should have the right to the repayment of that surplus in full. The Regulations have therefore added a definition for an ‘exit credit’ which for the small minority of employers in this position will be welcome news and prevent Funds from just pocketing their surplus on exit.

Unfortunately however even with these changes the revised Regulations are a bit of an opportunity lost. In January 2018 the Pension Committee at ICAS provided a response to the Scottish Public Pension Agency (‘SPPA’) suggesting some additional items which would make these changes more workable and balanced. These recommendations included:-

  • a recognition that CAB’s should be able to make deficit contributions to Funds on a ‘closed on-going’ basis until the last member’s beneficiaries have ceased to receive payments.
  • A consistent basis for the calculation of these payments.
  • That CAB’s funding position be fully and consistently adjusted to recognise and reflect inherited liabilities from prior public sector employments. It is wholly unreasonable that CAB’s are expected to pay for benefits built up for staff who previously worked for public bodies.
  • It should be compulsory for all LGPS funds to provide CAB’s with a note of their estimated cessation value annually to allow both to better manage their funding position.

Scottish Government is to be commended for at least leading the way in trying to find a resolution to the difficult issues faced. A review of 3rd Tier employers in England & Wales is currently underway and it is to be hoped that the findings of this exercise will lead to similar changes to those implemented in Scotland but hopefully even taking a step further. It will be hugely interesting to see how these new Regulations are enacted in practice.

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