Posts Tagged ‘Pension Protection Fund’

Lauren Jones

Simon KewSimon Kew has kindly agreed to contribute the following blog for Spence & Partners’ website. Simon is the Director of Pensions at Jackal Advisory and is recognised as one of the country’s leading experts on the regulator and the scheme funding process.


Most economic commentators are now upgrading their growth forecasts on the back of a steady flow of positive news over the last few months with increased activity in the manufacturing, construction and service sectors. Mark Carney, the Governor of the Bank of England has just announced upgrades in growth predictions from 1.4% to 1.6% for 2013 and from 2.5% to 2.8% for 2014. He considers that the recovery has finally taken hold and that the improvement has now to be sustained. Read more »

Greig McGuinness

Damn & Blast

Since its inception the PPF have based the risk based levy on the D&B rating of Scheme sponsors.  This system is not without its shortfalls and critics but, we have learned to live with it.  Consultants have come to terms with the vagaries of how D&B work and sponsors have spent a lot of time and money putting processes in place to mange their D&B rating.

Alas the PPF have announced that they will part company with D&B and from the 2015/16 levy they will instead partner with Experion.  In the meantime D&B scores will continue to be used as they have been in the past while the PPF and Experian work together to develop a bespoke scoring system. Access to the new insolvency risk scores expected early next year.

I expect that the PPFs aim will be to limit the peculiarities that score holding companies with minimum assets and trading histories highly while strong, long standing trading companies are scored lowly due to late payment of the occasional invoice. Only time will tell how much value the strategies currently in place to manage D&B ratings will have under the new system.

Kevin Burge

The Department for Work & Pensions have said that they will review the compensation cap to ensure that long serving workers are not unfairly penalised.

The cap is one of the fundamental elements of the PPF’s compensation structure and any change will affect the long term strategy of the PPF to be self funded by 2030. It will of course be of immediate interest to all levy payers as if any increase was agreed then the levy will increase, all else being equal. Read more »

Kevin Burge

PPF DC Style

One idea coming from the Pensions Minister’s think tank is that a “PPF” style fund is set up to protect DC schemes with the levy falling on the contributions.

It is far too early to read too much into the idea but it is part of the overall concept that without guarantees of some sort the minister is obviously still concerned that the ordinary man or woman on the street will opt out of auto enrolment due to a general mistrust of anything associated with the word pensions. Read more »

Brian Spence

If we were to compare the developments in UK pensions in 2010 to a football match, it might be described as a classic game of two halves – with the half time whistle being blown a little early in May for the General Election.

Unlike most football games, there was a new coalition referee for the second-half who decided that some of the goals in the first half were under review. If fans were feeling a little cheated at this point, they soon got over it as the second half began with a flurry of events, announcements, consultations, surveys, opinions, discussions, guidance, strikes and so on – I even recall someone saying at a meeting in June that they were unable to offer an opinion on the market because they had been on holiday for a week.

With so much having happened in 2010, and as we begin the countdown to Christmas and the New Year, we thought it might be useful to look back, sort the fact from the fiction and offer a post match summary of what actually happened.

Please let us know if we have missed anything out, what’s affected you most or what is likely to go down as the big story of 2010 in years to come – there’s plenty to choose from.

A new Government
In the first four months of the year, under Gordon Brown’s leadership, the DWP published regulations for Automatic Enrolment and National Employment Savings Trust (NEST) and confirmed that the option to contract out of the additional State Pension into a Defined Contribution pension scheme would be abolished from 6 April 2012.

But did it all matter when, after 6 days of uncomfortable behind-the-scenes negotiations, the Labour Government was replaced by the newly formed Conservative and Lib Deb Coalition on 12th May.

With the new government came a new lineup under David Cameron: George Osborne as the Chancellor of the Exchequer, Iain Duncan Smith as Secretary of State for Work & Pensions and Steve Webb as Minister for Pensions.

Some strong statements and intentions followed soon afterwards. IDS was first up with his vision for improving the quality of life by phasing out the default retirement age, ending compulsory annuitisation at age 75 and, from April 2011, the Basic State Pension was to rise by the minimum of prices, earnings or 2.5%, whichever is higher. He also committed to making automatic enrolment and increased pension saving a reality.

Next it was George Osborne with the first Budget of the Coalition Government on 22nd June, which included a number of announcements on pensions:

  • Pensions Indexation. From April 2011, the Consumer Prices Index (CPI) will be used for the indexation of all benefits, tax credits and public service pensions.
  • State Pensions and Benefits. From April 2011, the basic State Pension will be uprated by the higher of earnings, prices or 2.5 per cent. CPI will be used as the measure of prices but the basic State Pension will be uprated by the equivalent of RPI in April 2011.
  • State Pension Age. The Government will review the date at which the State Pension Age rises to 66.
  • Pensions Tax Relief. The Government will restrict pensions tax relief through an approach involving reform of existing allowances, principally of a significantly reduced annual allowance in the range of £30,000 to £45,000.
  • Public Service Pensions. An independent commission chaired by John Hutton, formerly Secretary of State for Work and Pensions, will undertake a fundamental structural review of public service pension provision by Budget 2011.
  • Default Retirement Age. The Government will consult shortly on how it will quickly phase out the Default Retirement Age from April 2011.

Two days later, reviews were announced into the timing of the State Pension Age rise to 66 and how best to implement auto-enrolment.

We all caught our breath for a few months and then, in October, the Government announced that, from April 2011, the annual allowance for tax privileged pension saving will be £50,000 and from April 2012 the lifetime allowance will be £1.5million.

Soon after, the outcome of the independent review into auto-enrolment was published and, separately, the Government announced that the State Pension age would rise from 65 to 66 between December 2018 and April 2020 for both men and women.

The Pensions Regulator flexes its muscles
Bill Galvin became the new chief executive of tPR from 17 May, replacing Tony Hobman, after five years in charge.

Soon after, guidance was issued on record keeping, monitoring employer support, multi-employer schemes and winding-up. Consultations were launched on transfer incentives and single equality schemes.

From June to September tPR used its powers of enforcement, handing out the first Contribution Notice to the Bonas Group Pension Scheme and a Financial Support Direction to companies connected with the Nortel Group and Lehman Brothers Group.

After four years of operating the Trustee Register, tPR changed the way it assesses the conditions for registration. From 51 firms at the start of the year, it is expected that this number will be considerably less by the year-end.

and the PPF was busy too
January and November saw the PPF unveil not one but two Purple books as a revamp took place and those schemes currently in the assessment period were removed.

June was the month the PPF issued new guidance to actuaries completing section 143 valuations and in October a new formula was proposed for calculating the pension protection levy from 2012/13 onwards.

Finally, as the year approached its end, the first scheme (the Paterson Printing Pension Scheme) successfully transferred through the new Assess & Pay Programme, just under 18 months after the company went insolvent.

How 2010 is shaping up – end of year financials
As we write, the pound is up 4.5% in the year against the Euro and down 3.5% against the dollar, the FTSE 100 sits around the 5750 mark, up 6% on the year, and the benchmark government bond yield has hardly moved compared to a year ago. Wouldn’t it be great if these relatively moderate movements were the result of a number of small predictable steps in one direction throughout the year and we knew what was going to happen next year? If only it was that easy when we agreed our recovery plans.

No doubt many of us will end the year by looking to the future. Will 2011 be the year that EU regulation imposes further funding requirements on defined benefit schemes? How will the rpi/cpi debate play out? Will new rules allow early access to 25% of our pensions savings if we fall ill? How about an ETV mis-selling scandal? Like 2010, a lot could happen. Please let us know what your predictions and concerns might be.

But before you become too paralysed with fear about potential hyper-inflation, the break-up of the European Union, winning the Ashes or never hosting the World Cup, you may wish to consider the words of Mark Twain: “I’ve been through some terrible things in my life, some of which actually happened”.

With Seasonal Best Wishes,
Brian Spence and the team at Spence & Partners

Alan Collins

‘Ello, I wish to register a complaint.  Much like Monty Python’s famous Norwegian Blue parrot, private sector defined benefit pension schemes are dead.  They are not resting, stunned or even pining for the fjords – they’re stone dead.

I therefore believe the calls by the UK pensions industry to shield defined benefit pension schemes from the effects of Solvency II are somewhat misplaced.  If the only reason for not adopting Solvency II is to prevent the further closures of such schemes, then these calls do not stand up to scrutiny.  Schemes have been closing rapidly under the existing regime and will continue to do so irrespective of European legislation.

Many employers overburdened by regulation and the dawning realisation of the real cost of pension guarantees have called time on defined benefit provision. The adoption of Solvency II may well further hasten this inevitable demise. For a large number of schemes, accepting this now will be a good thing in the long run.

The closure of schemes leaves two main issues: (1) should defined benefits constitute a cast-iron promise to beneficiaries and (2) how do we best close the funding gaps to ensure all liabilities are met?

The magnitude of UK defined benefit obligations have grown over time, often beyond the sponsors’ control. Layer upon layer of legislation, primarily relating to guaranteed indexation, has left employers to fund obligations which were not present or intended when schemes were first set up.  In effect, this has hindered the private sector from delivering pensions which can be guaranteed.

Beneficiaries certainly believe a promise is a promise and fully expect employers to stand behind their obligations irrespective of the above problems.  This feeling is heightened by the fact that fewer and fewer beneficiaries have an ongoing mutual interest in the prospects of the sponsor. However, by allowing measures which rely so heavily on employers, it is also clear that the UK funding regime has never been set up in a way to match the understanding of the beneficiaries.  It is a structure based on hope rather than expectation.

As integration across member states continues and the workforce in the EU becomes increasingly mobile, I would expect that benefit promises made by companies in all EU states will face harmonised regulation and enforcement. UK residents who end up working in other EU states would fully expect benefit promises to be honoured just as our European counterparts would surely expect the same protection working in the UK.

The expectation of benefit promises being honoured seems to make it inevitable that there will be levelling up of pension legislation across the EU, whether by Solvency II or other means.

The National Association of Pension Funds claims that the UK system already provides a strong level of protection for its members through the employer covenant, The Pensions Regulator (tPR) and the Pension Protection Fund. While the current regime is undoubtedly more robust, any inference that the existence of the PPF is a justification for a lower funding target should be discounted.

In support of this view, the Association of Consulting Actuaries believes that the current directive with its requirement for the prudent funding of technical provisions is providing ‘an appropriate balance between protecting members’ benefits and keeping the cost to employers at an affordable level’.  While balance is appropriate, I believe it would be a mistake to retain a lower funding target because it is all that can be afforded in the short-medium term.  It is much better to aim for the right target, even if it is going to take longer to get there.

As well as possible directives on Solvency II, there are a number of additional factors which support stronger funding targets such as the views of the Accounting Standards Board; the ultimate legal obligation on employers is already set at buyout; and the dominance of solvency levels in pension related discussions during mergers & acquisitions, where FRS and technical provisions are cast aside.

For all but the very largest of schemes, the only realistic end game is to buy out all of the remaining benefits with an insurance company as soon as it is affordable and efficient to do so.  In the meantime, the need for employer flexibility and the reluctance of tPR to accept very long-term recovery plans have lead to the adoption of weaker funding targets which rely on the ethereal employer covenant.  However this is the system we must work within at the moment.

Whichever way we end up reserving for and funding schemes, the UK pensions industry needs to face up to the fact that its biggest task is dealing with legacy deficits and not propagating the virtues of future benefit accrual.  The private sector defined benefit experiment has failed and the best that can be done is to ensure that current obligations to members are met. It is time to admit that the parrot is truly dead.

Greig McGuinness

I was recently reviewing a set of accounts from a partly PPF bound scheme with both final salary and money purchase sections. Just to complicate matters the money purchase section was contracted out on a GMP basis prior to 6th April 1997 (i.e. it has a Defined Benefit underpin); oh and a couple of the money purchase members had their annuities purchased in the Trustees’ name when they retired. This all leads to some fun and games when you try to segregate the membership and assets.

It’s relatively straightforward if you stick with the terminology final salary and money purchase. A final salary member is always a final salary member and a money purchase member is always a money purchase member and therefore money purchase section assets, are always money purchase section assets but, is a defined contribution member always a defined contribution member?

So many people, myself included, at times use the terms final salary & defined benefit and money purchase & defined contribution as though they are interchangeable which is not always the case and can lead to confusion. Final salary pension schemes are the very definition of defined benefits however, although money purchase schemes tend to be defined contribution, this is not always the case. Up until the beginning of this century KPMG and the Pensions Trust had money purchase schemes where a specific contribution level would purchase a specific deferred pension, and there are a multitude of pure money purchase schemes that look like defined contribution but have a capital guarantee where your individual fund value is guaranteed to be no less that your contributions which makes it a defined benefit.

Does this really matter? Am I just being a pedant? The answers are yes and maybe a little.  A pension scheme that looks to be money purchase but has a defined element has all the governance requirements and risks of a final salary scheme; they need actuarial involvement (including triennial valuations), pay PPF risk based levies and have the same company accounts reporting requirements as final salary schemes.

In the particular scheme I was looking at we have the position where members have accrued benefits in the money purchase section on a defined contribution basis but when they retired the annuity was purchased in the Trustees’ name. So although the liability is completely matched by the investment, they are scheme pensioners with a defined benefit i.e. they are a pensioner of the money purchase section but also a defined benefit pensioner.

As for the GMP underpin members, this is where quantum theory comes in; the PPF will only recognise them as defined benefit members (at least for compensation purposes) if their fund values are insufficient to purchase annuities that will cover their GMP. Therefore as with the fabled cat you don’t know what they are until you do the test, until then (depending on your quantum school) they are either both DC and DB, or neither.

Neil Copeland

“There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency”

Well said, that man! That man being David Norgrove, chair of the Pensions Regulator.

So why have we seen two such failures in a week? Both HJ Berry, a Preston based cabinet maker, and the Readers Digest suffered insolvency, ostensibly due to an inability to fund their pension scheme deficits. I haven’t seen any comment on the Regulator’s role, if any, in the HJ Berry case but it appears from press reports that the Regulator vetoed a deal that was acceptable to the employers, trustees and the Pension Protection Fund in the case of the Readers Digest. I can only conclude that neither business was deemed “otherwise viable” by the Regulator but a representative of Moore Stephens, the administrator, sounded confident on 5Live last night that there was a viable, profitable Readers Digest business to be bought by someone. Though I guess it was his job to sound positive.

Whilst the details of the proposed deal aren’t known, the broad outline appears similar to other deals we have seen accepted in the past by the Regulator, with an equity stake being taken by the trustees.

We have advised on cases where having satisfied very stringent conditions and following lengthy discussions with all parties, the Regulator has given clearance to an insolvent restructure of the business, with the pension scheme being left behind in the old company to ultimately fall into the PPF. This clearance was not, and should not be, easily granted.

It would appear that the Regulator is becoming more reluctant to sanction such deals, even as a last resort – and in fairness to David Norgrove he has stated quite clearly that the Regulator does not consider that it has an obligation to maintain employment.

However if you compare the likely outcomes of the Readers Digest case with a sanctioned insolvent restructure, with appropriate safeguards for the trustees and/or PPF, they will be little different other than the preservation of jobs in the sanctioned restructure. Whilst the Regulator may not consider that it has an obligation to the employees of Readers Digest to preserve their jobs, if all other outcomes are broadly the same, then it is difficult to understand why the Regulator did not clear the proposed deal.

Clearly the Regulator has to guard against unscrupulous employers simply contriving circumstances to allow them to dump their pension liabilities on the PPF, and it may see sanctioning such deals as distorting the market and unfair to a firm’s competitors, but such arguments are likely to be of cold comfort to Readers Digest employees facing a very uncertain future.

The latest news is that the Regulator has not ruled out pursuing the US parent over pension funding. The Regulator could in theory seek to issue a Financial Support Direction (FSD) against the US parent. It has been loathe to use its powers in this area, even against UK employers. It has been suggested that the Regulator is concerned that courts could overturn FSDs, considerably reducing the size of the stick that the Regulator can wield. It must be even less certain that a US court would support the enforcement of an FSD on a US company.

Alan Collins

If, like myself, the prospect of trawling through the 2009 Purple Book published by the Pensions Regulator and the Pension Protection Fund (the PPF) is a research step too far, you will most likely have turned to the Executive Summary.

Being short of time, I was then less than pleased to see the Executive Summary running to around 10 pages.

So having now briefly digested the aforementioned the following provides my executive summary of the Executive Summary –

– the end date for the reporting period was 31 March 2009 (the nadir of recent pension scheme funding dates with the combination of low gilt yields and pre-bounce equity markets).

– 37 percent of scheme members were members of open schemes at 31 March 2009, down from 44 percent at 31 March 2008;

– Aggregate Technical Provisions funding levels fell to 70.3 percent at 31 March 2009, representing a total shortfall of £329 billion;

– the level of corporate liquidations in Q3 2009 was over 50 percent higher than at the low-point in 2007, though not as severe as in the recession of the early 90s;

– average allocation in equity fell from 53.6 percent oto 46.4 percent (this may of course be due to the fall in equity values rather than any “tactical” shift);

– there was a marked rise in the long-term risk to the PPF between March 2008 and June 2009, as measured by the PPF’s Long-Term Risk Model;

– PPF expects to collect £651 million for the 2008/9 year. The average levy paid is unchanged at 0.08 percent of scheme assets.

– 564 schemes had their levy 2008/9 capped (it will no doubt be interesting to see how this figure changes in due given the reduction in the cap to 0.5% of scheme assets for 2010/11);

– the total number of contingent assets in place has risen by 30 percent from 452 in 2008/9 to 587 for 2009/10;

– Liability Driven Investment (LDI) strategies continued to take root. The National Association of Pension Funds (NAPF) survey data indicated that 26 percent of schemes had implemented an LDI strategy by 2009 up from 23 percent in 2008; and

– to end on a subject dear to our hearts here at Spence and Partners Limited as specialists in managing schemes during PPF assessment periods (and our sister company Dalriada Trustees Limited), there were 240 schemes (covering 201,000 members) in the PPF assessment period as at 31 March 2009. Also in the year to 31 March 2009, the PPF paid out a total of £37.6 million in compensation payments to eligible members.

Finally for a brief update of subsequent events (from a corporate perspective, though same could be said for scheme funding) –

While we spent late 2008 telling companies your FRS/IAS is not going to be as bad as you think (thanks in most part to sky-high corporate bond yields), we are now in the process of telling the same individuals the exact opposite. “Surely the funding level must be better this year?” – “Err, No” (thanks to higher expectations for long-term inflation and a correction in bond yields have more than offset the equity bounce in most cases). Further details of this were set in in an earlier article on the current state of play for accounting under FRS17 and IAS19.

Page 2 of 41234