MetLife Assurance Regulatory Policy Update
What’s My View? Dan DeKeizer
7th June 2010
This month's Quarterly Report from Pension Capital Strategies (PCS) contained few positives for those interested in the long term health of company pension schemes. Most strikingly, whilst PCS pointed to significant increases in funding for pension fund deficits (£11.1bn last year, up £4bn on the previous year), the report highlighted the fact that this increased commitment from employers was balanced by a 15% decline in the overall employee pension provision. De La Rue is just the latest in a line of companies to look at the spiralling costs of funding their scheme deficit and has decided that closure is the only option.
What’s My View? Dan DeKeizer
18th May 2010
The formation of the new government has been discussed at great length over the past week, but it is still remarkable that we are now living under the first coalition government that the UK has had in 70 years. The aim of the coalition is to deliver strong and stable government - an objective which I think most would welcome. However, it remains to be seen how well in practice the coalition will weather the stresses and strains of government, at the same time as overcoming significant policy differences between the coalition partners.
What’s My View? Dan DeKeizer
22nd April 2010
With the opening of the General Election campaign highlighting political divisions, it is interesting to note where rare areas of political consensus may exist. Though Labour may be at odds with the Conservatives and business leaders on National Insurance rises, one area where they appear to be in harmony is around the need for people to work longer.
What’s My View? Dan DeKeizer
15th March 2010
The Pensions Policy Institute published its fourth report on retirement incomes and assets this month. The report focused on the future outlook for pension savers.
One finding which stood out for me was the fact that whilst state pension reforms could make it easier for lower income pensioners to meet replacement rates (calculation of income the pensioner would require to meet other basic needs versus the income required to achieve an acceptable standard of living), the shift away from DB schemes into DC schemes could see moderate to high income pensioners struggling to meet their expectations for reasonable replacement income from their pension alone.
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What’s my view? Dan DeKeizer
Last month the PPF and the Pensions Regulator published the fourth ‘Purple Book’ providing an in-depth analysis of how the UK’s defined benefit pension schemes fared during the economic turbulence experienced in 2008/09. It provides a fascinating snapshot of the reality of DB provision in Britain today. The purple book points out over 12 million people are covered by DB plans in the UK, but less than a quarter of them actively work for the employer that provides the plan. In the last two years the number of members in open schemes has fallen from 50% to 37% of the membership. It’s reasonable to assume that a DB plan that is neither open to new members, nor being enjoyed by a meaningful percentage of active workers is fairly low on the priority list of concerns for corporate management.
The Purple Book also points out some disturbing statistics about funding, with the average funding position falling on both FRS 17 and s179 basis to well below 100%, and funding on a full buy-out basis falling below 60%. While it’s noted that the measurements are as of 31 March 2009, which had most economic measures well below historical norms, the strain this creates on future contributions is clear. Pension deficits have been noted in the press as issues in merger and reorganization, with both the BA-Iberia arrangement and the Kraft-Cadbury purchase being examples.
In combination, these issues raise the importance of understanding and valuing the employer covenant. While it is surely valuable for trustees to have an ongoing profitable company as a corporate sponsor, accepting excessively long recovery periods may just be kicking the problem down the road. Public reports suggest that BT (as one example) is proposing a 17 year recovery plan to restore their funding position. While BT may be a special situation due to the government guarantee of certain of their obligations after privatisation, given normal economic cycles of 5 to 7 years duration, is it realistic to assume that any recovery plan will survive the next 2 to 3 recessions after this one?
A critical question in valuing that employer covenant, then, is the willingness of the corporate sponsor to continue to operate a DB plan with growing liabilities. Whether it is continued accruals, final salary structures, indexation or just longevity, many plans are chasing an ever receding target for full funding. It may well be that in these cases finding ways to secure the benefits that exist today is the most valuable objective of the trustees rather than betting those benefits along with the hoped for future benefits on an economic recovery that happens to produce extra returns for their specific sponsor and investment mix.
It’s my view that engaging the sponsor and the trustees in considerations of the ways liabilities are growing and taking concrete steps to manage that growth would go a long way to reducing scheme risk for both sponsors and members.
Department of Work and Pensions Announcements
DWP announces series of pension reforms
On 12th January, the Department of Work and Pensions announced that it would be introducing a series of regulations in response to their consultation on Workplace Pension Reform and the input they had received. The regulations cover automatic enrolment, scheme quality and compliance and other elements. They also published regulations to establish NEST, the successor organisation to the Personal Accounts Delivery Authority (PADA). The DWP press release says that ‘These reforms deliver the final part of the package proposed by the independent Pensions Commission, and reflect a significant delivery milestone based on a broad consensus.’ Auto-enrolment will begin in October 2012 and the other pension reforms are planned to be in place by October 2017.In their response, the CBI said: ‘“The CBI supports moves to encourage more people to save for their retirement. “The changes announced today show that the Government has listened to businesses. We are pleased that firms will face fewer short deadlines and less paperwork than was previously proposed, particularly given the challenging economic conditions. “However, discussions are still taking place about how these reforms will affect firms with existing pension schemes. The Government needs to ensure it does not make the system too onerous for companies who are already doing more than the law will require, or it could encourage them to cut contributions to the legal minimum.”
The NAPF were also broadly supportive. Joanne Segars, NAPF Chief Executive, said: “Today’s announcement is an important step forward to ensuring every working person has a pension that comes with their job. The Government has listened to many of our concerns on how employers must auto-enrol their staff into a pension. We welcome the more pragmatic approach they have now taken. However, in a number of areas they have not gone far enough. Further changes will be needed to help maintain existing good quality provision.”
Link to Written Ministerial Statement by Minister of State for Pensions and the Ageing Society (Angela Eagle)
http://www.parliament.the-stationery-office.co.uk/pa/ld200910/ldhansrd/text/100112-wms0001.htm
Link to DWP press release:
http://www.dwp.gov.uk/newsroom/press-releases/2010/january-2010/dwp004-10-120110.shtml
The regulations are available at:
www.dwp.gov.uk/workplace-pension-reforms
Link to CBI press release:
http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/4338c671a2b76996802576a90050c032?OpenDocument
Link to NAPF press release:
http://www.politics.co.uk/opinion-formers/press-releases/welfare-and-pensions/napf-response-to-government-announcement-on-workplace-pension-reforms-$1352818$364408.htm
DWP Announcement on GMP Equalisation
On 28th January in a Written Ministerial Statement on ‘Pension Schemes and Equality’, Angela Eagle, the Minister for Pensions and the Ageing Society announced new guidance on GMP equalisation for trustees. Although the Government’s recent work on GMP equalisation was primarily focused on the Financial Assistance Scheme regulations, Ms Eagle’s statement implied that their conclusions had a wider impact on all pension schemes. The Minister said that ‘The examination of the relevant legislation and case law has led the Government to conclude that where a scheme member has accrued entitlement to a guaranteed minimum pension after May 1990, European law requires that any inequality in scheme rules which results from the legislative provisions governing GMPs should be removed, whether or not a person can show that a comparator exists.’ She went on to say that ‘The Government intend to bring forward amending legislation when Parliamentary time allows. However, in the meantime, it is the Government's opinion that, in order to ensure full compliance with European law, trustees and others should act as if existing domestic legislation requires equalisation.’
The Written Ministerial Statement may be viewed at:
http://www.publications.parliament.uk/pa/cm200910/cmhansrd/cm100128/wmstext/100128m0001.htm#10012850000017
DWP: Lawrence Churchill to Chair the NEST Corporation
On 26th January the DWP announced that Lawrence Churchill, currently the Chair of the Pension Protection Fund (PPF) will chair the NEST Corporation. He started as Chair Designate from 1st February 2010 and will take on the full responsibilities as Chair on 5th July 2010, when the NEST Corporation is established. Mr Churchill’s first task will be to help recruit other trustee members of the NEST Corporation.
The DWP press release may be read at:
http://www.dwp.gov.uk/newsroom/press-releases/2010/january-2010/dwp018-10-260110.shtml
DWP: Financial Assistance Scheme
On 21st January the DWP announced that it would be putting the final phase of the Financial Assistance Scheme (FAS) regulations before Parliament. They estimate that the Government will pay out £3.5 billion to around 150,000 people. The FAS exists to help employees who lost their pension savings in the period from 1 January 1997 to 6 April 2005 before the Pension Protection Fund was created. The FAS benefits are broadly similar to those of the PPF with at least 90% of the DB pensions benefit pension accrued by individuals at the time of scheme wind up being paid at time of retirement, although some caps are in place. The DWP press release adds that: ‘Responsibility for the administration of the FAS was transferred from the DWP to the Board of the PPF in July 2009, to establish a single organisation with responsibility for providing financial help to members of defined benefit pension schemes.’
The DWP announcement was welcomed by the UNITE union who campaigned for the creation of the FAS and PPF.
The consultation on the draft regulations may be found at:
http://www.dwp.gov.uk/docs/fas-synthetic-buyout-consultation.pdf
http://www.dwp.gov.uk/consultations/2010/fas-transfer-assets-to-gov.shtml
Link to DWP press release:
http://www.dwp.gov.uk/newsroom/press-releases/2010/january-2010/dwp012-10-210110.shtml
Link to UNITE press release:
http://www.unitetheunion.com/news__events/latest_news/unite_welcomes_governments_co.aspx
DWP: New chair of the Pensions Advisory Service
On 21st January the Secretary of State for Work and Pensions, Yvette Cooper, announced that she has appointed Partha Dasgupta as the new Chairman of The Pensions Advisory Service. The appointment takes effect from 4 January 2010 and will be for three years. Mr Dasgupta was previously Chief Executive of the Pension Protection Fund.
The DWP press release may be read at:
http://www.dwp.gov.uk/newsroom/press-releases/2010/january-2010/dwp013-10-210110.shtml
General Announcements
Early Day Motion on Allied Steel and Wire workers’ pension scheme
Three MPs have tabled an Early Day Motion on pension payments due to former Allied Steel and Wire (ASW) workers, calling for them to receive 100% compensation from their pension funds. The EDM no 553 may be viewed at:
http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=40132&SESSION=903
CBI/PWC Financial Services Survey
The CBI and PWC published their latest Financial Services Survey on 11th January. The press release summarised this as saying ‘Activity in the UK financial services sector increased slightly over the past three months, continuing the rally of the previous quarter, but the modest growth was less than expected and firms expect volumes of business to fall in the coming quarter’.
The press release may be read at:
http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/d6f27e4b3949250680257693003f232c?OpenDocument
The survey may be obtained through the CBI website at: http://www.cbibookshop.biz/ .
Default Retirement Age
On 11th January the Federation of Small Businesses (FSB) put out a press release calling for the Government to scrap the default retirement age. John Wright, National Chairman at the Federation of Small Businesses, said: “Many small business owners have no intention of putting in place a blanket policy to retire their staff at 65 – they understand the valuable contribution and skills that older workers bring to the business.”
The Institute of Directors took a more nuanced approach, saying that the default retirement age should rise to 68. Miles Templeman, Director General of the Institute of Directors, said: ‘This would allow people to work longer, while ensuring that employers retain the flexibility they need to manage their workforces."
Meanwhile, the Forum of Private Business called for the default retirement age to stay, saying ‘there is nothing to stop anyone working beyond 65, providing it suits both parties. The current law works perfectly well, so why tamper with it?’
The FSB press release may be read at:
http://www.fsb.org.uk/news.aspx?REC=5822&re=policy/news.asp
The FPB press release may be found at:
http://www.fpb.org/news/2297
The IOD press release may be read at:
http://press.iod.com/newsdetails.aspx?ref=464&m=2&mi=62&ms=
Equality and Human Rights Commission on Ageing Workforce
On 25th January the Equality and Human Rights Commission launched a set of proposals for fundamental changes to employment policies to open up more work opportunities for older Britons and address the challenges of an ageing workforce. The proposals include abolishing the default retirement age, the extension of the right to request flexible working to all, overhauling employer recruitment practices to prevent discrimination and improved training and development.
The press release may be read at:
http://www.equalityhumanrights.com/media-centre/fundamental-changes-to-employment-policies-proposed-to-benefit-older-workers/
Further information may be found at:
www.equalityhumanrights.com/justageing
Government publishes responses received to the Equality Bill consultation
On 27th January the Government Equalities Office published a document called ‘Equality Bill: Making it work – Ending age discrimination in services and public functions. A Policy Statement’. This document summarises the responses they received to a consultation on the use of age as a factor in financial services products and sets out their plans for specific exceptions from the ban. On financial services they say:
We will create a specific exception to allow financial service providers to treat people of different ages differently, but only where this is proportionate to risks and costs. Prices can still be varied by age, where this genuinely reflects risk or costs and is not an arbitrary decision;
We will improve transparency by requiring financial service providers to publish aggregate data in respect of certain products that anyone can check;
We will improve access by requiring the providers of certain insurance products to operate a signposting and referrals system. Where this requirement applies and an insurer does not provide the service to a person because of their age, they will be required to refer the person to a supplier who can meet their needs or refer them to a dedicated signposting service.
The ABI responded positively to the GEO statement saying that they welcomed the Government’s acknowledgement ‘that a competitive market for motor and travel insurance exists for consumers of all ages.’
The GEO Policy Statement may be read at:
http://www.equalities.gov.uk/pdf/GEO_EqualityBillAge_acc.pdf
The ABI press release may be read at:
http://www.abi.org.uk/Media/Releases/2010/01/ABI_welcomes_Government_statement_on_age_and_insurance.aspx
Pensions Regulator passes better regulation inspection
On 29th January the Better Regulation Executive and the National Audit Office published the report of their independent review into the Pension Regulator’s risk-based approach to regulation. According to the Pensions Regulator’s announcement ‘the report concludes that the regulator has thoroughly embedded the Hampton principles at both operational and strategic levels - and identifies examples of good practice across the range of areas. ‘
The TPR press release may be read at:
http://www.thepensionsregulator.gov.uk/whatsNew/pn10-02.aspx
To view the response to the review please visit:
http://www.thepensionsregulator.gov.uk/pdf/hampton-review-response-2010.pdf
Pensions Regulator consultation on record keeping
On 2nd February The Pensions Regulator published a consultation setting out standards for member records and requiring schemes that fall short to take steps to improve their performance.
The TPR press release may be read at:
http://www.thepensionsregulator.gov.uk/whatsNew/pn10-03.aspx
The consultation may be read at:
http://www.thepensionsregulator.gov.uk/pdf/record-keeping-con-doc-2010.pdf
The updated guidance may be read at:
http://www.thepensionsregulator.gov.uk/pdf/RecordKeepingPDF.pdf
PPF Announcements
PPF publishes Policy Statement
On 29th January the PPF published the ‘2011/12 Pension Protection Levy Consultation Policy Statement: Insolvency Risk’. They have made certain changes for the 2011/12 levy and all schemes and they say that employers should take note of them and act as soon as possible before the 31 March 2010.
The press release may be found at:
http://www.pensionprotectionfund.org.uk/News/Pages/details.aspx?itemID=154
The Policy Statement may be found at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/policy_statement_insolvency_risk.pdf
PPF 7800 Index
The Pension Protection Fund has updated its PPF 7800 Index to the end of December 2009. According to the press release, ‘The aggregate funding position (total assets minus total liabilities) of almost 7,400 DB funds is estimated to have improved over the month to a deficit of £32.6 billion at end-December 2009, from a deficit of £92.5 billion at end-November 2009… . Scheme funding is better than it was a year previously (there was a deficit of £190.6 billion in December 2008).’
The latest edition of the PPF 7800 Index may be read at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/PPF_7800_January_10.pdf
Two More Schemes Enter the PPF
On 14th January the PPF announced that it has taken two more schemes under its wing last month (December), resulting in a further 1,181 people around the UK now receiving compensation – or will do so in the future. Champion Pension Scheme and Gilbraith Tankers Limited Pension Scheme are the latest schemes to transfer to the PPF.
The press release may be read at:
http://www.pensionprotectionfund.org.uk/news/pages/details.aspx?itemID=152
Fourth Purple Book Published
On 19th January the PPF and the Pensions Regulator published the fourth ‘Purple Book’ providing an in-depth analysis of how the UK’s defined benefit pension schemes fared during the economic turbulence experienced in 2008/09.
The press release may be found at:
http://www.pensionprotectionfund.org.uk/news/pages/details.aspx?itemID=153
The Purple book may be downloaded from the PPF website at:
http://www.pensionprotectionfund.org.uk/Pages/ThePurpleBook.aspx
National Audit Office report on PPF
On 5th February the National Audit Office published its report on the Pension Protection Fund. The press release said: ‘The Pension Protection Fund, which protects private sector pensions, has delivered value for money in terms of investing efficiently and preparing adequately for the potential impact of future claims’. However, the release went on to note that: ‘The Fund's deficit increased during the recession - from £517 million in March 2008 to £1.2 billion in March 2009 - largely because of the combined deficit of the increased number of schemes being assessed on whether they should be transferred to the Fund. However, the value of the Fund’s assets far outweighs its annual compensation payments: at the end of March 2009 its assets were £3.2 billion but its current compensation payments amount to £70 million a year.’ The NAO concludes that: ‘The Fund has developed a suitable model to assess future liabilities and this has proved resilient to a range of stress tests. However, the model’s longer-term projections are sensitive to important assumptions. The Fund should, therefore, establish a framework for illustrating the sensitivity of output from its long-term risk model.’
The NAO press release may be read at:
http://www.nao.org.uk/whats_new/0910/0910293.aspx
The full NAO report on the PPF may be downloaded from:
http://www.nao.org.uk/publications/0910/pension_protection_fund.aspx
What’s my view? Dan DeKeizer
It’s been widely speculated that one response to longer life spans and declining retirement savings will be delayed retirement or continuing part time work. The recent Pensions Trend report Ch4: The Labour Market and Retirement (published on 9 Dec 2009) from the Office of National Statistics noted that ‘The average age of withdrawal from the labour market for women has risen from 60.7 years in 1984, when data first became available, to 62.4 years in April-June 2009.’ For men, the average retirement age peaked at 64.5 years in 2008 and has been relatively stable into 2009. These relatively mild increases in retirement don’t yet show evidence of wide spread delays in retirement age.
The reasons for continuing to retire in the early 60’s are probably as varied as individuals – but the economic impact of retiring at those ages is simply unsustainable for the majority of us. After all, the Department of Work and Pensions published figures to show that in 2010 ‘there will be 12,000 people aged 100 or over in the UK. In 10 years time this will have nearly doubled to 22,000.’ Newsroom on Department of Work and Pensions website (published on 31 December 2009) Admittedly, those are the extreme cases, but for these 22,000 pensioners, if they retire before 65, they will spend nearly as many years in retirement as they did working. I can’t imagine many of us are saving half of our income, which would be roughly what’s needed in that situation. It’s clear that as people live longer, they will need to work longer
Both the DWP figures and the ONS figures will be important for the Government when reviewing the future State Pension Age, but the figures are also of interest to employers, pension providers and individuals themselves when planning their financial future. Older workers will increasingly become a feature of the UK workplace, which presents both advantages and challenges for the future. On the one hand, the early departure of older workers from the workplace during the 80s and 90s created a huge loss of knowledge and expertise which cannot always be met through retraining of younger workers or immigration. Older workers have a lot to contribute to the world of work, bringing experience, knowledge and a judgment honed over decades in the workplace. On the other hand, older workers often need to be managed differently, responding to different kinds of career (and financial) motivation. There may be health issues for workers remaining in the workplace during their 60s, and there will undoubtedly be more demand for flexible and part-time working.
Financially, many people will not have much choice about continuing to work, and will need to work to supplement their pensions or to save more for when they do eventually retire. Such individuals may need to re-train or consider other careers to meet their financial needs.
This will also have an impact on pension funds in addition to the relatively obvious issue of funding requirements needed for increasing longevity. Trustees should start taking these changing work patterns into consideration when considering options available to their scheme members. With the increasing trend to live and work longer, it may be time to review early retirement rights due to the increasing cost of people spending longer in retirement. This may not always be appropriate for cases where individuals need to retire due to ill health, but the costs of early retirement rights and young spouse pension rights are already proving to be considerable.
The huge bonus of the 20th century’s advances in healthcare and living standards is a situation where more 45 years olds are reaching 65, more 65 year olds reaching 85 and more 85 year olds reaching 100 than ever before. It is my view that the growing longevity of each generation needs to be looked at again by pension trustees so that they develop plans to encourage realistic levels of saving, to encourage people to work longer, and to ensure pension benefits remain sustainable in the long term.
Department of Work and Pensions: Number of people aged 100 and over to double in next 10 years
On New Year's Eve 2009, the Department of Work and Pensions published figures to show that in 2010 “there will be 12,000 people aged 100 or over in the UK. In 10 years time this will have nearly doubled to 22,000. In 2010 there are will be around 12 million pensioners in the UK, rising to 16 million by 2050. And the number of people aged 100 or over will increase from around 12,000 to 280,000 in the same period”. Department of Work and Pensions Minister Lord McKenzie said; “It is clear that in the coming years an older society offers great opportunities as well as challenges. Opportunities for those in retirement to continue working, learning and contributing to society, but challenges around how best to support this group.’
http://www.dwp.gov.uk/newsroom/press-releases/2009/december-2009/dwp080-09-311209.shtml
Cass Business School presents findings on systemic risk in financial services
The Actuarial Profession has commissioned a report by Cass Business School into the nature and causes of systemic risk in financial services. The press release said, “The paper, presented at a meeting of the Institute of Actuaries on 7 December 2009, shows just how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy.”
To view the press release or to download the paper, please go to:
http://www.actuaries.org.uk/media_centre/press_releases/pr-rels/2009/systemic_risk
PADA Launches new brand for the personal accounts scheme
On 7th January the Personal Accounts Development Authority announced that the National Employment Savings Trust (NEST) will be the permanent name of the new national workplace pension scheme formerly known as the personal accounts scheme.
The press release may be found at:
http://www.padeliveryauthority.org.uk/documents/press-release-nest-07-01-2010.pdf
The new website may be found at:
http://www.padeliveryauthority.org.uk/nest.asp
NAPF launches Trustee PensionsConnection
On 10th December 2009 the National Association of Pension Funds (NAPF) launched Trustee PensionsConnection, a new service specifically designed to help pension scheme trustees meet the demands of running their scheme on behalf of millions of people saving for retirement.
The press release may be found at:
http://www.napf.co.uk/DocumentArchive/Press%20Releases/01_2009/20091210_10-12-2009%20NAPF%20Helps%20Trustees%20Get%20Connected.pdf
The website may be found at:
http://www.napf.co.uk/PensionsConnection
ONS updates its Pension Trends report
The Office of National Statistics (ONS) has updated its Pensions Trends Report. Chapter 4 (The Labour Market and Retirement) and Chapter 14 (Pensions and the National Accounts) were both updated on 9th December 2009.
Both may be read at:
http://www.statistics.gov.uk/pensiontrends/
Pensions Policy Institute publication on ‘Could increases in State Pension Age be brought forward?’
On 14th December 2009 the Pensions Policy Institute published ‘Could increases in State Pension Age be brought forward?’ The report comments on the feasibility of Conservative proposals in October 2009 to investigate the possibility of bringing forward planned increases in the State Pension Age.
The paper may be read at:
https://www.pensionspolicyinstitute.org.uk/default.asp?p=124&publication=0259&
Retail Distribution Review: FSA consults on raising professional standards for all investment advisers
On 16th December 2009 the Financial Services Authority (FSA) published proposals for enhancing the professionalism of investment advisers under the Retail Distribution Review (RDR). According to the press release, “A key element of the FSA’s wide-ranging reforms is that by the end of 2012, advisers, whether independent or restricted, will need to demonstrate greater knowledge and skills and meet enhanced standards in dealing with clients. The FSA is proposing to create a new in-house governance structure to ensure advisers achieve this greater level of professionalism, both initially and on an ongoing basis through the achievement of new, higher level qualifications; meeting enhanced standards of continuing professional development; and adhering to common ethical standards.”
The FSA is inviting responses to its proposals by 16 March 2010.
The press release may be read at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/173.shtml
The consultation document may be read at:
http://www.fsa.gov.uk/pages/Library/Policy/CP/2009/09_31.shtml
BAS publishes consultation on Pension and Insurance Transformations
On 18th December 2009 the Board for Actuarial Standards (BAS) of the Financial Reporting Council published a consultation paper setting out proposals for a technical actuarial standard on the actuarial information required to ensure good judgements can be made about the effects of changes to pension funds and insurance contracts (transformations). According to the press release, “The BAS’s objective is to ensure that actuarial information properly covers matters that affect scheme members and policyholders, including fairness, security and the level of benefits.”
The press release may be read at:
http://www.frc.org.uk/bas/press/pub2197.html
Copies of the paper can be downloaded from the BAS’s website at:http://www.frc.org.uk/bas/publications/pub2198.html.
DWP consultation on disclosure of information requirements in pension schemes
DWP published a consultation on 6th January 2010, on a draft statutory instrument containing proposed amendments to regulations covering disclosure of information requirements in occupational, personal and stakeholder pension schemes. The consultation paper also sets out the Government's response to the consultation exercise on "Review of consultation requirements applying to occupational, personal and stakeholder pension schemes" which was carried out in 2009.
The press release and consultation may be read at:
http://www.dwp.gov.uk/consultations/2010/pen-scheme-disclosure.shtml
http://www.dwp.gov.uk/docs/pen-scheme-disclosure-consultation-jan2010.pdf
ACA: 87 per cent of DB schemes now closed
On 6th January 2010 the Association of Consulting Actuaries (ACA) published a survey of workplace pension schemes. The survey found that 9 out of 10 defined benefit schemes (DB) in the sector are closed to new entrants with 1 in 5 now also closed to future accrual (double that of 4 years ago).
The press release may be read at:
http://www.aca.org.uk/files/ACA_Pensions_survey_highlights_need_for_action_in_2010-4_January_2010-20100102183601.pdf
The paper may be read at:
http://www.aca.org.uk/files/ACA_pension_trends_survey_statistics-29_December_2009-20091224101342.pdf
Regulator Announcements
TPR: New requirements for trustee knowledge and understanding now effective
On 8th December, the Pensions Regulator (TPR) announced that its revised Trustee Knowledge and Understanding (TKU) code of practice is now in effect. The code sets minimum requirements for trustees to help ensure pension schemes are run effectively.
To view the press release please see:
http://www.thepensionsregulator.gov.uk/press/pn09-19.aspx
Memorandum of Understanding between the Office of Fair Trading and the Financial Services Authority
On 9th December 2009 the OFT and the FSA published a new Memorandum of Understanding which establishes a framework for cooperation between both bodies on financial services. The joint introduction by Hector Sants of the FSA and John Fingleton of the OFT states that: “Financial markets and the wider economy have changed dramatically since April 2006, and we need a more flexible approach that identifies and regularly updates key themes, and plans specific joint action around those. In particular, we wish to strengthen our co-operation on competition issues. We know that the Government welcomes our plans in this area. The MoU draws together the whole range of our mutual understanding and cooperation,annexing Concordats on Unfair Terms, Consumer Protection and Banking Conduct, as well as the
new Competition Concordat. It is both our statement of intent, and a working document of
practical ways to achieve maximum effectiveness of regulation.”
The MOU may be downloaded from:
http://www.fsa.gov.uk/pubs/mou/fsa_oft.pdf
Pensions Regulator calls for Greater Scrutiny of Transfer Incentive Exercises
Speaking at the NAPF Annual Trustee Conference on 10th December 2009, David Norgrove, chair of the Pensions Regulator said: "Trustees should start from the presumption that such exercises and transfers are not in member interests. If a company is willing to encourage the transfer, the company's gain is likely to be the member's loss."
The press release may be read at:
http://www.thepensionsregulator.gov.uk/mediaCentre/pressReleases/pn09-20.aspx
To view the full speech text please visit: http://www.thepensionsregulator.gov.uk/doc-library/the-role-of-trustees-in-our-protection-framework.aspx
Pensions Regulator consults on independent trustee register review
On 11th December 2009 the Pensions Regulator announced that it is reviewing how it assesses the conditions for joining and remaining on its register of independent trustees and published a consultation document on the proposed new criteria. Responses to the 12 week consultation should be submitted by 12 March 2010.
To view the press release:
http://www.thepensionsregulator.gov.uk/press/PN09-21.aspx
The consultation may be read at:
http://www.thepensionsregulator.gov.uk/pdf/TrusteeRegisterCondoc2009.pdf
PPF Announcements
PPF 7800 Index Update
The PPF 7800 Index has been updated to the end of November 2009.
Highlights include:
- The aggregate funding position (total assets minus total liabilities) of almost 7,400 DB funds is estimated to have improved over the month to a deficit of £92.5 billion at end-November 2009, from a deficit of £97.6 billion at end-October 2009 (Chart 1 and Table 1). Scheme funding is better than it was a year previously (there was a deficit of £123.9 billion in November 2008).
- The total deficit of schemes in deficit in November 2009 is estimated to have improved to £132.9 billion from £135.1 billion at the end of October 2009 (Chart 3 and Chart 4). In November 2008, the aggregate deficit of all schemes in deficit stood at £149.0 billion.
- In November 2009, the total surpluses of schemes in surplus increased to £40.4 billion from £37.5 billion at the end of October 2009 (Chart 6). In November 2008, the total surplus of all schemes in surplus stood at £25.0 billion.
The update may be viewed at:
http://www.pensionprotectionfund.org.uk/Pages/PPF7800Index.aspx
Three more schemes transfer to the Pension Protection Fund
On 10th December 2009 the PPF announced that in November 2009 it took three more schemes under its wing. Butler Pension Scheme, Clark & Co (Engineers Grimsby) Pension Scheme, and Clark & Co (Womersley Road) Pension Scheme – are the latest schemes to transfer to the PPF.
The press release may be read at:
http://www.pensionprotectionfund.org.uk/News/Pages/details.aspx?itemID=145
PPF Publishes 2010/11 Levy Policy Statement and Final Levy Determination
On 18th December the PPF published its 2010/11 Pension Protection Levy Policy Statement. According to the press release, the document sets out:
- that the Board aims to collect an overall levy of £720 million
- the levy scaling factor of 1.64
- a risk-based levy cap of 0.5 per cent of liabilities, to protect the most vulnerable 10 per cent of schemes
- a change to the way probabilities of insolvency for foreign employers are calculated
- changes to the requirements for certification of block transfers,and
- a 9 April 2010 deadline for certification of deficit reduction contributions.
The PPF announcement may be read at:
http://www.pensionprotectionfund.org.uk/levy/Pages/PensionProtectionLevy.aspx
The policy statement may be read at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/1011_levy_policy_statement.pdf
PPF ‘Webinar’ on valuation guidance
The PPF ran a webinar on 25 November 2009 covering valuation guidance for actuaries of FAS qualifying schemes. Written answers to questions may be found at:
http://www.pensionprotectionfund.org.uk/FAS/info_pensions_professionals/Pages/FASWebinar.aspx
What’s my view? Dan DeKeizer
The report issued by the Institute of Fiscal Studies in December points out that Defined Benefit provision for public sector workers is well in excess of that provided in the private sector, valued, on average, as 25% of salary each year. In the recent IoD paper titled "Pension Apartheid", found at:
http://www.iod.com/intershoproot/eCS/Store/en/pdfs/policy_paper_Pensions_Apartheid_report.pdf
There is a growing concern about the future demand on taxpayers that could result in voter rejection of governments that continue to support such relatively high levels of pensions.
However, while recognizing the burden on the taxpayer posed by these unfunded or under-funded schemes, my own concern is broader. I don't think an average worker retiring from a lifetime in a public service job would see a dramatic increase in their standard of living due to this pension. In other words, the pension promise is, in fact, a reasonable and desired outcome for these workers. With that in mind, I turn to the NAPF annual survey referenced below noting with some satisfaction that employers have generally resisted the temptation to reduce pension contributions in their Defined Contribution schemes during the economic downturn, maintaining them at an average of 11.5% of salary.
While we may consider pension contributions for public service workers as unsustainable at 25% of salary, surely pension contributions of 11.5% of salary are far from sufficient to provide a life of financial dignity in our retirement years. Perhaps the question we should be addressing is where private sector workers will find the extra 10 to 15%. Certainly, personal savings rates are well below that (and skewed to high earners), future home values uncertain and emotionally costly to monetize, and the higher potential returns available through risky investments are just that - risky.
Certainly the government can do more to strengthen the defined benefit promises made to the public sector through pre-funding, or a combination of increases in retirement ages and slowing accrual rates to be more reflective of the reality that as a country we're experiencing longer working lifetimes as well as longer time as pensioners. Indeed, in the pre-budget report, Alistair Darling announced plans that will see teachers, nurses, civil servants and local government workers share the increase in costs after they exceed an agreed ceiling. The private sector, as well, has opportunities to improve the security of their defined benefit promises through benefit changes, increased contributions and accessing the capital support of insurance companies through annuitisation. On the DC side much more needs to be done - at a minimum being honest with ourselves as a society that contributions near 10% of salary will not provide enough to retire. Instead of a pension statement that focuses on the current value of accumulated assets, we need to tell participants just how little regular income those assets will buy at normal retirement age so they can prepare for their future.
It's my view that the right way to end so-called pension apartheid is to raise the bar for Defined Contribution such that each of us can rationally anticipate a lifestyle in retirement not far removed from that we have enjoyed while working.
Pensions General
CBI and Watson Wyatt publish second biennial Pensions Survey
On 7th December the CBI and Watson Wyatt published a report claiming that 'Final salary pension deficits are making it much harder for recession-hit firms to restructure themselves in preparation for an economic recovery'. The CBI and Watson Wyatt's latest biennial Pensions Survey showed the costs of defined benefit - including 'final salary' - schemes are hitting UK competitiveness and have become a leading issue in boardrooms, especially as deficits have worsened during the recession.
According to the press release:
Three quarters of respondents (73%) expect that the business will have to pay even more into its final salary scheme in their next funding plan, despite most schemes being shut to new members.
And one in three firms (33%) felt that pensions provision had significantly obstructed internal reorganisations or mergers and acquisitions, often leading to reduced competitiveness - double the level of 2007's survey. Similarly, 38% said that business investment had been hit.
Given the wider impact of pensions costs, eight out of ten directors (80%) believe most final salary schemes will close to existing members over the next few years as a result of the current turmoil, with employees moving into DC schemes.
A third (37%) are planning to take cost-saving steps within the next two years, designed to reduce the cost of schemes or close them completely.
An increasing number of firms are looking to transfer some of their final salary liabilities to an insurance company in order to reduce risks in relation to past pensions commitments. Half of scheme sponsors (49%) expect to have secured at least some pension liabilities with an insurer in 10 years' time.
Institute for Fiscal Studies: The pension advantage of public sector workers
On 2nd December the Institute for Fiscal Studies published a report claiming that defined benefit pensions in the public sector are worth more as a share of the total remuneration package than they are in the private sector. Research by Professor Richard Disney, Carl Emmerson and Gemma Tetlow, published in the latest Economic Journal, reveals the key drivers of this public sector pension advantage: longer job tenures; the option of claiming pensions earlier; and lifetime earnings profiles that peak in workers' late 50s rather than their late 40s.
The IFS announcement and full report may be read at:
http://www.ifs.org.uk/publications/4669
The Pensions Regulator publishes annual analysis of recovery plans
On 10th November the Pensions Regulator published the latest edition of its annual analysis of recovery plans from defined benefit and hybrid pension schemes. This analysis updates previous publications in 2007 and 2008, providing an overview of scheme recovery plans with valuation effective dates from 22 September 2005 to 21 September 2008. This represents the first near complete triennial cycle of the regulator's scheme funding regime - with schemes divided into three "tranches" based on the effective date of the scheme valuation. Both recovery plan lengths and back-end loading have increased for schemes in tranche 3. As the Pensions Regulator notes in its Executive Summary on page 5 'this appears to be the impact of adverse market conditions leading to lower asset values, although it should be noted that the data predate the market activity in late 2008 and early 2009.'
To view the press release: http://www.thepensionsregulator.gov.uk/whatsNew/pn09-16.aspx
To view the report in full: http://www.thepensionsregulator.gov.uk/pdf/scheme-funding-analysis-2009.pdf
FSA to simplify system for calculating regulatory fees
On 10th November the Financial Services Authority (FSA) announced proposals to simplify the structure of the fees it levies on regulated firms and to enhance fairness and transparency. The FSA is inviting responses to the proposals in its consultation paper by 11 January 2010. In February 2010, depending on the outcome of this consultation, the FSA plans to consult on fee levels for 2010/11 using this new fee model.
The FSA press release may be read at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/154.shtml
The consultation paper 'Regulatory fees and levies: Policy proposals for 2010/11' (CP09/26) may be read at:
http://www.fsa.gov.uk/pubs/cp/cp09_26.pdf
Ofcom publishes BT pension consultation
On 1st December the telecommunications regulator Ofcom published an initial consultation on the way it takes BT's pension costs into account when setting regulated wholesale charges for certain telecommunications services, including broadband and telephone lines. Ofcom is consulting on whether stakeholders believe there are good reasons for changing the current approach, and if so, how the approach should change.
The Ofcom press release notes that 'In recent years, pension deficit payments have become an issue for many companies across the whole of the UK economy. Because of the financial significance of these payments in the case of BT, Ofcom considers it right to consult on whether or how such payments should be factored in when setting BT's regulated prices.'
The consultation can be found at: http://www.ofcom.org.uk/consult/condocs/btpensions/
The news release can be found at:
http://www.ofcom.org.uk/media/news/2009/11/nr_20091201
Queen's Speech
The Queen's Speech on 18th November included a number of measures of interest to the pensions sector. A new Financial Services Bill will establish a new statutory Council for Financial Stability to replace the Standing Committee, chaired by the Chancellor and comprising HM Treasury, Bank of England and the Financial Services Authority. It will strengthen the FSA, including through providing explicit objectives, formalising its international work and expanding the remit of the Financial Services Compensation Scheme. The Bill will introduce requirements on systematically important financial firms to set up recovery and resolution plans that will make banks safer and easier to wind down in the event of a future crisis.
A Fiscal Responsibility Bill will put the Government's deficit reduction plan on a statutory footing in order to half the deficit over 4 years and put debt on a sustainable path ion the medium term. Further details will be revealed in the Pre Budget Report on 9 December.
For more information on the Financial Services Bill see:
http://services.parliament.uk/bills/2009-10/financialservices.html
ABI and AMPS launch new SIPP Good Practice Guide
On 17th November the Association of British Insurers and the Association of Member Directed Pension Schemes (AMPS) launched a new Good Practice Guidance for Self Invested Personal Pension (SIPP) providers. The guidance gives providers examples of best practice in writing customer and adviser literature, to ensure that the types of SIPP, their features and, importantly, their charging structures are described clearly and accurately.
The ABI press release may be read at:
http://www.abi.org.uk/Media/Releases/2009/11/New_SIPP_Good_Practice_Guide_will_improve_communications_to_consumers_and_advisers.aspx
Liberal Democrats ask question on deficits in police pension scheme
On 22nd November the Liberal Democrats received an answer to a Written Question they had asked the Government on how much the Home Office had paid to fill a deficit in the Police pension scheme. The Government's answer revealed that the Home Office paid almost £500m to police forces to make up deficits in their pension funds last year, more than double the amount that was paid two years ago.
The Liberal Democrat press release may be found at:
http://www.hazelthorpe.org.uk/index.php?mact=News,cntnt01,print,0&cntnt01articleid=456&cntnt01showtemplate=false&cntnt01returnid=15
The parliamentary question can be found here:
http://www.publications.parliament.uk/pa/ld200809/ldhansrd/text/91109w0003.htm#09110920000626.
The Pensions Regulator: Keeping pensions safe - improving scheme governance and administration
On 24th November the Pensions Regulator launched a campaign aimed at encouraging good governance and administration and better management of pension scheme risks. A statement published alongside results of the 2009 pension scheme governance survey outlines the regulator's key focus areas. The regulator makes clear that trustees responsible for running pension schemes need to be sure that:
* they have the right skills, and they get the right people to help them run their pension scheme;
* they have the right processes in place to manage scheme risks.
Over the next few months the campaign will renew the regulator's focus on governance and administration aiming to improve standards across the industry by:
* providing updated guidance on internal controls;
* publishing a revised scope and guidance for trustee knowledge and understanding;
* publishing bite-sized e-learning for trustees on risk management;
* consulting on new proposals for record keeping; and
* updating existing guidance on winding up pension schemes.
The TUC welcomed the move. TUC General Secretary Brendan Barber said:
'The TUC welcomes the Pension Regulator's campaign highlighting the importance of good pension scheme governance and administration. Trustees play a vital role in the governance of scheme assets and this initiative seeks to support trustees in fulfilling this role effectively. The TUC believes that member nominated trustees bring an invaluable member perspective to the good governance of pensions and we continue to campaign for their representation on trustee boards to be raised to 50 per cent. In a time of financial upheaval and uncertainty around pensions, a strong member voice is more important than ever.'
To view the Pension Regulator press release:
http://www.thepensionsregulator.gov.uk/whatsNew/pn09-17.aspx
The TUC press release may be viewed at:
http://www.tuc.org.uk/pensions/tuc-17280-f0.cfm
PADA publishes its findings from the Investment Consultation
On 25th November the Personal Accounts Delivery Authority (PADA) published the key findings from its consultation process on the discussion paper Building Personal Accounts: Designing an investment approach. The purpose of the paper was to gather ideas and evidence on the most appropriate investment approach for personal accounts members who will be low-to-moderate earners with a tendency to be relatively risk averse. PADA conducted an extensive consultation process with a broad range of stakeholders, including the hosting of 10 roundtable discussions which covered a range of issues raised in the discussion paper. The response document sets out the findings of the consultation and will inform PADA's recommendations to the trustee corporation on the most appropriate investment strategy for personal accounts scheme members. The document does not set out PADA's recommendations as PADA is continuing to undertake a programme of work to develop these.
The PADA press release may be read at:
http://www.padeliveryauthority.org.uk/documents/press-release-25-11-2009.pdf
The findings of the Investment Consultation may be read at:
http://www.padeliveryauthority.org.uk/investment-consultation-findings.asp
FSA appoints senior advisors on governance and authorisation
On 26th November the Financial Services Authority (FSA) announced the appointment of five new senior advisors who will assist the FSA in its work on governance issues. These advisors will provide input into developing the FSA's regulatory framework for ensuring effective governance in financial institutions, and will also contribute to the panel interview process for individuals wishing to take up major board positions in the UK's largest financial institutions.
The new advisors are: Sir Dominic Cadbury, Baroness Hogg, Lord Marshall, Sir Brian Pitman and Sir David Scholey. These appointments will take place with effect from January 2010.
The FSA press release may be read at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/162.shtml
Pensions Regulator asks trustees to focus on managing scheme risk
On 1st December the Pensions Regulator published revised internal controls guidance for consultation which are aimed at focusing greater attention on risks facing pension scheme members. The guidance was published alongside new 'bite-sized' e-learning modules which provide an overview of the topic. The new guidance aims to ensure that trustees, especially of smaller schemes, have the tools to perform their critical role in protecting pensions, particularly in the current economic climate.
The draft revised guidance will replace the existing guidance and should be read in conjunction with the code of practice on internal controls. Responses to the 12 week consultation should be submitted by 1 March 2010.
The press release may be read at:
http://www.thepensionsregulator.gov.uk/whatsNew/pn09-18.aspx
The website for the consultation and 'bite-sized learning' may be found at:
http://www.thepensionsregulator.gov.uk/safe/index.aspx
PPI publishes updated PPI Pension Facts
The Pensions Policy Institute has updated its PPI Pension Facts part of its website. This may be viewed at:
http://www.pensionspolicyinstitute.org.uk/default.asp?p=67
NAPF Announcements
NAPF response to DWP consultation on workplace pensions
The NAPF has submitted a response to the Department of Work and Pensions consultation on 'Workplace Pension Reform - Completing the Picture'. Key recommendations by the NAPF include:
(1) Employers should be given more flexibility over the date on which they have to automatically enrol their staff. The DWP should not prescribe a specific day in the month but should allow employers a choice, so that they can align auto enrolment with existing payroll processes.
(2) The period that employers have to provide information to the Pensions Regulator should be extended to three calendar months after the auto-enrolment date. This would give employers one full calendar month after the opt-out period ends to collate information.
(3) Employers who already offer good quality schemes should be able to use waiting periods when auto-enrolling short term workers, but only once per employment period. This would save unnecessary administrative costs for employers while also protecting the rights of short term workers.
The DWP Consultation "Workplace Pension Reform - Completing the Picture" can be found at
http://www.dwp.gov.uk/docs/workplace-pension-reformcompleting-the-picture-consultation240909.pdf
The NAPF response to the above consultation can be found at
http://www.napf.co.uk/policy/recentreports.cfm
NAPF urges restraint on executive pay
On 13th November the NAPF announced that it has written to the Chairmen of Britain's top 350 companies urging executive pay restraint and making it clear that company remuneration should be aligned with the long-term interests of shareholders, including pension funds. Boards should pay close attention to how profits are apportioned between capital, remuneration and dividends to shareholders. This follows a year in which many companies have raised capital and many dividends have been cut. The growing trend of deferring parts of bonus payments into shares is good practice and the NAPF expects that more companies will go down this route in 2010.
The press release with a copy of the letter may be found at:
http://www.napf.co.uk/DocumentArchive/Press%20Releases/01_2009/20091113_13-11-2009%20-%20Executive%20Pay%20Restraint%20and%20Alignment%20with%20Long-Term%20Interests%20of%20Pension%20Funds%20Needed.pdf
NAPF comments on Walker Review
Commenting on the publication on 26th November of Sir David Walker's review of corporate governance in UK banks and other financial industry entities, David Paterson, National Association of Pension Funds' (NAPF) Head of Corporate Governance, said: "Taken as a whole, we welcome Sir David Walker's recommendations as they strike a better balance than is presently the case between the governance needs of financial institutions and their owners. Greater transparency on remuneration and bonus deferral will help improve the alignment of management with the interests of long-term investors, an important issue we raised in a letter sent earlier this month to the Chairmen of the FTSE 350. We support the recommendations to broaden the responsibilities of institutional shareholders which are in line with the proposals recently announced by the Institutional Shareholders' Committee."
The NAPF press release may be found at:
http://www.napf.co.uk/DocumentArchive/Press%20Releases/01_2009/20091126_26-11-2009%20-%20Walker%20Review%20-%20Better%20Balance%20Between%20Banks%20and%20Institutional%20Investors.pdf
NAPF publishes Annual Survey
On 27th November the NAPF published its Annual Survey. Key findings from the comprehensive analysis of 300 NAPF scheme members include:
- Contributions to defined contribution (DC) schemes have weathered the storm and have not been cut back as a result of the recession, as some suggested would be the case. Average contribution rates to DC schemes have remained stable and now stand at 11.5%. Additionally, 10% of schemes have suggested that they will increase contributions in future.NAPF Chief Executive, Joanne Segars, said: "Our survey shows the high levels of commitment employers have in providing good quality pensions for their staff; but the recession has made their job more difficult. "The Government can no longer sit on its hands. It must take bold and positive action to help support employer-sponsored pensions. The Chancellor has a golden opportunity to make a difference in his Pre-Budget Report by announcing that the Government will issue more long-dated and index-linked gilts. This single measure would benefit pension funds by helping to reduce deficits and support corporate scheme sponsors by reducing the scale of pension fund liabilities on their balance sheets. It is an opportunity that must not be missed."
- DB pension funds' allocation to equities has continued to fall: the average allocation to equities now stands at 44% compared to 51% a year ago. This is as a result of both falls in equity values and continuing de-risking by pension funds. The allocation to fixed asset classes has increased by 5% and this now stands at 38% on average.
- Uncertainty remains over the impact of the Government's 2012 pension reforms. 41% said they will maintain their scheme in its current form and auto-enrol their employees into it. However, the risk of levelling down remains: 8% of schemes say they are planning to reduce their contributions in 2012. A further 10% said employees who do not choose to join the existing pension will be auto-enrolled into Personal Accounts at the minimum level and a further 13% are proposing other changes. 27% of schemes have yet to decide what action they will take.
The NAPF press release may be found at:
http://www.napf.co.uk/DocumentArchive/Press%20Releases/01_2009/20091127_27-11-2009%20-%20NAPF%20Annual%20Survey%202009%20-%20Government%20Action%20Needed%20As%20Recession%20Impacts%20Pensions.pdf
The Annual Survey may be ordered from their website at:
http://www.napf.co.uk/Publications/researchreports.cfm
PPF Announcements
PPF publishes Annual Report for 2008 - 2009
On 5th November the PPF published its Annual Report for 2008 - 2009. According to the press release, the main points were:
• Increased claims result in £1.2bn deficit (88 per cent funding level)The PPF press release stated that a rise in the number - and value - of pension schemes claiming on the Pension Protection Fund (PPF) resulted in its deficit increasing from £517 million as at 31 March 2008 to £1.2 billion as at 31 March 2009.
• Pension protection framework has proved to be resilient
• More than 200,000 people receiving PPF levels of protection
• PPF is now a significant investor, with a £2.9bn portfolio
• Successful hedging strategy yields returns of 13.4 per cent
The PPF press release may be read at:
http://www.pensionprotectionfund.org.uk/News/Pages/details.aspx?itemID=137
The Annual Report and Accounts may be read at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/ara_0809.pdf
The NAPF press release may be read at:
http://www.napf.co.uk/DocumentArchive/Press%20Releases/01_2009/20091105_05-11-2009%20-%20Reassurance%20Needed%20Over%20Future%20PPF%20Levy%20Approach.pdf
The Liberal Democrat statement may be read at:
http://www.libdems.org.uk/press_releases_detail.aspx?title=Government_must_ensure_pensions_lifeboat_is_kept_afloat_%e2%80%93_Webb&pPK=2c5e3137-7605-4392-978c-865c39e09eca
PPF Proposes Improvements For 2011/12 Levy Year
On 9th November the PPF published proposals for the 2011/12 pension protection levy year which aim to improve the way it assesses the insolvency risk for sponsoring employers of pension schemes that pay the levy. PPF Chief Executive, Alan Rubenstein, said: "Measuring the insolvency risk of the 20,000 sponsoring employers of schemes we protect is a complex task - and we need to have a system which accurately reflects the risks posed by a range of different employers, commercial and non-commercial, large and small, UK and foreign. We have shown in the past we are prepared to make changes to the way we do this."
The full press release may be read at:
http://www.pensionprotectionfund.org.uk/News/Pages/details.aspx?itemID=138
The consultation document may be found at:
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/insolvency_consultation_Nov09.pdf
PPF 7800 Index Update
On 10th November the PPF published the PPF 7800 Index update to the end of October. The press release noted some improvements in the aggregate funding position of almost 7,400 DB funds. According to the PPF press release 'The aggregate funding position (total assets minus total liabilities) of almost 7,400 DB funds is estimated to have improved over the month to a deficit of £97.6 billion at end-October 2009, from a deficit of £148.9 billion at end-September 2009 (Chart 1 and Table 1). Movements in financial markets would have raised the deficit by £19.9 billion but this was more than offset by a change in assumptions which took effect at 31 October 2009 and reduced the deficit by £71.2 billion. Scheme funding is, nevertheless, worse than it was a year previously (there was a deficit of £77.6 billion in October 2008).'
The press release may be found at:
http://www.pensionprotectionfund.org.uk/News/Pages/details.aspx?itemID=139
PPF: New Guidance for Actuaries on S143 Valuations
On 1st December the PPF issued new guidance for actuaries completing section 143 valuations (version H3). A new, more informal document - "Additional information on carrying out a section 143 valuation" has also been issued. This new document contains practical information for actuaries on the s143 process and includes a checklist for the basic items that should be included in s143 valuation reports.
The press release may be found at:
http://www.pensionprotectionfund.org.uk/News/Pages/details.aspx?itemID=143
The related documents may be found at:
http://www.pensionprotectionfund.org.uk/TechnicalGuidance/Pages/ValuationGuidance.aspx#s143valuations
What’s my view? Dan DeKeizer
The debate on a default retirement age continues. News at the end of last month was the High Court judgement denying the appeal from Help the Aged and Age Concern, concluding that a default retirement age at 65 does not contravene EU Directives against age discrimination. At the recent Conservative Party Conference, a recommendation has been tabled to raise the State Retirement Age to 66 by 2016, instead of the much longer path currently contemplated.
The demographic reality is that many of us will want or need to continue to work for income beyond age 65. A social agreement that achieves simplicity for all, protection from spurious discrimination claims for employers, and dignity for older workers and pensioners seems necessary and the ongoing debate highlights the serious nature of this discussion.
The continued trend towards defined contribution (DC) provision for retirement will, if anything, heighten the debate. A strong final salary defined benefit (DB) scheme has historically underpinned default retirement ages. When the financial capacity to retire for each individual is based on their personal circumstances of job history, contribution rates, and investment returns, the risk that greater numbers of workers will feel “forced out” is very real. In addition, whilst recent market trend has demonstrated that DC contributions have increased over the last few years, combined employer and employee contributions paid into DC schemes still remain lower than typical DB contribution rates. If lower amounts are being contributed it is likely that the eventual pensions will be lower than their DB counterparts.
The burden for funding and investing assets, as well as ensuring that those assets last throughout retirement, now rests squarely on the shoulders of today’s workers. With it comes a tremendous challenge for individuals as they are being asked to determine largely on their own how much to save, how to invest that money wisely and how to prudently manage their income plan in retirement so they are not depleted prematurely. This creates the real possibility that many pensioners will be forced to dramatically adjust their lifestyles and standard of living if they cannot work beyond age 65.
The issue of DC pensions could have serious repercussions for employers, with a likely increase in the number of employees requesting to work longer. It’s my view that companies should not only work hard on member communication and ensuring that their DC pension scheme is adequate for their employees, but also prepare for the dramatic changes in the management of their human resources that demography tells us is just around the corner.
Department for Work and Pensions Announcements
DWP Consults on Second Batch of Pensions Regulations
On 24th September the Department for Work and Pensions (DWP) published its second batch of regulations on pensions reform and Personal Accounts for consultation. The consultation documents seek views on matters including scheme self certification, qualification criteria for pension schemes and requirements to provide employees with information on auto enrolment. The consultations will consider the timetable for the implementation plan for the reforms and make additional proposals for the compliance and enforcement regime of auto-enrolment. In addition the Government is also publishing a second consultation, on draft guidance on the use of Group Self Invested Personal Pensions for auto-enrolment and the use of default options in workplace personal pensions used for auto-enrolment.
The main consultation will run until 5th November 2009. The second consultation will run until 17th December 2009.
The proposals in the consultation papers were criticised by the Association of British Insurers (ABI) who expressed concern at the phasing in of employer contributions starting from 1% in 2012, rising to 2% in 2015 and 3% in 2016 as well as the six week consultation period for the main measures. Maggie Craig, the ABI’s Director of Life and Savings, said “Botched implementation of the Pensions Act will put the success of the reforms at risk. It was always understood that some phasing was necessary, but the four-year delay before contributions rise to 3% is unacceptable. It means that no employer will have to pay more than 1% until October 2015 – the rate of saving for people in the scheme will move at the pace of the slowest. As things stand, employers may be encouraged to ditch private schemes, which benefit from higher contributions, in favour of the state-backed scheme where they could pay just 1% for at least three years, with Government approval. So, at a time when Britain is not saving enough, the crucial first few years of the new system will see less saving.”
The National Association of Pension Funds (NAPF) welcomed what it saw as ‘significant concessions’ in the Government’s proposals compared with March 2009. In particular, they welcomed changes to the overall length of the auto-enrolment period, the length of time employers are given to provide information to employees and improvements to what they see as the previous lack of flexibility on holding opt-out forms. The NAPF was concerned that if the auto-enrolment rules are too complex, it will encourage employers offering high value schemes to “level down” to the 2012 minimum. However, they said that problems still remain on issues such as opt-outs and refunds.
The British Chambers of Commerce said that the Government is still underestimating the costs of its proposals on auto-enrolment to small businesses, estimating that “Automatic enrolment alone will cost businesses £5.6 billion a year - so pension reform must be continually reviewed on this basis.”
The DWP press release may be viewed at:
PADA launches Myth Busting Programme
On 17th August the Personal Accounts Delivery Authority (PADA) announced that they will be embarking on a ‘myth busting’ programme to explain how the personal accounts scheme will fit in to the pension landscape from 2012. The initiative, led by PADA’s market engagement team, will consist of an ongoing meetings programme with key audiences including pension advisers, trade bodies and employers to explain the likely features of the pension scheme, clarify misunderstandings about its role and explore how the personal accounts scheme might be used.
The Myth Buster site may be found at:
http://www.dwp.gov.uk/newsroom/press-releases/2009/september-2009/dwp037-09-240909.shtml
Both sets of consultations are available at:
http://www.dwp.gov.uk/consultations
The ABI press release may be found at:
The NAPF press release may be found at:
The British Chambers of Commerce press release may be found at:
DWP Consultation on Section 75
The DWP has published a consultation on plans to make the employer debt rules more straightforward after claims that the existing rules stand in the way when businesses restructure.
“The proposals follow on from an informal consultation started last November. They would mean that employers in well run multiple employer schemes would not be required to meet a debt if they were planning to restructure, provided prescribed circumstances and conditions are met. The changes will not apply where a multi-employer scheme winds up, or the employer experiences an insolvency event. In these situations, the existing employer debt rules will continue to protect members’ benefits. In addition to these changes, a number of other technical amendments are proposed to make the existing Employer Debt (Section 75) regulations work better in practice.”
“The consultation period begins on 17 September 2009 and runs until 19 November 2009.”
This document is available on the Department’s website at:
http://www.dwp.gov.uk/consultations/2009
The press release may be read at:
http://www.dwp.gov.uk/newsroom/press-releases/2009/september-2009/dwp035-09-170909.shtml
DWP invites applications for first Chair of Personal Accounts Scheme
The DWP has announced that they will be recruiting for members of the new trustee corporation which will be running the Personal Accounts scheme. The trustee corporation will be set up as an independent body that will run the personal accounts scheme in the best interests of its members. It will be overseen by a chair, deputy chair and up to thirteen ordinary members. The Government is considering an early start date for the trustee corporation to allow sufficient time for the trustees to familiarise themselves in their roles, and to prepare for the personal accounts scheme to be launched in 2011 with a limited number of volunteer employers, so that the functionality of the scheme may be tested before auto-enrolment starts in 2012.
The press release may be read at:
http://www.dwp.gov.uk/newsroom/press-releases/2009/september-2009/dwp036-09-240909.shtml
For information on the recruitment process please see
http://www.hays.com/jobs/trusteecorporation/
Pensions General
Personal Accounts Delivery Authority Appoints its General Counsel
On 7th September the Personal Accounts Delivery Authority (PADA) announced the appointment of Nick Carter as its General Counsel. He will play a central role in the delivery of the personal accounts scheme in time for the onset of employer duties in 2012.
Nick Carter will oversee all legal, risk, compliance and governance matters arising in the personal accounts delivery programme and will be building these functions for the trustee corporation which will operate the personal accounts scheme.
The press release with the announcement may be found at:
http://www.padeliveryauthority.org.uk/documents/press-release-07-09-2009.pdf
Court Ruling on Default Retirement Age
On 25th September the High Court upheld a judgment keeping the default retirement age at 65 against an appeal jointly launched by Help the Aged and Age Concern. Mr Justice Blake decided that the default retirement age did not contravene an EU Directive against age discrimination.
The Court’s decision was welcomed by the CBI who called it ‘a vital victory for common sense’ and said that ‘it supports the approach that employers already take to retirement. Businesses don’t want to lose good people, whatever their age. CBI said “Eight out of 10 people who ask to work beyond 65 see that request accepted. Defeat for the government today would have created an unworkable situation that would have fuelled litigation and resentment.”
However, the Equality and Human Rights Commission has called on the Government to abolish the Default Retirement Age using the Equality Bill, which is soon to be debated in the House of Lords, rather than wait until a review of the policy next year. Their view was echoed by the Trades Union Congress which said: ‘'The decision of the court will be a blow to working people who need, or want, to work on beyond 65. It will allow employers to go on using an arbitrary retirement age as an excuse to weed out staff without having any obligation to compensate them or use fair processes. We hope that the Government will not use this decision as an excuse the delay the promised review of the default retirement age.'
The Equality and Human Rights Commission press release may be found at:
The TUC press release may be found at:
http://www.tuc.org.uk/pensions/tuc-17024-f0.cfm
The CBI press release may be read at:
Joan Bakewell calls for abolition of age 65 compulsory retirement age
The charity Working Families is marking its 30th anniversary by publishing the thoughts of key thinkers, politicians and policy makers on the changing world of work and of family life and structures. The essay by Dame Joan Bakewell, the Government's appointed Voice for Older People calls for the abolition of the default retirement age. The collection of essays is entitled: 'Tomorrow's World'. It may be purchased from Working Families at the cost of £10 (plus £2.75 P&P) for the hard copy, or £5 for the download from the following website link:
ABI and FSA publish online Pensions Calculator
The ABI and the Financial Services Authority have published an online pensions calculator “designed to help people guess how much they will have to live on in retirement….. The pensions calculator, on the Moneymadeclear website, enables anyone with a pension fund from a previous employer, those paying into a new pension scheme, or people without any existing pension at all, to calculate their potential retirement income based upon regular payments.” Further functionality will be added to the calculator in the future.
The press release may be found at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/119.shtml
The calculator may be found at:
http://www.moneymadeclear.fsa.gov.uk/tools/pension_calculator.html
Baring Asset Management: ‘Over six million people have no idea where their pension is invested’
“According to new research conducted by Baring Asset Management, a staggering 16.8 million (48%) people in work in the UK have never reviewed their pension plans and over 1.03 million people last did so over a decade ago. Of those who have reviewed their pension arrangements, over a third (37%) or 6.87 million don’t know where their pension is invested.”
For the Barings press release please go to:
http://www.barings.com/ucm/groups/public/documents/marketingmaterials/045667.pdf
TaxPayers' Alliance and Institute of Directors Joint Report: "How to save £50 billion”
The TaxPayers’ Alliance and the Institute of Directors has published a series of recommendations for cut-backs in Government spending. One of their recommendations is to “increase employee contributions to all unfunded public sector pension schemes by a third”. They estimate this would save £2,508m annually. Their report was criticised by the General Secretary of the TUC, Brendan Barber, who said that “Particularly striking is the absence of any cuts in the welfare state for the super-rich, such as tax relief on the huge pensions that top directors pay themselves.”
The TaxPayers’ Alliance report may be read at:
The TUC press statement may be read at:
http://www.tuc.org.uk/newsroom/tuc-16953-f0.cfm
New TPAS Website Launched
The Pensions Advisory Service (TPAS) has launched its new, revamped website. "Initial re-action to the revamp has been very positive", says TPAS Chief Executive Malcolm McLean. "It looks and feels better and we hope it will encourage even greater use of the service which has already seen large increases in visitor activity in recent times. It remains our wish to make available the most comprehensive, free pensions information and guidance service in the UK. The provision of a quality website is integral to that aim".
http://www.pensionsadvisoryservice.org.uk
TUC Comments on Private Sector Pension Statistics
On 10th September the TUC published an analysis of official private sector pensions statistics and concluded that ‘between 2005 and 2008 there was a 5.1 per cent drop in the proportion of the working population in the private sector in membership of a DB pension (18.6 per cent to 13.5 per cent). Over the same period, the increase in membership of DC schemes with an employer contribution was just 1.9 per cent (19.9 per cent to 21.8 per cent). Between 2007 and 2008, the number of people in a DC scheme with an employer contribution actually fell.’
TUC General Secretary Brendan Barber said: 'No wonder employer groups are so keen to attack public-sector pensions. It's a good diversion from the continuing retreat by employers from providing any kind of pension. This is an inevitable consequence of the ruthless deal led economy that makes investors see any kind of company that offers a decent pension as part of a long-term commitment to staff as soft and inefficient.
The TUC press release may be found at:
http://www.tuc.org.uk/pensions/tuc-16933-f0.cfm
The TUC analysis is based on raw data from ONS pension analysis statistics, available at:
http://www.statistics.gov.uk/statbase/Product.asp?vlnk=14058
Pensions Policy Institute report on Retirement income and assets: how can housing support retirement?
On 15th September the Pensions Policy Institute published a report commissioned by Prudential UK and Europe which considers “the role that housing wealth could play in supporting retirement for today’s pensioners and for future generations of pensioners. The report shows that housing wealth could play a greater role in supporting retirement in the future, but not everyone has housing wealth and those who do have housing wealth do not always view it as a way to save for retirement. For most people, housing wealth will be a complement to saving in a private or occupational pension, not a substitute.”
The report may be read at:
http://www.pensionspolicyinstitute.org.uk/default.asp?p=12&publication=0246&
The press release may be read at:
Pensions Policy Institute Briefing Note: ‘How could changes to life expectancy affect spending on pensions?’
The Pensions Policy Institute has published a briefing note on the “uncertainty in future longevity may have on expenditure on pensions.” This may be found at:
http://www.pensionspolicyinstitute.org.uk/default.asp?p=124&publication=0244&
Pensions Regulator and FSA publishes guidance for employers on talking to your employees about pensions
“The Pensions Regulator and the FSA have jointly published a new information leaflet for employers - 'Guide for employers: talking to your employees about pensions'. The leaflet sets out questions that employers may be asked by their employees about pensions and suggests answers and other sources of information that employees can refer to. It will be relevant to employers with DB, DC and contract-based schemes. The leaflet does not increase the responsibilities on employers but encourages them to look at the activities they can do voluntarily, at little or no cost, to help their employees to get greater value from the scheme. The Pensions Regulator and FSA have come together to publish this information with a shared belief that more engaged and confident employers can better support employees in planning for their retirement.”
To view the employer guide visit:
http://www.thepensionsregulator.gov.uk/responsible/index.aspx
To view the press release go to:
http://www.thepensionsregulator.gov.uk/mediaCentre/pressReleases/pn09-13.aspx
Pensions Regulator shortlisted for Better Regulation Award
The Pensions Regulator has been chosen as a finalist for 'The Better Regulation Award' at the forthcoming National Business Awards. Previously a finalist in 2007, the Regulator has been shortlisted this time for its programme of work to minimise the burden on pension schemes of meeting their legal duty to register and submit data to the regulator.
http://www.thepensionsregulator.gov.uk/mediaCentre/pressReleases/PN09-12.aspx
ABI Data on Pension Transfers
On 16th September, the ABI published data revealing that pension transfers using the industry Options system took 11 calendar days in the second quarter of the year. ABI said this compared to transfer times of just eight days in the first quarter, and the 31 calendar day industry average in 2008. ABI’s director of Life and Savings Maggie Craig said: "Although there has been a slight increase in the average transfer time from the Q1 2009, this should not detract from the efforts of pension companies to improve performance on Open Market Option transfers…. The good news is that in just one year, average transfer times have fallen by nearly three weeks."
The ABI release may be read at:
National Association of Pension Funds Council Membership 2009/10
The NAPF have announced the result of elections of people to serve on the Association’s main policy-making bodies, their Investment Council or Retirement Policy Council. The appointments are effective from the NAPF Annual General Meeting on 16 October 2009 and last for four years. The NAPF press release may be found at:
Centre for Policy Studies report on Pensions
The Centre for Policy Studies has published a report by Michael Johnson, a former investment banker called ‘Don’t let this crisis go to waste: a simple and affordable way of increasing retirement income’. The report calls for a more generous State Pension for older pensioners, enhancing the savings of low earners and a simpler State Pension framework. The report may be read at:
http://www.cps.org.uk/cps_catalog/don't%20let%20this%20crisis%20go%20to%20waste.pdf
The press release may be read at:
http://www.cps.org.uk/index.php?option=com_content&view=cpsarticle&id=240&Itemid=17
NAPF launches Pensions Quality Mark
On 21st September the National Association of Pension Funds launched its Pensions Quality Mark and announced seven eligible companies including Marks & Spencers Plc and Kelloggs. According to the NAPF press release “The Pension Quality Mark will help employers demonstrate the value of their defined contribution (DC) pension scheme and, by making workplace pensions more understandable and attractive, encourage more employees to join. The awards, presented by Angela Eagle MP, Minister of State for Pensions and the Ageing Society, certify that the companies’ DC pension schemes have met the key qualifying criteria on contribution rates, governance and communications. The other companies in the first wave to be awarded the Pension Quality Mark are Accenture, BG Group, IBM, Standard Life and The Royal College of Physicians.”
Further information about the Pension Quality Mark can be found at:
http://www.pensionqualitymark.org.uk
The NAPF press release may be read at:
British Chambers of Commerce Research on PPF Levy
The British Chambers of Commerce (BCC) has published research on the Pension Protection Fund (PPF) levy which claims to highlight ‘the serious problems the levy is causing for firms that offer DB pension schemes.’ The press release says ‘The original amount the PPF levy collected from companies with DB schemes was £300 million per year. However, this was raised dramatically to £675 million in 2007/8, and now the figure stands at an astonishing £700 million. As a result, many firms are finding the levy far too punishing a cost, especially during an economic downturn. The BCC argues that businesses do not have to offer the more generous DB scheme, but they do so to show they value their employees. There is now a real danger that the levy could force DB schemes to close at an even quicker rate, and that businesses could even become insolvent as a result.’
The press release may be read at:
The report may be downloaded at:
What’s My View? Dan DeKeizer, MetLife Assurance Ltd
The debate in Brussels on Solvency II continues, with concern growing in respect of the impact on the UK pensions industry.
We have stated previously that we believe that the pensions promises made by employers to their staff should be kept. We expect that is the common goal of all companies who sponsor pension schemes. However, the reality is that some companies will fail, leaving under-funded pension schemes to secure less than promised pension benefits with an insurance company through a bulk annuity contract or enter the Pension Protection Fund (PPF).
Whilst it is generally accepted that the guarantee offered by the majority of corporate sponsors is seldom as strong as the guarantee offered by an insurer backed by prudent reserving and capital standards, introducing this level of security will be expensive for UK corporates. Where sponsors do not have the financial ability to improve the current situation, it seems counter-productive to require additional capital to back their promises, either by increasing funding requirements or applying Solvency II-type factors. However, it would be a constructive move for sponsors of DB schemes to have improved information about risk levels and appropriate prudent funding targets for their scheme.
One means for companies to assess this target for prudent funding would be for them to carry out a Solvency II-type risk analysis of their scheme funding. They could then agree with regulators to fund their scheme at a level that retains material risk to the scheme or corporate sponsor, but on the understanding that over time they would increase funding levels to mitigate this risk.
For this to be truly successful, however, there needs to be assurances to sponsors that they will not be penalised for having surplus funding in their schemes. Moreover, to encourage a greater level of funding, companies should be incentivised to increase contributions through taxation and regulation.
Allowing employers more flexibility to increase funding levels in their scheme over an agreed period of time with the risks understood would help shift the pendulum away from the problem of constant pension deficits to a more balanced picture over time that would satisfy the regulators and take pressure of the PPF.
Pensions News
Solvency II – Concern grows on draft rules for capitalisation of annuities
There has been extensive press coverage of the UK pensions industry’s concerns at new draft Solvency II implementing measures on capital requirements for long-term annuities. The CEA the European insurers association have published on their website a letter they wrote this month to Thomas Steffen, the Chairman of CEIOPS, the European regulatory body which drafted the implementing measures. The CEA says that ‘after analysing the first and second sets of draft advice, we have realised that CEIOPS appears to have abandoned the principle-based and economic approach it had adopted in favour of crude ratcheting up of financial requirements. Overall, the draft advice is characterised by a systematic injection of quantitative and qualitative elements of conservatism that lead to a number of proposed measures which, in our opinion, are not only inconsistent with the principles crystallised in the Framework Directive, but also not inline with the agreed fundamentals of the new regime. The cumulative effects of the proposed solutions would result in a regime which includes a level of prudence that goes far beyond the level which has been politically agreed, fails to encourage sound internal risk management and entails a cost of compliance that would be unreasonable for the whole European industry’.
The CEA letter may be read at:
PADA launches Myth Busting Programme
On 17th August the Personal Accounts Delivery Authority (PADA) announced that they will be embarking on a ‘myth busting’ programme to explain how the personal accounts scheme will fit in to the pension landscape from 2012. The initiative, led by PADA’s market engagement team, will consist of an ongoing meetings programme with key audiences including pension advisers, trade bodies and employers to explain the likely features of the pension scheme, clarify misunderstandings about its role and explore how the personal accounts scheme might be used.
The Myth Buster site may be found at:
http://www.padeliveryauthority.org.uk/documents/myth_buster_v3.pdf
The Key Facts site may be found at:
http://www.padeliveryauthority.org.uk/documents/key_facts_v5.pdf
The press release may be found at:
http://www.padeliveryauthority.org.uk/documents/press-release-17-08-09.pdf
Court overrules tribunal on loss of final salary pension
The Pension Advisory Service reported on 27th August that the Court of Appeal has overturned a tribunal decision that gave an unfair dismissal victim compensation for the loss of her defined benefit pension. In the case of Roberts v Aegon UK Corporate Services, the Court of Appeal allowed the employer’s appeal by determining that a final salary pension scheme was not a unique benefit but, rather, an important part of the total remuneration package. Consequently, the Employment Advisory Tribunal (EAT) is not entitled to apply different tests to different aspects of the remuneration package.
The full story may be found on the Pensions Advisory Service website at:
Consultation on draft Financial Assistance Scheme Regulations
On 12th August the Government published a consultation on the draft Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2010. The consultation seeks views on the draft Regulations that make proposals for the delivery of the remaining elements of the extension to the Financial Assistance Scheme (FAS) announced on 17 December 2007. These include:
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the transfer of assets to government;
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payment of lump sums; and
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provision for those members of schemes who would have received more from their pension scheme than the Assistance payments FAS would otherwise provide had their scheme continued to wind-up and purchase annuities rather than transfer assets.
The written consultation period will last for 8 weeks and end on 6 October 2009.
The announcement may be found at:
The consultation may be read at:
http://www.dwp.gov.uk/docs/fas-misc-amend-regulations2010.pdf
The draft regulations may be found at:
http://www.dwp.gov.uk/docs/fas-misc-amend-regs-2010-draft-si.pdf
The summary document may be read at:
http://www.dwp.gov.uk/docs/fas-misc-amend-regulations2010-ia.pdf
PPF Updates Trustee Guidance for the Financial Assistance Scheme
During August the Pension Protection Fund updated its guidance for all trustees of pension schemes that have qualified for the Financial Assistance Scheme (FAS) and are in the process of winding-up. This takes account of new regulations which have been laid recently. The guidance may be found at:
http://www.pensionprotectionfund.org.uk/fas/info_pensions_professionals/pages/guidanceandforms.aspx
Accounting Standards Board seeks views on proposals on future reporting requirements for UK and Irish entities
On 11th August the Accounting Standards Board issued a consultation paper ‘Policy Proposal: the future of UK GAAP’, which sets out its proposals for the future reporting requirements for UK and Irish entities. The Board’s proposals envisage a differential reporting regime based on public accountability, broadly in line with the IASB’s definition in the IFRS for SMEs, which states that entities do have public accountability if they (a) trade their debt or equity instruments in a public market or (b) hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses.
The Board is proposing a three-tier approach to developing UK GAAP converged with IFRS as follows:
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Tier 1 – publicly accountable entities would apply IFRS as adopted by the EU (‘EU-adopted’ IFRS).
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Tier 2 – all other UK entities other than those who can apply the Financial Reporting Standard for Smaller Entities (FRSSE) could apply the IFRS for SMEs.
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Tier 3 – small entities could choose to continue to apply the FRSSE.
The press release may be found at:
http://www.frc.org.uk/asb/press/pub2054.html
Pensions Policy Institute response to PADA on Personal Accounts
On 7th August the Pensions Policy Institute published its submission to the Personal Accounts Delivery Authority’s consultation on ‘Building personal accounts: designing an investment approach’. The submission may be found at:
DWP consults on draft Occupational and Personal Pension Schemes regulations
On 11th August the Department for Work and Pensions issued a consultation on a draft of the Occupational and Personal Pension Schemes (Authorised Payments) Amendment Regulations 2009. The draft statutory instrument makes minor amendments to regulations governing occupational, personal and stakeholder pension schemes consequential to changes made to Her Majesty’s Revenue and Customs’ (HMRC) taxation rules. Existing pensions legislation allows for lump sum payments to be made in certain circumstances and operates, in the main, by cross referring to HMRC tax law, specifically the Finance Act 2004. HMRC have identified a number of situations where the tax rules treat certain lump sum payments from a pension scheme as unauthorised but where it would produce a fairer tax treatment for the recipient if they were treated as authorised payments (payments which are not subject to a high taxation charge). These changes were introduced by HMRC through the Registered Pension Schemes (Authorised Payments) Regulations 2009 and come into force on 1 December 2009. A copy of the regulations can be found on the HMRC website at: http://www.opsi.gov.uk/si/si2009/uksi_20091171_en_1
The consultation may be downloaded from:
http://www.dwp.gov.uk/docs/opps-auth-pyt-regs-consultation.pdf
PPF Announces Changes to Valuation Assumptions
On 31st July the Pension Protection fund announced that it is considering making some changes to the assumptions used for pension scheme valuations under section 143 and section 179 of the Pensions Act 2004 in line with pricing in the buy-out market. The PPF is accordingly consulting on these assumptions and the consultation will close on 11th September. They plan to introduce the new assumptions from 31st October 2009.
The press release and consultation may be found at:
http://www.pensionprotectionfund.org.uk/news/pages/details.aspx?itemid=124
Pension Protection Fund publishes new electronic newsletter
The PPF have started publishing a new bi-monthly electronic newsletter. The first edition for September 2009 may be viewed at:
http://www.pensionprotectionfund.org.uk/ppf_bulletin_sept_2009.pdf
What’s My View? Dan DeKeizer, CEO, MetLife Assurance Ltd
Whilst the Pension Protection Fund (PPF) has recently announced that it intends to establish a steering group of senior business figures and others to help further develop its proposals for the long-term future of its pension protection levy (see ‘Pension Protection Fund (PPF) updates consultation on long-term levy future’, Regulator Announcements). In my view this does nothing to address the more pressing concern that schemes in the PPF assessment period are left to manage the challenges posed by a lengthy assessment process.
During the assessment period, which can last up to two years, pension schemes are required to look for insurance providers in the open market who may be able to secure members’ benefits at a level higher than those specified by the PPF. However, over this period, the assets owned by the pension scheme are subject to market volatility and consequently may drop in value such that trustees are prevented from securing with insurers the benefits they anticipated at the start of the process.
We believe that pension schemes entering the PPF should be encouraged to secure benefits outside the PPF as soon as it is identified as being possible. This public private sharing of the liabilities of pension schemes with insolvent sponsors between the PPF and the private insurance sector will help reduce the liabilities for the industry funded PPF.
However, in order to assist such burden sharing, the PPF assessment process should include an early step requiring the scheme to secure an insurance policy for known existing members with benefits equal to the current PPF formula for minimum benefits. Using a common benefit framework would speed the quotation process and encourage competition, helping to lower the net cost of the insurance policy. For schemes that cannot fund to this level of benefits, such an early step would allow a rapid identification of that reality and help eliminate the complexity of the assessment process when both PPF and private solutions are in play.
If, after the data cleansing and missing member search is complete, there are remaining assets, these can be used to buy PPF level benefits for those new (or corrected) members; with any remaining funds used to top up benefits in excess of PPF levels. If assets are insufficient to buy PPF benefits for the newly identified members, the scheme can still go into the PPF, with the PPF retaining the insurance policy as a well matched asset for the majority of the accepted liabilities, thereby reducing the overall risk to the PPF itself and minimising future levies.
Pensions News
Retail Distribution Review: Financial Services Authority (FSA) publishes Consultation Paper
On 25th June the FSA issued a consultation paper on its Retail Distribution Review (RDR), which sets out detailed proposals for implementing the wide-ranging reforms it outlined in November last year. According to the FSA’s press release, the changes, will improve outcomes for savers and investors by enhancing the quality of advice they receive, and prepare both consumers and the industry for the future. The changes are due to take effect from the end of 2012.
In particular, the FSA is consulting on rules to ensure that:
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Independent advice is truly independent and reflects investors’ needs;
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People can clearly identify and understand the service they are being offered;
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Commission-bias is removed from the system – and recommendations made by advisers are not influenced by product providers;
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Investors know up-front how much advice is going to cost and how they will pay for it; and
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All investment advisers will be qualified to a new, higher level, regarded as equivalent to the first year of a degree.
The FSA is calling on all investment advisers to consider how they will adapt to these reforms. According to the FSA, the RDR presents a significant opportunity for firms and individuals in the retail investment market to modernise practices, raise standards and improve the way they treat their customers.
The FSA press release may be read at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/082.shtml
The consultation paper may be read at:
http://www.fsa.gov.uk/pubs/cp/cp09_18.pdf
Government plans for the reform of financial markets
On 8th July the Chancellor of the Exchequer published 'Reforming Financial Markets', a document setting out the Government’s proposals for the reform of the financial system. The proposals focus on reform of the way banks are regulated, with emphasis put on the risks financial firms can present to the economy and greater protections for consumers. The proposals include:
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Plans for the FSA to place higher capital requirements on firms that present greater risks to the system, and measures to deal with the potential failure of institutions that might have a significant impact on the economy;
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Steps to help consumers make better informed choices, including a national money guidance service funded by a levy on the financial sector and a new independent consumer education body; and
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A strengthened framework for financial stability, to deal with system-wide risks in today’s complex global markets. This will include setting up a new Council for Financial Stability - which will bring together the Bank of England, the FSA and the Treasury to monitor system wide financial stability and respond to long-term risks as they emerge.
The Treasury press release can be found at:
http://www.hm-treasury.gov.uk/press_65_09.htm
and the Reforming Financial Markets document at:
http://www.hm-treasury.gov.uk/reforming_financial_markets.htm
Conservative Party recommendations on financial regulation
On 20th July the Conservative Party launched a white paper on banking regulation entitled, ‘From crisis to confidence: Plan for Sound Banking’. The main recommendations as outlined in the party’s press release are:
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Abolish the Financial Services Authority (FSA) and the tripartite regime it operated with the Bank of England and the Treasury;
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Create a strong and powerful Bank of England with the authority and powers necessary to ensure financial stability;
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Create a powerful Consumer Protection Agency that will bring together in one body the consumer protection powers currently split between the old FSA and the Office of Fair Trading;
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Demand that banks set aside much more of their own money for their risky lending as a form of insurance policy;
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Appoint a Treasury Minister to help ensure that European regulations are right for the City of London
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Ask the Office of Fair Trading and the Competition Commission to conduct a focused examination of the effects of consolidation in the retail banking sector.
The press release may be found at:
http://www.conservatives.com/News/News_stories/2009/07/Our_plan_for_sound_banking.aspx
Work and Pensions Committee: Tackling Pensioner Poverty Report
On 30th July the Work and Pensions Select Committee published a report on ‘Tackling Pensioner Poverty’. The Chairman of the Committee, Terry Rooney MP, said:
“The Government has done a lot to help pensioners, but there is a lot still to do. The Government has committed to eradicating child poverty, now they need to commit to eradicating pensioner poverty. Many Government strategies have worked well in the past but are now showing diminishing returns. The Government needs to develop new and innovative programmes to lift pensioners out of poverty.”
The report may be read at:
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmworpen/411/411i.pdf
Regulator Announcements
New Insurance Sector director at the FSA
On 15th June the FSA announced the appointment of Ken Hogg, currently interim Chief Financial Officer at MGM Assurance, as Insurance Sector director. He started at the FSA on Monday 6th July and will report to Jon Pain, FSA managing director for retail markets. The Insurance Sector team leads the FSA's work on insurance sector issues and represents the FSA in its dealings with a wide range of external stakeholders including trade associations, professional bodies, analysts and international regulators. It aims to ensure that industry wide insurance issues that may pose a risk to the FSA’s objectives are identified and resolved on a timely basis. Prior to joining MGM Assurance, Ken Hogg was Chief Operating Officer at AIG Life. He also spent 20 years at AEGON.
Ken Hogg succeeds Sarah Wilson, who had indicated at the beginning of this year that she wanted to seek new challenges outside the FSA. She has, however, agreed to stay on for several more months in an advisory capacity.
The press release can be found at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/077.shtml
The Pensions Regulator - Prudent funding targets are key to the health of pension schemes
On 23rd June the Pensions Regulator published a statement emphasising the importance of prudent funding levels for pension schemes, stating that, where sponsors are in difficulty, flexibility is available in recovery plans. According to the press release, the statement highlights that:
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Economic and financial conditions have resulted in cash constraints for many employers in the short term, and for some, greater uncertainty about longer term prospects;
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The current regulatory framework and approach to scheme funding is sufficiently flexible to cope with these conditions;
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Technical provisions are the scheme-specific funding standard which pension schemes must target and the regulator's requirement is that they are set prudently; there is flexibility in setting a recovery plan to repair a deficit to meet the funding objective;
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At the current time, FRS17 is unlikely to represent an adequate level of prudence without further adjustment;
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Any risk margin in the assumptions for setting technical provisions must take account of the extent to which the employer covenant can support them;
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Technical provisions should not be compromised to make a recovery plan appear affordable; the size of the deficit does not necessarily dictate annual deficit repair contributions to the pension scheme, these must be determined with reference to what is reasonably affordable for the employer.
To view the press release in full:
http://www.thepensionsregulator.gov.uk/whatsNew/pn09-07.aspx
To view the statement:
http://www.thepensionsregulator.gov.uk/pdf/EmployerCovenantStatementJune2009.pdf
To view the case studies:
http://www.thepensionsregulator.gov.uk/guidance/schemeFunding/fundingCaseStudies.aspx
The Pensions Regulator publishes Annual Report and Accounts for 2008 – 2009
On 14th July the Secretary of State for Work and Pensions laid the Pensions Regulator's audited annual report and accounts for 2008-2009 before Parliament. Tony Hobman, chief executive of the Pensions Regulator, said:
"This has been a tough year for schemes and for those running them. We have
continued to deliver against our long-term strategic themes, focused on our statutory objectives, to protect member benefits, to reduce calls on the Pension Protection Fund and to raise the standards of governance and administration across work-place pensions in the UK. At the same time we have delivered extra support through the economic downturn, including a recent series of statements and a round of national workshops to explain our approach to scheme funding. We have also sustained our commitment towards Better Regulation. By reducing collection burdens and introducing pre-populated scheme returns, contributing to our drive to doing more for less, we have been able to target more resources on our regulatory front line."
To view the press release in full:
http://www.thepensionsregulator.gov.uk/mediaCentre/pressReleases/pn09-09.aspx
To view the annual report and accounts for 2008-2009:
http://www.thepensionsregulator.gov.uk/pdf/AnnualReportAccounts20082009.pdf
The Pensions Regulator publishes responses to its consultation on the draft revised trustee knowledge and understanding (TKU) code of practice and scope guidance
On 17th July the Pensions Regulator published the responses it has received to its consultation on the draft revised trustee knowledge and understanding (TKU) code of practice and scope guidance. The Pensions Regulator has found widespread support for the TKU regime. In its press release the Pensions Regulator said:
”The responses demonstrated the extent to which the regime has become embedded in normal trustee activities since it was implemented in 2006. We were pleased to see that most respondents were supportive of the TKU regime and acknowledged the positive change it has made in the confidence with which trustees now approach their responsibilities. Despite some early concern about our increasing expectations of trustees, most respondents recognised that the requirements have not changed substantially and, as such, the revised code and scope have not substantially changed either.”
The draft revised code is laid before parliament and the Northern Ireland Assembly and it is expected that the revised code will come into effect later this year.
To read the press release in full go to:
http://www.thepensionsregulator.gov.uk/mediaCentre/pressReleases/pn09-10.aspx
To view the consultation report:
http://www.thepensionsregulator.gov.uk/pdf/TKUconsultationreport2009.pdf
To view the code:
http://www.thepensionsregulator.gov.uk/pdf/TKUcode2009.pdf
Pension Protection Fund (PPF) updates consultation on long-term levy future
On 30th July the PPF announced that it will be establishing a group of senior business figures and others to help develop further its proposals for the long-term future of its pension protection levy. This steering group will look at formulating revised proposals for a new levy formula. The group will be supported by a second group of technical experts who will help the PPF and the steering group explore the practical issues of formula design. This move is in response to industry reaction to the proposals which were first published for consultation last November. While most people supported the principles behind the proposals, they were divided on how the proposals should be implemented. Membership of the two groups will be by PPF invite only. Details about who will sit on the two groups will be announced later in the year.
Once this group has reached its conclusions, the PPF will publish revised proposals for consultation in early 2010. The PPF does not intend to implement any new proposals for the levy until 2012/13 at the earliest.
To view the press release go to:
http://www.pensionprotectionfund.org.uk/news-details.htm?id=7672
Update on the future development of the pension protection levy, can be found on the PPF website at: http://www.pensionprotectionfund.org.uk/levy_update_doc_july_2009.pdf
What’s my opinion? - Dan DeKeizer
There is a debate going on in Brussels right now about whether the solvency requirements for occupational pension schemes should be brought in line with the rules for private insurers under Solvency II (see 1. European Commission Hearing on EU Occupational Pensions Directive, Pensions News). In order to reach a conclusion, policy-makers need to understand the fundamental differences between private pension provision and employer-sponsored occupational pension schemes. What is called for is a nuanced approach which plays to the different needs of providers of occupational schemes.
We believe that the pensions promises made by employers to their staff should be kept, and expect that is the common goal of all companies who sponsor pension schemes. However, the reality is that some of those companies will fail, leaving some pension schemes underfunded and with no recourse to future corporate profits to shore them up. The guarantee offered by the majority of corporate sponsors is seldom as strong as the guarantee offered by an insurer backed by prudent reserving and capital standards. In addition, the fact that the PPF is required by law to both have a levy (which can increase in the future) and benefit reductions (which can become worse in the future), indicates that the current contingency arrangement is not sufficient to ensure that pension promises are kept. In turn, this increases both social costs and the chance of seeing more elderly either dependent on the state and/or living in poverty.
Where pension schemes have the ability to do so, insuring their benefits with strongly capitalised insurers provides a welcome additional level of protection for their pensioners and their dependants. Even insuring a partial level of benefits, for example, without inflation indexing or benefits at the current PPF level, can give confidence to scheme members that the majority of their pension is secure.
Where sponsoring companies do not have that financial ability, it seems counter-productive to require additional capital to back their promises, either by increasing funding requirements or applying Solvency II-type factors. I believe this just introduces an unnecessary increase in costs for the schemes without actually improving the likelihood that the pensions will be maintained or that the company will survive for the lifetime of their pensioners.
Encouraging companies to fund their schemes more appropriately during favourable economic times, perhaps by providing tax credit for higher levels of funding the pension plan, and permitting the withdrawal of those funds or contribution holidays when the scheme secures benefits with a well capitalised insurer, may be a more successful approach to helping pension schemes and pensioners realise the full value of the promises made to them in the past without increasing the burden on the state and ultimately the taxpayer.
Turner Review – FSA continues to push stricter regulation
In a speech to the Global Financial Forum in New York on 24th March, Lord Turner, the Chairman of the Financial Services Authority said that the potential macroeconomic costs of tighter regulation for banks had to be set against the benefits of lower risk to financial stability. He said that a major objective of the reforms set out in the recent Turner Review on banking supervision was ‘to return banking to its basic functions – providing vital services of real value to the real economy. And a major lesson of the crisis is that that we cannot rely on market discipline alone or even primarily to achieve this, or to ensure that financial instability risks are contained, but must use robust regulation.’ He said that there were three most important aspects of this reform. The first is ‘a macro-prudential approach, focusing on whole system risks, rather than only on risks at the individual institution level’. The second change requires ‘major changes to capital adequacy regulation’ and the third ‘a dramatically increased focus on liquidity’.
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/056.shtml
European Commission holds Open Hearing on Solvency II and Occupational Pensions
The Internal Market and Services Directorate General of the European Commission has announced a Public Hearing on the harmonisation of solvency rules applicable to Institutions for Occupational Retirement Provision (IORPs) covered by Article 17 of the IORP Directive and IORPs operating on a cross-border basis on Wednesday, 27th May 2009, in Brussels. The aim of this Public Hearing is to draw first lessons from the public consultation launched in early September 2008. The Commission may discuss whether the solvency requirements agreed in the Solvency II Directive may be extended to cover occupational pension schemes.
Information and registration details may be found at:
http://ec.europa.eu/internal_market/pensions/commission-docs_en.htm#hearing
One Hundredth Pension Scheme transfers into Pension Protection Fund
On 31st March the Pension Protection Fund announced that the 100th scheme had now transferred into the PPF. 343 members of the Bristol-based Brooks Service Group Plc pension scheme will now receive PPF compensation, or will do so on retirement. The PPF Chief Executive said “This is a major achievement for an organisation set up just four years ago – and will help reassure people belonging to work-based pension schemes that their pensions are protected should their employer go bust. This is especially important during a time of recession.”
The transfer of the 100th scheme into the PPF means that it is now paying, or will pay, compensation to a total of 31,191 people throughout the country. 178,904 more people are members of 290 schemes which are currently in a PPF assessment period, which generally takes about two years to complete.
http://www.pensionprotectionfund.org.uk/news-details.htm?id=7064
Pension Protection Fund Announces Compensation Cap for 2009/10
On 2nd April the PPF announced that the compensation payable to defined benefit pension scheme members, whose employers have gone into liquidation, will be capped at £31,936.32 for people who have not yet retired but whose scheme has a retirement age of 65. The figure will come into effect from 1 April 2009. The compensation cap for those scheme members who have taken early retirement also increases by the same percentage. Under PPF rules, those people who are already retired and had reached their scheme's normal pension age when their employer wound up receive 100 per cent of what they are entitled to. But, because those who have yet to retire will receive 90 per cent of what they were entitled to, their compensation will also be capped at the 90 per cent level, ie £28,742.68. The average payout to people whose schemes have transferred into the PPF is £4,000 a year.
http://www.pensionprotectionfund.org.uk/news-details.htm?id=7078
UK Single Equality Bill
The Government published the Equalities Bill on 27th April 2009. It seeks to ban discrimination of all kinds (including age discrimination) in access to all goods and services outside employment. The Bill also aims to brings together existing legislation on disability, sex, race, religion or belief, sexual orientation, gender reassignment, and marriage and civil partnerships. Most of the Bill is expected to come in to force from autumn 2010. The Equality Bill will ban age discrimination against people aged 18 and over outside of the workplace, where goods are bought, and services provided, such as in shops, hospitals, and when buying financial products. However, this aspect of the legislation which concerns age dscrimination will not come into force until 2012 at the earliest. Specifics on age-related legislation as it applies to insurance products will be consulted on this summer as part of the Government’s Regulatory Impact Assessment.
More information and a copy of the Bill can be found on the Government Equalities Office website:
http://www.equalities.gov.uk/equality_bill.aspx
ABI Reviews Money Market Sectors
On 5 April the Association of British Insurers announced that they are proposing to introduce a new fund sector for more cautious investors. This new fund sector has not yet been named, and the ABI is still consulting on what stakeholders think of its proposals. ABI Fund Sectors categorise different types of investment fund, allowing consumers and financial advisers to compare funds with similar investment profiles against each other. The ABI emphasised that although no fund is without risk, the new sector will seek to help consumers identify funds that have a greater focus on capital stability. The proposed new sector would exist in parallel with the existing money market sector, and would have stricter limits on the type of instruments funds can invest in and their maturity. In order to seek views on its proposals the ABI has launched a consultation. The closing date for the consultation is Friday 8 May 2009 and will be reported on shortly afterwards.
Responding to the Association of British Insurers' (ABI) Money Market sector review, the Investment Management Association (IMA) welcomes the proposal to add a new "cash like" money market sector definition. IMA has also been reviewing its own Money Market sector to complement European-wide initiatives as well as the ABI's work.
ABI Press Release
http://www.abi.org.uk/Newsreleases/viewNewsRelease.asp?nrid=17554
Investment Management Association Press Release
http://www.investmentuk.org/press/2009/20090406.asp
Pensions Policy Institute publishes report on Retirement Income Needs
On 28th April the Pensions Policy institute published a report on ‘Retirement Income and Assets: Do pensioners have sufficient income to meet their needs’ The report identifies the main factors that determine pensioners’ needs for income and considers whether pensioners are likely to have sufficient income to meet their needs and expectations throughout their retirement.
The press release and report may be read at:http://www.pensionspolicyinstitute.org.uk/news.asp?p=327&s=2&a=0
New UK Study estimates heavily obese men lose over 10 years of life to obesity
A new study by the actuarial profession which calculates the number of years of life lost to obesity reveals that a young, heavily obese man with a BMI of over 40 or waist to height ratio over 0.74, is estimated to lose over 10 years of his life, and possibly as much as 20 years, when compared with a man having optimum measurements.
Co-author Dr Ben Rickayzen, Head of the Faculty of Actuarial Science and Insurance at Cass and Fellow of the Institute of Actuaries, said: “This study covers a topic that is important to the planning of health care, social policy and insurance in the UK and validates recent government policy and the surrounding publicity over nutrition. …To date, the majority of the research into the effects of obesity on mortality is based on US population samples. However, there is a dearth of research into obesity using UK specific data. The aim of this paper is to redress some of this balance by considering the effect of obesity on life expectancy in the UK”.
http://www.actuaries.org.uk/__data/assets/pdf_file/0019/149014/20090407_Obesity_press.pdf
FSA on Credit Rating Agencies and Hedge Fund
Dan Waters, Sector Leader of the FSA’s Asset Management division gave a speech on ‘Regulatory Challenges for Fund Managers’ at a Future of Fund Management conference on 24th March. On credit rating agencies, he said that ‘Poor quality credit ratings and poor use of credit ratings played an important role in the crisis.’ He said that ‘There is a consensus among regulators globally that we should regulate Credit Rating Agencies to ensure rigorous analytical independence, and ensure that they only rate instruments simple enough and with enough historic record to make consistent rating possible.’
On market transparency, he said that the ‘FSA is reviewing whether there could be arrangements which more effectively support the holding and protection of client positions at clearing houses, and also whether the arrangements for settling defaulted OTC equity transactions could be improved.’ He reiterated the FSA’s commitment to regulating off-balance-sheet vehicles such as Structured Investment Vehicles, conduits and hedge funds. However, he said that ‘we are yet to see any concrete evidence to support the view that hedge funds have made a significant direct contribution to the underlying causes of the crisis.’ This did not mean that regulators should not seek to improve the regulation of hedge funds in the future, and he outlined the FSA’s views on what an effective regulatory framework for hedge funds would look like.
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0324_dw.shtml
What’s my opinion? - Dan DeKeizer
The ABI’s decision to consult on introducing a new fund classification for more cautious investors is a sign of our times. This is partly because it shows how investor confidence has been damaged by the recent market turbulence. A more optimistic interpretation of this development is that this is a sign that savers are seeking to take a more active role in managing their pension investments, and are looking for funds which address their concerns and need for real income security in their later years.
As populations age, savers may be more focused on the importance of having a secure retirement, yet at the same time employers are increasingly pulling out of providing occupational pensions for their employees. The challenge for the future is twofold: how do we help employees to understand the huge benefits of having guaranteed lifetime income and – when no such scheme is available – how can the private pensions industry help address the changing needs of today’s workers and savers? It has always been true, but is more obvious now than ever, that the traditional three-legged stool of protected retirement income - the government, employer and individual – really comes down to individual choices and social agreement. Where available, the choice to work for an employer with a strong defined benefit plan versus one with a defined contribution plan or one with no plan at all is one of those choices that individuals make in preparing for their future income security. With employers closing defined benefit plans to new members or new accruals, the task of replacing that value falls even more directly on the individual.
And I don’t see the Government (the “social agreement”) stepping up to take the place of the employer. The Government’s introduction of Personal Accounts for people on low incomes by 2012 seeks to address the problem for part of the population, but Personal Accounts are not for everybody, and it remains to be seen whether widely discussed risks of either Personal Accounts replacing existing occupational pension schemes or a ‘levelling-down’ of the overall employer contributions emerge. The Pension Protection Fund’s recent update of the compensation cap they apply for future pensioners retiring at the age of 65 reminds us that Government-sponsored solutions to pension scheme closure (although necessary in extreme cases) are limited in their ability to provide desired levels of pension income.
In fact, here in 2009, employers are facing similar choices to those that consumers will face in a few years’ time. How much money needs to be set aside to secure a satisfying retirement? How to find those funds in the budget? And who can be trusted to hold and administer those funds? Sadly, employer-sponsored pension schemes are still not sufficiently valued by many employees, at the same time as the true cost is becoming more apparent to both employers and the market. As a result of this we are increasingly seeing employers looking to the employee to manage responsibility for their pensions in the future, whilst past obligations are secured by the insurance industry through buy-out solutions. A well-capitalised insurer can offer flexibility of benefits, leading to wider choices for trustees and better solutions for pensioners. More importantly, such a solution offers secure lifetime income for the pensioner. This is what our current pensioners need and what those of us still in the workplace are looking for in the future.
Turner Review – FSA continues to push stricter regulation
In a speech to the Global Financial Forum in New York on 24th March, Lord Turner, the Chairman of the Financial Services Authority said that the potential macroeconomic costs of tighter regulation for banks had to be set against the benefits of lower risk to financial stability. He said that a major objective of the reforms set out in the recent Turner Review on banking supervision was ‘to return banking to its basic functions – providing vital services of real value to the real economy. And a major lesson of the crisis is that that we cannot rely on market discipline alone or even primarily to achieve this, or to ensure that financial instability risks are contained, but must use robust regulation.’ He said that there were three most important aspects of this reform. The first is ‘a macro-prudential approach, focusing on whole system risks, rather than only on risks at the individual institution level’. The second change requires ‘major changes to capital adequacy regulation’ and the third ‘a dramatically increased focus on liquidity’.
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/056.shtml
European Commission holds Open Hearing on Solvency II and Occupational Pensions
The Internal Market and Services Directorate General of the European Commission has announced a Public Hearing on the harmonisation of solvency rules applicable to Institutions for Occupational Retirement Provision (IORPs) covered by Article 17 of the IORP Directive and IORPs operating on a cross-border basis on Wednesday, 27th May 2009, in Brussels. The aim of this Public Hearing is to draw first lessons from the public consultation launched in early September 2008. The Commission may discuss whether the solvency requirements agreed in the Solvency II Directive may be extended to cover occupational pension schemes.
Information and registration details may be found at:
http://ec.europa.eu/internal_market/pensions/commission-docs_en.htm#hearing
One Hundredth Pension Scheme transfers into Pension Protection Fund
On 31st March the Pension Protection Fund announced that the 100th scheme had now transferred into the PPF. 343 members of the Bristol-based Brooks Service Group Plc pension scheme will now receive PPF compensation, or will do so on retirement. The PPF Chief Executive said “This is a major achievement for an organisation set up just four years ago – and will help reassure people belonging to work-based pension schemes that their pensions are protected should their employer go bust. This is especially important during a time of recession.”
The transfer of the 100th scheme into the PPF means that it is now paying, or will pay, compensation to a total of 31,191 people throughout the country. 178,904 more people are members of 290 schemes which are currently in a PPF assessment period, which generally takes about two years to complete.
http://www.pensionprotectionfund.org.uk/news-details.htm?id=7064
Pension Protection Fund Announces Compensation Cap for 2009/10
On 2nd April the PPF announced that the compensation payable to defined benefit pension scheme members, whose employers have gone into liquidation, will be capped at £31,936.32 for people who have not yet retired but whose scheme has a retirement age of 65. The figure will come into effect from 1 April 2009. The compensation cap for those scheme members who have taken early retirement also increases by the same percentage. Under PPF rules, those people who are already retired and had reached their scheme's normal pension age when their employer wound up receive 100 per cent of what they are entitled to. But, because those who have yet to retire will receive 90 per cent of what they were entitled to, their compensation will also be capped at the 90 per cent level, ie £28,742.68. The average payout to people whose schemes have transferred into the PPF is £4,000 a year.
http://www.pensionprotectionfund.org.uk/news-details.htm?id=7078
UK Single Equality Bill
The Government published the Equalities Bill on 27th April 2009. It seeks to ban discrimination of all kinds (including age discrimination) in access to all goods and services outside employment. The Bill also aims to brings together existing legislation on disability, sex, race, religion or belief, sexual orientation, gender reassignment, and marriage and civil partnerships. Most of the Bill is expected to come in to force from autumn 2010. The Equality Bill will ban age discrimination against people aged 18 and over outside of the workplace, where goods are bought, and services provided, such as in shops, hospitals, and when buying financial products. However, this aspect of the legislation which concerns age dscrimination will not come into force until 2012 at the earliest. Specifics on age-related legislation as it applies to insurance products will be consulted on this summer as part of the Government’s Regulatory Impact Assessment.
More information and a copy of the Bill can be found on the Government Equalities Office website:
http://www.equalities.gov.uk/equality_bill.aspx
ABI Reviews Money Market Sectors
On 5 April the Association of British Insurers announced that they are proposing to introduce a new fund sector for more cautious investors. This new fund sector has not yet been named, and the ABI is still consulting on what stakeholders think of its proposals. ABI Fund Sectors categorise different types of investment fund, allowing consumers and financial advisers to compare funds with similar investment profiles against each other. The ABI emphasised that although no fund is without risk, the new sector will seek to help consumers identify funds that have a greater focus on capital stability. The proposed new sector would exist in parallel with the existing money market sector, and would have stricter limits on the type of instruments funds can invest in and their maturity. In order to seek views on its proposals the ABI has launched a consultation. The closing date for the consultation is Friday 8 May 2009 and will be reported on shortly afterwards.
Responding to the Association of British Insurers' (ABI) Money Market sector review, the Investment Management Association (IMA) welcomes the proposal to add a new "cash like" money market sector definition. IMA has also been reviewing its own Money Market sector to complement European-wide initiatives as well as the ABI's work.
ABI Press Release
http://www.abi.org.uk/Newsreleases/viewNewsRelease.asp?nrid=17554
Investment Management Association Press Release
http://www.investmentuk.org/press/2009/20090406.asp
Pensions Policy Institute publishes report on Retirement Income Needs
On 28th April the Pensions Policy institute published a report on ‘Retirement Income and Assets: Do pensioners have sufficient income to meet their needs’ The report identifies the main factors that determine pensioners’ needs for income and considers whether pensioners are likely to have sufficient income to meet their needs and expectations throughout their retirement.
The press release and report may be read at:http://www.pensionspolicyinstitute.org.uk/news.asp?p=327&s=2&a=0
New UK Study estimates heavily obese men lose over 10 years of life to obesity
A new study by the actuarial profession which calculates the number of years of life lost to obesity reveals that a young, heavily obese man with a BMI of over 40 or waist to height ratio over 0.74, is estimated to lose over 10 years of his life, and possibly as much as 20 years, when compared with a man having optimum measurements.
Co-author Dr Ben Rickayzen, Head of the Faculty of Actuarial Science and Insurance at Cass and Fellow of the Institute of Actuaries, said: “This study covers a topic that is important to the planning of health care, social policy and insurance in the UK and validates recent government policy and the surrounding publicity over nutrition. …To date, the majority of the research into the effects of obesity on mortality is based on US population samples. However, there is a dearth of research into obesity using UK specific data. The aim of this paper is to redress some of this balance by considering the effect of obesity on life expectancy in the UK”.
http://www.actuaries.org.uk/__data/assets/pdf_file/0019/149014/20090407_Obesity_press.pdf
FSA on Credit Rating Agencies and Hedge Fund
Dan Waters, Sector Leader of the FSA’s Asset Management division gave a speech on ‘Regulatory Challenges for Fund Managers’ at a Future of Fund Management conference on 24th March. On credit rating agencies, he said that ‘Poor quality credit ratings and poor use of credit ratings played an important role in the crisis.’ He said that ‘There is a consensus among regulators globally that we should regulate Credit Rating Agencies to ensure rigorous analytical independence, and ensure that they only rate instruments simple enough and with enough historic record to make consistent rating possible.’
On market transparency, he said that the ‘FSA is reviewing whether there could be arrangements which more effectively support the holding and protection of client positions at clearing houses, and also whether the arrangements for settling defaulted OTC equity transactions could be improved.’ He reiterated the FSA’s commitment to regulating off-balance-sheet vehicles such as Structured Investment Vehicles, conduits and hedge funds. However, he said that ‘we are yet to see any concrete evidence to support the view that hedge funds have made a significant direct contribution to the underlying causes of the crisis.’ This did not mean that regulators should not seek to improve the regulation of hedge funds in the future, and he outlined the FSA’s views on what an effective regulatory framework for hedge funds would look like.
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0324_dw.shtml
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