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Doncaster takes low-rate £28m loan in novel move to fund scheme

Doncaster council has sought to turn the low interest rate environment to its advantage by taking out £28m in short-term loans to help fund its employer contributions to South Yorkshire Pension Fund. The employer said it saved more than £500,000 by paying the deficit contribution in a one-off lump sum, including the interest payments on the loan, compared with paying the same contribution in instalments.

Public sector pension consultants said they believed the move to be the first of its kind in the public sector, but added the terms of such loans were crucial to their adequacy for schemes. The risk of erosion of the capital value through market swings should also be considered, they said.

Doncaster’s loan, first reported in Sheffield newspaper The Star, will be broken down into four short-dated blocks, to be repaid by March 2017. “The decision to borrow this money was the result of a simple cost calculation,” said Doncaster council’s finance director Simon Wiles in a statement

“The interest payments on a loan, added to the cost of a one-off lump sum payment allowed us to save just over half a million pounds, compared to the cost of paying back the sum in instalments.”

Barry McKay, partner at Hymans Robertson, said he had encountered discussions about local councils borrowing money to fund deficits but had never come across the practice in action.

“If the £28m put in will be invested in the main fund strategy, likely in equities, market risk means that the capital value might fall in the future,” he said.

Simon Kew, director of pensions at Jackal Advisory, said he thought the loan was a smart move for Doncaster, allowing the council to borrow on a cheaper basis than it would have to pay in instalments.

“Yes, [Doncaster] will have a slightly higher gearing, assuming the loan was secured, but the payment was due so they would have been a creditor in any event,” said Kew.

Doncaster’s action is part of a wider effort by the four South Yorkshire boroughs to tackle their pension deficits.
The four local authorities – Barnsley, Doncaster, Rotherham and Sheffield – have all signed up to a plan to pay back their deficit over 21 years.

For Doncaster, this figure amounts to a £12m repayment a year. It explained the growing deficit as a result of changes in the tax position of pension funds, increased life expectancy of members and declining investment income, particularly as a result of falling gilt yields.

Kew said employers were currently under pressure from the local government pension scheme to increase contributions.

“We’re seeing commercial organisations with an LGPS liability facing unreasonable requests for foreshortened recovery plan periods,” he said.

Doncaster had already taken steps to increase employee contributions prior to taking out the loan. Employees earning up to £13,500 contribute 5.5 per cent of their salary while those earning more than £150,000 pay 12.5 per cent.

The employer said it saved more than £500,000 by paying the loan back in a one-off lump sum, with interest payments, compared to paying the same deficit contributions in instalments.

Category : Savants in the News — admin @ 9:22 am December 15, 2014

In the November 2014 edition of PMI News our Director of Pensions, Simon Kew, was asked for his thoughts on the Pensions Regulator’s revised Code of Practice for Defined benefit funding. We attach a copy of the article “Code Words” here, for you to read.

On 29 July 2014 we saw the formal adoption of the Pensions Regulator’s revised ‘Code of Practice 03 – Funding Defined Benefits’. Pre-dating that somewhat is a quote from the Nobel Prize-winning scientist Francis Crick, back in 1962: “If the code does indeed have some logical foundation then it is legitimate to consider all the evidence, both good and bad, in any attempt to deduce it.” Admittedly, Crick’s comments were in reference to the Genetic Code, rather than the output of a long-departed former regulator, however I do believe that a little deduction in relation to the regulator’s modified Code is merited.

Let me first debunk a myth. The regulator has always looked at the long-term viability of an employer, and has said previously that it believes the “best security for a scheme is a healthy sponsor”. I don’t, therefore, believe that the regulator’s new objective “to minimize any adverse impact on the sustainable growth of an employer” will lead to any major or fundamental change in the regulation of schemes and their sponsoring employers.

Indeed, I have seen recent evidence that the regulator is quite willing to apply pressure to the trustees of schemes where there is Pension Protection Fund (PPF) drift (i.e. the PPF deficit is increasing year-on-year) to trigger the wind-up of the pension, PPF assessment and, ultimately, the insolvency of an employer. Sponsors are likely to rely on the new objective as a means to strengthen their negotiating position, which trustees should be mindful of, although that will have little bearing on the regulatory view. PPF drift remains, to my mind, the most substantial danger to the solvency of an employer, as there is a triple threat from cashflow, trustees and the regulator.

An integrated approach to risk management sits at the heart of the regulator’s new Code, and this is where we have seen the most varied and, in some cases, wild interpretation. The basic premise is sound, and one that trustees should be taking already – look at the three main risk types holistically.

They are:

1. Employer covenant
2. Investment
3. Funding

The suggested approach is to understand the risks across each of these areas, and define schemespecific parameters for each, to allow trustees to balance the needs and risks associated with them. A change in one is likely to impact on the other two, which is why there is such focus on balance and the integrated approach.

A word of caution is needed at this point – an integrated approach does not mean a single scheme adviser to cover all three areas. It is widely accepted that we should not have a single trustee, no matter how experienced, to maintain a scheme. From a governance perspective it is unsavoury, and because of conflicts of interests it is equally unpalatable. That position is no different for a scheme’s advisers. In law, the American Bar Association (ABA) has gone as far as to define this issue in its Rules of Professional Conduct by saying: “While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practising alone would be prohibited from doing so”.

Closer to home, the regulator states:

There are two main types of adviser conflicts that may arise:

1.An adviser may have a conflict of interest if he or she (or the same firm) is also advising the employer or, in certain circumstances, acting for another scheme or employer with whom the trustees are engaged eg an actuary, auditor or lawyer; and/or

2. Advice provided by the adviser is biased due to financial or non-financial benefits derived by the adviser, or the adviser’s firm

In defence of the ‘one adviser approach’, I often hear two arguments based on cost and the installation of ‘Chinese walls’. Tackling the latter point first, I would say that these firewalls are, at best, paper-thin in all but the most stringent of conditions. Whether one person, or three, from a single advisory organisation is appointed, there are inherent conflicts – as the ABA and the regulator have recognised. I would also question the apparent cost savings, if an adviser from each discipline is supplied and a fully-working firewall is in place, as there has to be duplication of effort from that organisation. This duplicated effort comes without the additional benefit of a full and frank discussion, challenging appropriately and creating ‘professional tension’, that individual advisers from three separate companies would provide.

I am not oblivious to the perception of higher costs for separate advisers, although I do see this as a perception rather than reality – if trustees and employers push for targeted support, when required, appointing the blend of advisers to best suit the needs of the scheme – there can be a healthy discussion, with little or no conflict, to help arrive at the most appropriate solution for the members,trustees and sponsor.

In the previous paragraph I use the word ‘targeted’, in relation to the support provided by advisers, and I intentionally draw your attention to it. Covenant in its basic definition is the ‘employer’s legal obligations to a defined benefit (DB) scheme, and its ability to meet them’. The legal obligation part is relatively simple – who is on the hook for the scheme and its deficit? Ability is slightly trickier when there is some ambiguity concerning the strength of a sponsor. I have always said that, where there is a very strong or very weak employer, a covenant assessment is unnecessary, and a costly exercise in stating the bloomin’ obvious. The key issue then is affordability – What money is available? When and what security can be sought to mitigate any extended recovery plan? Admittedly, the process of identifying each of these elements can be a tad complex, especially in a multi-national group company, but the elementary questions remain the same for every scheme and every employer.

The regulator states in the revised Code that: “It is not necessary to eradicate risks completely”, which is refreshing to see. Of course, we should seek to manage and mitigate risks where we can, although that is not always possible. Put simply, ‘worry about what you can change’. Acknowledge that there is a risk, assess if management or mitigation of that risk is feasible, practicable or appropriate, then act accordingly – with suitable advice if required. That’s where a targeted, proportionate covenant assessment can help. It also provides the bedrock for the integrated approach to funding, as I have set out in Figure 1.

Lastly, I will look at the ‘what if?’ question – it is all very well putting a Recovery Plan and Schedule of Contributions in place, but what if something changes?

Assuming a positive outcome, namely an upturn in fortunes for a sponsor, trustees should seek to have in place some uplift elements to their funding plans such as:

1. a split of profits over certain levels n
2. an improvement in scheme share of dividend payments
3. increased levels of contributions
4. a stake in new businesses/products

For a less rosy outcome, trustees may look for some of these options:

1. negative pledges
2. ways to improve the scheme’s position on insolvency
3. support from other group entities
4. contingent assets n cash in an escrow account

In summary, the new Code of Practice doesn’t revolutionise the way schemes and trustees are regulated, it simply provides a little more clarity on how regulation is being approached. My synopsis, in much fewer than the 15,000 words in the Code, is this:

1. Identify risks
2. Mitigate and manage those risks where appropriate/proportionate to do so
3. Seek professional help if you are unable to action one and two effectively.

Category : Savants in the News — admin @ 6:50 am November 11, 2014

Regulator nets £184m from Lehmans as cases treble

The Pensions Regulator’s unprecedented £184m settlement for the members of the Lehman Brothers pension scheme is its biggest trophy in a growing anti-avoidance campaign, with the number of investigations trebling since last year.

The investigation is in many ways unique due to the circumstances in which Lehmans became insolvent, but some argue it has wider significance for schemes with overseas parent companies.

FSD timeline

The settlement is the result of a six-year investigation which began in late 2008. The regulator’s determinations panel issued financial support directions for six of the 38 companies in the Lehman Brothers Group in September 2010.

The regulator’s interim chief executive Stephen Soper said in a statement: “This is a pleasing and appropriate settlement for the 2,466 members in the Lehman Brothers pension scheme, and shows we will not hesitate to pursue regulatory action to protect members’ benefits and PPF [Pension Protection Fund] levy-payers where we believe it is appropriate.”

The regulator has the power to issue FSDs and contribution notices against defined benefit scheme sponsors and their associates if they deem that corporate activity might have a negative impact on the scheme’s security.

In the past year the number of avoidance investigations being carried out by the regulator jumped to 55 from 17 the previous year, according to the successive annual reports.

“The regulator has increasingly been required to engage its anti-avoidance powers to secure the retirement benefits of members and protect the PPF,” said Soper. “This case demonstrates that the regulator’s anti-avoidance powers can be used effectively, even in highly complex international insolvency situations.”

When the determinations panel rules to issue an FSD or CN, all parties are notified and given the opportunity to refer the decision to the Upper Tribunal. If the decision is referred, the CN or FSD cannot be issued until the case before the tribunal is finished.

The panel has determined CNs should be issued and sent determination notices on two occasions (for FSDs, see graphic).

Simon Kew, director of pensions at Jackal Advisory, said the size of the settlement combined with the length of the investigation was an indicator of the regulator’s willingness and capability to use its powers.

He said that in the past, the regulator may have been seen as a “paper tiger”, but the determination “shows they’re not limited in their legal resources”.

We will not hesitate to pursue regulatory action to protect members’ benefits and PPF levy-payers where we believe it is appropriate

Stephen Soper, Pensions Regulator

He added: “It’s the largest recovery that the regulator has made. It’s also been lingering on for six years on the case so not quick.”

Chris Parlour, senior consultant at Punter Southall, said the settlement would mark the end of the Storm Funding appeal, a case centred around whether the regulator could issue notices or FSDs for more than the total amount of the shortfall of the scheme.

“The effect was that the regulator could ask several of the Lehmans companies for funds that exceeded the total section 75 debt that was calculated at the time of the insolvency.”

The section 75 debt, also known as employer debt, is the employer’s share of contributions to cover any underfunding in a scheme when the employer leaves.

Offshore sponsor risk

At the time of Lehmans Brothers’ insolvency in 2008 the scheme’s deficit was calculated at £119m, however this increased over time and was estimated in June 2014 to be £184m.

Kew said the determination raised considerations for schemes with sponsoring employers that were part of a larger group based outside the UK.

“If you have a larger group and the power or money is offshore it’s really important to understand where the money is coming from,” he said.

Kew said where schemes were part of complex organisational structures, trustees should be mindful of the securities in place, whether through assets or their covenant.

He added: “If trustees’ sponsoring employer is a holding or shell company they could be in a very vulnerable position.”

Category : Savants in the News — admin @ 12:11 pm August 26, 2014

Mark Leftly: Success for auto-enrolment looks far from automatic

Westminster Outlook The Pensions Regulator’s quarterly update, “Automatic Enrolment: Compliance and Enforcement” (for the period April to June) is as gripping a read as its title suggests.

At seven pages, though, getting from cover to cover is at least a brisk exercise and contains a warning that auto-enrolment might not turn out to the “stunning success” that the pensions minister Steve Webb has claimed.

Auto-enrolment started in 2012, forcing companies of all sizes to put staff into a pension scheme, unless employees either opt out or they earn less than £10,000, which means most part-time workers miss out.

Employers with fewer than 30 staff don’t start the scheme until 2017. Currently, companies with more than about 60 staff must comply, although even those with up to 499 workers only got going in January.

The bulletin notes how an employer was caught out by the changes. Managers wrongly thought they could defer their start date from last November to 2017. The regulator forced it to launch the scheme and backdate contributions. November was when businesses with 500 to 799 people had to get started, so this was hardly a small enterprise. The company surely had the back-office departments to understand and navigate the new system, but still got it wrong.

Indeed, the regulator has closed 917 investigations into employers since 2012 – nearly a quarter between April and June this year. Notably, there have been 23 occasions when the regulator has directly used its powers to ensure compliance, such as inspecting an employer’s premises.

Simon Kew, pensions director at Jackal Advisory, is concerned these cases involve “super employers” that should have found the switch quite simple. Mr Kew told me: “I can’t help but see significant issues when the SME/micro-employers are forced to automatically enrol … If the regulator has used its formal powers 23 times, it goes to follow that the problem will increase exponentially from 2015 onwards – not least due to the numbers of staff required to keep on top of non-compliance with the regulations.”

In other words, auto-enrolment could wreak havoc on the small businesses on which the economy depends.

twitter.com/@mleftly

Category : Savants in the News — admin @ 11:36 am August 22, 2014

2014 Employer Covenant Consultants of the Year – M&A Awards

Jackal Advisory are pleased to announce that they have been awarded “Employer Covenant Consultants of the Year”, for 2014, by Acquisition International’s M&A Awards. Our Director of Pensions, Simon Kew said “This is a fantastic achievement for our team, which reflects the splendid work we have undertaken in the covenant advisory space.”. He added “We are great believers in providing a top-quality service with clear, pragmatic advice at an affordable cost – it really is super to see this reflected in an award.”.

Jackal Advisory has been a key innovator in providing support to schemes and their employers, through covenant, affordability and restructuring advice. We are continuing to innovate and are close to launching a new service designed specifically for the SME market. More details on that will follow in a matter of days.

 

Category : Savants in the News — admin @ 1:23 pm June 30, 2014

Unions face pensions crisis

Campaigning union forced to cut benefits at its own staff pension scheme

The Public & Commercial Services Union (PCS) has fought some of the toughest campaigns of recent years to protect the pension rights of around 250,000 members.

There have been public sector walk-outs and a ‘68 is too late’ offensive to tackle the austerity-led Coalition’s plan to raise the retirement age.

Yet the PCS has a pension crisis of its own: a deficit of around £65.5m against a declining annual income that is currently £27.6m.

The repairs needed to solve this issue are as hard-hitting as anything the PCS has opposed. One proposal has been for PCS staff to receive half their salary on retirement only after 45 years of service, against 30 years today.

“We read about that and thought our own changes won’t look so bad,” laughs a senior member of the trade union movement.

Many of the more public sector and industrial-focused unions face similar problems.

Unison, for example, had a liability of £120.4m in 2012, up from £106.6m the previous year, against income of £173.1m. Unite, the country’s biggest union with 1.4m members, saw its liabilities grow by nearly one-fifth to £144m the same year, narrowing the gap on its income of £155m.

” There is also a broader issue of the change in demographic of their staff ”

The PCS has struggled partly because of civil service cuts which have resulted in a fall in membership and therefore the income needed to address the pension burden.

Union sources point out that there is also a broader issue of the change in demographic of their staff.

“Until 10 or 15 years ago shop stewards would go and work for the unions as a last career stop in their 50s,” says one union negotiator. “That changed so younger people, even of around 21, were being hired. The pension was meant for a different type of person.”

Lucrative final salary schemes were an incentive and a reward for experienced shop stewards to move to a union’s headquarters. Only working for around a decade would mean that they built up a good extra pension pot, but did not work for the time that would result in huge, unaffordable payouts.

“Traditionally unions were rather like charities, paying low wages but having good benefits”

That change started to hit at the point when the economy, and therefore investment income, was in a downswing. The situation might worsen as more staff with big pension pots retire in the coming years.

Unions introduced these attractive pensions to lure the best staff because salaries were rarely competitive with other organisations.

Simon Kew, director of pensions at Jackal Advisory, says: “Traditionally unions were rather like charities, paying low wages but having good benefits. The vast majority of these are historic benefits, quite mature benefits – it’s all a legacy problem when they’re seeing falling membership and falling revenues, so even a moderate deficit will look disproportionate.”

And if the unions don’t take tough action now, that burden will only grow.

Category : Savants in the News — admin @ 6:28 am June 11, 2014

Battle to plug deficits continues as FTSE 100 see £8bn deterioration By Maxine Kelly | May 1, 2014

The total pension deficit of FTSE 100 defined benefit schemes worsened by an estimated £8bn, bringing the total to £57bn at the end of 2013, according to research, but experts maintain larger schemes are managing their risk exposures effectively.

Companies have been striving to improve their DB scheme funding levels with the aim of eventually removing the plans from their balance sheets completely, as pension liabilities are an important component of corporate debt.

Key survey findings

Five companies were found to have liabilities greater than their equity market value – BT, BAE Systems, International Airlines Group, RBS and RSA.

Changes to accounting regulations were also highlighted – including IFRIC 14, which concerns funding requirements and the amount of pension surplus a company can recognise as an asset – that could alter schemes’ investment strategies.

It was estimated that DB pension provision has reduced by around 10 per cent in the past 12 months. “We believe that the majority of FTSE 100 companies will cease DB pension provision to all employees within two years,” the report said.

The research, released this week by consultancy JLT Employee Benefits, looked at the most recent annual reports of all companies in the index and adjusted the figures to December 31 2013.

Managing director Charles Cowling said there is more risk being run in company pension schemes than they are “comfortably able to manage”.

“If you’ve got a big equity position you run the risk that your balance sheet is going to be all over the place, and within that there’s the possibility you could even theoretically become insolvent,” he said.

Cowling added that the majority are managing their risks effectively, but that it was a delicate balancing act for sponsors.

“Cash is a scarce commodity; you don’t want to put it into the scheme if you don’t have to,” he said. “But if you’re not going to fill deficits with cash, you’re going to have to fill them with investment returns and that means potentially taking more risk.”

Celene Lee, senior manager in the pensions advisory team at consultancy PwC, said that while schemes are at different stages, the systems put in place have had an overall effect of reducing risk over recent years.

“Although many schemes still have a significant amount of risk or return-seeking portfolios, there is now a stronger element of diversification within these portfolios, with pension schemes accessing alternative asset classes and smart beta funds, or seeking inflation-linking assets to match pension payments,” she said.

The study found FTSE 100 pension schemes had an average 56 per cent allocation to bonds, which is unchanged from the previous year. This contrasts with the 6,150 schemes eligible to enter the Pension Protection Fund, which showed an average allocation of 44.8 per cent to gilts and fixed interest (as at March 31 2013).

Closing funding gaps
The amount sponsors contributed to their schemes’ deficits has fallen to slightly more than £16bn in 2013, down from £18.5bn the previous year.

The report stated: “The large increases in the contributions seen in the last couple of years have ended.”

The 10 largest surplus contributions into company schemes were as follows:

Pension contributions £m Cost of benefits £m Surplus contributions £m
BAE Systems   1,256   348   908
GlaxoSmithKline   635  (124)   759
Royal Dutch Shell   1,454   843   611
Barclays   840   348   492
Diageo   593   103   490
Royal Bank of Scotland   977   506   471
AstraZeneca   534   164   370
BT   542   225   317
International Airlines Group   449   147   303
Lloyds Banking Group   667   376   291

Source: JLT

Defence company BAE Systems made the largest surplus contribution totalling £908m, followed by pharmaceutical giant GlaxoSmithKline with £759m and Royal Dutch Shell with £611m.

Cowling said the majority of FTSE 100 companies are signed up to making deficit contribution payments for the next 10 years or more.

“I don’t see the deficits going away particularly easily; we may get continued good investment returns combined with easing in interest rates but a lot of those deficits will take a lot of shifting,” he added.

Simon Kew, director of pensions at employer covenant adviser Jackal Advisory, said while some cash-constrained employers with large DB deficits may be deemed insolvent on a balance sheet basis, so long as the employer is able to service debts as they fall due then it can still be “business as usual”.

“That doesn’t mean they can’t continue to trade successfully or recover in time but, broadly, if they are not forecast to remove the deficit in say 20 years, they could be classed as ‘balance sheet insolvent’,” he said.

Lee added schemes should have a clear plan to manage risks and stick with it.

“Making small steps is important,” she said. “Put in place a good governance framework for both trustees and sponsor, understand the dynamics of the pension scheme assets and liabilities, and work towards a plan one step at a time.”

To view the article on-line click here

Category : Savants in the News — admin @ 7:25 am May 2, 2014

Reassessing the Covenant

In February, Jackal’s Simon Kew was asked by Pensions Age for his views on employer covenant, the Pensions Regulator and the post- recession landscape.

You can read the full article here.

Category : Savants in the News — admin @ 9:22 am March 11, 2014

PMI Question Time

On the 13th of March, our Director of Pensions will be sharing the stage with two of the most respected and recognizable people in pensions – Robin Ellison and Malcolm McLean.

The event, being held at the offices of Squire Sanders in Leeds, will see Simon Kew debating the future of pensions regulation, with the other members of the panel.

Places for this event will be highly sought after and very limited, so to book your place and for further details, please click Question Time 2014.

Category : Savants in the News — admin @ 12:39 pm March 4, 2014

Mini-speaking tour of Scotland in May, for Thomson Dickson Consulting

Jackal Advisory Director of Pensions, Simon Kew, is undertaking a mini-speaking tour of Scotland in May, for Thomson Dickson Consulting. Taking in Glasgow on 7 May and Edinburgh on 8 May, he will be addressing the future of pensions regulation, in light of TPR’s revised Code of Practice and their ‘new and improved’ approach to Scheme Funding and employer covenant. To sign up for the event, or for further details, please visit the TDC website:

http://www.tdcllp.com/

Category : Savants in the News — admin @ 12:20 pm February 26, 2014

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