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November 2014

Good day to you, Dear Reader (yes, I know there’s one of you out there!). After a short hiatus, I have returned to the keyboard to write a review of recent developments in the world of pensions. Reports of my writer’s block have been greatly exaggerated!

As George Osborne reveals he spent his summer holiday in a campervan in the Peak District, it may explain why Government intervention has, recently, been noticeable by its absence. Rumours that George informed our esteemed Pensions Minister that he would be vacationing, in a caravan in Rhyl, for two weeks are unsubstantiated…but may explain the Prof’s absence in the press. Not that the Treasury are calling the shots, of course…

I can see clearly now…
Talking of HMT, it was announced yesterday that the pensions of ‘army generals and top Whitehall mandarins’ would be classed, for the first time, as welfare spending. Naturally, this doesn’t make the problem go away – it merely provides transparency. Apparently, HMRC is writing to millions of households, ‘with detailed figures on how the government spends their income tax and National Insurance contribution’. A riveting read, I’m sure. Here’s hoping they recycle the missives, rather than hurl them straight in their general waste, so they don’t add to the cost of refuse disposal.

I want to retire, no longer required…
More happy news regarding the state pension age. The headlines state that a ‘worst case scenario’ would see today’s 20-year olds working until they are 75. We are expecting the SPA to be increased to 69 by 2049, although this could well be brought forward. That is then seen as a slippery slope to a 70+ retirement age, some 15 years later. Come 2064 I’d be highly surprised if the state pension still exists – if a week is a long time in politics, 50 years is as predictable as a Z-list celebrity’s Facebook relationship status.

Need guidance? Don’t ask MA…
Back in October we saw the breaking news that the Money Advice Service (MAS or ‘MA’ to her, considerably richer, advertising agency) would not be asked to help provide the ‘guidance guarantee’, put in place to help retirees liberate their pensions legally, boosting the coffers of HMT, rather than through one of those scorpion-related services, we have heard so much about.(Ed. That makes me think – surely we should get some of the ‘pensions liberation’ marketing bods on-side, because their campaigns seem to be a hell of a lot more effective that anything that falls out of the Civil Service and related NDPBs!)

Instead, Citizens Advice will provide face-to-face guidance (not advice – nobody here is providing advice, remember), alongside The Pensions Advisory Service’s telephone based guidance (not advice, don’t let the name fool you). We are yet to see any meaningful direction around how this will work in practice, but a very honest comment from, I infer, a Citizens Advice worker doesn’t fill me with confidence.

“We are not licensed or qualified or allowed to give financial advice eg how to invest money. We can signpost clients to the Telephone Pensions Advisory Service, or give them a list of local independent financial advisers (who will charge a fee) but that is all we are allowed to do.”.

You can lead a horse to water, but it seems you can only lead a retiree to a fee-charging IFA…much work to be done, methinks.

And so, I leave you to Guy Fawkes’s night on that cheerful note. Fawkes, famously said to be the “last person to enter Parliament with honest intentions”. I make no comment in that regard, although I do find it curious that we still ‘celebrate’ the chap over 400 years later.

Category : A month in the life of pensions — admin @ 1:05 pm November 28, 2014

August 2014

Scribing this immediately after, what we are told was, the coldest August Bank Holiday on record, is perfect timing. Afterall, are we not constantly informed that pensions are full of ‘doom and gloom’? That said, I shall endeavour to find some silver linings in those clouds…

Cash and carry
HMRC has published a ‘policy impact document’ that claims, of the c. 400,000 retirees that will initially have the chance to access their pensions, around 130,000 would choose to do so. I do love the way these government departments work – implement the policy, then look at what impact it will have. Genius.

As we know the new rules, which allow 25% of a DC fund to be taken tax-free and the rest subject to income tax, kick in from April 2015. There are concerns that the desire to take money for short term gains e.g. holidays / cars / home improvements / lion taming courses will not only see those pension pots depleted considerably by tax, but leave the pensioner in penury later in their retirement.

I have been called cynical for suggesting that the move was for two reasons. One, to ‘buy’ the grey vote and two, to increase tax takings. To give you an idea of the financial rewards for HMRC, it is estimated that the tax revenue from this move will rise from £320m in 2015-16 to an eye-watering £1.2bn in 2018-19…cynical, moi?

Oh Brothers, where art thou?
Following the collapse of Lehman Brothers and a six-year pursuit by the Pensions Regulator, it was announced this month that the members would receive full benefits due to a settlement that sees the £184m buy-out of scheme liabilities.

Of course, this is fantastic news for nearly 2,500 members of the scheme, as well as TPR itself. The cheers from Brighton, however, would have been drowned out by those from East Croydon as the deal also protects the PPF from taking on the deficit.

The case was not without repercussions, a short-lived one being the ruling that a Financial Support Direction (FSD) issued by TPR had ‘super priority’ – meaning that it ranked ahead of other creditors including the Administrator / Liquidator – tell me, which Insolvency Practitioner would take on a case if they were not going to receive payment? Thankfully, that wrinkle in legislation was ironed out by the Supreme Court and common sense reigned in the land.

Charge of the investment brigade
A recent report tested providers of investment products for charges, on portfolios between £5,000 and £1m, to see if investors are being charged too much. Looking at SIPPs, which are likely to feature more heavily when compulsory annuities are abolished, show running costs between £60 and £120 for a £20k investment or between £196 and £1,125 for a £250k fund. We have always known in the industry that it pays to shop around, but getting that message over to the ‘person on the Clapham omnibus’ is not an easy task.

A brief look out of the window shows that the clouds have not dispersed and opening it tells me that the temperature has not increased. Looking more closely though, if I squint and wrinkle my nose, I do believe I can spy something glistening…

Category : A month in the life of pensions — admin @ 1:03 pm

July 2014

I write this month’s blog after a weekend of sunshine, humidity and some cracking thunderstorms that the forecasters have been struggling to predict with any certainty. Uncertainty…what a wonderful segue into pensions…

HMT hands GG to TPAS and MAS – OMG!

Her Majesty’s Treasury (HMT) has confirmed today (21 July) that the ‘Guidance Guarantee’ for retirees, they trailed in the Budget, will be carried out by The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). HMT believes that by handing the responsibility to independent bodies, rather than the providers themselves, consumers will ‘trust’ the guidance. The government has stated that it will continue to work with the likes of Citizens Advice and Age UK, to ensure they remain ‘inside the tent’.

So far, HMT has received approval for £10m for this service, seeking to double that amount in due course to fulfil the £20m contribution promised when the announcement was made. At the time of writing, I haven’t seen what the estimated costs (initial and ongoing) are for TPAS / MAS to fulfil their new obligations, nor whether there is a chance of the £20m war chest to be boosted, should the need arise. I’m not a betting man, although a small wager on provision of the guidance guarantee exceeding £20m is looking rather appealing!

CoA upholds CG for BTPS – ATM

The Court of Appeal (CoA) has ruled that the government (i.e. taxpayer – remember, there isn’t a bundle of cash, sitting in escrow, waiting to be handed out if the need arises) remains responsible for the full cost of benefits for the British Telecom Pension Scheme (BTPS), should there be an insolvency event. Cue much wailing and gnashing of teeth at the department for Business, Innovation and Skills (BIS) who hold the cheque book in respect of the Crown Guarantee (CG) that was provided at the time British Telecom (BT) was privatised, back in 1984.

The government believed that they had provided a guarantee for those pensions up until the point of privatisation, with all post-1984 pensions for the employer to stump up. The Trustees of the Scheme, along with the employer, are keen to see the guarantee extended to all pensions – quelle surprise.

This case has been rumbling along for some time now, with the previous decision to uphold the CG made in the High Court in 2010. The difference between the two judgements is on how the liability is calculated – the High Court stated that buyout should be the measure, whereas the CoA has removed this highest of measures, in favour of the company’s obligation to pay deficit contributions, as per the BTPS trust deed and rules.

Estimates for the cost of the guarantee range from around £8bn to anything up to £22bn, although the latter figure has been, apparently, dismissed by the BTPS trustees.

The government’s next step is to appeal the judgement to the Supreme Court, should they chose to do so. Again, I am not one prone to gambling, however a modest wager on an appeal being lodged looks better value than my tip in The Open!

Talking of The Open and Rory McIlroy’s triumphant win, according to Forbes his earnings for the year to June 2014 were $24.3m…now there’s a chap who is unlikely to need to call on the Guidance Guarantee when he decides it is time to retire!

Category : A month in the life of pensions — admin @ 1:00 pm

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