At the same time, the firm has promoted eight more of its outstanding professionals to associate partner. The new associate partners are Emily Brown, Michael Davies, Mark Frost, Claire Fuller, Robert Hurst, Marcus Johansson, Stephen Kilgannon and Rob Skelton.

David Joy, Managing Partner, says: “Our four new partners embody what makes First Actuarial special – the client-first approach that drives our growth. Equally, with the eight new associate partners, we’re recognising individuals who’ve delivered exceptional achievements for First Actuarial during their time here.”

Nationwide promotions

The new partners and associate partners come from a range of locations across the country. Many have provided solid leadership in their local office as well as making valuable contributions to the wider business.

David Joy says: “At our newest location, Birmingham, entrepreneurial qualities are particularly important to increase our West Midlands client base and staff headcount. Andrew Allsopp, as partner, and Mark Frost, as associate partner, are a great team, each with the local reputation and track record needed for success. They recently moved their operations into Gallagher’s Birmingham office, which will give them the capacity for long-term expansion.”

First Actuarial’s four new partners

Andrew Allsopp

Andrew Allsopp joined First Actuarial two years ago and has channelled his entrepreneurial strengths into establishing the firm’s flourishing Birmingham office. He was previously an owner of Quattro, a Midlands-based pensions consultancy, which was acquired by Broadstone.

Andrew says: “Building the Birmingham base of First Actuarial has been a rewarding challenge. We’re attracting more and more professionals to deliver what local clients want – caring services from people who understand the setting in which they work. Our headcount is increasing steadily as we grow our West Midlands client base.”

Marcos Abreu

Marcos Abreu joined First Actuarial in 2019, and is central to the management and growth of the firm’s Tonbridge office. With 12 Scheme Actuary appointments, Marcos also plays an active role in the wider business. Alongside his Scheme Actuary responsibilities and the demands of a young family, he leads the London team and contributes to a range of firm-wide and industry initiatives.

Marcos says: “My career has thrived here because I’ve been given the freedom to make a real difference to the company’s success. I work closely with other people, and I set great store on giving tangible opportunities to colleagues and supporting future leaders in Tonbridge. I’ve always felt well supported by the partners in Tonbridge. The firm trusts me to get things done, while offering a sounding board when I need it.”

Carl Fletcher

Carl Fletcher is an actuary with an entrepreneurial spirit and a wide range of responsibilities. Along with Scheme Actuary appointments, Carl is Head of Benefit Corrections and Data Audit Services and is also responsible for employee share scheme valuations.

Carl says: “First Actuarial has given me the ideal environment for finding business opportunities and developing them. It’s a great place to work, and what we do is interesting. The firm has given me the freedom to develop new areas and they’ve recognised my achievements.”

Scott Harrison

Scott Harrison is an actuary who has spent 17 years working for First Actuarial. Hard-working and reliable, he prides himself on getting things done, finding problems and correcting them proactively.

Scott says: “Achieving partnership gave me a real sense of satisfaction and achievement. I’ve seen First Actuarial grow as a company since my summer internship in 2007 to what it is now, and I work with people I’ve known and respected for a long time. Associate partnership was an invaluable opportunity, giving me more influence when helping to develop colleagues in a positive way to improve the firm.”

David Joy concludes: “All four new partners demonstrate entrepreneurial flair, able to win new business, drive efficiency and bring their colleagues along. Our eight new associate partners are committed professionals who deliver fantastic services, attract new business, and provide leadership to other talented individuals. As we become an increasingly integrated part of Gallagher, we see these appointments further strengthening our leadership team and enhancing the service we provide to clients.”

The post Four new partners and eight new associate partners in First Actuarial’s latest promotions first appeared on First Actuarial.

Managing an investment portfolio in the final stretch isn’t about sitting back and running down the clock. It requires a highly coordinated, liquid formation to lock in those gains and ensure a frictionless transition to an insurer.

However, while tournament football provides the high-stakes drama, the actual process of getting a team to the final stages calls for the long-term infrastructure, backing and daily discipline of an elite club.

To understand how a modern, buy-out focused investment strategy operates, we need to look at the entire club hierarchy – from the boardroom to the pitch.

Club chairman – The sponsoring employer

Before any tactics can be drawn up on the training ground, you need to understand the financial muscle behind the club. The sponsoring employer is the club chairman – backing the team, underpinning the covenant and setting the overall direction of travel.

But even the most ambitious chair cannot deliver success alone. What matters is how well that ambition translates on to the pitch. In a pension scheme context, this means alignment. The sponsor provides the support and the setting, but achieving a successful buy-out depends on a shared understanding of the end game and a plan to get there.

When that plan is in place, the rest of the team can execute with clarity. When it is not, progress can quickly stall.

The management team – The trustees

The trustee board acts as the management team. They have ultimate responsibility for the squad, defining the end-game target and making the final decisions. It’s their job to keep everyone focused on the ultimate goal – securing members’ benefits through a successful buy-out with an insurance company without taking unnecessary risks along the way

The coaches – The Scheme Actuary and investment consultant

Behind every successful manager is a coordinated coaching team. The Scheme Actuary and investment consultant must work hand in hand as joint tactical coaches.

The actuary monitors match fitness – tracking the funding level against insurer pricing to block any unexpected shocks. Meanwhile, the investment consultant designs the playbook, ensuring the asset strategy reacts appropriately to the actuary’s evolving assessment of the funding position. Together, they prevent the team from chasing reckless, flashy tactics.

Goalkeeper and defence – Liability matching assets

Your liability matching assets – typically gilts and liability-driven investment (LDI) funds – are your goalkeeper and back four. Their only job is to absorb market pressure and defend your funding position against interest rate and inflation volatility.

When you’re close to buy-out, you cannot afford any defensive slips. Your focus should be to ensure your hedge ratios are tightly aligned with your liabilities. Otherwise, a sudden market swing could undermine your funding position just as you are ready to approach the insurance market.

Midfield – Liquidity management and capital preservation

With credit spreads tight, chasing yield is a foul. Lock in liquidity instead.

Your midfield controls the tempo and ensures a smooth transition. For schemes targeting a short- to medium-term exit, complex, illiquid assets are completely out of the question. You need to be nimble.

However, with corporate credit spreads remaining incredibly tight, simply loading up on long-term corporate bonds isn’t the easy answer it used to be – there’s simply not enough reward for the risk.

Instead, your midfield engine room needs to focus on a diversified mix of highly liquid, low-risk assets like cash and short-dated bonds.

Punting on tight credit spreads doesn’t make sense right now. Instead, short-duration bonds allow you to lock in decent yields and maintain liquidity without tying up your capital or taking on unnecessary credit risk.

This safeguards your hard-won capital and gives you the flexibility to move instantly when the right insurer offer lands.

Attack – Trimming the squad and execution speed

A fragmented portfolio is a slow portfolio. Streamline your assets before approaching insurers.

Your attack is about clinical execution as soon as an opportunity opens up. Insurers are active and ready to trade, but a deal can still lose momentum if your assets are slow to transition. With scattered funds across a fragmented and clunky structure, you run the risk of missing the optimal market window.

Your star striker is a streamlined, transparent asset line-up. By actively cleaning up your portfolio and eliminating operational friction across pooled investments, you create a portfolio that’s incredibly easy to transition.

This proactive setup means you can move from a quote to a completed transaction at lightning speed, locking in the best possible terms without costly delays on the goal line.

That said, many portfolios will include some exposure to growth assets – such as equities, property and diversified growth funds (DGFs) – particularly those that have driven funding improvements in earlier phases. These can play a useful role in enhancing returns. But as you approach the buy-out window, they must be carefully managed. Illiquid or complex arrangements can quickly become a bottleneck.

In this context, growth assets become more like impact players off the bench rather than the focal point of the attack. Where retained, they should be high-conviction, well understood and, crucially, capable of being realised efficiently. Otherwise, the discipline is to trim them back in favour of assets that support speed and certainty of execution.

Ultimately, the winning attack is not the most exciting one – it’s the one that converts quickly and decisively when the opportunity presents itself.

Backroom staff – Other essentials

You cannot win a championship with the starting eleven alone. A huge amount of work happens behind the scenes. While my focus is strictly on the investment engine, a successful buy-out relies heavily on other specialists getting their areas right.

Crucial factors like data cleansing, benefit clarification and the deeper nuances of sponsor affordability all require careful, expert consideration.

As the investment consultant, I don’t manage these complex workstreams directly. But I know that when the wider advisory team gets the data and the sponsor alignment sorted, it gives the investment strategy the perfect platform to succeed.

The final whistle

The investment strategy for the end game is entirely different from the strategy that got you there. You don’t need to take unnecessary risks to score goals. You just need to secure the win you’ve already engineered.

That means a bulletproof defence of liability-matching assets, a highly liquid and tactical midfield that doesn’t overpay for credit spreads, and an agile, streamlined portfolio ready to execute the transaction at pace. The portfolios that match this disciplined formation are the ones that will deliver a full-time win for members.

Is your squad ready for the buy-out window?

Contact me if you’d like to discuss your scheme’s end-game tactics.

The post Winning the buy-out game: Investment tactics for pension schemes first appeared on First Actuarial.

But as it turns out, there isn’t much to say. Gilt markets barely flinched, presumably because the news was widely expected. Instead, it got me thinking about longer-term pension challenges.

The real problem for pensions isn’t that Keir Starmer has resigned, who replaces him, or how markets react on any particular day.

The problem is that pensions have become a political football.

Johnson, Truss, Sunak, Starmer – and now, in all likelihood, Burnham. Five prime ministers in seven years. Six pensions ministers in the same period, soon to be seven if the next prime minister decides to reshuffle. This ministerial merry‑go‑round is the last thing pension savers need.

Pensions are, by definition, long‑term. In any type of scheme, people lock money away for decades in the hope of securing a stable income in retirement. For a financially stretched population, even finding the spare cash to save is hard enough. But when the rules of the game keep shifting, it becomes increasingly rational to question whether saving into a pension is logical at all.

Every budget sets the pensions rumour mill spinning:

● Will tax‑free cash be restricted?
● Will tax relief be cut?
● Will the State Pension be means‑tested, penalising those who’ve saved responsibly?
● Will pension pots still grow tax‑free?
● Will inheritance tax rules be changed again?

It’s a bleak reflection of the current landscape that none of these questions can be answered with confidence. Right now, anyone with savings of any kind could be forgiven for feeling like a target. And if that’s the case, why not spend the money on a holiday or a car? That may make more sense than locking it away and hoping government doesn’t find a new way to raid it.

This is no way to run a pensions system. Investment markets carry plenty of risks, but none is as corrosive as the risk that a future government – of any political colour – rewrites the rules and wipes out decades of sacrifice.

People need long‑term incentives to save, but above all they need certainty that the terms they sign up to will still exist when they retire.

The incoming prime minister should seek cross‑party agreement to lock in a stable pensions framework – and then step back. For decades to come. The best thing politicians could do for pensions right now is to commit, collectively, to leaving them alone.

The opinions expressed are my own and should not be interpreted as the views of First Actuarial, Gallagher, their employees, clients or associated organisations.

The post Dear Prime Minister… Pensions need stability first appeared on First Actuarial.

Your immediate answer to the above question might well be “What on earth are you talking about?”

Bear with me though. I do have a point to make (and I think it’s a good one).

Before I get there, a bit of background…

New funding code – What has changed?

Actuarial valuations with effective dates from September 2024 have been subject to The Pensions Regulator’s (TPR) new Defined Benefit (DB) funding code. Under that code, there are two routes of compliance: Fast Track and Bespoke.

Under the Fast-Track approach, schemes must meet criteria set out by TPR around assumptions, recovery plan length and investment strategy. A key requirement is that the discount rate must be no higher than ‘gilts + 0.5% pa’ by the time the scheme reaches significant maturity (which is, broadly, when the weighted average term of future benefit payments is 10 years or less).

Schemes that do not meet these criteria must take the Bespoke route to compliance. This will involve providing more information to justify the approach adopted. An increased level of scrutiny comes with using the Bespoke route, but TPR has explicitly stated that Bespoke compliance is every bit as valid as Fast Track compliance.

The one big question that we cannot answer right now is exactly what approach TPR will accept under the Bespoke route.

This will likely be decided on a case-by-case basis. Once the code has been in place a while longer, and more valuations have been submitted, we will have a clearer idea of TPR’s acceptable boundaries. But at this early stage, we do not.

Superfunds – Changes to the regulatory regime

First of all, a quick reminder of what a DB superfund is. At its heart, a superfund is a vehicle that provides an alternative to an insurer buy-out (i.e. another option that can remove the responsibility for paying member benefits from the sponsor – for a price).

There are different superfund models being developed, from the shorter-term ‘bridge to buy-out’ used by Clara to a longer-term run-off model. At the time of writing, Clara is the only operational superfund so far in the UK.

As the market develops, TPR expects different operational and governance models to emerge. And so, in order to protect member benefits, TPR has created a regulatory regime that applies across all superfunds. A key part of this regime is the required level of member security a superfund must provide, along with the assumptions used to calculate the minimum level of technical provisions.

The latest guidance from TPR, issued in January 2026, sets out these requirements in detail and makes changes to the assumptions used to calculate technical provisions. It remains the case that superfunds must provide a capital buffer sufficient to provide a 99% probability that members’ benefits remain fully funded over five years. But the basis on which the technical provisions must be funded has changed – with the required discount rate moving from ‘gilts + 0.75% pa’ to ‘gilts + 1% pa’.

It’s this change that has potential implications for funding valuations.

Back to your valuation – we finally get to the point

While there’s no explicit link between the new funding code and the superfund regulations, they are both fundamentally designed to do the same thing – protect member benefits.

And, in my opinion, this shared objective, protecting member benefits, means that we can infer what TPR might consider a reasonable approach to funding under the new DB funding code by looking at the superfund regulations.

Surely, if a scheme can demonstrate that it provides a similar level of security for member benefits as a superfund, then it’s reasonable to expect that the scheme should not have to fund more prudently than a superfund does.

Not every scheme will be able to demonstrate that level of security, but some will, and others may be able to put in place arrangements that achieve it. You could argue that a contingent asset – or even an extremely strong employer covenant – could provide a similar level of security as the capital buffer in place for a superfund.

So, if you are the trustee or sponsor of a scheme considering your funding strategy, I believe that this gives a clear steer that ‘gilts + 0.5% pa’ is not the only acceptable answer.

And if that’s not the case, and TPR is unwilling to accept a discount rate of ‘gilts + 1% pa’ where there is sufficient security for member benefits, that could raise some uncomfortable questions about consistency.

The post Revised superfund regulations – Good news for your new funding code valuation? first appeared on First Actuarial.

Gallagher sees First Actuarial as a key part of its plans to strengthen its UK market position. The company already has a strong actuarial, administration and consultancy business here. The acquisition opens up full market coverage to the new combined company.

David Piltz, CEO at Gallagher, says: “We are pleased to announce that Gallagher has acquired First Actuarial. Gallagher is one of the UK’s leading pensions and employee benefits consulting businesses. The deal will broaden, deepen and enhance client offerings, expanding Gallagher’s value proposition.

“As the UK pensions market evolves with increasing complexity and regulatory change, First Actuarial brings complementary capabilities that enhance our ability to serve clients across the full spectrum of scheme sizes, ensuring a seamless integration and a unified approach to delivering exceptional service.”

First Actuarial will operate on a ‘business as usual’ basis for the foreseeable future. The entire management board and all partners will stay on in their current roles. Staff will continue to use the same systems and processes, and First Actuarial’s name and logo will remain in use.

Over time, the acquisition is expected to have a positive impact on First Actuarial’s services, as the consultancy draws on Gallagher’s many strengths – including technology, scale and expertise – to offer our clients new tools and even better services. By way of example, Gallagher has an award-winning technology platform – Gallagher Guide – which offers a fully digital retirement journey for pension scheme members.

David Joy concludes: “We’ve come a long way since 2004, and we feel like we’ve found our new home at Gallagher. With their support and investment, we’re going to go a long way in the future.”

The post First Actuarial acquired by A J Gallagher, global insurance broker first appeared on First Actuarial.

Data as a strategic asset

Central to the guidance is the notion that schemes need to treat their member data as a strategic asset.

As we discussed in our recent blog post, Pensions dashboards: The gateway to digital pensions administration, scheme administration has a longstanding profile problem. Up to now, administrators have rarely been seen as a strategic partner at the trustee table, where areas such as investment generally garner more interest.

However, developments such as the pensions dashboards and this latest regulatory guidance push member data – and administration more broadly – up the agenda of every scheme.

Data quality and scheme end games

The rationale for this regulatory focus is that the better your data is, the more effective your scheme will be in servicing its members during day-to-day administration. Crucially, a saver’s user experience of the pensions dashboards will also hinge significantly on the quality of data held by the scheme. And good quality data is incredibly important to the end-game strategy too.

Trustees preparing for a buy-out soon learn how important data quality is when negotiating with insurers on risk transfer pricing. Schemes need to give insurers complete clarity on the risk they’re buying into, and data is central to that.

In recent years, scheme run-on has emerged as a formalised end-game strategy. Schemes that decide to run on will progressively give members more digital options. A manual process is much more forgiving of the data used, as administrators can review and correct details as they go along. For an online transaction carried out by a member in real time, on the other hand, all the data that might conceivably be needed has to be 100% correct.

Data is the base layer, sitting under the platforms, tools and processes of a digital journey. Only with good quality data can schemes even consider innovations such as online retirement.

So whether a scheme’s end game is to buy-out or run on, member data has to be seen as a strategic asset.

What does quality data look like?

TPR’s guidance builds on the industry’s experience of preparing data for the pensions dashboards.

The centrepiece of the guidance is what TPR calls the six data quality dimensions:

• Accuracy
• Completeness – no missing data
• Consistency – alignment of data across all instances
• Timeliness – up-to-date information whenever it’s needed
• Uniqueness – i.e. no duplication
• Validity – correctly formatted data.

Schemes need the correct data in place at the right time. In a digital world, these six dimensions have never been more important, as we discussed in our recent blog post on pensions dashboards and digital administration.

Data improvement plans

If the six data quality dimensions are central to TPR’s guidance, then data improvement plans sit alongside them. With a robust governance element, data improvement plans are designed to give schemes “a structured framework for planning, documenting and delivering data improvement activity”, as PASA (Pensions Administration Standards Association), which has produced a template data improvement plan, noted.

This builds on substantial work in this area. There are already four regulatory data reports – one for common data, one for scheme-data, and then two pertaining to the Pensions Dashboards Programme.

In addition, as an established part of First Actuarial’s scheme administration onboarding process, we produce an implementation report assessing data quality and itemising any data issues uncovered during the transition period.

We’ve also been working on a standard data improvement plan, which we are now revisiting in light of TPR’s guidance and PASA’s recommended template. We’ll be inserting this into our administration processes, to be produced immediately after onboarding.

We particularly welcome the flexibility of the guidance for scheme-specific needs. We have to remember that not every scheme was within the scope of the Pensions Dashboards Programme, for example. Data improvement management must reflect the reality of every scheme.

Data improvement in practice

The guidance outlines an overarching data quality process:

• Identify
• Review
• Measure
• Improve.

That aligns with the spirit of our existing approach to data quality, which in practice, can take a number of forms, including actions arising from:

• Formal data management processes
• Common data reporting
• Scheme-specific reporting
• Information tracing such as address checks and mortality screening
• Data cleansing integral to specific transactions.

The guidance states that data quality needs to be reviewed at least twice a year. This goes over and above industry practice right now, and makes complete sense once everyone recognises data as the strategic asset that it is.

The guidance TPR provides on data scoring deserves a special mention. Although common data scoring is both established and consistent, the same cannot be said for scheme-specific data scoring. More consistency in this area will help TPR to assess scheme performance, and drive significant improvements in scheme-specific data. Guidance on data quality would have been incomplete without this valuable element.

Batting TPR’s underarm bowl

As scheme administrators, we’re the day-to-day custodians of data quality. TPR’s recognition of data as a strategic asset could not be more important to administrators like us who have been striving to get a place at the table for some time. TPR has bowled us an underarm bowl and we’re going to give it a good whack.

This guidance is only the start of a transformative data journey that TPR will be taking every scheme on. Administration’s focus on data quality is officially vindicated and the rest is down to us.

The post The Pensions Regulator delivers ‘underarm bowl’ to administration with helpful data quality guidance first appeared on First Actuarial.

How are we achieving this?

The answer is to keep everything simple and focus on what matters.

A pragmatic, proportionate approach

The new code was designed to codify good practice, not reinvent the wheel. For schemes with sensible, well-thought-out strategies, compliance shouldn’t mean tearing up plans or incurring unnecessary costs. Our approach reflects that.

Rather than overengineering the process, we concentrate on delivering key figures soon after the valuation date. This means trustees get the information they need to seek investment and covenant advice without delay.

This approach quickly determines whether a streamlined approach can be taken – with many trustees of well-funded schemes opting to align their low-dependency funding basis and technical provisions.

For schemes that need it, we offer an interactive tool to design a journey plan to low dependency during an initial meeting. In most cases, this identifies a sensible strategy right away.

This streamlined approach avoids the bottlenecks and inflated fees we’re seeing elsewhere. For our clients, the valuation process has been smooth, efficient and cost-effective.

The statement of strategy – easier than you think

There’s a common misconception that preparing the statement of strategy is a daunting and costly task. In our experience, that impression is wrong, particularly for Fast-Track valuations.

When advisers have done their job properly throughout the valuation, the statement of strategy can simply capture existing advice and decisions already made. There’s no need for fresh consultancy or extra rounds of recommendations – completing the statement is a straightforward matter of recording what’s been agreed.

Far from being a complex obstacle, it’s simply about entering data that’s already available, not starting from scratch or paying for unnecessary advice.

Avoiding the fear factor

We know that some advisers are fearful of breaching The Pensions Regulator’s (TPR) guardrails and triggering regulatory intervention. Our message is simple – if your strategy is justifiable and proportionate, press ahead. Don’t let fear drive inefficiency.

TPR isn’t expected to report on its regulatory approach until well into 2026. In the meantime, trustees should focus on putting in place a strategy that works for their scheme – not on second-guessing intervention that may never happen.

Real results, happy clients

Scheme trustees who have completed their valuation have appreciated our pragmatic advice, our ability to keep costs proportionate, and our commitment to making the process as painless as possible.

As David Archer, Trustee Director at Zedra Governance Limited, said:

“The advice from First Actuarial in support of our recent valuation under the new funding code has been clear, practical, and focused on what matters most. All their recommendations were sensible and proportionate. They have been excellent at providing advice that is adept and technically accurate, and at the same time pragmatic and sensible. They’re great at explaining actuarial and regulatory requirements in plain and straightforward language – and doing so cost-effectively.”

Looking ahead

As we submit more valuations in the coming weeks and months, we plan to share insights and lessons learned. But one thing is clear: early engagement and a proportionate approach work. It’s a simple process that delivers compliance without complexity – and keeps costs under control.

If you want an adviser who can deliver a valuation process that’s efficient, pragmatic and focused on your needs, talk to us today. We’re ready to help you navigate the new funding code with confidence.

The post Streamlined scheme valuations under the new funding code first appeared on First Actuarial.

Less obviously, what the Pensions Dashboards Programme has already achieved is a shift of perspective across the pensions industry. Trustees and administrators are taking a close look at what they need to do to deliver digital pensions administration. They’re worried about outdated IT infrastructure, data quality and legacy systems, and are keen to take action.

Something has changed.

Up to now, digital transformation in pensions administration has been uneven. We’ve seen some sound developments such as multi-feature online member portals, but these are often the preserve of larger schemes or the result of a concerted drive from trustees.

Seizing the dashboards moment means spreading innovation across all schemes. As David Fairs, Chair of the Pensions Administration Standards Association (PASA), said in a recent podcast on digital administration in pensions:

“Some of the large schemes have embraced technology and are using it to really enhance member experience. And I think if they could share some of their experience and then cascade it down into small schemes, that would be really great.”

Will digital pensions administration lose the personal touch?

Across First Actuarial’s pensions administration services team, we all agree that digitisation developments should enhance personal service rather than replace it. We have no intention to remove the personal one-to-one member interactions we’re known for. That may or may not be typical of thinking elsewhere in the industry, but it’s our firm position.

With any pension change, we need to be sensitive to the needs of older people. It’s interesting, though, that many of them – along with the majority of active members – are now comfortable with digital services. The implementation of the pensions dashboards over the next year or so will accelerate that shift to digital. So it’s right to grow our digital offering, but human contact remains important.

Digital pensions administration – Three key challenges

We see three key challenges in the shift to digital administration:

• Data quality
• Legacy systems
• Cyber security.

Let’s discuss them, one by one.

Data quality

Digitisation and data quality go hand in hand. Even with the pensions dashboards – and all the relentless focus of PASA on data in best practices for digital pensions administration – data quality remains challenging.

If data isn’t good enough, then any solution we provide for members will never be usable, especially given the complexities of pensions. Commonplace complications like divorces and the special promises within Defined Benefit scheme rules will continue to present challenges across most schemes.

In the podcast we mentioned earlier, David Fairs referred to a backlog of investment in data cleansing. He argued that data cleaning needs to become a business-as-usual activity rather than a project.

At First Actuarial, we’ve always taken data quality seriously, not least because we are both members of PASA working groups! For example, before any of our administrators do a calculation, we’ll carry out a mini data cleanse for certain schemes so we know we can trust the numbers.

We run mortality screening on a monthly basis, to identify any members who may have died recently. And as well as all verification processes in place for member benefit payments, we’ve been running annual address data quality checks for many years now.

Legacy systems

Legacy systems are another obstacle holding digitisation back. Again, pensions dashboards have forced some schemes to confront the limitations of their IT infrastructure. But many are still struggling to deliver a digital member experience with older systems. What seems to be a digital experience on the surface may in fact be a manual process behind the scenes. And it can be hard to get data in and out of those systems.

Cyber security

If we’re to move towards an end-to-end member experience – beyond relatively straightforward online processes such as change of address or bank details, and retirement quotation requests – cyber security is a standout challenge.

Cyber security could not be more important when making digital payments such as pensions. But there really is nothing like a bit of a human touch in mitigating the cyber risks involved. And that’s another reason why we see digital administration as an enhancement rather than a replacement.

AI-enabled digital pensions administration

No discussion about digital pensions administration would be complete without exploring the potential of AI.

At First Actuarial, we’ve been looking at AI for some time now. We’re particularly interested in what the secure use of AI can do to personalise member communications such as onboarding and retirement videos.

But in common with many industry representatives, we think that caution is needed with AI. We need to be sure that robust due diligence and cyber security measures are in place. We’ll be paying particular attention to data privacy, given sensitivities around the personal information that pension administrators handle. Over and above that, we’ll want to check that it’s genuinely adding value, as we would with any technology.

PASA recently released guidance on the use of AI in pensions administration, in which it highlighted both the opportunities and risks of AI, and emphasised that high-quality data is a precondition.

Back to the podcast on digital pensions administration, Jonathan Hawkins, PASA Director, listed a number of appropriate scenarios for the use of AI:

• Personalising member communications
• Checking outputs
• Automating routine areas of administration.

He argued that those use cases will become “more interesting and more nuanced as we get into the AI space and we start to understand what works well and what works less well”.

This chimes with our concerns about complexities such as the spouse pension of a member who has been married three times. We need to use our administration expertise to identify and test potential pitfalls while keeping an open mind to the potential of AI as it evolves.

How to prevent trustee overwhelm

Faced with all the changes on the horizon, combined with the stresses and strains of existing workloads, how can today’s overwhelmed trustees set priorities for digital transformation in pensions administration? And where will they find the budget and resources?

The Pensions Regulator (TPR) is playing an exceptionally useful role in supporting the transition to digital pensions administration. In reality, the reason why pensions dashboards are getting off the ground is that schemes are legally required to comply with deadlines.

TPR has been taking a closer look at the use of technology in administration, and there are further data quality regulations in the pipeline. All these developments are laying the foundations for further digitisation.

For data testing, for example, TPR has been pointing to the Government Data Quality Hub, which recommends testing against six dimensions of data quality:

1. 1. Accuracy
   2. Completeness
   3. Uniqueness
   4. Consistency
   5. Timeliness
   6. Validity.

Next steps for digital transformation in pensions administration

Over and above their pensions dashboards obligations, what is the one thing that trustees should be doing right now to open up the potential of digital transformation in pensions administration?

From a trustee perspective, one invaluable change would be to position administration at the heart of every trustee meeting, and cover every significant data and administration issue. That way, administrators could act as a strategic partner by adding their expertise to discussions on pension scheme digital transformation.

Besides that, we believe that it’s essential to continue to provide personal care for members, and our feedback really bears that out. We get positive feedback on the digital elements of member experience, which direct members to our skilled administrators at appropriate points. And that’s exactly how we plan to move forward with digital pensions administration.

The post Pensions dashboards – The gateway to digital pensions administration first appeared on First Actuarial.

Robert Hurst, Co-Head of Administration, says: “This appointment puts me in a strong position to help shape the member experience of the future. Claire and I enjoy strong relationships with each other and across our nationwide administration team. Importantly, we have interconnected skillsets – technology can only deliver positive change with robust processes and high-quality data.”

Claire Fuller’s trainee administrator roles at Towers Watson (formerly Swiss Life) and Pearson Publishing gave her early exposure of both in-house and third-party administration. She then spent 16 years at Xafinity, where her career path shifted to systems and data analysis. She moved to First Actuarial in 2013, rising to the position of Head of Pensions Administration Systems prior to her latest appointment.

Robert Hurst has worked in pensions administration for 27 years, starting at Capita as a trainee administrator, progressing to Pensions Administration Manager. Following further roles at Kerr and Company (now Broadstone) and Aon, Robert then moved across to the process side of pensions administration. He was appointed as Process Manager at First Actuarial in 2020.

With regulatory focus on data quality and guidance, together with developments such as the pensions dashboards – which Claire and Robert have worked on from the beginning – scheme administration is clearly moving into a new digital era.

Claire Fuller, Co-Head of Administration, says: “First Actuarial has always played to my strengths, encouraging me to develop my technical and managerial abilities. My previous position, as Head of Pensions Administration Systems, allowed me to see across the whole business. That understanding, seen through a technology and data lens, should prove invaluable as we enter the new digital era of pensions administration.”

Both Claire and Robert are actively involved in PASA (Pensions Administration Standards Association), working with colleagues across the industry on standards for process and data quality in pensions administration.

Claire Fuller concludes: “Scheme administration at First Actuarial is known to be exceptionally member-focused and we’ll be looking to build on that strength while making the most of the latest technologies and industry initiatives which are advancing at pace.”

The post First Actuarial appoints Co-Heads of Administration to drive digital transformation first appeared on First Actuarial.

Because the arrangement involves the transfer of some of its employees, First Actuarial’s working environment and company culture were strong considerations for Co-op. They could see that First Actuarial’s Manchester office would be a good workplace for its employees.

Gary Dewin says: “What Co-op and First Actuarial have in common is a people-centred culture. That came through strongly and it tends to be reflected in the quality of services – employees who work well together are more likely to deliver better customer experiences. We were impressed with First Actuarial’s personable and knowledgeable people.”

Sam Mullock, Partner and Head of Business Development at First Actuarial says: “When schemes are administered in-house, members expect to speak to pension team-members they know. We will keep that personal feel, rather than operate like a distant outsourced provider. Members will be able to contact the team easily and speak with the people they know. We’ve agreed with Co-op that we’ll progressively enhance the services we provide – for example by improving the journey from work to retirement – rather than change them overnight.”

IGG, as Chair of the Trustee, said: “It has been a really collaborative process working with the in-house team, the Co-op Group and First Actuarial to make this transition smooth and seamless for both members and colleagues. Huge thanks to everyone involved.”

The post Co-op appoints First Actuarial to administer the Somerfield Pension Scheme first appeared on First Actuarial.

Private healthcare has become a higher priority in recent years. With employees struggling to access NHS services, more and more employers are turning to health and protection benefits, as the Reward & Employee Benefits Association (REBA) recently reported. Employers avoid the disruption that healthcare delays can cause, and they can also get people back to work quickly with speedier rehabilitation.

Lee concludes: “Employers tell us that their people expect wellbeing services, and healthcare is an important part of that. It’s all part of the efforts employers are making to reward and retain their valued people.”

First Actuarial is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.

The post First Actuarial adds healthcare to its employee benefit services for employers first appeared on First Actuarial.

1. Effective system of governance (ESOG)

Trustees must establish, monitor and maintain an effective governance framework for their scheme. The ESOG, which should be proportionate to the size and complexity of the scheme, gives trustees oversight of day-to-day operations and helps demonstrates a well-run scheme.

2. Own risk assessment (ORA)

Schemes with 100 members or more need to carry out and document an ORA every three years and update it following any major change to the ESOG.

In the ORA, trustees will review and assess the effectiveness of their governance framework. They should then outline any changes needed to help further mitigate risk.

The first report will be due 12 months after the first full scheme year after the general code came into force. For example, if your year end is 31 March, your first ORA will be due by 31 March 2026.

3. Risk management function

Trustees of schemes with more than 100 members are also required to have a risk management function in place. The risk management function will regularly review key risks and report to the trustees as part of their oversight of the scheme’s governance framework.

The pivotal point – Where trustees should be now

By now, trustees should have completed their gap analysis, outlining what is already in place and identifying what more is required for compliance.

A plan should be in place with all the actions needed to bridge the gap between current practices and compliance. And trustees should be well on their way to closing those gaps and finalising new policies and processes.

This is a pivotal point of general code compliance. It draws to a close the steps required to establish and demonstrate that the scheme has an ESOG. Trustees should then make plans for ongoing compliance.

Trustees should now begin preparing for their first ORA using the information gathered so far. It’s important to remember that this will likely be a significant task and that the ORA deadline will come around fast, so shouldn’t be left to the last minute.

While TPR has not stipulated that outputs need to be made public or published online, they will be able to request sight of the ORA should they wish.

We understand that this is yet another project to undertake, with likely additional costs. However, it’s important to remember that by improving your governance framework, you can mitigate risks and safeguard your members. This in itself may yield other benefits – for example, by identifying any data issues and taking steps to correct them.

Our recent general code case study demonstrates that schemes can make broader gains rather than simply undergo a tick-box compliance exercise.

Has your scheme fallen behind? If you haven’t quite reached this pivotal point, don’t worry – it’s not impossible to catch up. But you do need to take action now. Read on to discover how First Actuarial and its Client Hub can make lighter work of general code compliance projects.

The general code and First Actuarial’s Client Hub

As many First Actuarial clients will be aware, we’ve developed a Client Hub to help you with the processes and documentation needed to run an effective scheme.

We’ve updated our Client Hub to help you meet the requirements of the general code, with these capabilities:

• ESOG – The Governance tile of the Client Hub now provides an ESOG area, with a range of tools to help you record and manage your ESOG, including monitoring and reporting tools.
• Gap analysis – Once you’ve populated the Client Hub with your key policies and documents, you can generate a gap analysis at the click of a button. If your scheme has yet to reach the pivotal moment I’ve just described, this may reassure you that it’s not too late. In our case study, we describe how we helped establish and document a new governance framework for trustees keen to comply with the general code, in only two months.
• Documentation – With the Client Hub, you can link policy documents, additional information and evidence to each individual module of the general code. In our case study, we discuss the raft of documentation that can be stored centrally in the Client Hub, saving trustees time when documenting evidence for their ESOG. The Client Hub will also map the finalised documents to the various modules of the code.
• Prompts and reminders – The Client Hub allows you to add review dates, prompts and reminders, alongside all your policy documents and evidence. This will help you make sure you’re reviewing elements of your governance framework at the right times.
• Ongoing monitoring and reporting – The new ESOG section of the Client Hub provides the tools to monitor and report on compliance, as the general code requires.

In summary, you can store your documents on the Client Hub, then use the Governance tile to produce outputs like the gap analysis instantly – a significant time-saver. This will help you stay organised, as you’ll always know where the latest versions are and when items are due for review. And crucially, it will keep all that information secure.

How else can we help you with the general code?

Alongside the capabilities of the Client Hub, our consultants can give you the support you need to meet the general code requirements:

• Training – We can provide trustee training to take you through what you’ll need to do to meet the requirements of the general code and why.
• Gap analysis – We can then help you with the gap analysis, to identify what’s needed to close the gap between existing practices and general code requirements.
• Policies and documentation – We can work closely with you from that point to produce or update any additional policies and documentation needed.

Our aim is to make this work as easy and efficient as possible for you. We lighten the load for you while giving you full control over your own policies.

Our approach is:

• Collaborative – We work in an incremental way, getting agreement at every stage of drafting.
• Proportionate – Together, we agree on proportionate approaches, based on the specific attributes of the scheme and First Actuarial guidance.
• Clear – We identify areas of focus and map policies and documents to the various elements of the code.
• Realistic – We take care to consider the impact of any changes on the actual running of the scheme, to make sure they’re feasible and realistic.
• Future-proofed – We look beyond the implementation of general code changes, and make sure we help you meet ongoing monitoring and reporting requirements.

What trustees should do now

I can’t overemphasise that if you have yet to complete your gap analysis and put a plan in place on how to meet the requirements of the general code, you must do that now.

The deadline for your first ORA will come around quickly for those schemes required to prepare one, and you need to start preparing for it as soon as possible.
We are here to help, especially if you feel that your scheme is falling behind. So do get in touch if you need any guidance on what you should do next.

The post The general code one year on – a pivotal moment for trustees first appeared on First Actuarial.

Let’s start by looking at the term private markets. It covers a whole range of investments – essentially any investment that can’t be publicly traded on an exchange. It could refer to private equity, infrastructure, property, private debt or loans, or other unlisted forms of lending. These may be accessed directly, or via pooled funds.

The attraction of these assets is that they’re expected to provide higher returns than their listed counterparts. The theory of this is sound. These assets are harder to value, harder to trade, and less liquid than public assets. Investors want to be compensated for these downsides, and investors are after one thing – returns.

Private markets have indeed provided strong returns in the past. Until early 2022, interest rates had been at rock bottom for more than a decade. This is a good environment for private markets to grow, which is exactly what they did. Over the 25 years to 2024, private equity funds delivered an average return of 13.1% pa, outperforming the S&P 500 index by 4.5% pa.

However, as any good investment adviser will tell you, the past is no guide to the future. As interest rates have risen over the past three years, returns have been bumpier, with analysts suggesting that private markets are yet to find a new normal in this higher interest-rate environment.

Good news for the Government

As far as the Government is concerned, this encouragement for DC providers to invest in private markets is all about boosting the UK economy. As part of the Mansion House Accord, the Government has committed to ensuring a pipeline of UK investment opportunities. These might be infrastructure projects such as solar farms or new hospitals, which should genuinely improve life in the UK. There’s certainly a role for the Government to play in identifying and prioritising projects. But the Government cannot guarantee returns.

Fidelity is one of the DC providers that has not signed the Accord. One of the reasons it cites is that the UK makes up around 15% of global private markets (according to its research), and it doesn’t want to agree to invest 50% of its private market allocation to the UK. Restricting the investable pool by requiring a disproportionate allocation to the UK reduces the likelihood of delivering good returns.

This, I think, gets to the nub of the issue. The Government’s move seems to be about meeting its own aims, rather than improving outcomes for savers. Its priority is to access some portion of the billions of pounds it deems DC providers to be selfishly investing globally, rather than taking a hit on returns for the good of the nation.

DC schemes and private markets

The Accord applies to 10% of assets held across default investment strategies. This doesn’t necessarily mean that every default investment option will have a 10% allocation to private markets. Some providers will retain a simpler default option with listed assets only, and lower fees.

The cost of investing in private markets is higher than investing in public markets – for example because companies and projects need bespoke expert valuations, increasing the dealing cost. Private market funds sometimes have a performance-related fee in addition to regular management charges. Currently, DC defaults have a charge cap of 0.75% pa. If a proportion is invested in more expensive assets, providers might need to find other areas to reduce costs.

Then there’s the liquidity issue. Private assets are often large and/or long-term investments, which cannot be traded with ease. DC providers will need to find ways to invest in these assets such that they can still provide sufficient liquidity for individuals, to meet fund switches and withdrawals and invest incoming contributions.

Having said all this, DC schemes can, and do, already invest in private markets, though allocations and prevalence within default funds vary. Legislation and regulatory changes over the past few years have made this easier, notably with the creation of a new fund structure, the LTAF (long-term asset fund), for this purpose.

Good news for savers?

Private markets offer diversification of growth assets, which benefits investors. These assets are less correlated with geopolitical events and market shocks than public assets are. An allocation to private markets would therefore protect the value of a DC fund somewhat during a wider market downturn (to the extent that the fund is allocated to private markets).

For individuals some time away from retirement, investing in private markets is likely to improve returns, though the impact will be limited.

Over a 25-year period, private markets would need to achieve returns 3% higher each year than the alternative investment option to increase the total asset value by 10%. Not outside the realm of possibility, but also not a given.
Those who are less than 15 years away from retirement are unlikely to see any impact of this change. Default investment strategies typically de-risk between 10–15 years from retirement. This is likely to be the point at which private markets start to be phased out of a lifestyle strategy, due to their higher risk profile and lower liquidity.

The underlying reality, however, is that UK savers aren’t putting aside enough of their income today to fund their retirement. According to the Financial Lives 2024 survey carried out by the Financial Conduct Authority (FCA), 12% of people didn’t know whether they had more or less than £10,000 in their DC savings. 33% said that they had less than £10,000 in combined DC savings pots – worryingly this was also true for 18% of over 55s.

An allocation to private markets may have a marginal impact on savers’ pot value at retirement, but it’s much more important for individuals to make sure they’re saving enough in the first place, and that their investment strategy suits their own circumstances. Employers have a crucial role to play here, by educating employees and supporting them to understand and engage with their DC provision.

Limited positives overall

The Mansion House Accord is the Government’s way of accessing pension scheme assets and putting them to work for the UK. The impact on affected individuals is likely to be positive, but small. The Government needs to overcome some hurdles to make this more achievable, most importantly by creating valuable, attractive opportunities – which are competitive with global private markets – for DC schemes to invest in.

Individuals aren’t sufficiently engaged with their pensions, and it’s time for the Government to undertake a wider review of the pensions landscape, including an increase in auto-enrolment contribution rates to improve retirement outcomes for future generations. Otherwise, we’ll have a real crisis on our hands.

If you’re interested in finding out more about how First Actuarial can support you as an employer, please get in touch.

The post Mansion House Accord – What’s the impact? first appeared on First Actuarial.

David Joy, Managing Partner of First Actuarial, says, “Last year, our revenue grew by 15% and this year we’re firmly on track to exceed that. To build on this growth, while sustaining our client-first approach to service delivery, we’re expanding into new locations. As one of the UK’s major business hubs, offering a large pool of impressive finance professionals, Birmingham is the obvious choice.”

The office is situated on Colmore Row, close to Birmingham’s main train and tram stations. It boasts excellent communal facilities and meeting rooms, and will provide a central base for nearby client visits and networking activities.

Andrew Allsopp, Associate Partner, says: “The Birmingham office brings us closer to many of our valued clients in the West Midlands. Birmingham’s business district is a thriving and beautiful area of the city, and we’re looking forward to being a part of it.”

Mark Frost, Senior Actuary, adds: “It’s great to be joining a firm that has grown on the basis of its solid reputation for treating both staff and clients fairly. I’m looking forward to building up First Actuarial’s presence in Birmingham.”

Throughout its 20-year history, First Actuarial has enjoyed stellar growth. It started out as a consultancy delivering actuarial, administration and investment services for pension schemes. And over time, it has expanded into broader employer benefits, including financial wellbeing, Defined Contribution arrangements, and group protection employee benefits such as life assurance, income protection and critical health cover.

David concludes: “Our choice of Birmingham as an office location confirms our belief in the West Midlands as an important business centre. First Actuarial has grown exponentially over two decades, and we believe there is still a huge market for a firm like ours with a strong client-first service ethic. We’re keen to hear from like-minded professionals who want to be a part of our success story”

First Actuarial is actively recruiting for pensions professionals to develop its actuarial, administration and investment services. The firm offers career opportunities in these areas from graduate trainee to senior professional levels.

The post First Actuarial opens Birmingham office – its seventh in the UK first appeared on First Actuarial.

David Parfett, Co-Head of Employee Benefits at First Actuarial, says: “SMEs often find themselves priced out of the employee benefit market. It’s hard for them to compete for job seekers against larger employers and their shiny benefit platforms. But without recruiting and retaining skilled people, they can’t grow their businesses.

For a modest cost, this new group protection package provides life assurance and income protection for SME employees. It includes features which are usually unavailable with smaller policies. First Actuarial can also arrange critical illness protection as an add-on policy.

David explains: “The cost can be as little as 1% of salary costs, making it an affordable employee benefit with additional wellbeing services included. Our package also gives employers a higher free cover level – at which cover can be provided without the need for medical underwriting – than would typically be available if they applied directly to an insurer.”

Like all group protection schemes, the arrangement offers additional wellbeing services – such as a digital GP – at no extra cost. These can prove particularly valuable in smaller organisations, helping them build out their health and wellbeing provision.

Suzie Nedza, Employee Benefits Consultant at First Actuarial, says: “Of the insurers we looked to partner with, Legal & General offered attractive terms and competitive pricing. They’re a well-known brand and their knowledge of the SME market is impressively broad. They made it clear how keen they were to work with us from the outset. They worked flexibly with us in developing an arrangement that would work for us and our SME clients.”

First Actuarial is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.

The post First Actuarial and Legal & General launch affordable employee benefits for SMEs first appeared on First Actuarial.

First Actuarial’s client base includes more than 200 not-for-profit organisations, such as charities, independent schools and housing associations.

Chloe says: “In most CPC member organisations, someone – a finance director or HR manager, for example – will be managing pension provision single-handedly. The CPC brings these people together, providing a supportive peer network and putting specialist partners such as First Actuarial in place.”

First Actuarial’s guiding principle in its work with not-for-profit organisations and charities is to strike the right balance between pension benefits and charitable aims.

Dale Walmsley, Partner at First Actuarial, says: “We build client relationships based on value rather than fee generation, an approach which aligns with the not-for-profit ethos. We plan to use our pension expertise to share knowledge and drive debate in the CPC community around key developments such as The Pensions Regulator’s new funding code. In turn, that will deepen our understanding of the third sector, benefiting both CPC members and our own clients.”

As CPC partners, First Actuarial will actively participate in events around the year, hosting a hybrid seminar on a subjecs chosen by members and speaking at the CPC’s annual conference.

Chloe concludes: “My early impressions are that First Actuarial are proactive and energetic. Their understanding of the sector comes across clearly. And they’re sensitive to the reputational risks and resource constraints that charities face in managing their pension schemes. I’ve got high hopes for our partnership.”

The post The Charities Pensions Club appoints First Actuarial as actuarial partner first appeared on First Actuarial.

If other countries respond in kind and trade barriers become widespread, it’s easy to imagine adverse consequences for global stock markets.

That said, with schemes’ modest exposure to equities, this may not be too worrying right now.

And at this point, we can’t rule out that Trump’s underlying intention is to threaten the introduction of tariffs – and the expansion of existing ones – to force concessions from the US’s trading partners.

If that turns out to be the case, then the deployment of tariffs might prove to be short-lived. It may even result in positive stock market movements, particularly given Trump’s characteristic pro-business stance.

In any case, given that equities are a long-term investment, knee-jerk reactions from investors to these developments strikes us as unnecessary.

Most commentators believe that tariffs will have an inflationary impact. However, to the extent that this affects the UK, the impact may actually turn out to be beneficial. Schemes’ exposure to rising inflation tends to be limited by their benefit caps. And if the market response is to raise interest rates (resulting in higher gilt yields) then liability values might go down.

Whether gilt yields will increase is open to debate. Prior to this weekend’s developments in the US, the Bank of England was expected to cut the UK base rate later this week. That outcome now looks uncertain, leaving the future direction of UK interest rates and gilt yields very much up in the air.

What is true, however, is that gilt yields are much higher than they have been for many years – with most schemes recording much improved funding positions as a result.

We recommend that any trustees who haven’t recently considered whether to increase their liability hedging may wish to do so. Schemes that are in a reasonably good shape today, may have cause for regret if interest rates do fall again.

The post How will Trump’s tariffs affect Defined Benefit pension schemes? first appeared on First Actuarial.

At the time of writing, it looks like 2024 was a record year for scheme transactions. 2024 was also the first year in which one insurer completed more than 100 transactions – unthinkable only five years ago.

Looking forward, we’ll almost certainly see more records broken in the risk transfer market in 2025. The question is, which ones?

There’s no guarantee that the total volume of transactions record will be broken in 2025. This is because that particular metric is mainly driven by the timing of a small number of very large deals. One mega transaction can have an undue influence over the year’s statistics.

2. More of the same

Record-breaking numbers aside, we can expect more or less the same from a frenetic risk transfer market. Some commentators may be predicting a bit less activity in 2025, but nobody really expects a significant drop. If we look at our pipeline, there are many schemes at the preparation stage, all set to transact in 2025.

3. Buoyant smaller scheme activity

At First Actuarial, we make no secret that the focus of our risk transfer team is on schemes up to £100m in size. And we’re happy to report that the smaller scheme market is in the best shape we’ve seen for some time.

With our growing risk transfer team, we’ve completed more transactions than in any other year. Along the way, we’ve spotted signs of ongoing healthy market conditions for smaller schemes:

• We arranged competitive processes for a number of schemes which would have required an upfront exclusivity agreement only 12 months ago
• We engaged with an insurer which typically only quotes for schemes at least ten times larger than the one we’re working with
• We saw increased flexibility in price negotiations to ‘get deals over the line’ – even with the smallest schemes.

4. More market entrants

With new insurers Royal London and Utmost appearing in 2024 (hot on the heels of M&G in 2023), the bulk annuity market is larger than ever. It will be interesting to see whether these newer players can scale up their capacity to quote on a greater number of deals in 2025.

We expect to see even more market entrants in 2025. A few months ago, for example, Brookfield, a large Canadian financial services giant, applied to the FCA for approval to trade in the UK insurance market.

The question of which scheme sizes these newer players will target is a big unknown. For Utmost, only one deal has been announced to date for a £20m scheme, and we expect future deals to be larger. Royal London has completed transactions between £30m and £350m (although the larger transactions were for internal schemes).

Meanwhile, established insurers such as Aviva and Just continue to quote on very small deals, and an increasing number of insurers are looking at sub-£100m transactions. With that in mind, some insurers may be forced to target larger deals that are predominantly the domain of other insurers. In turn, those insurers may push for even larger deals.

5. Innovation

I’m looking forward to more innovation in 2025. Several insurers now have streamlined quotation templates in place. During 2024, significant refinements to these templates paved the way for increased transaction volumes and more accurate benefit modelling. I discuss these templates in more detail later in this article.

Alternatives to traditional risk transfer mechanisms are also gaining traction. One example is M&G’s recently announced Value Share BPA proposition, which shares financial risk and reward with corporate sponsors.

6. More alternatives to buy-out

a. Consolidators

As we’ve all seen, there’s been a great deal of buy-out activity in recent years. But alternatives are now clearly in focus.

We see Clara, the only approved Defined Benefit consolidator, writing more deals for schemes that can’t afford to buy-out. As a sectionalised scheme with funds overseen by a single governance committee, Clara is slightly cheaper than a buy-out. Clara runs schemes on until buy-out with an insurer becomes affordable.

The question for 2025 is how many more deals Clara will take on, and whether it will face competition from new consolidators entering the market.

b. A possible government consolidator

The previous Government committed to establishing a government consolidator via the PPF, to look after schemes that are unattractive to commercial providers. 2025 will hopefully provide clarity on whether the new Government plans to proceed with this development, which was originally due to be in place by 2026.

c. Scheme run-on

2024 was the year in which scheme run-on became an industry talking point, prompted by improved funding levels and reduced sponsor dependency.

Scheme run-on can mean running on indefinitely or running on for a period until a bulk annuity transaction becomes more attractive.

We fully expect more schemes to consider run-on this year. My colleague Steve Deverell-Smith is just one of a number of people arguing that “run-on can and will work for schemes of all sizes”. Read his recent blog post – Defined Benefit scheme run-on – For the few or the many?

7. Continued administration capacity constraints

It’s no secret that the industry is stretched on both the insurer and scheme administration fronts.

Scheme administration is the biggest pinch point in the risk transfer process. Administrators face the double whammy of business-as-usual requirements on top of project work, notably the Pensions Dashboards Programme, which will intensify in 2025.

This is slowing down buy-out transactions. Scheme administrators must always put their members first. But regulatory pressures around pensions dashboards and other initiatives are equally pressing.

On the insurer side, there simply aren’t enough people to do the work. We see a great deal of staff movement between the various players, and the lack of continuity could slow down the number of transactions completed.

8. Ongoing difficulties with non-standard quotation templates

One of the most common challenges we encounter in risk transfer projects is the completion of streamlined quotation templates. Four of the insurers in the risk transfer market use these templates as part of their respective quotation processes.

While these are broadly beneficial, the lack of standardisation across insurers means that schemes often have to populate multiple templates which each have differing data requirements. The additional quotation costs have a disproportionate impact on smaller schemes.

What we really need is a collaborative exercise across all insurers in the market to standardise the data formatting.

9. Earlier GMP equalisation

On to everyone’s favourite subject – GMP equalisation. As I’ve described, administrators are heroically juggling business-as-usual work with time-consuming projects, and GMP equalisation features prominently in that mix.

Many schemes enter the buy-in process with unequalised benefits, and deal with GMP equalisation at the data cleaning stage. Earlier equalisation is tricky without changes to the streamlined quotation templates.

But trustees and sponsors have much to gain from earlier GMP equalisation. It would improve certainty around the cost of the transaction. Even more importantly, it would foster more orderly transitions.

Currently, buy-ins and GMP equalisation are often implemented at a similar time. This can be confusing for members. Earlier scheduling, enabled by equalisation-friendly quotation templates, would free administrators up to implement GMP equalisation and then support the transaction without distraction. This has to be a welcome development for an over-stretched industry.

Encouragingly, some insurers have indicated that they’re looking into this. Let’s hope we can get it sorted in 2025.

10. No end to the hype and celebrations!

It can get a bit wearing, can’t it? Every time a buy-in is completed, there seems to be a rush to LinkedIn to put the word out. And the industry press seems to have an insatiable appetite for risk transfer stories.

But really, why not continue to celebrate our successes into 2025? If we’ve given members more financial security in retirement – and delivered unexpected upsides in some cases, like enhanced benefits from scheme surpluses and members rescued from the PPF – that has to be worth celebrating.

The post 10 predictions for the risk transfer market in 2025 first appeared on First Actuarial.

The report discusses recent regulatory initiatives aimed at improving data quality. And with no blame attached, it describes the current shortcomings of data scoring and makes recommendations for improvement.

But it’s more than a discussion document. In the appendices, PASA has helpfully provided lists of data items that schemes should focus on when testing data for:

1. All members
2. In-service members
3. Deferred members
4. Pensioners and dependants.

This is an important step towards aligning data scoring across the pensions industry and improving transparency of scheme data quality.

The timing is critical. Our new digital world makes heavy demands on the data we hold. We no longer live in a world of mainframe computers, print-based archives and typing pools. We’ve got automated systems which run on structured data.

Clear transparency of data scores in place will transform the scope for delivering the enhanced member experience and efficiencies that the new digital world offers, with data-driven technologies such as AI.

But there’s a long road ahead.

Where are we now on data scoring?

At present, there’s a worrying mismatch in approaches to data checking, especially where scheme-specific data is concerned. And not all trustees add data scores to their scheme returns on a regular basis.

Consistent and repeatable data scoring can only be achieved if administration data is digitally accessible, stored in one location and recorded consistently for all members. Right now, only a small minority of schemes are in that position. In a former paper-oriented industry like ours, old habits die hard.

In the main, common data – the information all schemes hold – is relatively problem-free. That said, requirements around common data are in flux. First name initials of members are a great example of data that has previously been acceptable but is no longer adequate. A letter to a member can be addressed to Mrs C Fuller, rather than Mrs Claire Fuller, for example.

In the digital world, this isn’t enough. With pensions dashboards, data matching isn’t possible without a member’s full name. Trustees need to adopt a digital mindset, and hold data that is fit for the digital world.

And then there’s data accuracy. Up to now, we’ve assessed data on the basis of presence – checking that we hold data in the date of birth field, for example. But we haven’t measured the accuracy of the data itself. First Actuarial contracts a third party verification service to check member addresses every year. Across the industry, we need to do more of this.

An important change is that trustees must consider their long-term outlook of their scheme, and not just business-as usual activities and standalone projects such as GMP rectification. Schemes should start to think more broadly about future demands on data, rather than taking a piecemeal approach.

We’re going to be asking so much more of scheme data than we did before, and increased stringency and consistency come with that.

Why are schemes in this position?

Up to now, there has been no real regulatory enforcement in this important area. Without that, trustees have focused on other priority areas such as their investments.

That’s not to say that there has been no regulatory output. As early as 2010, TPR set out its expectations for assessing common and scheme-specific data. Only a small number of schemes took action at that point. When TPR updated its guidance in 2016, we saw more schemes make changes to their data scoring. But it’s been a slow process.

And that’s why we felt, as an industry group, that closer focus and increased support were needed.

What are TPR’s expectations?

The Pensions Regulator has launched its data quality initiative. Schemes now have to submit data scores on an annual basis, rather than once every three years as they’ve done up to now.

TPR has contacted those schemes that have not been providing scores as part of their scheme returns, making its expectations around data scoring abundantly clear.

TPR is planning to analyse the scores from next year’s scheme returns, to get a benchmark of data quality and scoring. It’s important to emphasise that schemes shouldn’t worry about submitting a low data quality score. Low scores are what the industry fully expects right now.

What matters at this stage is that schemes should be actively looking at their data. It’s when 2026 scheme returns come in that TPR will want to see improvements in scores.

What administrators should be doing

Now is the time for scheme administrators to shine. Data underpins everything that happens in the pensions industry, and it needs to take centre stage.

The good news is that administrators are well-equipped to meet the challenge. Most if not all administrators have great data skills. The trick is to start looking at data in a different way.

We tend to focus on data at the level of individual members, as we support them through their journey. We need to expand our outlook – to see the bigger picture, and to consider both the present and the future. We already do that to an extent with work such as the regular data overhauling we carry out. We just need to widen our data view a little bit more.

In the immediate term, administrators should review their data scoring analysis and provide assurance to trustees that a full data analysis has been carried out. They should state clearly what has been analysed and how the tests have been performed. Data scoring should be consistent and comparable.

The better our data gets, the more interesting and useful scheme administration can become. We need to get our data into a fit shape for the future that is already here.

We’re here to help schemes

The mood music from both PASA and TPR is one of support rather than judgement.

Yes, the report talks about measuring and comparing schemes. This can conjure up an image of a pension scheme data league table. But it’s about setting a benchmark and then helping schemes as they progress with data quality and scoring improvements.

First Actuarial’s administration team has extensive experience of common and scheme-specific data scoring. We’ll be speaking with all our clients, to help them meet TPR’s requirements, put together a data management plan, and future-proof their data.

Data needn’t be boring. This is an exciting time for everyone involved in pensions data, as exciting new opportunities open up in scheme administration and the member journey.

The post Why data scoring is the key to a new era of scheme administration first appeared on First Actuarial.

There are many debates to be had about the wisdom of pension freedoms and the speed with which they were introduced. On the one hand, people are now free to make good decisions in line with their personal needs and circumstances. But on the other hand, they’re equally free to make bad decisions, which may result in paying more income tax than necessary or even running out of money.

How pension freedoms changed DC pensions

Pension freedoms had a dramatic effect on Defined Contribution (DC) pensions and their usage.

Traditionally, pensions have been vehicles that provide an income in retirement. Defined Benefit pensions still do that, of course, but it’s worth remembering that in the past, Defined Contribution pensions were also seen as retirement income generators. They were savings vehicles which people used to buy an annuity when they retired, usually after taking their tax-free lump sum.

While there was some flexibility around how and when they did this, for most people there was no alternative to an annuity.

At the time, there was much debate about the pros and cons of annuities. Many people were concerned about the lack of choice, and annuities acquired a reputation – rightly or wrongly – for delivering poor value for money. Over the years, the cost rose considerably, and much of the value was lost if someone died soon after the start of their lifetime annuity.

The pension freedoms changed all that, allowing people to choose how and when (from a specified minimum age) to access their funds.

Estate planning and DC pensions

The impact of pension freedoms on estate-planning decisions gradually came to light.

DC pensions are typically set up under a discretionary trust, meaning that on death the funds remaining in the pension pot can be paid out to a ‘nominated beneficiary’. This arrangement falls outside the estate for inheritance tax (IHT) purposes.

With pension freedoms and the various ways that people now took their benefits, an individual could access their fund without withdrawing it in full. Death made no difference to the treatment of the remaining amount.

This changed how some people perceived their pensions. Rather than seeing it as a means of providing a retirement income, they treated it as a savings vehicle which provided significant tax advantages on death.

And that’s where the 2024 autumn Budget came in.

This increased use of pensions as an estate planning vehicle to avoid IHT hadn’t escaped the notice of HM Treasury, which resolved to clamp down on it.

They are doing so by bringing pensions into the IHT regime. From 2027, most unspent pension funds will form part of an individual’s estate. The exact details are subject to consultation, but HM Treasury is proposing to add any unused funds to the overall value of the estate. If the estate has a total value of more than £325,000 (or £500,000 if the home is left to a direct descendant), then the assets will be liable to IHT at 40%.

To clarify, all or part of an estate that is left to a spouse or civil partner will not attract IHT.

We can now expect to see further significant changes in the way people – and not just the wealthy – approach their estate planning once the autumn Budget changes to IHT are bedded in.

Can we expect changes to DC pension drawdown?

My colleague, Andrew Overend, recently made a valuable point about a possible unintended consequence of the autumn Budget IHT changes.

In his blog post, The autumn Budget and Defined Contribution pensions – Rumours and reality checks, he argued that up to now pensioners have been more likely to take a cautious approach to drawdown, knowing that any unspent amount can be passed to their beneficiaries tax-free.

Taxing leftover pension savings at 40% upon death, on the other hand, may encourage “excessive early drawdown of pension savings and increase the number of pensioners becoming dependent on the state in later life”.

The return of annuities?

Alongside any changes to estate planning and drawdown, a more unexpected change may be a resurgence in the popularity of annuities.

When pension freedoms were introduced, annuity sales collapsed – by as much as 95%. Although they subsequently recovered to an extent, annuities remain a deeply unpopular product today. But although they’re still seen as delivering poor value for money, they nevertheless do what pensions are supposed to do – provide a guaranteed income for life.

Despite two Bank of England interest rate cuts over the last few months, average annuity rates have in fact risen over the past year or so. Annuity rates have improved by up to 50%. These improvements are still with us, and sales of annuities have gone up.

As one reason for income drawdown, the estate planning option, starts to disappear, could annuities be heading for a revival? That would certainly get DC pensions back to their original purpose.

The post Unintended consequences of inheritance tax changes for Defined Contribution pensions first appeared on First Actuarial.

The questions is – should they?

There’s a generally accepted wisdom in finance that bigger is often better.

In pensions, that is most likely to be achieved through consolidation in one form or another. And that’s why we see a flurry of insurers rushing into the bulk purchase annuity market to grab their slice of the pie.

A similar argument can be made for capital backers, asset managers, the Pension Protection Fund and, to some extent, those in the adviser community too. But perhaps it’s those in government who have the most to gain – their eyes must be burning brightly at the prospect of unlocking the £1.4 trillion or so in the coffers of UK Defined Benefit schemes and making it work more productively for the benefit of the wider economy.

2024 – A tale of two markets?

Looking at the transactions carried out by insurers through the first three quarters of 2024 will tell you at least part of the tale. Although we have continued to see near-record numbers of transactions, the volumes of deals transacted through to the end of the Summer were falling short of 2023 levels. This suggested that while appetite may remain from the ‘smaller’ schemes, there may be a different dynamic at play that is capturing at least some of the attention at the larger end of the market.

Will there be a spate of late deals for larger schemes – along the lines of 2023 – or has something else got their attention? If the last few weeks are anything to go by, which has seen Deutsche Bank, Michelin and NatWest announce multi-£bn deals, I suspect the answer will prove to be ‘a bit of both’.

Time to pause… and run-on?

For some of those larger schemes at least, the financial prize offered by run-on has perhaps caused them to pause and take stock – and, as The Pensions Regulator (TPR) has so rightly encouraged – “consider all the options”.

And if run-on can genuinely offer better outcomes for both sponsor and member in some scenarios, it’s perhaps right that we pursue this option.

Besides, for a £multi-billion scheme with the right backing, the numbers can be so compelling that it would be rude not to take a peek, at the very least.

Is bigger always better?

But what if you’re not a £multi-billion scheme? What if you’re a £100m or (he whispers) a ‘small’ £40m, £25m or even £10m scheme? There are still plenty of those schemes around.

Taking the question to a simple level, if you ask any of my three kids that question, the answer is most definitely no. They are quicker, faster, stronger, cuter and already (most definitely) smarter than me.

And I’d have to agree.

Yes, size matters, but it’s only one metric against which a decision can, and probably should, be framed. Relying on asset size alone is lazy. We all know it’s what you do with it that counts – the ratios of expenses to assets and net returns respectively are much better metrics in my humble opinion.

Yet, in truth, the answer is even more nuanced than that.

If it’s not all about size, what else matters?

As we speak to more and more clients about scheme run-on, it’s often the softer, non-financial angles that shape which end game the sponsor and trustees might be minded to pursue. Whether it’s:

• The simple fact that run-on is much better aligned to schemes still open to accrual or whose period of ‘significant maturity’ is still comfortably distant on the horizon
• Concerns about value for money currently offered by the insurance market
• A desire to do something more meaningful with the assets they’ve worked so tirelessly to build up– rather than simply gifting them to the insurance market
• A desire to offer members more than what is currently available from the current crop of insurers – whether that be more personal, tailored administration services, broader support, better option terms or a broader suite of benefit options
• Accounting issues about the detrimental impact pensions transactions can have on the sponsor’s bottom line, or
• Simply a good old-fashioned commitment to see things through to their natural conclusion

… it’s likely that run-on will remain a viable option for those schemes with the covenant visibility and complementary objectives to support it.

In the meantime, conversations about surplus sharing will rumble on.

Is it time for a different perspective on run-on?

Run-on can and will work for schemes of all sizes.

But to make it work, you need to look at it through the right lens, and with the right backing and the right adviser – one that’s willing to challenge conventional thinking and put the needs and interests of their client first.

So, whether you’re a £15m scheme or a £100m+ scheme, all the end-game options deserve their place on the drawing board, and should stay there until such time as you rule them out. [H2] Get in touch with our experts

Trustees and employers are now getting to grips with the need to explore non-insured solutions for their schemes.

On Tuesday 19 November at 11am, our run-on specialists will host a webinar to explore (and maybe dispel) some of the myths associated with run-on. Find out more and register here. It would be great to see you there.

Alternatively, to discuss your scheme and the options available to you, contact your usual First Actuarial consultant, myself, or any member of our dedicated run-on consulting team.

The post Defined Benefit scheme run-on – For the few or the many? first appeared on First Actuarial.

Low-dependency funding

Firstly, schemes need to agree their long-term objective – essentially whether they plan to buy-out with an insurance company or to run-on.

Secondly, the funding code says that schemes need a plan in place to reach their low-dependency funding target. And once they achieve that, they are expected to have a low-dependency investment strategy.

Again, we already knew this – there’s no real change from the draft code. Most trustee boards should already have plans in place to move towards a low-dependency basis. It’s good that this funding code hasn’t disrupted that. Any plan already agreed to meet the draft code is likely to meet the requirements of the final version.

The Pensions Regulator’s (TPR) expectations for the structure of the low-dependency investment strategy seem reasonable to us, by which I mean that they’re not excessively prudent. Again, this is consistent with the draft code.

Flexibility to diverge from low dependency asset allocation

We welcome the flexibility trustees now have to diverge from a low-dependency, low-risk asset allocation, where appropriate. Even with the long-term objective underpinned by low-dependency actuarial assumptions, trustees now have some latitude to invest in a slightly riskier way.

A particularly welcome aspect of the new funding code is the clarity that surplus assets don’t need to be invested on a low-dependency basis. Where a scheme holds an excess of assets over and above the value of its liabilities, trustees can now invest that surplus more freely.

That’s a key change from the draft, and a really positive development. In fact, from an investment perspective, it’s the best part of the new funding code. It offers the potential for a scheme to aim for a funding level above 100% on a low dependency basis, and to invest the surplus in assets that offer long-term growth potential.

This flexibility to invest surplus assets more effectively creates a strong argument not to be too cautious when setting the low-dependency level.

For low-dependency funding on a fast-track basis, TPR says that the discount rate should be no higher than gilts + 0.5% pa. Let’s look at a couple of example approaches open to a fictional scheme with £10m of liabilities (valued at a discount rate of gilts + 0.5% pa) and £12m of assets:

• Example 1 – The scheme sets a discount rate of gilt + 0.5% pa. It’s now 120% funded, with £2m that can be invested flexibly.
• Example 2 – Because the scheme is well-funded, the scheme sets a discount rate of gilt + 0.25% pa. It’s now 100% funded, with a liability value of £12m, which is equal to the assets.

Example 2 shows that with a cautious liability value, the scheme potentially misses out on the investment flexibility that a surplus would have brought. Example 1 still satisfies TPR’s guidance, and the surplus assets can now be invested in assets with potentially higher returns. This offers the additional benefit of building up a funding buffer to protect against adversity.

It’s a powerful argument for avoiding an excessively prudent long-term funding target, and could become a key discussion point at future funding valuations.

Prior to the new funding code, there was a tendency to take a more prudent approach at each valuation – reducing the discount rate and becoming 100% funded on an increasingly prudent basis. Whereas now, schemes can work at an acceptable level of prudence to build up a surplus, which can be invested in a more effective way.

More flexibility for open schemes and run-on

This makes it easier for investments to support scheme run-on, at a time when the prospect of run-on is turning many trustees’ heads. As Vicky Greenwood argues in Pension scheme run-on – Gimmick or game changer? run-on should be considered by every scheme, even though it may only prove suitable for a minority of schemes.

In a similar vein, we also welcome the additional flexibility for schemes that are open to accrual, another significant change from the draft code. Trustees can now allow for longer-term future accrual and new members when considering significant maturity. Our recent First Briefing provides further commentary on this.

Guidance on matching assets

The final version of the code clarifies that matching assets do not have to generate income directly. This is helpful guidance.

Many schemes continue to successfully use leveraged liability-driven investments (LDI). The structure of this asset class makes it very effective at liability matching, but LDIs do not typically generate income. We welcome the fact that schemes can keep such arrangements in place as they reach a strong funding position.

It’s always important to ensure that accurate liability hedging takes account of yield curves, and it’s good to see that TPR has recognised this in the code. When investing in bonds, schemes should consider when they’re due to mature and pay out, in relation to cashflow planning, and protecting against interest-rate and inflation risks.

The importance of proportionality

The code includes a section on proportionality. The final code sensibly offers some flexibility for trustees of smaller schemes. As Steve Deverell-Smith points out in a recent blog post – DB funding code – What does it mean for employers – the average cost of implementing the code could run to nearly £10,000 per scheme over three years. Allowing for some degree of proportionality is a key concession for smaller schemes.

Clarification on sponsor consultation

There is no change to the requirement to consult sponsors on investment matters.

Historically, investment decisions have always been made by trustees. Although trustees were required to consult with the sponsor, in theory, they could ignore any disagreement (if there were good reasons to do so). The draft funding code stipulated that the agreement of the employer was in fact needed, which seemed at odds with trustees’ ultimate prerogative to determine the investment strategy.

However, in the final code, TPR has restored the status quo, giving trustees the same investment autonomy as before.

Why my glass is half full

The funding code will require trustees to consider their investment arrangements in more detail and many trustees – especially in smaller schemes – may perceive the new obligations to be excessively onerous. However, from an investment perspective, much of the final code is as expected. The changes made to the earlier draft strike me as favourable, and the increased flexibility regarding the investment of surplus assets is welcome.

The post The new Defined Benefit funding code and scheme investments – Reasons to be cheerful first appeared on First Actuarial.

To date, most retirees have been able to rely on at least some Defined Benefit (DB) income, but the situation is changing. Over the next few years, we’ll see more and more individuals planning to retire with only DC savings.

Whether they will be able to retire though is open to question. In many cases, the size of their DC pot is likely to fall well short of the amount required to provide the retirement lifestyle they’re anticipating.

It’s clear to me that awareness of the size of DC savings required to provide a comfortable retirement is poor. Most people simply don’t know how much money is required.

An annual income of £43,000 for a single person and £59,000 for a couple are needed to live comfortably, according to the Pensions and Lifetime Savings Association’s (PLSA) retirement living standards.

For most people, the State Pension – the full amount currently standing at £11,500 pa – will provide a good foundation. But that leaves DC savings pots with some heavy lifting if they’re to make up the additional amount recommended by the PLSA. Based on current annuity rates, a 65-year-old retiree will need a DC pot of approximately £600,000.

When assessing the Government’s pension policy, it’s easy to assume that changes will only affect the wealthy. The reality though is that a sizeable pension pot, which may at first glance seem to be the preserve of the wealthy, is actually what ‘normal’ people need.

As a civilised nation, shouldn’t we strive to provide a comfortable retirement for as many individuals as possible?

To achieve this, the Government should foster an environment which encourages as many as possible to accumulate a pot of at least £600,000.

Any government message (or budget measure) that creates the impression that a DC pot in excess of £500,000 is the preserve of the wealthy is counterproductive. The Government’s primary pension objective should be to paint a realistic picture which will push people to save more.

The gap between private and public sector pensions

The PLSA’s research also reveals that pension contributions of 8% (the minimum auto-enrolment level) over the working lifetime of an average earner will result in a DC pot of around £110,000 and an estimated retirement income of £18,400 per annum, including the State Pension.

By comparison, a nurse starting work today at age 22 can expect to receive an NHS pension of about £30,000 pa (in today’s terms) from age 68, with the State Pension on top.

The difference between public sector DB and most private sector DC pensions is staggering and widely underappreciated.

Most private sector employees are unlikely to be saving anywhere near enough to provide the level of retirement income they’re anticipating. At some point over the coming years, I expect awareness of this issue to surface, and many will want to increase their contributions. I would argue that government pensions policy should create an environment that encourages people in every sector of the economy to save more.

What is a ‘normal’ person?

It seems reasonable to consider that someone we see as a ‘normal person’ would be a basic rate taxpayer. But paying higher-rate tax is becoming the norm. The number of higher-rate taxpayers has increased – from 4.2m in the 2017–2018 tax year, to 6.3m in 2024–2025.

Over the coming years, fiscal drag will bring even more people into the 40% tax bracket. 7.8m people (20% of all taxpayers) will be in the higher bracket by 2027–2028, according to projections by the Institute for Fiscal Studies.

This matters because pension changes made by the Government at this point may eventually catch up with people who don’t expect to be affected. And they may be the very people who then realise that they haven’t saved enough for their retirement.

Will Rachel Reeves reduce pension tax relief?

One particularly strong rumour in recent weeks has been the suggestion that Rachel Reeves will cut pension tax relief in the Budget.

At present, anyone who pays pension contributions receives tax relief at their marginal rate. Officially these rates are either 20%, 40% or 45%. However, the gradual removal of the Personal Allowance on earnings between £100,000 and £120,000 means that marginal tax for those individuals is actually 60%.

The current tax relief structure makes pension contributions tax-efficient for everyone. This is particularly the case for those people earning between £100,000 and £120,000, who can use their contributions to avoid paying tax at 60%.

Opponents of this structure argue that relief is concentrated on the highest earners. While this is true, it’s simply a reflection that those who earn the most also pay the most tax.

An alternative structure might see tax relief set at 30%. Such an approach does have some merit, but on balance I think it would prove detrimental.

Setting pension tax relief at 30% would be great news (in the short term at least) for basic rate taxpayers, who would see their pension contributions augmented by the state, resulting in a faster accumulation of their pension pot. However, for other taxpayers, the change would be less welcome.

Tax relief at 30% would mean that a higher-rate taxpayer would pay 10% tax on their pension contributions. The funds invested would then accumulate tax-free. However, once that higher-rate taxpayer retired, under the current tax structure they would be likely to receive a quarter of the accumulated pot tax-free and pay 20% tax on the balance. This is equivalent to a tax rate in retirement of 15%.

Higher-rate taxpayers would need to weigh up how this tax incentive compares to an immediate 40% tax charge followed by tax-free growth and tax-free income if invested in an ISA. For many, greater ease of access to savings might tip the balance in favour of the latter approach.

A government policy which increases the attraction of savings vehicles offering immediate access may not prove conducive to long-term pension saving.

Another drawback of changing the tax relief system is that once changed, what is to stop a future government changing it again – perhaps reducing the 30% to 25%, as per my example? Wariness of future government meddling with pension savings might offer a further incentive for higher rate taxpayers to save through ISAs instead.

Finally, as I noted earlier, fiscal drag will increase the number of individuals adversely impacted. For anyone who becomes a higher-rate taxpayer in future, the case for making pension contributions will have less appeal.

My expectation is that most individuals will make most of their pension savings later in their careers. And that’s exactly when they’re most likely to be higher-rate taxpayers. Young people are stretched financially, dealing with childcare and housing costs. For them, pensions tend to be tomorrow’s problem. When they reach an age, and income level when they can finally start to build up a pension pot, they’re far less likely to do so if tax relief is not available at their marginal rates.

As a nation, we’re saving far less for retirement than we should be. In my view, reducing tax relief would exacerbate this and would be detrimental to the long-term accumulation of pensions savings. For this reason, I strongly oppose such a change.

Should we reduce the tax-free lump sum?

Under the current rules, individuals retiring from a DC pension arrangement can take a quarter of their accumulated pot as a tax-free lump sum. This is subject to a maximum amount of £268,000, meaning that anyone retiring with a pot lower than £1.07m (i.e. most people) will be able to take a quarter of that amount tax-free.

If the tax-free lump sum were to be reduced to £100,000, for example, anyone retiring with a pension pot of more than £400,000 would be impacted. As I noted earlier, despite the likely public perception that a pension pot of this size is huge, the reality is that it’s well below the level required to deliver the retirement lifestyle that many people expect.

One further point to note is that while public interest in and understanding of pensions tend to be limited, the existence of the tax-free lump sum is both well known and popular. Reducing the tax-free amount would send out a damaging message and would present a disincentive to save among those people who really should be saving more.

I accept that the current tax-free limit is generous, but reducing it even slightly sets a precedent that future chancellors might choose to follow. This would be unhelpful. My preference would be to maintain the current level of £268,000. Fiscal drag will mean this affects an increasing number of retirees over time.

Employer National Insurance

At present, employers don’t pay National Insurance (NI) on contributions to workplace pensions.

Changing this would directly increase staffing costs, and it seems likely that many employers would respond by cutting costs elsewhere. For employers currently paying more than the 3% required under auto-enrolment, one option would be to reduce pension contributions. Alternatively, employers might scale back on recruitment plans or restrict future salary rises. All these actions would ultimately result in lower employer pension contributions for employees.

As with the previous two rumours, I look at this potential change from my standpoint that pension savings are generally insufficient. It seems inevitable that adding employer NI to pension contributions would result in at least some employers paying less into pensions – not a desirable outcome.

Changes to inheritance tax

Under the current rules, DC pots are almost always excluded from an estate when an individual dies – in other words they aren’t subject to inheritance tax.

This is not the case with other types of saving, and means that many individuals will draw on those alternative sources in retirement before touching their pension. This is a logical approach because if they die with money left in their pension pot, it can be passed on as tax-free inheritance.

However, the purpose of saving in a pension vehicle should be to provide financial support for an individual in retirement. So it does seem an anomaly that retirement savings can be used as a means of inheritance tax planning. Revising the rules to include DC pots within the deceased’s estate does not strike me as an unreasonable change.

That said, there may be unintended consequences for individuals who expect their estate to be subject to inheritance tax. The current rules encourage a cautious approach to the drawdown of pension savings, since the pensioner knows that if any of the pot is left over when they die, it can be passed on to their beneficiaries tax-free.

If that carrot is removed and the pensioner knows that any pension savings left over will be taxed at 40% on their death, they may see a greater incentive to draw down money sooner and accept an immediate 40% income tax charge. That money could then be spent or gifted to beneficiaries. Such action may result in excessive early drawdown of pensions savings and increase the number of pensioners becoming dependent on the state in later life.

As I said, I don’t think bringing pension pots into a deceased’s estate would be an unreasonable change, but it might exacerbate the risk of pensioners drawing down their pension too quickly. One solution might be to require pensioners to secure a minimum level of income before being allowed to implement drawdown on the remainder of their pot.

Finally, a plea

Most people are not saving enough for retirement. Many are unaware that this is the case – a typical view being that they have been auto-enrolled, and because their contributions are at the level recommended by government recommends, they’ll be alright.

There is a huge exercise required to educate the public on the size of retirement savings required, but we need a stable tax and regulatory regime to achieve that. It’s difficult to suggest that someone should increase their pension contributions if the belief persists that government (of whatever colour) will simply change the rules in the future and grab a bigger share of the pot.

Rumours such as the ones I’ve set out in this blog post circulate ahead of every budget. But they’re unhelpful, and I would urge all politicians to stop using pensions as a political football. Pension savings are a long-term commitment to the future, and we need a long-term commitment from MPs to stop moving the goalposts.

None of the points made in this blog post constitute financial advice.

The post The long read | The autumn Budget and Defined Contribution pensions – Rumours and reality checks first appeared on First Actuarial.

Thinking back nearly 15 years (give or take a few days) to the start of my career in pensions, while gilt yields were at similar levels, other things were quite different. GMP equalisation wasn’t a phrase to shudder at, we were still on the first version of The Pensions Regulator’s funding code, and the Code of Good Practice on Incentive Exercises was yet to be released (eventually landing in 2012).

Pension incentive (or liability management) exercises – as they were known then – were very much on trend, offering employers grappling with ballooning pension scheme deficits one option to help stem the tide. And as funding deficits remained stubbornly in place, the pensions industry reacted by creating new options for employers seeking to reduce the cost and risk burden.

Incentivising member transfers before retirement (Enhanced Transfer Value [ETV] exercises, as they were more commonly known) were the first kids on the block. They were later followed by exercises that focused more on reshaping pensions. Pension Increase Exchange (PIE) exercises focused on changing the rate at which pensions increased over time, and Bridging Pension Option (BPO) exercises sought to better integrate occupational pension scheme and State Pension benefits.

Although these exercises looked and felt quite different, there were common themes – all of which centred first and foremost on the priority of sponsors to reduce deficits and risk. As an added benefit, a well-designed exercise could generate a P&L credit.

And while interest in ETV exercises has waned in recent years, member take-up rates (i.e. popularity) of PIE and BPO exercises have remained relatively stable.

The future of ‘member options’ exercises

So, do we expect more of the same going forward?

To put it bluntly, no.

The time when employers looked for the quick wins in pensions has long gone.

With improved funding levels for many schemes, employer priorities have changed. In parallel, financial advisers have shifted their focus away from churning out advice on ‘bulk’ exercises, in favour of adding value to the member experience in the pre-retirement phase.

Rethinking the member journey

However, perhaps the most notable change has been in the role that trustees increasingly play in the member journey, with a firm focus on facilitating choice and improving member outcomes. Professional trustees are some of the key drivers of this shift in attitude.

And with this change in dynamic comes an opportunity to revisit member options.

Historically, the feasibility of introducing these options has focused primarily (and entirely in some cases) on their financial merits. Yes, the financials still need to make sense, but there is now a broader spectrum against which success can be measured. As such, trustees increasingly accept the need (and perhaps even their responsibility) to revisit:

• Which options to make available to members
• How to communicate these options
• What support to provide to members.

Integrating the member and funding journey plans

Deciding not to offer member options and/or renewed member support is not necessarily the wrong decision, but it is still an active decision

All trustees need to review their endgame strategies and journey plans under encouragement from the Regulator. Wouldn’t a review of the member journey be a natural extension of this?

The majority of schemes will eventually end up securing member benefits with an insurer. However, most insurers will provide neither PIE nor BPO as an at-retirement option, and a standard transfer value will be available to members at a significant discount to the premium paid over to insurers.

It therefore seems clear to me that we should be considering whether there is a role for trustees (and sponsors) to play now, while it’s still possible to add these options to standard retirement processes and make them accessible to members.

Along similar lines, it’s easier to provide members with access to education, guidance and financial advice before the move to an insurer, when the trustee has much greater flexibility to tailor support to member needs.

Over time, insurers may catch up, but only if member demands support this. Indeed, one insurer, Just Group, recently decided to offer its book of members access to financial advice. Offering either guidance or advice in the run-up to retirement ensures member are better informed on their retirement choices and mitigates the risk of poor decisions. However, this is currently an isolated practice rather than the norm.

Given the positive role trustees and sponsors can play in influencing their members’ retirement journeys, I would argue that member options and support should be (much) higher up on the agenda. Happy members mean happy trustees – and also happy sponsors. There’s potential for a win-win-win here.

Don’t get me wrong, I mentioned buy-out earlier, but that is not at the expense of the only other viable endgame alternative in my mind – scheme run-on. For me, one of the biggest advantages of a run-on strategy is the ability to influence and control your own member experience over the medium- to long-term, rather than relying on third-party insurers to do the right thing.

According to the DWP, almost 2 in 3 UK adults think pensions are so complicated that they can’t work out what to do. This is enough to suggest to me that member options, financial support and education should be on the standing agendas for all trustee board meetings.

All too often, success in pensions translates into funding levels or the latest big risk transfer deal. I for one would be proud to see the quality of communications and member experience included as key metrics of success.

The post Putting members first in the ‘new world’ of Defined Benefit pensions first appeared on First Actuarial.

If this purpose is not met, then pension services like actuarial advice, investment consultancy and scheme administration become somewhat irrelevant.

One of the most important things we do at First Actuarial is to make sure that more than 46,500+ pensioners across 200+ pensioner payrolls are paid the correct amount on the correct date every month. It’s not just important for the pensioners themselves. It’s also essential for First Actuarial’s relationships with scheme trustees.

For many pensioners, their occupational scheme pension may be their main or only source of income – especially before they reach State Pension age – so they’re reliant on their timely and correct pension payment for even their basic living expenses.

This places a great deal of responsibility on the shoulders of our national payroll team and on First Actuarial as a whole. A reliable, accurate and timely pensioner payroll process is essential for maintaining the trust we build up in our relationships with pensioners and scheme trustees over time.

What is the future of pensioner payroll?

There are two areas of change that will really impact the future of pensioner payroll – automation and self-service.

In the main, members of pension schemes who are retiring today are much more technologically savvy than their predecessors from only a decade or so ago. After all, they’re likely to be using smartphones, apps and self-service portals on a daily basis. We’re seeing that a large number of new retirees are already used to updating their personal details online and receiving digital payslips. They expect the same features in retirement.

Of course, there will always be a small number of scheme members who prefer to receive their printed retirement pack or paper payslips in the post. First Actuarial and other providers in the pensions industry will of course continue to cater for their preferences. But for the most part, the future of pension communications is online.

We’re always keen to make our work as efficient as possible. This applies as much to pensioner payroll as it does to our other services. The firm is enjoying strong business growth, and as we bring new schemes on board, it’s more important than ever that we provide the most efficient payroll service possible.

Looking ahead to the short and medium term, we’ll be investing more of our time and efforts in new payroll software, which will bring more automated payroll processing and reporting. We’ll also be introducing self-service portals for pensioners. With these innovations, we’ll be streamlining every stage of our payroll processes.

Sentient robots? Judgement Day? What about AI?

Who knows where artificial intelligence (AI) will take us in the years to come, but I think we can say with some confidence that ongoing expansion and adoption is inevitable. The first question that springs to mind with AI is – how will this affect day-to-day payroll operations? The answer isn’t clear right now, but I believe we will see a shift in the skills required of a payroll professional rather than a complete replacement of their role.

It’s true that AI may be able to do a lot of the heavy lifting when it comes to payroll processing in the future. However, in my opinion, the human touch will remain essential, particularly in the pensioner payroll world.

Tools such as chatbots are useful up to a point, but nothing will replace the reassurance you get from a conversation with a real person. It’s this kind of personal touch that we’ve always prided ourselves on at First Actuarial. This will continue to be the member experience we offer in the years to come, whatever the future holds with AI.

At First Actuarial, we will continue to give all our scheme members the best service possible. Robust payroll operations mean that they will be able to rely on their pension income when the time comes to enjoy their retirement.

The post The future of pensioner payroll – and why it really matters first appeared on First Actuarial.

As if to prove that point, research conducted by the Mental Health Foundation found that over 40% of UK adults have experienced financial worries. Almost a quarter of them said those worries had a significant impact on their mental health.

Financial stress can have a profound effect on mental health, leading to anxiety, depression and other serious conditions. And it’s more widespread than you might think.

The problem of poor financial wellbeing extends well beyond those of us unfortunate enough to struggle to make ends meet and repay debts. An astonishing 24 million UK adults lack confidence in managing their money – according to the Money and Pensions Service – and only a third receive help.

How does financial anxiety affect the workplace?

The UK’s mental health epidemic is no secret. But we’ve recently started to hear more about the relationship between mental illness and financial wellbeing (or the lack of it).

During 2023, the average employee took 7.8 days sick, up from 5.8 days in 2019, figures from the Health Foundation reveal.

Of course, not all sickness absence is attributable to financial problems. However, we also know that people who start to suffer from depression are 4.2 times more likely to continue to be depressed 18 months later if they have problem debt.

A number of group protection insurers have observed separately that from 2023 onwards, people have really struggled to cope with the cost-of-living crisis and economic uncertainty.

How do they know this? They’re able to quantify the high demand for mental health consultations via the apps and employee assistance programmes that come as part of employers’ group protection policies.

Wider research highlights that employee concerns include:

• Worries about managing debt
• Concerns about inadequate pensions savings
• Ability to provide financially for loved ones if they get sick or worse, they die
• The strain of caring for disabled or elderly relatives
• Lurching from payday to payday
• Struggling to make ends meet.

How can employers improve the financial wellbeing of their workforce?

Employers have a duty of care to prioritise the wellbeing of their employees by implementing supportive measures that address both financial and mental health concerns. Organisations can play a vital role in supporting their employees’ financial and mental wellbeing. Here are some steps employers can take:

• Financial education: Providing financial literacy workshops or seminars can empower employees to make informed decisions about budgeting, saving, investing and managing debt. By equipping them with the necessary skills and knowledge, businesses can help alleviate financial stress.
• Group protection: Offering financial protection through life assurance, income protection or critical illness benefits can give employees invaluable for peace of mind. These policies provide vital financial and emotional support in some of the most challenging periods of people’s lives. Group protection policies include complimentary benefits that help employees take control of their own wellbeing.
• Other financial protections: Putting in place other employee benefits – including employer-sponsored retirement plans, financial planning services, and matching contributions to employee pension savings accounts – demonstrate a commitment to employees’ long-term financial security.
• Employee assistance programmes (EAPs): Implementing EAPs opens up confidential counselling and support services for employees facing personal or professional challenges, including financial difficulties. Access to mental health professionals can help individuals cope with stress triggers and develop healthy coping mechanisms.
• Flexible work arrangements: Offering flexible work arrangements, such as remote work options or flexible hours, can alleviate financial burdens associated with transport costs and caring for children and other dependants. It can also improve work-life balance and reduce stress levels.
• Open communication: Encouraging open dialogue about financial challenges and mental health issues is a simple step that can improve wellbeing. It creates a supportive environment where employees feel comfortable seeking assistance or sharing their experiences without fear of judgement. Line managers are ideally positioned to promote and signpost wellbeing support available to employees. Training line managers to provide wellbeing support can be a great investment.

What does financial wellbeing look like in the workplace?

Where employees have reached out and accessed valuable mental health support, a ‘return to work’ success rate as high as 96% has been reported.

Employees who feel in control of their finances have peace of mind, improved self-esteem, and a sense of optimism about the future.With improved financial security, adequate savings, financial protection and manageable debt levels, individuals are freed up from stress and anxiety and can focus on other aspects of their lives, including their work. By fostering a culture of support, understanding and empowerment, businesses can create environments where employees thrive both personally and professionally.

The post Putting the spotlight on mental health and financial wellbeing at work first appeared on First Actuarial.

Happy summer everyone!

While much of the document will remain familiar to those of us who have followed the evolution of the funding code over the past five years, there is a strong sense of balance between old and new.

A quick reminder: it’s now 10 years since the last funding code. The newly updated code, alongside the Funding and Investment Strategy Regulations 2024, is intended to better suit a Defined Benefit (DB) landscape in which most schemes are now closed and maturing.

The central premise remains that when a DB scheme is very mature, it should be funded and invested in a way that doesn’t need any further support from the sponsoring employer.

Yes, there is still an acceptance that buying-out members’ benefits with an insurer may still be the long-term target for some schemes. As such, stakeholders will still be expected to take this objective into account when setting other elements of their scheme strategy. Alongside that, however, there is a recognition that run-on now has its place at the table, as does the DB ‘superfund’ or ‘consolidator’.

There is also a recognition that for open schemes, the journey will probably be different, and that the long-term objective may never align with a low-dependency target. Here, sense has prevailed, and open schemes now have more flexibility than early drafts of the code gave them.

On my reading at least, schemes will still need:

• A real grasp of the sponsor covenant, their cashflows and their prospects
• A statement of strategy – which TPR is very likely to scrutinise
• A funding and investment strategy which would require 100% funding on a low-dependency measure by a ‘relevant date’
• Technical provisions (i.e. the funding target) that are set consistently with the above
• A well-hedged investment strategy which is liquid and highly resilient to short-term adverse changes in markets at the “relevant date”.

And yet the new code, as drafted, gives stakeholders greater flexibility in agreeing their funding and investment framework.

Here we have less of a formulaic tick-box exercise and more of a principle-based (and dare I say it, common-sense) approach to considering the end game. For example:

• It’s now clearer that the low-dependency investment allocation (LDIA) is a notional one used to set funding assumptions. The LDIA is not intended to interfere with trustees’ investment duties; trustees (with good reasons) can invest at variance from the LDIA at significant maturity.
• There’s a distinction between how schemes are expected to invest their low-dependency investment allocation and what options they have with any surplus assets.
• There are some easements for smaller schemes (those with fewer than 200 members) and open schemes.

The increased flexibility compared with earlier drafts is evident throughout, and has been widely welcomed.

Do the new requirements come at a cost to employers?

Given the improved funding levels of the last few years, the DWP-estimated £7bn or so of shortfall contributions – to be redirected thanks to the ‘levelling down’ and ‘levelling up’ of schemes as a direct result of the revised framework – appears to be wide of the mark.

There is therefore no doubt that the contribution tap can be turned off for many schemes. For some schemes however, no matter how much you turn the tap, it may not be sufficient. With those schemes, some tough conversations lie ahead – perhaps emphasising the importance of reassessing those goals and having that all-important plan B.

Yet it is the initial implementation costs, identified by the DWP in its impact assessment (part 9) as £7,000 per scheme on average in the first year, that will concern the smallest schemes. And while an increase in average ongoing costs of around £1,100 per scheme may not seem like much, the reality is that every pound matters for those schemes.

I sense this is just the tip of the compliance iceberg, particularly when you consider what the statement of strategy might involve and the increased scrutiny for those c20% of schemes that may be going down the Bespoke compliance route.

What next for sponsors?

For sponsors with valuation dates of either 30 September or 31 December 2024, the challenge is clear. You’ll need to familiarise yourself with the code and collaborate with your trustees to achieve a balanced valuation and investment strategy outcome.

Remember, the new regime doesn’t require you to get it perfectly right on day one. Indeed, it’s taken the Regulator more than five years to get this far! This is intended to be an iterative approach, with the expectation that you will finesse your journey plan as you near your destination.

For small and open schemes, familiarise yourself with and make effective use of the easements. They exist for your benefit, and you may need all the help you can get.

The average costs of implementation could run to nearly £10,000 per scheme over three years, according to DWP estimates. Proportionality (a word TPR uses, together with ‘proportionate’, some 23 times in the code), is going to be key, alongside getting the best support you can for your money.

For all other sponsors, it may be best to avoid getting into the weeds right now. Instead, you should take the opportunity to reassess the high-level funding and investment strategies you have in place for your scheme(s).

The landscape continues to evolve, and with new superfund guidance and the long-awaited funding code being laid by parliament, this is likely to be a summer of change – certainly if July is anything to go by. The game may now look somewhat different from what we expected at the start of this process some five years ago. It’s therefore a good idea to begin by checking you have your goalposts in the right place.

There’s no doubt that challenges await as we all take stock and familiarise ourselves with the new requirements. The skill will lie in navigating them in a proportionate, considered and cost-effective way, particularly with schemes that remain some distance away from their relevant date.

The post Defined Benefit funding code of practice – What does it mean for employers? first appeared on First Actuarial.

New legislative requirements apply to scheme valuations with dates on or after 22 September.

But there’s a problem.

Before Rishi Sunak called the general election, The Pensions Regulator (TPR) was due to provide clarity on how to comply with these new regulations via an update to its code of practice on funding.

With the general election campaign came purdah, meaning tight restrictions on government and civil service activity. This prevented TPR from distributing information – such as clarification on the funding code – that could be perceived as political.

Even now the election is over, TPR needs the approval of government before laying the revised code before parliament for the required 40 working days (the summer recess doesn’t count).

One important missing detail concerns significant maturity – the point at which a DB scheme is mature enough for the funding level and investment strategy to require only low dependency on the employer for further support, according to TPR. To date, there has been no definition of significant maturity. The regulations specifically require TPR to define significant maturity in its revised funding code.

The new Government will need to step in quickly to propose any further changes or simply to enable schemes to comply with the new funding code with effect from September.

As the situation stands, schemes with valuation dates after 22 September (to which the new regulations apply) may have to start their valuation work without the necessary clarification. We all need guidance as soon as possible.

2. How to share surplus

For at least two decades, we all lived in a largely surplus-free DB universe as we battled to manage scheme deficits.

In the new era of scheme abundance, the previous government started discussing how to free up surpluses and put them to good use. They were keen to redirect the surplus funding into the UK economy to promote productive growth.

The possibility of surplus sharing appeared in the 2024 Options for DB schemes consultation, opened by the Department for Work and Pensions (DWP).

First Actuarial responded that it might be fairer to also give something back to pensioner members, rather than hand over the entire surplus to the employer for reinvestment in the economy. We pointed out that the measures for sharing scheme surplus seemed focused on closed schemes. Another use of surplus is to help keep schemes open for active members (or even re-open schemes to new members).

We also expected the proposed measures to have limited impact on the amount of assets released for productive finance. Investment power rests with trustees, not with employers. Trustees of a well-funded closed scheme are much more likely to invest in assets that match the buy-out position. The likelihood is that only the surplus as measured on a buy-out basis would be directed into more rewarding investments.

As for employers, many may prefer to get rid of their closed scheme if it’s 100% funded on a buy-out basis, rather than run-on the scheme and wait for a surplus to emerge.

Overall, many schemes simply don’t know what to do with their surplus, and the employer can’t get it back. The surplus can become trapped.

This is partly down to behavioural obstacles. Trustees have no experience of extracting surplus because it’s been so long since it was an option. They’re also duty bound to protect their members. If they’re suddenly returning scheme funds to the employer, they may feel that they’re failing to protect their members’ interests.

Trustees need clear political and regulatory guidance on this. As Vicky Greenwood stated at First Actuarial’s annual conference a few weeks ago, we would welcome the views of TPR on how they see surplus extraction working.

3. Buy-out or run-on?

2023 was a record year for bulk annuity transactions. For smaller schemes though, buy-out is far from straightforward, even if they’re in a relatively strong financial position. Few insurers are interested. With resourcing constraints, it’s more cost-efficient for them to handle larger schemes and they can only take on so much business per year. Those small schemes that can afford buy-out tend to get a less competitive deal.

With run-on, on the other hand, schemes can focus on retaining economic value within their scheme, rather than handing it over to insurers. If done well, it could be a real game-changer for schemes of all sizes.

This is the central point that First Actuarial’s Vicky Greenwood recently made in her article on scheme run-on. However, she also stresses that political support is needed to make run-on a mainstream approach.

4. Do we need a public consolidator?

In its Options for DB schemes consultation, the DWP introduced the idea of a government-backed public consolidator, which would be open to all schemes that meet its entry terms. The previous government wanted to provide more options for those small schemes currently struggling to access the buy-out market.

However, the previous government did stress how important it was to minimise the impact on the superfund and insurance buy-out markets. To achieve this aim, they planned to target the public consolidator at those schemes struggling to access the current market.

As they saw it, schemes that could already access the market would continue down this route.

However, this may be difficult to achieve in practice. Some of the proposals put forward in the consultation – such as the public consolidator having a government guarantee which is stronger than those available from commercial providers – would make the public consolidator attractive to all schemes, even those that can already access the market. Being able to accept schemes with a current buy-out deficit would also give the public consolidator a competitive advantage over the private market.

If the new Government is to minimise disruption to the current market, they’ll need to apply strict eligibility criteria, for example a limit on the overall size of the scheme, except in circumstances where there’s clear evidence that a deal with a commercial provider isn’t possible.

Another question is whether the public consolidator would increase productive investment in the UK economy, something the Labour Party sets great store on. If the consolidator targets small, closed, maturing schemes, there will be less scope for more productive investment. These schemes will still have the same maturity profile whether they run-on as closed schemes or enter the consolidator.

If the new Government is willing to provide a robust guarantee, then the consolidator can take more investment risk. This will help meet political aims. However, this is akin to taking the assets to the Treasury and paying benefits on a pay-as-you-go basis. It would raise political issues and increase the risk of disrupting the market.

5. Decisions on the Lifetime Allowance

The previous government abolished the Lifetime Allowance (LTA), which is a limit on the pension savings that an individual can build up in a registered scheme while benefitting from tax relief.

At one time, the Labour Party promised to bring back the LTA, arguing that it only benefited the wealthiest. They then dropped this idea, partly in response to lobbying from senior NHS staff and unions and partly because it would be too complicated to reinstate the LTA.

However, there are a number of issues around the abolished LTA that still need to be addressed. We’re waiting for clarification on several areas, including the lump sum and death benefit allowance, and members with protected allowances. In the absence of this guidance, the HMRC has even suggested in some cases that members should delay retirement, stating that “members may need to wait until the regulations are in place before taking or transferring certain benefits”.

So irrespective of whether the new Government brings back the LTA, they will need to provide clarification, most importantly to avoid delays for those awaiting retirement.

6. The Mineworkers’ Pension Scheme

The Labour Party made a manifesto pledge to review existing arrangements in place for the use of surplus in the Mineworkers’ Pension Scheme.

When British Coal was privatised in 1994, half of the Mineworkers’ Pension Scheme surplus was used to enhance member benefits, and the other half was placed into a government investment reserve. In return, the Scheme got a government-backed benefit guarantee. Scheme members and government then received equal shares of any further surplus.

As the investment reserve grew significantly over time, many argued that government’s share of the surplus was disproportionate to the risk it underwrote.

Pressing pension issues for the new Government

The new Labour Government faced a bulging to-do list from day one, with huge challenges almost everywhere it looked.

There are some big pension issues to consider and a surprise Pensions Bill was announced in the King’s Speech. But among the big pension issues we’ve looked at here, there are some pressing details that the Government will need to address sooner rather than later.

The post What’s on the new Labour Government’s pensions to-do list first appeared on First Actuarial.

That’s great news for those three-quarters¹ of schemes expected to have a surplus of one form or another. It does, however, pose a new set of questions for those schemes, but more on that shortly.

For the quarter of schemes that have survived the last 18 months only to find themselves still in deficit, you have my sympathies. A different challenge for you awaits, and that is another article entirely.

What next for schemes that find themselves in surplus?

Latest estimates suggest that there is an aggregate £225bn² of surplus pension assets when assessed against a ‘low-dependency’ measure of liabilities. That’s a big number whichever way you cut it, so it’s no wonder that the Government has been keen to explore ways in which the assets “held in DB pension schemes can deliver for the wider economy”.

Eager to follow suit, The Pensions Regulator is now encouraging schemes in surplus to reconsider their main options – “buying out or running on”.¹ That’s quite a step change given that there was no mention of “run-on” in the Regulator’s 2022 statement.

Now, buy-out is not a new concept. In fact, 2023 was a record year in the buy-out market, with nearly £50bn of premiums written. With around 85%³ of schemes believing buy-out still represents the gold standard of outcomes for members, 2024 is expected to be another bumper year for the risk transfer market. But if we consider that there are some £920bn⁴ of assets sat in schemes that are estimated to be fully funded on their buy-out measure, it’s clearly going to take some time to shift pensions risk from the funded regime to the insurance sector.

Is the Regulator’s nudge towards run-on in fact more like a push?

Before we can consider whether run-on is more of a necessity than a ‘consideration’, we need to understand what it is and what it isn’t.

What is run-on?

Run-on is a framework that allows economic value to be built up in the first instance, and then extracted from a pension scheme over time, without jeopardising the long-term security of member benefits.

Why run-on rather than buy-out?

The biggest beneficiaries of the current buy-out trend are undoubtedly the insurers.

By deciding to run-on rather than buy-out, schemes can focus on retaining much of the economic value within their scheme, with insurer profit margins being diverted, in part at least, ultimately benefiting both the sponsor and the membership. Our estimates suggest that 10–15% of value can be released cautiously in this way over time, if done correctly.

Importantly, the decision to run-on is not irrevocable, unlike a buy-out. It’s also not incompatible with a longer-term aspiration to buy-out, with many run-on strategies ultimately expected to end up moving to buy-out when economical to do so – in a similar way envisaged by Clara-Pensions and some of the capital-backed journey plan products available.

Which schemes should consider run-on?

In short, I believe every scheme should consider run-on.

Based on our analysis to date, we expect that perpetual run-on is only likely to be right for a minority of schemes – with the scale, security, governance and, potentially access to a Defined Contribution scheme under trust, to make the cogs of run-on work smoothly into the long term.

However, that answer only tells part of the story. It’s unlikely to be economical for all but the largest of schemes to run-on in perpetuity – there comes a point for most schemes where their size and profile of membership make it just as cost-effective to access scale via insurance. That said, a medium-term run-on strategy could have economic (and wider social) benefits for a much broader spectrum of schemes.

It’s on this middle ground that the focus shifts to making the active decision to defer buying-out until it’s economically advantageous to do so. In this scenario, the scheme builds up its reserves while it matures so that when it eventually engages with the market, there is sufficient capacity and competition to make the premiums attractive.

In the meantime, there is a whole world of possibility. Future accruals could be maintained for active members, trustees could shape member discretions, scheme expenses could continue to be met and buffer capital could still be built. This is what we would term ‘running-on as a bridge to buy-out’ – and it could look quite different to simply waiting until buy-out becomes affordable.

In fact, many schemes (large and small) are already running-on in one form or another. They just haven’t formalised or optimised the framework yet!

What does a run-on framework look like?

Under a properly designed run-on framework, buffers, security mechanisms and controls are all put in place to minimise the risk of failure and carefully control the build-up and extraction of any surplus.

In the case of perpetual run-on, investment strategies will have a high degree of resilience, hedging and cashflow matching. And funding levels should, by design, be relatively stable (and on the up). While the case for an allocation towards return-seeking or higher-yielding assets is supported by the longer time horizon (and arguably the current low levels of credit spreads), downside risks need to be proportionate to the circumstances and appropriately managed. The risk of deficits emerging should be low but will require rapid correction where they occur, and trustees should have a plan B (likely to trigger buy-out) should the scheme lose its way.

As always, there are nuances here. The considerations for fully solvent schemes will differ from those still on the journey. Those bridging the journey to buy-out will have a different perspective from those that are considering sharing any surpluses that emerge over time. Open schemes will have more flexibility than more mature ones. And so on.

Every run-on journey will have different characteristics, but the underlying principles will be similar.

Are there any risks?

Let’s be 100% clear. Run-on is not a risk-free solution. While many investment risks can largely be managed, some will remain – principally in the default, equity and illiquidity spaces – and these will require some thought.

Other risks, such as longevity, legislative, political, governance and expense risks, will remain. The risk versus reward trade-off must therefore be right.

Gimmick, game changer or even necessity?

I’m a romantic. I believe that greater innovation and choice will ultimately lead to better outcomes. But:

• I’m an actuary – I see risks that need to be properly managed before I see reward. It’s easy to forget that over the last five years alone we’ve experienced a global pandemic, a European food and energy crisis prompted by war, a UK gilt crisis and a cost-of-living crisis, all resulting in severe market volatility.
• I’m a realist – I know that the resources of both third-party administrators and insurers are constrained. Not every scheme that can afford to strike a deal over the next few years will be able to do so. We could be doing more to support these schemes achieve better outcomes.
• I’m a mother – I believe in learning from history without letting it constrain either our beliefs or our future. I believe in better pensions for every generation – those who have already earned their right to a comfortable retirement as well as those who simply deserve the right not to worry about an impending retirement crisis.

If done well, and with the right motivations (and political support), I see run-on as a real game changer for schemes both big and small, whether their motivation is to run-on indefinitely or until there is a better, more cost-effective alternative.

References:

¹ The Pensions Regulator’s Annual Funding Statement 2024, schemes completing a T19 health check

² DWP consultation on Options for Defined Benefit schemes Options for Defined Benefit schemes – GOV.UK (www.gov.uk)

³ 83% survey across c250 industry professionals, Vidett Endgame conference

⁴ Annex to DWP consultation on Options for Defined Benefit schemes

The post Pension scheme run-on – Gimmick or game changer? first appeared on First Actuarial.

Fast forward to the present day and the number of members still building up benefits has fallen by some 30% to around 0.7 million, according to The Purple Book 2023. Yet, at the time of writing, yields are closer to the 4.5% mark and the comparable cost of DB accruals is less than half of what it was in 2021.

For those DB schemes still open to accruals this is great news from every angle. Benefits are just as valuable, yet considerably more affordable, than they were just a few years ago, and there is less pressure on the corporate purse strings to contemplate diluting or even curtailing future service benefits. However, this does prompt a new string of questions.

As ever in the complex world of UK pensions, there is no simple conclusion that can be drawn to suit all circumstances – the decisions made in the past will influence your next steps and influence the choices you will need to make in the future.

Open to future benefit accruals, but still living in the past?

For those schemes that are still open to new entrants and/or accruals, there’s a fair chance that unless you have recently concluded a late 2022 or 2023 valuation, sponsors (and potentially members) are paying more than they need to.

For those schemes in the T19 tranche of valuations (with effective dates running up to September 2024), discussions will no doubt provide the opportunity to renegotiate ongoing future service contributions, providing respite for many sponsors (and potentially members). If you haven’t considered this, you probably should, and sooner rather than later.

For schemes looking to ride the crest of a wave through to buy-out, the considerations are different.

Open to future benefit accruals, but contemplating transferring risk to an insurer?

With buy-out funding levels continuing to look attractive through a corporate de-risking lens, many sponsors and trustees will no doubt be considering whether the time is right to get those pension liabilities off the company books.

Before they can take advantage of current market dynamics, however, they need to revisit any ongoing accruals they may have. Active members and their associated liabilities cannot typically be covered by an insurance policy due to the inherent uncertainties surrounding them. There are options that avoid pressing the nuclear button straight away, but what is right for sponsors and members in this situation will vary.

Contemplating transferring risk to an insurer, but legacy ‘employed deferred’ benefits remain?

Many schemes closed to future accruals several years ago. However, for myriad legacy and legal reasons, they may still have ‘employed deferred’ members who typically have more generous benefits than their ‘true deferred’ counterparts. This will either involve an ongoing link to company salary or an entitlement to more generous terms while they remain in active company employment. Unfortunately, these benefits can quite often be uninsurable.

If your scheme fits either of the above boxes, chances are you will need to act before an insurer can take your pension obligations away from you.

Previously closed to accruals but made a commitment to revisit the decision if circumstances changed for the better?

For those sponsors that have recently and successfully acted to curtail all forms of accrual in their schemes, has that decision stood the test of time?

Under the pressure of consultation conditions, many sponsors will have committed to revisit the decision if financial conditions improved – and, for many, improved they certainly have.

While I’m not advocating a slurry of DB schemes to re-open their doors (wouldn’t that be nice though?), I do think there’s a good argument to revisit any prior commitments made on this front, given the corporate responsibility towards ‘good faith’ if nothing else. If I were a member, I would certainly be raising that challenge.

Is running-on the scheme a viable option?

Finally, you can’t read a pension briefing nowadays without someone mentioning the new kid on the block: ‘run-on’.

In practice, the principle of purposefully running-on a scheme to generate surplus assets does sound like a great option provided the basics are done well.

Yet to really make run-on work in the current environment you need the correct governance and scale:

• Scale to ensure costs aren’t a stumbling block
• Scale to access the right investments
• Scale to make it viable to access surplus via subsidising Defined Contribution (DC) contributions in the same hybrid trust.

While none of the above is unsurmountable, it does strike me that if run-on is on your radar, then it may be simpler all round to consider the merits of repurposing DB surplus assets to make DB pensions more widely available. It may not quite be better pensions for all, but one small step feels like a better outcome to me than none – and I suspect it’ll be much easier to get your trustees’ agreement on sharing scheme surpluses in this way.

Looking to the future

Looking forward to the next three years, who knows what the future may hold? Not least considering where the current raft of DWP consultations on greater flexibilities will lead us – and when. It is, however, fair to say that it won’t be a quiet three years, and there’ll be plenty of interesting conversations and new solutions to embrace along the way.

In the end, people need a reliable income in retirement, and I hope we’re entering an era in which it will be easier to provide people with pensions, whether the scheme is DB, DC or even CDC.

The post ‘DB or not DB’ – That really is the question! first appeared on First Actuarial.

The retirement living standards comprise three levels of annual retirement expenditure – minimum, moderate and comfortable:

All figures net of tax

These standards help savers understand how much money they will need to attain the lifestyle they want in retirement.

At the moderate level, pensioners will have enough income for a fortnight holiday abroad and a long weekend UK break each year, £55 a week to spend on groceries, and a small car.

How helpful is auto-enrolment?

From being a daunting prospect for many employers, auto-enrolment is now a standard part of HR and payroll processes.

Auto-enrolment has been a real success in making more people save for their retirement. More than 10 million people have been automatically enrolled into workplace pensions since 2012, benefiting from employer contributions and tax relief. Some employees may never have saved any money for retirement without auto-enrolment. The vast majority of these employees have been auto enrolled into a Defined Contribution (DC) pension scheme.

While it’s good news that so many more employees are saving for retirement, the legal minimum DC contribution is a combined 8%. Realistically, contributing this amount into a pension each month over a working life of, say, 45 years will not be enough to achieve an adequate retirement income for the next 20+ years, especially if there are no other savings or income streams earmarked for later life.

There have been calls for the minimum contribution rate to increase to 12%, amid growing concerns around pensioner poverty. Recent analysis has found that with a contribution level of 12%, a typical 18-year-old would have an extra £96,000 in their pension pot, in real terms, by retirement age, equivalent to £250 per month.

How well are employees planning for their retirement?

Are employees failing to understand that a total of 8% auto-enrolment contribution will not be enough to provide a moderate standard of living in retirement? Or are there broader trends at play?

The answer is both.

Most employers have introduced auto-enrolment without putting in place the information and support that their staff need to make effective retirement plans. And past studies have consistently shown that even before auto-enrolment, inertia played a significant role in people’s reluctance to save for retirement.

Many individuals simply don’t review how much they contribute, how they are invested, and how and when they will access their benefits.

The Government and The Pensions Regulator take action

The Pensions Regulator (TPR) has grasped the inadequacies of auto-enrolment and now expects employers to make sure that their workplace pensions:

• Are monitored on a regular basis
• Deliver good value
• Provide retirement outcomes for staff.

The Government has also taken action to help young and low-paid workers. The Pensions (Extension of Automatic Enrolment) Act 2023 gives the Secretary of State the power to:

• Reduce the lower age limit for auto-enrolment from 22 to 18
• Remove the lower earnings limit for qualifying earnings.

Unfortunately, due to the combined impact of the Covid-19 pandemic and the cost of living crisis, the implementation of these changes has been delayed. Given that underfunding, at the 8% contribution level, is widely acknowledged, any statutory increase to the minimum contributions – from 8% to 12%, for example – is hard to envisage in the current financial climate.

What can employers do to improve workplace pensions?

Employers cannot rest on their laurels when it comes to their pension provision. Although a scheme may have been considered fit for purpose when it was first launched, pensions have continued to evolve significantly over the past decade.

This is due to a number of reasons, including:

• Market shifts and provider developments
• Changes in legislation
• The trend for individuals to reassess their life priorities, particularly since the pandemic.

So, if the hands-off approach instilled by auto-enrolment simply means some employees are not saving enough, what can employers do to help their employees plan for retirement and engage with their pension?

Employers should ask themselves these questions:

• Is our workplace pension scheme compliant with TPR’s requirements?
• Does our workplace pension scheme offer value for money?
• Are our employees fully engaged with our workplace pension scheme?

Worryingly, a common answer to these questions is “I don’t know”. Employers around the country are failing to meet their corporate responsibilities for their workplace pension. And their employees lack the pension knowledge needed to understand their benefits and plan their retirement.

It’s for these reasons that First Actuarial has launched its FirstEngage service. We work with employers to make sure they comply with pensions legislation and regulatory requirements. We also help them educate employees to understand their pension and the benefits it will give them at retirement.

You can find out more about our FirstEngage service here, or get in touch with me to discuss how we can help you manage your Defined Contribution pension arrangements.

The post Are Defined Contribution pensions failing to deliver good retirement incomes? first appeared on First Actuarial.

What is the FCA proposing?

£760m in redress was paid by the Financial Services Compensation Scheme (FSCS) due to unsuitable advice given by personal investment firms (PIF) between 2016 and 2022, the FCA has found. An astonishing 95% of this redress involved only 75 firms.

In light of this finding, the FCA wants polluter firms who have “got things wrong” to hold sufficient funds to meet their own redress obligations, rather than effectively passing the cost to other firms through the FSCS levy.

The FCA is proposing to require PIFs to set aside capital for potential redress liabilities arising from designated investment activities. The calculations would allow for a probability factor, reflecting that not all potential redress liabilities will result in a redress outcome.

The capital to cover potential redress liabilities would be deducted from the firm’s capital resources. If the firm is undercapitalised after this deduction has been made, it will have to comply with asset restriction rules. These rules would prevent the firm from carrying out transactions not deemed by the FCA to be “in the ordinary course of business”.

The FCA will also use new reporting requirements to direct their supervisory process. Firms will need to provide the aggregate value of redress liabilities and the number of consumers affected. They will also be expected to keep records of how they have arrived at their stated redress liabilities.

Alongside the “polluter pays” proposals, the FCA is consulting on a wider review of the regulatory regime for PIFs. The aim is to move towards a more comprehensive regime that would incorporate:

• New regulatory rules around capital and liquidity adequacy
• Improved risk management requirements
• More extensive reporting and disclosure requirements
• Wind down planning requirements.

The consultation was accompanied by a ‘Dear CEO’ letter, reminding firms not to avoid their redress commitments.

When will the changes take effect?

The changes are expected to come into effect in the first half of 2025.

The consultation closes on 20 March 2024, and the FCA plans to issue a Policy Statement in the second half of this year. There will then be a period of at least six months for firms to prepare for the changes.

Which firms are affected?

The FCA expects around 4,900 firms to fall within the scope of the proposals.

Exemptions will apply for some PIFs – most notably sole traders and unlimited partnerships. However, exemptions for these firms will only apply to the asset retention requirements. This means that they will still be expected to identify and quantify their redress liabilities, and to report to the FCA on their findings. They will then decide on the need for any action, such as imposing bespoke asset retention requirements on firms that are assessed to be undercapitalised.

A broader exemption will apply to PIFs that are part of a group and are subject to group supervision by either the FCA or the Prudential Regulation Authority (PRA). Such firms would need to notify the FCA that they will be making use of the exemption, and outline how the group assesses and holds capital for the risks posed.

How will firms be expected to identify cases that may give rise to redress?

Potential redress liabilities will fall into two categories:

• Unresolved redress liabilities: Where the firm has received, but not resolved a complaint. This includes complaints under review by the Financial Ombudsman Service (FOS).
• Prospective redress liabilities: Where the firm has identified recurring or systemic problems, or foreseeable harm that could give rise to an obligation to provide redress.

In practice, identifying unresolved redress liabilities should be relatively straightforward as firms will have records about any complaints already received.

Identifying situations that may result in prospective redress liabilities may be more challenging. The FCA considers that firms should already be aware of cases of potential harm as part of their compliance with Consumer Duty. However, given that this process will be largely self-regulated, there may be inconsistencies in the way that firms identify and quantify their exposure to risk.

Why are the FCA’s proposals a particular concern for firms that have advised on pension transfer?

There are several aspects of the proposals that will be particularly onerous for firms that have given pension transfer advice:

1. Redress arising from pension transfer advice can be significant. Indeed, the FCA notes in its consultation document that between 2012 and 2022, 83% of PIF FSCS costs arose from advice on self-invested personal pensions (SIPPs) or pension transfers. This means that firms that have provided this sort of advice are likely to identify higher levels of potential redress liabilities and are thus more likely to be impacted by asset retention rules.

2. Establishing a suitable estimate for potential redress associated with pension transfer is difficult. This is particularly true of redress relating to defined benefit transfer, which is highly sensitive to the circumstances of the case and depends on multiple factors – such as the date the transfer was effected, the occupational scheme that the consumer transferred out of, and the investment strategy adopted for the transfer proceeds. Firms may find they need specialist actuarial support to assess their exposure to potential future redress payments, and this could be costly.

3. A particular challenge of defined benefit transfer redress is that it depends on market conditions as at the first day of the quarter, and can vary materially from one quarter to the next. The First Actuarial Redress Index, shown below, tracks movements in average redress on pension transfers that took place after 2015 – and clearly shows how variable redress can be. It’s worth noting that redress for earlier transfers, such as those paid in the 1990s and 2000s, tends to be much higher, although the broad pattern of falling redress over the past few years will also be mirrored in those cases.

Modelling shows typical redress for a 50 year old who had a pension of £10,000 pa in 2015, transferred out in 2017 and invested the transfer proceeds in a mixed portfolio of assets

Because redress has to be recalculated before a final settlement is made, even if it is estimated “accurately” as at a given date, it won’t necessarily reflect the amount that a firm ultimately has to pay out. It’s worth bearing in mind that complaint resolution can be a lengthy process – it can take a year for cases referred to the FOS to reach an initial decision and, if the case is then referred to an ombudsman, a final decision may take a further 12–18 months.

Firms are required to have adequate financial resources at all times. This may mean that they need to incorporate margins for prudence into their estimated redress figures or revisit their redress calculations regularly. Firms that choose the latter will need to be able to identify every scenario in which redress could increase, or seek actuarial support to help them.

4. It will be permissible to allow for professional indemnity insurance (PII) cover in the calculations. This may prove a pragmatic solution for some firms – for example, they may be able to set aside sufficient capital to cover their policy excess on each unresolved or prospective redress case. However, it will be important to be mindful of exemptions – for example, some policies exclude defined benefit transfer advice written to younger individuals – and limits of cover. As noted, redress on pensions transfer can be significant, so there may well be instances where the PII cover is not sufficient to meet all potential redress liabilities.

5. The probability factor built into the calculations will (in the absence of specific agreement from the FCA) need to be at least 28%. However, a higher percentage (leading to higher capital) will be required if a firm has reason to believe that applying the 28% figure would understate its exposure to future redress. This could be the case if the firm knows that a higher proportion of past complaints against it have been upheld. It can be difficult to defend against complaints about defined benefit pension transfer, particularly where the advice was given some time ago – gaps in data often mean that the adviser is unable to demonstrate suitability of advice. There is scope therefore for the probability factor to be significantly higher than 28%, particularly for firms that advised on defined benefit transfer. There is also scope for the probability factor to change over time (as complaints are received and resolved), resulting in unexpected swings in capital requirements.

6. As part of its narrative about potential future regulatory regimes for PIFs, the FCA moots the need for higher capital requirements based on the activities conducted by a given firm. This would mean that firms that have given “high-risk” pensions transfer advice would see increased capital requirements as well as potentially higher liquidity requirements.

Given the above, firms may revisit their offering and decide to cease providing pensions transfer advice. This would have implications right across the financial advice and pensions industries.

The legal requirement for specific financial advice before a defined benefit transfer can be implemented is particularly relevant here. If fewer advisers are available to provide this advice, people may either be unable to transfer out of their defined benefit pension or will only be able to do so at considerable cost.

The FCA references its Advice Guidance Boundary review (AGBR) at various points in the consultation paper. However, it is difficult to see how the AGBR can address this issue unless legislation is amended to remove the requirement for financial advice before defined benefit transfer. This seems improbable given:

• The high risks associated with such activity
• The FCA’s broad stance that transferring a defined benefit pension is unlikely to be in the consumer’s best interest.

What can firms do now?

Ahead of any regulatory change, firms can prepare in a number of ways:

1. Understand how redress works

The FCA is clear that in order to comply with Consumer Duty, firms must monitor consumer outcomes, handle complaints fairly and identify systemic issues in advice. Firms are also expected to understand the risks they are exposed to and to hold appropriate financial resources to meet those risks.

Therefore, a key step that firms can take now – which would be advisable irrespective of whether the proposals set out in CP23/24 are ultimately implemented – is to gain a robust understanding of redress. For firms that have written defined benefit pension transfer advice this might mean training relevant individuals on the factors that influence redress.

2. Gather data about legacy pensions transfer advice

It is good practice for firms to keep records of the pensions transfers they have advised on as they build a picture of their redress risk. Pulling together summary data about each case (such as the transfer value paid, date of transfer and client’s age) is a good starting point. For firms that have written defined benefit transfer advice, it may be a good idea to start gathering more detailed data, such as information about the ceded pension, so that any holes in the data can be identified and steps taken to fill them.

3. Understand the magnitude of redress risk to which they are exposed

It may be helpful, and a matter of good governance, to get a rough estimate of the redress risk the firm is running. In the case of defined benefit transfer advice, firms may want to speak to their actuarial advisers about how best to assess their exposure to redress. There are cost-effective ways of doing this that do not involve a full redress calculation for each “at risk” case.

4. Speak to the PII insurer

Firms will need to understand their PII cover in order to integrate this into their calculations. It is also crucial that firms make their PII insurer aware of any planned suitability reviews so they do not inadvertently trigger the exclusion of cases from PII cover.

Sarah Abraham leads the pension redress team at First Actuarial and has extensive experience in calculating redress in relation to non-compliant pension transfer advice.

This article was originally published in FT Adviser. Reproduced with permission.

Read First Actuarial’s response to the FCA consultation.

The post Implications of the FCA’s ‘polluter pays’ proposals for firms that have advised on pension transfer first appeared on First Actuarial.

Every now and then, someone might escape from the distractions and disturbances of office life by spending a day working at home. Maybe a deadline was looming or they needed head space for a complex project. This made particular sense once offices became more open plan. But by and large, homeworking was a privilege for senior staff.

Office life meant working side by side with our colleagues all week long, battling through rush hour to spend a full day with people we didn’t always like. But the office was also where we supported each other, held team meetings, discussed problems and unusual cases, and importantly, trained and developed people.

Along came the pandemic

When Covid-19 struck, we were suddenly sent home with our laptops. Hats off to everyone who managed to adapt. Video-conferencing tools like Microsoft Teams and Zoom became the new normal. “You’re on mute” entered the lexicon of working life.

Although we could see each other on Teams and Zoom, we knew that we were missing out on face-to-face contact. It was hard to understand other people’s moods or interpret body language, for example. But that was true of every area of pandemic life, not just work.

Getting back to (the new) normal

Lockdown came to an end, of course, and firms encouraged their staff to return to the office. But by then, most of us had fully adjusted to home working. Some of us felt we could manage our lives better by putting a colour wash on or receiving Amazon deliveries in the course of the working day. The pandemic changed our collective notion of work-life balance.

Most firms and managers were keen to avoid upsetting their staff by forcing them back into the office full time. That’s when the idea of hybrid and flexible working practices took hold – you could spend two or three days in the office and work from home the rest of the time. Most of us even had some scope to choose which days to work from home. Hybrid working was designed to fit in with the post-pandemic flexi-lifestyle.

The efficiencies of hybrid working

If you’re focused and disciplined, your output may well have increased as a result. Many of us now switch on our laptops first thing in the morning and burn through our work until teatime, and even into the evening.

With no time or money wasted on travel or overnight accommodation, meetings and industry events can take place online. Within an hour or two, they’re over and we can turn to the next piece of work. What a result for employers and staff alike.

What have we lost?

Personally, I’ve always loved meeting people. I enjoy seeing how they look, how they act, and how they react. It gives me a clearer understanding of the people I work with and helps me make informed and sensitive decisions.

As I’ve said, online video conferencing means that we can still see people. But how well are we reading their emotions and understanding their inner responses?

Are they happy? How is their mental health? Do they really agree with my proposal, or are they keen to get the meeting out of the way with minimal resistance so they can move on to something else? Are they even listening? Some people will give every impression of paying attention, when on the same screen they’re reading a document that has no bearing on the discussion at hand.

When you attend a meeting in person, on the other hand, you’re committed to that meeting, and you have to actively engage with it. Participation and attention levels are higher. There’s nowhere to hide.

Are we trying to do too much?

For all the talk of work-life balance, I wonder whether we’re just finding new ways to overload ourselves. Are we all working so efficiently, in fact, that we no longer find time to take proper breaks or chat with our colleagues? And with the post-pandemic shortage of skilled workers, are we driving ourselves into mental illness and even burnout? And if we are, who will notice?

We need to remember that hybrid working is designed to blend remote working with in-person presence. Face-to-face is a fundamental human need. Let’s get back out there. If someone says, “Shall we meet up?”, try saying, “Yes, fancy a coffee?” rather than “I’m busy right now, but I can do a quick call on Teams if you like.”

It’s time to reclaim the humanity of our working lives.

This article was first published in Professional Pensions.

The post Hybrid working – Are we losing touch with each other? first appeared on First Actuarial.

Meet Amy Atherton, Level 3 HR Support Apprentice

Amy, why did you choose to do an apprenticeship?

I’ve always been interested in HR. But it’s hard for young people like me to get a job without a relevant qualification or industry experience. Choosing an apprenticeship seemed like the best way to kick-start my career in HR.

The apprenticeship provides hands-on learning, along with the opportunity to gain practical and knowledgeable skills. I’m building a strong foundation for my career in HR with the valuable experience I’m getting.

What do you love most about your apprenticeship?

One of the many things I love about my apprenticeship is that I work alongside other professionals in my field and learn directly from them. They’re all willing to share knowledge, skills and best practices with me. And that’s really helping me with the study side of my apprenticeship, which combines theory with learning on the job.

It’s also great to bring the knowledge and skills that I’ve developed through the apprenticeship to my team at First Actuarial. This gives me the sense of strengthening the HR team and creating a better service for everyone, while developing my own understanding.

What do you feel are the main challenges of doing an apprenticeship?

Although an apprenticeship is a great opportunity, it does come with challenges. During busy periods at work, it can be hard to juggle the requirements of the role with the demanding assignments that form part of the apprenticeship. However, I get a set number of hours per week for study time, and this reduces the stress and helps me get the work done with minimal disruption.

Another challenge I’ve faced is that this is the first time I have ever been ‘virtually’ taught. At the beginning, I did find it hard to not have face-to-face interactions with my tutors, However, I’ve found that I’ve adapted over time and overcome any difficulties by having regular one-to-one catch-ups with tutors. I now find it a very efficient way to learn while working full time and taking care of my own wellbeing and personal life.

How have First Actuarial supported you on your apprenticeship journey so far?

First Actuarial have been very supportive throughout my apprenticeship. They’ve given me the time needed to focus on my apprenticeship, and we have regular check-ins to see if I need any further support with my studies. First Actuarial have also been happy to help with research for my assignments, which relieves the pressure.

I would highly recommend any young person to apply for an apprenticeship at First Actuarial. It’s a fantastic way to kick-start your career!

Meet Katie Mosley, Level 3 Workplace Pensions Administrator Apprentice

Katie, why did you choose to do an apprenticeship?

I was new to the pensions industry and only had a bit of knowledge, but I was eager to learn more and the apprenticeship scheme looked the perfect way to do that.

What do you love most about your apprenticeship?

I love learning how to grow within my role and expand my knowledge of pensions. The support I receive allows me to focus on my learning while giving me the time I need for my day-to-day work.

What do you feel are the main challenges of doing an apprenticeship?

Balancing my day-to-day workload with the apprenticeship is definitely the biggest challenge.  It can be hard to find the right balance, but the support I get from First Actuarial has given me enough time to complete my apprenticeship work.

How have First Actuarial supported you on your apprenticeship journey so far?

First Actuarial have been extremely supportive. They’ve allowed me to block out time for my apprenticeship work and meetings with my apprenticeship tutor.

I have regular catch-ups with my work manager, who supports me with any queries and concerns, and gives me guidance on my apprenticeship work where possible. There’ve been times when I’ve had a lot going on with my day-to-day workload, but my manager has delegated some of this work to others so I can focus on my apprenticeship. I really appreciate that.

The post Take two apprentices – Amy Atherton and Katie Mosley discuss their apprenticeships at First Actuarial first appeared on First Actuarial.

The Pensions Regulator’s (TPR) new code consolidates 10 of the existing codes into a single modular code of practice. On the surface then, the general code shouldn’t merit much fanfare for well-run schemes with a decent governance framework based on these 10 existing codes of practice. But the new general code does much more than simply consolidate existing guidance.

What’s new in the general code?

The general code gives trustees several layers of new requirements to contend with:

• ESOG – All schemes will need to be able to demonstrate that they have an Effective System of Governance (ESOG) in place
• ORA – Schemes with more than 100 members will also have to carry out and document an Own Risk Assessment (ORA) at least every three years (scaled back from an annual requirement in the draft code)
• Risk management function – Schemes will need to decide how best to meet the expectations around the newly created risk management function.

They may also need specific policies in place covering areas such as fees and remuneration, and the appointment of advisers and service providers.

Lots to get on with then!

TPR does helpfully recognise that a ‘one size fits all’ approach isn’t appropriate, and that trustees can take a ‘proportionate’ approach. But what is ‘proportionate’ exactly? It’s clearly open to subjective interpretation. I suspect that many trustees will find it simpler to seek full compliance, after weighing up the benefits of doing so versus the perceived risks of non-compliance and the spectre of regulatory scrutiny.

How will the general code affect smaller schemes?

Some of the new requirements apply only to schemes with more than 100 members. This means than many schemes – widely seen as small in the industry – will need to comply with the same modules of the code as those with thousands of members. Although there may be potential for flexibility by taking a “proportionate” approach.

It’s clear from conversations with clients that this is a real concern. Keen to channel their time and energy into the effective running and funding of their scheme, they worry that these new requirements will be an unwelcome distraction.

Many trustees and sponsors are only now coming to terms with the additional work and costs arising from GMP equalisation, often with minimal benefit for their members. They predict that the general code will involve further difficult conversations with sponsors around yet more expense.

Back to the general code, the challenge for trustees of smaller schemes will be to carry out each duty efficiently but meaningfully, and not turn any of the requirements into tick-box exercises. This is most likely to be achieved through a combination of technology – needed to deliver compliance efficiently – and a suitable approach to prioritising and mitigating the risks they face.

How can technology help schemes comply with the general code?

Trustees should now be starting to work out how their existing governance framework compares with the detailed expectations of well-run schemes set out by TPR.

The right technology should lighten the load of trustees at this time by helping them:

• Carry out the necessary gap analysis
• Identify priority areas
• Monitor ongoing compliance
• Flag when they need to review their policies and processes in line with the requirements of the general code.

By using a technology-driven process, trustees will know that their journey to compliance is a focused, efficient and effective one. And importantly, it will help them reduce costs.

What about scheme members?

When faced with another lengthy list of compliance requirements, trustees and sponsors of well-run schemes can feel that undertaking such an exercise will result in increased costs with no tangible benefit for members.

Once trustees of smaller schemes start to work towards compliance, I would recommend that they prioritise those areas that will do the most to protect members’ benefits and mitigate risks.

By focusing on actions that enhance member protections while aligning with the scheme’s objectives, trustees will avoid the ‘tick-box’ trap, and can instead deliver genuine, improved outcomes for members.

The post The new general code – How to lighten the burden of compliance while improving member outcomes first appeared on First Actuarial.

1. Is buy-out affordable?
   Ask your Scheme Actuary for an estimate of the buy-out position. Some insurers will provide indicative pricing. If you have a buy-out deficit, can your sponsor plug the gap?
2. Is buy-out the right option for your scheme and members?
   While your members will benefit from a secure pension following a buy-out, any chance of future discretionary increases will be lost. Consider alternatives, such as other investment strategies or running the scheme on.
3. Is your sponsor on board?
   Many sponsors like the idea of a buy-out to remove their pension risks but may not be as keen on the costs involved or the loss of a possible future refund. Start discussions with your sponsor at an early stage.
4. Are your data and documentation ready?
   Do you hold complete and accurate member information? Has your benefit specification been signed off by lawyers? Insurers are unlikely to engage with your scheme without this.
5. Have you got the right advisers in place?
   You’ll need experienced advisers with specialist expertise at every stage. Insurers will also consider your advisers and their track record before deciding on whether to quote.
6. How flexible are you?
   In the current busy market, there’s no guarantee you’ll get a quotation when you want one. If your timescales are flexible, you’ll be at an advantage. You may also need to agree exclusivity with an insurer to get a formal quotation.
7. Is your governance ready?
   Getting your governance processes in order is important as insurers expect quick decision-making. Your project plan should set out the key decision points and who needs to be involved.
8. Are your investments ready?
   In the run up to a buy-out, your investments should be in ‘insurer-friendly’ funds, which trade regularly and are likely to broadly match buy-out pricing.
9. Do you have a member communications strategy?
   You should agree how you are going to communicate with your members and how often. And make sure your member communications are positive; buy-out is a good news story.
10. Are you on top of the legal aspects?
    Get lawyers to advise on the buy-out provisions in your scheme rules. You’ll also need legal advice at various points along the way. Trustees and sponsors need to work together to achieve a successful buy-out. Having the right advisers on board and being ready to transact with flexible timescales will put your scheme in a strong position for insurer engagement.

This article originally appeared in the October 2023 issue of Pensions Aspects.

The post Is your scheme buy-out ready? 10 questions to ask first appeared on First Actuarial.

Why do I think I’m the right person then? Why did I apply?

I’ve been an active PMI member for some time – writing articles, working on their think tanks, and the like. But so have countless other pension professionals.

If I’m honest, I think it’s because I’m someone who likes to speak! For some time now, I’ve had a strong feeling that there are lots of important things that aren’t being said in pensions. Maybe we’ve all become more careful about what we say.

But at industry conferences – after I’ve grabbed the mic to speak my mind yet again – people have come up to me and thanked me for raising questions that they were clearly desperate to ask. Maybe it’s because I’m from Yorkshire, or maybe it’s my decades of experience in pensions, but I do feel empowered to ask those questions.

Because let’s face it, the industry is facing so many challenges it’s hard to keep track of them all. This is no time to hide away from hard realities – from pension-specific challenges, like pensions dashboards and GMP equalisation, to broader issues like climate change. We’re trying to deal with all of this and more, at a time when every organisation is struggling to find enough people to get the work done.

The pensions industry in a state of transition

The pensions industry is in a state of transition, and the PMI is no exception. It’s an organisation that has traditionally run face-to-face seminars and conferences. But since the pandemic, of course, much of this has been delivered online. It turns out that we can all get more done by avoiding time-consuming trips to London for industry events.

So we’ve embraced new ways of working. And we’ve definitely improved the way we deliver education, with online courses and exams, and a relaunch of some of the PMI’s key qualifications.

All that is great, and it’s probably a lot more inclusive. But along the way, I feel we’ve lost the value of meeting people face-to-face. If you’ve attended any real-life conferences recently, you’ll know that they’re not exactly as well-attended as they used to be. It can be a bit dispiriting. And it’s not just about lockdown. New legislation and other changes have increased all our workloads.

But it’s important to get away from our screens every now and then, no matter how busy we are.

Getting under-represented groups involved in the PMI

As President of the PMI, I’m planning to put some serious effort into engaging with younger people and making sure that the needs of small-medium schemes are fully represented.

With young people, I think it starts by simply talking to them. What do they want? What will help them in their careers? What motivates them to come and work in pensions? As a profession, we have a tendency to picture ourselves as a bunch of old men smoking our pipes around an oak table. We need to change that.

The invisibility of small-medium schemes has been a bugbear of mine for as long as I can remember. I ask searching questions about the needs of smaller schemes whenever I get the opportunity. Giving them a voice and representation was definitely one of my biggest motivations for becoming President of the PMI. I’ll now be in a much stronger position to get their needs on everyone’s agenda.

How PMI Pathways can help

PMI Pathways is all about growing the membership and getting more people through to associateship and fellowship so they have more say in the direction of the industry.

As lead providers of education and qualifications for the pensions industry, the PMI is uniquely positioned to achieve this. It provides a series of qualifications, which everyone has traditionally had to work through. But maybe because they weren’t always relevant to every area of professional work, their popularity waned over time.

PMI Pathways, launched in April 2023, addressed this problem with a choice of five pathways to work through. This makes the industry’s qualification structure more relevant to everyone working in pensions, and that has to be good news.

PMI Pathways is also the route to become an associate and then a fellow. Fellowship in particular gives individuals real influence over the direction of the PMI. And that’s why I want to encourage more people to go through the PMI Pathways – so they can become more involved, and have more say.

Where PMI is now

Passing the baton of the presidency is Sara Cook, a highly organised pensions professional. Without her hard work, I would not be in a position to put my plans in motion.

Sara played a key role in launching PMI Pathways. And internally, she helped launch the three strategic pillars everyone at the PMI is now working towards. These are:

1. Helping pension schemes understand their role in addressing climate change, from both a governance and a moral point of view
2. Examining the important issues that government needs to act on
3. Reaching out to the wider UK and beyond, by working with the PMI regions and other structures.

Looking forward to my presidency

I’m keen to continue the good work of Sara and the rest of the PMI team in all these areas.

For a long time, the PMI was seen as a London-centric body. But we now have PMI regions in Northern Ireland PMI region and Scotland. We’re also actively engaging more closely with professionals in India and the Philippines who work in offshore arrangements and take PMI exams.

The industry has changed shape over recent years, and we have a number of people working in the industry who don’t have a pensions background. The PMI can play a key role in helping these people develop and learn. It can also provide a way for the whole industry to pool ideas in the face of our shared challenges.

As I’ve said, I want to encourage more people in the industry to get involved with the PMI’s face-to-face meetings and discussions. We can all work efficiently on our laptops at home, but the most productive collaborations come from in-person meetings.

And that’s how I’ll measure my success. If I get more people wanting to follow the PMI Pathways and work with the PMI – as volunteers or event attendees – then I will feel that I’ve made a real difference during my term of office.

The other day, I was asked whether First Actuarial clients might be worried that I’d be taking my eye off my day job. I actually think that the PMI presidency will help with my day job. By giving me a deeper understanding of the industry, it will help me to make sure our pension schemes are administered even more effectively.

Scheme administration has traditionally lacked profile in the pensions profession. And First Actuarial isn’t one of the giants of the industry (not yet, anyway). But here I am, the new President of the PMI. I’m hoping that people see that you can make a difference no matter where you come from and what your role is in pensions.

So please have a think about how you’d like to get involved in the PMI. If you’ve got a passion for what you do and a belief that you can make a difference, we look forward to seeing you soon at a real-life PMI event!

The post Meet Robert Wakefield – the newly elected President of the PMI first appeared on First Actuarial.

Our teacher split us into groups of two or three, gave each group a stack of thin pieces of card, some scissors and sellotape, and said:

“Your task is to make a bridge that will span the gap between two tables. The team that makes the bridge that supports the most weight before collapsing wins.”

We all went off to make our bridges and I remember – surprisingly clearly given it was 30 years ago – the design of our bridge, which had:

• H-girders made out of folded bits of card to span the gap
• Pillars designed to fit between the gap in the tables
• Diagonal beams transferring the load to the pillars
• Sellotape (surprisingly strong in tension) between the two pillars to take the load.

Our team didn’t win. The winners borrowed a wooden ruler from the stationery cupboard and hid it in card and paper! But it did teach us how to build a bridge that was as strong as possible given the materials we had.

Architects of bridges also build models. Nowadays though, they use complex mathematical models with programmed elements such as:

• Laws of physics
• Force of gravity on earth
• Geological surveys of the ground on which the bridge is to be built
• Density of the material used
• The breaking strain of every component
• Predictions of how these materials degrade over time
• Mathematical models of fluid and aerodynamics to simulate the impact of wind and water on the bridge and its foundations.

Our understanding of the laws of physics and measurement of the bridge’s components and its environment combine to give us a precise measure of risk. They can accurately tell the architect how likely it is that the bridge will collapse. The architect can then design the bridge to a tolerable level of risk.

These models are both complex and expensive though. Also, the user of the model would have no idea whether the model had an underlying error in its code that skewed the predictions it made.

But what’s all that got to do with investment strategy?

It comes down to a question I always ask – What kind of risk models should we apply? Should we use the equivalent of card and sellotape (i.e. a simple model made with a spreadsheet)? Or should we invest in the equivalent of the architect’s complex modelling?

Why investment strategy is like architecture… and why it’s different

In the design of a bridge, then, the laws of physics and conditions that determine how bridges work are known to us. But this isn’t the case with investments. As we were brutally reminded in September and October last year, the rules and conditions that drive pension scheme investments can change very suddenly. Markets are not governed by intractable laws, but by behaviour, politics and other human variables.

A complex mathematical model is about as useful for investment strategy as it would be to an architect designing a bridge on an alien planet where factors like mass, geology and climate are unknown. No matter how complex, the model can’t possibly give an accurate measure of risk and the ‘probability of failure’ in such uncertain conditions.

Any model, simple or complex, is of equal use to the architect. They will give the architect a clear understanding of how to build a bridge that’s as strong as possible given the materials available.

It’s the same when modelling pension scheme risk. Both simple and complex models can help us understand how to design an investment strategy. They can give valuable pointers on how to build a strategy that’s as robust as possible given the asset classes available and the targeted returns. But neither will accurately measure the risk of it going wrong.

There are though some major advantages of a simple model over a complex one.

Firstly, it’s less likely to go wrong. A simpler model will make any inaccuracies easier to spot, lowering the risk of an unseen error that may lead to bad advice.

Secondly, it’s much more cost-effective. Consultants need to recoup the time spent programming, maintaining and checking for errors in complex models by hiking up fees.

And finally, a clear and simple model leaves the user in no doubt that the model is ‘just a model’. In contrast, a fancy ‘online stochastic modelling tool’ may make the user over-confident about the output.

For all these reasons, First Actuarial tries to make everything as simple as possible and only as complex as necessary. We won’t flog you any over-complex, over-priced modelling that will only foster poor decision-making.

The post What design technology classes can teach us about investment strategy first appeared on First Actuarial.

In 2019, membership of Defined Benefit pension schemes fell below one million for the first time. How did we get to this point? After all, the tradition of paying a guaranteed pension for life goes right back to the 1880s, when Joseph Rowntree founded one of the first workplace pension schemes.

As the costs and risks have escalated, many employers have no longer been able to provide Defined Benefit pensions that pay employees a lifelong retirement income. We’re now in a situation where the majority of employees in the private sector have a savings account – an individual Defined Contribution (DC) pot – rather than a guaranteed pension for life.

The mixed provision of DB pensions and DC arrangements presents a number of challenges for employers and their employees, notably:

• Risks – The shift from DB to DC transferred pension risks from the employer to the individual scheme member. Without a guaranteed retirement income, individuals are entirely responsible for their investments, and how they spend their pot of savings (not least making sure they don’t run out of money).
• Reliability – DB presents very real difficulties for employers, who need predictable costs and risks. Employees need reliability too, but with DC it’s hard to work out how much money they’ll get from their pot when they retire.
• Difficult decision-making – With DC, individuals often struggle to decide how much money to save, where to invest it, and how much money to spend in retirement.

What do employers and their employees want from pensions?

As employees, we all want a pension that’s reasonably predictable, paying us a retirement income regardless of circumstances. Like employers, we also want reliable costs. In our case, we want a stable level of take-home pay, with no sudden hikes in contribution rates. And we’re uncomfortable about having to shoulder all the risks, such as investments and longevity, individually. We don’t want to run out of money before we die.

Like many employers in the social housing sector, Thirteen Housing Group is keen to provide reliable pension benefits to its colleagues, as Heather explains in the presentation. High quality pension provision is a valuable tool for recruitment, retention and retirement. At the same time, fixed costs are important for employers everywhere, especially where business planning is concerned.

What is CDC?

The Pension Schemes Act 2021 gives the UK a legal structure for Collective Defined Contribution, or CDC. This is a type of pension scheme that already exists in some form in the Netherlands, Denmark and Canada.

With CDC, costs are fixed at the outset, when the scheme is implemented. So both employers and employees know what the costs will be from the beginning. This means no deficit contributions and no sudden increase in costs following a valuation. Instead, at each valuation, predicted benefits are adjusted if necessary to reflect the results of the valuation.

CDC promises to take us back to the original aims of an occupational pension scheme – a reliable income for life. We build up a target benefit, which may change but will be payable for the rest of our lives, in a similar way to DB.

Employers get the cost certainties and risk reductions they’re looking for. And CDC also provides a solid recruitment and retention offer, as Heather points out. The benefit may not be fully guaranteed, as it is with a DB scheme, but it will be a lot more predictable than DC.

The collective aspect of CDC is crucial. In CDC pension schemes, the risks are shared across all scheme members. For example, by pooling investments collectively, a strategy can be set with higher expected returns, meaning better and more predictable benefits for members.

Finally, and perhaps most importantly from a member perspective, those difficult decisions are eradicated. Individuals will no longer have to manage their pot single-handedly. CDC lifts away those complex and intimidating investment choices. Once again, people can join an organisation and pay into a pension scheme, with the reassurance that the pension will pay them throughout their retirement.

Where do we go from here?

CDC is well on its way. Royal Mail is setting up the first CDC scheme in the UK, due to be launched this year. Government is currently consulting on multi-employer CDC schemes, so that could soon become a reality as well.

Across the housing sector, CDC presents huge potential gains for larger, paternalistic employers.

We’re keen to gather together like-minded individuals such as Heather to explore the future of CDC in the housing sector. If you’d like to join us, please get in touch with me via the link at the end of this article.

The post The future of pensions in the social housing sector first appeared on First Actuarial.

Rather than plunging straight into the run on gilts and its impact on Liability-Driven Investment (LDI) and scheme funding, Richard started by building a broad picture of global and UK markets. He went on to explain what happened during the crisis and then considered key questions, such as what individual schemes should be doing and whether LDI remains appropriate.

Starting with global equities, Richard showed that values in this market have fallen – usually a sign of underlying economic trouble. What has caused this? Apart from lingering Covid effects, the invasion of Ukraine has undermined confidence in the global economy, and rises in gas and oil commodity prices have had an inflationary effect.

But this is a UK-specific shock. Homing in on UK equities, we see a market that is less diversified than its global counterpart and is mirroring its problems. The relatively strong recently performance of the FTSE 100 index is misleading as it’s due to significant distorting factors.

Inflation is high – 10.1% at time of writing. This has led to significant increases in gilt yield, with everyone anticipating rises in base rates. Although that is the case in many developed countries due to Covid spending, the UK has a debt to GDP ratio of over 100% and is also running a budgetary deficit.

Finally, market discomfort with political uncertainty spilled over with the mini-Budget and the Chancellor’s announcement of cutting taxes funded by borrowing – an inflationary move. The Bank of England had been trying to control inflation by raising interest rates. The run on gilts at the end of September was a consequence of markets’ loss of confidence faced with these conflicting approaches.

This is where LDI comes in. First Actuarial has produced an explainer video about LDI, which Richard summarised. In economic terms, LDI is similar to holding a portfolio of gilts which is partly funded by borrowing.

LDI does not behave like other asset classes. With LDI, schemes need to manage the leverage. In the gilt crash, schemes borrowed to purchase assets which then fell in value. The effect was akin to a highly mortgaged household in a housing market crash.

In the ordinary course of business, schemes periodically add or remove cash to manage the leverage. But with a sudden, sharp drop in gilt values, it may not be possible to inject the cash quickly enough to satisfy the requirements of the LDI manager. In that situation, the LDI managers are within their rights to reduce leverage by selling some of the scheme’s gilts. This put some schemes in the unenviable position of having to repurchase gilts at a higher price to regain lost protection.

Some LDI providers had to scale down the protection they offered schemes, disposing of gilts at fire sale prices. Only when the Bank of England stepped in with its asset purchase programme, buying gilts back so schemes could reduce their leverage, did the gilt yield come back down and more normal market operation return. The market became more orderly, although the value of gilts remained volatile.

Bank of England intervention came to an end on the day of this webinar.

What position are schemes in?

Richard was unable to address individual arrangements in the webinar, and instead outlined a range of positions in which schemes might find themselves.

The position of many schemes is likely to have improved materially. Positive scenarios include an under-hedged scheme with some LDI and a provider that has withstood the market shock.

Schemes in an improved position may want to take pragmatic steps to hold on to their gains. Some schemes are seriously looking at insurance buy-out and want to protect their position.

A limited number of schemes find themselves financially worse off. In First Actuarial’s experience, however, the damage incurred is tolerable for most schemes adversely affected.

Is LDI still appropriate for schemes?

In recent weeks, some well funded schemes – now wary of the risks associated with managing leverage – have started to consider protecting their position with conventional gilts instead.

However, Richard believes strongly that LDI will continue to have a place in the pension scheme world. LDI may prove useful if interest rates fall again, and it can also help schemes improve their position using growth assets rather than cash contributions from the sponsor.

That said, the risks associated with LDI need to be considered. Advisers are talking about a new world of LDI, with funds operating at lower levels of leverage than before. This may make investment strategies less capital-efficient. And although capitalisation calls are less likely to happen in future, because of the de-leverage, where will that capital come from when LDI funds absorb so much cash?

The bottom line, however, is that LDI funds can withstand more market shock than was the case a few weeks ago. Many trustees are likely to conclude that the benefits of LDI outweigh its now moderated risks.

Next steps

The Pensions Regulator (TPR) is encouraging trustees and their advisers to obtain an accurate position in order to make an informed decision. Richard reiterated this. However, he emphasised that in seeking a sound estimate of their financial position, trustees should be aware of two challenges in the current conditions.

Firstly, it may not be easy getting accurate asset values from LDI providers at this point, for example due to recapitalisation payments in transit. Secondly, in volatile conditions, the day you choose for your funding update can have a material impact on the results. It’s important to take a rounded view rather than trying to take a snapshot and acting solely on that position.

Many schemes will need to review their investment strategy, even if their position has improved. Recent events have altered the asset mix. Liabilities and matching assets will have shrunk relative to growth assets. Portfolios will contain a higher proportion of illiquid investments. Also, the capital calls will have altered the balance between bonds and non-bonds.

Another point of agreement between First Actuarial and TPR is that this is not all bad news. That is not to detract from the limited number of schemes that have lost their hedging and must now replace it at greater cost. But whether yours is one of those schemes or not, it’s important to take a broad look at conditions and how they affect your particular arrangement.

The post State of the nation – Capital market conditions and LDI first appeared on First Actuarial.

In its previous assessment of existing scheme-specific funding requirements, Government emphasised that maturing schemes needed to think more clearly about their ultimate objective and take a joined-up approach to funding and investment issues.

However, Government concluded that because nothing was fundamentally broken, root and branch change would not be needed. In our view, the draft regulations do not reflect the spirit of incremental change.

We believe that hitting pause on the DB funding rules at this point makes sense as there is a general feeling that a new investment paradigm is emerging. In this context, introducing an inflexible ‘one size fits all’ approach to DB funding could have unintended consequences.

Systemic risk from LDI

Gilt yields have risen significantly in 2022. While this means most DB schemes will see an improved funding position, these rises have put significant pressure on leveraged liability-driven investment (LDI) funds, and have resulted in additional capital calls on DB schemes.

It has been clear since the last week of September that the combined effect of multiple schemes hedging against interest rate rises by purchasing LDI contracts has the potential to create large-scale systemic risk.

The pressure to de-leverage LDI solutions by providing additional collateral means many schemes are re-examining their strategy. Their recent experiences indicate that existing approaches may need to be materially altered for a new economic environment.

Higher yields raise questions over ‘significant maturity’

The draft regulation states that a scheme reaches significant maturity on the date it reaches a specified duration of liabilities. The problem is that the duration depends on the discount rate used and will change with fluctuations in gilt yields. Durations have been tumbling over the past few months and the impact of defining maturity on the basis of such a yield-sensitive measure is uncertain.

Making separate provision for open schemes

In our consultation response to the DWP, we also argued for open DB schemes to be treated differently. With the flow of new entrants in open schemes, the duration of liabilities generally doesn’t decrease over time.

The consultation document does recognise the distinctive needs of open schemes. In particular, it states that open schemes that are not maturing and have adequate ongoing sponsor support should not have to undertake inappropriate de-risking of their investment strategy. But there are no specific carve-outs for open schemes in the regulations and we worry that this leaves a gap for regulatory over-reach.

We aren’t confident that the regulations will allow open schemes to continue to invest productively and provide adequate and reliable pensions to scheme members at an affordable cost to employers. It’s also the case that with a new Prime Minister and Cabinet in place, the position of the Government on economic growth is unclear at the time of writing.

A pause would provide useful opportunity to clarify Government’s agenda on growth and avoid the possibility of regulatory mis-interpretation.

Why pausing the new DB funding rules makes sense

We believe that the case for pausing the draft funding and investment regulations at this stage is a compelling one. This would allow for a thorough consideration of recent political and market developments alongside responses to the consultation. We will then be able to move forward on a more solid basis.

The post First Actuarial calls for DWP to pause new DB funding rules first appeared on First Actuarial.

With the development of the pensions dashboard ecosystem proceeding at such a rapid pace, trustees need to start making their scheme dashboard-ready.

We are running a series of three webinars designed to give you all the information you need about pensions dashboards and how to prepare for them. The webinars will feature speakers from First Actuarial and a range of industry groups.

The first webinar – How to make your scheme dashboard ready – took place on 14 June 2022. In the webinar, Angela Bell, Industry Outreach Lead at The Pensions Regulator joins First Actuarial’s Robert Wakefield and Claire Fuller. They provide an overview of pensions dashboards and discuss how you can make your scheme dashboard-ready.

First of all, does your scheme fall within the scope of the Pensions Dashboard Programme? The first iteration includes all UK-based pensions, including the State Pension, Defined Benefit pensions (including cash balance schemes) and Defined Contribution pensions.

How will the pensions dashboard work?

This is where it can get complicated. To provide a clear picture, Claire Fuller, dashboard lead for First Actuarial gives an outline of how pensions dashboards will work to give individuals a full picture of their pension savings. (For more detail, watch the webinar recording below.)

She explains that when an individual first registers, they will provide information to identify themselves. By doing so, they’re giving consent for that personal data to be shared. The data is passed on to providers of all schemes in scope. The providers then check whether that individual is a member of their scheme. Matching is based on criteria agreed by trustees. Once matched, the scheme will provide a dataset, and the member will be able to request benefit information and view it on the dashboard.

At present, we expect the information to pass through an integrated service provider (ISP). The benefits of this approach include:

• The ISP manages the volume of data coming from the dashboard to scheme administration, so day-to-day work is not disrupted
• No data is stored in the dashboard; it is only viewed on the dashboard
• The approach is similar to that of auto-enrolment, so it is proven and low-risk.

The role of The Pensions Regulator

Angela Bell explained that The Pensions Regulator aims to maximise scheme compliance with dashboard duties. They are putting a targeted communications programme in place to give all industry stakeholders the right guidance and support.

Initial guidance in June is designed to help trustees get ready. It will outline legal duties and provide a timeline of what they must do. Follow-up guidance later this year will reflect final regulations and technical standards.

Since this webinar was recorded, The Pensions Regulator has published its initial guidance, which marks the beginning of a full communication programme to raise awareness of trustee responsibilities and drive progress. Read the guidance here.

In terms of compliance, The Pensions Regulator aims to take a proportionate and reasonable approach except where noncompliance is wilful and deliberate. They will set this out in more detail once Parliament has passed the regulations.

Timescales of the Pensions Dashboard Programme

The pensions dashboard will be implemented in a series of waves, starting with the largest schemes (those with more than 1,000 active or deferred members) from June 2023 to October 2024.

This gives the first tranche, the largest master trusts, a staging date of June 2023. By that date, they will have to

a. Comply with the regulations

b. Be connected to the dashboard and ready to process requests and return data where a match is identified.

Trustees should note that the process of connection will clearly need to start prior to the staging date.

What can trustees start doing now?

Irrespective of their staging data, trustees should start preparing to be dashboard-ready now. They should:

1. Discuss it as a board agenda item
2. Work with scheme administrators to agree an approach
3. Consider what the scheme’s matching criteria will be and what needs to be done to make that data available, accurate and accessible. Read the PASA guidance on data matching.

Contact us to register for other webinars in the series.

The post Webinar on demand – How to make your scheme dashboard ready first appeared on First Actuarial.

Pension scam victims lose an average of £51,000 of their life savings, according to Action Fraud, and some individuals have lost seven-figure sums. Between January and May 2021, a total of £2,241,774 was reportedly lost to pension scammers, according to the Financial Conduct Authority (FCA).

Fraudulent pension transfers are a huge part of the problem, involving the theft of millions of pounds every year. But for a long time, the strongest official response was a leaflet warning pension savers. More recently, the banning of cold calls offering ‘pension reviews’, in January 2019, and a recent television advertisement campaign have been positive steps, but public awareness persists at low levels. The FCA reports that only 40% of people they surveyed in 2021 knew to be wary of opportunities to transfer their pension.

Prior to the new regulations, scheme trustees and administrators had a duty to carry out careful due diligence and warn pension savers about a suspected scam. The problem was that they had no real power to refuse a statutory transfer. This put them in a difficult position, on the one hand having to carry out due diligence with care, while on the other hand having no real power to stop a transfer, to which the member has a statutory right.

The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021

New regulations came into force on 30 November 2021 and apply to all transfer requests made after this date. Under these regulations, transfers fall into one of two conditions.

The First Condition is where the receiving scheme is a type listed in the regulations. These are: a public service pension scheme, an authorised Master Trust on The Pensions Regulator’s (TPR’s) published list, and a Collective Defined Contribution (CDC) scheme that has obtained authorisation and is included on TPR’s published list

Transfers that satisfy the First Condition – where the trustees or administrators are satisfied beyond reasonable doubt that the transfer is to a receiving scheme listed in the legislation – are relatively straightforward and do not require a great deal of additional due diligence.

The Second Condition covers all other receiving schemes, and is broadly split into two types. Type one applies to low risk, UK-based personal pension schemes, where the trustees or administrators have already carried out sufficient due diligence to decide that the transfer can proceed without further checks. This can be achieved by the creation and maintenance of a ‘clean list’.

First Actuarial is taking the approach of having a ‘virtual clean list’. Essentially if the provider appears on the current list of approved providers with the FCA and the Prudential Regulation Authority (PRA) at the point of transfer, then the transfer can proceed without further due diligence.  This approach ensures that we are basing our decision on the most up to date approval status of the UK based pension provider.

Type two applies to receiving schemes that are either occupational, Qualifying Recognised Overseas Pension Schemes (QROPS), or schemes that require further due diligence (i.e. those that are not on the ‘clean list’ as detailed above). Proposed transfers to such occupational or QROPS arrangements require the collection of evidence to show employment and or residency links.

Red and amber flag system

The regulations also introduce a system of red and amber flags.

There are six red flags:

• The member has failed to provide required information
• The member has not provided evidence of receiving MoneyHelper guidance
• Someone has carried out regulated activity without the correct regulatory status
• The transfer request follows unsolicited contact
• An incentive was offered to the member to make the transfer
• The member was pressurised to make the transfer.

And there are seven amber flags:

• The member has not shown an employment or residency link
• The member cannot show an employment or residency link
• There are high risk or unregulated investments included in the receiving scheme
• The receiving scheme charges are high or unclear
• The receiving scheme investment structure is unclear, complex or unorthodox
• Overseas investments are included in the receiving scheme
• There is a sharp or unusual rise in transfers involving the same adviser or receiving scheme.

Scheme administrators should make a risk-based decision when assessing whether any amber flags are present. If it is felt that there are amber flags, the member must attend a guidance session with MoneyHelper, a free information service provided by the Government.

Following that session, the member will be given a unique reference number. If this is not provided to the transferring scheme, then the administrators give the case a red flag.

If the administrators decide (on behalf of the trustees) that on the balance of probabilities there is one or more red flag present, then the transfer must be refused. Where this is the case, the member must receive, within seven working days, clear communication that there are factors in place that remove the statutory right to transfer and that they are at risk of being scammed. If a scam is suspected, it should be reported to Action Fraud and the FCA.

For transfers to occupational schemes or QROPS schemes, the administrator is responsible for obtaining the required evidence of employment or residency links. It is encouraging that the Pension Scams Industry Group estimates that only around 5% of current transfers will require the employment links, residency links or additional due diligence work.

A welcome opportunity to combat pension scams

Although the new regulations will add to scheme administration workload, I am hugely in favour of them. They will finally make the due diligence process worthwhile. The regulations give trustees and administrators the power to protect their members from fraudulent pension transfers, which can only be a positive outcome for pension savers.

Could this be the end to fraudulent pension transfers, or will scammers evolve to find ways around the regulations? I sincerely hope that the former is true and that fraudulent pension transfers become the ghost of pensions past.

The post New pension transfer regulations: The power to say ‘no’ first appeared on First Actuarial.

It’s taken a while to get the legislation prepared. But delays – with Brexit and then the global pandemic – could only stand in the way for so long. It’s testament to the strength of the CDC idea, and the urgent need for a new type of pension, that it has enjoyed cross-party support since the early days and has withstood the crises of recent years.

CDC reduces volatility by planning for the long term, spreading investment risk across all members. Compared to individual-based Defined Contribution (DC), this offers distinct advantages.

The collective nature of CDC frees schemes up to invest for a good return. It also insulates members against the jeopardy of DC. CDC offers a reliable income for life, rather than a pot of savings that individual members must manage as best they can. And members nearing retirement are protected against sudden drops in equity value without having to switch to bonds and lose out on any last-minute equity growth before they access their pension.

It was the promise of an income for life that attracted the Communication Workers Union (CWU) to the prospect of CDC when Royal Mail proposed replacing its DB pension fund with DC. Supported by First Actuarial, CWU’s negotiations with Royal Mail resulted in a proposal for CDC, marking the start of the journey that eventually led to UK legislation.

The CDC scheme agreed between Royal Mail and the Communication Workers Union will open soon after the August 2022 go-live.

Master trusts and multi-employer schemes

CDC schemes sponsored by a single employer such as Royal Mail are only the start. CDC is a natural fit for master trusts catering for both multiple employers and individual members of the public. It also allows for larger employers that want to start a CDC scheme of their own.

Speaking on 28 March at the Royal Society of Arts (RSA) CDC Forum, Guy Opperman, Minister of State for Pensions said that “we should capitalise on the enthusiasm that is building for extending CDC to other types of pension scheme, such as multi-employer schemes and master trusts. I am keen to move quickly, but we must get this right if it is to work. That is why I am calling on all those who are seeking to deliver the full benefits of CDC to work with us to help make this a reality.”

The possibility that Nest, the scheme set up by the government, could be developed to offer CDC was also discussed at the RSA CDC Forum. This takes me all the way back to 1998, when I proposed a national CDC scheme to the new Labour government’s stakeholder pension consultation.

Two and a half decades later, an employer switching from DB to individual DC provision need not write off the idea of moving later to CDC. Employees with individual DC pots will then be able to transfer them to a CDC scheme and convert them into a CDC pension. A CDC pension is likely to be higher than a pension annuity purchased with a DC pot at retirement.

Other recent and upcoming CDC developments

The Pensions Regulator’s (TPR) consultation on its draft code of practice for authorising and supervising CDC schemes closed recently. With a strong focus on quality of member communications, the code takes a detailed look at the administrative, governance and IT systems that will have to be operational before a CDC scheme application can be considered.

Meanwhile, the Minister of State for Pensions is planning a DWP (Department for Work and Pensions) consultation later this year on the design principles for CDC schemes catering for both multiple employers and individuals.

What should we make of these recent developments?

On the positive side, both the CDC regulations and TPR’s code of practice are written to cater for CDC master trusts. Very few changes will be needed to the legislation and regulations to accommodate master trust CDC. Hopefully, then, it won’t be long before master trust CDC is facilitated, and not much longer after that before the first CDC master trusts come on to the market.

On the negative side, the code is arguably over-detailed. Many in the industry have commented that it is unnecessarily strict and could put the growth of CDC at risk. I’m hoping that the regulations and the code can be applied with a lighter touch where there are no competitive pressures or vulnerable customers.

Towards a brighter future with CDC

Ultimately, CDC will only become mainstream when an employer can join a CDC master trust as easily as they can join a master trust providing individual DC accounts, and when individuals can join a CDC scheme instead of a personal pension.

To help achieve that, First Actuarial will undoubtedly engage with DWP on the development of CDC. We have plenty of ideas on how CDC could be run, for both multiple employers and individuals.

As the Minister of State for Pensions said at the CDC Forum: “CDC schemes have the potential to transform the UK pensions landscape and deliver better retirement outcomes for millions of pension savers.”

It’s great to see that level of political enthusiasm, particularly in such challenging times. Let’s hope that we see master trust CDC developed within this term of parliament.

The post What next for Collective Defined Contribution pensions? first appeared on First Actuarial.

While imposing restrictions on the use of the tax we pay might seem far-fetched, this is precisely what is starting to happen with money loaned to the Government.

The tax received by the UK Government does not fully cover its expenditure, so the Government borrows the shortfall. This is achieved through the gilt market – a gilt effectively representing an IOU from the Government, which promises to pay an investor back their loan at a future date with a small amount of interest paid in the meantime.

The emergence of green government bonds in the UK

Until now, money raised from the sale of gilts went into the Government’s coffers along with our tax payments, and the entire pot was used to cover all government expenditure. The recent issuance of the UK’s first green government bonds changes that dynamic –we now have a hypothecated pool of money (£10bn from the first issuance last month) that is to be spent exclusively on green projects. These include zero-emission buses, offshore wind farms and schemes to decarbonise homes.

Each of us will have our own views on how governments should spend their money. Not everyone will welcome defence spending, for instance, and the foreign aid budget clearly divides opinion, but we have a process for regulating this. Prospective governments prepare a manifesto and the public makes its choice every five years or so. It might not be a perfect system, but it surely has to be better than governments spending money only on projects for which they can raise capital.

Furthermore, it’s worth noting that one school of thought suggests that green government bonds are unnecessary as much, if not all, of this eco-expenditure would have happened anyway.

From the Government’s perspective, however, the issuance of green gilts at the current time is a masterstroke. So great is the clamour for green investments that high demand at the recent green gilt auction resulted in a lower interest rate being paid by the Government than would have been the case if the money had been raised through the sale of traditional gilts.

The Government intends to continue issuing green gilts and, while I have some reservations about the merits of hypothecated borrowing, I welcome the new approach if it genuinely means that there will be an increase in funding for green projects.

It’s worth asking, however, whether green gilts make as much sense for pension scheme trustees.

Should scheme trustees invest in green government bonds?

As investors, trustees might use ESG criteria to shun certain investments. A decision to invest in the shares of a solar panel manufacturer rather than those of an oil company might be perfectly understandable, even if the latter offered higher expected returns.

However, I do not think a consideration of that nature is meaningful when it comes to gilts. Why be so blinkered as to only invest in green gilts when the money raised from traditional gilts is also used to sustain our green and pleasant land? If, as at present, the ‘pleasant gilts’ offer a higher expected return than their green counterparts, then surely the former should be preferred by trustees wishing to hedge liabilities?

Let’s look at two potential reasons for schemes to invest in green gilts:

1. Trustees might wish to allocate part of their scheme’s assets to green projects. Buying green gilts would clearly achieve that – but, with an expected return of just 0.9% per annum, it hardly represents a compelling investment proposition.
2. Green gilts could be used to hedge the scheme’s liabilities. For this purpose, the yield on the gilt is less important – what matters is ensuring that the value of the investment moves in the same way as the liability value when interest rates fluctuate. In such a situation, I remain unconvinced that trustees should be unduly concerned as to whether the gilt is green.

Ultimately, how important is it whether the money a pension scheme lends to the government is used to build a wind farm, to provide free school meals, or to support businesses struggling to cope with a global pandemic?

If you read over the coming months that other pension schemes are starting to invest in green gilts, my advice to you would be to not go green with envy.

The views and opinions expressed in this article are those of the author, and do not necessarily reflect the official policy or position of First Actuarial.

The post No guilt about avoiding green gilts first appeared on First Actuarial.

It seems to me that SHPS is no longer a scheme that serves employers keen to continue offering a DB pension for their employees. But does it really have to be that way? I don’t think so.

The 30 September 2020 actuarial valuation results

The SHPS actuarial valuation results are out, and the contribution rates for benefit accrual are massively up. Again. This is one of several ways in which the interests of employers whose membership is open to new entrants are being sacrificed in favour of employers who have closed their membership.

This need not be the case – the SHPS Trustee could amend its approach so open employers don’t suffer. In the absence of that outcome, however, open employers should seriously reconsider whether it’s tenable to continue with accrual in SHPS.

The interests of open and closed employers are in conflict

Years ago, most employers in the SHPS had employees accruing DB pension and were open to new entrants. When employers are similar to each other, an industry-wide pension scheme can serve all its employers, with roughly acceptable cross-subsidies between them.

Over time, changes within the SHPS have mirrored the trajectory of the pension industry as a whole. Employers whose DB membership of SHPS is open to new entrants are now in the minority. The majority of employers have either closed to new entrants or closed to accrual entirely. This has resulted in a conflict of interest between employers whose DB memberships are open to new entrants and employers who have closed their DB membership.

The respective circumstances of open pension schemes and closed pension schemes are fundamentally different. A closed scheme is running down, so the benefit outgo may exceed contribution and asset income, requiring realisation of assets to pay benefits. The investment time horizon is finite and shortening all the time, increasingly limiting the scope to make rewarding investments. And there has to be an eye on an end game, which may involve an insurance buy-out or consolidation.

In a prudently funded open scheme, on the other hand, contribution and asset income is likely to be in excess of benefit payments, if the active membership has not greatly shrunk. The investment time horizon is long, opening up the scope to make rewarding investments, which will pay for benefits and keep contributions down. An open scheme may have funding in place for the day it eventually closes, but while it’s open, it can and should invest appropriately for an open scheme.

The Pensions Regulator, in its thinking about the long-term funding targets, has addressed this. The Regulator has proposed that maturing schemes should work towards a high degree of independence from their employers, and that funding and investment strategies should recognise this. But the Regulator also recognises that an open scheme may not be maturing, and therefore need not move down the path to independence until increasing maturity indicates that it should.

This gives the SHPS Trustee a fundamental problem. The SHPS funding and investment strategies are suitable for a maturing scheme, and that makes them unsuitable for an employer open to new entrants.

Open employers make a greater contribution to prudence

The regulation of private sector pension schemes is required to be prudent. This is generally interpreted as having more than money than is expected to be needed to pay the benefits, to be on the safe side. It’s helpful to think separately about the best-estimate cost of providing benefits – which is what we expect to happen – and the prudent additional funding above best-estimate.

There are two ways to add to the prudent additional funding – deficit contributions and contributions for future service in excess of the best-estimate cost. All employers pay deficit contributions, but only those employers still accruing benefits make contributions in excess of the best-estimate cost of those benefits. Open employers, then, are making bigger contributions to prudent funding than closed employers.

Employers auto-enrolling into DB are overpaying most for benefit accrual

Different employers have different entry strategies. Some open employers may auto-enrol into a Defined Contribution (DC) scheme, with SHPS DB being an additional option for employees. Such a policy is likely to result in fewer entrants to SHPS DB and an older active membership. Other open employers may auto-enrol into a SHPS DB section. These employers are likely to have younger active memberships, and will be overpaying the most for their benefit accrual.

The allocation of deficit contributions is unfair to open employers

Up to and including the 2014 SHPS valuation, every increase in deficit contributions was identified separately, building up to four layers of deficit contributions, each with their own expiry date.

The first two layers of deficit contributions were expressed as a percentage of active members’ salaries, but this policy ceased to be tenable as an increasing number of employers closed to new entrants or closed to accrual. The third and fourth layers of deficit contributions were divided in proportion to an employer’s liabilities.

After the 2017 valuation, the original percentage of salary deficit contributions was abolished and replaced with deficit contributions in proportion to liabilities. This caused a noticeable change of deficit contributions for some employers (typically those who had been in SHPS for a long time). Also, after the 2017 valuation, instead of adding a fifth layer of deficit contributions, the layers were merged into one and divided in proportion to accrued liabilities. This caused a noticeable increase in deficit contributions for those employers who had been in SHPS for less time. Yet employers who have been in SHPS for the least time have paid most for their benefit accrual.

The introduction of a single stream of deficit contributions is unfortunate for open employers. Because they’re open to accrual, the additional liability attracts deficit contributions away from closed employers. Even if everything had gone as expected between the 2017 and 2020 valuations, the share of deficit contributions picked up by open employers would still have increased and the share of deficit contributions paid by closed employers would have decreased. Yet in the meantime, the open employers will have paid a prudent (i.e. more than enough) contribution for their accruing benefits.

Bad news for open employers

The 2020 valuation results are bad news for open employers. Their contribution rates for accruing benefits have increased greatly, and they are paying for:

• An investment strategy which is more cautious than warranted for open employers
• High contribution rates for accruing benefits, partly due to excess caution in the investment strategy and partly due to prudence in the discount rate, which affects younger members more
• A method of setting deficit contributions which attracts deficit contributions away from closed employers.

What can the SHPS Trustee do?

Planning within SHPS could be divided into two: one part for closed and closed-to-new-entrants employers, the other part for open-to-new-entrants employers. The latter could have a funding and investment strategy of its own, more suited to open employers. This would eliminate the cross-subsidy from open to closed employers.

A formal division of SHPS into two would be a complex project, but I don’t think this is necessary or desirable. The SHPS Trustees could think separately about funding and investment strategies for open and closed employers. They could also consider best-estimate costs and additional prudent funding separately. The signed-off SHPS valuation (and investment strategy) would be the sum of the two parts.

What can open employers do if the management of SHPS is not reformed?

If big enough to justify it, open employers can bulk transfer out of SHPS into their own scheme, and continue to accrue benefits in a scheme in which the funding and investment strategies are suitable for them.

Otherwise, open employers need to consider carefully whether continuing to accrue benefits in a scheme that doesn’t serve the interests of open employers is the right thing to do.

The views and opinions expressed in this article are those of the author, and do not necessarily reflect the official policy or position of First Actuarial.

The post The end of Defined Benefit accrual for housing employees in SHPS? first appeared on First Actuarial.

So why is the pensions industry still sending information to scheme members that is at best off-putting and at worst baffling? Why do so many pensions documents get filed or even binned without ever being read by the person they were written for?

And I’m not just talking about documents. If someone’s first experience of a member website isn’t a positive one, it will be hard, if not impossible, to get them back.

That’s why we decided to focus on the member experience when we updated our administration strategy recently. It couldn’t be more important to produce information that members are happy with, and more broadly to engage with people in the right way.

At First Actuarial, we take pride in our member-first approach. We have no performance targets in place on our administration team. So if a member calls with a query, we might have to spend up to an hour talking them through it. We’re happy to do so. We don’t want targets to get in the way of giving individual members all the help they need.

And yet, we found that much of the information we sent out to members was nowhere near as digestible as it could be. So we asked ourselves – how can we improve it? Over the past year, we’ve been making all our communications as clear and concise as possible, delivering information in ways that best suit the needs of our members.

Here are 10 ways we’ve improved our member communications.

We’ve moved from Plain English to understandable English

Many organisations seem to obsess over Plain English guidelines But ticking the Plain English compliance box isn’t the be-all-and-end-all. Plain English, as it’s currently framed, may work well for highly-educated people, but we think understandable English should be our aim.

We got in touch with Quietroom, a consultancy well known in the finance industry for promoting clearer communications. We showed them examples of pension statements we send out to members. They picked out a few words we often use, and told us when those words were in most popular use. One word had peaked way back in 1911! So it was quite humbling.

We worked with Quietroom to rewrite communications such as retirement packs and transfer value statements. By using familiar phrases like “Your benefits in a nutshell” we aimed to make it easier for members to understand information about their pensions.

We signpost key information in complex documents

Pensions bring members face to face with some of the most important decisions they’ll ever have to make, so it’s important to get the communications absolutely right. Administrators are there to help people make choices. We do this by providing information, so it’s crucial that members understand it.

Quietroom didn’t just help us with language; they also introduced broader communication approaches. As a result, we now highlight particularly important information in lengthy documents with signposting and colour-coding. We outline the contents upfront, to make pension statements less bewildering. We may then ask – what do you want to do next? That’s where the colour-coding and signposts come in. We give them a manageable number of choices, each of which will direct them to a specific section or page and colour code.

This approach is particularly useful with legal information. Member communications are governed by a lot of legislation, which many people find confusing. So we signpost members to the parts they definitely need to read. And we direct them to a section where they’ll find the legal information they need.

We create videos to make information clearer

We’ve started making videos as another way of making information more digestible for members. We will be publishing a series of videos over this year. Our standard retirement pack, for example, will include a link to a short video that will talk members through the contents of the pack. For example, it asks the member whether they’ve received a pack in the last few days and suggests their first step is to check that their personal details are correct.

We are dementia-aware

There seems to be an overall increase in the number of people diagnosed with different forms of dementia so we decided to link up with the charity Alzheimer’s UK. We told them we wanted our administrators to become more aware, to help them deal with dementia sufferers in the best way. 12 of our administrators have now had online training provided by Alzheimers UK. This has given them a good understanding of the issues facing people with dementia.

We’re now considering how to make best use of that training. We aim to put in place specialists in each office who can be responsible for having conversations with members who have dementia.

We actively consider how to handle a range of member needs

Our work with Alzheimer’s UK has led us to consider how to communicate with people with a range of needs. If they can’t understand what we’re telling them, for example, there may be relatives we can speak to. We may also need to allow for powers of attorney. We’re thinking about large-font documentation for the partially sighted. And videos may be more suitable than text for some groups of people. We’re reviewing all our processes with different needs in mind.

We want to deal with death as sensitively as possible

Dealing with deaths is an inevitable part of administration work, and it can make for some very difficult phone calls. In a similar way that we engaged with Alzheimer’s UK, we are planning to engage with Samaritans to see if they can help us. It’s important to provide the best possible support at every stage of life. And for the bereaved, it’s particularly important to make things as straightforward as possible.

We do all we can to combat pension scams

Pension scams have become more prevalent during lockdown. Our administration team has seen a 25% increase in member requests for transfer values and early retirement quotes. That tells us how insecure many people are feeling about money. This is fertile terrain for pension scammers, who prey on financial worries.

We responded positively when The Pensions Regulator (TPR) launched its pledge to combat scams in autumn 2020. We’ve signed up to the pledge, and we’re finding that more and more trustees are asking whether we comply with it.

We’re sending our statement of support to all our clients, reassuring them that we have measures in place to combat scams. Our transfer value packs now contain prominent information about scams, including warning signs and useful websites. And a QR code takes members to a television advert produced by TPR and the Financial Conduct Authority.

Over the past year we’ve received more and more calls from claims management companies asking for all the details of an individual’s transfer values, supposedly under GDPR (General Data Protection Regulation). This scenario is not covered under GDPR legislation, however. To make sure that we are handling these enquiries in the right way, we contacted the Information Commissioner’s Office. As a result, we go straight to members and notify them that we’ve received the enquiry. We also look up the company on Companies House.

We have an online facility with Experian to verify identity

Submitting birth certificates to prove member identity has always been problematic, particularly for members with more than one pension, and has become even more so in lockdown. For that reason, we now use an online facility provided by Experian to verify people’s name, age and correct address. This means we can verify 90-95% of members without needing additional evidence of their identity. Again, this is about making processes as straightforward as we can for members.

We engage with industry bodies to foster best practice

We work very closely with PASA (Pensions Administration Standards Association) as part of our commitment to raising standards in pensions administration. PASA provides a good forum for sharing ideas on how best to help members. We’re also working with two working groups to keep member information secure within the Pensions Dashboard currently in development.

Member experience is something we discuss with The Pensions Regulator and other third-party administrators every quarter. Combatting pension scams is very much part of these conversations. Together we identify trends and discuss the best way to manage them.

We channel member feedback into continuous improvement of our services

We’ve always been keen for members to give feedback, and we’ve acted on ad hoc comments received on phone calls and emails in the course of our work. However, we realised that we had no mechanism in place to make it easy for members provide feedback whenever they wanted to.

To formalise member feedback, we started with our at-retirement processes. When a member has retired, we send them a letter to confirm their payments. We’re now adding a QR code, for smartphone users, and a link for all devices. If they click on either of these, they can answer three questions:

1. Are you satisfied with the way we’ve dealt with your retirement?
2. Has First Actuarial kept you informed throughout the process?
3. Did we keep you informed of the timescales involved?

These simple questions are designed to encourage as many members as possible to respond. There’s also a free-text field for further comments.

If this proves popular, we’re likely to extend it to other areas of admin work, starting with transfers.

The litmus test of our service and communication improvements isn’t what we think, but what our members think. Are they happy with everything we’ve done? If not, what have we done wrong? And is there anything we could do to make it even better?

Engaging with members in this way is key to continuous improvement of our services, and the way we help them understand their benefits. It’s how we meet members’ needs in a constantly changing world.

The post 10 ways to improve communications with pension scheme members first appeared on First Actuarial.

As scheme administrators, First Actuarial is in the front line of the fight against pension scams. We can give trustees every reassurance that we’re taking this problem very seriously. We’re committed to doing all we can to protect members’ savings.

We have given our full support in recent years to initiatives promoted by The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) that attempt to eradicate pension scams.

In 2020, TPR asked trustees, providers and administrators to pledge to do all they can to protect scheme members and follow the principles of the Pension Scams Industry Group (PSIG) Code of Good Practice. First Actuarial has signed up to this pledge as part of our commitment to stopping scammers in their tracks.

We make sure our administrators comply with this pledge along with all legislative requirements and industry-wide guidance. And we give them the training they need to spot scams and help combat this ugly side of pensions.

Our anti-scam measures include robust processes in the following areas.

Communicating the risks of scams to members

Our transfer value documentation meets the requirements set out in TPR’s pledge to warn members about pension scams on a regular basis. The steps we take include:

• Enclosing a copy of the Be ScamSmart leaflet, jointly published by the FCA and TPR, with all transfer value quotations that we issue
• Enclosing a copy of a letter on pension scams jointly prepared by TPR, the FCA and the Money and Pensions Service
• Encouraging members to get impartial guidance from Pension Wise
• Highlighting the different forms pension scams may take
• Providing members with links to websites where they can find out more about pension scams.

Due diligence on pension transfers

We carry out appropriate due diligence with thorough checks on pension transfers. We then document those checks. The steps we take include:

• Making sure that members have obtained appropriate independent financial advice where the unreduced value of their benefits exceeds £30,000
• Checking that all advisers are authorised to provide advice on transfers, by making sure the details provided match those on the FCA register and that the firm involved is not a clone firm
• Carrying out due diligence on all transfers, and following the process set out in the PSIG Code of Good Practice where further due diligence is required
• Raising any concerns we have about a transfer with our technical team for review and guidance
• Informing clients if we suspect a transfer request may be a pension scam.

Training and keeping our knowledge up to date

Our technical team analyses all pensions legislation and guidance. They provide regular training to our scheme administrators. This includes any updates to guidance and relevant codes on pension scams from the regulators.

A number of our employees also attend industry seminars on pension scams run by bodies such as the Pensions Administration Standards Association (PASA) and the Pensions Management Institute (PMI).

Embedding scam awareness in all documentation

There are three key areas of communication warning members about scams covered in the pledge and we are embedding these in our communications.

Annual benefit statements
We recommend that schemes that issue annual benefit statements include links to the ScamSmart section of the FCA website and include a copy of ScamSmart leaflet.

Transfer value documents
As stated above, we give full warnings of scams in all our transfer value documentation.

Client websites
Where members have access to a scheme website or portal, we recommend that it displays warnings about pension scams.

First Actuarial’s commitment

First Actuarial is committed to protecting members from scammers and will continue to look at ways to help members understand the risks out there and what they need to consider when approached by these predators.

The post First Actuarial’s pledge to combat pension scams first appeared on First Actuarial.

And then the world went crazy.

As lockdown approached, the big question for First Actuarial’s payroll team was – how were we going to manage 162 payrolls and pay all their pensioners from home? Aside from getting to grips with the new structure, a real practical issue was that almost everyone worked on desktop computers rather than laptops. Thankfully the firm shared our concern, and the payroll team was prioritised in the race to equip every employee with a laptop before the country locked down.

A second challenge was the team’s payroll processes. We worked with printed reports and each payroll run would generate a file full of paperwork. The pandemic forced us to go paperless, almost overnight.

The worst possible time for our payroll team

For two specific reasons, lockdown could hardly have happened at a worse time of year – we were bang in the middle of annual pension increases and the tax year-end loomed. A real double whammy.

When First Actuarial’s administration calculates the annual pension increases, we import the new amounts into our payroll system. Reconciling the payroll from the previous month to the current one is complicated not only by these increases, but also by any irregular or suspended payments and, sadly, deaths.

That would be painful enough for one payroll, but we had 162 to manage, and the vast majority of them schedule their increases for April. Previously, people had colleagues on hand who could help straight away. The team pulled through, and managed to hit all its targets and deadlines, but it was a tough time.

Across our 175 payrolls, we pay almost £24m gross each month to 37,235 pensioners, including 1,208 who live overseas.

Although the end of the tax year is less onerous than it was before HMRC introduced Real-Time Information, the volume of payrolls we’re handling makes it very challenging. And we still have to check the figures before we submit them.

2020 delivered yet another difficulty when the Government delayed the budget, which had a knock-on effect on the year-end software update. This gives us data such as the personal allowance increases. The resulting squeeze on the time available for year-end impacted us all.

All of this was a real baptism of fire for Gary in his new role as national manager, but life wasn’t much easier for the rest of the team. People had to hit the pension increase and year-end deadlines while adjusting to working entirely on screen. What helped was that Peterborough had, under the previous structure, managed payrolls for two other offices, so they could share their experiences of working remotely. The new national team got stuck in – banding together and working through it all.

Managing Change

At this early stage of the pandemic, people were grieving the loss of normal life and grappling with very real challenges on the domestic front. Gaining key worker status for our payroll team was enormously helpful. At the end of the day, if we can’t work, pensioners won’t get paid. Key worker status made a big difference to colleagues with children at school or nursery, reassuring us that we’d be able to work uninterrupted.

Throughout this extraordinary period, the payroll team has managed this change without missing a single deadline or delaying a single payment to 37,235 pensioners who depend on us for their retirement income.

We all adapt to change in different ways, and people did worry about sitting on their own with no team around them. From working side by side in office-based teams, they were suddenly working alone in a remote location as part of a national structure. And not everyone knew all their new colleagues.

We set up a group chat on Microsoft Teams for the entire payroll team, where anyone could raise questions or discuss issues. People quickly got used to video calls and liked being able to see who they were speaking too. They began to feel less stressed and isolated.

Throughout this extraordinary period, the payroll team has managed this change without missing a single deadline or delaying a single payment to 37,235 pensioners who depend on us for their retirement income. Working under that pressure every month at home on your own is not easy. But as a team, we all met the challenges we faced.

Everyone stepped up brilliantly

If we’d all been in the office, the change would have been much slower. People would have struggled to get out of the habit of paper files and print-outs. But the pandemic has accelerated a lot of business processes, and payroll is no exception. It’s turned out well.

People got to know each other, and light-hearted chat began to appear amid the work-related queries. Everyone stepped up brilliantly. So in a lot of ways, lockdown made it easier to form one big team. Without it, we would have taken longer to gel and break old habits.

We’ve been really impressed with the team and the hard work and team spirit they all demonstrate on a daily basis. They’ve done an amazing job over the past year.

We truly believe that home-working has benefited us all. It’s made everyone feel like one team. It’s been great to see everyone getting to know each other and working together.

Payroll is pressurised work and lockdown isn’t easy for anyone. Since March 2020, the team has taken on 13 new payrolls. Across our 175 payrolls, we pay almost £24m gross each month to 37,235 pensioners, including 1,208 who live overseas.

With other areas of work, if you miss a deadline by a day or two, it’s not the end of the world. But with payroll, if you don’t get the work done, checked and transmitted on time, people will be paid late and may have to go without.

We’ve been really impressed with the team and the hard work and team spirit they all demonstrate on a daily basis. They’ve done an amazing job over the past year.

The post Running pensioner payroll in the pandemic – The best of times and the worst of times first appeared on First Actuarial.

Trustees should have already updated their Statement of Investment Principles (SIP) with details of their voting arrangements with asset managers, and will need to include an Implementation Statement in their next scheme annual report and accounts.

One of the new requirements is that trustees must monitor the voting practices of their investment managers, with full consideration of significant votes.

Rather unhelpfully, the concept of a significant vote is not defined in the legislation, and The Pensions Regulator has not issued guidance. We are aware that some consultants – possibly because it’s the easiest solution to yet another disclosure requirement – intend to leave it to investment managers to determine which votes were significant. This is akin to asking managers to mark their own homework – a fundamentally flawed approach.

It is also an opportunity missed, in our view. First Actuarial supports the underlying principles of these new requirements. Holding up the voting record of investment managers to closer scrutiny is right and proper, and a robust process, if well designed, need not be onerous for trustees.

Any feedback generated by the process should encourage investment managers to take their voting responsibilities seriously. At First Actuarial, trustees and sponsors increasingly ask us to help them make a positive impact on issues such as climate change with their investments. Voting at shareholders meeting is one way that shareholders can make a difference in such areas. To achieve this, it’s crucial that fund managers’ votes align with the aspirations of the scheme. This is why we are so keen to draw out the differences in fund managers voting records and to ask fund managers to justify their actions.

Significant votes – First Actuarial’s approach

For this reason, we have developed an approach that provides meaningful analysis of investment managers’ votes in a way that is simple for trustees to implement.

We start with the results of more than 20,000 votes held at the AGMs of companies listed in major developed markets during the previous year. This data is provided by PIRC, corporate governance specialists who carry out voting and engagement activities on behalf of organisations and pension schemes.

We group the voting data into eight categories and, within each category, we rank the votes in order of the proportion of shareholders voting in favour of each proposal.

Our view is that significant votes are those that sit in the middle of the rankings. These tend to be closely contested votes, indicating that the action of an individual investment manager may have had a meaningful impact on the outcome.

Our approach means that we can compare the voting records of different managers in a meaningful way and, for additional context, we also provide a comparison with the voting history of local authority pension schemes (as implemented by PIRC).

Significant votes – Our key findings

We recently completed our first voting analysis, based on data for the year ending 31 March 2020. Here are some of our key findings.

Environmental and socially-focused resolutions

In this category, votes are brought by shareholders with proposals typically seeking to require companies to take action on environmental or social matters.

Our analysis of the five most significant votes in this category (and indeed of the longer list of votes) indicates that Manager B is less likely than their peers to support shareholder proposals of this nature.

On the back of our research, we have requested a meeting with Manager B to discuss their practice towards voting on shareholder proposals. Such action is what the legislation envisaged – ensuring investment managers are held to account over their voting practices.

Manager B has recently announced a change in approach, meaning it intends to vote in favour of more shareholder resolutions aimed at tackling climate change. We are monitoring this position to see if this is delivered in practice.

Active fund manager

In the chart below, we present our analysis of significant votes for an active manager which, we have previously concluded, has firmly embedded Environmental, Social and Governance (ESG) issues in their stock selection procedures.

At first glance, analysis of their voting record in significant votes is surprising. This is a manager who seems inclined to vote with management on director-brought proposals (the first six categories), while mainly opposing shareholder votes.

However, this manager has actively selected the companies in which it invests and their favourable assessment of the management of those companies will have been a key factor in its decisions. It is perhaps unsurprising then that Manager E tends to vote in favour of the management boards.

Nevertheless, we have asked them to provide an explanation for some of their voting. For example, the manager’s own voting guidelines states that it will “consider voting against the auditors’ appointment if we have concerns about their independence, level of non-audit fees”. Yet they voted in favour of all five of our most significant votes in this category, including the Royal Caribbean resolution where a significant majority of shareholders voted against.

In the final two categories (votes brought by shareholders), the manager frequently opposes the proposals. The manager responded very quickly to our queries in this regard – generally with answers which we considered to be reasonable. For example:

“C.H. Robinson – resolution 5 – Adoption of greenhouse gas emissions reduction targets – We opposed a shareholder proposal to adopt greenhouse gas emissions reduction targets which in our view is too prescriptive and not aligned to the company’s business model.

“We opposed this shareholder proposal as we believed the company were making progress in this area. We have engaged with the company on its approach to climate change and responsible transportation and continue to encourage progress.”

Passive manager

Finally, we have identified an investment manager which only votes on stocks held within actively-managed mandates. If trustees invest in one of their passive funds, the manager does not exercise voting rights at all. For those wanting their fund manager to have a positive impact on the world and society with their voting, this is likely to be unacceptable. If this manager is asked to provide their voting record in significant votes, it is likely that they will provide examples from the votes cast on stocks held in their active mandates. They are unlikely to disclose that they do not vote on passively-held companies.

Audit and reporting

Votes in this category are brought by the company management, and represent a request for shareholders to sanction the directors’ preferred way of proceeding, for example by agreeing to the appointment of auditors or to accept the accounts.

The importance of a robust audit appointment process is increasingly recognised. Scandals such as Enron, Parmalat and, more recently, Wirecard, could have been avoided under a more rigorous audit regime. A periodic change of auditor can be an important safeguard against such problems being repeated or overlooked.

The voting records of four major investment managers in our five most significant votes in this category are shown below.

Although we only show five votes here, our analysis considers many more votes and certain patterns are repeated. Managers A and C consistently demonstrate a willingness to vote against company proposals in this area, whereas Managers B and D are much more inclined to vote with management.

If either Manager B or D were asked to provide details of how they voted in significant votes, we consider it unlikely that they would readily provide information suggesting they are more willing than many of their peers to wave through auditor appointments.

Investment manager voting – Nowhere to hide

The new legislation offers an opportunity to look at investment managers in a different way, and we are optimistic that this will lead to more responsible voting over time. However, in order to hold investment managers to scrutiny, it is vital that managers are not allowed to determine which votes are significant.

Our approach makes it easy for trustees to undertake a robust analysis and leaves investment managers with fewer places to hide.

The post Your Implementation Statement – How to go beyond the tick box and get real value first appeared on First Actuarial.

The Annual Allowance – Cutting through the complexity

The NHS Pension Scheme is a key part of the total reward package for the NHS workforce and provides great value for money for much of its membership. However, our research into the impact of pensions tax in the NHS showed that the Annual Allowance was a material concern for some members. Pensions can be quite difficult to understand at the best of times and the Annual Allowance brings in even more complexity. 

For this reason, we were delighted to work with NHS Employers to design and build a ready reckoner to raise awareness of this complex and sensitive issue. We designed and developed the ready reckoner with user experience as a priority. To make the tool simple and easy for NHS staff to use, First Actuarial’s development team ran a series of feedback sessions on the look and feel of the tool. 

NHS Employers provides guidance for staff for each required input, and help is also integrated into the tool. The ready reckoner can be used on any computer or mobile device.

A key output of the ready reckoner is a simple risk indicator of the user’s Annual Allowance position, which works as a traffic light system:

• Green: The employee is projected to be well under the Annual Allowance.
• Amber: The employee is projected to be reasonably close to the Annual Allowance.
• Red: The employee is projected to breach the Annual Allowance (although the scheme may well continue to provide good value).

For some members, the tool will indicate the need for further investigation and possibly professional advice.

NHS Employers is keen to emphasise what the tool does and does not provide. The ready reckoner gives members an Annual Allowance risk indicator rather than a definitive statement of the member’s tax liability. The Annual Allowance, like all pension calculations, is complex, involving a huge number of variables, not least other sources of income such as investments and rental properties.

NHS Employers is proactively encouraging managers and HR professionals to use the tool, with guides, webinars and videos available for employers. For NHS employees who have concerns about the Annual Allowance, the tool provides a valuable risk indicator, and can help consider next steps such as discussing potential tax liability with an accountant or an Independent Financial Adviser. And that’s exactly what First Actuarial designed it to do.

As demonstrated by the development of our ready reckoner, First Actuarial staff are experts on the Annual Allowance and its interaction with the NHS Pension Scheme. We work with employers in the NHS to help employees understand how they are affected and what action they can take. This support is often a two-step process: a group workshop to explain the issues in simple terms, followed by individual guidance session for anyone who needs further help.

The post NHS Employers launches First Actuarial’s NHS Pension Scheme Annual Allowance and tax ready reckoner first appeared on First Actuarial.

The answer was clear. We want to help employers flourish, with a DB funding code that does nothing to hold back business growth. We want members to benefit from any funding changes. And we’re keen to minimise any regulatory change, as there’s not a great deal wrong with the status quo.

We came up with seven objectives which, if achieved, would bring about meaningful improvements to DB funding, benefiting schemes, sponsors and the members they serve.

1. Society should provide pensions efficiently

Providing pensions collectively is far more cost-efficient than an individual pot. Having both active members and pensioners in a scheme means contributions for current workers can provide for pensioners without the need to pay investment managers to sell and buy assets. And in collective schemes, members pool mortality risk, so there is no need to buy costly insurance, and no risk of running out of money.

Providing pensions efficiently is good for members, employers and society as a whole. So regulatory change should not result in more schemes closing or winding up.

For some employers that sponsor schemes open to pension accrual, the Regulator’s proposed funding code will result in higher contributions and cautious investments that will combine to make scheme closure the only realistic option. This doesn’t just mean a switch to less efficient individual pots; it also has a negative impact on employee relations, with a potential knock-on effect on business growth.

2. Schemes should invest productively

Investments in productive assets (i.e. assets that can generate profits and cash flows in line with inflation) play a crucial role in making the value of pension benefits higher than the original contributions made. By contrast, at the time of writing, every £1 invested in (non-productive) gilts for a 45 year old scheme member will be worth only 46p by the time that individual is an 80 year old pensioner.

The Regulator’s proposals push schemes towards more risk-averse investments, which guarantee that schemes will make a loss in real terms. That goes against the whole principle of pre-funding pension provision, by which we deliver on the pension promise to members with returns that make it affordable to employers.

3. A change in regulation should benefit members

The proposal introduces a real possibility of increasing scheme funding without delivering any additional benefit for scheme members. Yes, schemes may be funded at a higher level, but many would still end up in the Pension Protection Fund (PPF) in the event of insolvency, with no additional benefits for members. In the meantime, the employer would have less money available to fund pay rises, contributions to replacement DC schemes or investment in new jobs and production.

If employers are mandated to increase scheme funding, they should at least be able to invest those extra funds in productive assets, with some of the additional returns trickling down to members.

4. Build on PPF provision for all schemes

The introduction of the PPF marked a significant step forward in protecting DB pensions, and means schemes should be able to fund at a level where they expect to be able to pay all their benefits long term and to invest productively. If all schemes are required to overfund their benefits and invest scheme assets over-cautiously in bonds and to pay PPF levies at the same time, we are effectively requiring double insurance.

When DB members end up in the PPF, it is often seen as a disaster. In reality, however, members are often better off with the slightly reduced benefits of the PPF than they would have been with full provision from a typical DC arrangement. And if PPF compensation is considered insufficient, then the answer is to increase it.

5. Preserve the ongoing covenant between employer and employees in open schemes

We see a DB scheme that is open to new members as an ongoing covenant, or two-way commitment, between an employer and its past, current and future employees.

Employers provide their employees with pensions in an efficient way that allows them to attract, retain and retire staff in line with business needs. In return, members receive good quality pension benefits, while accepting the risk of PPF-level benefits if their employer becomes insolvent.

Deferred members who don’t want this deal can transfer benefits into a Defined Contribution arrangement, with all the risks and rewards that go with that. While pensioner members are unable to transfer, they face a much smaller reduction of benefits within the PPF.

6. Put an end to generational inequity in open schemes

All generations need pensions. Yet the proposal prioritises older generations (deferred and pensioner members) over current and future generations of workers.

Many schemes that close to new members are at the same time forced to make huge investments in loss-making assets to pay for the past pensions of active, deferred and pensioner members.

How can it be right to ask employers to divert significant resources into overfunding pensions for older generations at the expense of younger people?

7. Maintain the efficiency of open collective schemes

Every scheme closure makes it a bit harder for society to provide everyone with a pension.

A successful pension regulation system is one in which employers are willing and able to sponsor continuing accrual of benefits, i.e. keep schemes open to new entrants.

In the building industry, there is a role for demolition companies, but the principal task is construction. That the pensions industry and its Regulator have, in the main, been shutting down pension schemes for the past 20 years is a sign that things are wrong. We need to build both pension schemes and regulations that are fit for the future.

The post Seven ways to improve Defined Benefit funding first appeared on First Actuarial.

At the time of writing there is no sign of a drop-off in transition activity, and we expect that trade volumes will be well over £1bn by the end of the year. That said, we have the potential headwinds of a second wave, of course, as well as the Brexit trade negotiations to get through. Nimble and co-ordinated strategic and implementation decisions will be needed to weather conditions as uncertain as these.

Covid-19 and asset transitions

Part of the increase in activity has resulted from the high levels of market volatility associated with the pandemic. Many of our clients had put triggers in place based on market levels and, with the volatility of the past quarter, these led to increased investment strategy changes and asset movements as thresholds were met.

Many of these trigger strategies were put in place immediately after the initial dramatic market falls that took place early in the pandemic. Time is of the essence with trigger strategies in volatile conditions, and our agile transitions team has been quick to plan and implement a range of changes – sometimes at very short notice – to help individual clients respond to market conditions in the most effective way.

Our team has worked hard with investment managers to make sure all transactions take place as smoothly as possible, and the increased volume of transitions has given us a greater understanding of the individual requirements the different managers have. This has allowed us to become even more efficient when moving money.

Covid-19 has also presented practical challenges brought about by the shift to homeworking. One specific problem has been obtaining the necessary signatures, something that was much more straightforward in office life. Through conversations with asset managers, we have worked hard to identify all the signing options available to trustees, negotiating concessions where possible. Trustees are now able to authorise and instruct transition activity while working at home in the vast majority of cases.

The real secret to First Actuarial’s transitions success

Moving large sums of money – sometimes hundreds of millions of pounds – is laden with risk. The consequences of getting an asset transition wrong can be very costly. Scheme trustees need to be able to put their trust in the people who move money on their behalf. They can only do this with highly professional and experienced advisers.

Our dedicated transitions team is led by specialists with decades of experience across a wide range of investment managers and asset classes. The two team leaders, Mitesh Dayalji and Andrew Grant, share almost half a century’s investment experience, including 17 years dealing exclusively with asset transitions.

We are highly practised at handling the differing requirements of all the fund managers. We know that the biggest risks with asset transitions are getting the amounts or the timing wrong, so that’s what we focus on. We mitigate those risks by combining our professional expertise with robust and proven processes.

Another reason for our growing popularity among trustees is our competitive fees. With no external shareholders to answer to, we are free to charge a fair price for the job and we have no target chargeable hours. Our efficiencies, coupled with the nature of First Actuarial, make our fees lower.

Our investment services business model is to employ advisers who are experienced and capable of providing good quality advice efficiently. Whereas other organisations assign junior staff members to more modest-sized schemes, we provide experienced resource every time. Our clients seem to appreciate that. And there’s nothing to stop trustees from using one firm for investment advice and then working with First Actuarial to arrange the asset transition. We work flexibly under such circumstances, and expect to see a growth in transition-only mandates this area in the coming years.

Demand for our investment services has increased exponentially over the past five years, and our wider investment team has grown with it. The success of our investment team has in turn has generated more and more asset transition work, allowing us to grow our team. Together, we offer the expertise trustees need to navigate the choppy market conditions we’ve all come to expect.

The post Record growth for First Actuarial’s asset transitions team first appeared on First Actuarial.

First Actuarial discussed the issue with PIRC, corporate governance specialists who carry out voting and engagement activities on behalf of organisations such as local authority and trade union pension schemes. “We suggested that PIRC launch their own pooled fund and explained how they could do this,” says Rob Skelton. “We helped them select The Asset Management Exchange (AMX) as the platform provider best suited to create this new pooled fund and build a cost-effective solution using best in class providers. In turn, AMX has appointed State Street Global Advisors to carry out portfolio management for the fund.”

The newly-launched Enhanced Governance Fund brings together the respective strengths of the partnership:

• AMX provides rigorous governance and risk oversight of the fund
• State Street Global Advisors tracks the MSCI World Index cost-effectively
• PIRC exercises shareholder voting rights following its robust and independent voting guidelines.

The Shareholder Rights Directive and ESG requirements

Pension schemes are already required to state in their Statement of Investment Principles (SIP) how they are tackling ESG issues, and voting at shareholder meetings should be a key part of their approach. Voting at shareholder meetings gives pension schemes influence over companies’ governance and behaviour, including how companies adapt to climate change, treat their employees, and impact wider society.

The EU’s Shareholder Rights Directive (SRD2) makes this key element of pension schemes approach to ESG an urgent issue for many scheme trustees. Under SRD2, schemes become more accountable for their voting as institutional investors. Trustees have to state publicly how they are implementing their stewardship policies and disclose how their significant votes were cast.

“First Actuarial’s investment team takes ESG very seriously, and we apply an ESG rating to each of the funds our clients use,” says Rob Skelton. “PIRC’s voting services – which include promoting sound governance, responding effectively to climate change and fostering good employment practices – cover the full range of ESG issues. Their independent outlook provides a genuine alternative to fund manager block voting, especially in areas like executive pay and director appointments.”

Hilary Salt, partner at First Actuarial, concludes: “This is a real breakthrough on a problem we’ve been trying to solve for over thirty years. I’m proud and delighted that First Actuarial has played a big part in making the PIRC and AMX partnership happen. For decades, our clients – in particular our trade union clients – have been pressing for a shareholder voting alternative based on long-term capital stewardship values. With this solution, more votes will be cast in ways that deliver on those aspirations. And it will be open to all schemes – large or small. Trustees will be able to make full use of the value of their shares, which includes voting rights.”

Notes to editors

1. First Actuarial was set up in 2004 as a partnership with no external investors. We work with employers and trustees, providing the right blend of actuarial, consultancy, administration and investment services for every scheme we work with, building long-term relationships based on trust. First Actuarial is widely considered to be a trusted source of independent expertise on pension policy. We play an active role in government and industry affairs.
2. The Asset Management Exchange (AMX) is an institutional platform which gives investors and asset managers a way to do business with each other. Built with a fund infrastructure designed for the needs of institutional investors, AMX standardises, centralises and streamlines the entire process of investing so it works better for everyone. Established by Willis Towers Watson in 2017, AMX negotiates with managers and transitions assets, provides reporting, and adds an extra layer of oversight. The platform is open to all investors and managers across the investment industry.
3. Pensions & Investment Research Consultants Ltd (PIRC) is Europe’s largest independent corporate governance and shareholder advisory consultancy with over 25 years’ experience in providing proxy research services to institutional investors on governance and other ESG issues. PIRC’s range of services is designed to facilitate and support responsible capital stewardship by long-term investors. PIRC is dedicated to help clients effectively exercise their shareowner rights and to identify and mitigate governance risk in their portfolios. Our services are built on incisive, independent research, comprehensive data and extensive engagement with both companies and market participants.
4. State Street Global Advisors (SSGA) created the world’s first Exchange Traded Fund and is an indexing pioneer. As the asset management arm of State Street Corporation, SSGA has, over 40 years, helped clients achieve their investment goals by building active and index strategies across asset classes.

The post First Actuarial gives pension schemes more say over shareholder voting first appeared on First Actuarial.

I’m proud to be chairing a new working group, set up by the Pensions Administration Standards Association (PASA) to address these problems. The Exit Agreement Working Group is setting up a recommended exit agreement for trust-based pensions administration contracts across the pensions industry.

While not mandatory for providers, the exit agreement will act as a template for trustees to use as part of selection procedures and contract negotiations. We’d like to think that in time all providers will comply.

Improving administration transfers – PASA’s long-standing commitment

PASA has a strong track record in driving up standards in this area, aiming to make providers more helpful, fees more reasonable, and the overall process easier. All its corporate members have to sign up to PASA’s Code of Conduct on Administration Provider Transfers.

First Actuarial and scheme transfer improvements

As a successful firm continuing to win considerable new administration business, we have everything to gain from improvements in administration transfer. What’s more, we believe that everyone in the industry stands to benefit. That’s why we’re delighted to be playing a central role in the PASA working group.

In my day-to-day work running First Actuarial’s Administration function, I make sure all schemes get the care and attention they need. Many schemes switch providers to give their members the best possible service. But all too often, they are hit hard with unexpected additional costs, delays and uncertainties at the transfer stage. I’m particularly concerned that large additional costs like this can have a disproportionate impact on smaller schemes.

What the working group aims to achieve

Every member of the working group shares a commitment to bringing about positive behavioural changes when one firm is handing over administration responsibilities to another. The trustee has to come first, even when one firm is exiting the relationship, and there are far too many unwelcome surprises at present.

A more helpful culture will benefit the trustees and the firms themselves. After all, who knows who will be working with whom in the future? We see this as a win-win for the pensions industry as a whole as we all face the challenges that lie ahead.

The post Improving scheme administration transfers – First Actuarial’s Robert Wakefield chairs industry working group first appeared on First Actuarial.

First Actuarial has produced a webinar to help the UK workforce take control of its finances during this challenging time. It’s freely available to all UK employers, who can then distribute it to their staff as they see fit.

The webinar came about when we were talking with our financial wellbeing clients. At the start of the pandemic, they were all keen to support employees in any way possible. Communications were becoming challenging as staff started working from home, and they felt that their employees needed an extra layer of support.

The webinars we delivered to our clients were well received and gave us food for thought. We realised that among the company-specific guidance we provided, such as pension and investment information, there was a lot of general content that would apply to any organisation.

As a result, we have produced a 35-minute webinar, available to all UK employers, with practical tips on how to cope with the current situation from our financial experts, in areas such as:

– Updating the household budget
– Managing pensions and savings
– Coping with financial difficulty
– Avoiding money scams.

The webinar also points to useful sources that can help people manage their physical and mental health.

Feedback on our financial wellbeing seminar

The webinar has been available for over a month now, so we have a clear view of how employers have received it. One HR professional described it as the best half-hour webinar she had ever attended. Others told us that the webinar was useful and practical, and saw that it would help people feel calmer about the life changes they were going through.
A number of HR and Reward professionals reported back that they felt in control of the webinar. Rather than First Actuarial having a separate communication channel with their staff, HR themselves would share it across the organisation. They could choose whether to send it to all staff, or to certain groups of the workforce who would find it particularly helpful. Or they could send it to their HR director in the first instance, to get their view.

Delivering bespoke wellbeing webinars

Once employers have circulated the generic webinar, which is free of charge, many see the value of a bespoke version, which includes organisation-specific information.
Unlike the generic webinar, which is a recording, the bespoke version can be delivered live. Our specialists work with the employer to provide tailored guidance. The employer chooses which areas to cover. These can include:

– Specific how-to guidance on your organisation’s pension scheme, including investment fund options and death benefit forms
– Life assurance policies, and how to update them
– Employee share schemes and other savings opportunities
– Employee Assistance Programmes.

We pitch each area of the webinar at the right level of detail for the employee audience, again, as agreed with the employer.

We provide a live Q&A panel during the webinar itself. We can also put in place one-to-one web chat facilities to help employees address any sensitive issues. Attendees receive a handout and can consult the recording after the event, either in full or in topic-based sections.

In week 11 of lockdown, 350 employees from one organisation attended bespoke webinars we provided. Issues around financial wellbeing and control are clearly as important today as they were at the start of the pandemic.

Planning future financial wellbeing webinars

In conversation with HR and Reward departments about financial wellbeing, and from feedback on this webinar, we’re learning more and more about what people need.

Our Covid-19 and Financial Wellbeing webinar raises the importance of understanding where your money goes, which has led a lot of people to want to learn more. We know that many people really need help in working out how to budget their money. And even if they feel they already know a bit about it, they still enjoy checking that they’re doing it right. And at the same time, they may pick up a new tip or two.

So we can expect our Covid-19 financial wellbeing webinar to be the start of a bigger area of our work, even as life starts to return to normal.

Find out more about our Covid-19 wellbeing webinar

Find out more about our webinar and register to watch and share it, on our Covid-19 financial wellbeing webinar page.

The post Covid-19 and financial wellbeing – A webinar for UK employers first appeared on First Actuarial.

Their research was led by Janet Heath, Independent Pensions Consultant and Secretary to the Trustees. “We are delighted to be working with First Actuarial,” says Janet. “Their friendly and pragmatic approach combined with their experience of GAD-certified schemes made them stand out from the competition.”

Dolce Ltd is an artisan catering company, providing school meals of restaurant quality, freshly cooked using raw ingredients. Established more than 20 years ago, they now supply schools across the UK, and served 11 million school dinners in 2019.

Sam Mullock, a partner at First Actuarial, says: “We are delighted to be working with the Dolce Ltd Retirement Benefits Scheme. We believe that our smart pension solutions will help them run the Scheme efficiently and effectively.”

Sam will lead the First Actuarial team with support from Craig Moran, Carolyn Stanton, Declan Boyle and Emma Fairclough.

First Actuarial LLP is a nationwide partnership with more than 300 staff covering five offices – Basingstoke, Leeds, Manchester, Peterborough and Tonbridge. Each office provides a full range of services. The firm works with a wide range of organisations from small charities to FTSE 100 companies.

The post Dolce Ltd Retirement Benefits Scheme Trustees appoint First Actuarial first appeared on First Actuarial.

What are the key findings, and what does it all mean for trustees and employers with pension schemes?

Mortality Projections – The headline findings

Improvements in mortality over 2019 – at just under 4% – are some of the highest seen over the last 10 years.

This means that for most ages, projected life expectancies are higher than those calculated using CMI_2018, around 0.2% higher for males and 0.4% higher for females. Projected life expectancies remain lower than in all other earlier versions of the model.

Improvements for males aged 97 to 100 are slightly lower than last year.

How does this compare with previous years?

The tables below compare the projected life expectancies from CMI_2019 with previous years:

Technical bit: Life expectancies are calculated using the S3PA mortality base tables, assuming a long-term rate of improvement of 1.5% p.a

Recent mortality trends

Mortality over 2019 has been lower than in any previous year considered (there have been fewer deaths than the long-term average would suggest). This is shown in the solid black line in the chart below.

The same pattern can be found when looking at rates of mortality improvement, which have been well above the average over the last 10 years, again shown by the solid black line in the second chart below.

Differences between populations

While averages are useful, we should bear in mind that mortality improvements can vary significantly between different populations.

The CMI notes that in England and Wales, mortality improvements in less deprived areas have been about 1% a year higher than those in more deprived areas.

These findings are echoed in the recent report Health equity in England: The Marmot Review 10 years on, which demonstrated a clear link between life expectancy and area deprivation.

What does all this mean for pension trustees and sponsors?

Trustees and employers will be keen to gauge the impact of the latest projections. We estimate that for valuations in 2020, life expectancies could be around 1% to 2% lower compared to typical assumptions that may have been adopted three years ago.

Trustees and sponsors with scheme valuations in 2020 may see a small reduction in liabilities as a result of adopting the latest set of mortality projection tables.

The data and charts used in this article have been prepared by and/or on behalf of Continuous Mortality Investigation Limited (CMI). The CMI does not accept any responsibility and/or liability whatsoever for the content. The CMI does not (i) warrant its accuracy; or (ii) guarantee any outcome or result from the application of any of CMI’s work. You assume sole responsibility for your use and for any and all conclusions drawn from its use. CMI hereby excludes all warranties, representations, conditions and all other terms of any kind whatsoever implied by statute or common law, to the fullest extent permitted by applicable law. © Continuous Mortality Investigation Limited.

The post The latest life expectancy figures are out –What do they mean for pensions? first appeared on First Actuarial.

Having looked at GMP equalisation in some detail, we think there will be a number of hurdles to overcome before schemes even get to the point when they can commence work. In this article, I discuss those hurdles and go through the work pension administrators will have to carry out to equalise GMPs.

Identifying the members affected by GMP equalisation

The first thing schemes need to do is to identify those members who have a GMP entitlement built up between 17 May 1990 and 5 April 1997, the GMP equalisation window. Some of those members may now be pensioners (and in receipt of a pension for more than 20 years). Some, either active or deferred members, may not yet be taking their benefits. Others may have transferred out, or had all their benefits settled, by way of a lump sum payment or via an annuity policy in the member’s name.

And of course, some affected members may have died, in which case we’ll have to look at the benefits paid to their survivors.

Does this mean that we don’t have to look at members who joined after 6 April 1997? Yes, providing the benefits they transferred into the scheme – or the benefits they had set up within the scheme as a pension credit member – do not include GMP.

It’s not clear what action, if any, we need to take for those members whose benefits were previously settled. Hopefully the next GMP equalisation ruling in the Lloyds Banking Group case will give us some clarity relating to transfers.

Calculating benefits for the opposite sex

Once we’ve identified all the members affected by GMP equalisation, the next step is to establish the information we need to calculate the benefits the member would have been entitled to had they been of the opposite sex. To do this we need to go back to the point the member left pensionable service, the last point before total benefits diverged for males and females.

For those pensioners who retired as active members, we will need to go back to the date of retirement. A number of questions arise here. Will this information be held on the administration system, or will we need to trawl through the calculations behind the retirement quote to get the information we need? And what do we do if the last scheme administrator didn’t pass us the retirement quote calculations? Will we work back from the current pension and strip out all pension increases to get back to what we believe would have been the starting pension?

All of this may involve us making a number of assumptions, and we cannot be 100% certain at this point that this will be good enough.

Where individuals commuted pension for cash at retirement, do we need to consider whether that decision would have been different had they been of the opposite sex? Are there any members who were restricted in the amount of cash they could take because GMP could not be commuted? Can we just ignore this? Let’s hope so.

For those who retired as deferred members, we will need to go further back from the date they retired to the date they left pensionable service, which could be over 20 years ago.

The big issue here is data. Can we replicate the current pension from the data we hold? If we can’t, then we may need to make some sweeping assumptions when it comes to calculating the benefit entitlement if the individual had been of the opposite sex.

The sorts of issues we are likely to come across at this point is whether we have the full history of part-time/full-time hours, and whether we have details of any late or early retirement factors applied at that time. This information will have been used to determine the total pension at date of leaving or retirement date. A key question is whether the administrator at that time kept that level of detail on the system.

HMRC is helpfully providing administrators with details of the GMP covering 1990-1997 for both the ‘true’ sex and the ‘opposite’ sex, calculated using year-on-year contracted-out earnings. This, together with information from retirement quotes or benefits recalculated from scratch, will then be used to recalculate the benefits at retirement for the ‘opposite’ sex, and then at each pension increase thereafter.

Having established the year-on-year dual records, we will apply the chosen GMP equalisation method to determine the equalised pension benefit, year on year, then compare those with the amounts paid. And where a top-up is required, we will determine the sum of back payments due (including any interest).

For a reminder of the different calculation methods, please see our First briefing on GMP equalisation.

The sums may not be complicated, but it’s a detailed process that is bound to take time.

When can we start equalising benefits?

We’re not in a position to start equalisation benefits just yet. There are still a number of areas where we are waiting on guidance as well as the outcome of the next Lloyds Banking Group court hearing.

The cross-industry working group has identified ’29 dark corners’ – the tricky bits where further thought is needed. The pensions industry is expecting guidance on these later this year, and we think it is sensible for schemes to at least wait until this is available and understood. Only then should they start carrying out individual member GMP equalisation calculations.

In the meantime, trustees and their administrators should be establishing their data requirements and address any gaps in the data.

Work can also start on considering which GMP equalisation method will be appropriate for their scheme. There’s a lot of talk in the pensions industry about using GMP conversion to address GMP equalisation, and that approach may appeal to some schemes. But as it can only be applied prospectively, one of the other methods will need to be chosen for determining back payments for current pensioners. And there is nothing to stop schemes from thinking about that now.

At First Actuarial, we’re aware of the huge amount of calculations that pensions administrators will have to carry out, and we are preparing for that. Once the necessary clarifications are in place and the work can finally go ahead, it will be volume of calculations, much more than complexity, that will be the big challenge with GMP equalisation. To keep costs down as much as possible, we’ll be automating as much of the calculation work as possible. Get in touch with me (see box below) if you need help on the preparation work or simply want to plan ahead.

Wendy Handcock spoke on GMP equalisation at our recent client conference with Duncan Buchanan from Hogan Lovells. A video and slides from the session are available on the First Actuarial client conference 2019 web page.

The post Sorting out GMP equalisation – How hard can it be? first appeared on First Actuarial.

And what a response it is – it’s not often we get a government paper as positive as this one. It confirms that CDC will be brought into legislation in the UK ‘as soon as parliamentary time allows’. For everyone at First Actuarial, but especially colleagues who have worked with me to propose CDC at the Royal Mail, this is a real cause for celebration.

And let’s not forget the wide range of organisations, 79 to be precise, who contributed detailed responses. These include employers and trade unions as well as pensions businesses. We were delighted to see a number of our responses in the document. If you’re interested, these are in paragraphs 24, 107, 111 and 158.

The vast majority of responses were in favour of CDC and keen to see its introduction in the UK, as the Government press release notes. So much for those commentators who claimed there was limited appetite for CDC. The breadth and depth of responses submitted suggest there’s more public hunger for change than some in the pensions industry might think.

Collective DC – the feelgood story that keeps on giving

In fact the whole story of CDC up to now has been an overwhelmingly positive one – from the enthusiastic report on CDC by the Work and Pensions Select Committee and cross-party support to where we are today, on the threshold of legislation and with the Royal Mail aiming to launch the first UK CDC scheme in 2020.

For those who think the day-to-day business has been ground down under the weight of Brexit, this will come as a pleasant surprise. It’s a move that promises real improvements to ordinary people’s lives. Pensions are not a luxury; ordinary working people need an income in retirement, and they need a guarantee that it will last their entire life.

But what the pensions industry currently provides is nowhere near that. In the private sector, we’ve closed a succession of Defined Benefit (DB) schemes and replaced them with Defined Contribution (DC) arrangements, which are more like saving accounts than pension schemes. They give each individual a pot of money at retirement, with no affordable way of turning it into what people really need – a wage in retirement.

You don’t have to be an ‘entitled millennial’ to see how inter- and intra-generationally unfair that is. Across all age groups, people have steadily lost their confidence in pensions, and for today’s employers the whole issue is a nagging headache.

What is CDC?

CDC is designed to bridge the gap between DC and DB. It is DC, in the sense that pension benefits are based on what fund assets will buy. But it leaves behind the scheme deficits of the DB world, as there are no promised benefits. The beauty of CDC is that it can deliver an income for life without defining the benefits upfront.

It achieves this through collective planning. Individual DC is currently based on single pots of money, which rules out the economies of scale that DB enjoys. Collective DC can pool those individual pots into a much larger, and more efficient grouping of assets. And a stream of incoming contributions can be used to pay outgoing benefits directly. This opens up investment in more volatile assets expected to give better long-term returns. Both of these generate significant savings on investment and disinvestment.

These savings translate into better benefits for scheme members.

CDC schemes can also harness the value of longevity risk-sharing: this is the ‘actuarial magic dust’. Think about individuals relying on their own savings pot. Each person needs to save something like 40 years of income to manage the risk of running out of money. But if thousands of people save together, then all that’s needed is 20 years’ of income per individual, equating to the average life expectancy.

CDC also lifts away the burden of managing investments on an individual basis. This is a responsibility that can come as a nasty surprise when individuals first start saving – and again as they approach retirement.

Introducing CDC at Royal Mail

As the consultation response states, the DWP plans to introduce CDC provisions slowly, starting with the Royal Mail scheme. This is where CDC first emerged as a practical idea here in the UK, with First Actuarial playing an instrumental role. We’ve worked with Royal Mail, the Communication Workers’ Union (CWU) and the DWP on the CDC proposal.

The simplified approach that the Government is taking to allow the Royal Mail CDC scheme to go ahead is the right one, I believe. Let’s get the Royal Mail scheme right and then expand CDC to other organisations.

Terry Pullinger from the CWU is strikingly enthusiastic about CDC. As he states in the response document: “We are very proud and ready to be at the forefront of this historic moment which we believe will make a major contribution to offering future dignity and security in retirement for decent working people.”

To read more about the story of CDC at Royal Mail, read our case study and article, Royal Mail, CWU and First Actuarial – History in the making with CDC pensions.

Where does CDC go from here?

Heartening though the Royal Mail story is, nobody wants CDC to end there. I strongly welcome the flexible structure of the legislation which will accommodate variations in the CDC model as time goes on. Other employers are already interested in CDC, and the Government has pledged to work with interested parties to broaden out the legislation once the Royal Mail scheme is established.

With the likelihood of primary legislation being held up by Brexit, it would be good to see work on the regulations start straight away. In time, I’d like to see an amendment to admit mastertrusts and multi-employer schemes. Mastertrusts would be a great way to allow drawdown from individual-based DC and offer improved pension options to the self-employed.

CDC may be new to the UK, but there are CDC schemes already in operation in other countries. We need to scrutinise existing models to make sure the details fit the UK’s own legal and cultural frameworks. Taxation (not covered in any length in the Government’s response) is a particularly thorny issue that needs to be tackled sooner rather than later.

Let’s get the CDC conversation going

Pensions are a society-wide issue, and this is a key moment in their history, so there’s a strong case for making all generic documents public – and welcoming scrutiny. It’s good to see the response document emphasising the importance of clear communication. Like everyone at First Actuarial, I pride myself on communicating in plain English. As the response document points out, ordinary people are likely to misinterpret the financial term ‘best estimate’ as ‘highest estimate’, for example. We must guard against such misunderstandings.

I would raise one concern. There is a tendency to hold CDC to a higher standard than is the case elsewhere in the pensions world – where bamboozling members is commonplace. That’s not to say we shouldn’t hold ourselves to a high standard in communicating CDC. But for members the most important thing is for their scheme to work!

Moving forward with a positive mindset

It really is brilliant to have got this far. Why do I say this? Well CDC is a great example of actuaries working creatively to find a solution to a big problem. We’ve already seen one trade union, CWU, coming together with an employer, Royal Mail, to take a new innovative approach to pensions. And they’ve now persuaded Government to pass legislation to make it happen.

There’s plenty of work to do to bring CDC to fruition, but everyone at First Actuarial is up for it. And we’re more than happy to help if the Government wants to set up a CDC working group.

Think of CDC as the pension equivalent of a greenfield site, a scheme with none of the legacy problems such as aging systems that we hear so much about. We can start with a blank screen and design schemes that meet the needs of the many not just the few. We need more initiatives like this to rebuild Britain and improve standards of living at every level of society.

The post CDC pension schemes are go! UK Government gives green light to life-changing pension innovation first appeared on First Actuarial.

The CWU had grave misgivings about DC, which puts the burden of risk on members. DC is cost-inefficient and produces a highly uncertain pension. And without adequate pension provision, employers can end up with a workforce that can’t afford to retire – as we at First Actuarial often point out.

Our latest case study outlines the negotiations that took place between CWU and Royal Mail, with First Actuarial in a supporting role.

Introducing CDC at Royal Mail

Following months of unsuccessful negotiations, and with the threat of industrial action, we hit on the idea of CDC, or Collective Defined Contribution.

The beauty of CDC, as a number of commentators have since pointed out, is that unlike other DC arrangements, contributions are pooled collectively. Not unlike DB in fact. A collective fund opens the way to more efficient, and less cautious, investment. For Royal Mail, this made for a win-win scenario – efficient use of employer and member contributions, combined with an attractive target benefit.

Relative to DC, CDC removes a lot of the uncertainty and risk for scheme members, who don’t have to choose their own investment strategy or work out how to spend their pot when they retire, in the way they do in a typical DC arrangement.

CDC also means that the scheme can offer a target benefit, which is tested in an annual actuarial valuation, which members can rely on in retirement. This target is a career-average benefit, so it looks like a DB scheme.

A wage in retirement scheme

The phrase ‘wage in retirement scheme’ is one that the CWU coined in the original proposal, and it has certainly gained currency in the pensions industry since. It has renewed the focus in the industry on providing an income for life, and was a key theme of the Union’s negotiations with the Royal Mail. The CWU wanted its members to be able to retire without having to worry about surviving on a low retirement income after buying an annuity, or even worse, running out of money before they die.

We’re running ahead of ourselves, however. Before we can put CDC in place at Royal Mail,  and hopefully elsewhere, we need to have legislation in place.

In the absence of legislation, both Royal Mail and the CWU agreed on CDC in principle, and started to lobby Government to facilitate CDC. Since then, Royal Mail and the CWU have appeared together at a number of pension events, sharing the idea of CDC in order to publicise and garner support for what they’re doing.

The good news is that the DWP is now working hard to draft the legislation needed to make it happen.

So it is very much a new chapter in positive industrial relations history between the union and Royal Mail. But more than that, it’s an innovation that could change the lives of millions of people, in Royal Mail and beyond.

Read the full story of how we supported CWU in the introduction of CDC in our Royal Mail case study.

The post Royal Mail, CWU and First Actuarial – History in the making with CDC pensions first appeared on First Actuarial.

With GMP equalisation well and truly on the front burner, however, the issue remains in turmoil. A recent meeting I attended – with representatives from The Pensions Regulator, the Department of Work and Pensions and other Third-Party Pension Administrators (TPAs) – confirmed that there is still no clear way forward.

Although the Lloyds Banking Group ruling has given us clarity on ‘what’ to do – we have to equalise GMPs – the ‘how’ to calculate it remains uncertain.

Why is GMP equalisation such a problem?

There are in fact several established ways of calculating GMP equalisation. We outline these in a table in our recent First briefing on GMP equalisation.

So what’s the problem?

Well unfortunately, while the Lloyds Banking Group ruling considered each of those methods, it failed to provide direction on which to use, although two of them look more likely than others. After years of waiting for a firm steer, we still have no certainty on the correct way to equalise GMPs.

There is no quick and easy solution, no reliable one anyway. We plan to produce a GMP equalisation calculator once firm guidance is in place, but right now we run the risk of wasting everyone’s time and money by basing it on the wrong method. There’s a great deal of detailed work involved in GMP equalisation at individual member level – I plan to cover this in detail in a future GMP equalisation update – and nobody can afford to go through it more often than they have to.

In fact, the effort and costs involved will all too often exceed the value of any additional benefit calculated, whatever the Daily Express says about the promise of a pensions windfall. Many scheme members might receive an arrears payment of something like £35 and a rise in pension of £7 p.a., all subject to tax.

It’s precisely for this reason that the pensions industry has been reluctant to equalise GMPs until they have no option but to do so. Unfortunately, nobody has seen fit to set a minimum change value.

Preparing for GMP equalisation

Pension scheme administrators had until the end of December 2018 to issue any discrepancies between their own GMP liability records and those of HMRC. Here at First Actuarial we managed to get almost all our records cleared, and we did this by making sure there was a full history in place of all earnings and contributions contracted out of the State Earnings Related Pension Scheme (SERPS) between 1978 and 1997.

GMP equalisations will be based on this contracted-out data, so any scheme that has failed to check it before now needs to take care of it as soon as possible. Once you’ve done that, you’ll be in a good position to embark on the necessary calculations as soon as a ruling is made on the correct method.

Another thing to consider now rather than later is the very real scenario where a scheme member of a Defined Benefit scheme with GMPs asks for a transfer value. Up to now, transfer value calculations have not equalised the GMP elements.

As the situation stands, either the member will forgo any future benefits related to GMP equalisation or the scheme will have to pay an additional amount once the situation becomes clearer. The latter option involves making partial transfers from the scheme, which isn’t always possible, and the receiving scheme has to be willing to receive an additional payment. This should give you some idea of how cumbersome GMP equalisation will be.

We know from discussions with trustee boards how worried they are about the prospect of equalising GMPs. But once we have a way forward you’ll be able to hit the ground running if you follow these three steps today:

1. Check that your contracted-out membership data is accurate and up to date.
2. Review your scheme transfer processes and make sure your members are not disadvantaged
3. Make sure you have a good quality pension administrator in place.

At First Actuarial, we’re aware of the huge amount of calculations that pensions administrators will have to carry out once clearer guidance is received, and we are preparing for that. We’ll be automating as much of the calculation work as possible, to keep costs down for our clients. Trustees should make sure they have good quality pension administration in place, in advance of a ruling. Get in touch if you need help on the preparation work or simply want to plan ahead.

The post GMP equalisation and your pension scheme – What trustees need to know and how they can prepare first appeared on First Actuarial.

AE was based on the assumption that if people didn’t bother to join a pension scheme, if they were entered into one they would similarly not bother to leave. To ease people (and employers) into the pensions mindset, minimum contributions were set at a low level, with planned increments over time, and people had the right to opt out.

It seems to be working.

With not long to go before the second phase of contribution increases in April 2019, now seems as useful a point as any to review AE, go through any challenges that remain, then look ahead to see what further changes are in the pipeline.

April 2019 – The second AE contribution increase

As I’ve said, contributions were low when AE first came in. We’ve gone through one phasing event – an industry term for the point at which contribution increases and limit changes take effect – and the second one is due in April 2019. Finance, payroll and HR professionals may be relieved to know that there are no further phasing events announced.

This table below shows how each minimum pay basis will increase this April:

* where basic salaries must, in aggregate, be at least 85% of gross earnings.

The Government has committed to maintaining the AE earning trigger at £10,000 for the 2019/20 tax year (in practice this is calculated per pay period). It has also confirmed that the lower and upper qualifying earnings limits will increase to £6,136 and £50,000 respectively from April 2019.

We go through this in more detail in our freely available First briefing.

The changes are being introduced with effect from the start of the new tax year, so the impact on people’s payslips will so be partly offset by a number of changes – the new income tax personal allowance and bandings, National Insurance (NI) rates and increases in the National Minimum Wage and the National Living Wage.

How should you communicate these changes to your employees? While there’s no legal requirement to do so, bearing in mind that the changes may well reduce take-home pay, it might be a good idea to remind employees that this will be happening. They will then be more prepared for the change and are less likely to bombard your HR or payroll team with queries or complaints.

Mind the gap – the net pay trap

One issue that may affect some of your employers is what is known as the net pay trap. While the earnings trigger is not changing from £10,000, as I’ve said, the income tax personal allowance is due to rise in April 2019 from £11,850 to £12,500. This means that there’s a widening band between the point at which people are being auto-enrolled, and the point at which they start paying tax.

The risk is that people earning between £10,000 and £12,500 p.a. will end up in the wrong type of pension scheme when they’re auto-enrolled. In those occupational pension schemes established as ‘net pay arrangements’, members don’t qualify for any tax relief on their personal contributions as no tax is paid on their earnings. On the other hand, in a ‘relief at source’ arrangement (generally ‘contract-based’ arrangements, but also certain occupational schemes, including NEST), they get 25% tax relief top up on their own contributions, despite not paying tax.

It may be the case, then, that employers have established pension schemes which are inadvertently tax-inefficient for certain employees. And as a result, some lower paid employees don’t get the pension benefits they’re entitled to, while higher earning employees others receive full tax benefits.

I believe it’s important to ensure that your hard-working employees receive pension benefits in the most tax-efficient way possible.

The Pensions Regulator (TPR) is aware of the problem and believes that employers should consider the impact of this on their workforce and where appropriate, consider making alternative arrangements for those employees affected

Are you doing AE right?

One linked issue that is starting to get some attention is whether employers are deducting the contributions correctly from employees’ salaries –from either their gross or net salary, according to the basis on which their scheme has been established.  If this is done incorrectly then employees will either get no tax relief or double tax relief – either way there is clear potential for problems.

This has been acknowledged by both TPR and HMRC who issued a joint statement on the matter in 2018.

It’s really important that employers check that they’re doing everything correctly – we can help you resolve that problem, but it does involve a fair bit of unpicking.

Using salary sacrifice to offset increased contributions

One way to offset the increase in AE contributions is to use salary sacrifice, or salary exchange as it’s also known, to make NI savings. Implementing salary sacrifice as these contribution increases take effect can reduce the impact on take-home pay for employees, and lower the financial burden of increased contributions on employers.

So how does this work? Under salary sacrifice, an employee opts to reduce their gross salary by an amount equal to their desired pension contribution. In return, the employer agrees to pay into the pension scheme an amount that is equivalent to the gross amount of salary the employee has exchanged. Employer and employee NI are payable on gross salary, but not on employer pension contributions.

This is how salary sacrifice generates NI savings for both employer and employees. Not only that, but employees see an increase in their take-home pay. The total amount of money paid into the employee’s pension fund remains the same, and total pension benefits are unaffected.

In my experience salary sacrifice is becoming increasingly common. When we raise it with our clients, there is usually some awareness of it. Some may be using it unknowingly in areas such as childcare vouchers. Others find it offputting, maybe too complicated, although I always explain that it needn’t be so. It’s really just a slightly different way of making pension contributions.

If a company is going through changes to their pension scheme(s), the cost of introducing salary sacrifice is usually quite small. But it can also be implemented as a standalone project as a way of softening the blow of contribution increases from AE or as a result of pension scheme valuations. It’s a great way of making pension arrangements as cost-efficient as possible.

One point to note is that salary sacrifice is not suitable for everybody. For lower earners, salary sacrifice doesn’t work. And you need to take extra care when AE overlaps with state benefits.

While the Government isn’t championing it as such, they are accepting of it. HMRC will want to see that you’ve set it up correctly though. If you haven’t, they can and will make you undo it all and sort it out, which is expensive and time-consuming.

We provide more detail on all of this in our First briefing on salary sacrifice, and we can help introduce it in your organisation.

What further AE changes are on the horizon?

It’s clear that AE is here to stay. Having gone through the first phasing event in 2018, we’ve seen that the number of people leaving their pension scheme as a result of higher contributions was insignificant. These days businesses of every size need to comply – in contrast to the early days when AE applied only to larger companies, the Tescos of this world.

Most employers are managing AE perfectly well, with only minor difficulties in some cases. The Pensions Regulator is reluctant to adopt a big stick approach if it’s clear that the employer is trying to do the right thing.

So rather than questioning the viability of AE, the attention is much more on how to develop it further.

A policy paper from the Department of Work and Pensions (DWP), Automatic enrolment review 2017, was subtitled ‘Maintaining the momentum’, another clear indication that AE is here to stay.

The paper made a number of recommendations, including:

• Ensuring that workers on all levels of income are included
• Extending AE to the self-employed
• Reducing the lower age limit from 22 to 18
• Starting pensions from the first pound of earnings rather than the minimum level, which is around £6,000 p.a.

I believe these changes would be very positive ones. With an extension to all workers, everyone would be entitled to minimum employer contributions should they decide to opt in. Reducing the minimum age would get people saving into pensions at an earlier stage. The self-employed certainly need to consider how they will provide for their retirement, not least because they don’t have the same entitlement to state benefits. There has been talk of an additional, almost compulsory, NI contribution, which is a good idea in principle and worth looking at.

While such measures can only be a good thing, however, I do think that in the longer term the minimum total contributions need to increase beyond the current level, and I also wonder whether there should be a more equal split between members and employers. The minimum contributions are currently tilted so that employees pay more than their employer, and maybe that needs to shift.

As the situation stands, the Government has taken the recommendations on board and are looking to introduce them in the mid-2020s. If you consider that the Government has Brexit to contend with, however, you might find that aspiration less reassuring.

In the meantime, new businesses have to set up AE immediately, and after April contribution rates will be stable. So leaving aside minor tweaks such as increases in line with inflation, the policy paper recommendations will be the next opportunity to include those who are currently missing out.

Engaging with your employees

The immediate challenge is to improve engagement. To achieve the current retirement income that people want, they need to save more than those minimum levels. So there needs to be a realistic conversation with people – it’s great that you’re in a pension scheme, but how much is this going to provide you with once you’ve retired?

It’s problematic because, of course, so many lower earners are buckling under the weight of competing financial pressures. If you’re struggling to keep a roof over your head, put food on the table and keep on top of bills, how important is saving for something that’s decades away?

On balance though, I think that AE is meeting its original objectives. It’s got more people into pension schemes, and reports from organisations like TPR confirm that there’s an enormous number of people saving into pensions who weren’t doing so before.

In only seven years, we’ve made a great start.

The post Auto-enrolment is here to stay – So what happens next? first appeared on First Actuarial.

A lot of employers are fed up with their pensions and want to see the back of them. They want to see their pension fund going to a good home.

No disinterested observer in this development, Truell is supporting a Pension Superfund that will “pool the assets and liabilities of private-sector retirement plans”.

So what lies behind the idea of a pension superfund, and what do smaller employers really think about their pension commitments?

The recent DWP White Paper, Protecting defined benefit pension schemes, suggests that the Government is taking steps to encourage consolidation. Certainly there will be consulting over coming months to put together a framework for consolidation, offering pension innovation with safeguards to protect member benefits.

The White Paper also refers specifically to the Superfund proposal, and includes a provisional cost saving analysis. The PLSA, which has swung its weight behind the Superfund, provides a useful definition in its DB Taskforce Opportunities for Change report.

So how true is Truell?

Judging by Truell’s comments on jaded employers, and looking at these initiatives as a whole, it seems that everyone’s got it in for small pension schemes. But what is the reality of pension provision in UK SMEs?

Contrary to the picture painted of uncaring organisations, there is a robust tradition of staff care in many small-to-medium manufacturing companies, service providers, charities, NGOs schools and research institutions.

We can glibly dismiss this as ‘paternalism’ if we like, but running a business, or not-forprofit organisation, with the view to perpetuating a ‘good thing’ is a laudable aspiration. And many of them see it as an integral part of their social purpose to uphold a tradition of paying people in both today’s wages and tomorrow’s deferred pay – what we know as a pension.

there is a robust tradition of staff care in many small-tomedium manufacturing companies, service providers, charities, NGOs schools and research institutions.

A central function of any organisation is to look after its staff. Many employers see no conflict between meeting their pension obligations and managing business as usual. They don’t always operate as venture capitalists would like them to, but as they want to.

Some, in fact, see venture capitalists, investment bankers and fund managers as the people who have put them and their pension schemes in the state they are in today. That, of course, is debatable, but what is certainly untrue is that well-meaning employers are somehow sick of their pensions.

Protecting pension rights when the employer stops caring

Alan Rubenstein, who along with Edi Truell is launching the new superfund scheme, says:

We know that many businesses are constrained by their pension liabilities and need to find a more affordable way to fulfil their promises to pension scheme members, trustees and sponsoring employers.

It’s easy to demote the rights of people who are no longer working in an organisation, and no longer of strategic importance to its executive. But they have certain legal rights, meaning that the promises made to them must be kept. Should any company not meet its funding obligations to these people, the Pensions Regulator has the right to demand that organisation put its pension scheme into the PPF and enter administration.

This is far from a pleasant process. It means people can lose their jobs and part of their pension (quite a large part if they are well pensioned). Nevertheless, the Pension Protection Fund does provide a safety net and many small schemes cherish its security.

In praise of smaller pension schemes

Putting aside arguments about grandfathering scheme liabilities, and the lack of evidence that employers could fulfil their pension obligations more efficiently through a superfund.

SMEs play a valuable part in the economic life of the country. Many are well run and even those that find themselves in difficulty can return to solvency, given the right economic tailwinds. And SMEs themselves are a confident bunch. This year, the CBI has reported that 23% of UK SMEs are predicting average revenue growth of over 10% for the next three years.

First Actuarial and small pension schemes

I work with one of the few consultancies interested in advising smaller pension schemes and I declare an interest. Here at First Actuarial, we’re happy to support these schemes, helping them to remain appropriately funded, governed and administered. I wonder how many of our clients would respond to being described as “fed up with their pensions” and wanting “to see the back of them”.

Far from being sick of pensions, many of our clients – most of them, I would like to think – are wholeheartedly behind their pension scheme and work with firms such as ours to keep those schemes affordable, well governed and well administered.

Some, in fact, see venture capitalists, investment bankers and fund managers as the people who have put them and their pension schemes in the state they are in today.

Some of our clients who are already involved in superfunds find that last man standing defined benefit master trusts are failing to meet their needs. They find themselves locked in by section 75 and have little control of their pension costs. Neither do they have much say in the overall direction of the super trust, so they’re basically taking the pain without the credit from staff that makes pension provision worthwhile.

On the other hand, superfunds can be a viable option for some trustees andemployers, so we keep an open mind and look the detail as we enter into strategic discussions with our clients.

Bigger is not always better

Superfunds are unlikely to wave a magic wand that will ease the pain. Taking a patient out of a loving environment, a local cottage hospital for example, and moving them to a much larger general hospital – may sound more efficient to the accountants, but it won’t necessarily make the patient better.

Every pension scheme should be considered on its merits and not on its size. To argue otherwise is to disparage the many trustees who are doing their level best to pay the pensions they promise – and under their own steam.

After all, it’s the responsibility of every organisation, big or small, to look after its staff. We should not assume that big is better – any more than assume that “small is beautiful”.

The post In Defence of Small Pension Schemes – Big Isn’t Always Better first appeared on First Actuarial.

To understand what on earth Spotify might have to do with the distinctly un-musical world of pensions, we need look no further than the growing popularity of Collective Defined Contribution schemes, or CDC, in what is already a crowded space.

Let’s start with Defined Contribution pensions

One of the hardest things to explain to someone with a DC pension is that it’s not a pension. People save money throughout their working lives and accumulate what is really a ‘pot’ – a reservoir of capital, the result of a lifetime of regular saving. The average DC pot saved is less than £40,000.

That £40,000 average will creep up in time as:

• more people use DC as their primary means of retirement saving
• auto-enrolment kicks up the savings rates
• more people engage with what is still the best long-term savings show in town.

But many people with small pots will need to convert those pots to pension income sooner than that.

Top tier DC pension-holders – living with a mixed blessing

What of that small but growing group of DC wealthy individuals who have either been saving into a well-funded DC plan and are now mature savers? Or people who have taken their transfer values and are now savings-wealthy? For those people, the options are advised drawdown, non-advised drawdown, robo-drawdown, or an annuity.

I speak with quite a few senior pension managers in my line of work. The word on the street is that employees reaching their last decade of work with large sums of pension savings are not satisfied that those drawdown choices provide them with the ‘wage for life’ implied in term ‘workplace pension’. Nor are they happy with the low income provided by an annuity.

“One of the hardest things to explain to someone with a DC pension is that it’s not a pension.”

Ironically, many of these ‘wealthy’ savers are not wealthy at all. I met a number of steel workers in Port Talbot in the midst of th recent pension scandal there. They were shocked to be told they needed wealth management skills in order to manage their pension pot themselves.

I fear that for many of them the novelty of being savings-wealthy will wear off quite quickly. Indeed, during the recent market wobble, the visibility of their online fund values led one steel worker to tell me he’d lost in a week what he expected to earn in a year. His capacity for loss was put to the test.

The Royal Mail pension dispute – CDC comes of age

The problems of imposing either restrictive annuity arrangements or inappropriate wealth management solutions on people with limited appetite for risk or financial capability, is one that exercised the minds of the Communication Workers Union. I can say that with certainty, as First Actuarial advised its senior officials during the protracted pension dispute with Royal Mail.

From an early stage in the dispute, it was clear that the Royal Mail lacked the financial strength to support ongoing accrual of the defined benefit scheme on its balance sheet.

As 2017 wore on, it became obvious that even a watered-down DB scheme, with limited guarantees, was a burden that Royal Mail could not carry. At best, Royal Mail could only partly guarantee a cash sum at retirement – which employees would have used to buy an annuity or transfer into a wealth management solution.

Critically though, the postal workers were telling the CWU they did not want a lump sum or an annuity or a drawdown plan. Instead, they wanted a ‘wage in retirement’, which roughly translated into a stream of monthly payments paid until they died. 89.1% of the vote supported the CWU pushing for a wage for life over a cash sum – or ‘pot’ – at retirement.

The first breakthrough in the negotiations, which by autumn 2017 had reached the reconciliation service ACAS, was an acceptance by both sides that a CDC pension
was the only way forward in terms of corporate finances. The DC element, as in defined contribution, of CDC would impact Royal Mail’s cashflow, but not its balance sheet. The second breakthrough was a recognition that upgrading the plan from DC to CDC also made it possible to provide a wage for life or ‘pension’ for the scheme membership.

What is a Collective Defined Contribution (CDC) pension scheme?

It is a scheme in which the defined contributions are not paid into a separate investment account for every member, but are held in one pool, collectively. An actuarial plan decides what target benefits can be afforded from the assets and contributions.

Why is CDC a good idea?

Collective investment can be both more rewarding and less risky. In a DC scheme, an individual is always either accumulating or decumulating, with the attendant exposure to market value volatility and high cost of annuity purchase.

In an open collective scheme, benefits are paid out of contributions and asset income, with minimal exposure to short-term market value volatility. Collective investment has a longer time horizon than individual DC investment, making it possible to invest more rewardingly, and on average provide higher, more reliable benefits.

There is not the space in this article to go through every detail of this agreement, but the two sides accepted that targeting pensions, rather than guaranteeing them, gave both workers and employer the common ground they needed to stay at work and build a broader agreement that would help Royal Mail recover after a bruising year.

Recover it has indeed done, and in spectacular fashion. Its share price has rebounded by 50% since November 2017, primarily on the news that a resolution to the pension dispute has been found. Royal Mail’s return to the FTSE 100 looks like a foregone conclusion, and nearly £2bn has been added to its capitalisation.

This recovery is fragile though, as the settlement is dependent on the completion of secondary regulations for this DC upgrade to happen. At the TUC pensions conference in February 2018, the Pensions Minister warned that there is still a long way to go before the CDC scheme can be set up, and in the meantime Royal Mail will be operating an interim cash-balance solution.

But I sense an urgency in Whitehall to make this deal stick. There aren’t many good news stories in this period of fraught Brexit negotiations, and that £2bn increase in Royal Mail stock has great political capital.

That then is the story of how Royal Mail, its union and its staff came to avoid a strike, find favour with the markets, and reach what all sides hope will be a lasting pension settlement.

Does this have broader relevance? Well it wouldn’t surprise me to see organisations operating well-funded DC schemes, or DB schemes with high cash equivalent transfer value (CETV) take-up, keen to find a way to upgrade DC. When news gets out of the Royal Mail settlement, even the large ownoccupation DC schemes might start looking at the cost of a DC upgrade.

Great news – but what about Spotify?

Spotify has achieved success not by adding anything new, but simply by providing a better way to access what people value most. CDC may only be a DC upgrade, but it offers the potential to do to workplace pensions what Spotify has done to the way we listen to music. It could make retirement easier, and more rewarding, for millions of people.

The post CDC Pensions and Spotify – More in Common than You Might Think first appeared on First Actuarial.

When the news broke in January, the future looked uncertain for the company’s 20,000 UK employees. And as industrialists took the measure of the consequences for the country, other questions quickly emerged.

How would the Government deal with the huge infrastructure projects that Carillion had failed to complete? Who would manage the maintenance and service of hundreds of hospitals, schools and homes? And as for the thousands of smaller businesses providing services to Carillion – many of which were already struggling with 120 day invoice terms and now faced non-payment – what did the future hold for them?

But one area that should not be causing any additional worry is the future of the company’s defined benefit pension schemes.

Safeguarding the Carillion pension empire

The company we came to know as Carillion was created in July 1999, following a demerger from Tarmac, through which it acquired a number of huge UK employers, including Mowlem and Alfred McAlpine. This gave the new company immediate responsibility for 13 defined benefit pension schemes.

Almost two decades later, 27,500 people continue to have benefits in schemes reliant on Carillion as sponsor, with close to half of these already receiving their pensions.

Commentators were not slow to point to problems with Carillion’s pension schemes. The Guardian reported that MPs were accusing the company of trying to wriggle
out of its pension obligations, for example. And The Economist asked whether pension protection was still viable, referring to ‘a big hole’. All in all, the future of these schemes looked deeply uncertain, and this can only have added to the anxieties of Carillion’s employees and pensioners.

The fantastic news, however, is that all of Carillion’s pension scheme members have the security of the Pension Protection Fund (PPF). The PPF came into being in 2005 to pay compensation to members of eligible schemes, where companies have gone bust without enough funding in the pension scheme to cover future payments.

One area that should not be causing any additional worry is the future of the company’s defined benefit pension schemes.

It’s time to take a more measured look at the prospects for Carillion pension scheme members.

Assessing the real impact on Carillion defined benefit pensions

If the outcome of work to be carried out by liquidators PwC over the coming months is that the Carillion-sponsored pension schemes enter the PPF, then members may unfortunately see some loss of value. There is a risk that future pension increases will be less than would otherwise have been expected. Those under pension age will see a 10% reduction in their pensions, and the largest pensions will be limited by a ‘cap’. And of course, benefits will stop building up for the estimated 500 active members of those Carillion pension schemes that were still open to accrual.

None of this is good news for members of the pension schemes, and the impact should not be understated. However, the existence of a secure pension safety net ought to be seen by former Carillion employees as a source of calm and reassurance at a time of great uncertainty and worry.

Learning the lessons of recent pension collapses

Back in the early 1990s, members of Mirror Group pension schemes were not so fortunate. In 1991, the newspaper group itself hit the headlines when Robert Maxwell was revealed to have ‘stolen’ more than £400 million from 32,000 members. These were very different circumstances, and the Mirror Group and its pension scheme survived, but the stress caused to members who feared they would lose everything was enormous, and before the PPF was established, members had considerable cause for concern.

More recently, headlines concerning the fate of the BHS Pension Scheme, continued to feature members facing the loss of their entire retirement savings. However the PFF was by now in existence, waiting in the wings if needed.

Bringing us back up to date, we see what can happen when pension scheme members have only limited access to trustworthy information. At the beginning of this year we discovered that many members of the British Steel Pension Scheme had been persuaded to transfer huge sums of money into risky and dubious financial vehicles by disreputable financial advisers. As we wait to find out how many can seek redress for this blatant misselling, we can only speculate how many of them would have turned down such transfers had they fully appreciated what the PPF provides.

How much damage have irresponsible reporting and misleading information done to the confidence of UK pension scheme members over the years? Are Carillion members already easy prey for the unscrupulous advisers circling over them? Let’s hope not, because there is more good news.

Finally some good news for Carillion pension scheme members

The PPF is in fact very well positioned to absorb the Carillion schemes. Pension industry estimates suggest that the combined shortfall in the schemes – calculating the potential impact according to the ‘Section 179 basis’ – could be as much as £0.9bn.

How much damage have irresponsible reporting and misleading information done to the confidence of UK pension scheme members over the years?

Substantial though that estimate is, the PPF is likely to be able to handle it, for three reasons at least:

• The actual impact on the PPF is likely to be lower than this, as the PPF doesn’t fund itself on the same assumptions as Section 179.
• There may be some debt recovered by the liquidators to pass to the schemes.
• The PPF currently runs a surplus of £6bn, so it is able to take the strain of the Carillion shortfall in its entirety, along with any future company insolvencies that may occur. That is precisely what it is designed to do.

So, while the unfolding story of the collapse of Carillion will be distressing for many people, let’s hope that the members of its defined benefit pension schemes in the UK are able to keep as calm as possible and carry on in the knowledge that their pension is very well protected.

The post Keep Calm and Carillion – The Company’s Pension Schemes Are More Secure than They Look first appeared on First Actuarial.