September 2009
'The Pensions battleground: stalemate or truce?' Simon Banks is quoted:
This summer we have seen the closure of many ‘defined benefit’ pension schemes, which provide benefits based on a formula linked to salary. They are closing because they are reliant on employer support and have either become too expensive, or have grown too large relative to the employer.
Most employees will probably outlast the business currently employing them, so a shift away from a pension model reliant on employer support may seem sensible to many. The problem is that ‘defined contribution’ schemes, usually offered as a replacement, can be ill-suited to those lacking financial confidence.
The battleground between government and the pensions industry is therefore over ‘shared risk’ schemes. These have been suggested as a middle-ground option that would be less onerous for employers and yet provide some useful guarantees to employees. The government regards these proposals as tainted by self-interest, and is optimistic about what member training and communication can do to improve ‘defined contribution’ schemes.
This stalemate, if it continues, will benefit nobody.
I think people want:
- To have a retirement income that is, at least, similar to their peers
- One that is reasonably predictable, with regular updates as it builds up
- A higher flat pension (with discretionary indexation when markets permit), rather than a low but fully-indexed pension
- Clear communication of what is guaranteed and what is not
So a shared-risk scheme offering a decent guaranteed pension at retirement, but with future increases dependent on funding, should meet these requirements. Such a scheme would not have to be onerous for the employer, as the reserve for future increases would provide the buffer needed to guarantee the minimum benefits. The scheme could be made less potentially onerous still by having a retirement age dependent on life expectancy.
Would it be better than a simple defined contribution scheme? Yes, because it would cost a similar amount to run, but would offer a more predictable flow of benefits. Adverse financial conditions would be managed by allowing inflation to gradually erode the pension. This would be easier to cope with than the unpredictable and volatile swings in the projected pension from a defined contribution scheme. Financial planning would be easier for the member, and he or she would not have to take responsibility for decisions as to how to invest the pension.
What about transparency? Defined contribution schemes offer clarity over what the employer is putting in (the input), while defined benefit schemes provide clarity over the output. This shared risk scheme can offer some of both – clarity over the minimum contributions the employer has agreed to make to cover future benefits, clarity over the minimum guaranteed benefit, and some indication of the likelihood that full indexation would be achieved.
What about public sector schemes? These are guaranteed by taxpayers, so the argument runs that ‘shared risk’ is unnecessary. However the value of unfunded public sector pension promises, by some calculations, already exceeds the national debt. I believe ‘shared risk’ will be a necessary safety valve, so that their future claim on output can be managed. Options include linking retirement age to life expectancy, or pension increases dependent on cost / affordability, like the private sector.
This is, of course, only a mere sketch of the ‘pensions truce’ needed to ensure a sustainable system. Currently, automatic enrolment and taxation are also big pension policy issues, but in my view the battle over defined contribution and shared risk schemes may well turn out to matter most to the ‘ordinary’ pensions consumer, even if he or she is unlikely to read this blog! Reuters, 30 September 2009
Punter Southall is quoted:
Punter Southall noted that the impact on individual companies in terms of the levy depends on several factors. A statement from the firm said: Although the deadlines have passed to take action to reduce your 2009.10 PPF levy, scheme sponsors and trustees should understand the likely level of future levies and take action now to reduce these levies. Pensions Age, 30 September 2009
'Complex problems, innovative solutions' Richard Jones is quoted:
Punter Southall principal Richard Jones agrees: Insurance companies are finding it very difficult to buy and sell corporate bonds at the moment because there can be a 20pc bid/offer spread. Insurers are withdrawing the guarantees they used to provide for up to three months. Now they're saying it's not guaranteed at all. Professional Pensions (web), 30 September 2009
'FSA receives plaudits for control of buyout' Richard Jones comments:
If a pension scheme adopts a similar investment strategy to that used by an insurer, in around 84% of scenarios, the pension scheme will be able to run off the liabilities at a cost below the buyout price.
This suggests that it is only the most risk averse of finance directors who should consider transferring liabilities to an insurer to represent a good use of shareholder funds.
Jones added that the market had been talked up by many other commentators, and that the FSA had done a fantastic job in curbing the market fervour that had been fed by loss-leader deals.
With the disappearance of temporary pricing discounts and the initial euphoria of deal closures dissipating, monoline insurers in particular have struggled, with some high profile new entrants being unable to write business due to a lack of available capital, he said.
He added that he expected the listed, diversified insurance companies to write most bulk buyout deals in future. Pensions Week (web), 30 September 2009
'Firing on all cylinders' Kevin Burgess comments:
I saw a scheme recently which had a deficit of 15m that should have been 10m. The scheme thought it had changed its rules about five years ago to reduce pension increases and to change the retirement age and accrual rate. But it had failed to implement these changes properly. If it had had proper governance procedures in place, it would have seen that the documentation wasn't properly implemented and filed.
Burgess says that the credit crunch has also made trustees more aware of risks. Two years ago trustees would not have considered money in a bank to be at risk, but look what happened to the Icelandic banks. Engaged Investors Online, 28 September 2009
'Scheme News' Richard jones comments:
"If a pension scheme adopts a similar investment strategy to that used by an insurer, in around 84% of scenarios the pension scheme will be able to run off the liabilities at a cost below the buyout price. This suggests that it is only the most risk averse of finance directors who should consider transferring liabilities to an insurer to represent a good use of shareholder funds." Pensions News, 25 September 2009
'Buyouts not for 84% of pension schemes – Punter Southall' Richard Jones comments:
"Less than 1% of the UK's private sector defined benefit liabilities were bought out over 2007 and 2008, suggesting the vast majority of pension schemes concluded the buyout premium was not worth paying" said Richard Jones, principal and head of Punter Southall Transaction Services.
Jones estimated the total sum of UK buyout deals would be worth £3bn is assets this year, rising to £4-5bn in 2010.
He also said he believed the business written thus far can be explained by the unique circumstances of the sponsors involved and the heavy discounts offered at the end of 2007 and first of 2008.
Jones said discounts in 2007 and 2008 reduced premiums to as low as 2%. The figures are hypothetical but based on PSTS's understanding of market deals. IPE.com, 24 September 2009
'Punter Southall claims buyouts are a bad deal for four fifths of schemes' Richard Jones is quoted:
However Jones said buyouts could be better value for small schemes, which would be able to save administration costs.
He said: "A buyout can be attractive to remove the expense of operating a small scheme, which can reach the level of 20% of the scheme's liability. Also, it could remove the longevity risk associated with small schemes, as in several cases those schemes do not have enough members to match the average longevity risk"
The report also said some projections for growth in the buyout were "overly optimistic".
Jones said: "In the short term we do not expect activity to pick up to any great extent. Total business volumes for 2008 were £8bn, but this figure was inflated by two exceptional and very large deals by cable & wireless and Thorn.
"Some insurers and other commentators have suggested that the buyout market will see business levels of up to £8-10bn over 2009, but we consider these estimates to overly optimistic. We think it is more likely that total volumes will be around £3bn."
Jones said as the initial euphoria and temporary pricing discounts of up to 10% dissipated some insurers were beginning to struggle.
Despite this Punter Southall predicted a more positive scenario for longevity swap solutions.
Jones explained: "While we expect this market to grow, this will not happen overnight. The longevity swaps market faces obstacles which will need to be overcome if it is to avoid the anti-climatic fate which has befallen the bulk buy-out market". Professional Pensions Online, 24 September 2009
'No such thing as a safety net' Matthew Furniss is quoted:
It is not certain if the FSA will honour this, which is potentially a big risk, says Punter Southall senior consultant Matthew Furniss. This was a concern before September, but the events of that month have exaggerated its importance as people realised any type of company can go busy. Professional Pensions, 22 September 2009'A downward spiral' Matthew Furniss is quoted:
Punter Southall senior consultant Matthew Furniss, who recently raised issues around deflation and buyout liabilities, believes deflation, if it occurs, will be driven predominantly by the dramatic collapse in oil prices.
Furniss says "Oil price falls will have a downward impact on food prices because of transportation costs, and will also mean gas and electricity prices should fall further in the forthcoming months." Professional Pensions, 21 September 2009
'Public sector cap proposals 'misinformed' Joanne Livingstone comments:
"It is surprising that a politician as experienced in pensions as Terry Rooney should appear to be unaware of the pensions tax system that has been in force for several years."
She added his comments also made no mention of the proposed reduction in tax relief that will come into effect for those with income in excess for £150,000.
Livingstone said from 2011, it is expected that such higher income individuals will be taxed on the annual increase in their DB pension provision highly unattractive to those affected.
She added: "Imposing an additional cap on pension would simply add another level of complexity to an already over complex system that contains the necessary mechanisms to restrict pensions for those earning more that £150,000 in its current form." Professional Pensions, 10 September 2009
'FMA Q&A' Matthew Furniss quoted:
Punter Southall senior consultant Matthew Furniss is a member of generation cynic and known as Crouchy to his friends.
"My best subject was music- consequence of piano lessons under duress from age six"
"My worst was German although I could order you a Schwarzwalder Kirschtorte any time(but alas nothing else)"
"Crouchy" more due to my striking resemblance to a certain Tottenham forward that any underlying footballing ability." Professional Pensions, 10 September 2009
'UK DB deficit increases to £173bn' David Cule comments:
“What these figures show is the gradual improvement in this creeping recovery we are seeing. There is still a significant shortfall, but it is a slight improvement from the dramatic shortfalls we saw from last summer until spring 2009.” 8 September 2009, IPE.com
'Highs and Lows ' Danny Vassiliades is quoted:
Schemes with high numbers of deferred pensioner liabilities could also find themselves hit, according to Danny Vassiliades, principal at Punter Southall. "A sudden burst of inflation will significantly increase liabilities and deficits at a time when they are already concerning employers." He said. 7 September 2009, Pensions Week.
'Insurers confident Solvency II will change' Martin Hunter is quoted:
Punter Southall transaction services business consultant Martin Hunter said annuity providers would have already adjusted annuity prices if they expected Solvency II to force them to hold more capital and so push up the costs.
"Annuity prices have not gone up at the moment. That does suggest to me that they are at least optimistic that either the proposals will change before they implemented in 2012 or they will be successful in getting an exemption for annuity business." He said.
He added "They would already be factoring in the extra capital they would have to hold."
Insurers have become increasingly vocal in recent months about the potential for the proposals to push up the prices for annuities in the future, but Hunter said this belied their true concerns about the effect it would have on their existing annuities business.
He explained annuity providers are likely to be concentrating much more internally on the implications for existing annuities – which might necessitate great capital reserves if the current proposals are adopted.
"That would reduce quite significantly their expected returns on their current annuity books, which is probably more of an issue for insurance companies." 3 September 2009, Professional Pensions
'Pensions Puzzle', Jane Beverley is quoted:
Jane Beverley, principal and head of research at actuary Punter Southall in London, says two categories of schemes were covered: cross-border schemes and funds subject to Article 17 of the Iorp directive. Article 17 applies to schemes that don't have a sponsor underwriting the pension commitments. "They looked at whether Solvency II should be applied to these regimes, but there was also a much wider discussion around solvency and pensions" she says. Risk Magazine, 1 September 2009
'Scheme news' Richard Jones is quoted:
Richard Jones, principal at Punter Southall highlighted long-term expectations underperforming assets and credit spreads as the main reasons for ITV's pension deficit trebling in size in the six months up to June 2009. Pensions Management, 1 September 2009
'Missing: Last seen in admin' Richard Thomas is quoted:
As Richard Thomas, administration director at Punter Southall, points out, RSPA has not yet fulfilled its purpose.
"The increase in awareness of the need for quality and standardisation has arguably been restricted to professionals within the pensions industry" he says.
"There is therefore more the organisation could achieve before it can identify its legacy". Pensions Management, 1 September 2009
'IASB releases official discount rate review proposal' Simon Banks is quoted:
Punter Southall principal Simon Banks said the use of the corporate bond yields to determine the discount rate could also change depending on the result of the broader changes to IAS19.
He said: "By applying this sticking plaster the IASB has given itself more time for its detailed review of IAS19 which is ongoing. It has gone out of its way to say that this change in no way implies that the outcome of their detailed review will be to continue to use corporate bond based discount rates." Global Pensions, 1 September 2009
'Buyouts take a back seat' Martin Hunter is quoted:
However Punter Southall's Hunter believes longevity swaps are not, at present, an option for smaller and mid-sized schemes.
"Longevity swaps are quite complicated products so it's not really worth it for a small pension scheme because the cost of doing the deal is too much. As more deals get done it might be more viable for medium and smaller sized schemes to access longevity swaps, that's certainly what the providers hope" he says. IPE, 1 September 2009
Punter Southall Pensions Bulletin - July 2010