Steve Webb bows out as Ros Altmann becomes pensions minister
Ros Altmann has been entrusted with continuing the Government’s pensions reforms after Steve Webb unexpectedly lost his seat in last week’s General Election. His sparring partner in the Commons, Labour’s Greg McClymont, also lost his seat.
Ms Altmann has already been acting as the Government’s Business Champion for Older Workers for almost a year and with the Government’s pension reform programme still a work in progress, the decision has clearly been taken to elevate her to the House of Lords to make sure the pensions brief is carried forward by someone who also enjoys the high regard of the pensions industry.
Of the other noteworthy ministerial changes, Sajid Javid has replaced Vince Cable as Business Secretary and Greg Hands has replaced Danny Alexander as Chief Secretary to the Treasury. Iain Duncan Smith stays on as Secretary of State for Work and Pensions.
The full list of ministers appointed to the new Government is here. Parliament itself reconvenes on 18 May and the State Opening of Parliament, when we will see the Government’s legislative programme is 27 May.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
Comment
There has been universal praise for Steve Webb’s achievements during his five year stint as pensions minister (itself a record), not least of which was his delivering the single tier state pension. But there remains much to be done. It will be interesting to see what Ros Altmann focuses on in her unexpected new role, as the Conservative’s manifesto had relatively little to say on pensions policy (see Pensions Bulletin 2015/17).
EIOPA stress tests and quantitative assessment launched
As expected (see Pensions Bulletin 2015/08), EIOPA – the European pensions regulator – has launched its first stress test for IORPs (EU jargon for occupational pension schemes) along with a further quantitative assessment of the solvency of such schemes.
The stress test is intended to test the resilience of defined benefit and hybrid pension schemes against adverse market scenarios and increases in life expectancy as well as to identify potential vulnerabilities of defined contribution schemes. UK schemes providing defined benefits will have the impact of adverse scenarios calculated on an EU-wide “holistic balance sheet” and also the normal UK “Technical Provisions” balance sheet. The adverse scenarios include falls in equity (of up to 45%) and an increase to life expectancy – measured by a permanent decrease in mortality rates of 20%.
A “dedicated satellite module” for defined contribution schemes analyses the effects of a variety of shocks on future retirement income of three representative plan members, who start to receive pension benefits respectively 5, 20 and 35 years from now.
The Pensions Regulator will co-ordinate the stress test in the UK and has, we understand, already written to the UK’s 150 largest schemes asking them to participate.
The aim of the quantitative assessment is to collect evidence to assess the appropriateness of EIOPA’s proposals that were publicly consulted on in 2014 (see Pensions Bulletin 2014/42). Those proposals elaborate on the use of the holistic balance sheet and possible supervisory responses, with a focus on the valuation of technical provisions and sponsor support.
The selection of the IORPs which will be finally involved in every jurisdiction will be made by national supervisors. In the UK we understand that the Pensions Regulator will co-ordinate the assessment, as they did for the 2013 quantitative impact study. The deadline for submission of data is 10 August 2015, with the results of the analysis due to be delivered in December.
Comment
Trustees and sponsors of large schemes will have to decide whether or not to participate. We understand that the Pensions Regulator is encouraging them to do so as it feels that this will enhance the credibility of the UK data submission to EIOPA. In a number of circumstances it may be a useful exercise, revealing the impact of a financial shock in the future, and sponsors may be interested in the outcome to aid decision-making; indeed, regulated financial firms already have to do something similar when evaluating pension obligation risk and this provides some useful information for employers about the risks involved.
We are much less positive on the quantitative assessment. The specification document recites that the consultation responses received were overwhelmingly against using the holistic balance sheet for solvency purposes, but EIOPA is ploughing on with it regardless. We think that this is a waste of time and money, assuming that insurance-style reserving for pensions is off the agenda in the medium term.
No progress in clearing deficits and recovery periods lengthen
The Pensions Regulator has reported no progress in defined benefit schemes clearing their deficits over the past three years – and in nominal terms the deficits are larger. This, along with a lengthening of recovery periods, is the key finding to emerge from the Regulator’s annual publication of scheme funding valuations and recovery plans.
The Regulator’s latest analysis and related statistics (see Pensions Bulletin 2014/20 for last year’s report) is based on nearly 1,650 “tranche 8” schemes – that is those with triennial valuation dates between 22 September 2012 and 21 September 2013 – which had submitted a recovery plan to the Regulator by 31 January 2015 (because they had a funding deficit). 83% of the schemes submitting recovery plans had also submitted recovery plans in tranche 5 and tranche 2.
A further 250 tranche 8 schemes had reported surplus positions by 31 January 2015 – this is around 13% of all tranche 8 schemes as compared to 12% of tranche 5 schemes reported to be in surplus and around 11% of tranche 7 schemes in surplus reported last year.
Tranche 8 schemes have exactly the same average funding ratio on the scheme funding (technical provisions) basis as three years earlier (ie at the previous valuation for these schemes), but they also have larger deficits on average in nominal terms and receive higher deficit reduction contributions. These schemes also appear to have made use of recovery plan flexibilities, with the average recovery period lengthening by close to three years.
The analysis again splits some of the statistics to illustrate how they are impacted by employer covenant by assigning the reporting schemes in deficit to one of the four covenant groups which are a feature of the new framework within which the Regulator is regulating the funding of defined benefit pension schemes (see Pensions Bulletin 2013/50). Compared to tranche 7 (though these are different schemes with different sponsors) there has been a weakening in covenant strength.
Perhaps unsurprisingly, as the covenant group strengthens, when looking at all tranche 8 schemes, average funding levels on the technical provisions basis increase and, when looking at those in deficit only, the average length of recovery plans shorten.
