The end of the road for executive pensions?
As the debate rages in the press as to whether the Government’s Green Paper on the future of pensions tax relief is a genuine consultation, LCP’s annual executive pensions survey published this week suggests that a new system could scarcely be worse for executives than the currently proposed post 2016 system.
The survey suggests that, insofar as executive pensions are concerned, the progressive reductions in the annual and lifetime allowances, including the tapered annual allowance for high earners introduced by the Summer Budget, already spell the end for executive pensions from next April.
This year the survey focusses on executives in FTSE 100 companies, confirming the continued move towards flexible forms of pension compensation. Seven out of ten FTSE 100 executives in the survey receive a flexible combination of defined contribution and salary supplement of cash, or cash alone. Only one out of ten still has a DB pension.
Auto-enrolment steams ahead
The latest annual report on the progress of auto-enrolment published by the Pensions Regulator contains some eye-catching statistics, including the discovery that 500,000 more small and micro employers are expected to be “staged” into the system over the next three years than had previously been thought.
The Regulator reports that 1.8 million small and “micro” (employing less than five people) employers are expected to comply with their auto-enrolment duties over the next three years, peaking over the summer of 2017 when 350,000 employers are expected to be staged (compared to last year’s estimate of a peak of 220,000 in the summer of 2016). Explanations for this huge increase include more start-up businesses and fewer business failures than previously expected.
The Regulator also says that 5.2 million eligible jobholders were auto-enrolled by March 2015, joining the 9.3 million workers who were already active members of qualifying schemes. This represents a milestone in that more than half, 59%, of UK employees are now saving into a workplace pension (up from 47% in 2012). However, of the 20 million strong workforce whose employers have reached their staging date, some 5.1 million employees remain unpensioned – almost certainly the vast majority because they do not meet the requirements for the auto-enrolment duty to apply.
The Regulator concludes by saying that over the coming year it will focus its attention on educating and enabling small and micro employers to comply with their duties, as well as overseeing the first group of large employers through the re-enrolment process.
Comment
Auto-enrolment implementation successfully continues (and this despite concerns about adviser and provider capacity issues which the Regulator says have not materialised). No doubt the next few years will be very busy but it is hard to argue with the proposition that the policy is a successful one.
Ombudsman says that schemes don’t need to address GMP inequalities right now
In a determination that may not find favour in Government circles, the new Pensions Ombudsman, in turning down a complaint from a member, has concurred with the view of the scheme’s new administrator that now is not an appropriate time to take action to address GMP inequalities.
The case concerned a deferred member, who on approaching his normal retirement age in 2013, received an estimate of his retirement benefits from the then scheme administrator. This was shortly followed by a different and higher estimate from the new scheme administrator. Both relied on an actuarial increase that, under the scheme’s rules, the Scheme Actuary needed to certify as being reasonable.
The new administrator employed a different methodology to the former administrator, in particular including a “Barber underpin” check in relation to that part of his deferred pension that had accrued between his joining the scheme on 1 August 1991 and 17 November 1999 when that scheme’s “Barber window” closed. To add further to the complexity, the scheme’s normal retirement age for males went from 62.5 to 65 on 1 January 2003, necessitating a separate “2003 underpin” calculation.
The member raised objections to the second administrator’s calculations, including in relation to GMP inequalities (which was likely to have little impact in his case). He also came up with his own (even higher) estimate. But the Ombudsman ruled that the second administrator’s calculations should stand.
Comment
In reaching his decision, the Ombudsman chose not to pry into the whys and wherefores of the calculations undertaken by either administrator, deferring to the professionalism of both Scheme Actuaries. But what will grab the headlines is that he also took the line that, until the Department for Work and Pensions reaches a landing on the GMP inequality issue, the scheme can defer taking action on it.
PPF sheds more light on route to self-sufficiency
The Pension Protection Fund has provided more clarity than ever before on what it means by “self-sufficiency” and how it intends to get there in its latest Long-Term Funding Strategy Update.
Following last week’s Annual Report and Accounts (see Pensions Bulletin 2015/32), the funding strategy update gives further detail on how the 88% likelihood of reaching self-sufficiency is calculated. In particular it states that the self-sufficiency target in 2030 is:
- An amount of money at 2030 that is the PPF’s best estimate of the amount needed to pay future benefits (so has a 50% chance of paying future benefits); plus
- A 10% additional margin, which is intended to have the effect of giving the PPF a 90% chance of being able to pay future benefits in full
The significance of 2030 is that this is the point at which the PPF believes that the levy will no longer be an effective tool for managing the PPF’s funding position as it will be so small in comparison with the PPF’s assets and liabilities. By this point in time (which the PPF calls the “funding horizon”), the PPF will want to have adopted a lower-risk investment strategy.
The original intention was that by 2030 the only risks that would remain would be longevity risk and future claims risk. This has now changed, with both the PPF’s intended investment in long-term illiquid assets and the probable absence of CPI-linked investments in future both likely sources of investment risk from 2030.
Other assumptions to be changed over the year include a lower expected recovery rate for claims following an insolvency, updated longevity and age profile assumptions, revised correlations between insolvency levels and the state of the economy and recognition of the differences between the PPF funding basis and the PPF levy (section 179) basis.
The drop from a 90% likelihood of achieving the self-sufficiency target by 2030 last year to 88% this year has been caused primarily by lower scheme funding levels and changes in data, but this has been mitigated slightly by the PPF’s improved funding and the net effect of assumption changes. The figures assume that schemes which are almost certain to fall into the PPF in the coming years have already fallen into the PPF.
Trustees and employers may be interested to learn that the PPF’s interest rate projections are based on models that allow for mean reversion, and their view of the long-term difference between RPI and CPI inflation is 1.1%.
Comment
It is helpful to have a clearer view of the PPF’s definition of self-sufficiency, and interesting that it equates to a 90% chance of paying benefits in full. The PPF Board is of the view that 90% strikes an appropriate balance between the security of the members and the cost to levy payers. If that percentage were to increase, to put the PPF on a footing similar to insurers, there would be a magnified effect on levy payers who have been getting used to falling levies as a proportion of section 179 liabilities.
PPF outlines how it will respond to pre-packaged administrations
The Pension Protection Fund has provided more detail on how it will respond if it believes a pre-packed company administration is not properly taking into account the views of trustees or the PPF.
Pre-packaged administrations, or “pre-packs”, are used to immediately transfer the business and assets of a company to new owners free of the liabilities – including the pension scheme – of the old company. Whilst there can be good commercial reasons for doing so there have also been cases where pre-packs have been used to try to “dump” pension scheme liabilities on the PPF.
Where the same insolvency practitioner intends to continue as the officeholder in the subsequent liquidation or company voluntary arrangement, PPF Restructuring & Insolvency Team - Guidance Note 2 confirms that the PPF will:
- Consider the extent of trustee/PPF consultation before the insolvency practitioner’s appointment; and
- Assess whether the views of the trustees/PPF have been properly taken into account as a result of this
Where the PPF has concerns this may lead to it appointing an alternative insolvency practitioner. The PPF will also consider the need for a compulsory winding up order if the new company will be dissolved immediately after administration.
The guidance concludes by stating the factors that the PPF will consider in reaching its decision.
Comment
This is the second “guidance note” issued recently by the PPF’s Restructuring & Insolvency Team. In its first, it warned that in situations like those described above it may well take the actions listed. This latest guidance note expands on this policy which is designed to protect the PPF.
MEPs give the thumbs down to the holistic balance sheet
As the European pensions directive, “IORP II” (see Pensions Bulletin 2014/40) continues to go through the wheels of the EU legislative process, a group of MEPs has cast doubt on the EU imposing solvency requirements on pension schemes.
This has come to light via the publication of a draft report by the European Parliament’s Committee on Economic and Monetary Affairs, led by the rapporteur, Irish MEP Brian Hayes.
Many of the detailed amendments to the draft directive (the report is over 130 pages long) are a tidying-up exercise. However, there are some interesting interventions of substance by the Committee. Most strikingly a new recital is proposed, which it is worth setting out in full as follows:
“The further development at Union level of solvency models, such as the Holistic Balance Sheet (HBS), is not realistic in practical terms and not effective in terms of costs and benefits, particularly given the diversity of institutions within and across Member States. No quantitative capital requirements - such as Solvency II or Holistic Balance Sheet models derived therefrom - should therefore be developed at the Union level with regard to institutions for occupational retirement provision, as they could potentially decrease the willingness of employers to provide occupational pensions’.
If this does make it into the final version of the directive then it puts a European solvency requirement out of bounds for the medium term at least.
Other significant changes proposed by the report are:
- A requirement for schemes to be fully funded whenever they set up as “new” or “additional” schemes, whether cross-border or not
- A right for members to transfer to other pension schemes both cross-border and within member states; and
- The common pension benefit statement envisaged in the Commission proposal is accepted as an idea but most of the prescriptive detail is stripped out and replaced with a statement of guiding principles
We expect further debate in the Parliament in the autumn and eventual adoption of the directive early next year so it is likely that we will have new UK pension law early in 2018.
Comment
The grandiose ambitions of the Barnier Commission to impose a catastrophically onerous funding regime on UK plc seem to lie in tatters. Even if the Parliament’s proposed anti-solvency recital does not make the final cut then it seems clear that the mood in Brussels now is against such a thing. We are not quite ready to read the last rites for EU-imposed solvency for pensions but the time might not be far away. One might also wonder what the point now is of the quantitative assessment (see Pensions Bulletin 2015/21) currently being conducted by EIOPA and the Pensions Regulator.
DWP updates its new State Pension documents
The Department for Work and Pensions has updated its fact sheets covering the new State Pension scheme. They explain what it is, how it is calculated, its dependency on building up a national insurance record (through contributions or credits), how the self-employed will be affected, and how deferral of the pension works. There are also fact sheets on the current State Pension scheme and how it can be topped up. A final fact sheet covers how a State Pension can be obtained through a spouse or civil partner’s national insurance record (mainly for those in the current State Pension scheme, although there are some exceptions in the new State Pension scheme).
A longer guidance document on the new State Pension scheme has also been updated.
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.
