July 5, 2010

The Pensions Regulator's First Contribution Notice

I've just noticed that I wrote my last blog in December 2009. Tsk! what a shocking lack of commitment!

Thought I ought to write a short blog now just so I can remember what to do.

No doubt you will have heard about the Pension Regulator's decision to issue its first ever Contribution Notice on the Belgium based company Michel Van De Wiele N.V (VDW). The power to issue CNs was introduced in legislation in 2004 (and here was me thinking I was a bit dilatory in not having blogged in six months). To be fair to tPR, they are governed by quite complicated and untested legislation. Many commentators believe that tPR wanted to make sure it had a watertight case before using its powers in this way as a successful challenge could seriously dent its perceived power.

VDW acquired Bonas Ltd in 1998. The Bonas Group Pension Scheme had a large deficit, which VDW were keen to rid themselves of. In 2006 Bonas was put into Administration and its business was immediately bought by VDW in a pre-pack insolvency. I have written previously on the poor image of pre-packs (rightly or wrongly deserved) which you can read about here if you have a few minutes spare. http://tinyurl.com/3ab65re

The Bonas Group Pension Scheme entered the PPF in January 2007, therefore members will be receiving benefits at the level currently promised by the PPF.

The Contribution Notice is for just over £5million, this has been calculated as the deficit in the Bonas scheme on the PPF solvency basis on the date the notice was issued. One of the primary objectives of tPR is to protect the PPF and it would appear in this case that it has decided to give the PPF priority over the the members entitlement to full benefits. One might wonder why the Contribution Notice is not for a sum that will provide members with benefits in excess of the PPF underpin? As the scheme entered the PPF in 2007 perhaps it would be impossible to 'unwind' this and secure higher benefits? It would certainly raise further queries if tPR secured a higher return but members of the Bonas scheme did not receive more than the basic PPF entitlement.

Charlie Thomas and I chatted about how greater transparency from tPR could assist an industry looking for signals on dealing with the various knotty problems faced by pension schemes. Charlie wrote on this in her last editorial piece for Pensions Week, which you can read here: http://tinyurl.com/26spywu (Don't worry, it's a short one). Whilst it is clearly not realistic to expect tPR to open its heart (and its decision making processes) in all cases and situations. However, in order to assist us all and to avoid misunderstanding about its motivations and criticism of seeming 'odd' decisions, it would help if tPR threw the industry it regulates a bit of information every now and again.

Anyway, enough from me for now. Based on recent experience, the next blog I write could be wishing you a Merry Christmas.

December 18, 2009

Enhanced Transfers & Aviator Shades

You will probably have read the Chair of the Pensions Regulator's comments concerning his dim view of pension transfer incentive exercises (where sponsoring employers provide an enhancement to standard transfer values).

If you have the time you can read the full text of David Norgrove's speech here http://tinyurl.com/ye8cnwo .

Perhaps you actually attended the NAPF Trustee Conference and would like a souvenir of the experience, or maybe you were there and got locked in the toilets and missed out completely.

If you'd like to pretend that you were in charge of tPR you could deliver the speech yourself to an appreciative audience. Helpfully, the pauses in the speech are clearly marked out so you will know when to breathe. I'm planning to deliver it to my in-laws following Christmas dinner. I'll let you know how it goes.

However, if you're pressed for time (and are currently thinking of stopping reading about now) the highlights of the speech were Mr Norgrove's statement that "Trustees should start from the presumption that such exercises and transfers are not in member interests." He also added that "There may be individual circumstances that lead some individual members to make a transfer decision based on sound rationale and advice - but in general it is unlikely to be in members' interest to transfer out of a DB scheme."

TPR has said it has received reports of worrying tactics being used during enhanced transfer exercises, including:

execessive pressure to make a decision - with constant e-mails, phone call and home visits
the provision of misinformation, including a strong suggestion that the future of the scheme is at best uncertain
putting excessive time pressure on members to make a decision

Obviously, nobody condones transfer schemes where the incentive may be 'sending the boys around' or applying a 'chinese burn' so many seemed a bit miffed that tPR's message on the subject seemed to link enhanced transfer value exercises with shady practices.

As you would imagine, many commentators in the pensions industry have responded by saying that enhanced transfer exercises are appropriate and may be appreciated by scheme members if carried out correctly.

A few thoughts crossed my mind whilst reading Mr Norgrove's comments and the responses to it:

If trustees should presume that transfer values are not in a member's interest, what should they presume about standard (unenhanced) transfer value requests?
The Financial Assistance Scheme was partly a Government response to claims that it encouraged people to join DB schemes by overstating the cast-iron guarantees that they provided. Could tPR come under fire in the future if an overtly negative view discouraged members from taking an enhanced transfer value from a scheme whose employer became insolvent at some future point
No one would dispute that it would be wrong to provide misinformation about the future of the scheme i.e. suggesting that benefits may not be paid in full. However, some of the information that Trustees are required to provide to members, such as Summary Funding Statements can cause anguish in themselves and lead members to make their own conclusions about the future of a scheme. Telling members about what would happen in the event of wind-up and the operation of the Pension Protection Fund can (and does) cause some members to question the future of the scheme, especially if the funding level is poor. How much reassurance can a Trustee give to someone who is 10 or 20 years away from retirement.
A few years ago, when pretty much everyone in pensions agreed that most people should contract back into SERPS, some well known figures said that they would remain contracted-out as they preferred the certainty of money in their personal pensions to a government benefit that could have changed beyond recognition by the time they retired. Could you really tell somebody whose scheme benefits were in excess of the PPF cap that an enhanced transfer value would not be in their interest?

On this final point, it is interesting to note that the Telegraph recently reported that a number of pilots at British Airways, who are forecast to get quite high pensions, are transferring their benefits to other pension arrangements. http://tinyurl.com/y9hmzb4

One could imagine that a pilot set to receive a pension of, say, £75,000 per annum would not be greatly impressed to receive a pension of under £30,000 in which only the post 1997 benefits get any increases in retirement should the scheme fall into the PPF. Mind you, it would be hard to read their emotions if they were wearing aviator sunglasses.

British Airways pension difficulties are well known and I doubt that Willie Walsh would get a warm reception for suggesting an ETV exercise in the near future.

TPR may be thinking that if a company can fund an ETV then it can fund full pension benefits as they fall due. That may be the case in the short to medium term but you would be quite optimistic to argue that it would always be the case.

October 20, 2009

Spiked Helmets and Pensions

Do you like the title? I’m hoping that it will be the only page that Google finds should anyone find themselves wishing to search for archaic military headgear and its impact on pensions.

The link between the two is provided by Otto von Bismarck. I’ve listed some nuggets of information about old Bismarck below, which some of you may find interesting, or may just be useful in a pub quiz.

Minister President of Prussia between 1862 and 1890
Instrumental in defeating Austria in 1866 and France in 1870, which paved the way for the German Empire in 1871.
First Chancellor of the German Empire.
Nicknamed the ‘Iron Chancellor’ (I don’t know about you but I usually think that people given a name featuring ‘iron’ are a tad scary eg. The Iron Lady, Iron Mike Tyson, Iron Man, Iron Maiden,)
Operated a slush fund to bribe journalists and discredit opponents
Introduced the first state sponsored old age pension in 1889
Was partial to wearing a spiked helmet on formal occasions

It is the last two which provided the title for this blog. However, only one is relevant to the remainder.

Bismarck introduced pensions for two principal reasons. To steal the thunder of burgeoning socialist parties and to protect workers against disability caused by age, not it should be noted age itself. This is an important distinction; the pension was a safety net to protect those unable to work due to old age not an invitation to cease working. The pension age was set at 70, which may seem harsh when it is considered that average life expectancy was about half of this at the time but is understandable given the aim of the legislation.

There is obviously much discussion concerning state pension age at present. Generally the discussion surrounds how much it should increase by and when. The Conservatives made the news at their recent party conference by proposing increases be introduced a decade earlier than currently planned by the Government. The Institute of Directors has called for the state pension age to be raised to 70.

My state pension age is currently 67, who knows what it will be in 10 or 20 years time. I don’t know about you but I am not filled with enthusiasm by the thought of sitting at my desk at the age of 69 filling in online Scheme Returns (unless the technology exists so I can submit them telepathically). However, the state is not there to fund my retirement plans.

According to the DWP, a man reaching age 65 can expect to spend around 30% of his life in retirement. In 1950, a man reaching age 65 could expect to spend around 18% of his life in retirement. The state pension was not designed to cope with the increases in life expectancy that we are seeing today. The changes that are to be phased in recognise this fact.

Increasing the state retirement age will not be popular; age 65 has been in place since 1928. (Germany had already reduced it’s pension age to 65 in 1916). The Conservatives have stuck their neck out on their issue and it will be interesting to see if the Government adjusts its current plans in response. It has been suggested that state pension age could be linked to an index but one would imagine there would be a lot of argument about how this would work in practice. Perhaps, the government could adopt the practice of the insurance industry and base your state pension on your postcode (no, oh well, just a thought).

There is impetus for the state retirement age to increase more quickly than currently planned. If this occurs in practice, it needs to be accompanied by well presented and frequent explanations. What is more, people should be urged to seriously consider their future plans and how they intend to fund these. Personal Accounts will go some way towards this, but where these are introduced, members should be encouraged to view them as a foundation on which to build and not as the solution to their plans to cruise the Mediterranean in retirement.

Too many people adopt the position of Mr Micawber and just trust that something will happen to help them in retirement.

Information and education is key. I’m sure a bit of pensions knowledge at an earlier age would have been as advantageous to me, if not more so, as learning that Bismarck said ‘laws are like sausages, it is better not to see them being made’.

Richard Bryant

Atkin Trustees Ltd

www.atkin.uk.com
Tel: 01926 844040
Fax: 01926 844042

Notice: This e-mail message and any attachments are confidential. If you are not the intended recipient you should not read, copy, distribute or otherwise use the information in this e-mail. Please return the material received to the sender and delete all copies from your system.

Whilst we run anti-virus software on all internet e-mails we are not liable for any loss or damage. The recipients are advised to run their own anti-virus software.

We do not accept liability for any e-mail interception, data corruption, or unauthorised amendment, or the consequences thereof.

Any information contained in this message that does not relate to the official business of this firm shall be understood as neither given nor endorsed by it.

Regulated by the Institute of Actuaries in respect of a range of investment business activities.

Atkin & Co is the trading name of Atkin Trustees Limited. Registered in England No 2768340. Registered office: Oakslade, Station Road, Hatton, Warwickshire, CV35 7LH.

October 12, 2009

Campaign For Good Data – An ignominious start

I went to see the comedian Michael McIntyre recently. I won’t repeat any of the jokes in case any of you are going to see him on this tour. However, I did howl at his sketch on the spice rack. One of his repeated refrains was ‘how depressing is my life’.

For some reason, this catchphrase crossed my mind as I sat down and started typing. I’m now three years older than Alexander the Great was when he had conquered the known world; I’m sitting down to write my first ever blog which can be read by anyone with access to the internet and I’ve decided to address the topic of pension scheme data. Michael McIntyre is performing to tens of thousands of people. I’m hoping for something in the tens.

If you work in the pensions industry you will probably have a pension data horror story to be wheeled out at opportune moments (I usually start telling them when double glazing sales people ring me up in the evening).

Bad data is a hot topic. The Pension Protection Fund has recently estimated that 40% of schemes were delayed in entering the PPF because of bad data. This obviously has a ‘knock on effect’ on the costs borne by the transferring schemes and the amount of assets transferred to the PPF. Given the longevity of pension schemes and the number of changes they are subject to over the years (members, advisers, rules & legislation) data ‘black holes’ are an inevitability.

The PPF’s estimate is quite revealing. In the best case, one must assume that the Trustees and their advisers were unaware of the problems. At worst, perhaps there was awareness of potential problems but they were ignored or deferred for another time.

Full data audit exercises can be expensive; Trustees & sponsoring employers may baulk at the costs. Any administrator tendering for new work would be brave to push for a data audit exercise at the outset. Cost will be one of the major factors in the minds of the Trustees or sponsoring employer looking to make a new appointment. Factoring in the cost of a data audit exercise is not likely to impress. However, the PPF’s comments indicate that glossing over data issues is false economy.

The Pensions Regulator has obviously issued a good practice guide to record keeping which aims to help Trustees and administrators to check on the existence and accuracy of key data. This is a very useful document but is it enough to deal with the current data issues in the UKs pension schemes? Perhaps for bigger schemes where there are well informed trustees supported by good advisers and a supportive employer, but I can guarantee that there are many schemes out there with data issues which will not be picked up until such time as it reaches the ‘endgame’ where buy-out is considered or it enters an assessment period of the PPF.

The costs of bad data will become evident over time and ignoring the issue now just delays the inevitable. The case for more regulation on record keeping is compelling. It would be relatively simple for Trustees to be required to provide confirmation of compliance with tPRs guidelines in the annual scheme accounts on a ‘comply or explain why not’ basis. Similarly, Trustees could be asked to confirm compliance directly to tPR in the Scheme Return.

The risks and costs associated with poor data are great. Guidelines and encouragement can only go so far to remedy the issues; it may well be time for stronger action.