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Archive for the ‘Pensions’ Category

PPF index shows a slight slip

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The Pensions Protection Fund published the PPF7800 Index today for the end of April, showing the state of health of the 7,400 pension schemes under its supervision.

The Index is currently showing a small net deficit, of £2.2bn, reversing March’s small surplus (£0.3bn). Given the growing turmoil in currency markets during April associated with the financial and economic situation in Greece and other small EU countries, something which was only capped this week with the agreement between EU finance ministers, a drop of the Index back into negative territory is not surprising but the small-scale nature of the drop was a surprise, and a particularly welcome one.

Some 69% of schemes were in deficit this month, more or less the same as the 68.5% in March, which seems to support the view that the picture is, essentially, little changed. Evidently, this remains an uncomfortable proportion of schemes in deficit, even if the overall net balance of assets and liabilities lends the view that the average scheme is not all that much in deficit. The total assets of these schemes reached £913bn, a drop of 0.2% over the month and an increase of 18.2% since April 2009; total liabilities stood at £915bn, a small increase on the month but a drop on the £961bn recorded in April 2009.

During April, the value of both assets and liabilities deteriorated, the latter by more than the former (hence the drop of the net figure into negative territory). Over the year as a whole, rising stock markets have added 16.4% to pension scheme assets, while rising bond yields have added only marginally to liabilities.

So, overall the picture continues to be encouraging, although the change in the actuarial assumptions underpinning the calculation of the Index in October last year continues to affect the figures. Caution remains necessary – pension schemes are far from out of the woods just yet.

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Written by Calvin

11/05/2010 at 9:09 pm

IASB puts up new Exposure Draft on pensions accounting

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The International Accounting Standards Board has put up a new Exposure Draft proposing amendments to the accounting regime for defined benefit pension schemes.

The Exposure Draft is, essentially, the accounting profession’s way of publicly consulting on changes to the accounting standards which govern financial reporting regimes. Like everything else, accountancy is governed by global standards which seek to harmonise how accountants report company accounts; unfortunately, IAS19, which governs how defined benefit pension schemes are accounted for, is subject to the same short-termist approach as the rest of the corporate world, implying that it is inimical to the long-term nature of defined benefit pension schemes. Both it and its predecessor in the UK (FRS17) have been blamed, at least partly fairly, for contributing to the rush to close DB schemes.

The IASB has already been through a lengthy consultation process on its preliminary views on refining how defined benefit schemes are financially accounted for; this new consultation runs until early September this year. The Draft is available for public comment and the IASB aims to finalise its plans by mid-2011, with a view to the new standard becoming effective in 2012 or 2013.

The new Exposure Draft seeks to ‘improve’ (in the context, a word full of dread!) pension scheme accounting by requiring companies:

– to account immediately for all estimated changes in the cost of providing pension benefits and all changes in the value of plan assets

– to use a new presentation approach that would clearly distinguish between different components of the cost of these benefits

– to disclose clearer information about the risks arising from defined benefit plans.

Some of this inevitably needs decoding. According to KPMG, what this means in practice is that companies will henceforth have to stop booking a ‘profit’ in their accounts equivalent to the gap between expected investment returns and the interest cost paid on pensions liabilities. This ‘pensions credit’ is, essentially, a way of recording a paper profit from the pension scheme where schemes’ investment returns are higher – as they usually are, where schemes are investing in equities – than the AA corporate bond yield used to discount liabilities. The introduction of the amendments to IAS19, which will require the assessment of investment returns to be based on the same yield on AA corporate bonds, thus effectively ending the credit, will, clearly, lead to greater transparency in accounts – and, at the same time, to a further reduction in the attractiveness of running DB pension schemes.

KPMG’s press release quotes that this will ‘cost’ UK businesses £10bn in lost earnings, with the largest schemes facing a ‘loss’ of £50m per annum, while the ubiquitous John Ralfe believes that this will ‘cost’ BT £750m (turning a £500m ‘profit’ from the scheme on the existing basis into a £250m ‘loss’ under the new one). Ralfe has a long-standing antipathy to schemes investing in equities – as this blog has previously observed. In terms of the actual cost in individual cases, much would seem to depend on how much schemes have invested in equities – though (perhaps to disappoint Ralfe) this is unlikely to result in schemes adopting more cautious investment profiles in the interim.

Will it make much difference? Yes, clearly, to those schemes which remain open to future accrual (the BTPS among them): changes in accounting rules which take money away from the profit and loss account – however much such money was paper only, and regardless of whether pension schemes should have been used in this way to boost earnings – will have an impact on ordinary workers since that ‘profit’ will have to be found from elsewhere so as to retain the level of earnings. Whether it will lead to more schemes being closed, given the numbers of schemes which have already come crashing down and the weight of other arguments against running DB provision which already exist, is a moot point.

Certainly, however, it – together with the requirement for further ‘clarity’ on the risks associated with defined benefit provision – can’t help; I’m almost of the view that it’s the latter that is the most damaging feature of all this: regardless of the ‘losses’ which need to be made up, having to write (or read) even more stuff in company accounts about just how much risk is posed by running a defined benefit scheme may well end up wearing down even the most resilient of corporate defenders of DB provision.

Clearly, these remain tough, and worrying, times for DB schemes, and most of all for the members of them.

Written by Calvin

30/04/2010 at 6:19 pm

Posted in Pensions

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Pension Trends: ONS speaks on contributions

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The Office for National Statistics produced the most recent instalment of its ongoing Pension Trends publication, which it appears to update on a rolling basis, last Friday. This most recent update is for Chapter 8, on pensions contributions.

The headline stuff from the report, and the policy implications that flow from it, has been pretty well rehearsed – and is also there in one-page summary at the start of the document. Total contributions into pension schemes went down in 2008, for the first time since the series began in 1995; while the level of total saving in DC schemes, at around 9.1% of salary, not only compares poorly relative to the level of contributions going into DB schemes (21.5%); but also in absolute terms, in the context of the levels of contributions generally thought necessary to produce a decent income replacement rate in retirement. Employers pay around 70% of the contributions, which closely aligns with the policy of the Connect Sector of Prospect for a split of two-thirds: one-third between employer and employee contributions.

These things we know (not least because the ONS has already reported them in its annual survey (press release; report). What I did find particularly interesting about the updated chapter 8, however, was Table 8.14, which reports the changing levels of employer and employee contributions since 2001 by type of scheme; specifically, funded and unfunded ones.

This reports that employer contributions into funded schemes has more than doubled since 2001, to 32.7% (although now apparently off its peak), while the employee contribution has also risen, to 7.1%. In unfunded schemes, the employer contribution has also risen, to 14.8%, but it is the employee contribution that has more than doubled, to 7.5%. Thus, the ordinary members of unfunded schemes are actually paying a higher level of contribution into their pension schemes than are members of funded schemes, in absolute terms, as well as a higher proportion of the employment-based costs of such schemes.

Well worth bearing in mind when considering the position of unfunded schemes and the debates over pensions provision in the UK.

Meanwhile, Philip Inman has an ill-considered and over-the-top piece in The Guardian today which purports to name ‘the California teacher, the BT engineer and the German car worker‘ as ‘the real villains of the piece’ in the global economic crisis, as a result of their membership of occupational pension schemes (the California teachers pension is the second largest in the US; the BT Pension Scheme is the largest private scheme in the UK; and the German car worker – well, it fits the thrust of Inman’s story). According to Inman, it is chasing the level of returns required to finance an ‘otherwise unaffordable’ retirement, forcing investors to ‘stop at almost nothing to win big’, which is to blame for creating the global asset bubbles which led to the crisis. Hold the history books! I thought it was greed that got us in this mess, when after all it was ordinary folks just trying to do an honest job to give us the retirement pensions that we so unreasonably demand…

Bearing in mind that very recent ONS data records that pension funds only account for around one-eighth of the UK stock market, and consistently so since 2006, it’s a little difficult to believe that yours and my pensions are really at fault for investment managers’ speculative activity: still less to pin it down to the ‘greed’ of workers for an ‘affluent retirement’ via their membership of occupational pension schemes. More prosaically, schemes will invest in a variety of investment vehicles commensurate with the age profile of their members. Some of that will be in high risk assets; some in low risk ones. According to its most recent Annual Report, the BTPS invests some 41% of its assets in low risk vehicles such as fixed interest accounts and inflation-linked savings; a further 11% in property, 35% in shares and 12% in alternative investments. That doesn’t look so irresponsible to me, still less the sort of investment profile which gives a green light to investment managers to ‘rape and pillage’ on their account.

A rather shameful piece in this respect, Mr. Inman.

During April and May, the Connect Sector of Prospect is asking branches to help members understand the importance of pension provision and the advice they can get from the union in this area: if anything in this post confuses, concerns or alarms you, why not have a word with your branch principal officers and try and arrange something which seeks to respond to your concerns?

Written by Calvin

12/04/2010 at 4:18 pm

CBI on public sector pensions

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The CBI has put out a report today on public sector pensions (press release; report).

The CBI claims to speak for businesses which ’employ around a third of the private sector workforce’ and to ‘communicate the British business voice around the world’. So, I’m almost tempted to ask ‘what has public sector pensions got to do with you?’ – except, of course, that decent quality public sector schemes highlight the decline into sheer inadequacy of pensions provision across much of the private sector and may also – in somewhat better times – act as a source of pressure on the private sector to improve its own levels of provision. So, the ‘voice of business’ has indeed a very clear reason to intervene in the debate on public sector pensions.

Aside of the usual prejudice in the report – for example, the continued misuse of the total size of the deficit in public sector schemes, as if bill had to be paid now rather than amortised over a period extending well into the future – what is the CBI actually saying should happen to public sector pensions?

No changes to existing accrued rights – that’s clear. But, for the future, what it wants to see is higher retirement ages for all staff, not just new joiners, and for all public sector workers to be moved off defined benefit provision (including career average schemes). Funded schemes (within this context) would be able to choose their own route, while those in unfunded schemes would be shifted into a new type of provision called ‘notional DC schemes’. Here, contributions are built into a series of personal accounts but, instead of being invested in the stock market, are revalued in line with rises in earnings or prices before being used at retirement to buy an annuity.

The CBI doesn’t state what sort of pensions it expects these personal accounts to buy. Over time, and taking a long-term view of pensions investments, simple revaluation is, however, likely to lead to much smaller individual pots than even a ‘conventional’ DC scheme invested in a range of types of investment commensurate with an individual’s age and risk profile. Consequently, notional DC schemes are likely to lead to much smaller pensions.

This leads me to a couple of points:

1. Why does the CBI expect public sector workers in unfunded schemes to have retirement pensions which are substantially poorer than existing DC provision?

2. As a society, do we really want the burden of paying additional state benefits to people unfortunate enough to be in such schemes? The switch to DC schemes in the private sector is already loading the state with additional, and unpredictable, burdens in the future as a result of the pensioner poverty that will be the result; do we really want further burdens from forcing public sector workers into even poorer schemes?

Having a majority of public sector workers in these sorts of schemes would certainly alleviate the potential comparative pressures on private sector employers. Establishing poorer pensions provision into the public sector increases the relative attractiveness of private sector employment – and at no extra cost. It also underpins the removal of the ‘burdens’ on business of decent pensions provision, since it helps to establish existing ‘conventional’ DC provision as the standard. (The burdens on the taxpayer of having a greater number of pensioners reliant on the state for income, and the concomitant reduction in available money to spend on CBI members’ goods and services, is perhaps a concept too far removed from the CBI’s preoccupations and thinking.)

Whether this would lead to private sector employers following suit is uncertain – and perhaps unlikely, since private sector employers are largely interested in containing costs, and switching to ‘conventional’ DC provision tends to do that within existing arrangements establishing pension contributions at fixed levels. So, this move is unlikely to form part of a further general spiral of decline on top of that already in motion. If employers did follow suit, however, it is interesting that the prospect of such poor pensions in comparison with even existing DC schemes is likely to increase pressures on those employers who had gone down such a road to raise contribution rates, since this is one of the few variables that could be changed to improve the eventual outcome.

[Same day edit: The FT‘s report of the story carries a reference to there being a cash balance element to the CBI’s proposals (in which the lump sum that members receive on retirement prior to conversion into annuity reflects a percentage of pay for each year worked, revalued in accordance with prices or earnings). If true, this would alter some of the emphasis of the last half of this post – since the pensions thus generated would be better than it envisages (while remaining poor). However, while the CBI report refers to cash balance schemes at an earlier point in the text, I can’t see there being a cash balance element to the way it writes up its proposals for a notional DC scheme (and, anyway, if it’s intended to be a cash balance scheme, why call it ‘notional DC’?]

Written by Calvin

06/04/2010 at 12:42 pm

Future pensions: the view from the NAPF mountain

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A state pension worth around 1/3rd of average earnings to provide a robust floor of benefits, supplemented by a workplace pension built around auto-enrolment and mandatory contributions, the whole supervised by a new regulatory settlement based on a standing Retirement Savings Commission analogous to the existing Low Pay Commission.

That’s the vision of the National Association of Pension Funds, the industry body representing scheme sponsors, in Fit For the Future, a new report on pensions published yesterday (press release; full report). Praised by the TUC as offering ‘serious and constructive proposals for the future of pensions‘ there’s a lot in the report to commend, as well as some items for debate.

It’s hard to disagree with the NAPF’s view of the pensions landscape: workplace saving has fallen dramatically both in terms of numbers and in terms of the value to ordinary workers of the pensions generated there. Rightly, the NAPF doesn’t spend too long analysing how this situation has come to pass, but is oriented more towards what can be done to stop the decline and get the principle of workplace saving back on track.

There are many factors which help to account for why this situation has come to pass, as these pages have already argued; though it would be perhaps rather churlish in this context to remind that decisions to close schemes appear to stem largely from the unsympathetic and ruthless cost-cutting actions of scheme sponsors themselves. The Connect Sector of Prospect has some experience of negotiating alternatives where employers are looking to move away from defined benefit provision; outside this experience, that employers have tended not to stop anywhere in the middle of the pensions continuum but have leapt straight from defined benefit to defined contribution is less of a reflection of the lack of risk-sharing alternatives, as the NAPF directly suggests, than of the realities of employment relations in the 1990s: employers have done so because they can; and because the will to do something more creative (but evidently more costly) has not, except in a few, admirable cases, been found.

Despite the acknowledgement that ‘workplace pensions remain central to providing people with an adequate
retirement income’ and that workplace provision is ‘at the heart of good pension provision’, the central role in the NAPF’s vision is occupied not by workplace saving, but by a beefed-up state pension scheme – perhaps rather surprisingly, for an organisation representing (workplace-based) scheme sponsors, but perhaps a reflection that what has been lost will be hard to replace other than by slow incremental steps, starting from the 2012 reforms. Even within the context of workplace savings, the primary place in the NAPF programme is taken by a suggestion for a maximum of twenty ‘super trusts’ whose role would be to offer members of small schemes the low charges facilitated by the benefits of scale – a worthwhile, and supportable, idea alongside the NEST but whose contribution to revitalising workplace provision might well turn out to be less than dynamic.

Other suggestions from within the workplace savings context include offering ‘core’, unindexed pensions to scheme members only (it seems to me that indexation is an under-appreciated pensions benefit; while a focus on the scheme member only might be supported when retirement is far away, but deeply regretted once into retirement since ensuring loved ones are provided after your own death becomes much more important the closer you get to that point); improved mandatory contributions to the NEST (definitely supportable); better advice to accounting standards bodies on accounting for pensions (likewise); and a new statutory objective for the Pensions Regulator to promote good pensions provision (clearly a good idea).

So, there are some worthwhile things to explore in this document and the NAPF is to be congratulated for putting it out. It would be a shame if its publication at this point in the electoral cycle led to its many good ideas being lost to public debate. Nevertheless, in the meantime, I’m reminded once again that quality pensions expanded and became more beneficial at a time of labour strength; their contraction at a time of labour weakness simply proves that advances in benefits have to be won by collective action and are not given away by employers for free.

Budget Day 2010

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ToUChstone, the TUC’s policy blog, has linked up with Left Foot Forward, Labour List and Liberal Conspiracy in the Progressives Liveblog of this afternoon’s Budget speech.

Click on the link on the right and join ToUChstone for commentary and debate on the Budget from 12 noon today, for coverage of Prime Minister’s questions, and then straight through into the Budget.

Meanwhile, the TUC’s pre-Budget statement calls for:

a Budget for growth, jobs and a better balanced economy that moves away from sucking up to the finance sector and instead invests in productive industries and green jobs,

The statement also calls for honesty in the continuing debate about public services and for politicians to spell out what they mean rather than hiding behind smokescreens and euphemisms.

As far as pensions are concerned, a debate which focuses on the facts rather than the myths would also be helpful.

Written by Calvin

24/03/2010 at 10:15 am

NEST charges set at 0.3%

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The DWP has confirmed the charging structure for NEST – the National Employment Savings Trust (the new name for the system of personal accounts being implemented from 2012). This has been welcomed by the Personal Accounts Delivery Authority.

The structure will have two components:

– an annual management charge, levied on the value of funds in the account, of 0.3%

– a 2% charge on contributions.

The latter is intended to be an interim measure intended to fund PADA’s start-up costs, after which time the charging structure is expected to fall away to leave only the 0.3% AMC. PADA has published an accompanying briefing note arguing that this structure meets the aims of the Turner Commission and that the twin element leaves median savers in the target group, even in the short-term, better off than with an AMC of 0.5%. Certainly it meets the government’s response to the Turner Commission, which centred on a belief that it was possible to achieve an AMC at a rate of 0.5% of funds invested in the short-term and below 0.3% in the long-term.

The PADA report also argues that such a charging structure is significantly lower than what most savers in the target group could currently achieve (not least in comparison with stakeholder pensions) and one comparable to that achieved by high earners and savers in large schemes. Clearly those in the scheme from the beginning will be faced with higher charges than those who come in later – and arguments have been raised that those saving for a short time before retirement are likely to be hit relatively highly by the charging structure (see BBC news report). Nevertheless, if PADA is right that such a structure is equivalent to a 0.5% AMC at the median, then such arguments do carry less weight (although PADA does acknowledge both situations in its report). It’s also true that those who are in the situation and with funds less than, currently £17,500 may also benefit from the trivial commutation rules.

The impact of a low charging regime on pensions in payment under the scheme is key, as David Pitt-Watson’s RSA report recently explained, and its achievement in this context will help NEST achieve its main objective in addressing the problem of under-saving for retirement amongst low to moderate earners. (Pitt-Watson repeated this point at the recent launch of the Unions21 report Tomorrow’s Pensions.) Figure 3 of the PADA report also highlights the impact of high charges on the overall pension pot – in particular for those switching between schemes.

So – another welcome step along the road to the establishment of NEST. Nevertheless, it is somewhat worrying that research continues to highlight that a higher proportion of those in the key target group are likely to opt out of auto enrolment in workplace saving – up to 40% of low-paid workers on less than £15,000. Clearly auto enrolment and NEST are different concepts – up to the point that auto-enrolment in companies that do not currently offer a scheme is likely to conclude in enrolment in NEST. Political uncertainty over the future of NEST cannot help, and it is clear that there is a level of confusion – backed up by misinformation, some of it deliberate – out there which precludes a more positive reaction at this stage.

As part of the education campaign for which Hymans Robertson is also calling, there is a need for clear, explicit and punchy arguments of the merits of workplace savings, not least in NEST. Here’s my starter for five:

1. a 4% personal contribution triggers an additional 1% from HMRC and, more importantly, 3% from the employer: a doubling of your savings at no cost to yourself. And it’s part of your pay, just deferred until you retire.

2. workplace saving is an easy way to start to save, and then to keep doing so, since the money comes straight from your wage packet

3. the state benefits on which you might now be relying to save you from poverty in retirement may not be there when you get to retire, or they might not be worth what they are now

4. low charges in NEST means more of your savings go to fund your pension pot

5. decent flexibility: you can change your contributions whenever you want and, once you reach 55, you can get at your funds whenever you want.

Any others?

Written by Calvin

16/03/2010 at 6:11 pm

Posted in Pensions

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