Pension News July 2008

September 7th, 2008 by JCB
Posted in Pensions News | No Comments »

This is a summary of my presentation given to the U.K.M.P.A at their annual conference held in Harrogate in May 2008.

P.N.P.F. 2008

Richard Williamson, as Chairman of the P.N.P.F., told the members what had been happening to the fund since last we all met in November 2006. I, therefore, dealt with the more turgid topics of current affairs in the Pensions World.:

Pensions Bill

Since November 2006 there have been several new pension bills, one of which is currently working its way through Parliament. Each bill has been a little bit different from the last. The 2004 bill concentrating on protection of scheme benefits and the 2008 Bill concerned with Personal Accounts, the central thrust of the Bill being auto-enrolment.

The new requirement of the 2008 Bill will be that nearly all U.K. employees will be put into a pension scheme by their employer, the default scheme will be Personal Accounts if the employer does not have a suitable scheme of its own.

Under the Bill employers must automatically enrol all employees between age 22 and state pension age into a “suitable” pension scheme. Suitable being:

• The company’s own occupational pension scheme
• Personal Accounts, which will be a centralised scheme.
• A personal pension arrangement

Enrolment should take place as soon as a member is employed, but where the scheme provides benefits above the minimum required by Personal Accounts then a waiting period of up to three months will be allowed. For a defined benefit scheme it must provide benefits broadly equivalent to or better than a pension payable from age 65 with a 1/120^th accrual rate.

Employees will be allowed to opt-out should they so desire.

The Pensions Regulator will be responsible for monitoring and enforcing the new legislation. The Bill also covers amendments to existing occupation pensions legislation, including a new power for The Pensions Regulator to impose its own calculation of technical provisions if it does not think the trustees have been prudent enough.

Budget 2008

Alastair Darling was always going to find Gordon Brown a hard act to follow as Chancellor, therefore to set his own stamp on the budget he decided to adopt a “go green” approach. Many of the environmental measures in his first budget do not directly target pension schemes, but show the increasing effect that this area of policy is likely to have on every aspect of the economy.

The measures in the budget that do impact on pensions include.

· Changes to authorised payments

· Changes to the Lifetime and Annual allowance, which have been raised to £1,650,000 and £235,000 respectively

· Easement in the trivial commutation rules

· Easements to the rules concerning taxable property and 25% lump sum rules

· Confirmation that in calculating deductions for corporation tax purposes in respect of pensions costs a company can only use the pensions contributions actually paid.

An Agenda for Trustees

There are vast arrays of important issues facing trustees and it is essential they tackle these matters, some of the key topics are:

(1) Governance

The trustees need to demonstrate ‘good governance’ in the performance of their duties. A good governance structure will help the trustees in minimising risk, identifying and maximising efficiencies and identifying interest of scheme members. The attributes of good governance include:

· Proper and timely execution

· Good decision making

· Clear accountability

· Regulator review and assessment

(2) Investment Strategy

An expanding range of investment choices has added to the complexity of this area and increased demand on trustees. The trustees’ primary concern lies with the interest of the members of the scheme, but matching the expectations of members has never been easy in respect of investment returns. The time required of trustees to make informed decision on investment strategy is increasing dramatically now that choice and complexity is so high.

(3) Employer’s Covenant

A key aspect of the new requirements for scheme funding is the need for trustees to assess the covenant of the employer. One of the greatest risks facing defined benefit pension schemes is the financial position of the employer and its ability to service the pension scheme.

(4) Scheme Funding and Recovery Plans

When going through the funding process the trustees must bear in mind The Pension Regulator’s (TPR) policy on “triggers”, most notably the funding target for technical provisions (aka scheme liabilities) and the shortfall recovery period. For the technical provision TPR’s primary focus will be on ensuring they are prudent given the scheme’s circumstances.

For the recovery plan(s) TPR has retained a ten year trigger point, but has emphasised that this should not be considered the industry “standard”. Recently TPR has issued a consultation document on longevity assumptions, which may in themselves become “triggers” as TPR has stated that 96% of all valuations are using longevity assumptions that are not prudent enough to take into account that people are living longer.

(5) Internal Controls

The Trustees are responsible for assessing the risks to the scheme, and not just the financial ones, and documenting the controls in place. Where a control framework is in place a review and update should be undertaken on an annual basis.

(6) Trustee Assessment

A key element to good governance is assessment of skill and knowledge. Trustees should be making formal assessments of their own procedures and decisions, which include their skills and knowledge following assessments of strengths and weaknesses action plans for improvements can be developed.

Survey

I thought we could end on a recent survey carried out by Axa which has discovered that most people in the U.K. fear public pension reforms will mean they will retire on less state benefits and have to work longer. 91% think it will mean an increase in the number of years they will have to work. Whereas 57 % of the U.K. workers think they will have enough to live on, 64% of retirees say their retirement income was sufficient. Over 80 % thought they would have a better retirement than their parents, but only 40% thought their children would have a better retirement.

Harrogate was lovely and I would like to thank the U.K.M.P.A. for inviting me.

Debbie Marten

Debbie@pnpf.co.uk