Transfer values Government consults on draft regulations

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1 12th July 2007 Issue No: 29 Pensions Bulletin Transfer values Government consults on draft regulations Further to the consultation last summer (see Pensions Bulletin 2006/33) and the government s statement of intent at the start of this year (see Pensions Bulletin 2007/03), the Department for Work and Pensions has issued draft regulations in the form of a consultation document. The main purpose of these regulations is to incorporate much of actuarial guidance note 11 (GN11) into regulations, re-expressing where necessary so as to fit with the government s statement of intent. There are no plans for the Board for Actuarial Standards to issue a standard to support the new approach. The key requirement is for the initial cash equivalent to be calculated on an actuarial basis, by reference to the scheme s normal pension age, to make provision within the scheme for a member s accrued benefits, options available to the member that would increase the initial value of the cash equivalent and discretionary benefits (to the extent that the trustees decide shall be taken into account). Trustees, not the scheme actuary, determine the assumptions to use (although they should seek actuarial advice). Such assumptions must be best estimate and must have regard to the class of member to which the member belongs, the scheme s current investment strategy for that class, anticipated changes to the strategy as those members age and the yield on assets held by the scheme and the anticipated future investment returns. There is no need for the trustees to certify their approach (unlike that currently required of the scheme actuary). The regulations also: Allow the initial cash equivalent to be reduced to reflect any reasonable administration costs incurred by the scheme. Remove the requirement for consistency between the bases of transfer in and transfer out calculations it is left for trustees to decide how they will award benefits in respect of incoming transfers although it is expected those transferring in would be made aware of any differences in calculation. Replace the GN11 report, required if transfer values are to be reduced, by an insufficiency report but the requirements remain broadly the same. Require the trustees to tell members that the Financial Services Authority and the Pensions Regulator provide information that may help them in their decision, and advise members to consider taking financial advice. The regulations also make amendments that are not related to the withdrawal of GN11. These include the ability to increase or decrease a cash transfer sum from a defined contribution scheme to reflect any changes in the value of the underlying investments between the date of leaving service and the date of surrender or disinvestment. The Department for Business, Enterprise and Regulatory Reform is considering the arrangements that will apply to directors disclosures in company accounts from April

2 Additional draft guidance relating to the calculations for public service pension schemes will be released at a later date. Consultation closes on 17th August 2007 and 6th April 2008 remains the target for implementation. The limited change to the current transfer value procedure is both expected and welcome. Although there are certain issues to be clarified it is hoped the transition will not be too onerous for the majority of schemes. Second Governance survey Pensions Regulator The Pensions Regulator has published its second occupational pension scheme governance survey. Key findings are that: there has been an increase in trustee training and high levels of trustee training continue to be associated with strong governance; schemes are not experiencing significant difficulties in recruiting or retaining trustees; scheme confidence in managing conflicts of interest has increased significantly, and most schemes consider they manage conflicts effectively; the majority of defined benefit schemes have investigated the financial standing of the employer in the past year; and larger schemes are monitoring scheme administration more closely than smaller schemes. However, there are areas where there has been little improvement, such as in risk management and internal controls, and managing scheme administration. Pension trends survey Association of Consulting Actuaries The Association of Consulting Actuaries (ACA) has published a second summary of the findings of its most recent survey of pensions trends, carried out earlier this year (see Pensions Bulletin 2007/24 for the first instalment). The main findings of this second report are: the trend for defined benefit (DB) scheme closure continues, with 81% of respondents reporting that their defined benefit arrangements are now closed (up from 68% two years ago) and 14% of such schemes are closed to future pension accrual too; the trend for trust-based defined contribution (DC) schemes to be replaced by contract-based plans, notably group personal pensions (GPPs) has also continued; contribution rates continue to move upwards: DB rates now average 22.6% for employers and 6.1% for employees; Page 2

3 DC rates now average 6.2% for employers and 4.1% for employees; Whilst average employer contributions to DC arrangements have increased, they are still significantly below the levels that are likely to provide benefits equivalent to DB arrangements. The ACA maintains that a high proportion of today s employees will be seriously under-pensioned due to the combined effect of inadequate contribution rates, improving longevity and the inherent volatility of investment returns under DC arrangements. The ACA summary of contribution rates is slightly different to that reported in the National Statistics survey detailed below, but this is to be expected as the two surveys were carried out over different timescales. Occupational pension schemes survey 2006 National Statistics The Office for National Statistics (ONS) has published the results of the first survey of occupational pensions schemes since it took over responsibility from the Government Actuary s Department (see Pensions Bulletin 2006/25). The key findings of the 2006 survey as they relate to private sector occupational pension schemes are: there are an estimated 13,700 schemes with 12 or more members (500 fewer than in 2005), and a further 59,100 with fewer than 12 members (up from 55,000); there are some 4.4 million active members of schemes (down 0.3 million), continuing a decline since million of these are in DB schemes and 1.09 million in DC schemes; 41% of active members are now in closed schemes, 95% of these in closed DB schemes, 53% in schemes with more than 10,000 members; there are 5.1 million pensions in payment (down 0.2 million), and a further 7 million preserved pensions (up 0.6 million); 75% of active members are in contracted-out employment, and of these, 87% are in contracted-out DB schemes; 63% of schemes have 65 as the normal pension age (only 38% of public sector schemes follow suit, 55% still operate a normal pension age of 60); employer contribution rates to open DB schemes increased to 14.2% (from 12.1%) and for closed DB schemes fell from 17.0% to 15.0%; and contribution rates to open DC schemes fell from 9.1% to 8.9% and for closed DC schemes increased from 7.3% to 7.8%. The results for contribution rates in this survey show a smaller difference between DB and DC schemes than the ACA survey summarised above but the gap is still significant in both surveys. Page 3

4 Pension Protection Fund PPF 7800 Index Following the announcement by the Pension Protection Fund (PPF) of the launch of its PPF 7800 Index measuring the estimated funding positions of 7,800 defined benefit pension schemes on a section 179 basis (which approximates to the cost of buying out PPF liabilities see Pensions Bulletin 2007/28), the PPF has now published its first monthly update, highlights of which include: the aggregate funding position of the 7,800 schemes has risen from a surplus of 96bn in May 2007 to one of 99bn in June 2007 (compared with a deficit of 8bn one year ago); and the total surplus of those funds in surplus has risen slightly to 128bn, whilst the total deficit of those in deficit has fallen slightly to 30bn (compared with a deficit of 66bn one year ago). The most interesting aspect of this approximate assessment of changes to the deficit risk to which the PPF is exposed is the substantial improvement that has taken place over the last twelve months, as a result of improved equity and bond markets. What is not clear, since there are other factors at play, is whether the PPF will be in a position to translate this good news, if it continues, into reduced levies in 2008/09. Government legislative programme for 2007/08 On 11th July, the Prime Minister made a statement about the draft legislative programme for the next session of Parliament, outlining the Bills that the Government is currently planning to introduce. More details have now been provided via the document The Governance of Britain: The Government's Draft Legislative Programme. This indicates that, as expected, there will be a second Pensions Bill whose main purpose is to legislate for the detail of Personal Accounts. But it will also contain simplification of the regulatory and institutional landscape, of private pension schemes, and of the State Second Pension. A National Insurance Contributions Bill is also promised whose main elements are: new regulation making powers that would enable ministers to align the Upper Earnings Limit (UEL) with the point at which higher rate tax becomes payable; and removal of the restrictions to the current maximum level of the UEL, which stipulate that it can be no more than seven and a half times the point at which NICs become payable. Pensions Bill 2007 returns to the Commons The Pensions Bill has completed its passage in the House of Lords after having its Third Reading on 11th July 2007, following substantive amendments introduced at its Committee Stage (see Pensions Bulletin 2007/25) and Report Stage. At Third Reading one further amendment was inserted by opposition peers namely that four years after the passing of the Act post-legislative scrutiny will be carried out to check on its operation with the possibility of further scrutiny. The Bill now passes back to the House of Commons, where one of Mike O Brien s first tasks as pensions minister will be to seek to remove a number of the Lords amendments. The Government has made clear Page 4

5 that it wishes to reverse the amendments made in the Lords on the financial assistance scheme, the provisions to introduce retirement income funds as an alternative means of providing retirement income and the payment of voluntary national insurance contributions. Finance Bill 2007 being progressed in the House of Lords The Finance Bill is due to receive its Second Reading in the House of Lords on 17th July 2007, and is scheduled to reach the statute book by the time Parliament rises for its summer recess on 26th July Pensions Bulletin 2007/22 gave details of the pension commencement lump sum (PCLS) condition easements introduced to the Bill during its passage through the House of Commons. Occupational pension schemes Speeding up wind-ups Regulations have been laid before Parliament to implement measures to reduce the time taken to wind up pension schemes. They are little altered from those issued in draft (see Pensions Bulletin 2007/21). The Occupational Pension Schemes (Winding Up, Winding Up Notices and Reports etc.) (Amendment) Regulations 2007 (SI 2007/1930) will: enable trustees to discharge small accrued pension (or pension credit) entitlements by way of winding up lump sum or trivial commutation lump sum payments, where members did not have the right to the lump sum under the scheme rules; and require schemes which start to wind up after 1st October 2007 to make their first annual report of their progress to the Pensions Regulator within two years after they start winding up, instead of the current three years this will enable the Regulator to make directions to facilitate winding up at an earlier stage. The explanatory memorandum provides further details. One of the respondents to the consultation suggested that the winding up lump sum rules should be extended to allow pensions in payment to be commuted where the value of the member s pension is less than 1% of his lifetime allowance. The Government is to look into this further. Thoresen review of generic financial advice Otto Thoresen, the insurance company executive carrying out a review of generic financial advice for the government, recently outlined some of the emerging themes of the review so far: the regime/service he is envisaging will look to place its emphasis on the provision of guidance rather than generic financial advice the idea being to create a system which the public will not confuse with existing advice-based services; the design of the new regime/service may well consist of a small central body with an advisory, strategic and accreditation function, with the actual services provided by external providers the socalled partnership approach which would build on the infrastructure of public advice networks already established; and Page 5

6 the cost of the new regime/service is likely to be shared between the government and the financial services industry. Thoresen was appointed by the Treasury earlier this year to research and design a national approach to generic financial advice as part of the Government's long-term approach to financial capability. An interim report of the review s findings is expected this autumn. Mortality assumptions in actuarial calculations Three linked events have occurred on 10th and 11th July 2007 which are of significance to scheme actuaries and their clients: Scheme actuaries have been sent a letter from the presidents of the Institute and Faculty of Actuaries which discusses a number of matters to do with mortality assumptions. It states that all relevant recent experience confirms that mortality rates for the retired population in the UK have continued to fall rapidly, with no real signs of slowing. It highlights the recent debate over mortality projections and states that the interim cohort projections, issued by the Continuous Mortality Investigation (CMI) in 2002, assumed a fall in the rate of mortality improvement from the levels experienced up to their publication. However, continuing high rates of mortality improvement mean that the short cohort and medium cohort projections now imply a rapid tail-off in rates of improvement in future mortality and show a very different pattern from the most recent data published by the CMI and Office for National Statistics (ONS). The letter refers to the CMI s Working Paper 27 which has been published along with a draft spreadsheet library of mortality projections (Please note that this is a large document and may take some time to download). The paper provides a useful summary of many of the projections currently available (including the interim cohort projections, ONS projections, P-splines and Lee-Carter) and provides a proposed standard naming convention for mortality projections. The paper stresses that none of the projections is recommended for any particular situation and their inclusion in the library does not imply suitability and that provision of the library will not take away the need for individual actuaries to use their judgement and make recommendations best suited to the firm or scheme. It is noticeable that the projections in the library vary greatly. The Board for Actuarial Standards (BAS) has also announced a review of the mortality assumptions used in actuarial calculations, which may result in additional or amended actuarial guidance. The review is to be wide-ranging but will concentrate initially on future rates of mortality improvement. The BAS expects to issue a discussion paper early in 2008, followed by an exposure draft. Pensions administration and risk management Raising Standards of Pensions Administration (RSPA), the voluntary initiative by the pensions profession, has developed a risk matrix tool intended to help pensions administrators review the operation of scheme administration and carry out high level assessments of current risks. By completing an excel spreadsheet, a report is generated that identifies potential risks. Page 6

7 Institutional Shareholders Committee framework on voting disclosure The Institutional Shareholder s Committee (ISC) has published some suggestions on disclosure of information on voting carried out by the beneficial owners of shares or their delegated representatives typically fund managers. The suggestions cover the method of disclosure, what should be disclosed and the need for institutional investors to review their voting disclosure policy on a regular basis. This Pensions Bulletin should not be relied upon for detailed advice or 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. Lane Clark & Peacock LLP provides a full range of actuarial, consultancy, risk analysis and administration services to companies in the UK and internationally. LCP is part of the Alexander Forbes group of companies, employing over 4,000 people internationally. Alexander Forbes is a public company listed on the JSE in South Africa. 30 Old Burlington Street London W1S 3NN Tel: Fax: St Paul s House St Paul s Hill Winchester Hampshire SO22 5AB Tel: Fax: *PO Box 12 Suite 7, Pollet House St Peter Port Guernsey GY1 4AG Tel: Fax: *Oriel House York Lane, St Helier Jersey JE2 4YH Tel: Fax: LCP Belgium Marcel Thirylaan 200 Avenue Marcel Thiry 200 B Brussel Bruxelles, Belgium Tel: +32 (0) Fax: +32 (0) LCP Libera AG Stockerstrasse 34 Postfach 8022 Zürich, Switzerland Tel: +41 (0) Fax: +41 (0) LCP Libera AG Aeschengraben 10 Postfach 4010 Basel Switzerland Tel: +44 (0) Fax: +44(0) Actuarial Consultancy of the Year UK Pensions Awards 2005, 2006 & 2007 FT Business Pension and Investment Provider 2007 Investment Consultancy of the Year UK Pensions Awards 2007 FT Business Pension and Investment Provider 2007 All rights to this document are reserved to Lane Clark & Peacock LLP. This document may not be copied or used in anyway without prior permission from Lane Clark & Peacock LLP. LCP is a limited liability partnership registered in England and Wales with registered number OC LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street, W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. A member of the Multinational Group of Actuaries & Consultants Main offices in: AFRICA AUSTRALIA EUROPE NORTH AND CENTRAL AMERICA * No regulated business is carried out from these offices Page 7