Our poll of trustees and sponsoring employers on the changes from the Budget

We recently ran a high level breakfast seminar to discuss the pensions revolution kick-started by George Osborne in March.

During the sessions we surveyed the attendees to gauge their views on some of the pertinent issues.

Our poll found that:

100% support the government’s decision to expand pension flexibility.

This is perhaps no surprise. Increased freedom and choice is nearly always universally welcomed, despite the short period of flux that we have to go through to get there.

68% expect defined benefit (DB) members to be tempted to take their transfer value and convert to defined contribution (DC) to access flexibilities.

This is surprisingly high and only time will tell if this view is borne out. If the government decides to ban transfers from DB to DC from April 2015 (and we have received strong indications from HM Treasury that if they do bring in a ban it will be from that date) this could create a “buy it now while stocks last” style firesale. However, if the government does not ban the transfers it will be interesting to see the steady state numbers. It is hard to think that many members will transfer as they will risk losing the guaranteed income, which surely remains very valuable.

90% of attendees think that individuals will act prudently in retirement.

This has certainly changed from my early conversations with employers who were very worried that their members could make more decisions in retirement. It is here that the guidance guarantee will be crucial in ensuring members consider their own needs and don’t underestimate their longevity – otherwise there could be a lengthy wait for a Lamborghini (or Aston Martin...).

73% expect annuities to remain a key part of retirement planning.

This certainly echoes our view that the need for a guaranteed income during retirement will be highly valued by individuals. There is no doubt that the frequency or size of annuity purchases will decrease and it is likely that many individuals will use some of their DC savings to purchase an annuity at some point.

14% support a government ban on transfer from defined benefit to defined contribution.

This is interesting as restricting freedom to just DC only members seems to go against the government’s ideology and is perhaps driven by the fear of the impact on the economy by the possible exodus from long-dated gilts.

What should employers and trustees be doing?

The wide-ranging changes in the budget mean that trustees and sponsoring employers need to move from ‘wait and see’ to taking action. Top of their list should be the need to review their default investment strategies to ensure that they remain relevant for the majority of their members. This is especially so when typically the vast majority of the members make use of default strategies.

Sponsoring employers should also review the benefit structures in their DB schemes to ensure they remain fit for purpose in the changing world. Members use of trivial commutation and additional voluntary contributions are going to change with the Budget’s changes to the way members will structure their retirement income. By reviewing the schemes’ benefits employers could realise long-term cost savings as members have access to the fullest range of options as possible. In many cases rules will need to be changed and this work should begin sooner rather than later.

David Brooks
Technical Consultant

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

Many Trustees are missing the opportunity to reduce risk

Things are looking up for pension scheme funding – at least from an investment point of view. However many Trustees are failing to seize opportunities as they are presented, or simply believe that better times await.

Gilt yields have risen from their lows in 2012 and this has resulted in the present value of liabilities reducing. For a typical pension scheme, the impact of rising yields is expected to have reduced the present value of the liabilities of a typical scheme by approximately 10% to 15% since July 2012. Inflation pressures (at least in the short term) have eased with CPI falling below 2%.

Trustees should also have seen strong improvements in investment returns with the MSCI World Index providing 16.8% p.a. returns over the five years to 28 February 2014 – certainly ahead of the likely investment returns assumed in the average pension scheme’s funding assumptions.

What does this mean for Trustees and sponsors? For those that haven’t planned, it simply means that any deficit could be made good sooner, and employers may hope that any recovery plan payments will reduce or cease early.  The belief is that investment risk needs to be maintained if that hope is to be realised.

Trustees don’t need to go that far back to recall similar ‘feel good’ moments, such as the end of 2007 when many schemes were in a much healthier funding position before the financial crisis of 2008/2009 set in.

For any scheme that is closed to new entrants or accrual, or whose liability is having an impact on the balance sheet of the sponsor, simply doing nothing should not be an option.

There are three issues the Trustees should be considering:

·    Given the improvement in funding above where we thought we would be at this point in time, can we reduce the current level of return required (i.e. can we have less exposure to growth (or risk) assets without impacting on the schemes ongoing funding basis and recovery plan?

·    Where growth assets are still needed. Is it possible to deliver growth more efficiently, with less risk?

·    Given the rise in gilt yields and falling inflation expectations can we use this as an opportunity to reduce funding level volatility that arises from changes in interest rates and inflation?

Of course those Trustees who do not have a plan in place, answering these simple questions can take time. With Trustees typically meeting on a quarterly basis, there is the risk that opportunities would have evaporated by the time they are ready to act.

According to the Pensions Regulator’s ‘Occupational Pension Scheme Governance Survey’ (2013), 45% of pension schemes do not have a long term de-risking ‘flight plan’ in place.

BROADSTONE has a five step de-risking plan to help guide the trustees through the design and governance process to ensure that opportunities to de-risk are not missed.

Peter Dean

Investment Consulting Director

Telephone:  +44 (0)20 7893 3456

Email:  contactus[@]broadstoneltd.co.uk