Bond yields: unwelcome news for defined benefit pension scheme sponsors

Bond yields are at all-time lows. Notably, long-date corporate bond yields ended the year as low as they’ve been for at least a decade. My handy source of data doesn’t really go back much further, but I wouldn’t be surprised if they’ve never been this low – ever.

 (Source: FT-SE Actuaries indices, Markit iBoxx indices)

This may be great news if you are invested in bonds, but for many defined benefit pension scheme sponsors it is unwelcome news. Unfortunately, pension liabilities on corporate balance sheets should be calculated using a discount rate equal to corporate bond yields. Thus, as yields have fallen, balance sheet liabilities have risen – our friends at Mercer have estimated that overall balance sheet deficits could have doubled over 2014.

Some sponsors may be ambivalent about such balance sheet volatility – taking the longer-term view that what goes up, must come down. But others may be more sensitive, worried about how an apparent weak balance sheet might be perceived by customers, lenders, and possibly even shareholders.

Low corporate bond yields could have other effects. I have a client who pegs commutation factors (the conversion rates used to determine how much pension is reduce by when a member opts for a lump sum on retirement) to corporate bond yields. As yields have fallen, those rates have become steadily more generous – great news for scheme members at retirement, but potentially very expensive for the scheme sponsor. Transfer values are usually linked to bond yields as well, so they too will have become more generous.

Balance sheet volatility may encourage sponsors to try and do a better job of matching assets and liabilities. But trying to match when yields are low means locking in at what feels like precisely the wrong time – unless of course you take the view that in 6 months’ time I’ll still be saying that bond yields are at an all-time low.

John Broome Saunders
Actuarial Director
Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

Collapsing yields prompt another pensions crisis

With long gilt yields hovering just above 2%pa, many pension scheme deficits will be looking rather unpleasant.

Since the beginning of 2014, yields have tumbled by over 1.5%pa – that could easily mean a 25% increase in the liabilities of a typical defined benefit (DB) pension scheme. Typical risk asset returns have been moderate at best – UK equities, for example have returned 1.2% over 2014. Some pension schemes may have been able to hedge some or all of their long-term interest rate risk – either by investing in bonds, or using ‘Liability Driven Investments’ (LDI) to match scheme assets with liabilities. But many schemes will not be completely hedged in this way, and will now be suffering from significantly increased deficits – on pretty much any calculation basis.

Looking forward, the prognosis is bleak. With the European Central Bank beginning its own Quantitative Easing programme, there doesn’t seem any immediate prospect of higher yields – indeed, some commentators, think that yields could fall still further.

What should DB scheme trustees do? Fortunately, most only need to get out of bed and worry about how to fund deficits every three years, so many may well pull the covers over their eyes and keep their fingers crossed that, by the time the next valuation comes around, the position is a little better. But those with valuations now are faced with the unpleasant prospect of asking sponsors for more cash. Some sponsors may be able to find a few extra pennies, whilst for others deficit funding may be driven primarily by affordability - in which case there’s probably no chance of extra cash no matter what the actuary says.

Of course, schemes that hedged their interest rate risk a few years ago will be feeling very smug indeed. But hindsight is a wonderful thing.

John Broome Saunders

Actuarial Director

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

Leaving Service - What Happens Next to your pension?

In today’s workplace, the days of a job for life are long since over. Many people will change jobs ten to fifteen times during their working careers. Their workplace pension can become a casualty of these frequent changes, with pension arrangements being made and removed on leaving the employer.

Most of the UK’s leading pension providers follow a standardised process which ensures that the former employee retains their benefits and ceases the pension relationship between themselves and their former employer.

At the time of leaving service with their current employer, employees will receive a leaving service pack which will confirm their options and most likely include a direct debit instruction to continue contributing to their pension personally.

The pension plan is converted by the provider into an individualised arrangement, and once this change has been made both the employer and their engaged financial adviser, both cease any liability or obligation to provide assistance to the former employee.

Starting a new job will most likely result in an additional pension being set up for the employee by their new employer. The employee can then choose to transfer the existing plan into their new arrangement or continue with two (or more) plans. This can create administration issues both during employment and at retirement.

Employee awareness and understanding is therefore vital to this process and it is the responsibility of the employer to ensure that the employee knows what comes next.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

The importance of a good payroll provider

With the changes in pensions legislation that have occurred over the last few years, the role of the payroll provider has changed in its importance to the company pension scheme. Before they enjoyed something of a backseat role, but now they have been thrust to the forefront of a company’s dealings with its pension provider.

Automatic enrolment has added extra layers of complexity into the process of assessing eligibility, managing the membership, data, and contribution payments for pension schemes.

As with any dealings with an individual or firm, you get out what you put in and with payroll providers it is no different. Employers who bring their payroll providers in to this process early, often find that the teething issues most pension schemes encounter can be greatly reduced.

However it is not just the employer’s responsibility to bring their payroll providers in on the pensions process, it is also the responsibility of the pension providers themselves.  For some it can be as simple as inclusion on regular conference calls, and for others far more specific inclusion and training is required.

Encouraging a greater awareness of the automatic enrolment process on the part of the payroll provider should be the overriding aim of both the employer and the pension provider respectively as auto enrolment becomes more established in workplace pensions.

Robert Simmons
Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

What’s the impact of longer working lives on an employer’s benefits scheme?



A recent YouGov poll for the Department for Work and Pensions (DWP) (the full results of which can be found here) showed that the main reason for continuing to work was ‘needing’ to earn money (31%). This statistic resonates with our work with employers. 

Since it has been unlawful to force people to retire unless there are objectively justifiable reasons for doing so (age discrimination), people continuing to work beyond traditional retirement age are becoming a primary consideration for businesses when it comes to succession planning and the provision of benefits.

The fact that nearly half (49%) of those polled now think that they will retire later than they thought they would goes to suggest that this issue is something that is likely to gain momentum.

The key questions from the employers we work with are: “how can our benefits package accommodate the diversity of our workforce?” and “how do we pay for it?”.

The cost of employee benefits can escalate (sometimes rapidly) as cover is provided beyond a traditional retirement age.  As a result, many employers utilise the exception to the principle of equal treatment on the grounds of age for group risk insured benefits, while other employers continue to fund ongoing insured benefits.

As the responsibility appears to continue to shift from government to employer, and then on to employees to fund benefits, it is likely that the use of flexible (and voluntary) benefits will continue to grow at a pace.

 
Whatever the future holds, making sure that employees fully understand and appreciate the benefits on offer is key to an employer’s staff reward and commercial success.

Robin Watkins

Risk & Flexible Benefits Consultant

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Declaration of Compliance Process - Important?

Employers who pass their assigned staging date to commence the automatic enrolment process need to be aware that their responsibilities do not end once they have finished automatically enrolling their employees.

The regulatory body (the Pension’s Regulator http://www.thepensionsregulator.gov.uk/) has a very specific mandate from central government to encourage employers to have an ongoing involvement and a visible engagement process after their automatic enrolment process has completed.

One specific arm of this mandate is the declaration of compliance process (DOC).

The DOC is a method by which the employer confirms that the scheme that it operates is fully compliant with the standards set out by the Pensions Regulatory body. Employers are required to complete this every three years, in tandem with their re-enrolment of those employees who were not automatically enrolled at the assigned date.

After the assigned date, there is a very small window for the employer to complete their DOC using the Pensions Regulator’s website and if the DOC is not completed in this time, then the regulatory body has jurisdiction to levy fines on defaulting employers.

An important part of this process is to educate employers as to the ongoing role of the Pensions Regulator, beyond the role that it plays in the run up to automatic enrolment.  The DOC remains an employer’s responsibility but it is the responsibility of every financial advisor to ensure that the employer is aware of what is required as part of this process and their ongoing role within it.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Importance of Good Employee Communication

With the changes in pension’s legislation, more employees than ever are being automatically enrolled into pension schemes with their respective employers.  Employees who are affected by this are often unaware of these changes and the potential benefits or implications of being involved in such a process.

There is a distinct knowledge gap between an employee’s idea of what their pension should be and the actual reality of the workplace pension that is offered. The engaged employer should be aware of this knowledge gap utilising many forms of media to engage with its employees.
Communications can take several forms from employee facing booklets to presentations made by product providers or financial planning consultants. With all of these methods it is important to keep in mind the three prime concerns of every employee: What do I have to contribute? What will I receive at my retirement? How much will I pay for this additional benefit?

Financial planning consultants can liaise with their clients to tailor the best delivery method to effectively engage with their employee demographic. Answering questions early and definitively provides a more stable grounding for employee engagement in the pensions process. There will always be issues which will be encountered over the employee’s time within the pension but the likelihood of the same queries and questions occurring can be decreased considerably by good employee communication and engagement.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The DWP’s announcement on commission, what does it mean for your scheme?

In March 2014 the Government announced a number of changes to the pension system to improve workplace pensions for employees. These changes affect both employer and employee to some degree, and the biggest change that will affect employers is the removal of commission payments to financial advisers.

In the past, many employer-based pension schemes were set up to pay commission at both scheme level and new employee level. This would cover things like scheme reviews, ongoing payments, new joiners and governance meetings. All of which could be covered by commission overall payments received in respect of the scheme.

This is set to change when initial and trail commission are removed in November 2014 and April 2015 respectively. Payments will cease and most advisers will have to review the position with the employers they service.

In most cases, this will likely result in moving to a fee based retainer to cover the services which would have previously been covered by commission.  

Employers affected by these changes need to revaluate the services they are receiving from financial advisers to make a judgement as to whether their fees are appropriate to the level and quality of services being provided.

Robert Simmons
Corporate Pensions Administrator
Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Previous Pension Minefield - A Survivors Guide

In today's modern workplace individuals change employer ever more frequently so that an individual may change employer numerous times during his/her working life. The days of a 'job for life' that the previous generations enjoyed are long gone.

In most cases, individuals moving employer have pension benefits with their former employers.

With pension transfers becoming more common, employees with benefits in old pension schemes from former employers may decide to transfer these benefits to pension schemes run by their current employer. This can serve to eliminate the additional administration that can result on an employee’s retirement.

In recent years, the Financial Conduct Authority and the Pensions Regulator have heavily scrutinised the area of pension transfers and have especially highlighted the need for good quality advice in this area.

Mindful of this need for greater transparency, many of today’s pension providers will not consider the transfer of benefits for any employee until they receive financial advice from an independent financial adviser. Others will not allow transfers without employer consent.

Employees may be unaware of the value of their pension ‘pots’ and the potential minefield that they may be stepping into when seeking to transfer benefits. Many previous pension schemes may have additional (hidden) benefits that may be lost on transfer to their current employer’s scheme.

As advisers, it is important for us to be mindful of these benefits when reviewing  the previous pension arrangement of a corporate employee and understand when a line is crossed from providing mere factual information and explanation and veering into the area of individual ‘advice’..

Robert Simmons
Corporate Pensions Administrator
Telephone: (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

 

Will April's pension freedoms throw your automatic enrolment scheme off the tracks?

Doesn’t it seem like your automatic enrolment journey is finally chugging along nicely? At the start there was the surprise of just how many new processes you had to learn and how much administration time it seemed to take up. Yet now your consultant has helped you understand those things you thought you knew then realised you didn’t, and finally the whole assessment piece is just a few new employees a month which is taking an hour rather than a day. Your enrolled employees even appear to be engaged and talking about the benefit to them. This auto enrolment thing is easy!

Now we know in order to keep it so we always need to keep one eye on the future and consider how it will affect your company’s scheme. We’ve talked in previous blogs about what the new pension freedoms proposed for April 2015 will mean for your employees, but are there things for the employer to consider?

One thing stands out to me. What happens if an existing employee of 55 or over decides to access their company pension but not retire from work?

Further questions flow from there: Are you aware of whether or not you will need to re-enrol them in to your company scheme? Are your employees aware of the impact this could have on their tax position or what will happen if they use all their savings up? Accessing their pension could reduce their annual contribution allowance to £10,000, do they know this and what are your responsibilities as the employer? What does this mean if you have a salary exchange scheme up and running?

Finally of course is the question your employees will ask you in a couple of months’ time – “Does our pension scheme provide access to facilities to allow all the new pension freedoms in April?”

You may not have heard, but the majority currently don’t….

Now is the time to start thinking about the new freedoms coming in April and how you can keep your automatic enrolment scheme on the right track.
  

Charles Goodman

Consultant

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk