News

Pensions Watch - May 2011

Mind the gap
Following on from the research undertaken by Aviva, Deloitte, Oliver Wyman and The Future Company last September (see Pensions Watch – September 2010) that suggested the average Briton has under-saved by £10,300 per annum, the Chartered Insurance Institute (CII) estimates that the UK faces a £9tn (£9,000bn) retirement savings shortfall, as a consequence of chronic under-saving, a halving of annuity rates over the past 20 years and dramatic improvements in life expectancy. 

Based on the OECD’s (Organisation for Economic Cooperation and Development) benchmark replacement ratio (income in retirement as a percentage of pre-retirement income) of 70 per cent, the report suggests that the average Briton retires on just 30 per cent of their pre-retirement income equating to a shortfall of £16,700 per annum.

Making the sums add up
According to accountants KPMG, the cost savings from Lord Hutton’s recommendations on reforming both funded and unfunded public sector pensions (see Pensions Watch - March 2011) will be more than offset by the move to a £140 per week flat rate state pension and the end of DB schemes contracting out of the second state pension (S2P).   The research suggests that if the taxpayer is to benefit fully from Hutton’s proposals, then either the current accrual rate for public sector pensions must move from one eightieth to one hundredth of annual salary or the increased state pension must be deducted from the occupational pension received by public sector workers.  Against the backdrop of a proposed increase in public sector employee pension contributions and a continued pay freeze, any suggestion of a further dilution of benefits from public sector defined benefit (DB) schemes could well be the straw that breaks the camel’s back. 

Separately, consultant Hymans Robertson revealed that since the previous triennial valuation in 2007, the percentage of deferred members within 36 of the Local Government Pension Schemes (LGPS) in England has increased from 26 per cent to 34 per cent of total members, while the active membership percentage has fallen to 39 per cent from 46 per cent.  This is largely as a consequence of redundancies and recruitment freezes imposed on councils.  Over the same period, the average LGPS funding ratio declined from 85 per cent to 75 per cent.

Pick a number
The 6,560 private sector DB schemes that are insured by the industry-funded Pension Protection Fund (PPF) safety net, recorded a collective surplus at the end of April of £37.2bn, down £8.3bn on a month earlier.  However, when adjusted for male life expectancy improvements, the surplus declined to £2.3bn.  Meanwhile, according to consultant Aon Hewitt, the collective IAS19 DB schemes deficit of the UK’s top 350 companies narrowed from £66bn to £41bn between end-March and end-April, largely as a result of buoyant equity markets.

Separately, the BT Pension Scheme, the UK’s largest DB scheme, with £37bn of assets, saw its IAS19 pension deficit fall from £5.7bn to just £1.4bn for the year ended 31 March 2011, as assets over the year increased by £1.7bn and liabilities fell by £4.3bn, against the backdrop of £1bn of sponsor deficit payments.

Risk – one word but not one number
According to pension risk transfer solutions provider, MetLife Assurance, in a survey covering DB schemes with assets ranging between £20m and £1bn, 89 per cent of trustees believe that de-risking should be firmly established on the trustee agenda, with 60 per cent rating it as a higher priority than it has been to date.  Options for reducing scheme risks included asset risk hedging solutions, longevity risk hedging solutions, buy-ins and buyouts.

Topping trustees’ list of top three risks to be addressed was investment risk at 73 per cent, followed by longevity risk at 71 per cent, employer covenant risk at 45 per cent, inflation risk at 39 per cent and those risks arising from poor administration and data at 26 per cent.

Shutting up shop
Travel agent Thomas Cook, Daily Mail publisher DMGT and foods and cleaning products group Unilever joined the 17 per cent of UK DB schemes that, according to the NAPF (National Association of Pension Funds), are already closed to future accrual.

A bird in the hand
According to a straw poll taken by consultant Towers Watson, 57 per cent of scheme sponsors and trustees are in favour of converting part of a DB scheme member’s pension entitlement into a cash pot (or “cash balance”), which could then be drawn down by the member as a series of cash lump sums prior to retirement.  In exchange for this increased flexibility, the scheme member would relinquish the index-linking and assume the accompanying longevity risk on this part of their pension.  

Separately, Pensions Minister Steve Webb has suggested he may revisit his proposal to allow savers early access to their personal pensions pots in an effort to boost saving for retirement, given evidence of improved retirement saving in other countries that allow early access, despite the pensions industry having given the proposal the thumbs down (see Pensions Watch -March 2011).   Much will depend on the take up of NEST, when the auto-enrollment scheme is launched in 2012.

Myners revisited
A little over ten years after publishing his review of pension scheme governance in the UK and his ten voluntary principles for both DB and defined contribution (DC) scheme trustees (which later became six), Paul Myners declared himself happy with “the direction of travel” of pension funds.  Indeed, since March 2001, Myners believes there has been a step change in trustee effectiveness as evidenced by the move away by pension schemes from peer group benchmarking to liability driven investment and the greater scrutiny by trustees of their investment managers and as a consequence of the role of the Pensions Regulator in making trustees more aware of their fiduciary responsibilities.   

That said, Myners believes that there should be more formal assessments by trustees of their advisors and a pooling of capital by smaller and medium-sized DC schemes into Dutch-style collective “super trusts”.  Championed by the NAPF, super trusts are large-scale, not-for-profit, trust-based multi-employer DC pension schemes. 

And finally…

Roll up, roll up
We started this month’s Pensions Watch with the CII’s estimate of the gargantuan savings gap facing Britain, which is largely attributable to the chronic under-saving of the past few decades as the UK struggles to re-establish its long lost savings ethic.   With no quick fix in sight, Ros Altmann, director-general of Saga, has proposed a simple but potentially very effective solution to boosting retirement saving in the UK.  Basically, anyone paying into a pension in a particular month would be automatically entered into a £1m-a-month lottery (presumably funded by the pensions industry).  The simplest ideas are often the best.  

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