Year in review: Funding and liability management took centre stage during 2017, as the debate over defined benefit pension scheme sustainability and member protection ramped up.
Stories featuring the various ways in which trustees and employers measure or lower liabilities have proved particularly popular this year.
From indexation to pension increase exchange exercises, our most read stories of 2017 convey the industry’s increased focus on DB funding and affordability.
With the Department for Work and Pensions’ white paper due during the first quarter of 2018, discussions on the future of DB are set to continue.
John Lewis slashes deficit with CPI switch
February 6
Retailer John Lewis agreed a new recovery plan with the trustees of its DB scheme after a large reduction in the funding deficit, due partly to a change in inflation indexing.
The scheme carried out a triennial valuation dated March 2016, showing a deficit of £479m, down from £840m in March 2013, prompting discussions about the recovery plan.
The reduction was due to “payment of deficit contributions, a change in allowance for discretionary pension increases, and excess investment returns, partly offset by a reduction in the real discount rate”, according to a company update.
This change in allowance for discretionary pension increases was a switch to the consumer price index from the retail price index for annual increases to different sections of the scheme.
A spokesperson for the scheme explained that John Lewis “announced that the annual increase for pension built up before April 6 1997 is, in the future, expected to be calculated using CPI inflation (capped at 2.5 per cent) instead of RPI inflation (capped at 5 per cent). This change has been implemented to make sure that the John Lewis Pension is affordable and fair to past, current and future partners”.
'Greenest of green papers' explores DB sustainability options but lacks urgency
February 20
Earlier this year, the DWP published its wide-ranging green paper on ‘Security and Sustainability in Defined Benefit Pension Schemes’.
It discussed numerous topics, including conditional indexation, additional scheme funding powers for the Pensions Regulator, and consolidation.
While industry experts welcomed the variety of issues covered in the document, some noted a distinct lack of urgency.
“It’s almost as if… they’ve just started on day one of the discussion,” said Steve Webb, director of policy at provider Royal London. He noted that many of the issues have already been discussed for some time in other areas of the industry, including the Work and Pensions Select Committee and the Pensions and Lifetime Savings Association.
Tom Selby, senior analyst at platform provider AJ Bell, dubbed the paper “the greenest of green papers from the DWP”.
However, the paper was praised for being balanced and measured, with Tom McPhail, head of retirement policy at Hargreaves Lansdown, noting that the pensions industry is likely to see a “beefed-up Pensions Regulator coming out of the end of all this”.
Mums know best: Hogg Robinson mortality study slashes liabilities
June 5
Hogg Robinson Group undertook a medically underwritten mortality study of its UK pension fund members, shaving £68.4m off its liabilities.
The exercise limited the £278.7m scheme’s IAS 19 deficit growth to £9.7m, despite a marked drop in the discount rate used for the year to March.
Announcing its annual results in May, Hogg Robinson said the study had been a “valuable” exercise, in which it contacted 13 per cent of the membership, representing 39 per cent of liabilities.
About two-thirds of those contacted responded to the survey, or 24 per cent of liabilities. Specialists then analysed the data and projected these into revised mortality assumptions.
Members representing almost £1.5bn of liabilities were surveyed in 2016 by mortality specialists MorganAsh, an increase of 63 per cent on 2015.
Mums can be inappropriate for larger schemes, where the health and lifestyle idiosyncrasies that affect certain postcodes or job titles may be averaged out by a diverse membership.
“In my experience, the medically underwritten approach is something that tends to be deployed for smaller groups of lives,” said Michael Chatterton, managing director at Law Debenture Pension Trustees.
Teachers’ Pensions gets slammed over admin
November 13
Members of the Teachers’ Pension Scheme, which is run by Teachers’ Pensions, took to social media to complain to the scheme over long telephone waiting times for customer support, an inability to access pension information online and incorrect charges.
One teacher said that he had experienced “the most appalling support possible”, and had spent hours trying to get through over a period of weeks.
“I was unable to access projected figures relating to my pension and this made it impossible to compare projected pension against current part-time income and whether it was advisable to draw my full pension now or later,” he explained.
Another teacher, who did not wish to be named, told Pensions Expert that they had attempted to view their pension for over a year.
The problems sparked debate over the potential pitfalls of driving people online, as experts stressed the importance of data quality when moving to an online administration mechanism.
A spokesperson from the scheme's administrator Capita Employee Benefits said: “We are committed to delivering a high-quality customer service. There have been some instances where members haven’t received the experience both they and we expect, and we have put steps in place to resolve that.”
BAE actuarial switch sidesteps funding slump
December 11
Defence and aerospace giant BAE Systems declared a £2.1bn actuarial deficit across its nine schemes, as of March 31 2017, leaving its funding level broadly unchanged since the last triennial valuation.
Actuaries working for the schemes have now adopted an “asset-led” valuation system, where liabilities are discounted based on the expected returns of the assets held by the schemes.
In contrast, the ‘gilts-plus’ methodology, which is common practice in the industry, discounts liabilities based on the yields available on gilts, often referred to as the risk-free rate of return. In recent years, deficits have ballooned as gilt yields have fallen.
Experts said a growing number of schemes are seeking to mirror BAE’s shift, in recognition of the fact that a large proportion have no desire to transfer liabilities to insurers, and therefore no fundamental need to hold gilts in their portfolios.
For all the deficit reduction brought about by BAE’s new funding methodology, the underlying nature of its pension promises and the assets held to meet them did not appear to have changed, leading some to question the merits of such a move.
“Has BAE pulled off the trick of shrinking its pension liabilities simply by ignoring the economics of pensions?” asked John Ralfe, an independent pensions expert.
