As more major scheme situations come to unhappy conclusions, this year is not looking good for thousands of pension scheme members

News that the Pension Protection Fund (PPF) intends to increase this year’s levy has prompted many to question the body’s accounting methods.

The appearance of the Pension Protection Fund (PPF) in the European Court of Justice on January 25 could force it into oblivion in less than two years if the EU’s ruling on full entitlements is enforced.

With inflation at a record high, the two-fold impact it has on pensioners means they should start tightening their belts.

The government’s proposal to set up a free national financial advice service has been met with fierce criticism from independent financial advisers (IFAs).

The Department for Work and Pensions’ decision to allow scheme trustees to set the assumption on transfer values has been lambasted by Standard Life, with the company saying the decision is likely to encourage employers to offer transfer bungs to ex-employees.

The New Year has prompted a flurry of senior and high profile industry figures to reconsider their careers by either stepping down, or stepping up and achieving their dream job.

Abbey’s new liquidity fund has made substantial gains since its launch in September 2006, and now stands at £4,782m, according to the company’s statistics.

Figures released by EDHEC business school suggest the stock market has been strong in recent months with emerging market, fund-of-funds and event-driven strategies standing out as December’s best performers, with monthly returns of 2.67%, 1.72% and 1.65% respectively.

THE TIMING of January’s increase in UK base rates may have come as something of a surprise to markets, but it doesn’t change our view that the outlook for UK equities in 2007 is quite positive.

Morley Fund Management has launched the Aviva Morley Emerging Markets Local Currency Bond Fund with the aim of capitalising on narrowing yield spreads between local currency emerging market bonds and the developed bond markets.

The Alternative Investment Management Association (AIMA) has voiced concerns about impending changes to the UK’s investment manager exemption (IME), warning its abolition could cause an exodus of hedge fund managers and a significant loss of business for the UK.

ASSET TROUBLES

The addition of a hotel buy-to-let company to the Aegon Scottish Equitable self-invested personal pension (Sipp) has prompted a renewed debate over sensible property investment in personal pensions.

More than a month after the proposed changes to the alternatively secured pension (ASP) market, emotions are still running high with both Winterthur Life and AJ Bell writing open letters of complaint to the government.

The new National Pension Savings Scheme (NPSS) promises charges lower than most retail pensions, plus the advantage of a body with fiduciary responsibilities. For all but the largest employers, this seems to be the best of both worlds – very low cost together with the advantages of trustee stewardship but none of the trustee headaches and compliance issues.

The TIP (trustee investment plan) market has defied its critics and is developing well, according to the 14 companies that participated in PM’s annual survey.

Friends Provident and Standard Life are leading the way in the development of wrap platforms after announcing a partnership to enable legacy data sharing.

Bravura has completed a six-month ‘wrap initiative’ for the Nucleus Financial Group with the aim of helping independent financial advisers (IFAs) to manage their portfolios more effectively and achieve full visibility of all assets on the platform.

Following the pensions bill’s second reading, the Department for Work and Pensions (DWP) has reiterated its pledge to improve the basic state pension, while Which? has highlighted the importance of the delivery authority.

PMI Independent Financial Advisers (PMI) is threatening legal action over software supplier O&M Systems’ alterations to commission payments, PM can reveal.

You have probably just about finished flicking through the pile of autobiographies and novels you found in your stocking at Christmas, and work has picked up in the office so you are looking for a book that’s a little more intellectual and more relevant to your job.

The pensions white paper published in December provides more detail on the new system of personal accounts proposed in May following the Pensions Commission’s recommendations.

The number of surrenders is looking set to increase throughout this year and it is important to establish where this money goes and that everyone is dealt with fairly

So we were out to dinner the other night with a bunch of people we knew only slightly, and that meant it all started off with everyone asking what everyone else did for a living. I kicked off with my usual line about being a test pilot, but it eventually came out that I’m involved in pensions.

The changing face of pension fund investment advice has led to an increasing need for specialist advice in many diverse and expanding areas

The Treasury is to conduct a review of the open market option, something which is long overdue as the process is much misunderstood and also under-used by the public

To understand the risk, you need to understand the objectives, because when it comes to making investments for a scheme, the two run hand in hand

Antoinette Odoi talks to Co-op’s Alan Murphy about prudent pension schemes, using technology to communicate to scheme members, and how to cook a tasty Greek lamb dish

State and private pensions are in need of great changes and general reform, but, what is really needed, is a consensus on all sides, if anything is to be achieved

As regulation rises and pressures on trustees increase, there has been a surge in interest and new business in the TII market

Trustee protection and liability insurance is more important than ever before, especially given the way the pensions climate has changed over the last few years

An air of confidence underlies this year’s TIP survey, which comes as no surprise after a positive 12 months in the marketplace

Actuarial advice can take trustees and employers only so far. Having access to knowledge about other pension schemes takes them further towards confident decision-making

New research has shown DC pension provision is on the increase, with many companies beginning to review and increase their contributions

Talks between employees and trustees can often be tricky. PM offers a guide on how to compromise so that both parties achieve their goals

Customers feel a lack of confidence in the financial services sector and who can blame them?

Migration from DB to DC schemes, cutting edge technology and increased regulation are transforming the world of pensions administration

Group chief executive Richard Harvey intends to swap Aviva for Africa when he retires in July and moves to the continent for a middle-aged gap year.

Scottish Widows Investment Partnership (SWIP) chief executive officer Chris Phillips has resigned to take up the helm at Morley Fund Management.

Paternoster has completed the setup of its management team, and added further bulk annuity expertise to the firm, with the appointment of Prudential’s David Still as pricing director.

DB is dead, long live DC. Or so we are led to believe. But that isn’t necessarily the case at all.

1. True, the proportion of DB schemes still open grows as the scheme size increases.
   This is partly due to the fact that larger size schemes are by their nature a lot less volatile, thanks to their larger member base. The required funding to run a DB scheme is probably more of a factor. The cost involved in keeping pace with modern day governance has hit small to medium-sized DB schemes hard. Trustee education is one problem, mainly because there isn’t one cohesive information source. Another problem is not having access to specialist advice.
   Most schemes – not all – are still in deficit, although these have reduced in recent months with the increase in bond yield and return on equities.
2. Many DB schemes are finding their deficits difficult to manage and are looking to spread their risks. This means DB schemes will be looking to the buyout market for either a full buyout solution or a risk management solution offering a partial transfer of risk to an insurance company.
   The second solution offers a limited but affordable option to transfer some of the risk away from the employer. Some risk management solutions include:
   - partial buyout;
   - insuring individual risks;
   - special purpose vehicles;
   - profit share;
   - mortality bonds;
   - changes to scheme design, including reduced accrual, lower pension increases, increasing retirement ages etc.
   Key is ensuring these solutions meet the needs of the sponsoring scheme.
3. There are several new entrants into the buyout market. Some are internationally recognised well established insurers and others include newly authorised insurers. All must appreciate the DB market will want to reduce risk, but not at any price.
   With this in mind you would imagine that these new entrants might put some downward pressure on price. However, it’s hard to gauge at this early stage what effect they will have on the market. The effect might not be that great because of the reserving requirements, but at the very least expansion in the market should allow more schemes to be able to wind up if they choose to do so.
4. Most of the new strategies involve reducing or transferring risk. For example, one element of risk such as mortality exposure might be taken on by an insurer while investment exposure remains. Normally, most of the problems will remain, past service liabilities will remain the main problem for most companies as it is difficult to retrospectively change benefits already accrued. Mostly these new strategies have only bought DB schemes some breathing space, spreading risk and cost until they can afford full buyout.

1. While cost efficiency could be a factor, it’s likely this is only part of the equation, as most larger schemes could provide members with a full buyout value on wind-up. And a replacement DC scheme would be cheaper in the long run.
   The value that employers still attribute to DB for the recruitment and retention of employees may be one reason to keep schemes open. Another could be the ability to pick and choose the best of the best investments, auditors, accountants in a competitive market – a completely bespoke service for the best price.
2. The end, no doubt is coming, but the thinking now seems to be that it will be a slower and less painful death than first thought.
   The Pensions Regulator’s risk-based approach and more legislation have largely driven the development of new products and services in the market. Many solutions now look at managing or minimising risk in the long run rather than providing a short-term wind-up/replacement solution. While this market is still in its infancy, the innovation is to be welcomed.
3. It simply gives employers and trustees more choice when faced with the question of what to do with the scheme. And more providers also means more competitive pricing in what is seen as an expanding market. There have also been moves to provide more innovative, flexible and bespoke buyout products and I would expect to see more of this going forward.
4. The key here I think will be choice. As products and services evolve with the market, employers and trustees are likely to start looking around for better or cheaper options. So the money in DB schemes will probably be shifting around, rather than disappearing altogether into buyout policies. Buyout is after all not the full story, and there are alternatives such as ‘semi-bundled’ that may offer a better solution.

1. The PPF/TPR Purple Book shows that many large schemes remain open to new members. There is no doubt that for some of these schemes they are well run and well funded. Continuing to keep them open is both economically sensible and retains a key employee benefit in a highly competitive recruitment and retention market place. However, there will be schemes in the larger sector which are heavily in deficit, and while they remain open to new members, they will be attempting to reduce deficits by cutting benefits, and raising retirement ages and/or contributions.
2. The end of the DB debate will continue for some time. The economic circumstances of most schemes are just not right for them to move to fully closing off their risks. We have seen the advent of liability-driven investment (LDI) strategies and more innovative buyout approaches, but these are still in their infancy, and LDI in particular leaves the question of mortality risk unresolved.
   More innovation is needed, particularly on mortality risk, to enable the DB risk management market to grow.
3. New buyout companies in the DB market during 2006 have had an initial impact in terms of lowering prices, which has been good for scheme members and trustees. It remains to be seen whether these lower prices are sustainable in the longer term and if new entrants will adopt a more conservative approach once a portfolio of schemes and a track record is established. I would anticipate the breadth of competition in this arena will drive forward the pace of innovation.
   There is no doubt that schemes in wind-up that provide most of bulk business written to date will slow down. This will mean the market for risk management for DB schemes needs to grow to provide enough flow of business to satisfy these providers and to meet the market needs.
4. New strategies for dealing with DB risk issues (other than wind-up and buyout alone) will at the larger end of the market provide some methods of dealing with investment risk. It is more the economic circumstances schemes are in that will drive their behaviour.
   If they are well funded then a structured approach to buyout may well be a consideration.
   Some employers may even be prepared to pay to exit if buyout costs are close enough to a scheme’s assets. However, for the majority of schemes which are way off buyout funding, then the approach will be to manage up the assets and reduce risk using a range of other strategies to improve investment performance. These schemes will still be exposed to mortality risk unless a non buyout solution is available in this area.

1. Cost efficiency could be one of the reasons, but it could be a combination of factors, including pressure from unions or concern about the potential impact on staff morale. There may be more investment flexibility where members are further from retirement and remaining open could be a way of maintaining this.
   Most of these schemes are likely to have a deficit, especially if you assume a buyout position, but some schemes could be in surplus based on FRS 17/technical provisions.
   If economic indicators alter the basis of scheme funding, there may well be a sudden surge of closure to take advantage of the prevailing circumstances.
2. For some companies, the end of DB is not a debate, simply a matter of timing.
   Recent innovations give trustees and employers a growing number of options, which can help provide strategies to manage the risks, and/or removing liability from schemes, potentially working towards scheme disposal. These strategies may help to manage some of the DB ‘headaches’, or they may be the cause of new ones. Whether you see them as sophisticated or unnecessarily complicated, advice is central to making the right choices for individual schemes.
3. Undoubtedly new entrants have led to some downward pressure on bulk purchase annuities (BPAs) market prices over the last 6-12 months. To some extent this is expected to be a short-term effect as the new start-ups are under pressure to quickly and publicly establish a presence in the market. This activity has raised the profile around a range of BPA solutions, however, it is still too early to assess whether this is actually accelerating the buyout decision.
   The level and timescales to achieve the ‘equilibrium point’ in market pricing will depend on the number of new entrants that settle in the market and the speed at which the overall market size increases.
4. Current and new strategies will not fundamentally change the direction trustees have chosen to take their schemes. Those decisions have for, the most part, already been made.
   These strategies may help schemes achieve their chosen outcomes more efficiently. Consolidation of services can make the transition from DB more affordable and manageable.

“Many DB schemes are finding deficits difficult to manage and are looking to spread their risks. This means DB schemes will be looking to the buyout market”

Behind the headlines pitting DC against DB, the future for final salary schemes is uncertain, with myriad solutions on offer. But will any of them last?

While the future of the UK’s DB schemes hangs in the balance, the regulator is planning ahead to ensure companies have all the help they need

The best thing to do now with defined benefit schemes is know how to manage their closure

The popularity of LDI as a solution to risk management seems unlikely to wane, but it may not be the answer to the UK’s increased longevity

DB schemes are seeing great changes, mainly due to employers seeking to end their commitments

The shape and processes of a DB scheme can be altered to hopefully provide a suitable outcome for all involved

In the face of increasing regulation and the introduction of personal accounts, the world of pensions is becoming harder to understand

As most defined benefit schemes are coming to a close, it is

time for employers to start considering the alternatives to these schemes

Actuaries have traditionally had a large part in the construction of defined benefit schemes, and, as the times change, so must they learn to adapt