DB to DC transfers – Pensions Regulator consultation

man jumping over fenceBlend Images | Shutterstock

2 March 2015

The Pensions Regulator has produced a useful consultation document on DB to DC transfers and conversions and invited comments by 17 March 2015.

The consultation document is pretty clear, concise and accessible and is likely to form the basis of new guidance for DB pension scheme trustees faced with the tricky question of how to handle DB members wishing to transfer to a DC scheme.



For me, there are five key areas:

  1. There should be relatively few cases where such a transfer is actually in the best interests of the member – giving up guaranteed retirement benefits is not to be taken lightly. However, it is not the role of the trustee to second-guess circumstances: for instance, the passing on of the whole DC pot tax-free if death occurs before 75 may be attractive in a small number of cases
  2. Transferring members will be required to take independent financial advice if their cash pot equivalent value exceeds £30,000. Schemes will need to monitor this threshold and to check that advice has been sought – but will not need to pay or provide for this advice; they should instead provide information on finding FCA authorised advisers
  3. This is going to be a significant area for potential fraud – probably larger than the pensions liberation scandal. It will obviously attract bees to the jam-jar (as bank robber Willie Sutton is reputed to have said) “because that’s where the money is
  4. It should be second nature to trustees to realise that we must consider the balance of need of members: particularly those transferring versus those remaining. Schemes in deficit will need to consider their insufficiency report to help determine the relevant discount factors for transfer values
  5. We may see large and lumpy transfer requests coming in, which may have a small impact on the liquidity needs of Scheme investments

The full consultation document along with timetable can be downloaded from the Pensions Regulator website.

Author: Martin Veasey
© www.veaseyassociates.co.uk 2015

Something Different: March 2015 Solar Eclipse

solar eclipse near totalityhttp://www.timeanddate.com/eclipse/in/uk/london

27 February 2015

On this Friday afternoon, perhaps a little whimsically, I’ve chosen to write on a subject that has nothing to do with pensions, investments or finance but still fascinates me: Astronomy.

Over the next few days, expect significant media coverage of one of the rarer astronomical events: a forthcoming almost-total eclipse of the sun over the UK on Friday 20 March 2015.

Weather permitting – which is always a problem for us! – the show will begin at about 8.30am as the Moon starts to move between the Earth and the Sun, thus partly blocking our view of the Sun. The best view will occur around 9.30am (the image above simulates the view from London1) with the Moon completely moving away by about 10.30am.

It is expected that about 84% of the solar surface will be obscured as viewed from London, 88% from Sheffield and 93% from Edinburgh2 – thus confirming the view of the innate superiority of life in the North! If you want to see full totality, you’ll need to charter a boat and bob around in the Norwegian Sea somewhere to the east of Iceland. If you do this, please send photos and I’ll be delighted to feature them.

To put the rarity of these eclipses into context, the next similar quality solar eclipse visible from the UK will not occur until 12 August 2026; in the meantime there promises to be a splendid solar eclipse on 21 August 2017 best seen from Missouri, Kentucky and Tennessee – and yes, I am thinking of going …

Much less rare are eclipses of the Moon, where the Earth is interposed between the Sun and the Moon and blots out the Sun’s light from reaching the Moon, thus turning a full moon a deep dark red in colour – there will be one on 28 September 2015 at just before 4.00am …

SAFETY – it would be absolutely remiss of me to not warn about the dangers of looking at the Sun even under eclipse conditions. There are many websites with detailed advice (e.g. http://www.timeanddate.com/eclipse/eclipse-tips-safety.html).

Sun glasses are particularly dangerous – in my view worse than nothing – as they shield a fair amount of visible light thus reducing the immediately painful warning dazzle whilst doing absolutely nothing to stop the infrared radiation which will burn and scar the retina into blindness. Heed the safety warnings and, if you are accompanying children, please watch them particularly carefully.

I’ll be using special (and inexpensive) eclipse glasses from a reputable astronomy store.

Depiction of eclipse in Incan timesNational Geographic / Leonard de Selva

Of course, due to their dramatic nature and rarity, eclipses were historically seen as portents of great change and, often, disaster. Nowadays we think we know better … but part of me still wants to cross my fingers …

Author: Martin Veasey
© www.veaseyassociates.co.uk 2015

Auto Enrolment – 2015 review of thresholds

The word "pension" compressed with a clampAlexandra Nika | Shutterstock

1 February 2015

I last wrote about the auto enrolment thresholds at the end of 2012.1

Since then, the auto enrolment staging process has progressively unfolded and, as at the time of writing, smaller employers with just 50-60 workers are in the process of implementation.

Whilst staging will continue for some considerable time, it is fair to say that auto enrolment should now be just as embedded in the thinking of smaller and mid-size as well as larger companies.

One aspect that seems to be getting little coverage – though some of the trades unions and other commentators have highlighted this2 – is that of the consequences of Government’s policy on adjusting the various threshold bands associated with auto enrolment:

auto enrolment thresholds

The graphic to the right (click to magnify it if needed), shows the change in the three key thresholds since 2012.

As a reminder, the Qualifying Earnings trigger sets the level at which someone becomes an eligible employee for AE. Once someone is eligible, pension payments are based upon earnings above the Lower Level up to the Upper Level of qualifying earnings.3

Now, throughout the last annual reviews, the Government has aligned – as a matter of policy rather than legislation – the Lower and Upper Levels of qualifying earnings with the respective lower and upper National Insurance thresholds. This was thought to be to help employers simplify payroll systems – though many employers are following a rather different approach to contributions as we have seen.4

Unfortunately, from the perspective of encouraging pensions saving, the Government’s review of NI thresholds have been less aligned to the future needs of beneficiaries and more with reducing the NI burden on employees and employers. This effective tax cut, particularly in 2013/4, had the effect of reducing the maximum compulsory amount payable into AE and is only gradually being remedied.

Much more of a problem is the review of the Qualifying Earnings trigger. The Government stated an ambition to continue to link this to the personal tax allowance – and this allowance has, for political reasons, risen much faster than the cost of living. This allowance is currently set at £10,000 and both coalition parties are now, in the run up to the General Election, talking about raising this to £12,500 in the next Parliament.

The effect, of course, is startling in that it it squeezes some of the lower paid workers out of eligible employee status altogether – surely an undesirable effect? Linking Qualifying Earnings to the personal tax allowance confuses the “needs of the country” (in raising tax revenue) with the “needs of the member” (in saving for retirement). There is merit in the argument for having some gap between the QE and LL thresholds – to prevent transitory earnings spikes pushing some people into AE unnecessarily but I would argue that this differential has grown too wide since 2012.

  1. http://www.veaseyassociates.co.uk/2012/12/follow-up-department-of-work-and-pensions-auto-enrolment-thresholds-2013-14
  2. see for instance http://www.tuc.org.uk/economic-issues/pensions-and-retirement/freeze-auto-enrolment-thresholds-boost-pensions-saving-says and http://touchstoneblog.org.uk/2012/12/a-disaster-in-the-making-dwps-decision-on-the-automatic-enrolment-trigger/s
  3. Of course, many employers have simplified matters by applying a more straightforward payment on full pensionable earnings. This process permits a simpler payroll, so long as the employer formally certifies that employees are not disadvantaged.
  4. ibid, footnote 2 above

Author: Martin Veasey
© www.veaseyassociates.co.uk 2015

Where did the deficit come from? – a study in scarlet (ink)

cover of the book: A Study in ScarletWikipedia

20 January 2015
According to Pension Protection Fund (PPF) data1, the s.179 funding level for the aggregate universe of DB schemes potentially eligible for entry into the PPF fell sharply during 2014. According to their database, the aggregate funding position moved from a small surplus (0.8% at Dec 13) to a significant deficit (-17.7% at Dec 14).

So where did all this red ink2 come from?

Well … conventional growth assets may not have helped much. Trustees will be familiar with the roll-forward phenomenon on actuarial valuations; that the selected discount rate becomes a sort of ‘hurdle rate’ going forward – if asset growth doesn’t keep pace, then the funding ratio will slip back. The FTSE All-Share index3 made a modest total return (including dividends but gross of any fees) of 1.2% in the year. Diversified overseas investment would have done rather better – a hedged investment in FTSE All-World xUK would have made 5.6% – rather higher if left unhedged.

The villain, as ever, seems to be the quiet, unassuming gilt markets sitting quietly in the corner. Bloomberg’s 30yr conventional gilt index yield4 fell by 1.2% over the year – translating this into cash returns, the FTSE Actuaries UK Conventional Gilts Over 15yr index made just over 26% in the year! Even the Conventional Over 5yr index put on almost 20% and the Index-Linked Over 5yr did slightly better.

PPF 7800 DB Pension Scheme Funding Ratio - December 2014Data: PPF

This would obviously have helped schemes holding gilts but the big impact was on the assessed current value of liabilities. Even schemes with quite a high level of interest rate and/or inflation cover would have seen some impact but an equity growth portfolio combined with a bond-like liability structure would have made for a challenging 2014.

For completeness, the PPF database does also note the small impact of new actuarial assumptions the PPF adopted in April – these led to a deficit change of just over £8m – just over 0.6% decline in funding ratio.


Author: Martin Veasey
© www.veaseyassociates.co.uk 2015