Consultancy Services - Liability Management

PCS Alert - January 2010
Contact
Charles Cowling FIA Charles Cowling FIA /uploads/contacts/contact_1.png JLT Pension Capital Strategies St James House 7 Charlotte Street Manchester M1 4DZ 0161 242 5388 07920 834047 0161 242 5306 charles_cowling@jltpcs.com Charles has 25 years’ experience in the actuarial profession and has acted as principal actuarial adviser to several FTSE100 companies and their pension schemes, as well as the not-for-profit sector (including in connection with the pension scheme of the Actuarial Profession). Before joining JLT Pension Capital Strategies in 2006, Charles spent 22 years as a Scheme Actuary and consultant, including advising remuneration committees on all aspects of executive remuneration. Charles has pioneered the use of modern corporate finance techniques in actuarial work, advocating a move towards a lower level of risk and a strengthening of standards in the management of pension schemes as early as 2004, through sessional papers. Charles is a Fellow of the Institute of Actuaries. He has a BSc from Durham University and he is also a Chartered Mathematician, a Chartered Scientist and a Fellow of the Institute of Mathematics and its Applications.
Rob Dales FIA Rob Dales FIA /uploads/contacts/contact_20.jpg 3rd Floor, Bond House The Bourse Boar Lane Leeds LS1 5EN 0113 203 5883 0779 909 4392 0113 203 5862 rob_dales@jltpcs.com Rob joined PCS in 2007 having previously been a Director at KPMG for 10 years. Rob has 20 years experience of advising Trustees and companies on all aspects of pension matters but in the last 10 years has specialised in providing advice to the company. Rob’s particular expertise is in designing and implementing liability management solutions for pension schemes. He was one of the first actuaries to implement an enhanced transfer value exercise back in 2002. Rob has extensive experience in assisting companies with the more complex aspects of pension arrangements including Scheme Funding, dealing with the Pensions Regulator and the pension implications of corporate transactions and insolvencies. Rob has written several articles which have been published in the Financial Times, Pensions World, Yorkshire Business Insider and Professional Pensions. Rob is also co-author of "An Introduction to Pensions" published by Gee. After graduating with a first class honours degree in mathematics in 1987, Rob qualified as a Fellow of the Institute of Actuaries in 1992.
Simon Taylor FIA Simon Taylor FIA /uploads/contacts/contact_21.jpg 6 Crutched Friars London EC3N 2PH 020 7895 7809 0792 054 3015 simon_taylor@jltpcs.com Simon has over 20 years' experience of advising companies and trustees on all aspects of their pension and benefit arrangements. After spending more than 15 years at a competitor firm, specialising in giving advice to pension scheme sponsors, Simon joined what is now JLT Actuaries and Consultants in 2006 and was Head of Corporate Consulting before becoming part of the JLT Group in late 2009. Simon currently sits on the Board and Executive of Pension Capital Strategies with a specific focus on driving sales and introducing new initiatives. His current clients range from FTSE 100 retailers through well known media companies to small family run businesses. Whilst mainly giving advice to companies, he also has several Scheme Actuary appointments which enable him to give more rounded advice to clients. In particular, Simon specialises in risk and liability management and reduction, scheme funding and accounting and benefit design.

Pension Increase Work

Many companies are commencing exercises where members are offered the opportunity for exchanging non statutory pension increases for a higher tax free cash sum or a higher non increasing pension. The basis of this exchange is normally such that a source of uncertainty and risk is removed from the scheme and the cost of the alternative benefits can be cheaper for the scheme to provide.

Why are companies offering this option?

The principal reasons for companies asking Trustees to change the scheme rules and offer this additional option are:

• Increasing pensions are expensive to provide, especially when interest rates are low, inflation is rising and longevity increasing.
•   The exchange is on the basis that the cost of the alternative benefits leads to a reduction in deficit, partially as a result of the member taking a higher tax free cash sum.
• Whilst there is an initial increase in pension payment (and PPF levy) the overall liability reduces due to the increased cash payment and conversion terms offered to members.
•   This option does not involve the company paying for an incentive.
• Whilst the savings will only emerge over time (as members retire) it should be possible to build an appropriate assumption in to Technical Provision calculations.

Why would members exchange pension increases?

Defined benefit pension schemes provide members with limited choice at retirement which has no reflection of their personal circumstances. There are a number of reasons why a member would exchange increases even if they are told the value of the alternative benefit is lower, namely:

• Research shows that members with a choice (i.e. those who have to purchase an annuity at retirement from a defined contribution scheme) predominantly select a level pension to maximise the initial income.
• For a number of pension scheme members an increasing pension in retirement is franked against state benefits thus they may be no worse off without the increases.
• A higher initial pension could lead to a higher tax free cash sum payable on retirement.
• Members may see the offer as good value (even where they are told the value is lower than the original benefits) if their expectations on life expectancy are shorter than assumed in valuing the liabilities.
• The cost of living in retirement does not necessarily increase with inflation as the level of activity reduces with age. Members want the highest income when they are less active due to ill health and infirmity. 

Can this be offered to pensions in payment?

Subject to the Trustees agreeing to the appropriate Rule changes it is possible to offer this to pensioners but the option of higher tax free cash is not available. Offering to current pensioners can give an immediate impact on the deficit.

Correctly planned and implemented exercises can be a win-win for members, companies and trustees. The first steps to such an exercise would be a feasibility study to analyse current membership and model potential outcomes.