Embed Size (px)
Citation preview
In thIs Issue
p1 Key actions in Q1 2015
p2 Pension increases: more change
ahead?
p3 The million £ drop: April 2016 sees
the end of the Contracting-Out DB
subsidy
p4 Contact details
In this LCP Corporate Pensions Update we consider:
� Key actions to take ahead of the increased flexibilities
available from April 2015.
� The implications on DB pension schemes of a new report
regarding UK inflation statistics. In particular, companies
that have pension schemes that currently use RPI should
investigate the possibility of reducing cost and risk by
adopting a more appropriate index for inflation-linked
pension increases.
� The potential cost to companies as a result of the end of
contracting-out in April 2016.
LCP CorPorate PensIons uPdate QUARTER 1 2015
2015 - how you can reduce pension cost and risk
Key uK pension assumptions and statistics*
31 dec 2014 30 Jun 2014 31 dec 2013
IAS19 discount rate 3.2-3.9% 4.1-4.5% 4.2-4.7%
Assumed RPI
inflation
2.8-3.3% 3.2-3.6% 3.3-3.6%
Assumed CPI
inflation
1.5-2.6% 1.9-2.9% 2.0-2.9%
Long term gilt yield 2.4% 3.4% 3.6%
FTSE 100 index 6,566 6,744 6,749
* the figures shown are indicative ranges, different figures may be appropriate depending
upon the individual circumstances
Key actions to take in 2015Companies should consider all items on this
checklist. For a more detailed checklist on
implementing flexibility for DB scheme members
please click this link.
Be ready for increased pension flexibilities
available from April 2015
� Communicate with management and members
� Review retirement processes (eg consider partial transfers)
� Review scheme “option terms” (eg transfers, early retirement)
Consider one-off exercises
� Small benefit cash-out for pensioners and deferreds over 55
� Other de-risking exercises, eg Advised Transfer
Value, Pension Increase Exchange
Strategic review of your schemes
� DC vehicles and investment funds
� Inflation index developments
� Review changes ahead of cessation of
contracting-out in 2016
LCP Corporate Pensions Update Quarter 1 2015 2
A new report on UK price statistics has reignited discussions about the indices to use for inflation-linked pension increases in Defined Benefit pension schemes. Some schemes may be able to change the index they use, potentially reducing liabilities by the order of 10%.
Many schemes grant annual increases in april, so
companies wishing to explore this possibility should
raise it with trustees as a matter of urgency (some
companies already are). Even if changes are not possible now, further developments are expected so the position should be kept under review.
Historically, many UK pension increases were linked purely to the RPI (Retail Prices Index). That changed in 2010 when the Government decided to use the CPI (Consumer Prices Index) for future statutory minimum pension increases. This resulted in significant reductions in some liabilities for affected pension schemes because the CPI is expected to be lower than the RPI, perhaps by between 1.0% pa and 1.5% pa according to the Office for
Budget Responsibility. However, schemes faced a “legal lottery” as the detailed wording of their pension scheme documentation was critical in determining whether they could move to using the CPI. In some cases, there is discretion over the choice of index – the RPI, CPI or one of their many variants.
Although the RPI is used for many purposes, eg all issued index-linked gilts will continue to be RPI-linked, it was stripped of its formal “national statistics” designation in 2013 due to fundamental flaws in its methodology. The latest report, an independent review of UK consumer price statistics commissioned by the UK Statistics Authority, concurs that the RPI is flawed. It strongly recommends that the use of the RPI “should be discontinued for all purposes unless there are contractual commitments at stake”. This is potentially very significant for pension schemes, some of which may be granting RPI-linked pension increases without a clear contractual requirement to do so.
Pension increases: more change ahead?
Companies that sponsor DB pension schemes should make sure they can answer the following questions:
� What do the scheme rules say about pension increases?
� What consideration has been given to the choice of index for inflation-linked increases?
� Has legal advice been sought on the choice of index?
� When and how will the next set of pension increases be decided?
� If there is scope to change the index used, what is the potential impact on the value of scheme liabilities?
uK price indices compared
Some of my clients could see 10% wiped off their liabilities by this simple change.
Alex Waite
head of LCP Corporate
Consulting
-2
-1
0
1
2
3
4
5
6
Jan-
06M
ay-0
6S
ep-0
6Ja
n-07
May
-07
Sep
-07
Jan-
08M
ay-0
8S
ep-0
8Ja
n-09
May
-09
Sep
-09
Jan-
10M
ay-1
0S
ep-1
0Ja
n-11
May
-11
Sep
-11
Jan-
12M
ay-1
2S
ep-1
2Ja
n-13
May
-13
Sep
-13
Jan-
14M
ay-1
4S
ep-1
4
Gro
wth
(% p
a)
UK price indices compared
CPIRPI
3LCP Corporate Pensions Update Quarter 1 2015
The report makes other recommendations to the UK government which may be relevant to pension schemes:
� moving from the CPI to the CPIH index (a variant which includes owner occupiers’ housing costs) for most purposes. This would be likely to affect statutory minimum pension increases, which are currently linked to the CPI;
� issuing gilts linked to the CPI or the CPIH, rather than the RPI, subject to consultation and assurances about market demand;
� discontinuing several price indices, including RPIJ which was introduced in 2013 to try to correct for the most fundamental inadequacies of the RPI; and
� making technical changes to the various indices which could change their expected future values and the gaps between them.
These are only recommendations at this stage, with a
formal public consultation expected in summer 2015
and a final response later in 2015. However, where
there is any discretion over the choice of index used
for pension increases, the report may add weight to
arguments for moving away from using the RPI.
any companies undertaking pension increase
exchanges, advised transfer value exercises, buy-ins
or buy-outs, should particularly seek advice urgently
on the implications of these latest developments.
If there is flexibility to move away from using the RPI, companies may need to move quickly if they want to agree this with the trustees before the next pension increase takes effect. They could explore the possibility of initially increasing pensions in line with the lowest index and making catch-up payments as necessary once the choice of index is agreed.
The report’s recommendations, if implemented in full, may have implications for all types of inflation-linked pension increases, so companies should keep a watching brief on this issue. It seems likely that price index definitions and calculations will be subject to further change over the coming years. Each change could have implications for funding valuations, accounting assumptions, transfer value calculations and buy-out premiums, as well as the actual benefits paid to members.
Which pension increases are affected?Any pension increases which are linked to inflation are potentially affected. This includes increases between leaving and retirement, (sometimes called “revaluation”) as well as after retirement (typically called “pension increases”). Most schemes pay the minimum statutory “revaluation” pre-retirement, so many will already have moved to using the CPI. There is much greater diversity of practice for “pension increases” post-retirement, both within and between schemes.
Schemes may find they can, or must, use different indexes depending on the scheme section and members’ dates of joining and leaving active service. Following any developments at national level, legal advice will be required to determine the pension increases payable, based on scheme rules, member
communications and administration practices.
The million £ drop?The Government subsidy for DB pension schemes which are “contracted-out” of the State second pension ends in April 2016. Companies with employees in DB schemes will need to pay extra National Insurance contributions.
For an employee earning £35,000 this will cost the company an extra £1,000 per year and the employee will see a reduction in take-home pay of £400 per year.
This could mean a £1m annual drop in profits (or more) for companies with 1,000 or more employees in the DB scheme. There are options to reduce the cost but companies need to act now to be ready for April 2016.
For information on how LCP can help with this change click this link.
The LCP Corporate Pensions Update is based on our current understanding of the subject matter and
relevant legislation which may change in the future. Such changes cannot be foreseen. This document is
prepared as a general guide only and should not be taken as an authoritative statement of the subject
matter. No responsibility for loss occasioned to any person acting or refraining from action as a result of
any material in this Corporate Pensions Update can be accepted by LCP.
All rights to this document are reserved to Lane Clark & Peacock LLP (“LCP”). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given.
We accept no liability to anyone to whom this document has been provided (with or without our consent). Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales
with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock
LLP. A list of members’ names is available for inspection at 95 Wigmore Street, London W1U 1DQ, the firm’s principal place of business and registered office. The firm is regulated by the Institute and
Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances
to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of
the professional services we have been engaged to provide. Lane Clark & Peacock UAE operates under legal name “Lane Clark & Peacock Belgium – Abu Dhabi, Foreign Branch of Belgium”. © Lane
Clark & Peacock LLP 2015.
Lane Clark & Peacock LLP
London, UK
Tel: +44 (0)20 7439 2266
Lane Clark & Peacock LLP
Winchester, UK
Tel: +44 (0)1962 870060
Lane Clark & Peacock Belgium CVBA
Brussels, Belgium
Tel: +32 (0)2 761 45 45
Lane Clark & Peacock Ireland Limited
Dublin, Ireland
Tel: +353 (0)1 614 43 93
Lane Clark & Peacock UAE
Abu Dhabi, UAE
Tel: +971 (0)2 658 7671
Lane Clark & Peacock Netherlands B.V.
Utrecht, Netherlands
Tel: +31 (0)30 256 76 30
LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,
insurance and business analytics.
Tim Marklew
Partner
+44 (0)1962 872747
Alex Waite
Partner
+44 (0)1962 872738
LCP events
We hold a range of events that provide clear information and analysis on important pensions and
investment topics. Bringing together LCP experts and industry speakers, our events include conferences,
breakfast briefing seminars, webinars, topic lunches, round-table debates and various training sessions.
For full details of all events and to register, please visit www.lcp.uk.com/events
any questions?
If you would like any assistance or further information on the issues raised, please contact Alex Waite,
Tim Marklew or the partner who normally advises you at LCP via telephone on +44 (0)20 7439 2266 or
by email to [email protected].
