Pensions World

Pensions hold no fear for consultants. Allison Plager finds out why

If there’s something strange in your neighbourhood,
Who ya gonna call?
Pensionbusters!

Apologies to the well-known 1980s film Ghostbusters, but who would ever have thought that the film’s theme song would adapt so well to pensions? The next stanza is just as good:

If there’s something weird and it don’t look good,
Who ya gonna call?
Pensionbusters!

Who would deny that pensions can be a strange and difficult topic? Even the esteemed editor of this magazine, Stephanie Hawthorne, admitted to finding it a daunting task to set up a stakeholder pension scheme in her August 2009 comment “Work till you drop?”. Stephanie was making the point that it is not easy to know where to obtain good independent financial advice. Companies running pension schemes, on the other hand, can always call their pension consultant. And with all the pension changes and regulations that companies are dealing with, as well as running the business in a recession, it is helpful to have someone on call who can make sense of pensions issues.

I ain’t afraid of no pensions

Pension consultants are indeed only too happy to blast through the fearsome issues surrounding pension schemes and, for the uninitiated, there is a wide range to choose from. Table 1 presents some facts and figures about several consultants. Included among them are the global firms, eg Aon Consulting, Hewitt, Mercer, Watson Wyatt, but also also smaller firms, eg Hanover Pensions and KKW Pensions Management, which may appeal more to trustees of smaller schemes.

Given the economic climate, not a lot of corporate activity seems to have taken place within the consultancy industry this year. A notable exception is that Capita Hartshead acquired Gissings in June.

The myriad of services offered by consultants and their charging structure are covered in Table 2, while Table 3 gives readers an idea of the size of scheme targeted by each consultant as well as indicating their clients’ intentions for the pension scheme.

The recession has clearly had an impact on companies offering pension schemes. For example, Marcus Hurd of Aon Consulting says there has been “a decline in the number of clients who actively encourage employees to join the pension scheme”, but ironically the recession “has resulted in an increased appreciation of the pension benefit and hence greater interest”.

Similarly, James Stansfield of BBS has seen “less appetite for employers to promote schemes” and Heath Lambert’s Stephen Rowntree suggests that the reluctance to encourage employees to join up may also reflect “future strategic change following the introduction of Personal Accounts”.

Taking up the point that employees might be more appreciative of the company scheme in a recession, Capita Hartshead’s Malcolm Pearce says this might be manifested by the fact that fewer employees are opting out of schemes.

“Don’t get caught alone”

The seemingly inexorable demise of the defined benefit (DB) scheme continues with many schemes now closed at least to new entrants, but increasingly also to future accrual. Recent findings from Pension Capital Strategies, a subsidiary of JLT, showed that only 140 companies in the FTSE 250 had any DB scheme at all and, of those, only 20 were providing DB to more than 5% of payroll.

Further evidence is provided by the first report of the Association of Consulting Actuaries’ (ACA) survey on pension trends, published in early September 2009*. This found that 87% of DB schemes were closed to new entrants of which 18% were also closed to future accrual. Nearly 40% of DB schemes were considering changes to future accrual, with 35% considering a move to career average and 22% a move to DC.

The figures in Table 3 reflect the ACA survey figures to some extent, but with some fluctuations. In the table, the percentage of clients staying with DB for example ranges from nil to 65%, while that for clients with schemes closed to new entrants goes from 100% to 4%. In this respect, Mr Hurd says that “a growing number of clients are considering pensions’ provision in a wider context – changing the level of benefits, suspending or reducing contributions to DC plans or considering alternatives to pensions”.

Many companies are “consulting or working on closing their DB schemes at least to new members”, agrees Watson Wyatt’s David Robbins. The economic situation is sometimes a driver for such action and trustees of schemes which are already closed to new entrants are in some cases considering closing the scheme to future accrual so they can concentrate on paying benefits.

Most employers are “committed to providing pensions for their employees”, says Hewitt’s Andy Cox, but “increasingly they do not see it as their role to take the high levels of long term risk associated with final salary arrangements”. A DC scheme moves the risk to the employee, but the question then is how to ensure the employee receives good advice. The ACA survey found that three-quarters of employers surveyed felt their employees were uncomfortable in taking on the investment, inflation and longevity risks inherent with DC schemes.

“If you’re seeing things …”

The 2012 reforms are undoubtedly keeping consultants busy. Employers need to “be thinking about their plans for 2012” says Mercer’s Steve Charlton. Quite apart from the logistics involved, employers “should recognise that there will be costs”. The “hard costs” will come from having to pay additional contributions for employees who previously have not been scheme members, but there will also be “soft costs”. These will arise, for example, from the changes needed to systems to operate the new auto-enrolment, to identify individuals unaffected by the new rules, etc. They will need to think about how they can absorb any of this extra expense or how it can be minimised.
The main issue for employers, says Simon Hazeldine of HSBC Actuaries and Consultants, is “the new duty to automatically enrol workers into a pension scheme and contribute for them”. This is the first time that “all employers will have to make contributions to a pension arrangement, other than the state pension scheme, for nearly all employees”.

Mr Charlton says that despite the publicity, “pockets of industry and employers exist where little is known about the 2012 changes”. Some are even still taken by surprise when told about them. He is concerned that the smaller employers, at whom the new legislation is largely directed, may not be able to afford consultants to help them implement the rules. It is important, he says, that the Department for Work and Pensions raises awareness as, unlike stakeholders, the new regime will apply to all employers.

“If ya all alone, pick up the phone”

Investment risk has rarely been greater than it has been over the last few years.

As Mr Hazeldine says: “Since the beginning of the economic downturn, one of the main issues has been the falling values of their assets across all investment markets and, with perhaps of more concern, an increase in the volatility of asset prices”. These sudden falls “can exacerbate what is a general negative issue into a significant scheme-specific problem” and may also have “a considerable impact on the calculation of funding levels, which in turn may lead to serious discussions with the sponsoring employer over contribution levels, and even the future viability of their defined benefit scheme”.

As a result he says some schemes which have previously “resisted investment consultancy advice” have decided to take advice “to stem recent losses and better position their pension schemes for the risks that remain, exploring actions that could reduce the volatility in asset valuations”.

So, Who ya gonna call?
Pensionbusters!

Allison Plager is a financial journalist; allison.plager@lexisnexis.co.uk

*The ACA’s 2009 Pension trends survey Report 1 is available at www.aca.org.uk