Survey

BROAD SHOULDERS

Pension consultants can offer useful support in these difficult times. Allison Plager, financial journalist, reports

Running a pension scheme is a challenge for all involved. Although the new pensions regime introduced back in April 2006 was intended to simplify arrangements, in fact it was formed of complex and often impenetrable legislation enshrined in the Finance Act 2004, as amended by the Finance Acts of 2005 and 2006. The pensions industry subsequently had to take in the Pensions Act 2007 which reforms the state pension system as set out in the White Paper, Security in retirement: towards a new pension system.

Trustees and sponsoring employers are also having to cope with an economic downturn and the prospect of a recession. The Pension Protection Levy is yet another outlay for cash strapped companies and investment returns remain unsettled.

As Anthony Arter, head of pensions at Eversheds, says about the many recent regulatory changes facing trustees: “In many respects trustees are still coming to terms with the raft of legal changes that we have seen over the past two to three years. Some schemes are yet to complete their first valuation under the new scheme funding regime and those that have will soon be gearing up for their second. In addition, uncertainty still persists around a number of issues connected with the new tax regime for pensions that was introduced in April 2006 and around the issue of age discrimination.”

Help at hand
The pension consultant can provide trustees and employers with a shoulder to cry on and there is a good range from which to choose. Table 1 gives some essential information about a selection of these consultants. They range in size from global organisations such as Hewitt, Mercer, Watson Wyatt, Hymans Robertson and Aon Consulting to small practices including Brian Tatch & Co and KKW. In addition, a number of accountancy firms offer pensions consultancy, eg, BDO Stoy Hayward, KPMG and PricewaterhouseCoopers; these are also multi-national organisations with vast resources available to call on.

As in most years, there has been some corporate activity among consultants in 2008. For example, BDO acquired Wolanski Checkley Fisher, Barnett Waddingham acquired Garvins, and Capita Hartshead acquired Aspen and Higham Dunnett Shaw (having previously taken over FPS, among others).

Table 2 gives an idea of the wide range of services from actuarial to communications to pre-retirement training provided by consultants. Table 3 looks at the type of client targeted, most used services and clients’ intentions with regard to nature of pension scheme offered to employees.

Coping with change
The year 2012 will see the introduction of Personal Accounts and auto-enrolment. Although this is still four years away, trustees and employers are certainly aware of them.

The Association of Consulting Actuaries (ACA) recently published its “2008 smaller firms pension survey report” in which over 390 firms with up to 250 employees responded to a number of questions. The survey showed that Personal Accounts and auto-enrolment into pension schemes should boost pension coverage in UK smaller firms, but less happily they are also likely to cause levelling down and closures of existing schemes, with 31% of respondents saying they might reduce pension scheme benefits or close the scheme altogether. The UK’s 1.2m smaller firms employ some 9.6m people and 1m of these firms have fewer than four employees. Around 80% of smaller firms offer no workplace pension scheme, so the pension reforms should mean that all employees are enrolled in either an exempt workplace pension scheme or the new Personal Accounts scheme.

Pension consultants on the whole say that clients are not yet giving too much thought to Personal Accounts. Paul Marks, Gissings Consultancy Services, says “at present, the introduction of Personal Accounts is not causing a significant amount of additional work”, rather it is a case of “education and information”. As the deadline approaches he anticipates “engaging in additional work in preparing clients for their introduction and, in particular, how best to respond”.

Some consultants expect their clients to be largely unaffected because their arrangements will mean they are exempt. Hamish Wilson’s Gary Tansley, for example, says Personal Accounts are not expected “to be a major issue for our clients as most have defined contribution (DC) arrangements that would exempt them”.

Uncertainty is also a concern, as final details are not yet in place. As Hanover Pension’s Bill Hudson says “employers cannot plan with certainty, they can only make rough plans about the direction in which their retirement provision will move in the future”. There is also an element of cynicism, with Simon Hazeldine of HSBC saying some clients are “sufficiently worldly wise to believe that much of the detail may yet change”. As to what clients may do, he says some are “considering introducing a company contribution to their DC vehicle in advance of Personal Accounts to get some benefit from the spend”. The risk of waiting to do this until the accounts are launched might be that employees “see the contribution as doing no more than the bare minimum”.

Potential worry
If reforms are a potential worry for the future, investment is a subject that has always been of paramount importance to trustees. It is all about risk management. Trustees have to make informed decisions and need to understand the implications of what they decide.

Watson Wyatt’s Mark Stewart says that “pension schemes globally are increasingly guided by risk management and 2007 saw reinforcement of this reflected in the substantial number of clients completing risk budgeting exercises”. Very few clients do not measure and manage their pension scheme risk. Similarly, PricewaterhouseCoopers’ Marc Hommel sees an increase in trustees looking at what is meant by risk, the different types of risk and what to do about unwanted risk. He mentions a range of solutions, eg liability driven investment, swaps and hedges, which can be used where appropriate in dealing with risk.

It seems that for defined benefit (DB) schemes, balanced management has faded out of favour as trustees look for more tailored arrangements. Buck Consultants Kevin LeGrand says that “almost all” the firm’s DB pension schemes have moved away from balanced funds and instead have “adopted scheme specific benchmarks and specialist investment manager arrangements”. Recently there has been a lot of interest in “interest rate and inflation rate hedging”, although he adds that clients have been delaying the implementation of full hedging while long term interest rate and inflation rates remain unattractive. On the other hand, for smaller schemes, Simon Jagger of Jagger Associates says that balanced management “can still be used as a component where the combination of balanced plus a bond fund can be a simpler approach than having a completely scheme specific structure”.

Uncertainty
The pensions levy is another impact on a pension scheme resources and, as Mr Jagger says it “paradoxically increases the case for some schemes that they would get drawn into it, whereas if they had not had to pay the levy, they would have survived!”.

Although most seem to regard the levy as worthwhile, there is a feeling that it creates uncertainty as the rate has increased much more rapidly than expected. Lane Clark & Peacock’s Jeremy Dell say “clients would like to see a period of stability from the PPF”. He likens the experience to a “roller coaster ride of ever-changing levy formulae, swings in the scaling factor and last-minute changes in arrangements for contingent assets”. As a practical suggestion for the future he supports the idea that clients who have taken steps to de-risk their investment strategy should be given some kind of recognition in the levy.

Facing the challenges ahead
The nature of trustees’ duties is evolving all the time. Marc Hommel says they cannot be looked at “in isolation”. It is necessary “to understand the impact of the pension scheme on the employer and vice versa”. Trustees have to engage with a range of expertise to address the challenges faced, eg valuation, credit rating, overall human resource strategy and the underlying employer covenant. The pension scheme can impact on the whole business, eg financial reporting, tax, corporate transactions. They have to focus on what they can do to gain control of risk rather than pensions in remuneration and they look to consultants to advise across all aspects.

The problem for trustees is that the cycle never stops, says Bridge Trustees’ Antony Miller. “Just as they get to grips with the new legislation the goalposts are moved with more new legislation and regulatory guidance being issued all the time. Before the end of this year, trustees can expect to have to absorb a new Pensions Act, changes to the calculation of transfer values, regulatory guidance on conflicts of interest and scheme governance, consultation over the future of the PPF levy and much more besides. While we relish such challenges, there are many trustees who would prefer a more stable environment.”

The consultant has to advise not only on how everything fits together, but also on how trustees can manage the scheme to provide optimum value all round.

allison.plager@lexisnexis.co.uk