POLITICAL STAGE Cash in hand

Listed companies should disclose pension risks more clearly in their company accounts, reports Ceri Jones, financial journalist

Lincoln Pensions is calling for all listed companies to disclose their pension exposure risk in their annual reports and accounts to give stakeholders a better understanding of the cash flow and funding risks involved.

"The feedback has been highly supportive," says Darren Redmayne, chief executive officer at the specialist covenant assessment company. "A lot of stakeholders are saying that it is good that the debate is now being held.

"Trustees need better information to make more informed decisions," he adds. "Trying to read your company’s accounts is a challenge for any group of trustees. There is potential for confusion. The main challenge is understanding the cash position, and making sure that the level of cash contribution is balanced with the needs of other stakeholders. The Regulator wants trustees to be better integrated and to understand the risks they are running."

Lincoln Pensions’ research reveals that two-thirds of FTSE 350 companies, with defined benefit (DB) scheme assets of around £332bn, fail to disclose the deficit relative to the funding target; and over half do not reveal the time it would take to pay down the scheme deficit under their recovery plans. Not a single FTSE 350 company provided a measure of future funding risk volatility, such as value at risk, while roughly one third mentioned the scheme’s hedging strategy.

"A majority of the FTSE 350 neither disclose the size of their technical provisions deficit, the key figure for setting funding contributions, or the length of their recovery plans," Mr Redmayne added.

"Directors of listed companies must now make a ‘long-term viability statement’, which requires an assessment of the longer term risks. This new requirement is the perfect catalyst for making these disclosures obligatory," he said.

DB transfers soar

We know that nearly 8,000 people transferred out of defined benefit (DB) schemes and into defined contribution (DC) between Q3 2015 and Q1 2016, as the Financial Conduct Authority (FCA) has told us so, but the number of transfers has climbed dramatically in recent months as gilt yields hit rock bottom.

Tideway Investment Partners, led by James Baxter and based in Westminster, is one firm that has seen soaring applications. At one point in November, over 100 transfer reports were being produced for the firm’s clients. Mr Baxter said that enquiries have escalated, as financially savvy DB scheme members have become aware that transfer values have soared as a result of recent market movements.

He added that a few employers in the financial sector show their scheme members their cash equivalent transfer values online, which focuses the mind, and that one bank even allows a member to select the best of his or her last three months’ transfer values.

This is very much the exception, however. In contrast, a recent Lane Clark & Peacock study showed that 30% of its clients "are providing illustrative transfer values in retirement packs; all the rest are describing the option without providing a figure".

Tideway has also won a corporate mandate to provide advice to an employer’s workforce and deferred scheme members, and expects more of this type of activity in future.

Auto-enrolment – a fine mess

Hundreds of thousands of pounds of auto-enrolment fines may have been incorrectly levied on employers, according to research by payroll provider Paycircle.

In the third quarter compliance report by the Pensions Regulator, 82% of employers that requested a review of their issued penalties were able to get them reduced or removed.

Fewer than 20% of employer instigated statutory notices completed by the Regulator in the third quarter still stood; and an astonishing 82% of penalties in employer instigated reviews were revoked, substituted or varied.

While hundreds of thousands of pounds of fines have already been handed out incorrectly, the number could spiral as penalties rise, Paycircle says.

"With over 80% of businesses successfully having their statutory notices either altered or revoked, some might argue that the Regulator has been too heavy handed in its auto-enrolment enforcement," says Catherine Pinkney, co-founder of Paycircle. "Smaller business owners should be aware that in many cases these fines are being overturned, saving them hundreds of pounds. If you are a small employer and feel the penalty you have received is unfair, the chances are you can get the decision either changed or reversed entirely."

Self-employed are the next big focus

The government is looking at ways to bring the self-employed into pension saving, as part of its forthcoming review of auto-enrolment. The preferred solution would be catch-all, such as additional national insurance contributions which can then be paid into a private pension.

Regarding contribution levels, there have been hints that the government feels unable to move on from the 8% minimum in 2019, despite a tacit understanding that current contribution levels are far too low.

For example, Steve Webb, former pensions minister, said a recommendation on contribution rates should not be delayed until 2019, as workers would have "a lost decade" saving at inadequate levels. The International Longevity Centre – UK has also said that the government must not "shy away" from introducing auto-escalation of auto-enrolled pension contributions, despite the grim economic outlook.

Opposition to secondary annuity market overwhelming

The government’s decision to backtrack on the development of a secondary annuity market was based on overwhelming opposition to the idea, according to 18 submissions from industry bodies on the secondary annuity market published by the Treasury.

The industry was keen to express its scepticism that a secondary market in annuities would be difficult to operate, with many complex legal and regulatory issues, and that the market would be small and a lack of competition would lead to poor pricing. A surprising number of submissions focused heavily on the risks to the elderly of giving up a guaranteed income and the potential for pressure from their families to cash in their plans.

Firms must now write to their customers with their annuity quote alongside the best available rate on the open market. The reports will need to include a clear of explanation of the difference between the offers.

The FCA has said that while it is well understood in the industry that consumers should shop around to get the best deal, very few people actually do so.

"The government’s inability to deliver on a secondhand annuity market was understandable, given the major risk of poor customer outcomes in a secondhand market," says Jon Greer, pensions expert at Old Mutual Wealth. "But it does mean there is pressure on the authorities to be seen to act to tackle perceived injustice in the annuity market.

"Today’s proposals from the FCA represent an unprecedented interventionist approach. It is hard to think of another market where a company is forced to promote a cheaper product from a competitor at the point of sale. The fact we have reached this stage illustrates the degree of frustration at the apparent lack of progress in increasing competition in the annuity market.

"More competition and more shopping around will ultimately help to drive higher standards of living in retirement for annuity buyers, which must be a good thing. But there are plenty of issues to iron out in the FCA proposals.

"First, asking providers to provide the best available guaranteed quote will drive a race to the bottom, where price becomes king and service is secondary."

Greer predicted further consolidation among annuity providers, and that the cost of the detailed underwriting process involved in providing these quotes would ultimately will be passed on to clients.

The secondhand annuity market had been due to open in April 2017.

In Brief

It’s all in the yachts

The Pensions Regulator has confirmed that Sir Philip Green’s £100m super yacht could be seized to plug the £571m BHS pensions deficit.

Chief executive Lesley Titcomb told the Work and Pensions Committee that the courts could decide that Sir Philip should sell assets to plug the deficit if the trustees or the Pension Protection Fund pursue a contribution notice debt through this channel.

Frank Field, chair of the cross-party committee, had written to the Regulator, urging it to explore the option of "acquiring assets other than cash" owed by the former retail chain owner.

Sir Philip notoriously fanned ill-feeling by showing off his new yacht Lionheart, just as 11,000 workers at BHS lost their jobs.

The close of 2016 also marked the end of another long career, in this case of Michael Sherwood at Goldman Sachs, who left the firm six months after becoming embroiled in the BHS affair.

At the parliamentary inquiry investigating the retailer’s collapse and its pension black hole, Sir Philip told MPs he was "1,000,000%" sure that he would not have sold the store to former bankrupt Dominic Chappell had the businessman not been vetted by Goldman Sachs.

"If they had said, ‘Don’t deal with this guy’, that would have been the end of it ... but that is not the advice that we got," Sir Philip added.

Mr Sherwood, however, denied that there had been a "sniff test" on Chappell and claimed he was making observations rather than giving formal advice. He later apologised to MPs for not disclosing that Goldman Sachs had been approached by Green about a £40m loan to BHS at the time of its sale.

Iain Wright, chair of the Business, Innovation and Skills Committee, questioned how Mr Sherwood’s clients could "trust" him when he "failed to remember a potential £40m transaction".

The MPs report took the view that Goldman Sachs should have been clearly either "in" or "out" of the deal – they should not have had authority without accountability.

A friend of Sir Philip’s since 2003, Mr Sherwood also owns his own yacht and a $11m condominium unit in Miami Beach.

 

Ceri Jones is an award winning financial journalist. She has edited several publications including the Investors Chronicle, Financial Adviser and Pensions Management.