Focussing on low income households is especially important because personal car ownership has been proven to enhance life opportunities for this demographic. Put the other way round, not being able to afford your own car reduces access to good quality work and social mobility. This is a subject Altelium has explored before in an article entitled “Ensuring a fair and equitable transition to the clean transport market,” and in this context the ABI work is particularly to be commended.
But the insurance market has overlooked a core feature of the market that will be vital to everyone, particularly those in low income households in future - the ability to buy and insure a reliable second hand electric vehicle (EV).
The second hand market is where eighty per cent of people source their cars. In 2023, used EV sales grew by 90.9% to 118,973, but this was just 1.6% of all used car sales. Sales of used EVs may be in excess of 700,000 by 2030, over 9% of all used car sales.
For these used EVs, a battery health certificate will be vital proof that the vehicle is worth buying – who otherwise will trust what the vehicle’s true range is, or that the battery will last?
The insurance industry should put battery health tests at the heart of any future plans to manage premiums because it is also good for people and good for the planet.
A healthy battery is a sign of a particular type of driver. One who has consistently charged it smoothly, avoided repeated fast charging, been easy on the brakes and acceleration and is therefore far more likely to be safe driver. The precious resources in the battery will last longer, and the driver will have a car that lasts longer and has a higher resale value.
Insurance discounts tied to annual battery health testing would:
1. Incentivise owners to drive and operate their vehicles to maximise vehicle health, protecting value and resources.
2. Offer a way to reduce insurance premiums.
3. Align with the broader goal of promoting equal access to sustainable transportation.
Alex Johns Altelium Partnership Lead said “The insurance industry should be exploring with a sense of urgency the value of an annual battery health check as part of policy renewal. It would put the insurance industry firmly on the side of the consumer and makes complete sense for people and planet alike.”
However, by the time we reach April 2024, it is estimated that around 6 million DC pots will have been accessed for the first time since the pension freedoms have been introduced in April 2015, will all of those members be reflecting with fond memories of the pension freedoms?
The pension freedoms were introduced as it was felt that the retirement market wasn’t working properly for all retirees. The pensions freedoms legislation came into force in April 2015, before that date many people reaching retirement had to buy a regular income (via an annuity). From April 2015, other options were added like cash withdrawals, flexible drawdown and combinations. At that point in time it was felt that annuities were rigid and expensive and a barrier to saving for retirement. The intention was to give choice to DC savers, particularly those with lower values, deliver better pension outcomes, and to allow savings to be accessed in a way that better meets savers needs.
Over the last 10 years, there have been many positives, for example, we have seen DC savers cash in small pension pots which have, on the whole, delivered an overall improved financial outcome in the short term. We have also seen many savers make their money stretch further by benefiting from being invested in the stock market over longer time frames. We have also seen creative retirement plans being actioned, with members accessing money in phases and /or using pension and ISA combinations to manage tax liabilities. When the pension freedoms have been accessed in a considered way, we are seeing the intended benefits.
However, the pension freedoms also introduced some financial anxiety for members that had to suddenly engage with something they have not prepared for. Many members know it is a serious financial decision that they have to take, and they have been wrestling with where to get information and who to trust. In recent years the tax free cash has also provided alleviation to short term financial pressures, but it may come at a longer term cost if other sources of income cease and / or the ability to work is no longer feasible.
The key to successfully navigating the pension freedoms has been for a member to be supported and informed. Unfortunately, the pensions industry was initially not given enough time to anticipate and respond to the “human factor”. What’s worse is, that 10 years on that’s still the case, with not all members receiving appropriate guidance or advice prior to navigating the pension freedoms. The consequences we have seen have been some avoidable tax bills being triggered, people leaving money in cash or entering into in appropriate or expensive drawdown products.
Unfortunately we have also seen a significant rise in savers being targeted by scammers. It is imperative that we keep our focus on how we can help members make better choices; increasing the access to guidance, affordable advice or financial coaching to support with their decision making. We also need to put in place decumulation defaults for those that won’t engage. We have taken baby steps with the stronger nudge to pension wise, but significantly more effort is needed to improve member outcomes.
The pension freedoms have been a minefield for many members and DC savings assets will be more material in the next 10 years so the potential for error increase in materiality. However, with this scale, this gives the platform for the pension freedoms to be a powerful tool to allow members to personalise and maximise their retirement incomes, by being able to flex and intertwine with other savings, but only if accessed with appropriate support.
We cannot wait 10 more years to get a better guidance and advice framework in place, we are hopeful we will see some meaningful changes this year as part of the FCA’s guidance and advice boundary review. In the meantime, we would encourage trustees and employers to review what support services that have in place, there will be gaps that can be filled. And finally, if you are curious, back in 2014 there were around 350 new Lamborghini’s sold in the UK each year, recent figures suggest this has increased to around 650… hopefully that’s a relief to readers.
]]>One such objective, as described in the 2018 White Paper is to “reach self sufficiency with low risk investment strategy and run off with minimal call on the sponsor”. With the final draft of the 2024 funding and investment strategy regulations now published and the resulting need for trustees to agree an objective, this article explores what we mean by a dynamic discount rate (“DDR”) and the benefits that such an approach might bring, in conjunction with a run-off objective.
What do we mean by dynamic discount rate?
First, we need to be clear as to what we mean by the term DDR approach. This can be described as one where the discount rate used for funding purposes moves in sympathy with the expected return on the asset portfolio that is backing the liabilities. It is worth remembering that the DDR approach is not new. For example, many schemes such as those that are open and / or immature have used discount rates based on the expected return of the asset portfolio, with the discount rate reviewed at each valuation.
Furthermore, the existing funding regulations explicitly include an option for the discount rate to be chosen taking into account “the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns”.
However, the primary focus of this article is the use of the DDR approach for schemes where the asset portfolio consists of investments with a high degree of contractual cash flows that are similar in nature and profile to the expected benefit outgo such as the one illustrated in the diagram below .
Why is this relevant now?
The new funding regime is being introduced against the backdrop of material improvements in funding for many schemes. The chart below, taken from the WTW Asset Liability Suite, highlights the dramatic improvement on a low-risk funding basis over the two-year period to end of 2023 for the many schemes that use this real-time monitoring tool.
As schemes approach full funding on their chosen longer term objective, it is more important for trustees and sponsors to understand the causes of variations in funding levels, and whether they are triggers for action. It is human nature to be more concerned in a funding level fluctuation of, say, 100% to 98% than a change from 82% to 80%. If some of the fluctuation is caused by the discount rate methodology, such as one which is based on gilt yields plus a fixed margin, then that could be considered to be unhelpful.
Another factor of relevance is that as schemes mature and typically look to invest more in cashflow matching assets, there is an increasing focus on the yields of those assets when determining the discount rate for funding purposes.
What are the benefits of a DDR approach?
Greater consistency of funding and investment strategies – for a scheme that invests in credit and other assets that are expected to provide regular contractual cashflows, the main drawback of a discount rate based on a gilts curve plus a fixed margin (or, say, a variable margin but one that doesn’t reflect the specific assets held) is the funding level volatility that arises from credit spread fluctuations.
A DDR better captures changes in the yield on the assets held by the pension scheme and the funding level will exhibit a lower level of volatility over time which has a benefit to the trustees and scheme sponsor as it provides greater funding stability. There is still expected to be some amount of volatility that the trustees will need to monitor and manage; however, the approach benefits trustees as they will have higher quality funding information. They can therefore be more effective in their governance and monitoring by spending their time dealing with the things that matter rather than artificial volatility i.e., the “noise” caused by the model error in the discount rate.
Greater opportunities for investment strategy – if the focus is on finding assets that provide a stable funding level when the discount rate is expressed as the yield on gilts plus a fixed margin then this could lead to considering a smaller pool of potential assets. A DDR approach should make it easier for pension schemes to hold certain assets (e.g., infrastructure) which form part of the larger pool of available assets and therefore result in greater investment choice. There may also be wider societal benefits as envisaged in the Mansion House reforms.
Continuing with the investment theme, to the extent that a DDR approach would encourage a more integrated asset liability methodology to determining the discount rate, it is possible that some schemes would need to employ less leverage within the assets and perhaps focus more on cash flow matching. A consequence would be that there would be less need for leveraged LDI.
From the perspective of the sponsor, if DDR increases the likelihood of schemes adopting low-risk run-off targets then costs to the sponsor may be lower than those under a buyout strategy, but there will be a greater reliance on covenant and over a longer period as a consequence.
There are other points to bear in mind before adopting such an approach. For example, the modelling required will be more complex than that required for other funding methodologies, depending on how closely the discount rate is linked to the actual assets held by the scheme. This will require, for example, more detailed and regular flows of asset information. Furthermore, the judgements required are more explicit than in funding approaches involving fixed margins and can be difficult to make quickly in response to changing events. This can be challenging for trustees who, in most schemes, are ultimately responsible for setting the discount rate assumptions even if these need to be agreed with the sponsor.
What does TPR think?
Whilst not originally coined by TPR, the phrase “dynamic discount rate” does feature in the draft Code of Practice[6] in the section on setting the low dependency discount rate, with the key message being as set out below:
Whilst we await the final version of the Code, it is clear that the concept is acceptable to TPR.
In summary, I believe that the DDR approach could become more commonplace in conjunction with schemes adopting a low-risk run off strategy. Consequences of schemes adopting this approach could include very different investment strategies with investment in a wider pool of assets, less use of leveraged LDI and fewer schemes targeting buy-out as their long term objective.
]]>With USAID funding, WTW will design a pilot facility enabling the U.S. Development Finance Corporation (DFC) to offer a parametric insurance solution (Resilience Wrapper) that protects its direct loans to private enterprises from climate-related shocks. Following a triggering event (such as a cyclone, flood, or drought), the subsequent loan repayment will be covered by the insurance payout. The Resilience Wrapper protects the borrowers’ debt servicing obligations from the most impactful climate risks, ensuring that they can remain operational and avoid default following a shock event.
Simon Young, Senior Director, Disaster Risk Finance & Parametrics, WTW, said: “Vulnerability to climate change and disaster risk can have a direct effect on the cost of borrowing, particularly in lower-income countries. This adds additional pressure on debt servicing capacity and increases the likelihood of debt default, which can lead to credit rating downgrades.
“With USAID funding, the WTW parametric solution will be a game changer for building the financial resilience of communities to extreme weather events by helping to unlock much-needed private sector investment in critical adaptation projects in climate vulnerable countries.”
In support of the President’s Emergency Plan for Adaptation and Resilience (PREPARE), the short-term catalytic funding was awarded through the USAID Climate Finance for Development Accelerator’s Adaptation Finance Window initiative. The initiative utilises catalytic grant funding to de-risk the development and scaling of private sector-led climate adaptation approaches in frontier and emerging markets; it also includes an investment from the USAID Enterprises for Development, Growth, and Empowerment (EDGE) Fund.
Gillian Caldwell, USAID Chief Climate Officer, said: "A disaster can bankrupt a business overnight. Innovations like the WTW Resilience Wrapper make communities better equipped to withstand disaster by supporting the local companies they depend on, while incentivising lenders to work in places they might otherwise consider too risky for investment. I commend WTW's leadership in this area as it signals both the need and the opportunity for greater private investment in resilience.”
]]>The first step will be for the participating insurers – Allianz, Aviva, Axa, RSA and Zurich – to enter higher-risk buildings they currently insure, and which are awaiting remediation works, into the Facility at the point of their annual renewal. These firms have continued to be active in the market and are the top five firms providing insurance cover for commercial and residential buildings.
The Grenfell tragedy and Dame Judith Hackitt Review exposed significant construction and fire-risk issues related to these buildings. As a result, insurers have to consider the heightened risk of an entire building sadly being destroyed in the event of a fire and have had to limit the amount of cover they could provide because the risk is too high for one firm to cover on its own. Brokers, Freeholders and Managing Agents have instead had to source insurance cover from multiple firms, meaning that several insurers are involved in covering one building, creating a ‘layered’ effect and adding to the cost. It is these buildings which will likely benefit most from the Facility.
Through a reinsurance panel led by Swiss Re, the Facility will enable insurers to expand the capacity they have for writing insurance for affected buildings and take on new business. Over the course of the following 12 months, the insurers will consider which additional buildings can be entered into the Facility as and when their insurance policies are due for renewal.
We have long recognised the emotional and financial strain that is being placed on leaseholders in England, Wales and Northern Ireland and flat owners in Scotland, and we support the FCA's rules on providing greater protection and transparency. While the launch of the Facility is an important milestone, we have always said that there will be no single insurance intervention that will help all leaseholders equally. It is the buildings that will see the costly ‘layered’ insurance replaced with cover through the Facility that will likely see the biggest impact on their premium. For buildings where one insurer already provides 100% of the cover, they may not see an impact on their premium when entered into the Facility. In the longer term, it is hoped that the Facility will reinvigorate competition in the market and encourage other firms to write more business for affected buildings.
There are options available to government that could have a more immediate impact for leaseholders. This includes providing financial support to the Facility which may increase market confidence and encourage even more firms to join, and cutting Insurance Premium Tax which would provide a 12% reduction in costs.
Leaseholders should contact the person or company responsible for arranging their insurance cover, who can then discuss the Facility with their broker or insurer. More information on how the Facility will work is available here. Information for brokers representing the affected buildings is available from the British Insurance Brokers’ Association.
Buildings insurance premiums will continue to be based on a variety of risk factors, such as the type and age of the building, previous claims history and other property risks such as storm/flooding or escape of water. External factors such as construction costs and supply shortages will also have an impact.
Steve McGill CBE, Founder & CEO, McGill and Partners said: “Insuring cladded, multi-occupancy buildings that pose a fire safety risk has challenged our industry for some time. However, this unique facility aims to present a competitive market solution that will address this important issue and I am incredibly proud that McGill and Partners has played such a pivotal role.
“Contributing to the expansion of insurance availability for buildings with combustible cladding and other fire safety issues has been a significant priority for us. We are known for our innovative thinking and thrive on creating solutions for complex and challenging risks, and it has been possible to develop this transformative and much needed facility with the support of our reinsurer and insurer partners.”
Mervyn Skeet, ABI Director of General Insurance said: “Supporting leaseholders and making insurance more widely available for higher-risk buildings with fire safety issues has been one of the ABI’s top priorities. I’m grateful to McGill and Partners and all the firms involved for their help in establishing this commercial intervention and hope it will encourage more insurers to enter the market and offer cover for these buildings.
“The industry has been determined in its efforts to support leaseholders, but it cannot solve the issue alone. Establishing the Facility is a significant step forward, but Government intervention and swifter remediation is still the only long-term solution. We strongly encourage Government to consider how it can support the Facility to boost confidence in the market or remove Insurance Premium Tax for affected buildings, to offer more immediate relief to leaseholders.”
Tim Bailey, President of the ABI, said: “The Fire Safety Reinsurance Facility has been a priority cross-industry project to expand capacity in the market and boost competition. We're pleased to have made the Facility a reality in order to support leaseholders and as ABI President, I'm grateful to all those involved."
Aidan Kerr, UK&I Lead at Swiss Re Public Sector Solutions, said: “Swiss Re is delighted to be acting as lead reinsurer for this facility, which is a great demonstration of how the insurance industry can work together to help support leaseholders. This facility will help to improve availability of insurance for people living in affected buildings, whilst the vital remediation work to rectify their fire safety issues is completed."
Graeme Trudgill, Chief Executive at the British Insurance Brokers’ Association (Biba), said: “We are delighted with this new facility, which is the culmination of two years of constructive collaboration between BIBA, McGill and Partners, the ABI, expert real-estate brokers and Government. Launching the facility was a key BIBA commitment in our 2024 Manifesto and aims to create a more affordable insurance solution for medium and high-rise residential buildings that have fire safety issues. We hope that in the longer term this will have positive affect on leaseholders.”
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Furthermore, over one in ten (13%) of over 50’s use, or intend to use, the income tied up in their home to fund their retirements, making up 15% of their overall retirement income. While 5% have or intend to use income from an investment property, making up a sizeable 26% of their retirement income.
The research also reveals that a small number are also turning to children or family members for financial support in retirement. While this only makes up 2% of over 50’s, the proportion of retirement income derived from this source is a sizeable 21%.
Claire Altman, Managing Director of Individual Retirement at Standard Life, commented: “Pension planning grows increasingly complex for retirees as we continue to move away from the era of guaranteed DB pensions, with people increasingly reliant on more varied sources of income. This data also highlights the reliance on the State Pension and the inherent challenges around potential changes to the State Pension age. Almost three quarters of over 50’s say it makes up, or will make up, around half of their income in retirement.
“For those approaching or at retirement, the focus will be on how to access their savings and make them work harder. Most people will want a degree of guaranteed income to cover essential spending but the reality is almost a third (31%) of over 50s say they are unsure or don’t know how to use or plan to use their savings. This makes it all the more imperative to make sure we, as an industry, are helping people make the best decisions around how to manage their retirement income.”
David Everett, Head of Pensions Research at LCP, commented: “These important, but highly technical, regulations have been necessary as errors and omissions have been discovered in the recently enacted Finance Act 2024. The regulations seem to address nearly all of the promised changes highlighted in various HMRC newsletters since December 2023 and as such are very welcome.
“Scheme administrators, in particular, will need to take note of some of the changes made by these regulations. These include which lump sums and lump sum death benefits will need to be newly reported to HMRC, and how the new lump sum allowances are established for those who have started to take benefits before 6 April 2024.
“Unfortunately, this is unlikely to be ‘job done’ for HMRC when it comes to legislating for this modified pension tax regime. We are aware of other changes that will need to be made to the new law, and trust that HMRC will tackle them in a timely manner. “
The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024
]]>Those failing to deliver value must set out a plan to improve or transfer members to a better-value scheme.
TPR launched an exercise to ensure compliance with rules over value for member assessments.
The initiative is already helping to drive consolidation, with 16% of schemes from the pilot reporting that, having concluded their schemes do not offer good value, they have opted to wind them up.
Following the initial pilot, TPR will be scrutinising information from defined contribution scheme returns with the potential for fines to be issued for non-compliance.
TPR has already issued a fine of £12,500 against a corporate trustee. This penalty will be included in TPR’s next compliance and enforcement bulletin, covering July to December 2023, which will be published later this spring. Further fines will be issued shortly.
Mel Charles, TPR’s Interim Director for Frontline Regulation, said: “Where trustees are found to be in breach of their duties on value, we’ll want to understand how they’ll improve. But, if they can’t or won’t, we expect them to transfer members to a better-value scheme and consider winding up their scheme.
“It is encouraging that our initiative has shown schemes are now actively choosing to wind up in the face of the new regulations.”
• In Q4 2023, the average quoted transfer value was £143,000 - this is the lowest figure since LCP started their analysis in 2014 and coincides with high government bond (gilt) yields.
• In the 12 months to 31 December 2023 LCP administration teams provided transfer value quotations to 3.8% of deferred members, with a value of £227m in total. This compares to 4.2% and £317m in the 12 months to 31 December 2022. Overall transfer quotation activity remains significantly lower than the peak in activity seen in 2017 when almost 8% of deferred members requested transfer quotations with a total value of £778m.
• In Q2 2023 the total value of payments in respect of quotations was £4m with an average size of £198,000; in comparison to the peak for quotations provided in Q1 2017 where £92m paid out with an average size of £627,000.
Avneet Gill, Associate Consultant at LCP, commented: “For many years, the average transfer value paid for a DB pension was around twice the size of the average UK house price. With the recent sharp falls in transfer values, for the first time in 10 years, the average transfer value paid out is now back to being broadly in line with the average UK house price.”
The emergence of AI, particularly unrestricted advanced GenAI models, is set to reshape the cyber landscape as it augments both threat actor and defensive capabilities.
Cyber insurance has a key role to play in helping businesses and broader society understand and manage this ever-evolving threat. It is important that businesses and the insurance industry take proactive steps to manage the potential changes to the threat landscape.
Despite the advanced capabilities of GenAI technologies and applications of Large Language Models (LLMs) to cybercrime, material impacts on the cyber threat landscape have so far been minimal. This is due to the industry’s safety mechanisms and effectiveness of AI model governance and cost and hardware barriers which have prevented widespread misuse by threat actors.
However, as they become more accessible they pose an increasing risk, creating potential opportunities for threat actors to use the tools in malicious ways, leading to harm or damage for people, property, and tangible and intangible assets.
The impact of GenAI on the cyber landscape is likely to increase the frequency, severity, and diversity of smaller scale cyber attacks, which will grow over the next 12-24 months, followed by a plateauing as security and defensive technologies catch up to counterbalance their impacts.
Dr Kirsten Mitchell-Wallace, Director of Portfolio Risk Management, Lloyd’s said: “Lloyd’s has been exploring the complex and varied risks associated with AI since 2016 and its developments present both opportunities and risks for businesses and the insurance industry.
“When considering the threat landscape, we must stay responsive to these rapidly changing technologies, learn from them, and seek to make the most of the efficiencies they bring. Generative AI is not the first, and won’t be the last, disruptive technology to impact the cyber threat landscape, so it is critical that business improve their risk mitigation, security and defence technologies, as well as seek appropriate risk transfer today, more than ever before.”
Lloyd’s continues to work with governments, regulators, security experts and insurers to understand and underwrite the risks associated with AI, partnering with industry, engaging policy makers, and supporting sustainable innovation.
]]>On the whole, trustees of pension schemes have risen to the challenge, increasingly considering sustainable investment opportunities and challenging asset managers on their management of sustainability issues.
However, there have been pockets of resistance, with one often cited barrier to the consideration of sustainability being confusion over the definition of ‘fiduciary duty’. To help address this barrier, the FMLC have produced new guidance on decision-making in the context of sustainability and the subject of climate change.
Decision-making on sustainability – what has been the issue?
A key area of confusion to date has been whether sustainability factors are financially material.
In 2014, the Law Commission of England and Wales issued what has since been considered as the authority on fiduciary duty. In their 2014 report, the Law Commission set out a distinction between financial and non-financial factors:
Financial factors are defined as “. . . any factors which are relevant to pension fund trustees’ primary investment duty of balancing returns against risks”.
Non-financial factors are defined as “. . . factors which might influence investment decisions that are motivated by other (non-financial) concerns, such as improving members’ quality of life or showing disapproval of certain industries”.
Criticism to date has been that the distinction between financial and non-financial factors using the definitions above is not clear-cut, resulting in confusion. In addition, our understanding of sustainability has progressed considerably since 2014. There is a question mark over whether existing legal guidance has evolved to take account of this pace of change.
That is where the latest guidance from the FMLC comes in.
How FMLC helps
In our view, the FMLC guidance helps to break down existing uncertainties by highlighting the following legal positions:
Financial and non-financial factors
FMLC highlights that today, financial factors are broad. What at first may appear to be a “non-financial factor” is actually “financial” when properly understood (we give an example of this below).
FMLC also highlights that what distinguishes a financial factor from a non-financial factor is the motive underlying its consideration, rather than the nature of the factor. For example, if as a trustee board you are considering the exclusion of a specific investment based solely on your beliefs, then this would not necessarily be a financial factor.
“Numbers and Narratives”
FMLC notes that pension fund trustees will need to expect that the reasons for their decision, made with regard to financial factors, should involve both numbers and words.
Sometimes financial factors cannot be quantified but it does not follow that they lack weight.
Example to show different thinking under FMLC
Let's take modern slavery as an example. Firstly what is the motive for the consideration? Likely there is a view from trustees that modern slavery could have an impact on the financial return achieved by the scheme, as well as concerns about the wider implications of being associated with such practices.
On discussion, the trustees agree that modern slavery could detract from financial performance, as any firm undertaking such practices could be subject to sanctions, as well as loss of earnings from consumers moving away from firms associated with such activity.
The trustees recognise that their conclusion is largely based on words that reflect the severity of the potential situation rather than concrete numbers. In this situation, it is worth noting that the trustees need not take any moral position themselves on modern slavery – rather they are reflecting on the financial implications of other people taking a moral position (amongst other factors that may detract from financial performance). Subsequent actions may be to consider sectors particularly exposed to modern slavery and increase stewardship activity relating to the topic.
Other key highlights
There are several other helpful points raised by the FMLC guidance as follows:
The guidance gives a helpful overview of why a trustee is considered to be a fiduciary and what this means in practice, including that “pension fund trustees are, broadly speaking, not judged in hindsight, nor are they expected to have perfect foresight when making complex investment decisions.”
Before approving any advice, trustees should be able to articulate the basis of the advice - demonstrating understanding, rationale, data and assumptions on which the advice is based - and the scope of the advice, covering both the areas the advice covers and (equally as important) the areas that it does not.
FMLC highlights the role advisers play, but reaffirms that pension fund trustees continue to have ultimate responsibility for decisions. The importance of trustees, advisers and investment managers not working in “silos” is recognised, to ensure open dialogue.
Trustees are not expected to be experts in the field of sustainability. When seeking professional advice, trustees should not be “rubber stamping”.
“Sustainability may reduce risk or improve return . . . the relevant entry point for consideration for sustainability in the context of pension is as a financial factor.”
It may be necessary to forgo short-term gains as they may create longer-term identifiable risks to the sustainability of investment returns. The trustee should be aware that they may still be complying with their fiduciary duties in the scenario of accepting reduced short-term returns as this may create long-term value for the scheme.
With reference to climate change specifically (but noting this could apply to many factors), FMLC notes that whilst it may not be difficult to accept that the overall direction of travel over time will be away from activity that could have adverse climate change consequences, it is important to note that material developments may sometimes be sudden.
Legislation requires trustees to make informed and reasoned decisions and to ensure that all relevant factors have been discussed and considered. So long as trustees act within their powers and the above has been considered and can be demonstrated, trustees should not need to fear liability.
Driving forward change
Whilst the FMLC are quick to highlight that their guidance is not legal advice, it is clear to see already that this update will help to drive forward change.
Following the publication of the guidance, several expert witnesses recommend to the House of Commons Work and Pensions Committee that the guidance be captured by wider trustee guidance produced by the Pensions Regulator (TPR). Watch this space for further developments.
This article features input from Erhan Reyman, Pension Management Consultant at BW.
]]>What should the Solvent Exit Analysis cover?
The SEA should cover the following points:
• Solvent exit actions: The management actions needed to extinguish all liabilities and cancel PRA permissions, as well as the timeline over which the various steps will occur.
• Solvent exit indicators: A set of KPIs that the firm will monitor to forecast whether it is at risk of needing to exit the market.
• Potential barriers and risks, including measures to remove or mitigate these risks. The PRA notes that historically material barriers to solvent exit have only been identified when the process begins!
• Resources and costs required, noting in particular that a solvent exit strategy may lead to additional costs (or reduced asset sale values) compared to running as a going-concern.
In addition, the SEA also needs to set out the communication plan to relevant stakeholders, clarify the decision making / governance process for solvent exit, and ensure that there is an appropriate risk / compliance review process in place to ensure the plan is robust.
What new measures are needed to comply with the SEA requirements?
For many firms the starting point will be to review their existing resolution plan against the PRA’s expectations and then to adapt it.
A key focus area for firms will be setting the KPIs that might highlight a need for the firm to exit the market, as well as the trigger points for more in-depth discussion. The PRA expects firms to monitor trends and forecasts of these indicators – an extension of many current risk reporting dashboards.
In addition, firms will need to perform a detailed assessment of how the firms risk profile changes when the firm moves to exit the market, and identify major barriers. For example a Lloyd’s syndicate may be exiting the market because of adverse reserve runoff and may therefore need to consider alternatives to the typical reinsurance-to-close process.
What is a Solvency Exit Execution Plan?
The SEEP is a detailed plan for how to wind the business up in an orderly fashion.
Because it is very detailed, firms do not need to maintain a SEEP, but would be required to produce one within one month if they are at risk of needing to exit the market.
The need to produce a SEEP would most likely follow a breach of one or more trigger thresholds in the SEA, or if the board believes there is a reasonable prospect of exiting the market.
What should firms consider?
The best firms will take a proportionate approach, embedding the Solvent Exit Analysis in routine risk management tools, whilst also ensuring that their approach meets regulatory expectations.
Firms can make use of existing resolution plan documents and piggy-back exit indicators on the existing risk management framework – or better still take the opportunity to update some of those longstanding risk measures and tolerances!
We recommend identifying which liabilities are best suited to being transferred, run-off or reinsured as part of a solvent exit. It is equally important to understand under what market conditions or runoff circumstances each option may be unavailable.
Working with the risk function to test existing contingency plans by workshopping simulated scenarios will be an effective measure to identify potential barriers to a solvent exit, so that you can review lessons learned and create an improved set of actions within your SEA.
Overall, the firms whose risk and actuarial teams have strong links with the business will be best placed to produce value-adding exit analysis, which not only meet regulatory requirements but help provide insight into key business risks.
]]>The report warns that global heating could be accelerating. Breaching the 1.5°C goal appears increasingly likely, with the world having temporarily passed this threshold last year. This could trigger multiple tipping points, such as the collapse of the Greenland ice sheets, with potentially irreversible effects.
The climate could be more sensitive than expected. While often referred to as a ‘tail-risk’ the probability of significant temperature rise may be surprisingly large. New approaches are suggesting that doubling greenhouse gas concentrations could result in a 7°C or more temperature rise.
‘Climate Scorpion’ surveys the latest knowledge about extreme climate risks and outlines how we can best use actuarial thinking to inform policymakers. It introduces the idea of ‘Planetary Solvency’, that is an assessment of the different ecological threats, including those beyond climate change, to determine the risk of planetary ruin.
Sandy Trust, Lead author and IFoA Council Member said: “There is an urgent need to provide policymakers with realistic assessments of climate risk, to support decisive policy action to accelerate the energy transition. Alongside clarity on the risks, we need to invest in educating policymakers and the public on positive tipping points and behavioural change to support a more rapid transition.
“As actuaries, we have a responsibility to play an active role in addressing the sustainability challenge. Our long-term thinking, financial system understanding, risk management mindset and probabilistic reasoning combine powerfully to complement climate science and communicate risks clearly to regulators and policymakers.”
Professor Tim Lenton, from the University of Exeter, said: “This report puts forward the case for why and how the actuarial approach can be used for climate change. It compellingly argues that we should view climate risk as a problem of ‘Planetary Solvency’, understanding and managing risks to the long-term survival of global society. In short, we need to have a best guess about the worst-case and make policy on that basis.”
Professor Johan Rockstrom, Director Potsdam Institute Climate Impact Research, said: “This report shows how important it is for us to collaborate across disciplines on climate change. It re-emphasises how important it is to treat 1.5°C as a physical limit and not a political target, recognizing the risk from tipping points. Four of these are showing scientific evidence of now being at risk already at 1.5°C, really putting humanity’s future at risk. This is a planetary crisis which we must address with co-ordinated policy action to accelerate the energy transition.”
Lord Stern, Chair Grantham Institute, said: “This report underlines just how overwhelming the scientific evidence is now: helping politicians to understand that climate change presents very serious global risks, to life, health and wealth, demanding an urgent global response from policymakers to avoid the worst impacts. We are already experiencing the impacts of climate change and these will worsen, impacting the basic elements of life for people around the world – access to water, food production, health and the environment. Unfortunately, the current pace of progress is not nearly rapid enough and if we fail to curb the impact of climate change, it could damage society and the global economy more than the World Wars.”
All members will receive their originally promised pensions in full, along with back-payments to remedy any reductions in their benefits during the Pension Protection Fund (“PPF”) assessment period
Clara will provide £34m of new capital to increase the security of members’ benefits in the £600m Debenhams Scheme
The Debenhams Scheme has been in PPF assessment since 2019
Clara-Pensions (“Clara”), the member-first consolidator for defined benefit pension schemes, and the Trustees of the Debenhams Retirement Scheme have reached agreement on the UK’s second ever superfund transaction.
The 10,400 members of the Debenhams Scheme, which entered the Pension Protection Fund’s (PPF) assessment period in April 2019 following the insolvency of Debenhams, will now join Clara, where they will receive 100 per cent of their promised pensions in retirement.
During an assessment period, the trustees and PPF prepare the scheme for transfer, including identifying and cleansing data issues and carrying out a full administrative review, which ensures a smoother and quicker transition to a buyout provider or consolidator.
Under the terms of the transaction, £4 million in back-payments will be paid to members who received reduced pensions during the PPF assessment period, when member benefits were aligned to PPF Compensation levels.
Clara will also provide an additional £34 million of dedicated funding to support the Debenhams Scheme members. This significantly improves member security and provides increased certainty on the journey to an insured buyout in five to ten years’ time.
The Debenhams Trustee, who were supported by the PPF in considering which options outside of the PPF would provide the best possible outcome for members, have now written to inform members of the intention to transfer their pensions to the Clara Pension Trust.
Mark Cliff, Chair of Trustees for the Debenhams Retirement Scheme, said: “Ever since Debenhams went into administration, the trustees have been working hard to find a solution that is in our members’ best interests. We are confident that transferring members’ benefits to Clara provides the best available outcome for them.”
“The trustees took extensive professional advice to assess all the options. We have also consulted closely with the Pension Protection Fund and The Pensions Regulator throughout the process. Personally, I would like to thank all our members for bearing with us during what I know has been a long period of uncertainty. A huge thanks also go to our advisory team, and to Clara, for diligently working to provide our members with a solution that delivers a significant improvement to both the level and the security of their benefits.”
Simon True, CEO of Clara-Pensions, said: “This is another landmark day for British pensions and I would like to offer a warm welcome to the 10,400 members of the Debenhams Scheme. The Trustee of the Debenhams Scheme, as well as the Pension Protection Fund, have done an excellent job safeguarding members over the last five years and preparing the scheme for a smooth transition to Clara. We’re honoured to take on the responsibility for the next stage of their journey.”
“By injecting £34m of new capital we are making these pensions more secure and setting them on the path to an insured future in a few years’ time. Joining Clara also means topping up the pensions of all members back to 100% of what was originally promised to them. With 20,000 members now in the Clara Pension Trust, we are firmly on the road to making British pensions safer and more secure.”
Sara Protheroe, Chief Customer Officer, at the PPF, said: “This is a positive outcome for members of the Debenhams Scheme. When a scheme enters PPF assessment, our focus is always to protect members and achieve the best available outcome for the scheme. We’re pleased that our collaborative approach working with Clara, coupled with the value from our specialist PPF panellists, has helped secure a better than initially expected outcome for members. This deal also demonstrates the success of our PPF+ Advisory panel, which we introduced in 2022 to support overfunded schemes to explore options beyond the PPF, as well as the PPF’s ability to continue to evolve to meet the needs of the changing landscape of defined benefit pensions.”
Iain Pearce, Partner, Head of Alternative Risk Transfer Solutions at Hymans Robertson, said: “This is a really significant day for members of the Debenhams Scheme, who will now benefit from the additional capital which will be locked away until Clara delivers on its ‘bridge to buy-out’ promise to insure benefits in full in the future. It’s been great to work closely with the Trustees to achieve this outcome for members that would not have been possible prior to the introduction of the superfund regime. We’re pleased to have played our part advising on this groundbreaking project.”
Jonathan Hazlett, Partner, Head of Pensions at Osborne Clarke, said: “We were delighted to act as legal advisers to the trustees of the Debenhams Scheme on the transfer of their members to the Clara Pension Trust. This was a ground-breaking and complex transaction, which has pleasingly resulted in members receiving their full benefits again after Debenhams’ insolvency. It was great to be involved in a transaction where all involved worked collaboratively and efficiently to deliver an excellent result for members.”
Alan Pickering, Trustee, Clara Pensions: “We are delighted by the prospect of welcoming the Debenhams members into the Clara community. Our aim, as with all our members, is to provide them with the peace of mind that they deserve on their pension benefits. We look forward to welcoming these members where they will join our existing 9,600 members from the Sears Retail Pension Scheme.”
]]>The survey, which was conducted in anticipation of the upcoming General Election, sought to understand advisers’ key priorities for the next Government.
While the overarching sentiment from participants is a desire for reform, their priorities fell into the following key areas:
Tax burden reduction: The most popular request, from 25% of advisers, was a desire for reforms that would lessen the tax burden on consumers saving for retirement.
Consistency and certainty: 17% of advisers want Government to establish a more consistent approach to implementing and overseeing pension rules, including death benefits and the Lifetime Allowance.
Simplification: 12% of respondents highlighted the need for simpler rules surrounding retirement, investment and taxation.
Steven Cameron, Pensions Director at Aegon said: “It’s clear from our findings that to support their retirement clients, financial advisers want a future Government to reduce the tax burden for consumers. The recently announced Budget cuts in NI by the current Government will have been welcomed, but the question is what further reductions in tax might be delivered in future. While cutting NI rather than Income Tax preserves the generosity of pensions tax relief, it does not help those over state pension age who don’t pay NI.
“Advisers are also very mindful of the complexities of the current system. More simplification could help advisers explain current tax, pension and investment rules to their clients, while more consistency would improve their ability to advise on longer term financial planning. The future of the pensions Lifetime Allowance will be front of mind with the Labour Party stating it would reintroduce this in some form if in Government.
“In light of the importance of longer-term planning for retirement, we urge all political parties to set out future policy proposals in their upcoming election manifestos. It’s vital that politicians avoid constant change or unnecessary disruption when it comes to planning for retirement. Financial advisers across the country want to help their clients to ‘do the right thing’ and make well-informed decisions about securing their financial future. Complexity and constant change – be it constant tinkering or radical overhauls - makes this far more difficult to achieve.”
In support of these findings, advisers shared their perspectives:
On the tax burden reduction:
“Increase in personal allowance. A tax-free limit for pensions to be passed on post 75…”
“Make pensions tax free to a solid level so that they [people] are able to choose to fund care…Concentrate on making things better for normal [people].”
On consistency and certainty:
“Consistency and no big changes.”
“Not changing ages for accessing pensions.”
On simplification:
“Clear information around allowances and protections.”
The research for the paper also found that opt-out, employer review safeguards and timing around State Pension Age or earlier are high on savers’ wishes.
Commenting on the research findings, Kathryn Fleming, Head of DC At-Retirement Services, Hymans Robertson, said: “The need for DC pension pots to deliver a sustainable income in retirement is ultimately the exam question the industry is trying to answer. There’s an ambition to get as many people as possible to engage with their retirement savings, but there will always be a significant number of people who won’t engage. It’s therefore essential that there’s a safety net in place for these individuals to give them the best chance of having good retirement outcomes.
“Members’ income sources for retirement are likely to be determined by more than just their DC savings, but it will be challenging to collate a picture of this across a scheme membership. It is also notable that as DC wealth increases, so too does the likelihood of an individual taking financial advice. In addition, there is significant evidence that small pots are simply cashed in. Any design is therefore likely to need flexibility to suit different segments of members.
“Pension schemes will also be starting from different positions, with different regulatory requirements and different membership profiles. The decision makers will also have different risk appetites, strategic objectives, commercial synergies, so differing solutions will evolve.”
The paper outlines a set of principles for providers to consider. These considerations include deciding priorities around strategic objectives and member needs, identifying risks, and understanding how the solutions fit with member behaviour once in retirement. The first principle which solution designers should follow is to identify what data they are using, what assumptions are made and how they may change over time. Secondly, they should know their members and what member needs their solution is aiming to meet, now and in the future. Thirdly, they should set their default design objectives and be clear on what a good member outcome will look like. Lastly, they should apply a risk lens and conduct scenario analysis and member testing.
Commenting on the developments that are needed, Kathryn continues: “As with most things in pensions, there’s not a perfect answer. But there are a number of options that are already available or are being explored by the industry that may feature in default decumulation solutions. These include annuity, income drawdown, and CDC, as well as longevity pooling and blended solutions.
“We would encourage providers to really seek to understand their average member’s needs now and in the future. People are complex and the data being relied upon to build a picture of an average member is incomplete. What members want or need from their DC retirement savings is exceptionally personal and varied, therefore the approach taken to designing something for an average member is going to require a lot of careful consideration. Finally, these solutions cannot be set and forget. In the absence of any upfront decision from a member, there needs to be consideration given to delayed engagement.”
The research can be read in the paper Designing decumulation defaults – remember the member here.
Darren Wateridge added: “The market landscape is the most dynamic and competitive it has ever been, and we welcome that challenge. We have some really exciting plans and initiatives coming up this year to further support our clients.
“It has been a privilege to be part of the evolution of Quantum over the last 10 years and I am very much looking forward to now being integral to the strategic leadership going forward.”
Darren joined the Firm in 2013 as a Senior Consultant and Actuary and has over 25 years’ experience in the pensions industry.
He is currently Scheme Actuary to a number of pension scheme clients and advises trustees and companies on the wide range of issues affecting pension schemes including; scheme funding, company accounting, scheme benefit change exercises and de-risking strategies.
Darren is also a member of the Association of Consulting Actuaries.
This is the latest in a string of promotions for the firm, most recently with Simon Hubbard to Principal Consultant in Cardiff.
We still have 5,000 private sector defined benefit pensions schemes holding £1.4 trillion worth of assets. And added to that are about 1,200 defined contribution pensions schemes – where the benefit is less certain. But that model of pension provision – a system of small schemes independent of one another – is becoming a relic. The pensions industry is undergoing radical change and is now on a journey towards, fewer, but larger, pension schemes.
Automatic enrolment has changed the face of saving. 11 million savers have been newly enrolled by their employer and are now saving for older life. Many for the first time. This has not only helped address the huge challenges of under-saving for later life – but created an environment where the vast majority of savers are within a few master trusts.
Over a million small employers, new to pensions, sought to comply with their duties and took the path of least resistance, enrolling their workers en masse into large schemes with high governance standards. Now 90% of trust-based members are within master trusts, with 82% of members concentrated in the largest 5 schemes by assets under management.
Other DC schemes have looked at the scale and expertise that master trusts offer and decided they can’t compete. Over the last decade we have seen a 67% reduction as schemes consolidate. At the same time, we have also seen radical shifts in the defined benefit pensions system.
For so long our role was in helping schemes put their best foot forward with funding to make up deficits. But we are now in a position where defined benefit pension schemes are funded to their best levels in living memory – with around 80% fully funded on a technical provisions’ basis.
With the first superfund in the market, capital backed journey plan offerings under consideration, and even the prospect of a public-sector consolidator…. a whole new range of options for trustees and schemes are available in securing members’ benefits.
In DC schemes for example 87% of master trusts have data management plans in place – essential for protecting scheme information – but fewer than a third of small schemes do. And in DB, 79% of large schemes have a journey plan towards their long-term objective but just 53% of small and micros have the same.
Schemes at the smaller end of the market (particularly in DC) tend to be less aware of TPR and our expectations, and less able to adapt to new legislative requirements. Standards of governance, administration and value for money are typically lower in these schemes.
Our newly laid General Code provides a set of clear, consistent expectations on scheme governance. There are no excuses for not knowing what is expected. That is why we are clear that we will help to drive consolidation in savers’ interests so that only schemes that deliver good outcomes remain.
Second best isn’t good enough for savers. Our proactive engagement and market oversight will make sure that those schemes that remain in a reshaped market always deliver good outcomes for savers. Our approach to poorly performing schemes will be to make sure they improve or move their savers to a better scheme.
We rely on them to take decisions in the best interests of others. But as we move towards fewer, larger schemes, the ask of trusteeship is changing. Increasingly we will need boards to be able to synthesise a broad range of data inputs and translate these into strategic decision-making.
To understand commercial considerations offered to schemes with scale to move the market. And crucially, still represent faithfully the saver voice and savers’ interests in all that they do. Making good investment decisions and employing sophisticated investment governance practices remain essential. We need all trustee boards to be suitably skilled to invest in diversified assets that deliver good outcomes for savers. Not because we favour one asset class over another.
But because all schemes should have the knowledge and experience to be able to consider investments in asset classes that might deliver better outcomes for savers.
The Government’s Mansion House reforms are designed to enable the financial services sector to unlock capital for UK industries and increase returns for savers while supporting growth across the wider economy.
A key focus of the reforms is in supporting investment in “productive assets”. We believe that if trustees have the right expertise, the right advice, and the right governance, these kinds of investments can play a role in a diversified portfolio.
But it is not a simple task to invest, for example, in private markets. There is less readily available public information to assess investment prospects.
There are higher costs from increased due diligence and complex ongoing management. And challenges in valuations, with varying approaches from different fund managers; the actual value being unknown until an asset is sold. But the rewards by making sound diverse investments are obvious. A potential for higher risk-adjusted returns. New investment opportunities with the diversification benefits that provides. And even sources of inflation protection with access to inflation-linked cashflows.
As a regulator, we want to prompt trustees to ask tough questions of themselves, and in our Private Markets Guidance published earlier in the year, we challenged them to do more for savers.
It's not our job to tell trustees how to invest people's pensions. But it is our job to make sure they focus squarely on delivering value and have the right skills and expertise to consider all asset classes including the ability to challenge the advice and offerings put in front of them.
We remain in an era of high interest rates and high inflation. Trustees must grapple with assets at risk, weaker growth prospects and pensions in some cases, failing to keep pace.
There are no easy answers. And in a complex world, trustees must understand complex data and use it to inform strategic decisions in the interests of their members.
Using disclosure as a tool to really look across the whole pensions’ universe, to learn from the best and improve how they operate. One area where we are seeing disclosure requirements start to genuinely change behaviour are the climate reports. Those introduced by the 2021 Pensions Act and brought into being by the Task Force on Climate-Related Financial Disclosures.
Already there is increased awareness, debate and a better understanding of climate-related risks and opportunities in the pensions market.
That’s because there is the right framework, guidance and regulation. This means schemes can plot potential transition pathways to more sustainable investment. Not everyone would agree that disclosure is changing behaviour. I have heard some say that reporting may in fact get in the way of decision making and action.
But the disclosures that are required should be the output of the strategic decisions that trustees are making. As a regulator we will increasingly use that disclosure and constructively challenge trustee decision-making so that savers’ interests are really being met.
The goal is not disclosure for disclosure’s sake but to encourage genuine change in how schemes operate. To encourage trustees, working with skilled advisers to embrace best practice, focus on maximising opportunities and mitigate risks that climate change presents.
And regarding defined contribution schemes, we have been working with the FCA to further develop our joint Value for Money framework. This seeks to enable schemes to compete on metrics that matter and move the focus from cost alone to genuine value for money. The framework is backed with potential new powers to tackle poor performers if market dynamics aren’t fast enough to ensure only good schemes remain.
But while disclosure is likely to be a constant for all schemes, the ask of trusteeship is not one-size-fits all. Different kinds of schemes will need different balances of experience, challenge and inclusion of the member voice. For instance - DB schemes approaching end game will need a strong commercial understanding of the options available to them. In the past, most if not all trustees and employers of well-funded schemes would have sought out insurers to buy their pension scheme.
But that is not the only option available now
With risk transfer deals in the region of £40-50bn per annum in the last few years, in the context of £1.4trillion in DB assets, there is a significant potential gap.
Emerging to meet this demand are Superfunds and – in time – Capital Backed Journey Plans. We also expect to see other new and innovative saver-focused offerings as the market develops. Understanding the balance of benefits and risk between all of these options is a key part of that decision making process for trustees – they have to make the right decision for their members.
In DC schemes, the challenges are just as complex – but different. With long time horizons, and a generation of 18-year-olds soon to be saving, they will not only have to drive long-term value, but also support savers in turning their pension pot into a retirement income.
That will require a sophisticated understanding of how to support savers to make the right decisions for themselves, but also, potentially to work with providers on developing at-retirement solutions that work for their members.
Across DB and DC, the models of trusteeship are also changing – with the rise of professional trustees, sole trustees and fiduciary management – each bringing benefits and presenting challenges.
A few professional trustee firms have become firmly part of the fabric of pensions. More than half of schemes with more than £5m in assets use a professional trustee from one of just 13 different firms.
And whilst these firms bring expertise, the number of independently-minded people making decisions for savers has decreased massively. It is now a very different environment from one where a pension was provided by the employer and overseen by the finance director. It is instead, a concentrated, commercialised marketplace of complex financial institutions.
Not only that, but because of the size of those schemes, the investments that these schemes make could not only affect retirement pots. They could also impact the wider UK economy. So, we need to perform our role in the broader financial landscape, stress-testing different economic events and anticipating how to respond.
We already recognise the role that pension schemes play in the complex financial services ecosystem. That is why we are making sure that our capable people are deployed in the right way, with appropriate focus on financial stability issues, and that our systems and processes support this.
We have doubled the number of investment consultants we have and are improving our capacity to respond, in part driven by better collaboration between regulators, improving relationships with market participants, and enriched data capture. This is all part of work in train to reshape TPR to be a regulator fit for the future. We need to meet the dynamic needs of the emerging pensions market and savers.
That means being more proactive and assertive in our work. Focused on protecting savers' money by making schemes and employers comply with their duties. Driving consolidation where it is in savers’ interests. It means enhancing the pensions system through effective market oversight. Raising standards of trusteeship and using disclosure to facilitate nuanced interactions which lead to better strategic decisions.
It means supporting innovation in savers’ interests – being flexible with our regulatory approach and co-designing with industry so that new products and services always deliver good outcomes.
To make this happen we are aligning our structure to our strategic priorities and essential functions, directing our resources and talent to these areas to meet our key objectives.
This will involve creating three new regulatory functions, namely:
Regulatory Compliance – protecting savers’ money through the effective and efficient delivery of regulatory compliance services, targeting schemes and employers.
Market Oversight – enhancing the market through strategic engagement with schemes and others who influence delivery of pension savers’ outcomes.
Strategy, Policy and Analysis – using insights from our regulatory approach and elsewhere to evolve the regulatory framework and support innovation in the interests of savers.
We will become more market-focused, making sure we are even closer and better connected to developments in the pensions market and able to positively influence change as it unfolds. Though they are internal structural changes, I expect the industry to also see a gear-change in how we interact with you, and in our effectiveness over time.
We will increase our use of data, digital and technology to identify where we need to focus our efforts. We will develop multi-disciplinary teams that can focus on the themes and the risks we are addressing. We will learn from every interaction we have and use that learning to update our risk analysis and our regulatory approaches. And we will develop quicker routes to enforcement to ensure that bad actors can’t threaten peoples’ pots or the UK market.
The acquisition of the Scottish Widows portfolio represents Rothesay’s sixth acquisition of in-force annuities, further demonstrating the strength of its capabilities in this part of the pension risk transfer market.
Rothesay has over £60 billion in assets under management and pays out, on average, £2.5 billion in pension payments each year. It was purpose-built to secure the future for its policyholders and is trusted by the pension schemes of some of the UK’s best-known companies to provide pension risk transfer solutions along with award-winning levels of customer service.
The transaction, which is subject to regulatory approval, is initially structured as a reinsurance agreement for the in-force bulk annuity portfolio, with a Part VII process to follow next year.
Policies will continue to be serviced by Scottish Widows until the effective date of the Part VII transfer at which point they will begin to receive benefits in the normal way from Rothesay. Policyholders do not need to take any action.
The overall financial impact of this sale on Lloyds Banking Group is not material.
Tom Pearce, Chief Executive Officer at Rothesay, said: “I am delighted that Lloyds Banking Group has chosen Rothesay as the long-term home for its bulk annuity business and look forward to welcoming our new policyholders from Scottish Widows. Rothesay’s substantial capital resources combined with the proven strength of our execution capabilities mean we are able to deliver solutions for our clients across all areas of the pension de-risking market. We are proud to provide award-winning levels of customer service for our policyholders along with long-term security for their retirement.”
Chira Barua, CEO of Scottish Widows and CEO Insurance, Pensions and Investments at Lloyds Banking Group, said: “We’re on a mission to help people in the UK build financially secure futures, supporting the Group’s strategy of building a customer-focussed digital leader and integrated financial services provider. This sale will enable us to focus and invest in the insurance, pensions, investments, retirement and protection markets where we want to grow, whilst ensuring positive outcomes for our Bulk Annuities customers.”
LCP was appointed as specialist de-risking adviser to the Trustee and LV=, with A&O providing transaction legal advice (alongside Eversheds who provided further advice to LV=) and Redington providing investment advice on the asset transfer. Just was advised by Pinsent Masons.
Huw Evans, Chair of the Ockham Pension Scheme and a Director of BESTrustees Limited, commented: “This is an excellent achievement for the Scheme. Securing member benefits under the buy-in insurance policy, regulated by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), gives additional layers of protection to members and effectively removes investment and other demographic risks from the Scheme. Our advisers, LCP, A&O, Hymans and Redington worked collaboratively to run an efficient process and drive the project to a successful conclusion.”
Stephen Percival, Chief Financial Officer at LV= commented: “This transaction is another important step in reducing our DB pension scheme funding risks, which further enhances the stability and quality of LV’s capital surplus. The transaction both secures the benefits for the Ockham pension scheme members and is also in the best interests of LV’s 1 million+ members”.
Gareth Davies, Partner at LCP, commented: “It has been my pleasure to have helped LV= and their respective trustee boards to implement buy-in transactions across each of LV= group’s three DB pension schemes. The scheme prepared well and carefully considered and tailored their market-approach which was rewarded with strong insurer engagement and attractive proposals from multiple insurers. It highlights that even in the current busy market good preparation and the right strategy pays off and leads to a good result for a scheme and its members.”
Kishan Radia, DB Business Development Manager at Just Group added: “This was a great team effort with high levels of collaboration to deliver the transaction successfully in a vibrant, busy market, that’s working for schemes of all sizes. Working closely with the Trustees’ advisers we tailored our proposition to meet the needs of the Scheme, who locked into an agreed portfolio of assets and transferred those assets to Just. We are very proud to have completed this transaction, securing the benefits of c700 members of the Ockham Pension Scheme.”
In total, a record of over 254 transactions took place during 2023 with an average transaction size of around £190m, with over 158 transactions transacting in the second half of 2023. Over 150 transactions were valued at under £100m.
Commenting on the findings, James Mullins, Head of Risk Transfer at Hymans Robertson, comments: “2023 was an incredibly busy year for the risk transfer market as many defined benefit pension schemes used their improved funding levels to target whole-scheme buy-in transactions. It’s clear that large transactions are likely to continue to drive market volumes in 2024 and beyond. However, we also continue to see a healthy and competitive market for smaller schemes that want to transfer risk. For instance, all our buy-ins transactions under £30m received quotations from multiple insurers in 2023.
“2024 looks set to be another bumper year for the buy-in market, given record transaction pipelines and activity. There are two key examples of this. Firstly, there are over 15 buy-in transactions due to come to market over the next few months that are each between £1bn and £2bn. This group of large transactions alone add up to around £30bn and that’s before we take into account the material flow of buy-ins that are less than £1bn, along with mega transactions that are several £billion in size. Secondly, there has been a high volume of transactions at the start of 2024, despite January and February tending to be quieter months for the buy-in market. For example, the risk transfer team at Hymans Robertson has already led on over £3bn of completed transactions in the first two months of the year.”
]]>Arthur Cobill, an adviser at IFM, and William Hofstetter, one of its directors, have been banned by the FCA from advising customers on pension transfers and pension opt outs. Mr Hofstetter has also been banned from holding any senior management function at any regulated firm.
Mr Cobill and Mr Hofstetter agreed to pay £120,000 and £40,000, respectively, to the Financial Services Compensation Scheme (FSCS) to contribute to compensation for IFM’s customers.
Between 8 June 2015 and 22 December 2017, IFM provided unsuitable pension transfer advice and failed to properly consider whether it would be in customers’ best interests to transfer out of their secure DB pensions. The firm operated a contingent charging model, only collecting fees if customers transferred out of their DB pension schemes following the firm’s advice. While this approach benefited IFM, Mr Hofstetter and Mr Cobill, it risked the long-term financial health and interests of their customers. A review by the FCA found that 83% of IFM’s pension transfer advice failed to comply with its minimum required standards, and customers risked financial loss as a result of the poor advice they received.
Out of 307 IFM customers advised to transfer out of their DB pension scheme, 261 completed the process. Mr Cobill advised 245 of those, including 198 members of the BSPS. In total, the BSPS members advised by Mr Cobill had pension benefits worth over £90 million.
Mr Hofstetter was responsible for the compliance oversight of IFM’s process for pension transfer advice.
Customers transferring out of the BSPS were already in a vulnerable position due to the uncertainty surrounding the future of their pension scheme, so it was critical that they received good advice.
Therese Chambers, Joint Executive Director of Enforcement & Market Oversight, said: ‘Pensions are the safety net people spend their lives building. For many customers, their DB pension was their most valuable asset, and it was their only retirement provision other than their state pension.
‘As experienced advisers, Mr Cobill and Mr Hofstetter, and IFM should have known better than to unravel this.
‘It is only right that Mr Cobill and Mr Hofstetter contribute towards compensating those affected.’
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• The aggregate surplus of the 5,050 schemes in the PPF 7800 Index is estimated to have increased over the month to £442.3 billion at the end of February 2024, from a surplus of £425.4 billion at the end of January 2024.
• The funding ratio increased from 143.9 per cent at the end of January 2024 to 146.1 per cent.
• Total assets were £1,400.8 billion and total liabilities were £958.5 billion.
• There were 529 schemes in deficit and 4,521 schemes in surplus.
• The deficit of the schemes in deficit at the end of February 2024 was £3.9 billion, down from £4.3 billion at the end of January 2024.
Shalin Bhagwan, PPF Chief Actuary said: “Over the past month, we’ve seen positive movements across our estimates in the PPF 7800 index. In particular, there has been a continuation in the upward trend of the funding ratio, with a 2.2 per cent increase in February to 146.1 per cent. This change is the result of a £16.9 billion increase in the aggregate surplus of eligible schemes in the DB universe, to £442.3 billion. While the deficit of schemes in deficit fell by £0.4 billion to £3.9 billion.
These movements resulted from both a decrease in the liabilities of schemes in the DB universe by 1.2 per cent and a net rise in the value of assets held of 0.4 per cent. Falling liabilities were a result of an increase in shorter-dated gilt yields as stronger inflation data meant that markets priced a later and shallower rate-cutting path for global central banks. On the asset side, decreases in the value of bond portfolios were offset by high returns on overseas equities.”
View the March update and see the supporting data on the 7800 Index for 29 February 2024 here: The PPF 7800 index | Pension Protection Fund.
“The end-game options available to employers is also now expected to expand with the government set to make it easier to extract surpluses and the PPF lining itself up as a public sector consolidator. Whilst many schemes will already have an end-game strategy locked in, for those that don’t, employers should be sitting down with trustees to agree what the future of their scheme should look like.
“Whatever path is taken, schemes still need to have best-in-class administration, excellent data and meticulous preparation to give them the best chance of achieving their goal.”
Vishal Makkar, Head of Retirement Consulting at Buck, a Gallagher company, comments: “February saw little movement in the aggregate funding level of the schemes in the PPF Index after January’s drop in liabilities. DB schemes largely remain in the same healthy position, signalled by the aggregate surplus increasing to £442.3bn, with little change in liabilities and only a slight increase in asset values. The overall funding ratio still rests at 146.1% and schemes will welcome this stability, especially when it comes to meeting their long-term funding targets.
“These funding improvements are already encouraging schemes to take a closer look at their endgame options and contemplate ‘what’s next’. Trustees will still be absorbing recent announcements around new funding regulations, alongside the Regulator’s General Code, so it makes sense that they are taking time to deliberate the best way forward for their endgames.
“The increase in surplus last month is interesting given the DWP’s recent focus on enabling DB surplus extraction, which could prove a useful avenue for encouraging UK investment. We need clearer guidance on extracting ‘trapped’ surplus, while of course protecting any safeguards for members’ benefits, but the consultation is ultimately a step in the right direction. The proposal, if implemented correctly, will not only give schemes more choice, but potentially boost the investment of assets that support the UK economy and UK gilt market as a whole.”
Charlotte Fletcher, Business Development Actuary at Standard Life, part of Phoenix Group: Funding positions for UK defined benefit pension schemes show a marginal increase in February. The aggregate section 179 funding ratio for the 5,050 schemes in the PPF 7800 Index now stands at 146.1 per cent at the end of February 2024, compared to 143.9 per cent at the end of January 2024.
"The PPF’s latest update shows that the funding levels of UK DB schemes continues to improve, with many DB schemes in stronger funding positions than they have been for many years. This is providing the opportunity for many trustees and sponsors to look to lock down risk and improve the security of their members’ benefits through the purchase of bulk purchase annuities.
“The regulatory landscape continues to evolve, with the Government's ongoing consultation on options for DB schemes bringing to the forefront discussions around how surpluses are managed. While much of this detail still needs to be worked through, we expect that bulk purchase annuities will continue to be the primary means of securing members’ benefits. This is reflected in the continued strong demand for pension scheme buy-ins and buyouts, with record volumes predicted in 2024
View the March update and see the supporting data on the 7800 Index for 29 February 2024 here
“The British ISA is expected to appeal primarily to individuals who already fully use their existing £20,000 ISA allowance.
“Even for individuals ‘maxing out’ their stocks and shares ISAs, there are questions over the appropriateness of increasing exposure to UK equities rather than a more geographically diversified portfolio. The Consumer Duty requires advisers to avoid causing foreseeable harm which will prompt consideration of past and anticipated future relative performance.
“Given the narrow target market, the British ISA looks like a very niche product. Furthermore, the Consultation Paper highlights the many new considerations in offering it within what will become an even more complex wider ISA regime. With a maximum annual subscription of £5000, it could prove very challenging to cover costs while offering this product at a charge level that provides value for money.
“While the Chancellor’s aim of encouraging greater investment in UK companies is understandable for UK economic growth, this needs to be weighed up against what’s in individuals’ best interests. A specific new product may not be the right way of going about it. Another option with much wider scope would be to disclose exposure to UK equity investment upfront and more prominently. This could be disclosed alongside other important aspects including investment risk profile and wider asset allocation approach. Individual investors could then make informed decisions, perhaps with the help of advisers, on the extent to which they want to support the domestic economy while pursuing longer-term goals.
“This could extend beyond ISAs to other products, most notably pensions. With the Chancellor also proposing workplace pension schemes disclose the proportion of their funds invested in UK equities, it will be essential that the definitions and language used are fully consistent to avoid confusing consumers.”
]]>Schroders hosted a summit in December with the PMI and key parties to discuss the issues. The output of the first part of the research, unveiled today, has mapped out three key areas in which UK savers need support –
• Financial resilience
• Rising costs of housing
• Long-term retirement needs
The report brings together industry findings from a wide range of sources. Over a fifth (22%) of adults are borrowing more money to keep up with living costs, the proportion of pensioner households renting privately during retirement could increase 3-fold over the next 20 years and the UK has a projected £350 billion annual long-term savings gap.
The LSI is a multi-stage project which, first, aims to define and quantify the extent of the problem, before identifying solutions and seeking to deliver change by handing recommendations to policymakers in a white paper later this year.
Schroders and the PMI have today shared the outputs of the first stage of the project with a broad range of senior stakeholders across pensions policy, regulation, business and think tanks. In doing so, Schroders and the PMI hope to spark a broader conversation and build consensus about how to address the challenges of the current lifetime savings market.
Schroders and the PMI will continue, alongside their expert panel, to the next phase, focusing on practical solutions to the problems that have been identified.
Ruston Smith, Chair, Pensions Management Institute, said: “We are today announcing we have delivered on the first stage of this initiative: defining the problem. We have identified key pinch points which are preventing people from building financial security in both the short and long-term. As this is such an important societal problem, spanning across a number of regulatory regimes, we want to share our insights and take a collaborative approach to broaden the discussion. We want this initiative to be a real force for positive change, to help people have easier and better choices and therefore better outcomes and greater financial security.”
James Barham, Executive Chairman, Schroders Solutions, said: “We hope that the breadth and depth of our panel will help to break down the silos between different areas of the savings system and allow us to build a consensus around what needs to be done to address the key challenges facing people saving today.
“Many stakeholders are worrying about these problems and a great deal of splendid work has been done already. This is why we are sharing our data pack now, in the hope that we can enrich the debate, and spark more conversations. It makes for sobering reading, but our hope is it acts as a trigger for more people to join the debate. “Because together we passionately believe that if we can address some of the problems of the lifetime savings market the benefits to the UK, and its millions of citizens is almost immeasurable.”
In addition to savings and pensions specialists, the LSI has spanned a mix of organisations such as retailers, debt charities, financial education charities, unions, insurers, banks, platforms, fintechs and consolidators.
]]>Annuity providers have announced strong sales, and Canada Life recently reported record individual annuity sales of £1.2bn for last year.
But where is the annuity market, and incomes, heading? Annuity rates are driven by the returns available on gilts, which in turn are linked to the Bank of England base rate. The Bank of England has held steady for the past seven months with a base rate of 5.25%, and financial markets are predicting a cautious approach to any changes in the near term.
Nick Flynn, retirement income director at Canada Life explores where the market may develop: “The annuity market is incredibly busy, as clients seek to capitalise on the relatively high incomes currently on offer. Given where we’ve been in the recent past, this is clearly a positive story for the many customers seeking retirement income security. While I don’t have access to a crystal ball to predict the future, annuity rates are closely linked to the returns available on government bonds. As the Bank of England sets the base rate, this in turn changes the yields on these bonds, or gilts, as they are known. As a general rule, a 30-basis point rise in yields on gilts would increase annuities by 3%.
“While we continue to see inflation higher than the 2% target rate set by the Government, the Bank of England will tread very carefully before considering reducing the base rate. In fact, at the last MPC meeting, two of the members voted to increase base rate. So, on that basis, annuity rates are likely to remain at or near recent historical highs. However, wider market forces can change rates, for example, competition from providers who offer annuities in the open market seeking market share.
“While it may be a fool’s paradise to predict annuity incomes in the future, what I know today is customers looking for income security, either at the point of retirement, or at the point of de-risking their drawdown strategy, can now get much better value from their choice of an annuity.
“Always seek the advice of an annuity specialist or regulated financial adviser before taking any decisions. These professionals will help guide you through the myriad of options available, whether that be 100% value protection, longer guaranteed periods, or simply taking your health and lifestyle into account, which may result in a better income.”
How lifetime annuity rates have changed over time
Source: Canada Life annuity rates over time, as at 21/12/2023
]]>More than two thirds of women (68%) invest money at least once a month and more than 2 in 5 (42%) check their savings and investments online, or via an app, at least once a week. This leads to almost one in five (19%) knowing exactly how much their investments are worth at any given time.
Of the women who do invest, the largest proportion save into a regular savings account (61%) and one in three (35%) invest into Cash ISAs, but just over one in six (17%) hold a stocks and shares ISA, compared with 30% of men.
Equal numbers (37%) cited ‘easy access to funds’ and ‘being protected by the Financial Services Compensation Scheme (FSCS)’ as the most important aspects of choosing a savings or investment product. ‘Low or reasonable fees and charges’ was most important to almost one in four (23%), and almost one in five (19%) stated that ‘access to a digital app’ was essential.
Almost two in five (37%) of women surveyed say they do not invest at all, compared with almost a quarter of men (24%). The reasons given were varied. Predictably in the current environment, ‘not having any surplus money’ to invest (45%) was top of the list for most women. Almost one in five (18%) think the risk is too high, 10% say they find investing too complicated and 9% worry that they won't be able to withdraw money if they need it urgently. Some (6%) say they don’t know where to start. These factors all highlight the need for targeted financial education and further empowerment for women.
Aviva’s research also shows that women have a balanced approach to risk. When asked to describe their investment risk tolerance the majority (85%) said their investment strategy was either medium (35%) or low (50%) risk. This approach is to be commended as studies suggest that female investors regularly outperform their male counterparts over the longer term, which is attributed to a patient and more disciplined investment style.
Joanne Philips, Managing Director of Direct Wealth at Aviva says, “In an era where financial independence is a key aspiration for many, there is a need to address some of the unique challenges that many women may face when it comes to investing.
“Whether they are just starting out, or looking to enhance their investment strategy, it’s important to consider and take practical steps to help navigate the often daunting world of investing. By providing tailored guidance for women, we hope to inspire confidence and enable them to achieve their financial goals.
“Aviva’s Wealth app is now available to download, and is designed to provide helpful information for investors and provide a holistic view of all their Aviva investments in one place. We know that a digital experience is important to consumers, so we hope by simplifying the investment journey we can help them to expand their wealth in an intuitive way.”
Key Investment tips:
Education – Start by building a solid foundation in financial literacy to develop knowledge about different investment concepts, terminology, and strategies to make informed decisions. There are plenty of online courses, tools and calculators available.
Set and prioritise financial goals: Clearly define short and long-term financial goals. Having clear goals will guide the investment strategy and help stay focused on what matters most. Decide whether saving or investing is best for you. Cash guarantees you safety but may get eroded by inflation. Investing will make your money work harder, but you could get back less than you put in.
Emergency fund: Before diving into investments, establish an emergency fund to cover unforeseen expenses. This provides a financial safety net and prevents the need to cash in investments in an emergency.
Don’t put all your eggs in one basket: Consider spreading your savings and investments across a variety of different funds, assets, and tax efficient wrappers to reduce your risk and optimise long-term returns. Diversification can provide a more balanced approach to long-term wealth creation. Only 7% of women say they are investing in a diversified portfolio vs 18% of men.
Support networks: Connect with other investors - building a strong network can provide valuable insights and encouragement throughout the investment journey. Learn from the experiences of others.
Stay informed: Keep abreast of market trends and emerging opportunities. Stay updated on what’s happening in the domestic economy or global events that may impact your investments. And regularly review your investment portfolio to ensure it still aligns with your goals and risk tolerance. You may need to make changes based on your financial situation or market conditions.
Understand your risk tolerance: Assess your risk tolerance and invest accordingly. Tailor your portfolio to align with your comfort level, ensuring a balanced approach to risk and return.
Investments can go down as well as up. These guidelines are designed to break down barriers and equip women with the knowledge and confidence they might need to navigate the world of finance successfully. However, individual circumstances will vary. It is always advisable to consult a financial adviser who can provide personalised advice based on specific goals and financial situations.
Aviva is a proud member of The Investing and Savings Alliance (TISA) and has joined forces with them to help make investing accessible to all. Its “Inclusive Investing” initiative was launched amplified at its Inclusive Investing Conference in London at the beginning of March 2024.
]]>Even where surpluses arose, they usually became trapped as scheme rules rarely allowed an employer to receive a refund and even if they did the tax regime punished it. Companies, understandably, viewed their DB pension schemes as a potential liability – even when fully funded or in surplus – and were looking for ways to offload their schemes as soon as possible. This fuelled the growth of the insurance buyout market from a trickle 20 years ago to a £50bn torrent in 2023.
Rising bond yields and stalling life expectancy
But the times they are a-changin’. Rising bond yields and stalling life expectancy have pushed many DB schemes into surplus positions. Many commentators are of the view that all this will do is fuel demand for buyouts, but I think it’s much more nuanced than that.
Indeed, Jeremy Hunt, the current Chancellor, seems to agree. In his 2023 Mansion House speech, Mr Hunt spoke about how he wants DB schemes to de-risk less and to invest for growth in order to provide private sector capital to the UK economy – so-called ’productive finance‘. He is now acting. He has already lowered the tax on refunds of surplus (with effect from April this year) to broadly align with the corporation tax rate, so that putting money into a DB scheme and then later receiving a refund is now (broadly) tax neutral. Further, a recent series of consultations from the Department for Work and Pensions (DWP) indicates that the rules on surplus ’extraction‘ may be about to change dramatically, opening up the possibility that a large number of employers will be able to receive refunds of surplus.
"For companies with DB pension schemes this could be signalling a sea change in how to view it. It’s no longer an obligation – it could be about to become an asset."
The numbers involved are potentially huge – under the proposals in the consultation a company with a DB scheme fully-funded on a buyout basis, as many now are, might easily have an ’extractable‘ surplus of 10-15% of assets, or maybe more depending on exactly how the surplus rules work. Even for a £100m DB scheme this could be £10m to £15m. For very large DB schemes, say over a billion pounds of assets, the numbers could be in the hundreds of millions. This raises the question of whether schemes that are fully-funded or could be made fully-funded with a cash injection, should run-on beyond full funding on a buyout basis. That said, smaller schemes will find their running costs are large relative to the potential size of any extractable surplus and so are likely to still want to buyout.
Of course, this is just a consultation. Lots could happen which would mean these changes never come to pass. For example, DWP may decide it doesn’t want to make these changes once it has consulted. And, of course, the UK is likely to face a general election before any of this gets done anyway. The Labour Party looks in pole position to form the next government and it’s not clear yet what they think of these proposals. They may support them, or they may not.
But, and it’s a big but, if you were thinking of buying out a medium or large-sized DB scheme, say over £100m, then you might want to think twice. It may be better to at least wait to see how this pans out, because once you’ve made the first step towards buyout by entering into an insurance contract there’s usually no way back. You may look back in two or three years’ time at the lost potential if your business competitors are then able to access significant surpluses from their DB schemes.
The natural reaction of many in the pensions industry will be to see surplus extraction as a bad thing for members of DB schemes. At first glance, that feels right as less money in the scheme clearly means a greater risk of members’ benefits not being paid in full, all else being equal. However, all else is not equal; we would expect surplus to be shared. We would expect that whenever a business takes a refund of part of a surplus that it is a pre-agreed condition that members of the DB scheme also see an uplift in their benefits, funded from the remaining surplus. That means members are building a ’buffer‘ and so even if there is a cutback of benefits later then they may still actually be better off. And if the surplus extraction rule is based on a buyout-affordability test, as we expect it to be, then the scheme would remain funded above the buyout level and so could execute a buyout transaction at any time. We think this means the security of members’ benefits will be similar to that offered by an insurance company – before taking account of any benefit uplifts.
Seismic effects for the pensions industry
If implemented, these changes will have seismic effects for the pensions industry. Here are just a few of the things I think might happen:
The buyout market may see contracting demand from larger schemes as these schemes are the most likely to be able to run-on efficiently.
Insurers may refocus on smaller schemes as these schemes are unlikely to be economic to run-on and so will still be keen to buyout.
Companies may use their DB surpluses to fund DC benefits for existing employees, rather than simply taking the cash, especially as this has better ’optics‘ with employees and stakeholders.
Some may even re-open their DB schemes (or delay closing them) to get value from the surplus.
We may see increased merger and acquisitions (M&A) activity in businesses that have long been thought to have an intractable ’pensions problem‘.
Scheme mergers, or bulk transfers, may become part of corporate M&A activity again, as smaller DB schemes can be merged into larger ones, magnifying the potential for surplus extraction.
We may see businesses with multiple small schemes looking to merge them together to access the new flexibilities.
We may see new consolidators enter the market looking for ways to enable businesses with smaller DB schemes to club together to access the new flexibilities.
Demand for long-dated gilts may fall, and demand for risky assets may rise, as schemes look to put in a little bit more investment risk to accelerate the growth of their surplus.
Corporates may be even keener to pursue member option exercises, e.g. enhanced transfer value programmes, to the extent this generates, or accelerates, surpluses that are ’extractable’.
To sum up, there’s a lot potentially about to change, and that means it’s probably wise to proceed with care.
]]>Inertia means that pension saving can often seem immune to the financial wellbeing of savers. Workplace pension saving has been maintained despite the increased cost of living, opt out rates remain consistent across the demographic of most firms, but it would be a mistake to think that pensions saving is unaffected. Too many people are saving at default levels of contributions that will struggle to provide them with the retirement income they aspire to. The challenge of persuading people to put money aside for their 60’s and 70’s when they don’t know whether they will be in the black until pay day is obvious. It’s where wellbeing programmes can make a difference.
A programme should include signposting to credible content that covers the breadth of circumstances that employees are likely to find themselves in. Online or face to face workshops for people with similar needs might be offered, alongside education that allows employees to learn at their own pace using tools and apps designed to improve their capability and importantly how they feel about their finances. The important thing is that programmes shouldn’t be purely focused on lower paid workers as financial stress can take many forms and impact anyone.
A major cause of stress about finances is just not feeling in control. At a simple level it’s knowing where the money is going, and that there will be money in the bank at the end of the month. Beyond that it includes an awareness of the need to have long and short-term plans in place to finance the goals we have in life, including our retirement. Those plans will be different for each employee, but the reassurance of having a plan, and the feeling of being in control is universal.
Knowing what you want to achieve is one thing, having the capability to deliver it is another. A key deliverable for any financial wellbeing programme is to improve knowledge. That might be education around something as simple as interest rates, or tax and tax-free allowances for those for whom managing wealth, or the fear of unexpected tax bills is a cause for concern. The aim should be to improve employee confidence in their ability to make the right decisions about their finances, and move them from doing nothing, to doing what’s right for them.
Improving knowledge might also have the effect of raising awareness about the complexity of a situation, and the need for additional guidance and advice. Financial wellbeing programmes should ideally include access to additional support, recognising that a do-it-yourself solution won’t be right for everyone.
Improving financial resilience - the ability to withstand life events that might have a negative impact on our financial position – is also of real importance. This will include an element of savings, but it should also include the value of insurance against events that could derail our finances and life plans. The aim is to reduce the extent to which employees might be worrying about the immediate impact of the unknown, and improve confidence in longer term planning.
Financial wellbeing programs are about improving how employees feel about their finances, reducing stress and helping people focus on what’s important to them. Pension saving will undoubtedly be a consideration for many employees, but the benefit for everyone is the potential for financial wellbeing to simply free up space to think about the future.
“Christine Lagarde has previously linked any decision to cut rates with signals on wage inflation, which according to the ECB’s wage tracker is currently running at around 4.5% - still well above the 3% target the ECB has stated would be conducive with its inflation target. The ECB will therefore be keenly watching how Q1 wage negotiations play out given how decisive they will be in bringing wage inflation, and thus CPI, down.
“With this in mind, the ECB has matched the Federal Reserve’s resolve to maintain a data dependent approach, continuing to emphasise a message of patience despite recent comments from Christine Lagarde that rate cuts ahead of the summer months may be likely.
“The ECB will still be reluctant to move too quickly, however, and we can therefore expect it will hold off on making any cuts until at least the 6 June meeting to allow for further crucial wage data to be considered. This would provide the ECB with more time to see how much of an impact, if at all, ongoing wage increases have on inflation, and we may see it make a more decisive shift in messaging at its next meeting in April.”
]]>Due to men (£41,850) earning a higher average annual salary than women (£28,765) in the UK, the research found that men’s investment pots could be worth around £10,362 more than women’s if they follow a regular investment strategy up until 2030.
If men and women in London had started to annually invest 7.5% of their income at the start of 2023 in stocks, the research shows that there would be a difference of £14,178 in their investment savings pots by 2030, the biggest gap in the UK. Men would see their investment pot soar to around £44,470, while women would see their investment pot worth an average of £30,292.
Brighton & Hove has the second-largest gap in investment savings (£12,250) whilst Exeter has the third-largest gap in the UK, with a £11,979 difference between men’s and women’s average investment value by 2030.
Dundee has the smallest gender investment gap, with female investors’ pots being worth £1,832 less than men’s by 2030
Dundee is the UK city with the smallest gender investment gap, due to the gender pay gap being significantly lower here. Men earn a salary of around £29,439 on average each year in the city, and women aren’t too far behind this, earning around £27,126.
If both men and women in Dundee invested 7.5% of these salaries into stocks until 2030, men would see their investment savings pots increase to around £23,313 in total, and women’s investments would be worth around £21,482. This leaves a gender investment earnings gap of just £1,832.
Wolverhampton follows behind with the second smallest gender investment savings gap, with a difference of £2,958. Meanwhile, Blackpool comes in third with women’s average investment pots averaging £4,580 less in value than men’s.
Shepherds Friendly’s Chief Finance Officer Derence Lee, comments: “How much you can afford to set aside for investing will depend on your financial circumstances, however, it’s interesting to see how the gender pay gap may be causing discrepancies when it comes to what female investors can earn.
“As a beginner in the world of investment, it’s natural to feel overwhelmed. To meet your financial goals, take the time to educate yourself on the different investment options available to you. Try to establish clear financial goals to give yourself a sense of direction and motivation. Plus, keep in mind that investments do involve risk and returns aren’t guaranteed.”
For more information on the gender investment gap, see the full results here:
The process is expected to complete towards the end of 2024 once the Schemes have received all monies due to them from the Group’s liquidation. Once that happens the members will come out of the PPF and become direct PIC policyholders. The Schemes will continue to be protected by the PPF during the buy-in period.
Jonathan Hazlett, Managing Director of Open Trustees who acted as sole trustee to the Schemes said: “We are delighted to have entered into these buy-in policies with PIC. The insurance market is extremely busy at the current time and it can be very challenging to secure member benefits for smaller schemes. It has been a long process but PIC has offered us the opportunity to ensure that the Schemes’ members receive benefits greater than what they would have received from the PPF.”
Tristan Walker-Buckton, Co-Head of Origination at PIC, said: “Many much larger schemes are now seeking to de-risk this year, so demonstrating that PIC is interested in the whole buyout market and has the adaptability and scale to accommodate all sizes of deal is important to us. Open Trustees have now been able to completely de-risk these three Schemes, providing greater security to the members.”
]]>Nearly 70% of those surveyed described revenue leakage as “death by a thousand cuts”.
The root of problem identified by the research is likely to be the vast volumes of customer data insurance providers typically manage, exacerbated by high levels of switching prior to the pricing reforms. Now, with premiums continuing to rise , consumers are being encouraged to shop around so the customer data management challenge continues.
This increases the chances of the same individual appearing multiple times across different databases within an insurance group without the dots being joined up. Aside from creating friction with the customer who may feel they are being asked questions the insurance provider should know, or find they are being targeted with inappropriate products, this may lead to inaccurate pricing at renewal. This all hurts an insurance provider’s ability to meet its regulatory obligations and damages the chances of the customer staying rather than switching. There is also the risk of fraud, wasted marketing budgets and increased operational costs, as well as lost cross-sell and upsell opportunities.
There could be an answer to this problem. It comes down to gaining a comprehensive real-time view of the customer at each stage of the journey but most importantly at the point of quote. By linking and matching disparate customer data within the business, insurance providers can create a single customer view. This can help determine that the right product is being offered for the risk presented, and at the right price. It can provide a sound basis for all future interactions with that individual and for effective data enrichment to understand a great deal more about their risk and needs.
Linking customer records across multiple siloed databases is a complex challenge, especially where an address or name may have changed. However, in response to this fundamental problem for the sector, insurance-specific solutions have emerged in recent years including LexisNexis® Scalable Automated Linking Technology (SALT), a patented method of linking and clustering data. This process involves finding common threads across customer records by pulling on a wide range of data sets, including public and insurance policy history data. Disparate records are then linked into a common LexID identifier.
By pulling together data from multiple touch points – quotes, renewals, claims and inbound customer enquiries – insurance providers can build a comprehensive and accurate representation of a customer’s history and lifetime value. It also means they can utilise a consistent methodology for standardisation and matching of customer data across multiple databases. Perhaps most importantly, it can help determine that the appropriate product is being offered for the risk, and that the premium fairly reflects that risk.
An insurance provider that knows the details of a customer’s wider insurance requirements, renewal dates and up-to-date contact information is much more likely to be able to carry out effective communication at all stages of the customer journey, and in turn, cross-sell relevant products at the right time.
The benefits don’t end there. The single identity for each customer then forms the basis for building a more comprehensive single customer view through data enrichment, allowing insurance providers to gain valuable new insights for example around cross-market claims history from industry-contributed data.
Insurance providers will soon be able to view the home claims for motor customers and the motor claims for home customers, knowing that one can be predictive of the other – even if the customer does not have a claim with that insurance provider. It won’t just be the presence of a claim or claims since the last renewal, it will be the type of claim, the circumstances, who is at fault, the settlement amount for both the person and the home or vehicle. This can bring a fresh perspective on new business and renewal decisions. Greater granularity and context around past claims can even justify the need to offer a premium discount to the customer at renewal. Or imagine the scenario of the customer who has just moved home and is looking for a quote for their new property – industry contributed claims data can confirm the past claims for that property.
At the heart of this contributory claims database solution is exactly the same unique, proprietary technology for linking and matching of consumer data that insurance providers can use to match their own consumer data. This makes it possible to identify previous claims history irrespective of individual subjects moving house or changing their name.
Ultimately insurance providers are under more pressure than ever to maximise the data they already hold. Linking and matching data using a unique identifier such as LexID for Insurance can help them make sense and make better use of customer data across all parts of their business.
“We would point out that LGPS funds tend to have a much higher allocation to growth assets such as equities, than their private sector counterparts, due to their long-term nature and the security both of employers and of benefits for members. However, while it is true that funds’ allocation to UK equities may well be lower than Government would like, and is likely to have fallen materially over time, it’s important to consider why that is the case. Funds invest in order to deliver the benefits to members cost-effectively for their employers, which means investing to generate the best risk-adjusted returns. UK listed companies make up only around 4% of the total global equity market and UK equities, as measured by the FTSE-All Share index, have returned around 7% per year on average compared to 10.5% per year from the MSCI All World Index over the last 20 years - and/or an average of 5% per year compared to 13% per year over the last 10 years. This supports Aon’s, and many LGPS funds’, preference to invest globally through considering a global investment opportunity set.”
Mary Lambe, Head of LGPS Governance at Aon, added: “Reporting on the percentage allocated to UK equities won’t, of itself, change investment behaviour and from a governance perspective, nor should it. As noted in our response to the recent consultation “Next Steps in Investment”, we don’t believe Government should be mandating how LGPS funds invest, and it is not clear how that fits with the fiduciary duty of Pensions Committees.”
The Broadstone Sirius Index finds that the fully hedged scheme lost ground in February with its funding level falling by 0.6 percentage points from 68.4% to 67.8% as a consequence of gilt yields rising around 0.1% during the month.
The half hedged scheme’s funding level remained almost constant, rising only 0.1 percentage points from 97.0% to 97.1% during February 2024.
Both of the deficits ended February at broadly the same level at which they entered it: £9.1m for the hedged scheme and £0.8m for the half hedged scheme.
Chris Rice, Head of Trustee Services at Broadstone, commented: "Continued funding stability in February and over the last year, has allowed trustees and employers to digest recent announcements of new funding regulations, options around surpluses, buy-out and consolidation as well as the Regulator’s General Code.
“There will be much for employers and trustees to do to make the most of recent and forthcoming changes, as well as complying with new regulations and guidance.
“The issues faced by individual schemes will be significantly different, as illustrated by the diverging fortunes of our tracked schemes. While some will be discussing surplus, run on, consolidation or buy-out, others will be concerned as to how the employer will afford the new funding requirements.
“In both cases it is essential that trustees and employers engage with their advisers to fix the roof while the sun shines and make progress in stable funding times.”
They commissioned an independent survey of 2,000 UK adults. It found that amongst a trend of low engagement and contributing amongst pension planners the figures were worse for women.
When looking at the proportion of UK employees who do not know whether they have a workplace pension or how much they contribute to it, the figures were almost twice as high for women (15%), compared to 8% of men.
Women are also more likely to only contribute the legal 8% minimum amount (5% employee contribution and 3% employer contribution) to their workplace pension pot (19%) compared to male respondents (15%).
My Pension Expert’s research also uncovered that less than half of women with a workplace pension (44%) say they know how it is performing, compared to 60% of men.
Lily Megson, Policy Director at My Pension Expert, said: “Our research casts a daunting shadow over the financial futures of British women as the gender pensions gap once again rears its ugly head.
“Women’s retirement health is already impaired by their lower lifetime earnings, so it is doubly concerning that they are not being especially diligent with their pension planning. And with one in six women contributing the legal minimum to their workplace, there is a real risk that many will be unable to adequately support a financially stable lifestyle in retirement.
“It’s clear that more needs to be done to get women engaging with their pension planning both in and out of the workplace – this is where the government and employers must step in. It is critical that robust financial education and pension monitoring tools are made widely available for the UK workforce, and more importantly, that proper encouragement and support is given to engage with them.
Only then will women be able to be truly financially empowered and fully engaged with their pension.”
“Ditching employee NI would simplify the system, leaving most people subject to income tax on their earnings alone. However, it would also inevitably place pressure on the government to hike other taxes, including potentially income tax, in order to fill the void.
“There are also practical implications that would need to be thought through. For example, the current state pension system is centred around the NI framework, with workers building up entitlement to the benefit based on their NI contribution record. Scrapping NI would therefore require a new system of NI credits to be introduced, assuming the state pension remains in its current form.
“There would also be implications for pensions ‘salary sacrifice’ arrangements, which allow savers to lower their NI bills in addition to benefitting from pension tax relief. Clearly if employee NI no longer existed, the benefit of salary sacrifice would be significantly reduced.”
Would scrapping employee NI mean the end of the state pension?
“While there is a notional split in government accounts between NI receipts and other government tax receipts, this is entirely illusory from a practical perspective. In reality, National Insurance simply forms part of the general tax pot.
“If this weren’t the case, the government would be making drastic cuts to various benefits, including the state pension, in order to make its sums add up. In fact, the state pension is set to rise by a bumper 8.5% in April as a result of the triple-lock, with both Labour and the Conservatives expected to recommit to the policy in their election manifestos.
“So while lowering NI means less income for the Treasury, it should not have a direct knock-on impact on things like pensions and benefits. Of course, it is possible that by reducing the overall tax take, the government has to make savings elsewhere, but these are as likely to fall on other areas of public spending as they are pensions and benefits.”
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Hymans Robertson has calculated that, for a basic rate taxpayer per £100 sacrificed into pension:
• before last NIC cut – cost to employee £68 (NIC saving is £12)
• after NIC cut to 10% – cost to employee £70 (NIC saving is £10)
• after NIC cut to 8% – cost to employee £72 (NIC saving is £8).
“Employer NIC saving on pay sacrificed throughout is £13.80. Some employers choose to pay some or all of their NIC saving into employees’ pensions. In light of the widening gap between the amount of NIC saved by employers and their employees, we would encourage employers that don’t currently share their NIC savings to consider doing so.
“NIC savings on other popular employee benefits like cycle to work, electric cars and tech schemes will also reduce. So for employees making use of multiple salary sacrifice schemes, the latest cut in NICs may not boost their take home pay by as much as they expect.”
Steven Cameron, Pensions Director at Aegon, said: “The further 2p cut in NI after an earlier 2p cut in January will be a welcome boost to take-home pay for millions across the UK, but it calls into serious question the approach to funding the state pension.
“There’s no magic money pot to pay state pensions – they’re funded by the NI of today’s workers. While employer NI contributions remain unchanged, having cut employee NI from 12% to 8% and self-employed NI from 10% to 6%, there is now far less money from NI to pay state pensions. The Treasury needs to confirm how they intend to plug the gap and if this will rely on a transfer from broader tax receipts.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said: “With budgets tight and economic growth in short supply, there will have been much debate over which giveaways to prioritise. It's now confirmed that the Chancellor has decided to cut NI which is something that benefits younger voters, applies across the UK and which is less costly than an income tax cut.
“This is because NI applies to working people and those above state pension age do not pay it. It is also a cut that will apply across the UK, as income tax rates are devolved in Scotland.
As a result of the Spring Budget, workers will see their rate of National Insurance (NI) contributions cut from 10% to 8% (or to 6% for those who are self-employed), providing a welcome boost to their pay packet. As a result, someone earning an annual salary of £30,000 will have an extra £349 in their pocket each year.
“While it’s tempting to see this as extra spending money, it’s worth trying to save at least a portion of it. Banks are offering inflation-busting interest rates on savings accounts at the moment so putting away additional cash could pay off. If you’re able to prioritise long-term savings, then you could consider using the money you get each month to top up your pension contributions - even small additional contributions now could give you a big retirement boost.
“For example, for someone earning an annual salary of £30,000 per year throughout their career from age 22 to 66, putting that additional £29 a month into their pension could lead to an additional £41,000 in retirement, not adjusted for inflation.”
Tim Middleton, Director of Policy and External Affairs, at the PMI said: “We feel frustrated that the Chancellor has chosen to press ahead with the Lifetime Provider initiative. We noted earlier this year that this was the wrong time for an initiative such as this and are concerned at the disruption this could cause for so much of the good work achieved to date by automatic enrolment.”
Mr Hunt also confirmed the reforms to Defined Contribution schemes announced over the weekend. Middleton added: “Whilst we remain supportive of initiatives that will increase investment by pension schemes in the UK economy, we are concerned at the implied suggestion that this would involve some form of coercion. We believe that trustees should retain absolute control of their investment policy and would like to see clarification of exactly what the Chancellor is proposing.”
The Chancellor has also confirmed that the Lifetime Allowance (LTA) is to be formally abolished from April. Middleton said: “There were sound operational reasons for deferring the LTA’s abolition and we are disappointed that Mr Hunt has not heeded the industry’s concerns. It was frustrating to hear him discuss his reasoning in which he appeared to confuse the Annual and Lifetime Allowances. Unfortunately, this Budget represents both missed opportunities and an ominously authoritarian approach to those who manage the UK’s registered pension schemes.”
Laura Myers Head of DC at LCP, said: "Greater transparency on scheme investments and investment performance is a good thing, and we support measures to improve value for money for members. But the Government needs to make sure that VFM measures accurately assess the performance of schemes over the medium and long-term, and do not distort behaviour by schemes worried about appearing at the bottom of short-term league tables. Trustees will also fiercely guard their right to invest in the way they think is best for their members rather than increase allocations to UK investments purely because of Government pressure".
Philip Smith, DC Director at TPT Retirement Solutions, said: On comparing DC scheme performance. “The Chancellor’s plans to require DC schemes to publicly compare performance data against competitors will pull back the curtain on pensions. Members and employers will be given much greater transparency on how their scheme is performing against others in the market. It is important that this comparison looks at the value for money that schemes provide, considering investment performance as well as fees.”
On publishing how much schemes invest in the UK
“There is a risk the Government’s policy to force schemes to publish how much they invest in the UK will conflict with its policy to compare scheme investment performance. While many trustees will be open to investing more in the UK, we expect they will still prioritise the investment performance, in line with their fiduciary duty. However, even if schemes do increase investment into UK equities, it may not provide the boost to the economy that the Chancellor hopes. Many large UK-listed companies such as those in the oil and gas or mining sectors, earn significant amounts of revenue from business overseas.”
On the pot for life reforms
“The pot for life reforms could be a game-changer in improving retirement outcomes for DC pension savers. The changes could provide members with a better opportunity to understand the benefits accumulated through their DC pension pot. Members would find it easier to engage with their pensions, make investment decisions, and monitor how much they have saved for retirement. In turn, this could encourage people to increase their contributions, so they are better prepared for retirement. Creating the pot for life system will be a huge operational challenge for schemes and employers. However, we believe that ultimately the lifetime provide reforms should provide better outcomes for members."
SPRING BUDGET 2024
IPT applies to most general insurance policies including motor, home, pet, and private medical insurance. The standard rate has doubled to 12% since October 2015. It is likely to hit the poorest the hardest who spend proportionately more on insurance, such as home and motor.
To power its campaign calling for a cut in IPT to help hard pressed households and businesses, the ABI has created a mascot, named Snippy.
Created by the costume production team behind the hit ITV show ‘The Masked Singer’, Snippy is a human-sized pair of scissors billed as helping to ‘unmask’ IPT as a tax that punishes responsible choices.
The campaign also highlights new research that shows most people have little or no knowledge of the tax.
It is estimated that IPT receipts will surpass £8bn this tax year, with current receipts up 10% vs the previous financial year. So far (to end Jan 2024) IPT has brought in £6.7bn, compared to beer (£3.1bn), spirits (£3.7bn), tobacco (£7.3bn) and gambling (£2.3bn).2
Mervyn Skeet, Director of General Insurance Policy said: “It is high time we unmask this tax which penalises people and businesses for being responsible.
“This tax hits the poorest hardest because they typically spend more on insurance, such as home and motor cover, as a proportion of their income.
“There has never been a better time for the government to show its support to the millions of homeowners and businesses who do the right thing by buying insurance. We should cut IPT now.”
]]>Whilst having proven and wide-reaching benefits for organisations of all sizes across all sectors, ERM is not universally found in all companies. Unfortunately, and often, the catalyst for organisations adopting ERM is often driven by the consequences of a major failure to manage risk or by regulatory requirements.
"However, it should not be viewed as simply a tick-box exercise, but instead a seamlessly integrated process in an organisation’s everyday culture that drives real business value, beyond compliance."
Builds resilience
In a time where the external market is so challenging and unpredictable, staying resilient is arguably more important than ever, and ERM is key to building a resilient organisation. Its proactive, collaborative approach empowers businesses to be more prepared, enables them to adapt to uncertainty and helps them leverage opportunities, especially around complex issues.
ERM uses techniques such as scenario analysis and horizon scanning to help organisations prepare for emerging risks and generate more creative strategies.
Creates a risk-aware culture
ERM increases the focus on risk management at senior leadership level, paving the way for more frequent, transparent conversations about risk across the organisation. This greater awareness of risk management helps companies detect risks at an earlier stage and creates more visibility of where they’re interconnected across different parts of the business.
Increases trust
Implementing ERM demonstrates an organisation's commitment to risk management as an integral part of their business strategy – this builds trust amongst customers, investors, employees, and other stakeholders.
Produces informative metrics
Real value can be created through ERM’s clear reporting metrics, which can help capture, challenge, monitor, and report on misinformation and disinformation.
Its ability to analyse historical trends also means organisations can be more prepared for disruptions that may otherwise be difficult to predict.
Increases efficiency
The holistic approach of ERM gives senior management a clearer picture of the organisation so they can make more informed decisions on things that will increase efficiency, reduce time and money, and ultimately make the business more successful. For example, it can assist with decision-making on resource allocation, budgetary spend, investments in new technology, upskilling employees, and much more.
Greater Business Continuity Management
Business Continuity Management (BCM) is closely interlinked with ERM, as BCM helps to ensure that organisations are continually operating effectively during and after a disruptive event or crisis.
If organisations employ an effective ERM strategy, they will be better positioned to continuously respond and recover from major risks and disruptions.
"If organisations employ an effective ERM strategy, they will be better positioned to continuously respond to and recover from major risks and disruptions."
]]>“As with the wider ‘Mansion House’ scheme, the emphasis on UK growth has the potential to benefit us all but it’s crucial that good outcomes for savers remain at the centre of any investment decisions irrespective of the investment type selected. As ever, maintaining a diversified portfolio of savings and investments is a sensible way to work towards both short and longer-term financial goals.”
Simon Harrington, Head of Public Affairs at PIMFA, comments: “While we strongly believe in the principle that retail investors can and should be encouraged to play a positive role in supporting UK businesses with private capital, it is not immediately clear to us that the British ISA represents anything more than a policy announcement in search of a headline.
“We see very little appetite to offer such a wrapper while the operational burden, which this would place on firms suggests that even if appetite were there it seems unlikely that firms would want to offer it.
“If the Government is really committed to reviving retail investment in UK PLC we would suggest simpler measures like a reduction or abolition of Stamp Duty on share purchases rather than the introduction of yet another ISA into the market”.
SPRING BUDGET 2024
However, this comes alongside the notorious freeze in the personal allowance and the higher rate tax threshold, which means more people paying higher rates of tax. When you factor them both in, higher earners are still better off, but, those earning less than £19,000 will actually be worse off. Meanwhile pensioners, who gain nothing from these cuts, will also be counting the cost.
2. Disappointment over tax allowances
The decision to plough ahead with the halving of the capital gains tax and dividend tax thresholds in April, is as predictable as it is disappointing. They will fall to a miserly £3,000 and £500 respectively, so it’s hard for investors to plan tax-efficient income and gains outside an ISA or pension. It’s a frustrating move that flies in the face of plans to encourage UK investment. This new tax blow will make it even more essential to consider using your allowances each year – including your ISA.
The capital gains tax cut on property will provide a small boost for property investors, but it still remains one of the least tax-efficient ways to invest – not least because the stamp duty rules for those buying multiple dwellings will be abolished. Investors still pay tax going in, tax on rental income, and still more tax on sales than is paid on profits from investments.
Yet again, there was no change to the ISA allowance – aside from the consultation of a £5,000 rise with the introduction of a British ISA. So far it hasn’t shifted at all since 2017 and would need to be hiked to over £27,000 just to keep pace with inflation. It means we either have to save or invest a smaller proportion of our income each year, or we’re exposed to an increasingly harsh tax environment.
3. Consultation into a new British ISA
Hunt announced a consultation into a British ISA. ISAs are a popular way to get people investing for the first time. During the consultation we will explore how best to support people investing in British companies. It’s essential that the ISA framework is kept simple.
4. Confirmation of the NatWest share sale in the summer
There is likely to be strong interest in the NatWest share sale, which will be the highest profile public share offer since the Royal Mail IPO more than a decade ago. Giving retail investors the opportunity of a slice of ownership in NatWest is a welcome move, given that they have been left out of previous sales, which have been reserved for institutional investors.
5. A British savings bond – fixed for three years
The British Savings Bond from NS&I will offer a guaranteed savings rate over three years. All eyes will be on the rate available, because even savers who want to buy British with their cash will not want to accept a disappointing rate in return. We’re expecting more details later today.
With the Bank of England set to cut rates in the coming months, savers will need to think carefully whether they want to wait for this bond, or fix now, while they can still secure a great rate.
It’s also worth noting that most savers are currently choosing easy access and shorter-term fixed rates, partly because three-year bonds are generally offering poor value compared to shorter fixes. Given this is a three-year bond, it will need to be a very attractive rate to inspire much interest from savers.
6. NS&I has been charged with raising more money next year
NS&I’s net financing target has been raised to £9 billion. However, given that it raised more than this in the last tax year – at £10.9 billion, it may not be the shot in the arm that savers may have hoped for. Given it needs to raise less cash, and the backdrop of expectations that the Bank of England will start cutting rates in the coming months, the next move for these bonds is likely to be a cut. This is generally bad news if you are holding premium bonds because it could mean a cut in the prize rate, which ultimately will mean Premium Bond savers, will stand a lower chance of winning a prize. To add insult to injury, the expected funds raised from the Green Savings Bonds was also cut from £1billion in 2023-24 to £0.5billion in 2024-25, so these are unlikely to get much generous either.
7. There’s a fairer deal on child benefit for singles and those caught by fiscal drag.
The government will consult on changing the higher income child benefit charge to a household basis. The child benefit rules that penalised single parents were always incredibly unfair. It’s hard enough managing a household on a single income, without the system being stacked against you, so the decision to move to a household basis is a welcome change.
In the interim, from this April the threshold will be raised from £50,000 to £60,000 and the top level of withdrawal to £80,000. After a decade of being rooted to the spot, this will be welcome, but there was scope for a bigger rise. If it had risen with average wages since it was introduced in January 2023, it would be £71,774.
One of the easiest ways to take yourself out of the child benefit trap is to pay into a pension.
8. The government committed to lifetime pension pots
However, we can’t expect anything overnight. It has committed to exploring the model and introducing it in the long-term. It means in the interim we will need to work harder to keep track of multiple pots as we change jobs.
9. Your vices will cost you dear
Last year’s alcohol duty rise was delayed to August, this one has been frozen to Feb 2025. It would otherwise have gone up by 3%. But tobacco duty will rise with inflation. There will also be a consultation on a tax on vapes, to be introduced in October 2026, at which point there will a one-off rise in tobacco tax, so there is an incentive to stop smoking and switch to vapes.
10. There’s relief for motorists as fuel duty is frozen
Fuel duty hasn’t risen with inflation since 2011, so a freeze is usually nailed as soon as the maths behind the Autumn Statement emerges. This time a 13% rise has been hanging in the balance, because Hunt didn’t commit to it in the Autumn Statement, so it’s a huge relief for motorists that duty has been frozen and the 5p per litre discount has been extended for another year. It’s expected to avoid a £50 rise in costs for drivers over the next year. Fuel prices may have come down from the highs of summer 2022. However, they’re still significantly higher than before the last few months of 2021 before the invasion of Ukraine.”
2023 though, was a year, where we experienced a number of bond positive and negative themes. Mixed economic data, persistent inflation and an elusive global recession after such monetary tightening meant volatile fixed income markets. Adding to this, deficit sustainability concerns with large issuance of government bonds and hawkish central banks caused a prolonged rates sell-off during Q2 and Q3.
On the positive side, it was a good year for credit; resilient global growth, balance sheet strength and more recently the market’s rejection of a hard landing has helped spreads grind tighter throughout the year. In addition, since late October, the sell-off in rates has now reversed and bonds have rallied aggressively as central banks move to a more dovish tone, with strong signals that the rate hiking has come to an end and expectations of rate cuts for 2024.
Here, we offer five reasons why we have high expectations for fixed income in 2024.
1. Falling government bond yields
Our conviction is that we are now entering the next phase of the economic cycle, characterised by weaker economic data, a pause in monetary tightening and eventual rate cuts. Historically this is a good time to own duration.
We expect the medium-term trend is for yields is to remain higher than we have seen for many years but trend downwards. In 2024 we believe investors will be paid well for taking fixed income risk through attractive yields.
Fewer than half of today’s 65-year-olds are expected to die within five years either side of their average life expectancy, official figures show. Fixating on life expectancy obscures outcomes that are more likely, according to retirement specialist Just Group.
“Applying average life expectancy figures to retirement planning doesn’t work because of the simple fact that individual people are very unlikely to be average,” said Stephen Lowe, group communications director at retirement specialist Just Group.
“A better option is to think about the ‘what ifs’ of later life and to prepare for the range of possibilities. There are really three potential outcomes – you die around average life expectancy, you die sooner, or you live longer. A robust retirement plan needs to cover those three bases.”
Official life tables give future expected mortality rates for each age group and gender. These can be used to calculate the probability of members of that age group or gender surviving up to age 100. The charts below are split into three groups of equal number, reflecting a one-third chance of each outcome.
For the cohort of men aged 65 in 2024, about one-third are expected to die before age 82, another third to die between 82-90, and the longest-lived third to survive beyond age 90.
For women aged 65 in 2024, about one-third are expected to die before age 84, another third to die between 84-92, and the longest-lived third to survive beyond aged 92.
“None of us know how long we are likely to live and these charts remind us why we shouldn’t assume that we’ll be somewhere in the middle,” said Stephen Lowe. “Expecting to survive to around average life expectancy – the middle third of your age cohort – actually gives a two-thirds chance you will be wrong which are not good odds when planning your finances.”
He said that the figures reinforce the importance of planning for each eventuality including early death and living well beyond the average.
“With annuity rates well above 6% for a 65-year-old, the current likelihood is that more than two-thirds of people will get their investment back or more as secure income, while the other third should not miss out because annuity payments don’t have to stop on death. Options such as joint-life annuities, guaranteed periods and value protection can ensure money continues to be paid out after an annuitant dies.
“As a retirement expert, providing guaranteed income for life solutions, we know that people worry about losing their investment if they die too soon but buying should never feel like a bet you can only win if you are lucky enough to live to a great age.
“Annuities are primarily about ease and peace of mind. They require no ongoing management, provide security to spend the income without worrying if it will run dry, along with the certainty that loved ones can benefit if the worst happens.”
Just Group specialises in analysing individual’s lifestyle and medical information to calculate personalised
annuity rates that can be much higher than standard rates.
“Most people know smokers can get higher annuity rates to reflect lower than average life expectancy but our underwriting process is so sophisticated it takes into account hundreds of different factors,” said Stephen Lowe.
“No-one is average so no-one should be accepting average annuity rates.”
Annuity buying tips:
• www.moneyhelper.org.uk – the government’s money and pensions guidance service offers access to free, independent and impartial guidance service Pension Wise and also has a useful online tool allowing quick comparisons of annuity rates and options.
• Employ an expert – an annuity broker or regulated adviser will work with you to better understand your goals, to choose the right options and shop around for the best deal.
• Full disclosure – providing details of your lifestyle and medical history is the only way to get a personalised annuity rate based on your unique situation.
• Don’t settle for less – seek out the highest offer because small differences in annuity offers can add up to large amounts over a long retirement.
For our AE teams, this means doing everything we can to ensure employers are meeting their pension duties to their staff.
Last year alone we engaged directly with more than 600,000 employers to support compliance, and, through enforcement, recovered more than £135 million?in missing pension contributions (2022-2023).
New site makes declaring compliance even easier
We also listen to what employers are telling us they need.
In January we launched an improved online service for employers and advisers to make it even simpler and easier to comply with their duties.
The refreshed declaration of compliance site introduces important updates that enhance the user experience. Extensive user feedback was an important part of the redesign. While the fundamentals of the service remain the same, a new ‘duties task list’ lets users know which sections are complete.
Other updates include improvements for those with accessibility needs and the ability to save or print a declaration summary instantly. The new design also makes it easy for declarations to be completed on a mobile device.
We’re pleased to say more than 88,000 employers and advisers have already used the site to declare or redeclare their compliance since it went live on 8 January.
There are also early indications that employers are finding the site easier to use, with more users completing their declarations and redeclarations.
Re-enrolment is a key duty
Our winter communications campaign is reminding employers that AE duties do not stop at enrolling employees, making that first declaration and paying contributions.
They must re-enrol staff – and then redeclare their compliance – every three years to meet their duties and ensure savers’ pensions stay on track.
Re-enrolment simply means putting eligible staff who have previously opted out back into a pension scheme. It recognises that their circumstances, income and employment may change. A workplace pension is a key employee benefit that employers shouldn’t lose sight of.
More than 1 million saving again thanks to re-enrolment
Thanks to the fresh opportunity re-enrolment offers, just over 1 million people are now saving for their future again, having previously opted out.
We are telling employers there is no excuse for non-compliance.
Those whose first re-enrolment deadline is coming up are being targeted with direct communications, as well as social media posts, urging them to re-enrol, as part of the campaign.
“Act now – or risk a fine”
The message is clear: ‘Do it now – it’s your legal duty. If you don’t, we can fine you’.
As our compliance and enforcement work is data and information-led, we are able to monitor for non-compliance and take action where needed.
The good news is that the vast majority of employers are meeting their duties. More than 2.3 million employers have enrolled or re-enrolled employees in workplace pensions since the launch of AE in 2012.
Thanks to those employers, a total of around 20 million people are now saving into workplace pensions.
Building on success
Building on the success of AE, we are looking forward to working with the government as it seeks to further extend the framework, giving many more people the opportunity to save for their future. We’ll work with the pensions industry, as well as the DWP, to ensure employers have the support they need to plan for change.
However, there are signs that price rises could be slowing – in the three months to January 2024, quoted premiums rose 7.6% compared with 8.5% and 9.9% in the previous two quarters. Part of the reason for the slowdown is the launch of new, more competitive policies,.
Still, customers who have made claims could see additional increases in the coming months following recent storm damage, Consumer Intelligence warns.
In the 12 months to January, customers claiming for water-related damage have seen quoted price rises of 49.1%, while those with buildings claims have seen increases of 47.6%, and those with damage-related claims 47.1%. By comparison, those with no claims have seen increases of 39.9%, and those making theft related claims have seen increases of 39.2%.
“Over the last 12 months, new business quoted premiums for buildings and contents insurance have increased by 40.6%. This is the largest yearly increase we have seen since our tracking began in 2014.
“One driver in the slowing of inflation is the launch of a number of products which have become increasingly more competitive. The main three products driving this were More Than Essentials, Esure Flex and One Click,” says Matthew McMaster, Senior Insight Analyst at Consumer Intelligence.
Long-term view
Overall, quoted premiums have now risen by 53% since Consumer Intelligence first started collecting data in February 2014.
Into the regions
All regions have seen increases in quoted premiums over the past 12 months of around 40%, ranging from Wales at 43.2% to the Eastern region at 38.9%.
Increases in quoted prices over the past three months range from 6.1% in the South West to 10.0% in London.
Age differences
Quoted premiums for under-50s households rose slightly faster than for over-50s households at 41.2% compared with 39.7%.
Over the last three months, quoted premium increases have been broadly similar at 7.8% for under-50s and 7.4% for over-50s.
Property age
Quoted premiums for properties of all ages rose by around 40% in the past year, with homes built between 1970 and 1985 receiving the highest rise in quoted premiums at 43.7%, compared with the lowest rise for homes built between 1940 and 1955 at 38.3%.
Over the past three years, increases in quoted premiums ranged from 8.4% for Victorian-era homes built between 1850 and 1895 at 8.4% and 6.7% for those built between 1940 and 1955.
Data from the Consumer Intelligence Home Insurance Price Index is used by the Office for National Statistics, regulators, and insurance providers as the definitive benchmark of how price is changing for consumers.
Key highlights
Only 7% of CEOs in the UK insurance industry are women, suggesting an under-representation of women at the executive level.
Lack of diversity among insurance executives could hinder company performance and reputation, which could ultimately adversely affect credit ratings.
A more balanced representation of women in management positions would improve the sector’s reputation and help close the overall existing pay gap.
“Female participation in management positions in the UK insurance sector seems to have stagnated at around 35% since 2019, while most other financial sectors have managed to improve the presence of women in senior positions by four to eight percentage points during the same period,” said Marina Gimenez, Analyst, Morningstar DBRS.
“In our view, the UK insurance sector has made progress in closing the senior gender gap, but there is room for improvement. Specifically, the sector needs to focus on enhancing job satisfaction by creating a supportive work environment that enables women at intermediate and senior levels of their careers to balance work and life responsibilities.“
]]>Aegon’s Pensions Director Steven Cameron looks at how the numbers stack up: “As speculation swirls around whether the Chancellor will be able to cut income taxes, the odds are on a small cut in the employee National Insurance rate rather than a cut in the basic rate of Income Tax. National Insurance is paid by workers up to state pension age, so cutting it focusses the benefit on this group, perhaps to make sure it pays to work. By contrast, while many state pensioners would benefit from a cut in the Income Tax rate, they won’t gain from a cut in NI as no-one above state pension age pays NI. Some might feel a cut in NI, following the 2% cut in January, means they are missing out again. However, for most, the inflation busting 8.5% increase in state pension from the triple lock could more than compensate.
“The full state pension is increasing by 8.5% this April from £10,600 to £11,502 a year, an increase of £902.40. The current rate of inflation is 4% - so in terms of ‘purchasing power’, state pensioners will be £478 a year better off as a result of the triple lock compared to if their increase had been based on current inflation.
“Individuals who depend entirely on the state pension and do not have private or workplace pensions, or other sources of income, are below the personal allowance of £12,570 so don’t pay Income Tax. However, a significant number of state pensioners receive additional income from private or workplace pensions, as well as other taxable sources alongside their state pension.”
The table below illustrates the amount pensioners would benefit were the Chancellor to announce a cut of 1% or 2% cut in Income Tax:
State pensioner on full new state pension
Steven Cameron continued: “Our analysis shows any state pensioner with an income up to £50,000 a year will see their purchasing power after inflation boosted by more under the state pension triple lock than from a 1% cut in Income Tax. And if workers were granted a 2% tax saving, we calculate the inflation busting triple lock still offers more benefit for state pensioners with incomes up to £36,470.
“So while some state pensioners may be disappointed if the Chancellor cuts NI and not income tax on Wednesday, balancing the books including being fair between generations is particularly challenging. Honouring the state pension triple lock in full is actually more beneficial to most state pensioners.”
Following industry engagement from last summer, TPR has created statement of strategy templates to minimise the administrative burden on trustees and is now seeking feedback on its proposals. The consultation builds on TPR’s previous DB funding code consultations and runs for six weeks closing on Tuesday, 16 April.
TPR’s Interim Director of Regulatory Policy, Analysis and Advice, Lou Davey said: “Receiving statements of strategy will give us additional data to better understand journeys that schemes are on as they mature, improving our regulatory oversight. Our proposals are designed to make it as easy as possible for trustees to comply with new legislation, and ultimately to show how they are acting in the best interest of savers.
“We want a broad range of views to ensure our proposals are understood and accepted by trustees and advisers.
“In particular we want to know if people think we are being clear on what data we’re asking trustees to provide, whether this data is readily available, or what challenges there could be in sourcing it.”
]]>“We would welcome confirmation that the triple lock will stay and the Lifetime Allowance (LTA) will go. Now is not the time to tinker with the triple lock, which is a lifeline for so many pensioners. And the LTA was an unwelcome disincentive to pensions saving.
“I also hope the Government will confirm the date for the implementation of the new Auto Enrolment thresholds and eligibility criteria. This change will help improve pension adequacy for millions of lower-paid people. Without a clear timetable for implementation, it leaves employers and providers unable to plan effectively, and results in lower pension saving for those who need it most.
“One concrete reform I would love to see is the introduction of Automatic Enrolment credits for carers, which would help reduce the gender pensions gap for a more equitable pensions system. And the Government needs to set out a plan to deliver adequacy from DC, phasing higher contributions by default to at least 12% and reforming the earnings thresholds to be inclusive.
“On CDC, I’d like to see the Government build on the good work done to date for Royal Mail, and introduce a framework to enable different forms of collective DC to be introduced, allowing a range of DC risk sharing approaches to be adopted by employers and providers to meet the varying needs of savers. We welcome the Pensions Minister’s intention to consult later in the year on whole life multiple-employer schemes. This consultation should be broad in nature and enable the assessment of a range of DC risk sharing designs to be covered which could be delivered as different flavours of CDC.
“It would be good to see the Government support progress on clarifying the advice/guidance boundary. Implementing the targeted support proposals in a comprehensive way as quickly as possible will enable the industry to much better support people who need help with their pensions but financial advice is not practical.”
“Finally, my dream would be the announcement of a fully independent pension commission with unequivocal backing from all political parties to develop long term policy for UK retirement.”
Commenting on the Chancellor’s proposals to make pension funds to reveal more about their investments, Alison Leslie, Head of DC Investment, Hymans Robertson, said: “The Chancellor’s initiative to disclose investment within the UK is aligned to the Mansion House reforms. The FCA will be concerned that this disclosure may lead to an expectation that more be invested in UK assets where potentially the investment case for doing so doesn’t stack up. There is a friction here potentially between the ambitions of Mansion House and the FCA’s duty to make sure initiatives protect members and the market framework.
“Return drivers are the key consideration of asset allocation decisions alongside diversification and risk management. If the investment case stacks up recommendations will be made to invest in the UK. Many argue however that the case for significant investment in the UK does not currently exist.
“The announcement on benchmarking against other schemes is not unexpected particularly against the largest >£10bn plus in assets. This will drive consolidation in the market. However, consideration still needs to be given to those schemes where, due to structure, it is and has been difficult if not impossible to move, for example those with GMP underpins. A solution to that has not yet presented itself and this remains a big problem.
“We look forward to the consultation to understand better how the Chancellor envisages various aspects of the measures will work.”
On her Spring Budget expectations for the DB market, Laura McLaren, Head of Scheme Actuary Services, Hymans Robertson, said: “Given the significant changes announced in the Autumn Statement on pensions and last week’s consultation on options for DB, it feels likely there will be minimal changes announced for the DB market. It would be good to see the focus on completing the pretty long list of existing DB policy priorities. DB scheme trustees and the pensions industry are already grappling with a lot – ‘Mansion House’ reforms, pensions dashboards, finalising the new DB funding regime, compliance with the General Code, GMP equalisation, pensions tax changes etc. Now isn’t the time for knee-jerk changes.”
On his hopes for a wider vision for pensions, Calum Cooper, Partner, Hymans Robertson, said: “We know the Chancellor has very little room for manoeuvre but there are pensions reforms the Government can make which cost nothing but just require conviction. For example, we know risk sharing can provide a huge ‘boost’ to pensions for the same money, while encouraging DB surplus to be deployed to improve adequacy and stimulate sustainable growth could be part of reviving DB and re-connecting generational wealth.
“I want the Government to be bold and make a statement of intent to re-instate the pensions ‘social contract’ to reconnect the generations. That would transform adequacy. We need to restore co-dependency, aligning the need of the next generation to save more with the wealth accumulated by previous generations. Such a transformation for prosperity requires long-term thinking and innovative product design, and action. It would be a bold and confident move for the Government to launch an independent pensions commission with this clear statement of intent. In the near term, a commitment to reforming TPR’s statutory objectives to encourage open DB pension schemes to thrive would be a great help.”
“However, this looks like a significant addition to valuations. The challenge will be to streamline compliance so it’s as easy as possible.
“The newly inserted clause in the regulations offered some hope TPR would use more discretion in how much information schemes need to provide. But it hasn’t cut requirements in many places. A scheme’s route to compliance will have the biggest effect on how much detail it provides. The example ‘Bespoke’ statement runs to over 20 pages, which underscores the appeal that Fast Track could have.
“All schemes face a lot of work to set out strategy in the format required. This is the first time trustees are required to include covenant information with a valuation. They’ll also need to say how the scheme is to provide benefits in the long term (buy-out, run-off or alternatives), and summarise the approach to de-risking between now and the end of the journey plan.
“It’s not clear how much value the extra disclosure requirements add in a funding landscape that’s changed since the process for these changes began. Only a small, and shrinking, number of schemes are poorly funded. Amidst the Mansion House agenda, increasingly focus is on endgame and surplus management rather than scheme funding.
The focus on proportionality in the consultation is also positive although we remain concerned that many schemes will inevitably need to provide lots of new information compared to current valuations, including in relation to covenant, which could prove burdensome for some. We will now consider the consultation carefully before responding next month.”
Emily Goodridge, Managing Director, Cardano, said: “The requirement for trustees to report covenant metrics demonstrates the continued focus of the Pensions Regulator (TPR) on the importance of covenant, as does TPR’s reiteration of both funding and investment risks as needing to be supported by employer covenant.
“We are supportive of TPR expecting trustees to look beyond the rating to consider the extent to which covenant can support scheme risks; and hope TPR makes clear the importance of a proportionate assessment of covenant across both Bespoke and Fast Track valuations, regardless of the information requirements for the Statement of Strategy.
“Much of this will be new to most schemes, and so trustees and their advisers will need to spend time getting familiar with these figures in the coming months, and some may need to take professional covenant advice for the first time. TPR's example of how they expect maximum affordable contributions to be evidenced is therefore also welcome. It's also worth noting that the first half of the Statement of Strategy covers the Funding & Investment Strategy (FIS) which needs sponsor agreement, so sponsors should also take note and ensure they understand what is required."
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Women need to contribute 22% of their salary from age 45 to match the average man by retirement age
Women need to pay in £213 per month more than men from age 45 to match their pension pot by retirement age
Government data on the gender pension gap reveals there is a 48% pension gap between men and women by the time they reach age 45 with men having £88,000 in their pension on average, compared to £46,000 for women. This gap is set to expand over the next few years as investment compounding and lower women’s average pay both impact on future retirement wealth.
Alice Guy, Head of Pensions and Savings, interactive investor says: “By mid-life a huge pension gap has already opened up by between men and women, and it’s an uphill struggle for women to make up the difference. Women often take time out from the workplace in their 30s and 40s to care for young children and that has a huge knock-on impact on pension wealth later on.
“It’s a double whammy for women - not only do they earn less on average, but investment compounding works in favour of those who have bigger pots in mid-life. Amounts saved in your 20s and 30s are worth their weight in gold as investment returns mean they snowball over time.
“The stark reality is that men in their 40s are already on track for a bigger pension pot in retirement even with no more contributions. And if men do continue paying in, women need to contribute a massive 22% of their salary to catch up by retirement.
“The good news is that even smaller amounts of extra pension saving make a big difference by the time it comes to retirement. Saving just £50 more each month for 30 years could add over £50,000 to your pension wealth in retirement.”
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The analysis of data from the Pension Protection Fund’s (PPF) Purple Book1 finds that 9% of schemes provide uncapped inflationary indexation increases to benefits accrued before 5 April 1997. An identical proportion of schemes are similarly providing uncapped inflation increases for post-1997 benefits.
More than two-thirds (68%) of schemes provided inflation increases either via CPI or RPI that, for the vast majority, are typically capped at 5% for post-1997 benefits.
For benefits accrued before 1997, 31% of schemes have capped inflationary increases and a similar proportion (32%) have fixed increases. One in five schemes (21%) do not have any indexation on these scheme benefits.
While the State Pension ratchet is similarly taken from September’s CPI print ahead of an April uprating, the triple lock is uncapped and also takes the earnings figure into consideration hence this year’s increase of 8.5% - a second successive significant lift.
David Brooks, Head of Policy at Broadstone, commented: “Soaring inflation has once more brought the topic of Defined Benefit indexation back into the spotlight.
“It is clear that the majority of schemes will be uprating member benefits below the September rate of inflation given the prevalence of 5% caps. It is important that members are aware of how their benefits will be impacted in April so they can budget accordingly and don’t receive any nasty surprises.
“What makes this issue more complicated for schemes and trustees is that the cost of living crisis has coincided with significant funding improvements for DB schemes leading to calls for discretionary increases for member benefits.
“Members believe that due to the improvement in funding levels, pension schemes could reasonably afford to grant a one-off uprating to help payments keep pace with inflation at a difficult time for household budgets.
“However, members need to appreciate that ‘heads I win, tails you lose’ has put large strains on employers to invest in these pension schemes over many years – more than they probably ever anticipated.
“Providing greater than agreed increases is not something that employers should be compelled to do although we understand the pensions minister is mulling on this area. Other than introducing some upside sharing for the distribution of a funding surplus from the recent consultation, it is unlikely there will be a legal way to help members.”
As a response to funding changes, 83% of schemes are defining an end-game strategy, with a 53/47 split between buyout and low dependency. The size of the scheme strongly influences this decision; larger schemes (over £500m) favoured low dependency whilst those under £500m favoured buyout.
Meanwhile, a noteworthy 78% of respondents are adjusting their return requirements, with the vast majority now looking to reduce their targets. The shift to a higher interest rate environment has created a surplus for some schemes, with 1 in 5 considering returning this to the employer.
Of the respondents looking to make asset allocation shifts over the next 12 months, some 38% were targeting increased corporate bond allocations and 29% greater LDI exposures. Some 38% and 40% of investors were looking to reduce their equity and illiquid allocations respectively. This trend is more pronounced among those targeting a buyout outcome.
Furthermore, almost half the schemes surveyed (49%) said liquidity needs will be an increasingly important priority in decision-making during 2024.
Ronan O’Riordan, Head of UK Business Development, Institutional, at Schroders, said: “These results indicate that schemes will likely continue moving towards lower-risk, lower-return seeking portfolios. Allocations to fixed income could offer schemes several benefits including providing predictable income streams, stabilising returns and offering lower volatility compared with equities. Fixed income can also be structured to deliver regular cashflows which can be aligned to liquidity demands, further enhancing their suitability for these schemes.
“The shift towards LDI and this emphasis on liquidity could also indicate a trend towards reducing leverage and increasing collateral coverage. This would improve schemes’ liquidity and resilience to market shocks, a key lesson from the 2022 gilts crisis. This suggests schemes are either learning from past experiences or simply adhering to regulatory guidance.”
Tim Middleton, Director of Policy and External Affairs at the PMI comments: “This survey provides a very clear assessment of the UK’s Defined Benefit sector in 2024. The most prominent picture is of the number of schemes which have become very mature and which also have sufficient funding to consider the most appropriate endgame solution. For mature DB schemes, this is seen through the reported attraction to corporate bonds and a corresponding reduction in exposure to equities. Trustees clearly see liquidity as important in their schemes’ stage of the glide path and this is reflected in reduced exposure to illiquid assets.
“It is also interesting to note how trustees’ thinking concerning endgame solutions has evolved in recent years. Until very recently, bulk annuitisation was seen as the only viable option. While 45% of the surveyed schemes are considering this, 40% are considering the alternative of run-off. Many smaller schemes may also be considering the new option of DB consolidation.”
The PMI’s Fiduciary Management (“FM”) Strategic Forum was created in 2021 as a partnership between Schroders Solutions and the PMI. This group represents many of the third-party evaluation firms involved in the FM market, along with senior independent trustees. Its focus is on discussing the key issues affecting pension schemes across all governance models and sizes and its findings have informed the topics of this year’s survey.
]]>Commenting on proposals to prevent ‘under-performing’ schemes from taking on new business, Steve Webb, partner at LCP said: “The threat of effectively shutting down pension schemes whose investment returns are relatively poor runs the risk of causing the whole industry to become very risk averse. Sometimes it is necessary to take investment risk to achieve the best returns but those risks don’t always come good. The penalty for being an outlier will be so great that this new approach could rein in the top performers as well as challenging the under-performers”.
Commenting on proposals to force schemes to disclose how far they invest in the UK, Laura Myers, partner and head of DC at LCP said: “Simply requiring pension schemes to list their investments in the UK will have little practical effect. There are big issues about what counts as domestic investment and just having to report something will not in itself change behaviours. Trustees will be looking for the best returns wherever they can get them, and publishing statistics on UK investments will not change that.
This rise was partially offset by aggregate scheme assets decreasing over February 2024, driven by schemes’ hedging strategies.
Over February 2024, UK pension schemes’ funding positions improved by c.£20bn against long-term funding targets, new XPS Pensions Group research shows. Based on assets of £1,420bn and liabilities of £1,266bn, the aggregate funding level of UK pension schemes on a long-term target basis remains extremely positive, at 112% of the long-term value of liabilities, as of 28 February 2024.
The update comes as the Government has this month released a consultation on models for allowing access to surpluses. The consultation outlines various possible ways trustees and sponsors could use surpluses to the benefit of members and sponsors, while also supporting the Government’s aim of schemes investing in productive assets.
Danny Vassiliades, Partner at XPS Pensions Group said: “The fact that aggregate pension scheme surpluses increased last month and are at near-record levels* underlines the timeliness of the Government’s consultation on models for surplus utilisation, first hinted at in the Chancellor’s 2023 Autumn Statement.
Any role played by DB schemes in support of wider UK growth must not risk the hard-won security of members’ benefits. However, with many schemes are now showing considerable surpluses and with the Government moving forward with its proposals, trustees and sponsors may wish to review their ultimate objectives in this context.”
* Source: XPS DB:UK, record levels October 2023.
Sam started his career at Aon in Manchester, qualifying as an actuary in 2007. Following a brief spell at Buck Consultants, Sam moved to London and worked for Lane Clark & Peacock for five years. He joined First Actuarial seven years ago and became a partner in 2019.
Sam says: “Throughout my career, I’ve looked beyond my day-to-day actuarial work, towards the business opportunities on the horizon. It’s always interested me. When the need for a dedicated business development leader arose at First Actuarial, I was already a partner doing a lot of commercial and marketing work.”
Sam sees First Actuarial’s recently codified values as key to First Actuarial’s past and future successes.
He concludes: “First Actuarial is a distinctive voice in a crowded market. What sets us apart is that we’re plain-talking, personable, and positive about pensions. We put clients ahead of revenue and profit targets. When you do a good job and help people with complicated problems, everything else follows. We’ve enjoyed steady organic growth over the 20 years since First Actuarial was founded, largely through word of mouth recommendations. That’s what happens when you’re serious about putting clients first.”
Kalpana Shah, IFoA President, said “The IFoA is concerned that without a strategic focus on the big picture challenges that society faces, both for this Budget and the subsequent election, the UK risks sleepwalking into another period of inaction. We understand that fire-fighting and planning for long-term resilience are not easy to do at the same time. But societal issues such as population health, social care, climate change and resource management are in urgent need of a systems thinking approach. There must be acknowledgement that driving effective solutions will go well beyond the next parliamentary term and current economic challenges. We encourage the Chancellor to kick start this process by capacity building in the Budget.
“We hope that this budget will provide the first step in establishing a platform to address the issues that often sit in the ‘too difficult’ box. Actuaries are experts in long-term risk management across several key sectors and take a rigorous, dispassionate and meticulous approach to their work. We look forward to playing our part in helping to develop long-term solutions to these big societal challenges.”
Other findings include 46% of respondents who would like to see the pensions triple lock phased out in favour of something more affordable.
Jamie Jenkins, director of policy at Royal London, said: “For the snapshot of advisers we polled, while there is support for reducing headline tax rates, it’s clear that they would rather see some easing of the fiscal drag caused by allowances being frozen or increasing slowly relative to income. Arguably, this is an issue that goes beyond simply taxation of income, affecting inheritance tax and working benefits such as the High Income Child Benefit Tax Charge.”
• Do not want to give their colleagues more work to do - 22%
• Can work from home, so they still feel they need to, or can, work when unwell - 17%
• Are made to feel guilty by other colleagues / senior members of staff for taking time off work - 13%
• Do not feel secure enough in their job to take time off work - 9%
For those workers who did call in sick, nearly one in 10 (8%) have had their illness or inability to work questioned by their manager.
Financial concerns sway people from taking time off sick
Within the last two years 18% UK workers have worked through illness because of the financial consequences of taking time off, and 10% are not taking time off because they are worried about not getting paid.
Dan Crook, Interim MD Group Protection, Canada Life, comments: “Presenteeism is alive and well, as shown by the significant number of workers not taking the time off to allow themselves to recover when ill. There is no doubt that this is in part being driven by an uncertain economic climate, and employers must recognise that their employees may have greater anxieties around losing their job. Fostering a workplace culture where employees feel at ease to take sick leave and step away from their day to day priorities to focus on their wellbeing, without questioning or hesitation, is key.
“Employees must also understand the importance of taking time off, and employers have a role to play in facilitating this. Recognising this, policies such as Group Income Protection, Group Critical Illness and Group Life Insurance demonstrates a commitment to not only their employees’ wellbeing and financial security, but equally that of their family too.”
I would also like to take this opportunity to thank Fiona Tait from Intelligent Pensions for all the many insightful articles she has provided us down the years as she has decided to step back from writing. Many thanks Fiona.
We look forward to welcoming you back next month
With this in mind Fan Lamoli, Vehicle Technician at Solus, Aviva’s network of vehicle repair centres, has put together a 10-step ‘ultimate’ checklist, to make sure your car has coped with winter and prepare it for the season ahead:
1. Check your car lights and bulbs are clean and working properly. Although days might be longer and brighter, it’s good practice to check that all your lights – such as headlights, brakes, fog, rear and indicator lights - are clean and in working order. Not only are faulty or dirty lights dangerous as they impair your vision and could cause a collision, they are also illegal and could lead to you facing a fine. If you’re unsure or not able to change them yourself, head to a mechanic or your local garage as soon as possible.
2. Check tyre pressure and depth. The fallout from winter can impact the state of your tyres - particularly where potholes are involved - so it’s worth taking the time to physically inspect your tyres for any damage. Keeping your tyre tread depth between 3-4mm - around the thickness of a pound coin - is recommended to improve steering and braking in your car in less favourable road conditions. It’s equally important not to over-inflate your tyres to prevent slipping and if you’ve put on snow tyres, remember to take these off in time for spring.
3. Check your windscreen wipers. Wiper blades can often be worn down and damaged by tough weather conditions, which is why all drivers should check they are in good working order. Windscreen wipers wipe away debris, snow, rain and more, so without them your vision could be severely impaired. Not only is it your legal responsibility to make sure you can properly see out of your windscreen, poor wiper maintenance could lead to you having a driving incident.
4. Inspect your windscreen for any damage or cracks caused by small stones flying onto your windscreen, which can be a distraction when driving and could impair your vision. If you find any chips, be sure to get these repaired as soon as possible to avoid any further damage.
5. Check oil and coolant levels, especially if you’re planning to visit friends or family further afield. Although easily done, take caution to prevent accidently mixing fluids and damaging your engine. Aviva research shows that over one fifth (22%) of people who have botched a DIY maintenance job on their car have needed professional help with fixing mishaps around topping up and checking fluids, so if you’re ever unsure, speak to your mechanic.
6. Check your brakes. Spring can be known for its showers and during wet weather conditions the stopping distance significantly increases, which is why it’s crucial to check that your brakes are in working order. If you notice any changes such as strange noises and find your brakes being unresponsive, head to your local garage or mechanic as soon as possible.
7. Never drive through flood water and take caution driving through fords or tides. After periods of heavy rain, it’s best to avoid driving through flood water where possible. It’s difficult to see how deep the water may be and you could end up becoming stranded or even swept away. Just 30cm of fast-flowing water is enough to move a car. During bad weather, fords and tides may be higher than usual and so if you’re ever in doubt, find an alternative route or wait for the tide to lower. It only takes a small amount of water to ruin an engine, so it pays to be cautious.
8. Check your batteries. If your car or car battery is more than five years old, it is possible that the 12v battery may be getting past its best. Spring weather can be unpredictable and a cold snap could impact a battery’s charging capability, which is why it’s good to get into the habit of checking your battery on a regular basis. If you own an electric vehicle, cold weather may also reduce the range, so bear this in mind when planning journeys and charge routines.
9. Pack an emergency kit in case you break down. Preparation is key and handy things to keep in your car include a warning triangle, torch and batteries, mobile phone and charger, breakdown membership card and tow rope, thick cardboard, or material (for traction), outdoor clothes and sunglasses (for glare) as well as a shovel, blanket and a de-icer.
10. Check whether your MOT is due and if so, book it in at an approved centre. In the UK, it’s illegal to drive a vehicle that doesn’t have a valid MOT, other than to the MOT test centre, or to remedy issues found on a previous test. If you can’t find your certificate or can’t remember whether your MOT is due, Aviva’s MOT Checker Tool will let you know if a vehicle has an up to date MOT and when this runs out. You can also use it to check the MOT status of your vehicle or one that you’re thinking about buying.
]]>"These findings only reinforce an alarming trend the country has been experiencing over the past few years; one of a population raiding its savings and retirement pots today to abate the cost of living crisis, at the expense of their hard earned futures. And this isn’t going away. The Department for Work and Pensions is observing a steady increase in workplace pension opt-outs, and Barnett Waddingham's research last year found almost a third (28%) of those over 50 said they had no private or workplace pension savings at all.
"It's clear the Government needs to act now to ensure the adequacy of pension contributions and to close the pensions education gap. If this doesn't happen, the government may be left to pick up the pieces of an aging, impoverished population."
“It’s essential that all political parties set out their future policies very clearly to voters of all ages ahead of the election. While the triple lock is on the face of it appealing to voters, intergenerational fairness must be a long-term consideration.
“State pension clarity is key but all parties need to make sure they’ve properly counted the costs. Politicians and individuals alike will be hoping that the period of skyrocketing inflation is past. If we return to a more stable environment with inflation nearer the Bank of England target of 2% and future wage rises likewise more modest, then the triple lock won’t prove quite as costly as in the last few years. This may make it more sustainable, although we must remember it’s paid for out of the National Insurance contributions of today’s workers, not out of some magic pot of money.
“Even if parties do commit to a triple lock approach, there are strong arguments for revisiting the exact formula to make sure the increases it produces are more predictable. For example, rather than looking at inflation or earnings growth over 12 months, some form of averaging over a longer period might produce results fairer for all.”
The three touted options are a cut in income tax rates, a further lowering of the rate of employee NI contributions, or the potential to unfreeze the Personal Allowance.
Steven Cameron, Pensions Director at Aegon, comments: “The Chancellor and Prime Minister have dropped numerous hints, if not promises, of further tax cuts in the Spring Budget on 6 March. Assuming a cut can be justified in the face of the latest economic data, the Chancellor has a range of options which have different implications for different groups of individuals.
“Lowering income tax rates would be a stand-out headline-grabber, but Jeremy Hunt could repeat what he did in his Autumn Statement and instead cut the employee NI rate. A third alternative is to unfreeze the Personal Allowance – the point above which you start paying income tax and NI – which could actually do more to boost the finances of those on lower and medium incomes.”
Cutting income tax rates vs. the employee NI rate
“On the surface, a 1% cut in income tax would have a similar impact on individuals as a 1% cut in employee National Insurance – but there are other points to consider.
“Firstly, a cut to your rate of income tax is not so good for future pension savings. Your pension contributions are boosted by tax relief at your highest rate of income tax, so a cut to income tax rates means less pensions tax relief. By comparison, a cut in your rate of NI would not affect this.
“Setting income tax rates is also a devolved power, and the Scottish Government has already confirmed its own rates for 2024/25, with higher earners to pay more income tax from April this year. This means that any cuts to income tax rates announced by the UK Government would have no income tax benefit to Scottish residents.
“On the other hand, a cut to National Insurance would apply right across the UK, including Scotland.
“But for those over State Pension Age (currently 66), a cut in NI rates would offer no benefit, as people above this age are exempt from paying any NI.
“Last but not least, the funds raised from NI are used to cover the cost of the State Pension. With an ageing population and the Triple Lock formula producing another huge 8.5% increase this April, cutting NI further would make the State Pension funding even less sustainable.”
An alternative – increasing the Personal Allowance
“The Personal Allowance sets an initial level of earnings on which we don’t pay income tax. Frozen at £12,570 since 2021, high inflation and growing salaries since then have meant more people now pay tax on a greater proportion of their salaries.
“In 2022, the threshold at which NI contributions begins was increased to match the Personal Allowance, with individuals now paying both income tax and NI on earnings above £12,570.
“If the Chancellor were to unfreeze and increase the Personal Allowance for income tax and NI by, say, 10% to £13,827 in his Spring Budget, it would mean millions of people earning above this amount would pay no income tax or NI on an extra £1,257 a year, saving a basic rate tax payer £251 in income tax and £126 in NI – a total of £377 in the first year. For anyone earning less than £50,270, this is more than the boost to take-home pay generated by an alternative 1% cut to income tax or NI.
“Increasing the Personal Allowance would also reduce the risk of the State Pension (increasing to £11,502 from April) tipping over the Personal Allowance and subjecting millions of State Pensioners to income tax on some of their State Pension, even if they had no other income. This would be extremely hard for any Government to justify.”
When asked about what inheritance tax changes they’d most like to see in the upcoming Spring Budget, the most popular response for over 55s was that they’d like to see the policy abolished completely (30%), but only 15% of young savers (age 18-34) agreed.
Instead, young savers favoured a more means-tested approach, with nearly a third (31%) reporting that they believe there should be exemptions or reduced rates for specific categories such as family homes or small businesses. The next most popular choice was the introduction of a sliding scale for inheritance tax based on the value of the estate (20%).
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “One of the benefits of saving into a pension rather than some other investment products or assets is that money held in a pension is usually free from inheritance tax because it is considered outside of someone’s estate.
“Our research suggests the majority of people don’t know about this benefit. The risk of someone not knowing is that estate beneficiaries could ultimately miss out or pay more tax than necessary on someone’s life savings and investments.
“It’s important to understand pensions and the way they are taxed for successful long-term financial planning. Inheritance tax planning is one area where pensions may be being underused.”
Tips from Becky O’Connor
• Consider pension drawdown - If you have multiple sources of retirement income or other assets, it may be sensible to consider using pension drawdown. Pension drawdown allows you to keep your pension invested while taking withdrawals as needed, potentially reducing the size of your estate subject to inheritance tax.
• Set up pension beneficiaries - By naming beneficiaries directly to your pension provider, you can easily pass on your pension savings after you die. The exact amount you can pass on tax-free to your beneficiaries after you pass away depends on your age and whether you have started accessing your pension. If you pass away before age 75, then beneficiaries would also benefit from not paying income tax on withdrawals from your pension. Make sure to keep your ‘nomination of beneficiaries’ form up-to-date.
• Review financial planning regularly - Personal circumstances and financial situations can change over time, so it's essential to review your pension arrangements and estate planning regularly. This ensures that your plan remains aligned with current goals and objectives and ensures maximum benefit from pensions exemption from inheritance.
Pensions and inheritance tax facts and figures
• Inheritance tax is charged on the value of an estate above the £325,000 threshold. This is known as the nil-rate band.
• The standard rate of inheritance tax is 40% on the value of an estate above the nil-rate band.
• There’s also a main residence nil-rate band that allows people to leave their homes to family tax-free. Under the rules, those passing their home to a direct descendant can benefit from £175,000 in tax-free allowance (2023/24). Married spouses and civil partners may be able to apply any unused allowance of their deceased partner, meaning that they can pass on as much as £1,000,000 as a couple.
• Individuals can gift up to a certain amount each tax year without incurring inheritance tax. This is known as the annual exemption (£3,000 per individual), and it can be carried forward for one year if unused. There are also exemptions for certain types of gifts, such as wedding gifts or gifts to help with living costs.
• Estate planning can help minimise the impact of inheritance tax on beneficiaries. This may include making gifts during their lifetime, setting up trusts, or making use of exemptions and reliefs.
To achieve this PIMFA is urging the FCA to consider the introduction of a fact find which is geared towards meeting the client’s need rather than asking open ended questions which could uncover information which is not directly related to this need. This will ensure that the advice given is focused on a specific outcome and client need, rather than taking consideration of the client’s wider needs and objectives which is currently required were they providing holistic advice.
PIMFA has also argued that the FCA consider introducing a stripped down way for providers of Simplified Advice to Know Their Customer. Further, PIMFA is urging the Regulator to include decumulation within its proposals for Simplified Advicegiven the very real value a personalised recommendation can play for savers needing certainty at retirement This stems from PIMFA’s research (1) which shows non-investors in particular value a recommendation relative to their own personal circumstances in order to encourage them to invest.
Moreover, while PIMFA welcomes the fact that the FCA has raised the monetary cap for Simplified Advice, we would urge the Regulator to consider scrapping it altogether given that the existence of the cap does not serve any real purpose. Further, the existence of the cap might prevent potential clients from accessing a personal recommendation or worse, lead them into inefficient investment solutions. If, for example, they were unable to find an adviser willing to offer them holistic advice on savings of £100,000 they would only be able to use the Simplified Advice process up to the £85,000 limit while the remaining £15,000 would have to be treated on an execution-only basis likely in the same solution. This illustrates the arbitrary nature of the cap and adds complexity where none is needed..
Simon Harrington, Head of Public Affairs at PIMFA, commented: “We welcome the FCA’s Advice Guidance Boundary Review and believe the Regulator’s proposals show real progress towards closing the advice gap.
“We also note the FCA’s own comments at our own Compliance Conference last year that it would take its time to get its proposals right. With that in mind we would urge the Regulator to take note of the changes we are advocating for particularly related to Simplified Advice which, we believe, has improved significantly since its previous Core Investment Advice proposals’.
"For simplified advice to work it needs to provide regulatory clarity for firms and has to be commercially viable. To provide regulatory clarity, we believe that the FCA needs to accompany the introduction of simplified advice with a specific chapter in COBS and accompanying guidance which outlines what questions should, and should not, be asked to clients to meet specific needs. Firms should then have the flexibility to design processes around this which meet the Regulator’s expectations.. This will reduce their potential liability in the event of future complaints and make them certain that the service they are delivering differentiates sufficiently from holistic advice.
"In order for it to be commercially viable we believe that the scope of the service should be expanded. There is very real value in allowing the sale of decumulation products to be included within simplified advice, provided that focus is on what the client decumulates with, rather than gaining an understanding of how they should decumulate. More broadly, we would urge the FCA to reconsider the £85,000 cap which we believe serves little, if any purpose."
“At the time, the full new state pension was £179.60 per week, or £9,339.20 per year, using 74% of the £12,570 personal allowance. Since then, however, the personal allowance has remained frozen at the same level, while the state pension has risen substantially.
“The state pension will soon reach £221.20 per week or £11,502.40 per year in the 2024/25 tax year, leaving just over £1,000 of the personal allowance. This will no doubt see a considerable number of pensioners who have additional retirement income dragged into paying tax.
“What’s more, the reality is that we are soon set to be in the perverse situation where pensioners might have to start paying back their state pension to HMRC because of frozen allowances, and our previous analysis found that pensioners could need to pay back a proportion of their state pension in income tax in just two years’ time.
“The triple lock increases the state pension by the higher of average earnings, inflation as measured by CPI or 2.5%. Due to the way the triple lock operates, if inflation or wage growth are over 4% for the next two tax years the government will need to start asking for some of its pension benefit back in tax unless it increases the personal allowance.
“Given that state pensions will shortly eradicate someone’s personal allowance any private pension provision other than the tax-free cash lump sum will therefore become taxable at their highest marginal rate. For many that could mean big tax bills depending on how much they drawdown.
“Pensioners are often worst hit by frozen tax allowances because they typically will be getting their income from a number of different investments and therefore lean heavily on CGT and dividend allowances to help create a retirement income in addition to their pension.
“However, the government has made it very difficult to avert being taxed very heavily on these types of investments. It is incredibly important that people look across the spectrum of financial products that provide tax efficiency and use them in the right way and at the right time to try to prevent their income being eroded by tax. Seeking professional financial advice can help someone make the most of their finances as current fiscal policy now mandates a different approach to financial planning.”
]]>“Labour’s proposal to reinstate the lifetime allowance but create a carve-out for certain public sector schemes would have created a two-tier system and been deeply unfair, particularly given the defined benefit schemes public sector workers enjoy are already significantly more generous than the average pensions enjoyed by their private sector counterparts.
“While it is good news Labour has ditched plans for this public sector carve-out, the party’s apparent insistence on bringing back the lifetime allowance if elected is concerning. Pursuing this policy would create huge, unwelcome complexity in the pension system and send a worrying message to savers and would-be savers.
“Fear of the lifetime allowance returning if Labour wins the election is already having an impact. Anecdotal evidence suggests savers are considering making decisions about their pension today – namely ‘crystallising’ their fund before the general election – in order to avoid a potential future lifetime allowance tax charge. The fact people are feeling forced into making a decision about their retirement pot based on something so uncertain is worrying and risks resulting in poor consumer outcomes. As a general rule, it is sensible to deal with the tax rules as you find them, rather than trying to second-guess what may or may not happen in the future.
“This is all entirely unnecessary. If Labour’s policy aim is to limit spending on pension tax relief, the annual allowance provides a much simpler mechanism to achieve this aim. But whatever the intention, we need Labour to come clean about their plans so savers can plan for the future with at least some clarity.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “The Lifetime Allowance represents one of the few major points of difference between the two main parties when it comes to pension policy, and it's likely to be a source of much debate in the months ahead.
“Prior to last year's Budget, the allowance stood at just over £1m, which sounds like a huge sum but, in reality, this is the figure that a growing number of people were reaching, and which penalised people, particularly in the public sector, for diligent saving over many years.
“If the LTA is to be reintroduced it makes sense to avoid creating a two-tier system of allowances between public and private sectors, due to the potential complexities this could create. It will also avoid a situation whereby certain types of workers receive more generous allowances, which would also have set a difficult precedent. Ensuring an allowance that gives everyone the opportunity to save for a decent retirement, and which reflects levels of inflation in recent years, is a far better approach.”
“The Policy Statement also makes a number of positive improvements to the draft framework set out in PRA’s consultation paper in June last year. We are pleased to see greater practicality in the calculation Capital Add-Ons and the improved clarity on timeframes for reviewing internal model applications.
We also welcome the additional clarity on timeframes for insurers that need to combine their internal models, for example, following a merger or acquisition. We believe that the timeframe set out in the Policy Statement is reasonable and realistic.”
Kathryn Moore, Head of Personal Lines, said: “The PRA’s Policy Statement on adapting Solvency II for the UK provides further clarity and further detail for insurers and other industry stakeholders.”
“We are particularly pleased to see a further increase in the gross written premium threshold above which insurers are regulated under the Solvency II rules. This increase from the originally proposed £15 million to £25 million means that more smaller insurers will fall out of the scope of Solvency II.
“Boards of affected firms should take this opportunity to assess how these proposals will impact their solvency position going forward. Those firms who do not exceed the threshold can continue to operate under Solvency II regime by applying for a voluntary requirement (VREQ).
“With the amended regime coming into force at the end of this year, time is of the essence for insurers to prepare and firms are encouraged to notify any changes in status with their supervisor at the PRA.”
PRA PS2/24 – Review of Solvency II: Adapting to the UK insurance market
]]>Gillian Davidson, GILC’s Chair and Partner at Sparke Helmore, commented: “AI has already become an essential part of our daily lives and is quickly making its way into the insurance sector. This trend is expected to continue as AI offers numerous benefits including faster claims processing, improved underwriting, innovative insurance products, streamlined administration processes, and more efficient chatbots.”
Better understanding of risk
The research highlights the ability of AI to quickly analyse vast quantities of data as a powerful tool for insurers in predicting and assessing risks, particularly when there is a significant source of data. As Gillian explains, “The use of AI can help insurers enter markets that may be challenging due to lack of lengthy loss histories for certain types of risks. AI can rapidly digest large volumes of data and produce more precise analytics, which can be useful in designing coverage for large-scale cyber incidents, for example.
“Ultimately, this improved risk analysis will benefit consumers as it enables insurers to offer more relevant and tailored coverage to their customers.”
New models, new distribution
Insurers and their legal advisers will closely monitor the progress of regulations and legislation specific to AI; the EU’s forthcoming AI Act will become the benchmark for many jurisdictions around the world. They will also be keenly aware of the liability, privacy, and cyber exposures that could emerge as their policyholders adopt AI in their business models.
In many markets, AI is being utilised or is likely to be adopted to optimise distribution models. The COVID-19 pandemic accelerated a shift by many insurers towards digital and online tools, replacing traditional distribution models. We are likely to see a similar rapid expansion in the use of digital techniques, including smartphone apps that often involve AI, to distribute insurance policies. This trend will be especially beneficial in markets with low insurance penetration.
AI could create new challenges
Insurers face a significant risk with regards to data privacy, which could be exacerbated by the widespread adoption of AI. The processing of vast quantities of personal and often sensitive data will mean that insurers need to have robust procedures to ensure compliance with national and international data protection standards.
Insurers also need to be mindful of the need to have measures in place to safeguard against data breaches, and to have adequate processes to handle the reporting and management of any breaches should they occur.
Gillian concluded: “Currently, insurance solutions tailored to the risks associated with artificial intelligence are still in the early stages of development. However, as the technology advances and becomes more prevalent, and regulatory bodies sharpen their focus, we can expect an increase in AI-targeted risk solutions.”
]]>Commenting on the appointment, Richard Shackleton, Head of Pensions, Hymans Robertson says: “Leonard will bring his experience and understanding of the pension needs of companies to this vital new role. In a rapidly changing market, corporate sponsors of schemes are playing an increasingly influential part in the decisions on pension schemes’ strategy and implementation, as well as in the appointment of trustees and advisors. Our mission is to help corporate sponsors cut through the noise across the pensions landscape. Leonard’s deep insights and expertise will enable us to bring the very best thinking to our corporate clients in exactly in the right way, when they need it.”
Commenting on his appointment, Leonard Bowman, adds: “It’s an exciting time in our industry. But, with so many ideas and potential choices it can be a maze for our corporate clients to know how to move forward. I’ll be helping companies identify the right path, and make the best decisions for their schemes, members and other stakeholders.”
Nearly nine out of 10 (87%) questioned are increasing spending at their own firm while 86% expect increased spending across the sector as a whole over the next three years, with 14% forecasting a dramatic increase.
The study from Ortec Finance, the leading global provider of risk and return management solutions for insurers and other financial services companies, found 84% believe the level of investment complexity and challenges the industry faces will increase over the next two years.
One issue driving increased spending on scenario and stress testing is the growing use of alternative asset classes by insurers. Almost all (97%) questioned say the relatively new risks and issues, such as liquidity and correlation posed by alternative asset investments, means insurers and insurance asset managers need to invest more in scenario and stress testing.
The increased focus on more esoteric, illiquid and unlisted asset classes as the search for yield intensifies is regarded as the biggest factor driving increased spending on scenario and stress testing. A growing focus on transparency and reporting is also a significant factor in the study.
Regulatory pressures are adding to the need for improved modelling along with climate risk and a general rise in risks faced by insurers.
Just one in seven (14%) rate the accessibility, user friendliness and overall usefulness of current stress testing, optimisation and scenario modelling software as excellent, while 69% believe it is “good”.
Currently, three out of four (75%) of insurers and insurance asset managers conduct up to half of their scenario modelling, optimisation and stress-testing in-house, with the remainder being performed by their asset manager or a specialist consultancy firm.
Hamish Bailey, Managing Director UK, and Head of Insurance & Investment said: “Scenario modelling and stress testing is vital to the success of insurers investment portfolios and that is reflected in the expectation of increasing investment in modelling.
“Increased use of alternative asset classes is a key factor in the increased spending, but insurers are grappling with a wide range of issues including the need for greater transparency and regulatory pressure as well as climate risks.
“While firms are generally happy with the software available it is clear there is room for improvement and a growing demand for specialist support.”
The audit backlog has existed for some time, but following a great deal of detailed work across the industry, the joint statement issued on Friday 9 February from the DLUHC and the NAO detailed proposals to clear the backlog and embed timely audit.
Included is a proposal for the Chartered Institute of Public Finance and Accountancy (CIPFA) to make temporary changes to the Code of Practice in Local Authority Accounting for 2023/2024 and 2024/2025. Should these proposals be implemented, what would be the implications for pensions reporting?
The overall outlook
The general thrust of the various proposals in the joint statement is to have a “reset” phase which clears the backlog of audits for years up to and including 2022/23 by 30 September 2024. This backstop date applies even if auditors issue a modified opinion due to not being able to complete all audit work by that date. From that point on, and to mitigate the risk that backlogs will re-emerge, the audit system will enter a “recovery” phase with progressively reducing timescales for signing-off subsequent audits. This will allow assurance to be rebuilt over several audit cycles.
To aid the recovery process, CIPFA will consult on proposals that reduce pensions disclosure requirements for at least two years, with the idea being that reduced disclosures will ease the burden on auditors and aid the system getting back on its feet. At this point in time, CIPFA has not yet issued the full consultation, so we can only go on the headlines provided by DLUHC.
As currently set out, the proposal is to reduce the disclosure requirements around pension liabilities / assets to be in line with UK Generally Accepted Accounting Practice (GAAP) - instead of International Financial Reporting Standards (IFRS) - for the 2023/24 and 2024/25 reporting periods. It is not totally clear what this means – it could be that instead of reporting under IAS19, pensions costs and net liabilities in local authority accounts will be prepared in line with FRS102. Alternatively, it could be that calculations are carried out as per IAS19, but only those parts that would be needed by FRS102 are actually disclosed.
Might this (not) help?
In broad terms, the pensions accounting framework under UK GAAP is reasonably consistent with IFRS, although IAS19 is more definitive with less room for subjective interpretation than the more loosely worded FRS102.
While it is true that FRS102 has slightly less extensive disclosure requirements, our view is that a move to UK GAAP (if that is what is proposed) can actually make auditing more difficult if there is more work needed to decide if a particular interpretation is in line with the more loosely worded standard. So rather than FRS102 being “easier” to audit than IAS19, there are arguments that the opposite can be the case.
Dancing on the (asset) ceiling
The application of asset ceilings have been a complicating factor for recent audits. IAS19 is clarified by IFRIC14 to provide a much clearer set of criteria of when, and to what extent, a pension surplus can be recognised in the accounts. There is no such direct clarification in UK GAAP. Furthermore, there is one important aspect where IAS19 and FRS102 explicitly differ – and that is whether an additional liability due to an onerous funding commitment needs to be included. It is not clear in the proposals how the inconsistencies between IFRS and UK GAAP would be managed.
The perils of unintended consequences
We do not believe that any of the actuarial firms have contributed to the auditing backlog through late production of accounting reports. However, for the 2023/24 period, preparations are well underway to produce 31 March 2024 reports under IAS19 for local authorities hitherto assumed to employ IFRS. A last-minute change to using UK GAAP, whether for the full calculations or only for disclosures, could definitely throw a spanner in the works. Any potential gains for the preparers or auditors of accounts from slightly less detailed disclosures might easily be undone merely by the extra work required to implement the change of approach.
Conclusion
At this stage, and until we have the opportunity to review CIPFA’s proposals in detail, we are keen not to dismiss the proposals out of hand. And we recognise that all parties are acting creatively to try to resolve a complex situation. However, we remain to be convinced that moving the accounting goalposts from IFRS to UK GAAP so late in the day will do much, if anything, to help with signing-off the pensions aspects of local authority accounts over the coming two years.
This is definitely one for local authorities to keep an eye on, and we encourage them to participate in the various DLUHC, NAO and CIPFA consultations over the coming few weeks. We will provide an update when the detailed CIPFA consultation is released.
]]>“As a parent myself, I know how the welfare of your children can affect your own mental health and it’s important that both parents and children have the support they need to help them through the situation.
“If extra care is needed, our mental health pathways, offer personalised, evidence-based support that helps the individual understand what’s causing their mental health problems, and offers coping mechanisms and ongoing support to help them take control of the situation and get on the road to recovery.
“At Aviva, we’re helping in several ways. Through our webinars, we’re enabling parents to spot the warning signs that something is wrong, and giving them the confidence to talk to their children about mental health and practical tools to help support their needs."
Historically, UK defined-benefit (DB) pension schemes were large holders of UK government securities or gilts. Yet such plans are a thing of the past, believes BI: there are no new schemes being set up, and existing ones are steadily running down as their members enter retirement.
Higher interest rates means the original company sponsors are offloading their pension liabilities to insurers, potentially boosting revenue at Aviva, Legal & General and others. Yet these insurers' exit from the plans makes them net sellers of gilts, notes BI. More importantly, from a government perspective, they aren't buying any more. That risk may spur a new approach to gilt issuance in the coming years, both in terms of tenor and coupon, adds BI.
Kevin Ryan, Senior Insurance Analyst at Bloomberg Intelligence, commented: “If UK pension funds continue to sell gilts at the recent annual rate, they could be out of the bonds in seven years.
“UK pension funds have typically invested in instruments such as gilts and cash to match maturing liabilities as scheme members moved into drawing their pensions. As companies have almost universally shifted to defined-contribution schemes -- and defined-benefit schemes have largely closed to both new members and new contributions -- pension plans have significantly less natural demand for gilts.”
According to BI, insurers and pension schemes now own just 24% of all gilts, from 65% a little over twenty years ago. Between 2020 and the start of 2023, they sold £211 billion of gilts and their overall market share fell 7.8 percentage points.
Bank of England Also a Natural Seller Of Gilts
The Bank of England is a known seller of gilts which, together with the pension-fund exit, could make it tricky for the UK government to raise additional debt, notes BI. The Bank of England began buying gilts in earnest in 2010 and its market share has only risen by about 9pp. Yet the bank's holdings increased 69% between Q1 2010 and Q1 2023, rising to £642 billion from £198 billion.
The quantitative easing that began after the 2008 financial crash was supposed to be followed by quantitative tightening. The gilt crisis of October 2022 -- when selling pressure led to evaporating market liquidity after the mini-budget -- apparently put the bank off and it isn't obvious that much action has been taken since, yet at some stage soon it can be expected to reduce its exposure via QT, adds BI.
Kevin Ryan added: “The UK Office of Budget Responsibility forecasts that in fiscal 2023-24 the government will need to borrow £123.9 billion, followed by £84.6 billion the year after and £76.8 billion in 2025-26. Insurers running DB pension schemes are unlikely to be buyers, given that most of these schemes are closed and running off, paying the members' pensions. Attracting new investors to the UK may present challenges that only high coupons are likely to solve.”
This analysis is in conjunction with a record surplus for PwC’s Low Reliance index, which shows that the UK’s 5,000-plus corporate DB pension schemes reached £390bn in February. This assumes that the UK’s pension schemes invest in low-risk, income-generating assets like bonds, meaning they are unlikely to call on the sponsor for further funding.
Meanwhile PwC’s Buyout Index - which tracks the position of the UK’s DB schemes against an estimated cost of insurance buyout - also continues to show that, on average, schemes have sufficient assets to ‘buy out’ their pension promises with insurance companies. This recorded a surplus of £250bn this month despite some recent tightening of pricing in the market.
In light of the surplus position, and the flexibility highlighted in DWP’s consultation, sponsors and trustees should start to re-evaluate the long-term strategy for their pension schemes.
John Dunn, head of pensions funding and transformation at PwC, said:With schemes increasingly reaching and maintaining surplus positions on a Low Reliance measure, the question for sponsors and trustees is how best to use and manage that surplus. The recent consultation discusses an option under which a scheme could release surplus assets above 105% of its Low Reliance liabilities. Our research indicates that this is currently equivalent to £340bn that could be used to utilise UK investment or make payments to members and the sponsoring employer.
“The consultation also explores the potential value in introducing a ‘super levy’ payable to the Pension Protection Fund (PPF) to provide protection of members’ full benefits on sponsor insolvency. So this combination of removing barriers around extracting “trapped” surplus for the benefit of the members and/or the sponsor, whilst at the same time enhancing safeguards for member benefits, could cause a significant shift in the pensions landscape and in the choices made on the best strategy for each scheme. DB pension schemes, once seen as a drag on business performance requiring significant financing, could now be viewed as a real asset on the balance sheet.”
Matt Cooper, head of alternative pension solutions at PwC, added: “The consultation will also consider a model for a public sector vehicle run by the PPF that will consolidate schemes that can not easily access the insurance buyout market - so likely smaller or less well funded schemes. If this comes in by 2026, as proposed, it would provide a new endgame destination for a significant number of DB pension schemes. While there will be operational changes that have to be overcome - for example, it won’t be an easy feat to move individual schemes onto a standard benefit structure - this could provide an alternative lower cost and secure solution for these schemes.
“The immediate question for smaller schemes targeting buyout is whether to change tack, or at least apply the brakes so that they can take stock of their position and strategy. We’re already seeing some schemes delaying insurance transactions while they reassess their options in the wake of the consultation - and with buyout pricing showing signs of hardening in response to changing market conditions and increased demand, others may choose to do the same. It’s not just smaller schemes that need to take action in light of the consultation, though - all sponsors and trustees should be re-evaluating the target strategy for their schemes in light of the proposed changes.”
The PwC Low Reliance Index and PwC Buyout Index figures are as follows:
Steven Cameron, Pensions Director at Aegon said: “The Advice Guidance Boundary Review offers a real opportunity for progress in closing the highly persistent advice gap. A triple whammy made up of difficult economic conditions, people living longer and individuals having to take on more personal financial responsibility means regulated advice has never been so valuable and must be encouraged to thrive. But millions of individuals are stuck between the ‘rock’ of holistic advice with a substantive price tag and the ‘hard place’ of generic information which doesn’t encourage engagement.
“We see the standout proposal as targeted support, which could have game changing potential. The ability to offer suggestions for ‘people like you’ could turn the current cliff edge between information and holistic advice into the continuum of support the Discussion Paper seeks. But for this to succeed, adviser firms must be allowed to offer targeted support, not just manufacturers as the Discussion Paper suggested.
“Regarding the other proposals, further clarity of the current advice / guidance boundary is unlikely to move the dial, although some FCA-approved template letters to aid clients with excess cash holdings or on retirement options might be beneficial.
“Similarly, we could see a modest increase in the use of simplified advice if the FCA worked with firms to identify examples of narrower customer needs which could be met commercially through this route.
“For targeted support to be truly game-changing, the FCA and Treasury need to be brave and bold. This middle ground support will never offer the optimal personalised solutions of holistic advice. But it could be a big improvement for the millions who currently get no – or no tailored - support whatsoever.”
Aegon has set out five fundamentals it sees as critical to the success of targeted support:
Focus on core consumer needs including ISAs, pensions and protection, and excluding complex or risky areas
Made available from adviser firms and benefit consultants – we strongly disagree with the suggestion of restricting it to manufacturers
Offered to help customers make the best use of existing products, as well as suggesting possible new purchases designed to deliver good outcomes
Offered proactively, rather than only when requested by consumers who very often don’t know what support they need, when
Accompanied by simple disclosures to explain the service and how it compares with advice and other forms of support
Steven Cameron continues: “We hope that the FCA and whoever is in Government later this year will continue to prioritise closing the advice gap. An industry which can truly support millions of savers and investors improve their personal finances will be good not just for those individuals but for the whole UK economy.”
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The research, which is carried out annually, assessed the extent to which private market asset managers are able to report on climate metrics across four asset classes: private debt, private equity, real estate and infrastructure. In 2023 asset managers reported on assets totalling £93.9bn, compared to £63.9bn in 2022. The most significant improvements were seen in the amount of data provided by private debt managers. Response rates increased to 43% from 21% in 2022 and emissions data (26%) was reported for the first time. However, reporting rates across other asset classes demonstrated no material change over the year. The response rate for infrastructure managers fell to 67% from 75% in 2022. The rate of reply from property managers fell to 47% from 60% in 2022. The lower response rate from managers reporting on property assets meant that there was less data provided on carbon emissions, with only two thirds (62%) of property funds providing this data.
Commenting on the need for Private Markets Managers to ensure they are continually improving their climate reporting, Simon Jones, Partner, Head of Responsible Investment, Hymans Robertson said: “Reporting on climate data remains at a relatively early stage across most private market asset classes. However, for asset owners who have set climate goals, there is a need to understand the progress that is being made. Better data helps not just the reporting needs of asset owners, but it also informs their strategic decision making. This is one of the reasons why we have advocated for the adoption of data quality objectives by asset owners within the TCFD frameworks.
“Our research shows that there have been some improvements in reporting, particularly within Private Debt strategies, but we’ve seen little progress across other asset classes. We recognise that change takes time and that continued engagement with asset managers is the way by which we and our clients can help improve disclosures. Although reporting should not be at all costs, we prefer managers to disclose the information they have available and the reasons why there are gaps, rather than simply say nothing.”
To support investors to get the information they need for decision-making, reporting and governance requirements, the report highlights five recommendations for asset owners:
Continue to ask for data: Asset owners can drive change by making consistent requests for information.
Engage with managers: It’s important for asset owners to assess their managers’ internal processes for data collection across private market assets. Where data is not being reported, asset owners should understand the actions being taken to begin reporting, with engagement being used to emphasise data requests.
Understand data verification processes: Managers should be asked to explain how reported data has been tested. This will help to ensure accuracy and can give confidence in the approach followed.
Be pragmatic: There may be some assets for which data collection is impractical or uneconomic. Understanding where asset managers are not pushing for data and why is vital.
Encourage transparency: It is more beneficial for managers to report on some metrics rather than not reporting at all because they have some gaps. Managers must be urged to assess both the relative significance of data gaps, and the actions that they are taking to ensure that climate risks are being managed effectively.
Over two fifths (42%) of consumers stated that they do not find it easy to interact with their provider, with one in four (25%) citing that the biggest reason for communication being difficult is their provider not having an app. The lack of an app was also rated as more important than the ability to ‘speak with someone.
This difficulty in communicating with providers could be leading to poor customer outcomes. The findings from Moneyhub show over a third (36%) of consumers aged 35-44 years said too little information is putting them off adding to their pension. And over 1 in 8 (13%) of consumers don’t even know who their provider is.
With the FCA’s Consumer Duty now in effect, demonstrating positive outcomes is more important than ever. However, when asked, only 19% (less than 1 in 5) of respondents felt that their provider had delivered on all four of the FCA’s Consumer Duty outcome areas.
One way for providers to do this is by using technology and solutions such as commercial pension dashboards and Open Finance. Alongside being able to find and view all their pension data.
Total percentage of consumers who think their provider has FAILED meeting the FCA’s Consumer Duty regulations to improve customer outcomes:
• “Communications to make effective financial decisions” – 25%
• “Good quality support and after-sales care” – 24%
• “Transparent pricing and demonstrating value for money” – 18%
• “Offering suitable products and services to meet your needs” – 16%
Mark Horwood-James, Managing Director at Moneyhub Personal Finance Technology said: “Consumers are saying loud and clear that pension and investment providers can be doing more to help them make better financial decisions. It is also striking how in demand technology is from customers. Apps and specifically the use of Open Banking and Open Finance technology can contribute to better financial wellness and encourage positive outcomes. The ability for consumers to see a holistic picture of their finances enables them to make decisions that can improve their long-term financial health. Pension and investment providers could have a huge impact in this area, creating brighter futures for their customers and their businesses.
“The UK Government’s new Smart Data sharing laws (DPDI) and Pensions Dashboard announcement – alongside the continued emergence of Open Finance is accelerating the race to deliver customer-centric solutions. And the next few years will rapidly reveal who leads, and who gets left behind.”
Margaret Snowdon, OBE said: “Consumers make financial decisions every day, whether buying a car or a TV and whether or not to use credit or even to get credit. Pensions are part of a wider universe in real lives. Providers have a big role to play in expanding consumer financial understanding, either by targeted and easy to digest information when action is needed, or better still, a continuous programme of bite sized information delivered in an eye-catching way, as early as possible. Nudges as part of a dashboard covering all of a consumer’s finances is the ideal.”
To read the full report, please visit here
Ensuring better adequacy in DC pensions and a bigger pool of investable capital – Most private sector pensions are DC but low contributions risk retirement shortfalls.
Making regulations work better for investment and savers – Regulation must make it as simple as possible to invest in illiquids where it is in the interest of savers.
Increasing investment opportunities – Developing an effective pipeline of assets with good risk reward profiles for pension schemes to invest in UK growth.
Continuing to focus on consolidation – Ensuring that consolidation takes place in the best interests of members.
Nigel Peaple, Director Policy & Advocacy, PLSA, said: "UK pensions already invest around £1 trillion in the UK economy, in particular through their ownership of Government and corporate bonds and listed equities. The PLSA and ABI have worked together to identify what more Government can do to attract further pension investment in the UK, provided the investment is in line with the interest of savers. This is a complex area, but we have picked out four areas for action: higher pension contributions, the right regulation, Government action to support investment opportunities and measures that enable the consolidation of pensions that is already underway. Taken together our organisations believe this is the right way to support growth in the UK and to look after the interests of pension scheme members."
Yvonne Braun.pngDr Yvonne Braun, ABI Director of Long-Term Savings Policy said: “Together, ABI and PLSA members safeguard £2.5 trillion of assets for the retirements of millions of workers in the UK. We strongly support the Government’s desire to ensure these assets work as hard as possible for savers, while also fuelling UK growth. But optimising asset allocation is not enough. We also need to ensure people save enough, regulation works, there is an effective pipeline of investment opportunities, and much greater consolidation. All this will drive UK growth, and we will continue to work with our partners at PLSA and with Government to advance this agenda.”
]]>Helen Ball, Chair of the PASA CDC Working Group, added: “We expect to see draft regulations for multi-employer CDC arrangements in 2024. These will hopefully shed more light on how the government intends to develop CDC schemes. It would be helpful to have cross-party consensus on this to ensure the industry can have the confidence to commit to moving this forward. Once the headline points have been fine-tuned we can focus on how these arrangements should be administered. PASA is keen to speak to other groups and organisations to assist with their work as those discussions progress.”
The new PASA paper ‘Initial observations on CDC developments’, can be found here.
]]>In total, 72 warnings were issued by listed companies with a DB pension sponsor in 2023, compared to the 68 issued in 2022.
Listed companies with a DB scheme issued 22 warnings in Q4 2023, an increase of 10% (2) on Q3 – making this the highest quarterly total since Q4 2021, when 22 warnings were also issued.
Across all UK-listed companies, 77 profit warnings were issued in Q4 2023, with more than a quarter (29%) of these warnings coming from companies with DB schemes. Companies with DB sponsors in the industrials sector issued the most warnings in Q4 and have issued the most throughout 2023 (29).
Over one-in-five (22%) of UK-listed companies with a DB pension scheme have issued a profit warning in the last 12 months.
Credit tightening remains key driver for profit warnings from companies with a DB pension scheme
Twenty-seven per cent (27%) of profit warnings issued by UK-listed companies with a DB sponsor in Q4 2023 cited pressures from credit tightening as a reason for the warning. Although these pressures have eased since Q3, when 35% of DB sponsors cited it as a reason, this is clearly higher than a year ago in Q4 2022 when 13% gave credit condition as a warning. Tighter conditions around securing finance continue to impact businesses.
Spending and contract delays also triggered an increasing number of profit warnings at the end of 2023 as cautious companies and consumers held back spending. Warnings citing delayed or cancelled contracts rose from 15% in Q3 to 23% in Q4, the largest increase of the quarter.
Karina Brookes, UK Pensions Covenant Advisory Leader and EY-Parthenon Partner, comments: “The percentage of profit warnings from UK listed companies in 2023 exceeded levels seen at the peak of the financial crisis, with one in five DB sponsors warning in the last 12 months.
“It is unsurprising to see the increase, given the high costs and tightening credit conditions that companies dealt with in 2023. DB Sponsors will be moving into 2024 with ongoing earnings challenges, alongside new pension regulations and guidance that also need to be addressed.
“In 2024, we see re-financing risk being a key area of concern, as interest rates remain relatively high and changing capital landscapes make it harder for some corporates to renew existing arrangements. There are still plenty of DB sponsors that haven’t yet dealt with the pain of re-financing in a higher interest rate world.
“This refinancing risk will play an increasingly important role as employer covenant has now been defined in legislation to ensure that both short term affordability and longer-term covenant horizon, are considered. Longer term financial resilience is a key factor when considering Scheme endgame strategy.”
Paul Kitson, UK Pensions Consulting Leader at EY, adds: “While the high interest rate environment is increasing the strain on companies' performance, it has also resulted in DB pension schemes being in relatively strong health, with many approaching or exceeding funding targets. There are significant surpluses emerging, giving rise to the question of whether there is true equitability between capital held in the pension scheme versus support for the corporate.
“Following the pension reform consultations announced in the Autumn Statement, Trustees and sponsors will be closely monitoring the upcoming Spring Budget for details around how the industry will be expected to drive forward the change.”
1. Use your pension annual allowance – “Your pension annual allowance is the total amount your employer and any third party can pay into all your pension plans in a tax year before a tax charge could apply. Having increased from £40,000 in the 2023 Spring Budget, the limit is currently £60,000 or 100% of your earnings in a tax year, whichever is lower. But it could be less if you’re a higher or non-earner or if you’ve already started taking money from your pension savings.
“If you can afford to do so, it makes sense to consider paying more into your pension plan before then to make the most of this year’s allowance and offset your contribution against tax payable.
“If you’ve already used all your annual allowance for the 2023/24 tax year, don’t worry – you might still have options, as you can usually carry forward any unused allowances from the last three tax years.
2. Top up your pension payments with tax relief – “Tax relief makes your pension plan one of the most tax-efficient ways to save for your retirement. This means your payments get topped up by the government, making it cheaper to save more into your plan.
“Not all pension schemes provide tax relief in the same way, although most UK taxpayers get tax relief on their own pension payments based on the rate of income tax they pay. This means most UK taxpayers will get a 20% top-up from the government on their pension payments, so it’ll only cost you £80 to pay £100 into your pension. The benefits are usually even more for higher or additional-rate taxpayers - but you’ll need to claim anything above 20% back from the government depending on how your payments are being made.
“Some workplace pension schemes offer tax benefits in a different way (salary sacrifice or salary exchange schemes, for example). So do check with your employer how this works for you if you’re not sure.
3. Take advantage of your workplace pension plan – “Workplace pension plans are a great way to save more for your future because your employer normally must pay in too. At least 8% of your qualifying earnings will be paid in, and a minimum of 3% of that will come from your employer.
“Some employers will even match the percentage you’re paying into your plan up to a certain amount. So, it’s worth checking to see if upping your own payments could mean your employer will pay in more too.
4. Consider bonus sacrifice – “If you get a work bonus, you might have the option to put some or all of it into your pension. Doing this could save on tax and National Insurance deductions, meaning you get to keep more of your bonus in the long run. And it could be a good way to make the most of your current pension annual allowance before 5 April.
5. Get your tax-free personal allowance – “Most people get a tax-free personal allowance, which is £12,570 for the 2023/24 tax year. When your taxable income reaches £100,000, your personal allowance is cut by £1 for every £2 of your income. Currently, you lose the personal allowance once your income reaches over £125,000.
“You may be able to recover any loss to your personal allowance by reducing your income through paying into your pension plan. That way, your pension contributions will be benefiting from tax relief at a marginal rate of 60%, which is quite a significant pension perk.
6. Get your child benefit back by paying more into your pension plan – “Worth a little over £2,600 a year to a three-child family, child benefit is reduced by the High-Income Child Benefit Charge when one parent’s income reaches £50,000. At £60,000, the tax charge cancels out the benefit entirely. But there is a way you could get some or all of it back if your earnings are in this range.
“Paying into your pension reduces what counts as your income, and it could allow you to keep your child benefit and boost your pension savings at the same time.
“You can choose not to take child benefit payments if your earnings are over £60,000, but you should still consider filling in the child benefit claim form. This helps you get National Insurance credits, which go towards your State Pension later in life. There’s speculation the salary at which you start to pay the High-Income Child Benefit Charge might be raised at the Spring Budget on 6th March.
“You don’t have to make all of these changes, but even taking just one or two actions can give your pensions a helpful boost and help you stay on track to meet your retirement expectations.”
In collaboration with its Consumer Advisory Group1, the ABI will commission research into the feasibility and impact of various social policies focused on helping low-income households manage their insurance costs.
Alongside this, it has published a roadmap outlining 10 concrete steps aimed at tackling insurance costs for all drivers. These steps are a combination of actions that industry, government or regulators could initiate or improve. These include making more data available for consumers to understand which vehicles are more expensive to insure, Graduated Drivers Licensing to improve road safety, and the cutting of insurance premium tax (full list below).
These actions are announced in the lead up to the publication of the ABI’s wider financial inclusion strategy. This aims to help consumers better understand and access insurance, protection and long-term savings products, which are key to households’ financial resilience.
Members of the ABI are also committing to better explain how insurance premiums are calculated and the steps customers can take to reduce costs. This includes more detailed explanations at renewal, but also throughout the purchasing process. The ABI has also expanded its online guidance for all insurers and consumers to use.
While motor insurance is competitively priced the industry has set a clear focus to combat recent price spikes.
Price rises have been driven by claims cost inflation with EY estimating that in 2022 for every £1 paid in premiums, insurers incurred £1.11 in claims and expenses. They now estimate that this figure rose to £1.14 in 2023. The impact of price rises on consumers has been exacerbated by a fixed rate of insurance premium tax (12%) – introduced by the government in 1994 (at 2.5%), it has risen steeply since. IPT currently adds £67 to the average motor policy.
Premium Finance, which allows consumers to pay monthly instead of needing to pay in one go, is another focus for the ABI as part of its package of steps on motor insurance affordability. The ABI is in discussions with the FCA and members on possible industry action on premium finance and is also considering how it can work with finance houses and brokers that are outside the ABI umbrella and therefore not in scope of any industry measures.
Mervyn Skeet, Director of General Insurance Policy said: “We know that insurance costs are putting strain on household finances, so we’ve been working hard to find solutions. Some of these actions we can do quickly, others will require time or assistance from the regulator or UK governments.
“Regardless, we will continue to do what we can under our new strategy to help consumers access the products that are integral to financial wellbeing and play a key role in the nation’s financial resilience.”
Beyond the affordability of motor insurance, the ABI’s financial inclusion strategy will cover the impact of ill health on financial security and ongoing work to ensure consumers get the right advice that they need to plan their financial lives.
The strategy formalises action already taken by the ABI to bolster financial inclusion. The ABI previously partnered with Plain Numbers and then Fairer Finance to support firms in developing clearer communications. It also ran an advertising campaign - Dad comes home - last summer aimed at explaining the role and workings of insurance and created a web hub of guidance and FAQs around motor cover. And it promotes engagement with pensions through its #PensionAttention campaign run in partnership with the Pensions and Lifetime Savings Association (PLSA).
The ABI’s 10-Point Roadmap to tackling insurance costs
1. Help consumers make informed decisions. The industry will do more on transparency around which vehicles are more costly to insure. For example, increasing visibility of the Group Rating system (which rates vehicles on risk) should help consumers make more informed choices.
2.Combat vehicle theft. The ABI is exploring a partnership with the police to aid in the recovery of stolen vehicles from ports. It’s also working with vehicle manufacturers, the Mayor of London’s office, and the National Police Chiefs' Council to find more ways to prevent vehicle thefts.
3.Tackle fraud and uninsured driving. Continuing to crack down on fraud and uninsured driving will reduce the costs borne by law-abiding drivers for their insurance.
4.Improve road safety and road infrastructure. Through campaigns, modern safety measures and road improvement.
5.Support new and novice drivers. Young and inexperienced drivers pose a greater risk to themselves and other road users. The phased approach of graduated driving licenses has been proven to improve safety.
6.Reduce the impact of the Personal Injury Discount Rate (PIDR). The rate for large, severe injury compensation needs a rethink, as these costs filter back to premiums.
7.Continue whiplash reform. Reform principles enacted for whiplash - which set reasonable compensation amounts and controlled the cost of injury claims - should be applied to similar injuries (bruised knees, sprained ankles etc).
8.Advocate for safety-focused vehicle technology. Making assisted safety features mandatory in new cars would contribute to improved road safety. Beyond assisted systems, automated vehicles could revolutionise road safety but only if legislation ensures user and system safety.
9.Lower Insurance Premium Tax (IPT). IPT adds £67 to the average policy. It’s getting worse as prices rise. It punishes responsible choices.
10.Support the repair sector. Work with government, vehicle manufacturers and independent mechanics to create a robust repair sector that can fix a broader array of vehicles. This will increase competition and choice for customers.
]]>The FCA’s £600k campaign, which will run across radio, digital audio and social media, will prompt consumers to review their savings by highlighting how quickly they can find a better rate. Consumers will also be able to use a dedicated page on the FCA website to calculate how much they could earn in higher paying savings accounts.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said: “We know that people can be put off switching for a variety of reasons, but they could be making their money work harder.
"There are some great rates out there and it could take as little as 5 minutes to find a better deal.”
The FCA has already taken action to improve the savings market and has seen signs of a more competitive market emerging, with customers moving their money to take advantage of higher rates.
From July 2023 to December 2023, the amount held in bank and building society non-interest-bearing accounts reduced by £13bn and in easy access accounts, which typically have lower interest rates, by £9bn. Deposits held in fixed-term and notice accounts, which often come with higher rates of interest, increased by £24bn.
However, more consumers could move to take advantage of rates available – including a number of accounts offering rates above 5%.
]]>The two distinct proposals are:
Proposal 1: more flexibility for returning surpluses to members and sponsoring employers (including LCP’s own policy proposal)
Proposal 2: the PPF becoming a public sector consolidator from 2026
Note that we also expect a Labour government (if elected) to be keen on pursuing these reforms (presumably with their own variants on the detail) given the public statements the Labour party have made about pension policy in recent months.
We will be responding to the consultation which runs until 19 April, and here are our initial thoughts in the meantime.
Proposal 1: More flexibility on using surpluses
With DB pension schemes never having been as well funded as they are now, we’ve been pushing for change in this area for nearly two years now and we’re delighted that our policy idea is being formally consulted on.
The government is consulting on a series of proposals that are designed to give DB trustees greater confidence to more readily distribute surpluses to members and/or sponsoring employers. The hope is that the proposals will also lead to more schemes investing more in productive finance, and for longer – which might be expected to further enhance the benefits to all parties. Of course there will need to be appropriate protection for members’ pensions if any new flexibilities are introduced.
One of the options for such protection, and the one that LCP has been championing, is that the PPF could guarantee 100% of benefits for any schemes looking to access these flexibilities, in return for payment of a higher levy. The consultation refers to this as a “100% PPF underpin”.
We believe that, if a meaningful change is to be made to the status quo, the 100% PPF underpin is critical to ensure that: a broad sweep of trustees are happy to distribute surplus; members’ pensions are protected; there is indeed a material impact on investment in productive finance (including supporting green and low-carbon transition); and there is protection for the gilt market. These are objectives that government and many in the industry strongly believe in. This is why:
Without the 100% PPF underpin, you can arguably give trustees as much surplus distribution power and TPR guidance as you like, but as the consultation says: “Any extraction of surplus will reduce security for members”. And the stark reality is that there are no proposals being made by government that change trustee overriding fiduciary duties in any way. So, even if they have a new power, why should trustees use their power to reduce security for members, including paying discretionary pension increases to pensioners? The short answer is: most will (rightly) be very nervous of doing so (unless they have strong protection in some other form). This is why we have always believed that introducing a powerful new protection for members through the form of a 100% PPF underpin is vital to materially change the status quo.
And it’s not just about existing surpluses. It is also about investment strategies for future growth. Without the 100% PPF underpin (or broadly equivalent protection negotiated at a scheme level), from our experience trustees will not have the confidence to invest for moderate long-term growth even though this can be expected to benefit all stakeholders. The pull of fiduciary duties towards insurance solutions is just too strong unless downside risk to members’ benefits is strongly protected in other ways. At a UK policy level, from the options being consulted on, we believe that providing a 100% PPF underpin is the only way to achieve material investment in productive finance from the £1.4tr of DB assets. And it’s also the only way to protect the gilt market from big sell-offs as larger schemes otherwise move to insurers.
One of the points raised in the consultation is the potential high level of PPF levy needed to support this regime – the PPF have suggested at least 0.6% pa of scheme assets. We think this figure is much too prudent. Imagine if just twenty of the strongest schemes, with an average of £5bn of assets each, entered this new regime (we hope it would be many more). This would mean the PPF would collect £0.6bn of levy in year one. By year four the PPF would have c£2.5bn in a ringfenced pot for an emergency! The covenant and funding strength of these schemes would necessarily be strong (in fact, they would be funded at the level of prudence that PPF is willing to price consolidation at!). So even if the occasional sponsor went bust, it is unlikely that there would be much deficit (if any) for the PPF to make up at all. It seems to us that this level of levy will prove to be too prudent over time, and this will therefore lead to yet further (material) surpluses emerging at the PPF – arguably not the best use of PPF levy payers’ money.
Proposal 2: PPF as a consolidator
We are supportive of exploring the potential for the PPF to become a consolidator of DB schemes with solvent employers (in addition to its current function relating to insolvent employers), but we’re cautious about the detail being proposed in this consultation.
Key questions remain unanswered. Eligibility could potentially be available for all schemes that are not 100% funded on a buyout basis and for any other schemes that can’t easily obtain quotations from insurers, and it is not clear how this will be assessed or policed. Entry prices for this new PPF consolidator could be materially attractive relative to the buyout market. The security of reserves can be expected to be less secure for members compared with those of an insurer. And the proposal to standardise member benefits would add complexity to the process of transacting with the PPF. This is because all the benefit specification, data correction and GMP equalisation projects will have to be completed up-front, followed by actuarial equivalence calculations to determine the level of benefits in the standardised format. It should also be noted that there would necessarily be winners and losers among individual scheme members arising from benefit standardisation (which trustees have historically had concerns about in other contexts).
In addition, trustees may have concerns that securing their members’ benefits with the PPF will not come with the same protections as purchasing a PRA-regulated, FSCS-underpinned insurance product.
But, if the proposal goes ahead as outlined, it could be very attractive for some employers. Compared with insurance, and potentially even to emerging superfund models, it could be a lower cost way to pass on pension risk and add value for shareholders.
We also suspect that other commercial consolidators (insurers and superfunds) will have significant concerns about the proposals, given that they appear to give the PPF a strong competitive advantage in the areas of: less prudent reserving and therefore pricing; the ability to standardise member benefits; and critically an easy way for schemes to swap their pension deficit for a fixed loan repayment schedule.
Finally, we also note with interest an apparent inconsistency. Under Proposal 1 above, the government is clear that the existing PPF must not be used to support the new option of a 100% PPF underpin (“funds from these functions should remain separate”). (Such support would materially reduce the initial level of levy needed because the 100% PPF underpin fund could borrow against the current PPF £10bn surplus if needed, and repay over time.) However, under Proposal 2, the government is open to using the current PPF to underwrite the risks for the PPF becoming a consolidator.
In summary, this second proposal needs further thought (and adjustment) if it is going to meet its objectives including protecting member benefits and not undermining commercial consolidators.
Concluding thoughts
At LCP we are delighted that the government has published this important consultation and look forward to continuing the debate with policymakers and within the pension industry in the coming weeks and months. We continue to call for change to the DB pension system to ensure DB pensions work for all concerned: members, trustees, sponsors, government and gilt markets, and the UK economy, including supporting the enormous low-carbon transition challenge we collectively face.
There is of course lots of detail to work through and it is important that any changes do not introduce new risks and unintended consequences. Our thoughts on how our own policy idea meets all these objectives, including some of the challenges that would need to be addressed, are set out in detail in our FAQs that you can find here.
]]>But a similar situation also affects individuals. Poorer households with less savings, more debt, and less housing security are analogous to sub-IG bonds. Do rising rates affect everyone either equally or proportionately?
Probably not
According to ONS data, net rent as a proportion of income is around 24% on average for renters, while net mortgage costs are much lower at 16%. In the lower deciles, these rise to 30% and 20%(1).
Moreover, these figures use net rent rather than gross rent, so they account for housing benefit, rebates, and so on; and they do not account for regional variations, particularly the costs of living in London.
At first blush, higher interest rates would seem to affect mortgage holders more, as they expect significant price rises. But there are several mitigants (again not for everyone, only on aggregate).
In particular:
• Fixed term mortgages mean homeowners will often have up to five years to prepare for the increase in costs, and will generally have a lower outstanding loan by that point
• Many will also be able to extend a typical 25-year term up to 35 years
• Many wealthier people will also have savings, which will now earn higher interest
For renters, while the link is less direct, landlords have generally passed through a large portion of the cost, with prices rising in the double digits(2). With tenancies typically on one-year terms, this means the average tenant has only around six months’ notice. So while the headline price rises are much higher for mortgages, there’s likely to be more scope to adapt to them
The median salary in London is around £44,000 pa(3), while the average cost of a room to rent is almost £1,000 per month(4), with higher figures for renting whole flats.
Using an average repayment mortgage of 4x salary, we can see any broadly median Londoner lucky enough to be a homeowner is likely to also be more resilient to the rise in rates. The table below works through this example.
These are not the only factors by any stretch. For example, younger people will tend to have less in savings, and may also have to pay student loans (another c£100 per month). What this illustrates though is that the burden of higher rates will not be felt evenly, and may disproportionately affect those least able to bear it.
Laura McLaren, Head of DB Actuarial Consulting, Hymans Robertson, said: “We’re pleased the Government has supported our call to link conditions for surplus extraction to scheme funding level and security of accrued rights. We also welcome the proposal that extracting surplus will not be conditional on use of funds for particular purposes. Surplus extraction will be more effective where it is part of a larger reframing of the statutory objective for DB, to bring about a DB renaissance and secure future pension provision.”
Isio Director and Head of Research & Development, Iain McLellan, comments: ‘’The last 20 years of defined benefit pensions regulation has prioritised the security of benefits that have already been built up over everything else, including future accrual and discretionary benefits. This has led to a narrow focus on de-risking and ultimately fully insuring accrued benefits for some £1.4 trillion of assets. This position is exacerbated by the complexities of the exact wording on schemes rules as to whether or not any surplus that may exist can be returned to the sponsor.
The Government’s consultation, launched today, looking at options for using surpluses could help unlock the huge value potential stored in UK DB pension schemes. This includes looking at introducing a statutory override to allow scheme rules to be changed to enable surpluses to be distributed, changing the tax rules to allow one-off payments to members and looking at safeguards to ensure excessive surplus distributions are not paid. We believe these are the right areas to focus on if we are going to enable DB schemes to deliver more value for members and the sponsors that have supported them over many decades.
The consultation also includes more detailed consideration of a public sector consolidator. We believe the industry has already shown a wide variety of innovation in this space and this may be a solution in search of a problem.”
Simon Kew, Head of Market Engagement at leading independent consultancy Broadstone, commented: “The DWP consultation on DB schemes seeks to deliver on many of the government’s stated aims for the sector, primarily freeing up capital to invest more productively.
“Given the drastic improvements in funding levels, it makes sense to enable greater scheme flexibility for surpluses and could deliver significant economic benefits. However, any extraction of surplus from a scheme will have a knock-on impact for member security – we are pleased to see the DWP acknowledge this but protecting member benefits must be the utmost priority as these reforms progress.
“The outlined plans for establishing a public sector consolidator by 2026 could open up opportunities for some schemes – particularly at the smaller end of the market – albeit we are expecting new entrants in the market this year to provide further supply for unprecedented de-risking demand.”
Chair of the Association of Consulting Actuaries (ACA), Steven Taylor: “The ACA will be consulting members’ views widely on today’s important consultation. On ‘surplus extraction’, we believe the right questions are being asked, for example around possible overrides to scheme rules where they are currently a barrier to efficient outcomes. However, under any approach, we will want to see that there is the flexibility available to sponsors and trustees to make decisions that best suit their scheme specific situations and protect savers. A key consideration must be that members’ benefits remain suitably protected whilst clarifying for all schemes the pathways that are available to allow for surplus extraction where this is appropriate.
“On a future public sector consolidator, there is a key need to ensure that the outcome does not risk undermining already well-functioning commercial market solutions that might offer better outcomes for scheme members and sponsors. The proposal in offering opportunities to a wide range of schemes appears far broader than initially expected and will require particularly close examination. For example there is a need to ensure measures do not introduce, to members’ detriment, a “get out clause” to avoid implementing the appropriate long term strategies and journey plans that are now expected in well run schemes that are well able to achieve buyout over a reasonable timeframe. Proposals that result in simplifying benefits, whilst well intentioned, would also necessarily create winners and losers among scheme members and these trade-offs will need to be scrutinised. ” added ACA Chair, Steven Taylor.
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The latest release of Isio’s Low-Risk Funding Index reveals the aggregate funding level for the 87 funds participating in the Local Government Pension Scheme (LGPS) in England and Wales has improved from 101% at 31 December 2023 to 104% at 31 January 2024, representing an improvement of almost £13bn.
The improvement is due to increases to UK government bond yields, which reduces the value of liabilities, and small increases to asset values. The improvement is partially offset by a slight increase in inflation.
Of the 87 participating funds, 54 have funding levels of 100% or higher, with levels ranging from 66% to 154% funded.
The results show that funding levels for LGPS funds and their employers remain consistently much higher than 31 March 2022 levels, which were used to set funding and investment strategies that may no longer be appropriate under current conditions. Back then, funding was 67% and none of the 87 funds had a funding level of 100% or higher on a low-risk basis.
Isio also conducted an analysis of strategic asset allocations within funds’ published 2023 annual accounts, where available, and estimates that around £10bn of LGPS assets were transitioned from growth to non-growth assets over the year to March 2023. This suggests that funds are starting to take small steps to lock in improved funding positions and reduce the risks associated with growth assets. However, closer inspection shows that some funds have actually increased their risk over this period.
Steve Simkins, partner and public services leader at Isio, says: “Our Index shows that funding levels for LGPS funds and their participating employers remain consistently strong, particularly as we approach the two year mark since the last actuarial valuations were carried out.
“It is positive to see that the LGPS as a whole has started to respond to these improved funding positions, by reducing the total amount of assets invested in higher risk growth assets. However, the estimated £10bn shift in assets is only a small proportion of the whole. We expect to see this pattern continue from March 2023, and potentially accelerate, while market conditions remain extremely favourable.
“While the modest de-risking at fund level is welcome, it is not sufficient for some employers in surplus who might want to move all of their assets into bonds. We would like to see more funds provide their participating employers with the opportunity to better manage their own assets, through the implementation of employer-specific investment strategies or other alternatives.
We continue to encourage employers, particularly Local Authorities, to engage with their respective LGPS fund to consider their challenges and individual circumstances to make a case for short-term reductions to contributions, enabling delivery of essential public services to local communities and retention of local jobs.”
Two-thirds of those surveyed felt that they did not have the knowledge required to choose their pension provider despite nearly 60% showing some interest in being able to choose their own provider. This is relevant to the government’s recent lifetime provider (“pot for life”) proposals and shows the vital importance of improving financial and pension education throughout society before implementing such a radical change.
Savers also value retirement benefits in the form of an income stream rather than a cash sum. 58% planned to take retirement benefits totally or mainly as an income with just 25% interested in taking their pension savings totally or mainly as cash. 81% of respondents valued a retirement income that would be guaranteed for life, with two-thirds attracted to an income that kept pace with price inflation.
Tim Box added: “These additional statistics show that it is vital that the Government ensures that savers are given appropriate support and education to save for retirement in an era when it is likely that State pension benefits will only become available in an individual’s eighth decade.”
Peter Hodgins, Clyde & Co Partner in Dubai, said: “As the global economy continues to feel the impacts of high inflation, funding for transactions for many insurance businesses has been challenging to find. Meanwhile, with over half of the global population expected to be called to the polls in 2024, as well as a number of escalating regional conflicts, heightened geopolitical risks have become a persistent concern. In the face of this market uncertainty, deal-makers have remained in wait-and-see mode, with a negative impact on overall transaction volume in 2023.”
The Americas remained the most active region for M&A – but the distance to second-placed Europe narrowed significantly in 2023, down to just 55 deals from 106 in 2022. The downward trend exhibited by Europe and the Americas in the first half of the year was reversed in the second half, as the number of deals increased. The Americas saw a modest increase of 5.1%, with Europe leading the revival with a 22.9% increase compared to the first half of the year. The opposite was true for the Asia Pacific and Middle East and Africa regions, that saw 20.7% and 33.3% decreases in activity in H2 2023.
Europe to lead insurance M&A rebound in 2024
Europe’s uptick in deal activity in the second half of 2023, combined with the expectation that central banks will cut interest rates later this year, is raising hopes that 2024 will see a return to the higher levels of M&A enjoyed in the years preceding 2022.
International carriers and MGAs which previously withdrew primary capacity from other regions are now looking to deploy their capital elsewhere.
Eva-Maria Barbosa, Clyde & Co Partner in Munich, said: “M&A activity is coming back to the European insurance market, as leading global carriers look to acquire specific business lines – particularly those high volume, but relatively low premium contracts that can be sold as embedded or affinity products. Companies finding it challenging to achieve healthy margins on commercial business are looking for reliable cash flow in the personal lines space.”
Opportunity in geopolitical risk
2023 will be a year dominated by geopolitical risks, with evolving regional conflicts in Europe and the Middle East and Africa, along with elections in the US, UK and further afield. This may cause insurance businesses either to rein in expansion plans or pull back from lines of business or territories impacted by conflict.
However, businesses will need support from insurers as they navigate this risk backdrop and its impacts on their supply chains and foreign assets located in and around conflict zones.
Peter Hodgins, Clyde & Co Partner in Dubai, said: “There is an important role to be played by insurers as businesses get to grips with evolving geopolitical risks. The Middle East has already seen significant events such as the Israel-Hamas conflict and tensions around the Red Sea driving up demand for cover of political risks and products like trade credit insurance as clients’ exposure increases.”
Digital assets attracting attention
Insurance businesses continue to pursue alternatives to growth beyond a merger or acquisition. The revolution in digital assets and the use of cryptocurrencies presents a significant opportunity for insurers, with a range of coverages already being written to cover the risks of trading in digital assets.
Liam Hennessy, Clyde & Co Partner, Brisbane said: “Digital assets are on a very fast trajectory globally and we're seeing great demand for them, and the underlying technology On the commercial side it presents a massive opportunity and some major Lloyd's insurers are starting to underwrite D&O, corporate crime, and professional indemnity risks on behalf of asset managers who are advising clients on diversifying their portfolios with exposure to this asset class. Even more exciting, we are seeing insurers adopt blockchain technology in their own businesses for example in loyalty programs, information storage and parametric smart contracts for simple claims.”
Outlook of cautious optimism
We believe deal activity has reached the bottom of this current cycle and will start to increase through 2024, with Europe leading the way. In the US, larger broking players are looking to make acquisitions in both the MGA and broking spaces, while cross-border transactions by intermediaries are also on the move. Elsewhere, international interest in the GCC region is returning, with international brokers looking to acquire businesses in the UAE and Saudi Arabia.
Peter Hodgins, Clyde & Co Partner in Dubai, said: “With financial markets potentially looking more volatile this year, growth in carriers’ investment portfolios is by no means certain. Continuing high interest rates will also impact the cost of debt funding for acquisitions and contribute to increased claims costs and higher operational costs. However, in the face of macroeconomic and geopolitical uncertainty insurers are increasingly viewing the current trading environment as ‘the new normal’ and we expect them to become less cautious with regards to M&A over the coming 12 months.”
These ongoing price hikes mean that over a third (35%) of drivers surveyed will choose to pay for their car insurance in monthly instalments when their premiums are up for renewal, to make their payments more manageable. This option is offered by most insurance providers but can add as much as 10% in interest to the overall cost of the policy, making it the more expensive option in real terms.
Drivers aged 35-44 are most likely to opt to pay for their car insurance on a monthly basis, with over half (51%) saying they’ll choose this payment option when the time comes to renew their policy.
Unsurprisingly, young drivers between 18 and 24 are also likely to choose to pay for car insurance in monthly instalments when it comes to their next renewal, with over 40% suggesting they will use this option to spread the cost and make the payments more manageable.
When asked about the recent price rises, just two in 10 (20%) of those surveyed said they would be able to comfortably afford any future increases in the cost of their car insurance policy. Nearly two-thirds (60%) stated they would likely struggle to afford their premiums if car insurance costs continued to rise.
The data also revealed that one in 10 UK drivers would consider getting rid of their vehicle altogether after seeing their car insurance premiums become far too expensive to afford.
Commenting on the issue, Liz Hunter, Commercial Director at Money Expert said, “Previously, young drivers have had to endure high costs of car insurance, due to their increased risk and lack of experience on the road. However, the data from our survey has highlighted that drivers of all ages are being stung on costs when it comes to renewing their annual policy.
The recent surge in car insurance costs can be attributed to several factors, including inflation, vehicle theft and a rise in insurance fraud. It won’t come as a shock to see that motorists are considering all options to afford their annual car insurance policy in order to keep them on the road.
As prices continue to rise, they start to become unaffordable for many to pay off in one lump sum, effectively forcing policyholders to pay for their car insurance in monthly instalments.
Whilst this may seem like a more manageable way to cover the cost for their premiums, motorists will pay more for their car insurance over the course of the year. Opting for monthly instalments can add as much as 10% onto the overall cost of a driver's annual cover, due to the added interest that many insurance providers include.
Further rises in car insurance risks pricing some drivers off the road completely, which could have an impact on employment opportunities, access to essential services and mobility in areas not served regularly by public transport.”
Liz Hunter gives her expert advice for drivers who are struggling with increased car insurance costs:
“There are a number of options that could help drivers reduce the costs of their car insurance:
If paying monthly, use a 0% credit card – Due to interest and service fees, you’ll often pay more by opting into monthly instalments via your insurer. If you’re unable to pay upfront, a better option may be to sign up for a 0% credit card and make smaller monthly payments until it’s paid off. Just be sure to clear your balance in full before the 0% period ends.
Renew in good time – Insurers will ask for a start date for your insurance when you’re conducting your search. If you need cover urgently within the next few days, you may be quoted a higher premium than if you had looked earlier. If you can, try to search and buy your insurance policy two to three weeks before you need it.
Shop around & compare policies – Rather than instantly accepting your renewal price, always use a price comparison site to compare rates from multiple providers to find the best deal. Not only will it save you time but it can help save up to £504 according to our latest calculation.
Add a named driver – A named driver is an additional person that you add to your car insurance policy, that will then have permission to drive the insured vehicle. Adding a more experienced driver to your policy (such as a parent) can reduce the cost of your premium significantly, as it may reduce the overall risk in the eyes of your insurer.
Check for unnecessary extras – Insurers are understandably keen for you to buy as many add-ons to their policies as possible. These might include key cover, legal cover and windscreen cover. The question to ask yourself is, do you actually need these additional levels of cover? Consider opting out of any you don’t realistically need.
Let insurers know if you work from home – If you work from home and never travel to a place of work, let your insurer know that you don’t use your car for commuting. This could significantly reduce your premium due to your car being off the road during peak times.
Maintain a clean driving record – Safer driving habits can lead to lower premiums long-term. The more points you have, the higher your premiums will be. In addition, a no claims bonus is accrued and added for each year where you don’t make a claim on your car insurance. This proves to insurers that you’re less likely to make a claim and can help to reduce your premiums drastically.
Choice of car - Something to remember is that the type, size and age of the car will have a bearing on the cost of your policy. As a general rule, cars with smaller engines and more security features will cost less to insure. So it’s worth checking the potential cost of insurance before purchasing a new or second-hand car to try and save money.
The review highlights examples of where actuaries are using or developing new ways to use existing and emerging data science techniques. The insight and case studies provided by IFoA members and their organisations show that the range of applications for data science and AI is widening at pace. While this opens up opportunities for actuaries in both traditional actuarial fields and new domains, ever-growing sources of data and increasing capacity of AI and data science tools changes existing risks and introduces new ones.
Alan Marshall, report author and IFoA Review Actuary, said: “It is exciting to see such high levels of innovation in this rapidly evolving field. Actuaries are using data science and AI to provide solutions to a range of problems and we want to support and encourage this work in a way that serves the wider good of society and seeks fair outcomes for all. We hope the findings in this thematic review will help actuaries to remain competitive in this field. I would like to thank all those IFoA members and organisations who took part in this review.”
The report also points to the extensive regulatory activity around the globe relating to the use of data science and AI. While different parts of the world are at different stages in terms of oversight, the report advises that in 2024, some jurisdictions are likely to evolve from principle-based guidance to more formal regulation.
Neil Buckley, IFoA Regulatory Board Chair, said: “Given the significant ongoing regulatory activity in many countries, there is a balance to be struck with any further IFoA specific actions, especially as the environment in which actuaries are working in data science and AI will undoubtedly continue to evolve. We support a review of our current ethical and professional guidance for data science, and the continued development of professional skills material in this area. We will also continue to engage with IFoA members and volunteers taking an active interest in AI and data science and encourage collaboration with global actuarial associations and other agencies to help drive responsible and ethical use of emerging technologies in the public interest.”
This report on ‘Actuaries using Data Science and Artificial Intelligence techniques’ is part of the Actuarial Monitoring Scheme (AMS). It continues the regulatory work of the IFoA in independently reviewing areas of work in which actuaries have significant involvement and influence.
SPP believes that further clarifying the boundary could be helpful for some, including pension trustees, and that a new targeted support regime, which sits between guidance and regulated activity, could create an opportunity for many firms to be able to better support consumers if properly considered and carefully implemented. We also support simplified advice in principle, but more information is needed to ensure that it offers consumers value for money.
In short, the review is certainly a step in the right direction.”
Jen Norris, Director in Isio’s Reward and Benefits division, said: Make immediate changes to the Income Tax exemption of £500 for advice. There is confusion on both what it can and can’t cover and the associated tax implications. There are various ways that this could be addressed but we’d suggest making changes. Principally, we would like to see the removal of the ‘pensions only’ nature of this as our experience tells us that individuals want to talk more holistically about their finances, and can often only consider increasing pension contributions once they’ve understood and addressed debt and affordability. The current restrictions are in conflict with this and also worry employers because of the tax and benefit-in-kind implications.
Actively encourage effective, tailored financial coaching to be offered via both employers and providers. If done correctly (holistic and specific to the individuals circumstances and employment benefits package), this provides clarity and confidence to the individual, often avoids the need for full advice, and is cost effective for the masses. We know from our recent survey (in conjunction with YouGov) and our experience coaching individuals, that what people want from their benefits and support differs wildly depending on age, gender, ethnicity and socio-economic backgrounds, and they will only engage when the benefits and support offered is relevant to them.
Mark Campbell, Head of Wealth Proposition Development in Isio’s Wealth Advisory division, added the following: ‘’Financial advice is complex, but the route to financial advice is also varied and potentially difficult to navigate. We propose that advisory firms should be expected to provide both guidance and advice and be able to assess and justify the level of support needed, while managing the conflict of interest that exists within the advice v guidance cost and profitability model.
The industry requires clarity around the boundaries of advice and guidance and requires a consistent, cost effective system of oversight across both that is reflective of the risk to individuals. This will reduce the cost burden to advisory firms and ultimately individuals, create confidence in the industry and ensure the industry flourishes by appropriately addressing the needs of those it serves. We believe that the ultimate goal should be that each individual is able to get the help they actually need at a fair price.’’
Isio will be responding to the Review in due course.”
The Office for National Statistics (ONS) have released details of a new methodology for estimating excess mortality for the UK and its constituent countries. The new approach will be adopted by ONS, National Records of Scotland (NRS) and Northern Ireland Statistics and Research Agency (NISRA) for reporting from this week onwards.
I was delighted to be asked to participate in the development and launch of the new methodology, and it has been valuable to work closely with ONS and other government statisticians, and another independent expert from the Continuous Mortality Investigation (CMI).
Chart – Current and new methods produce similar estimates of excess deaths during the peak of the pandemic but the new method shows no excess in the second half of 2023
In developing the new methodology the technical working group sought to satisfy the following principles:
Modelling which is transparent and whose principles can be understood by users
A method that can be used and adapted in the future, not just a way of measuring the impact of the pandemic
Unbiased over the long term, so excess deaths in normal times should be equally likely to be positive or negative
Makes allowance for ageing and growth of the population – the model should not indicate excess deaths just because there are more older people
Allows for mortality trends over time, comparing deaths to what we expected this year, not an average centred on a few years in the past
Allows for seasonality which is a significant feature in UK mortality data (there are more deaths in the winter)
Suitable for different countries and regions as well as the UK overall
Produces confidence intervals, helping users to understand that excess deaths are always an estimate
Accurate analysis of mortality is important to trustees and sponsors of defined benefit (DB) pension schemes to determine liability estimates, set member option factors, refine journey planning, implement more efficient investment strategies and to better assess the value-for-money of insurance transactions.
LCP mortality advice combines analysis of the socio-economic profile of scheme membership with insights into what is driving excess deaths and how long this may persist into the future. This enables us to refine assumptions to reflect the membership of your scheme. Understanding how the pandemic and ongoing health system challenges are impacting your members puts you in the best position to adopt an assumption that is right for you.
But analysis like this has wider repercussions, as it informs population health management initiatives and our understanding of how health and life expectancy is changing across society. We were delighted to provide pro bono support to government on this important initiative.
]]>Faced with a new regulatory environment, TPR is taking steps to make sure pensions continue to deliver good outcomes for savers while strengthening its regulatory grip. This will mean that TPR will engage differently with the market, and, from April, will create three new regulatory functions which protect, enhance and innovate in savers’ interests:
Regulatory Compliance – protecting pension savers' interests through the effective and efficient delivery of regulatory compliance services, targeting schemes and employers.
Market Oversight – enhancing the market through strategic engagement with schemes and others who influence pension savers’ outcomes, with a strong focus on delivering value for money and trusteeship.
Strategy, Policy and Analysis – using insights from our regulatory approach and elsewhere to evolve the regulatory framework and support market innovation in savers’ interests.
These will be supported and enabled by essential functions: Operations, Digital, Data and Technology, and People.
Chair of TPR, Sarah Smart, said: “We are moving from a fragmented pensions landscape of thousands of small schemes to an environment of fewer, larger schemes. That means we need to change our regulatory approach to protect savers in the future.
“The market should expect us to engage with it differently from now on. Our new structure means we will be swifter to address compliance failures and market-wide risks while being more dynamic in our industry engagement and bringing innovation to the fore.”
Chief Executive of TPR, Nausicaa Delfas, said: “We have to make sure that workplace pensions work for savers. Our organisational changes are about bringing our talented and capable colleagues together to protect, enhance and innovate in savers’ interests.”
How pensions are changing
Over the last decade, pensions have undergone a radical transformation. Automatic enrolment has made saving the norm for millions of workers and shifted the balance towards defined contribution (DC) saving. Master trusts are the vehicle of choice for most employers and account for 90% of DC memberships, with 82% of savers concentrated in the largest five schemes by assets under management.
At the same time, employers have moved away from defined benefit pensions, with just 4% of schemes fully open, with schemes considering their options in how they make good their promises to savers including the new wave of consolidation vehicles hitting the market like superfunds.
This means pensions have changed from a landscape of one employer, one scheme, to a competitive marketplace of competing master trusts and consolidation vehicles.
]]>The new guidance is intended to provide a framework for decision making. However, it does emphasise that decisions on investment must be made in the best interests of savers. This will include but is not limited to fee implications and ensuring appropriate governance processes are in place if there are problems with liquidity.
The regulator has also used this new guidance as a prompt for any own-trust schemes to consider if they have the capacity to consider private market investment, and if not, asking those trustees to consider consolidation into an arrangement that has the governance processes in place to provide (or at least consider) private market investment.
Importantly, this doesn’t just mean consolidation into a master trust - we increasingly see own trust schemes using ‘off-the-shelf’ solutions (allowing them to retain their existing governance model) and these will increasingly offer access to private markets.
While we welcome further guidance for trustees on how they could introduce and monitor private markets, trustees must maintain focus on what matters most to their members’ retirement outcomes.
Recent manager developments have highlighted how some investment platforms are still unable to support the use of illiquid assets. Many are therefore content to wait as a wider range of funds comes to market and investment platforms evolve their solutions – and, in the meantime, address what is often a greater threat to member outcomes: the cliff edge members face at the point of retirement.
While we expect larger DC schemes to consider the use of private markets throughout a saver’s lifetime, those schemes that have smaller governance budgets may once again feel the squeeze to consolidate into a master trust or by using an off-the-shelf product.
There is a danger that this becomes another driver of consolidation that sees the priority of cost over value. However, more expensive solutions that incorporate private markets are increasingly available from master trusts and off-the-shelf solutions. It’s essential those who are consolidating look beyond cost and consider what really drives value to their members.
For many, the number one priority will be the legislative requirement to include a policy on how illiquid asset classes are used in their default strategy before the deadline of 1 October 2024.
]]>Introduction
A lot can be achieved in 6 months to a year – some of our greatest inventions were created, our most important monuments erected, and our world connected in just that time frame. And besides, you are not starting from scratch unlike many of our inventors.
When naval engineer Richard James accidentally knocked a tension spring off a shelf, he watched as it mesmerizingly ‘walked’ across the floor. Six months later in 1943, the Slinky was launched at a toy fair and remains a hit to this day.
In 1989, a British computer scientist proposed the creation of a global hypertext system that would let users easily access information. He spent the next 3 months developing the World Wide Web. That’s right, it took Tim Berners-Lee 3 months to start the internet.
The Churchill War Rooms, the underground network of bunkers that served as the headquarters for masterminding Britain’s response to World War II, took just 8 months to create with a workforce of 600 builders.
That is fewer bodies than the number of consultants some have had in to advise on the Consumer Duty. Not that we have anything against consultants, I hasten to add.
Progress so far
Today I wanted to touch on the progress we have seen 6 months on since the first Consumer Duty deadline, identify some of the challenges and look ahead to the deadline for closed products.
We need to remember that the Consumer Duty is not just in the interests of consumers – it is in the interests of firms and our economy too.
As it is an outcomes-based regulation, it aims to give firms space to create an environment for healthy competition and innovation based on high standards.
Those high standards - driving competitiveness overseas - protect our consumers and the integrity of our markets and should fuel greater confidence in our financial services and products, in turn growing our financial services sector.
A bit of upfront effort now should mean fewer rules down the line.
We have published our findings of good and bad practice in a report. Many firms have already made great progress on the Duty. For example, they are offering the right products and services to the right customers; eradicating jargon and moving clients to less bespoke and cheaper options where that is a better fit.
We have seen board-level leaders giving serious consideration to what the Duty means for them culturally and operationally. Separately, we have seen some firms offering fairer value too, by increasing value received by savers, reducing fees, and maximising benefits to customers.
We also published results from a survey of smaller firms, looking at their progress on implementation. We were pleased to see significant progress since the last time small firms were surveyed.
Of course, we have identified there is still much room for improvement.
We do not want to see firms waiting to see if we will intervene to address an issue. Firms also need to get serious about their data and not assume they can just re-package existing information. And we want to see the Duty embedded across every firm at every level, with leadership from boards.
Price and Value
Perhaps the most challenging outcome of the Consumer Duty for firms to meet is that of fair price and value.
We do not set prices: Our job is to make sure that markets can work well. They can’t if products and services fail to offer fair value, or if they offer features that lead to foreseeable harm.
On a positive note, it has been reported that an impressive 37% of advice firms have reviewed or changed their fees structure since the Consumer Duty was introduced.
But there are areas where firms could do better.
Many of the fair value assessments we have seen are not relying on solid data and other credible evidence to justify the products’ value to retail customers.
Some firms for example have relied solely on benchmarking against the market when considering their pricing, rather than considering a fuller range including the real value that a consumer derives compared to the price they pay. The equivalent of a Google Shopping search does not prove to us that a customer is getting a fair deal.
We want to see firms considering all the aspects of fair value at the product level and considering the impact on different consumers.
Board reports will come under greater scrutiny as we look to these to evidence the steps firms are taking to drive good outcomes.
Opening up on closed products
We know many firms have applied their laser focus on open book products ahead of the Consumer Duty coming into force.
But the clock is also ticking for closed products which will come under the scope of the Consumer Duty at the end of July.
Under the Consumer Duty, closed products are ones that were sold before the 31st of July 2023, but have not been marketed or sold to new customers since.
We gave firms an extra year to get to grips with the complexity of older systems and the increased work involved.
There may be gaps in the data you hold from legacy systems for example.
We know you may not have every answer. But you need to have a plan for how you will produce one, and how your firm will evidence that it is delivering good outcomes for customers who hold closed products.
From the end of July, the requirements of the Duty will apply to closed products as they do to open products.
Gaps in monitoring data
First, gaps in monitoring data:
A key part of the Duty is that firms are able to evidence the outcomes their customers are receiving, whether that relates to life insurance, mortgages, cash savings, funeral plans or any other open or closed product. We know that one of the challenges firms face are out-of-date or incomplete client records for closed products.
They may not have on file the consumers’ characteristics and needs, sales records, or historic performance of the product.
This could make it harder to serve consumers appropriately – particularly those with characteristics of vulnerability.
Where a firm can’t fill gaps in its records, it should take additional steps to mitigate the risk of harm to consumers – for example through enhanced outcomes testing for these customers.
Fair value in closed products
The second challenging area is fair value in closed products.
We know some closed products may offer poor value.
In some cases, customers in legacy products might pay higher charges than they would for open products, where firms are competing for new business.
In all situations, firms must assess, and be able to demonstrate, that their closed products provide fair value to customers.
Firms should be confident that they don’t exploit consumers’ lack of knowledge or behavioural biases.
Firms can take into account the costs and benefits that were incurred before the Duty came into force.
We will not judge firms with the benefit of hindsight.
We don’t necessarily expect firms to re-price products or to repeat underwriting in every case if conditions such as life expectancy or economic conditions have changed.
However, if a firm could have reasonably known that its assumptions were significantly wrong at the time a product was sold, we will consider if the firm complied with rules that were in place at the time.
Keeping the customer connection
A third challenge is how to engage with customers, particularly the elusive ones.
Many firms do their best to track down less engaged customers. Some do more than others.
We know sometimes if a firm has lost contact with a customer because the customer does not want to be contacted or does not engage with the product.
This isn’t a new problem, but we still expect firms to go further to drive good outcomes for these customers.
They can do this by communicating more effectively; providing consumers with the information they need, at the right time, presented in the way they understand.
Firms will need to test, monitor, and adapt their communications approach if these are not driving the right outcomes for consumers.
Vested rights
A fourth challenge is vested rights.
Vested rights could include annual fees that are due or exit charges.
For example, a life insurance policy might have an exit charge written into the contract, that consumers must pay if they want to cancel the policy.
Sometimes these terms enshrined in vested rights may lead to poor outcomes for consumers with closed products - for instance, if a fee is significant and undermines the benefits of the product.
Where a problem is identified in a closed product, we expect firms to take appropriate action to mitigate harm.
Some firms may take the view that giving up their ‘vested right’ and reconsidering fees or charges, for example, is the most appropriate way of delivering a good outcome to their customers.
Others may decide they can best support their customers through clearer communications on what other deals are available and support on how to switch.
Closed book life-time mortgages is one product area where we may see more customers develop characteristics of vulnerability over the life cycle of the product.
It is particularly important to offer extra support where firms see an intersection of vulnerability of consumer and complexity of product or service.?
Firms’ capacity for the Duty
By now, firms should have a clear roadmap to comply with the Duty by the deadline for closed products which is 31 July 2024. At this point, all products will be inside the scope of the Consumer Duty.
Firms should have reflected on what lessons they learned in the run up to the first deadline, filled in the gaps on open products, and made sure closed products will comply by the deadline.
We expect sectors that will be impacted more by the closed products and services deadline to include life insurance, funeral plans, consumer investments, consumer finance and retail banking.
Some firms have suggested decommissioning some of their closed products, with the aim to migrate customers to alternative open products.
If firms are considering withdrawing closed products, they need to consider the impact this will have on consumer outcomes and make sure they are not causing foreseeable harm.
If firms are experiencing problems, we would like to hear from them sooner rather than later so we can tackle this together. You can expect further communication from us in the weeks ahead targeting closed products.
Conclusion
At all times, when supervising and enforcing the Duty, we will be informed by data and metrics as to where we prioritise our focus. It is not a once and done exercise for firms, or for us.
We know that firms’ capacity is not infinite and that many will be working on open products. They may be concerned that they now have to tackle closed products too.
At all times, we expect firms to take a risk-based approach to prioritisation. You do need to get it all done by July but if you are struggling with the order, ask: Which products or services are likely to cause the greatest harm? Where is the most work needed? This, rather than if a product is open or closed, should be the key factor – particularly once the July deadline has passed.
This is where your board report will be key: it will be used to assess and evidence how firms have provided good outcomes for consumers under the Duty. The first one will be due by the end of July.
It is worth reminding ourselves that we have been given an extra day to implement the closed product aspects of the Duty, as it is a Leap Year.
Now if it took under a year to create the Slinky, build the Churchill War Rooms and yes, even the internet, it is not beyond all our capability to apply the same grit, determination, and consistency to make all our products and services Consumer Duty compliant.
Getting it right for consumers means higher standards and healthier competition. It means improving trust in our sector, it means supporting growth and innovation, and it means boosting the UK’s competitiveness on a global stage. Competitiveness comes from being a beacon of high standards and fair value – and from entrenching consumer trust. This in turns attracts investment.
The prize is huge if we can get this right.
]]>“With precious votes to play for, a popular approach is probably to be expected and could mean tax cuts of all kinds, whether income or inheritance tax.”
Tax cuts impact
“The Chancellor has already overseen a cut in National Insurance contributions from 12% to 10%. Further big changes to tax could have some beneficial knock-on effects for savers wanting to prioritise their pension. For instance, cutting the basic rate of income tax - or perhaps more pressingly given wage rises, increasing the income tax thresholds - could mean people feel more able to save more into their pensions or to start contributing, thanks to an increase in disposable income. Rishi Sunak had announced in 2022 that he would cut the basic rate of income tax in stages, although this plan was later shelved. It’s worth noting that a reduction to tax rates would also mean an equal reduction in the amount of tax relief on pension contributions.”
Pension taxation
“Further direct changes to pensions taxation seem unlikely. Jeremy Hunt has already made some big, surprise changes to pensions: the abolition of the Lifetime Allowance, the increase to the Annual Allowance from £40,000 to £60,000 and the increase to the Money Purchase Annual Allowance from £4,000 to £10,000.
“If further reform of the tax treatment of pensions is something the Chancellor wishes to look at, introducing a flat rate of tax relief, taxing pension contributions or altering the way National Insurance contributions interact with tax relief are all possible methods that have been considered in a recent Government briefing paper.”
Pension policy
“We could reasonably expect further mention of the Mansion House reforms, which are designed to channel more pension fund money into UK growth companies. In particular, we would welcome more detail on the kinds of growth assets pension savers’ money would be funnelled into - how much the Government hopes pension funds will invest in the UK and at what cost. Whatever further detail may be announced here, we will be looking for detail on how pension savers’ retirement outcomes will be prioritised above any other economic objectives. There might also be further details of dates for when the extension of Automatic Enrolment changes: reducing the minimum age from 22 to 18 and removing the lower limit for the qualifying earnings band for contributions, will come into force.”
‘Pot for life’ pensions
“There could also be a mention of further developments around other suggested reforms, such as the Lifetime Provider or ‘pot for life’ model. The Government consultation on this proposal closed at the end of January, which could enable the Chancellor to make a further statement on next steps for this proposal.
According to PensionBee research, more than three-quarters (76%) of pension savers said they would consider opting for the new model if it was introduced.”
The State Pension
“When it comes to the State Pension, the Government has already committed to maintaining the Triple Lock guarantee and given the extent to which this benefits older voters, it seems unlikely that a much called-for review of the Triple Lock would be initiated now.”
“It is possible that calls for earlier access to the State Pension for those unable to continue working to State Pension age might receive some attention, following the State Pension Age Review 2023, by Baroness Neville-Rolfe, which highlighted the case for this, as this would be a popular move. It might also pave the way to further changes to the State Pension designed to make it more sustainable.”
Rabbits out of the hat?
“What else could be on the cards? One move the Chancellor could make for everyone, but especially pensioners and others on low incomes, would be to increase the personal tax allowance from its current level of £12,570. This would also counter accusations that the Government has been pursuing a policy of ‘fiscal drag’, allowing wage growth to bring more people over tax thresholds and generating more revenue.
“Another move that could benefit many people, but especially the older generation, would be to increase the personal savings allowance for tax on interest. Currently, basic rate taxpayers can receive £1,000 in interest without paying tax. As interest rates have increased, the likelihood of savers facing tax liabilities from going over these thresholds has increased. It’s possible that the Government could look to win over savers, in particular older savers who tend to have larger balances, with a generous increase here.”
“The focus now turns to pensions administrators who have next to no time to adjust their systems, processes and member communications so that for those benefits taken from 6 April 2024, compliance is by reference to the new law that is focussed on lump sum checks.
“And for a narrow group of pension savers that have started to take benefits, but have more to come, they will need to decide before taking any more benefits whether they should apply for a special certificate that reflects the lump sums they have actually taken or rely on HMRC’s broad brush approach to estimating them.
“With all the detailed technical changes being made, given that the Lifetime Allowance was one of the cornerstones of the pensions tax regime that has operated for 18 years, it will be quite some time before this new regime has been assimilated by the pensions industry. The worry is that despite the significant burden of introducing this new regime it may yet prove to be short lived, as a change of Government could well see some kind of reinstatement of the Lifetime Allowance.”
]]>Mike is a prominent figure in UK pensions with over 20 years’ experience in the industry. He joins from Hymans Robertson, where he was a Partner and DC Consultant leading on DC and Firmwide Pension Proposition delivery. He has extensive expertise, including pension scheme design and benefits management; change and implementation, automatic enrolment; salary sacrifice; Pension Dashboard preparedness and pension scheme risk mitigation/ transition to DB buy-out and DC transition. Mike has consistently focussed on better outcomes for members and most recently has been active with DC consolidation and pension exit strategies with this focus in mind.
He also spent four years as a consultant in the tax and pensions team at KPMG and, before that, he worked at the Co-operative Insurance Society as a Securities and Investments Board (SIB) Review Technical Analyst. He is a Fellow of the Pensions Management Institute.
Announcing the appointment, Sangita Chawla, Managing Director at Standard Life, part of Phoenix Group said: “I am delighted to welcome Mike to our team, at a time when customers face increased levels of uncertainty in their lives. With more than two decades experience and a depth of practical and technical knowledge, Mike’s insight will shape how we communicate with customers and employers to provide reassurance and understanding at every stage of the retirement journey and to help them achieve greater certainty around their financial futures.”
Commenting on his appointment Mike Ambery said: “Standard Life is an incredible brand with a long heritage of looking after people’s savings. The business undergoing a significant transformation, steadily growing its presence in pensions and adviser markets, with significant levels of investment in both its products and services for consumers. With numerous developments in the pensions and savings landscape over the last few years, I’m pleased to be part of such a dynamic business, and to be able to help shape its voice and policy as it supports consumers achieve their best possible retirement outcomes
Hilary has certainly made her years in the pensions industry count.
She has improved the position of all the schemes she has looked after, and has played a central role in the introduction of two new NHS pension schemes. For one client, she brought together seven legacy schemes, merged them with another big scheme, then integrated yet another scheme under one trust. She says: “Aligning all the benefits involved a lot of hard work and negotiation. But it was worth it to see every member in every scheme treated fairly.”
Hilary has been an active member of the pensions profession throughout her career. She has played an instrumental role in a number of national initiatives, including The Pensions Regulator’s funding industry working group. And she can justifiably claim to have transformed pensions knowledge in the trade union movement.
Hilary does have one regret though. She says: “I would have liked to have seen the Royal Mail CDC scheme up and running before my retirement. CDC is my most important legacy. First Actuarial’s Derek Benstead and I teamed up with the Communication Workers Union, and Royal Mail and its advisers to devise a fundamentally new type of pension for the UK. It’s our best hope of closing the generation gap in pensions.”
Changes in the pensions world since 1981
In a career that has spanned more than four decades, Hilary has seen a lot of change in the pensions industry.
She says: “When I started working with pension schemes, we were dealing with surpluses and benefit improvements. As the decades moved on, returns shrank and scheme deficits appeared. We’re now coming back to higher returns and surpluses and I feel like I’m back where I started.”
Over the course of Hilary’s professional life, open Defined Benefit pension schemes have all but disappeared in the private sector. “I see that as a failure of the industry, one that I hope CDC will help to address,” Hilary says.
She recalls: “Back in the 1980s and early 1990s, pensions were something that employers and trade unions would always discuss together. With the loss of trade union power, negotiations on pensions have become rare, and yet they’ve never been more necessary. For the millions of workers in minimum auto-enrolment schemes in particular, pensions should be near the top of the bargaining agenda.”
Hilary and First Actuarial
As First Actuarial approaches its twentieth anniversary, Hilary and her colleagues have been working hard to codify the values that the firm is known for. She says: “We’ve lived those values for a long time, but codifying them means that people can make sure we live up to them.”
Hilary sees training and development as a particularly strong value at First Actuarial.
She says: “Throughout the firm’s history, we’ve prioritised training and development. Right now, we’re preparing to welcome our first intake of actuarial apprentices, and that’s something to be proud of. In our Manchester office, I’m leaving behind a great team of people, led by three partners. I’ve seen them all develop into accomplished professionals who now work alongside the impressive individuals we’ve appointed as our client base continues to grow. I’ve no doubt that First Actuarial will go from strength to strength. The services we provide and the value that underpin those services are in great demand.”
Hilary concludes: “I’m really sorry to leave behind lots of fantastic clients and colleagues. And I will miss them. But I do feel that the time is right for me. The team here has developed to a level where they can carry on without me. That gives me the freedom to tackle a very different challenge. Throughout my pensions career, I’ve worked hard to improve the lives of ordinary working people. I intend to continue to do that in the wider world by playing an active role in the forthcoming general election.”
On the FCA review, the £450mn provision was less than some had feared but there will be question marks around how Lloyds has come to that figure. Lloyds has been honest in saying the outcome of the review is largely unknown. What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.
UK domestic banks are unloved but there’s reason to be optimistic, especially with valuations sitting where they are. Performance has clearly peaked, but there are several tailwinds yet to play out that could give room for upside beyond current consensus. Loan default levels remain low and with the return of real wage growth, plus a stabilising housing market, consumers should remain resilient.
At the same time, banks are seeing easing conditions in the mortgage market and what looks to be a peak in terms of consumers shifting to higher cost savings accounts. As these tailwinds ease, the power of the structural hedge can come through – think of this like a bond portfolio that’s rolling on to higher yields over the next few years. Lloyds looks well placed to benefit from these improving trends.”
Research from The Green Insurer, which is focused on helping drivers reduce carbon emissions and drive in a more environmentally friendly way, finds that motorists are becoming increasingly aware of the impact of driving on the environment and are cutting the miles they drive each year in response. One third (32%) have reduced the number of miles they drive annually in the past 12 months.
Cutting mileage is the third most popular measure taken by UK adults to reduce carbon emissions, following a reduction in the amount of time heating is switched on (cited by 51%) and taking other measures to reduce electricity and gas consumption (43%).
Other common measures taken include reducing air travel (18%), making changes to a house by fitting insulation or double glazing (16%), switching to sustainable electricity or gas (11%) and installing solar panels (8%).
Looking to the future, 28% of adults will continue to reduce the amount they drive in the year ahead, while 43% will reduce the time their heating is switched on, 38% will take other measures to reduce the amount of electricity and gas they use, and 25% will make changes to their houses by fitting insulation or double glazing.
When those who had not taken any measures to reduce carbon emissions were asked what had stopped them from doing so, the highest response (44%) was that they didn’t think it necessary, followed by 35% who thought it was too expensive to take action, and 22% who thought they couldn’t make a difference.
Others felt that they didn’t know how to take action to reduce their carbon emissions (11%), while 7% said that they needed help from companies to reduce their emissions.
Paul Baxter, CEO, The Green Insurer, said: “It’s encouraging to see that so many people are taking measures to reduce their carbon footprints in response to concerns about climate change. We also note that some of those who have not yet taken action don’t feel fully informed about how to cut their emissions, or would like more help from companies about how to do so.
“We aim to provide a solution to that concern by giving customers the option to easily buy genuinely green car insurance, which is the first in the UK to offset all carbon emissions while also helping drivers to cut the costs of driving and insurance.
“Driving habits are changing across the UK, along with all the other measures people are taking to reduce power consumption and heat loss from their homes. We have designed our insurance policies to reward people for how they have changed their driving behaviour.”
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The ongoing attacks off the coast of Yemen are affecting marine insurance and shipping costs. Several shipping routes are having to be avoided and re-directed creating less efficient trade routes and adding to the cost of marine war premium rates.
The political climate across the region remains volatile, and political analysts are widely agreed that there is a high risk that the current conflict may spread. OAC’s Risk Monitor has considered some of the key risks to the insurance industry should there be a material deterioration in the current situation in the Middle East.
A significant concern among political analysts is the risk of a direct conflict with Iran. Should this occur, it is highly likely to impact energy markets through global oil supplies – even though Iran is heavily sanctioned, it is still a significant supplier of oil to the global energy market.
Any disruption to Iran’s oil production is likely to have serious ramifications on the global energy market. Crude oil supply to Europe and North America was materially affected by the restrictions recently placed on Russian energy sources.
Significant loss of output from another major global producer would place further strain on an already fragile system. This is likely to lead to further inflation, potentially as severe as the inflation that followed the start of Russia’s invasion of Ukraine.
Air travel – and therefore the Aviation insurance market – could also be significantly impacted through a further narrowing of existing conflict-free corridors connecting Europe and Asia.
As flights have to take significantly longer routes, there will be upward pressure on air fares. This is likely to reduce demand for long distance air travel impacting passenger numbers and the total number of flights. Under this scenario, premium volumes in the aviation market are expected to decrease reflecting the reduction in exposure.
Due to impact on shipping and aviation routes, there is also likely to be a decline in cross border trade that relies on these routes. Supply chains will be impacted and this will put pressure on costs across all areas of the global economy.
At a time when global economies are hoping to emerge from inflationary issues and the economic pressures that arose as a result, this is likely to exert pressure anew. Insurance premium volumes, across pretty much all sectors and classes, would be likely to decrease.
The most highly impacted insurance classes are likely to be Marine Cargo, Marine War, Aviation Cargo, Aviation War, Political Risk / Violence and Trade Credit.
Bharat Raj, Head of London Markets at OAC, said: “Our Insurance Risk Monitor aims to track the biggest pressures on the global insurance market at a time of particular geo-political and economic uncertainty.
“Since October, we have seen the situation in Israel and Gaza slowly spread into other countries, including unrest off the coast of Yemen. There is an increasing risk of further escalation.
“The worry will be a further spread of conflict throughout the region driving more involved, prolonged involvement of Western militaries. Just as global economies are recovering from the inflation shock after the Ukraine invasion, an escalation of conflict could once more send cost rises rippling through the world, dampening growth.
“Aviation and shipping insurance markets are already seeing ramifications and these classes are likely to be worst impacted by escalating tensions. Going forward, it is essential for insurers to consider the plausible future scenarios and how these scenarios may affect their experience.
“Consideration should also be given to the impact on business plans, capital model assumptions, premium rating, underwriting decisions and risk management.”
“It wouldn't be surprising if the Chancellor called on the pensions industry to follow the example of the Mansion House Compact signatories to increase their allocations to unlisted equities. This would generate better outcomes for both pensions savers and growing UK companies.
“Building on the intention set in the 2023 Autumn Statement to review how defined benefit (DB) pension surplus could be used by corporate sponsors, the industry would now benefit from concrete 'next steps' to drive this forward. It is possible – although probably unlikely ahead of a general election – that the Chancellor announces a progressive proposal to allow surplus to be returned to corporate sponsors. If this were announced in March, it could potentially unlock a quarter of a trillion (£250bn) for UK companies to invest as needed.”
Axe Ali, EMEIA Financial Services Private Equity & Venture Capital Leader, comments: “The Chancellor has set a clear intention to boost investment in new and innovative UK companies, and initiatives including the Mansion House Reforms, the proposed British Business Bank growth fund, and the recently announced Private Intermittent Securities and Capital Exchange System (PISCES) trading venue are clear indicators of this ambition. In the Spring Budget, industry will be looking for the Chancellor to detail concrete next steps to drive these initiatives forward.
“In particular, following the announcement the British Business Bank growth fund in the Autumn Statement, the industry will be hoping the Chancellor uses this pre-election Budget to indicate when this highly anticipated investment vehicle will launch.
"The Chancellor is also expected to provide further detail on the recently announced PISCES trading venue. Intended to bridge private and public markets, PISCES should deliver a key focus of the broader change agenda to boost the UK’s capital markets.
However, the complexity involved in establishing such a platform may mean that an official launch date for the intermittent trading venue won’t be announced on Budget Day.
“Continuing the theme of strengthening the UK’s capital markets, the Chancellor has hinted that he may announce a tax-free British ISA. Long called for by industry, it will be universally welcomed if it is announced in the Spring Budget, incentivising more individuals to invest in UK company shares."
Chris Sanger, EY Tax Policy Leader, comments on the possible direction the Chancellor might take at the 2024 Spring Budget: “In choosing which of his “starters” make it over the finishing line and into the Spring Budget, the fact that this isn’t just a Budget, but a pre-election Budget, is likely to be front of mind for the Chancellor. This will be his Shop Window Budget and he’ll likely be focused not only on funding the Government’s programme for the next five years, but also on which policies will entice voters at the General Election.
“History shows us that pre-election Budgets tend to bring out the generous side in Chancellors and this one will likely focus more on handouts than hair shirts, with tax cuts and extra spending featuring heavily. However, the extent of the Chancellor’s largesse will heavily depend on the final forecast from the Office for Budget Responsibility.”
Chris Sanger, EY Tax Policy Leader, comments: “The Chancellor’s Autumn Statement delivered on his promise to make the cash-flow benefit of full expensing permanent, ironically reducing the urgency of businesses to invest before the relief was gone. The question therefore remains whether the Chancellor will go further to attract additional investment and jobs to the UK. Having only recently increased the corporation tax rate to 25% and reformed the research and development tax regime, the obvious levers have either been pulled or seem out of reach.
"One area of unfinished business is the potential to boost the impact of full expensing even further, by allowing this to apply to leased assets. The Treasury has previously been wary of this, due to the risk of leakage, but may now feel that it can safely extend the provisions to liberate additional finance and drive a welcome boost in investment.
“In order to accelerate investment even further, the Chancellor may examine current UK restrictions on how businesses can use tax losses, as current rules may limit the cash flow benefit full expensing is intended to provide. To address this, the Chancellor could exclude any losses generated by full expensing from these restrictions, which would simplify the process and provide even more incentive for companies to invest, bolstering the effectiveness of the original full expensing policy.
“Now that much of the world is, or will soon be, operating under a global minimum tax rate of 15%, the UK has the chance to enhance its attractiveness to global investors by offering targeted incentives. Given the tax rate of 25%, and established investors, the UK could offer low marginal rates to attract investment without lowering the average rate below 15%. Combining such an incentive with the use of enterprise zones, the Chancellor could deliver a boost to the Government’s industrial strategy and direct investment into particular priority locations and sectors, such as life sciences or advanced manufacturing.
“Businesses want clarity over the taxation regime for the next parliament, but that is likely going to have to wait to the manifestos, the election result and potentially the first Budget of the new government. Ahead of that, the Chancellor might focus on attracting additional cash investment, such as through ISAs and other reforms affecting personal investment.”
Tom Evennett, EY UK&I Private Client Services Leader, comments: “A headline grabbing potential change would be an outright income tax cut at the Spring Budget, as this would encompass all forms of income, from earned salary or self-employed income but also unearned income including rental profits and dividends. However, cutting taxes on this broad range would be expensive, and every 1p reduction in the basic rate of income tax would cost around £6.3bn in the 2024/25 tax year, rising to nearly £7.5bn in future years.
“The Chancellor may be more tempted to make changes that can be swiftly felt in household budgets ahead of a general election but are potentially less expensive for the Exchequer. This could include increasing the personal allowance and the threshold at which the higher 40% income tax rate becomes payable. While frozen thresholds have raised significant funds for the Chancellor as inflation has driven up pay, a rise in the personal allowance and the threshold at which people pay the 40% rate from the current £12,570 and £50,270 point could provide a tangible boost to household finances.
“Another option would be to raise the child benefit cliff edge, which sees the benefit diminish for families where the highest earner has an income of over £50,000. Raising the individual earnings threshold to £75,000 or capping at a household income of £100,000 would bolster family finances. It would also address a long running issue where families with one main earner on a £60,000 salary may consider it unfair that their child benefit is tapered off while a household with two parents earning £49,999 each receives the full child benefit entitlement.”
Chris Sanger, EY Tax Policy Leader, added: “The Chancellor might also use this Spring Budget to deliver on his promise of simplification. The current income tax system includes an effective 60% rate for those earning from £100,000 to £125,140, as the personal allowance is gradually removed.
"The Chancellor could remove this 60% band by changing the personal allowance from a tax-free income allowance to a tax credit of £2,514, being 20% of the personal allowance of £12,570. Those with tax bills under this amount would pay no tax, and those over would reduce their tax bill by this credit. This would simplify the system and mean that the credit was worth the same amount to all, regardless of tax bracket. By combining this change with increases in the thresholds, the Chancellor could deliver both simplification and some respite to many taxpayers.”
As part of a comprehensive member onboarding programme, the LifeSight team visited the company’s main sites and delivered multiple roadshows for its members during summer 2023. The roadshows were tailored for Electricity North West and provided demonstrations of the new LifeSight services and specific information about the new scheme and investment options. This created a foundation of strong engagement and positive endorsement among the membership.
The company also arranged for the dedicated LifeSight app to be automatically downloaded from app stores onto every eligible employee’s company mobile phone, to encourage members to engage with LifeSight’s digital services from the outset.
Colin Ross, Group Pensions Manager at Electricity North West, said: “As part of the move from our occupational DC pension scheme to the LifeSight master trust, we embarked on a thorough consultation process, engaging with our employees, existing trustees, trade unions and recognised employee forums to make sure members’ needs were fully reflected in any changes.
“The roadshows delivered by the LifeSight team were vital to make sure that all our pension scheme members had access to the same information, guidance and understanding about the changes taking place. We have a large number of members who are not fully office-based, so we were pleased that LifeSight offered the flexibility to help us ensure that everyone was fully engaged with these important and positive pension changes.
“Another important consideration which impressed us when choosing LifeSight was the excellent value and innovation offered by their investments and their ability to drive down investment costs using scale, passing those savings directly back to members.”
Jelena Croad, Head of LifeSight UK, said: “Electricity North West has put engagement and value at the forefront of its move to a DC master trust. The roadshow programme was a great part of the onboarding process and its decision to automatically download the LifeSight app onto everyone’s company mobile phone really gave a boost to engagement levels right from the beginning. We look forward to continuing to work closely with Electricity North West and its members to provide them with confidence and security in their retirement savings.”
The addition of Electricity North West’s membership means LifeSight now has approximately 360,000 members with £17bn in assets under management secured.
“The statistics show 73% of all DB pension schemes are estimated to be in surplus on a funding basis, compared with just 50% the year before. The average scheme funding level is estimated to be up by 13.5% percentage points to 114.5% in just 12 months, whilst the total deficit (of schemes in deficit) has more than halved, reducing from £63 billion to £28 billion.
“Driven by material increases in government bond yields and strong asset returns, the market has been alive to this seismic shift. Nevertheless, it makes for interesting reading with so much market and regulatory change in the pipeline and an election on the horizon.
“Under the Mansion House reforms we anticipate a consultation landing shortly on how schemes might generate and use surpluses investing more in productive assets. With the statistics confirming only a minority - less than 4% - of DB schemes remain open to new members now is the time for policymakers to look properly at longer term pensions strategy. Ensuring the regulatory environment balances keeping past benefits secure with offering good quality pensions to current workers.
“In the meantime, TPR and DWP are currently wrangling to make sure the final regulations and funding code are fit for purpose and proportionate given that there is now a very small, and reducing, number of poorly funded schemes.
“And the changes continue to be transformational for the risk transfer market. With a growing proportion of schemes having sufficient assets to buy out their liabilities with insurance companies, 2024 is already looking like it has the potential to be a record year for deals.”
Simon Kew, Head of Market Engagement at leading independent consultancy Broadstone, commented: “The Pension Regulator’s annual review provides a helpful update on the Defined Benefit universe at a time of unprecedented interest in the sector as schemes look to capitalise on funding improvements to reach endgame or self-sufficiency to provide better security for member’s pensions.
“The findings continue to confirm a universe that is reducing in number as more schemes manage to buy-out and one which has seen drastic progression in funding positions. For schemes and trustees, the findings once more re-iterate that the insurance market will be intensely competitive in 2024 and, most likely, through the next couples of years.
“Preparation, good scheme governance, excellent data standards and top-class administration will all be key to attracting and engaging insurers.
“Meanwhile, for larger schemes with strong sponsors, run-on may be an increasingly attractive and appropriate option. This could drive significant economic benefits as the government looks to promote a new regime of productive finance and investment in UK assets.”
Andrew Goddard, Partner at Isio: “TPR’s report shows the defined benefit (DB) market is shrinking as funding levels improve and schemes mature towards end-game scenarios. Trustees and sponsors are facing crucial decisions around optimal management of assets and liabilities and are increasingly realising the benefits of consolidation.
“The Regulator recently launched its new general code of practice and suggested some DB savers might benefit from higher standards of governance in a consolidation arrangement. Trustees and sponsors are considering consolidation not just to improve efficiencies and better protect member interests, but also because it is often the stepping stone they need to secure their preferred end-game solution.
“If a scheme is nearing buy-out, it can often be challenging in the current market to be noticed by insurers. Smaller DB schemes can benefit from the scale and status offered by a consolidator with a proven track record, which can help them cross the final hurdle.
“Meanwhile, schemes further away from buy-out might face more challenges to get there. For these schemes, joining a consolidator earlier on could ease some of the obstacles over the long-term - allowing them to streamline their path to full funding status and secure member benefits with greater certainty.”
The Pensions Regulator report on DB landscape can be found here
Despite almost all having publicly set net zero targets, the ranking shows significant failings in their detailed climate plans. Not one provider was deemed to be taking a leadership role on climate action. Just three of the twenty – Aviva, Legal & General and Nest – were found to have ‘adequate’ plans in place. 13 providers - including household names Royal London, Prudential and Standard Life - have plans deemed inadequate. The four worst performing providers – Mercer, Hargreaves Lansdown, The People’s Pension and SEI – who manage the pensions of over 2 million UK savers, have ‘poor’ plans in place, scoring on average just 1 out of 10 for climate action.
Richard Curtis, co-founder of Make My Money Matter, commented on the ranking: "Climate leadership is not just important for the planet – it's popular too. But the fact that 17 of the UK’s top 20 providers have inadequate or poor climate plans tells you all you need to know about how seriously the industry is taking this issue.
The public will rightly be worried about these results, and we hope this ranking acts as an urgent wake up call for the pensions industry to up its game on climate change. In doing so they can help protect the planet and provide savers with pensions they can be proud of.”
Detailed analysis was undertaken on seven core indicators of climate action: a commitment to a 1.5-degree pathway, measurement and disclosure of carbon footprint, detailed target setting, investments in climate solutions, a phase out of fossil fuels, deforestation and land use, and portfolio stewardship instruments. Providers were scored against criteria for each – using internationally recognised standards - with results totalled and ranked. See Editors Notes for full details on the methodology.
- On policies related to coal, oil and gas, 8 out of the 20 scored 0/10
- On deforestation and land use, all 20 were found to have poor or inadequate plans
On average, providers scored just 3.2 / 10. This shows that despite pockets of progress, the majority are failing to implement ambitious, science-based climate plans. Further inadequate action risks alienating pension holders who expect leadership from their provider and threatens long term financial returns as schemes fail to sufficiently address climate risk.
While this does not constitute financial advice, Make My Money Matter hopes this ranking helps savers and employers make more informed and environmentally conscious decisions on their pensions and encourages the UK’s largest providers to ramp up climate action in 2024. Specifically, Make My Matter is calling on all providers to end finance for fossil fuel expansion, tackle deforestation in their portfolios, and urgently scale up investments in climate solutions. For more information, see www.makemymoneymatter.co.uk/pensions
Tony Burdon, CEO of Make My Money Matter, commented: “In a year where an average temperature rise of 1.5 c was exceeded for the first time, this report should concern everyone who cares about their pensions, or the planet.
While there are pockets of progress which indicate what funds could achieve if they showed energy and ambition, overall leadership is scarce and progress slow. That’s why we now need all pension providers to recognise the findings of this report and invest in the skills and capacity needed to meet the climate crisis.”
Jan Willem van Gelder, Director of Profundo, commented “Given the disappointing results, I encourage UK pension providers to use the methodology of this study as a guide on what the public can expect of a robust climate action plan. Grand commitments to tackle climate change need to be followed by bold actions.”
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By the end of the year the majority of the world’s stock exchanges were up, particularly in the technology sector, because companies also made more profit, despite high inflation. Economic activity continued with less drag than expected from higher interest rates and inflation measures reduced to more normalised levels, albeit still at a level higher than the last decade. However, higher interest rates typically take 18 months to be felt in the wider economy, and 2023 might therefore have been the calm before the storm.
Part of the stronger economic activity we have seen has been funded by additional government spending. The UK has the highest UK Net Debt to GDP ratio since WWII when it topped over 200%, and the highest tax burden for more than 70 years. Whilst sovereign debt sustainability is not generally talked about, although the outgoing head of the Debt Management Office is now on the record warning about this, we expect a mixture of higher interest rates,
an ageing population, and little room for more tax increases, to mean this number will continue to rise.
To stabilise the debt to GDP ratio, whoever is in government will need all, or a combination of controlled higher inflation, low gilt yields, (even) higher tax revenues and less government spending.
One prospect not currently being discussed is that, if and when inflation is under control, we might see a reversal of Quantitative Tightening and more Quantitative Easing and other extraordinary monetary policy measures to bring down borrowing rates and help the UK finance its large debt load.
We are likely to see elections in not only the UK, but also large population centres like US, India, Mexico, Bangladesh, Indonesia and Pakistan. This not only has both national effects but also international effects and the relationships between countries is becoming more important.
Geopolitical risk feels like it is rising. To qualify that statement, I think a good working definition is an increase in hostile interactions between countries.
This is not just in terms of open conflicts as Russia/Ukraine and in the Middle East, but also in terms of significant changes in trading partnerships and supply chains for economies. This will likely be more of a problem for
long-term investors than is currently recognised.
Whilst it is tough to be objective about geopolitical risk, there is an index we look at which measures which proportion of stories in newspapers have some reference to geopolitical risk. That, at least, tells us if geopolitical risks are being talked about, so a proxy of sentiment.
Geopolitical events like 9/11, the Iraq and Afghanistan war, the Russia and Ukraine war, and the Gaza conflict, are front and centre for a period, but then very quickly both the world and the markets start to discount the impacts. Soon they are relegated from the front pages. The problem is when they drift on with no discernible outcome.
In my experience, the markets would prefer a ‘bad’ certainty which they can price, than general uncertainty which they can’t, or at least they tend to behave that way. From our perspective, taking a gamble on geopolitical events, or anything else, is not an investment strategy that sits well with our purpose, of paying the pensions of our policyholders.
But underlying the big shocks, are the longer-term, less reported impacts of geopolitics, which we also need to consider. Let’s take Germany as an example. Germany has been impacted by two large geopolitical changes. Russia’s invasion of Ukraine led to Western nations sanctioning Russia.
This impacted Germany’s material energy dependence on cheap Russian natural gas supplies.
Additionally, Germany has also built a large part of its economy on exports to China. Whilst there are many contributors to China’s lower than trend growth, the US/China tariffs and technological sanctions mean that Germany is directly impacted by the US/China face-off. These impacts mean that capital markets, technology sharing, and resource supply might decouple, leading to supply chains being refocussed amongst allied nations, rather than truly global trade. This is likely to have economic ramifications as a less-than-orderly – or perhaps openly-disorderly in the event of a further escalation. The pace at which companies retreat from China may pick up pace.
Geopolitical risk is taking up more and more of my time as I seek to manage our portfolio, and is probably at its highest level in my 20+ years in the markets. Companies that have large resource, manufacturing or sales exposure to countries that could be at the centre of hostilities are running very real geopolitical risk – this might in the future impact credit profiles and change our decision on a new or existing investment.
It also encourages a sense of community and shared responsibility, fostering a culture of mutual support and cooperation. However, executing these solutions requires a careful consideration of their practicality and feasibility.
In developing these strategies, a member-centric approach is crucial. Many members may not have extensive experience with financial service products and long-term saving products. So, it's essential to consider the power of inertia in automatic enrolment and how it can be used to develop solutions that meet the needs of this new generation of automatically enrolled savers.
Flexibility in Retirement Planning
The ideal solution would be a flexible retirement income solution that doesn't necessarily need to meet all members' needs but caters to those less likely to make active decisions regularly. This solution should pay a regular, sustainable income, not require ongoing financial advice, offer flexibility, and provide good value for money. The goal is to blend the best of investment solutions with the best of insurance solutions, providing flexibility when needed and an income when appropriate.
Managing risk
One of the main issues is the management of longevity risk. This refers to the uncertainty surrounding the lifespan of individuals within a risk-sharing group. If an individual lives longer than expected, they may end up depleting their share of the pooled resources, potentially leaving less for others in the group. This risk can be mitigated by diversifying the group, including individuals of varying ages and health statuses. This way, the risk is spread more evenly, reducing the potential impact of any one individual's longevity on the group's resources.
Another challenge is the management of investment risk. This involves the potential for losses due to fluctuations in the value of investments. In a risk-sharing arrangement, this risk can be spread among the group, reducing the potential impact on any one individual. However, this requires careful management and a clear understanding of the market dynamics. It's also important to consider the potential for cross-subsidies, where wealthier, longer-lived individuals may end up benefiting more from the arrangement than less affluent, shorter-lived individuals.
Research has shown that people are apprehensive about losing control over their money upon retirement. They want the ability to change their minds and understand what retirement looks like before committing to something irrevocable. Balancing this need for flexibility with providing security and confidence is a significant challenge in designing effective financial strategies.
Communication is key
Communication and information are also key considerations in the implementation of risk sharing. It’s essential that members understand how risk sharing operates and what they are signing up for. This is particularly important when it comes to death benefits, as members must be aware that they will not be eligible for any death benefits in respect of the risk sharing arrangement.
Underwriting could potentially play a role in some risk sharing solutions. At the point of retirement, guidance is needed so that people who are seriously unwell and have a much shorter life expectancy can choose a different path. For everyone else, an assessment of life expectancy over time can be done using member characteristics. This won't be perfect, but it’s a practical way of doing this that captures the major drivers of life expectancy.
Implementing risk sharing through a DC master trust
Risk sharing can be delivered through a DC master trust, a structure that allows for the pooling of longevity, where members receive additional benefits, known as longevity credits, upon the death of other members. This approach, however, comes with its own set of legal considerations. Trustees must ensure that they are acting in the best interests of the members, taking into account the risks and safeguards associated with risk sharing. They must also ensure that they are acting in accordance with the trust's rules and that any risk sharing arrangement is clearly set out. Furthermore, they must exercise their discretions properly, particularly when it comes to distributing longevity credits.
The regulatory environment also plays a significant role in the implementation of risk sharing. Master trusts are authorised and regulated by the Pensions Regulator, and any risk sharing solution must fall within HMRC's regulatory framework for registered pension schemes. This ensures that payments made are authorised within existing HMRC rules, avoiding any potential tax charges on the member or the scheme administrator. Additionally, the master trust must comply with the statutory framework for occupational pension schemes, and trustees must ensure that the benefits provided fall within the legal definition of a money purchase benefit.
Lastly, implementing risk sharing solutions, like longevity pooling, is feasible within the current legislative framework. Despite the inherent challenges, these solutions offer an opportunity for businesses to innovate and may provide better options for their members, provided they're properly designed and communicated.
Article taken from a webinar on risk sharing and the role that these solutions might take in pensions to improve the outcomes for DC savers. The session included pension providers, pension lawyers, consultants and employers. I was keen to reflect and share some of the key discussion points in this summary.
For those of you who were not able to dial in, a link to the webinar has been included here.
]]>TPR’s annual DB Landscape publication provides an overview of the occupational DB and hybrid pension landscape in the UK, reporting on scheme status, membership levels and assets under management.
As part of an ongoing programme of improvement, TPR has enhanced its methodology with heightened validation of the data it receives from its annual scheme return. These improvements have resulted in revisions to scheme status statistics which better reflect the current DB landscape.
Today’s DB Landscape for 2023 shows scheme funding levels improved since 2022. The number of schemes with 100% or greater *technical provision funding levels increased from 2,565 to 3,620. And the total deficit (of schemes in deficit) has more than halved, reducing from £63 billion to £28 billion.
As in previous years, the DB landscape continues to shrink. Since 2022, the total number of schemes reduced by 2%, from 5,378 to 5,297.
TPR’s Interim Director of Regulatory Policy, Analysis and Advice, Lou Davey said: “Today’s report gives an important overview of the DB landscape, which has more than 9.6 million memberships. Changes in scheme status have been small year-on-year but the trend of a contracting market continues.
“This year, we have reviewed how data for this annual report is gathered and analysed, resulting in notable changes to some of its figures. Historical data for the report has also been reviewed and, where necessary, revised.
“As a data-focused and digitally-enabled regulator, we are reviewing how we collect, analyse and provide information. This data informs our approach and continues to underline the importance of schemes having long-term plans in place as they mature.”?
Data for the report is given to TPR by trustees and administrators in their scheme’s annual scheme return. As part of this year’s scheme return exercise, TPR is asking that trustee and administrators carefully review and update their scheme status to ensure it aligns with scheme status definitions. Further information is available on the Exchange section of TPR’s website.
]]>a. Take your money as a flexible income (drawdown), which means you can set up a regular income, decide how much money to take and choose when to take it. You can start, stop, or change the payments you get at any time
b. Take your money as one or more lump sums, which means you can decide how much you take and when you take it.
c. Use your money to buy a guaranteed income for life (an annuity), which can give you a guaranteed regular income for the rest of your life. You can choose an annuity that provides for others – like a partner or children – when you die.
d. You could combine these options to suit your needs.
You can usually take 25% of your pension pot tax-free. Check with your provider that your pension plan offers the options you want. If not, you may need to transfer to another provider. But transferring won’t be right for everyone. You also don’t have to take your money out as soon as you turn 55, you can leave it right where it is. You can use our retirement options tool to understand which option might suit you.
If you have a Defined Benefit (DB) plan from an employer, you won’t get to choose drawdown or take lump sums as and when you please, unless you transfer into a DC scheme which is a complex decision and unlikely to be right for the vast majority of people. Instead, you’ll be paid an income for the rest of your life – usually on a monthly basis. The amount will normally go up in line with inflation, although some schemes apply a cap on increases. You might be able to take a tax-free lump sum, but doing this could reduce the total amount of money you get from your plan.
2. How you take your money will impact the tax you pay
After you’ve accessed the 25% that’s tax free, you’ll pay income tax on the remaining 75% of your pension pot. The amount of income tax you pay can depend on a few different things. For example, if you start taking money from your pension savings but still have income sources from elsewhere, you could find that you’re pushed into a higher tax bracket. This could be the case if, for instance, you’re still working part-time or are renting out a property.
This can still happen even if your pension pot is your only source of income. Taking out a large amount in one go could also mean you pay higher tax on your withdrawals, compared to if you were to spread it out in smaller lump sums over the tax year.
Let’s say you decide to take out £10,000 as a one-off payment. The government could assume that this is now your monthly income and deduct emergency tax from this payment – meaning you’d pay £2,952 in tax and would likely have to claim it back. But if you were to spread that £10,000 across 12 monthly withdrawals instead, you wouldn’t pay any tax as you’d be under your personal allowance for the year – which is £12,570 for the 23-24 tax year, and currently frozen until April 2028.
Bear in mind that tax rules are different in Scotland. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.
3. Your money could run out
Unless you decide to buy a guaranteed income for life, your pension money could run out. We’re living longer these days, so it can be easy to underestimate how long you might need your pension money to last.
If you take out too much in the early years, or if your investments don’t do what you expect them to, you could find yourself in a sticky situation.
Your income needs are likely to change throughout your retirement. For example, if you pay off your mortgage, you’ll find you need less. But if you find you need to seek additional care later on in life, you might find you need more. So, when you’re making plans to take your pension money or if you’re thinking about adjusting your current retirement income, try to think about the long-term impact it could have and take financial advice if you need it.
4. Taking money out can have a knock-on effect
Once you start taking taxable income from your pot (anything over your tax-free entitlement), you could be impacted in other ways.
Firstly, the amount you can pay into your pension plan while still getting tax benefits will reduce from £60,000 to £10,000 a year. So if your plan is to take money from your pension pot but continue working and paying in, you should keep this in mind.
Next, taking money from your pension savings could impact your eligibility for any means-tested benefits, as it’ll count part of your income. It also could impact any debts you owe. Any business or person you owe money to can’t normally make a claim against your pension savings if you haven’t accessed them. But once you have, you might be expected to pay.
The official figures show that over the age of 80, there are 1.1 million female widows in England and Wales, outnumbering the near-259,000 male widowers (widowers) of the same age group by more than four-to-one.
Women typically build up smaller pension pots than their male counterparts. The government’s analysis on the gender pension gap2 for private pension wealth at normal minimum pension age (age 55 when people can start withdrawing money from pensions) stands at 35%, rising to 44% for those with Defined Benefit (DB) pensions only.
This means that males enter retirement with far higher levels of income than females – the ONS suggests that annual disposable income for retired men (£30,052) is 21% higher than for retired women (£24,966)3.
Stephen Lowe, group communications director at retirement specialist Just Group, said: “The disproportionately large number of widows, compared to widowers, over the age of 80 should raise important questions for couples about their financial preparations for later life.
"Women, on average, enter retirement with smaller pensions and lower income. They are also more likely to live longer and to be left worse off in retirement when their partner dies unless, as a couple, they take steps to make sure the survivor is protected.
“This can be achieved by ensuring there is a continuation of income paid from the deceased’s pension arrangements. This kind of forward-planning can be particularly valuable in relationships where one partner has significantly more wealth, or greater pension income, than the other.
“The PLSA’s Retirement Living Standards show that on average a single person needs around 70% of the income of a couple to maintain the same standard of living in retirement.
“It may not seem the most romantic topic of conversation but making sure your loved one will be well provided for after your death, or vice versa, is a practical gesture of love and consideration.
“Making sure you have some of the more everyday aspects covered is equally important. For example, ensure both partners know where important information is kept, including wills, power of attorney and log-in details.
“It is important to prepare fully with a partner so you’re both clear on the plan when one of you dies. These are difficult conversations but a little planning ahead could make a real difference to the comfort and security of loved ones after death.”
The note from the leading independent pensions, employee benefits, investments and insurance consultancy arrives at a time when the world of investments is increasingly difficult and often daunting to navigate.
Investible assets can be powerful to help fund and support a charitable cause, but knowing what to invest in, who to invest with, and how to invest can be challenging.
The Charity Commission published its CC14 guidance last August for investing charity money which now states that all charity trustees should ‘take professional advice before making and reviewing investments’.
In addition, investment managers should be reviewed regularly and ‘independently of the manager’.
From an investment standpoint, the role of a long-term investment consultant can help avoid excessive fees, unnecessary manager reviews and pinpointing the components of the investment strategy that need attention.
For the first time, a range of investment managers have joined Broadstone’s call for action to help provide trustees with greater insight and understanding on their strategy including: investing their capital for the first time, investment policy and conducting investment reviews and monitoring.
Rachel Titchen, Charities and Investment Director at Broadstone commented: “The role of independent investment consultants isn’t as well established across the not-for-profit sector like it is within other sectors.
“Instead, we often we see charities adopting a long-lasting relationship with one or two investment managers. While these managers have been servicing the needs of charities well for many years, any advice or information they provide on investment strategy could inherently pose a conflict of interest.”
“The Charity Commission published its CC14 guidance to ensure investment managers are reviewed regularly and independently of the manager. Increasing trustees’ engagement with their investment strategy and taking independent advice is necessary to meet this expectation.
“All organisations working in the third sector should be doing their utmost to help charities succeed in their cause, and we are delighted to have the support of investment managers in this matter.”
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“Robust growth, disinflation, and monetary easing trends are gaining momentum across most emerging economies, establishing a solid foundation for EMD performance in the upcoming year, he says. “This is further reinforced by the Federal Reserve's pivot in December to end their hiking cycle which should support growth through policy easing later in 2024, especially as US inflation shows signs of moderation.
“However, a considerable portion of this optimistic shift is already reflected in EM bond pricing, particularly in sovereigns where credit spreads of investment-grade bonds are trading near decade lows. Despite these positive indicators, some caution is warranted. The upward revisions to global growth forecasts are primarily driven by US exceptionalism rather than broader synchronisation.
“If this trend persists over an extended period, it could eventually exert pressure on emerging market currencies, prompting policymakers to slow down their easing cycles and thereby impeding growth. It is important to note that we do not anticipate a significant tightening of the headline credit spread for the asset class from its current levels. Nevertheless, within the asset class, ample opportunities exist for investors to align with a more optimistic outlook and potentially achieve higher returns.”
Looking directly at which classes of EMD he favours currently, MacKerron says high yield corporates from regions such as Brazil, Colombia and Turkey are most compelling.
“We favour high yield corporate bonds of emerging markets in the current environment. Particularly fundamentally robust BB-rated corporates which have lagged the spread tightening of their sovereign counterparts since early 2023. Brazil and Colombia offer the best opportunities within Latin America and Turkey has issued many interesting opportunities in the past six months. There are also attractive opportunities in resilient telecommunications and related infrastructure in frontier jurisdictions. These are exhibiting favourable market trends in marked contrast to the saturated telecoms markets of the Americas and Europe.
“Whilst much of the financials widening stemming from the US regional bank woes of early 2023 has retraced, there remains some premium in the debut issuances from Eastern European banks. Lastly, Turkish corporate bonds look compelling relative to sovereign bonds having historically traded tighter to reflect a combination of dollarized export earnings, offshore liquidity and foreign sponsors, which provide some shelter to any return of politically induced volatility there. Ukrainian corporates have been another favoured sector, though bond prices are now reflecting their remarkable capacity to adapt to the shifting operating environment.”
Mackerron believes within sovereign EMDs, the opportunities are more “idiosyncratic” as performance has struggled relative to US credit in the past few months.
“Within sovereigns, opportunities are more idiosyncratic. The underperformance of BBB-rated sovereigns relative to US credit since mid-2023, exacerbated by last month’s heavy supply, has provided better entry levels for Romania through primary markets. Ivory Coast is one of the few fundamentally positive stories on the African continent at this juncture, having broken the two-year bond issuance hiatus for SSA sovereign issuers. Most value resides in CCC-rated and restructuring sovereigns, despite last year’s very high returns.
“As the IMF and bilateral lenders have stepped in, fears of a sharp wave of sovereign defaults following the successive economic shocks from 2020-22 have calmed. A few stressed issuers, such as Pakistan, are now likely to remain current into at least 2025 which should offer further upside. Lastly, those concluding their debt restructurings such as Ghana will likely be conducive for investor returns.”
The Member States are expected to adopt the amendments to the Solvency II regime by 30 June 2025 and to apply the revised regulations from 1 January 2026. In the UK, the Prudential Regulation Authority (PRA) has recently issued a second round of consultations on the subject, which closed in early January 2024 and plans to implement all the changes related to the so-called Solvency UK, the prudential regime for insurance companies in the UK, by December 2024.
The Solvency II review started in 2020 by identifying areas of improvement in the directive. In both the EU and the UK, one of the main goals of the review was reducing regulatory capital constraints to free up capital resources and facilitate insurers’ investment in long-term assets without affecting their capital position. In doing so, insurers are expected to better contribute to economic growth and financing sustainable initiatives.
We note that, notwithstanding the changing macroeconomic landscape, both in the EU and the UK insurance companies have maintained high solvency ratios in recent years. On top of this, the less strict capital rules are not detrimental to EU and UK insurers’ capital position and we believe that the new rules should not ultimately affect their risk appetite and asset allocation materially.
Solvency Review: A Summary of the Main Changes
In Europe and the UK, one of the most relevant changes to the directive is related to the risk margin. The risk margin is an additional provision insurers are required to maintain above their best estimate liabilities. Since the introduction of the Solvency II directive, the risk margin has been under scrutiny and received some criticism for being too large and too sensitive to interest rate volatility. Within the European Commission's 2021 Impact Assessment Report a recommendation was made to reduce the risk margin by introducing a time-sensitive parameter called “lambda”. In addition, the European Parliament proposed in July 2023 to reduce the cost-of-capital rate, another variable used in calculating the risk margin, to 4.5%, from the current 6%. If both changes are adopted, insurers, especially those with long-term liabilities, could benefit from a substantial release of technical provisions and regulatory capital, which could be deployed to finance European economies and long-term green investments. As in Europe, the UK regulator intended to reduce the risk margin by adopting a modified cost of capital calculation methodology. According to the new rules, the PRA indicated, in June 2023, that the risk margin is expected to decrease by around 65% for long-term life insurers and 30% for non-life insurers in the UK.
In Europe, another significant change is related to long-term equity investments (LTEIs). The reform takes into account the fact that insurers and reinsurers are generally long-term investors in nature, and therefore, it is aimed at easing the current requirement for LTEIs, which are perceived to be too restrictive. Other changes, including the modification of the risk-free curves used to calculate best estimate liabilities and the volatility adjustment, proved to be less material than initially planned in the current higher interest rate environment. Finally, the Solvency II reform will also require insurance companies to consider climate risk and ESG factors in their risk management framework.
In the UK, another relevant and significantly discussed measure is the adoption of less strict rules around the matching adjustment. The matching adjustment is a significant benefit for insurers that write long-term business, which can hold long-term assets that match the cash flow of similar long- term insurance liabilities. The new rules allow a broad criteria for assets that are deemed to be eligible for inclusion in a matching adjustment portfolio.Solvency II Ratios of the UK and European Insurers at Top Levels
Most of the Solvency II amendments summarised above are expected to benefit mainly long-term insurers (typically life insurance companies). Thanks to the revised measures, insurance companies with a long-term liability profile will not only be able to deploy additional capital resources but will also be able to invest them in a wider range of long-term assets without facing much higher capital constraints. We note that the regulators will implement these significant changes to the prudential regime in a context in which European and UK insurers have maintained robust regulatory capital ratios. In recent years, insurance companies have built significant capital headroom well above the minimum regulatory requirement. As reported by the European Insurance and Occupational Pensions Authority’s (EIOPA) insurance statistics, European insurers reported an average SCR ratio of 223% at the end of Q3 2023, compared with 217% at the end of 2022. In its latest financial stability report, the EIOPA also noted that life insurance companies are, on average, better capitalised than non-life insurance companies, with a median SCR ratio of 243% at end-Q2 2023 compared with 214% for non-life insurers.
In the UK, the average SCR ratio was slightly lower at end-Q3 2023, at 195% (190% at end-2022) but still well above the minimum requirement of 100%. In the UK, life and non-life insurers’ SCR ratios are almost equal at 194.2% and 195.5%, respectively.
While we remain vigilant on further announcements from the regulators that outline the final version of the amendments to the Solvency regime, it remains to be seen how the asset allocation of the insurers will change in accordance with the new rules. For instance, less strict regulatory rules might attract more risky investments that yield higher returns but are less liquid. On the other hand, shifts in asset allocation, if any, will likely be implemented gradually, and we do not expect a significant change in the companies' risk appetite. We also believe that insurance companies in both the EU and the UK will maintain minimum solvency ratio targets comfortably over the regulatory requirements in the future.
Retirement specialist Just Group said its analysis of current rates found that the gap between the best and worst deals is much higher at age 75 than at age 70 or 65.
A healthy 75-year-old can secure about 17% more income from the best annuity provider compared to the worst. The best-worst gap is 14% at age 70 and 11% at age 65.
Stephen Lowe, group communications director at retirement specialist, Just Group, said the figures highlight the importance of shopping around, particularly among older buyers who are at most risk of losing extra income with poor choices.
“Improving returns have pushed up demand for annuities in recent months but buyers must do their homework to avoid the poor value providers and to secure the highest income possible,” he said. “It means extra money every month for as long as you live.”
In cash terms, a healthy 75-year-old buying an annuity with a £50,000 pension could expect about £4,661 income each year for the rest of their life from the most competitive provider compared to £3,980 from the least competitive, a difference of £681 or 17% more income every year.
The chart shows that the gap has been as high as 22% in the past year.
At age 70 the best-worst difference is £492 or 14% extra income a year while at age 65 the difference is £342 or 11% extra income per year.
“Annuities provide secure income so people have peace of mind knowing that they can spend what they receive without worrying if it will fluctuate or disappear during their lifetime,” said Stephen Lowe.
“But there are no second chances when you buy annuity – you must get it right first time. That means disclosing health and lifestyle information so that the rate offered is personalised to your circumstances, then taking that information into the open market to see which providers are the most competitive. The better the deal, the more income you will enjoy for the rest of your life.”
He recommends all retirees should take the free, independent and impartial guidance from the government-backed Pension Wise service. Professional annuity brokers or financial advisers can help choose options and compare between providers.
Research carried out by the Financial Services Authority last year found half (50%) of annuity buyers did not compare rates to find the best provider and more than half (52%) did not know disclosing poor health could result in higher rates.
“These high numbers raise concerns about the level of support retirees are receiving – this is the closest thing in the financial world to being given ‘free money’,” he added.
This record year included a bumper fourth quarter which saw £1.5 billion in sales, off the back of a strong third quarter when sales totalled £1.4 billion.
The number of annuity contracts sold also increased in 2023, to 72,200 (+34% on 2022). This is the largest number recorded since 75,000 were sold in 2016, reflecting strong consumer desire to lock in a guaranteed income for their later years.
Level-only annuities, which pay the same income every year but can be vulnerable to inflation, remained the more popular version of the product, at 82% of the total number sold. This type of annuity has a higher starting income than an escalating annuity - which provides an income that increases every year. The proportion of escalating annuities sold increased by 2 percentage points vs 2022, making up the remaining 18% of total sales.
With six providers now offering annuities to new customers, 2023 also saw 64% of annuity buyers shop around – taking an annuity from a different provider to the one they held their pension savings with.1
However, only 29% of customers who bought an annuity did so with the help of professional advice. The?FCA’s Financial Lives 2022 survey 2 shows that consumers struggle to make crucial decisions about their savings, investments and pensions without regulated financial advice.3
Recent research carried out on behalf of the ABI by Thinks Insight and Strategy’s Behavioural Team suggests that there could be a compromise when it comes to advice. The research suggests that when professional guidance is ‘personalised’ to an individual’s circumstances, it can significantly impact the individuals decision making, leading to a better financial outcome.
Meanwhile, the Government and FCA’s continued work to close the advice gap as part of their Advice Guidance Boundary Review provides the opportunity to take a step in the right direction in closing the advice gap.
Rob Yuille, Head of Long-Term Savings Policy, Association of British Insurers, said: Securing a guaranteed income for life remains an important part of the mix of options for people to consider at and during retirement, and it’s great to see more people taking advantage of the protection they have to offer. It is also encouraging to see more people exploring the market to secure a higher income.
“However, we’d like to see more people taking advantage of professional advice and new forms of targeted support for consumers to ensure they can enjoy the best possible retirement.”
Providing vital protection and peace of mind to Defined Benefit pension scheme members and their employers, the bulk annuity market also continued to thrive with sales reaching £22 billion in the final quarter of 2023, taking the yearly total to £49.3 billion.
]]>According to the PLSA, an individual will now need £31,300 p.a. for a Moderate standard of living, up by 34%. For average earners, Hymans Robertson calculates that contributions of more than 16% p.a. are required to have a reasonable chance of achieving the Moderate standard. Even for high earners, simply paying the 8% minimum total contribution rate under auto-enrolment is unlikely to achieve the Moderate standard.
For a Comfortable standard of living, £43,100 p.a. is now needed, up 16% from last year. For those earning a salary of £50k p.a., the analysis has shown that a total contribution rate of more than 18% p.a. would be required to achieve this Comfortable standard, which is out of reach for most members.
For a Minimum standard of living, £14,400 p.a. is now needed, up 13% from last year, though most members who will receive the full State Pension are likely to achieve the Minimum standard. The State Pension remains a significant component of retirement provision for low earners, and members should understand their entitlement. A realistic target for low earners is likely to lie somewhere between the Minimum and Moderate standards.
Hymans Robertson’s projections are based on its Guided Outcomes (GO)TM Model, which calculates future retirement incomes by considering member specific characteristics such as age, salary, contribution rate, current fund value, assumed investment choice and retirement age.
The results are categorised using a colour scale of red (unlikely to achieve the standard), amber (moderate likelihood), and green (likely to achieve the standard):
Moderate (£31.3k p.a.)
Comfortable (£43.1k p.a.)
Commenting on the findings, Darren Baillie, Head of Digital Strategy for DC Pensions, Hymans Robertson, says: “The hill that members need to climb to achieve their desired retirement outcome has become shockingly steeper in the last year, partly due to the cost-of-living crisis. Plugging the savings gap through higher contributions alone is impossible for most people, so to meet the new standards, people will need to work for longer. Our analysis shows that a member in their mid-50s, who was on track to achieve the Moderate standard before the cost-of-living crisis, would now need to defer retirement by one to two years to achieve the same outcome.
“Trustees, providers, and employers need to take several actions to help members understand their pension adequacy and make informed decisions about their retirement. Firstly, they must help members set a retirement income target. This can be an effective way of improving engagement and the RLS provide a useful framework for deriving targets that can be tailored to members’ spending patterns. Secondly, they must help members find and understand their State Pension entitlement and what it means for the personal pension savings they’ll need for retirement. Finally, they must provide members with the means to monitor progress against their target and understand what changes they can make to improve their outcome.
“These actions should be in addition to the pensions industry promoting ways to help members extract more value from their DC savings, in response to the FCA’s highlighting of the lack of product innovation. Alternative design options such as longevity pooling could help older members, who have little time to make up the savings gap. Entering a longevity pool could allow members to achieve their desired standard of living without having to defer their retirement or significantly increase their contributions.
“It’s also vital that the Government does more to help. This should include an overhaul of the current auto-enrolment legislation and an increase in the AE minimum total rate to 12%.”
A copy of the Helping Members Achieve Retirement Goals – February 2024 report can be found here.
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The objective of the new Code is to better meet the needs of trustees, scheme managers and their advisers whilst simultaneously supporting modern scheme governance.
The SPP was designed to help pension professionals learn what differing schemes will be required to do and by when, how the code can be used to drive value and scheme standards and to explore what proportionality means in practice.
There remains considerable interest in the new Code as demonstrated by the fact almost 500 SPP members attended the webinar.
Prior to the event, most attendees already felt the Code was a “real opportunity to add value”, with 56% of attendees saying so when polled.
However, when asked the same question at the end of the event, almost two thirds (64%) believed the Code presented an opportunity to add value. .
In contrast, 44% initially stated that they felt the Code was a box ticking exercise, reducing to 36% after the event.
Rosanne Corbett, Director, Muse Advisory, said, “SPP polling suggests most pension professionals think the Code is a tangible opportunity to add value. This positive outlook increases further once the Code’s contents and requirements are better understood. With the Code coming into effect on 27 March 2024, pension professionals can support pension schemes to realise that value, which is great news for both the industry and savers.”
Analysis shows that for a 30-year-old earning £30,000, moving a £10,000 pension pot from a provider charging 0.4% to one charging 0.75%, would leave them £32,834 worse off when they retired at 67. If they moved a £50,000 pot, they would have £59,523 less to live on in retirement. And if the same person is earning £45,000 and moves a £50,000 pension, they will be £72,689 worse off in retirement.
People’s Partnership believes the pension industry needs to be more transparent and should help savers understand key information when transferring their pension, to prevent them from making detrimental financial decisions for their future.
Commenting, Patrick Heath-Lay, Chief Executive Officer at People’s Partnership, said: “While there are many factors that can make a pension attractive, the two fundamental aspects are investment returns and charges. Unfortunately, very few people know exactly what they are being charged for their pensions and they are being let down by an industry that doesn’t make this information easy to find or understand. If people can’t make an informed decision about the value they are being offered by different providers, they risk losing thousands of pounds from their retirement pots. This lack of transparency is an enormous issue that pensions providers have to address.
“Our research shows the real-world impact of small differences in percentages are incredibly hard to grasp, so the onus is on the pension industry to make sure consumers understand what they are being charged. We are taking direct action to provide our members with more guidance through the transfer process and are creating tools that will support them to make informed decisions that are in their best interests. We passionately believe that there must be an obligation on pension providers to give clearer information to those savers who are considering transferring and the industry must move to provide comparable consumer focused value metrics. ”
People’s Partnership found that only half (50%) of respondents said it was easy to find information on fees and charges from both their old and new pension providers. The research suggests fees aren’t anywhere near as important a consideration as they should be when transferring a pension, and that people don’t appreciate how seemingly small differences in costs can lead to significant differences in real terms.
]]>As the UK grapples with a significant cost of living crisis, Senior Capital’s research found that 32% of Brits find themselves unable to contribute to their pension. This financial strain has forced 21% of individuals to postpone retirement and continue working, fearing they lack sufficient funds in their pension pot. The ramifications extend beyond financial concerns, with 25% reporting that their greatest mental health burden stems from worrying about funding their retirement. Additionally, 37% express profound anxiety about their quality of life diminishing due to inadequate pension savings. These figures underscore the pressing need for comprehensive measures to address the escalating cost of living and its profound impact on retirement planning in the UK.
Due to the increase in house prices over the last 50 years, thousands of people find themselves in a situation of having a significant amount of capital wealth, however, are unable to access this to fund their retirement and pension pot in the present. In the early 70s, the average house price stood at a mere £4,975, but according to the latest figures released by the Office for National Statistics (ONS) in July, the average house price has skyrocketed to £290,000. In light of this, Rudy Khaitan, Managing Partner of Senior Capital, highlights how equity release loans unlock capital for those with high value assets, but struggling to acquire with liquid cash. By engaging in equity release, those who are currently struggling have the opportunity to tap into the significant value tied up in their homes, whilst also remaining in them and accessing much-needed funds to alleviate their financial strains amidst the ongoing cost of living challenges.
Managing Partner of Senior Capital, Rudy Khaitan, comments on releasing equity and the importance of LTV: “There is a growing need for new products that offer greater flexibility and choice, particularly in the relatively underserved later-life lending market. For pensioners or anyone planning for their retirement, LTV is a critical component when assessing your quality of life during your later years, so it’s vital to investigate a multitude of options that can help ease your financial obligations, as remortgaging may not always be the right option.
"The right equity release mortgage product, particularly those that offer the greatest flexibility through limited prepayment penalties, can be the better option vs a more traditional mortgage when you want to unlock the value in your home without taking on additional monthly repayments. It allows homeowners to access the equity built up in their property, providing a tax-free lump sum to supplement regular income, whilst still retaining ownership and the right to live in their home for life or until they move into long-term care. This can be particularly advantageous for those who are retired or have limited income, as it offers financial flexibility and stability without the burden of servicing higher mortgage repayments."
Amidst this new wave of pensioners who find themselves living on the poverty line, equity release loans have experienced a record 23% year-on-year increase as a vital lifeline amidst the cost-of-living crisis. According to the Equity Release Council, over 93,000 Brits took out this type of plan/loan in 2022. To create financial liquidity, stability and a better quality of life, Senior Capital was created to serve a growing number of homeowners looking to access capital from the £800bn currently tied up in property wealth.
The extent of future complications has become clearer with the publication of the HMRC policy paper 'Abolition of the Lifetime Allowance from 6 April 2024'. In light of this new understanding, there are several steps those working in the LGPS need to take in order to ensure both they and their members are ready ahead of April.
Member communications
We now know that although the planned abolition of the LTA will still have effect from 6 April 2024, other new allowances will also come into play from the same date.
Tax-free cash from a pension fund will be tested against the Lump Sum Allowance (LSA), which is set at the £268,275 (25% of the LTA).
A Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 (the same as the current LTA) will test both tax-free cash sums and pension death benefit lump sums.
Amounts above these allowances will be taxed at the member or beneficiary’s marginal rate. There is no provision to increase either of these allowances in line with any index, so expect them to bite harder over time as member benefits increase.
So far so complicated, but that’s not the end of it. For example, members will also need to be aware that:
Those members with LTA protection will have a different LSA based on the amount of their protection. This means for a member with a protected LTA of £1.5m, the LSA will be £375,000 (£1.5m x 25%).
A new Transitional Allowance will take account of any LTA used prior to 6 April 2024 and reduce the LSA by 25% of that amount.
This means that if 50% of the LTA was previously used, the LSA would be reduced by £134,137.50 (50% x £1,073,100 x 25%).
An Overseas Transfer Allowance (OTA) of £1,073,100 will also be introduced.
As you can see, pinpointing the exact ramifications of these changes will be difficult for members to work out by themselves, particularly for long-service, higher earning members. It is crucial that you find an effective way to communicate the changes to your members, providing them with simple breakdowns, realistic examples, and points of contact for their questions. Getting ahead of this can save a lot of turmoil post-April 6.
Internal changes
If the UK increasingly considers CDC, can we learn anything by looking further afield? Which risks and benefits are good to share, and which aren’t?
Dutch experience
The Dutch Pension Act, which came into force from 1 July 2023, marks a shift away from DB and CDC arrangements toward DC pension provision in the Netherlands. Notably, this is the opposite direction of travel compared to those currently being suggested by the UK government.
What has catalysed this shift in the Netherlands? Why are they reforming, when Dutch pension provision is rated as among the best in the world?* In short, members didn’t understand the risk sharing mechanisms behind the system, and this led to cries of intergenerational unfairness when difficult decisions around pension cuts arose.
Only a fool learns from his own mistakes, a wise man learns from the mistakes of others
Otto van Bismark - German statesman and diplomat
What can we learn to avoid the same about-turn and keep the introduction of CDC on a path to success?
It will be important for those working on pension scheme design to decide which risks and benefits get shared, and which don’t.
They’ll typically consider the implications of design decisions on members and it will be vital to ensure that the design leads to better outcomes.
But… this isn’t quite the same question a member’s asking. A member is less concerned about “what does this mean for all members?” and more focused on “what does this mean for me?”. And, at its heart, this is a question of fairness and transparency. Members must be happy with the pension they’ll get out, given the contributions they’ve paid in.
Importantly, fairness in isolation isn’t sufficient. It won’t wash if some members think they’re getting a hard deal and they don’t understand why, even if their lot is actuarially fair according to scheme rules. Instead, for a CDC system to be successful, members need to view the risk sharing mechanisms as transparent and equitable.
It's a rare opportunity when you get a blank sheet of paper to design from in the world of pensions. The decisions made today could affect millions of people for decades to come. As an industry we have to get this right, and lessons from abroad can teach us a lot.
]]>With the demand for government debt expected to fall significantly the increase in bond yields seen over January could continue.
Mercer’s monthly analysis of FTSE 350 pension schemes highlights the impact of significant bond yields increases during January 2024. These increases are not as large or as fast as seen in the mini-budget of September 2022, but with the demand for government debt from pension schemes expected to fall in 2024, this could be the tip of the iceberg.
Mercer’s analysis shows an increase in the aggregate funding level across company accounts since the end of December 2023, reaching 111% at the end of January 2024, a reversal of the deterioration seen over December 2023.
Adam Lane, Head of Corporate Investment Consulting at Mercer said, “Pension scheme funding positions are tied to the market and the volatility we’ve seen over the last few months really brings this into focus. Markets are pricing in falls in interest rates during 2024, but this should not be seen as the expected outcome. Our analysis suggests £300bn of pension assets could potentially be transferred to insurers in the coming years requiring significant sales of government bonds which, in the absence of any new buyers, is likely to put major upward pressure on yields and UK finances. It would seem volatility is here to stay for pension schemes.”
The UK’s Debt Management Office is aware of this problem and is expected to announce a reduction in the issuance of government bonds alongside the spring budget.
Mr Lane continued, “With the improvement we’ve seen in schemes’ funding positions since 2021, many schemes have taken action to lock in these stronger positions by de-risking their investment portfolios. Many schemes who have not passed their liabilities to an insurer have been making larger allocations to credit instruments and hedging funding positions against market movements. However, while many schemes will now be running lower levels of risk, residual risks will have become more pronounced as a result. For example, we anticipate those who have increased allocations to credit-instruments will now be bearing a larger amount of credit risk. We expect that this may come into sharper focus through the remainder of 2024.”
]]>Lauren Wilkinson, Senior Policy Researcher at the PPI said: “While increasing engagement is a key focus of both government and industry, a significant proportion of the population are unlikely to achieve positive retirement outcomes under the current system without changes to engagement strategies and consideration of other mechanisms.
These mechanisms are needed to support those who are unlikely, unable or unwilling to engage, or unlikely to achieve positive outcomes through engagement alone. The approach that is appropriate, be it engagement-focused or other policy levers, differs according to individual levels of financial capability and openness to engagement. Developing a better understanding of the range of needs and the varying capacity for engagement across the population is vital to the goal of delivering positive retirement outcomes for as many people as possible.
Building consensus on key goals and strategies for engagement, including best practice for data collection and utilisation, clear language to be used in communications across the industry and a standardised method for measuring engagement, could help some people to achieve better retirement outcomes. For those less likely to benefit from engagement, other mechanisms may more effectively deliver the goal of positive retirement outcomes. Appropriately designed defaults, rules of thumb and safety nets may be needed for those who are unlikely or unable to make informed active choices that will deliver positive outcomes.
Further investigation of segmentation, taking into account both openness to engagement and financial capability, could help to make engagement strategies more effective and ensure that other mechanisms are in place for those who will struggle to achieve positive outcomes through engagement alone. A designated taskforce or working group for engagement could be established to bring together key stakeholders from across government and industry in order to build consensus and develop solutions to the engagement challenge.”
PPI Report What could effective pensions engagement look like
The report sets out recommendations for government and businesses to support greater flexible working for over 50s and help more people to stay in meaningful work.
A new report from the 50+ Choices Roundtable shows how businesses, older workers and the wider UK economy would all benefit from employers and government prioritising greater flexibility in the workplace.
The Flexible After Fifty report, from the members of the 50+ Choices Roundtable, shows that nearly three quarters (72%) of over-50s are seeking flexible work to achieve a better work-life balance, with a third (34%) citing caregiving responsibilities and a desire for more personal time as key driver.
The report also highlights the growing uptake of different forms of flexible working among over 50s, with 33.2% (3.6 million) in the UK engaging in part-time work. Rates of home-working among over 50s have also risen, from 10% in 2020 to 22.4% in 2023, and flexi-time, which allows employees to customise their start and end times within certain limits, is utilised by 12.9% of over 50s in work. Adopting flexible working patterns is key to supporting people aged over 50 to remain in the workforce for longer, if they choose to, with all the benefits that brings.
Ahead of the Flexible Working Act coming into force in April 2024, the report recommends that the government lead by example by monitoring the uptake and effectiveness of flexible working across different age groups. It also recommends that small and medium enterprises or small businesses have better resources to help with implementation of the legislation, and that the government should back the Centre for Ageing Better’s Age Friendly Employer Pledge. The report will be presented to the Minister for Employment to respond to the recommendations.
Recommendations to government and businesses from the Flexible After Fifty report
Government:
• Should lead by example by monitoring the uptake and effectiveness of flexible working. This should be broken down by age.
• Should provide a range of practical examples for use specifically with over 50s (including case studies) to help illustrate how flexible working can be used to aid retention, retraining and recruitment.
• Ensure resources on HR support are available for small and medium enterprises or small businesses to help them with the implementation of flexible work legislation, including issues such as phased retirement.
• Should review the skills and training offering in both Job Centre Plus and via DfE to ensure it can be undertaken on a flexible basis (e.g. apprenticeships/ bootcamps).
• Back the Centre for Ageing Better’s Age Friendly Employer Pledge.
Business
• Should actively promote the availability and range of flexible work options to both new and existing employees, monitoring the uptake and effectiveness of flexible working.
• Should offer support to people managers to better support flexible workers of all ages.
• Should include promotion of flexible work in all job adverts and/or discuss this early in the recruitment process.
• Should ensure training and skills opportunities can be taken flexibly.
• Should actively adopt and sign the Centre for Ageing Better’s Age Friendly Employer Pledge.
Andy Briggs, UK Government Business Champion for Older Workers and Group CEO of Phoenix Group, comments: With a third of our workforce now aged over 50, this report is published at an incredibly important time. We must capitalise on this generation’s skills and knowledge to help individuals, businesses, and the economy to flourish.
“Many people aged over 50 face significant shortfalls in their pension savings, so helping them to stay in good work and reduce the pension savings gap is essential. This allows them to continue building their savings, and helps avoid a looming retirement crisis, amid widespread under-saving.
“Flexibility is crucial to helping people stay in meaningful work longer, without feeling they need to leave because of challenges associated with health, caring responsibilities, or needing a better work-life balance in later life.
“At Phoenix Group, all our roles are offered on a flexible, hybrid, full and part-time working basis from day 1 of employment and we offer 10 days paid leave to all those with caring responsibilities. I encourage all employers who can to adopt similar policies to increase the recruitment and retention of people aged over 50.
“The report outlines a series of recommendations for businesses and government to support flexible working practices. These recommendations will facilitate more effective recruitment, retention and reskilling of older workers, thereby improving retirement outcomes for these workers, and creating longer, fulfilling working lives. I want to thank all the businesses who contributed to this report, and we look forward to hearing the government’s plans on how they can support more people to work flexibly.”
Peter Cheese, Chief Executive of the CIPD, the professional body for HR and people development said: “Flexibility is an important way of working for many people, and it can become even more essential in people's later years and in balancing other life commitments. Flexibility over working hours, working arrangements and phased retirements are all approaches that can help people to keep working and earning in a positive way.
“This not only benefits the employee but also means that employers can retain skilled, knowledgeable and experienced staff, which is crucial when so many employers are struggling with skills gaps. By being more age-inclusive when recruiting, developing and retaining staff, employers can have a major role in creating more fulfilling working lives.”
Recommendations for businesses and government outlined in the report were created with the input of a range of 50+ Choices roundtable members, including the CIPD, the British Chamber of Commerce; the Federation of Small Businesses, the Recruitment and Employment Confederation; UK Hospitality; Institute of Directors, Make UK; and Business in the Community.
But when it is something as large and as critical to an insurance company as the software used within actuarial or finance, then there can be multiple barriers to change – concerns around cost, time, resource, IT compatibility and regulatory compliance all spring to mind. This means that making the decision to change can seem to be completely untenable and potentially impossible, yet many companies do change their software.
So, what drives them to make this change given the apparent barriers, and is there a tipping point when a company should start to look at alternatives and accept the impact that it could have on the business?
External factors – new regulations, new opportunities
Sometimes all that is needed to drive a desire for software change is one major external factor that sends actuarial shockwaves through the industry – changes in regulation.
Recent examples include Solvency II and IFRS17, with the likely Solvency UK reforms not far ahead. New regulation invariably means changes to methodology, changes to the granularity, or changes to the reports, that the existing systems or processes may struggle to achieve in the timeframe allotted.
Large scale regulatory changes only happen every decade or so which means that the software currently in use could potentially cope with a couple of these changes. But ask yourself – can your current software compete with the newer offerings that have the most recent, and usually upcoming, regulations at the heart of their design and architecture?
Another external factor that can raise questions over the suitability of the systems in place are new market opportunities. For example, most recently there has been an explosion of opportunity around Bulk Purchase Annuities (BPA) in the life insurance space, which brings with it some unique requirements, especially to new market entrants.
In order to price competitively in the BPA market, your software needs the ability to process multiple policies, or tranches of pensions, as well as aggregate them in several ways. This will require specific calculations and interactions along with particular memory and data requirements. Then, having the policies on your books opens the possibility of utilising the matching adjustment framework, which again requires specifics around the whole asset universe projections and optimisation approaches.
A similar trend in general insurance around hyper-optimising pricing based on granular data continues to be the holy grail that most companies seek in order to attain better underwriting results. Bringing onboard new systems for new market opportunities can open the door to utilising them for other existing calculations and processes in the business, thereby providing second order benefits and further improving the argument for change.
Internal factors – new people, new ideas
As well as external pressures there can also be an internal drive to alter, improve or enhance the situation. When new people join the company, irrespective of level, they bring with them experience and knowledge that may be unknown to the existing resource. By sharing and listening to the alternatives there can then be an opportunity and a desire to instigate changes to achieve goals previously not thought of as being attainable.
This does not necessarily have to be a whole system change, but small step changes can make big impacts in the long run too. One initial change could free up one person’s time, which then allows them to implement other improvements, which further creates more time and opportunity, and before you know it change and improvement is happening continually as people see the culture of change having a positive impact which provides motivation to embrace more change.
Over the last 20 years there has been large-scale consolidation across the market, with either whole companies or funds subsumed into other organisations. When this happens the models and systems will usually transfer along with them. This can give the new owners an opportunity to use and investigate alternative systems and approaches to modelling they may have not seen before.
They then have four scenarios to choose from: moving the new to the old, the old to the new, running parallel tools, or sometimes, when there are so many systems in place, it can also make sense to take a step back and do a full analysis of what’s in-house and what’s available in the market, given the potential amount of re-working required. A key point to note is that it can be very easy to fall into the trap of not looking at the benefits of the new tools you now have access to, and instead dismissing them out of hand, as a decision to move everything to the existing tool had been set years ago without a process to re-visit.
Vendors – new products, new options
Lastly, we have the impacts of the vendors on the insurance company, who have the ability to either push a company away or entice a company in and encourage them to look at alternatives.
One scenario is when the vendor no longer provides the level of service expected by the clients for the monies paid. They may not be as quick to respond to queries or requests for functionality, or they may increase prices to levels that aren’t viewed to be commensurate to the client expectations or usage of the system. Due to perceived barriers to change, clients will pay the increased prices, as implementing a replacement doesn’t appear cost or time effective. This may continue in the short term, but it can breed discontent and a refusal to listen to positive developments, which can then permeate away from the company via the employees’ network and out into the wider market.
Price increases are always expected along the way, for example due to inflation or the recouping of development costs for new features, but they must be justified by providing long-term benefits - if the cost of total ownership is more than the potential cost of implementing a new system, this may be reason enough to look for new vendors.
Another situation is when a vendor struggles to keep up with technological advancements. Sometimes it can be quite tricky for them to take advantage of new technology, especially when the solution is built on, or has embedded within it, older technology. But the issue vendors face is that there will always be a new entrant looking to utilise new advancements and demonstrate how much simpler, faster and more efficient their new offering is, whilst still providing all the requirements.
For example, we saw that throughout Covid many companies accelerated their remote and cloud strategies and any technology not compatible would be replaced promptly so as not to hold them back. Some software is easier to switch out but no matter how ingrained you think a solution is there is always a way to replace and improve the situation.
Summary
So, is there an easily defined tipping point at which a company should start looking at alternative software? In my opinion, no, as I believe companies should always be looking at alternatives.
The only way to ensure a company is certain that what they have in place is fit for purpose, provides the best value for money, and provides policyholders with the suitable protection they need, is by knowing what is available in the market, what new advancements have been made, and what alternative approaches there are.
Then, by also understanding how the external, internal, and vendor factors described above are affecting them, they can decide if taking that next step - investigating in more detail and determining what to replace, what that replacement should be and how to implement it - is worthwhile. But what the answers are to those questions is for another instalment I’m afraid.
I appreciate that finding out information on the alternatives can be time consuming, so if you have any questions about what is available and what the latest developments are in the market, along with an agnostic view of both, then please do contact us for a conversation as we have done the work already.
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David Brooks, Head of Policy at Broadstone, expects a quiet fiscal event for the pensions sector with various reforms either in process of implementation or in the consultation process.
Moreover, with a General Election expected at the tail-end of the year he predicts the Chancellor will direct efforts and money towards more retail-friendly offerings such as cuts to Inheritance Tax or personal taxation.
Existing reforms bedding in or in consultation
“The Autumn Budget confirmed that the Lifetime Allowance would be abolished on 6 April 2024 – a tax cut made at break-neck speed which could risk poor outcomes given the complexity of the legislation.
“The Mansion House reforms are still going through the legislative process and we do not expect a response to the ‘pot-for-life’ proposals by the time of the Spring Statement.”
Voter-friendly tax cuts expected
“With a General Election looming and the Conservatives needing to make up a hefty deficit in the opinion polls, we expect the Chancellor to use the Spring Statement to introduce further tax cuts following on from the Autumn Budget.
“It may be his last attempt to curry favour with the electorate – notwithstanding a late Winter election – and so any combination of Inheritance Tax, income tax and National Insurance are expected to be in the crosshairs.”
Stimulating saving
“Alongside tax cuts, Jeremy Hunt may look at other tax-free vehicles to create a nation of savers. There were scotched rumours ahead of the Budget that the annual tax-free allowances may be lifted for LISAs and ISAs. The allowances may be looked at again, while the Chancellor could also increase the value of property that can be purchased using a LISA from its current £450,000 limit.”
Any rabbits left in the hat?
“We’d expect the government to double down on its support for the State Pension triple lock given the importance of retirees to the Conservatives’ electoral fortunes.”
“Frozen thresholds acting as an onerous stealth tax via fiscal drag have been a lightning rod for critics of the government – unfreezing them would be a popular move.”
Pensions policy in the spotlight
“The Times has launched a campaign to improve pension adequacy and the Resolution Foundation propose the ability to access pensions early. The potential for a change in government sometime in the next 12 months appears to be focussing minds on future pensions policy.
“If the polls are to be believed, this government has a finite time to make significant policy developments before passing the baton to a different party. Initiatives, such as Pensions Dashboard, need to make significant progress before the end of March to ensure the project remains on track.”
Standard Life’s Retirement Voice report, conducted among 6,000 UK adults, found that only 7% of people make one-off contributions into their pension. However, their analysis shows that paying even small contributions can make a substantial difference to your total retirement pot, as it benefits from compound investment growth over time.
If you began working on a salary of £25,000 per year and pay the minimum monthly auto-enrolment contributions (5% employee, 3% employer) from the age of 22, you could have a total retirement fund of £434,000 by the age of 66. However, if you were to also top up your pension with nine one-off payments of £500 every 5 years, from the age of 25 to 65, you could find yourself £11,000 better off in retirement. Of course, those in a position to contribute more have the potential to amass a larger retirement fund – for example paying in £5,000 every 5 years, between the ages of 25 to 65, could result in a total pot of £549,000 – £115,000 more than if no additional contributions had been made. These figures are not adjusted for inflation.
Impact of one-off contributions
*if beginning working with a salary of £25,000 per year and paying 5% monthly employee contributions and 3% employer contributions into a workplace pension at the age of 22 and assuming 3.5% salary growth per year. Figures are not reduced to take effect of inflation. Annual Management Charge of 1.00% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied.
It’s always a trade-off as putting money away means there’s less of it to meet short-term costs or luxuries now, but these figures highlight the potential potency for one-off contributions to build up over a long period of time, particularly when possibly benefiting from the power of compounding.
Gail Izat, Managing Director for Workplace at Standard Life said: “When you come into a bit of extra money, whether it be a bonus, a gift or something else, it’s always tempting to spend it as soon as possible. Right now, lots of people will be using it just to get back on track with monthly bills. However, if you are in a position to do so, topping up your pension can be one of the best ways to look after your future self. Pensions are tax-efficient and have the potential to beat inflation and the interest on cash-based savings, so a small top-up now can lead to a big boost in the future.
“We’re coming towards the time of the year when a lot of people will be expecting their annual bonus, and sacrificing all or part of it into a pension can make a real difference in retirement. Employers and pension providers have a big role to play in conveying the benefits of looking to the future, if at all possible – crucially, showing how pensions are part of a bigger financial picture through targeted communications, as well as giving people the option of seeing all their finances in one place through tools like open finance, can help people stay engaged throughout their lives.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “Despite some forecasts suggesting we’d see a small increase this month, there will be little love this Valentine’s Day for news that inflation has once again stayed at 4% and you’re likely to find your flowers, chocolates and special treats costing more than they would have in previous years. However, the longer-term forecasts still suggest inflation to fall as we move through 2024. If you’re able to save, now’s a good time to look around for the best deal as banks start to price in the likelihood of the Bank of England lowering the base interest rate in response.
“The best savings rates sat around 6% last year, and now almost all are below 5%. It’s highly likely that we’ll see them continue to fall as we move through 2024. People are famously loyal to their bank, but people can now switch bank with the click of a button, often with a financial incentive to do so and securing the best possible rate really can make a difference over a couple of years – our analysis found that if inflation fell to the Bank of England’s target of 2%, someone with £10,000 to save who grabbed a 5% interest deal could see their savings worth £10,588 in real terms after two years. However, someone with the same amount to save who missed the best offers and picked up a 3% deal would have £400 less after two years (£10,189).
“For those with a greater appetite for risk, investing offers a greater chance of substantial returns, but there’s always the chance of losing money too. People able to take a long-term view could consider saving into a pension, which offers both the benefits of investing and tax efficiency.”
Steve Matthews, Investment Director, Liquidity, Canada Life Asset Management, said: "Inflation remaining at 4% will come as a surprise for many, with expectations of a slight increase in January. However, given the stubborn wage data seen yesterday combined with higher global energy prices and the ongoing developments in the Red Sea, there are still a number of bumps in the road for the Bank of England as it targets 2% inflation.
"Today's data will still support the Bank of England’s cautious stance on cutting rates any time soon, which is backed in general by the market in cutting its expectation for six cuts in 2024 to a more conservative estimate of three - in line with our opinion, with the first movement not expected until June.”
Lily Megson, Policy Director at My Pension Expert said: “Late last year, the Prime Minister celebrated reaching his 5% inflation target. We were told this was a victory, but the reality was that Britons were still grappling with the repercussions of 18 months of soaring inflation. Now, months later, with inflation still at 4%, we can see how premature the government’s back-slapping was – and it’s not good enough.
“The government has struggled to rein in inflation, leaving Britons and their hard-earned savings to bear the brunt. For many, making long-term financial plans has become a minefield, and planning for retirement has become particularly difficult as inflation continues to diminish the real-terms value of people’s pension pots.
“More help is desperately needed. It’s crucial going forward that the government ramps up its support to those struggling with their finances and their financial planning. MPs should be in dialogue with the financial sector to bring policies that ensure Britons have improved accessible routes to financial education and advice, rather than expecting people to navigate the ongoing cost-of-living crisis on their own.”
Legal & General has managed some of the UK's biggest pension buy-ins, including the £4.8 billion deal for Boots (the second largest in 2023), the £4.4 billion buy-in for British Airways in 2018 and the £4.6 billion deal for Rolls-Royce a year later. There were 11 deals in the year to the end of 2023 over £500 million (vs. 15 in 2022); the top five deals in 2023 were valued at £21.2 billion. The RSA and Boots deals were the largest ever buy-ins so far.
Kevin Ryan, Senior Industry Analyst (Insurance) at Bloomberg Intelligence, said: “It's clear that many companies view staff pensions as both a distraction and unwelcome liability, so we expect the trend to outsource the liability to continue.”
Under the IAS 19 rule, AA+ corporate bond yields are used to discount defined-benefit pension liabilities and are up sharply year-over-year, notes BI. Yields have risen steadily since July 2021 and though this year has seen some volatility, higher average yields are likely the new normal. The rise has outpaced the Covid-19 spike that drove yields sharply higher in March 2020. Rising interest rates, combined with geopolitical uncertainty, have driven the bounce.
Ryan added: “This is broadly good news for insurance companies with two sources of profit: underwriting and investment income. Many companies' defined-benefit plans should begin to appear better funded, making these more attractive to the buy-in, buy-out market. Still, challenges remain, with insurers uniquely qualified to manage them for pension-fund clients.”
Sizing Pension Liabilities at Aviva, L&G
The size of the deficit matters most for defined-benefit pension plans, but it's instructive to compare total pension liabilities with a company's market capitalization. Aviva's pension liabilities overshadow its market capitalization and may potentially be more of an issue than at either Legal & General or Phoenix. When FY 2023 figures are published, the situation will likely have further improved, notes BI.
In the early stages of his actuarial career, Indranil worked for Hazell Carr and Alexander Forbes. In 2010, he moved to Barnett Waddingham’s pensions actuarial team.
Indranil says: “First Actuarial has a friendly culture and everyone pulls in the same direction. I’m seeing different teams – such as actuarial, investment and buy-out – collaborate across the structure quite easily. It’s impressively agile. I’m looking forward to a varied workload and the chance to make a real difference in a number of areas.”
Who benefits from W&I insurance?
This insurance is invaluable for corporate entities, private equity investors, and other stakeholders engaged in M&A activities. By transferring specific risks from the buyer or seller to an insurer, W&I insurance can facilitate negotiations, enhance deal certainty, and provide a clearer path to transaction completion.
Why and when to use W&I insurance
W&I insurance is particularly useful in transactions where there is a significant gap between the risk appetite of the buyer and the seller. It offers peace of mind by covering undisclosed or unknown liabilities, enabling smoother transitions, and protecting the interests of both parties. Typically, it's considered at the initial stages of transaction planning, where it can be integrated into the strategic approach to risk management in M&A deals.
With this context in mind, the W&I insurance market's expansion is not only a testament to its practical value but also to its evolving sophistication, with products being tailored to meet the changing dynamics of the M&A world. The number of policies placed in 2023 was roughly four times that of 2016, highlighting the market's rapid development and the increasing comfort level of lawyers, professional advisors, corporates, and private capital with W&I insurance's nuances and benefits.
WTW's transactional risks team has been instrumental in this growth, advising on an increased number of transactions in 2023, despite a general slowdown in global M&A activity. This achievement underscores the importance of expert guidance in navigating the complexities of transactional risk insurance.
To further educate and inform our clients and the broader market, we are launching a series of articles detailing the lifecycle of the W&I insurance process. Our first instalment aims to clarify some common misconceptions about W&I insurance, setting the stage for more in-depth discussions in future articles.
Addressing four common myths about W&I insurance
The survey also shows that if we could travel back in time and offer advice to our younger self, given a range of options, over half (51%) would plump for ‘start saving as early as possible’.
Other popular advice to our younger selves includes taking care of our health (42%) and to worry less about what others think (33%).
Commenting Steven Cameron, Director of Pensions at Aegon, said:“While every individual is unique, many of us now live longer lives and our expectations and hopes for every stage of life, including those later years, are changing.
“Not so long ago, people tried to comfort themselves that rather than being past your best, ‘life begins at 40’. Then there was a period when you’d hear ‘50 is the new 40’ – so perhaps another way of looking at this research is that 60 is now the new 40.
“These new findings showing that over half of us wish we could have started saving earlier highlights just how important putting some money aside for the long term really is.
“Just a small increase in contributions can have a massive positive impact on the opportunities we open up for our future years.
“Regardless of how old or young you feel, it’s vital that we individually and collectively give thought towards how we plan for and navigate this phase of life. Aegon’s benchmark Second 50 report is a great starting point to guide that ongoing discussion.”
Jonathan Bland, Head Geek at Pension Geeks, said: "In our experience of going into workplaces and doing hundreds of live TV shows, we’ve never ever met someone who has any regret of saving too much into their pension at the time of retiring or getting near to it. So, I think it’s a great thing that the younger audience are getting informed and educated about the importance of saving for your future. I’d say it’s never too early, or late, to start saving."
Despite the success of automatic enrolment, doubling take-up in the private sector in just a few years, analysis from Oxford Economics indicates only 40% of households with a defined contribution (DC) scheme will have the savings needed for a ‘moderate’ standard of living in retirement by 2040.
Jamie Jenkins, Director of Policy at Royal London, said: "Automatic enrolment has undoubtedly been a huge policy success, reversing the decline in workplace retirement saving that started almost half a century ago. However, it remains unfinished business, with contribution rates at a level that will still leave many people unable to afford the standard of living they aspire to in retirement.
"People and businesses are facing many financial pressures at the moment and now isn’t the right time to increase contributions, but any reforms are likely to take many years to implement, so we should start planning now. Failure to do so could lead to a much bigger cost-of-living crisis in the decades ahead as today’s younger workers reach retirement."
Henry Worthington, Director of Economic Consulting at Oxford Economics, added: "Our latest analysis finds that many households fail to save adequately for retirement and that higher pension contributions can improve the adequacy of pension savings. However, we also show that poorer households may find it challenging to afford higher pension contributions?an important consideration for any potential policy reform.
"In addition, the analysis highlights the potential boost to economic growth from higher pension contributions. By 2040, UK GDP could be £0.4 to £7.4 billion higher, compared to our baseline."
Royal London report on Exploring the Implications of Higher Pension Contributions
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• The aggregate surplus of the 5,050 schemes in the PPF 7800 Index is estimated to have decreased over the month to £425.4 billion at the end of January 2024, from a surplus of £428.2 billion at the end of December 2023.
• The funding ratio increased from 142.8 per cent at the end of December 2023 to 143.9 per cent.
• Total assets were £1,395.2 billion and total liabilities were £969.8 billion.
• There were 599 schemes in deficit and 4,451 schemes in surplus.
• The deficit of the schemes in deficit at the end of January 2024 was £4.3 billion, up from £3.7 billion at the end of December 2023.
Shalin Bhagwan, PPF Chief Actuary said: “In the last month we've seen a slight fall in the estimated aggregate surplus of schemes in the DB universe - down £2.8 billion - to £425.4 billion and, on top of this, the deficit of schemes in deficit rose to £4.3 billion. Despite these downward trends, the funding ratio increased from 142.8 per cent at the end of December 2023 to 143.9 per cent.
The marginal changes to aggregate surplus and funding ratio somewhat mask the relatively large increase in bond yields over the month – this was driven by stronger-than-expected inflation data in the UK impacting the markets expectations about the pace of rate cuts by the Bank of England, as well as increased issuance from both governments and corporate borrowers. Volatile bond markets vindicate higher collateral buffers which, coupled with the ongoing private market denominator effect, appears to have added to the complexity of formulating an appropriate end-game plan and a corresponding investment strategy.”
View the February update and see the supporting data on the 7800 Index for 31 January 2024 here: The PPF 7800 index | Pension Protection Fund.
It found that a quarter (27%) of people with a workplace pension have either not checked it in the past year (11%) or have never checked it (16%).
Less than one in five (19%) UK adults with a workplace pension have checked it in the last month, and only a combined 54% have checked it in the past six months.
When it comes to contributions, 38% contribute between 8% and 10% of their monthly salary into their workplace pension (when combining theirs and their employer’s contributions). Just 8% of employees contribute more than 15%.
Notably, around one-in-eight (12%) of people don’t know whether they have a workplace pension or how much they contribute to it. Despite the lack of engagement and many only making the minimum contributions, most (59%) UK adults with a workplace pension say they will “rely” on it to fund their desired lifestyle in retirement.
My Pension Expert’s research also uncovered that 52% of UK employees have not done any further pension planning beyond making sure they are enrolled into their workplace pension scheme.
Lily Megson, Policy Director at My Pension Expert, said: “This research shines a bright and somewhat unflattering light on auto-enrolment workplace pensions. Whilst it’s rightly hailed as a ‘game-changer’ for ensuring employees save into a pension, much more needs to be done to help people to better engage with their workplace pension, and retirement planning more generally.
“Frankly, it’s troubling that people are not checking on their workplace pension more. But the onus must be on the government and employers to realise that auto-enrolment is just the first step – we need to see much, much more done to ensure financial education and pension monitoring tools are made available for the UK workforce.
“Workplace pensions are not just a box to tick – otherwise people could enter later life with a nasty surprise when assessing how financially prepared they are for retirement. Instead, the focus must be on private and public sector collaboration to ensure people are financially empowered and able to secure the fulfilling retirement they deserve.
Jaime Norman, Senior Actuarial Director at leading independent consultancy Broadstone commented: “The PPF 7800 recorded a very minor deterioration through January but the big picture of pension schemes holding on to hefty funding improvements remained consistent in the first month of the year.
“As a result, we are expecting another record year of de-risking in 2024 as schemes look to capitalise on the attractive funding position they have entered over the past couple of years. Meanwhile, insurers have moved quickly to ramp up capacity so they are able to meet this expected demand in what remains a competitive market.
“Despite this increased ability to meet de-risking demand, schemes still need to sure they have best-in-class administration, excellent data and meticulous preparation before approaching the market.”
The CMI Model is used by UK pension schemes and insurance companies which need to make assumptions about future mortality rates. While mortality experience in 2020 and 2021 will affect actuarial calculations, mortality in both of those years was exceptional and is unlikely to be indicative of future mortality. For this reason, the CMI places no weight on the data for 2020 and 2021 in the core version of the model, effectively ignoring those years.
More recent mortality has been less volatile and is more likely to be indicative of future mortality to some extent. Standardised mortality rates based on registered deaths in England & Wales in 2023 were similar to the 2015-2019 average and lower than in 2020, 2021 and 2022. Given that, the CMI proposes placing 10% weight on data for 2022 and 2023 when calibrating CMI_2023 while still placing no weight on data for 2020 and 2021.
As weights do not affect projections linearly, placing a 10% weight on data for 2022 and 2023 results in a projection that falls nearly half-way between a projection that places no weight on these years and one that gives them full weight.
Cobus Daneel, Chair, CMI Mortality Projections Committee, said: “While mortality since 2022 has been less volatile, mortality rates are still higher than what we expected prior to the pandemic which could plausibly be interpreted in a few ways: Were our pre-pandemic views too optimistic? Are there lingering short-term effects that will rapidly fade out as we revert to the pre-pandemic trend? Or did the pandemic have a fundamental impact on the longer-term trend?
“We have aimed to strike a balance between differing views with our proposals for CMI_2023 which would lead to similar life expectancies as in CMI_2022.
“We are conscious that the outlook for mortality remains uncertain and there is a range of reasonable projection methods and projected mortality rates. We are consulting on our proposals to gauge the views of users of the model. Given the uncertainty, we encourage and expect many users to modify the Model parameters or methods to reflect their own portfolios and their views of the impact of the pandemic.”
Detailed results
Chart A shows standardised mortality rates (which allow for consistent comparisons of mortality over time) in the general population of England & Wales from 2003 to 2023. Standardised mortality rates fell relatively rapidly in the period to 2011 and relatively slowly between 2011 and 2019. Mortality rose sharply in 2020 because of the COVID-19 pandemic. It subsequently fell and mortality in 2022 and 2023 was at a similar level to 2016 to 2018.
Chart B shows the progression of cohort life expectancy at age 65 in successive versions of the CMI Model. The figures for the proposed version of CMI_2023 are around two years lower than in the first version, CMI_2009.
The cohort life expectancies shown in Chart B for different versions of the CMI Model reflect a combination of mortality rates at the time and likely mortality improvements in later years. The fall in life expectancy since CMI_2009 is mainly due to changes in views of future mortality improvements. At the time of CMI_2009, mortality had been falling rapidly and this was generally expected to continue for some time, leading to relatively long cohort life expectancies. However, the outlook in CMI_2023 is for low mortality improvements in the short term. This leads to lower cohort life expectancies in CMI_2023 than in CMI_2009 even though mortality in 2023 was lower than in 2009.
The single biggest way to give your pension some attention is by topping up contributions. Standard Life analysis shows that increasing contributions by just 2% a month over the course of a career could lead to £108,000 more in retirement.
For example, someone that began working full-time with a salary of £25,000 per year and paid the standard monthly auto-enrolment contributions (3% employee, 5% employer) from age of 22, could amass a total retirement fund of £434,000 at the age of 66.
However, if they were to increase their monthly contributions by 2% (5% employee, 5% employer) from the age of 22, they could accumulate £542,000 by the age of 66 – £108,000 more than standard contributions might achieve. These figures aren’t adjusted for inflation. Making higher contributions could have an even bigger impact on a retirement pot – even a 1% increase could produce £54k of additional savings.
*assuming 3.50% salary growth per year, and 5% a year investment growth. Figures are not reduced to take effect of inflation. Annual Management Charge of 1% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied.
Dean Butler, Managing Director for Customer at Standard Life said: “This Valentine’s Day, if your finances and circumstances allow, show your future self some love by boosting your pension contributions. It’s amazing to see how a relatively small increase in contributions can significantly boost the pension you retire on by tens of thousands of pounds. While pension payments may not be the top priority when you begin your career, or when finances are squeezed, it will pay off in future.”
Dean Butler Standard Life shares some simple tips on how else you can give your pensions some love this Valentine’s Day:
1. Access advice or guidance
Many people feel unable to seek financial advice as things stand, and we’d like to see greater access to affordable advice. If you are able to, Unbiased is a good place to start. It’s important to understand and be comfortable with the cost of advice compared to any charges you’re currently paying on your savings for retirement. There are also a number of free guidance services available including the Government’s Pension Wise service.
2. Brush up on your pension knowledge
The more you know about pensions, the easier it can be for you to make informed choices about your own pension plan. There are plenty of free online resources to help you get to grips. MoneyHelper, backed by the government, provides clear guidance on your money and pension choices, explaining what you need to do and how you can do it.
3. Download an app or register for online servicing
Keeping an eye on your pension savings doesn’t have to mean setting aside lots of time or sitting down with a stack of documents. Using apps or online servicing can be a quick, easy way to look at your pension savings – and you can do this on the go. There are often other things you can do online or through apps, such as making pension payments or updating your details.
4. Check your beneficiary information is up to date
Your pension savings aren’t normally covered by your will, so your pension provider ultimately decides who receives them when you die. However, depending on the type of pension plan you have, you can usually name the people you want your money to go to. These are known as your beneficiaries. Your pension provider will take your wishes into account, but they cannot be bound by them.
If you’ve already nominated your beneficiaries, you should review them regularly and update this information if your wishes change. For example, someone may want to change their beneficiaries after remarrying or having children. Keeping this information up to date can help make sure your money goes to the people you want it to. You might need to ask your pension provider for a beneficiary nomination form. Or you may be able to name and update beneficiaries online.
5. Check on your investments
It’s important to look at where the money in your pension plan is invested – whether you’ve chosen those investments yourself or someone else has done the work for you. If you’re a long way from retirement, you might be happy to take more risks with your pension investments as you won’t be accessing your savings for a while. But if you’re nearing retirement or taking money from your pension plan already, you may want to take less risk. Whatever your situation, it’s important you feel comfortable with your investments and that they match up with your goals.
6. Check you’re getting everything on offer from your employer
If you’re saving for retirement, you could check that you’re making the most of your pension plan’s benefits. For example, if you’re over the age of 22 but under State Pension age, you’re likely to have been automatically enrolled in a workplace pension scheme. In this case, your employer normally needs to pay in a minimum of 3% of your earnings, while your minimum payment is usually 5%. Some employers are willing to pay in more than the 3% minimum, and some might match your payments up to a certain amount – so if you put in more, they will as well. It’s worth checking with your employer to see what’s possible as this could help increase the money saved into your pension plan.
7. Make sure your personal information is correct
If your contact details are out of date, your pension provider might not be able to get in touch with you, and you could lose track of your pension plan – meaning you spend time tracing your pensions or even miss out on money.
You might consider combining your pensions to keep track of them, which involves bringing multiple pension pots together.
However, it’s important to be aware that transferring may not be right for everyone, and you should seek advice if you are considering this option.
As a result, the incentive is distorting savings between those who can and those who can't. Many employees simply can't afford to contribute extra to get extra. Simply put, in today's DE&I language, it’s 'inequitable'. For example, there are UK employees working side by side doing the same job, but due to their personal financial circumstances, are getting paid differently. In more traditional language, matching contribution ladder structures may be curbing 'upward social mobility'. The collective idea for the UK is that hard work by anyone should bring with it the means to progress to a better financial future.
To preserve or not?
The merit of incentivising employees to save for their future still remains with this matching ladder structure. On one hand, we can quantify the exact extra rewards for the wise saver, and we can remind employees that it offers 'free money'. But, on the other hand, formal DE&I policies at FTSE companies emphasise eliminating unintended barriers and embedding equality in all practices. This raises important questions about the fairness of the system. For example, how do we view those returning from parental leave and trying to get back on a financial even-keel - should they forfeit maximum employer contributions in the meantime? Or younger employees burdened with student debt and saving towards property deposits - is it ok that they’re instead obliged (possibly not in their best interest) to pay-in their spare income to access maximum employer contributions?
There’s also greater appreciation that disabled employees have demonstrably higher living costs than average and have to dig deeper than others to enjoy maximum employer contributions. Some may not be able to for this reason.
Finally, we know some employees come from socioeconomic backgrounds where their communities' longevity expectations and long-term savings perceptions mean they’re simply more disengaged – it seems inequitable that they should still receive less.
Exploring new pension benefit approaches
Many organisations are now looking for ways to support employees with these kinds of challenges - and a new pension benefit approach may be the way to do this. Alternative contribution design approaches do exist. We’re seeing organisations explore approaches that align with current supportive measures, like pension holidays and cost-of-living payments. We’re working with clients to explore and implement these options. For example, defaulting employees annually to adequate employee contributions has shown success in maintaining positive savings levels without the need to link them to employer contributions. There are also other structures that can work well in specific industry sectors.
The potential impact of change
A change could have a huge impact. For those employees affected by this issue, our Guided Outcomes® analysis suggests improvements to retirement outcomes in a typical UK scheme of? up to 28%. Scheme objectives on pension savings gaps could also be enhanced. Such a change could not only address the pension savings gaps but also contribute to upward social mobility, improved longevity, and health spans, and ongoing positive intergenerational effects.
At Hymans Robertson LLP, we see opportunities for change and are working with clients to explore and implement innovative and equitable arrangements.?In a world where the social narrative is dominated by cost-of-living increases, there’s a real opportunity for a positive change that materially benefits employees – without necessarily imposing unaffordable expense on employers.
]]>The regulator will carry out a second tranche of engagement with the rest of the GAP market, with the aim of improving the value of the product across all firms. These firms have agreed not to use new distributors of GAP in the interim.
GAP insurance is typically sold alongside car finance. It covers the difference between a vehicle’s purchase price or outstanding finance and its current market value, in the event it is written off before finance has been repaid.
The FCA is concerned that the product is failing to provide fair value to some consumers.
In September, the FCA wrote to firms manufacturing GAP insurance products asking them to take immediate action to prove customers are getting a fair deal.
After assessing the responses to this request, the FCA was not satisfied and, as a result, has agreed this pause in sales with these firms. As part of this agreement, they have committed to make changes to their GAP products to provide better value for customers, in line with FCA rules.
This action follows findings in the FCA’s latest fair value measures data, which shows that only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims. The FCA has seen examples of some firms paying out 70% of the value of insurance premiums in commission to parties involved in selling GAP policies.
Sheldon Mills, Executive Director of Consumers and Competition, said: 'I welcome the agreement by firms providing GAP insurance to pause sales while they work on improving value for customers.
'GAP insurance can provide a useful service to customers, but in its current form it does not offer fair value and we want to see improvements.
'We will continue to work closely with firms as we carry out further engagement to resolve these issues and ensure customers are getting fair value products that meet their needs.'
The FCA has identified concerns with the design of GAP insurance across all distribution channels and is requiring firms to make changes.
The regulator will consider firms’ proposals for different distribution channels, and recognises that some channels may be able to address these concerns more quickly.
Under the Consumer Duty, firms must provide fair value to customers, ensure that products and services meet their needs, and provide good customer service.
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“The succession of storms that have battered the UK in recent months underlines the importance of home insurance, with insurers supporting thousands of customers whose homes and possessions have been damaged or destroyed. Despite rising cost pressures, insurers are totally committed to doing everything they can to continue to offer competitively priced home insurance”
said Louise Clark, ABI’s Policy Adviser, General Insurance.
The ABI’s Tracker covers over 16 million policies and is the only survey that looks at the price consumers actually pay for their cover, rather than the price they are quoted.
The figures show that between 1 October and 31 December:
The average premium paid for a combined buildings and contents policy was £364 up £14 (4%) on the previous quarter. In the year ending Q4 2023 the average premium rose by 19%. For 2023 as a whole, the average premium rose by 13% to £341.?
The average buildings only policy was £284, up £12 (4%) on the previous quarter. Over last year, the average premium increased by 15% to £262.?
For contents only cover, the average price paid at £131 rose £5 (4%) on the previous quarter. Over the last year, the average premium rose 7% to £124.
Insurers battling cost pressures to deliver value for money home insurance.
Bad weather. Insurers paid out £352million, dealing with 36,000 claims to their home insurance customers following Storms Babet, Ciaran, and Debi. These were three of the six named storms that hit the UK in the last quarter of the year, along with a tornado in Manchester. The full insured costs of these storms will not be known for several months. The beginning of the year also saw a surge in burst pipe claims following a cold snap.
Increasing rebuilding costs. The House Rebuilding Cost Index (HRCI) compiled by the Building Cost Information Service measures changes in the price of rebuilding costs, such as the price of raw materials and labour costs. In the two years to January 2024 the Index rose by 21%, further impacting on the cost of repairing people’s homes.
Despite rising costs, home insurance remains competitively priced. When adjusted for inflation, the average price of cover has actually fallen between 2014 – 2023. During 2017 – 2022, the average cost of claims rose by 6% in real terms.
Louise Clark added: “Flooding caused by extreme weather is devastating when it strikes people’s homes. That’s why it is vital more is done to increase investment in flood risk management that better protects communities which are at risk, alongside a zero-tolerance approach to building properties in areas of high flood risk.”
]]>Key trends include a marked increase in the attempted use of false Confirmed Claims Experience (CCE’s), the commercial equivalent of a no-claims bonus, which shows a potential link to ID theft of genuine companies. While 2022 saw a reduction of ‘crash for cash’ motor accidents, this trend was reversed in 2023 with a 25% increase in referrals.
Other trends in motor fraud include a continuous issue with mopeds and couriers inducing and fabricating incidents. Allianz has also identified similar accidents with pedal cycles and pedestrians which could be linked to the changes in the Highway Code.
In the Casualty space, the rise in professional enabler led fraud continues and within the property arena Allianz recorded a 41% increase in investigations relating to deliberate non-disclosure compared to 2022. This included policyholders falsifying previous claims history and not disclosing criminal convictions or directorships of liquidated companies.
James Burge, head of counter fraud, Allianz Commercial commented: “We have seen an uptick across the board on all aspects of insurance fraud in 2023. Our success in detection and preventive measures lies in the superb collaboration across our teams, with effective strategies and support from our suppliers and leadership teams. We remain focussed on fraud detection to protect our honest customers in 2024.”
]]>As Valentine’s Day approaches, Nationwide is focusing on romance scams as part of its wider efforts to tackle economic crime through education. Romance scams often involve criminals building online relationships based on a false sense of trust and the promise of a relationship. After laying the foundations, the criminal will inevitably request money, often using an emotional backstory in order to manipulate their victim.
Overall, there were 42 per cent more cases of romance scams reported by men in 2023 compared to women. And of the total romance scam cases involving men, nearly two in five (39%) involved those aged 50-70 years old, compared to 45 per cent of women. However, contrary to the view that romance scams are reserved for older people, one in five (20%) cases involved men aged 20-30, compared to just over one in ten (11%) women.
Overall, half of romance scam cases reported to Nationwide last year involved a reported loss of under £1,000. This is because romance scams tend to start with a lower payment value as the scammer looks to build trust with the victim. As trust and confidence builds, so does the payment value. A quarter (25%) of cases involve claims for £1,000 to £5,000, while a further 25 per cent involve higher reported sums (over £5,000).
According to Nationwide’s data, women are more likely to lose more than men, with the average 2023 claim standing at £10,610 compared to £8,181 for men.
Nationwide encourages any customers concerned about a payment to use its Scam Checker Service before making any payment. It is available in branch or by calling a 24/7 freephone number (0800 030 4057). If the payment goes ahead and the customer is subsequently scammed, unless Nationwide told the customer not to proceed, they will be fully reimbursed.
Jim Winters, Nationwide’s Director of Economic Crime, said: “Criminals can be very convincing and persuasive enough to get someone looking for love or feeling lonely to give them their trust, personal details and ultimately their money, even when they haven’t actually met each other in person. Our data shows all ages can be a target of romance scams as criminals will cast their net far and wide to stand the best chance of snaring a victim. This is why everyone looking for love, regardless of age or gender, needs to protect their wallet as well as their hearts by looking out for any red flags. Be curious, ask questions and involve family and friends who have your best interests at heart. Education is the biggest deterrent to scams.”
Example case study
Following a marital breakup, a Nationwide customer started a new relationship with someone they met on TikTok. The other person messaged the customer every other day via WhatsApp – however they never spoke, only ever messaged. The other person claimed to be serving in the US military and claimed to have sent expensive gifts to Nationwide’s customer. However, they were told that these were stopped on route and would be held until taxes and customs fees were paid. A payment of £7,000 was sent by the customer but the ‘courier’ delivering the packages contacted the customer and said police had seized the gifts and further payments were required. The scam was reported by a family member and initially the customer didn’t want to accept it was a scam. However, following a visit to a Nationwide branch where education about these types of scams and the red flags to look out for was provided, the customer realised it was, in fact, a scam and no further payments were made, while the initial payment was refunded.
Warning signs of romance scams and top tips on how to avoid becoming a victim
Red flags and warning signs to look out for:
Available or remote: Many repeatedly avoid meeting in person and have a variety of reasons as to why they can’t meet up, such as working abroad and being unable to travel. They may also refuse to even show themselves over a video call, claiming, for example, that their camera isn’t working.
Financially stable or in crisis: At some point they will introduce a crisis that means you need to help them financially, such as needing help with medical fees, an ill relative, paying for materials or tools for their business, travel expenses, or to avoid persecution. It may even mean you become complicit in their fraud.
Attentive or controlling: The scammer may try to establish constant contact, encourage you to keep the relationship secret and try to get you to communicate with them off of the original dating site you met on, by suggesting you move to a more private method, such as email, phone or instant messaging.
Besotted or obsessive: They are likely to fall in love with you very quickly and declare strong feelings for you after a few conversations. They will work hard to get you to match their feelings.
Generic or endearing: Scammers often use scripts and are in contact with more than one victim at a time. In order to keep all their plates spinning at the same time, they may avoid using your name and instead use terms of endearment like honey, babe or angel that can be used with multiple people.
Real photo or too good to be true: Romance scammers will often provide photos that may have been stolen from many places online, whether that be from professional websites, or from another person’s social media profiles.
Consistency or flaws in the story: Their profile on the internet dating website or social media page may include spelling and grammar mistakes and not be consistent with what they tell you.
How to keep your money safe:
Keep your conversations on trustworthy dating apps and websites: Scammers try to take your interactions outside the dating apps and websites. They encourage you to use private emails, phone calls and instant messaging. These cannot be easily tracked and are not as secure.
Do not let money come into your online relationship: This includes sending and accepting money. Meet them in person and get to know them. Giving lots of reasons for why they cannot meet up is a warning sign. They’re trying to hide. And if they ask for money, always walk away.
Research the people you meet online: If things start to become serious, it’s okay to look up this person a bit more. Are they on other social network websites. Can you confirm what they’ve told you about where they work or live or what their life circumstances are? Do a reverse image search on their photos. Scammers invariably reuse images of other people they find online.
Run it by friends and family: Often, scammers will try and make your relationship a secret between the two of you. Talk about your relationship with friends and family you trust. They may spot something suspicious.
Be wary of how they talk to you: Scammers often use scripts and work on multiple victims at a time. They avoid using your name and instead use general terms like honey, babe or angel. There may also be inconsistencies in their stories. It’s okay to be suspicious
]]>What it means for annuities
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown: “Last month’s shock rise showed us that that the path to 2% will not run smooth. Pensioners have had a particularly tricky time making their budgets stretch, but they do at least have the prospect of an 8.5% boost to their state pensions in April, which should go some way to alleviating the pressure on their wallets.
The tough experience of the past few years will have an enormous impact on how people plan their retirement income. Seeing inflation rise rapidly shows the importance of having headroom in your budget to tackle price spikes when they come.
We recommend people in retirement keep enough savings in an easy access account to cover one to three years’ worth of essential spending, so they have the headroom to meet rising costs if needed. It can negate the need for people in income drawdown to increase withdrawals to keep up with increases in their day-to-day costs or could act as an important top up for annuity income.
Those in the market for an annuity face important decisions. Annuities currently offer decent value with a 65-year-old with a £100,000 pension able to get up to £7,117 per year from a level annuity according to data from HL’s annuity search engine.
However, they need to be aware that the income they receive will not increase. You can of course get inflation linked products, but the starting incomes on offer are significantly lower than what you would get from a level product. An RPI linked annuity currently offers a starting income of £4,554, so you will need to consider whether you can afford to take the income hit now for the prospect of getting higher incomes in future.
Adopting a mix-and-match approach could be an option. You use an annuity to secure your key income needs and leave the rest invested, where it has the opportunity to grow. Annuitising in stages throughout retirement allows you to secure income at higher rates as you age. You may also find that you qualify for an enhanced annuity at some point during your retirement which would give you a higher income.”
What it means for savings
Sarah Coles, head of personal finance, Hargreaves Lansdown: “Remortgagers, holding out hope for a swift drop in inflation, followed by rapid rate cuts, are set for disappointment. January is likely to have seen inflation cling on above 4%, encouraging mortgage rates to stay put too.
The quick-fire mortgage cuts we saw at the start of the year have already stalled, and the average rates have risen very slightly as the market digests the fact inflation is proving tough to shift, and realises that it might take a little longer than they’d expected for rate cuts to kick in.
Inflation is likely to drop this spring, as energy price falls take the pressure off. The trouble is that we’re expecting it to bounce back shortly afterwards, and the Bank of England has said the blip isn’t going to persuade it to cut early or frequently – because it wants to see something more sustained.
It doesn’t mean the Bank of England is considering raising rates, or that mortgage rates will stop trending downwards. It may just take longer for mortgage rates to fall.
For those with a remortgage on the cards, it means you can’t rely on major rate cuts in the immediate future to do the hard work for you. You will need to factor in for rates to be higher for longer, and address the best way to handle this – whether it’s a switch to a tracker in the hope of future rate cuts, or whether you need to talk to your lender about more significant changes to make ends meet while rates are at this level.”
With a significant proportion of UK pension schemes in surplus does this mean that Defined Benefit (DB) pension schemes are an asset of UK Plc.
It may already be reasonable to start from the current pensions regulation and an existing surplus on a relevant measure and extrapolate to a view that the pension scheme is an asset of the business. Recent announcements give additional confidence to this belief.
However, there is uncertainty around how the value of the surplus can be realised, and careful judgement needs to be applied to the specific circumstances before coming to that conclusion. This includes:
Interrogation of the robustness of the surplus
Reviewing the scheme’s governing documentation, to understand to what extent the pension trustees have discretion over the use of surplus, and/or the ability to take action to stop a surplus being utilised, for example:
Is there a requirement or expectation to use surplus to pay benefit improvements.
In the scheme rules, under what circumstances can a payment to the sponsoring company be made.
Decisions on the plans for the pension scheme and indeed the business post transaction:
Trustees often see insurance buy-out as the ultimate endgame and may explicitly be targeting it, which can quickly dissolve a surplus on any other basis
Plans for the business may mean it makes sense to remove all pension risk in the period of ownership; for a private equity acquirer for example, this could facilitate selling a restructured business free of pensions after a certain time horizon.
These areas will determine whether and how a surplus can be accessed and should form a key part of due diligence in any corporate transaction.
The potential rewards are high and worth working for. There are already examples of businesses accessing surplus under the current regulatory regime. Pensions are now a potential asset rather than a liability.
Run-on with surplus used to pay Defined Contribution (DC) benefits
Schemes can be run-on after they have reached full funding at self-sufficiency level. Establishing a well-designed asset strategy that yields returns while managing the risks, means a surplus can be generated year-on-year which can then be used to pay contributions in respect of a company’s DC scheme. This effectively saves the business money (and generates profits) that otherwise would have been required to meet DC payments.
There are potential execution challenges around accessing the surplus in this way. The support of the trustees is needed, and securing this is likely to require giving them some additional assurances (for example security or a buffer) in addition to potentially sharing some of the additional value created with DB pension scheme members in the form of, say, a modest enhancement to annual pension increases.
This offers a potential route to derive value from surplus. Keeping the money 'in pensions' can be seen as improving employee equality from an inter-generational perspective and viewed positively by trustees (and need not attract a tax charge on refund of surplus). The ability to access potentially large pools of assets, and benefit from a relatively long-term investment time horizon (enabling investment in illiquid assets) can also be attractive to certain purchasers.
Target a surplus on the ultimate insurance buy-out of the scheme
An essential element of Due Diligence is to consider long term plans for the pension scheme, which often means getting to buy-out. In particular, can buy-out be achieved with investment returns over time or is a sponsor contribution likely to be required to get there. In our experience, detailed analysis, including a review of the buy-out position informed by current insurer pricing, and modelling that allows for the impact of members retiring (and so being priced on a more competitive basis) can often be a pleasant surprise for a potential purchaser.
There is also an opportunity to continue to run the pension scheme on once a buy-out is affordable. As members continue to reach retirement, the buy-out surplus would be expected to increase year-on-year even with a low-risk investment strategy.
In these circumstances, when the scheme comes to be ultimately secured with an insurer, there will be a cash surplus which, subject to the rules and tax (at the reduced rate of 25% from April this year) could be returned in whole or in part to the employer.
As regulations and practice emerge and surpluses persist, these routes to accessing surplus which we have already seen in a number of cases will become more commonplace and assigning a value to the potential to benefit from them more typical practice.
]]>The half hedged scheme’s funding level increased by almost a full percentage point, rising from 96.1% to 97% through the first month of 2024.
In a return to the rising rates experienced during 2022 and 2023, assets and liabilities – and so therefore the deficit - shrank, with a £0.2m funding improvement in the fully hedged scheme and a £0.3m in the half hedged scheme.
David Brooks, Head of Policy at Broadstone, said: "The publication of the funding regulations which will form the basis for the new Funding Code were recently published.
“Despite the recent rhetoric from the government about increasing risk for Defined Benefit schemes, the actual direction of travel remains clear for many schemes. The focus of the regulations, and our index, is the journey to low dependency where risks in funding, investment and covenant are properly understood and controlled.
“Importantly for some schemes, where there is a deficit there will be pressure to improve the scheme’s financial security which could mean an increase in contributions for sponsors.
“One important fall-out from the new regulations and code will be more work for schemes when conducting their valuation - for those schemes in a strong position, the value of this may be hard to understand.”
Advisers were asked what changes they had seen in client behaviours over the past 12 months due to the challenging economic climate. The research surveyed advisers on how often they observed specific changes amongst the majority, some, very few or none of their clients seeking retirement advice.
Over half of advisers indicated that some or the majority of retirement clients had made the following changes:
• Stayed in work longer and / or deferred accessing retirement savings (68%).
• Withdrawing more from their overall savings (61%) – although only 4% said this was the majority of their clients.
• Reviewing the amount and / or timing of passing wealth to the next generation (59%).
• Wanted to decrease their level of investment risk (53%) – although 36% noted they had seen clients increasing their investment risk.
• Looking to guarantee some income through a combination of an annuity and drawdown (53%).
Steven Cameron, Pensions Director at Aegon UK, said: “The challenging economic conditions of late have impacted most people, including those approaching or in retirement. This research shows just how widespread behavioural changes are, which in turn shows just how valuable retirement advice is, especially in times of change.
“Over two-thirds of advisers have seen clients working longer and / or deferring accessing their retirement savings. A delay of even a year or two can make a big difference to sustainable retirement income levels as a result of saving for extra years, having a longer period of investment growth and having fewer years of retirement to fund.
“While three-in-five advisers (61%) have seen some clients take more from their overall savings to get by, it’s reassuring than only 4% have seen this behaviour from the majority of their clients.
“For many, passing on wealth to future generations is a key objective for retirement savings, but it’s not surprising that three-in-five advisers (59%) have seen clients reviewing when or how much to pass on.
“It’s also interesting to see that different clients respond in different ways. While 53% of advisers have seen some clients reduce investment risk, 36% have seen clients take the opposite course of action to increase investment risk, perhaps to seek higher returns.
“The recent high interest rate levels and the corresponding rise in annuity rates may also have led to more clients seeking to guarantee some income, including through combinations of annuity and drawdown.
“Overall, the research paints a picture of many clients changing their behaviour around retirement, but in a wide variety of ways. This shows the important role advisers play in tailoring their advice to individual needs and preferences, particularly amongst those approaching or in retirement. This further emphasises that for many people in or approaching retirement, their ‘Second 50’2 can be uncharted territory.”
]]>The members’ DC pension benefits within these hybrid schemes will now be protected by the Aviva Master Trust.
Emma Douglas, Director of Workplace Savings and Retirement at Aviva said: “We’re pleased to have been chosen by the PPF as their trusted DC pension provider. It’s important that members’ benefits are moved swiftly and efficiently to give savers certainty as to the payment of their pension benefits. This new partnership demonstrates our commitment to innovating for workplace pension customers and employers and growing the Aviva Master Trust.”
Trustees will have the comfort that the Aviva Master Trust solution will be available for all DC benefits. However, they will also continue to have access to the wider DC market.
Matt Bayman, Director of Scheme Services at the PPF, said: “We look forward to working with Aviva who, through their Master Trust solution, will ensure that we can efficiently transfer schemes and, most importantly, help us to achieve the best results for members both inside and outside of the PPF.”
The Aviva Master Trust is a pension solution centred around member’s interests, governed by a fully independent Trustee Board. It celebrated its 10-year anniversary in January 2024.
It is clear, pension savers need more support. Auto enrolment has been a huge success in getting people saving. Changing auto enrolment to 18 years old and the abolition of the lower earnings threshold will help millions save more by default. However, 8% of earnings might not necessarily be enough to deliver the kind of retirement many savers aspire to, and there are potentially difficult decisions to make, especially at retirement.
The FCA’s discussion paper on the Advice Guidance Boundary Review acknowledges the difficulty in engaging individuals with pension saving. Behavioural biases get in the way because of the need to plan for an event which is perhaps 30 years or more in the future. The FCA also acknowledge the regulatory hurdles.
Trying to convey the need to act today about something many years in the future takes more than just providing information and leaving it to individuals to join the dots. The problem is that prompting an action that could lead to a different investment choice, a higher level of contribution, or consolidation of a pension pot, is likely to be viewed as marketing. The FCA have acknowledged that the Privacy and Electronic Communication Regulations (PECR) can be a problem when savers are automatically enrolled and are seeking views from pension providers.
The FCA’s most innovative suggestion is the implementation of a new type of help for consumers, which they are calling ‘targeted support’. Unlike advice, which relies on personal information and leads to a personal recommendation based on an individual’s circumstances, targeted support will deliver guidance for ‘people like you’. The initial data collection only needs to be enough to place an individual into the target market segment for a particular solution, or range of solutions, which might be recommended.
Rather than the solution being a highly personalised, optimal solution, the solution recommended through targeted support would provide “a better outcome for customers than would reasonably be expected if the customer did not receive any guidance”.
This could provide an opportunity to deliver more help for pension savers at key points throughout their savings journey. It could provide an opportunity to let individuals know what people like them should be saving. It might allow providers to contact savers who are invested in highly volatile investments as they approach retirement to head off that potential harm. Importantly it might enable targeted support for when people have decided to take their pension benefits, and throughout retirement if they are actively managing their retirement income.
It will be essential that providers design product solutions that meet the needs of specific customer segments, in line with consumer duty. This will ensure they have solutions that can fit within a targeted support framework. At retirement, customers looking for certainty around income might be pointed to an annuity, while someone who wants complete flexibility and has the capacity to deal with a volatile income could get a drawdown recommendation. Alternative solutions for people sitting between those two extremes might include collective defined contribution (CDC) or new products like that which Aviva is developing, which we are calling ‘Guided Retirement’ and will be a blend of flexible drawdown and an annuity, with targeted support built in.
The FCA describe their discussion paper as “high-level proposals”, reflecting “early thinking”. As far as early thinking goes targeted support sounds like a great idea, and something that should be explored further.
One in nine UK holidaymakers who plan to go away this year (11%) admit to never purchasing travel insurance, which is designed to help you in the case of an unforeseen emergency. This could either mean something that occurs on holiday or an incident that happens beforehand that disrupts travel plans. By taking out travel insurance as soon as you book your holiday, it will give you peace of mind knowing that you are protected, both in the lead up to your trip and while away.
Although some may not think about travel insurance for a holiday in the UK, it can be a useful lifeline. Aviva research finds that those staycationing this year expect to spend £855 on average per person and travel insurance can help protect you if you need to cancel or cut short your trip. For holidays in the UK, most travel insurance policies will cover pre-booked holiday accommodation of two nights or more.
2) DON’T get travel insurance at the airport or once you arrive at your destination
Aviva research shows that over one in nine holidaymakers going away this year (12%) plan to purchase travel insurance either at the airport or when they have arrived at their destination. By doing so, travellers may not realise that they would be unable to make a claim, should the worst happen. This is for a couple of reasons – firstly, because most insurers will state that all journeys must start from the UK. Secondly, you wouldn’t be covered for a journey that has already begun (which technically counts as soon as you’ve left your front door). Getting into the habit of taking out cover as soon as you’ve booked your trip is one way to make sure you’re protected from the get-go.
3) DO check you’re covered for whatever you have planned
According to Aviva research, 1 .5 million Brits are set to go on a winter sports holiday this year. While most standard travel insurance policies will cover you for a range of activities, they don’t always provide cover for injuries sustained during winter sports unless you purchase optional winter sports cover. This covers you for medical expenses as a result of incidents during the likes of snowboarding and skiing, while also providing cover against things like damage to your equipment, piste closures, or if you can’t take part in the fun because you’re not well. A broken leg alone, for example, can cost up to £7,500 during winter season so it’s worth considering purchasing the add-on. The same goes for more high-risk activities such as paragliding, which isn’t always included as standard. If in doubt, check your policy documents or speak to your provider.
4) DON’T travel against government travel advice
If the Foreign, Commonwealth & Development Office (FCDO) advises against all travel, but you decide to travel anyway, you probably wouldn’t be able to make a claim, should you require things like medical treatment or assistance while abroad. Though it may sound obvious, rules change frequently, so it’s worth keeping an eye on both the government website and any local government services for any particular advice before you travel.
5) DO read through your policy documents to avoid being ‘double insured’
Before taking out travel insurance, it’s worth looking at your existing home insurance policy to see if you have personal belongings cover, which could insure your items outside of the home, anywhere in the world. Doing so could help you to avoid duplicating cover with travel insurance for your belongings and could save you some £££s for your holiday. Just be sure to check the excess and whether your no claims discount could be impacted as a result.
6) Declare all medical conditions to avoid potential costly medical bills abroad
Medical treatment abroad can be very expensive, so if you travel without cover for existing medical conditions, this could have serious financial implications for you if treatment is needed for these while you’re on a trip. If ever in doubt about what is considered a ‘medical condition’, check your policy documents or contact your insurer directly.
While just 8% of drivers surveyed currently use telematics devices, 35% of drivers say that they are either quite likely or very likely to consider a telematics policy at their next insurance renewal. This rises significantly to 61% of younger drivers aged 18-24 who will consider a telematics policy in the near future.
Younger drivers routinely face higher motor insurance premiums because of the risks associated with their relative inexperience. This could explain why more than a quarter (26%) of drivers aged 18-24 surveyed claim to already use a telematics device, over three times the average number of drivers surveyed claim to have one.
When asked what would convince them to use a telematics insurance policy, 59% of all drivers said they would want to see substantially lower premiums. This was followed by 29% who would like reassurance that their driving data would be secure.
A fifth (20%) of drivers said they needed proof that a telematics insurance policy would be better for the environment to consider such a policy. However, almost twice as many (39%) younger drivers aged 18-24 say their main motivation would be that it would be proven to be better for the environment.
The majority (85%) of drivers who already have a telematics device fitted report reductions in their annual premiums of up to 20%. Almost three-quarters (70%) have seen reductions of between 5% and 15%. This rises to 80% of drivers aged 18-24 who have reduced their policy costs by between 5% and 15%.
Paul Baxter, CEO, The Green Insurer, said: “It’s interesting to see the direction of travel for telematics insurance as people become more conscious about the impact of driving on the environment.
“And it’s not surprising that younger drivers in particular are drawn to the benefits of telematics insurance. Their relative inexperience means they face the highest premiums, so it’s great to see how many younger drivers are already seeing a link between using telematics insurance and lower policy costs.
The industry also notes that the relation between BEFIT and the already implemented International Financial Reporting Standard (IFRS) 17 and 9 is not clear and must be addressed before the draft Directive is adopted.
Furthermore, the insurance industry is concerned about the level of flexibility for Member States in applying additional post-allocation adjustments in areas not addressed by the common framework. Insurance Europe calls for a limit to possible national adjustments, to achieve the goal of a streamlined, European, corporate taxation framework. The proposal should also effectively consider aspects specific to the insurance industry, such as the tax treatment of technical reserves.
Therefore, to achieve a clear and coherent legislative framework, and to avoid undue burden on companies, the insurance industry urges EU legislators to postpone negotiations on BEFIT until any legislative overlap is clear and addressed.
Business in Europe: Framework for Income Taxation (BEFIT)
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Declan says: “I’m looking forward to growing our services to support every scheme that needs it. With so much demand for insurers’ buy-out services, preparation counts for a great deal. So I’m building a strong project management capability to add to our risk transfer expertise. This is making every risk transfer project as efficient and organised as possible. We’re also training and developing junior colleagues as we expand the team, which is how we like to work at First Actuarial.”
Declan has over 30 years of pensions consulting experience, and has been spending more and more time advising on buy-ins and buy-outs in recent years. Since studying actuarial science at university, his employers have included Aon and Lane Clark & Peacock. He joined First Actuarial in 2007 and became a partner in 2011.
His appointment as Head of Risk Transfer comes at a time when improvements in scheme funding and increased governance responsibilities make risk transfer an attractive and achievable option for many trustees.
Declan says: “We look at the full range of risk transfer options. With more alternatives becoming available, we’re supporting many schemes through the decision-making and selection process. Following the Mansion House reform discussions, I’m expecting more employers to consider alternatives to winding up their scheme.”
Declan believes that in the short- to medium-term, buy-ins and buy-outs will remain the most suitable route for smaller schemes.
He says: “The buy-in and buy-out market is extremely buoyant and everyone expects it to remain so for the next few years. A growing number of insurers offer streamlined processes for smaller schemes, which work very well. We help trustees with the preparation work needed to meet stringent requirements as busy insurers assess whether or not to quote.”
Declan concludes: “We’re growing our team, developing the resources and expertise to lead clients of any size through a risk transfer project. We’ve pulled together a multidisciplinary team – covering actuarial, investment, defined contribution, project management and scheme administration – which are all impacted by risk transfers. This will give clients the end-to-end support they need. I’m confident that we can find a home for any scheme that wants to go to market.”
Here is a concise summary from our Insurance experts of the key takeaways.
Getting used to the new Lloyd’s oversight approach
Participants noted that they were not used to the downward shift in the level of engagement from Lloyd’s compared to the past few years. Participants were keen to keep a regular engagement with their capital point of contact in line with their proactive approach to capital management, but some struggled this year with the change in Lloyd’s oversight approach. One participant, interestingly, expressed frustration at being put on a fast track for capital approval without any recent deep dive review, with automatic capital loadings being imposed and limited chances to challenge.
Changes in submission timelines were generally accepted positively, but some syndicates felt the pain and concerns were raised about last-minute data/reports requests, impacting internal deadlines and resource constraints. Participants emphasised the need for more engagement with Lloyd's before templates are issued to avoid challenges during the submission process. It was noted that things were more pressured for syndicates that had the same first and second line submission deadline, as first line teams had to leave enough time for validation to complete their work before submission.
Discussions highlighted the evolving nature of the Lloyd’s Focus Areas templates, with concerns raised about the expanding scope and difficulties in aligning with individual syndicate risk reporting profiles. Participants called for more flexibility in adapting to changing economic conditions within the focus areas.
Opaque external models
The level of challenge related to external model changes (e.g. economic scenario generators or natural catastrophe models) was quite variable from one syndicate to another, especially depending on the external model or software being used. Participants shared experiences of difficulties in validating changes due to a lack of input from some software providers in addition to resource constraints internally. This put them in the awkward position of not being able to fully explain movements in capital due to the change in external models.
Our capital experts also shared insights on what boards care about, emphasising the need to link modelling to the actual market. More could also be done to ensure that Lloyd’s validation questions are more related and relevant to the business so that model use could be enhanced.
Validation refresh?
The attendees acknowledged the need for stability and improved relationship between validation team and the first line, with discussions on potential automation options. Nonetheless, it was felt that validation progressed well this year.
Some participants questioned the effectiveness of standardised testing, suggesting it might lead to superficial adjustments to ensure a passing grade. Concerns were raised about outdated rules (e.g. negative market risk contribution tests), calling for their revision to reflect current market dynamics. This speaks to the relative maturity of the validation process and that now would be a good time to reassess the validation framework as fit-for-purpose.
Many syndicates are already in the process of optimising the validation process, emphasising the importance of rationalising their test plan, early deep dives, standardising validation outputs, and exploring automation possibilities, especially regarding testing and reporting. The discussion touched on validation reporting inefficiencies, including governance and escalation processes, with suggestions for alternative methods such as using videos or interactive tools.
Conclusion
The roundtable provided a valuable platform for industry experts to discuss challenges and share insights on the Lloyd's Capital submissions process. Key recommendations included enhancing communication, revisiting standardised testing, and fostering more engagement between Lloyd's and managing agents. As the industry continues to evolve, addressing these issues will be crucial for a smoother and more collaborative submission process in the future.
The 2024 gender pension gap report finds that for women to retire with the same amount of money in their pension savings as a man, they would need to work and save for an extra 19 years on average. As automatic enrolment starts at 22, this means that by age three, girls are already falling behind boys in their provision for later life.
Women make up 79% of workers who earn less than the automatic enrolment earnings threshold – this means that 1.9 million women in employment are not automatically enrolled into a workplace pension. If both age and earning thresholds were removed from automatic enrolment, an additional 885,000 young women in employment would become eligible for a workplace pension.
Working, childcare and career gaps
On average, women spend 10 years away from the workforce to raise families or take on other caring responsibilities. This career gap amounts to an average of £39,000 in lost pension savings.
Furthermore, the spiralling cost of childcare is a hindrance to many working households, with the average cost of full-time nursery for a child under age two in 2023 being £14,800 a year, and in London the average annual nursery fees are £20,000 or more per child. Consequently, by their late 50s, women will have built up just 62% of the pension wealth of men.
Pensioners in poverty
On average, women live around seven years longer than men, meaning women’s pension wealth needs to go further. A lifetime of earnings and other inequalities results in two thirds of pensioners currently in poverty being women, with single women making up half of this number.
NOW: Pensions’ 2024 gender pensions gap report suggests policy proposals to narrow the current savings gaps to help savers achieve the retirement they deserve.
Joanne Segars OBE, Chair of Trustees at NOW: Pensions said: “It’s hard to believe that by the time a young girl starts school at four, she will already be falling behind a boy of the same age when it comes to providing for her retirement. Yet this is the reality many girls face as they leave education and enter the world of work.
Despite enacting some important policies in recent years to improve financial opportunities, outcomes and equity between men and women - like auto enrolment and gender pay gap reporting - our report is a timely reminder of the work that still needs to be done.
We believe it can and it must.
Our research is an important step in identifying, defining, and addressing the problem and what we can do as a society to fight for fair pensions for all.”
Lizzy Holliday, Director of Policy and Public Affairs, NOW: Pensions comments: “Policymakers have made important decisions in recent years which are already making a substantial difference to the way workers and their employers are providing for retirement. Yet, as our research shows, the scale of the gender pensions gap remains vast and will require bolder policy actions.
Some of the solutions are broader than traditional pension policy. Childcare and gender pay gap issues must be given the urgent attention they require. But setting out the roadmap for the future of auto enrolment including tackling the difficult issue of adequacy in retirement - which affects women disproportionately given lower pension wealth- should be front and centre of next steps.”
Lauren Wilkinson, Senior Policy Researcher, Pensions Policy Institute said: “While the Gender Pension Gap is widely recognised, there is a lack of clear consensus in terms of definition, magnitude and potential solutions. Measures of pension wealth and retirement income can both be useful to understanding the magnitude of the gap, but the approach taken in this year's edition of the underpensioned report provides a more nuanced analysis of the causes of the gap.
By their late 50s, women have average pension savings worth less than two-thirds of men's, with a substantial proportion of this difference stemming from inequalities in the labour market, including differing working patterns and the Gender Pay Gap. While there are some pensions policy options that could be introduced to potentially mitigate the Gender Pension Gap, it’s unlikely to significantly reduce without changes in labour market conditions and gendered divisions of domestic labour.”
The retirement living standards are calculated by the Centre for Research in Social Policy at Loughborough University on behalf of the PLSA.
There are three retirement lifestyles that are covered – minimum, moderate and comfortable – and they help give people an idea of what kind of lifestyle they can expect in retirement.
Rising living costs, particularly for food and energy bills, as well as shifting expectations about retirement lifestyles, are behind the increases in retirement costs, the PLSA said.
It said the research highlighted the increasing importance people placed on spending time with family and friends out of the home, as people’s priorities had changed following the coronavirus pandemic.
For example, in-depth discussion groups considered that at the moderate level of retirement, people should be able to have a monthly meal out with their loved ones and help their family members financially with a budget of £1,000, for example to help with grandchildren’s activities. This was considered particularly important in the context of the cost-of-living crisis.
While costs at the comfortable level of retirement also increased, the rise was less sharp. This also reflected changing expectations. For example, the research groups determined that a couple would need just one small secondhand car rather than two cars, which had featured in previous years.
The triple lock, which is used to uprate the state pension, acts as a crucial safeguard against rising retirement living costs, researchers said.
With a significant 8.5% increase to just over £11,500 per year from April 2024, the state pension remained a substantial foundation of retirement income – and this, alongside improved retirement annuity rates, would help median average earners be able to achieve most aspects of the moderate level, the report said.
Professor Matt Padley, co-director of the Centre for Research in Social Policy at Loughborough University, said: “In this year’s findings, we see the strong effects of rising prices in what’s needed to meet the cost of food and energy.
“Following the Covid pandemic, this latest research highlights a pronounced need and enthusiasm among the public for shared experiences beyond the confines of their homes, including activities like eating out and holidays.”
Nigel Peaple, director policy and advocacy, PLSA, said: “The cost of living has put enormous pressure on household finances over the last year and, as the research shows, this is no different for retirees.
“It’s important for workers saving for retirement to remember the standards are not prescriptive targets, they are a tool to help you engage with the type of spending you think you will do in retirement and to help you plan for it.
“It is also worth highlighting that a couple who each has a full entitlement to the state pension will achieve the minimum level, and if each is paid average earnings throughout their working life, they have a good chance of enjoying many aspects of the moderate living standard.
“Working and saving is likely to vary over a lifetime, for example taking time off to have children, so it is important to adapt workplace pension contributions to make up for periods not saving.
“Many pension providers now provide tools and calculators on their online platforms to allow savers to pick-and-mix elements of each retirement living standard, allowing them to leave out the things they don’t see as part of their life and tailor the standards to their individual circumstances and preferences.”
Here are the minimum retirement living standards for 2022/23 followed by 2023/24, according to the PLSA. The minimum standards reflect what is needed not just to survive but to live “with dignity”, including social and cultural participation. They include around £95 for a couple’s weekly groceries, a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. The minimum standards do not include a budget to run a car:
– Single person – £12,800, £14,400
– Couple – £19,900, £22,400
Here are the moderate retirement living standards for 2022/23 followed by 2023/24, according to the PLSA. The moderate standard, in addition to the minimum lifestyle, provides more financial security and more flexibility. For example, a couple could spend around £100 a week on groceries, £60 a week on eating out, run a small secondhand car, have a week holidaying in Europe and a long weekend break in the UK:
– Single person – £23,300, £31,300
– Couple – £34,000, £43,100
Here are the comfortable retirement living standards for 2022/23 followed by 2023/24, according to the PLSA. At the comfortable standard, retirees can expect to have more luxuries such as regular beauty treatments, theatre trips and two weeks’ holiday in Europe a year. A couple could spend around £130 per week on groceries and £80 a week per couple on meals out:
– Single person – £37,300, £43,100
– Couple – £54,500, £59,000
Previous research from this Generation Anxiety series has demonstrated how: many in this group expect to work beyond State Pension Age; are worried about the adequacy of their pension savings; whether they will pay off their mortgage before retirement; and a significant proportion acting as the Bank of Mum and Dad for the daily living costs of their adult children.
This latest data release from Just Group sheds light on the contribution Gen X is making towards the care of elderly relatives – creating a significant financial and emotional burden on this generation.
The data revealed that over one in 10 (11%) of Generation X are chipping in to provide financial support for the care of their elderly relatives; covering the costs of things like contributions to care home fees, visits from a home carer, weekly shopping or funding home improvements.
Those providing support estimated that they were spending an average of £237.50 a week – or £12,350 a year, around £800 more than the full new State Pension will be worth from April 2024 (£11,542).
Asked how they felt about contributing to their parents or relatives’ care costs, the majority answered that they felt poorer (54%) and more tired (53%) as a result. A further four in 10 felt unprepared (39%) and a similar proportion were stressed (42%).
Stephen Lowe, group communications director at retirement specialist Just Group, said the data accentuates the financial demands placed on this group: “When elderly parents or loved ones begin to need formal caring arrangements, it can be a difficult and emotional time.
“It is little surprise that Generation X feel that contributing financially to their parents or elderly relatives care is the right thing to do but it is clear that, for many, the cost of this additional support is adding to the already significant pressures squeezing this generation.
“The costs of contributing towards the care of elderly family members are not trivial – either in financial or emotional terms. Generation X is spending, on average, the equivalent of more than a full State Pension every year to provide this financial support.
“The money they are spending is unlikely to be surplus to requirements and there will be competing demands from saving into their pension pots to paying off their mortgage, from helping their children to supporting their elderly parents. It’s no wonder many seem resigned to working beyond the State Pension Age.”
From 2019 to 2022 the employment rate of older adults decreased each year from a record high in 2019 of 72.5% to 70.7% last year – but it is starting to tick up again.
Gary Smith, Financial Planning Partner and retirement specialist at wealth manager Evelyn Partners, says: “We see some early retirees, after a few years of financial reckoning or too much time on the golf course, contemplating a return to work. But whether you left work or not, accessing pension savings can have some unintended consequences, and you might have unwittingly walked into a pension tax trap.”
Whether following the dream of early or semi-retirement or seeking extra funds to make ends meet, many more savers are tapping into their pension pots flexibly – in other words, withdrawing taxable amounts – once they are able to after the age of 55.
The latest HM Revenue & Customs data showed flexible cash withdrawals from pension pots have jumped: between April and June 2023, £4billion of taxable pension payments were taken from pots by 567,000 individuals, compared with £3.4billion of withdrawals in the previous quarter made by 519,000 individuals. In Q4 2017, the figure was just £1.45billion by 187,000 individuals.
Smith continues: “Whatever the motivation behind accessing pension cash, most savers will have assumed that they could either continue to build up their pension or resume contributions and get tax relief once more if they returned to work. Indeed, the idea of plundering their pension pot in their mid- or late fifties might have been based on the assumption that they could rebuild it.
“This plan will be hobbled, however, if they have triggered a little-known cap on the amount they can continue to save with tax-relief benefits. The Money Purchase Annual Allowance is a tax hurdle that those who have had their eyes firmly ahead on big life decisions can easily trip over.”
What is the MPAA?
Like the Annual Allowance it is an annual limit on the amount that can be saved into a pension with the benefit of tax-relief. At the same time as raising the AA from £40,000 to £60,000 at the 2023 spring Budget, Chancellor Jeremy Hunt also raised the MPAA from just £4,000 to £10,000.
Smith says: “It is a substantially lower cap than the AA because the authorities decided they needed a measure that prevented retirees recycling pension income back into their pension to take advantage of tax relief twice over.
“Not only does it restrict savers’ ability to make tax-relieved pension contributions going forwards, it also wipes out the benefit of being able to use up to three previous years’ worth of Annual Allowances under ‘carry-forward’ rules. Using carry-forward allowances can be a very useful tool for business owners with uneven earnings and those who might come into a lump sum that they want to put into their pension, so for them this is a further penalty of the MPAA.
“While the welcome increase to £10,000, which kicked in in April 2023, gives savers a bit more leeway to rebuild their pension pot with tax benefits, the best tactic for those who want maximum flexibility is not to trigger the MPAA in the first place, if possible.”
Who is subject to the MPAA?
The MPAA can apply to anyone who has accessed their pension pot flexibly, the most common examples of which are:
If you take your entire pension pot as a lump sum
If you start to take amounts from your pension pot which are in part taxable - otherwise known as uncrystallised funds pension lump sums (UFPLS)
If you move all or part of your pension pot into drawdown and start to take an income
If you use your pension fund to purchase a flexible annuity or one that isn’t guaranteed for life.
Smith says: “While UFPLS might sound like an obscure piece of financial jargon, it’s actually probably one of the more common ways that someone might unwittingly trigger the MPAA. If you want to access your pension early, but you don’t want to crystallise and choose whether to put your pension into drawdown or an annuity, then dipping into a pot by taking one or more small lump sums looks like an attractive option.
“However, unlike taking the 25% tax-free lump sum all in one go, 25% of each UFPLS is tax free and the remaining 75% is taxed at the saver’s marginal rate. For some retirees in certain circumstances this can be a sensible way to access their tax-free cash, but it is counted as flexible access and triggers the MPAA.
“Those looking to access pension savings early and avoid triggering the MPAA should not despair, as there are options.”
What sort of pension access doesn’t trigger the MPAA?
Smith says: “You can take your tax-free cash as a 25% lump sum and not trigger the MPAA – but it depends on what you do with the rest of the pot.”
You take a tax-free cash lump sum and put the remainder of your pension pot into drawdown but don’t take any income
You take a tax-free cash lump sum and buy a lifetime annuity
You just buy a guaranteed annuity
You cash in a small pot of less than £10,000
Smith adds: “The first option is likely to stand out for many of those thinking of dipping into their pension savings while keeping the option of making substantial future contributions up to the Annual Allowance.
“However, releasing tax-free cash does require you to crystallise part or all of your pension funds - this is why the official term for tax-free cash is a ‘pension commencement lump sum’ (PCLS). A decision needs to be made in relation to what you then do with the non-tax-free element. There is no requirement for you to take an income from this portion of your pension fund and it is only when you do release some income from it that will trigger the MPAA.
“In fact, much of the confusion over the MPAA might come from the distinction between crystallising a pension and accessing it flexibly.”
MPAA and defined benefit pensions
The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.
So even if you’re subject to the MPAA, you can still save the standard £60,000 annual allowance into a defined benefit scheme if you’re lucky enough to be in one – that is assuming you make no contributions to a DC pension scheme.
You could also save the maximum £10,000 a year into the DC scheme, and then you would be able to save £50,000 with tax relief into the DB scheme (known as the alternative annual allowance), giving a combined pension savings total of £60,000.
]]>With wavering gilt markets and economic uncertainty over the last 12 months, schemes have generally been more conservative in their investment strategies. Yet the unprecedented levels of funding, as well as the recently announced Occupational Pensions Schemes (Funding and Investment Strategy and Amendment) Regulations, have led to an increasing number of schemes considering higher risk investment strategies.
John Dunn, head of pensions funding and transformation at PwC, said: “UK pension schemes certainly didn’t suffer from the ‘January Blues’, recording record levels of surplus, despite December and January proving to be something of a mini roller coaster ride for long-term gilt yields. Pension schemes’ conservative bond based investment strategies effectively hedged out most of the movements in the liability side of their balance sheets.
”Meanwhile global stock markets were up in the 12 months to December with the US market returning almost 25%. UK pension schemes missed out on much of this return because they have to balance the level of risk taken with the sponsor’s ability to absorb it. But what if the balance was adjusted? If we imagine a world where UK pension schemes invest only for growth and to generate surpluses for members and sponsors, the surplus at the end of 2023 would have been £300 billion higher based on those US market returns. Whether this is a missed opportunity or fool’s gold really depends on the ability of the pension scheme and its sponsor to handle the year in which asset values fell by 25% whilst still paying pensions.”
Laura Treece, senior pensions specialist at PwC, added: “The Government finalised the new funding regulations last week, announcing that the new rules are ‘explicitly more accommodating of appropriate risk taking where it is supportable’. The new rules are intended to allow even mature pension schemes to invest 20% to 30% of their core assets for growth plus the surplus assets - potentially unlocking £700bn of assets for productive investment decades into the future. This could boost not only pension schemes’ asset returns but also UK economic growth.”
The PwC Low Reliance Index and PwC Buyout Index figures are as follows:
“There are some immediate actions schemes could, and should, take:
• Verify cyber threat analysis updates: Confirm that all your advisers are proactively updating and refining their cyber threat analysis reports. It's crucial that they regularly review and enhance their threat intelligence capabilities to protect against evolving cyber threats.
• Enquire about intelligence sharing participation: Directly question your advisers on their involvement with intelligence sharing networks, such as the Cyber Information Sharing Partnership (CiSP). Participation in such frameworks is essential for staying informed about imminent threats and adopting best-practice responses.
• Clarify threat identification and management: Gain a clear understanding of the mechanisms your advisers use to detect relevant cyber threats and incidents. Request detailed explanations on how these are integrated into their active risk management processes, ensuring a robust defence mechanism is in place.
• Demand comprehensive and ongoing threat reporting: Insist on receiving frequent, detailed reports covering the spectrum of threat management activities—highlighting ongoing, resolved, and potential threats. These reports should demonstrate a continuous commitment to cyber security, reflecting an adaptive and responsive strategy to evolving cyber threats.
• Check the procedures your advisors have in place – are they robust enough? Are they being constantly evaluated and updated?! What are vulnerability scores? Do they adequately protect their business and client data?”
Wright added: “Sadly, the issue of cyber security isn’t going anywhere but the good news is there is a lot that schemes can do to stay ahead of the curve and protect members.”
Quoted premiums for van insurance rose 4% in the three months to the end of December 2023, which was significantly lower than the 12.9% rise in the three months to September, and the 9.8% increase in the three months to June.
Data shows that in December 2023, the quoted premium for a new van insurance policy most commonly fell between £500 and £999, with 36% of quotes falling within this range.
Quoted van insurance premiums are being pushed higher by the rising cost of claims which is being driven in turn by the cost of sourcing replacement parts and carrying out repairs, Consumer Intelligence says.
“As we have seen in the motor market, the rising costs of claims in relation to the increased price of sourcing replacement vehicle parts and completing repairs has pushed van insurance premiums higher this year, although the recent quarter's movements suggest that the rate of inflation is now showing signs of slowing,” says Laura Vas, Senior Insight Analyst at Consumer Intelligence.
“Inflation was less extreme for younger drivers, but premiums for the younger end of the market remain considerably higher than the quotes for those more experienced drivers,” adds Vas.
Age differences in the past year
Younger van drivers, under 25, saw the lowest increases in quoted premiums at 24.5% compared with 41.6% for the over-50s, and 36.6% for those aged between 25 and 49.
However, nearly 42% of over-50s van drivers can source a quote for less than £500 compared with 15% of those aged 25 to 49. No under-25s can do so.
Long-term view
The average quoted van insurance premium has nearly trebled, rising by 192.4% since April 2014 when Consumer Intelligence first started collecting data. Quoted premiums are at their highest levels since Consumer Intelligence records began.
Type of cover
Increases in quoted van insurance premiums based on how drivers use their vehicles varied slightly.
Owners using vans for social, domestic and pleasure saw increases in quoted premiums of 37.6% while tradespeople experienced rises of 35.3% in 2023.
The Lau islands, located on the eastern side of the Fiji archipelago, comprise sixty islands and islets over 114,000km2 of ocean. Sea level rise, ocean warming, acidification and the increasing frequency of tropical cyclones threaten coral reefs and the livelihoods of the Indigenous people of Lau that depend on the reef ecosystem as a source of food and income.
There is currently little in the way of climate risk protection available in the region beyond insurance policies covering fixed assets such as property. These only pay out after physical damage, and after a lengthy loss-adjustment process. Even then, very few households carry such coverage1.
Supported by BHP through social investment funds, WTW liaised closely with Fiji’s Vatuvara Foundation (VVF), the policyholder of the insurance programme, to create a fit-for-purpose insurance product tailored for a sub-set of the Lau islands. This programme will allow payouts to be deployed at the most critical time to help them withstand the adverse impacts of cyclones and effectively manage natural resources to ensure the resilience of the ecosystems themselves.
Working with WTW and local correspondent broker Insurance Holdings (Pacific) Pte Ltd., Vatuvara Foundation chose the development insurer Pacific Catastrophe Risk Insurance Company (PCRIC) to provide the policy after a competitive placement process.
In addition to enabling VVF-led rapid reef response activities such as reattaching broken corals and debris clean-up, the insurance payouts will provide community assistance activities that will alleviate food and water security concerns caused by storm damage.
These activities will help prevent the overharvesting and further degradation of Lau’s coral reef system during a community’s recovery from a cyclone and enhance both community and reef resilience.
Sarah Conway, Director and Ecosystem Resilience Lead, WTW, said: “We are grateful to BHP for supporting the design and implementation of the first coral reef insurance programme in Fiji. Building on lessons learned from our involvement with similar initiatives in other countries, this programme provides an exciting opportunity to innovate beyond rapid reef response to also include community assistance, enhancing the resilience of the ecosystem and those who depend on it.”
Katy Miller, Director, Vatuvara Foundation, said: “We are thankful that the innovative parametric policy will allow for the prompt access to funds following a destructive cyclone event to identify reef damage and assist reef recovery with a community-led team in Northern Lau. Increased frequency and severity of extreme weather events is expected in the area, and protecting natural ecosystems in the Lau Group is crucial to build long-term community resilience to anthropogenic threats including climate change.”
Ashley Preston, Head of Climate Resilience, BHP, said: “BHP is funding an innovative parametric insurance product, which aims to support the conservation of coral reefs and surrounding local communities in Fiji’s northern Lau Group, and build the knowledge base for how similar financial products could be used to improve climate resilience. We are pleased to work with WTW and Vatuvara Foundation on this project, which supports BHP’s commitments to action on climate, conservation and empowering communities.”
PCRIC CEO, Aholotu Palu, said “PCRIC is very pleased to demonstrate its commitment to serve non-sovereign entities with innovative parametric insurance products, in line with PCRIC’s mission to help the island communities of the Pacific to better prepare, structure and manage finances to foster disaster resilience and ensure rapid access to funds; the work of the Vatuvara Foundation, both in reef conservation and in local community empowerment, is recognised by the Government of Fiji as being in the national interest and consistent with development priorities, particularly the Blue Pacific Strategy, as well as commitments to climate change adaptation and disaster risk management.”
Initial coverage will include Vatuvara Island, which is a protected natural reserve; Yacata, where the local community resides; and Kaibu, the Vatuvara Private Islands Resort. Further sites in the Lau Seascape may be added in future years.
1 In Fiji, the penetration rate for non-life insurance is just below 2 percent.
More than half (51%) of Brits continue to feel negative about their retirement outlook, while positive sentiment has decreased from 42% in September 2023 to 41% in December 2023, indicating a slight decline in overall pension confidence over the last three months.
The Pension Confidence Indicator - a new measure of sentiment towards retirement - is the difference between the proportion of British adults stating they feel negative and the proportion who feel positive about their pension outlook, with a minus number indicating more negative than positive sentiment.
There was an increase in pension confidence among over 55s in the final quarter of 2023, but a bigger increase in negative pension sentiment among adults yet to reach the age they can first access their pension, over the same period.
There was a 7% increase in optimism about pensions among 55-64 year olds towards the end of last year, from 38% in September to 45% in December. Meanwhile, fewer said they felt pessimistic - a 9% drop from 55% to 47% over the same period). Over 65s were even more positive in December, with over half (53%) feeling confident about their pension, although this was a similar proportion to September.
Conversely, pension concerns intensified between September and December 2023 for those under 55, with 57% admitting “quite negative” and “very negative” emotions about their pension - a 6% increase in negative sentiment over the period.
Individuals aged 44-54 exhibited the highest levels (63%) of negative sentiment towards their retirement outlook and are the only age group to feel, on average, “less positive” (47%) about their pension compared to how they say they felt a year ago. This is a significant change from September 2023 when most (49%) 44-54 years olds felt “the same” about their pension compared to a year ago and only around a third (38%) felt “less positive”.
The State Pension remains a key factor behind whether people of any age feel good or bad about their future. Despite the government maintaining the triple lock and announcing a State Pension rise in April, distrust in the government remains a top three reason for negative pension sentiment among over 55s.
For younger savers, concerns around the inability to afford contributions (29%) overtook worries about high retirement costs (27%) as their primary pension concern between September and December 2023.
Men feel more positive than women
Despite under 55s generally exhibiting negative sentiments, men were (42%) more likely to express positive feelings about their pension than their female (26%) counterparts. In the working-age demographic, male savers aged 18-25, are notable outliers, with 46% reporting being on track for retirement, a significant rise from 31% in September.
Gender disparity persists among over 55s, where over half (58%) of men noted positive pension sentiments compared to only 37% of women. This may be partly explained by the persistent gender pension gap in the UK, which tends to widen with age.
Renters feel down about retirement
Working age renters (61%) were more likely to harbour negative feelings about their pension than homeowners (52%). This marks a concerning increase from three months prior (55% and 50% respectively). This suggests rising rents and a decline in homeownership continue to make saving for a pension more challenging.
The influence of homeownership at retirement remains profound. The vast majority (60%) of renting retirees express negative feelings about their pension, a stark contrast to homeowners in the same age group who feel mostly positive (54%).
Self-employed feel less negative
Fewer self-employed people noted concerns about their pension (falling from 61% in September to 56% in December), a similar level to their employed counterparts (54%), despite their exclusion from Auto-Enrolment.
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “Brits were feeling increasingly down about their pension prospects towards the end of last year. How we feel about our long-term financial prospects is a key indicator of how other financial pressures and concerns affect our lives.
Contrary to what you might expect - it’s not all doom and gloom when it comes to how people feel about their retirement prospects. It’s good to see positive sentiment among older Brits improve towards the end of last year, possibly alongside the slight easing of cost of living pressures, as inflation subsided, as well as State Pension increases and a recovery in stock market fortunes.
Younger workers and current retirees are generally more positive than the middle-aged; men are typically more positive than women and homeowners more positive than renters.”
]]>The new version also addresses a challenge in the way that ‘significant maturity’ was previously defined. The first version linked the date at which a scheme would be treated as significantly mature (and hence have to have substantially de-risked its investments) to a combination of scheme demographics and market conditions, notably interest rates. With the huge volatility in markets in recent years, the date of significant maturity would have been highly unpredictable and would not have formed a rational basis for long-term planning for schemes. Under the new regulations this problem has been resolved by anchoring the calculation based on market conditions at a set date – March 2023.
However, where schemes are well funded *beyond* significant maturity, David Fairs argues that an opportunity has been missed to make better use of scheme assets. He points out that a scheme that is funded in line with the Code, on a prudent basis, is likely to run up a surplus. Schemes which run on in this scenario can invest more in the kind of ‘productive finance’ assets that both the present Conservative government and a potential Labour government would like to see. But the framework for running a surplus - and potentially extracting some of it – remains rigid, and many schemes will simply buy out. Whilst this may be the right answer for some, it represents a missed opportunity to make the most productive use of the assets built up often over decades.
Finally, David Fairs also notes that although the Impact Assessment indicates that the new regulations will imply an extra £7 billion being paid in to DB pensions, this is over a ten year period and in the context of a DB universe of more than 5,000 schemes. Given the big recent improvement in scheme funding, if an average of just £600,000 extra per scheme per year is the consequence of this whole new regime, David Fairs says that ‘many might be asking is it still necessary?’
Commenting, David Fairs said: “It has been a long and winding road to get to this point in the process, including the shock of the Pandemic and the period of economic and political upheaval which has followed. So it is good that the revised regulations have finally been published and that the new funding code will come into force later this year. There is much that is good in the new regulations and they deal with important challenges to the first draft, including around the definition of ‘significant maturity’. But I cannot help thinking that they also represent a missed opportunity when it comes to a world in which growing numbers of schemes have the potential to run on and generate surpluses. The vast sums still held by DB pension schemes, and particularly the largest and best-funded schemes, have great potential to be put to more productive use. In my view, the regulations could have gone further to facilitate these new possibilities, encouraging and enabling schemes and their sponsoring employers to make the best use of the assets which have so painstakingly been accrued over the decades”.
“People depend on the State Pension for a significant chunk of their retirement income. It’s also key to confidence in people’s ability to retire at all.
“Even the suggestion that people won’t get it until their 70s will make people feel more distrustful than they already do in the State Pension system and may cause actual worry and anxiety about their future.
“If people suffer ill health or face the need to care before 71, as is likely for many, they may have to give up work sooner than they can receive their State Pension anyway and have to claim working age benefits for longer instead.
“While the sustainability of the State Pension needs to be properly examined, increasing the age people get it may not turn out to be the cost saving a government would hope for.”
“PensionBee research has found that nearly half (48%) of UK savers believe they won’t be able to retire before the State Pension age if and when it is raised to 68, as projected between 2044-2046. Given these findings, it's reasonable to anticipate even more people would be forced to work for longer if the State Pension age rises to 71 by 2050, as suggested by the International Longevity Centre.
“Our research also indicated that the perceived ideal retirement age is 60 - over a decade earlier. The growing disparity between this preferred retirement age and an increasing State Pension age would mean people would have to save even more through private pensions if they wanted to retire earlier. The ‘Pre-State Pension Gap’ is the total amount of income an individual requires to cover their expenses ahead of their State Pension entitlement from other savings, and this would get bigger.
“There’s also a risk that people could use up too much of their private pension savings early in retirement if they had to stop work before State Pension age, possibly leading to greater poverty in later old age.”
Kate Smith, Head of Pensions at Aegon, said:
“We know from our Second 50 research that over 95 per cent of us expect to depend on the State pension in later life - so this report will be concerning for millions of people.
“Pushing back the state pension age to age 71 would be a shock for many – when they are expecting to receive this from age 67 or 68. Some will only receive it for a short time, others not at all.
“This report, published in an election year, highlights the need for the political parties to detail their plans for state pensions ahead of the UK general election. This is too important an issue to be kicked into the long grass. People need to know where they stand and what this means for their later life, giving them plenty of time to adjust their working and savings plans.
“Raising the state pension age feels a like very blunt instrument - and would likely penalise those most in need.
“This report from the International Longevity Centre shows that we all collectively and individually would benefit from looking more closely at the uncharted territory of later life. Aegon’s Second 50 report offers a strong framework for this much needed discussion to be built around.
“The Second 50 is difficult enough to navigate given the longer working lives many of us face. We cannot look at what’s gone before to know what to do. Certainty around the state pension is vital.”
Lily Megson, Policy Director at My Pension Expert, said: “Entering your seventies with retirement but a blip on the horizon is a sobering thought for many – yet a very tangible reality that millions will face in years to come. After decades with their noses to the grindstone, don’t Britons deserve more support and appreciation?
“Although this may feel disheartening to many, it needn’t crush people’s dreams of a comfortable retirement beginning at whatever date they see fit. Diligent financial planning can make this possible – in other words, taking stock of pension products and investments, and engaging with independent financial advice to create a robust retirement plan where necessary. Where the government must intervene is facilitating this support and providing the necessary tools to help make this happen for Britons.”
However, this can be labour intensive and has the potential to create friction. The answer is within the market’s grasp however, as it lies in the applicant’s email address and the digital footprint behind it.
1% of insurance applications flagged for fraud
Consider that in recent tests using email address intelligence, we uncovered that 1 in every 100 insurance applications had a strong fraud marking. Then consider the volume of insurance quotes produced each and every day. The scale of fraud risk is clear, but so is the opportunity to effectively tackle the problem using email-based fraud risk scores.
As the economic squeeze persists for many households and insurance premiums continue to rise , insurance providers know that delivering a great customer experience is vital. Consumers demand a quick and friction-free application process to get fair and accurate quotes and every insurance provider is working hard to make sure their customers have the right level of protection in place at right price.
Insurance providers are also looking closely at the customer journey to ensure this is as streamlined as possible at application and quote stage. This means they must carry out the right level of validation checks, in a swift and seamless fashion.
Frictionless fraud detection
The application process naturally requires that the information provided by the customer is validated, verified, and enriched. But the extent to which fraud detection occurs at this stage is unquestionably a delicate balancing act. Lean too far one way and the door will be left wide open for fraudsters. Lean too far the other way and an insurance provider risks a creating a poor customer experience with applicants frustrated by a barrage of security checks. This difficulty is amplified by the current economic environment with fraud on the rise due to the cost-of-living crisis .
Application fraud is one of the biggest problems in the insurance industry with Action Fraud reporting that from October 2022 to October 2023, the average victim of a ghost broker lost around £1,288, a rise of 50% since 2019 . This reinforces why the insurance market is focusing so heavily on the robustness of front-end fraud detection.
Spotting cases of application fraud has traditionally relied on public and industry shared data, often post-policy inception. These checks can be effective, but are often labour-intensive. There is also the risk of the fraudster slipping through the net if they are not spotted before policy on-boarding.
Meeting the demand for a quick, efficient, and automated method of checking identities at the application process, email address validation through solutions such as LexisNexis® Emailage® Rapid, our powerful fraud risk scoring solution based on the applicant’s email address and other supplied information, now give insurance providers confidence in spotting potential fraudsters before they are allowed through the front door.
Digital Footprints
The key is the digital footprint that accompanies an individual email address, based on how it has been used online.
An email address is a unique global identifier because it used in virtually 100% of all online transactions, rich with transaction history and behaviour and difficult to change because it links to multiple online accounts. It means a fraud risk score can be built based on billions of global payment transactions including 82,200 fraud events shared on average daily . This instantly verifies the existence and age of an email address and its domain – this is powerful insight for understanding if a ghost broker could be at play. It will confirm the fraud risk and if the email has been associated with fraud in the past and which industry that fraud may have occurred. Individuals are accurately placed into Fraud Risk Bands and given a predictive risk score.
Drilling down deeper into the digital signposts of fraud, the Digital Confidence Score (DCS) is another set of outputs that can be used. DCS gives scores for pairs of inputs, such as email and IP address, email and shipping address or IP and billing addresses, and generates an overall confidence score. The higher the score, the higher the level of confidence that these inputs belong to the same digital identity.
Email address intelligence supports streamlined risk assessment
The challenge for the market has been in strengthening identity checks without causing a detriment to the customer experience. The banking sector has been using email intelligence-based tools to tackle identity fraud for a while. Now the insurance market can immediately identify if an application has a fraud risk through a real-time risk score as part of a streamlined risk assessment process. With the average fraudulent insurance claim costing over £15,000 and fraud on the rise , identifying even 1% of potential fraudsters early through email address intelligence could save the industry millions each year.
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We found that most risk teams were alert to the first three of these trends and were proactively taking steps to address them, even if their risk response was at an early stage.
In contrast, there was a risk that challenges related to social trends and interconnections between risks were flying under the radar.
What are the key social / cultural trends and interconnection risks that insurers face?
On social and cultural trends, CROs are currently concerned with people risks such as changing workforce expectations and a changing relationship with their customers. These also closely link to social media amplification and the potential for increased reputational risk.
Longer-term challenges include managing public perceptions of the overall insurance industry, dealing with public interest issues such as protection gaps, and managing long-term people like wealth gaps and an aging workforce.
Social media amplification is also a prominent example of the growing interconnection between risks. In the past, an operational risk such as claims system downtime would be contained, but increasingly it risks becoming a reputational risk through social media fallout and then a financial risk if consumers vote with their feet.
Other examples of interconnection risk that CROs highlighted include global supply chain risks, as well as a combination of cyber risk and dependency on critical (often outsourced) IT infrastructure, such as cloud computing environments.
So what does the risk function of the future look like?
Our vision for the risk function of the future is a team that fuses human judgement with technology and AI to produce value-adding business insights efficiently.
60% of CROs see better automation of risk work as a key development priority – and we agree. We believe that AI and automation can help:
• Automate routine data ingestion and analysis.
• Collect unstructured data for the risk team to analyse through AI and machine learning.
• Produce custom risk dashboards for stakeholders.
The objective of this is not to automate the risk function and create a “robo-CRO” - but to free-up risk managers to spend significantly more time partnering with the business and embedding a good risk management culture.
Correspondingly, our research highlighted the importance of soft skills such as relationship building and communication to support that business partnering role.
Good culture cuts both ways. On the business side, it means ensuring that first line teams take responsibility for aspects of risk management and that they are comfortable raising challenges with the risk team. On the risk side, it means having a “how can we help” mentality, whereas all too often the conversation at the moment is more about “how can we stop”.
Strategic CROs
The risk function of the future will be led by a strategic CRO who helps create a clear link between risk and strategy. Strengthening that link is essential if the risk function is to help businesses address long-term evolving risks like climate change and geopolitical evolution.
Being a strategic CRO means having a seat at the table for early-stage strategic decision-making. Being asked to provide a rubber stamp from a risk perspective at the end is no good!
Other qualities of strategic CROs include: giving clear and justified opinions on risk matters; being trusted by the board, NEDs and other executives; and being able to take a balanced view between taking and avoiding risk.
Levelling up your risk team
Risk teams need to evolve to support the business in the long term, but it’s easy to face decision paralysis when faced with a large number of strategic changes.
We recommend breaking the recommendations down into workstreams and taking a phased approach to each. For example, automating routine data ingestion and monitoring could begin with a small-scale pilot such as automating the regular KRI dashboard. Similarly risk leaders can’t position themselves as “strategic CROs” overnight, but can take steps to strengthen board relationships and seek opportunities to provide planning input.
Overall risk teams that embrace change and manage it proactively will be best able to keep pace with changing times, ensuring they give the business the best chance of success.
Jenny Gibbons, WTW’s Head of Pensions Governance, said: “For those who haven’t started yet, the publication of the Code represents the firing of the starting gun. But the race before us is a marathon not a sprint, with runners making steady progress much more likely to achieve their goals. The General Code is ultimately about improving governance and risk management for the benefit of members.”
Other findings from the WTW poll looked at areas of focus, with 41% of schemes turning their attention first to completing policy and process documents, and 12% saying risk management was the first place to shine a spotlight. The majority of the remainder intended to make progress in all areas or weren’t sure where to start, with just a handful turning first to aspects of board effectiveness and diversity.
“It’s very promising that most schemes know where their key focus for the Code requirements will be now,” said Gibbons. “It’s important to look at the direction in which the scheme is heading too. For example, if a scheme has already taken risk out of its funding and investment strategy, then the Board may want to focus on those parts of the Code that spell out a cyber risk management and preparedness approach.
“Similarly, if there is likely to be an upcoming change in the Trustee Board’s personnel, then the scheme may want to focus on Board Effectiveness or Trustee recruitment policy. Each pension scheme’s situation and requirements will be different and these are the areas that a thorough gap analysis should identify.”
Phil Brown, director of policy at People’s Partnership, said: “The earlier you can save into a pension the better as it means your money is invested for longer and has more time to benefit from growth in investment markets. So, the Government’s commitment to help younger workers start saving for their future is a huge step forward. But now we need to see promises turned into action, with a cross-party consensus on the timeline for delivering this change, given we have been waiting for this since 2017.
“Automatic enrolment is undoubtedly one of the most successful Government policies in living memory, enabling millions of people to save tens of billions of pounds extra into their pension. It’s absolutely right that the policy continues to develop so that it reaches its full potential and enables as many people as possible to have the opportunity to benefit.
“With nearly 4 in 10 people not saving enough for their retirement, the next big challenge for policymakers and the industry is reaching a consensus on how we solve the problem of under saving.”
TPR took action to ensure Capita was doing as much as possible to identify the extent of any impact on schemes, and then to inform trustees of affected schemes and their members so that protective measures could be taken.
TPR also contacted the trustees of schemes administered by Capita to highlight the steps it expected trustees to take. These included communicating with their members and meeting their obligations as data controllers.
This engagement was part of a multi-pronged approach, with TPR sharing appropriate information with other regulatory parties, including the Financial Conduct Authority, the Prudential Regulation Authority, the Information Commissioner’s Office (ICO) and the National Cyber Security Centre.
Executive Director of Frontline Regulation, Nicola Parish, said: “Today’s report into the Capita cyber security incident clearly demonstrates the rapid action we take to protect savers.
“The incident also highlighted the importance of trustees having robust cyber security and business continuity plans in place. We expect a scheme’s cyber security and business continuity plan to cover a range of scenarios so that, if an incident occurs, trustees can ensure the safe and swift resumption of operations.
“If trustees outsource administration, they are still responsible for ensuring scheme obligations towards members are met and that data is handled properly.”
Revised cyber security guidance
Pension schemes are at risk of being the target of cyber-attacks because of the large amounts of personal data and assets they hold. In December 2023, TPR published revised cyber security guidance to help trustees and scheme managers meet their duties to assess the risk, ensure controls are in place, and respond quickly to incidents. The guidance is also of use to scheme suppliers and advisers.
For the first time, TPR is asking trustees and scheme providers to report cyber incidents on a voluntary basis, so it can build a better picture of the cyber risk facing the industry and its members.
Last month, TPR published its new general code setting out what it expects of a scheme to maintain an effective system of governance. This brought together many key aspects of running a scheme, including cyber controls. The detail of what constitutes an effective system of governance will be dependent on the size and complexity of the scheme.
The 2023 Atlantic hurricane season featured an above-average number of storms and was characterized by record-warm sea-surface temperatures and a strong El Niño, notes BI. There were 20 named storms last year, the fourth greatest in a single year since 1950. Of these, seven developed into hurricanes and three into major hurricanes (category 3 or above).
That compares with the 14 named storms in an average season (including seven hurricanes and three major hurricanes). Yet vertical wind shear (related to the Pacific jet stream) restricted those making landfall. Hurricane Idalia was the only hurricane to strike the US, coming ashore as a category 3 hurricane in a low population area near Keaton Beach, Florida. The eastern Pacific also experienced a high number of storms -- 17 of which were hurricanes and eight major hurricanes.
Insurers Lulled by 2nd-Fewest West Pacific Typhoons Since 1951
Charles Graham, BI Senior Industry Analyst – Insurance, said: “El Niño didn't drive above-average cyclone activity in the West Pacific in 2023, contrary to expectations. The region endured 17 named storms (including Dora which crossed the East Pacific dateline). The only year to have had fewer named storms since 1951 was 2010, with 15.
“Twelve of the storms became typhoons including eight major typhoons. Mawar (the first category 5 typhoon of the season) passed close to Guam. Doksuri (the most destructive West Pacific storm in 2023) came close to the Philippines as a category 4 cyclone, before causing heavy rain and flooding in Taiwan and eastern China. Hong Kong still experienced record rainfall and flooding in September and October 2023 in the aftermath of super typhoon Saola, tropical cyclone Haikui and severe typhoon Koinu.”
North Atlantic Sea-Surface Temperatures Reach New Highs
Global sea-surface temperatures from April through December were the highest ever for those months since records began in 1850, notes BI. The North Atlantic was subjected to a strong to severe marine heatwave in June, which swept through the Mediterranean basin in July. In the North Tropical Atlantic, the heatwave continued to increase in intensity through the summer, with the western part of the region moving from moderate to strong warming conditions. The tropical Pacific was also affected by an intensifying heatwave in the eastern part of the basin, corresponding to the strengthening of El Niño.
Record sea surface temperatures contributed to above average levels of storm formation in the Atlantic, Eastern North Pacific and Indian Ocean. Convective storms brought hail and flooding to many regions.
Commenting on the Bank of England’s interest rate hold today, Chris Arcari, Head of Capital Markets, Hymans Robertson, said: “The Bank hasn’t cut interest rates this month because it’s being cautious, with lingering concerns about some elements of domestically-driven inflation. But it recognises the strong progress on inflation largely driven by supply-side developments, and agrees with consensus forecasts that headline CPI inflation will fall below the 2% target by or in the summer. And this comes at a time where UK real growth, realised and forecast, is very weak."
Explaining the background to the Bank’s decision, Chris said:
• “Sectoral divergence in economic activity potentially highlights a key risk to the outlook.
• Further declines in headline inflation should enable the major central banks to start reducing interest rates in the second half of 2024. Indeed, if consensus forecasts are correct, and UK inflation falls below target in the summer, current interest rate expectations might not be that unreasonable.
• However, we are likely to see the Bank of England retain a degree of caution. Tight labour markets and strong wage and services inflation – signs of genuine, domestically-driven inflation pressures - mean the pace of decline is likely to slow and core inflation is likely to take a lot longer to fall than headline measures.
• Easy wins from falling energy and moderating food and goods prices – which arguably owe more to global supply factors a central bank can do little about - are largely in the rear-view mirror. And here, too, there are risks, with developments in the Red Sea posing a threat to global supply chains and oil prices. However, for now, pandemic-era inflation feels unlikely given weak manufacturing activity and goods demand and a more manageable rise in freight costs.”
Shweta Singh, Chief Economist at Cardano: “Whilst there is no change in monetary policy settings today, the suggestion is now firmly that peak rates for this cycle have likely been reached and that the next move will be an interest rate cut. However, MPC members are wise to retain some caution as they plan their next policy move.
“Timing will be everything. The overall tone of February’s monetary policy statement is consistent with a central bank that wants to cut rates but also wants to be sure that they don’t move too fast.
“Inflation is not yet fully tamed. The unexpected rise in headline inflation in the year to December was a timely reminder that there is still work to be done. We think that the helpful trend in goods prices, seen during 2023, will not be enough on its own to return the headline inflation rate to the Bank’s policy target of 2%. For example, annual service price inflation still exceeds 6% and has seen only a very modest improvement since it peaked in Summer 2023.
“The MPC also released updated economic forecasts. These start to reflect a slightly more optimistic growth view. Growth forecasts have been revised higher for 2024-26 on the back of easier financing conditions, lower energy prices, and more supportive fiscal policy. The outlook for inflation is more muddied: headline CPI inflation forecast is revised lower for this year, partly due to lower energy prices, but higher for 2025-26 on the back of a better growth outlook and easier financing conditions. Inflation remains above the BOE target through 2026.
“The risk of a policy mistake that could cause a resurgence in inflation is clear. State pension payments, benefits and minimum wage are all set to increase at a pace much higher than the present rate of inflation in April. And, there is the potential to see even more stimulative fiscal measures in the Spring Budget. We believe that the market pricing for UK rate cuts this year is too aggressive and today’s announcement does not change that view.”
Claire Jones, Head of Responsible Investment at LCP, commented: “We agree with the assessment in the plan that “Climate change presents one of our greatest challenges, but also one of our greatest opportunities for economic growth.” We therefore welcome its commitment to “establish a clear, credible, and transparent framework to give investors the certainty they need to invest” in the UK’s green economy and provide “a crucial funding source for our transition to net zero".
Steve Webb, Partner at LCP, said: “A large part of the Labour agenda as set out in today’s document represents continuity with the current government’s agenda rather than a radical change of direction. The main difference seems to be a slightly more interventionist approach. In particular, a Labour government would strengthen the powers of TPR to force consolidation among smaller DC schemes and would take a closer interest in the investment strategy of the Local Government Pension Scheme. But if the Government had produced today’s document rather than the Labour Party, it would have represented further evolution rather than revolution”.
Lizzy Holliday, Director of Public Affairs and Policy at NOW: Pensions, comments: “We’re pleased to see Labour providing clarity on its future outlook for the financial services industry, particularly its position on important themes notably sustainable finance, innovation within the sector and financial inclusion.
“Empowering people to feel confident about their finances begins with developing a realistic financial inclusion strategy with a focus on promoting financial literacy in schools and colleges. As part of NOW: Pensions partnership with Debate Mate we help to educate students about personal finance in order to help them build healthy relationships with money, savings and pensions. Developing their understanding on key financial topics and building in early understanding of financial resilience can help to avoid feeling unprepared to make financial decisions in adulthood.
“Addressing gender inequalities in the financial services industry – as in all industries - is crucial for businesses, individuals and society. As part of our Fair Pensions For All mission we are very aware that the gender pay gap and the gender pension gap, are sadly, still very real challenges facing women across the UK. Our research in 2022, in partnership with the PPI, found that women would have to start saving into a pension from the age of four in order to retire with the same saving pot as men; this simply shouldn’t be the reality in the 21st century. We continue to focus on this issue and are publishing our new Gender Pensions Gap report next week.
“We welcome the concept of a pension and retirement savings review; pensions are a significant and essential part of all of our lives, and the wider economy. But often this isn’t realised until it’s too late. However, to have the greatest impact on millions of savers we believe joint work on developing a roadmap for Auto-Enrolment, including tackling the challenging topic of pensions adequacy, will be key.”
Tim Middleton Director of Policy and External Affairs at the Pensions Management Institute commented: “PMI is encouraged that the Labour Party shares the current Government’s commitment to increasing investment in UK equities. The establishment of a UK counterpart to the ‘Tibi’ scheme would be a constructive development which would facilitate greater investment in illiquid assets by DC schemes and so improve longer-term returns for members. However, whilst the Labour Party also recognises the need to close the ‘advice gap,’ we would have liked to have seen bolder suggestions over helping members manage decumulation effectively.”
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “Labour appears to be pinning its sail to the mast of the Conservative’s Mansion House reforms for pensions. This gives some clarity to the industry, suggesting that should a Labour government come to power, many of the initiatives already in motion, to unlock capital and to bring about consolidation, would continue.
A pensions review has the potential to give impetus to new initiatives too, such as the Lifetime provider model. It’s also encouraging to note Labour's support of streamlining regulation in line with the FCA’s Consumer Duty and its focus on outcomes.”
Alan Collins, Managing Director for Spence & Partners, commented: "The language and content does not indicate that significant change is on the horizon, with many of the "Mansion House" themes featuring in Labour's plans. However, I sigh at the prospect of yet another "review", particularly given how long recent funding code and scheme governance changes have taken to come to fruition."
]]>Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The triple lock has had a rollercoaster ride, delivering two of its highest increases ever in the past two years, after being controversially suspended during the pandemic. After a period of time when people’s finances have been torn to shreds by the cost-of-living crisis, the MPs were in no mood to oppose the 8.5% increase due to come into effect in April, but there was a sense that change is needed in how benefits are uprated.
Nigel Mills MP questioned whether the September inflation figure needed to be used for an April uprating, or whether the process could be simplified so that a later figure could be used that would provide a more realistic picture in periods when inflation or wages are moving quickly. He pointed out that using a two- or three-year rolling average might prove more useful in delivering a smoothed figure. Such measures would surely go some way towards containing costs.
Others pointed to the need for a more standardised approach to bring pensioners much needed certainty around what they get and when. Pensioner poverty was a key part of the debate with the recent Joseph Rowntree Poverty report showing over 2m pensioners are in poverty. Wendy Chamberlain MP added that given so many pensioners continue to go hungry, perhaps the discussion needs to move to how much the state pension needs to be, rather than how much to uprate it by.
We’ve reached an important point in this debate. The triple lock has boosted state pensions, but the fact remains many pensioners remain in poverty while state pension costs spiral. A review of state pensions, and the triple lock’s role within it, is urgently needed to deliver a system that delivers certainty for pensioners now and in the future.”
]]>This rise was partially offset by aggregate scheme assets decreasing over the month, driven by schemes’ hedging strategies.
Over January 2024, UK pension schemes’ funding positions improved by c. £36bn against long-term funding targets, new XPS Pensions Group research shows. Based on assets of £1,416bn and liabilities of £1,267bn, the aggregate funding level of UK pension schemes on a long-term target basis remains extremely positive, at 112% of the long-term value of liabilities, as of 26 January 2024.
Danny Vassiliades, Partner at XPS Pensions Group said: “Aggregate pension scheme surpluses increased significantly over January, with higher-than-expected December inflation figures tempering expectations about when the Bank of England will begin highly-anticipated rate cuts. With upcoming cuts in mind, schemes should be well hedged to protect against increases in the value of their liabilities.
Whilst the Bank’s announcement today to maintain interest rates at 5.25% was widely expected, with significant market interest in predicting the first of the expected rate cuts, pension scheme funding may continue to experience some volatility in 2024 as expectations continue to shift.”
2024 will be a year of unprecedented change for the risk transfer market, says Hymans Robertson as it issues its annual risk transfer report today. The leading pensions and financial services consultancy’s report expects 2024 to see more insurers competing for buy-ins, with a record volume of multi-billion pound transactions and more use of alternative risk transfer options and captive insurance solutions. These changes represent excellent opportunities for well-prepared pension schemes of all sizes, as there will be more competition at both the large and smaller ends of the market. There will also be a greater variety of established risk transfer options for pension schemes to choose between, helping to solve different endgame objectives.
Commenting on the findings from the risk transfer report, James Mullins, Partner and Head of Risk Transfer, Hymans Robertson says: “2024 is already shaping up to be a year of unprecedented change for the risk transfer market, which is presenting opportunities for well-prepared pension schemes. For example, we expect to see two new entrants competing for buy-in transactions by the middle of 2024. This will further increase competition for smaller and medium-sized pension schemes. In addition, there is an ‘early mover’ advantage for the first few pension schemes to transact with a new entrant in the buy-in market, as the insurer accepts a lower margin to help build up its credibility.
“At the larger, multi-billion pound end of the market, more insurers are demonstrating that they have the capability and appetite to complete record-breaking transaction sizes. Insurers also currently have access to a large amount of capital, which increases their capacity for transactions of all sizes. This gives the potential for all insurers to complete record transaction volumes during 2024.
“2023 saw the first superfund transaction and we expect to see more in 2024. This, along with increased activity for capital backed journey plans, means that we expect 2024 to be seen as a coming of age for the alternative risk transfer market. We also expect to see more use of innovation, such as captive insurance solutions. These allow the sponsoring employer to benefit as the pension scheme runs-off within an insurance wrapper.
“So, if last year’s story was about the rapid increase in demand from pension schemes, this year’s will be about increased supply from the insurers and alternative risk transfer providers.
“Existing and new insurers have geared up well for at least £50bn a year being the new normal for buy-in volumes. Indeed, our projections indicate that buy-in volumes will be at least £50bn every year for the remainder of the decade.
“To meet this increased demand and in preparation for these changes, we grew our team by a third last year and have now led risk transfer transactions totalling over £30bn, including 25 transactions with FTSE100 sponsors.”
The report also includes Hyman Robertsons’ expert insights on longevity risk, how trustees can compare insurers from an ESG perspective, and what affect the Solvency UK reforms are expected to have on the insurance market.
Hyman Robertson’s Risk Transfer Report 2024 can be read here.
]]>Swiss Re Institute report examines the effectiveness of eight MCED tests under various stages of development, with significant differences in their ability to detect specific cancers
Multi-cancer early detection blood tests offer a future where a single blood test can provide a routine, comprehensive screening for a range of cancers. This type of minimally invasive test would be a revolution in the early detection of cancers and has the potential to improve survival rates and decrease the economic burden of late-stage treatments. However, MCEDs are still in the early stages of development. Swiss Re Institute's new report "Multi-Cancer Early Detection: cancer screening beyond today's boundaries", explores the future risks and opportunities for patients and insurers.
Natalie Kelly, Swiss Re’s Head of Global L&H Underwriting, Claims & R&D says: "MCEDs offer us hope of catching cancers at the earliest stages, boosting survival rates and reducing costs by avoiding complicated late-stage treatments. However, given this early stage of their development, we need to carefully examine their potential, their risks, and the implications for insurers."
Early detection to save lives and reduce treatment costs
MCED blood tests are a type of liquid biopsy which can detect cancer biomarkers in a single sample of blood. These minimally invasive blood tests can be effective in detecting cancers at an earlier stage, potentially before patients are symptomatic.
Research indicates that early diagnosis can significantly improve 5-year survival rates for some cancers by 15–25%, if they can be detected before they spread to other parts of the body.
Earlier detection also has the potential to reduce the cost of treating cancer. Cancer Research UK concluded that treatment for certain cancers at stage 3 and 4 cost the UK's National Health Service nearly two and a half times more than the amount spent on treating cancers at stages 1 and 2.
Concerns over missing real-world evidence and potential for inaccurate test results
While the potential to increase survivability is promising, Swiss Re Institute urges caution. Although statistical evidence points to large theoretical gains in survival rates and cost savings, at this early stage of development there are no studies which have validated that potential in a real-world setting. Further, MCED tests currently require clinical validation by conventional diagnostic methods prior to commencing any treatment. There is also a risk of causing distress for patients who are given inaccurate results.
In order to better understand these concerns, Swiss Re Institute's paper examines the effectiveness of eight MCED tests under various stages of development, including some in clinical trials. Swiss Re uncovered significant differences in the current generation of MCED tests, in their ability to detect specific cancers, early and accurately, when treatment options are most likely to be effective.
With the speed of medical innovation, all signs point towards the wider deployment of MCED tests, as a complementary tool to existing practices within a decade.
For insurers, Swiss Re Institute's report examines the impact of widespread adoption of MCED tests and implications for life and health insurance products, particularly life, critical illness, and medical reimbursement covers. It outlines the need to undertake risk assessments to consider potential implications of MCED tests on underwriting guidelines, pricing, claims, product design, and regulatory compliance.
You can download "Multi-Cancer Early Detection: cancer screening beyond today's boundaries" here.
Stephen Lowe, group communications director at retirement specialist Just Group, said: “The population projections show that the clock is running down on a demographic time bomb for the UK’s creaking social care sector. An extra one million over 85s are expected by 2036 which is a huge increase as we trend towards an ageing population.
“Many of these people will eventually rely on public services for care and support, especially as Census data tells us that more elderly people are living by themselves, yet the system is already struggling to cope.
“Just Group’s Care Report has been running for over 10 years and shows year after year that millions of people are not prepared for the eventuality that they may need care in later life. Our latest research revealed three-quarters (75%) of those aged over 65 had not thought about care, planned for it or spoken to loved ones about it.
"Who can blame them? Twenty years of pronouncements and retreats on government policy have left the public confused and losing faith that the problem will ever be tackled. As we hurtle towards a General Election we are once again hoping to see a clear focus on delivering an achievable, funded social care policy that can handle the pressures it will face over the coming decades.”
National population projections - Office for National Statistics
“People often mistakenly assume they will receive all their pension tax relief automatically from HMRC. However, whether you need to make a claim to HMRC to receive the tax relief you are owed will depend on several factors including your income, the type of pension scheme you contribute to and how you contribute.
“Higher earning pension savers who make personal contributions to ‘relief at source’ schemes, such as SIPPs, risk missing out on thousands of pounds in tax relief if they fail to notify HMRC.”
How much tax relief could higher earners claim?
“A higher-rate taxpayer who contributes £1,700 to a SIPP in the 2022/23 tax year would receive basic rate relief of 20% automatically.
“As a result, a £1,700 personal contribution would automatically be boosted by £425 to £2,125 in their pension – but they would need to claim the extra £425 tax relief they are owed from the Revenue. An additional-rate taxpayer, meanwhile, could claim 25% tax relief from HMRC on top of the 20% relief they receive automatically.
“Higher-rate taxpayers who make larger pension contributions will have an even bigger incentive to fill out their tax return. For example, a higher-rate taxpayer making a £10,000 personal pension contribution would receive £2,500 basic-rate tax relief and be able to claim an extra £2,500 from the taxman. An additional-rate taxpayer who contributed £10,000 would be able to claim an extra £3,125 from HMRC.”
Source: AJ Bell
Do all higher earners need to reclaim pension tax relief?
“If you are a higher or additional rate taxpayer and have sufficient annual allowance available for the tax year, you should be entitled to tax relief at your marginal rate. However, you will only have to make a claim to HMRC if you are making personal contributions to a ‘relief at source’ scheme.
“If you are contributing to a ‘net pay’ pension scheme, your contributions will be taken from your pre-tax salary, meaning income tax relief is usually paid automatically. As a result, you shouldn’t need to make a claim as you should already have received the tax relief you are due.
“The exception to this is where someone contributes to a net pay scheme from earnings below the personal allowance of £12,570. In these circumstances tax relief will NOT be granted automatically, although the government has pledged to address this so-called ‘net pay anomaly’ in the coming years.”
How does HMRC pay reclaimed pension tax relief?
“Pension tax relief is not always paid directly into your pension. If you contribute to a ‘relief at source’ scheme, such as a SIPP, you will receive basic-rate (20%) tax relief automatically but will need to claim higher or additional-rate tax relief from HMRC.
“Once your claim is processed, HMRC will usually adjust your tax code in order to pay your extra tax relief. If you don’t have earnings, the Revenue may simply send you a cheque.
“Many will claim through self-assessment, so for the thousands filing last minute they’ll be applying today. But that isn’t the only route – if you don’t file a tax return you can contact HMRC directly or claim via your Government Gateway account.
“It is possible to backdate pension tax relief claims by up to four years (i.e. up until the 2019/20 tax year). If you are making claims for tax relief you are owed from more than four years ago, it will be at HMRC’s discretion whether or not to accept your claim.”
]]>It shows that between 1 October and 31 December 2023:
The average premium paid for private motor insurance was £627, up 12% on the £562 of the previous quarter.
The current average premium is 34% higher compared to Q4 2022, when it was £470.
When looking at annual averages, motor premiums were 25% more expensive in 2023 than in 2022 (£543 vs £434).
However, the largest single factor is repair costs, which jumped 32% in Q3 to £1.6bn of the total £2.54bn. This reflects a mixture of cost of labour, energy and also the fact that vehicles are becoming more sophisticated, with the likes of electric vehicles requiring ever more specialist expertise to repair. Early research suggests that electric vehicles are approximately 25% more expensive to repair than their petrol equivalents and take 14% longer to fix.
The end result is that insurers are spending more on claims and costs than they are collecting in premiums. Analysts at EY estimate that in 2022 for every £1 motor insurers received in premiums, they paid out £1.11 in claims and operating costs. EY also forecasts that in 2023, insurers will have paid out £1.14 in claims and operating costs for every £1 received in premiums.
But the industry is aware of the need for action.
Mervyn Skeet, the ABI’s Director of General Insurance Policy, said: “We’re acutely aware of the impact that rising motor insurance premiums continue to have on motorists. Rising repair costs and other factors outside of insurers’ control mean there is no single action that could bring down premiums. However, we are determined to do all we can to put the brake on.
“We are working with our members to understand what actions can be taken to help motorists manage costs. The cost of paying monthly (premium finance) is one of a number of topics we continue to discuss with our members and the Financial Conduct Authority (FCA). We’ve also been very clear, and continue to underline, that cutting Insurance Premium Tax would provide immediate relief for stretched consumers. We will be saying more, as we can, on other steps we will take in the coming weeks.”
Insurance Premium Tax (12%) currently adds £67 to the average motor premium.
]]>“From a reinsurance perspective, there were fewer surprises compared to last year, but it wasn't without its challenges. With retro capacity in place earlier than last year, the renewal was more orderly in the sense of a greater focus on price discovery, increased competition and many more requests to quote from brokers, who played a constructive role throughout the renewal.
“I would add that while the re/insurers have fared better in the first 9 months of 2023 than the past 5-6 years, the risk environment has not changed, in fact a new norm has been established. Geopolitical tensions even increased, inflation is still there, and the level of natural catastrophes remains at an elevated level. USD 100bn of insured losses related to natural catastrophes per year globally has become the new norm.
“It is therefore imperative that as an industry we maintain the underwriting rigor that we saw in the past few years in the primary market and during last year's reinsurance renewals.”
Were there any nuances in different lines of business (property, casualty and specialty)?
“Overall, we continued to see improvements in terms and conditions and emphasis across the industry to better understand, navigate and manage risk. No doubt there is still a lot of work ahead of us.
“On the property side, there was widespread recognition that primary insurers are best suited to absorb frequency losses, while reinsurers are best placed to act as a shock absorber. In general, supply and demand dynamics found an equilibrium with some oversubscription on the higher end of the Nat Cat programmes, however, lower attaching layers were not fully placed in several instances.
“While proceedings on natural catastrophe programmes were orderly, property per risk treaties remained challenging due to recent poor performance and lack of structural changes over a prolonged period. Reinsurance underwriters will have to continue their focus here to find a solution that is long-term sustainable.
“Despite additional pressure on loss trends and increased uncertainty particularly in US liability, whilst programmes got placed, it wasn‘t without challenges. We have observed moderated improvement on terms and conditions, but, in our view, not sufficient to compensate for loss deterioration and a challenging outlook .
“In specialty, what surprised me was cyber. The growth projections of our clients for 2023 did not materialise and clients opted to retain more, ceding less to the reinsurance market. This impacted particularly the proportional cessions.”
Was there any significant movement on contractual terms and conditions?
“No new topics were raised, as there are enough existing ones we need to solve. The industry saw the grief caused by ambiguity in wording during the pandemic and we don't want to experience a similar situation. Given the heightened societal and geopolitical tensions strikes, riots and civil commotion (SRCC) remains on the top of the reinsurer's agendas. Finally, we need to ensure appropriate war exclusions.”
How is Swiss Re helping clients to grow and uncover opportunities?
“In several ways. In some cases, the shift to higher attachment points in reinsurance programmes meant bigger self-retentions leading to capital strains. We’ve seen higher demand for capital driven quota shares that we've been able to structure often with our broker partners. Another example is we’ve deployed significant capacity to help clients grow into the renewable energy space.
“In addition, we continue to see increased demand for our Reinsurance Solutions, which are helping clients to leverage data and technology to get a different perspective on risk. Solutions like CatNet, Rapid Damage Assessment or our underwriting performance analytics, for example, are growing in popularity amongst clients.”
What’s the outlook for 2024 and the 1.4 and 1.7 renewals?
“It’s too early to tell. And in the absence of major losses or legal developments, we will be expecting another round of relatively normal renewals.
“However, already on 1 January, we witnessed a powerful earthquake hitting northern Japan. On 3 January, a JAL airliner carrying 379 people caught fire after colliding with a coastguard plane in Tokyo. And just a few days later Boeing grounded its Boeing 737 Max 9 planes after a door panel blew out. These events are tragic, and the considerable loss of life and damage is incredibly saddening. Our sympathies are with everyone impacted.
“These events along with political uncertainty across the globe inevitably factor into considerations for 1.4 and 1.7.
“Finally, it's important to recognise that the hard work during 2023 paved the way to a more predictable renewal this year. It's important the underwriting discipline is maintained to achieve a sustainable balance in risk sharing moving forward. “
The report, written in partnership with the European Sustainable Investment Forum and Marine Conservation Society, points to three main steps trustees should take to understand how opportunities align to their goals.
1) Look at the relevant data, while following the TNFD’s guidance and LEAP framework.
2) Exclude companies involved in activities that harm the blue economy, such as pollution and overexploitation, by implementing a negative-screening process.
3) Prioritise investments in companies that emphasise transparency and traceability in their supply chains to encourage and ensure sustainable practices.
Commenting on how investors can develop a successful approach to working with the blue economy André Ranchin, Investment Consultant and Biodiversity Lead, Hymans Robertson, says: “A healthy ocean is a powerful economic engine supporting many sectors. The ocean or, blue economy comprises economic activities including marine renewable energy, shipping, tourism, fishing, aquaculture and blue technology. The annual economic value of the blue economy is estimated at $2.5 trillion, ranking oceans as the equivalent of the seventh-largest economy by GDP, with ocean assets conservatively estimated at $24 trillion.
“Awareness of the role and importance of the oceans in combating the climate and biodiversity crises remains stubbornly low in the global investment industry. Possibly because the significant risks related to climate change and nature loss feel overwhelming.
However, while there is a lot to understand, if investors take the same steps as they would with any other opportunities, they will be able to develop a strong approach that meets their investment needs and sustainability goals.”
There are three additional actions outlined in the report that investors should take when engaging with marine biodiversity: collaboration, education and seizing opportunities. Collaboration focusses on working with like-minded groups to increase understanding and drive policy change. Education should concentrate on developing an understanding of how the sector is impacted by key themes such as overexploitation or pollution. Voting power and wider engagement should be used to encourage conservation and sustainable practices. And trustees should work closely with their investment managers and portfolio companies to limit harmful impacts and identify opportunities.
Will Oulton, Chair, European Sustainable Investment Forum and Non-Executive Trustee Director, Marine Conservation Society , says: “Climate change, biodiversity loss and pollution are three major risks to the health of our oceans. A healthy ocean is critical in tackling the climate crisis. I am pleased to have been able to work with Hymans Robertson on this paper to help Institutional investors take the initial steps to understand their risk exposures to the growing ocean economy.”
Hymams Robertson Report-Why oceans and marine biodiversity matter as investment issues.
]]>Expectations of a comfortable retirement aren’t limited to those on higher salaries – nearly one in three of UK adults earning between £20k - £50k expect this
Research by Phoenix Group’s longevity think tank Phoenix Insights has found achieving a comfortable retirement is the top long-term savings goal for people in midlife, but many face an uphill challenge to meet this standard**.
Retirement saving goals
Midlife is a key life stage which often prompts people to think about their future finances, with retirement less than 10 years away for some of this group. The research found 5.2 million of this group (59%) are taking action to save more for retirement, including spending less on holidays and luxury items, looking for a second job and prioritising long-term over short term saving.
When it comes to savings goals for later life, half (50%) of midlifers say they are targeting a comfortable retirement, and 43% are aiming to be debt-free before reaching retirement. The ability to pay off a mortgage will be a significant influence on being debt-free – Phoenix Insights modelling suggests over 13 million people are likely to face ongoing rental or mortgage costs in retirement.
Table: Base: 2,000 UK adults aged 45-54 who are not retired. Multiple selection question.
Expectations of a comfortable retirement will vary, but it is recognised that living comfortably means you have good financial security and the freedom and flexibility to do the things you want to do. The PLSA ‘retirement living standards’ suggest a savings pot of around £530k in today’s money terms is needed at for a comfortable retirement, and that’s on top of state pension income*.
The average amount people in midlife say they have currently saved for retirement is £88k, meaning they will need to save an additional £442k (in today’s money terms) by the time they reach state pension age to achieve comfortable retirement – around six times their current saving pot.
Graph 1: Savings gap between current average savings among 45-54-year-olds and the amount needed for a comfortable retirement living standard at state pension age (in today’s money terms).
Expectations of a comfortable retirement aren’t limited to those on higher incomes. Additional Phoenix Insights research found nearly one in three UK adults with a salary between £20,000 and £49,999 expect an income of at least the PLSA’s ‘comfortable’ retirement living standard.
Phoenix Group’s Patrick Thomson, head of research and policy at Phoenix Insights, comments: “Half of people in midlife have an ambition to live comfortably in retirement despite only around one in ten current retirees having a retirement income that is deemed to be comfortable. However, taking positive steps to save more where possible can make a big difference to retirement income prospects.
“Midlifers are fast approaching retirement but are among the least financially prepared for this. As a generation they have typically missed out on final salary pensions and also the introduction of a lifetime of workplace pension saving through auto enrolment. Our research shows some are looking to save more where they can, from spending less on holidays and luxuries items to renting out a spare room. But a significant group is still at risk of sleepwalking into retirement without sufficient savings to fund it.
“Not everyone will be able to save more, especially amid current cost-of-living pressures, so it’s important there is an adequate financial safety net from the state to support people in retirement. There is currently a lot of speculation around the future of the state pension, both in terms of age of access and how much people will receive, but whatever changes might be down the road, we need to ensure the system helps the most financially vulnerable and prevents poverty in later life from worsening.”
“Whether some schemes will follow this path will depend not just on these regulations but on the incentives to take more risk (for example, the ability for schemes to access surplus assets for the benefit of members and the sponsor) and the additional safeguards available to protect members’ benefits. So the picture is not yet complete and we will need to see the Government’s views, expected in the coming weeks in the form of a consultation, on these two key points before being able to assess how far the balance has really been tipped in favour of risk taking.”
Katie Lightstone, Partner in Employer Covenant and Restructuring at PwC UK, adds: “Today’s regulations make it clear that schemes can consider a much broader set of solutions for paying member benefits, many of which will have significant additional upsides. Critically, the most appropriate solution will depend on covenant strength. The regulations set out a new approach to assessing covenant, with a focus on the longer term outlook and insolvency likelihood, which will support trustees in this crucial decision.
“The biggest change from the consultation from a covenant perspective is the requirement for trustees to conclude on how long the covenant is ‘reasonably certain’ and to report this to The Pensions Regulator. This is a high bar, and making a call on when ‘reasonable certainty’ ends will be tricky. Agreement on this timeframe is likely to require significant input from sponsors as well as trustees.”
]]>The journey from today to wind-up can be broken into three key phases:
A – preparation
B – transaction
C – complete wind-up
But it would be a mistake to treat them all independently. Indeed, it is the co-ordination of these three phases which is where I think smaller schemes can really access additional value and ensure the journey all the way to ‘wind-up’ is as seamless and efficient as possible.
Preparation – focus on the right areas in the current admin capacity crunch
I’ve been advising schemes on buy-in and buy-outs for the last 12 years and it has always been important to do the right preparation to access the best pricing and avoid surprises later in the process.
This is more true than ever in the busy market. Insurers are having to be more selective about the buy-ins they quote on and so smaller schemes in particular need to prepare properly and thoroughly. The key challenge in the current environment is one of resource – there are lots of schemes looking to undertake data cleansing in readiness for a transaction and complete GMP equalisation alongside it.
So for smaller schemes it is about focusing on the right areas and starting the preparation work early. Undertaking a ‘data readiness’ assessment now, even where insurance is two or more years away, allows schemes to draw up their ‘to do’ lists and then prioritise each task. Putting in place a plan, with dedicated data preparation resource, also means the ongoing BAU service to members is not impacted.
My colleague Ruth put together a really helpful guide to “beat the triage” which includes lots of tips of how best to prepare and where to focus your time. Whilst data does not need to be perfect, there are some “must haves” and “nice to haves” which will help schemes access the best pricing possible and make the overall journey to wind-up smoother.
Transaction – streamline your process to access better terms and pricing
Even in today’s very busy buy-in market smaller schemes can still access competitive pricing from multiple insurers if they prepare properly and run the right process.
Whilst there is no “one size fits all” solution to buy-in transactions, there are tried and tested processes that insurers will engage best with. Our market-leading LCP streamlined service for smaller schemes instils a high degree of confidence with insurers in a scheme’s ability to transact efficiently. This in turn means insurers are more likely to quote and put forward competitive pricing.
Properly prepared schemes that are flexible in their approach and timing can still expect to receive competitive pricing from multiple insurers. Joining up the preparation phase with the transaction phase helps schemes focus on the right tasks ahead of approaching the market and have a clear plan on how to tackle final tasks post transaction. It also gives insurers confidence that the resource intensive wind-up phase will be well planned and executed, including the post transaction data cleanse. From experience, this often takes longer than schemes expect as issues arise which weren’t always planned for.
Complete wind-up – there is still a job to be done
It certainly isn’t job done once you’ve completed the buy-in transaction with lots of work left to do before schemes can move to buy-out and wind-up. The key to a successful final stage is the preparation work done at outset and the foundations laid during the transaction. It is also crucial to have a specialist wind-up adviser involved in projects from the outset to help you avoid common pitfalls, find pragmatic solutions to any challenges and make sure nothing falls through the cracks.
In the very busy market, insurers’ administration and operations teams are increasingly busy with the real heavy lifting at the point schemes move to buy-out. Planning this stage early, including identifying and planning the wind-up tasks as part of the preparation phase and agreeing timelines with insurers ahead of transacting will help ensure it is a smooth final step, particularly for members, with no surprises for all parties.
For example, having a plan for the data cleanse, solutions to the often trickier elements of wind-up such as historical annuities and AVCs and a clear communications plan help this final phase run efficiently.
Final thoughts
Undertaking a full transaction and winding-up a scheme is a big project. Crucially it is also the final chance to make sure the right benefits are insured for your members. Joining up the three main phases of the journey will help schemes save time and money and make the member experience smoother too – a win, win for all involved.
“Pensions have a number of advantages such as tax relief on contributions, employer contributions and the potential to benefit from investment growth. On the downside, pension savings can’t be accessed until the minimum pension age, and people with a Defined Contribution pension will need to assess how long it needs to last when considering how much to save and how much to take each month in retirement, unless they take an annuity.
“With property, there’s the option to sell before the minimum pension age but for most people, their property will be their home – so to access any money they’ll have to downsize, move to a cheaper area or consider equity release. Equity release can be valuable for people without any other assets but its important anyone considering this takes advice to make sure it’s right for them.”
However the publication of these regulations effectively fires the starting gun for the new DB funding regime. These regulations now await parliamentary approval expected in the coming weeks, and are then expected to be “in force” from April. The new Code – which is the Regulator’s interpretation of the regulations – is then expected to follow shortly after that.
However the new Code is not now expected to be effective until the September this year and it is at that point that the regulations will become effective in practice – and then only for DB pension scheme valuation dates that are after the effective date of the new code, which has been effectively confirmed as 22 September 2024. The first valuations subject to the new regime could therefore be those with valuation dates of 30 September 2024.
The final regulations address many of the concerns raised by industry, including specific clarifications for open schemes. However many had also been hoping for more clarity on flexibility for schemes once they reach “significant maturity”, which does not appear to have made it into the final draft.
David Fairs, LCP Partner and former Executive Director of Regulatory Policy, Analysis and Advice at TPR, saw this as a particular issue, stating: “Not providing further flexibility for pension schemes in the long term could be a challenge for some scheme sponsors, and arguably is at odds with the Government’s Mansion House agenda. Given that the Code is expected to ensure members receive their full benefit with a high level of probability, there is a real likelihood that some schemes will end up with trapped surplus. Ways of accessing surplus should now become a priority for Government if it wants pension schemes to support its Productive Finance agenda. Until then, sponsors and Trustees will need to creatively consider flexibility within the overall framework set out by the Government and TPR to achieve the right balance between security and flexibility.”
Commenting more generally on the regulations, Jon Forsyth, Partner at LCP said: “It’s great to see the starting gun for the new DB funding regime finally fired, and what is more it is pleasing to see that DWP has listened to the industry in a number of areas in making updates that we support, relative to the draft regulations we previously saw.”
“LCP and others in the industry had various concerns with the draft regulations, in particular that they were quite restrictive and seemed in some places to be out of sync with the greater flexibility afforded by the original draft TPR Code. Though not perfect, these regulations do address many of the concerns raised, and it’s particularly pleasing to see explicit clarifications for open schemes recognising their particular circumstances.”
“For some DB schemes the new funding regime won’t be a big change but for others it will mean a significant change in approach potentially to both investment and funding strategies, and the way in which the Trustees think about their sponsor’s covenant.”
“Hopefully from here it’s plainer sailing for DWP and TPR to finally get the new regime implemented and schemes can start to plan for this.”
“Having said all that, it’s hard not to think of the new DB funding regime as a solution to yesterday’s problem. Since it was first mooted there have been dramatic improvements in funding positions for many schemes and the Government’s DB policy is now increasingly focussed on considering making use of these strong positions for investment in productive finance. On this front it is pleasing that the final regulations are less restrictive in forcing schemes down a path towards low-risk investments in all circumstances, but more is needed in terms of policy change if the UK is to make best use of the £1.5 trillion assets in DB pension schemes whilst ensuring pensioners are very well protected.”
Laura McLaren, Head of DB Actuarial Consulting, Hymans Robertson, said: “The regulations have some welcome changes while keeping the same framework. The updates have addressed some of the biggest concerns, including inconsistencies with the draft code of practice. Changes to reflect the government agenda to encourage scheme investment in productive finance, means fears that some schemes would be hemmed in, or herded towards very narrow low-risk investment strategies, have been reduced. A fixed basis for maturity will help schemes map out their funding and investment strategy with a clear target date that won’t jump around with market conditions.
“But we won’t know what it will all mean until TPR publishes its new funding code. For example, there isn’t anything in this draft legislation confirming the specific Fast Track parameters or pinning down significant maturity. So today’s update is but one piece of the puzzle schemes will need to consider on regulatory compliance as their end-game plans develop. Nevertheless, 2024 is starting to look like it might be the year when the DB funding regime is finally fully realised.”
Simon Kew, Head of Market Engagement at leading independent consultancy Broadstone, said: “The government’s regulations on Defined Benefit funding and investment aim to help member’s assets work harder while preserving the security of their benefits.
“The increased focus on scheme-specific flexibility is to be welcomed given the risk of inflicting unnecessary cost and burden onto smaller schemes, in particular. Trustees and employers now have the clarity to set in place long-term plans for schemes that will benefit members while delivering a regime that will encourage productive finance and its potential benefits for the UK economy.”
The UK is still having to borrow vast sums to meet its current budgetary commitments, and tax cuts will make this harder. It’s no surprise that the Chancellor has been warned by the Institute for Fiscal Studies that if he wants to reduce the debt burden, tax rises or spending cuts will return in the future. Pledges of investment in infrastructure will necessitate extra borrowing but do have a greater chance of boosting economic growth over the longer-term, rather than a sweet rush of personal tax cuts.
The final fiscal event before a general election is always going to be packed with treats to woo voters. We’ve seen speculation about potential tax cuts to help keep us sweet, from inheritance tax to income tax and stamp duty. However, while tax cuts might hit the sweet spot for some voters, beyond the initial heady rush, there could be long term consequences, and some of the suggestions so far could end up eating away at our finances. Meanwhile, there are other far more satisfying tweaks the Chancellor has room to make, which could sustain better financial resilience both now and in the future.”
7 things we want from the budget
1. LISA reform
“The Lifetime ISA can change people’s lives – helping them into the property ladder and to save for the retirement they want. But it’s not perfect, and some tweaks could make a world of difference.
The 25% penalty for accessing money for purposes other than buying a first home or for retirement not only removes the effect of the government bonus, it also takes a chunk of people’s hard-earned saving. Reducing the early access penalty to 20% means people will not lose any of their own savings should they need to access their money early. This could particularly help groups saving for retirement such as the self-employed who may have variable income and need to access their money.
We believe the LISA could be made even more attractive if people were able to open one up until the age of 55. Recent analysis from the HL Savings and Resilience Barometer has shown this would help 70% of the self-employed who missed out on the LISA because they were too old when it launched.
In addition, the £450,000 limit on the value of property bought with a LISA has not been reviewed since LISAs launched. Rapid house price growth means this limit should be increased to help people, particularly in the South-East, who will struggle to find a property they can use their LISA to buy.
2. Lifetime Pension
We welcomed the announcement on Lifetime Pensions in the Autumn Statement. Allowing people to choose which pension they want their contributions paid to throughout their working life will help drive engagement and deal with the proliferation of small pension pots which causes real harm – especially when people lose track of money. The development of a Lifetime Pension model has the potential to transform the industry and we urge the Chancellor to continue to support it.
3. Auto-enrolment extension
The Auto-enrolment Extension Bill received Royal Assent in September, but we’ve yet to see further progress. These are important reforms that would enable many more people to start saving for retirement, but its timing needs to be carefully planned, particularly as we emerge from a cost-of-living crisis which has stretched many people’s finances to the limit.
Findings from the HL Savings and Resilience Barometer showed that introducing these reforms too early would impact people’s overall financial resilience by eroding the money they have to spend today. Those on lower incomes would be particularly hard hit. We believe government should press ahead with a timetable for the implementation for these reforms, but they need to be planned far enough in advance that we’re no longer dealing with the fallout from the cost-of-living crisis.
4. Money Purchase Annual Allowance
The MPAA is there to prevent people over the age of 55 sacrificing salary for pensions and then immediately withdrawing it, with 25% tax free and no National Insurance. The basis is sound, but its impact is extremely limiting on those trying to rebuild a pension.
The MPAA should be replaced with anti-recycling rules, which would mean that where a pension had been flexibly accessed, HMRC would treat contributions paid with the intent to recycle as an annual allowance excess and be taxed accordingly.”
There have been some really positive steps from the Government and FCA, who have prioritised their review of the advice/ guidance boundary. We want to see that momentum maintained, to help transform how we communicate with people, and how they, in turn, manage their money.
6. A considered approach to income tax changes
Among all the potential tax changes being floated, there is no suggestion of an early end to the freezing of tax thresholds, which will continue to do untold damages to our finances, and cost taxpayers far more than was originally envisaged when the freeze was introduced. The freeze on income tax and NI thresholds will keep pushing more people into paying tax on their income and more into paying higher rates of tax. Cutting the rate of tax while keeping thresholds frozen is counter-intuitive, so it’s important that the government considers income tax in the round.
If there is a cut to income tax, there should be a transitional period of at least a year in which tax relief on savings and investment products remain at their previous level to make it easier for people to plan for. This becomes increasingly vital while complexity in the UK tax system grows – not least from the divergence between income tax rates in Scotland and the rest of the UK.
7. Streamlining the ISA range
Over the years an array of ISAs has emerged, and while choice is positive, we need a balance between offering choice, and providing so many options that it becomes difficult to select the right one for your needs. There are three products that can be rolled into existing ISAs while maintaining this balance: Child Trust Funds into Junior ISAs; Help to Buy ISAs into the Lifetime ISA; and Innovative Finance ISAs into Stocks and Shares ISAs.
3 things we don’t want to see
1. Higher dividend and capital gains tax bills
The allowances for both are set to be halved in April. The dividend tax allowance was £5,000 when it was introduced in 2016 – and from April will now be a lowly £500. Meanwhile the capital gains tax will be slashed again to £3,000. It hasn’t been this low for more than 40 years.
Halting plans to cut the allowances for dividend tax and capital gains tax again would relieve pressure on both investors and entrepreneurs. Given the government’s growth agenda, and drive to encourage investment into UK companies, halting the planned threshold cuts could help promote this agenda and help the London Stock Exchange retain its lustre.
2. A sweetener to inheritance tax without a proper review of allowances
A cut in the rate has been floated, which would be popular among the growing number of people whose estates are set to breach the allowances. However, it’s not a progressive tax cut, and while it would improve the transfer of wealth to younger generations at the time of death, it would do nothing to encourage people to support their families with gifts during their lifetimes, when they may need it most.
Any changes to inheritance tax need to include a review of allowances. The gifting allowances have been in place for so long that they have lost an awful lot of their potency, making it more difficult for people to make lifetime gifts at the times when it can deliver the biggest benefit to their loved ones. There is also real scope for simplification by abolishing the £175,000 nil rate residency band and raising the IHT threshold to £500,000, which would make things far easier, without a particular distortion of behaviour or revenue."
3. Beware the British ISA
“One worrying proposal, is the idea of an additional ISA allowance specifically for investment in British companies. This would add unnecessary complexity, might actually fail to attract the investment it hopes for, and could end up adding risk for investors.
It might not boost British investment at all. Those who already max out their £20,000 ISA allowance could simply hive off all existing UK holdings to the British ISA, and use the extra wiggle room to invest more overseas in their usual ISA. However, if it does persuade people to invest more in the UK, it could unnecessarily concentrate portfolios, raising risks, especially if there was more volatility in the London markets.
A sensible alternative is to boost the overall ISA investment allowance. Just to keep pace with inflation since the £20,000 allowance was introduced, it would need to rise to more than £25,000. This would boost capital for listed firms, without limiting the potential for diversification, and without adding another layer of rules. There is already a home bias in ISA investments. Around 1 million of HL’s 1.8 million clients trade on London markets, accounting for 80% of trades in the last year.”
Compared with 2022, the number of workers cancelling policies in response to higher living costs has almost doubled from 4% to 7%. There has also been an increase in the number of people cutting back on pension contributions for the same reason, with numbers rising from 4% to 9%.
The 2023 Health and Financial Fears report also reveals a shift in consumer focus regarding insurance, with demand for private health solutions rising by 11% and cash plans by 5%, surpassing the demand for life insurance and income protection.
Greater awareness needed
Among those consumers who had cancelled policies in the past year, almost a quarter (24%) said they did so as they had never made a claim, 14% didn’t recognise the value of their cover, 12% could not specify their reasons for cancellation, and 5% were unclear about the purpose of the product. What’s more, less than half (49%) of UK workers were aware of the additional benefits often included in insurance policies that can be accessed without making a claim.
Given that well over a third (40%) of surveyed individuals prioritise affordability when considering insurance products, it’s crucial that consumers fully understand the products they are purchasing and the benefits they offer for the price paid.
Steve Bryan, Director of Distribution and Marketing at The Exeter, commented: The increase in the number of people who state they have cancelled insurance products due to financial pressures is disheartening but not surprising in the current economic climate.
“More concerning are the number of people who state they have cancelled a policy because they did not see value in the product they had purchased - including those who had not claimed. This highlights the valuable role that advisers play when recommending cover to clients. It also underlines the need for insurers, advisers, and policyholders to build ongoing relationships throughout the life of a policy.
“Frequent adviser reviews of a client's needs and regular engagement from insurers are key to ensuring that cover remains fit for purpose and that policyholders are fully aware of the benefits offered within their policies.”
Sarah Coles, head of personal finance, Hargreaves Lansdown: “There’s strength in numbers, and couples tend to be much better off financially than people living on their own. Most people end up coupling up at some stage, which is likely to leave them better off when it comes to money. However, we’re far more likely to be living with someone than we are to be married to them, which means we risk having the rug pulled out from underneath us at any time.
The latest edition of the HL Savings & Resilience Barometer shows life continues to be a financial slog for people living on their own. Only half of singletons (50%) have enough emergency savings (to cover at least 3 months’ worth of essential expenses), compared to around three quarters of couples without kids (77%). Those living on their own also have an average of £119 left at the end of the month, compared to couples with £371. Couples are also more likely to own their own home and be on track for retirement.
However, the only thing that’s worse for your finances than being single, is being in a couple with the wrong person – and paying the price of a split. If you’re married, there’s the stress and expense of a divorce, but most couples aren’t married, so they face all the risks of living together and splitting up.
5 prices cohabitees pay on a split
If you split up and one of you owns the house in their name, the other may have no right to live in it or to a share of the property.
On the flip side, if the property belongs to one of you entirely, but the other has contributed towards it in some way - including paying a share of the bills or helping with home improvements, they can claim an ‘interest’ in it, and go to a court for a share of the property.
It means couples who move in together may have made a bigger commitment than they appreciate.
If you split up, and one of you has sacrificed their career for caring responsibilities, they have no right to spousal maintenance. On average, women’s pay falls 7% for each child they have – so without maintenance to make up the difference, this could leave them thousands of pounds worse off each year.
In the event of a split, if one of you has a sizeable pension and the other has nothing, there’s no right to share.
If you have taken on debts or hold savings unevenly, there’s no automatic right to have this balanced out – even if one of you is holding savings for you both, or you have taken on debts for a joint project.
5 cohabiting risks even if you stay together for life
If one of you dies without a will, the other could get nothing. If the home is in their name, you could lose your home too. If your partner has children, everything passes to them. Otherwise, it goes to their parents. If you have children, the father isn’t on the birth certificate, and the mother dies, the father doesn’t automatically have a right to care for the child
Most pensions will pay out to a spouse when you die. If you’re not married, you can complete a ‘nomination of beneficiaries’ form, to ask for anything to pass to your partner, but if you don’t complete the form there are no guarantees that this will happen.
If one of you dies and leaves everything to the other, in a marriage or civil partnership this would all be free of inheritance tax. If you’re not married and you breach the inheritance tax nil rate bands, there could be tax to pay. In some cases, this could mean you can’t afford to stay in your home.
There are no inheritable ISAs. If your spouse holds an ISA on death, you will get an additional ISA allowance – called an Additional Permitted Subscription, which essentially means ISA assets they leave you can all be wrapped up in an ISA again without affecting your allowances. If you’re not married, you don’t get this extra ISA allowance.
There are tax disadvantages. We all have a personal allowance that’s not subject to income tax, a personal savings allowance, a dividend allowance and a capital gains tax allowance. Married couples can share assets between them to take advantage of both people’s tax allowances (and their annual ISA and pension allowances too), and the lower taxpayer can hold the balance. If unmarried couples try to do this, sharing the assets could trigger a tax bill.”
]]>The fall is due to reductions to UK government bond yields and higher inflation, which increase the value of low-risk liabilities, partially offset by increases to asset values. The Low-Risk Funding Index has also been updated to reflect the anticipated CPI linked 6.7% increase to be applied to LGPS benefits from 1 April 2024.
Of the 87 participating funds, 44 have funding levels of 100% or higher, with levels ranging from 67% to 148% funded.
The results show that funding levels for LGPS funds and their employers remain consistently much higher than 31 March 2022 levels, which were used to set funding and investment strategies that may no longer be appropriate under current conditions. Back then, funding was 67% and none of the 87 funds had a funding level of 100% or higher.
Since 31 December 2023, initial analysis suggests funding levels have improved from 101%, indicating that the year-end was a short-term funding low point. This presents further evidence that the fully funded positions are here to stay and should prompt a review of funding and investment strategies.
Steve Simkins, partner and public services leader at Isio, says: “Despite recent uncertainty in global bond markets, our Index shows that the significantly improved funding levels for LGPS funds and their participating employers remain relatively stable at these new, much higher levels compared to 31 March 2022.
“Employers participating in the LGPS continue to struggle to meet ongoing costs and their pensions contributions, which now look excessive, often represent a large proportion of their cost base. It was therefore positive to see the Scheme Advisory Board’s recent note on LGPS surpluses, including inter-valuation contribution rate reviews and de-risking matters, addressing what was already a healthy LGPS funding position at 31 March 2022.
“However, we are concerned that there is not sufficient recognition of the significant improvements for all LGPS funds since then. This is particularly relevant for Local Authorities who face serious financial pressures and for whom a reduction in pension contributions could make a significant difference.
“We encourage employers, particularly Local Authorities, to engage with their respective LGPS fund to consider their challenges and individual circumstances to make a case for short-term reductions to contributions, enabling delivery of essential public services to local communities and retention of local jobs.”
The Index continues to reveal the individual funding level for each of the 87 participating funds, allowing them to compare their relative position on a low-risk funding basis. The analysis also sets out the comparative position as at the previous actuarial valuation date of 31 March 2022, demonstrating the significant fund-specific improvements.
In all English regions, Northern Ireland and Wales, life expectancy at birth in 2020 to 2022 was lower than in 2017 to 2019, as the coronavirus (COVID-19) pandemic led to increased mortality in 2020 and 2021. These are 'period' life expectancy figures that look at past mortality experience and not projections of future likely life expectancy numbers.
Stephen Lowe, group communications director at retirement specialist Just Group, commented: “The ONS data reveals the sharp geographic variations in life expectancy at birth throughout the UK. Of the ten local areas with the highest life expectancy, all 10 were in the South for females and nine were for men.
“It demonstrates the importance on our health of the communities and socio-economic circumstances of where people grow up and live from education and housing through to working conditions. People living in wealthier areas are more likely to live longer lives with key risk factors like smoking and obesity typically higher among more deprived demographics.
“It's important that individuals don't fixate on average life expectancy figures for retirement planning because the range of possible outcomes are so wide and the longer you live, the longer you are expected to live. Retirees must prepare for living long lives, living to around average age, or dying sooner. All three are realistic possibilities that need to be covered when retirement planning."
]]>Standard Life’s Retirement Voice study, conducted among 6,000 consumers, found that only 9% of over 65s feel confident about managing their retirement finances as a whole, and over half of over 65s (52%) feel nervous about accessing their retirement funds.
Worryingly, almost half (43%) of over 65s don’t feel they understand the pros and cons of the various options available to them to access retirement finances, and fewer than one in ten (9%) are confident about how they will access or draw down their retirement savings. Only 13% of over 65s are confident that they know what options they have to use their pension savings to provide them with an income in retirement.
Over half (54%) of over 65s are also worried they are making bad decisions around using their retirement finances.
Dean Butler, Managing Director for Retail Direct at Standard Life said: “It’s rather worrying to see so many people fast approaching or even reaching retirement and yet feeling unsure about important areas of their finances. Being as informed as possible is key to being able to make good decisions and protect your financial future in retirement. Whether it’s deciding how you’ll take money from your pension, or when to do so, you need an understanding of options available, and the implications of each on your money in retirement. At the moment seeking advice can seem inaccessible to many, and we’d like to see advice and guidance extended and made more affordable to ensure people can make well informed decisions.
“Despite this, remember that while retirement can be daunting, you don’t have to do it all alone. If you are able to speak to an adviser, Unbiased is a good place to start to find one. Otherwise, Pension Wise offers free guidance, and it’s also worth speaking to your pension provider or employer if you feel you don’t understand your retirement finances and options fully.”
Standard Life shares key tips to help you understand your retirement finances:
• When can I access my pension money? People born before 5 April 1960 can access their State Pension from the age of 66. This is set to rise to 67 and then 68 in a phased approach for people born after this date. Private (workplace or personal) pension savings can typically be accessed from the age of 55, rising to 57 from 6 April 2028.
• What are the options for taking your pension savings? If you have a Defined Contribution (DC) plan, either a personal one you’ve been paying into or a workplace one you and your employer have been contributing to each month, there are three main ways to take your savings:
Take your money as a flexible income (drawdown), which means you can set up a regular income, decide how much money to take and choose when to take it. You can start, stop, or change the payments you get at any time
Take your money as one or more lump sums, which means you can decide how much you take and when you take it.
Use your money to buy a guaranteed income for life (an annuity), which can give you a guaranteed regular income for the rest of your life. You can choose an annuity that provides for others – like a partner or children – when you die.
You could combine these options to suit your needs.
You can usually take 25% of your pension pot tax-free. Check with your provider that your pension plan offers the options you want. If not, you may need to transfer to another provider. But transferring won’t be right for everyone. You also don’t have to take your money out as soon as you turn 55, you can leave it right where it is. You can use our retirement options tool to understand which option might suit you.
If you have a Defined Benefit (DB) plan from an employer, you won’t get to choose drawdown or take lump sums as and when you please, unless you transfer into a DC scheme which is a complex decision and unlikely to be right for the vast majority of people. Instead, you’ll be paid an income for the rest of your life – usually on a monthly basis. The amount will normally go up in line with inflation. You might be able to take a tax-free lump sum, but doing this could reduce the total amount of money you get from your plan.
• How to check your state pension age & amount: The current full State Pension amount is £203.85 a week for the 2023/2024 tax year, and the current State Pension age is 66 (rising to 67 by 2028). You can check your State Pension age on the government's website. The amount you’ll get depends on your National Insurance record and how many qualifying years you have. You'll usually need at least 10 qualifying years on your National Insurance record to get any State Pension. You’ll need 35 qualifying years to get the new full State Pension if you do not have a National Insurance record before 6 April 2016. It is possible in some circumstances to top up your National Insurance record, and your state pension forecast will highlight when this is possible. You can check your how much state pension you might get here.
• How to manage your retirement finances: It’s important to think about what you’ll spend your money on when you retire. You’re likely to spend less in retirement - for example you may have paid off things like a mortgage or car by that time. But you’ll still have everyday essentials to cover, like utility bills and food shopping. You might have a list of places you want to see and things you want to do to in retirement. Once you know how much you might need, you can compare this amount to the potential value of your pension plans and other income sources. This can help you see if you’re on track for the lifestyle you want.
The survey also found that better management of advisers and costs (47%), difficulty in finding future lay trustees (43%), access to expertise of trustees involved in multiple schemes (38%), and expert board-chairing skills (36%) were cited as the reasons for this increased use.
The research also explored what companies thought about their current pension governance models and how they would like these to evolve in the future. Overall, respondents felt that their current trustee governance models were working well. Nearly three quarters (72%) were confident that their scheme governance was fit for purpose to deliver a DB endgame strategy.
Commenting on the survey results, Leonard Bowman, Head of DB Endgame Strategy, Hymans Robertson, said: “It seems clear from this research that the role of professional independent trustees in UK retirement provision will be a much more dynamic aspect of the future management of DB endgames, which could lead to positive change and improved outcomes for scheme members. Whether managing DB endgame strategies, open DC trusts or new forms of retirement provision, the role of trustees in UK retirement provision will remain central for many years to come.
“It feels like this may become a much more dynamic aspect of the future, if companies follow through on their intention to regularly review their trustee boards and, in some cases, those reviews lead to change. Not only can we expect greater use of professional trustees, but how companies evaluate their professional trustees is also likely to evolve and become more sophisticated. Companies have standard governance timetables for reviewing their advisors but it remains to be seen whether their professional trustees will be integrated into this cycle in the future. If they are, we could see the development of more sophisticated corporate objectives and measures for their professional trustees, which could in turn lead to evolution in the professional trustee market. A culture of strong scheme and corporate governance are important to ensuring good member outcomes and would therefore be welcome.”
]]>Tom Selby, director of public policy at AJ Bell, comments: “We are approaching the 10-year anniversary of former chancellor George Osborne’s bombshell pension freedoms announcement at the March 2014 Budget. While those reforms have been widely welcomed by savers, who now have total flexibility over how they access their retirement pot from age 55, the government’s own tax systems remain stuck in the dark ages.
“Almost £1.2 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. Depressingly, the true overtaxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.
“It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.
“One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.
“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”
Why are savers overtaxed on pension withdrawals?
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills often running into thousands of pounds.
While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.
It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. If you don’t, you are left relying on the efficiency of HMRC to repay you at the end of the tax year.
How to get your money back if you are overtaxed
If you are taking a steady stream of income via drawdown then you shouldn’t need to take any action, as HMRC will adjust your tax code to ensure that over the course of the year you are taxed the correct amount.
However, if you make a single withdrawal then you will either need to fill out one of three forms or rely on HMRC putting you in the correct position at the end of the tax year.
Which form you need to fill out will depend on how you have accessed your retirement pot:
If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
If you’ve only flexibly accessed part of your pension pot then use form P55.
Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.
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Of course, there is a risk that future demand could grow to such an extent that some schemes may struggle to get traction in the market. As Greg Robertson described in his article: The dynamics of a busy bulk annuity market, we believe that this risk is small, with current insurers previously having evidenced they can scale up to meet demand, and with prospective new insurers adding further capacity.
We have already found that following the proposed Mansion House Reforms that a number of pension schemes with strong sponsors have initiated a fresh review of their long term target and we may find more schemes choose to seek value in running on their pension scheme and delay their move to buyout. Where this is the case it is likely that these schemes will not wish to run unrewarded risks and consequently look to hedge the demographic risks using longevity swaps.
Overall given the stepped change in funding position for many I expect another busy year with growth even relative to 2023, with around £60bn of bulk annuities transacted and £20bn of longevity swaps; meaning 2024 has the potential to be the busiest year ever in the de-risking markets.
Prediction 2 - Increased focus on non-price factors when selecting an insurer
Whilst price will remain an important consideration, with more schemes considering full scheme buy-in as a stepping stone to buyout I expect that trustees will increasingly focus on other differentiating factors, such as insurer brand and reputation, member experience and financial strength, when selecting the right insurer for their scheme.
With the increase in full scheme buy-ins and buyouts over recent years, member experience should be front of mind when going through a transaction process. This is particularly true from the point of buyout when the insurer will be dealing directly with members, but even during buy-in it’s important to ensure that the insurer processes allow member quotations to provided quickly and efficiently, and ideally with any online support already available from the scheme.
As insurers grow their new business capacity, it’s incredibly important that their implementation and administration teams are able to support the growth – this is an area of the market we’re keeping a close eye on at the current time.
Differences in member experience
The good news is that insurers have been, and continue to, develop their administration capabilities to drive up service standards for members, with our 2023 administration survey showing all insurers provide an ‘Acceptable’, ‘Good’ or ‘Excellent’ standard of administration. However, standards vary, and differences do exist between insurers which could be critical when selecting an insurer for some schemes depending on each scheme’s circumstances and what members are currently used to. For example:
Some insurers are able to continue to offer pension increase exchange option at the point of retirement, others will consider doing so depending on the scheme specifics, and others are not able to offer option for future retirements.
A number of insurers now offer online functionality including quotations, with others investing in developing this area.
Some insurers offer in person member forums, whereas others have invested more heavily in the quality and clarity of their communications.
Some insurers have inhouse administration teams whereas others use one or more third party administrators – understanding the pros and cons of each approach is key.
That said, in a busy market, the design of the quotation process will need adapting for each scheme’s situation to maximise insurer engagement, particularly if benefit features or the size of scheme means it is less attractive. As Greg outlined in his article, it will be more important than ever to work with a transaction adviser who understands the market and the differences between insurer offerings, and can think strategically to prioritise and engage with the right insurers and adapt the strategy to ensure the best possible outcome for each scheme.
Prediction 4 - Superfund transactions for the right schemes
It’s an exciting time in the de-risking market as we find innovative solutions to meet the needs of all clients, as evidenced with the first superfund transaction in 2023. 2024 will be a crucial year in the development of the superfund market as we work with clients to identify whether this option suits their particular circumstances. Whilst I think it’s highly unlikely that we see superfunds becoming a mainstream endgame for the majority, a handful of transactions in 2024 could potentially lead to some momentum in the space in the years to come.
As always, we will be watching markets closely to see if our predictions come true over 2024.
]]>Schroders Greencoat is the largest manager of operating solar farms in the UK** with 1.35 GWp of solar assets already under management. Schroders Greencoat’s extensive track record will benefit the Toucan Energy portfolio, and its specialist team of asset managers intend to harness the portfolio’s reliable generation of clean electricity and support the long-term financial stability of the assets.
The majority of the portfolio will be acquired by long-standing Schroders Greencoat managed funds, including Greencoat Solar II LP and Greencoat Renewable Income LP, as well as recently launched mandates. A significant portion is being acquired by six Local Government Pension Schemes: Avon, Cornwall, Devon, Gloucestershire, Oxfordshire and Wiltshire Funds via Schroders Greencoat Wessex Gardens LP, a place-based and locally-focused renewable energy infrastructure fund established last year. Tokyo Century is acting as a co-investor in the acquisition.
Schroders Greencoat agreed to acquire the Toucan Energy portfolio following a competitive bidding process managed by the joint administrators of Toucan Energy Holdings 1 Limited at Interpath Advisory.
Lee Moscovitch, Partner at Schroders Greencoat, said: “We are thrilled to have agreed to acquire the largest operational solar portfolio put to market in the UK. This is a major achievement for Schroders Greencoat, particularly given the size, complexity and number of stakeholders involved in the transaction.
“We will aim to deliver reliable returns for our investors via these assets, as they continue to provide a substantial contribution to the UK’s net zero strategy.
“I’d like to thank the joint administrators at Interpath Advisory for their management of a thorough due diligence process, which along with our own assessments, demonstrated the high quality of the underlying assets in the portfolio.”
Jim Tucker, Managing Director at Interpath Advisory and joint administrator of Toucan Energy Holdings 1 Limited, said: “We are delighted to have reached this landmark agreement with Schroders Greencoat which will see this excellent solar portfolio move into new ownership, delivering optimum value and generating a significant return for the portfolio’s creditors.
“This was a highly competitive sales process, requiring substantial preparation, due in no small part to the fact that assets of this scale and quality rarely come to market. We look forward to the transaction completing in the coming weeks.”
RBC Capital Markets acted as exclusive financial adviser to Schroders Greencoat on the transaction. Schroders Greencoat’s advisory team included Eversheds Sutherland, Evergy and PwC.
The joint administrators at Interpath Advisory were supported by KPMG LLP (M&A), Herbert Smith Freehills LLP (Legal), Interpath Advisory (Financial & Tax), Cornwall Insight Ltd (Commercial), The Natural Power Consultants Limited (Technical), and significantly by Toucan’s management team, for which the joint administrators express their thanks.
Following an initial market broking exercise early in 2023, the Trustee of the Schemes chose to partner with Standard Life to monitor the Schemes’ positions over time. Affordability was reached in the second half of the year, with the Schemes moving quickly to execute the transactions and lock in the favourable positions in just three weeks.
Mercer was lead transaction adviser to the Trustee, with Gowling WLG providing legal advice.
Kieran Mistry, Senior Business Development Manager, at Standard Life, said: “It was a pleasure to work collaboratively with the Trustee and their advisers over recent months to achieve this fantastic outcome. The co-operation and engagement of all parties was exceptional, facilitating these buy-ins on accelerated timelines, and re-enforcing the importance of being adaptable and agile.
Kieran continued: “This transaction demonstrates the value of close partnerships between schemes and insurers, following the blueprint we have developed with a number of schemes over recent years. Processes like this benefit from focus, attention and preparation of all parties to identify and capture opportunities which would otherwise be missed in a conventional market broking process.”
Hetal Kotecha, Trustee Director at Independent Governance Group and Chair of Trustee for the Schemes, said “The Trustee are very pleased to have secured these buy-in policies, significantly reducing risk and maintaining the security of our members’ benefits. This milestone step is the culmination of a wider journey of de-risking for the Schemes with the support of the sponsoring employers. We are grateful to Standard Life and our advisers for their collaboration and energy in securing this opportunity, working effectively with the Trustee and sponsors to execute quickly.”
Ben Stone, Risk Transfer Partner at Mercer, said “This is a great outcome for the Schemes, ensuring member benefit security against the backdrop of a record year in the bulk annuity market. We were pleased to be able to leverage our excellent relationship with Standard Life to achieve the Trustee’s objectives, using our expertise and the groundwork developed over time to mobilise swiftly once the opportunity presented itself.”
TPR’s guidance follows on from the Government’s Mansion House reforms, which are designed to enable the financial services sector to unlock capital for UK industries and increase returns for savers while supporting growth across the wider economy.
TPR expects trustees to act in the best interests of savers and that means properly considering the full range of investment options.
The guidance calls on trustees to ensure they have an appropriate level of knowledge and understanding to be able to work with their advisers to fully consider how accessing private market assets may meet their needs. This includes setting objectives for their investment advisers relating to private market investment advice and improving outcomes for members.
Those who do not have the skills or resource to explore a more diversified portfolio should consider changing their governance model or consolidating.
Minister for Pensions, Paul Maynard said: “I welcome TPR’s guidance encouraging pension schemes to consider investing in private markets. Considering a full range of investment options can help diversify portfolios and improve outcomes for savers.
“The guidance bolsters our ambitious plans to improve retirement outcomes and drive economic growth in line with our Mansion House reforms.”
Interim Director of Regulatory Policy, Analysis and Advice Louise Davey said innovation in the investment management market and the launch of new fund structures, like the Long Term Asset Fund, is providing more opportunities for defined contribution (DC) schemes to invest in private market assets.
She said: “Our focus is on driving up value for pension savers. For DC schemes, we want to see a shift in mindset from cost to value. Our guidance helps trustees consider how best to do this.
“Investing in a wider range of assets can help boost the value of DC pots. While private market investments generally carry higher costs, they can have a positive net impact on the value delivered. With appropriate advice, private market assets can play a key part in a diversified portfolio that aims to deliver better outcomes for savers.
“As the defined benefit universe develops and new models evolve involving, for example, consolidation or capital backed funding arrangements and run-off models to generate additional surplus, further opportunities for increased investment in private market investments are likely to arise.
“It's not our job to tell trustees how to invest people's pensions. But it is our job to make sure they focus squarely on delivering value from investments and have the right skills and expertise to consider all asset classes.
“We support innovation that benefits savers. Trustees who don't have the scale or governance to achieve these rewards should consider consolidating or changing their governance model."
“Improving retirement income adequacy needs to be the overarching objective of any pension policy. The relatively low level of pension contributions paid by the majority is a political time bomb waiting to go off, as employees are lulled into a false sense of security that they have saved enough.
“One of the first steps which will make the biggest improvements to member retirement outcomes is the implementation of the 2017 auto-enrolment reforms. We had expected to see the government’s consultation on implementing these reforms by now, and are concerned that the Call for Evidence has delayed this. After the change to base contributions on earnings from the first £, the next step is to start work on increasing the auto-enrolment contribution rate to 12% of earnings, with at least half paid by employers.
“For over 10 years, employers have been at the heart of pensions, and are largely responsible for the success of auto-enrolment. We recognise that not all employers are the same, with many paying more than the auto-enrolment minimum contribution and providing support in the workplace, including targeted pension campaigns to improve member engagement.
“If employers just become responsible for paying contributions to a lifetime provider, with none of the benefits of running their own scheme, such as attracting and retaining staff and improved financial wellbeing, this risks them disengaging from pensions and levelling down to the regulatory minimum. At a time when contributions need to increase, this would absolutely not be in the best interests of savers.
“Many policy and regulatory issues are already in full flow, which, together, have the potential to address the future proliferation of pension pots, large and small, as well as pensions engagement. These include the scheme consolidation agenda, value for money framework, pension dashboards, default small pot consolidators, the FCA’s proposed targeted support guidance model, and the pension industry’s digitalisation of pensions.
“Rather than developing an entirely new and vastly different pension framework at an immense cost, which could be incredibly disruptive for savers, employers and the pension industry, we believe the Government should wait and see how the various initiatives bed in and how the pension market reacts to support savers. Due to the combined impact of these initiatives, the pension industry will look very different in 10 years’ time, with fewer but larger pension schemes where individuals will be much more likely to be saving in the same scheme for longer, benefiting from greater targeted financial support and pension dashboards developed to allow transactions such as member-led consolidation.“
Paul Waters, Head of DC Markets, Hymans Robertson, said: “The lifetime provider model - so-called ‘pot for life’ - does not tackle the savings adequacy challenge for DC savers. The government’s proposal risks making the situation worse by placing more responsibility on savers and away from employers, without addressing how overall savings rates will be increased. Many DC scheme members lack the financial education and confidence to choose their own pension provider. The pot for life model risks members making poor decisions based on the cheapest or best marketed solutions, rather than those offering the best value for money.
“The large amount of time, resources, and infrastructure that creating a pot for life model would require risks distracting from existing priorities in DC pensions, which should be tackled first. Advancing small pot solutions, the government’s Value for Money framework, and the roll-out of the Pensions Dashboard should be completed, and would help create a more suitable environment for a lifetime pension model in due course.
“What a pot for life does do is leverage the power of inertia such that members build up savings in one place, making it more likely that members will engage with and understand their pension.”
David Brooks, Head of Policy of Broadstone, commented: “The sudden introduction of the lifetime provider model ahead of the Autumn Statement was a surprising change in policy. The risk is that these changes undermine some of the recent progress, confuse members and create additional, expensive burdens on stakeholders.
The new infrastructure required across multiple areas (administration, technology, regulation, protections, and safeguards for members, etc) will be significant. We worry this is a distraction. Given the range of other important initiatives in flight (dashboards, new VFM framework, further development of CDC, small pot consolidation, etc) we believe it would make more sense to focus current attention on making good progress in these areas.
We agree that engagement levels increase when savings pots are larger but have concerns that people may select based on familiarity or using a purely price or short-term performance lens, without thinking more holistically about future outcomes.
A move away from employer sponsored arrangements will reduce employers’ engagement with retirement saving.
How will the regulators ensure that lack of competition and potentially heavy marketing to individuals does not result in poorer outcomes for members.
Tessa Page, ACA DC Committee Chair, commented: There is a risk that “pot for life” prompts employers to view workplace pensions as less important, whilst also bringing a new set of risks around mis-selling and scams. We recognise a need to test the status quo of the workplace pensions framework but given the sheer number of initiatives in flight it feels that policy priorities should lie elsewhere.”
ACA Chair, Steven Taylor, added: “Many savers find pensions complex and difficult to engage with. To move to an approach whereby individuals are making judgements about the merits of different pension products (or perhaps “default” to an existing scheme and fail to consider a new employer’s scheme, through lack of engagement) is a significant ask, and will demand new safeguards and controls to avoid worsening member outcomes at retirement. There are a few alternative ideas and products that could deliver the laudable aims of this initiative, with lower risk.”
APPT Chair, Harus Rai, added: “APPT’s view is that a constructive and member-focused approach should be adopted to find a solution to the explosion of deferred pots. Amongst all the players, trustees are the party that focuses explicitly on member interests.
“As trustees, we believe that members are better off with fewer pots as they move from job to job during their careers. The continued proliferation of multiple pots under the current system undermines the retirement savings outcomes of auto enrolment.
“Solutions need to be evidence-based, built on new infrastructure which enables a secure pension transfer network. We’d like to work with the DWP and other bodies to develop new voluntary and automated pension transfer rules, using a technology-based solution to the rapid creation of new deferred pots each time employees change jobs.”
This helps to make your wishes clear. It should assist the trustees to implement the death benefits in line with their discretion.
Background information about death benefits
Death benefits from a SSAS are usually paid at the discretion of the trustees. As such they should fall outside the member’s estate for inheritance tax purposes. Typically, a member will give an expression of wishes to say whom they would prefer to benefit from their pension savings to the trustees of the SSAS, as distinct from documenting this in their will. If the pension scheme is included in the member’s will, this would take away the trustees’ discretion and therefore might bring the SSAS benefits back into the member’s estate.
The range of death benefits available from a SSAS, provided the scheme rules permit them, is set out in our Taxation of death benefits note.
Taxation of the benefits depends on the circumstances. One option is for the death benefits to be paid as lump sums to the member’s beneficiaries.
A higher limit may still apply to those individuals with forms of protection against the lifetime allowance.
Under the proposals, when determining the amount of lump sum death benefits that can be paid from a member’s SSAS, the member’s share of the SSAS assets will be compared against the LSDBA, less an allowance for any lump sums the member has drawn personally in their lifetime and also less death benefit lump sums already paid to their beneficiaries. If the member’s pension assets are greater than their available balance of the LSDBA, any excess funds paid as lump sum death benefits will be subject to income tax, assessed on the recipient at their marginal rate of tax. For some, this could mean their beneficiaries will be subject to tax in respect of lump sum death benefits paid after 5 April 2024.
However, death benefits do not have to be paid as a lump sum death benefit. The same funds could, instead, be designated for beneficiaries’ flexi-access drawdown from which the recipients may draw a pension. We understand from the draft Finance Bill 2023-24, backed up by comment in a recent HM Revenue & Customs newsletter, that there are no plans to change the taxation of the beneficiaries’ flexi-access drawdown.
However, if a flexi-access drawdown fund is to be set up for a beneficiary who is not a dependent of the member, then the member will first need to nominate the beneficiary for a pension to the scheme administrator. This is particularly important, where the member has surviving dependants. The definition of dependants includes spouses, children under the age of 23 and anyone genuinely financially dependent on the member. It does not include children of the member who are over 23 and financially independent. If the member does not nominate the beneficiary for a pension in writing, and is survived by a dependant, then it is unlikely a flexi-access drawdown fund could be set up for the non-dependant beneficiary tax efficiently.
In this situation, a death benefit lump sum could still be paid to the non-dependant beneficiary, but income tax will be paid on the excess of the lump sum, if the balance of the member’s LSDBA is exceeded. Hence the provision of an expression of wish nominating any non-dependant beneficiaries to be granted flexi-access drawdown funds could be a useful succession planning exercise.
Key takeaways for SSAS members
Expression of wishes forms should be reviewed periodically and kept up to date. It may be worth speaking with your professional trustee, financial adviser and the solicitor dealing with your estate about your wishes for your pension savings and updating the paperwork where necessary.
We have standard expression of wishes forms for our SSAS members to complete to nominate their beneficiaries. However, members can confirm their wishes to the trustees in whatever written form they would like, some preferring to write bespoke letters to the trustees to ensure they have covered all matters they wish to be taken into account.
We also ask our SSAS members to confirm their dependants to assist the trustees when determining which of the member’s beneficiaries can be treated as a dependant.
When completing or reviewing your expression of wishes form, among other things, consider:
Are your wishes clear?
Have you included all your preferred potential beneficiaries?
Have you have given the trustees the flexibility to provide your chosen beneficiaries with a flexi-access drawdown fund if you do not have sufficient LDSBA available for the benefits to be paid as a death benefit lump sum free of income tax?
If you have not included a dependant as a potential beneficiary, have you confirmed to the trustees why this is? You may be satisfied your dependant has been provided for sufficiently outside of the pension scheme but you may wish to explain this to the trustees and to your dependant to avoid any challenges to the benefits being paid at the time they become due.
SSAS death benefits are ultimately distributed at the trustees’ discretion and our SSAS Guidance for Trustees on how to decide Benefits on Death provides helpful details. The information with which members have provided the trustees will therefore be important.
]]>The report reveals that the 398 global natural disaster events caused a $380 billion (2022: $355 billion) economic loss during the 12-month period under review – 22 percent above the 21st-century average – driven by significant earthquakes and relentless severe convective storms (SCS) in the United States and Europe.
Global insurance losses during the year were 31 percent above the 21st-century average, exceeding $100 billion for the fourth year in a row. With insurance covering only $118 billion (2022: $151 billion), or 31 percent of total losses, the 'protection gap' stood at 69 percent (2022: 58 percent), which highlights the urgency to expand insurance coverage.
The number of large-loss natural hazard events reached record levels in 2023, with 66 billion-dollar economic loss events, and 37 billion-dollar insured loss events. Earthquakes caused the most economic losses, while severe convective storms were most costly to insurers. New Zealand, Italy, Greece, Slovenia and Croatia all recorded their costliest weather-related insurance events on record.
The report highlights that 95,000 people globally lost their lives due to natural hazards in 2023 – the highest number since 2010 – resulting largely from earthquakes and heatwaves. In terms of climate, 2023 was the hottest year on record with 'unprecedented temperature anomalies', and all-time highs observed in 24 countries and territories.
"Amidst increasing volatility and complexity, there is a significant opportunity for organizations to become more resilient to the climate and catastrophe risks highlighted in our report," said Greg Case, CEO of Aon. "By working across the private and public sector we are accelerating innovation, protecting underserved communities and better addressing the economic impacts of extreme weather to create more sustainable outcomes for businesses and communities around the world."
Andy Marcell, CEO of Risk Capital and CEO of Reinsurance at Aon, added: "The findings of the report highlight the need for organizations – from insurers to highly impacted sectors such as construction, agriculture and real estate – to utilize forward-looking diagnostics to help analyze climate trends and mitigate the risk, as well as protecting their own workforces. Risk managers can take advantage of increasingly sophisticated tools and leverage analytics to unlock capital and make better decisions. Equally, the insurance industry plays a critical role in improving the financial resilience of communities within their portfolios and taking the opportunity to bridge the protection gap with new and relevant products."
With efforts to limit global warming, investors can consider climate change from three perspectives: protecting their portfolios against financial risks; benefiting from growth opportunities in climate solutions, and determining how to have a positive impact and play a role in a world moving to net-zero.
"The report highlights how communities can be vulnerable to disasters in different ways. For example, earthquakes in 2023 highlighted underinsurance and the importance of regulation and enforcement of building codes," said Michal Lörinc, head of Catastrophe Insight at Aon. "In addition, deadly floods – notably in Libya and India – reinforce the necessity for proper maintenance of infrastructure while the Hawaii fires demonstrated the critical need for reliable warning systems and forecasting."
Aon's 2024 Climate and Catastrophe Insight report can be found here
The top 10 global economic loss events in 2023 were:
High-value items, usually worth more than £1,500, should be specifically declared on a home insurance policy to ensure they are fully protected. Contents valued at less than this limit will be automatically covered. The typical cost of a home insurance policy that includes protection for high-value items such as jewellery, antiques or fine art has increased by £58 from £243 at the end of 2022 up to £302 in November 2023.
Adding high-value items to a home insurance policy will usually increase the cost of the premium. Compare the Market’s figures show a home insurance policy that includes cover for high-value items is £108 more expensive than a policy that doesn’t specifically protect any high-value items.
The typical cost of all home insurance policies has risen by £46 between December 2022 and November 2023. The increase in the cost of home insurance may in part be due to a rise in the cost of claims for insurers as higher inflation has made it more expensive to repair or replace items.
The average value of many expensive items has also increased due to inflation. The typical value of expensive items specifically listed on home insurance policies has increased from £3,877 at the end of 2022 to £3,919 in November 2023. The most popular high-value items in people’s homes are jewellery pieces and watches. Other popular high-value items include laptops, computer equipment, and musical instruments.
As the cost of home insurance has increased, more people have been shopping around to save money. Enquiries on Compare the Market for home insurance that specifically covers high-value items have surged by 55% in the past twelve months. Households could save up to £176 on home insurance through Compare the Market.
Helen Phipps, home insurance expert at Compare the Market, commented: “Households should be careful not to underestimate the value of any expensive single items, such as jewellery or a big-screen smart TV when buying home insurance. Most contents policies will have a maximum amount paid out for any one item. It’s often around £1,500 but could be lower or higher depending on the insurer.
“High inflation means some possessions may now be worth more than the single item limit, so the policy will only partially cover the cost of a replacement. We would encourage policyholders to check the limitations of their cover, for example, items taken out of the home and either lost or damaged could fall under personal possessions cover and may not be covered by the main home insurance policy. Shopping around for the right home insurance policy with the help of a price comparison website could help you get the cover you need at the best price.”
Tips for preventing and dealing with home theft from the Association of British Insurers:
How to prevent it?
Consider installing a home security system, such as burglar alarms or security cameras.
Make sure your property is properly secured. Make sure all doors or windows have locks and check the locks are in good condition.
Purchase a safe to store valuables in while away from home and provide an extra layer of security.
Hide your valuables when away from home for an extended period of time.
When leaving your property uninhabited for an extended period of time, such as for a holiday, do not advertise on social media, etc. Make your property look occupied to deter potential criminals.
Make sure your high item valuables are covered with an insurance policy.
What to do if it happens?
Report the incident to the police. Insurers often require a police report as proof that theft has taken place.
Make sure it’s safe to return to your property.
Contact your insurer as soon as possible to get the claims process started. Many insurers operate 24-hour helplines and will be able to advice you on the next steps and what will happen with your claim as it goes forward.
Document all damaged or stolen items. This can help speed up the claims process.
Document any emergency repairs you have to make, such as repairing locks or windows, and save the receipts. Your insurance policy will usually cover you for any emergency repairs you make following an incident.
The State Pension and the Triple Lock
The Triple Lock continues to face scrutiny and question marks hang over whether a future Government will have to make changes to this mechanism for State Pension rises, in the name of keeping the cost burden down. The Conservatives have maintained the guarantee in the short term and Labour has also far supported maintaining the Triple Lock.
Inheritance tax
Defined Contribution pensions are generally exempt from inheritance tax (and if someone dies before age 75, they are exempt from income tax too).
The Conservatives are rumoured to be considering an inheritance tax cut. This could be in the form of reducing the headline rate from 40%, increasing the threshold for estates exceeding £325,000 or introducing targeted exemptions. Keir Starmer has said Labour would reverse a scrapping of inheritance tax if the Conservatives went ahead with it.
Mansion House reforms
Labour’s Shadow Chancellor, Rachel Reeves, has echoed the current government’s interest in unlocking pensions to support UK economic growth plans, so there is unlikely to be much divergence between the parties on the Mansion House reforms, which are designed to seek ways to incentivise pension funds to invest more in the UK
‘Pot for life’ or lifetime pensions and pensions dashboards
Proposed by the current Government, which has initiated a call for evidence on the idea of a ‘lifetime pension’ model to help solve the problem of multiple small pots, Labour’s stance on this proposal remains unclear although the party has previously criticised the Conservatives’ delays to the pensions dashboards delivery.
Tax cuts
Both Labour and the Conservatives are reportedly eyeing tax cuts as part of their election manifestos. Speculation suggests the Conservatives could consider gradual reductions in income tax, while Labour has ‘hinted’ at tax cuts for higher earners. Tax cuts put more money in people’s pockets, which could be used to plump up pensions. On the other hand, some higher earners pay more into their pensions as a way to reduce their tax bill, so lower income tax could reduce this incentive to use pensions for that purpose.
Becky O’Connor, Director of Public Affairs at PensionBee, said: “Pensions are often subjected to policy changes due to the costs involved to the Treasury of offering tax relief and the State Pension, but also because of the votes won or lost through tinkering with people’s retirement prospects.
“The ability for working people to have the opportunity to build a decent pension is a key pillar of a well functioning society and a healthier, wealthier older population reduces many cost burdens on the state. Equally, a recent focus for this Government has been making sure older people do not retire too soon and keep contributing to a growing economy for as long as possible. For all these reasons, there’s a fair chance that pensions will come up in manifesto commitments. But it’s also worth considering how other possible policies being mooted might indirectly impact people’s pension outlook, such as income or inheritance tax cuts.
“The PensionBee Pension Confidence Index indicates that faith in the State Pension is one of the key factors behind whether people feel confident in their own retirement outlook or not, with one fifth (22%) of people over the age of 55 who feel negatively about their retirement giving the reason: ‘I don’t trust the Government to maintain a decent state pension’.”
]]>A ‘lifetime provider’ model coming on top of the creation of an ‘ecosystem’ for pension dashboards and a ‘clearing house’ for micro pot consolidation would create substantial additional cost which would end up being borne by members, as would the additional marketing costs associated with a choice-based model;
There are better ways of tackling the proliferation of small pension pots, which do not involve such fundamental disruption to the existing system and do not risk undermining existing high quality provision for low and middle earners; a form of ‘pot follows member’ would help to prevent the creation of new small pots without undermining existing high quality provision;
LCP also identify a ‘shopping list’ of concerns and questions around the idea. These include:
• The risk of adverse outcomes for those who do not exercise choice, especially if more lucrative higher earners leave a scheme, thereby making the remaining scheme less economic for providers;
• How individual savers will be able to evaluate the different pensions on offer to them? Will they be expected to analyse complex VFM reports, or might they instead be swayed by the best marketing or incentive offers, possibly opting as a result for inferior options?
• Will ‘good’ employers be willing to continue to offer high quality schemes if there is a risk that past employees may continue to contribute, potentially costing the employer more? And if there is to be an ‘exemption’ for such schemes (as mooted in the consultation paper) how would ‘good’ schemes be defined?;
• In a ‘member choice’ model, will there be pressure over time for the rules to allow workers to divert contributions into their individual personal pension pot (eg a SIPP held on an investment platform); would this not conflict with the ‘Mansion House’ agenda based on large schemes with significant allocation to ‘productive finance’?
• What will be the approval regime for schemes / providers to be allowed to be ‘lifetime providers’? How will members be protected against the risk of scams associated with moving pension money around the system?
Commenting, LCP Partner Laura Myers, Head of DC at LCP said: “The top priority for tackling the under-saving crisis is getting more money going into workplace pensions. Yet implementation of legislation that would do just that is currently stalled whilst the government apparently has capacity to do work on a complete restructuring of the whole architecture of automatic enrolment. There is already a huge amount of change and reform in the pipeline, taking up the time and money of employers, providers and trustees.
These various reforms need to see the light of day and then be given time to bed in and their impact to be assessed before moving on to further change of questionable benefit and considerable cost to members”.
Last year saw historically high numbers of pension schemes securing their liabilities through an insurance led buyout, with over £50bn written in bulk annuity transactions alone. WTW expects this trend to only increase, with many schemes having already changed their investment strategies to lock in favourable funding positions throughout the year and many also preparing their data in order to approach the insurance market this year.
Jenny Neale, director in WTW’s Pensions Transactions team, said: “It’s clear that funding improvements have turbo-charged the pensions de-risking market and, from a capacity perspective, we have already seen that the insurance market is capable of scaling up to meet demand. The attractiveness of these opportunities is also enticing new insurers to enter the market adding additional capacity, which we believe will be sufficient to meet requirements in the year to come.”
“Despite the increased demand for de-risking, the Chancellor’s proposed Mansion House Reforms could give pause for thought for some pension schemes and their sponsoring employers. Whilst we expect buyout to be the long term destination for the majority of our clients, we have seen a number of schemes with strong sponsors initiating a fresh review of their long-term target and more schemes may choose to seek value in running on their pension scheme and delaying their move to buyout if a change in legislation allows easier use of any surplus run by the scheme,” said Neale. “If this is the case, it’s unlikely that these schemes would wish to run unrewarded risks and consequently could look to hedge their demographic risks through the use of longevity swaps.”
In addition to record high deal values, WTW is also anticipating several other developments in the UK pensions de-risking market in 2024, including:
An increased focus on non-price factors when selecting an insurer:
While price remains an important consideration, trustees will increasingly prioritise other factors, such as brand reputation, member experience and financial strength, when selecting an insurer. With more schemes considering full scheme buy-ins as a stepping stone to buyout, member experience will be an increasingly important consideration.
Opportunities for schemes of all sizes:
Despite the choice of transactions on offer, insurers are continuing to support schemes of all sizes. In 2024, WTW expects to see more multi-billion pound transactions for large pension schemes, as well as suitable counterparties for smaller schemes to transact with. However, in a busy market, the quotation process will need to be tailored to each scheme's situation to maximise insurer engagement.
Superfund transactions for the right schemes:
With the first superfund transaction taking place in 2023, this year will be crucial in the superfund market's development as pension schemes explore whether this option suits their circumstances. While superfunds may not become a mainstream endgame for the majority, a few transactions in 2024 could pave the way for future momentum in the space.
The continued fall in transfer activity is despite an end-of-year bounce in transfer values from October’s record month end low. XPS’s Transfer Value Index showed that the quoted value of a typical pension transfer increased by over 5% in December, and by 6.5% over the last quarter of 2023 to £164,000. The primary driver for this rise is the fall in gilt yields over the latter months of the year. December marked the first time the index has seen two consecutive month-end increases since late 2021.
90% of cases reviewed by the XPS Scam Protection Service in December raised at least one scam warning flag, according to XPS’s Scam Flag Index. This represents no change since the previous month. The Scam Flag Index has remained high throughout 2023, although a slight dip in the second half of the year may have been down to more members transferring to purchase an annuity, which has a lower risk of scam activity. The DWP published their 18-month review of the 2021 Transfer Regulations during the year and committed to working with industry to consider if changes could be implemented to reduce unnecessary warning flags and improve the transfer experience for members.
The consultancy’s annual Member Outcomes Survey found that transferring out of a DB scheme remained a more popular option amongst the over 55s despite falling transfer values. The consultancy also found that there was a continued increase in the rate of smaller pension pots being transferred, with 40% of transfer values being under £100,000 and one in six falling under the £30,000 threshold that means members are required to take independent financial advice.
Mark Barlow, Head of Member Options, XPS Pensions Group, said: “Despite transfer volumes hitting record lows, our research highlights that transferring as part of wider retirement planning remains a popular option for those over age 55.
Given that, it’s important that schemes provide support to members to help them make appropriate decisions for their circumstances. We are particularly concerned that a rise in smaller transfer values may put more of the most vulnerable members at risk of being scammed, as they are not required to take financial advice. Schemes should consider how they can best support these members as they begin to access their pension pots.”
Findings from its latest report ‘Tackling the gender pension and wealth gap’ reveals a clear distinction between the career paths of men and women after becoming parents. The findings highlight that women are still far more likely to stop or reduce their working hours for childcare after becoming a parent. Leaving work or going part time isn’t even a consideration for around half of male workers, while far fewer women, only around a quarter, say the same thing.
According to ONS data, the most common arrangement among families in the UK is for the father to work full-time, while the mother works part-time, until the youngest child in the family is 11. This is the set up for around half of families. The reverse, where the mother works full time and the father works part time only occurs in about 2% of families.
Over 9 in 10 (92.1%) fathers with dependent children work compared to three in four mothers (75.6%)^. The impact of more women taking a step back from their career to care for their children is highlighted in the labour force participation gap, with 1.65 million fewer women in employment in the UK than men*. Employment figures also show just how acute the difference between the sexes is, with over twice as many (nearly 3.6 million) female part-time workers than men.
A shortfall in pension savings alongside reduced, or missed, National Insurance contributions creates a double whammy, meaning women could face a reduced amount of State Pension they are entitled to without the full 35 years of NI contributions or credits. Mums who look after children and aren’t earning can get protection for their state pension record by claiming Child Benefit, which automatically provides NI credits until the youngest child is 12. Those families who don’t want to receive Child Benefit, because one parent breaches the earnings limit, can still receive credits, but the non-working parent needs to officially ‘claim’ Child Benefit to receive the NI credits. On top of that women tend to live longer than men, meaning they face a longer retirement with less pension savings.
Clare Moffat, pensions expert at Royal London: “Altering working patterns after having children most often falls to the female, but comes with a sting in the tail. Women not in paid work because they are bringing up children can miss out on building up a full state pension and be tens of thousands of pounds worse off in their personal pension.
“Data tells us that the majority of responsibility for raising children is carried out by women, and adversely impacts their income. Not only does the interruption to their employment pattern impact their financial security and independence in the short term, it also affects them in later life by creating a huge gap in their retirement savings.
“Reducing hours or stopping work altogether to care for children means pension saving takes a hit and it might also mean that they don’t have the 35 years of national insurance contributions or credits needed for the full State Pension.
“The number of decisions you’re faced with when you become a parent can be overwhelming, but shouldn’t just involve the length of maternity leave or dealing with childcare costs. Talking to your partner about money and thinking about how your financial planning decisions impact you as a couple, both now and in the future, is vital. That way you look at all options available to both people in a relationship.”
“This year, taking advantage of pension tax relief is perhaps more important than ever. Not only is the growing tax burden eroding incomes and wealth but also we will have a General Election this year and who knows what could happen to pension tax relief and the annual allowance under a new government.
“Higher and additional rate pension tax relief is the cat with nine lives when it comes to tax reform drives by successive Chancellors looking to raise extra revenues. It has come under the Treasury spotlight regularly over the last decade or more, usually around Budget time, and escaped unharmed – to the relief (pun intended) of many of the UK’s pension savers.
“The annual allowance for pension contributions is not ‘use-it-or-lose-it’ in quite the same way as the ISA allowance or CGT exemption, as the option to claim previous years’ unused allowances does exist under ‘carry forward’ rules. But political and budgetary imperatives could coincide over the next few years to water down generous pension benefits. There’s absolutely no guarantee that this valuable personal tax relief or the higher annual allowance will be around forever.
“Before ploughing more money into a pension, everyone should reflect on whether they can afford to lock away the funds until private pension access age, and whether making extra contributions makes sense in the context of their overall financial situation.
But with personal tax allowances frozen, and almost everyone paying more in tax as each year goes by, pension saving is one of the few ways of mitigating fiscal drag and keeping more of one’s earned income.
“So the higher rates of pension tax relief might be viewed on a ‘grab it while you can’ basis by those who have a bit of slack in their monthly budget or a lump sum in a bank account that could be working harder.
“For many of the more than 20million employees participating in workplace pensions, this could be simply a case of going into their HR or pension portal and raising their percentage monthly contribution. With the recent boost from the 2% cut in National Insurance, now would be a good time, as pension contributions could be nudged up without a change in take-home pay.
“Even if you are wondering whether investment returns will beat the 5% that some deposit accounts are currently paying, that is almost irrelevant when you factor in the tax relief turbo-charge that’s unique to pension savings. In any case, the 5% available on a few savings accounts looks set to be short-lived with rate cuts on the horizon, and if history is anything to go by, then you won’t have to take high levels of risk to beat that with long-term investing within a pension, never mind tax relief.”
Smith adds that working out how much of the 2023/24 allowance one has used up, considering whether and how to use up the remainder and deciding whether to boost pension contributions even further by using some ‘carry forward allowances’, is a job best not left to the last minute:
“While 5 April might feel like a way off, working out these pension reckonings is a process that savers can start now so that it’s not a panic finalising arrangements before the tax year closes.”
The annual allowance
Smith says: “As for the annual allowance, when it was raised from £40,000 to £60,000 at the March 2023 Budget, Labour suggested that they would look at reversing Jeremy Hunt’s measures, which also included the abolition of the Lifetime Allowance, a step that hits the statute books in April.”
The AA puts a cap on how much can be saved into a pension each year with tax relief benefits. It means that in the current tax year and the 2024/25 tax year (as things stand) savers can put £60,000 into a pension while still benefiting from pension tax relief. That amount is gross contributions, or the total put into a pension, so includes employer top-ups and the tax relief itself.
Anyone earning less than £60,000 a year is limited by an allowance for personal contributions instead equal to the total of their earnings in that year – but employer contributions can be made on top of this. More than the AA can be saved into a pension annually, but the contributions will not benefit from tax relief, and if the AA is exceeded, inadvertently or otherwise, savers might be faced with an unwelcome or unexpected bill from HMRC when tax relief is clawed back.
The highest earners, however, face a disadvantage in the tax relief stakes in the form of the tapered annual allowance, which affects those with a ‘threshold income’ of more than £200,000.[1] They see their AA reduce by £1 for every £2 they exceed an ‘adjusted income’ of £260,000. This taper brings the AA down to a minimum of £10,000. In other words, those earning £360,000 and above can put only £10,000 a year into a pension while still benefiting from tax relief.
Smith says: “Many of those looking to benefit from the demise of the Lifetime Allowance and resume or increase pension contributions beyond the £1million mark will be hobbled by this restriction.
“Whatever your AA, the opportunity arises at this time of year to tot up monthly pension contributions – including those due to be made before the end of the tax year – plus any bonuses paid into pension, and work out if there is any AA left.[2] There could be many worse ways to use some idle cash than to mop up that remaining AA.”
Carry forward allowances and lump sum contributions Those who are set to maximise their current year’s allowance can also mop up any unutilised annual allowances for the three previous years thanks to carry-forward rules.
Smith says: “Note that the annual allowance was £40,000 until the current tax year. Still, that affords a maximum of £180,000 that can be paid into a pension in this tax year for those entitled to four years of the full AA, and whose earnings allow it. But there are some rules and restrictions to note when considering carrying forward.”
You must have first used up the current year’s allowance – so the first step is to get an accurate reading of this year’s contributions and take those to the limit.
To get tax relief on pension contributions that you make yourself, you need to ensure that the payments made in any tax year do not exceed earnings in that year. An employer is not restricted by an individual’s earnings so they are able to pay in higher sums on occasion.
You will need to have had a pension in each of the three previous tax years but you don’t need to have made any contributions and your new contributions do not have to be made into the same pension.
Allowances from the ‘oldest year’ are used up first and at the end of every tax year, the oldest year falls away. Therefore, any allowances not used from the oldest year – now 2020/21 - will be lost for good if they are not carried forward.
Savers who have a lump sum via a windfall like an inheritance might be looking to boost their pension by using up carry forward allowances before 5 April but an important limitation on this is the second rule above – their ‘relevant earnings’ in this tax year.[3]
This is because, even if they have available allowances to the potential tune of £180,000, the amount they can put into their pension is still limited by their earnings in the tax year that they make the lump sum injection.
Business owners with irregular earnings who receive a glut of revenue all at once often find carry forward a very useful pension-boosting tool.
“Due to annual allowance rules business owners who have control over payments and remuneration can also opt for the business to make employer contributions into their pensions to maximise carry forward even if their relevant earnings in that year are much lower. However, as threshold income includes employer contributions, they need to be careful of tapering rules if this exceeds £200,000.”
Smith adds: “The ability to carry forward can be extremely useful for those looking to catch up on pension contributions because they want to give their pot a late boost before retirement, or because their financial position has improved and they want to take advantage of the tax reliefs on offer.
“Anyone over 50 years who receives a lump sum that they do not immediately need might consider ploughing it into their pension via carry forward as it will not be long before they can access a chunk of those savings tax-free anyway under pension freedom rules. The normal minimum pension age at which savings can be accessed is currently 55, rising to 57 from April 2028.
“It can be useful for those restricted by the tapered AA, especially if their earnings have suddenly increased and in previous years were below the threshold for the tapered allowance.
“But those who choose not to use up each year’s annual allowance as it arises should be wary of relying on carry forward too much, by assuming they can make up contributions at a later date. A bit like pensions tax relief itself, we don’t know how long carry forward will be around for.”
Where to put extra contributions
Those still paying into a workplace pension might wonder how to go about making one-off contributions as their monthly contributions are typically handled automatically by payroll and most employers give the option of feeding annual bonuses directly into the workplace scheme.
Smith says: “Employees looking to make one-off lump sum contributions can usually do so into their workplace scheme but others might choose to do so by opening a SIPP. This could offer flexibility when it comes to access: for instance a saver who wants to draw their tax-free lump sum but continue to pay into their workplace scheme, could take the lump sum from their SIPP. That leaves the workplace scheme undisturbed.”
Claiming back higher and additional rate tax relief
Smith says: “In many sorts of pension, the saver receives only the basic rate relief uplift immediately and automatically. Those paying into a personal pension like a stakeholder plan or SIPP will be used to having to claim their higher or additional tax relief via self-assessment.
“Or at least one would hope so, as recent evidence suggests that a huge amount of pension tax relief is going unclaimed. In the case of self-administered personal pensions, this very expensive oversight could be a case of forgetfulness as much as ignorance.
“However, many workplace scheme savers might be unaware of how their contributions work and that they also might need to reclaim relief from the higher tax rates. While ‘net pay’ and salary sacrifice schemes bestow tax relief at the marginal rate through payroll at the point of contribution, workplace pensions run on the confusingly named ‘relief at source’ basis do not, and those entitled to higher or additional rate tax relief must claim it back via a tax return.”
Smith concludes: “Questions around tax relief and carry forward can get very confusing and it’s always best to seek advice from a financial planner in these matters. Where a pension saver has, or is likely to have, hundreds of thousands of pounds saved, there will be crucial decisions to be made - in terms of both tax efficiency and portfolio management, and in both the saving and the access phases - that will benefit hugely from professional advice.”
]]>The Government needs to explain more fully what it is trying to achieve and provide more detail about how it intends to do this. There may be some merit in considering how a Lifetime Provider system could help connect people with their pensions and provide better outcomes but there are many policy initiatives already in various stages of development which could also achieve these goals.
We urge the Government to spend the time building the evidence base that Lifetime Providers will improve retirement outcomes for the majority of members and gain consensus about this before jumping into wholesale change of the pensions system.”