We have now had the full report which did not fundamentally differ from the Interim Report issued at the back end of last year. Workers will now have to work to 65, pay higher contributions and the final salary scheme will become a career average scheme, meaning that rather than a final salary figure being used in the pension calculation instead, a salary will be averaged over the working life so generally this will be a lower figure but actually fairer to most workers. The losers will be those who would expect rapid promotion over their working lives.

Why? Although this is not the main rationale set out in the Report, the reality is that simply the traditional FS scheme is unaffordable. We are all living longer so if pensions remain payable at 60 they will have to be paid for longer and the Govt has already announced an increase in state retirement age. Raising the age just makes sense. In addition it has proposed the removal of the default retirement age after lobbying from unions so it seems a bit odd that they now complain about having to wait a bit longer for pensions. Secondly, the taxpayers pocket is not bottomless and contributions from scheme members are historically lower than in the private sector. A member would have to find an additional 30% of salary to ‘buy’ an equivalent pension in the private sector. So essentially they are getting a 30% salary increase in pension contributions on a final salary basis. Not bad.

As far as a CARE scheme is concerned it is true that this is likely to produce a lower pension but this is still better than a pure money purchase arrangement which is often what is being put in place in the private sector as FS schemes are closed. The National Association of Pension Funds announced just a day or so ago that the closure of such schemes accelerated by over 17% the past year.

The howls of protest will be as predictable as they are wrong and there may well be marches and protest but I dont hear realistic alternative solutions being suggested. Remember that in London alone, the Local Government Pension Scheme is facing a £14.6 billion deficit. It is no longer the case that public sectors workers earn less based on the promise of a Final Salary pension. But if we are to avoid that ‘race to the bottom’ that Hutton wishes to avoid, we must do better than a Defined Contribution as they currently are. Come 2015 when these changes are due to bite, we may have improved the DC universe, but that’s by no means certain.

One of the most amusing stories that has arisen in the past week (although it has a serious purpose) is the proposal that Diageo, the drinks conglomerate has come up with to try and solve its Final Salary Scheme funding deficit. As readers may know, when an actuarial valuation reveals a deficit, the law requires that the Trustees and the Employer get together to try to agree a cunning scheme to repair that deficit over a period of time. This is called a Recovery Plan.

Now the usual way of doing this is by (for example) the employer putting in additional cash sums or contributions. Or it may put up some property as collateral or put in place a Guarantee. But Diageo has come up with a somewhat unique offer. It is handing over 2.5 million barrels of booze to the scheme Trustees. At the end of 15 years, the scheme must sell this back to Diageo for an amount expected to be “no greater than the deficit at that time”, which is estimated to be up to a maximum of £430m. The deal will generate an income to the UK Scheme of about £25m each year over the 15 years. While it’s true that this is no different from any other offering of property (as collateral) it should certainly help make the Trustees meetings go with a swing!!

All of which led me to wonder just what other assets companies might consider using in these circumstances. If you’ve got any ideas, just let me know!! No prizes for the funniest I’m afraid but it might cheer us all up over the Summer!!

Although it is really something of a statement of the bleedin’ obvious, PwC have recently issued a report which after extensive (and no doubt extremely expensive) research has concluded that Final Salary Pension Schemes will have ceased to exist within 10 years. This is not exactly ground breaking news to those of us within the Pension Industry who have been watching the death throes for several years now.

It does seem however that the pace of change is escalating and frankly this is no surprise either given current economic circumstances, the open ended cost and volatility of running such schemes and the legislative complexity of complying with the over burdensome regulatory regime.  (Oh and Obama’s ridiculous grandstanding over BP significantly reducing the value of our pension funds – when he clears up Bhopal he might just have the moral high ground!!) And that’s before one factors in increasing longevity of members (in other words, we’re all living too long for the actuaries to keep up) and the soon to be introduced reforms in 2012 (I say this with some caution since it is just remotely possible that NEST will be spiked as many of us in the Pension Industry hope…at least in its current form)

But the one area that the report flags up which should be of concern is the fact that employees are simply not saving enough for retirement. 60% of people won’t be able to retire at all due to lack of savings. Yet the previous Government (and this one too if they don’t do something about it) think that an 8% contribution into a monolithic money purchase scheme will be sufficient. Actually the figure that will be invested will be a mere 5.7% after the set up levy and management charges are taken off. Here’s a bit of advice that didn’t take a lot of research – IT ISN’T ENOUGH!!

It is no wonder that employers are incentivising their employees to transfer out of the DB arrangement into something less costly. Someone needs to get a grip of the Pension arena. Who will be brave enough to do it I wonder?

The Conservatives have indicated that if the PPF ever faces financial meltdown due to increasing claims on its purse, were they to be in power, they would not bail it out. Brave words from the sidelines, but I wonder whether in reality they would be willing to face the wrath of the ageing electorate by pulling the plug on it were (for arguments sake) BA and a few other big players hit turbulence.

The world has moved on since the days of passive resistance and genteel letters to the Times. The internet has provided a voice even for my generation of baby boomers and we are the ones most likely to be affected by any removal of the pension lifeboat however leaky it may be!! Action can be organised at the drop of an e mail!

But hold on…there is another side to the problem isn’t there? DB schemes are closing at an increasing rate and we are unlikely to see them coming back anytime soon if at all. The PPF depends on those schemes paying for its existence by way of the levies it imposes. The fewer the schemes paying levies, the more likely it is to fall over if the worst happens due to decreasing revenue. The PPF is, in effect, a large pension scheme, subject to the vagaries of the investment markets as much as any other scheme – only bigger. How can it protect itself from the risks it faces in a volatile environment? The phrase ‘between a rock and a hard place’ comes to mind here.

The current Government bailed out the banks to the tune of several billion pounds and a future Government might well say ‘enough is enough’. But surely the PPF would be a far worthier recipient of monies from the public purse than any risk taking culpable bank. Isn’t it?

It wouldn’t be a ’start of the year’ without a few predictions so Mystic Jens has been gazing into her crystal ball and has seen the future…mind you, she was still a little the worse for wear at the time so please do not take any of these suggestions seriously…until they come true that is!!!

First, a bit of a no brainer – there will be even fewer Defined Benefit schemes by the end of 2010 than there are now.

The new Tory Government will announce a review of pension provision with particular focus on the Personal Accounts Regime due for introduction in 2011..er…2012…er whenever…!!

The Review will conclude that ” something must be done”  and orders a further review chaired by the wonderful Steve Bee which will in due course decide what that will be, In the meantime, Personal Accounts will be introduced in a modified form resulting in over 300 sets of regulation. This will be called ‘Interim Pension Simplification’

The Pension Regulator will be abolished to be replaced by ‘The Regulator of Pensions’. This will be based in Brighton with the same management as before and the rebranding will cost the taxpayer around £1.5 million However, performance and regulation will in no way improve though the new logo wins a design award.

Defined Contribution Schemes will become the norm but employer contributions will reduce to the minimum level required by the modified Personal Accounts Regime. Since in order to help the economy, employers will no longer need to contribute to Personal Accounts, this will be absolutely zero.  All DC schemes will therefore also be rebranded into something called a ‘Personal Account’

The British economy once again collapses having invested the national debt into an iffy Ponzi scheme run by a 4 year old in Stevenage. Several large DB schemes that had some sort of company attached to them will go to the wall. This will put the PPF into meltdown.

On a happier note, pension lawyers will continue to advise hard pressed Trustees and those employers who have survived the crash on the ever growing complexities of the law.

Some things never change…

It has long been a bit of a joke in the pension world that BA is a pension scheme that occasionally flew a few planes. Well, many a true word spoken in jest it seems.

Although the immediate threat of a strike over the Holiday period has been averted, it is almost certain that a fresh ballot will produce the same result. What’s that got to do with pensions you may ask? The answer is painfully simple.

BA has a combined £3.7 billion black hole in it’s pension scheme funding.The law requires that the Trustees and the Company reach some sort of agreement on how that deficit is going to be dealt with by June 2010.

It is a problem being faced by many if not most final salary schemes at the present time. And while the figures may be somewhat larger at BA, the princples remain the same. How can a company fulfull its obligations to fund a scheme while it is struggling simply to remain in business. It is in no one’s interest to force a company into the hands of the insolvency practitioners by making unreasonable demands for payment. The Pension Regulator (which needs to approve any agreements – called Recovery Plans in pension industry speak) has tacitly accepted this in its guidance to Trustees.

Yet tPR speak with forked tongue since while claiming to understand the problems schemes are facing, it is questioning perfectly sound deficit reduction plans for fairly minor deviations from what it considers appropriate. But that is bye the bye.

The problem for BA – and potentially any company in a similar position, is how can the company continue to pump money into the scheme while maintaining a viable business and preserving salary and benefit levels.

One of the obvious ways of beginning to manage a deficit is to limit ways of it getting any bigger. By controlling it’s growing liabilities. And the simplest way to do that is by closing the scheme to future accrual. It is not of course an instant fix. It can take several years for any direct effect of ceasing accrual to be seen.

But (and this is the conflict) no union likes to see it’s gold plated benefits being reduced. So they fight, and by fighting, risk the financial stability of the company and ultimately the jobs of those they purport to serve.

It ain’t rocket science. But it does seem a lesson that some unions and even poorly advised boards of trustees seem unable to understand. If you squeeze an orange too much, all you get left with are squeaking pips!!

I’m flying Virgin in future…Happy Holidays and see you next year!

First the good news is we are being told that the recession is over and the FTSE 100 has risen to over 5300 at at 17th of November. You would think then that pension scheme trustees would be expecting reducing deficits when their scheme actuary comes to look at the figures.

On the other hand, other observers are telling us that pension deficits could have been underestimated by nearly £270 billion, and far from things getting better, in reality the funding position of schemes is getting far worse. And it is beginning to effect not only defined benefit schemes but defined contribution schemes too are also showing severe underperformance.

The reasons for this are complex – isn’t everything in pensions? The Bank of England quantitative easing program has led to a sharp decline in corporate bond yields. Why is this important? Simply because the value of a schemes liabilities are assessed by reference to corporate bond yields. Quantitative easing has released far more corporate bonds on to the market making them cheaper. As the value of these decrease, the size of the liabilities increase. It has acted as a counterbalance to any value that the increase in equity prices may have produced.

There will be no quick fix to the funding problem. Many DB schemes are taking the opportunity to close to future accrual in an attempt to control pension costs. But in a typical scheme, this can take 5 to 10 years to show any significant effect. In the meantime, no government seems able or willing to grapple with the thorny issue of simplification of the pension regime here in the UK. Yet another layer of complexity in the form of Personal Accounts is just around the corner and even were there to be a change of government within the next six months, it is unlikely that any new administration will tear up entirely what is already on the statute book. More’s the pity.