LCP’s Accounting for Pensions shows FTSE 100 pensions entering uncharted territory

The 2020 edition of LCP’s “Accounting for Pensions” was launched this week, covering the key facts, figures and trends revealed by FTSE 100 companies reporting in 2019, as well as commentary on what has happened since the start of 2020.

The report, which includes a focus on the pensions balance sheet position disclosed in company accounts, shows that immediately ahead of the Covid-19 crisis FTSE 100 schemes taken as a whole were likely to be in their best IAS 19 position for 20 years.  And whilst the crisis has created serious turbulence for many FTSE 100 companies, the pensions impact to date in their company accounts is likely to have been more muted thanks to the actions and investment policies, including hedging, being pursued by many trustee boards and companies.

Nevertheless, the disruption caused by the pandemic has given rise to a great deal of uncertainty in some key areas.  These include the discount rates used in IAS 19 reporting, the impact to come on assumptions made about future trends in life expectancies and the evolving regulatory background, progress on which has been materially delayed.

Amongst the report’s other findings are that companies are starting to adopt revised inflation assumptions in light of the proposed RPI reform and the generosity of executive pensions is continuing to be pared back.

Comment

Whilst we appear to be in calmer times than just a few weeks back, there is little doubt that we are nowhere near the end of the economic and financial disruption inflicted by Covid-19.  What remains to be seen is if and how companies and trustees react and adjust their pensions objectives for a new beginning and to reflect the latest “new normal”.

Thousands of older women could be being underpaid their State Pension

The state pension system has historically made provision for certain married women who were financially dependent on their husbands to claim a higher state pension based on their husband’s national insurance records.  Enquiries from readers of LCP partner Steve Webb's column in ‘This is Money’ have highlighted that the enhancement some married women could have received was not always automatically put into payment, and many may actually be missing out on part of their state pension entitlement.

The women potentially affected are those born before 6 April 1953 who are receiving less than £80.45 per week in state pension, particularly if their husbands were receiving a full Basic State Pension.  It’s most likely to be an issue where the woman was born before 17 March 1948 and the husband was born before 17 March 1943.

The issue is examined further in this edition of On Point, which highlights the problem (including the position for widows and divorced women), analyses the numbers of women potentially affected and calls on the Government to take action.  The On Point also outlines how to check if you or someone you know could be entitled to a state pension uplift, and we have produced a calculator to help with that check.

Comment

State benefits have changed greatly over the years, but it seems that the historic processes could have seen many older women missing out on thousands of pounds worth of state pension.  If you know anyone who might have been affected it’s worth checking if they are receiving a state pension of less than £80.45 per week in the first instance.

Corporate insolvency and Governance Bill introduced

On 20 May the Government introduced a new Bill, which will put in place a series of measures to amend insolvency and company law to support businesses during the Covid-19 pandemic and for the longer term.

The Corporate Insolvency and Governance Bill consists of six insolvency and two corporate governance measures, some of which are temporary in nature whilst others are permanent.  In this permanent group two are key insofar as their potential impact on pension schemes as unsecured creditors is concerned.  They are as follows:

• Company moratorium – designed to provide struggling businesses with a formal breathing space to pursue a rescue plan during which time no legal action can be taken against a company without leave of the court.  Companies will have 20 days to consider a rescue plan, extendable to 40 days, with further extensions at the agreement of creditors or the court.  The company will remain under the control of its directors during the moratorium, but the process will be overseen by a monitor who must be a licensed insolvency practitioner
• Restructuring plan – available to struggling companies, or their creditors or members, so that they can propose a rescue option as an alternative to the liquidation of the business.  The Government says that this plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.  Dissenting classes of creditors will be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure

In the temporary group the key measure for pension schemes (as unsecured creditors) is suspending, at least until the end of June, the ability for creditors to issue statutory demands and winding-up petitions where a company has been prevented from paying its bills by the pandemic.

Comment

The Bill provides more “tools in the toolbox” for corporate recovery, but by so doing may, in a crisis, weaken the hands of unsecured creditors such as DB pension schemes and by extension, the PPF, when it steps into the trustees’ shoes once the PPF assessment period is under way.  One example is where the trustees would like to pursue a company for contributions that have fallen due but have not been paid.

However, if the Bill succeeds in its principal aim of keeping more, essentially viable, businesses afloat, it will surely limit the calls on the PPF that might otherwise have resulted.

DB transfer activity falls sharply following Covid-19 lockdown – but early signs of starting to pick up again

Since the start of the Covid-19 lockdown we have seen a sharp reduction in transfer quotation activity, with the rate of requests falling initially to well below 50% of pre-lockdown levels.  In recent weeks, though, we have seen a material increase in activity – perhaps a precursor to a resumption of normal (or higher) activity levels as we come out of lockdown.

It was widely feared that uncertainty surrounding the future of sponsoring employers as a result of the Covid-19 pandemic, and pressures on personal finances, could lead to many more members of DB schemes looking to transfer their DB pension benefits elsewhere.  While this hasn’t happened to most schemes yet, the Pensions Regulator has asked trustees to alert their members to the risks involved with a DB transfer and has also issued guidance recommending that activity levels are actively monitored.  To help our clients with this, we now monitor on a weekly basis quotation request levels across the schemes we administer to help quickly identify any spikes in activity.

The Regulator also issued guidance to trustees at the end of March that said trustees may decide to suspend transfer quotations and payments to give themselves time to review transfer terms and the administration impact of any increase in demand.  A recent survey of LCP’s administration clients showed that 28% of schemes (covering 37% of the total non-pensioner membership) had decided to pause or reduce transfer quotations as a result of Covid-19, although some of these schemes have by now lifted the temporary restrictions.

More details of the impact of Covid-19 and the transfer experience of the schemes we administer can be found in our latest bulletin.

Covid-19 pension-related announcements

Since last week’s Pensions Bulletin, announcements and posts influenced by the Covid-19 health emergency in the world of pensions include the following:

• On 20 May the Government announced that it will unlock £150m from dormant bank and building society accounts to help charities, social enterprises and vulnerable individuals during the pandemic.  The press release mentions the consultation currently under way on expanding the dormant assets scheme to include a range of financial assets from the insurance and pensions, investment and wealth management, and securities sectors.  However, what is not mentioned is that this consultation (with a new closure date of 16 July 2020) proposes not to expand the scheme to cover pensions (see Pensions Bulletin 2020/08)
• On 21 May the Pensions Regulator added a further section to its “DC scheme management and investment” guidance on its Covid-19 microsite.  The new material appears under the heading of ”When does the temporary closure of funds create a default arrangement?”.  This addresses the issue of DC members who self-selected funds that have recently been “gated” (most commonly property funds) and the trustees are redirecting contributions into alternative funds (typically cash funds).  The concern is that by doing so, the trustees may have created a default arrangement with all the requirements that apply to these under the DC legislation.  The Regulator says that trustees may need to take legal advice on this point and that it believes there are only two circumstances when a default arrangement would not be created.  These are where members were made aware before they selected the original fund that contributions could be diverted to another fund in certain situations, and where members have consented in advance to the diversion of contributions.  Where a default arrangement has been unintentionally created, the Regulator says that trustees should immediately take steps to ensure compliance with the DC legislation
• On 26 May the Institute and Faculty of Actuaries’ Continuous Mortality Investigation published its seventh weekly report on mortality data.  This report worryingly shows a small increase in adverse mortality compared to that revealed last week, but the IFoA suggests that this is due to the timing of the VE Day anniversary bank holiday which likely had the effect of delaying some of the reporting over that weekend into this latest weekly report.  The number of deaths in England and Wales in the week ending 15 May of 14,573 was 4,157 (40%) greater than expected, with 3,810 having Covid-19 mentioned on the death certificate.  The accompanying report suggests that by 25 May there could have been between 62,000 and 66,000 more deaths in the UK since the beginning of 2020 than expected
• On 26 May the Pensions Regulator published a blog by its Chief Executive Charles Counsell in which he recapped aspects of guidance in relation to transferring out of both DB and DC schemes previously published by the Regulator on its Covid-19 microsite
• On 26 May the PPF published a guide for pension savers drawing in material from six bodies with responsibility for protecting UK pensions – with each in turn outlining some of the measures they are taking to support savers during the pandemic.  The guide also directs savers as to where they can go to seek free, impartial guidance should they have any further questions.  “Covid-19 and your pension: Where to get help” is introduced by pensions minister Guy Opperman

DC pension costs VAT exemption – HMRC warning

HMRC is warning in guidance issued recently that not all DC schemes will fall within the definition of “qualifying pension fund” for which regulations issued in March provide that certain supplies made to such funds are VAT exempt (see Pensions Bulletin 2020/10).

HMRC’s update to its VAT Finance Manual says at VATFIN5120 that “Given the principle that VAT exemptions must be construed narrowly, it will be HMRC’s working assumption that a pension fund does not meet all the criteria ... and will therefore not be a qualifying pension fund”.

Comment

Not all DC schemes will be able to meet the criteria for exemption – for example, those that do not contain the pooled contributions of more than one member will not qualify.

Furthermore, even if a DC scheme does have the status of a qualifying pension fund it does not mean that all services to it will automatically become exempt.  To be exempt services must be necessary for the management of the fund.  There are significant areas of doubt concerning what counts as an exempt management service, and as such, those providing services to a “qualifying pension fund” may need to take advice.