This blog is written by William McGrath and sets out his view of how we can manage DB pension schemes in the private sector. I do not take the private sector to include LGPS or the unfunded pensions that are threatened by recent statements by Reform. William’s background in on this link.

William McGrath

That Baroness Sherlock emphasised it was for trustees to provide leadership and make “Informed Decisions” was positive.  She was responding to Baroness Altmann’s amendments to the Pension Schemes Bill.  Better coordination between regulators as also promised (see attached summary).  We have been supporting Baroness Altmann’s efforts to add to scrutiny of actuarial work.

The underlying need now is for clear risk-benefit analysis from a member and sponsor perspective.  We think “Informed Decisions” links well to actuarial work to implement Technical Actuarial Standard 300 V2.1 P5.  Below is a short summary of what could be taken as necessary for trustees to reach “Informed Decisions”.

The major area unaddressed in documents from consultants and providers covering run-on v buyout options is how much of pension liabilities is now covered by the PPF.  This should be modelled.  The answer needs to be set against the industry promoted idea of a “Gold Standard” which has lost carats.  Factors to consider are the eased solvency requirements of life insurers and reinsurers and the drive to invest in global private debt.  The lack of Government guarantee is always glossed over.

Also linked  at the bottom of this blog are some related notes on the growth agenda and the benefits for boards taking a fresh look at their DB pension scheme.

Some considerations

Here are some considerations for trustees making “Informed Decisions” which may not be standardly addressed:

Defined Benefit Pension Schemes : Trustees to have Government backing to make “Informed Decisions” on strategy

• Ask for the Technical Actuarial Standard 300 V2.1 comparison of bulk transfers and Credible Alternatives led by “run-on”.  It’s a regulatory “must” since April 2024 for actuaries to produce the comparison and to make it available to intended users.

• PPF is an excellent, well funded insurance safety net.  Know the proportion of liabilities it covers should the sponsor fail immediately or at points in the future.  What is the probability (1) of that happening; (2) of that happening when the scheme is not self funded to buyout levels.  This topic is missing from most standard analyses.

• Actuarial work lacking scrutiny is a well known problem.  Demographic assumptions are a good example.  The actuarial profession’s in-house life expectancy tables (CMI) are industry standard in assessing risk transfers.  Trustees should know that nearly all deals over the last 15 years are “out of the money” and schemes doing nothing have gained substantially.  Trustees should be aware that CMI tables are produced by committees featuring current senior executives of insurers and reinsurers.

• Know the “balance of powers” within the scheme rules.  Likely trustees set the investment strategy and sponsors can wind up the scheme.  The “upside and veto” combination of stakeholders is a good back cloth for value sharing agreements.

• Tax rule changes make Authorised Payments a practical and attractive use of surpluses.  Model a stream of payments (working well within guardrails) made from surpluses generated by returns above the discount rate and by prudence emerging in the demographic assumptions.  Then you have a base case proposition for all stakeholders to consider.

• Schemes individually should look at their track record and the scheme’s funding position and the sponsor’s strengths, its interests and its ESG strategy.  Then trustees can best assess what is in the best financial and wider interests of members.

There is more literature appearing on run-on and bulk transfer decisions.  Is there a risk of disinformation?  Who inspects the documents amongst regulators?

We are part of an industry group The Pensions and Growth Alliance.  It sees the implementation of FRC’s Technical Actuarial Standard 300 V2.1 as being of real importance.  TAS300 raises relevant maths and governance questions which trustees need the answers to in order to meet their fiduciary duties.  Baroness Altmann in her remarks in the House of Lords raised the importance compliance by actuaries with FRC regulations and that there should be more scrutiny of actuarial work.

If more schemes are minded to run-on they can reasonably expect Government to respond.  Government can look again at the remaining limitations on PPF cover; the tax incentives to invest in UK productive assets and tax rates on surpluses recycled to support current pensions.

Three short articles to download

Ensuring Trustee Accountability in Pension Surplus Distribution: Debate on Amendment 13

A debate in the House of Lords led by Ros Altmann

Optimizing UK Defined Benefit Pension Strategies for Economic Growth

Explores DB pension risk-benefit analysis, regulatory impacts, value sharing, and investment strategies to boost UK economic growth and shareholder value.

Optimizing UK Defined Benefit Pension Strategies for Economic Growth

Explores DB pension risk-benefit analysis, regulatory impacts, value sharing, and investment strategies to boost UK economic growth and shareholder value.

Robert Cochran has consistently banged the drum for workplace pensions and he’s been a supporter for all that Guy Opperman held dear when it come to saving and engaging Scottish Widows with their pension. If you have some time and can plug into his pod it can be reached from this linked in post.

Opperman has not tied himself as Steve Webb did to a single organisation. I am sure that Scottish Widows would benefit for employing Opperman as Royal London benefited from Webb.

Instead Opperman has built a portfolio of customers including firms in the UK , the Middle East and in extremity – South Africa. He has been on tours to Australia and spoken alongside pensions dignitaries around the globe. Generally he makes sense.

In this pod he looks back nostalgically at his time as pensions minister and is particularly interesting as he talks his way through the slow disintegration of his party in Government. He is touching as he explains how he got his pensions legislation through despite the indignities meated out to him by Boris Johnson and Liz Truss. Rishi Sunak comes out well in this (I know he had a strong relationship with the then DWP SOS, now shadow Chancellor- Mel Stride.

He is kind to the Labour Government’s pension team who he sees as seeing through Pension Superfunds and CDC which he sees himself as initiating. I suspect there is something of a rewrite here, but let it be, he was an early adopter of ideas which may be coming to fruition this decade.

Less successful may have been the attempts to make workplace pensions fill the gap left by the demise of SERPS on one side and private DB pensions on the other. The harsh reality is that his first challenge was to implement the 2017 auto-enrolment enhancements to contributions. He did not get them ( he says because of the Treasury and he blames the Treasury for failure to fulfil a promise made nearly 10 years ago. Will it make the cut-out of 2030 and change of Government, Opperman doesn’t think so.

Opperman wasn’t universally liked within his own department and certainly not by Steve Webb. It is hard not to like him out of Government just for his good humour and Harrovian good manners. I’ve had good conversations with him over the years and thoroughly enjoyed his podcast. Robert Cochran is his kind of man and Guy Opperman is a man’s man. All the same, he lacked clout in Government and in that he’s been bettered by Torsten Bell.

Whatever we got from Guy Opperman, is secondary to what we’re getting from the soon to be Pension Schemes Act. But GO’s Pensions Act sent us towards a consolidated private system which we might yet get!

He lent the job of Pensions Minister a fresh exuberance we have not seen since!

Opperman’s exuberant style

As part of the work we have been doing set up Pensions Mutual and a CDC to provide workplace pensions from the start of 2027, we have been looking at how pension administration looks in the UK.

We started looking at pure systems providers , Lumera and Festina are overseas players who have credentials from delivering CDC in the Netherlands and variants up and down Europe’s West Coast from Scandinavia down. My impression is that they are focussing on DC and DB administration.

We are intrigued by niche players such as Spence’s Mantel supplier which brings us homegrown software that is already in place in integrated administrators such as GPA and Barnett Waddingham but much of what we see from the consultants still looks to be adaptations of historic systems such as Profundi. Aptia alone is advertising itself as a CDC administrator offering.

I suspect that most of the work being carried out at the large consultants – Mercer, Aon and WTW will focus on delivering Retirement CDC from 2028 onwards and that this will not be an accumulation product. Whether the existing DC and DB services will be adapted to deliver UMES whole life workplace CDC schemes remains to be seen.

It’s a time of change, not least in pension admin management. What was JLT/Mercer admin has been bought out by Bain and re-established as Apria, WTW has a new bos

Aon is keeping quiet but is widely reckoned to be launching its own CDC UMES workplace pension plan which would sit alongside its workplace DC master trust.

That leaves a few slightly smaller integrated administrators who must be considering whether to deliver CDC to rival DC as a workplace pension. Isio have recently brought into the fold Premier Pensions and found a new head of admin , Hymans have recently sold its non core business to Howden while XPS must have a gaping hole to fill having recently lost a big client.

This is all headline stuff!

What of AI?

Into the miasma of pension administration comes AI that is bound to make a stink over the next five years as manual processes get replaced by processes driven by artificial intelligence). The outcomes are still focussed on humans but getting there will need less humans and will be more reliant on what has been learned from systems of the past.

Every conversation we have with pension administration offers us a new take on how systems providers and administrators are coping with the challenge of being de-humanised and I would not be surprised if the first robo- administrator follows the first robo-taxi into production by the end of the decade. If I can put my getting around town into the hands of AI , I can put my saving for and paying of my retirement income.

I discovered the other day just how distant my life had become from paying in cheques. This was a wake up to me that I now expect things to happen without human interaction.

How close are we to administering workplace CDC?

CDC collects contributions like AE workplace DC pensions do. But it pays  the build up  of pensions as a DB scheme. The tricky bit is the allocation of pension entitlement to those saving for retirement and this will with UMES be based on dynamic pricing which buys entitlement with each new contribution but can increase (or decrease) the value of each pension entitlement according to the state of the fund and of expected future liabilities (pensions).

The system of pricing, valuations and display of pension due (on the dashboard and conventionally) has yet to be cracked by any administrator we have talked to and it looks to me that actuaries, administrators and investment fund managers need to be integrating their offering digitally and not relying on human fallibility! We are looking at the perfection of digital solutions and procuring the means to get it will be a big task for proprietors of CDC schemes – together with their scheme executives and trustees.

We do not want to build in the dark , we will build by corresponding with TPR, Church of England and any other UMES CDC players who appear in the next few months. Administration is one of the big challenges with getting CDC pensions going in the workplace! We cannot replicate Royal Mail though we bless them for opening the door for the next wave of innovation!

Is human talent in the attic- gathering dust?

I was looking at the people building Pensions Mutual and found that only three of us cannot draw a pension (being 55 of older). Seventeen of the people working with me to deliver a CDC pension to a wider group of people would otherwise be under-deployed (for the talent that they bring).

This article was brought to me by one of those who “liked ” it, he’s one of those helping out and doing so with an energy and expertise that we all value.

Thanks to Avivah for doing more than “liking” , thanks for writing what needed to be written. Let’s not let all our experience sit in talent’s attic gathering dust.

I am not sorry that those who have picked up a fortune in inheritance. It is now confirmed that they are going to have to pay 7.5% on inheritance tax outstanding to HMRC , six months after the death of a wealthy person.  This is only if tax due has not been paid within six months of the death of the wealthy person. It relates to tax on unspent pension pots chosen to benefit from pension freedom exemptions.

Charging interest on money outstanding is quite reasonable of the Government and charging tax on an unspent pot of someone drawing down in retirement is a risk those in future will be taking when making decisions on how to use retirement savings.

The retirement savings in question, were originally supposed to be to “purchase” an annuity and freedom from this obligation was announced when Steve Webb was the Pension Minister in 2014. The decision was announced by George Osborne and immediately gave rise to a tax loophole for rich people.

That loophole meant that they could live off other savings than the pension and use the money saved in a “money purchase” pension , not to purchase an annuity but to avoid paying inheritance tax. That loophole is now being closed, the money free from being used as a “pension” but privilidged by an “exempt- exempt- exempt” tax treatment , is losing one of the three tax exemptions.

The same Steve Webb who was there the Pensions Minister is now calling another Government for making sure that the tax is paid in full and on time (or with commercial interest if not paid on time).

Here’s the parliamentary statement made this week confirming the state law will be applied. Thanks to Mary McDougall of the FT. In a response to Parliament’s upper house this week, Dan Tomlinson, exchequer secretary to the Treasury, said the government

“does not intend to change the existing, longstanding deadlines which ensure tax is collected quickly and efficiently”

“IHT is due at the end of the sixth month after the date of death”.

There are many things going on in the world right now that are inhumane. But forcing those who manage other’s affairs after their death to do so to a recent timescale is not high among them. Steve Webb is stretching Liberalism too far for me. I am a Liberal, all of my family have been Liberal and my father was the first Liberal lead of Dorset County Council. I deal with matters to do with his and my mother’s estate . I actually find this statement from Steve offensive to a family who will pay inheritance tax in due course

“It’s inhumane . . . No consideration has been given to the human dimension of this. Often bereaved people have a lot to cope with,”

said former Liberal Democrat pensions minister Sir Steve Webb, now a partner at consultancy LCP.

“What difference would six months make to the government, compared with the difference it would make to families?”

To write financially, it would mean paying an extra amount of IHT as late payment tax and that’s tough luck for those who struggle to find pension pots. By April 2027 they may have the dashboard to help them but if they don’t , they will have the records of the bereaved. If the bereaved has an unspent pot which forms part of an estate that will typically be valued at a million pounds of more, then I’d expect it to be valued within six months. If the worse happens and it doesn’t, then 7.75% pa hardly seems penal.

Steve Webb  , you should stop pleading for the wealthy and continue your amazing work for those with prospect in retirement of poverty.

A little context

The government estimates its pension proposals will bring about 1.5 per cent more estates within the scope of death duties in 2027-28, on top of the 4 per cent that already exceed the £325,000 nil-rate band, which can rise to £500,000 where a property is passed on. 

UK inheritance tax is applied at a rate of 40 per cent above the nil-rate band. Pensions will still pass to spouses and civil partners without incurring inheritance tax.