Bob Scott reviews the past year in pensions and makes some predictions for what the industry will see in 2019.
In pension terms, 2018 was again defined by high-profile corporate stories - BHS, British Steel and, at the beginning of the year, Carillion. Its insolvency revealed an £800m pensions deficit which had developed over a period when the company was paying increasing dividends to its shareholders whilst stating that funding the pension scheme was a "waste of money".
In the aftermath of Carillion, The Pensions Regulator was humiliated once again by Frank Field and his select committee. They wanted a scapegoat but it's difficult to see what action the regulator could have taken that could have made any sort of meaningful dent in an £800m deficit. Disappointingly but not unsurprisingly, the press headlines zoned in on the negative, not mentioning that the Pension Protection Fund (PPF) meant members were £800m better off than they would have been had there been no PPF at all.
Compared to Carillion's chief financial officer, Richard Adam, Sir Philip Green almost came over as a generous benefactor as he agreed (after much negotiation with TPR) to pay £363m to top up the new BHS pension scheme. Later on in the year the BHS scheme was bought out in full. Another pensions success story which was drowned out by negative comments regarding Sir Philip.
British Steel's offer to members to join a new pension scheme as an alternative to entering the PPF could have been straightforward had deferred members not been given the further (time-limited) option of taking a transfer value. The amounts involved were eye-watering in comparison to average earnings and members found themselves set upon by an army of advisers, introducers and other parasites keen to get their hands on steelworkers' money. Based on a £500,000 transfer value, a 4% upfront fee plus ongoing charges at 2% of the fund translates into £20,000 up front plus £10,000 per annum. All in return for a sausage and chips supper.
The fallout from Carillion in particular has seen the resignation of the regulator's respected chief executive, Lesley Titcomb; a renewed determination by the regulator to be seen to be involved in all manner of pension schemes and corporate situations; the defined benefit (DB) white paper; further guidance from the FCA; and the promise of much more to come from all sides.
Whilst we have, so far, not had any changes in pensions minister - Guy Opperman staying the distance - the same cannot be said of the Secretary of State for Work and Pensions as Amber Rudd succeeded Ester McVey last month after she had taken over from David Gauke in January.
As I write this, the DWP had just released its consultation on DB consolidators. The government's original policy intention had been for consolidators to mop up the large number of small "sub-optimal" funds and provide them with better governance, scale and cost-effectiveness. So far we have seen no evidence of providers seeking to enter that market - the target seems to be mid-sized, well run schemes which would be much easier to take on.
The government has missed a trick with the consultation in not including a statutory mechanism for simplification of benefits. The most successful existing consolidator - the PPF - boils down all benefits onto a common basis and, if we are going to see consolidation on any sort of scale, simplification is a necessary precursor.
Other consultations include collective defined contribution and the pensions dashboard and the regulator continues its informal consultations on funding defined benefit schemes.
All this means that, as we move into 2019 we can look forward (Brexit aside) to much activity on the pensions front including a pensions bill which, among other things will include clauses designed to prevent people from being Sir Philip Green.
We can also look forward to further movement against RPI as a measure of inflation and increases in minimum auto-enrolment contributions.
And here are my predictions for 2019:
- Although the government is told in no uncertain terms that "consolidation won't work on any scale without benefit simplification", the message is ignored. As a result a handful of commercial consolidators emerge, looking to make a handsome return for their private equity backers.
- By the end of 2019 we will have had another three pensions ministers and two secretaries of state for work and pensions.
- Several more employers will announce that they intend to follow Royal Mail and to introduce collective defined contribution (CDC) for their employees to provide something better than a traditional defined contribution plan but without the over-regulation of DB schemes.
- TPR will signal its intention to use its funding powers for the first time
- Steps will be put in train for RPI to be phased out. Index-linked gilts fall in value. Schemes with CPI liabilities backed by index-linked gilts find they have large deficits as their CPI-linked benefits don't fall in value
- The pensions dashboard is up and running with data from a number of large providers.
Whatever happens, I predict as we look forward to 2020, the pensions landscape will be very different from what we see today.
Bob Scott is senior partner at LCP and is the immediate past chairman of Association of Consulting Actuaries