1. consulting on future benefits for the northern bank pension scheme Why is the Bank making these proposals? What happens next?
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2. Why has the bank made this proposal? Understanding pension risk
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3. What are the risks associated with a DB pension scheme?
Demographic assumptions:
Life expectancy determines how long a pension will be paid.
Financial assumptions:
Inflation determines the cost of increasing benefits which are inflation-linked.
Salary inflation determines the cost of final salary benefits.
Investment returns ...
DB benefits are guaranteed, and might still be in payment 50 years from now.
If there is any risk that the future does not turn out to hold what we thought, that risk falls on the employer.
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4. Investment returns: the discount rate
The discount rate is determined by taking a view on the investment return that the scheme’s assets will achieve.
Investing cautiously minimises the risk of volatile returns, at the cost of achieving better returns.
The Northern Bank scheme is very cautiously invested.
To value a pension scheme’s liabilities, the cost of paying future instalments of pension to a present value must be assessed.
If I have to pay you £100 in 10 years time, how much do I need to hold now?
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5. The Bank’s accounting issues
The accounting standard discount rate is determined by “investment grade” corporate bonds – linked to gilt yields which are at an all-time low.
The Bank’s presentations of the scheme’s surplus/deficit have been measured by reference to the accounting standard.
What is actually driving the Bank’s proposal?
The Bank has to present its accounts on the basis of an international accounting standard.
It seems to be committed to delivering a return on equity of 12.5%.
It has to meet capital adequacy requirements which are also driven by the accounting basis.
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6. Reducing or eliminating risk
In the world of DC, all of the risk is borne by members:
Investment returns: what is your individual “pot” invested in?
When you retire – how long will you live for?
What will inflation do during your retirement?
If you don’t purchase an annuity you are effectively self-insuring.
Risk does not go away.
It’s a question of who bears it.
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7. Is there another option?
We have asked for detailed information regarding the scheme’s investment strategy, funding position and actuarial and investment advice.
Once we have that we will present alternatives to closing the scheme.
The Bank’s position is not unique.
Other organisations, including banks, are retaining open DB schemes.
The Bank has not made a convincing case that its only choice is closure.
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8. The bank’s illustrations meet naimh
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9. WALKERS SOLICITORS Naimh’s illustration w
Scheme continues
DC for the future – Naimh takes cash
DC for the future – Naimh buys an annuity
DB pension
12,600
6,800
DC pension
4,300
Total pension
11,100
DB cash
83,900
45,100
DC cash – tax free
32,200
DC cash - taxed
96,600
Total cash
173,900
77,300
Naimh will be 45 by 30 September 2018
She will have completed 25 years’ pensionable service
Her current salary is £22,500 p.a.
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10. Clarification required
Scheme continues
DC for the future – Naimh buys an annuity
Pension from past service
DB ,800
DB ,800
Pension from future service
DB ,700 ?
Total pension
14,500
Cash from past service
52,000
45,500
Cash from future service
44,000
Total cash
96,000
“No change” scenario:
It would be helpful to show DB pension before and after 1 October 2018 separately.
DB pension for service after that date will be bigger if the scheme is not closed because it increases in line with the RPI (CARE benefits) or salary – not CPI.
DB cash is provided by converting (“commuting”) pension into cash. The illustration uses a commutation factor of £20 for each £1 of pension surrendered, but commutation factors are age-related. What are the actual factors used?
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11. Clarification required
Scheme continues
DC for the future – Naimh takes cash
DC for the future – Naimh buys an annuity
Pension from past service
DB ,800
DB ,800
Pension from future service
DB ,700
DC ,000
Total pension
14,500
6,800
9,800
Cash from past service
DB ,000
45,100
DB ,100
Cash from future service – tax-free
DB ,000
32,200
DC ,200
Cash from future service – taxed
96,600
Total cash
96,000
173,900
77,300
New scenario, and Naimh buys an annuity:
The illustrated annuity does not increase, and there is no attached partner’s pension.
For clarity, the illustrative DC annuity should include both.
New scenario, and Naimh takes her DC benefits as cash:
The illustration points out that some of the cash will be taxed but the effect of taxation is not spelled out. Is Naimh a basic rate taxpayer?
Is a 6% investment return realistic?
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12. WALKERS SOLICITORS A health warning
The illustration assumes that salary and RPI increases are 1% higher than CPI increases.
The DC annuity is approximate and uses current annuity rates.
But the illustration makes the loss of value of DB pension visible, if the scheme closes.
It also makes the poor comparison of a DC annuity with an unchanged DB pension for future service visible.
These figures have not been precisely calculated. They are intended to give an early warning.
Once we have all of the information we need, our actuaries will provide more accurate illustrations
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13. What next? Consultation and consent
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14. WALKERS SOLICITORS Is consent required? w
Generally contracts of employment will not prevent proposals such as these going ahead.
The members’ guide to the scheme:
“Nothing in this booklet may be taken to override the provisions of the trust deed and rules.”
“The Bank intends to continue the Scheme indefinitely, but has the right to modify its terms, with the consent of the Trustee, or to terminate it.”
The proposals will require an alteration to the rules.
The Trustee’s consent is required. We need to see the legal, actuarial, and investment basis on which it proposes to make any decision.
Benefits from past service cannot be reduced, but the link to RPI increases (CARE benefits) and final salary can be terminated.
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15. WALKERS SOLICITORS Consultation w
“In any context, the essence of consultation is the communication of a genuine invitation to give advice and a genuine consideration of that advice. In my view to achieve consultation sufficient information must be supplied by the consulting to the consulted party to enable it to tender helpful advice.”
(R v Secretary of State for Social Services, ex parte Association of Metropolitan Authorities [1986] )
The Bank is under a legal obligation to consult you and the Union.
Information must be given
“in such fashion and with such content as are appropriate to enable, in particular, representatives of affected members to consider, conduct a study of, and give their views to the employer on, the impact of the change on such members.”
The Trustee must makes its decision after considering what is in the best interests of scheme members. It is important that they fully understand your point of view.
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16. Any questions?
Ivan Walker Walkers Solicitors
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