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The Actuary The magazine of the Institute & Faculty of Actuaries
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Occupational pension schemes today

Over the past four years the Pension Fund
Partnership has carried out an annual
survey of occupational pension schemes in the UK. This year’s findings make particularly interesting reading, both as stand-alone information and in comparison with previous years. They confirm that change really is afoot in a number of areas.

The findings
This year’s research covered 269 schemes, the majority of which were defined benefit (DB). This slant arose primarily because responses were requested, where more than one scheme is operated, in respect of the scheme with the largest asset value. Even where DB schemes have been closed in favour of defined contribution (DC) arrangements for new employees, the DB scheme is usually the largest fund. However, when asked what other types of schemes the DB respondents operate or are involved in, the findings are revealing (see table 1).
Had this question been asked four years ago, this table would undoubtedly have been much shorter. If nothing else, it shows the breadth of expertise which individuals responsible for overseeing their staff pension arrangements now need to call on.

DB schemes and their funding
Among this year’s DB respondents, over one in five schemes were closed to new members, while a further 3% had been closed both to new members and to existing members. The total percentage of closed DB schemes (25%) was up from 14% on the 2001 research figure. Of those not closed, one-fifth overall said it is likely or very likely that their scheme will be closed to at least new members in the next year. When examining the detailed breakdown, however, the percentage figure of DB schemes likely to be closed is actually substantially higher among respondents from the smallest schemes (under £25m) than for the largest (over £500m).
Aside from scheme closures, another aspect of DB schemes to have come under recent scrutiny is their minimum funding requirement (MFR) positions. In this year’s research, the average MFR funding position was 108.7%, down from 111.2% in 2001. There have been some interesting changes in funding levels:
– 16% of schemes had a funding level in excess of 120% (last year’s proportion: one-quarter of schemes);
– almost a quarter of schemes had a funding position of less than 100% (last year: 12%);
– overall, 9% of schemes had a funding position below 90%;
– looking just at local government pension schemes, almost one-third had an equivalent funding position of less than 90%;
– the percentage of schemes with a funding position of less than 100% has almost doubled, compared with our findings of four years ago.

Contribution rates
Another area which the research examines is contribution rates. Two points from this area are clearly revealed in the study: the marked difference between member and company contribution rates, and the substantial difference in company contribution rates between DB and DC schemes (see table 2).
These findings also appear to reinforce the fact that company contributions to DB schemes are rising. Given the turmoil in the financial markets over the last year, it will be interesting to see how these figures turn out in next year’s study.

Trustee qualifications
Publication of the Myners report earlier in the year threw the spotlight on a number of issues regarding trusteeship, including trustee training and qualifications. The findings of our research this year show that, on average, around three-quarters of scheme trustees have attended a trustee training course. Indeed, in well over half the schemes, all trustees have attended such a course. These results are consistent with last year’s findings.
As to the actual amount of training received, it appears that trustees have received, on average, around 2.5 days’ trustee training each, although this is slightly less for the smaller schemes (2.0 days) and slightly more for the largest schemes (2.7 days). The equivalent figure for trustees of DC schemes is 1.4 days. The individuals making up the equivalent of trustees in local government pension schemes have received, on average, 1.3 days’ trustee training each.
Almost one-quarter of scheme trustees hold a PMI or other pensions qualification, although the percentages vary considerably between 12% for the smallest schemes to 53% for schemes with assets exceeding £1bn. Investment qualifications are held by trustees in just 2% of the smallest schemes but by around one in six trustees in the largest schemes. Overall, two thirds of the smallest schemes say their trustees have no PMI, pensions, investment or other relevant qualifications, this dropping to around half for the larger schemes. For the local government pension schemes the equivalent figure is 78%. However, around a quarter of all schemes do have trustees holding other types of professional qualifications, for example accountancy qualifications, although the equivalent figure for the local government pension schemes is only 13%.
If schemes begin to adhere to the Myners’ principles, these findings may change over time. However, one third of respondents overall, particularly the smaller schemes, said they have no plans to make changes as a result of the Myners’ report.

Trustees’ concerns
What, then, have been the main discussion points at trustee meetings? Unsurprisingly, it is investment matters which have been the dominant topic of discussion, not just in this year but in each annual survey. This year’s results are shown in table 3.
In addition to showing an increased incidence of discussions about FRS17, DB versus DC options, and scheme closure, the research reveals a gradual increase in the incidence of using managers of managers, greater proactivity in voting, and increased use of independent custodians. However, some areas have not altered much; for example, as in the previous three years’ studies, three-quarters of respondents had not received a new business solicitation from any actuary/consultant in the previous 12 months.
As for ongoing service levels from actuaries/consultants, the average score for overall satisfaction this year has dropped from 0.95 to 0.88 (2=excellent, -2=poor). Perhaps this is why 17% of respondents say they reviewed the appointment of their actuary/consultant in the past year and 20% plan to in the next year.
One area of particular consistency in this research has been the biggest problem schemes feel they are facing legislation! Complexity and intrusiveness of legislation, and trying to keep abreast of new legislation, are still the biggest bugbears for schemes, although the percentage of respondents citing these issues has slightly diminished recently. This year FRS17 requirements, risk of investment underperformance, and volatility in investment markets were cited by well over half the schemes. Compared to last year, the percentage of schemes mentioning these latter two areas as major challenges has increased by 50%.
Finally, then, what would the schemes do if they could change one thing? Table 4 reveals the top wish list. Whether the government takes notice of some of these issues remains to be seen, but at least they are likely to provide fuel for further press coverage!

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