Last updateMon, 20 Feb 2017 9am


Pension flexibilities: opportunities for final salary pension schemes

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Liam Mayne, Associate, corporate consulting at Barnett Waddingham

The decision to relax rules relating to the purchase of an annuity at retirement has revolutionised the defined contribution (DC) landscape. The measure has been popular with members – HMRC has estimated that since April 2015, around £9 billion of retirement savings has been accessed by over 500,000 members.

The measures do not extend directly to defined benefit (DB) members – however, it is now apparent that the second-order impact of these changes on DB schemes could be substantial indeed.

Previously, not much attention was typically paid to a member's statutory option to transfer their benefits to an alternative arrangement. Now, many non-pensioner members are exploring opportunities to transfer their final-salary benefits and avail of the flexibilities in a DC scheme.

Opportunities for sponsors – de-risking and cost reduction.

Around 60% of DB members in the UK are not yet retired – covering assets of approximately £800 billion; this highlights the potential for large transfers to occur from DB to DC in the future. 

This presents opportunities for sponsors to manage the financing of DB schemes. For each member transferring, the financial obligation and associated risk is removed. This will be expected to reduce cash funding, in effect, the prudent reserve which schemes must fund for is released. In addition, it will be cheaper than securing benefits with an insurance company, which is the end game for many schemes.

For those sponsors approaching this in a pro-active manner, liability management exercises are likely to include actions such as subsidising the cost of members' financial advice. However, the upshot for these companies would be a plausible scenario of 20% to 30% of non-pensioner members aged 55 and over transferring out.

Incentive exercises – potential pitfalls

In addition to technical matters such as the relationship between the scheme's funding and transfer bases, a key component of a successful strategy includes adequate member protection. A minority of historic cases have led to some reputational damage for incentive exercises – however, such projects are now subject to a voluntary but universally-adopted code of practice supported by the industry.
It is also necessary for companies to involvei independent financial advisers (IFAs) to represent members' interests – indeed, new legislation compels companies to pay the cost of financial advice if the company is incentivising members to take a transfer.

Maximising the opportunities

Taking advantage of the pension flexibilities regime represents one of a number of tools available to companies. Ideally, it will form part of a wider strategic framework that is scheme-specific - for example, a transfer incentive exercise is unlikely to be optimal for a mature scheme with a small proportion of non-pensioners. We recommend a collaborative approach with scheme trustees. This will facilitate better understanding of any potential roadblocks e.g. quality issues with member data.

The appropriate use of IFAs presents an important line of defence for members – we recommend adequate due diligence is performed to understand processes, capacity and preferences. We believe in keeping the big picture in mind at all times - if done in a sensible way, companies can reduce costs and better control their risks.

Meeting members' needs in the longer term

The long-term success of incentive exercises will depend on protecting members from poor decision-making. The prevalence of pension scams and the tendency for individuals to underestimate their own life expectancy means there are significant risks to negotiate.
Here employers can play a leading role in providing access to financial education programmes. It is crucial this is done before individuals leave the workforce – it is much more difficult to engage after this point.

Good outcomes will require good quality advice – in a positive step, the government has recently announced an increase in the tax relief available for employer-led advice whilst also setting out plans for members to be able to fund advice from their pension pots on a tax-free basis.



How FDs can take the risk out of spreadsheets

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Spreadsheet errors have been blamed for a number of high profile corporate meltdowns including one in the rail franchise bid process for the West Coast mainline that is said to have cost the taxpayer around £60m. It is estimated that calculations made using spreadsheets represent up to £38 billion of private sector investment decisions per year and simple errors could be putting billions of pounds at risk.

With so many high profile incidents filling the newswires, it may seem unlikely that the spreadsheet is set for a reprieve in 2017. However, new developments utilising cloud technology are set to allow finance directors to cling on to their beloved spreadsheets and make them robust enough to satisfy regulators and auditors, who have already indicated that they consider them, in their existing state, to be a major potential risk.

For the uninitiated, it can be hard to see the appeal of a spreadsheet when sophisticated Enterprise systems are available as an alternative. However, the downside of these systems is that nothing can be completely spontaneous and more often than not, the busy IT team needs to be called in to tackle what the spreadsheet is capable of doing in a fraction of the time.

Large businesses still like to use spreadsheets to analyse data but difficulties arise because their sheer size can make them very difficult to handle leading to multiple copy and paste operations that burn up huge amounts of time. Yet people persist because spreadsheets free them from the meticulous clutches of IT and they get the control and flexibility they long for.

Connected to a complex cloud 'back end'

One option is to industrialise them and transform them into Enterprise spreadsheets that are connected to a secure cloud server designed for group financial reporting and management information. This automates the entire close process, down to P&L, balance sheet, cash flows and other required reports, saving days of laborious and error prone consolidation.

This solves the problem of a lengthy and risky manual consolidation process and speeds up reporting by automating the ad hoc reporting process so that it is possible to automate business processes without any disruption and carry on using a familiar tool without any of its' well- known problems.

The finance team can continue to enjoy the simplicity and comfort of using a spreadsheet at the 'front end' with a connection to a complex (but well-hidden and transparent to the user) cloud 'back end' that does all the difficult work. This eradicates, at a stroke, the problem of keeping a complete track of every change made to every spreadsheet cell by every user at every point in time since document inception. This is invaluable for forensic audit and for industrial grade security and eliminates all of the risks.

• Reduces the reporting effort via automation of the ad hoc reporting process; ensuring data integrity and 100% accuracy. Running a report is a simple process with selection from a click drop down menu. Time consuming manual intervention is eliminated
• Existing spreadsheets and other disparate data sources (such as MS Access and core ERP) are integrated and reconciled into one solution
• There is no large scale data migration and therefore minimal disruption to daily business operations
• Multi-user functionality ensures all authorised users can access and update the same data concurrently avoiding issues with versioning, copy/paste difficulties and data integrity

20 entities will take minutes, not days to complete group reporting

In practice, entities can exist anywhere in the world and all are required to submit financial data to group finance at regular intervals. With Enterprise spreadsheets, each one is connected to a cloud server via a simple spreadsheet interface from which, data is fed and all the local formats are translated to a group chart of accounts.

The data is immediately available to view upon submission to the server so they can see a real-time consolidated position of the group. This approach means that the finance team can take immediate control of modifying the fine details of the financial consolidation process and associated adjustments such as defining currency conversion logic. It has the added benefit of ensuring formulae and rules are executed correctly as well as being supported by a full audit trail that logs every change involving accounts or administrative data, which is securely stored in the cloud server.

Combining the old with the new

The reporting challenges faced by group finance directors are complex to say the least and until now, spreadsheets have proved to be most 'straight-forward' solution for consolidation purposes and analysis. They are the easiest choice as users are already familiar with them, they are scalable and the IT department does not need to be involved whenever a new report is needed. When weighed up against an expensive enterprise solution, the spreadsheet invariably wins hands down.

The demand for combining the best of the old with the advanced technology of the new is a trend that is set to resonate in 2017. Businesses are tired of investing and embracing new tech that fails to live up to the hype. Why reinvent the wheel when you can simply improve it?

As we enter 2017, we should not overlook older business tools which simply need a new business model to remain valuable. This use of smart technology to deliver next generation Enterprise spreadsheets has the potential to put an end to a problem that has resulted in almost one in five large businesses suffering financial losses and ultimately will put power back in the hands of business users. The tidal wave against spreadsheets is finally turning.


Triple-lock pension is unsustainable, say MPs

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The triple-lock safeguard on state pensions is "inherently unsustainable" and should be scrapped, according to a report from MPs.
The Commons Work and Pensions Committee said the triple-lock will worsen an economy which is already heavily biased towards baby boomers and should be ended by 2020.
The triple-lock guarantees that the state pension rises by the highest of one of three figures - average wages, inflation, or 2.5%.
But the committee's report said: "The triple-lock is inherently unsustainable. In the absence of reform the state pension would inevitably grow at a faster rate than the rewards of work and would account for an ever-greater share of national income. In particular, we find no objective justification for the 2.5% minimum increase."
Instead of the triple-lock, the committee proposes the new state pension and basic state pension could be linked to a minimum proportion of average earnings.
Frank Field, chairman of the committee, said: "Home ownership, taken as a given by many in my generation, is out of reach for too many aspiring young people today. At the same time as tightening their belts, they are being asked to support a group that has fared relatively well in recent years. Millennials face being the first generation to be poorer than their forebears. No party has been immune from chasing the pensioner vote – but at what cost to future generations? Politicians of all stripes must accept some responsibility for these trends, and we must act together now to address them."

How will the FTSE100 deal with continued Brexit uncertainty in 2017?


By Ben Barlow

As one of the world's leading centres of finance, London has always been a centre for investment. However, the surprising result of the Brexit referendum in June last year  has cast doubt on that status, as uncertainty over the United Kingdom's political future has dominated business headlines.

If you trade on the FTSE100, trying to make sense of what lies ahead in 2017 is difficult, to say the least. Here, we will discuss how Brexit and other economic factors will drive this stock index in the coming year.

Continued weakness in Sterling may send the FTSE to record highs

One of the most dramatic effects of the Brexit vote has been the precipitous drop in Sterling in the months that followed. With the GBP/USD currency pairing closing at 1.24 on December 21, the pound sterling has dropped almost 17% from its 12-month high of 1.49, a mark that was reached earlier last year.

This turn of events has been a considerable blow to the national ego of the United Kingdom, and it has made international travel considerably more expensive for ordinary Britons.

However, the fact that this currency has recently touched 168-year lows has given British corporations an affordability advantage that they have not enjoyed in generations.

Furthermore, many of these companies have increasing interests in overseas markets. These outposts often earn their revenue in the local currency, most of which have outperformed Sterling in 2016.

Should Brexit uncertainty continue to drag on through 2017, offshore divisions that earn their revenue in foreign currencies should continue to see their results improve significantly, thereby giving a boost to the FTSE 100.

An expected rally in the price of oil may buoy the index in the first half of 2017

Although Brexit has dominated business news in the United Kingdom for most of 2016, a recent decision by OPEC and its allies to significantly curtail production should give the FTSE 100 a significant bump in the first half of this coming year.

BP and Royal Dutch Shell make up 15% of the capitalization of the FTSE. If oil prices rally well above $60 per barrel on expected production cuts of 1.8 million barrels per day, the resulting increase in their stock prices should give the FTSE some much needed support in a year where political turmoil is expected to play a big role in its fortunes.

Although this expected oil bull market will come as a welcome shot of adrenaline to a stock index that has been floundering with the ongoing Brexit drama, this rally may be slowed or stopped altogether in the second half of 2017.

As prices move higher and remain high, oil production in the United States and Canada will increase as their oil shale and oil sand plays once again become profitable.

This will increase supply, which will cap further price increases, with possible reductions occurring later in 2017 and into 2018.

Because of this, the boost that energy will provide the FTSE 100 will be noticeable early on in 2017, but has the potential to fade away as the year wears on.

Companies with interests in the EU will suffer if Brexit negotiations are drawn out

Let's not kid ourselves, though: the number one influence on the FTSE in 2017 will be how the British government handles the invocation of Article 50.

If there is one truism about the stock market, it is that uncertainty of any kind is bad for business. At this time, it appears that the British government is seeking the right to trigger Brexit negotiations without having to consult Parliament on their plans beforehand.

Although there are advantages to holding back details until negotiations have officially begun, some analysts favour these plans being laid out before Parliament before Article 50 is triggered, as this will provide a measure of cost certainty for businesses listed on the FTSE 100.

Should the government decide to go with the former plan, the longer that it takes to enter into negotiations with the European Union, the greater the risks that volatility will pose for investors.

London will stay No 1, say banking experts

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London will still be Europe's financial centre in five years' time according to a majority of Britain's leading bankers, according to a new survey.

The report, carried out by consultancies Synechron and TABB Group, discovered that 72 per cent of UK banking executives think London will retain its standing as a regional finance hub after Brexit, despite concerns that Britain could lose passporting rights. The survey contacted  80 financial services executives working in capital markets at UK banks.

Tim Cuddeford, a managing director at Synechron Business Consulting, said: "Whilst Brexit poses an unforeseen challenge for financial institutions, the prospect of rising compliance and huge relocation costs appear inevitable. Despite this uncertainty, we've found that the majority of British bankers believe that London will remain the financial centre of Europe, painting a very hopeful picture of the future."


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