Corporate reporting implication in migrating from defined benefit to defined contribution pension schemes: A focus on the UK

AbstractThe UK has seen a significant transition from Defined Benefit (“DB”) to Defined Contribution (“DC”) for occupational pension saving. The planned automatic enrolment program starting in 2012 is expected to increase the use of DC. The main features of DC are that investment risk falls onto the individual during the pre-retirement phase and that there are no guarantees as to investment returns or the level of pension. In July 2012, Steve Webb, the Pensions Minister, challenged industry to think hard about meeting the need for more certainty about pension savings in DC plans and to consider providing an affordable ‘Money Safe’ guarantee where the member would get back at least the nominal value of their contributions (individual, employer and tax relief). This paper explores whether this is viable for the mass market.

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The problematic nature of UK pension fund regulation: Performing governance at the expense of innovation

Competition & Change ◽

10.1177/1024529420974608 ◽

2020 ◽

pp. 102452942097460

Author(s):

Gordon L. Clark

Keyword(s):

Financial Services ◽

Pension Fund ◽

Best Interests ◽

Defined Benefit ◽

Defined Contribution ◽

Dead End ◽

Fit For Purpose ◽

Board Decision Making ◽

The Uk ◽

Pension Adequacy

At the heart of UK pension fund regulation are quasi-compulsory codes of practices and tests of pension fund trustees’ competence. This regime of ‘soft’ regulation focuses upon the ‘performance’ of governance and is intrusive in terms of expected behaviour and board decision-making. Framed by defined benefit pension obligations in the private sector, it lacks rigorous standards of value when applied to defined contribution pensions. As such, pension ‘adequacy’ is discounted by the premium placed on performing governance in the market for financial services. The UK pension regime has hit a dead-end being neither fit-for-purpose in a world of technological disruption and financial turmoil nor capable of empowering those funds willing and able to innovate in the best interests of participants.

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An analysis of the Dutch-style pension plans proposed by UK policy-makers

Journal of Social Policy ◽

10.1017/s0047279421000155 ◽

2021 ◽

pp. 1-21

Author(s):

IQBAL OWADALLY ◽

RAHIL RAM ◽

LUCA REGIS

Keyword(s):

Risk Sharing ◽

Pension Plans ◽

Retirement Savings ◽

Investment Strategies ◽

Defined Contribution ◽

Replacement Rate ◽

Policy Makers ◽

Pension Schemes ◽

Simulation Based ◽

The Uk

Abstract Collective Defined Contribution (CDC) pension schemes are a variant of collective pension plans that are present in many countries and especially common in the Netherlands. CDC schemes are based on the pooled management of the retirement savings of all members, thereby incorporating inter-generational risk-sharing features. Employers are not subject to investment and longevity risks as these are transferred to plan members collectively. In this paper, we discuss policy related to the proposed introduction of CDC schemes to the UK. By means of a simulation-based study, we compare the performance of CDC schemes vis-à-vis typical Defined Contribution schemes under different investment strategies. We find that CDC schemes may provide retirees with a higher income replacement rate on average, together with less uncertainty.

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Stochastic Actuarial Modelling of a Defined-Benefit Social Security Pension Scheme: An Analytical Approach

Annals of Actuarial Science ◽

10.1017/s174849950000049x ◽

2008 ◽

Vol 3 (1-2) ◽

pp. 127-185 ◽

Cited By ~ 3

Author(s):

Subramaniam Iyer

Keyword(s):

Social Security ◽

Social Insurance ◽

Stochastic Methods ◽

Pension Scheme ◽

Defined Benefit ◽

Defined Contribution ◽

Stochastic Variation ◽

Simplified Approach ◽

Pension Schemes ◽

Social Security Reforms

ABSTRACTAmong the systems in place in different countries for the protection of the population against the long-term contingencies of old-age (or retirement), disability and death (or survivorship), defined-benefit social security pension schemes, i.e. social insurance pension schemes, by far predominate, despite the recent trend towards defined-contribution arrangements in social security reforms. Actuarial valuations of these schemes, unlike other branches of insurance, continue to be carried out almost exclusively on traditional, deterministic lines. Stochastic applications in this area, which have been restricted mainly to occasional special studies, have relied on the simulation technique. This paper develops an analytical model for the stochastic actuarial valuation of a social insurance pension scheme. Formulae are developed for the expected values, variances and covariances of and among the benefit expenditure and salary bill projections and their discounted values, allowing for stochastic variation in three key input factors, i.e., mortality, new entrant intake, and interest (net of salary escalation). Each deterministic output of the valuation is thus supplemented with a confidence interval, that is, a range with an attached probability. The treatment covers the premiums under the different possible financial systems for these schemes, which differ from the funding methods of private pensions, as well as the testing of the level of the Fund ratio when the future contributions schedule is pre-determined. Although it is based on a relatively simplified approach and refers only to retirement pensions, with full adjustment in line with salary escalation, the paper brings out the stochastic features of pension scheme projections and illustrates a comprehensive stochastic valuation. It is hoped that the paper will stimulate interest in further research, both of a theoretical and a practical nature, and lead to progressively increasing recourse to stochastic methods in social insurance pension scheme valuations.

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The Financial Theory of Defined Benefit Pension Schemes

British Actuarial Journal ◽

10.1017/s135732170000516x ◽

1997 ◽

Vol 3 (4) ◽

pp. 835-966 ◽

Cited By ~ 76

Author(s):

C.J. Exley ◽

S.J.B. Mehta ◽

A.D. Smith

Keyword(s):

Market Valuation ◽

Defined Benefit ◽

Defined Contribution ◽

Investment Management ◽

Playing Field ◽

Critical Areas ◽

Pension Schemes ◽

Modern Business ◽

Corporate Pension ◽

Management Techniques

ABSTRACTIncreasingly, modern business and investment management techniques are founded on approaches to measurement of profit and risk developed by financial economists. This paper begins by analysing corporate pension provision from the perspective of such financial theory. The results of this analysis are then reconciled with the sometimes contradictory messages from traditional actuarial valuation approaches and the alternative market-based valuation paradigm is introduced. The paper then proposes a successful blueprint for this mark-to-market valuation discipline and considers whether and how it can be applied to pension schemes both in theory and in practice. It is asserted that adoption of this market based approach appears now to be essential in many of the most critical areas of actuarial advice in the field of defined benefit corporate pension provision and that the principles can in addition be used to establish more efficient and transparent methodologies in areas which have traditionally relied on subjective or arbitrary methods. We extend the hope that the insights gained from financial theory can be used to level the playing field between defined benefit and defined contribution arrangements from both corporate and member perspectives.

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Pension costs and liabilities for UK-regulated utilities

Journal of Pension Economics and Finance ◽

10.1017/s1474747211000205 ◽

2011 ◽

Vol 11 (1) ◽

pp. 89-117

Author(s):

GORDON HUGHES

Keyword(s):

Defined Benefit ◽

Present Value ◽

Real Rate ◽

Goods And Services ◽

Pension Schemes ◽

Pension Costs ◽

The Uk ◽

The Cost ◽

Pension Liabilities ◽

Regulated Utilities

AbstractThis paper argues that a substantial portion of the risks associated with the defined benefit (DB) pension schemes operated by regulated utilities in the UK will, in practice, fall on customers via the tariffs that they pay for regulated goods and services. It examines the assumptions made by regulated companies in their FRS 17 valuations. These assumptions generate parameters that systematically understate both the present value of pension liabilities and current service costs. These are re-estimated using the risk-free real rate of discount and compatible assumptions. On this basis, the total pension deficit for the sample increased from £12.7 billion to £56.3 billion in 2009, equivalent to about 110% of regulated revenues. Further, the cost of current service for 2008–09 was 20% higher than total contributions in the year, despite large top-up contributions. If contributions were increased to cover current service costs and to eliminate pension deficits over a period of 10 years, the additional contributions would amount to 235% of actual contributions or 13% of regulated revenues implying a significant increase in regulated charges. Companies in the communications and transport sectors face the largest adjustments in addressing the problems of underfunded pension schemes.

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Financial Management of the UK Pension Protection Fund

British Actuarial Journal ◽

10.1017/s135732171200044x ◽

2013 ◽

Vol 18 (2) ◽

pp. 345-393 ◽

Cited By ~ 2

Author(s):

J-P. Charmaille ◽

M.G. Clarke ◽

J. Harding ◽

C. Hildebrand ◽

I.W. Mckinlay ◽

...

Keyword(s):

Risk Management ◽

Financial Management ◽

Enterprise Risk Management ◽

Pension Scheme ◽

Defined Benefit ◽

Corporate Sponsor ◽

Stakeholder Groups ◽

Pension Schemes ◽

Enterprise Risk ◽

The Uk

AbstractThe UK Pension Protection Fund (PPF) was established in April 2005 to protect the pensions of members of UK private sector defined benefit pension schemes which have insufficient assets and whose corporate sponsor fails. The Fund takes over the pension scheme assets and assumes responsibility for the payment of compensation to the former members of the scheme. The PPF is funded by a levy on the population of eligible schemes. This paper discusses the application of Enterprise Risk Management principles and techniques to the unique situation of the PPF. The elements of the financial management of the Fund have been developed by reference to practice within proprietary insurance institutions and within pension funds. The paper will be of interest and, we hope, of some value to students, researchers and analysts and also to the PPF's own stakeholder groups that have a stake in an effective pension protection regime.

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UK pension changes in 2015: some mathematical considerations

The Mathematical Gazette ◽

10.1017/mag.2016.55 ◽

2016 ◽

Vol 100 (548) ◽

pp. 193-202 ◽

Cited By ~ 1

Author(s):

John Stubbs ◽

Jacob Adetunji

Keyword(s):

Arbitrary Number ◽

The State ◽

Defined Benefit ◽

Defined Contribution ◽

Bank Account ◽

Legal Requirement ◽

Pension Age ◽

The Uk ◽

State Pension ◽

Special Case

Since April 2015 there has been no legal requirement in the UK to purchase an annuity with pension savings [1] while for those who reach state pension age on or after 6th April 2016 the UK Government changed the state pension deferral arrangements [2]. The latter refers to an arrangement whereby a pensioner can receive an enhanced state pension by deferring its uptake for an arbitrary number of years. These two changes raise certain questions for prospective pensioners which are worthy of some mathematical consideration.An annuity is a guaranteed income for life in exchange for a certain sum of money: the pension pot. An alternative to the annuity since April 2015 is a ‘draw down scheme’ in which the pension pot can be used almost like an ordinary bank account and money periodically withdrawn. These two choices arise from ‘defined contribution’ pension arrangements. By contrast ‘defined benefit’ work-based (company) pensions allow no such choice and are not considered further here apart from the special case of the UK state pension. With an annuity a further option to consider, and one which predates the 2015 changes, is whether to take payments that are fixed or index-linked to inflation. Only the UK state pension offers a late retirement enhanced pension if its uptake is deferred.

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