Subject SA4
CMP Upgrade 2013/14
CMP Upgrade
ActEd often produces a free CMP Upgrade, which provides details of changes to the
syllabus, Core Reading and ActEd materials. This year, however, due to the large
number of changes to the Course Notes, Q&A Bank and X Assignments, it is not
practical to produce a full upgrade.
This document provides a summary of the major changes so that you are aware of the
main themes of these changes and the chapters that have been subject to the greatest
change.
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The names of various bodies have changed and been updated throughout the course as
follows:
From To
Chapter 1, Page 13
Later versions of various documents in the required reading have been updated as
follows:
Chapter 1, Page 17
Chapter 2, Page 5
The full basic state pension (BSP) payable during the 2013/2014 tax year is
110.15 per week. The married persons pension for 2013/14 is 176.15 per
week.
Chapter 2, Page 7
The QEF is equal to the lower earnings limit and for 2013/2014 is 5,668. The
LET for 2013/2014 is 15,000.
Chapter 2, Page 10
Two new paragraphs have been added to the after the third paragraph on page 10 as
follows:
As part of its single-tier pension reforms (see section 1.6), the Government is
intending to abolish contracting out through defined benefit arrangements by
April 2017 at the earliest, to coincide with the introduction of the single-tier
pension.
At the time of writing (May 2013) this date has been moved forward to April 2016 and
it is expected that:
accrual under S2P and the ability to contract out will cease from a date to be
agreed (April 2016 at the earliest).
a single tier State pension will be introduced to replace all State pension benefits
(ie the BSP, S2P and Pension Credit). A current amount of around 140 per
week has been proposed.
Chapter 2, Page 15
To protect individuals, employers must not offer employees incentives to opt out
of a workplace pension, either during employment for existing employees or
during recruitment for prospective employees.
The part from the Core Reading onwards under the section on qualifying schemes has
been changed to:
For employers who choose to use defined benefit or hybrid schemes, auto-
enrolment can be delayed to September 2017.
Chapter 2, Page 16
NEST
The National Employment Savings Trust (NEST) was set up by the Government
to provide a vehicle for auto-enrolment which may be offered to employees by
employers who do not wish to set up their own scheme, or do not currently
support a suitable arrangement. NEST will operate as a single multi-employer
defined contribution scheme.
Contributions to NEST are actually based on qualifying earnings rather than Upper
Band Earnings. However at present the definition is actually the same as Upper Band
Earnings were earnings between the Lower Earnings Limit and the Upper Earnings
Limit (which are 5,668 pa and 41,450 pa for 2013/14).
The eligibility and contribution requirements will be phased in, in stages, from
October 2012, as follows:
More information about automatic enrolment can be found on TPRs website at:
http://www.thepensionsregulator.gov.uk/automatic-enrolment.aspx
The main reason behind this reform is the view that unless people save more, work for
longer and/or pay more tax they will have a standard of living in retirement which is
worse, in real terms, than those currently retiring.
Contracting out
Contracting out of S2P will cease from the implementation date so employees
and employers in contracted-out schemes will see an increase in their national
Insurance contributions.
Remember that many private DB schemes are closed to new hires and some are also
closed to future accrual. In the latter case, the cessation of the ability to contract out is
irrelevant. Those DB schemes open to future accrual for some members will need to
cease contracting out and this will impact on these members benefits.
This power will be available for a limited period of time and will only allow an
amendment to be made insofar as the value of the change is not more than the annual
increase in the employers National Insurance contributions in respect of that member.
Currently the State Pension Age for men is 65 and for women will be rising from
60 to 65 gradually from 2010 to 2020. The Pensions Bill 2011 proposes that SPA
for females will increase to 65 by 2018 rather than 2020, in order to comply with
the EU Directive for equal treatment for men and women. It is then proposed that
the SPA will increase gradually to 66 between 2018 and 2020 with further
increases planned after that time.
As part of the review of the single-tier pension the Government has announced
that it will carry out a review of the State Pension Age every five years.
Regulatory reforms
Increases to GMPs are different from those that apply to other pension benefits.
Converting GMP into scheme benefits should simplify scheme administration
and make communication to members easier in the long run. However, it is
difficult to achieve without making some members worse off.
Many commentators believe that the UKs pension legislation and regulation is
too complicated. Any ongoing review would hopefully aim to simplify it.
Chapter 2, Page 28
The duties above outline the trustees fiduciary duties. A fiduciary duty is
defined as a legal or ethical relationship of trust between two or more parties. In
such a relationship one party, in this case the trustees, acts in a fiduciary
capacity to the other one, in this case the scheme beneficiaries, in a manner
which gives rise to a relationship of trust and confidence.
Chapter 3, Page 6
The reductions for the 2012/2013 tax year are 3.4% for the employer and 1.4% for
the employee. These rates will apply up to and including the 2016/17 tax year.
Chapter 3, Page 10
The second sentence of the final paragraph has been updated, with an additional
sentence added, as follows:
The AA for the 2013/14 tax year is 50,000. From the tax year 2014/15 onwards,
the AA will reduce to 40,000.
Chapter 3, Page 12
The final sentence in the section Lifetime Allowance of the third paragraph has been
updated as follows:
The LTA is currently 1,500,000 from the 2012/13 tax year but will reduce to
1,250,000 from 6 April 2014.
Chapter 4, Page 31
The fourth sentence of the second paragraph of Section 7.1 has been updated as follows:
The cap for the year 2013/2014 is currently set at approximately 34,867 for an
NPA of 65 and will increase in line with earnings.
Chapter 4, Page 34
At the start of each financial year, the PPF Board estimate the total levies
required to fund the PPF. The levy estimate for the 2013/14 financial year is 630
million.
This is lower than the levy estimate had the parameters remained unchanged
from 2012/2013 which would have been some 765 million, breaching the
legislative restriction that a levy estimate can be no greater than 25% higher than
the previous years estimate (of 550 million). However, to reflect the current
economic environment, the PPF has changed the levy parameters to target a levy
of 630 million. The PPF has announced that it expects to increase the levy for
2014/2015 and thereafter should the current economic conditions continue.
The PPF did intend to maintain a stable levy of 550 million for three years from
2012/13 but this was not possible due to economic conditions.
SLM is the scheme-based levy multiplier, set at 0.000056 for the 2013/14
levy year.
LSF = risk-based levy scaling factor, set at 0.73 for the 2013/14 levy year.
To determine the smoothed deficit, the values of the assets and liabilities will be
smoothed using five-year financial market averages up to March 2013.
Chapter 5, page 7
Version 1 of TAS P applies to reserved work and work performed for aggregate
reports completed on or after April 2011 and before 1 January 2013. Version 2
(which is summarised below) applies subsequently.
incentive exercises.
Chapter 6, Page 11
A new paragraph has been added after the The sponsor heading:
Over the years an increasing number of employers are finding the risks
associated with defined benefit pension schemes to be unacceptable. As a
result, the majority of defined benefit schemes are now closed to new entrants
with a significant proportion also closed to future accrual. Employers are still,
however, left with past service liabilities which have to be managed.
Chapter 6, Page 13
A new section was added to the bottom of the page. As a convenient way to add to your
notes, this follows on the next page:
De-risking
A number of options exist for the employer to facilitate de-risking of the defined
benefit scheme as follows.
Investment strategy
Chapter 12 discusses various approaches the employer may wish to consider in order to
mitigate investment risk.
Insurance products
Insurance products are covered in Chapters 11 and 26. The scheme can either
undertake a buy-out, where all or part of the schemes liabilities are passed to an
insurance company at an agreed price, or a buy-in, where annuities are
purchased and held as scheme assets to protect against the investment,
inflation and longevity risks.
In order to extinguish the defined benefit risk the liabilities would need to be bought out
in the name of each member with an insurance company (this is known as a buy-out).
A buy-in is where annuities are purchased by the scheme, usually to match specific
liabilities, and are an asset of the scheme. A buy-in would mitigate risks but not
extinguish them.
Incentive Exercises
These are exercises where the members are given an incentive to take up an
option. The two exercises most commonly undertaken in the UK are Enhanced
Transfer Values and Pension Increase Exchanges.
Chapter 6, Section 7
Section 7 has been moved back to become Section 8 and a new Section 7 has been
added. As a convenient way to add to your notes, this follows on the next page:
7 Defined Ambition
In November 2012 the Department for Work and Pensions published a strategy
document entitled Reinvigorating workplace pensions which proposed a new
category of pension known as Defined ambition (DA).
This document discusses the desire to increase the range of products available to savers in order
to provide more certainty.
At the time of writing (May 2013), this document can be found as follows:
http://www.dwp.gov.uk/docs/reinvigorating-workplace-pensions.pdf
The aim of DA is to provide greater certainty for scheme members about the
value of their pension fund in a DC arrangement, but also less cost volatility for
employers than a DB arrangement. The intention is that these aims are met by
sharing the risks among a number of parties including scheme members,
employers and insurance and investment businesses. The rest of this section
covers defined ambition schemes in more detail.
These arrangements are often DB or DC schemes which have been adapted to transfer
some risk from one party to another eg from the employer to the member in a DB
scheme and the member to an investment business in a DC scheme.
Current defined benefit arrangements which involve some sharing of risk include
the following:
The retirement income guarantee means that members will need to purchase a
fixed term annuity rather than a whole of life annuity. Members who live
beyond the fixed term would then receive their subsequent pension from the
guarantee fund. This removes some of the longevity risk from the individual
member.
Guarantees are discussed further in Chapter 23.
Guarantees and risk-sharing provided by the insurance industry:
guarantees on the return on the fund and the income at retirement
whereby the member is not subject to the downside risk but takes a share
in the upside risk, as opposed to a standard DC arrangement where the
member shoulders all of the downside and upside risk.
Examples here could be with-profit and deposit administration arrangements
with insurance companies as discussed in Chapter 11.
Plan design; employer-funded smoothing fund: the employer pays a
percentage of core contributions into a central fund which is used to
manage a targeted income at retirement. There is no longevity risk for the
employer, but there is some uncertainty surrounding the contributions
payable.
The intention would then be that some risk is shared between the members and
investment returns can be smoothed and contributions adjusted accordingly.
Chapter 7, Page 16
Future legislation changes may also cause problems, such as the proposed
State Pension reform as described in Chapter 2. For example, the deduction
stated in methods (2), (3) and (4) could be changed by legislation.
The proposed changes to State benefits, as discussed in Chapter 2, mean that sponsors
who want their schemes to integrate with State benefits may need to take action, in
particular:
as the ability to contract out for a DB scheme will cease, integration through this
approach will no longer be possible
a single tier State pension will be introduced as a level expected to exceed the
BSP and therefore a lower amount of private provision may be appropriate.
However, the scheme is unlikely to be able to reduce accrued rights and so may only
make changes in respect of future accrual of benefits.
Section 3.2 has been moved back to become Section 3.3 and a new Section 3.2 has been
added. As a convenient way to add to your notes, this follows on the next page:
3.2 Smoothing
Smoothing is a process whereby short-term fluctuations in the market are
reduced. One possible approach is to use an average discount rate, taking
market yields over an averaging period, such as 2-5 years, rather than the yield
as at the date of the valuation.
Due to concerns raised in the light of current low gilt yields, the Department for
Work and Pensions undertook a consultation on whether smoothing should be
permitted.
However, in early 2013 it (the DWP) announced that it would not be introducing
smoothing following concerns raised that smoothing would mean that the effect
of low gilt yields would still be felt after the economy had recovered, and the loss
of transparency when using smoothed asset and liability values. In addition the
call for evidence had not revealed a strong case for pursuing such measures.
DWPs consultation also asked for views on whether a new statutory objective for TPR
is necessary and this is to go ahead. The new objective will ensure an employers need
for sustainable growth is considered during scheme funding negotiations and is properly
reflected in trustees dealings with the employer.
Section 3.1 has been amended. As a convenient way to add to your notes, this follows
on the next page:
3.1 Introduction
FRS 102 (Section 28 applies to employee benefits) replaces FRS 17 for accounting
periods beginning on or after 1 January 2015. Early application of FRS 102 is
permitted for accounting periods ending on or after 31 December 2012.
Note that any requirements to account under International Accounting Standards (IAS)
override country-specific requirements. IAS came into force in the UK for accounting
periods beginning on or after 1 January 2005 from this date, listed companies had to
use IAS 19 to account for pension costs in their group consolidated accounts.
Therefore, some UK companies may have moved directly from SSAP 24 to IAS 19.
FRS 17, and not FRS 102, is discussed in the rest of this section in detail. The focus of
FRS 17 is that a realistic assessment of the difference between the pension and assets
should be recognised in the balance sheet, ie it is a balance sheet focused standard.
The Accounting Council amended the disclosure requirements of FRS 17 to bring them
broadly into line with the disclosures required under the previous version of IAS 19 (but
not the current version of IAS 19). FRS 102 will replace FRS 17 but its disclosure
requirements are not aligned with the current version of IAS 19.
The Accounting Councils best practice disclosure guidelines, which apply to both
FRS 17 and IAS 19, are described in Section 5.
4 IAS 19
4.1 Introduction
With the exception of actuarial gains and losses the elements of the pension
cost under IAS 19 are calculated using much the same method as FRS 17.
service cost
+/ remeasurement effects
The first two elements of the pension costs (ie the service cost and interest) are
disclosed through the profit and loss account. The final element, the remeasurement
effects, is disclosed through Other Comprehensive Income (OCI). This is discussed
further in section 4.5 below.
The asset ceiling is defined as the present value of the sum of refunds of surplus to
which the sponsor has an unconditional right and reductions in future contributions. It
is discussed further in section 4.6 below.
Thus the element of pension cost which passes through the profit and loss account, and
set out consistently with the other standards, is calculated as:
less interest income assumed using the assumed discount rate on assets
plus past service cost the liability arising due to benefit improvements can be
amortised over the period until the benefit vests
Do note however that this is not how the pension cost would be presented in the
accounts.
Assets are measured at fair value at the balance sheet date. Auditors now
require this to be bid value rather than mid-market value (based on wording in
other international accounting standards).
In practice, this usually means that the uniform accrual to date of payment method is
used as described in Chapter 16.
4.4 Assumptions
As for FRS 17 the assumptions are the responsibility of the directors. The
involvement of a qualified actuary is encouraged but not required.
The discount rate used to value the liabilities should be determined by reference
to market yields at the balance sheet date on high quality corporate bonds of
consistent term and currency or, if there is no deep market in such bonds, the
market yields on government bonds.
In the UK, actuaries and auditors often base the discount rate on the yield on long-dated
AA-rated corporate bonds. This discount rate is used to value the liabilities and also
used to determine the interest on the difference between the assets and liabilities.
Under the current version of IAS 19, all gains and losses are to be recognised
immediately outside the profit and loss account, under Other Comprehensive
Income (OCI).
In fact these gains and losses are the remeasurement effects discussed above. They
therefore are the result of:
the impact of any changes in the assumptions in valuing the liabilities
the difference between the expected value of the liabilities and the actual value
due to experience differing from that assumed
the difference between the expected value of the assets (calculated using the
discount rate to determine the expected return on the assets) and the actual value
due to experience differing from that assumed
and any changes in the asset ceiling not included in the interest cost.
This method is analogous to the recognition of gains and losses through the Statement
of Total Recognised Gains and Losses (STRGL) under FRS 17 where gains and losses
are recognised immediately and not through the profit and loss account.
Prior to the current arrangement, many companies adopted the 10% corridor
option a method of delaying recognition of gains and losses. These
companies are likely to see a one-off significant change in their balance sheet
liability the first time they adopt the current approach as any currently
unrecognized gains and losses are taken onto the balance sheet.
If the result is negative ie an asset, then it should be limited to the asset ceiling
which is defined as the present value of the economic benefits in the form of
refunds from the scheme (more specifically, refunds to which the sponsor has an
unconditional right) or reductions in future contributions.
In practice, the calculation of the asset to be shown on the balance sheet can be very
complicated. For example:
it may be difficult to determine the extent to which an employer has an
unconditional right to a refund of surplus
arguably, even if the scheme is in surplus on an accounting basis, a reduction in
future contributions may not be available if these funds are needed to meet past
service liabilities under the SFO.
4.7 Disclosure
4.8 Example
In this section, we show by way of a worked example the figures that might appear in a
companys accounts relating to pension costs under IAS 19. In practice figures would
probably be rounded and some detail may be ignored due to materiality.
You will gain the most benefit from this example if you attempt the calculations
yourself.
We will consider how the figures calculated in the previous example would differ if the
company were reporting under IAS 19. We will assume the same assumptions can be
used for IAS 19 in this instance.
Summary of results
The calculations in the previous example showed that, using the FRS 17 methodology
and assumptions:
Current service cost (CSC): 0.68m
Past service cost and gains/losses from settlements and curtailments are nil
The table below shows the value of the liabilities on the FRS 17 basis and the bid value
of the assets at 1 January X and 1 January X+1:
Value at 1 Value at 1
January X January X+1
Additional information
In addition:
During the year X actual benefit outgo was as expected, ie 1.0m.
This could also be calculated by determining the interest on the net asset/liability at the
start of the year and the net cashflow as follows:
1.6m 0.055 0.68 10% 4m 1.0550.5 1 0.08m
The pension cost which passes through the profit and loss account for year X is:
CSC 0.68m
Interest cost on net liability / asset (0.08)m
Past service cost 0.00m
Gains/losses from settlements/curtailments 0.00m
Pension cost 0.60m
The expected value of the defined benefit obligation at the year-end is:
The actual value of the obligation is 42.0m. Therefore, there is an actuarial loss on the
obligation of 1.61m (42.00m - 40.39m) .
The actual value of the assets is 35m. Therefore, there is an actuarial loss on the assets
of 6.79m (35.00m - 41.79m) .
Therefore, overall there is an actuarial loss of 8.40m (1.61m + 6.79m) during year X
and this will be recognised through the OCI.
The pension liability shown in the balance sheet at 31 December X will be:
Section 8 has been moved back to become Section 9 and a new Section 8 has been
added. As a convenient way to add to your notes, this follows on the next page:
8 Incentive exercises
These are exercises where the members are given an incentive to take up an
option. The two exercises most commonly undertaken in the UK are Enhanced
Transfer Values and Pension Increase Exchanges.
ETVs may also be offered to members as an alternative to buying out their deferred
benefits with an insurance company. Which option is beneficial to each member
depends on a number of factors, including the level of the enhancement and the
members personal circumstances. For example, single members may benefit from the
ETV option as they may be able to use all the funds to provide benefits for themselves
only.
Pension Increase Exchange (PIE) exercise: these are options offered to members
whereby they exchange their entitlement to non-statutory pension increases for
a one-off uplift to their pension. This option can be offered to existing
pensioners as a one-off exercise and also to future pensioners as an option on
retirement. The level of uplift can be set such that the overall liability is reduced.
8.2 Restrictions
A Code of Good Practice for Incentive Exercises was introduced in response to industry
and government concerns that incentive exercises could be conducted in a way that
disadvantaged pension scheme members. The Code was written by an industry working
group and published in June 2012.
Incentive exercises should only be offered to members who are over age 80 on
an opt-in basis. Advisers should adhere to a vulnerable client policy when
providing advice.
All parties involved in an incentive exercise should ensure that they are aware of
their roles and responsibilities and act in good faith in the areas over which they
have direct control.
The Pensions Regulator has also issued guidance on incentive exercises and this can be
found at:
http://www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx
8.3 Assumptions
ETVs are often calculated by adding a margin to the unreduced CETV (the ICE), for
example a margin of 20% could be added (ie applying a factor of 1.2 to the ICE).
The same principles apply as for Section 7 but as the Code proposes that the calculation
must be undertaken using the framework for actuarial equivalence tests it would be
appropriate for the CETV basis to be used.
So the critical calculation is a ratio of two annuities that reflects the members sex, age
and marital status, and the different pension increases in the two annuities. Thus, the
key assumption is the level of pension increases in the two annuities. The level of
price inflation will be particularly important if the increases relate to price inflation.
Glossary
Auto-enrolment
Fiduciary
We recommend that you read the whole of the new version of the Course Notes and
Study Guide to ensure that you are familiar with the course. There have been a large
number of changes to the ActEd text and we do not attempt to list all of these changes
here.
However, in order to help you focus your preparation we summarise the significant
changes to the content of the Course Notes not covered by the Core Reading changes
above. For example, there are various updates for the date of the latest professional
guidance which are referenced in the Core Reading changes (in particular in Chapters 1
and 5) and so these are not repeated again here.
Chapter 1
The table of current UK data has been updated for the 2013/14 tax year.
Chapter 2
The objectives of the Pensions Regulator, which can be found on its website, have been
updated on page 14.
The ActEd text at the start of Section 5.5 has been updated. As a convenient way to add
to your notes, this follows on the next page:
TPR is keen to identify those schemes where members benefits appear to be at greatest
risk. The Regulator may question the trustees of such schemes further to see whether
they have taken all reasonable steps to maximise the security of members benefits.
In order to identify these schemes TPR use a filter mechanism based on risk indicators.
This is a move away from setting triggers focused on individual items such as technical
provisions. These indicators include:
whether recovery plan contributions and the amount of investment risk
appropriately reflect the relative strength of the employer and also the
affordability of contributions
any specific issues and concerns relating to deterioration in sponsor covenant
strength or possible avoidance
the shape of recovery plans including initial low levels of contributions
the investment performance assumed over the life of the recovery plan
any significant issues from previous valuation submissions.
Further details can be found in the 2013 DB annual funding statement at:
http://www.thepensionsregulator.gov.uk/docs/db-annual-funding-statement-
2013.pdf
Chapter 4: Section 8
The Pensions Act 2004 made provisions for the Financial Assistance Scheme (FAS).
The FAS compensates some people who have had benefits reduced because:
they were members of an under-funded defined benefit scheme that started to
wind-up between 1 January 1997 and 5 April 2005, and
their scheme began to wind-up and did not have enough money to pay members
benefits, and
the employer cannot pay the shortfall because it is insolvent, no longer exists or
no longer has to meet its commitment to pay its debt to the pension scheme, or
the scheme started to wind up after 5 April 2005 but is ineligible for help from
the PPF due to the employer becoming insolvent before this date.
The scheme came into operation on 1 September 2005 and the benefits have been
improved on a number of occasions since then and are now closer to those payable from
the PPF. The FAS will now top up members benefits so that, overall, they receive 90%
of their expected pension, subject to a maximum overall cap of 32,575 pa, payable
from scheme normal retirement age (but not before age 60), increasing with CPI up to a
maximum of 2.5% pa.
The cap is increased annually in line with inflation, as measured by the CPI, and the
figure of 32,575 pa applies to anyone whose entitlement starts between 1 April 2013
and 31 March 2014.
Chapter 7
Section 1 on eligibility has been updated to allow for the auto-enrolment provisions. In
particular a new paragraph has been added after the first Core Reading paragraph on
page 2, as follows:
Chapter 8
References to the European Court of Justices gender directive have been added on
pages 4 and 5. The directive states that with effect from 21 December 2012 it is not
lawful for insurers to take gender into account when deciding the price of insurance.
The judgment does not apply directly to pension schemes but implies that gender
specific calculations may contravene the European Unions general principles of non-
discrimination.
Chapter 27
Section 2.2 on multi-employer schemes has been updated and the ActEd text in this
section now reads as follows:
The rules governing debt on employer for multi-employer schemes are complicated and
were amended with effect from April 2010 and January 2012. However, in summary
the regulations permit an employer that is ceasing to participate in a multi-employer
scheme to pay less than its share of the statutory debt on employer (Section 75 debt),
provided certain conditions are met. Depending on the regulatory mechanism used, the
debt may not be triggered or may be modified or apportioned to another employer.
TPR has issued guidance on multi-employer schemes and employer departures. This
guidance, which was issued in July 2012, can be viewed on TPRs website at:
http://www.thepensionsregulator.gov.uk/guidance/multi-employer-schemes-and-
employer-departures.aspx
We have updated questions and solutions for the changes in the Core Reading and
ActEd text. There have been changes to the Q&A Bank, and in particular to the X
assignments. Assignments X2 and X4 have been extensively rewritten, and include a
number of new questions.
We only accept the current version of assignments for marking, ie those published for
the sessions leading to the 2014 exams. If you wish to submit your script for marking
but have only an old version, then you can order the current assignments free of charge
if you have purchased the same assignments in the same subject the previous year (ie
sessions leading to the 2013 exams), and have purchased marking for the 2014 session.