Weekly Update May Monday 31th 2021
Profit warnings down but half of DB sponsors remain on life support
Profit warnings from listed companies with defined benefit schemes have dropped by two-thirds in the past six months, but more than half remain in the insolvency “danger zone”, according to figures from EY.
There were 13 profit warnings issued by listed companies with DB schemes in the first three months of 2021, 66 per cent down since the third quarter of 2020 and 41 per cent down since the fourth quarter, the figures showed.
They represent 26 per cent of all UK profit warnings and four per cent of all UK-listed companies with DB schemes.
UK quoted companies issued 50 profit warnings in total during the first quarter of 2021, down 83 per cent from the 301 recorded in the same period last year, which represents the largest year-on-year percentage fall in UK profit warnings on record.
Despite the good news, however, 59 per cent of listed companies with DB schemes remain in the insolvency “danger zone” and are using government support measures.
Pensions Expert reported in April that DB sponsors accounted for 43 per cent of the UK-listed companies that issued three profit warnings and claimed furlough support between March 2020 and March 2021.
EY’s updated figures show that a total of 64 UK-listed companies have issued at least their third profit warning in a 12-month period since March 2020, including 27 companies with DB schemes, though this figure remains unchanged from those reported in April.
RPI change may leave DB schemes at risk of overpaying transfer values
The change to the retail price index means that defined benefit schemes risk overpaying transfer values by 10 per cent if transfer terms are not adjusted, according to calculations by Hymans Robertson.
The government’s response to the RPI reform consultation, published in November, confirmed the long-expected change to RPI that will see it aligned with the consumer price index including housing costs by 2030.
However, the market has yet to reflect this expectation, with no noticeable downwards trend predicted in 2030.
This indicates that investors are currently paying a significant premium to hedge inflation, potentially of around 0.5 per cent a year, the pensions and financial services consultancy stated.
The CPIH runs at a lower rate than the RPI, typically by around 1 percentage point a year.
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, explained that transfer values are often linked to market-implied RPI.
“They do sometimes deduct an ‘inflation risk premium’ from market-implied RPI, but it is rarely as large as 0.5 per cent per annum,” he said.
“If a scheme is currently using market-implied RPI to calculate transfer values, it is arguably overstating the transfer value for RPI-linked liabilities by around 10 per cent.
“We predict that with DB pension scheme increases most commonly linked to RPI, this could have significant implications for future and current pension savers.”
Govt outlines two-page statements for DC pensions
The government has proposed rules which will require providers to send savers simpler pension statements, limited to two pages.
According to draft rules published as part of a consultation yesterday (May 17), the government will make it mandatory for providers to issue simpler statements for certain defined contribution pension schemes used as part of auto-enrolment.
The changes are set to come into effect in April 2022 and while only auto-enrolment savings are being focused on for now, the government said it would look to introduce simplicity across all schemes in future.
Under its proposals, the two-page statement will enable savers to see:
- how much money they have in their pension plan and what has been saved in the statement year;
- how much money they could have when they retire; and
- what they could do to give themselves more money at retirement.
Pensions minister, Guy Opperman said: “It’s clear the status quo is not working, with savers left puzzled by the complex, sprawling, jargon-filled statements commonly used by the pensions industry.
“Simpler statements will set a new standard for how pension companies communicate with their members.
“With more people saving for their retirement than ever before thanks to the success of automatic enrolment, it’s vital they can understand what’s going on with their hard-earned money and actively plan for their future.”
What do we need to set aside for retirement?
It is a question that has confounded people for generations: how much is enough when it comes to saving for retirement?
The unfortunate truth is that no one can know for sure. Our desires and needs in retirement change – as do our incomes during the course of our lifetime. That is before mentioning many of life’s other uncertainties.
The investment industry’s general rule of thumb is to save at least 15 per cent of your pre-tax income each year.
That’s assuming you save for retirement from age 25 to age 67. Together with other factors, this broad rule should help you achieve the same standard of living you enjoyed in your working years when you reach retirement although this is not guaranteed.
The rise in retirement savings could perhaps be attributed to the growing realisation that people can no longer rely on government provision in the form of state pensions to help significantly fund retirement.
However, the constant changing of the rules has undermined investors’ confidence, so much so that some don’t even see the point in trying to save specifically for retirement at all.
Avoiding saving for retirement is not the answer. It creates bigger problems further down the line. But there is also potentially an issue for those that are uncertain as to whether they are saving enough.
Surveys found that where there was an element of uncertainty, people tend to save less – not more. Those investors who describe themselves as undecided as to whether they are saving enough for retirement are only saving 13.9 per cent of their income. That is less than the recommended 15 per cent.
Perhaps one of the most difficult aspects of saving for retirement is making it a priority, and picturing your ‘future self’.
How will the future you want to spend your time? How much money will you want to spend? And where will you want to live?
And if these answers aren’t immediately clear, it’s easy to fall at the first hurdle and simply never think about retirement savings until you really have to – by which time it may be too late. Historically this has been true, with many people failing to make later life a priority.