The changes to pension regulations which allow those who are not in a defined benefit (DB) schemes to withdraw as much as they like from their pension pot, as opposed to purchasing an annuity, has received extensive coverage.
A less well-publicised change in the pension landscape is the revised methodology for calculating the Pension Protection Fund Levy (PPF Levy ) for companies that have introduced asset back funding partnerships (ABFP) as a means to reduced deficits in their defined benefit schemes.
Asset Backed Funding Partnerships
ABFP’s involve the securitisation of an asset, to create a regular income stream over a specified period of time. The trustees invest in the ABFP which becomes a pension scheme asset. Subject to certain exceptions, not more than 5% of the current market value of scheme assets may be invested in Employer Related Investments (ERI) at any time. To get round the ERI constraints the assets are held within a Scottish Limited Partnership (SLP) which is a separate legal entity from its partners and therefore does not constitute self-investment.
The business assets which have been used in ABFP’s include property, inventories, and receivables and intangible assets, such as brands. Intangible assets are often not on the company’s balance sheet, as they have been organically created by the company over many years. The employer contributes the asset to the SLP, which then “rents” it back to the employer for ongoing use within its business for a fee. These fees provide a profit stream to the SLP from which a profit distribution is paid to the pension scheme.In the event of default the Trustees will exercise “step in” rights which enable them to realise the asset.
The investment in the SLP is normally valued within the pension scheme accounts as the discounted value of the future cash flows to be received from the SLP.The value of the investment in the SLP reduces the pension scheme deficit and effectively enables the employer to make payments to reduce the schemes deficit over a longer time frame than would otherwise be required by the Pensions Regulator, thereby releasing funds to be used within the business.
ABFP’s have provided a valuable tool for companies facing growing pension deficits which have resulted from the increase in pension liabilities on the back of low interest rates and bond yields, and increased life expectancy. An additional benefit of ABFP’s is that that they reduce the annual Pension Protection Fund (PPF) Levy.
The Pensions Regulator has accepted ABFP’s as long as they are valued robustly following specific rules that meet the guidance criteria. However, the PPF has changed the rules under which employers can claim a reduction for investments in ABFP’s for the calculation of the PPF levy with effect from March 31st 2015. The new rules are more onerous for scheme trustees and will in most cases result in an increase in the PPF levy, which is paid by the employer.
The PPF levy comprises two components – the scheme based levy (SBL) which is paid by all DB schemes based on their total pension liabilities and – the risk based levy (RBL) which is paid by DB schemes which have a deficit. The RBL is based on the net pension liabilities which would be assumed by the PPF in the event that the employer becomes insolvent. The RBL also takes into account the specific risk of the employer becoming insolvent based on a scoring system developed by Experian.
The Pensions Regulator has categorised ABFP’s as Asset Backed Contribution (ABC) arrangements.The PPF have advised that since the assets used in ABC arrangements are typically used in an employer’s business it is inappropriate to consider the “going concern” value of the ABC arrangement, when the employer has itself suffered an insolvency event. The PPF consider that the investment is in an ABC arrangement is inherently more risky than other plan assets in an insolvency context. Consequently, the PPF have advised that the value of the investment in the SLP in the schemes accounts must initially be deducted from plan assets for the purpose of calculating the RBL.
To get credit for the ABC arrangement, the Trust must certify its value under the assumption that the employer has suffered an insolvency event. The Trustees must obtain an annual valuation from a qualified valuer to determine the likely value that would be realised by the Trustees when the secured asset is sold subsequent to the employer becoming insolvent.
Valuers must assess not only insolvency scenarios such as administration or receivership where the assets are kept in good condition and the business may be sold as a going concern, but also scenarios such as liquidation where a fundamental business breakdown means that assets are realised at greatly reduced prices, particularly intangible assets such as brands.
Valuers must consider whether the secured asset can be realistically separated from the rest of the company’s assets and still realise significant value, as well as consider the practical issues for the Trustee to realise the secured asset, whilst a receiver, administrator or liquidator is disposing of the remaining business assets. This may be a significant issue when the secured assets are brands or specialised real estate. Where the secured assets are assumed to be inseparable and therefore sold with the remaining business assets to a single purchaser, the valuer must consider how the realisable value would be allocated.
The PPF expect the valuer to consider the likely dividend payable to unsecured creditors on insolvency, which means that the valuer must assess the realisable value of the remaining business assets and the amount of secured and unsecured creditors.
The PPF also require the valuer to probability weigh the type of insolvency event the company is likely to enter, given the nature of the business, the assets and liabilities of the company at the time of the valuation and the charges secured against the company’s assets as well as the impact of being part of a wider group if this is the case.
The valuer also has a strong duty of care to the PPF and they have to acknowledge that the PPF will be relying upon their valuation to reduce the company’s annual levy to the fund.
Does this make sense?
In our opinion, yes. The purpose of the RBL is reflect the risk of a DB scheme entering the PPF in the event that that an employer has become insolvent. The scale of the net liabilities that would become the responsibility of the PPF must be determined. It is both fair and reasonable that the value attributed to an ABC arrangement for the purposes of calculating the RBL can be realised in practice.
This is especially true when we are considering an insolvency event where administrators and liquidators will be in charge of the company’s assets with an obligation to realise the best value outcome for secured and unsecured creditors, but the trustees have the right to step in and sell the secured assets from under the insolvency practitioner’s nose. Can they work together; is it in both parties’ best interests to do so and why?And if not, what would be the consequences?
It is in the interests of the tax payer that these schemes and arrangements are real and genuine and truly reduce risk.
Stuart Whitwell is Joint Managing Director at Intangible Business
Pandemic risks eclipse treasury priorities as businesses diversify investments to mitigate impact
The Covid-19 pandemic has shunted aside existing challenges to sit atop treasurers’ priority lists, according to “The resilient treasury: Optimising strategy in the face of covid-19”, a survey run by the Economist Intelligence Unit (EIU) and sponsored by Deutsche Bank.
The results show that treasurers are looking to diversify their investments in a bid to mitigate the pandemic impacts, including heightened liquidity, foreign-exchange and interest-rate risk. As many as 55% plan to increase investments in long-term instruments, with 48% increasing investments in bank deposits, another 48% in local investment products, and 47% in money-market funds.
“The Covid-19 pandemic has drastically altered business plans in 2020. It has placed a certain level of strain on treasury processes, but the challenge it presents has been managed by traditional treasury skills. It is clear that pandemic risk will be on the treasury checklist for years to come, but it is one of many risks the department faces and will continue to manage,” says Melanie Noronha, the EIU editor of the report.
Despite Covid-19 looming large, other challenges wait in the wings. Notably, the replacement of the London Interbank Offered Rate was identified by 38% of respondents as the main challenge of their function.
Technology, meanwhile, continues to be a pressing issue, with treasury teams becoming increasingly reliant on IT solutions. Here, data quality is rising up the list of concerns. Already highlighted as very or somewhat concerning in 2019 by 69% of respondents, the figure rose to 78% in 2020. Acquiring the necessary skill sets to realise the full benefits of this data and technology is also a continuing priority – with some progress registered from last year. In 2020, 30% of respondents say they have all the skills they need to manage technological change, up from 22% in 2018.
“Treasury’s focus on technology is not only helping teams operate more efficiently in a remote-working environment, it has long played – and continues to play – a key role in realising their long-term priorities,” notes Ole Matthiessen, Head of Cash Management, Corporate Bank, Deutsche Bank. The survey shows that
Release 1 | 2 managing relationships with banks and suppliers (highlighted by 32% of respondents) and collaborating with other functions of the business (also 32%) remain top of the agenda – and seamless digital systems will help give treasurers the bandwidth and insight to be more effective partners for both internal and external stakeholders.
Based on a global survey of 300 treasury executives, conducted between April and May, the survey explores stakeholders’ attitudes among corporate treasurers towards the drivers of strategic change in the treasury function – from the pandemic through to regulation and technology – and their priorities for the next five years.
Digital collaboration: Shaping the Future of Finance
By Ryan Lester, Senior Director of Customer Experience Technologies at LogMeIn
With heightened economic uncertainty and increased customer expectation becoming the norm in the banking industry, it is understandable that the sector is struggling to keep afloat. Due to its precarious nature, banking institutions are trying their best to ensure they remain relevant in the competitive landscape and guarantee that their customers continue to be a priority.
When it comes to the first half of this year, the pandemic has shown how easy it is for industries to fail. Customers and companies alike had to get used to the new normal, as physical locations started to close. The banking industry felt this first hand, as banks were made to restructure how their business ran, with restricted opening hours and a wider push to motivate people to use online banking.
While some had already embraced digital options prior to the pandemic, this proved to be a stark contrast to the elderly population, who frequently visited branches to access their finances. Moving forward, banks have to adopt new methods to ensure customers get the most out of our their accounts, without their experience suffering.
Heightened Customer Expectations
When the pandemic reached its peak, people were encouraged to use online banking, as telephone contact was under strain with long waiting times and pressure mounting on contact centre agents. According to Fidelity National Information Services (FIS), which works with 50 of the world’s largest banks, there was a 200% jump in new mobile banking registrations in early April, while mobile banking traffic rose 85%.
With branches remaining closed, customers were continuously being urged to limit the amount of calls they made to the most urgent cases and consider whether they could solve their answers through mobile online banking or checking the company website. Although already being adopted in pockets of the industry, this was a real catalyst that spurred banks to up their game on digital channels and with self-service tools.
Banks are challenged with precariously balancing customer needs with the cost of personalised support. With the demographic of customers changing over the last few years, customers are becoming increasingly younger and more comfortable with technology. Influenced by the “Amazon Effect”, their expectations have raised to an all-time high, placing record strain on the sector
Customer experience isn’t just about support anymore, it’s about serving your customer at every point in the journey. Companies have an opportunity to elevate the experience they provide by moving beyond one-and-done interactions to create continuous engagements with their customers. It is starting to become a primary competitive differentiator in the market and one that doesn’t have a lot of variation. Deploying AI chatbot technology will be able to strategically help banks improve customer experience and raise the level of support that agents provide.
Digital collaboration: Working around the Clock
The benefits of adopting digital channels and self-service tools are second to none. By implementing chatbots, fuelled by conversational AI, banks will be able to help serve a wide range of customer queries and ensure they are protected from fraud and scams.
Conversational AI is exactly what it sounds like: a computer programme that engages in a conversation with a human. When it comes to service delivery, conversational AI can be deployed across multiple channels to engage with customers in ways that effectively address evolving customer needs. At a time defined by COVID-19, self-service tools such a conversational chatbots can work around the clock to solve customer queries in a concise and timely way. Of course, self-service tools won’t completely replace human agents in the banking industry, but they will help companies re-distribute customer traffic and workflows in ways that enhance customer experience. Self-service tools fuelled by conversational AI can also improve employee experience because service employees can handle fewer, but higher-level service tasks that chatbots might escalate to them.
Adopting new tools to help facilitate consistent and concise answers and help maintain customer experience is on the forefront of many industry minds. Banks such as the Natwest Group have seen this first-hand and are testament to the benefits that a good digital experience can provide. Simon Johnson, Capability Consultant, Digital at NatWest Group highlights NatWest’s use of digital tools during lockdown, “Over the last few months, we’ve learnt how to use digital tools to help our employees remotely. From a banking perspective, there have been a lot of changes including base rates, waive fees and the best ways of contacting our vulnerable customers, ensuring we keep them protected from frauds and scams.
“By introducing our Bold360 chatbot interface, Ella, we’ve been able to get relevant information out quickly, apply the best practice and ensure that our customer journeys are being developed correctly. Due to the volume of questions, some of our customers were finding themselves waiting longer than usual. So digital channels become essential to helping reduce the wait time. Using Bold360, we were able to mitigate issues and answer questions in a more timely way through our chatbot.
“Moving forward, as we open more digital services, we are analysing our data to see if customer will return back to their usual way of banking, now that they’ve seen what a good digital experience can provide. Either way, with Ella, we are ready.”
Chatbots and Humans: The Best Option for Customer Service
Over the last year, banking institutions have recognised the power that digital collaboration can have to their success. Delivering exceptional customer service and support is key for any business wanting to stay competitive in today’s market and banks are especially challenged with precariously balancing customer needs with the cost of personalised support. Leveraging the right technology, such as AI-powered chatbots, will enable the banking industry to provide better support and a more robust customer experience in the long term. Other institutions must follow suit, or risk becoming obsolete.
A sleeping digital giant wakes? 4 key trends accelerating payments transformation in the US
By Lauren Jones, International Payments Ambassador, Icon Solutions
The US payments industry is undoubtedly ripe for change. Before the unprecedented shock of COVID-19, digitization and payments transformation initiatives had been organic, piecemeal and predominately the preserve of the largest banks.
Now, increasing pressure means that financial institutions of all sizes are working to define a digital strategy to unlock new opportunities, drive business value, and stay competitive. But beyond the immediate impact of COVID, what underlying trends are accelerating digitization in the US?
- Real-time payments – the stimulus for change
Real-time payments have been met with a degree of caution by US financial institutions. Risking traditional profit generators in return for potential revenues down the line is a gamble many have not been willing to take. But immediate payments are coming to the US whether banks like it or not.
Major payments infrastructure providers, including NACHA and The Clearing House (TCH), have moved to encourage immediate payment adoption in recent years. But the Fed, frustrated with a slow rate of progress, has announced that it is pressing ahead with the implementation of its FedNow system (despite significant industry objection). Although the Fed’s true intentions are open to interpretation and this may just be a play to accelerate private initiatives, it is a clear signal that they mean business.
This means holdouts risk their own ‘Kodak’ moment if they miss the huge opportunities in front of them by fixating on traditional revenue streams. Banks are in a position to support innovation across entire industries such as healthcare, which could be released from the constraints of paper-based bureaucracy and slow, expensive transactions.
Another opportunity that can be unlocked via instant payments is ISO 20022 (used in the TCH RTP system). It is the future of payments messaging standards and can greatly enhance various payments processes through increased data-carrying capabilities. More importantly given the current climate, citizens reliant on federal or state support can benefit from RTPs combined with additional data to immediately access emergency funds.
- The kids are growing up
The US is getting older. Consumers who were 10 when the iPhone first launched are now 23. This means we are seeing a ramp-up of digitally native Gen Z consumers (roughly those born between 1995 and 2010) accessing banking services.
Demographics are an inexact science and not perfect predictors (there are technophobe college students and 100-year-old Instagram influencers), but we can detect noticeable trends.
Younger customers don’t usually choose a bank because there is an ATM in their neighbourhood, a slightly better interest rate or an advert in the newspaper. Rather, a strong digital presence, personalised tools, rewards and experiences, and the trusted recommendations of friends and family, will have a more significant impact on customer acquisition.
Banks must look at the effect this will have on their longer-term digitalization strategy and be able to segment what this emerging customer base might want and how they will interact in years to come.
- Checkmate? Evolving corporate requirements
Corporate treasurers are people and their experience of seamless, immediate payments in their personal lives shapes expectations in the workplace. Although check usage for business-to-business (B2B) transactions is still the norm in the US and barriers remain, corporates are increasingly demanding the ability to transact in a real-time, omnichannel environment, 24×7.
The benefits are clear. Corporate treasurers stand to enjoy enhanced liquidity management and transparency, greater control over payments and enhanced data for reconciliation purposes. And for consumers, alternative digital payment options such as buy now pay later promote choice and flexibility.
- Increasing competition
A significant consequence of emerging consumer and business demand for digital offerings is the increase in competition from fintechs, technology giants and other third-parties. Traditionally, incumbent banks have enjoyed the advantage of consumer trust to offset more limited innovation. But as consumers become more comfortable entrusting their financial transactions to non-banks, banks must differentiate and digitize to remain competitive.
Data is where the technology giants excel, and their ability to personalise experiences and emotionally connect with their users is unprecedented. Banks need to learn from the positive aspects of this model to better understand their users and deliver meaningful, useful products and services.
For data to become the cornerstone of a banks’ customer relationship and take services to the next level, breaking the channel silos and extracting value from a comprehensive dataset will be decisive. But with only 18% of banks reporting that they are in the process of shifting from a transactional revenue model to a data-driven revenue model, this work has some way to go.
Taking customer propositions to the next level
Customers now expect services that work for them, not their banks. All banks, no matter the footprint, need to move quickly to offer a broad digital service platform that adds value to both the customer and the bank.
By defining a robust payments transformation strategy, banks of all sizes can remain fiercely competitive by rapidly lowering costs, unlocking revenues and promoting innovation
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