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All change? Restructuring DB schemesfor employer survival

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WWW.PENSIONS-PMI.ORG.UK PMI NEWS MAY 2017 3

FEATURE ARTICLES08 All Change? Restructuring DB

schemes for employer survival

12 Trouble Overseas

16 The pensions dashboard – we’ve only just begun…

22 How to create habits that build yourfinancial future

28 ‘Above the line’ investment costs

34 Welcome to Money Alive – Pension Freedoms

REGULAR ARTICLES

04 Editorial

05 Notes from PMI House

06 Qualifications

07 Events

11 Expert Insight – Financial Education

15 Investment Insight – Target Retirement Funds

20 Investment Insight – DiversifiedInvestment Opportunities

26 A month in pensions

32 News from the Regions

33 PMI AAP

36 NEST update

37 Regulator update

38 Services directory

44 Appointments

12

+contents

4 PMI NEWS MAY 2017 WWW.PENSIONS-PMI.ORG.UK

Last month’s announcement that CharlesCounsell was to leave the Pensions Regulatormarked the end of an era. Mr Counsell’s brief

was to oversee the initial implementation ofautomatic enrolment - an intricate and demandingproject which was managed brilliantly from start tofinish. Mr Counsell’s efforts were justly rewarded inthis year’s New Year’s honours, which saw himawarded the OBE in recognition for his efforts. Mr Counsell’s task at the regulator has now been

all but completed. Those employers who have yet tostage are now mainly the ‘new born’ employers whocommenced trading after the initial implementationof automatic enrolment had commenced. MrCounsell is now to manage the Money AdviceService (MAS), which after a troubled start, is shortlyto be merged with the Pensions Advisory Service(TPAS) and those parts of the Pension Wise servicecurrently offered by the Citizens’ Advice Bureau. Hisproven organisational skills mark him out as theperfect candidate for the role.

This year sees the completion of a formal review ofautomatic enrolment which will evaluate the successof the project to date and shape future policy forworkplace pension provision as a whole. This willpresent some intriguing challenges and may requiresome bold decisions by the Government.The programme has to date, been more successful

than even its more optimistic supporters hadanticipated. Opt-out rates remain at about 10%.Whilst it would be more helpful to have statisticsconcerning persistency rates as a whole, it is worthnoting that about half of those who have beenautomatically re-enrolled into an employer’s schemehave chosen to remain. This suggests strongly that thepublic has – so far – been persuaded that saving into aworkplace pension scheme is beneficial. This is a useful start for this year’s formal review.

Some aspects of the review will surely bestraightforward. The ban on transfers to and fromNest will inevitably be lifted, as will the overall capon contributions.

However, there are some wider issues which will beharder to resolve. The emergence of the Gig Economyhas seen large numbers of people enter self-employment, which places them outside automaticenrolment. There have been calls for comparable levelsof pension coverage to be extended to the self-employed, but to date there have been no concretesuggestions as to how that might be achieved. Afterthe debacle over Class 4 National Insurancecontributions in this year’s Budget, the Governmentwill need to exercise extreme caution over any planswhich might increase costs to the self-employed.Another elephant occupying an increasingly

cramped room is setting longer-term contributions at arate that will fund a genuinely comfortable retirement.The industry is all too aware that phasing couldthreaten automatic enrolment as members findthemselves required to contribute more than thecurrent statutory minimum of 1% of QualifyingEarnings. However, there is widespread recognitionthat the minimum rates that are to take effect fromApril 2019 are inadequate and that a more realisticrate is likely to be about 15%. How is this to beachieved whilst retaining public support?Whilst Charles Counsell may have completed his

specific task at the Pensions Regulator, there remainsmuch to be done to secure the longer-term future ofautomatic enrolment. Indeed, to quote WinstonChurchill, “this is not the end. It is not even thebeginning of the end. But it is, perhaps, the end ofthe beginning”.

Automatic enrolment - the end of the beginning

[ ]n

editorial

Mr Counsell’s brief was to oversee the initial

implementation of automatic enrolment - an intricate

and demanding project which was managed brilliantly

from start to finish

Tim MiddletonTechnical ConsultantPMI

pmihouse


Follow us @PMIPensionsDiscuss this month’s articlesusing #PMINews

notes from

A farewell to PensionsWorld After 45 years of publication, we are sad toinform our members that Pensions Worldceased publication last month. StephanieHawthorne, who has just completed her28th year as editor at Pensions World, hasbeen an incredible ambassador for pensions,appearing regularly on television and radio,as well as in the nationals.

Her editorials have not only set thetone for the magazine but the industry as awhole, and have led to many awards,including our coveted award for‘outstanding contribution to the pensionsindustry’ presented at our 2015 AnnualDinner. Stephanie now plans to continueher financial writing on a freelance basis,and the PMI wish her the best of luck inthe future.

PMI Fellowship NetworkThe London and Birmingham PMIFellowship Network groups will be meetingon Thursday 25 May and Wednesday 31May to discuss ‘What will a good DCarrangement look like in 2022 from theperspective of all stakeholders?’

The Edinburgh session will now takeplace on Tuesday 23 May to answer theseparate question of ‘How can we makesavings in the workplace sexy?’, lookingspecifically at how to encourage people toplan, and save more money.

If you would like to attend any of thesessions, please contact the MembershipDepartment at [email protected]

APPT membershipAPPT membership is due for renewal bySaturday 1 July. Renewal notices will becirculated to APPT members by email duringthe first week of May. Members are remindedthat they must submit evidence of their 2016continuing professional development (CPD)before renewing their 2017 membership. Allevidence must be submitted to the PMI’sMembership Department.

PMI Trustee Groupmembership renewalsTrustee Group Members were due to renewtheir membership on 1 January 2017.Those members who have not renewed werelapsed on 8 March. If you have been lapsed inerror, contact the Membership Departmentto reinstate your membership.

Trustee Group Members also receive freeattendance at our twice-yearly seminars,which focus on trustee issues. The nextTrustee Seminar will take place on Tuesday6 June at CMS Cameron McKenna, LondonEC4N 6AF. For further details and to bookplease visit our website.

PMI Trustee Group BoardCertificateIf your Board is a member of the PMITrustee Group, and each member hasachieved 15 hours’ CPD, then you are eligiblefor a PMI Certificate of Achievement.Contact the Membership Department forfurther details.

CPDYour completed 2016 CPD reports were due by 31 January 2017 – if you have notcompleted your report, please do so now andsubmit it to the Membership Department.

Fellows and Associates are reminded thatmeeting the PMI’s CPD requirement iscompulsory (except where retired/non-working). Under our CPD Scheme, PMImembers are required to record at least 25hours during the year. Please log on to ourwebsite and update your CPD record.

Members have been notified that thewithdrawal of the designatory initials FPMIand APMI is inevitable for those who do notcomply with the PMI CPD requirements,and who have not submitted any evidence ofCPD for the years 2014 through to 2016.

Associate MembershipAssociate Membership is open to those whohave completed the Advanced Diploma inRetirement Provision qualification. We arepleased to announce that Ruth Dovey andTara Spillings have been elected toAssociate Membership, and are now entitledto use the designatory initials APMI.

FellowshipFellowship is open to Associates with fiveyears’ membership and five years’ loggedCPD.

We are pleased to announce thatJacqueline Brough has been elected toFellowship, and is now entitled to use thedesignatory initials FPMI.


qualificationsPUBLICATION OF APRIL 2017EXAMINATION RESULTSThe marking of the April examination scriptsis now under way, and will continuethroughout the month. Examination resultswill be posted on Monday 19 June.

A copy of the pass list will be available onour website from 9am on Tuesday 20 June.You are reminded that if you are to receiveyour examination results promptly, we must beinformed of any recent change of address.

Anyone who will be away from homewhen the results are posted, and would likethem sent to another address, should contactthe Qualifications Team.

MULTIPLE CHOICEEXAMINATIONS Multiple choice examinations include:n Award in Pension Trusteeship (APT)n Certificate in DC Governance

(DC Gov)n Retirement Provision Certificate (RPC)

The results for the March exam were issued inApril. A copy of the Examiners’ Report can befound on our website. The next public examwill be held on Wednesday 13 Septemberfrom 2.30pm. The closing date for entries isFriday 14 July.

OCTOBER 2017EXAMINATIONSThe timetable for the October 2017 AdvancedDiploma examinations can be found on ourwebsite, where the application form is alsolocated. All candidates entering for theexaminations must be registered as aStudent/Certificate or Diploma Member.

The closing date for receipt of Octoberexamination entries will be Friday 28 July.You are reminded that the Octoberexaminations will be set on the syllabusesdetailed on our website and the current 2017study materials should be used in preparation.

VQ EXAMINATIONSThe results for the March exams will be postedto centres and independent candidates onMonday 8 May. A copy of the exam papersand the examiners’ report will be available onour website.

The next examinations will be held fromMonday 4 – Thursday 7 September. Theclosing date for entries is Friday 30 June.

DIPLOMA IN INTERNATIONALEMPLOYEE BENEFITS 2017If you wish to sit Module One of the Diplomain October you should apply as soon aspossible. The syllabus and study material forthe module are now available.

Full details and forms can be found on ourwebsite. The closing date for the Octoberexamination entries is Friday 28 July.

INTERNATIONAL 1 -FOUNDATION IN EMPLOYEEBENEFITS LECTURE COURSEFOR OCTOBER 2017EXAMINATIONWe are pleased to run this two-day lectureprogramme again, preparing Students for theCore Unit 1B/DipIEB Module 1 examination,to be sat in October. This programme ofpreparation and revision was launched inresponse to the growing demand for face-to-face tuition at the start of the study period, andclose to the exam itself. The course consists of amock examination and feedback throughoutthe study period leading up to the examination,and will take place on Friday 7 July andFriday 8 September in Central London.

For further information, and to downloadthe booking form, visit our website.

ARE YOU LOOKING TOEXPAND YOUR KNOWLEDGEIN TRUSTEESHIP AND GAINFORMAL RECOGNITION?The Award in Pension Trusteeship (APT) is fortrustees, or those interested in trusteeship,based on the Pensions Regulator’s indicativesyllabus. It provides formal recognition of atrustee’s knowledge and understanding (TKU)in line with the requirements of the PensionsAct 2004.

The syllabus covers trusteeship essentialssuch as: Investment and Funding Issues,Scheme Management Issues, and Law andPensions.

There are a number of providers that runtrustee training courses combined with sittingsof the APT examinations, and a full list can befound on our website. We strongly encouragecandidates to attend training sessions, as resultsindicate that those who attend tend to dobetter than those who do not.

For further details contact a member of the Qualifications Team or alternatively visitour website.

FINAL CERTIFICATES OF ACHIEVEMENTSCongratulations to the following VQcandidates who have recently achieved theirfinal certificates. Thank you to the assessors,internal verifiers and centre contacts who havesupported these candidates.

Award in Pensions Essentials Kimberley GrayPeter KilpatrickJennifer MackintoshSharon McGregor

PMI ANNUAL CONFERENCE- last chance to book

Our ‘Annual Conference’ will take placeon Thursday 11 May at CavendishConference Centre, 22 Duchess Mews,London W1G 9DT. Topics include:

n Welcome address and question time withRichard Harrington, Minister forPensions

n Post-Brexit decision making - whatother headwinds may we face in 2017?

n Post Brexit - what laws might need tochange and how will this impact pensionschemes?

n Finding value in an ever-changing worldn PANEL: Blockchain and the potential

impact on pensionsn Meeting the expectations of the 21st

century pension scheme membern 21st century schemes – deciding on the

right scheme design for your membersn PANEL: Understanding the employer

covenantn What makes a good 21st century trustee?

For further details visit our website.

PMI TRUSTEE SEMINAR

Our first Trustee Seminar of 2017 will takeplace on Tuesday 6 June at CMS CameronMcKenna, Cannon Place, 78 Cannon Street,London EC4N 6AF. Topics include:

n Why are valuations controversial?n Setting the scene for DBn Technology and the pensions industryn How scams are developingn Behavioural financen Legal update n Adequacy of DC savings rates

Attendance is free for PMI Trustee Groupmembers but is open to both PMI Membersand non-members to attend at a charge.

For further details and to book see enclosedbooking form.

Hosted by:

INTRODUCTION TO UK PENSIONS

We will be running our next 'Introduction toUK Pensions' seminars on:

n Wednesday 5 July - Leedsn Wednesday 20 September - London

This introductory workshop is designed for those with little or no previous pension’sknowledge. Our expert panel will talkthrough the essentials of the pensions industrytouching on the core areas that professionalsstarting out in the pensions industry need toknow, as well as answer any questions youhave about the industry.

For further details and to book see enclosedbooking form.

Leeds event hosted by:

London event hosted by:

PMI TECHNICAL SEMINAR

We will shortly be taking bookings for ournext technical seminar which will look atClimate change and the implicationsfor trustees and pension schemeadvisers. This seminar is aimed at pensiontrustees and their advisers. The event will:

n explain pension trustees’ legal duty tomanage climate risk

n consider the financial risks associated withclimate change where these risks arematerial to the fund’s performance

n provide direction on how to understandthe scheme’s investments to understandclimate risks within the portfolio

n offer guidance on steps that trustees cantake to limit their liability risk by notfulfilling their duty to measure and manageclimate risk

To register your interest for this event contactthe Events Team at [email protected]

Formal invitations will be circulated later thismonth.


events

CONTACT US

Full details on all our eventscan be found on our website,along with all our bookingforms.

If you would like to speak to one of ourevents team email [email protected] oralternatively call 020 7392 7425.

DIARY DATESn 2 MAY 2017

PMI London Group – Business Meeting

n 4 MAY 2017PMI North East Group – Pub Quiz

n 11 MAY 2017PMI Annual Conference

n 18 MAY 2017PMI North East Group – Annual Dinner

n 6 JUNE 2017PMI Trustee Seminar

n 7 JUNE 2017PMI Midlands Group – Half Day Conference

n 8 JUNE 2017PMI North East Group – Legal Update/Seminar

n 14 JUNE 2017PMI Eastern Group – AGM/Afternoon Seminar

n 4 JULY 2017PMI London Group – AGM/Dinner

n 5 JULY 2017PMI Introduction to UK PensionsSeminar – Leeds

n 20 SEPTEMBER 2017 PMI Introduction to UK PensionsSeminar – London

Regional Groups’ activities shown in italics


All Change?Restructuring DB schemes for employer survivalThe Government's recent Green Paper on Security and Sustainability in Defined Benefit (DB) PensionSchemes ('Green Paper') highlights an important category of DB sponsor:

“For the vast majority of stressed sponsors, business failure would occur regardless of the burden of[DB pension contributions]. But there is a subset of employers where reducing the burdens ofsupporting a DB scheme, potentially coupled with business restructuring, could result in betteroutcomes. We should therefore think very carefully about what can be done to relieve pressure onstressed sponsors and schemes to help to deliver the best possible outcomes”. (para 219, emphasis added)

This article looks at what options are available to employers and trustees at the moment to ensuresurvival, and what areas are being considered in the Green Paper.


The current regime The Government doesn't want a situation whereemployers who could ultimately fund their pensiondeficit are able to walk away from their obligationsto their DB schemes. If this were possible then itwould increase the number of schemes entering thePension Protection Fund (PPF), and members wouldbe worse off as a result of receiving PPF levelbenefits. The current legal framework reflects thisconcern, as it only allows sponsoring employers indistress to be released from their obligations to a DBscheme in very limited circumstances.

The current mechanismThe legal mechanism which is used to implementrestructuring in such a scenario is a regulatedapportionment arrangement (RAA). This enables asponsoring employer to sever its ties with a DBscheme, and for the balance of the debt to beapportioned to another company. Given thesensitivities referred to above, an RAA requires (i) theapproval of the Pensions Regulator, (ii) the PPF not toobject, and importantly, (iii) the trustees to besatisfied that there is a reasonable likelihood of thepension scheme entering a PPF assessment periodwithin the following 12 months. This last pointmeans, broadly, that the trustees must be satisfiedthat it is reasonably likely the sponsoring employerwill suffer an insolvency event in the next 12 months. RAAs are not common. According to the

regulator's 2010 statement “RAAs will continue tobe rare and the regulator and the PPF will not agreeto such arrangements lightly”. Examples of whenthey have been used include Lufthansa/BMI, Uniq,Kodak and Halcrow.

Use of RAAs There are two broad situations where RAAs havebeen used. Firstly, RAAs have been used in situationswhere a potentially profitable company is beingsmothered by its pension obligations, and freeing itfrom those obligations via an RAA means it can besold to a third-party buyer as a viable business. Insuch situations, there will typically be a payment intothe PPF that exceeds the amount that would bereceived by the scheme on insolvency (otherwisethere would be little incentive for the regulator toagree to the RAA) along with the PPF having anequity stake in the future business. The restructuringin Monarch Airlines, which resulted in the pensionscheme being de-coupled from its sponsor and thebusiness being sold to a third party, is an example ofthis type of situation.

Secondly, RAAs have been used as part of amechanism to reduce the level of pension benefitspaid by an employer. In this scenario, a new schemewill be set up to provide benefits which are betterthan PPF benefits, but not as generous as thebenefits under the original scheme. The reduction inbenefits is typically achieved by reducing the pensionincrease and revaluation requirements to the PPFlevel. However, the overall mechanism involving theRAA is complicated. Members must agree to transferfrom the employer's original scheme to the newscheme; those members who don't transfer to thenew scheme will remain in the old one. The RAA isused to release the employer from its obligations tothe old scheme, and instead place the pensionobligations on a newly established company that willimmediately enter insolvency so that the old pensionscheme can enter the PPF. Halcrow is an example ofwhere this mechanism has been used. It is possiblethat this type of mechanism may also be used inrelation to the British Steel Pension Scheme.

Potential changes – the green paperWhile the Government seems to have ruled out anyacross the board changes, it may be willing to makechanges to ease the burden on a more limited sub-setof sponsoring employers and schemes – those whofall into the category of 'stressed'. The Government isconsulting on the Green Paper until Sunday 14 May,so it is not clear at this stage which of the ideasexamined in the Green Paper will be taken forward.

Relax the RAA requirement that insolvencyis expected within 12 months? The Green Paper recognises that the current 12-month test may be too restrictive, and that there area group of employers that are likely to enterinsolvency, but are unable to take advantage of anRAA as they do not meet the 12 month test. Therestrictive nature of the test means that at the pointwhen they meet the test it is too late to rescue valuefrom the business, and that it could be preferable tohave a more relaxed test that enabled a restructuring

Jonathan SharpSenior AssociateBaker McKenzie

While the Government seems to have ruled out any

across the board changes, it may be willing to make

changes to ease the burden on a more limited sub-set

of sponsoring employers and schemes – those who

fall into the category of 'stressed'

t

Sarah HicklingSenior ProfessionalSupport LawyerBaker McKenzie

to occur sooner, which could realise more value forthe scheme and PPF.The next question is what this test would look

like. One option raised to define a stressed employeris to use profit before tax. However, such a narrowtest could be subject to manipulation, and thereforea more case-by-case assessment may be appropriate(similar to how the regulator views RAAs) but with adifferent set of criteria. Given the significantimplications for members of having their benefits cutback from what they were originally promised, theGovernment wants any option for a company to bereleased to be appropriately policed.

Suspension of pension increase andrevaluation requirementsThe Green Paper raises the option of makingpension increases and revaluation conditional on theemployer and scheme having the resources to makethe payments. We set out above the complicatedprocess involving an RAA that needs to be followedto reduce pension increases and revaluationrequirements under the current regime. Introducinga new option that allowed changes to take placewithout the need for a complex mechanisminvolving members transferring to a new schemecertainly merits consideration. However, carefulconsideration would be needed of how such apower would operate. For example, would thetrustees have a role in the process, and what wouldtheir role be? Also, there would need to be a re-starting of contributions (and potentially a catch-upin increases) if the employer's strength or thescheme's funding level improved.

Standardising inflation measuresWhether schemes provide pension increases andrevalue benefits using the Retail Price Index (RPI) orthe Consumer Price Index (CPI) depends on theparticular wording of the scheme rules, and so

something of a lottery applies. The Government floatsthe possibility of introducing a statutory override toenable a switch from RPI to CPI for pension increasesand revaluation. Such an option was considered andrejected by the Government when CPI was firstadopted by it for statutory increases, so it would be achange from its previous position. Again, if such apower was introduced a decision would be neededon who exercised the power, and whether it onlyapplied in certain circumstances.

ConclusionThe options for sponsors to restructure are currentlyvery limited. In deciding whether to make changes tothe current regime the Government will need tobalance carefully the potential prize – more breathingspace for sponsors who are struggling to survive withtheir DB commitments, allowing the emergence ofsustainable businesses and ultimately potentiallygreater value for schemes and the PPF – against themoral hazard risks of employers escaping the promisesthey made to their employees. If the Governmentdecides to introduce more flexibility, for example intothe RAA or indexation and revaluation requirements, it will need to give careful thought to what the scopeand nature of the role of each of the key stakeholders– sponsors, trustees, the regulator and the PPF – willbe in relation to those new requirements.

In deciding whether to make changes to the

current regime the Government will need to

balance carefully the potential prize – against

the moral hazard risks of employers escaping

the promises they made to their employees


KEY MESSAGESn Trustees and employers who are in the'stressed' category, where the employer isstruggling to support the scheme butinsolvency is not necessarily imminent,should be aware of the proposals in theGreen Paper, and the potential for futureoptions to relieve the pressure on theemployer.

n If any changes to the current regime aremade it is likely to take some time for theseto be implemented due to the complexityof the issues. We therefore recommend that employers or trustees who foreseeemployer insolvency as imminent considerthe options within the existing frameworkrather than waiting for the outcome of theGreen Paper.

[ ]n


insightexpert

T he new Lifetime ISA (LISA) was launched inApril for individuals under the age of 40, tobe used for buying a first home or for

retirement. The LISA has had negative press from thepensions industry, as concerns have been raised thatit will compete with workplace pensions, andundermine automatic enrolments success inencouraging people to save.However, I don’t believe this will be the case.

Pensions should, of course, remain an integral partof saving. Yet other choices such as the LISA shouldnot be seen as a threat, as they may actuallyencourage employees to develop a savings habit,which ultimately could benefit pension savings. Afterall, the LISA is a great option for those who want tosave for a deposit on their first home due to theguaranteed bonus.In fact, we recently carried out some calculations1

which found that whilst saving into a LISA can helpemployees to save for a deposit faster than using asavings account, by achieving this earlier they canalso increase the size of their pension pot, as moneycan be diverted to pension savings earlier thanwould have been the case if a LISA had not beenused for a house purchase.The introduction of the LISA has also raised

important questions about how it will operate in theworkplace, and if employers will offer it as part of areward package. Interestingly, our latest research2

found that 42% of employers who responded to ourpoll will provide access to the LISA through theirreward packages.It’s great to see that many employers will provide

the LISA as another savings option for employees.After all, workplace savings are not just aboutpensions, and employers need to think about whatsavings vehicles suit which employee needs,appealing to a broad range of individuals at differentlife stages and with different saving priorities. Forexample, the workplace already supports employeeswith various savings vehicles such as ISAs, shareschemes and pensions, to help them with theirshort, medium and long term savings goals. Suchvariety allows employees to choose a savingsmethod, or a combination of methods, which arethe most appropriate for them at a given point intime, so offering the LISA as part of an overall savingpackage makes sense.

However, it is imperative that employersunderstand the needs of their staff beforeimplementing any savings vehicles. The key is toidentify what an employee’s saving priorities andattitudes to risk are. The various cohorts of theemployee population will differ: younger groups may want to save for a deposit for a house, whereasfor an older group that probably won’t be a priority,but a good pension will be.On the back of this, employers can then start to

build out a benefits provision that will appeal toeach demographic in the workforce.With so many options now available, the

provision of financial education, guidance and advice in the workplace is essential for employees to understand what can be achieved throughworkplace saving.

1 Research by WEALTH at work demonstrated that the

25% guaranteed bonus which comes when saving into

a LISA means that it could actually help employees to

save for their first mortgage deposit much quicker than

if they save into a high street savings account; and that

by achieving this earlier, they are then able to start

saving more into a pension earlier than would otherwise

have been the case.

2 Statistics quoted are from the Lifetime ISA poll carried

out on the WEALTH at work website from August 2016

until March 2017. The poll asked ‘Will you provide

access to the proposed Lifetime ISA through your

reward packages?’ and received 50 responses.

The full research findings are available at

www.wealthatwork.co.uk

FINANCIAL EDUCATION

Jonathan Watts-LayDirectorWEALTH at work

Workplace savings not just about pensions

It’s great to

see that many

employers

will provide

the LISA as

another

savings

option for

employees

[ ]n


I n recent years HM Revenue and Customs(HMRC) has become increasingly vexed by theextent of opportunistic arbitrage involved in

pension transfers overseas. In their eyes – andthose of many in the industry – the statutory right to transfer to a Qualifying RecognisedOverseas Pension Scheme (QROPS) when retiringto live abroad was being abused – for theperceived tax advantages.Conditions to be met were twice tightened, in

2012 and again in 2015, when the list of overseasschemes which had asked to be listed by HMRC asmeeting the requirements to be a QROPS was re-labelled the ROPS list. This increased UK schemeadministrators' concern about the risk of a schemesanction charge should HMRC subsequently decidethe overseas scheme never was a ROPS (let alone aQROPS). Due diligence was difficult, challenging,and costly.

HMRC has now decided to align the taxtreatment of registered pension schemes andoverseas pensions. Draft regulations will scrap the‘70% rule’ (which has required overseas schemesto use at least 70% of funds that have receivedUK tax relief to provide the individual with anincome for life) and amend the pension age testto allow for payments to be made before age 55,where the payment would be an authorisedpayment if paid by a registered pension scheme.Aligning overseas pensions rules with UK

flexible access options in these ways might haveheralded further abuse, had not draftamendments to the 2004 Finance Actsimultaneously extended the scope of HMRC'sreach. UK tax charges are to apply to a paymentby a QROPS to an individual who has beenresident outside the UK for less than 10 tax years:the current look-back period is five tax years.

Trouble Overseas

NOTE: This article is basedon draft legislation in theFinance (No.2) Bill 2016-17and accompanying HMRCguidance, and representsthe position at the time ofwriting (31 March 2017).


This extension will apply to funds transferred on orafter 6 April 2017 only. In a further twist, the draftFinance Bill applies UK tax charges for five yearsafter the transfer – irrespective of where theindividual is actually tax-resident. This disincentive to transfer overseas was

followed by a more dramatic announcement withthe Spring Budget. Where an individual requests atransfer from a registered pension scheme to aQROPS on or after 9 March 2017, a charge toincome tax, referred to as the Overseas TransferCharge (OTC), of 25% of the amount of thetransfer value may apply.Highly prescriptive rules impose a raft of new

obligations upon the member, the QROPSadministrator, and the UK transferring schemeadministrator; this article focuses on the impact onthe UK scheme.There are various exemptions to the new charge.

The OTC does not apply on transfers from aregistered pension scheme to a QROPS where thetransfer was ‘requested’ before the 9 Marchannouncement. In this context, a transfer request ismade only when a member gives a formalinstruction to the scheme administrator to transferfunds to a named overseas pension scheme.Otherwise, transfers to QROPS will be taxable

unless both the individual and the pension are inthe same country, or both are in the EEA, or theQROPS is provided by the individual's employer.Most overseas transfer requests come from

members who are either: a emigrating and wish to take their pension withthem, or

b have no intention of taking up residency abroad,but want to take advantage of perceivedattractions of tax regimes elsewhere: in the EU,particularly in Gibraltar or Malta.

Where the transfer was exempt from the OTC atthe time of transfer (e.g. the member is EEA-resident and the scheme is also in the EEA), butcircumstances change within the ‘relevant period’1

(e.g. if the UK leaves the EU without securingmembership of the EEA), the OTC arises at thattime (the scheme member and scheme managerbeing jointly liable) in relation to the transfer fundremaining after any benefits already taken from that fund.

Conversely, if circumstances change within the‘relevant period’ so that a transfer that waschargeable to the OTC would have not beenchargeable had the new circumstances existed at the time of the transfer, a repayment can beclaimed. Repayment of the OTC can also be claimed where the charge was deducted and paidin error.In certain limited circumstances, a scheme

administrator who did not deduct an OTC wheresuch a charge applied on transfer to a QROPS canapply to HMRC for discharge of liability to the charge.

Information requirementsAs you would expect, as well as complicationaround exceptions and circumstantial reversals, the information required to and from various parties is equally onerous.

Before the transfer is madeWithin 30 days of receiving the individual’sinstruction to transfer the benefits to a QROPS,the scheme must notify the individual that they are required to provide a long list of information on form APSS 263, within 60 days of requesting the transfer be made. This includes writtenconfirmation that the individual is aware:a that a recognised transfer to a QROPS may

give rise to a liability for an OTC, and that theyare aware of the circumstances under whichsuch a liability arises, in which liability isexcluded at the outset and in which liability isexcluded only if conditions continue to be metfor a period of time; and

b that a transfer other than a recognised transfer to a QROPS of funds held for the purposes of, or representing accrued rights under, anarrangement under a registered pension schemegives rise to a liability for an unauthorisedpayments charge, and may give rise to a liabilityfor an unauthorised payments surcharge.

After the transfer is made – information to be provided to the individualWithin 90 days of making the transfer to theQROPS, the scheme administrator of thetransferring scheme must provide the followinginformation to the individual:

Ian NealeDirectorAries Insight

HMRC has

now decided

to align the

tax treatment

of registered

pension

schemes and

overseas

pensions

t

1 The ‘relevant period’runs until the expiry of five full tax years fromthe date of the originaltransfer from theregistered pensionscheme to the QROPS.


a If the OTC applied:n the date of the transfern that the OTC applies to the transfern the amount of the charge on the transfern the amount transferredn whether, or to what extent, the schemeadministrator has accounted for the tax toHMRC, or intends to do so, and

n if the scheme administrator has alreadyaccounted for the tax to HMRC, the date onwhich they did so

b If the OTC did not apply:n the date of the transfern that the transfer is excluded from the OTC, and

n the reason why the transfer is excluded from the OTC

Where the reason why the transfer is excluded iseither because the individual and the QROPS are inthe same country, or that the individual and theQROPS are both in countries within the EEA, thescheme administrator of the transferring schememust also provide the individual with details of:

n the date on which the ‘relevant period’ ends, and

n how the transfer may not be excluded from acharge upon a change of residence or theQROPS changing the country of establishment.

As a transfer to a QROPS is a benefit crystallisationevent, the administrator of the transferring schememust also provide the individual with a statement ofthe percentage of the lifetime allowance that hasbeen used up by the transfer within three months ofthe date of the transfer. Where a lifetime allowancecharge arises as a result of the transfer, the schemeadministrator must also provide information inconnection with that charge. Note that the amountthat is deemed to crystallise for lifetime allowancepurposes is the amount of the transfer value beforethe deduction of any OTC.

After the transfer is made – information to be provided to the QROPSWithin 31 days of making the transfer, theadministrator of the transferring scheme mustprovide a statement containing the followinginformation to the manager of the receiving QROPS:

n whether or not the transferred funds were subjectto the OTC, and

n if the transferred funds were chargeable, theamount of the tax charge, and

n if the transferred funds were not subject to theOTC, the reason why the charge did not arise

After the transfer – provision ofinformation to HMRCWithin 60 days of making a transfer to a QROPS, the scheme administrator of the transferring schememust report the transfer to HMRC using form APSS262. The extra information that the schemeadministrator must provide to HMRC is:a whether or not an OTC arose on the transfer andif the transfer isn't taxable, the reason why it isn'ttaxable, and

b if an OTC did arise on the transfer:n the amount of the transfer before the deductionof the transfer charge (but after the deduction of any lifetime allowance charge paid by thescheme administrator)

n the amount of the tax charge the schemeadministrator has made before making thetransfer, and

n the amount of the transfer actually paid to theoverseas scheme after the charge has beendeducted from the transfer

Three Key Pointsn Registered pension scheme administrators will beobliged to deduct a 25% overseas transfer chargefrom any transfer requested on or after 9 March2017

n Some transfers are excluded from this new taxcharge, i.e. wheren both the individual and the pension are in thesame country; or

n both are in EEA countries; orn the QROPS is provided by the individual'semployer

n Significant additional information requirementsapply between the transferring scheme, themember, the QROPS administrator, and HMRC.

Highly

prescriptive

rules impose a

raft of new

obligations

upon the

member, the

QROPS

administrator,

and the UK

transferring

scheme

administrator;

this article

focuses on the

impact on the

UK scheme

[ ]n


insightinvestment

E ver-increasing investment and regulatorycomplexity has changed the game for definedcontribution (DC) scheme trustees and

governance committees in recent years.Retirement was once a much more straight-

forward affair. The vast majority of people retired theyear they became eligible for their state or definedbenefit (DB) pension and bought an annuity withany savings they had accumulated. That sustained arelatively simple investment approach; membersmore or less glided to a simple mix of corporatebonds and cash.Today, several factors have added new demands

to the process of selecting and managing schemeinvestments. The 2014 Freedom and Choicemeasures multiplied the range of options availablefor members at retirement while an expandinginvestment menu has amplified the demands foranalysing and selecting the right strategies. Inaddition, trustees and independent governancecommittees (IGCs) must now contend with thesignificantly increased governance requirementsintroduced by the Financial Conduct Authority andThe Pensions Regulator.These factors have intensified the need for

investment specialists to be embedded within schemegovernance. Integrating expert analysis - through anindependent investment adviser or a specialist on thetrustee board or IGC - can prove a lengthy process. It also comes at a cost, a further challenge in anenvironment where schemes are juggling tightergovernance budgets and managing the total cost tomembers below the 0.75% charge cap.With demands on trustees growing, alongside the

need to adapt swiftly and efficiently to a shiftinginvestment and regulatory backdrop, agility isessential. And with time and resource commitmentsunder strain, the quest for schemes to work towardsgreater efficiency in monitoring and managingunderlying investments assumes greater urgency.Enabling more schemes to draw upon expert

investment insight, and giving trustees more scopeto dedicate resources to activities like memberengagement to promote strong savings behaviours,is crucial. DC markets in Australia and the US haveevolved to feature models of collective governancethat enhance schemes’ capacity to leverageeconomies of scale for investment oversight. InAustralia, those economies are achieved at scheme

level and in the US at fund level.In the UK, both paths are emerging. At the

scheme level, regulators’ focus on qualitygovernance and value for money is leading somesmaller trust-based schemes to consolidate intomaster trust arrangements. Meanwhile, the vastmajority of small employers have chosen the mastertrust route for automatic enrolment of theiremployees. The combined buying power of poolingwith other schemes enables smaller schemes toaccess top-tier governance and investments at ratesthat would otherwise not be possible. Master trustsnow account for 85% of automatically enrolledmembers and 35% of assets.Target retirement fund solutions are also in the

ascendance - estimated to rise from just 1%currently to 27% of multi-asset allocations by 20251.Investments and asset allocation are managed andmonitored by the asset manager of the funds - aform of inbuilt investment governance that mitigatesthe demands on trustees and plan sponsors. Theflexibility they offer for adapting glide paths tochanges to regulations, the investment environmentand member behaviour substantially reducesadministrative burden.It’s not yet clear whether the UK will continue to

go down both of these paths, favour one over theother or if alternative solutions will emerge. Theinclusion of target retirement solutions within mastertrust arrangements represents an interestingconvergence of the two. What is clear is that theimpetus for change is strong. Ultimately, governancemodels that provide enhanced value alongsideheightened, responsive and expert investmentoversight will play a vital role in generating strongersavings and investment outcomes for members.

MARKETING COMMUNICATION FOR PROFESSIONAL CLIENT USE ONLY.State Street Global Advisors Limited. Authorised and regulated by theFinancial Conduct Authority. Registered in England. Registered No.2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place,Canary Wharf, London, E14 5HJ n Telephone: 020 3395 6000 Facsimile:020 3395 6350 n Web: www.SSGA.com. Investing involves riskincluding the risk of loss of principal. The information provided does notconstitute investment advice as such term is defined under the Marketsin Financial Instruments Directive (2004/39/EC) and it should not be reliedon as such. It should not be considered a solicitation to buy or an offer tosell any investment. It does not take into account any investor's orpotential investor’s particular investment objectives, strategies, tax status,risk appetite or investment horizon. If you require investment advice youshould consult your tax and financial or other professional advisor. Allmaterial has been obtained from sources believed to be reliable. There isno representation or warranty as to the accuracy of the information andState Street shall have no liability for decisions based on suchinformation. © 2017 State Street Global Advisors. All Rights Reserved.DCUK-0442 Exp. date: 11/04/2018

TARGET RETIREMENT FUNDS

Daniel LeutyUK Head of Strategic DC ClientsState Street Global Advisors

With demands

on trustees

growing,

alongside the

need to adapt

swiftly and

efficiently to

a shifting

investment

and regulatory

backdrop,

agility is

essential

[ ]n

Evolving governance for better outcomes

1 Spence Johnson WTW

global pension asset

study 2016


The pensionsdashboard –

we’ve onlyjust begun…When the Government threw its supportbehind the pensions dashboard last year,you’d be forgiven for thinking that we werenearing the end of a very long journey.After all, a little gentle encouragementand some political goodwill should beenough to drive the project to completion,right? Wrong.What we saw last year was only the start

of a very long road, with a few nastyjunctions and traffic jams to come. Thereare some tricky bumps to navigate beforesavers can really benefit from the onlinepensions one-stop-shop of our dreams.


Supporting people to saveThe UK faces considerable challenges when it comesto saving for retirement. It’s safe to say that definedbenefit (DB) schemes are nearly all but extinct, andthat while automatic enrolment has got off to agood start, it is still early days given currentcontribution levels. We change jobs more often, at least 11 times (on

average) at the last count, and have multiple pensionpots. Millions of people are saving the bareminimum through automatic enrolment – and whenthey change employer, they change pension provider(in a lot of cases) too. Part-time workers (especiallythose with multiple jobs) and the self-employed areat serious risk of ending up underpensioned. And, inboth good and bad news, we’re all living longer.In short, at the very time when we need to be

saving more, many of us just aren’t saving enough.The majority of the population need to save more forlater life, and we need to help them do it.We, as an industry, also need to make it easier for

people to engage with their pensions. We need tohelp them become more empowered. We need togive them the right tools to make their right choicesfor them. We need the pensions dashboard.

What is a pensions dashboardanyway?In a nutshell, it’s an online one-stop-shop for pensioninformation. Savers will be able to go online and seeall of their pensions in one place, including the statepension. This will help them at every stage of theirsavings journey.Younger members will be able to keep track of

how much they are saving, giving them theknowledge they need to adjust the amountaccordingly. As members approach retirement, thedashboard will make it easier for them to seekguidance and advice, and to plan for their future.And throughout their journey, savers will

(hopefully) be able to see how much they are beingcharged by individual pension providers. This willfree them to transfer their pots (in a controlled way)to get a better deal. Knowledge is power. Thedashboard has the potential to be a powerful tool.

Challenges lie aheadAs I said a little earlier on, there are some trickybumps in the road that we’ll need to navigate if thedashboard is really going to deliver for savers. For a

start, all pension schemes are going to have toembrace the dashboard if it is going to work. Ideallyby choice, of course, but potentially by compulsion.And data quality will be a big deal too. There are

some pretty big variations across the industry at themoment. Ultimately, the dashboard will succeed orfail based on data quality. It can be the whizziestthing any of us have ever seen from a technologyperspective – but without good data (and without itbeing trusted by the consumer) it could turn out tobe a gigantic white elephant. And we certainly don’tneed another of those to destroy trust in pensions.

Defining the benefitsFor large defined contribution (DC) master trusts likeThe People’s Pension, the dashboard also makesgood business sense.Just think about it in administration terms. This

year, we’ll have to send out 2.5 million annualstatements – the majority by post. Think of thestamps. Think of the trees. Think of the postman.Environmental issues (and postal workers) aside,that’s an expensive process. Clearly the dashboardwouldn’t make a massive difference overnight. But,in time, as people engaged with their pensionsavings more often, we think we’d see some prettybig savings.It might also help us tackle the tricky problem of

pension schemes losing touch with their members.Huge amounts of time multiplied by lots of schemesevery year looking for members, equals a giganticheadache for providers. With engaged memberslogging into a pensions dashboard, we could see lesspeople going astray.I know what you’re thinking – he’s in cloud

cuckoo land. But it’s a start. And if we don’t build it,people definitely won’t come.

Getting everyone on boardFor smaller schemes, especially historic definedbenefit (DB) schemes, the benefits to being part ofthe dashboard might not be as compelling. In somecases, their data might take a lot of work to get it toa common standard.And that’s not something a scheme might be

keen to do if taking part leads to a risk their chargesmight be seen as uncompetitive, or that it mightrender them obsolete.I’m sympathetic to this – but the consumer has to

come first. Which is why I believe it’s so important

Darren PhilpDirector of Policy andMarket EngagementThe People’sPension

There are

some tricky

bumps to

navigate

before savers

can really

benefit from

the online

pensions one-

stop-shop of

our dreams

t


that the dashboard be kept as far away fromcommercial interests as possible.The Treasury is pushing an open and federated

model, so advisers and providers will be able to buildwhizzy tools and solutions to help people make themost of their pensions. It could be a hub ofinnovation. But it needs to be trusted by consumersfirst and foremost if it is going to work.Alongside the various offerings that will no doubt

spring up from providers and advisers, there needs tobe an independent public good dashboard that could– perhaps – be run by the new single public advicebody launching in 2018. There needs to be a placewhere people can go and access the service free atthe point of use. Without any cross-selling of product.This is important because trust is important.

Commercial companies can provide the plumbing –obviously – and can be involved, but the dashboardneeds to operate within a regulated environmentwith a strong member focus. And, importantly, on anot-for-profit basis. It will be full of member data – a potential goldmine of information in lessscrupulous hands – so strong and independentgovernance will be vital.

Collaborating for successThere’s been a lot of publicity about the dashboard –and not all good. There have even been suggestionsthat the providers involved in developing it areessentially buying access to a commercial advantageonce it’s up and running.This is clearly nonsense. The Government has

made it very clear that the industry needs to coverthe cost of the dashboard. That’s what providers aredoing. Yes, there might be administrative savings along way down the line. But it’s no cash cow.It’s good to see so many of the biggest pension

providers engaging with the project. The biggestproviders represent the majority of pension savers, so they need to engage.But smaller providers shouldn’t see a lack of

ability to make a sizeable financial contribution tothe cost of building the dashboard as an obstaclethey can’t afford – their ideas and input are welcometoo. They’ve got to be involved too if the pensionsdashboard is going to work.Some people will probably continue to sling mud

from the sidelines for some time. That won’t help theconsumer. They have to come first here. A dashboard

will change the way we do pensions. As an industrywe owe it to our savers to deliver something that willhelp them achieve their retirement goals.

A week is a long time in pensionsThe challenge for providers is that the world ofpensions is going to change, whether the industrychanges or not; much like any other aspect of lifewhich is so heavily influenced by politics. If we’regoing to ask everyone to save, we need to make it as easy as possible for them.Because the bottom line is this: if people

understand what they need to do to achieve a goodincome in later life and decide not to do so, that’stheir fault. If they don’t understand what they needto do and lose out as a result, the blame lies squarelywith the industry.

ConclusionThe proof of concept has been delivered ontime. Now we, as an industry, just need to make thepensions dashboard work.Yes, it will be a struggle for some schemes to

embrace the dashboard. My money would be onparticipation becoming compulsory for all schemes in the not too distant future. There are significantissues that we need to get right around governance,data quality and identity verification. But there’s areal will in the wider industry to make this happen.We need to get the dashboard right to increase

engagement. This is a chance for us to put people in charge of their own destiny. To help them get the support they need to get the best possibleretirement outcome. And, at the very least, to helpthem know where they stand. To help them plan forlater life. The tool is the pensions dashboard. And the time is now.

KEY MESSAGESn Savers need the pensions dashboard nowmore than ever

n Without quality data, the dashboard won’thelp produce quality outcomes

n Providers large and small are needed tohelp drive innovation and make thedashboard a success for both the industryand savers alike

There needs

to be a place

where

people can

go and

access the

service free

at the point

of use.

Without any

cross-selling

of product

[ ]n

insightinvestment

Death and taxes are inevitable, as the sayinggoes. So too, increasingly, is individualresponsibility for retirement. As

Governments and employers retreat from the fieldon the grounds of cost, so the responsibility forretirement saving and spending passes to individuals.Whether we like it or not, do-it-yourself is the newmantra. Longevity risk, investment risk, inflation risk– it’s the duty of individuals to manage these ontheir own account. We are all actuaries, now.It is a morbid and uncomfortable subject, but our

eventual demise, and especially the timing of it,matters greatly when planning for our later life. Weneed to think about how long we will live inretirement (clue: it is a lot longer than it used to be)and how we fund it. Burying our heads in the sand isno use. Part of being effective actuaries will berecognising the three levers at our disposal: savings,retirement date and standard of living.Typically, we have until now outsourced the

uncertainty surrounding when we will die toactuaries themselves. They use mathematicalmodels, statistical techniques, and time estimates oflife expectancies. They are able to project longevity,investment and inflation risks, on average. Theoverall liabilities can be predicted, the assetsnecessary to meet those liabilities calculated, and theappropriate mix of investment returns sought by thelife insurance company.Our task as individuals, with responsibility for our

own retirement, is infinitely harder. By definition thepooling which defines actuarial science is absent. Weare either dead or alive – there is no average. Sincewe can’t model our longevity, how can we overlay arequired rate of investment return or a sustainableincome withdrawal rate? Judging how long anindividual life will last is art not science. No wonderbeing your own actuary can lead to under-spendingas well as over-spending. The fear of living longerthan we bargained for contributes to thephenomenon of retirement under-consumption.But if being your own actuary is by definition an

uphill struggle – at least in this case the actuaryknows his subject well. Retirement is by definitionindividual – there are so many variables in play,whether in terms of health, dependents, tax,bequests, and the like. Doing it for ourselves (or,ideally, with the help of a financial adviser) opens upthe possibility to better tailor our retirement savings

pot to our own lifetime spending needs and goals.As long as we know what we want from life, that is.

With greater freedom comesgreater responsibility Systems without compulsory insurance-basedretirement provision are not new: in the US,Australia, New Zealand and Hong Kong, forexample, longevity insurance i.e. annuities havenever been popular. Citizens have always had theright to do it themselves.But with rights come responsibilities.As we, individually, take on greater responsibility

for making our retirement income last our lifetime,we need to gain a better understanding of our lifeexpectancy and investment risk, as well as inflation,compounding and sequence of returns risk.A greater overall appreciation of how long we

are living is required. World Health Organisationstatistics put average global life expectancy at 71.4as of 2015; in 1960 the figure was 52.4 years. It isalso a moving target. As medical advances continueapace, your life expectancy is likely to rise furtherfrom the at-birth time series estimate: i.e. you willlive longer than the life expectancy figure assignedto you at birth suggests. Assuming the same growthrate that has applied steadily in the past twohundred years, people born today have a 50%chance of living to 104.These figures are mind-blowing, and should

force a complete rethink of retirement.

Working through the sums Living the 100 year life means rethinking how muchwe save, when we retire and how much we spend inretirement. It also means recognising the need togrow your savings in retirement, as well as drawingan income from them. This means taking oninvestment risk. Not least to protect your incomeagainst inflation.Inflation is a silent assassin. It is not something

most people think about on a daily basis, but isessentially the time decay of money – graduallyeroding the purchasing power of your money. Worsestill, as we all live longer, we give it more time for itsinsidious effect to take hold. See Figure 1.

But time can work in your favour, too. Thepower of compound returns is the eighth wonder ofthe world, as Einstein once said. It demonstrates that

DIVERSIFIED INVESTMENT OPPORTUNITIES

Gregg McClymontHead of RetirementAberdeen AssetManagement

As we,

individually,

take on greater

responsibility

for making

our retirement

income last

our lifetime,

we need to

gain a better

understanding

of our life

expectancy

and investment

risk, as well as

inflation,

compounding

and sequence

of returns risk

We are all actuaries now



[ ]n

time, literally, is money. Someone who savesfrom the ages 21-30 and then stops, ends upwith more money at retirement than someonewho saves for 40 years, but only started savingat 30 (Source: CLSA, assumes 7% per annumgrowth). By a similar token, sharp andunfortunate drops just before or after you startto draw an income from investments can benigh-on impossible to recover from – even whenthe average return is reasonable over the courseof retirement investing – this is known assequence of returns risk. See Figure 2.

Over to you, thenBeing your own actuary sure ain’t easy. But itisn’t impossible either. Save more, work longer,spend less. Invest shrewdly with both eyes onthe risks of longevity, investment and inflation.In certain countries, we can already see a

hybrid model evolving where essential incomeneeds are met via the state pension and otherassets, with discretionary income from drawingdown on still-invested pots of money. This is bothpractical and sensible. So too is the increasingprevalence of older workers in the labour market,and rising state pension ages. In this waygovernments can prescribe and proscribeindividual behaviours; nudge and coerce. We are not totally on our own. But in the end theresponsibility for retirement is ours, increasingly. It is time to unleash that inner actuary.

Important information For professional investors only – not for public distribution.

Investors should be aware that past performance is not a guide to future results. Thevalue of investments, and the income from them, can go down as well as up and yourclients may get back less than the amount invested.

The above marketing document is strictly for information purposes only and should notbe considered as an offer, investment recommendation, or solicitation, to deal in any of theinvestments or funds mentioned herein and does not constitute investment research asdefined under EU Directive 2003/125/EC. Aberdeen Asset Managers Limited (‘Aberdeen’)does not warrant the accuracy, adequacy or completeness of the information and materialscontained in this document and expressly disclaims liability for errors or omissions in suchinformation and materials.

Any research or analysis used in the preparation of this document has been procured byAberdeen for its own use and may have been acted on for its own purpose. The results thusobtained are made available only coincidentally and the information is not guaranteed as toits accuracy. Some of the information in this document may contain projections or otherforward looking statements regarding future events or future financial performance ofcountries, markets or companies. These statements are only predictions and actual events orresults may differ materially.

The reader must make their own assessment of the relevance, accuracy and adequacy ofthe information contained in this document and make such independent investigations, asthey may consider necessary or appropriate for the purpose of such assessment. Any opinionor estimate contained in this document is made on a general basis and is not to be relied onby the reader as advice. Neither Aberdeen nor any of its employees, associated groupcompanies or agents have given any consideration to nor have they or any of them madeany investigation of the investment objectives, financial situation or particular need of thereader, any specific person or group of persons. Accordingly, no warranty whatsoever isgiven and no liability whatsoever is accepted for any loss arising whether directly or indirectlyas a result of the reader, any person or group of persons acting on any information, opinionor estimate contained in this document. Aberdeen reserves the right to make changes andcorrections to any information in this document at any time, without notice.

Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the FinancialConduct Authority in the United Kingdom.

Figure 2.

Figure 1.

Decline in purchasing power over timeWhat will $1,000 today look like tomorrow?

The power of compoundingAccumulated return


In the January 2017 issue of PMI News, I talkedabout ’why we need to teach our children how tobudget, save and invest’. Knowing and

understanding the problem is half the battle. Nowwe know the challenge facing this generation, whatcan we actually do about it?

How can we teach our children to budget, save and invest?Before we begin, we need to reset the context.We need to help people reframe the idea of

saving. From one of sacrifice, to one of long-termreward with extraordinary results. Saving is like amuscle; the more you do it, the stronger yourfinances get. Let’s help our young workers flex theirsaving muscles early.We all need to consider how we can be a

personal trainer to our finances. This means settingregular challenges, where we delay gratification forlong-term gain. We face a daily barrage of doom and gloom over

the future of our financial security. For youngworkers there are challenges; the end of final salarypensions, and the shift onto the individual to ensurethey have an income in retirement. This is a new ageof financial responsibility.The savings ratio for 18-35 year olds is minus

2%1; they are spending more money than they earn.

But what if by the time you reached the age of18, you were financially savvy? What if you had thepower of disciplined saving ingrained in you already?What if you had clear financial goals and a plan toreach them?This sounds beyond the average teenager, or

indeed the average Briton. After all, 16 millionpeople in the UK have savings of less than £1002.I believe it is possible. And it’s within our gift to

make it happen.First of all, we need to start early.By early, I mean from day one. If parents put away

50p for a week, every week from the day their childwas born to when they turned 18, that person wouldenter adulthood with over £7303 in the bank before(in most cases) their working life has even begun. SeeFigure 1.In fact, the earlier you save and invest (in the

period we call ’The Opening’) the more heavy liftingyour money does for you (more on that later).The alternative is the longer you leave it, the

more you have to sacrifice to save and the harderyou have to make your money work as youapproach retirement (’The End Game’).

“Ordinary things consistently done produceextraordinary results” – Keith CunninghamI am currently lobbying the Government to allow

parents to open Lifetime ISAs (LISAs) on behalf oftheir children as soon as they’re born.

How to create habits thatbuild your financial future

Robert GardnerCo-Founderand DirectorRedington


1 https://www.wsj.com/

articles/savings-turn-

negative-for-younger-

generation-1415572405

2 http://www.bbc.co.uk/

news/business-37504449

3 Source: Redington4

http://www.moneysaving

expert.com/savings/

junior-isa

4 http://www.money

savingexpert.com/savings

/junior-isa

5 http://www.bbc.co.uk/

news/business-37798513

Saving is like

a muscle; the

more you do

it, the stronger

your finances

get. Let’s help

our young

workers flex

their saving

muscles early

Figure 1

Open a Children’s bank account where they canearn up to 3.25% tax free. Open a Junior ISA4 andinvest in stocks and shares tax-free. If you set upyour children with a pension, then for every £80 youput in, the Government adds £20. Putting in £2.50a day could set them up with a pension nest egg ofover £60,000 by the age of 215.All of a sudden, their savings are 1,000 times

stronger than the average Briton. And all it took waschoosing the pain of discipline over the pain of regret.Let’s fast forward a few years. We know that

money-saving habits are formed by age seven. Howcan we ensure those habits are ones that will standa child in good stead for the future?We can teach our children how to budget at

nursery. Toddlers enjoy watching Peppa Pig and theDisney movie Frozen. Empower them by giving themtokens for the weekend. If they want to watchPeppa Pig, that’s 1 token; Frozen is 3 tokens, etc.This puts them in control, but limits theirconsumption. You can build on the game byrewarding them with extra tokens for completingchores around the house. All you’re doing is nurturing and reinforcing a

positive habit that will serve them in the future.There’s a fantastic book called The Marshmallow

Test by Walter Mischel that studies the concept ofdelayed gratification. It’s the story about kids whohave a marshmallow placed in front of them and toldthat, if they wait a period of time, they’ll get two.They studied which kids are able to do it and not,

and the key is behaviour. The kids who resisted thetreat used hacks to control themselves. They’d covertheir eyes, turn around, stamp the floor; anything tostop themselves eating the marshmallow. They’ve

tracked those kids for 40 years. Those that wereable to resist are healthier, wealthier and have betterrelationships.This is not about maths. It’s about changing

behaviour. We need to treat this as a healthy habitformation. They say old habits die hard, but saving isone habit that can change how we live.Let’s skip ahead a few more years. What about

once they’re teenagers?Money Matters is an interactive financial

education game developed and delivered byRedSTART and Inspirational Youth. It was designedto teach students key savings principles in a fun,engaging, game-based environment (for more onthe power of games and learning, check out KeirMacdonald’s piece on gamification which can beviewed on the Professional Pensions website).The Money Matters game is used to teach youths

the power of saving and how it can be harnessed. Ithas helped transform young people’s perceptionsaround saving.Perhaps the most powerful lesson to come out of

these sessions is the power of compounding. Would you rather be given £10,000 each day for

30 days…or have 1p doubled every day for 30 days?The immediate answer most people give is the

former; £300,000 sounds like a pretty good deal fora month’s work.Most people don’t realise the power of

compound interest, which, given time anddiscipline, has the power to change the outlook of aperson’s financial future. That 1p doubled every daywill clock in at over £5.3 million in the same amountof time. See Figure 2 t


Figure 2

Albert Einstein put it best when he said:“Compound interest is the eighth wonder of theworld. He who understands it, earns it... he whodoesn’t, pays it”.The wonder of compound interest is that it

transforms your hard-earned savings into more andmore money. Investment returns over long periods oftime do all the hard work for you. See Figure 2 below.Interest can work wonders for savings. Add in the

benefit of tax-free contributions from theGovernment and you have the power to make yourmoney do incredible things.Money Matters and RedSTART also teach ways to

be savvy about how you spend your money. We livein an age where advertisers and marketers are paidfortunes to make us want to buy things; in the USalone, almost $200 billion was spent on adverts in20166. It’s on our phones, billboards, televisions; it’severywhere.Again, back to the pain of discipline versus the

pain of regret. I mentioned in my previous article thatwe love credit cards, in spite of it essentially being a’debt’ card. This makes spending easy. And teenagersare armed with them without sufficient advice toprepare them for the responsibility this brings.Without prior knowledge, and without good

financial habits, the YOLO culture wins, every time.Spending is easy. A prime culprit is the ’Buy One GetOne Free’ deal, designed to entice us into spendingmore than we actually need under the facade thatthey save us money. Recently, the Money AdviceService calculated that, rather than saving money,families were adding more than £1,000 a year totheir supermarket bills because they could notunderstand the deals. Luckily, it doesn’t have to be a one-sided battle.

There are apps that make saving easy, too. Oinky7,a savings app, makes it simple for savings to becomea habit. By automating standing orders into an ISA orinvestment platform, saving suddenly becomeseffortless. To the point when you no longer eventhink about it; it just happens. That’s when you’veformed a habit.And if FinTech isn’t for you, there are more

practical measures. For example, according to theLunch Price Index, the average Briton spends £6 perday on lunch.Saving £4.60 a day for 50 years allows you to

have a living pension (£18K) in retirement. Thechallenge is to break the habit of trips to the localshop and take home-prepared food in instead. Thensave and/or invest the difference. These are simpletricks that will have huge implications down the line.It’s in your hands to control whether thoseimplications are positive or negative.While responsibility is undoubtedly on the

shoulders of the individual, I believe the Governmentis capable of doing more. Across the Atlantic, in theUSA, the Government has opened the 529k;essentially a tax-free Lifetime Savings ISA for kidsgoing to college. I would love to see somethingsimilar in the UK.The power not only to take control of your own

financial future, but also to start the next generationon the path to greater financial security, is entirely atyour disposal. For every credit card ad, there is anOinky. Every day is an opportunity to take a steptowards a better financial future. Wealthy investorsknow this. To work, it requires two things: thecommitment to reinvest your returns, and the magicof time. The ball is in your court.

6 https://www.emarketer

.com/Article/US-

Spending-on-Paid-

Media-Expected-Climb-

51-2016/1013739

7 Robert Gardner is an

Advisor and angel

investor for Oinky

We know that

money-saving

habits are

formed by

age seven.

How can we

ensure those

habits are

ones that

will stand a

child in good

stead for the

future? [ ]n

a month inpensionsLEGAL

Alex LaneAssociateEversheds Sutherland(International) LLP


CONSULTANCY AND ADMINISTRATION

PPF Levy – atypical sponsorsThe Pension Protection Fund (PPF) recently provideddetails on a small subset of pension schemes whoseinherent structure poses difficulties for their levyassessment. The PPF has developed an alternate approachfor schemes caught in this category.

Affected schemes include those with sponsors whodo not produce conventional commercial accounts, orwhose governance or corporate structure does not lenditself to assessing its insolvency risk, or to a conventionalwinding-up process. Examples include regulatory bodiesand organisations which are established through statuteor government action.

The risk for these schemes is that the scores theygenerate do not reflect the reality of their present risk or,in some cases, do not provide a score at all. As a result, a‘short-term’ alternate approach has been developed toplace entities which are established by statute, the Crownor Central Government into Levy Band 1.

The PPF is welcoming views as part of itsconsultation on the third PPF Levy Triennium for 2018-19 – 2020-21 on whether the position of theseemployers should be addressed in the long term, eitherwith the current alternate approach or a new one.

Finance Bill 2017 – impact forpensionsThe first draft of the Finance Bill 2017 was published on20 March 2017, including the measures announced inthe 2016 Autumn Statement and Spring 2017 Budget.

As expected, the Bill has retained the measures toreduce the money purchase annual allowance to £4,000,and to change the taxation of transfers to some overseaspension arrangements. The plan is to introduce a tax

charge of 25% on transfer values to QualifyingRegistered Overseas Pension Schemes (generallyreferred to as QROPS) save where certain limitedexceptions apply. The bill also increases to £500 theexemption on income tax for employer-arrangedpensions advice.

The Bill had its first reading on 14 March 2017, with the second reading date yet to be announced.

Fire Brigades Union confirms age discrimination appealThe Fire Brigades Union has confirmed it has filed anappeal against the Employment Tribunal’s (ET) decisionin Sargeant and others v London Fire and EmergencyPlanning Authority and others.

The Union’s decision was not unexpectedconsidering the difficulty in reconciling the Tribunal’sapproach in another recent age discrimination caseinvolving the Judiciary pension scheme, McCloud andothers v Lord Chancellor and Secretary of State for Justiceand another.

The ET in Sargeant had held that age–relatedtransitional provisions for the Firefighters’ Pension Schemecould be objectively justified on the basis of social policywhen the aim was to protect those closest to retirement,and take account of their legitimate expectation of nosignificant change to their pension benefits.

The ETs in both Sargeant and McCloud reachedradically different conclusions on similar questions ontransitional provisions and objective justification. TheGovernment is also seeking an appeal in McCloud, andit will be interesting to see the Employment AppealTribunal’s decision for both cases.

Most transfers of safeguarded benefits (typically DBbenefits such as final salary or CARE benefits) are toarrangements that provide flexible benefits. Since 6 April2015, transfers of this type can generally only take placeif the member has received appropriate independentadvice (AIA).

AIA can only be given by an authorisedindependent adviser who is regulated by the FinancialConduct Authority (FCA) and is specifically authorisedto provide advice on the conversion or transfer ofpension benefits. However, the FCA in their recentguidance on ‘Advising on pension transfers – ourexpectations’ have expressed concerns about the advicethat is being given by certain regulated advisers, which

has meant that trustees must continue to be vigilantwhen performing their due-diligence checks beforeagreeing a transfer.

If a regulated adviser gives AIA they must provide awritten declaration to the trustees or administrator of thetransferring scheme confirming the following points:n that advice has been provided which is specific to the

type of transaction proposed by the member orsurvivor

n that the adviser has permission under Part 4A of theFinancial Services and Markets Act 2000, or resultingfrom any other provision of that Act, to carry on theregulated activity in article 53E of the RegulatedActivities Order

Richard WyattSenior AssociateMercer

Transfers and appropriate independent advice


Richard AkroydSenior ConsultantWillis Towers Watson

ACTUARIAL AND INVESTMENT

The Department for Work and Pensions (DWP) hasasked in its paper ‘Security and Sustainability in DefinedBenefit Pension Schemes’ whether ‘the Government[should] … allow schemes to move to a different[inflation] index, provided that protection againstinflation is maintained’.

The Retail Price Index (RPI) has traditionally beenused to uplift pensions in most UK pension schemes – itwas the ‘official’ measure, and for many years the onlyrecognised measure of general UK price inflation.

However, life moves on and it is no longer seen as areliable measure of inflation. The Consumer Price Index(CPI) has taken over as the ‘official’ measure of inflation(and this may also not be a fair measure, but that is aseparate article). Whether a scheme’s members arereceiving increases based on RPI or CPI will nowdepend on their scheme rules, and how they interactwith pension legislation. The Green Paper invites adiscussion on whether schemes should have moreflexibility in this regard.

RPI or CPI indexation – why is it important?

CPI and RPI are calculated differently, with CPI expected to be around 1%lower than RPI each year. While not a lot over one year, it becomessignificant over the lifetime of a pensioner and of a pension scheme, with amove to CPI often reducing the value of a scheme’s liabilities by 10% ormore. It is no surprise that this has led many trustees and employers to lookclosely at how their own rules work.

Some schemes have moved to providing increases on a CPI basis. Thiscould be because their rules require increases in line with legislation or, forexample in the case of John Lewis, because increases are discretionary forservice before April 1997, allowing flexibility to choose an appropriate basis.In other cases, such as Arcadia, the scheme rules allowed the trustee andsponsor to choose an alternative inflation measure. However, others havebeen unsuccessful in making a switch due to how their rules wereformulated, for example the High Court ruled out a proposal that theBarnardo’s pension scheme should move to CPI, as RPI is still beingpublished. The recent Thales judgement appears to reject a move to CPI, onthe grounds that the changes to RPI have not been sufficiently material; thejudge also rejected the argument that, as the purpose of pension increases is

to protect against inflation, the ‘right’ measure of inflation should be usedeven if this differs from what is documented in a scheme’s rules.

So it appears that we will continue to have the current complexity (somemight say lottery) of RPI and CPI increases unless the DWP does bring inamending legislation, which it decided not to do when it originally movedthe ‘official’ inflation measure from an RPI to a CPI basis.

Any change to legislation which permits but does not require trustees tomove to CPI will be a difficult decision for trustees, who will be caught in themiddle of conflicting arguments. On the one hand they might be able toimprove the funding level of the scheme substantially, which will improvethe security of members’ benefits and provide some relief for plan sponsorsfrom ever-increasing deficits; on the other hand, members will expect toreceive RPI increases in future years, and pensioners and unions are likely toargue for the status quo. Trustees may need to make difficult decisions onthe sustainability of their sponsor, and possibly in the future whether torevert to RPI if the funding positions improve.

The DWP’s next steps are something to keep a keen eye on over the nextfew months.

COMMENTS

n the firm reference number of the company orbusiness in which the adviser works for the purposesof authorisation from the FCA to carry on theregulated activity in article 53E of the RegulatedActivities Order

n the member's or survivor’s namen the name of the scheme in which the member has

safeguarded benefits to which the advice given applies

If one or more of the five confirmations are missing, thedeclaration is deficient and does not comply with thelaw. Therefore, the declaration must be checked toconfirm that it contains all of the confirmations. If thedeclaration is not received within three months from the

date the guaranteed transfer statement was issued to themember, the member loses their statutory right to takethe transfer value.

Trustees and administrators must also check theadviser’s permissions on the FCA register, which confirmif the adviser can advise on pension transfers and pensionopt-outs, and if the FCA has imposed any conditions orexemptions on the adviser.

All of this highlights the importance of carrying outthese checks as part of the due diligence that trustees andadministrators must perform before agreeing to anytransfer.


‘Above the line’investment costs


For many many years the investment communityhas been getting on with its complex day job,often well, sometimes less well, but largely

subject to only scant scrutiny by pension schemes.Trustees can generally understand the concept ofreturn, even if they are less in tune with risk, liquidityand duration. Equally, trustees can generallyunderstand that stuff happens which affects thevalue or the income streams derived from theirinvestments, but are less in tune with economicrelationships and the complex interaction between,say, a Fed rate hike and the unemployment numbersin Japan. Fair enough, lay trustees are not experts,and even professional trustees are rarely trainedeconomists. We all have a limit on our bandwidth. The Financial Conduct Authority (FCA) realises

this and has, as a result, been trying to help inrespect of one area where perhaps not enoughattention has been paid in the past: costs. TheirAsset Management Market Study and transactioncosts disclosure consultation both wade into theissue – aiming to make investment services moreefficient, and so to improve returns.

Ready, steady, chargeInvestment costs are multi-faceted and complex. Thisarticle focuses on one area of cost: the most visiblearea – the ‘above the line’ costs. The line in this article is drawn at the point where

the unit price is calculated. When a consumer buys into a pooled investment

fund they do not become the direct proportionalbeneficial owner of the assets that sit within thatfund. Instead they become the owner of ‘units’.They own a slice of a cake, not the ingredientswithin it, making managing a pooled investmentmuch easier. The unit price will vary to reflect,amongst other things, the changes in value of theunderlying investments, but not the money investedinto or paid out of the fund. I’ve simplified as it’svery complex and usually involves a team of people.Investment costs can be deducted above or below

this line – i.e. before or after the unit price iscalculated. As a rule of thumb (although by nomeans a hard rule) costs below the line are

investment operation costs, for example custodyfees and transaction taxes, while those above theline are the investment manager’s fees – although toadd more confusion, the manager may use some of‘their’ fees to pay below the line costs.

AMC clearlyThe most commonly known and used cost ofinvestment is the annual management charge(AMC). It is strictly speaking a below the line costbecause it is taken before the unit price is calculated,but sometimes that’s not entirely clear as investmentreturns (which can be measured as the differencebetween unit prices over a given time period) can bequoted before or after the AMC has been deducted.AMCs have been around for as long as assets

have been managed by third parties and, as aconsequence, despite perhaps common perception,are an intangible, almost organic, concept. There isno common definition of an AMC, and twomanagers can calculate their AMCs in completelydifferent ways, and include different elements withinit. Nor is AMC a universal term. A host of otherthree-letter acronyms are used to describe the sameconcept, if not the same detail. Then there is onefinal complexity: despite being an ANNUALmanagement charge, they are not applied annually.The AMC is calculated on a pro rata basis at thesame time as the unit price. For example, a fundwith daily unit prices will have a daily AMC of1/365th of the annual percentage. AMCs are applied throughout the time that the

asset manager holds the funds. However, otherabove the line costs can be incurred on investment,on disinvestment or, like the AMC, along the way,but on a regular or irregular basis

Some collector’s itemsContribution or allocation charges (not to beconfused with bid to offer spreads which are belowthe line and designed to cover the dealing costs ofinvestment or disinvestment) are rare in pureinvestment agreements, and looked as if they wereheading for the history books until the DC chargecap regulations (Regs) breathed new life into them.

Richard ButcherManaging DirectorPTL

Investment

costs are multi-

faceted and

complex. This

article focuses

on one area of

cost: the most

visible area –

the ‘above the

line’ costs


Under the Regs the charge cap can be constructedin a number of ways – one way being to use acombination of a lower than otherwise AMC and acontribution charge. However, these days they arefairly simple: a fixed percentage is deducted fromeach £1 of contribution paid. The Regs limit thecharge to no more than 2.5% in qualifying schemes(that is to say, schemes used for or as an alternativeto automatic enrolment). One historic curiosity with these that may still be

found in older, mainly insured contracts was the‘Positive Contribution Charge’. A provider might, forexample, allocate 105% of the contributionsreceived into the scheme, although what they werereally doing was deploying some smoke and mirrorsto ramp up the AMC (105% allocated to funds witha nominal 1% AMC were actually paying 105% x1% = 1.05%).Another model allowed by the charge cap Regs

for qualifying schemes is the flat fee charge. Again,this is fairly straightforward. In return for a lowerAMC the provider charges an additional flat fee of £x(limited to £25 pa). This charge is applied whether ornot contributions are being paid.

Complexity on complexityBut it doesn’t stop there. Next, and at the oppositeend of the time horizon to contribution charges, areexit charges. These were also very common in thepast, where a percentage of any money taken out ofthe policy is deducted. In insured schemes thischarge wasn’t normally taken if the member wasretiring at their normal retirement date. The FCAlimited exit charges on DC pension products lastyear, and the current maximum exit charge is 1%. The manager may also have licence to charge

other ad hoc fees where, say, an additional service isrequested which is not priced into the standardagreement. Care needs to be taken with this assometimes, particularly in the past, they could bereally quite aggressive. For example, some managers

would charge extra for a valuation of the assets theymanaged for their client – that is to say, theycharged to tell you what they were investing foryou. So where an additional bill comes in (or chargeis deducted) check it against the contract to makesure it is permitted, that they’re not accidentallycharging you for an inclusive service, and that theamount is correct. You’ll have gathered by now that the universe of

above the line charges is complex in scope andoperation. Their saving grace, however, is that theyshould all be shown in the contract somewhere –although not necessarily explicitly. While charges likethe AMC will be explicit, others, like ad hoc fees,may not be. In answer to this complexity, the FCA has

proposed that asset managers (although notqualifying schemes) should only apply all-in fees.This could, certainly, make life easier for theconsumer if it happens (and there is push-back). In the meantime, the best advice for consumers is to be vigilant.

You’ll have

gathered by

now that the

universe of

above the line

charges is

complex in

scope and

operation

[ ]n


regionsnews from the

LONDON REGIONPMI London Annual General MeetingDate: Tuesday 4 JulyTime: 6.00pmLocation: Mayer Brown, 201Bishopsgate, London EC2M 3AF

The Committee of the PMI London Groupis delighted to confirm the date for the2017 Annual General Meeting. Manythanks to Mayer Brown for once againhosting this event

As is traditional, after the shortbusiness of the meeting, we will bereceiving a talk from an industry expert.Vivi Friedgut, CEO and founder ofBlackbullion an innovative andcompletely independent educationcompany working with schools,universities and innovative companies tohelp make educating people aboutmoney. Vivi is also the author of MoneySmarter, a family guide aimed at helpingparents to get their children smarterabout money. We are delighted that Vivican join us and full information will beprovided nearer the time.

As usual at the AGM we will also beratifying any new appointments to thecommittee and any necessary notices forelection will be issued in advance.Invitations to the AGM will be issued tomembers in May but please put the datein your diary.

PMI London Group DinnerDate: Tuesday 4 JulyTime: 7.30pmLocation: Rocket Restaurant,Bishopsgate, London EC2M 3AB

Following the AGM, the London Group willbe arranging a dinner at the nearby Rocketrestaurant. Full details of the event andcosts will be issued shortly, however, wehope that a number of attendees at theAGM will be able to join us, so pleasemake a note in your diaries and awaitfurther information.

MIDLANDS REGIONThe Midlands Region’s annual Half-DayConference, sponsored by Gateley Plc, will take place on Wednesday 7 June attheStudio, Birmingham. Booking forms will be sent out shortly. Be sure to secureyourself a space as soon as possible, as this event is very popular.

The first free evening seminar of 2017was held on 25 April at the offices ofEversheds Sutherland. Geik Drever, theDirector of Pensions at West MidlandsPension Fund, and Gary Delderfield, Partnerat Eversheds Sutherland, gave apresentation on the latest developments inPensions Investment Pooling. Thanks to allinvolved for making the event a success.

NORTH-EAST REGIONOur Annual Dinner will be held onThursday 18 May at The Queens Hotel. We will be joined by a speaker from theYorkshire Air Ambulance.

Our next seminar will be a ‘LegalUpdate’ and will be held on Thursday 8June at the offices of Eversheds.

Full details of these and other eventswill be advertised via email. Please contactJane Briggs at [email protected] you would like to be included on theemail distribution list. Further details of our2017 schedule have been added to ourregional page on the PMI’s website.

EASTERN REGIONOur next event will be our AGM seminaron Wednesday 14 June at the beautifulvenue of Wherstead Park, Ipswich,sponsored by Ensors. This will start at 5pmwith a networking tea, followed by theshort AGM at 5.45pm, and then hopefullya talk by Sir Steve Webb. This bringsEnsors’ four years’ sponsorship of our AGMseminars to an end. We are very gratefulfor the support they have given, and areseeking a new sponsor for this event. Ifyou wish to be added to our distributionlist contact Susan Eldridge [email protected].

We are still seeking additionalcommittee members to spread the loadand ensure the future of the Group. So ifyou value the CPD provided and would liketo help us keep it going, please contact aCommittee member.


pmi accredited adviser programme

[ ]n

FCA updateFinancial Conduct Authority (FCA) publications whichmay be of relevance to members include:

n 10 March 2017 – the FCA publishes an update topension redress methodology. The FCA announcedproposals for updating the methodology used tocalculate the redress owed to consumers who weregiven unsuitable advice to transfer out of a definedbenefit (DB) pension scheme

n 7 March 2017 - one year since the implementationof the Senior Managers and Certification Regime(SMCR), a range of policy changes have beenintroduced by the FCA and the Prudential RegulationAuthority (PRA) to increase individual accountabilitywithin the banking sector.

Further details can be found on the FCA’s website.

Review of the FCA’s appropriatequalification examination standards:CP16/24In September 2016 the FCA opened a consultation onproposals to update the existing appropriate examinationstandards (AES) for appropriate qualifications listed in theTraining and Competence (TC) sourcebook. Theconsultation closed on 13 December 2016. Theconsultation response and policy statement is due in Q2 of2017. We understand that the FCA plans to publish therevised standards in a format very close to that whichappeared in the consultation document. Further details canbe found on the FCA’s website.

Regulatory mattersWe have received some queries about the scope ofregulation in the following areas and we would welcomeany feedback from PMI AAP members working in thisarea and/or those familiar with the issues:

1) advising members wanting to transfer safeguardedbenefits

2) assisting an employer with selecting a default fund orfunds for a workplace pension scheme

3) assisting an employer in explaining how a workplacepension scheme operates to newly eligible employeesand current members in a staff meeting

4) assisting the employer in complying with the automaticenrolment rules and regulations

5) recommending a workplace pension provider to anemployer.

Please send any feedback you have to Neil Scott [email protected]

Code of Professional ConductPMI AAP members are reminded that as members of thePMI they must adhere to the PMI Code of ProfessionalConduct. For further details visit our website.

Money Alive websiteWe would like to draw your attention to the followingwebsite which was launched in February. It is a usefuleducation tool for pension scheme members. See P.34 for further details or alternatively visitwww.moneyalive.co.uk

Diploma in Regulated Retirement AdvicePMI’s fully RDR compliant qualification the Diploma inRegulated Retirement Advice (DRRA) comprises twounits covering the entire syllabus. As well as being fullyRDR compliant it is also an appropriate qualification forthe regulated activity ‘acting as a pension transferspecialist’. The study manuals for each unit can also bepurchased for reference purposes.

It is possible to obtain copies of the study manuals forthis qualification and a single user licence that covers bothstudy manuals in a PDF version. The cost is £400. Forfurther information please contact Neil Scott oralternatively visit our website for further details.

SPS RenewalsWe have been renewing SPSs in recent months and anumber of queries have arisen that we can clarify below:1. The fee for SPS renewal only applies to Affiliate

Members2. We will issue an SPS in the week before the old SPS

expires or on receipt of all necessary application forms(declarations) and fees (if any) – whichever is sooner

3. The declaration only requires details of the total hoursstructured and unstructured CPD completed and therecording system used. It is not necessary to provide fullevidence of CPD activity at this stage. However, anitemised list of CPD activity will be very helpful

Queries regarding renewals can be addressed to theMembership Department at [email protected] or on 020 7392 7410.

PMI AAP FeesThe fees for 2016-17 are as follows: there is a fee of £45for Affiliate Members to renew an SPS. There is no renewalfee for Student Members, Trustee Group Members,Certificate Members, Diploma Members, Associates orFellows. Membership subscription fees will depend onmembership grade, and will be required when they fall due.For Affiliate Members the subscription fee is £75.


Welcome toMoney Alive– Pension Freedoms

Money Alive is the UK’s first video-centric financialservices website that aims to engage, educateand empower consumers to make better financial

decisions. It takes people on an impartial educationaljourney, featuring a series of PMI-accredited videos, createdto help them make better pension freedom choices.We launched Money Alive for people who are

increasingly having to take personal responsibility forimportant financial decisions, but who are often turned off from what can be perceived as a dry, daunting, evenscary subject – for example those overwhelmed by thevast amounts of text contained in the ironically named‘wake-up packs’.


EngagementVideo now represents 70% of all consumer internettraffic, and this is forecast to grow to 82% by 2020(Source: Cisco VNI Forecast and Methodology, 2015-2020). When we drafted the scripts for our filmsand animations we were influenced bycontemporary research about engagement withpensions, and how people learn. We also had directinput from Professor Rosalind Searle – a psychologyacademic from the University of Coventry BusinessSchool. Consequently, you’ll find that our videojourneys are broken down into bitesize chunks, andare filmed using different styles, locations andscenery. Our script-writing mantra is “never say thisis complicated” instead say “this is worth puttingtime into”. In fact, we start the video journey byreminding users how long they may have spent inthe workplace building up their pension pots, andthat by comparison an hour or two spent thinkingabout retirement options is an hour or two wellspent. Website accessibility has also been a keyconsideration during the build.

EducationOur scripts were written by Mark Thewlis – one ofMoney Alive’s four founding directors. Mark is a CII-accredited trainer, and a man who has spent muchof his career teaching advisers and industryprofessionals how to pass their pension exams. Westart the journey with a motivational piece, followedby a summary of options which leads into guides onall the main options. These then go on to casestudies and topic animations which give moreinformation on topics relating to that particularoption. For example, following the guide toguaranteed income there are animations on subjectsincluding inflation, tax and shopping around.

EmpowermentFormer Lord Chancellor Sir Francis Bacon is oftencredited with the saying “Knowledge is power” andwe have a more recent Chancellor, George Osborne,to thank for pension freedoms. Pension freedomsinspired Money Alive’s inception, because we saw aneed to improve the process of empoweringconsumers, through having better knowledge, tomake better decisions and thus enjoy a betterretirement. Once empowered the site hasstraightforward ‘next steps’ video, and a number ofoptions for people to go and find out more (throughuseful website links) or get advice, or perhaps buy anannuity. This gives the whole site a joined-up feel,and on completion users know where to go next.

White labelling and analyticsA white-labelled version of Money Alive can belicensed and tailored to the specific requirementsof organisations, for example employers orpension schemes, who wish to communicate withtheir employees and members about their DCretirement choices.The technology behind the website has been

built to be flexible, it can accommodate bespokemedia, offer different journeys and can also beconfigured to produce analytics – effectively givingan audit trail of individuals’ activity/engagementwith the site and its content. This has far-reachingapplications, for example where an organisation hasa need to demonstrate that their user group has hadparticular information, and perhaps the opportunityto seek help. The analytics are both passive (whereindividual user activity is reported through a masterdashboard) but can also be positive – for exampleusers can be asked questions such as “Can youconfirm you have watched and understood thisvideo?”. If questions are used the answer candetermine the individual’s next steps on the site (forexample clicking ‘Yes’ can bring up the next video,clicking ‘No’ can offer the opportunity to watchagain, or to get help from a source determined bythe site licensee).

Your own next stepsOnce a user has completed their educationaljourney, where they go next can also be determinedby the licensee – for example, a preferred adviser orannuity broker.

Revolutionising employee/member engagementMoney Alive has been designed to be a cost-effective way of helping people make betterfinancial decisions. It is available 24/7, can beaccessed as often as a user likes, works equally wellacross all devices, and includes a ‘Save my progressfeature’ to help people navigate their journey. Wethank Sir Francis Bacon and George Osborne fortheir inspiration.

Ian BeestinMarketing DirectorMoney Alive

KEY MESSAGESn Engages, educates and empowers consumersn Educational content accredited by the PMIn Available 24/7 and works equally well across all devicesn Designed to integrate with and complement existing solutionsn Can accommodate bespoke median Detailed analytics to help understand audience engagement and forbetter risk management

[ ]n


MIND THE GENDER GAP updateNEST

MANAGING RISK IN AN UNCERTAIN WORLD

A s New York University's Peter Carr said ofprice volatility, 'It is only a good measure ofrisk if you feel that being rich then being

poor is the same as being poor then rich.’ Sometimes,the order in which things happen is important. That’swhy, while trying to manage risk in an uncertain world,pension scheme trustees can’t rely on any one measurebut need a range of ways of thinking about risk.Volatility is one of the main issues at stake in

determining risk adjusted returns. It measures thelikely variability in the returns (both positive andnegative) of a particular asset or portfolio of assets. Ifone asset or portfolio offers a better return for thesame level of volatility, or less volatility for the samereturn, then it is clearly more attractive. Portfolioswhich offer the best returns for a given level ofvolatility or the least volatility for a given level ofreturn are ‘efficient’ portfolios.No one likes uncertainty, but this matters because

excessive volatility erodes the value of returns. If youstart with £100, lose 50% and then make 50% back,you’re still down £25. More volatile assets should giveyou extra returns because they’re riskier and riskshould be rewarded. But what you tend to find overtime is that returns from volatile assets probably aren’tas great as they should be because of this ‘volatilitydrag’. This has played out in equity markets, wherelow volatility stocks tend to outperform high volatilitystocks. In recent years this has probably beenexacerbated by a significant amount of moneyflowing into low volatility ‘smart beta’ tracker funds. Also important is sequencing risk, or path

dependency. This essentially refers to the order inwhich you get your returns, which can have a bigimpact on final outcomes, particularly if you’re makingcontributions along the way. Self-evidently, if apayment into your pension fund happens to coincidewith a peak in a market, you’ll be buying in at the topprice. If markets then fall, your money has to workharder to get a higher return than the original priceyou bought in at. Volatility drag will compound thatfact, and these effects build up over time. Path dependency is also a factor when determining

how much risk might be appropriate at differenttimes. For example, most lifestyled pension funds willswitch members’ money out of riskier assets into lessvolatile – and therefore lower growth - assets a certainnumber of years before a member is due to retire. Thisis to consolidate any gains made and avoid significant

losses just before the member is most likely to needthe money. However, if this switch happensmechanistically regardless of the actual performanceof that pot, members may well find that they’ve gonefrom being rich to being poor, with no opportunity toget rich again. That’s why at NEST we take a moredynamic approach to this process. If markets havebeen good and members nearing the end of thegrowth phase have done well, we’ll potentially startmoving their pots across into the consolidation phasesooner. If on the other hand they’ve not experiencedquite as much growth as we might like and risk assetslook undervalued, we may consider keeping their potsin more growth-seeking assets for longer, to maximisetheir chances of building them up. Another factor in achieving good risk adjusted

returns is diversification. You don’t want to be overlydependent on a small set of risk premia, or the returnsyou make for taking risk. Equities for example provideone type of risk premia, whereas illiquid assets such asproperty or infrastructure provide another. The trick isto find different asset classes that aren’t highlycorrelated and so provide truly different opportunities.The problem with relying on one type of risk premiacould be demonstrated by my experience of investingin Japan. I spent twenty years investing in Japaneseequities including the early 90s where the Nikkeihalved in value. Virtually every year after that, theconsensus thought quite reasonably that the markethad hit rock bottom and had to go up. Thirty yearslater, the Nikkei is at almost exactly the same place(and has been significantly lower). If you were adomestic investor and had a heavy home equities bias,as often happens, you would have struggled to makeany money at all over the last thirty years. As fiduciaries, we can’t predict the exact

circumstances our members’ contributions willexperience. But we can help smooth the path byspreading our members’ money across a diverse rangeof investments and taking a sensible amount of risk atdifferent times in their savings career. That’s the routeto good long term risk adjusted returns.

Mark FawcettChief InvestmentOfficerNEST

While trying

to manage

risk in an

uncertain

world,

pension

scheme

trustees can’t

rely on any

one measure

but need a

range of

ways of

thinking

about risk

[ ]n


t

updateregulator

SETTING AND MONITORING INVESTMENT STRATEGIES

Good

investment

governance is

essential to

all pension

schemes,

indeed to any

institutional

investor, and

we expect

them all to

adhere to

those

common

principles

A s part of our strategy to produce simplerguidance for occupational pension schemes,we have published new investment

guidance for trustees.The guidance follows the common principles set

out in our defined contribution (DC) investmentguidance, together with some specific considerationsrelevant to defined benefit (DB) schemes.It includes examples of approaches and factors to

consider when investing scheme assets to funddefined benefits. We expect trustees to have suitablydocumented investment arrangements that areappropriate for their scheme’s circumstances,including their level of complexity.Good investment governance is essential to all

pension schemes, indeed to any institutional investor,and we expect them all to adhere to those commonprinciples.The investment strategy is one of the most

important drivers of a scheme’s ability to meet theobjective of paying the promised benefits as they falldue, and we expect trustees to set this in the contextof their integrated risk management approach.It’s important to set clear investment objectives for

your scheme, and to identify how and when theyshould be achieved. Our guidance states that trusteesshould focus on areas that have the most impact formeeting their scheme’s objectives, and identify thenecessary skills for the board of trustees of theirscheme. It also provides some practical guidance onhow to get the best from their advisers.A good investment strategy is likely to:

n involve effective governance, delegation andmonitoring

n form part of an integrated risk managementprocess

n be consistent with the scheme’s objectives andany long-term plans

n have an overall amount of risk consistent with riskappetite

n involve risk-taking that is understood andbalanced

n allow for the scheme’s future cash flow andliquidity requirements

As well as setting an investment strategy, it isimportant for trustees to consider how their strategyis to be implemented. This includes consideringoperational risks, security of scheme assets, assettransitions and liquidity and collateral management.The new guidance emphasises the importance of

focused, timely monitoring, and outlines how trusteesmay find it helpful to put together an investmentmonitoring dashboard. This can provide an at-a-glance financial position of how a scheme is meetingits objectives, and highlight potential risks and issues.

Transparency on penalties andclarity on professional trusteesAs part of our 21st century trustee initiative, we haveclarified our expectations by publishing a reviseddescription of a professional trustee for consultation.Our initiative seeks to raise standards of

governance and administration to protect memberbenefits by being clearer about what it expectstrustees to do, and being swifter to take action wherestandards are not met.In response to our discussion paper and

conversations with the industry, trustees asked us tobe clear about which trustees would be held tohigher standards, and how that applied to the finesthat may be levied on them.The consultation on our draft monetary penalties

policy started on 23 March, and will last for six weeks.By consulting on our monetary penalties policy we

are inviting views on our approach to applying fineson trustees and other scheme managers, but we arealso sending a clear message that we are gettingtougher on poor governance.The consultation invites comments on our revised

description of professional trustees. Previous responsesto our 21st century trustee discussion paper includedcomments regarding the definition of a professionaltrustee, and requests for further clarification.Professional trustees have a higher duty of care to

members, and we will be looking at how this higherstandard can be made clearer. We consider aprofessional trustee to include any person, whether ornot incorporated, who:n acts as a trustee of the scheme in the course of

the business of being a trusteen or is an expert, or holds themselves out as an

expert, in trustee matters generally

We are leading an open and extensive debate onstandards of trusteeship, and the consultation is animportant part of the package we are developing,that will continue to clarify our expectations oftrustees, when we will act and where standardsshould improve. We will announce further parts ofthe package and future plans in the coming weeks. [ ]n


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