The leading pensions magazine www.pensionsage.com July 2016 Employee benefits Are workplace pensions still a valued benefit for employees? Intergenerational fairness: Does the current pensions system negatively impact younger generations? Global investment trends: e various pension fund investment trends occuring throughout the major pension markets The Brexit aftermath and the fallout for pensions Charities’ pensions The LGPS-charity problem and the ramifications of this for charities Target-date funds TDFs are the default fund in the US, but will they ever catch on in the UK? How does the UK pensions system stack up against its global comparators? UK versus the world
Transcript
T h e l e a d i n g p e n s i o n s m a g a z i n e
www.pensionsage.com July 2016
Employee benefi tsAre workplace pensions still a valued benefi t for employees?
Intergenerational fairness: Does the current pensions system negatively impact younger generations?
Global investment trends: � e various pension fund investment trends occuring throughout the major pension markets
The Brexit aftermath and the fallout for pensions
Charities’ pensionsThe LGPS-charity problem and the ramifi cations of this for charities
Target-date fundsTDFs are the default fund in the US, but will they ever catch on in the UK?
How does the UK pensions system stack up against its global comparators?
UK versus the world
01_paJuly16-cover.indd 1 18/07/2016 10:50:43
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Just when you thought you had gotten used to the pensions industry being lobbed with constant changes in recent years, along comes a curveball so severe it reminds you that whenever you think you’ve seen it all, there will always be something capable of knocking you o� your feet. ‘Humbling’ is the most positive way to describe it, I suppose.
I am, of course, talking about Brexit, the generation-de� ning event ending a 43-year membership in the European Union. Following a frankly nasty campaign in the run up to the election, with divisions, lies and negativity the
weapons of choice, the result came in at 52 per cent voting to leave, 48 per cent wishing to remain.
Coincidentally, the referendum was on the same date as our sister title’s European Pensions 2016 awards, which celebrated the achievements of those within the European pensions industry over the past year. Never had the idea of the UK and Europe separating felt so distant.
� e enjoyment of the night before made the morning a� er – bleary eyed and feeling decidedly worse for wear – all the more shocking.
Maybe I was too dismissive, or simply naïve, but I never seriously contemplated that the Leave campaign would win. Yet I certainly was not alone with this oversight. Leave advocates seemed as surprised as the remainers when the results trickled in, including those spearheading the campaign. An early consequence of Brexit was squabbling between the government and the Leave camp as to who should have prepared an action plan in the event of a Brexit vote, something neither of which had appeared to think necessary.
� e � nancial markets had not factored in this result either. � e shock was expressed with stockmarkets, in the UK and beyond, su� ering sudden declines and the pound dropping to a 31-year low.
Pensions were among the � rst casualties of the UK’s decision to leave the EU. De� cits climbed to a record £935 billion, liabilities reached £2.3 trillion and the value of annuities dropped ‘like a stone’.
Looking beyond the � nances, the result has created uncertainty as to which EU legislations a� ecting UK pension schemes will remain. � is has le� pension schemes frozen as to whether to keep chipping away at GMP equalisation, for instance.
Pension schemes can be forgiven for being in a quandary. � e sector has been warned that it will be in for a ‘rough ride’
following Brexit, yet it has been advised not to take any knee-jerk action over this as so much is still uncertain.
Currently I’m feeling decidedly uncon� dent about our leaders actually being capable to lead us out of this uncertainty. Especially as UK politics has lately been more dramatic than your average soap opera, with the � nancial markets akin to the overnight ratings of the show. It is di� cult for pension schemes to do much more than watch in wonderment at the spectacle occurring.
However, turning this soap opera into a dystopian thriller are the societal wounds opened up by the EU referendum. � e a� ermath of the result has exposed splits between the UK nations, between town and country, and between the young and old.
However, while Brexit may have revealed divisions, both real and imaginary, there is no reason why di� erences generally should be disliked or feared.
Pensions industries globally compare the di� erences between regions, pensions structures and even di� erent departments within pensions to improve their services – the government drew inspiration from Australia when creating pensions freedoms for example.
� is issue of Pensions Age explores those wider horizons. � e di� erent trends happening in pensions systems across the globe, and the overseas products that may meet the needs of UK schemes. How the pensions industry works with other sectors, such as helping to fund care. And the role of pensions within society, such as how to manage intergenerational fairness and adapt its o� erings to an ageing workforce.
� e aim of this issue is to help pension schemes step back and take a look at the bigger picture. � is could be a useful task for everyone in the wake of the referendum fallout. Di� erences will need to be discussed, respected and ultimately put in the context of the wider aim – to now ensure the best Brexit outcome for the country.
But no matter what form the UK’s relationship with the EU takes once negotiations complete, UK pension schemes will still continue to work with, in� uence and learn from their partners, both in Europe and beyond.
Helping your members navigate the new world of retirement savings!
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Pensions Age magazine, and its content in all and any media are part of Perspective Publishing Limited. All Perspective Publishing Limited’s content is designed for professionals and to be used as a professional information source. We accept no liability for decisions of any nature, including financial, that are made as a result of information we supply.
The UK versus
the world
Setting the trend 46 Lynn Strongin Dodds examines the various pension fund investment trends occurring globally
USA style 48Target-date funds are popular in the US but have yet to catch on in the UK. However, following pensions freedoms, will TDFs become the solution of choice for people to invest ‘to and through’ retirement? Laura Blows finds out
40Co
ver
fea
tur
e
Generational warfare? 54With an ageing population and the ‘grey vote’, which has seen increasing amounts spent on pensions whilst those of working age have experienced cuts, the issue of intergenerational fairness has never been more important. Natalie Tuck explores what can be done to create equity between the generations
Pensions still on a pedestal? 58Nowadays employers have a wide variety of employee benefits to offer to staff. With this in mind, David Adams asks whether a workplace pension still has value as a staff recruitment/retention tool
Passing the buck 60Adam Cadle outlines the LGPS-charity problem and the ramifications of this on charities’ future
Joining together: Pensions and care 62Gill Wadsworth explores how the pensions industry can help individuals fund long-term care needs in old age
In the race to build a pensions system fit for the modern world, how does the UK stack up against its global comparators?
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NEW circulation fi gures Pensions Age now has its new circulation fi gure from the Audit Bureau of Circulations (ABC). Th is is our BEST EVER circulation audit, and we would like to thank all our readers for their support. Th e average circulation July ’14 to June ’15 comes in at 15,579 print copies, near double most of our competitors. Th is is 100% requested and/or copies sent as a member benefi t (NAPF, PMI, SPC, AMNT). (source: ABC, see www.abc.org.uk). Pensions Age is also sent as a Tablet Edition to our 24,000+ online subscribers (source: Publishers Statement September ’15).
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Rising interest rates: Be careful what you wish for 23Stuart Lingard explains why higher interest rates may not be as benefi cial as it fi rst appears for pension funds
Opportunity in the aftershock 25Percival Stanion reveals that aft er the Brexit shockwave lies opportunity for pension fund investors
Elevate, delegate and declutter 27Susan Hoare explains why it is important to create the time for strategic planning
Exchange-traded funds focus: New horizons 29Ashley Fagan explains how pension fund investors use ETFs for a growing range of applications across asset classes, while Sandra Haurant comments on the changing shape of the ETF industry and how these investment vehicles are becoming more commonplace in pension funds’ strategies
Pensions Age Northern Conference: Ahead of the game 35Th e inaugural Pensions Age Northern Conference, held in Leeds, welcomed speakers from varied backgrounds, providing delegates with the knowledge they need to stay ahead of the game
Playing by the rules 38Following the EU referendum, there are concerns over which EU regulations will still apply in the UK. However, Brexit is (at least) two years away and UK pensions are not only aff ected by EU rules. Pensions Age provides a run-through of the international directives concerning UK pensions
The UK versus the world 40In the race to build a pensions system fi t for the modern world, how does the UK stack up against its global comparators?
Beyond Brexit: Britain, Europe and the PensionWealth of Nations 44Th e World Pensions Council’s M. Nicolas J. Firzli warns the UK to tread slowly following Brexit, as one-nation Tories will try to get a ‘better deal’ fi rst
Setting the trend 46Lynn Strongin Dodds examines the various pension fund investment trends occurring globally
USA style 48Target-date funds are popular in the US but have yet to catch on in the UK. However, following pensions freedoms, will TDFs become the solution of choice for people to invest ‘to and through’ retirement? Laura Blows fi nds out
Draw down under 50A pick and mix retirement product being created by super funds in Australia would appear to off er tailored and sophisticated outcomes for retirees. David Rowley reports
An image overhaul 53Th e pensions sector has long debated how to make itself more enticing to savers. But it can be hard to see what changes need to be made for yourself. Th erefore Pensions Age asks marketing experts what the pensions industry can do to rebrand and enhance its reputation
Generational warfare? 54With an ageing population and the ‘grey vote’, which has seen increasing amounts spent on pensions whilst those of working age have experienced cuts, the issue of intergenerational fairness has never been more important. Natalie Tuck explores what can be done to create equity between the generations
Staying strong 56Adam Cadle talks to Weetabix Group Pension Scheme chair of trustees Ian Forrest about the recent successes within its retirement plans and what the future holds
Pensions still on a pedestal? 58Nowadays employers have a wide variety of employee benefi ts to off er to staff . With this in mind, David Adams asks whether a workplace pension still has value as a staff recruitment/retention tool
Passing the buck 60Adam Cadle outlines the LGPS-charity problem and the ramifi cations of this on charities’ future
Joining together: Pensions and care 62Gill Wadsworth explores how the pensions industry can help individuals fund long-term care needs in old age
Work/life balance 64Th e ILC’s Dave Eaton explores the impact of a longer working life on retirement saving
A brief history of pensions 65It’s said that ‘the past is like another country, they do things diff erently there’. With this in mind, Laura Blows speaks to the Pensions Archive Trust (PAT) chairman Alan Herbert about why there is a need for the PAT and what can be learnt from past pensions events
has expressed an interest in using the NAPF Pensions
Infrastructure Platform as a means of incorporating
infrastructure into its retirement date fund portfolio.
12 September The government announces
that the privatisation of Royal Mail through a
stock market flotation is to happen within weeks.
Employees at Royal Mail will be given 10 per cent
of the shares with the rest being offered to retail and
institutional investors.
13 September A ‘virtual’ aggregation of pension
pots combined with a central clearing house and
database has the potential to achieve far more
than current government proposals of pot follows
member, Centre for Policy Studies research fellow
Michael Johnson argues.
14 September Consultancy charging for
automatic enrolment schemes becomes illegal.
The law affects defined contribution schemes
qualifying for auto-enrolment, and prevents
employers receiving advice under
agreements with third parties - other than
trustees, providers, or scheme managers
- and paying for that advice out of the
members’ pension pots or contributions
16 September The Pensions Institute
publishes a final set of 16 ‘good practice’ principles for
modelling defined contribution pension plans. In a
report entitled Good Practice Principles in Modelling
Defined Contribution Pension Plans, the institute
lists a number of areas, including modelling member
characteristics and longevity risk, which aim to help
pension providers design better DC pension plans.
17 September Legal & General announces it has
achieved pension scheme membership of 99.5 per
cent of eligible employees after completing automatic
enrolment staging this year. Just 11 employees, or 5
per cent, opted out, resulting in the almost universal
uptake.
17 September New research reveals getting ready
for automatic enrolment will cost UK businesses
as much as £15.4bn. A Centre for Economic and
Business Research study finds that small businesses
face a set-up fee of £8,900 to prepare for the new
legislation. Small to medium businesses with 100
employees face costs of £12,600, while businesses
with 250 staff face costs of £15,600.
05 September The Pension Protection Fund says its levy estimate
for 2014-15 will be £695m, an increase of around 10 per cent on the
previous levy year. The lifeboat fund leaves its levy rules unchanged and
states the latest estimate is in line with previous indications and is mainly
due to market movements.
round up
T here are, as the saying goes, lies damned lies and statistics - and
no more so than in the murky world of price indices. As we
know the baskets of goods and services
that comprise the Retail Price Index (RPI)
and the Consumer Price Index (CPI) are di� erent which, hardly surprisingly,
means that the results produced once the
computers have whirled are di� erent as
well. Over time RPI increases are higher
than CPI for this reason which is, of course, why governments favour the latter
for index-linked bene� ts. Which brings
us to pensions.Earlier this year those pensioners whose annual increment is based on RPI
were spared the threatened recalculation
of RPI that would have moved it closer to
CPI (i.e. reduced the level of the annual
increment in most years). � is was wel-
come but it should not disguise the fact
that as true measures of real pensioner in-
� ation neither RPI nor CPI are accurate.
� ey are both too low. Various attempts
have been made over the years to measure
pensioner in� ation and without exception
these show higher annual increases than
the two main indices. In the main those
of us who rely on our occupational pen-
sions to look a� er us in old (or older!) age
have got poorer over the past 10 years or
so. � is is strongly in� uenced, for some,
by the fact that even where within a DB
scheme there is the � exibility in any one
year to grant an increment higher than
their obligated percentage (e.g. RPI) few
of them have done this. One of the challenges for a trustee
is to weigh up the sometimes compet-
ing claims of the di� erent classes of membership of
the fund. � is applies on both the asset side and the liabilities side of the funding ratio calculation.
A greater than RPI increase for those with pensions in
payment is obviously in the interest of these fund members. But because there is a cumulative e� ect
to such an increase the cost to the fund continues into
the future. And that could be seen not to be in the interests of those members
yet to receive their pensions (active and
deferred) - nor, of course, of the fund
sponsor. But if trustees and sponsors could think out of the box other possibili-
ties might occur to them. Say that trustees are concerned that
over the last 10 years the purchasing power of the pensions they pay has been
eroded. � ere is nothing to stop some
funds making an award in excess of RPI
to a lower pension group whilst sticking
with RPI for the remainder. Clearly there
is an arbitrariness to this - what would
the cut-o� point be and what about those
whose pensions are low because they had
short service? But that should not mean
that it should not be considered.� e rules of trust deeds were estab-
lished in many cases in a di� erent era
from today. It seems to me that these rules
should never be regarded as holy writ and
if there is something in them that seems
inequitable given the societal and other
changes that have occurred since the deed
was � rst devised then why not change it?
Indeed this has happened to most long-
standing funds where the current deed is
o� en very di� erent from the original. In
the fund of which I am a trustee the deed
originally speci� ed that when a pensioner
started to receive the state pension the
amount he or she received would be deducted from his occupational pension
(the so-called ‘state pension deduction’). Many years ago now trus-
tees and the sponsor (to their great credit) agreed to remove this deduction.
With one action the total annual pension receipts of all pensioners was enhanced - something that
was of course of special value to poorer pensioners. It was a truly progressive
change.In the light of the changes of the last few years - scheme closures, the
freezing of pensions conse-quent on stopping accrual
for actives, even the changing of indexa-
tion in some funds (RPI to CPI) - it may
seem fanciful to propose the improve-
ment of bene� ts. Clearly if times were
more propitious and the funding ratio
of your fund was more positive then you
have a stronger case to make! Or at least
a better chance that you will be listened
to. Nevertheless it is sometimes necessary
to re� ect that if your fund claims that the
real value of pensions in payment will be
maintained it is unlikely that over the past
decade that this has happened. Paddy Briggs is a Member
Nominated Trustee Director of the Shell Contributory Pension
Fund. He writes in a personal capacity and the views he
expresses are his own.
26 October 2013
www.pensionsage.com
news & comment
opinion
Confessions of an amateur trustee Protecting pensioners
from infl ation – can we do it better?
“The rules of trust deeds were established in many cases in a different era from today. It seems to me that these rules should never be regarded as holy writ”
here are, as the saying goes, lies damned lies and statistics - and
no more so than in the murky world of price indices. As we
know the baskets of goods and services
that comprise the Retail Price Index (RPI)
and the Consumer Price Index (CPI) are di� erent which, hardly surprisingly,
means that the results produced once the
computers have whirled are di� erent as
well. Over time RPI increases are higher
than CPI for this reason which is, of course, why governments favour the latter
for index-linked bene� ts. Which brings Earlier this year those pensioners whose annual increment is based on RPI
were spared the threatened recalculation
of RPI that would have moved it closer to
CPI (i.e. reduced the level of the annual
increment in most years). � is was wel-
come but it should not disguise the fact
that as true measures of real pensioner in-
� ation neither RPI nor CPI are accurate.
� ey are both too low. Various attempts
have been made over the years to measure
is to weigh up the sometimes compet-
ing claims of the di� erent classes of membership of
the fund. � is applies on both the asset side and the liabilities side of the funding ratio calculation.
A greater than RPI increase for those with pensions in
payment is obviously in the interest of these fund members. But because there is a cumulative e� ect
to such an increase the cost to the fund continues into
the future. And that could be seen not to be in the interests of those members
yet to receive their pensions (active and
deferred) - nor, of course, of the fund
sponsor. But if trustees and sponsors could think out of the box other possibili-
ties might occur to them. Say that trustees are concerned that
over the last 10 years the purchasing power of the pensions they pay has been
eroded. � ere is nothing to stop some
funds making an award in excess of RPI
to a lower pension group whilst sticking
with RPI for the remainder. Clearly there
is an arbitrariness to this - what would
the cut-o� point be and what about those
whose pensions are low because they had
short service? But that should not mean
that it should not be considered.� e rules of trust deeds were estab-
lished in many cases in a di� erent era
from today. It seems to me that these rules
news & comment
Confessions Confessions
Protecting pensioners
Protecting pensioners from infl ation – can we do
from infl ation – can we do
Rounding up the major pensions-related developments from the past few weeks
Rounding up the major pensions-related developments from the past few weeks
stock market flotation is to happen within weeks.
Employees at Royal Mail will be given 10 per cent
of the shares with the rest being offered to retail and
VIEW FROM THE NAPF
www.pensionsage.com
October 2013 11
round up
news & comment
It might seem a slightly sad con-fession, but if there’s one thing
that gets policy wonks like me excited it’s a leaked report. And
when it’s a leaked report from the EU’s lawyers, saying one of the
European Commission’s propos-als would be illegal, then the
frisson is almost unbeatable. OK, I know I should steady on.
But the latest leak is a real corker. � e Council of Ministers Legal
Service report says large parts of the EU’s plan for a Financial
Transaction Tax would contravene EU law.
� e FTT was to be introduced in 11 EU member states. � e NAPF
has argued that it would hit pen-sion schemes outside the partici-
pating countries – including many schemes in the UK. � e UK government had already
lodged a legal challenge in the European Court of Justice. Now
the leaked EU legal report says the FTT “exceeds member states’
jurisdiction for taxation”, “is not compatible” with the EU Treaty
and would ‘”likely lead to distor-tion of competition”. It’s not quite a knockout to the
plan, but it’s a heavy body-blow. EC policy-makers will be forced
back to the drawing board. � e at-titude of the new German govern-
ment will be a crucial factor.A slimmed-down FTT could yet be brought forward. It enjoys
political support. � ere is no room for complacency.But right now, the lawyers and
their leaked report are driving the FTT agenda.
James Walsh, lead EU policy adviser, National Association of Pension Funds
T he price range for the Royal Mail IPO was set at £2.60 to £3.30 per share, implying a market capitali-sation of £2.6bn to £3.3bn.
� e government is seeking to sell a majority stake in the business. Royal Mail
sta� will be given 10 per cent of the shares,
with the rest being o� ered to institutional
and retail investors. According to Hargreaves Lansdown head of equities Richard Hunter, the share
o� er is expected to close on 8 October, meaning “investors will need to act quickly”.
Business Secretary Vince Cable had announced to Parliament in July that the
government intended to o� er shares in Royal Mail.
“� is is an important day for the Royal
Mail, its employees and its customers,” he
said. “By announcing that we intend to move ahead with a sale of shares in Royal
Mail, we are completing the third and � nal
part of the reforms agreed by Parliament
two years ago. � is delivers on the commit-
ment in the coalition’s agreement to give
Royal Mail access to private capital includ-
ing opportunities for employee ownership.”Hunter said private investors should be
able to “purchase Royal Mail shares through
the nominee account, ISA or SIPP”.� e Communication Workers’ Union
criticised the plans as a “betrayal of the Brit-
ish public”.“� is is simply about dogma from
old fashioned Tories wedded to privatisa-
tion,” the union’s general secretary Billy Hayes said.
Unite’s o� cer for Royal Mail managers
Brian Scott said he did not want a national
institution sold o� to companies “more interested in pro� ts than providing a joined-
up national service”.� e Royal Mail had also announced promotions and increments for its pension
plan members will continue to � ow through
into � nal salary pensionable pay right up
until the conclusion of the next periodic
review in 2018. Any increase in pensionable
pay would be capped at RPI in� ation up to
5 per cent.It had previously said it was imposing
a basic pensionable pay cap for scheme members as it faces an extra £300m annual
bill from its pensions operations. Unite had previously accused Royal
Mail of implementing pension changes to
“fatten the company up for privatisation”.Despite the postal service’s move to
slow the rate of change to pensions, CWU
deputy general Dave Ward said: “We want
the company to recognise its main asset - its
workers - who literally deliver the success of
the business.”CWU argued that despite the govern-
ment taking control of the assets in 2012 to
pave the way for privatisation, the company
wants to use remaining assets to reduce its
own contributions. Royal Mail completed
a formal consultation in August and the union is calling for an agreed process to protect members’ bene� ts.“� ere is a great hypocrisy in the way
the scheme is being managed by Royal Mail,” Ward said. “� e company wants to
keep its contribution rate to 17 per cent whilst maintaining managers’ bene� ts at 40
per cent. � ey can a� ord higher contribu-
tions to protect postal workers’ bene� ts.”Written by Adam Cadle
Royal Mail � oats on stock market Pension plan amendments announced amid news of potential strike action
Rounding up the major pensions-related developments from the past few weeks
Rounding up the major pensions-related developments from the past few weeks
Dateline - September 2013news & comment
Rounding up the major pensions-related developments from the past few weeks
Rounding up the major pensions-related developments from the past few weeks
stock market flotation is to happen within weeks.
Employees at Royal Mail will be given 10 per cent
of the shares with the rest being offered to retail and
institutional investors.
round up round up
It might seem a slightly sad con-fession, but if there’s one thing
that gets policy wonks like me excited it’s a leaked report. And
when it’s a leaked report from the EU’s lawyers, saying one of the
European Commission’s propos-als would be illegal, then the
frisson is almost unbeatable. OK, I know I should steady on.
But the latest leak is a real corker. � e Council of Ministers Legal
Service report says large parts of the EU’s plan for a Financial
Transaction Tax would contravene EU law.
� e FTT was to be introduced in 11 EU member states. � e NAPF
has argued that it would hit pen-sion schemes outside the partici-
pating countries – including many schemes in the UK. � e UK government had already
lodged a legal challenge in the European Court of Justice. Now
the leaked EU legal report says the FTT “exceeds member states’
jurisdiction for taxation”, “is not compatible” with the EU Treaty
and would ‘”likely lead to distor-tion of competition”. It’s not quite a knockout to the
plan, but it’s a heavy body-blow. EC policy-makers will be forced
back to the drawing board. � e at-titude of the new German govern-
ment will be a crucial factor.A slimmed-down FTT could yet be brought forward. It enjoys
political support. � ere is no room for complacency.But right now, the lawyers and
their leaked report are driving the FTT agenda.
James Walsh, lead EU policy adviser, National Association of Pension Funds
T he price range for the Royal Mail IPO was set at £2.60 to £3.30 per share, implying a market capitali-sation of £2.6bn to £3.3bn.
� e government is seeking to sell a majority stake in the business. Royal Mail
sta� will be given 10 per cent of the shares,
with the rest being o� ered to institutional
and retail investors. According to Hargreaves Lansdown head of equities Richard Hunter, the share
o� er is expected to close on 8 October, meaning “investors will need to act quickly”.
Business Secretary Vince Cable had announced to Parliament in July that the
government intended to o� er shares in Royal Mail.
“� is is an important day for the Royal
Mail, its employees and its customers,” he
said. “By announcing that we intend to move ahead with a sale of shares in Royal
Mail, we are completing the third and � nal
part of the reforms agreed by Parliament
two years ago. � is delivers on the commit-
ment in the coalition’s agreement to give
Royal Mail access to private capital includ-
ing opportunities for employee ownership.”Hunter said private investors should be
able to “purchase Royal Mail shares through
the nominee account, ISA or SIPP”.� e Communication Workers’ Union
criticised the plans as a “betrayal of the Brit-
ish public”.“� is is simply about dogma from
old fashioned Tories wedded to privatisa-
tion,” the union’s general secretary Billy Hayes said.
Unite’s o� cer for Royal Mail managers
Brian Scott said he did not want a national
institution sold o� to companies “more interested in pro� ts than providing a joined-
up national service”.� e Royal Mail had also announced promotions and increments for its pension
plan members will continue to � ow through
into � nal salary pensionable pay right up
until the conclusion of the next periodic
review in 2018. Any increase in pensionable
pay would be capped at RPI in� ation up to
5 per cent.It had previously said it was imposing
a basic pensionable pay cap for scheme members as it faces an extra £300m annual
bill from its pensions operations. Unite had previously accused Royal
Mail of implementing pension changes to
“fatten the company up for privatisation”.Despite the postal service’s move to
slow the rate of change to pensions, CWU
deputy general Dave Ward said: “We want
the company to recognise its main asset - its
workers - who literally deliver the success of
the business.”CWU argued that despite the govern-
ment taking control of the assets in 2012 to
pave the way for privatisation, the company
wants to use remaining assets to reduce its
own contributions. Royal Mail completed
a formal consultation in August and the union is calling for an agreed process to protect members’ bene� ts.“� ere is a great hypocrisy in the way
the scheme is being managed by Royal Mail,” Ward said. “� e company wants to
keep its contribution rate to 17 per cent whilst maintaining managers’ bene� ts at 40
per cent. � ey can a� ord higher contribu-
tions to protect postal workers’ bene� ts.”Written by Adam Cadle
Royal Mail � oats on stock market
Royal Mail � oats on stock market Pension plan amendments announced amid news of potential strike action
Pension plan amendments announced amid news of potential strike action
Pension plan amendments announced amid news of potential strike action
Pension plan amendments announced amid news of potential strike action
08 October 2013
www.pensionsage.com
Rounding up the major pensions-related developments from the past few weeks
news & comment
round up
Dateline - September 2013
02 September The
Kodak Pension Plan
completes the acquisi-
tion from Eastman
Kodak Company of
the personalised im-
aging and document
imaging businesses
and creates a new company known as Kodak Alaris.
05 September TUC’s annual PensionsWatch
survey reveals the UK’s top bosses in the FTSE 100
saw their average pension pots increase by £41,000
last year to £4.74m, highlighting what unions
are calling a “sharp divide” in company
pension values.
05 September
Minister for Pensions
Steve Webb says tackling
‘catastrophic’ early
retirement will be the
government’s focus as it
seeks to extend working
lives. Measures to prevent people from retiring very
early would provide the most “bang for your buck”,
has expressed an interest in using the NAPF Pensions
Infrastructure Platform as a means of incorporating
infrastructure into its retirement date fund portfolio.
12 September The government announces
that the privatisation of Royal Mail through a
stock market flotation is to happen within weeks.
Employees at Royal Mail will be given 10 per cent
of the shares with the rest being offered to retail and
institutional investors.
13 September A ‘virtual’ aggregation of pension
pots combined with a central clearing house and
database has the potential to achieve far more
than current government proposals of pot follows
member, Centre for Policy Studies research fellow
Michael Johnson argues.
14 September Consultancy charging for
automatic enrolment schemes becomes illegal.
The law affects defined contribution schemes
qualifying for auto-enrolment, and prevents
employers receiving advice under
agreements with third parties - other than
trustees, providers, or scheme managers
- and paying for that advice out of the
members’ pension pots or contributions
16 September The Pensions Institute
publishes a final set of 16 ‘good practice’ principles for
modelling defined contribution pension plans. In a
report entitled Good Practice Principles in Modelling
Defined Contribution Pension Plans, the institute
lists a number of areas, including modelling member
characteristics and longevity risk, which aim to help
pension providers design better DC pension plans.
17 September Legal & General announces it has
achieved pension scheme membership of 99.5 per
cent of eligible employees after completing automatic
enrolment staging this year. Just 11 employees, or 5
per cent, opted out, resulting in the almost universal
uptake.
17 September New research reveals getting ready
for automatic enrolment will cost UK businesses
as much as £15.4bn. A Centre for Economic and
Business Research study finds that small businesses
face a set-up fee of £8,900 to prepare for the new
legislation. Small to medium businesses with 100
employees face costs of £12,600, while businesses
with 250 staff face costs of £15,600.
05 September The Pension Protection Fund says its levy estimate
for 2014-15 will be £695m, an increase of around 10 per cent on the
previous levy year. The lifeboat fund leaves its levy rules unchanged and
states the latest estimate is in line with previous indications and is mainly
due to market movements.
News, views & regulars
News round-up 8-18Appointments 19 Word on the street 20 Soapbox: Light at the end of the tunnel? 21Market commentary: Brexit woes 22 Diary 26Opinion: Brexit 68Final thoughts 70
By agreement, Pensions age is distributed free to all SPP Members as part of its package of member benefi ts
Rounding up the major pensions-related news from the past month
news & comment round up
Dateline - June
1 June DB pension scheme deficits now reach record levels, with the total deficit for all UK private sector pension schemes exceeding the £300bn mark for the first time in May, JLT Employee Benefits’ reports. Its latest monthly index for DB private sector schemes finds the total deficit for the UK’s DB plans is now £310bn. This time last year the figure was £255bn.
6 June An increase in the average discount rate has helped FTSE 100 DB schemes reduce their overall deficit by £15bn. According to Barnett Waddingham’s annual survey of pension disclosures, the increased rate has reversed the rise in deficits witnessed in 2014 by FTSE 100 DB schemes. The average discount rate went up by 0.2 per cent to 3.8 per cent p.a. from 3.6 per cent p.a. in 2014.
7 June Longevity risk is the biggest threat facing pension funds across the globe, new research reveals. According to a global survey commissioned by State Street of 400 pension professionals who were asked what level of priority they assign to different risk types, 26 per cent say ‘very high’ in relation to longevity.
9 June The PLSA’s DB taskforce opens its call for evidence on the efficiency, capital allocation and benefit challenges facing DB pension schemes.
The taskforce, established in March 2016, says “the nature of DB schemes means they should have the capacity to deliver efficient management of longevity risk, deliver long-term investment returns and provide adequacy of income in retirement”.
10 June Pension Insurance Corporation completes a longevity reinsurance transaction with Prudential Insurance Company of America. It is the third transaction Prudential Insurance Company of America, a PFI company, has completed with PIC. The deal covers longevity risk associated with pension liabilities, amounting to approximately $1.1bn for around 2,900 pensioners across two sections of the Aon Retirement Scheme.
13 June Sir Philip Green calls for MP Frank Field to resign as chairman of the inquiry analysing the collapse of BHS. In a letter to Field, Green accuses him of “destroying his reputation”. Green says Field has shown “a bias against
him” and a “lack of interest in a fair process”.
14 June ICI Pension Fund secures a £630m pensioner buy-in with Scottish Widows, the insurer’s largest external bulk annuity transaction to date. This buy-in, which covers over 4,000 of the fund’s pensioner members, follows several buy-ins completed by the fund since March 2014.
15 June Over a third of companies in the FTSE 100 are paying out more in dividends to shareholders than the amount of their pension scheme deficit, analysis shows. Analysis by AJ Bell also finds that FTSE 100 companies who have funding deficits on their staff pension schemes paid out a total of £48bn in dividends a year for the past two years.
17 June The Independent Governance Committees of Aviva and Friends Life merge, creating one IGC which oversees the combined business. Friends Life became part of the Aviva Group in April 2015 and integration work has been ongoing since then to bring the two organisations together.
8 June People facing bankruptcy proceedings may not have to hand over undrawn pension funds following a recent ruling in the High Court. In Hinton v Wotherspoon, it was ruled that creditors could not access pension benefits belonging to anyone bankrupt who was over the age of 55 if they had not already elected to access their savings.
21 June The creation of the Lifetime ISA is the start of a drift from pensions to ISAs, according to 68 per cent of employers surveyed in a new poll by Wealth at Work. Wealth at Work director Jonathan Watts-lay explains that many see the introduction of the LISA as the “foundation for workplace pension ISAs”.
22 June The number of pension schemes with a recovery plan of at least 10 years in length has been recorded at 379 in the 12 months up to 30 April 2016, TPR states. Responding to an FOI request from Pensions Age, the regulator says it is due to publish its Orange Book incorporating analysis relating to recovery plans.
23 June Usdaw calls for Marks and Spencer to open talks with the union about proposed changes to terms and conditions of employment, including pension changes. Plans to close the final salary pension scheme to future accrual were announced in its financial results for the year ended 2 April 2016.
25 June The UK’s European Commissioner Lord Hill resigns following Britain’s decision to leave the EU. In a resignation statement, Lord Hill says he did not believe it was right for him to carry on with his work as the commissioner in charge for financial services.
28 June Carpetright’s net IAS19 retirement benefit deficit reduces by £1.8m in the period to from 2 May 2015 to 30 April 2016. According to the company’s latest financial results, the deficit reduced from £4m to £2.2m. Carpetright says the reduction reflects a combination of the movement in financial assumptions and pension deficit contributions made by the company.
29 June Average pensioner incomes have almost caught up with workers’ incomes, according to data from the ONS. Pensioner incomes were 38 per cent lower than average workers’ in 1994/95. In 20 years, that gap has narrowed to just 7 per cent, the ONS states. The figures also show that average income among pensioners where the head is under 75 is more (£348 per week) than where the head is over 75 (£257 per week). This difference is larger than in 1994/95.
30 June The PLSA reveals it has secured a £5m buyout with the Pension Insurance Corporation for its DB pension scheme. As a result of the buyout, the PLSA ended the year with a deficit of £4.8m, despite having an operating surplus of £600,000.
For more information on these stories, and daily breaking news from the pensions industry, visit pensionsage.com
27 June Firefighters working for Southampton airport are to ballot to go on strike over proposed ‘adverse pension changes’, according to Unite. The airport’s owner, AGS, is planning on closing the firefighters’ defined benefit pension scheme, despite Unite proposing changes to the scheme that would make savings of £3.5m a year, which includes reducing the employer contribution from 44 per cent to 20-21 per cent.
20 June BT pension scheme deficits in the year to 30 June 2015 increase by almost £3bn, the firm’s latest funding update reveals. Between 30 June 2014 and 30 June 2015, the funding shortfall in the scheme increased from £7,044m to £9,960m.
Image by: Tupungato
24 June The UK votes to leave the European Union, following a referendum. The result of the vote is leave 52 per cent and remain 48 per cent, with a voter turnout of 72 per cent. An exclusive ballot of attendees, conducted at the European Pensions Awards, reveals that 60 per cent are in favour of remaining in the EU and 40 per cent desire Brexit.
The past month has seen financial and political turmoil in the wake of the Brexit vote, with the pensions industry
suffering the fallout from the decision.The United Kingdom voted to leave
the European Union in a referendum held on 23 June. ‘Leave’ obtained 52 per cent of the vote and ‘remain’ 42 per cent. The country has two years in which to negotiate an exit from its membership in the EU once article 50 of the Lisbon Treaty is triggered.
The surprising result caused political and financial shockwaves that have yet to subside.
A series of high profile of resignations occurred in the aftermath of Brexit, the most notable of which was Prime Minister David Cameron, replaced by Home Secretary Theresa May. The pensions industry was also affected by
this wave of change, with Shadow Work and Pensions Secretary, Labour MP Owen Smith, resigning and instead standing for Labour party leadership, while the UK’s European Commissioner
Lord Hill resigned as the commissioner in charge for financial services for the EU.
Stockmarkets, both in the UK and abroad, suffered sudden declines the day the result was announced. The pound fell to a 31-year low against the dollar, rating agencies downgraded the UK from its AAA status, and concerns arose over the likelihood of another UK recession.
Despite the market turmoil, Conservative MP Boris Johnson, who was a leading ‘leave’ campaigner, claimed on 27 June that “people’s pensions are safe, the pound is stable and the markets are stable”.
However, according to Hymans Robertson, UK pension deficits hit a record level of £935bn as of 27 June, with extreme lows in gilt yields driving pension liabilities to an all-time high of £2.3trn.
Annuity rates were an early casualty
of the referendum, having fallen by more than 3.5 per cent in the two weeks after the UK’s decision to leave the EU.
Fourteen pension providers, including LV=, Just Retirement, Aviva, Legal & General and Standard Life reported falling annuity rates since the Brexit result was announced.
Annuity rates have been “falling like a stone” and the situation “will get worse before it gets better”, Retirement Intelligence director Billy Burrows warned.
In contrast, transfer values have reached record levels since the UK’s decision to leave the EU, according to the Xafinity Transfer Value Index.
On 30 June 2016 the index reached £223,000 – exceeding the highest reading recorded for the whole of 2015, £214,000.
The significant rise in transfer values has been driven by a large decline in gilt yields since the result of the referendum.
Xafinity head of proposition development Paul Darlow said: “Whilst these reductions in gilt yields are good news for members looking to take a transfer value of their defined benefits, it is not good news for pension schemes themselves. Most pension schemes
news & comment round up
News focusNews focus
Pension deficits reach record levels following shock Brexit vote
Industry urged to avoid knee-jerk reactions over market turmoil and legislative uncertainty
will have seen their deficits increase significantly.”
The volatile financial markets are a reminder for the new generation of income drawdown customers not to risk pension money they can’t afford to lose, Just Retirement group communications director Stephen Lowe advised.
A rise in pension scammers was also seen before the referendum result was even announced, as fraudsters used the economic uncertainties around a Brexit and what this could mean for the value of people’s pensions as a hook to steal pension savers’ funds.
The Brexit angle is a new one for fraudsters, who have previously persuaded people to transfer their pensions by offering early access to cash or guaranteed high-return investments.
Also, the Welsh Local Government Association warned its Local Government Pension Scheme that it may face “huge problems” as a result of the UK’s decision to leave the European Union.
In a statement, Welsh Local Government Association leader councillor Bob Wellington said he has a duty to highlight potential difficulties for the workforce following the vote to leave.
“For example, any prolonged collapse of the stock market will signal huge problems for the £13bn LGPS in Wales which is fully funded and based on market investment,” he said.
“With an actuarial valuation due this year it is vital that confidence is returned as soon as possible, otherwise millions of pounds will be lost for the schemes pensioners.”
Overall, UK DB schemes are in for ‘rough ride’ due to higher inflation and an expected fall in asset values following Brexit.
KPMG pensions partner Stewart
Hastie warned that the UK’s 6,000 private sector DB schemes will be in for a “rough ride hit with the prospect of higher inflation, and an expected fall off in pension asset values over the next couple of years”.
However, Hargreaves Lansdown head of retirement policy Tom McPhail said that on the liability side of the equation, any increase in bond yields would be a good thing (although it would be offset to some extent by falling values on the asset side of the balance sheet). A 0.1 per cent rise in gilt yields would reduce deficits by £23.3bn, he stated.
According to Lane Clark & Peacock partner and ACA chairman Bob Scott, “it is worth noting that those schemes with significant unhedged overseas investments could actually see their asset values increase – at least in sterling terms”.
For Pensions and Lifetime Savings Association chief executive Joanne Segars: “Even though pension schemes are long-term investors with diversified portfolios, continued uncertainty and the increased volatility that goes with it makes it difficult for schemes to protect savers’ interests.”
It is because of this uncertainty that the pension industry has been warned against knee-jerk reactions.
“Those running DB schemes need to remember that pensions are long term and should avoid knee-jerk reactions to short-term market volatility, Hymans Robertson partner Patrick Bloomfield said.
There is also uncertainty surrounding EU pensions legislation – whether they will still need to be adhered to by UK pensions schemes once the removal from the EU is complete.
“Much will depend on the precise nature of our future relationship with the EU, which may mean that some aspects of UK pension provision continue
to be influenced by the EU. In other areas, UK pension law may need to be disentangled from EU legislation,” Segars stated.
Today’s pensioners may be concerned about threats to the ‘triple lock’ on the state pension, former Pensions Minister and Royal London director of policy Steve Webb said, “but it would be odd for a government to prioritise a cut which would affect the most powerful voting bloc in the country”.
Brexit may also affect how easy it is for policymakers to set clear pension policies in the future. Scott said: “The vote to leave, which confounded bookmakers’ predictions, may make it even harder for policymakers to set a clear pensions strategy.
“Market volatility and a period of political uncertainty are unlikely to be conducive to setting a coherent long-term strategy for pension provision.”
Scott however added that there may be “some upsides down the road”.
“For example, Brexit might mean that the UK escapes insurance-style reserving on DB schemes, which could yet be imposed through a future IORP Directive over which we would have had no veto. Leaving the EU might also give the DWP a good reason to abandon measures to require DB schemes to adjust benefits for GMP inequalities, which would ease schemes’ administration and costs,” he explained.
One certainty has already arisen however. Although the equalisation of men and women’s state pension ages is an EU law, Pensions Minister Ros Altmann has confirmed there will be no change to the current plan for women’s state pension ages to rise.
New ways for company pension schemes to calculate the cost of future promises to members are
being reviewed by the government in an attempt to ease the pressure of rising deficits.
Pensions Minister Baroness Ros Altmann has said the government is to review how defined benefit schemes account for their liabilities.
The news comes following the UK’s decision to leave the EU, which saw gilt yields dip below 1 per cent for the first time on record, leading to DB scheme deficits ballooning to over £900bn.
She was reported in The Financial
Times as saying that there was a case for considering how pension liabilities are currently valued for regulatory purposes. She also said that the government needed to look at why employers and trustees were not using the flexibility they had to value pension payments.
Reacting to Altmann’s comments, Pinsent Masons pensions expert Alastair Meeks said that any technical changes to DB payment accounting could be immensely valuable to employers if their contribution bills were reduced as a result. But he urged caution as alterations could lead to future problems.
“If funding levels are to be stated on a more forgiving basis, the risk arises of
schemes subsequently winding up with an unexpectedly large deficit when it comes to securing those pension scheme benefits with an insurer,” Meeks said.
“Taking a practical approach to scheme funding in times of unusual market stress is one thing, but the government must take care not to indulge employers with very real pension scheme funding problems just because they are consumed with the rage of Caliban seeing his own face in a glass.”
Altmann’s announcement follows the National Audit Office (NAO) stating that the UK’s public sector pension liabilities are equivalent to 81 per cent of gross domestic product.
Figures published by the department revealed public sector net liabilities of £1,493bn, the single largest liability on the government’s balance sheet. It represents 42 per cent of all UK government liabilities.
By comparison, it is over a quarter larger than the government borrowing and financing reported in the Whole Government Accounts for 2014-15, which was £1,175bn.
In 2014-15, the government made pension payments of £127bn, comprising of around £38bn to former public sector employees and £89bn in state pension benefits. Public sector pension payments, net of member contributions, were equivalent to 1.6 per cent of GDP
“Although government reforms have helped to generate cash and reduce pension costs in the longer term, overall the liability has risen by around a third since 2009-10,” the NAO explained.
“There is a limit to the level of pensions the government can finance annually as a proportion of GDP without having to reduce spending in other areas or increase income through higher taxes or further borrowing.”
Written by Marek Handzel and Natalie Tuck
Pensions Minister hints at possible changes to DB liability accounting
New ways to calculate DB liabilities being reviewed by govt, as National Audit Office finds UK public sector pension liabilities are equivalent to 81% of GDP
12 July 2016 www.pensionsage.com
news & comment round up
Latest scheme deficit issues
Carpetright’s net IAS19 retirement benefit deficit reduced by £1.8m in the period from 2 May 2015 to 30 April 2016. According to the company’s latest financial results, the deficit reduced from £4m to £2.2m. Carpetright said the reduction reflects a combination of the movement in financial assumptions and pension deficit contributions made by the company. The firm has made two £0.9m contributions to its closed defined benefit pension schemes.
Greene King has revealed its pension deficit decreased by £6.9m to £52.3m in its preliminary results for the year ending 1 May 2016. The total deficit comprised of £48.6m from Greene King schemes and £3.7m from Spirit schemes. Following its acquisition of Spirit Pub Company in June 2015, the group
now runs three DC schemes that are available to all new employees and three DB schemes, which are closed to new entrants and future accrual.
The Halcrow Pensioners’ Association is to launch a legal challenge against the deal between The Pensions Regulator and Halcrow. The Halcrow pension scheme is reported to have £758m liabilities at the end of 2014 and only £500m of assets leaving a deficit of £258m. In a deal with The Pensions Regulator, the Halcrow pension scheme is to be restructured. The scheme’s 3,300 members have been contacted by the trustees and given the choice of transferring to a new company scheme that will put them on essentially fixed incomes for the rest of their lives, or being transferred into the Pension Protection Fund.
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The Department for Work and Pensions is consulting on whether the National Employments Savings Trust
(Nest) should provide its members with a more comprehensive offering, in line with the shift in consumer needs following the launch of the pension freedoms in 2015.
Last year, Nest, the government-backed firm published a consultation document that resulted in the development of a three-tier retirement income strategy – which involves a cash account, a trustee managed drawdown and a deferred annuity.
Nest currently offers a choice of a cash lump sum or an annuity purchase from a limited number of insurance companies.
It has been suggested that an extension of the scheme’s remit may cause competitors to voice their concerns that it could defy the European State Aid restrictions, which prevent publicly funded services from competing against commercial operations, where an already operating market exits.
While Nest’s primary function of auto-enrolment is considered a statutory duty, offering a drawdown is not. Nonetheless, it is also regarded as illogical to lead members all the way through
to retirement and then abandon them without considerable pension income options.
In addition, although Nest offers an in-house retirement solution, it is essential that all members are encouraged
to shop around to find the best possible for their retirement needs. Resultantly, it is advised that Nest should only provide a solution for those who have decided to stick with their existing provider.
Hargreaves Lansdown head of retirement Tom McPhail said: “This call for evidence makes sense. The current restrictions on Nest risk leaving its members without the help and support some of them need to make the most of their retirement savings. With pension freedoms the rules of the game changed, so the services offered by pension providers needed to change too. Commercial pension providers have all already adapted to reflect this; Nest now needs to do this too.”
“Nest has an opportunity to pioneer new ideas around the provision of drawdown for lower value and financially disengaged investors, as well as innovative solutions to the challenges of longevity insurance, through the use of deferred annuity type products.”
AJ Bell senior analyst Tom Selby said: “While it would be good for existing Nest members to have access to a drawdown solution in the wake of the pension freedoms, it is questionable whether there is a market need for a wholesale state-backed individual pension and drawdown provider.”
While an income drawdown service may have its benefits, it may not be the best time for Nest to extend its offering as it still owes the taxpayer around £500m that it used as its initial start-up capital. According to the National Audit Office, the business is still a very long way from being able to pay off its debt.
Nest debt recently increased, having borrowed an additional £72.5m from the government, its latest annual accounts revealed.
The loan stood at £378.1m last year and has risen to £459.6m. Loan funding from the DWP is provided to meet the implementation of Nest and its running costs. It will be repaid from charges levied on scheme members.
Nest also has a £10.5m liability with its scheme administrator, Tata Consultancy Services (TCS). In its annual report, Nest Corporation, the scheme’s trustee, said the liability was an imputed finance lease “mainly reflecting the shortfall between the scheme administration assets recognised and cash payments made to TCS”.
As a result, Nest has non-current liabilities totalling £470.1m.
In the report, Nest Corporation chief executive and accounting officer Helen Dean explained that the scheme had focused on scaling up to manage significant increases in volumes.
“To put that in perspective, employer numbers have increased from 14,000 at 31 March 2015 to over 86,000 just 12 months later,” she wrote.
“At the end of March assets under management were now in the region of £827m, compared to £420m in March 2015, and the number of member accounts in the scheme had grown from two million to almost three million.”
There are now over 3.3 million members in Nest, with over 135,000 employers signed up to the scheme.
DWP questions whether Nest should offer drawdown
Annual accounts reveal Nest borrowed an additional £72.5m from government
This survey is for Pension Funds and Sponsoring Employers only (INCLUDING Independent Trustees for pension funds). Not open for Consultants.
As DC schemes increasingly become the dominant method of retirement saving in the UK, so the focus has understandably shifted to improving the structure and governance of DC provision. Consolidation has been seen as the solution to tackle the challenges facing DC schemes today and as a result master trusts are growing in popularity.
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BT’s pension scheme acts as “no bar” to the telecommunications company restructuring to make its Openreach business a
separate legal entity, a report by law firm Sackers has claimed.
The report, commissioned by Sky, is a continuation of a long-running dispute between BT and its internet competitors – Sky, TalkTalk and Vodafone.
However, in response, a spokesperson for BT said Sky cannot simply “wish away inconvenient truths”.
“The kind of governance changes they have suggested for Openreach would have a material negative impact on the pension position. We at BT are clear about this, and our view is supported by authoritative, independent analyses by KPMG, PwC and Freshfields.
“Sackers have raised the importance of the employer covenant and the critical impact this will have, but unlike KPMG and PwC, they are not employer covenant advisers.”
Established in 2006, Openreach is the part of BT’s business that controls the network that runs from the local exchange to people’s homes and businesses. BT allows other communication providers to use this network and has over 560 communication providers using its network.
However, several of BT’s biggest competitors who use the network have called on BT to make Openreach separate from its main business, as they say it gives BT the upper hand in the market and causes under-investment.
There have also been concerns from the communication’s regulator Ofcom on the performance of Openreach.
In February this year Ofcom published its Strategic Review of Digital Communications, which found that Opeanreach needs to change, taking its own decisions on budget, investment and strategy, in consultation with the wider industry. Therefore Ofcom suggests that BT should consider ‘functional and legal’ separation.
Despite this, BT has remained
steadfast in its position that restructuring the business in such a way would put its 300,000 pensioners at risk. In its most recent results for 30 June 2014 to 30 June 2015, the funding shortfall in the pension scheme increased from £7.4bn to £9.96bn. BT also saw its share price plummet by 10 per cent post-Brexit. BT’s stock dropped to £3.13 from £4.40.
Sackers said BT has listed three obstacles from a pensions perspective that prevent it from separating Openreach from its main business. These include the pension benefits of employees in the Openreach business, who remain entitled to DB pensions under the BT Pension Scheme.
Furthermore, the existence of the ‘Crown Guarantee’, which relates to BT’s DB pension liabilities; and the impact that creating Openreach as a wholly-owned subsidiary would have on the financial employer covenant afforded to BT Pension Scheme.
However, the report by Sackers concluded that there should be no obstacles from a pensions perspective.
“We have concluded that there is no bar from a pensions perspective to achieving functional and legal separation of Openreach in this way, i.e. it is technically possible to manage the legal issues relating to Openreach employees’ DB pension liabilities held currently in the BT Pension Scheme,” the report said.
Sackers suggested that the most straightforward and least intrusive way to achieve functional and legal separation from a pension perspective would be to permit the newly-formed Openreach subsidiary to join the BT Pension Scheme as a participating employer.
It added that this would be easier to implement if, on the functional and legal separation of Openreach, the government were to amend the Crown Guarantee to cover the pension liabilities of Openreach under the BT Pension Scheme.
Pension scheme ‘should not stop BT restructuring Openreach’
BT pension scheme should not prevent business restructuring, Sky-commissioned report finds; BT disagrees
The Pensions Ombudsman Service has reported an 18 per cent rise in enquiries in its 2015/2016 annual report.
The ombudsman handled some 5,000 enquiries, 1,363 of which it took up for investigation, a 6 per cent rise on 2014/2015. It also completed 35 per cent more investigations than last year.
Pension liberation cases accounted for 20 per cent of all completed investigations, while only 11 new cases were taken on to investigate complaints about the Pension Protection Fund.
Sixty-three per cent of cases were resolved informally by the ombudsman’s adjudicators and 37 per cent were resolved formally with an ombudsman’s decision, reversing last year’s position when 44 per cent of cases were resolved informally and 56 per cent formally.
The PO spent £3.3m on costs last year, which it said was within budget. It responded to 98 per cent of all enquiries within two working days of receipt.
The Pensions Ombudsman Anthony Arter said that personal pensions had accounted for a large number of complaints. He explained that in the 2014/2015 financial year, they had accounted for 25 per cent of the ombudsman’s complaints. This had now increased to 46 per cent, with the largest rise being in relation to SIPPs.
The PO’s report follows the Financial Ombudsman recently revealing it had received 440 complaints regarding pension freedoms, out of a total 4,495 complaints involving pensions, between 1 April 2015 and 31 March 2016.
Delays were measured as the greatest reported issue about pension freedoms,
with a total of 24 per cent. The Financial Ombudsman noted that complaints of pension provider delays reached their peak during summer 2015 but have steadied since. Nonetheless, this type of enquiry accounted for the largest proportion of complaints overall.
This was followed by complaints regarding requirement to get financial advice, annuities and information given about pensions at 15 per cent, 13 per cent and 10.5 per cent, respectively. The average uphold rate across all complaints was 51 per cent, with 25 per cent for complaints involving pension freedoms.
Recent determinations from the PO include that of Veterans UK, the administrators of the Armed Forces Pension Scheme, which was told by the
PO to review the medical evidence of a former scheme member who was refused the early payment of his preserved pension on ill health grounds.
The PO also threw out a case lodged by a former employee at Motorola, who complained that he was misled by an online benefits projection used by the company’s pension scheme, which led to him retiring on less money than expected.
A complaint made by a member of the DHL Group Retirement Plan about not receiving sufficient information about a change to the scheme’s early retirement factors was also dismissed by the ombudsman.
The PO recently began publishing opinions issued by its adjudicators as well as formal ombudsman determinations.
Opinions will now be published on the Pensions Ombudsman Service website if they are appealed to the Pensions Ombudsman or Deputy Ombudsman, or are considered of interest.
Written by Marek Handzel and Talya Misiri
Pensions Ombudsman reports 18% rise in complaints
PO received 5,000 enquiries between 2014-15, while the Financial Ombudsman handled 440 pension freedom complaints between 2015-16
18 July 2016 www.pensionsage.com
news & comment round up
Pensions Age and the Pensions and Lifetime Savings Association have teamed up for what we believe will become the leading jobs service for the pensions sector.
All new vacancies on the site, which is at www.pensionsjobs.com will be promoted via the Pensions Age daily email newsletter, and directly by the PLSA. This will ensure very wide coverage, especially given there are now over 24,000 active subscribers on the newsletter. The Pensions Age website and the PLSA website will also be promoting the service.
PLSA commercial services director Julian Mund said: “We’re delighted to be working with Pension Age to help us expand and grow
PensionsJobs.com”. Pensions Age managing director
John Woods, said: “We very much welcome this new partnership with the PLSA, and look forward to providing a valuable service for pension funds (including trustee and pensions manager roles), sponsoring employers (including HR and FD functions), consultants, life companies, TPAs and other industry participants to fill their vacancies.”
To advertise on this service please email [email protected] (Please put PENSIONS AGE in the subject line), with details of your role. We will then give you a quote with various options and get your vacancy live on the service.
RobecoSAM has promoted its head of private equity Reto Schwager to the role of interim CEO. Schwager’s appointment comes as RobecoSAM’s
current CEO Michael Baldinger announced his decision to depart from the firm. Schwager will assume the role on 15 August, subject to FINMA approval. The recruitment process for a permanent replacement to lead the firm has already begun.
Kames Capital has appointed Yasmine Ellis as business development manager within the firm’s UK wholesale distribution team. Ellis will be responsible for
building a strong portfolio of UK private banks, financial institutions and advisory wealth managers, stockbrokers and family offices. She joins from Schroders where she worked with the company’s business development team.
Aon Hewitt welcomes Alison Trusty as a hedge fund researcher in its liquid alternatives manager research team. Trusty will be responsible for
coordinating event-driven strategies, credit strategies and coverage of fund of hedge funds. Prior to this, she served at Hymans Robertson for five and a half years, leading the firm’s research and advice on hedge fund strategies and managers.
The Pension Protection Fund has appointed Jayne Nickalls to its board as its new non-executive director. Nickalls joins the PPF from the Financial Services Compensation Scheme, where she served as non-executive director. Previously, she worked at UK-based web supplier Jadu, where she advised on business development and strategy. She also accumulated extensive experience in digital and IT as VP Consulting Services Northern Europe of US software firm Chordiant Software, from 1997 to
2004. Nickalls then served as CEO of Directgov for six years and transformed the service from a start-up to a successful business at the centre of the government’s digital strategy. PPF chairman, Lady Barbara Judge said: “As I come to the end of my term as chairman of the PPF, I am delighted that one of my last actions in this role is to welcome Jayne. She brings with her a wealth of experience to help up improve services 220,000 PPF members and provide them with the security and confidence.”
Jayne Nickalls
Reto Schwager
Old Mutual Wealth has appointed Iain Wright as chief risk officer. Wright will be responsible for the oversight of strategic, operational and financial risks
to the Old Mutual Wealth businesses. Wright’s new role was approved by the FCA on 5 July, and he will report to the CEO Paul Feeney. Wright succeeds Kevin Lee-Crossett, who has been promoted to chief legal officer.
Iain Wright
Yasmine Ellis Alison Trusty
www.pensionsage.com July 2016 19
round up news & comment
Workplace pensions and savings firm Punter Southall Aspire has hired Alan Emberson and John Bisset as directors. The senior appointments come as part of the Punter Southall Aspire’s attempts to grow its workplace solutions business and technology offering. John Bisset joins the firm with an extensive history in pensions and asset management, including a long career at Aegon as business development director, UK private wealth management. More recently Bisset was at Lombard
International. Alan Emberson formerly held the role of corporate relationship director at Standard Life, where he developed the business’ relationships across FTSE 350 companies at both HR and benefits director level. Commenting on the appointments, Punter Southall Aspire chief executive Steve Butler said: “Alan and John both have significant life company experience, which will be invaluable as we scale our workplace solutions business.”
John Bisset
IG Group Holdings has appointed Paul Mainwaring as its new chief financial officer designate. Mainwaring succeeded the current CFO Mark Ward on 11 July, who will
depart from the business after a short handover. Once regulatory approval is received Mainwaring will assume the role on a permanent contract and join the IG board. He was previously CFO of Tullett Prebon and qualified as a chartered accountant.
On � eresa May’s appointment to UK Prime Minister “She has proven that she is not a sensationalist and believes that thinking through the impacts of any decision is key before implementing it. � is mentality will not only be good for the economy in general but will hopefully rule out any extreme movements in pension policy in the near future. � e pensions industry needs some stability and long-term thought before any further changes are made.”Talbot and Muir head of pensions technical Claire Trott
On falling annuity rates post-Brexit “Annuity rates are disappearing o� the bottom of the chart. Just six months ago a 60 year old could get a better deal than the terms now being o� ered to a 65 year old. Even though rates are now at historic lows, there is no certainty whether or when rates will go back up again. It is also important to note that in recent years, anyone who decided to delay buying an annuity may well be worse o� today.” Hargreaves Lansdown head of retirement policy Tom McPhail
On DB contribution requirements post-Brexit“Over the last three years aggregate de� cit contributions paid by FTSE350 companies have remained stable. However, given the movements in
� nancial markets over the last six months, and the implications of Brexit, it seems likely we will see a move back to the contribution levels required post � nancial crisis. � e future funding needed to meet DB pension obligations is another unwelcome area of uncertainty magni� ed by the vote to leave the EU.”Barnett Waddington head of corporate consulting Nick Griggs
Crabb on his cabinet resignation“A� er careful re� ection I have informed the prime minister today that, in the best interests of my family, I cannot be part of her government at this time. I am greatful to my team and I look forward to supporting the government’s one nation vision from the backbenches.”Former Work & Pensions Secretary Stephen Crabb
Denying anti-derisking claims for BHS’ pension fund“We would like to take this opportunity to correct that assertion. Goldman Sachs did not advise Sir Philip Green or Arcadia against supporting the de-risking of the BHS pension schemes. To the contrary, Goldman Sachs supported the de-risking of the schemes.”Goldman Sachs spokesperson
On stagnant plans for WASPI women“I have been trying, since I started in my post, to � nd a way to see if we can help them because when these measures were going through parliament, I could see how unfair those changes seemed to be. To impose the second increase on top of what was already increasing state pension age, for a group of women who had in many ways been relatively disadvantaged in the pensions system. I understand how they feel, but also have to say that not everyone else understands or sympathises in the same way.”Pensions Minister Ros Altmann
20 July 2016 www.pensionsage.com
news & comment round up
VIEW FROM THE SPP
� ere has been much debate about the merits of a secondary annuity market but just how realistic a proposition is this?
Contingent bene� ts remain a key stumbling block. Who has the contingent right and what is this right? Is contingent bene� ciary consent required? � e capacity of the contingent bene� ciary needs to be considered, for example dementia issues. What about children’s annuities? � ere is no standard annuity contract to provide the answers.
Looking at the tertiary market, who will be allowed to buy? Will overseas buyers be allowed? What aspects of competition law prevent over regulation of overseas buyers? Will providers be party to the later assignations of the annuity? A steady income stream from a UK insurance company is likely to be highly attractive. How will money laundering, � nancial crime and sanctions be addressed? Should anyone purchasing the right to annuity income have to have a UK bank to avoid issues with paying to overseas accounts? If there is to be bundling of annuities, what type of � nancial instrument will be used?
And ultimately what about death noti� cation? Currently providers can also use trace-smart to establish whether an annuitant is still alive. � ere is little possibility of the annuitant committing fraud so there may be no ability to use trace-smart. Unnoti� ed deaths could lead to overpayment and recovery issues, especially if payments are to an overseas bank account. While it’s clear that the secondary market is coming, there are a lot of hurdles to overcome before we get there.
Recently, on the London Metropolitan tube line from Amersham to Aldgate, delayed yet again on my way into work, I began to draw
a perhaps tenuous comparison (I’ll leave you to decide!) between the state of the TFL underground system in London and the pensions industry.
� e tannoy announcement � lled the carriage, informing passengers of yet another signal failure (can you believe we are meant to be one of the most technologically advanced nations in the world), delaying thousands of commuters on their way into work before they reached their � nal destination, and preventing them from reaching the light at the end of the tunnel. Now, taking the pensions industry into consideration, I have been immersed within it for � ve years now and have witnessed the snail-pace process of any legislatory or policy approval. It’s a headache for me, as a journalist, let alone the industry experts and pension savers themselves.
In some cases delays can be welcome within pensions (I’m thinking GMP equalisation here) but overall, pensions legislation should be changed more quickly than it is currently. Here, I’m thinking about the pension charge cap delays where savers’ � nancial interests are potentially a� ected. � ere seems to be consultation a� er consultation on any pensions issue that could quite easily be passed at the second hurdle for example. Recently I spoke to Spence
and Partners corporate pensions adviser and professional pension scheme trustee David Davison about issues surrounding the LGPS, charity pensions and the sheer outrageous policies surrounding public service contracts, TUPE and charity pension liabilities. � e New Fair Deal guidance surrounding this issue was long-awaited and applies to transfers of sta� from central government departments, agencies and the NHS. A� er this long-awaited guidance came to fruition however, we learnt that it does not apply to local authorities. A certain question mark arises here as we are still waiting for this legislation to extend to the LGPS, but we could be talking years not months before further reform is implemented – quite frankly unbelievable. It should have been included in the � rst place.
Whilst it is essential to ensure that policy amendments and legislation changes are not rushed through in a way that might be detrimental to the overall UK savings sphere, the overall process can be pushed through faster. � e powers-that-be have a tendency to come up with an idea, conduct a load of consultations on the matter, and then either put it on the backburner or pass through the legislation about two years later. � e government and parliament are partly to blame for this, so let’s hope that a glimmer of light shines through the windows of the House of Commons and Lords and we see any future Pensions Act or whatever it may be passed through a more accelerated process, whilst maintaining clarity and fairness.
In the current governmental environment it may be hard to envisage this light but let it eventually shine down on the industry!
Written by Adam Cadle
VIEW FROM THE PMI
� e EU referendum on 23 June completely eclipsed all other events on that day – including a pensions story that had
occupied the front pages of the national media only a week previously. � at day also saw the closing date for the Department for Works & Pensions’ (DWP) consultation on the future of the British Steel Pension Scheme (BSPS).
� e choice facing the government may be summarised as pragmatism vs principle. On the one hand, dis-applying Section 67 of the Pensions Act 1995 would keep BSPS – and its 134,000 members – out of the Pension Protection Fund (PPF). In addition, it would provide members with bene� ts superior to those that the PPF would provide. On the
other hand, it would set a potential-ly dangerous precedent that could encourage employers to propose similar solutions each time there is a complicated corporate restructuring exercise involving de� ned bene� t (DB) liabilities. Accrued rights would no longer sacrosanct.
� e trustee of the BSPS favours the dis-applying approach on the basis that it represents the better outcome for members. It also appears to be the preferred option of the government. On this basis, we would seem to be poised for a seismic shi� in our ap-proach to legacy DB bene� ts. A change of this signi� cance should not be engulfed by other news events.
Tim Middleton, technical consultant, PMI
“The choice facing the government may be summarised as pragmatism vs principle”
rates at 0.5 per cent has been described as a “brief respite for pension schemes”.
JLT Employee Bene� ts director Charles Cowling says the Governor of the Bank of England, Mark Carney, has signalled that he expects to see a rate cut in the sum-mer as a result of Brexit and a worsening outlook for economic growth.
� e immediate reaction in the mar-kets to the BoE’s decision to hold interest rates was that UK government bond yields were higher and the FTSE 100 fell back by around 70 points to overnight levels, Investec Wealth & Investment head of � xed interest Darren Ruane states.
According to Towry head of invest-ments Andrew Wilson: “� e previously rampant FTSE 100 has had the wind taken out of it sails on the news that the BOE is standing pat, and this has also impacted European markets. Equities had been ral-lying on hopes of central bank stimulus, including from the Bank of Japan, but for now it may have been better to ‘buy the rumour’.”
However, Ruane notes that the sterling rallied against both the US dollar and euro following Carney’s decision to hold interest rates at 0.5 per cent.
� e sterling rally is in contrast to the initial a� ermath of Brexit, which saw the GBP lose almost 8 per cent to the euro and was minus 12 per cent on the year to date. Indeed, on the 6 July the pound shrank to a fresh 31-year low against the dollar, falling to $1.296 as investor con� dence waned.
Stockmarkets, having seemingly not factored in a potential Brexit, had also suf-fered a sharp decline the day the result was announced, with trading the morning a� er Brexit opening with a 7.4 per cent drop for the FTSE 100, along with the FTSE 250
seeing an 8 per cent decline. � e a� ermath also saw European equities fall by 5 per cent whereas Bunds and US Treasuries posted gains.
Despite the initial shock, the FTSE 100 saw a rapid bounceback, up by 3.58 per cent on 29 June, having regained all of its losses and more since the Brexit vote. How-ever, � nancial � rms and house-building companies saw their share prices remain de� ated. Taylor Wimpey’s shares fell 16 per cent while Barratt Developments and Travis Perkins both fell 13 per cent.
Henderson Global Investors temporar-ily suspended trading in its £3.9 billion UK Property PAIF and PAIF feeder funds due to “exceptional liquidity pressures”, a� er the Brexit vote, with other companies’ property funds also following suit.
� e a� ermath of the referendum result also saw a number of rating agencies down-grade the UK. It lost its top AAA credit rating from S&P, which said the referen-dum result could lead to “a deterioration of the UK’s economic performance, including its large � nancial services sector”. Rival agency Fitch lowered its rating from AA+ to AA, forecasting an “abrupt slowdown” in growth in the short term.
Hymans Robertson partner Patrick Bloom� eld says although rating agencies may have downgraded their view of gilts they are more expensive than ever to buy.
“Regardless of what rating agencies have to say, many investors are willing to pay sky high prices for gilts for the security o� ered by the British government, even if this is now outside the EU.”
However, Lombard Odier IM head of global equities Didier Rabattu believes increased loosening of developed market monetary policies and an economic down-turn could present investors with opportu-nities for emerging market investment.
Written by Adam Cadle
Market commentary: Brexit woes VIEW FROM THE PLSA
I want to update readers on the Financial Transaction Tax, on which EU ministers – or at least those from the 10 participating countries – appear to have taken some big decisions.
My last FTT report described how this troubled project had been encountering choppy waters. Estonia had dropped out of participating, and there were deep disagreements on key issues such as the scope of the tax and how the revenues would be used.
Now, according to Austrian Finance Minster Jörg Schelling, who chairs the negotiations, the 10 nations have suddenly agreed on ‘99 per cent’ of policy issues. Two working parties have been set up to resolve outstanding di� erences and � nal decisions are expected at a meeting in the margins of ECOFIN on 9 September.
I must admit the cynic in me questions whether it can really be so simple. A� er months of major disagreements, can the group of 10 really have patched up their di� erences quite so easily?
� e truth will be out in due course. In the meantime, rival reports suggest the FTT might be dropped in favour of a bank levy or Financial Activities Tax, as implemented recently in Slovenia. � is kind of tax simply imposes a levy on bank pro� ts or on bankers’ remuneration. It’s easier to do, and satis� es many of the same political concerns addressed by the FTT.
So perhaps that’s where the ‘99 per cent’ agreement comes from – the 10 nations have simply agreed to do something else instead.
� e FAT might be just the thing to allow the FTT’s backers to save face. We shall see.
James Walsh, policy lead for EU and international, Pensions and Lifetime Savings Association
The referendum vote to ‘Brexit’ has only added to the sense that interest rates globally are likely to stay lower for longer. Even
in the United States, which is considered further along the economic cycle than many other developed economies, the pace of any moves towards interest rate ‘normalisation’ remains uncertain. Despite this uncertainty, it seems clear that the path of official interest rates in the US will eventually be upward from here.
While pension schemes should benefit from higher interest rates through a fall in the value of their liabilities, it would not be all good news. In addition to long-dated gilts, most schemes typically have global bonds exposure which may be tracking a core benchmark, such as the Barclays Global Aggregate Bond Index. Over the course of this year, that approach has been successful as we have seen core bond yields fall ever lower and benchmarks generate strong returns. However, it is important to recognise the potential risks
associated in holding a significant degree of interest rate risk.
In general, for a fixed-income security or portfolio, the longer the duration, the more sensitive it is to fluctuations in interest rates. When rates go up, generally the value of these securities goes down, even more so if they have longer-duration characteristics.
The availability of cheap financing and ample liquidity has prompted a number of governments and companies to lock in longer-term debt at record-low interest rates and because many benchmarks are issuance weighted, as large entities issue more debt, their positions within the benchmark increase. This has the effect of increasing both the benchmark’s duration and the investor’s exposure to the heaviest debtors. This longer duration means a fixed income strategy tracking an index would be exposed to a higher degree of possibly unintended interest rate risk.
Meanwhile, as the chart opposite shows, the benchmark’s overall yield has noticeably declined in recent years as core bond market yields have fallen to record lows in some markets.
So while pension schemes might understandably be wishing for higher interest rates in the UK, the impact on their benchmark-oriented fixed income strategies should be borne in mind. In contrast, fixed income strategies that have flexibility to move away from tightly tracking a benchmark can reduce certain risks, including interest rate risk, while potentially providing additional yield benefits.
“While pension schemes should benefit from higher interest rates through a fall in the value of their liabilities, it would not be all good news”
www.pensionsage.com July 2016 23
investment interest rates
Rising interest rates: Be careful what you wish for
Stuart Lingard explains why higher interest rates may not be as beneficial as it first appears for pension funds
Written by Stuart Lingard, director, global fixed income product management, Franklin Templeton Investments
In association with
More information:Jill Barber, Head of Institutional, UK & Ireland, Franklin Templeton [email protected] 7073 8544franklintempleton.co.uk
Historical Duration of the Barclays Global Aggregate Bond Index and Commensurate Yield CharacteristicsYield-to-Worst and Modified Duration31 January 1995–31 March 2016
Source: FactSet. Past performance does not guarantee future results
Britain’s vote to leave the European Union has sent shockwaves through financial markets. Sterling hit a 31-year
low against the US dollar and anxieties over the repercussions for the UK economy and political uncertainty have kept markets volatile.
In the run up to the vote we had cut risks in our portfolio and added gold as well as hedging instruments, including a European volatility index. These instruments have protected our portfolio from a sharp sell-off in risky assets following the ‘Leave’ decision.
While financial markets have stabilised somewhat, volatility and uncertainty are likely to be a continuing trend in the coming months. We also face a number of political risks in the coming months, with an Italian constitutional
referendum in October and French and German general elections due next year.
However, every cloud has a silver lining. As the dust settles, the market correction, as well as the wider political and economic ramification of the Brexit, may provide us with an attractive opportunity to add risks.
Firstly, the climate for investment is likely to stay benign for longer than anticipated. Following the vote, investors are pricing in the likelihood that the Federal Reserve will keep interest rates on hold for some time, at least until next year. Easier-than-expected monetary policy from the US should dampen the strength of the dollar, supporting emerging economies.
Secondly, the shock defenestration of the political establishment in the UK, in my view, makes it easier for
policymakers in Europe and other parts of the world to implement popular and radical initiatives to support the economy.
Talk of recapitalising Italian banks is a case in point. Italy’s undercapitalised banks, with €360 billion of bad loans, need help. However, a long list of stringent EU rules constrains the ability of
government to rescue them. For example, the government cannot inject capital into the country’s banks without triggering an onerous EU ‘bail-in’ clause, where bank creditors are required to shoulder losses to limit the burden of taxpayers. After the Brexit vote, Italian Prime Minister Matteo Renzi may be able to push its EU partners to approve his otherwise controversial recapitalisation plans which include suspension of ‘bail-in’ rules.
Finally, post-Brexit turmoil may push European governments to adopt fiscal stimulus to boost growth. In continental Europe, the economic outlook remains weak and the European Central Bank is running out of options as we believe cutting interest rates further into negative territory would be counterproductive.
Against this backdrop, pressure will increase on governments to boost demand by increasing spending, in pro-growth projects such as infrastructure. In Europe, public spending on infrastructure is some 15 per cent below its pre-crisis peak. Business communities in the UK are already urging the government to commit to infrastructure spending in a move to shore up confidence. Critically, there is probably no better time for governments to invest in infrastructure. With the average yield on government bonds close to 1 per cent, borrowing costs are at historic lows. Raw material prices have also slumped.
The ‘Leave’ vote has no doubt unleashed widespread chaos in Europe’s political and economic landscape. However, under the smokescreen of Brexit, impediments to badly-needed change and reform in Europe and elsewhere may be removed. This, if it happens, will bring attractive opportunities for investors in the long term.
Opportunity in the aftershock
Percival Stanion reveals that after the Brexit shockwave lies opportunity for pension fund investors
In association with
Written by Percival Stanion, head of international multi asset, Pictet Asset Management
2
4
6
8
10
12
0
50
100
150
200
250
300
350
2003 2005 2007 2009 2011 2013 2015
EUROPEAN POLICY UNCERTAINTY INDEX
EURO-AREA 12M EY-1OY GOVT BY, RHS
Source: Pictet Asset Management, Datastream, June 2016.
PMI - Scams, Scandals & Loopholes - how to avoid them 20 September 2016SackersLondon Would understanding how to protect your pension scheme, whether you are a member, a trustee or a company sponsor be of interest? The expert line up of speakers will discuss the issues employers and trustees are struggling with and outline how knowledge, communication, education and advice can help to prevent future scams from occurring.For more information, visit: pensions-pmi.org.uk/events
Pensions Age Autumn Conference 22 September 2016Hilton Tower Bridge LondonThis one-day conference, which is open to pension scheme managers, trustees, FDs, advisers, pension and HR professionals, will offer delegates the up-to-date knowledge and guidance they need to help them run their pension schemes to the absolute best of their ability, and give them the tools to not only meet their goals but exceed them to the benefit of the member and the industry as a whole.For more information, visit: pensionsage.com/autumnconference
PLSA Annual Conference & Exhibition19-21 October 2016 ACCLiverpoolThe challenge facing the industry remains the same as ever: how do we help people to save enough? But this year it’s different as well. Pensions freedom, more policy reforms and political upheaval have changed the context in which we operate. So we need fresh thinking on long-term saving. With world-class speakers, the this is your chance to find out how your organisation fits into this future. For more information, visit: plsa.co.uk/conferences_and_seminars
Irish Pensions Awards24 November 2016Shelbourne HotelDublin The Irish Pensions Awards give recognition to those pension funds and providers who have proved their excellence, professionalism and dedication to maintaining high standards of Irish pension provision over the past year. Now in its fifth year, it is an event not to be missed, with over 300 guests attending in 2015, this year is set to be even bigger and better. The deadline for entries is 27 July 2016.For more information, visit: europeanpensions.net/irishawards/
Month in num
bers
£935bn The UK pension deficit hit a record level of
£935bn in the final week of June, after having reached £900bn as a result of the UK’s decision to leave the EU. Extreme lows in gilt yields also drove pension liabilities to an all-time high of £2.3trn. The UK aggregate deficit is also at its worst point on record by around £25bn.
78% The PPF 7800’s funding level dropped by this
number, nearing its lowest-ever level. The aggregate deficit of the 5,945 schemes in the PPF 7800 Index had increased to £383.6bn at the end of June 2016.
1 in 5 The proportion of millennials who believe that
the state pension will not be available by the time they retire, according to findings from NOW: Pensions.
Visit www.pensionsage.com for more diary listings
26 July 2016 www.pensionsage.com
VIEW FROM THE ACA
Our reaction to the British Steel Pension Scheme consultation is for any solution to be found within the current legislative framework. In particular, we suggest that consideration is given to setting up a new scheme with lesser benefits, transfer to which is with member consent and facilitated through a regulatory apportionment arrangement under, which those that don’t transfer go into the Pension Protection Fund.
Looking beyond the British Steel situation, we support moves to find an alternative to insolvency and PPF entry for the 600 to 1,000 DB schemes whose employers have such a weak covenant they are unlikely to able to deliver on their promises.
This might continue to be the regulated apportionment arrange-ment, but we suggest this should be critically re-evaluated. It could be an alternative mechanism through which an appropriate compromise could be reached, so long as the revised benefits are at least as good as PPF compensation. In either case, a facility to switch from RPI to CPI is desirable given the current legal lottery.
We would support a very nar-row adjustment to section 67 of the Pensions Act 1995 to facilitate a reduction to benefits, but only for the BSPS, given the nature of its pension increase rule, and with no prec-edent established that this could be extended to other schemes.
We are opposed at the current time for any adjustments to be made to the bulk transfer without consent legisla-tion but any future changes should apply across the board, not restricted to large schemes.
When asked what concerns them, individuals with responsibility for defined benefit (DB) pension
schemes regularly cite issues such as lack of time, resources, knowledge and information. In other words, their collective ability to identify issues, make decisions and implement them efficiently.
Such concerns are understandable — the range and complexity of issues facing pension schemes continues to expand, while regulatory requirements also continue to grow. Making the right decisions at the right time gets increasingly important as schemes mature and become less able to bounce back from setbacks.
But many schemes are drowning in the quantity of things that they need to do. And because of this, they often lack time to deal with the most important issue; the development of a strategic scheme business plan, focusing on the next one to three years, that helps trustees prioritise their time to make real progress on long-term goals. Without this focus, schemes are merely treading water.
We believe that the best practice model for trustees is to ELEVATE their role to that of a strategic decision maker, focusing on strategy while implementation and second-order decisions are dealt with outside of the trustee board. This way they can retain oversight but avoid the temptation to get involved in detail.
But focusing on strategy without making any other changes requires trustees to stretch their very limited time even further. So alongside ‘ELEVATE’, trustees also need to ‘DELEGATE’ and obtain help from outside of the trustee board.
The concept of delegation can feel quite uncomfortable for some trustee boards who feel responsibility for maintaining close involvement in all items. But for many boards, remaining closely involved in one item is likely to prevent them from devoting time to something else. For example, spending an hour discussing a member’s ill health-led retirement might mean there is no time to talk about long-term investment strategy. Considering trade-offs like this can help trustees identify the items they must retain and those that can be delegated and delivered by others.
But who are trustees delegating to? Depending on the scheme and corporate structure, trustees might have access to sub-committees, in-house resources, a pensions manager, the scheme secretary or a range of advisers. All of these can accept delegated responsibility, but whoever trustees delegate to, controls are needed. This requires suitable mandates to ensure clear roles, responsibilities and agreed reporting mechanisms.
Alongside Elevation and Delegation, more trustee time can be freed by looking at DE-CLUTTERING trustee meetings. Here, the focus is on ensuring streamlined delivery of routine items
(with reporting kept high-level) leaving more meeting time to focus on strategy.
For example, rather than letting your advisers spend an hour talking through a detailed and backward-looking report, request a high-level report; take it as having been read and note it. Spend meeting time talking about forward-looking items and agreeing strategic actions.
De-cluttering meetings like this requires good chairing skills together with cooperation from your advisers. If they want a voice at the table, they will need to focus on the added strategic value they can bring - in turn delivering value for money for trustees. Trustees also have their part to play in ensuring that they come to meetings well prepared.
So ELEVATE the role of trustees, DELEGATE matters that can sensibly be delegated, and DECLUTTER your meetings. The outcome of which is … more time to spend on strategic issues, with less time spent on day-to-day issues and backward-looking reports. There will be more chance to consider new opportunities in the time you have created, and less deferring of ideas until future meetings. And ultimately more chance of making faster decisions that have a positive impact on the pension scheme.
Elevate, delegate and declutter
Susan Hoare explains why it is important to create the time for strategic planning
In association with
Written by Susan Hoare, principal consultant, Aon Hewitt
The concept of elevate, delegate and declutter is just one theme that is covered in Aon’s research into effective governance. To take the governance challenge and see how you rate, either as an individual, as a trustee board, or against your peers, go to www.aonhewitt.co.uk/governancechallenge
Expanding ETFs - Ashley Fagan explains how pension fund investors use ETFs for a growing range of applications across asset classes p30
Sponsored by
www.pensionsage.com July 2016 29
Sponsored by
Exchange-traded funds focus: New horizons
investment ETFs
Ashley Fagan, CFA, director, head of iShares UK institutional client business, iShares
The golden nugget - Sandra Haurant comments on the changing shape of the ETF industry and how these investment vehicles are becoming more commonplace in pension funds’ strategies p32
These are challenging times in which to be a pension fund manager or a trustee – in an environment of low interest
rates, with high recent market volatility, with the transition from defined benefit (DB) to defined contribution (DC) schemes, as well as the relatively recent advent of ‘pension freedom’ in the UK to contend with. Another challenge for pension funds is, as the Pension and Lifetime Savings Association (PLSA) phrased it on the day the results of the UK’s referendum on the EU were released: “The ramifications for UK pensions of the UK’s decision to leave the European Union”2 which, at the time of writing, are not clear.
The financial crisis drove the need for greater diversification across asset classes, with investors seeking to identify sources of return while looking to manage and monitor risk more carefully than ever before. Since then, investors have diversified across a wider range of asset classes, often using more tactical strategies, all of which has driven a need for more flexibility. With pressures on costs, many pension funds have reviewed the financial products that they use to ensure that they are getting the best value for money. Active products have been reviewed too, to see if traditional active managers could be replaced in some instances with other ways to access the underlying assets, such as via a passive
investment vehicle. The investment landscape for passive investments has been changing and today there can be value to be added – and costs to be saved – for client portfolios through careful selection of passive investment vehicles to access markets.
There have been several headwinds, including new banking regulations put in place since the financial crisis, which has led to an increasing cost of funding for banks. The main catalyst of this increased cost has been the implementation of regulatory frameworks such as Basel III or the Volcker Rule3. For those investors looking to financial derivatives for index tracking, the costs of holding these instruments, such as equity futures, has increased. In fact, we have seen a transition of clients holding equity futures switching into ETFs due to lower holding costs and greater operational efficiency. Between June 2014 and 2015, we have seen $22 billion of client switches out of index futures and other financial instrument into our ETFs4.
Meanwhile, Exchange-Traded Products, of which ETFs are the largest category, have seen steady growth and the ETP industry has grown to over $3 trillion1 in assets under management (AUM) globally, with total expense ratios (TERs) and the transaction costs of the funds generally trending downwards while liquidity has been increasing. ETFs are increasingly being recognised
for the structural benefits they offer which include low costs, transparency and liquid access to a broad range of asset classes via a fund traded on a stock exchange. The ability to achieve diversification at a reasonable cost and the transparency of the underlying holdings are benefits that are frequently mentioned.
Their adoption by institutional investors is most advanced in the US. In 15 years, from a standing start, however, European-domiciled ETFs have now grown to $529 billion in assets under management (AUM)1.
In our experience, pension fund managers are using ETFs for a wider range of applications in a growing number of asset classes. From investing in markets where access is limited or too expensive, to gaining exposure to core asset classes, right through to liquidity or transition management, ETFs are playing an important role. The range of strategies covered by ETFs now includes those that were previously only accessible via an active manager, such as smart beta equity and emerging market equity.
We gained further insight into the increased usage of ETFs by institutional investors and the ways in which they are using these products from the results of the fifth ETF survey that we at BlackRock recently carried out in conjunction with Greenwich Associates5. The respondents included institutional funds (corporate and public pension funds, foundations and endowments), asset managers, insurance companies, investment consultants and advisers.
In the Greenwich survey, the most common ETF applications mentioned were:• Making tactical adjustments to portfolios: 84%
Ashley Fagan explains how pension fund investors use ETFs (Exchange-Traded Funds)1 for a growing range of applications across asset classes
Expanding ETFs
1Exchange Traded Funds are the largest category of Exchange Traded Products – the category also includes Exchange Traded Notes and Exchange Traded Certificates. Source: BlackRock, ETP Landscape as at 31 May 2016.2The PLSA (formerly the National Association of Pension Funds), sent a memo to all members on 24/06/2016, “The ramifications for UK pensions of the UK’s decision to leave the European Union will start to become clear over the coming weeks and months. Much will depend on the precise nature of our future relationship with the EU, which may mean that some aspects of UK pension provision continue to be influenced by the EU. In other areas, UK pension law may need to be disentangled from EU legislation...It is essential that the UK government and policymakers in Brussels now act swiftly and decisively to manage current volatility and announce a clear plan to renegotiate our future relationship with the EU.” 3Part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.4Source: BlackRock, as at June 2016.5Greenwich Associates 2015 Global Exchange Traded Funds Survey
• Using ETFs for core allocations: 64%• Gaining international diversification: 64%• Rebalancing an existing portfolio: 55%• Putting cash to work within equity markets: 37%
Source: Greenwich Associates 2015, U.S., European, Canadian and Asian Exchange-Traded Funds Studies.
Case study: Fixed income ETFs attract new usersOne of the drivers of growth for ETF flows that was identified by the survey was an increase in demand for fixed income ETFs, which we believe will continue, based on the Greenwich survey. While 95% of ETF investors globally use ETFs for equity allocations, fixed income ETF use varies. In Europe, it has reached 82% of users in the asset management segment. However, although we have already seen significant growth in usage and total AUM, particularly in 2016 to date, fixed income ETFs still represent only a small piece of the overall fixed income market, particularly in Europe. In Europe, the recent Greenwich data noted that 30% of fixed income ETF users in the study have been investing in these funds for less than two years, so there is certainly room for growth.
Liquidity in fixed income markets has become challenging, transaction costs are now a significant portion of the total cost of ownership, and there are challenges involved in sourcing the
underlying bonds. To this end, ETFs can offer fixed income investors an additional layer of liquidity. Fixed income ETFs can often be materially cheaper to buy and sell and can offer an inventory of bonds which has been built up over time. Some pension funds are using bond ETFs for cash and liquidity management as well as for cost-efficient transition management. Product innovation means that virtually all fixed income subsectors are now accessible, including high yield and emerging markets. Credit investors have been using fixed income ETFs to take or reduce exposure to a broad-based universe of credit. Tactically, they have used fixed income ETFs to take a directional view on the asset class. ETFs are also frequently used for putting large inflows to work quickly or meeting a large redemption.
One way that pension funds have been taking advantage of the potential liquidity fixed income ETFs can provide is by incorporating them into their funding level trigger based de-risking strategies. The fixed income ETF can provide a cost efficient tool that may allow pension schemes to get quick access to a diversified pool of underlying bonds at often lower transaction costs, when a funding level trigger is hit. When compared to investing in the underlying bonds directly, this can lead to significant time and cost efficiencies.
Investors sometimes raise concerns around how ETFs will react in times of market stress when compared with the
underlying investments, yet in periods of market volatility we have actually seen ETFs hold up as robust financial instruments. For example, following the March ECB meeting this year we saw trading volumes spike in corporate bond ETFs because the ETFs offered price transparency at a point when the underlying market saw limited trading activity.
Going forward, we believe that pension schemes and their stakeholders could benefit from exploring how the passive investing landscape has evolved and the potential opportunities that arise to add value to an investment strategy. After all, in an environment where every basis point matters, can pension schemes afford not to have every possible tool in their toolkit to help them navigate these challenging times? We expect that the tailwinds that have drawn institutional investors to ETFs will persist, and continued growth will be driven by more innovative products coming to the market, and investors becoming more familiar with ETFs and how they can be used.
investment ETFs
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While we wait to know precisely what the referendum result will mean for the UK, one
thing that is certain is that the markets’ waters are choppy and navigation for pensions investors will require a firm hand on the tiller.
The industry reported recently that the UK’s pensions were facing a funding hold of £900 billion after the vote to leave the European Union and in the immediate aftermath, a lot of decisions were made quickly. SPDR ETF sales strategy EMEA Antoine Lesne, writing in the midst of fast-moving markets on 25 June 2016, the day after the referendum results, said: “Many investors are trading, with numerous ETFs topping their 30-day average volume within just a few hours of trading.” Indeed, the industry has reported a scramble to invest, highlighting a move into exchange traded funds (ETFs) linked to the FTSE 100 index, UK financial stocks, sterling and gold, with many in the City reporting exceptional trading volumes.
Composition and qualities ETFs are investment funds that are traded on stock exchanges. Inside they hold various assets – equities or bonds for example, but also alternative assets – and usually follow an index, in a similar way to a traditional index-tracking fund. They are essentially a wrapper, but inside they behave just like passive index funds.
Pension funds’ interest in them is not new. “Even prior to Brexit, it had become more and more important to assess the vehicles a pension fund uses and to make sure it has everything available in its toolkit to manage a portfolio as cost-efficiently as possible,” iShares UK institutional sales head Ashley Fagan says. “It’s essential [for pension funds] to look at the ways they are implementing investment strategies and make sure they are actually using the lowest cost vehicle that is available.” And that, says Fagan, is frequently an ETF.
They certainly offer a variety of
possibilities. “ETFs are available tracking a very wide range of market indices, providing the opportunity to invest in almost any liquid asset class without the risks and costs of selecting an active manager,” PiRho Investment Consulting director Nicola Ralston explains.
ETFs are gradually becoming a larger, longer-term part of pension portfolios, but one of the first uses for ETFs among pension funds was as an instrument to
aid in transitions from one investment vehicle to another. A fund wanting to move away from an underperforming active manager, for example, could use ETFs as a kind of interim instrument. “ETFs are a common solution for this interim beta exposure,” explains Fagan.
But, JLT Employee Benefits senior consultant and head of manager research Murray Taylor warns this approach should be used with caution
The golden nugget
Summary■ ETFs are gradually becoming a larger, longer-term part of pension portfolios. One of the first uses for ETFs among pension funds was as an instrument to aid in transitions from one investment vehicle to another.■ According to the ETFs in the European Institutional Channel study, around a quarter of continental European institutions and 20 per cent of UK pension schemes invest in them. Seventeen per cent of institutions on the continent who were not currently investing in ETFs said they intended to do so in the next year.■ Ease of use and the costs reduction in ETFs are two of the main reasons why people are now investing more in ETFs and turning away from derivative products.■ The access ETFs give to an extremely wide range of non-core markets is also an appeal, with increased interest in smart beta, non-market-cap weighted indices and factor indices, such as quality and minimum volatility.■ The use of pension funds is expected to increase given the need for transparency, cost efficiency and liquidity in pension schemes portfolios.
Sandra Haurant comments on the changing shape of the ETF industry and how these investment vehicles are becoming more commonplace in pension funds’ strategies
and decisions need, of course, to be considered within the wider context of today’s environment. “If you are completely disenchanted with your investment strategy and have not yet decided where you want to go, that is where an ETF can be useful,” he says. “But we are now in a new world and currently need different thinking. Moving into an ETF is a change of strategy, albeit a short-term one, and inevitably what you do now will be wrong because we do not know what will happen next.”
ETFs themselves are not a new product, and according to the ETFs in the European Institutional Channel study, carried out by Greenwich Associates, commissioned by BlackRock and published in December 2015, around a quarter of continental European institutions and 20 per cent of UK pension schemes invest in them. Those not yet using them may soon start – 17 per cent of institutions on the continent who were not currently investing in ETFs said they intended to in the next year. And in the same period, more than a third (35 per cent) of investors in continental Europe said they planned to increase their investments in ETFs.
Ease of use was a key factor for those switching to ETFs and away
from derivative products, for example, and cost was of equal importance. The Greenwich study shows that almost half
of respondents shifted from derivative products to ETFs in the past year, with 17 per cent doing so because of operational simplicity and another 17 per cent switching because ETFs were cheaper.
CostsThe costs involved with investing in ETFs have come down in recent years, says Fagan, making them more attractive to pensions. “I think what has changed is that the passive landscape has evolved significantly over the past 10 years, but even more so recently. We have seen that the ETF has become more
cost efficient compared to traditional beta instruments,” she says. “The ETF industry has grown, funds have become larger in size, and liquidity has increased. The amount of trading has increased, and that has brought down the transaction costs for ETFs.”
She added that the cost of holding ETFs has also come down, because management fees, or TERs, have declined thanks to increased institutional usage. “We have seen an increase in numbers of clients using ETFs for long-term holdings, and we are aware that the longer an investor is holding a fund, the bigger the impact of the management fee on the total cost of ownership,” says Fagan.
Ralston agrees: “ETFs are typically cheaper than active management – often much cheaper. However, fees vary widely and investors should not assume that all ETFs are cheap in absolute terms.” Weighing up cost differences is, then, crucial to ensuring the product is the right choice – and the fall in fees is not enough to convince everyone that ETFs are the right choice. Taylor agrees: “The costs of some ETFs are coming down, but looking over a longer time frame, [traditional] passive vehicles are still more cost effective.”
The access ETFs give to an extremely wide range of non-core markets is also an appeal. “We are seeing increased interest in smart beta, non-market-cap weighted indices and factor indices such as quality or minimum volatility,” Taylor says. Where pension funds may not have internal expertise or find it difficult to get exposure to certain countries such as Canada, for example, or certain emerging markets, ETFs can be useful. “You can use ETFs almost as a completion mandate to complete that exposure to your strategic asset allocation,” says Fagan. It is also relevant to fixed income, she adds. “We see an increased interest in emerging-market debt and high-yield ETFs, especially in a low-yield environment where it is difficult to find areas that give adequate yield.”
TransparencyOne of the other advantages of ETFs is that, in the main, they are transparent. “All of our iShares ETF holdings are published daily on our website, so trustees can have a very good understanding of what the underlying investments are on a daily basis,” says Fagan. “Additionally iShares has a strong track record in managing our funds in line with the index, so that is an added layer of transparency because the index rules are very transparent. You can have a clear idea of how the fund will invest going forwards.”
According to Ralston: “For many ETFs, transparency of holdings and costs is part of the appeal.” However, she cautions, there are exceptions: “The sector is now extraordinarily diverse, and it is important not to over generalise. Not all ETFs are highly transparent.” So-called synthetic ETFs, for example, do not offer the same levels of clarity. “Some ETFs, such as leveraged and inverse ETFs, are extremely complex and are unlikely to be suitable for most pension funds,” she cautions.
Given the need for transparency, cost efficiency and liquidity, ETFs seem to have secured their place in pension funds’ strategies. Ralston says: “It is likely that the use of ETFs by pension funds will continue to increase, as ETFs can be a good route to gain cheap passive exposure to certain asset classes. But she adds a note of caution: “The sector is now so diverse and complex that even the choice of a suitable ETF may be far from simple. And, as with any investment vehicle, the ETF label should not be seen as bypassing the need for proper analysis as to the terms and risks.”
In these uncertain times insight into the future is welcomed by all; that was the general feeling from delegates at the Pensions Age Northern Conference. Held a little over two weeks before the EU referendum,
there was certainly a feeling of anxiety in the room.
The result came as a shock for many, but especially Pictet Asset Management head of international multi-asset Percival Stanion, who believed the remain camp would have the advantage as he thought the undecided would vote to keep things as they are.
Erring on the side of caution though, Stanion noted that a leave vote would result in a two-year negotiation period that could easily be extended. He said that alternative trade options for the UK would be
the Norwegian, Swiss or Albanian models.
However, on the positive, he said that the EU sees the UK as a very important trade partner: “Looking at exports to the UK from the EU, you can see the UK has 14 per cent of all exports, it’s almost the same size, in terms of importance as the US.”
When it comes to being prepared for the future, the Pension Protection Fund’s general counsel David Taylor provided delegates with information on the future of the PPF levy. He said the PPF has already started thinking about the third levy triennium for 2018/19 to 2020/21 and that trustees should not
panic as they know “people value stability”.
“If we are going to make changes they are going to be supported by evidence,” he said.
Eversheds pensions partner Charmian Johnson and principal associate Amanda Small also gave trustees an update for the hot topics of the summer from a legal perspective.
For example, the latest defined contribution developments include a ban on active member discounts and member-borne commission, which are both now in force. In addition, the second line of defence is now on a statutory footing; as of
The inaugural Pensions Age Northern Conference, held in Leeds, welcomed speakers from varied backgrounds, providing delegates with the knowledge they need to stay ahead of the game
Pensions Age Northern Conference: Ahead of the game
6 April, members must be given generic retirement risk warnings on retirement flexibilities.
“I think that as there is an increasing shift of responsibility to the individual for their retirement savings, it comes as no surprise that the latest mix of developments are linked to member protection and the new defined contribution flexibilities,” Johnson said.
The Association of British Insurers policy adviser for retirement and savings, Lucy Forgie, covered some of the recently introduced pensions policy, such as freedom and choice. She said most savers seem to be taking a sensible
approach to the freedoms, as in the last quarter more annuities were sold than drawdown products.
As she noted, in the near future the government will be introducing further developments to freedom and choice, such as the secondary annuities market. She said that the ABI sees a “central role” for Pension Wise in this market to “ensure consumers understand the possible consequences of the product they’re giving up”.
On the Lifetime ISA, which the government is introducing in April 2017, Forgie said the ABI welcomes the introduction but it needs to be used to increase overall savings and not be used as an alternative to auto-enrolment.
“For most people, employer contributions mean that a workplace pension will remain the best option for saving for retirement.”
Proactive not reactive Ultimately we cannot predict the future, as the EU referendum showed us. However, as the conference title suggests, we can take certain steps to stay ahead of the game.
For example, Aon Hewitt
principal consultant Alex Den Braber spoke to delegates about improving behaviours when making investment decisions. “Discover, develop and deliver,” he said.
This involves creating a questionnaire to test views and then categorising them in order of importance. Aon has also designed a checklist to help trustees make investment decisions.
“Without it they are very confident and make decisions quickly but they are influenced by biases[...]when they use the checklist they are slower but they make better decisions.”
For trustees, there are of course always challenges to be working on that can make the future easier. Capita Insurance and Benefits Services divisional head of marketing and research Robin Hames listed some of these “modern woes and common foes” in his presentation.
For example, he revealed in a survey of pension managers and trustees that 65.3 per cent believe the main administration challenges over the next 12 months are scheme changes following the Budget 2014, revealing still the impact of the
freedom and choice reforms, and 51.4 per cent believe it to be GMP reconciliation.
Looking at the investment side of things, Schroders � duciary manager Hannah Simons talked to delegates about having a “common sense investment strategy”. She said it is sensible for trustees to have a four-step process; discover who you are and what you are trying to achieve; translate that objective into something that is investable; set how you will achieve this and � nally check the progress of how you are doing.
Lincoln Pensions managing director Richard E Farr and director Nick Tinker spoke to delegates about using employer covenant to stay ahead of the game. He referenced � e Pensions Regulator’s guide, which notes that it is “important trustees understand employer covenant as well as the scheme’s funding and investment positions before they take decisions which a� ect the scheme’s funding”.
� is linked into the presentation by Rothesay Life co-head business development Guy Freeman, who covered integrated risk management, which takes into account investment,
funding and employer covenant.
“Some pension funds, not all, could be missing opportunities to be getting better outcomes for their members, to save them from going into the PPF, so integrated risk management is a topic that should be discussed,” Freeman said.
review conference
www.pensionsage.com July 2016 37
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Panel discussion: Remuneration for MNTs� e panel discussion featured several independent trustees who gave a brief presentation on current challenges in the industry and were subsequently asked questions by delegates.
One of the hot questions of the discussion was whether member-nominated trustees should be remunerated for their time. PTL client director Keith Lewis responded positively as he thinks that if “some sort of payment helps the process, then why not”?
However, Dalriada Trustees trustee representative Chris Roberts said that it would be an “additional expense” for pension schemes that already have a “fairly heavy governance burden”. He also warned that if it were compulsory then the role may appeal to the “wrong people”.
BESTrustees trustee executive Ann Rigby added that the question of paying member-nominated trustees always leads her to the thought of “do we want them to have a quali� cation?” and if they are remunerated then “you almost go down the road of them being an independent trustee”.
She said: “I’m not too sure if that would work but I do think there should be more support in the role that member-nominated trustees do at the moment from employers.”
Following the EU referendum, there are concerns over which EU regulations will still apply in the UK. However, Brexit is (at least) two years away and UK pensions are not only affected by EU rules. Pensions Age provides a run-through of the international directives concerning UK pensions
Playing by the rules
European regulations
IORP Directive (I and II)The IORP Directive
is a high-level EU framework for workplace pension funds.
It lays down minimum standards on funding pension schemes, the types of investments pensions may make and permits cross-border management of pension plans.
The IORP Directive is the basis of the UK’s workplace pensions legislation, but despite this, IORP I’s impact is quite limited, as it requires little that is not already required by the UK anyway. In contrast, the revised IORP Directive – IORP II – goes much further. It features elements such as relaxation of the funding requirement for cross-border schemes and stricter knowledge requirements for trustees.
The final IORP II Directive text has recently been published, ruling out any Solvency-based funding regime for pensions (known as a ‘holistic balance sheet’). The PLSA has deemed this “a significant and welcome outcome in the long-running battle over funding of cross-border schemes”.
According to RSM head of pensions Ian Bell, despite Brexit, the IORP II Directive will still be incorporated into the Pensions Act 2017.
EMIRThe European Market Infrastructure Regulation (EMIR) is a body of European legislation for the regulation of over-the-counter (OTC) derivatives. EMIR is the EU version of a new
global framework to inject more regulation and transparency into the derivatives markets. The regulations include requirements for the reporting of derivative contracts and implementation of risk management standards. It established common rules for central counterparties and trade repositories.
EMIR is not yet implemented, but as pension funds use derivatives extensively to hedge risk, it is already having a huge impact in terms of system preparation and compliance.
“We are expecting there to be a rush for the ‘clearing door’ as we get closer to the deadline and schemes need to make sure they do not get caught out,” law firm Sackers warns. “Once the deadlines and the pension scheme exemption have expired, schemes will not be able to enter into any new interest-rate derivatives unless they are cleared.”
MiFID/MiFID II/MiFIRThe Markets in Financial Instruments Directive (MiFID) sets the framework for the investment markets. MiFID was applied in the UK in 2007, but is currently being revised (MiFID II) to improve the functioning of financial markets in light of the financial crisis and to strengthen investor protection. The changes are currently set to take effect from 3 January 2018 and will include a new Markets in Financial Instruments Regulation (MiFIR).Pension funds are exempt from MiFID. Yet according to PLSA policy lead for EU and international James Walsh , while MiFID impacts
principally on asset managers, rather than directly on pension funds, MiFID II is set to have a major impact on LGPS by reclassifying local authorities as ‘retail’, rather than ‘professional’ investors.
EU Gender DirectiveThe most recent of the EU’s equal treatment legislation is 2012’s EU Gender Directive, which requires equal treatment of men and women in pensions. This impacts on UK pension funds hugely, according to Walsh, given the historic differential treatment in the UK. In particular, the EU Gender Directive is the basis of ECJ rulings on GMP equalisation.
EU Data Protection DirectiveThe 1995 EU Data Protection Directive is the basis for the 1998 Data Protection Act, which is key legislation on data protection. Pension schemes have to ensure their data management is compliant – an issue of growing importance for pension funds in recent years, particularly due to risks of cybercrime. The new data protection regulations are expected to be coming into force in 2018, though the timing of this is less certain, Bell warns, as the UK’s exit negotiations from the EU may be ongoing at the point that the regulations are due to begin.
EU VAT DirectiveThe EU VAT Directive sets EU-wide framework for VAT rates. This is the foundation legislation on which recent court battles over pension schemes’
still worth being aware, the Foreign Account Tax Compliance Act (FATCA) was enacted by the US to prevent offshore tax evasion by US tax residents and puts an obligation on foreign financial institutions to disclose their US customers to the US Internal Revenue Service (IRS) or else be subject to a 30 per cent withholding tax on their investment income from US sources.
According to Rowe, the original concern with FATCA, from a UK pensions perspective, was that “UK pension schemes might have
to register with the IRS, perform due diligence to identify US citizen members and make reports to the IRS. Alternatively, to avoid the 30 per cent withholding tax, schemes could have withdrawn from investing in US capital markets but, in many cases, this would not have been palatable, practical or, in terms of trustees legal duties to invest in members’ best interests, even legal.”
However these concerns were allayed in 2012 with an agreement between the UK and the US to exempt all UK registered pension schemes from FATCA’s reporting requirements.
FrankThe Dodd-Frank Wall Street Reform and Consumer Protection Act,
commonly referred to as ‘Dodd-Frank’ is a compendium of federal regulations, primarily affecting financial institutions and their customers, that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. It is supposed to lower risk in various parts of the US financial system. The Volcker Rule, a key component of Dodd-Frank, restricts the ways banks can invest and regulates trading in derivatives.
Dodd-Frank stipulates that any pension scheme that enters into an agreement with a US-based organisation or any of its global subsidiaries are required to use central clearing for derivatives trading.
A global outlook
Basel IIICurrently financial markets are
preoccupied with the implementation of Basel III rules. Designed to make the banking industry safer, these rules will have an adverse effect on pensioners. Increased capital requirements for banks will result
in higher costs for pension funds interacting with banks. Pension funds typically need banks to transfer market risks using derivatives. Basel allows for lower capital requirements if these instruments are collateralised with cash or traded on a cleared basis. Either way, pension funds need to have excess cash liquidity if they want to make use of this caveat. “However, the more cash they put aside, the less they
can expect as an investment return, hence an opportunity loss for the pensioners,” Cardano head of financial markets Max Verheijen explains.
“In order to limit the impact of Basel, funds need to act now. They probably have to (re) negotiate current international swaps and derivatives contracts with their banks, make sure to be ready for clearing and set up repo lines,” Verheijen advises.
rights to reclaim VAT on investment costs have been fought.
AIFMDPensions funds may come across the Alternative Investment Fund Managers Directive (AIFMD), an EU regulatory framework for monitoring and supervising risks posed by alternative investment fund managers, including managers of hedge funds, private equity firms and investment trusts. There is an exemption from AIFMD for occupational pension schemes.
FTTThe Financial Transaction Tax (FTT) is a proposal to introduce a financial
transaction tax within 11 participating member states (but not the UK) of the EU, initially by 1 January 2014, postponed to 1 January 2016 and then to end June 2016. This deadline has now been extended again to allow for further work by the European Council.
The EC has confirmed that there will be no exemption from the FTT for pension funds. FTT would impose a minimum levy of 0.1 per cent on equity and fixed income transactions and 0.01 per cent on derivatives transactions. Under the proposal, FTT is due on transactions in financial instruments even if the parties are established outside the ‘FTT zone’, where that instrument is issued by a
person resident or incorporated in one of the 11 member states in the ‘FTT zone’.
“Although the UK is not in the FTT zone, as the tax is likely to be levied on the basis of issuance as well as residency, UK-only trades on a European instrument are likely to be caught,” JLT Employee Benefits senior technical consultant Julian Rowe explains. “It is likely that UK pension schemes would pay the FTT when transacting in securities issued in the 11 participating member states or when dealing with the UK branch of an institution (such as a bank) with its headquarters in one of the 11 member states.”
If you take the annual Melbourne Mercer Global Pension Index as gospel, then the UK has the ninth best pension system in the world.
In its 2015 index report, the consultancy giant deemed the UK to be once again worthy of a respectable B grade; ahead of the likes of the US, Germany and Japan, but sitting well below angelic A-graders Denmark and the Netherlands.
Mercer judged the UK to have just managed to hold onto its B grade, with a score of 65 out of a possible 100, down from 67.6 in 2014. Pensions freedom was blamed for the drop, with the report arguing that it posed long-term challenges to adequate retirement incomes.
But that wasn’t the only blot on its sheet. Sins such as the UK’s low level of retirement saving, unfunded state pension promises, increasing old age dependency ratio and substantial government debt all threaten its ability to deliver pensions salvation.
Raising contributionsThe first misdemeanour, low contributions into DC schemes, has long been a concern.
Columbia Threadneedle Investments head of pensions and investment education Chris Wagstaff says that for an average DC scheme in the UK, the employer contribution comes in at under 4 per cent, while the employee pays in a little below 2 per cent.
Research conducted by Columbia Threadneedle, in association with the Pensions Policy Institute, found that somebody on average earnings should be contributing between 11-14 per cent of their salary to ensure a good retirement income. This should be made from when they are aged 22 until the state pension age, presuming that they are eligible for a state pension that is index linked.
“When you look at our voluntary system, it falls quite a way behind mandatory and quasi-mandatory systems,” says Wagstaff.
“So if you look at Australia, that mandatory contribution
The UK versus the world
In the race to build a pensions system fit for the modern world, how does the UK stack up against its global comparators?
Summary■ The Melbourne Mercer Global Pension Index puts the UK as having the ninth best pension system in the world. This is ahead of the US, Germany and Japan, but behind Denmark and the Netherlands.■ The UK received a B grade with 65 out of 100, down from 67.6 in 2014. Pensions freedom was blamed for the drop, as it may pose long-term challenges to adequate retirement incomes.■ Low DC contributions is a concern of the UK system. The average UK employer contribution is 4 per cent, and the employee 2 per cent. In Australia, mandatory contribution is 12 per cent and in Sweden it is 18.5 per cent. However in New Zealand, the voluntary Kiwisaver has only just upped its contributions from 4 per cent to 6 per cent.■ Low engagement with pensions in the UK is another concern. This is attributed to the UK’s individualistic culture, particularly with regards to savings and investments, in contrast to Denmark and the Netherlands, for example. ■ The UK currently has about 6,500 DB schemes and 40,000 DC ones. In contrast, the Dutch have a little over 400 multi-industry schemes. Six million UK employees are now auto-enrolled into a scheme, with roughly half enrolled into master trusts, leading to expectations of scheme consolidation in the UK.■ The UK’s almost entirely unfunded public sector and state pensions run the risk of relegating the UK to a ‘C’ grade in Mercer’s index. However, pensions freedoms and the Lifetime ISA may counter a potential drop in state support for funding retirements.
is 12 per cent of earnings now, and if you look at quasi-mandatory systems, such as the Netherlands, the savings rates there are pretty good as well.”
In Sweden, that amount is even higher, with an 18.5 per cent payroll deduction.
“What’s interesting about the Swedish model is that it’s
deducted and invested for you,” says BNY Mellon international head of pensions and insurance segments Paul Traynor. “Unlike the Japanese system, where they take a deduction for their defined benefit pay-as-you-go set up, a bit like how our national insurance contributions deliver our state pension.”
Traynor says that he is concerned
about workers in what he dubs the ‘Uber economy’, who cannot necessarily rely on paternalistic employers.
“The bad thing about auto-enrolment is that it allows people to contribute 2-3 per cent and then forget about it, thinking that they’re contributing enough. No one is telling them that they’re not,” he says.
LCP partner Andrew Cheseldine says that although the UK has low contribution rates, it is not an outlier. The voluntary Kiwisaver in New Zealand, for example, has only just upped its contributions from 4 per cent to 6 per cent.
He also points out that the government’s decision to raise the national living wage will boost DC
contributions in the UK anyway, without any need for nudging or auto-escalation.
“The national living wage is going to increase DC contributions on average, across the board, by 40 per cent from 2020,” he explains.
“It will go from £6.70 to £9.20 by 2020. So if my pay was £11,000 this year, then my pensionable pay was about £5,000. If I get a 40 per cent pay rise, then that takes me to £15,400 and my pensionable pay is now £10,000.
“So my pension pay will double.”
Lower engagementThe UK’s low contribution rates have also translated into low engagement, says Wagstaff.
have in this country is that we’re very individualistic when we approach most things, not least with savings and investments,” he says.
“When you look at Denmark and Holland, a lot of people do things that are of benefit to society, rather than themselves. They tend to have cultures where they do buy into the idea that they need to save for their future.
“That’s something we lack in the UK.”To counter this, he says the UK could
do well to replicate work that has been carried out in the US, which tries to tackle what they call ‘present bias’.
American researchers have discovered that creating an avatar of a person aged 70, complete with spending habits, can help younger savers to identify with their future selves. It has also been shown to encourage people to double their contribution rates.
If adopted in the UK, this application of behavioural science could counter the danger of people pulling away from their pensions under contribution auto-escalation, which relies on apathy more than anything else.
ConsolidationOn a macro level, imitating other countries’ landscapes could also help to improve provision in the UK.
At present, the UK has about 6,500 DB schemes and 40,000 DC ones. The Dutch, in contrast, have a little over 400 multi-industry schemes.
Much has been made of the trend towards consolidation in both spheres, thanks to the emergence of master trusts. Wagstaff says that automatic enrolment has accelerated this.
Six million employees are now auto-enrolled into a scheme, with a little under 90 per cent having gone into DC arrangements. Out of that figure, roughly half have become members of master trusts.
“We reckon that over the next 10 to 15 years, that will be more like two thirds,” he says.
“So in that respect, we are moving more towards a Dutch model, but we are quite a way away.”
Traynor bemoans the continuation of the UK’s fragmented landscape.
“The efficiencies I see in the Nordics, in the Netherlands, are wonderful. They allow for better outcomes for the DC members,” he says.
These permit schemes to use scale to secure cheaper rates with investment managers, develop invaluable in-house expertise, and deliver first class communications to members.
New flexibilitiesThe Mercer report also warned that the UK was in danger of being relegated to the ‘C league’ as its public sector and state pensions are almost entirely unfunded and propped up by a government facing an increasing national debt and rising longevity.
In the case of the former, Cheseldine says it has caused a large degree of unfairness through the UK’s system, which is not as acute in other countries.
“There are about six and half million active members of DB schemes: one million in the private sector and five million in the public sector, so there’s a real mismatch compared to the public sector and everyone else.”
The question marks over the state pension’s sustainability are shared across the globe. Savers in some countries have used this knowledge to concentrate more on their private provision, as Traynor says.
“In the US, they are much more aware than we are that their social welfare system is not going to be the safety net that they should look to rely on,” he explains.
“We still believe in this country that the state will be there for us. And the truth is that as time moves on, that is less and
less likely.“The state pension will become more
unaffordable, and over 25 years will, in real terms, shrink.”
Contrary to the fears expressed by Mercer, Traynor believes that pension freedoms and the creation of a Lifetime ISA in the UK will help to counter this drop in state support.
“I like what Osborne did to get rid of a compulsory annuity and what he did with Lifetime ISAs,” he says.
Much like in New Zealand and the US, Osborne has begun to set up a pensions system where you can access funds before you retire.
“So there might be one or two lifetime events where you can access your savings and that will make saving much more appealing to a millennial,” he says.
To back up his assertion, Traynor cites a global survey of attitudes to saving carried out by BNY Mellon and Cambridge University last year, which revealed that 63 per cent of millennials believed that they would save more if they could unlock their pension funds early.
With flexibility, higher saving rates and better nudging techniques, the UK may yet find itself a strong contender in the ‘best pension system’ competition.
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William Butler Yeats wrote ‘Aedh Wishes for the Cloths of Heaven’ in 1899, to mark what he
thought would be the beginning of a new era in European culture and civilisation: ‘Tread softly because you tread on my dreams’ says the poet. By voting to leave the European Union on 23 June, Britain has shocked the EU establishment and treaded abruptly on the delicate dreams of pensive EU-utopians across the continent. On 29 June, the leaders of the union’s 27 remaining member states gathered in Brussels to stage theatrically their ‘concerted riposte’, insisting
‘Britain make a quick exit’ by activating ‘immediately’ Article 50 of the Lisbon Treaty, formally starting the two-year period leading to withdrawal.
Of course, it will be in England’s national interest not to move fast in the coming months: London needs to obtain first written reassurances on the ‘free movement of goods, capital, services’ from the part of Brussels before invoking Article 50. And the longer the UK waits, well the more political pressure on the Anglophobe faction led by Martin Schulz, a failed Socialist publisher from the Rhine Province (Marx’s home state) turned President of the EU Parliament
and Jean-Claude Juncker, the ridiculously rigid President of the EU Commission. Britain must use this deliberate delaying tactics to hammer the message that free trade with the UK should be construed as totally separate from ‘the free circulation of people’ and the forced ‘contribution to the EU budget’ (a stealth tariff). In this long struggle, Britain will have many allies amongst Dutch, Danish, Swedish and Central European member states (except Poland) who all resent Germany’s heavy-handedness.
Who knows? By temporising indefinitely to defend its economic interests, the new UK government may well change the course of European history and finally force the EU establishment itself to reform the rigid Maastricht/Lisbon constitutional framework, thus giving more leeway to Britain and other economically-dynamic Northern and Central European nations and allowing a more nimble union to focus on the free trade of goods and services without undue bureaucratic burdens, modern antitrust law and stronger external borders, leaving the rest to member states (the far more efficient ‘European Community’ model, conceived by Winston Churchill and Jean Monnet, the Anglophile ‘chief architect of European Unity’).
Asset ownership and the real balance of power favourable to BritainFreed from the ever-tightening grip of EU directives that are corroding English common law and burying British companies under piles of poorly planned regulations, the UK economy will be free to pursue a more dynamic growth trajectory, unleashing the full potential of British workers and entrepreneurs. The UK will also have the opportunity to deepen its longstanding, privileged economic ties with rapidly growing jurisdictions such as Australia, Canada, India, Singapore and Hong Kong (all growing much faster than the EU average – see chart), without being
The data-chart, conclusions and opinions expressed here are the author’s and do not necessarily reflect the views of the World Pensions Council (WPC) and its members.
brexit political environment
44 July 2016 www.pensionsage.com
Beyond Brexit: Britain, Europe and the Pension Wealth of Nations
The World Pensions Council’s M. Nicolas J. Firzli warns the UK to tread slowly following Brexit, as one-nation Tories will try to get a ‘better deal’ first
hindered by Brussels or Berlin. In our model [see chart], the average
annual growth rate is shown on the X-axis. The ‘Decorrelation from EU-Core’ index, shown on the Y-Axis, is a composite economic, monetary and legal/regulatory indicator summarising the overall macro-political distance from ‘Core-EU states’, defined as Germany, France, Italy, Belgium and Luxembourg (the original members of the 1958 European Coal and Steel Community, with the exception of the Netherlands). For all practical purposes, the ‘EU-Core’ is synonymous with all Western European Eurozone countries including
Spain and Portugal – except Ireland, Malta, the Netherlands and Denmark (whose currency is pegged to the euro).
Our research shows that a trade war with London is clearly in no one’s interest in Europe, and Britain may have a stronger hand than it seems in future negotiations. The total market capitalisation of UK companies is larger than the combined market caps of the Frankfurt and Paris bourses, and, more importantly, assets owned by UK pension funds are more than 11 times bigger than those of all German and French pension funds put together [see chart – the relative size of a country’s pension assets is
indicated by the size of its national flag]. Put simply, Britain is by far the
number one client of most Mainland European investment bankers, asset managers and insurers (not to mention German car and French wine exporters): if need be, at the first hint of threat to the City of London, Her Majesty’s Government should be in a position to respond very forcefully, bringing Brussels to reason rather rapidly…
Chart legend:l Economic Growth (x-axis): average annual growth rate of GDP (2012-2014). Source: World Bank national accounts.l Decorrel. from EU Core (y-axis): composite economic, monetary and legal/regulatory indicator (see further description in Section 2). Source: World Pensions Council (WPC) proprietary estimates and the author’s recent contributions to Euromoney Country Risk ratings (30 June 2016) l National Pension Assets (flag size): OECD Pension Markets in Focus, 2015 (2014 data); the relative size of US and UK pensions being actually bigger than represented here; Norway data not counting the country’s sovereign wealth fund
Economic Dynamism and National Pension Wealth: ‘EU Core’ vs. Other OECD Countries
Economic Growth (x-axis): average annual growth rate of GDP (2012-2014). Source: World Bank national accounts. Decorrel. from EU Core (y-axis): composite economic, monetary and legal/regulatory indicator (see further description in Section 2). Source: World Pensions Council (WPC) proprietary estimates and the author’s recent contributions
to Euromoney Country Risk ratings (June 30th 2016) National Pension Assets (flag size): OECD Pension Markets in Focus, 2015 (2014 data); the relative size of US and UK pensions being actually bigger than represented here; Norway data not counting the country’s sovereign wealth fund
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-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Econ. Growth (annualised 2012-2014)
Decorrel. from EU-Core (composite econ. & poli-sci index)
Economic Dynamism and National Pension Wealth: ‘EU Core’ vs. Other OECD Countries
Written by M. Nicolas J. Firzli is director-general of the World Pensions Forum (WPF) and advisory board member for the World Bank Global Infrastructure Facility
Despite the differences and cultures, eking out returns in a world where interest rates are languishing at the bottom
and markets continue to be erratic is challenging to most pension funds in developed markets. The recent Brexit vote has only exacerbated the volatility, making the journey that much harder, but pensions have a long road ahead and are not yet veering off their strategic courses.
Investment landscape“I have so far not seen any material shifts in asset allocation in the US or Middle East except for in some cases, fund managers buying the dips,” says BlackRock head of institutional client business in the UK, Middle East and Africa, Justin Arter. “In general fund managers do not want to do anything in a hurry and wish to wait to see things settle. One of the lessons learnt from the 2008 financial crisis was short-term relief
can lead to long-term pain.” Arter’s views are also mirrored in
other more mature pension markets in Europe. Going forward, all eyes will be on the impact the UK’s decision to leave the European Union will have on the worldwide economy and asset levels. “We think it may have a chilling effect on growth and that returns may be lower than expected and more volatile,” he says. “I think what it means is that the search for yield will continue and that investments that are inflation linked and generate sustainable and secure income will be even more in the view finder.”
This trend is also reflected in the recent Mercer European Asset Allocation survey of 1,100 institutional investors across Europe, which showed that in general, within fixed-income portfolios, there was a shift away from low- or negative-yielding sovereign bonds towards higher-yielding non-domestic and corporate bonds where schemes can use the cash to cover their outgoings.
Equity allocationsIn addition, the report revealed that average equity allocations across Europe has been whittled down since the 2015 survey, although this has been offset by a corresponding increase in allocations to alternative assets. These range from real assets such as real estate, infrastructure debt and natural resources to hedge private equity and multi-asset funds.
The holdings though vary according to the regulatory constraints, the availability of acceptable alternatives, and investor risk tolerance. For example, schemes in Belgium and Sweden continue to have the highest average equity weights, versus Denmark and Germany excluding the contractual trust agreements (CTAs), which have been gaining popularity among the larger pension schemes over the last few years to fund their pension liabilities off the balance sheet. This is because CTAs that are legally separated from the sponsoring undertaking do not have restrictions regarding their asset allocation.
“What we have seen is that in the mature markets of Netherlands, UK and Ireland, de-risking continues and equity asset allocation is down,” says Mercer principal Nathan Baker. “They are looking at alternatives to fill the gaps. We are also seeing this increase in alternatives in other markets, although for less-constrained investors the bond allocation fell – by 6 per cent in the case of German CTAs. Overall in Europe we
£
Setting the trend Lynn Strongin Dodds examines the various pension
fund investment trends occurring globally
Summary■ Within fixed-income portfolios, there has been a shift away from low- or negative-yielding sovereign bonds towards higher-yielding non-domestic and corporate bonds where schemes can use the cash to cover their outgoings. ■ Average equity allocations across Europe have been declining, offset by a corresponding increase in allocations to alternative assets.■ European pension schemes are looking at high yield, emerging market debt, private debt and other assets with long lock ups. ■ Japan is following a diversified strategy, with more allocation to bank loans, alternatives and US high yield in the fixed income space, along with major allocations to equities outside the domestic market for the first time.■ In contrast, the Netherlands is still heavily weighted towards more conventional assets. ■ Target-date or lifecycle funds are popular in the US and a prominent feature of the 401K DC plan.
are seeing schemes looking a high yield, emerging market debt, private debt and other assets with long lock ups.”
Baker also notes that there is “less benchmark hugging” and a greater focus on alpha risk within the portfolios, particularly for the larger schemes. They are more likely to have the resources to extract illiquidity premia internally or hire an external manager while the smaller schemes – less than €50 million – are still using passive management, although this incorporates alternative indexation such as smart beta strategies, he adds.
Alternatives Japan, which is home to one of the oldest populations in the world, if not the oldest, is also following a more diversified strategy. “In the past the country was mainly invested in Japanese securities,” says Natixis Global AM global head of institutional sales Fabrice Chamouny. “However, government bonds are negative and we are seeing more allocation to bank loans, alternatives and US high yield in the fixed income space. We are also seeing major allocations to equities outside the domestic market for the first time.”
One country that is bucking the alternative trend is the Netherlands, which is still heavily weighted towards more conventional assets, according to J.P. Morgan Asset Management EMEA head of pension solutions and advisory Sorca Kelly-Scholte. “Although we are seeing a loosening and broadening of investment strategies across Europe, the Dutch pension funds continue to invest in traditional assets, although they do look at property and infrastructure. This is because they are very focused on costs and fee structures as well as what they see as a lack of transparency, leading to an aversion to private equity and hedge funds.”
The other difference is that the Netherlands is under a stricter regulatory regime – the FTK framework (Financieel Toetsingskader) framework – than many other country schemes and it has so far resisted the trend towards DC although
that it is slowly changing. The pace is much faster in countries such as the UK, which over the past three years has made auto-enrolment a permanent fixture of the pension landscape and more recently lifted the lid off the annuity requirements so that people have greater choices to save or invest their retirement pots.
Investment sophistication As for investments, target-date or lifecycle funds, which are popular in the US and a prominent feature of the 401K DC plan, are gaining traction. There is a growing array of products in the UK that differ substantially in their management costs, mixes of underlying investments and attitude to risk. Typically a series of funds is chosen to create a ‘glide path’ that sees the allocation strategy become less risky and equity weighted over time.
“The Dutch are under pressure to move to DC and, in general, we are seeing public policy in many countries giving individuals greater responsibility for their pension provision,” says State Street Global Advisors head of European defined contribution Nigel Aston. “Markets that are more developed in Europe include Italy, where 80-90 per cent of the market is already DC. In Sweden, DC was introduced nearly 20 years ago and the country is now reviewing consolidating the options offered from around 850 funds to 10 governed portfolios. What we are seeing in these more-established markets is that fiduciaries are generally becoming more sophisticated in their asset allocation because they have scale.”
Bfinance head of client consulting Sam Gervaise-Jones also notes that one of the biggest differences between pension schemes is the degree to which they can invest internally. “For example, in Australia, they have the scale to centralise decision making and do as much as possible in house,” he says. This means a DIY approach to passive investing but then using the fee or risk budget to outsource the more sophisticated and illiquid strategies to specialists.
FeesAustralia, which is the fourth largest private pension market, with roughly AU$2 trillion in its superannuation, or national pension, schemes, require people to set aside 9.5 per cent of any income earned in the country into a retirement fund or a self-managed retirement investment vehicle. Like the Dutch, there is a sharp focus on costs.
“Australian Supers adopt a progressive approach to procuring asset management services and developing innovative pricing ideas that align interests,” says Allianz Global Investors head of UK & Ireland Solutions team Iain Cowell. “They also have a different and more aggressive approach when it comes to performance fees. If a fund manager underperforms, there are claw-back provisions, which mean that their bonus fees from previous years must be repaid (either partly or fully).”
DiversificationIn terms of asset allocation, Schroders senior strategist Sangita Chawla points out there are a variety of funds under the superannuation banner and each is designed with its own strategy. A typical allocation though is 60 per cent invested in equities, 20 per cent in fixed income and the rest is split between property, commodities and hedge funds with a bit of cash. New Zealand, on the other hand, has around four to five funds on offer catering to different risk appetites.
“Overall, we are seeing fund managers move from a narrow to broader range of assets as well as greater use of dynamic tools to change allocation in the DC space” says Chawla. “The focus is also more on an outlook-driven approach, so instead of aiming to outperform the benchmark, the goal is more for a cash-plus target, which is not constrained by the index and gives fund manager more investment scope.”
Written by Lynn Strongin Dodds, a freelance journalist
Considering the US is the largest pensions market in the world, it is somewhat surprising to note that the most popular
pension investment style in the US has barely made ripples across the pond.
Target-date funds (TDFs) are mutual funds that follow a glidepath investment strategy, working towards the investor retiring at a set date. Unlike a lifestyle fund, which involves the individual saver’s money being moved in and out of the various asset classes, a TDF enables the investor to stay within the one fund, with its underlying asset classes adjusted accordingly as the fund heads towards its end date. The asset mix is also determined by what the TDF is aiming towards – cash, annuities or drawdown (in which the investor can stay invested within the TDF) – when the target date is reached.
US popularity The popularity of TDFs in the US is immense. According to Morningstar’s 2016 Target-Date Fund Landscape, TDF assets grew from $116 billion to $765 billion over 10 years.
Morningstar’s research on the US market acknowledges that it is too soon to tell if TDFs – designed as 60-year-plus investment strategies – will successfully help investors reach retirement readiness. There are hints of a victory though, it states, as “their annualised asset-weighted average investor return is 0.7 percentage points higher than the funds’ average total returns for the past decade through the end of 2015. Most other broad investment categories have negative return gaps”.
Vanguard’s How America Saves 2016 finds that, in the US, nine out of 10 DC
plan sponsors offered TDFs in 2015, up 14 per cent compared to 2010. Ninety-eight per cent of the survey’s participants are in schemes offering TDFs, with 69 per cent of respondents using the funds.
An important factor driving the use of TDFs in the states is their popularity as default funds. However, Vanguard’s research shows that TDFs are a popular choice amongst savers themselves, as only half of TDF investors entered the funds through default arrangements; the rest actively choose to invest using TDFs.
TDFs popularity over lifestyle strategies in the US can also be attributed to ‘Safe Harbour’ legislation, which means that an employer selecting TDF as the company pension’s default fund is protected from being sued in the event of poor investment outcomes. As BlackRock managing director, strategic product management, Becky Tilston-Hales explains, in the US TDFs are “almost a ‘government endorsed’ strategy for pension funds”.
TDF versus lifestyle TDFs have a number of benefits, beyond litigation protection, that have made them a popular choice in their own right.
TDFs are valued for their simplicity and their flexibility, as the fund manager can quickly adjust the underlying asset mix. However, employers and trustees may be concerned at the loss of ‘control’, having to hope the asset allocations within the TDF that the fund manager chooses suit their members requirements.
“Trustees and sponsors value the built-in governance, which means that the target-date strategy will evolve with changing member needs, regulations and investment market conditions,” State Street Global Advisors senior DC investment strategist Alistair Byrne says. “They also value that the funds are simple to administer and relatively easy to communicate to members.”
However, according to Royal London pensions investment strategy
USA style Target-date funds are popular in
the US but have yet to catch on in the UK. However, following pensions freedoms, will TDFs become the solution of choice for people to invest ‘to and through’ retirement? Laura Blows finds out
Summary■ Target-date funds (TDFs) are mutual funds that follow a glidepath investment strategy, working towards the investor retiring at a set date.■ In the US, TDF assets have grown from $116 billion to $765 billion over the past 10 years. Nine out of 10 DC plan sponsors offered TDFs in 2015, up 14 per cent compared to 2010. ■ TDFs are valued for their simplicity, flexibility and governance. However, employers and trustees may be concerned at the loss of ‘control’ over asset allocation.■ The UK TDF market has been negligible, but pensions freedoms has sparked some growth and new entrants to the market.■ Along with the UK DC market, TDFs are expected to gain traction within the retail pensions space.
manager Lorna Blyth: “Advocates of TDFs claim they are more dynamic than lifestyle funds, as they have a ‘more rigid approach’. The reality is that both deliver a means of moving from one asset mix to another, over a period of time, to meet risk requirements. The key difference is just the structure.”
So the choice between lifestyle and target-date funds could simply that: choice. Each has pros and cons depending on the need of the investor, rather than one being inherently better than the other. So why aren’t TDFs and lifestyle funds equally enjoying the spoils of the UK market?
PlatformsThe take up of TDFs within the UK occupational pensions seems negligible – so low, for example, that Morningstar was unable to provide any data when requested. One issue cited as possibly holding back the growth of TDFs in the UK is their limited availability on DC investment platforms.
As a TDF is required for every year (or cluster of years) end date, a lot of different TDFs need to be available. This can make TDFs quite difficult to manage on an investment platform, particularly as they are geared up for the more popular lifestyle strategy. “The platforms need to catch up and get the infrastructure right for the new world,” Redington director, head of defined contribution, Lydia Fearn advises.
Mobius Life institutional distribution director Craig Brown notes that his investment platform company has not encountered any concerns that investment platforms in the UK are unable to manage TDFs. “We manage TDFs and whilst their management on an investment platform is more involved than lifestyle funds, both approaches are based on fund blending, which is our core capability,” he states.
Signs of changeHampered by investment platforms or
not, lately there have been sparks of life from the UK TDF market.
Providers that have been offering TDFs for years are now seeing an increase in activity, due to pensions freedoms reforms requiring simplistic ‘to and through’ retirement saving products.
For instance, “this year we have onboarded two new TDF clients who have converted from a lifestyle approach, and we are in discussions with a number of other schemes who are considering such a move,” Byrne says.
‘Heavy weight’ US TDF providers, such as J.P. Morgan and Vanguard, recently entered the UK market, and AB lead portfolio manager, multi-asset solutions, EMEA, David Hutchins finds that “large numbers of new employees joining DC schemes are now going into TDFs”. Also, new pension schemes set up for auto-enrolment may use TDFs as their default fund, Fearn notes.
One such example of this is the National Employment Savings Trust (Nest). According to Nest director of investment development and delivery Paul Todd, Nest’s TDF structure allows it to easily manage money appropriately over the whole of an individual’s time saving, including making the call on when to move the saver’s pot from risky to less risky asset classes.
“This is unlike traditional lifestyling where the re-balancing of assets happens automatically each year. Because TDF managers can make judgments on what action will best keep the saver on track, this can mean more thoughtful movement between assets,” Todd says.
This can also mean lower transaction costs, and there are clear communications advantages to having clearly named single-year TDFs, he adds.
Uses of TDFsTodd acknowledges TDFs ‘make sense’ for Nest, as it has the size and scale to create its own TDFs tailored to its members; smaller schemes without the
ability to do so may come to a different conclusion about using the funds. In contrast to Nest’s size, Tilston-Hales notes that in BlackRock’s experience, it is commonly small- to medium-sized schemes beginning to utilise TDFs.
While Fearn does not think trustees would want the responsibility of managing TDFs for members post retirement, for employers with contract-based DC, TDFs can be a ‘nice, neat’, low-governance solution to enable a member to move through into retirement.
Another area of possibility is the retail space. The structure of TDFs, with its easy-to-understand structure, could make it popular within ISAs (particularly as the upcoming Lifetime ISA will be geared towards long-term saving), and the “clear benefits of TDFs in the robo-advice space” means Hutchins believes “the take up in the UK retail space is set to follow the strong growth seen in UK DC pensions”.
However, its success would depend upon effective engagement, otherwise people may end up in a TDF that does not match their needs, Intelligent Pensions head of pathways Andrew Pennie warns.
Despite the ways in which a TDF could be implemented in the UK, Blyth is sceptical of how much success TDFs can really have here. “I believe that lifestyle strategies will remain a more popular choice simply because they can deliver a range of outcomes and choice of risk levels on a more cost-effective basis than TDFs,” she says.
It is doubtful that TDFs will seriously challenge lifestyle funds as the default of choice anytime soon. Yet the increasing need for ‘to and through’ retirement savings products, plus the requirement for simplicity to encourage member engagement, makes it more likely that the UK pensions market will find room to welcome this US approach.
The consensus that has greeted the proposal for the AU$2 trillion Australian superannuation system to
adopt a Comprehensive Income Product for Retirement (CIPR) is significant. Disagreement and bitterness between the interests of the big bank super funds (backed by the Liberal party) and those of the not-for-profit industry funds (backed by the Labour party) is common, but both have registered their approval.
The appeal of a CIPR is its flexibility, which means that no one retirement plan is likely to look the same as another. The proposal was devised from a 2014 Draw down under
A pick-and-mix retirement product being created by super funds in Australia would appear to offer
tailored and sophisticated outcomes for retirees. David Rowley reports
Summary■ A positive consensus has greeted the proposal for the AU$2 trillion Australian superannuation system to adopt a Comprehensive Income Product for Retirement (CIPR). The proposal will lead to super funds designing their members a product with flexible elements of a drawdown pension, deferred, lifetime, fixed-term annuities or group self annuity products, all offered through a single portal. The final details are due at the end of the 2016, with the 116 active default super funds expected to soon have a CIPR.■ The CIPR proposal was devised from a 2014 review to combat what is referred to as a ‘lump sum mentality’, whereby half of all retirees treat their superannuation balance as a cash windfall, rather than an income stream. ■ Take up of CIPR has not met expectations, with the blame put on the difficulties in communicating its complexities. However, this could change in July 2017, when deferred annuities will gain the same tax exempt status as a pension in Australia.
review to combat what is referred to as a ‘lump sum mentality’, whereby half of all retirees treat their superannuation balance as a cash windfall, rather than an income stream. The proposal will lead to super funds designing their members a product with flexible elements of a drawdown pension, deferred, lifetime, fixed-term annuities or group self annuity products, all offered through a single portal. The final details are due at the end of the 2016, but what is highly likely is that all 116 active default super funds will soon have such a product.
Funds like the idea, as it is a government endorsement to help them in their efforts to hold onto a greater number of retirees. The government likes the idea of reducing the reliance on a means-tested state pension, while members should appreciate the innovative and flexible solutions. The CIPR is likely to be offered on a negative consent basis, but members will still be able to take some of their balance as a lump sum.
Jeremy Cooper, the author of the groundbreaking Cooper review of superannuation in 2010 and chairman of Challenger, the main provider of annuities in Australia, simply explains how it will work. “If each person’s wealth is 100 different jelly beans and each glass
is an option (such as cash, growth, annuities), then the members works out how many jelly beans they put in each glass and once they have got to 100 that is your CIPR.”
Clever advice and guidance will make such choices a success and the Australian Prudential Regulatory Authority (which performs roles similar to The Pensions Regulator) will be watching poor outcomes closely.
Griffith University professor of finance, and a retirement product adviser to super funds, Michael Drew, believes trustees and executives are going to be pushed
outside of their comfort zone. “Trustees will need to articulate and action a set of investment beliefs that will need to include drawdown rates; sequencing risk; liability-driven investing (aged care, medical costs, bequest motive); and pooling (annuities, mortality credits) and/or account based design,” he says.
To this list of challenges he adds the smart ‘nudges’ that help members understand the retirement income challenge they face.
However, the first key battle is retention in a system where members can change funds as easily as Brits change insurance through a price comparison website. Funds also risk losing members who opt for cash alone or who choose a self managed super fund route. For this reason Jana senior consultant Matthew Griffiths describes the ‘post-retirement pot’ as a battleground in which the CEOs of super funds could lose their jobs if they do not meet retention targets. One fund, Sunsuper, has gone as far as to offer a tax rebate worth up to AU$2,400 for those members who choose a pension rather than a lump sum. The rebate was normally awarded to the scheme directly and benefited all members.
New productBefore the idea of a CIPR, the typical pension product for a superannuation fund was income drawdown from a conservative growth fund made up of 50 per cent equities and 50 per cent defensive assets. The approach taken by the AU$6 billion Australian Catholic Super may become more typical in the future. It splits a new retiree’s fund into an interest-bearing cash account equal to two times their desired annual income. The rest goes into a more aggressive growth fund with shares, property, infrastructure and bonds. Dividends and interest payments generated from this account are paid into the cash bucket each quarter.
The fund has marketed this approach to members with the example of Amy,
a 65 year old who has a balance of $300,000 and who chooses an annual income of $24,000. Her cash account starts at $48,000 and her growth assets at $252,000. After one year, her cash balance reduces to $25,400 (minus $24,000 plus $1,400 interest), but her growth assets rise to $304,500 due to favourable market returns. At this point some growth assets are moved to cash, leaving $68,000 in cash and $261,300 in growth. So after one year Amy’s total assets rise to $329,900.
The plan at present lacks an insurance product that would help Amy sleep better at night, if returns are not this favourable, but some in the industry describe such products as “halfway to an annuity” and better value.
Rice Warner managing director Michael Rice, one of the most prominent actuaries in Australia, has not endeared himself to annuity providers by frequently pointing out that it is much cheaper (and easier) to hire an actuary to design such a product than pay the profit margin embedded in an annuity. He also reasons that with a state pension and 85 per cent of retirees owning their own home, the security of assets and income that an annuity provides is already catered for.
He sees annuities as appropriate for those aged 80 plus, when annuity contracts offer better value and protection from fraud – a growing
“The appeal of a CIPR is its flexibility, which means that no one retirement plan is likely to look the same as another”
number of academic studies have measured the extent to which retirees are more easily fooled by fi nancial scams as they age and the extent to which their fi nancial decision making worsens.
Products that use fi xed term or lifetime annuities have not started well. VicSuper, a government employee fund based in Melbourne, launched a CIPR-inspired product that combined an investment fund with a choice of either lifetime or fi xed-term annuities in June 2015. Take up has not met expectations and the blame has been put on the diffi culties in communicating its complexities. However, this picture could all change in July 2017, when deferred annuities will gain the same tax exempt status as a pension in Australia. Such annuities are likely to be triggered around age 75-80 and receive a much higher endorsement from the industry.
Th e full variety of what a CIPR could look like is illustrated by the Brisbane based Energy Super, which
has AU$6 billion in assets with 48,000 members. It is off ering the Mercer LifetimePlus group self annuity alongside its more conventional investment fund. LifetimePlus works by receiving a portion of a retiree’s assets and pooling
them with others of a similar cohort. Th e product delivers quarterly investment returns, a half-yearly bonus for as long as a member stays alive or stays within the fund, and capital returns paid half-yearly aft er 15 years of membership. It should work out cheaper than an annuity and more aspirational in the way it rewards members who live the longest.
A word should also be made of trends amongst retirees. Michael Bysouth, a fi nancial adviser with Yellow Brick Road, probably the best known independent fi nancial adviser fi rm in Australia, sees the growing strength and reputation of superannuation working against it. He is seeing a rising proportion of people entering retirement with debts.
“People are consciously making a choice to spend on property or to look aft er their family as they are less worried about the debt because they can see their superannuation account holds enough money to pay it off ,” he says. “Twenty years ago, people did not have any confi dence in their superannuation, so they were focusing on paying off the debt before retirement.”
Written by David Rowley, a freelance journalist
What are the lessons for the UK?By the standards of Australian superannuation, the UK public is too oft en kept in the dark about the relative performance of their pension schemes and the value for money of their fees. To ensure against mis-selling, particularly at the start of the crucial decumulation stage, it is likely that the UK regulators will be forced to bring greater transparency. However, once you make performance and fee more easily accessible, it is logical that you must off er the choice to switch. In Australia, members were given the right to switch funds in 2005 and greater regulation for transparency has gone hand-in-hand. Rating agencies also help the public and IFAs in their choices by taking performance information to create league tables of funds. On the same principles of public transparency, it is proposed that MySuper funds will have to provide visual online modelling tools for their CIPRs to enable comparison of products.
Such openness breeds competition and innovation. If the UK were to adopt a similar system to CIPR then it would be welcomed by actuaries excited at the possibilities of product design (and particularly those frustrated at not being able to design defi ned ambition products).
� e workplace pensions industry needs to learn from the [consumer] retail sector, which has the highest customer engagement levels of all. Whilst many might sco� at this; the parallels between the latest new trainer and a workplace pension being few and far between, they’d be mistaken. It’s the attitude that needs emulating. � e workplace pensions sector is not customer centric. At all. � e customer doesn’t sit anywhere near the edge of the business, let alone the heart of it. In fact the customer isn’t even considered a customer; they’re called policyholders or clients. � e industry needs to put on some customer-focused spectacles and rebrand itself through these lenses, which will make it immediately more attractive. � is is not as daunting as it might sound. In many areas only tweaks will need to be made, for example, changing the internal vernacular from policyholder to customer. Borrowing retail marketing tactics too is another way for workplace pension providers to alter the perception of the industry. For instance gami� cation (using elements of play and common game mechanics to a� ect behaviour) is a big way for retailers to keep their customers coming back for more. For example Nike launched NikeFuel, a game for Nike+ subscribers. An app would note all the physical activities performed by users and transcribe them into points. A� er reaching a certain level NikeFuel unlocks trophies and rewards and compiles a daily leaderboard. � is generates motivation for Nike’s customers, not only to keep doing sports, but also to share their results. Gamifying workplace pensions, creating an interactive saving calculator, for example, would not only engage customers but educate them too.
Another sector that workplace pension providers can draw inspiration from is the mobile industry. As well as customer engagement being low for mobile networks, so too was di� erentiation. It was hard for any brand to stand out on anything except for price. Furthermore, the desire to purchase was also lacking and these exact issues are shared by the pensions market. O2 irrevocably changed this status quo by adding ‘music’ to their brand identity. � is meant an immediate additional bene� t for the customer, one which changed the perception of the organisation from dull and boring to cool and value adding. Forward-thinking pension providers should identify value streams that mean something to their target audiences that could do the same for them, such as ‘sport’ or even more niche like ‘career development.’ A � nal lesson pension providers can learn from both the retail sector and mobile networks is the onus both sectors place on the brand. Leaders like John Lewis and O2 put their brand at the centre of their decisions – everything from marketing through to HR and logistics. Somewhere along the way pension providers have lost their brand focus. However, having a strong handle on the brand is proven to impact every facet of the business, such as altering patterns of demand, becoming more customer-centric, creating di� erentiation and widening the competitive gap to make the market less price sensitive and promoting innovative growth and value streams. Not only does this serve to enhance the o� ering to the customer, it also adds shareholder value, which is a win-win for all.
BrandCap managing partner Manfred Abraham
� e real challenge facing both savings and pensions industries is how to address delayed grati� cation. � at new kitchen, an updated car, this year’s holiday are all so much more tangible than a distant cruise funded from a decent pension. Why? We’re living in an age of instant availability combined with low interest rates. Want a new car/kitchen/XYZ? No savings? No problem. It’s £x a month. � ese more immediate purchases represent the pensions industry’s real competition. And, over time our alternative, no saving, spending options have shi� ed from ‘nice to have’ to being the normal way of life for many.
We’ve been tackling this delayed grati� cation problem for Sun Life. How? Bringing the future into immediate focus. For example, using marketing that asks ‘who will look a� er the pet when its owner is gone?’ or ‘I still want him to learn to drive’ (advert for a funeral savings product). � is approach has shi� ed Sun Life’s brand consideration by 10 per cent.
Bray Leino Yucca digital and data director Alan � orpe
The pensions sector has long debated how to make itself more enticing to savers. But it can be hard to see what changes need to be made for yourself. Therefore Pensions Age asks marketing experts what the pensions industry can do to rebrand and enhance its reputation
The recent referendum on the European Union has revealed the stark disunity within the country, none more so than
between the generations. Following the result, scores of
young people took to social media to condemn the older generation. As Resolution Foundation senior economic analyst David Finch notes, this issue of intergenerational fairness has been “bubbling along under the surface” for several years, but it has taken the EU referendum to highlight it so visibly.
The government caught on several months ago, when the Work and Pensions Committee launched an inquiry into intergernational fairness and whether government pension policies have had a significant impact on the disparity between the generations.
“From housing and education to pensions and taxation, younger generations are losing out disproportionately to older generations,” says Intergenerational Foundation co-founder Angus Hanton.
This statistic is one of many high-lighting the ways in which younger generations are at disadvantage. For
example, between 2010-2015, total spending on
pensioners rose by 6.2 per cent in real terms. In contrast, during the same period, non-pensioner spend decreased by 6.5 per cent, according to a report by the International Longevity Centre.
Finch
states that between 2009-2015, typical pay for those in their 20s fell by 12 per cent, whereas it only fell by 6.6 per cent for those in their 50s. And then there is the issue of housing; in 1997 almost three-fifths of those under 35 owned their own home, according to Finch, whereas the most recent statistics from 2014 show this is now just a quarter.
Despite this, the UK is ranked fifth
on the Intergenerational Fairness Index, a representation of how younger and older people are doing compared to the working age group. However, as the International Longevity Centre points out, a higher ranking on the index does not necessarily mean a higher standard of living for all generations, it could equally mean that people of all ages are poor.
Many policy experts believe the pendulum has swung too far towards supporting pensioners; Finch explains that when you see support being taken away from the poorest third of working age families whilst pensioner support has
increased for all pensioners, you “start to question the balance”.
Pension woes Arguably, one of the biggest disparities between older and younger generations is pensions. A recent study by the Intergenerational Foundation found companies are spending £42 billion a year on final salary defined benefit
pensions for older employers. On average an older worker in a DB
scheme receives pension contributions worth £23,600 a year, equivalent to about 20 times the average younger colleague in a DC scheme receives, at just £1,200 a year. Not only that, Hanton points out that in the wake of Brexit, pension liabilities have ballooned. “It means companies have even less money to spend on expansion, recruitment, or research and development – all areas that affect younger workers more than older workers,” he explains.
However, former Pensions Minister
Generational warfare?
With an ageing population and the ‘grey vote’, pensions spending has increased, whilst governmental non-pensioner spend has declined. Natalie Tuck explores what can be done to create equity between the generations
Summary■ The EU referendum result, which saw more older voters choose to leave and the young voting to remain, has exposed a hostility between the generations. ■ As the baby boomer generation moves into retirement, there is a strong ‘grey vote’ that politicians are keen to attract.■ This has created an issue of intergernational disparity, with government policy tailored more favourably to pensioners.■ However, politicians and older generations need to consider the consequences to younger generations and the UK economy to resolve the issue.
Steve Webb, in his contribution to an ILC report on the welfare state, argued that the mixture of automatic enrolment, the new single-tier state pension and increases to the state pension age provides the chance of a stable and sustainable regime for retirement saving; perhaps the beginning of rebalancing between the government has also introduced the Lifetime ISA, available only to those under 40, to help them save to buy a home or for their retirement. Finch sees it as a “shift in focus” for the government but it is only a “small step on the way to addressing” the housing issue.
Blame game? “I think what’s important for our intergenerational commission is that this shouldn’t be seen as some kind of generational war. It is more important to tackle long-term political and policy failures,” Finch says.
True, the government creates policy and has ultimate responsibility over where the budget is spent, but, as ILC head of economics of an ageing society Ben Franklin points out, the ageing population poses a difficult trade off for elected officials.
“On the one hand, ageing may require strategies to downsize the generosity of public pensions and other age-related services in order to support long-run affordability. On the other hand, ageing
will result in an increasingly powerful older voting block who will support a larger and more generous welfare system for the elderly,” he explains.
Despite the fact that older generations do not generally want to deprive upcoming generations, they are still inclined to vote in the interests of their own generations.
“One possible explanation is that parents expect to redistribute their wealth to their children and that by reforming the system, this makes such redistribution harder,” explains Franklin.
In spite of this, something needs to change. The ILC believes that the current system cannot continue if the welfare state is to survive. In its report on the future of the welfare state it notes that the working-age population in the UK is going to fall or stagnate. By 2040, the number of working age people supporting each person over 65 will drop from four to 2.5.
As noted, the younger generations are becoming increasingly vexed with the generational disparity. Hanton believes the young are wising up to the wealth of the older generations.
“They serve them on their holidays, in restaurants, in cinemas and at theatres. The fact that spending by older generations has increased by a third over the last 15 years is not lost on the young, who have suffered a 30 per cent decline in their own spending,” he says.
“That old age lobby groups have insisted on protecting universal benefits while young people suffer smacks of intergenerational selfishness. The fact that the wealthy old do not offer to take less, so the poorer old can take more, suggests that intragenerational selfishness is also at work.”
The solutionHowever, “it will take a brave politician and solidarity from older generations to bring about a fairer deal for young
people,” Hanton adds. “If old people demand youth-friendly policies then progress might be made.”
There needs to be real policy change to bring about fairness and one idea from the ILC is to apply the theory populised by Marx: “From each according to their income ability, to each according to their needs.” In this case, the ILC says policies such as the triple lock would need end and the winter fuel allowance, transport passes and TV licence limited.
Hanton also questions whether the state could introduce measures to help
people pass wealth more easily between the generations. Because people are living longer, he says, they are inheriting money from older family members when they need it the least, often when they are themselves retired.
“The state could introduce two measures to pass wealth more evenly across the generations, by encouraging greater lifetime giving to younger generations, and by reducing inheritance tax on bequests that skip a generation.”
Of course, as Franklin points out, young people express strong support for pensioner spending as the “old and the young are not two completely different homogenous entities”.
“Similarly, while there is now a higher proportion of working age people in poverty than pensioners, this does not mean that we have solved pensioner poverty altogether, Franklin adds. “The role of the state must be to improve the health and wealth of the population where it is most needed, irrespective of age. One age group is no more worthy that the other”.
Can you outline the structural workings of the Weetabix Group DB and DC pension schemes?The DB scheme closed to new entrants with effect from 5 April 2013. Members who joined prior to that date continue to accrue DB pension, but employees joining the business after that date join the Weetabix Group Personal Pension
Plan (WGPPP).
Could you outline the funding status of each scheme? The DB schemes within the group have modest deficits versus their technical provisions, in the context of the Weetabix Group. There are no funding issues in relation to the WGPPP given it is a standalone DC arrangement.
The Weetabix Group pension scheme recently won the Best Investment Strategy Award at the Pensions Age Awards 2016. Could you explain your current investment strategies you are utilising in the current market? In order to reduce the volatility of the scheme’s funding position and variability of sponsor contribution requirements, over the last couple of years we have worked with Mercer to design an integrated investment and funding strategy. We have revolutionised the scheme’s investment arrangements (with the new strategy having been in place since June 2015) and now employ a well-integrated funding and investment strategy, termed cashflow-driven financing.
From an investment perspective, key to the approach is the use of income-generating assets, with the objective to provide a reasonably high cashflow match for the scheme’s expected benefit cashflows. The current asset portfolio therefore consists of
long-term buy and maintain corporate bonds, which form the ‘bedrock’ of the strategy, alternative credit investments (specifically, high-yield debt, multi-asset credit, income- focused property, and private debt), and liability-hedging funds (which aim to achieve a 100 per cent hedge ratio of liability interest rate and inflation exposure).
The scheme’s investment strategy is integrated with the funding approach. In particular, a dynamic discount rate methodology is used whereby the actuarial discount rate (on the technical provisions basis) is linked to the current yield available on the asset portfolio and is re-assessed by the scheme actuary on a monthly basis. Since the new integrated strategy was fully implemented in June 2015, the scheme’s funding level has continued to progress reasonably steadily. In particular, we have seen a lot less volatility than we would have experienced with our old strategy (which had more traditional investment arrangements, including an allocation to equities and other more traditional growth assets). The scheme’s funding position has been largely unaffected by changes in gilt yields or credit spreads and, in particular, was unaffected by equity market falls in August 2015 and January 2016.
Staying strong Adam Cadle talks to Weetabix Group Pension Scheme chair of trustees Ian Forrest
about the recent successes within its retirement plans and what the future holds
Have any of the schemes undergone a de-risking exercise or does the fi rm expect to undergo any more in the near future? We would see the move to the new cashfl ow-driven fi nancing strategy as a de-risking exercise in itself.
As already mentioned, the scheme’s assets are invested in income-generating securities to achieve a reasonably high cashfl ow match for the projected liabilities. As part of this, we have removed equity risk (as the asset portfolio consists of purely fi xed-income instruments and income-focused property) and minimised interest rate and infl ation risk by targeting a 100 per cent hedge ratio. Th e approach we have implemented also mitigates the risk of needing to disinvest from the scheme’s asset portfolio to access cash (for example to meet benefi t payments) when asset prices are depressed.
We have also considered and tried to minimise the impact of reinvestment and default risks by adopting prudent assumptions within the overall approach (particularly within the discount rate methodology).
As a next step on overall risk management, we are now considering how we can further address the remaining risks to which the scheme is exposed, for example longevity risk.
What are the Weetabix trustees doing to combat the threat of scams to benefi ciaries? We have communicated with our members on the need to be vigilant and in particular to adopt the attitude that if an off er seems to be good to be true, it probably is. We intend to continue to remind our members about this.
Our administrators are experienced and bring to our attention any request for
a transfer to an arrangement that may be a scam. Th is allows us to take appropriate steps.
How is the scheme administered? Is it through a third-party administrator? We have appointed Mercer to manage the scheme’s trustee bank account and take on other administrative duties.
As the intention is for some investment income to be received into the trustee bank account to help meet benefi t obligations, cashfl ow management is important – so this is an important feature of our relationship and agreement with the Mercer team.
What issues in the near future do you see as being potentially problematic for the scheme? As highlighted earlier, we’re conscious that longevity remains a key risk for us and are investigating the ways we could look to mitigate this with our advisers.
In addition, from an investment perspective the governance associated with our type of approach could become an issue – but we’ve worked hard with Mercer to ensure that sensible processes are in place for us to be able to assess the success of our strategy eff ectively. In particular, we make use of Mercer’s fi duciary or implemented platform, which vastly reduces the governance burden.
As the issues around occupational pension schemes become more complex and better regulated, we have an ongoing training programme in place, which ensures that governance of the pension scheme evolves and that we, the trustees, understand our duties and responsibilities.
Written by Adam Cadle
Weetabix Group Pension SchemeTh e Weetabix Group Pension Scheme (c.£500 million asset portfolio) had a reasonably traditional portfolio, with defi ned allocations to growth assets (equities, property, and diversifi ed growth fund exposures) and matching assets. In 2013, the trustees and sponsoring company initiated dynamic
de-risking of the overall investment strategy of the scheme. Th is involved (over 2013-14) increasing hedging of interest rate and infl ation exposures at market-favourable rates and opportunistically selling growth assets to capture upturns in market valuations. As a result, funding levels saw a signifi cant improvement by Q2 2015.
“We have revolutionised the scheme’s investment arrangements and now employ a well-integrated funding and investment strategy, termed cashfl ow-driven fi nancing”
With a wider range of employee benefits now being made available by employers of all types
and sizes; and in the light of the many recent changes to the UK pensions landscape, how important is a workplace pension to employees today?
Pensions popularity“Aside from holiday and flexible working arrangements, an above statutory contributory pension is still the most important thing employees look for when changing jobs,” says Hays Recruitment director for the senior finance sector, Karen Young. Research from Hays showed that of 14 different employee benefits, a pension offering above statutory contributions was the third
most valued (cited by 45 per cent of respondents, compared to 57 per cent who valued the chance to have over 25 days of annual leave; and 62 per cent who cited flexible working).
It is too early to say how auto-enrolment will alter the view of
pensions among employers or employees. We know opt-out rates may rise as contributions increase, while in the shorter term some smaller employers may (illegally) encourage opting out as they struggle to pay employer contributions while absorbing increases in the minimum wage in what may well continue to be challenging economic conditions. The good news, says Mercer principal Emma Roberts, is that there is little evidence of employers that already offered pensions bringing contributions in general down to the levels mandated under auto-enrolment.
But auto-enrolment may alter the way some employers treat workplace pensions in the longer term, suggests Pensions and Lifetime Savings Association (PLSA) DC policy lead Tim Gosling. He stresses the PLSA’s support for master trusts used by many employers to deliver auto-enrolment pensions, but asks to what extent employers will engage with the pension scheme if they are not so directly involved with its operation.
“More people coming into pension
saving is a good thing if it results in a virtuous circle of employers offering more generous contributions to attract talent,” says Gosling. “At the moment with auto-enrolment we’re seeing very high enrolment rates, which is fantastic, but I think that’s largely on the back of inertia. The opt-out rate when we get to 2018/2019 is going to be a much better gauge of what people really value than any of the market research done so far.”
Holistic approachBut if opt-out rates do increase in future it could be because employees are saving money elsewhere, possibly with the active assistance and encouragement of an employer. “One of the trends that we are seeing and we expect to accelerate over the next few years is the change to a more holistic approach to savings,” says JLT Employee Benefits director Mark Pemberthy.
He believes the launch of freedom of choice and related announcements, particularly around the inheritance of pensions savings, are driving this trend, by turning a DC pension into a long-term savings scheme that does not have to provide an income for life and can be passed on to legatees.
In addition, no one knows what impact the Lifetime ISA (LISA) might have on workplace pension saving when it is launched in April 2017. Gosling expects some employers to offer it alongside existing pension scheme membership.
“The LISA will definitely have a part to play in future savings plans for those up to the age of 40,” says Willis Towers Watson senior consultant Ann Flynn. “A lot of employers
PENSIONS
Pensions still on a pedestal?
Nowadays employers have a wide variety of employee benefits to offer to staff. With this in mind, David Adams asks whether a workplace pension still has value as a staff recruitment/retention tool
Summary■ Aside from holiday and flexible working arrangements, an above statutory contributory pension is still the most important thing employees look for when changing jobs.■ Auto-enrolment may alter the way some employers treat workplace pensions in the longer term. ■ The key trend in the provision of financial benefits will be a shift to help improve employees’ overall financial wellbeing.
work for them have other priorities other than thinking about retirement.”
Financial wellbeingPemberthy believes the key trend in the provision of financial benefits will be a shift to help improve employees’ overall financial wellbeing. This seems to chime with the findings of research from Willis Towers Watson, which reveals the extent of some employees’ financial worries, particularly in younger age groups and negative impacts this was having on performance at work and absence through illness. The company’s advice to employers seeking to address this issue is to engage with the workforce to identify different financial needs and concerns within groups; and to review the design of current employee benefit programmes to ensure it meets those needs.
Pemberthy stresses the importance of providing information and support for employees making decisions in relation to pensions and other finance-related employee benefits. One helpful step the government has taken in this respect is to increase the tax exemption for employer-arranged pensions advice from £150 to £500. “We do see a significant appetite for that,” says Pemberthy. “The workplace is still the best environment for individuals to access guidance and advice in a subsidised way.”
Flexible benefitsIt is still generally the case that
larger employers are more likely to offer employees access to
a broad range of employee benefits, but this is gradually changing, with a growing
number of smaller organisations working with benefit providers to developing flexible benefits packages.
Pemberthy says the flexible benefits market is growing quickly, thanks in large part to online technologies. “Technology makes it possible for employers of all sizes to promote additional benefits through payroll,” he says.
These include life insurance and assurance, critical illness cover, medical insurance, dental cover, eye tests, flu jabs, retail vouchers, dining cards, technology schemes, subsidised gym membership, cycle to work or technology purchase schemes and childcare vouchers. A growing number of employers now allow employees to choose from a ‘menu’ of 15 to 20 benefits or more. Young notes that health and wellbeing benefits of various kinds, including eye tests, but also stress relief therapies, massage clinics and zumba classes seem to be particularly popular with younger workers.
The Hays research shows which benefits seem to be most valued by employees after flexible working, generous holidays and an above statutory level pension. They include health insurance (cited by 34 per cent of respondents), financial support for professional studies (25 per cent), a company car (22), life insurance (20), share incentives (15), subsidised leisure facilities (15); and discounts on company products and services (14).
Loans for purposes including season tickets are increasingly popular says Young. Hays now offers its own employees with over a year’s service loans of up to 20 per cent of base salary, often used for purposes such as paying a rental deposit or buying a new car.
It is clear that employees respond well to an employer prepared to invest in their personal and professional development. Employees in the IT, construction, HR, finance, marketing and retail sectors in particular seem to value an employer prepared to invest in their skills and development, according to Young.
Salary sacrificeOne possible problem on the horizon is the way that HMRC wants to clamp down on the use of salary sacrifice to pay for employee benefits. In his March 2016 Budget George Osborne reiterated his support for pensions, childcare and healthcare benefits paid for via salary sacrifice – but post-Brexit, Osborne will surely not be Chancellor for much longer. At the time of writing it is not at all clear who will replace him, who will be in post as pensions minister, or even which party will be in power by March 2017, so there will continue to be uncertainty over the future of salary sacrifice (among so many other things).
EnduranceYet, despite that uncertainty, pensions will surely remain an important part of the benefits package. One key reason, says Roberts, because “a pension is one of those benefits employees need through-out their working life”, while other benefits may be more or less appealing to different demographic groups.
And although one of the great clichés of the pensions industry is the difficulty faced by employers, providers and anyone else in getting younger employees interested in pensions, Roberts suggests this is not a universal truth. “Some younger workers are quite clued up, because they’ve had recent experience of their parents planning for retirement,” she explains. “They really understand the value of that benefit.”
So, even in these uncertain times, while an ever-greater range of employee benefits will be good news for employees in organisations of all kinds; and despite sometimes mixed messages coming from government and occasional cases of employer neglect, it seems that the workplace pension will remain a key employee benefit for a while yet.
Like all other parts of the economy, charities’ pension funds are faced with falls in equities, bond yields and rising
life expectancy. It comes as no surprise therefore that the total charity DB deficit level in the UK stands at £1.7 billion, according to the UK Civil Society Almanac 2016, compiled by NCVO.
For CFG senior policy and public affairs officer Anjelica Finnegan: “The collapse of Tata Steel and the BHS deficit show that pension policy is broken and provides challenges for all sectors.”
“It is widely recognised that government needs to commit to serious reform,” she adds. “The trend among charities has been to close DB schemes in favour of DC schemes. However, there are some unique challenges that charities face that businesses don’t. For example, for many charities much of their income is restricted and so can only spend their funds as determined by the restriction as opposed to core costs, such as paying down deficits. This therefore can prevent charities from closing their DB schemes.”
A major threatOne major issue is threatening the very existence of charities however – the LGPS-charity problem. Many charities become admitted bodies in the LGPS when they take on public-service contracts that involve a TUPE arrangement. If staff from a local authority are transferred to a charity under TUPE regulations, the charity is required to offer them a broadly comparable pension arrangement. It is common practice that when staff already in the LGPS are transferred over to a charity, that charity takes on responsibilities for historic liabilities.
GJH pensions director and pensions manager at The Children’s Society Gareth Hopkins warns that “in real terms, this translates to a lot of money and risk, which charities are not considering; let alone pricing into their bids”.
“The ‘new’ Fair Deal published
in October 2013 applied to central government departments, such as the Principal Civil Service Pension Scheme; the Teachers’ Pension Scheme; and the NHS Scheme – basically, anyone and everyone apart from local authorities like the LGPS. Why the revised Fair Deal was not extended to local government is anyone’s guess,” he adds.
Updated legislation incorporating the LGPS has been drafted but it could well take years before it is published.
“LGPS has a supposed inability where they can’t allocate different liabilities to different employers under the same agreement,” Spence & Partners director David Davison states.
“For many charities there is also a growing recognition that councils have adeptly transferred historic past service liabilities in millions of pounds to them, due to LGPS inability to segregate service between employers and without making employers aware of the impact. This
Passing the buck? Adam Cadle outlines the LGPS-charity problem and the
ramifications of this on charities’ future sustainability
Summary■ The total charity DB deficit level in the UK stands at £1.7 billion, according to the UK Civil Society Almanac 2016, compiled by NCVO.■ It is common practice that when staff already in the LGPS are transferred over to a charity, that charity takes on responsibilities for historic liabilities. The ‘new’ Fair Deal failed to extend to the LGPS. This is placing huge pressure on charities and threatening their existence.■ The charity industry has argued that local authorities should be asked to retain risk related to pension liabilities.■ Non-associated multi-employer DB schemes are still significant challenges for charities. The deficit caused in these schemes is preventing them from taking steps to ensure their financial sustainability.
“It is common practice that when staff already in the LGPS are transferred over to a charity, that charity takes on responsibilities for historic pension liabilities”
Passing the buck?
has been hugely expensive for charities. DCLG and LGPS continue to try to ignore this issue and sweep it under the carpet.”
The gravity of the situation is exemplified by the transfer of liabilities that can occur either on an ongoing basis or through cessation. Davison emphasises that organisations must enter public service contracts with their eyes open.
“Liabilities can be transferred at the start and worked out on an ongoing basis, on the basis that the contract continues,” he explains. “However when it comes to the end of a contract, you can move to a point where you have a cessation liability and these could be about 50 per cent higher. Yet often the majority of those liabilities relate to liabilities that were built up by the council or a previous supplier. This is patently completely unfair.”
Davison describes a charity in the education sector with an outsourcing contract for three years from 2014, with current assets of £1.6 million, ongoing liabilities of £2 million, so an ongoing deficit of £400,000 but a cessation deficit of £1.4 million.
Furthermore he speaks of a charity that transferred in the six staff from the Principal Civil Service Scheme with large benefits. “It is supposedly fully funded on a transfer value basis but only on an ongoing basis. The charity now has in excess of £600,000 of a deficit, which is now close to crystallising as all but two of the members have left and the agreement is a closed one, so no-one else can be added,” Davison explains.
“Pension risk relating to TUPE is huge, and must not be underestimated,” Hopkins argues. “There are ways and means of mitigating pension risk. In danger of over-simplification, local authorities should be asked to retain all risk related to pension liabilities, and this should be reflected in the commercial contract.”
A change in practice by one local
government pension scheme, Lothian Pension Fund, has reflected a recognition of the unfairness of the issue. This fund recognised that applying a cessation debt to an employer who has transferred in from a local authority is unfair and has therefore accepted that exit payments in these circumstances should be calculated on an ongoing basis for both transferred-in staff and any new staff that join the charity and are enrolled into the LGPS.
“Clearly this represents a significant change and one which surely must have implications for other administering authorities, as if there is an acceptance in this fund that the prior approach is inequitable, it must be, de facto, inequitable in all similar funds,” Davison states.
The battle goes onThe buck doesn’t stop here for charities however, with two other major issues potentially affecting their welfare. Non-associated multi-employer defined benefit schemes are still significant challenges for the sector.
“The way that these schemes operate means that charities are faced with the Hobson choice of continuing to accrue unaffordable liabilities or trigger a cessation (Section 75) debt that requires immediate payment they cannot afford to pay,” Finnegan accentuates.
“The deficits caused by these schemes, which were historically marketed as a safe and sensible option for charities, is
preventing them from taking steps to ensure their financial sustainability. This means that charities are forced to close, which has a knock on effect for other organisations remaining in the scheme and ultimately, for the employees that have their pensions with these schemes.”
The DWP has recognised that the S75 rule needs reforming and has run a consultation on the matter, but the government has yet to act in 12 months since the consultation closed. In the meantime, charities have been forced to close that could otherwise have remained open, had they been able to exit their multi-employer pension scheme more flexibly.
Staying strongCharity pension schemes within the LGPS currently find themselves in somewhat of a dark tunnel where liabilities are concerned. It would not be at all surprising if the Charity Commission is taking rather a dim view on how certain charities are exposing their organisations to great levels of pension risk under TUPE arrangements. “One may even argue it is illegal,” Hopkins states.
“A cynic might say that local authorities are offloading pension liabilities as part of a rather grandeur de-risking attempt. However I suspect the real reason is far more simplistic – the local authorities, themselves, don’t understand pension risk. It is important charities gain pension and legal advice before committing to a particular contract and charities should be prepared to walk away. Some charities seem to loathe this approach due to reputational risk, which is nonsense.
“Charities need to make a stand – until the third sector collectively refuses to take on pension risk, local authorities will continue to pass on these liabilities as business as usual,” he concludes.
More than 10 million people in the UK will be aged 75 or over by 2040; a 100 per cent increase on
the number of septuagenarians in the country today.
The social care system – already under significant pressure – will face increasing strain as older citizens seek ongoing support as their health deteriorates.
Local authorities are able to foot some of the bill but as persistent austerity measures reduce the amount of state funding available, the individual is ever-more responsible for paying for their social care.
In April this year the government delayed the imposition of a £72,000 cost cap, claiming funding pressures on local authorities made it impossible to implement such legislation, which means
individuals will need to find financial support elsewhere.
Pensions linkGiven their long-term funding objectives and focus on later life, the pensions industry is considering ways in which traditional retirement products can support social care needs.
Following the introduction of freedom and choice last April, which allows retirees aged 55 or over to draw their savings as they see fit, pensions look more attractive than ever as a route to funding social care.
Aegon retirement director Steven Cameron says: “Since freedom and choice, pensions have become an ideal means of funding long term care. People can have complete flexibility over how much [money] they take and when, which means they can hold some back
notionally in case they need to use it for long-term care.”
Cameron points to flexi-access drawdown as a ‘huge step forward’ in matching pensions with funding long-term social care.
Flexi-access drawdown allows savers to withdraw as much as little from their pension savings as they like, keeping the pot invested. The first 25 per cent is tax free while further withdrawals are subject to income tax.
Cameron says savers can ringfence a specific amount from their total pot for social care, while budgeting the rest to fund the earlier part of retirement.
He gives the example of an individual with a £700,000 defined contribution pension fund, ringfencing £100,000 for future social care, while keeping it within the drawdown product. The saver could then determine a sustainable income based on the remaining £600,000, which could support the rest of their retirement.
Cameron says: “I can see a growing demand for tools that consumers use – with the help of an adviser – to carry out modelling that help them come to more informed decisions about using a pension to provide a sustainable while holding some money back for long-term care.”
Flexibility and freedom in pensions might have made them more accessible to those wanting to fund long-term care, but they are not without their drawbacks.
First is adequacy. The average pension pot is already seen as falling far below the levels needed to meet average income demands. Add the additional drain of
Joining together: Pensions and care
Gill Wadsworth explores how the pensions industry can help individuals fund long-term care needs in old age
Summary■ Since freedom and choice, pensions have become an ideal means of funding long-term care. People have complete flexibility over how much money they can take and when, which means they can hold back an amount if they need to use it for long-term care. Flexi-access drawdown is one method to achieve this.■ The adequacy of pensions to do this remains subject to debate. The average pension pot is already seen as falling far below the levels needed to meet average income demands and the additional drain of paying for long-term care on top of day-to-day living costs is problematic.■ Reductions in the LTA have further compounded this problem, with social care costs potentially pushing savers over the LTA limit.■ Awareness of funding for long-term care needs to be raised. The Just Retirement Care Index 2016 found more than three-quarters of people aged over 45 have “neither thought about care nor spoken to their families about potentially needing care”.
paying for long-term care on top of day to day living costs in early retirement, and the pension looks untenable.
Adviser firm Tilney director of financial planning David Smith says: The main problem [with using pensions to fund long-term social care] is that, typically, pensions in isolation will not provide an adequate income to fund care costs.”
Smith’s comments are supported by research from Cass Business School, which issued a report in March 2016 on funding social care in later life.
Authors of the paper Les Mayhew, David Smith and Duncan Leary, of the Institute and Faculty of Actuaries and Cass Business School, state: “A typical pension income will not be sufficient to pay care home fees without state support so that most people will struggle to find just a fraction of the costs, even if they draw down all their savings.”
LTAReductions to the lifetime allowance (LTA) from £1.25 million to £1 million in the 2016/17 tax year have further compounded this problem. The LTA restricts tax-free contributions to £1.25 million, after which savers are taxed at their normal rate while incurring tax at 55 per cent on withdrawals.
Cameron says any attempt to use pensions as a home for the cost of social care, as well as standard retirement expenses, may push individuals over the LTA, rendering them inefficient.
Cameron says: “If individuals want to fund for both standard retirement but also want to protect against long-term care costs they might find they run into problems with the LTA. I do think pensions are the right vehicle and give you right flexibility but the LTA restricts your ability to protect against this in full.”
Cameron says a reversal in the reduction in the LTA should be a number one priority for the government if it wants people to use pensions to
fund long-term care.And it’s not just the LTA that can
make pensions an inefficient means of funding long-term social care.
TaxationSince pensions are not subject to inheritance tax, Smith says in cases where savers have additional savings they can draw on, these should be prioritised to avoid an unnecessary charge when the retiree dies.
“Clients often have a bit of everything – bank accounts, ISAs and a pension – and they’ve got to decide which investment will fund long-term care. Every investment except the pension forms part of an estate for inheritance tax, so I would suggest using the other savings before a pension to fund social care,” Smith says.
Paying into a pension is one of the most tax efficient means of saving for the long term, but withdrawals are still subject to income tax. This is in contrast to a care plan that incurs no tax since payments are made directly to care homes.
Just Retirement group communications director Stephen Lowe says: “One potential downside to using pensions to pay for care is current tax treatment. Payments made from a qualifying care plan to a Care Quality Commission registered care provider are not subject to income tax, while pension payments are made to the individual so they are taxed, which can make a substantial difference.”
However, Cameron argues that dedicated care plans are often deemed unattractive by savers since they lack flexibility. Instead, he proposes allowing pensions to be paid directly to the care home, therefore bypassing income tax.
He says: “There isn’t a huge demand from individuals to save completely separately for long-term care. It is far more palatable to build that into broader pension planning. I could envisage
a government saying in future that if you pay for long-term care out of your pension you won’t get taxed on proceeds if is paid directly to a care home.”
Raising awareness Irrespective of whether pensions or other savings vehicles are the best route to providing funding for long-term care, commentators claim there is widespread ignorance on the need to make the provision at all.
The Just Retirement Care Index 2016, which interviewed 1,200 people aged over 45, found more than three-quarters (77 per cent) have “neither thought about care nor spoken to their families about potentially needing care”.
Lowe says: “When questioned further, most people seem to have some awareness that they may have to pay something towards social care but they don’t know how much or for how long. There is also a proportion of people who believe the state – often the NHS – either does or should fund this cost.”
Lowe suggests there is a need to invest in “awareness-building activities to ensure that people move from a state of unawareness to awareness”.
He adds: “Only then can we start to build peoples’ comprehension and then conviction to act to make provisions for the costs of later life.”
Pensions provide a possible route to saving for social care but it is unlikely individuals will choose to ringfence specific portions of their savings. The new flexibility for DC savers means provisions can be made for any lifetime event and singling out social care is unnecessary.
The concerns are whether people understand the need to hold back a proportion of their savings to cover long-term social care costs and just how high that cost might be.
On 1 October 2011 it became illegal for an employer to demand compulsory retirement from an employee
at age 65. Since then, the state pension age (SPA) for women has increased from 60 to 65, and between 2018 and 2020, the retirement age for both men and women will rise to 66. The rise in SPA is just as well for the Exchequer; if SPA fails to rise in line with longevity and the so-called pensions ‘triple lock’ remains in place, the state pension could cost an additional £40 billion per annum by 2060. The end of compulsory retirement is just as well for employers, and employees.
Research by the International Longevity Centre – UK (ILC-UK) found that would-be pensioners expected to need on average £20,000 a year to pay their regular bills in retirement, but their total private pension income was expected to be worth £15,800 a year, a £4,200 per year shortfall. That’s of those who even have pension savings: the Myth of the Baby Boomer, a Ready for Ageing Alliance research report, published in August 2015, revealed that almost three in 10 of Britain’s 55-64 year olds do not have any private pension savings at all.
As of 2015 there were more than one million people working beyond the SPA in the UK. There are obvious advantages for employees to remain in the workforce beyond SPA, such as the health benefits of remaining physically and mentally active; retaining a strong
sense of purpose and utility, and enabling individuals to save more towards their retirement and spend less time relying on their pension savings. Similarly, employees working beyond SPA can also have a positive impact on the health, utility and pensions arrangements of businesses.
As of 27 June 2016, the combined deficit of UK corporate pension schemes stood at a record £935 billion, while liabilities also hit a record £2.3 trillion. By continuing to contribute their skills, experience and expertise to a business, older workers can continue to contribute to company productivity, and ultimately the corporate pension schemes they benefit from. However, at the same time as 1.1 million people were working beyond the SPA, one million people aged 50-64 had also been made ‘involuntarily workless’, i.e. pushed out of their previous job as a result of ‘shocks’, a combination of redundancy, ill health or early retirement.
In order to retain the talent and experience of older workers, an
increasing number of businesses like Anchor, the housing and care provider, have begun to offer flexible working arrangements, allowing employees to scale back their careers over time. Anchor’s head of public affairs Mario Ambrosi has explained that: “Older workers are as effective, take less short-term sickness leave, are less likely to leave an organisation, and are more reliable than younger workers… also, the mentoring element is hugely important.”
Therefore, it would appear to be in the commercial interest of employers to make the adaptations to working patterns necessary to retain their older workers (including allowing employees some form of carer’s leave to enable them to provide informal care for loved ones without needing to leave the workforce). It is also in employers’ interests, and those of the businesses that manage their pension schemes to encourage older workers to remain invested in their funds.
Along with ending compulsory retirement and raising the SPA, the last government also introduced pension freedoms, whereby individuals aged over 55 could begin to drawdown their pensions without purchasing an annuity. The job of the financial services industry now is to protect against the temptation of older workers to begin to drawdown funds too early; devise new ways of managing continued accumulation for those over SPA and still in work, and remodel lifestyle assumptions and volatility accordingly. The job of employers to ensure that their employees do not become one of the ‘missing million’ made involuntarily workless before SPA, who might need to tap into their pension savings to see them through a period of extended unemployment.
Written by Dave Eaton, policy and public affairs assistant, International Longevity Centre – UK
Work/life balance The ILC’s Dave Eaton
explores the impact of a longer working life on retirement saving
What are the aims of the PAT? Th e formal objectives of the PAT are to establish and maintain a library and archive relating to all matters aff ecting the management and development of occupational pensions and personal pensions in the UK and other countries that might have a relevance to pension provision in the United Kingdom. It also aims to further education in pensions knowledge.
How do you determine what artefacts are suitable for the PAT? What are your criteria?We look for collections of minutes, Trust Deeds and Rules, booklets, correspondence and other records relating to occupational and personal pensions that give an insight into how pension provision has developed. Th ey may come from schemes or representative and professional bodies, as well as personal collections from pension professionals. A number of pension managers and actuaries have collections stored away in loft s and garages at their homes. We have an extensive collection from schemes within Associated British Foods and we also hold the archived records of Lloyds of London Superannuation Pension Fund, established in 1929. Th e general rule is
that we normally only take documents that are more than 10 years old. Th ere can be exceptions if papers are in danger of being destroyed or in the case of magazines, held in the PAT library.
What is the oldest artefact you have in the Pensions Archive? And in contrast, what is the most recent addition to PAT?Th e oldest archival item in the Pensions Archive collections is a 1905 pension scheme booklet of Christ’s Hospital held within the George Ross Goobey collection. A recent addition to the Pensions Archive was a collection of scheme booklets, which were added to the United Pension Services collection of over 1,400 pension scheme booklets. London Metropolitan Archives houses
A brief history of pensions
It’s said that ‘the past is like another country, they do things differently there’. With this in mind, Laura Blows speaks to the Pensions Archive Trust (PAT) chairman Alan Herbert about why there is a need for the PAT and what can be learnt from past pensions events Th e Pensions Archive Trust (PAT)
Th e Pensions Archive Trust is charitable company limited by guarantee, which was formed in August 2005 to preserve the history of pensions. It provides a resource for study and investigation that is of value to students and academics as well as the public in general. It also provides a point of reference for those involved with run-ning pension schemes.
It was created to tell the story of the development of occupational pension schemes, which give a fascinating insight into social and economic change in the UK. Since the early schemes began in the 1860s many employers, companies, trades unions, individuals, representational and professional bodies have made their contribution to developing schemes that have helped many people enjoy a better retirement. However, it was a story at risk of being forgotten. Th e years of progres-sion and success were in danger of being hidden behind the damaging headlines of company failures, which have led to some employees losing a signifi cant part of their pensions.
Th e PAT is run by a board of directors of experienced people drawn from the pensions world, supported by a president and fi ve vice presidents. Th e current president is Michael Pomery, a former president of the Institute of Actuaries who succeeded the late Alastair Ross Goobey in 2008.
Front page of the constitution of the Association of Superannuation & Pension Funds (now the Pensions & Lifetime Savings Association) going back to 1923 (from London Metropolitan Archives collection reference: LMA/4494)
the Pensions Archive and manages it on a day-to-day basis and has in addition extensive business archive collections. London Metropolitan Archives is the pan-London and City archive repository managed by the City of London Corporation. Malcolm Deering, a PAT volunteer, has researched the wider collections held by LMA and extracted details of pensions that go back even further. Seventeenth century examples include Middlesex Sessions papers documenting the Royal Navy scheme for naval officers, of which details can be found on the PAT website.
Which artefacts within the Pensions Archive do you think are the most significant? The largest and most significant personal collection is that of George Ross Goobey. It covers his time as pension fund manager of the Imperial Tobacco Pension Fund, where in the 1950s he introduced the cult of equity investment to his trustees, which was also taken up by other pension schemes in the UK, through his involvement with the then National Association of Pension Funds. It also covers his time in retirement when he took on many roles related to pensions and was much in demand as a speaker at conferences and other events when he was able to express his views on pensions and investment issues.
Which is your personal favourite piece in the PAT, or which you are most proud to have obtained?
Again it must be the Ross Goobey collection, when we were given access to his papers, which had remained in six rusty filing cabinets in the garage of his home in North Somerset until the sale of the property following the death of his widow. I and a colleague were given the opportunity of recovering the files from which the Pensions Archive has been able to build a picture of his professional life and his many other interests.
Why is the PAT needed? How do these examples of different pensions eras relate to the rapidly changing (especially lately) pensions systems of today?
66 July 2016 www.pensionsage.com
Maxwell: The Game 1991 (courtesy of the Pensions Archive Trust)
Pensions history timeline1590: The Chatham Chest was established to provide pensions to disabled seamen.1601: The Poor Law made parishes responsible for the care of their aged and needy.17th century: The first company pension schemes were set up in the late seventeenth century in private firms associated with the government, such as the Bank of England and East India Company.1672: Establishment of a pension scheme for retired Royal Navy Officers provided by the state. 1684: The first civil service pension was provided to Martin Horsham, an official in the port of London.1712: A Superannuation Fund for the lower ranks of the Customs and Excise department was established, with officers receiving a third of their final salary on the conditions of making a regular yearly contribution, seven years’ service and good behaviour, which was payable when staff were unable to continue regular employment. 1739: The Bank of England first pension was granted in 1739. 1803: A separate pension scheme for senior Customs and Excise officials was established.1806-7: Customs and Excise Superannuation Fund extended to all grades of the department.1810: Superannuation Fund extended to the whole civil service. 18th and 19th centuries: Friendly Societies – in the 18th and 19th centuries, groups of workers formed mutual and friendly societies to save for funeral costs and put money aside for old age, illness or unemployment. One of the earliest was established in 1707 for Oxford University’s printers.1834: Poor Law Amendment Act led to a much harsher regime aimed at deterring the so-called ‘undeserving’ poor from relying on support from the parish.
Alan HerbertIn 2001, Alan Herbert, chairman of the Pensions Archive Trust, saw the need for establishing a Pensions Archive to record the history and
development of pension provision in the United Kingdom. The project was announced in 2002 after he had taken a number of soundings that confirmed there was general support for it.
Herbert retired as head of pensions of BP in 1997, after a career in pensions in the brewing, food and oil industries spanning 37 years. He was a non-executive director of Liberty International Pensions (1997-2000) and of Dunnett Shaw & Partners (2000-2005). He has been chairman of the Advisory Council of The Occupational Pensions Defence Union since 1997 and retired during 2007.
Herbert sits on three trustee boards and chairs two of them. He is a Fellow of both the Institute of Chartered Secretaries and Administrators and the Pensions Management Institute. Herbert was a member of the Occupational Pensions Board and of the Pensions Panel of the Confederation of British Industry. He served for a period as a council member of the National Association of Pension Funds.
The PAT is needed to record the evolution of occupational pensions (or workplace pensions as they are now called) in the UK. Changes in pension provision have to a large extent followed changes in tax rules laid down in various Finance Acts over the years. In more recent times a series of Pensions Acts have also brought about changes that have added to the cost of pension provision and led to employers changing the type of benefits they are prepared to provide. These developments can be followed in the minutes and papers of the representative and professional bodies held
in the Pensions Archive.
Arguably pensions artefacts should be preserved as a means of helping individuals learn from past success and mistakes. What examples of past success and mistakes come to mind when thinking about pensions provision – and do you have any objects in the PAT relating to these mistakes and success?It will be 25 years in November this year that the Maxwell saga came to light. The PAT holds papers relating to the saga and the action taken to compensate the pensioners exposed to loss. Whilst final salary pensions were a great benefit to
many people and were a success story, if something went wrong due to weak governance the consequences for pension scheme members could be disastrous. In those days there was no Pension Protection Fund.
One of our vice-presidents, Dame Jane Newell, who donated the papers, was very involved as she was a founder trustee of the Maxwell Pensioners Trust, which was set up in 1992 to appeal for funds to assist Maxwell pensioners. She subsequently became its chairman. In writing about her experiences she said:
“For my part, the Maxwell years were a baptism of fire into the world of pensions. Having seen what happens when everything goes wrong with a pension fund gave me a very clear perspective on why members’ benefits need to be protected through strong governance, legislation and regulation. The recommendations of the Pension Law Review Committee (the Goode Committee), set up as part of the government’s post-Maxwell initiatives, led to the 1995 Pensions Act and significant changes to how pension schemes operate, changes that have been built upon in subsequent regulation and legislation leading to better standards of governance and a properly robust regime.”
The notoriety of the Maxwell event even led to a board game being produced one of which is held in the Pensions Archive [see picture].
Successive governments have been accused of short-term thinking with
regards to creating pensions policy, and pension funds themselves have also been criticised for having short-term investment thinking. How can the PAT help counter these ‘short-term attitudes’?By reviewing the effects of past decisions relating to pensions it can often help with planning the future. We particularly had politicians and their researchers in mind when we set up the Pensions Archive. On the investment front, the Ross Goobey papers illustrate the advantage of taking long-term investment decisions.
What are the future plans for the PAT?The Association of Consulting Actuaries has recently financed the digitisation of its archived records held in the Pensions Archive. Some of the Ross Goobey papers have also been digitised and can be viewed online. It is planned that further selective digitisation of records should take place to give easier access to them.
Looking to the longer term the PAT would like to see pension archives set up at regional records offices across the country, recording the part played locally by employers, trustees and pension professionals in establishing occupational pensions.
It is all part of creating a greater understanding of pensions and savings amongst the public. If Pensions Age readers are interested in being involved in this project do contact us.
Written by Laura Blows
1841: The Chartered Gas Light and Coke Company Superannuation Fund was set up, one of the earliest private occupational pension schemes.Mid 19th century: Many railway companies established pension schemes for their staff.1890s: Public sector employees granted pensions modelled on the civil service scheme, including teachers, the police (1890) and poor law officials (1896). Late 19th century: The establishment of company pension schemes increased, such as Reuters creating a pension scheme in 1882 and WH Smith in 1894.20th century: Rowntree’s and Cadbury, firms who demonstrated great concern for the welfare of their staff, established pension schemes at the start of the 20th century.1908: A state pension was first established for a limited section of the older population.1922: A uniform pension scheme for local government staff was established1940: The Old Age and Widows’ Pension Act broadened the benefits available to women by reducing the pensionable age to 60 for unmarried insured women and the wives of insured male pensioners, with an associated increase to women’s contributions.1959: A National Insurance Act introduced a top-up state pension scheme, based on earnings, which was also known as the graduated pension. Late 20th century: Privatisation led to many workers being transferred from public sector pension schemes into private company schemes, and changes to tax legislation in 1988 saw many employees move over to personal pension schemes from their employer’s pension scheme.1995: The Pensions Act created the Minimum Funding Requirement and equalised the retirement ages of men and women.2012: Auto-enrolment begins, requiring employers to automatically enrol eligible employees into a workplace pension scheme, unless the staff member chooses to opt out.2015: ‘Freedom and choice’ begins, enabling pension savers to take their pension pot as cash and removing the effective requirement to purchase an annuity. 2015: Launch of Pension Wise, a free and impartial government guidance service.
“Brexit is not really about FX - unlike 1992, when the exit from the ERM almost created a constitutional crisis. Sterling could rise in the years to come or it could fall. It all depends on how the UK economy performs relative to the Eurozone. Having said that, I think Brexit has driven the probability of relatively low GDP growth higher; hence GBP is likely to weaken further. However, the Eurozone could also weaken as a result of the Brexit crisis. � erefore, my preferred line of action as things stand right now (for a UK investor) is to get exposure to USD assets rather than EUR assets.”
Absolute Return Partners CIO Niels Jensen
68 July 2016 www.pensionsage.com
brexit opinion
A� ershocks
The shock of Brexit has impacted the fi nancial markets and pushed up the UK’s DB pension defi cits to over £900 billion. With this in mind, how can trustees attempt to ‘future proof’ their schemes from Brexit turmoil?
“Market volatility means DC trustees must keep on top of investment governance and ensure appropriate default and lifestyling options. DGFs (diversi� ed growth funds) have become popular and are designed to maintain good returns with reduced volatility during exactly this kind of market uncertainty. It will be interesting to see which DGFs succeed and trustees should keep a close eye on relative performance.
Annuity rates are falling further under pressure from continued low interest rates. Trustees and employers may want to increase the options and support available for members at retirement.
For DB trustees, those who have adopted robust hedging and liability management strategies will be much more ‘future proofed’ against the low-interest environment than those who haven’t. Employer covenants will also come under scrutiny by trustees. Increased tension between trustees and employers is likely given recent TPR pronouncements that employers can a� ord to clear de� cits more quickly.”
Addleshaw Goddard pensions partner Jade Murray
“Many schemes will be well equipped to ride the storm, and are ‘future-proofed’ through diversi� cation of assets, hedging and liability-driven investment. For schemes not so well protected, this is a wake-up call to consider the implications of the referendum on their investment strategy.
Much of the UK legislation a� ecting pension schemes has its roots in the EU. While it seems likely that equivalent legislation will remain in place in the short term, this will ultimately depend on the relationship agreed between Britain and the EU. We may not see much change, not least because some level of compliance/harmonisation is likely to be required by the EU as part of the negotiated terms. However, it is possible that the vexed issue of GMP equalisation may be axed as a result of Brexit.”
Sackers partner Caroline Legg
“For de� ned contribution pension funds, communication with members about their investments is essential. Opportunity exists for younger savers and people who are who are further away from retirement (e.g. 15 plus years) as a decline in equity markets allows them to buy into the market at a lower price. However, it is extremely important that young savers do not make impulsive investment decisions by selling today and crystallising losses.”
“It is important at this time that trustees recognise that schemes’ liabilities are long-term in nature and that they are not unduly distracted by short-term phenomena. Immediate and drastic portfolio reconstruction would be an overreaction. Nobody yet knows what the longer-term impact of Britain’s exit will be, and trustees should allow for all contingencies.”
PMI technical consultant Tim Middleton
www.pensionsage.com July 2016 69
opinion brexit
“Post-Brexit it would be wise for pension schemes to be watchful of a possible contagion into European assets, especially the euro. Even though the ECB is expanding its balance sheet aggressively, it is noticeable that investors have reduced their bets on a continued depreciation of the euro. Whilst it shouldn’t necessarily be seen as a way of ‘future proo� ng’ a pension scheme, if the Leave vote refocuses market attention on the potential political divisions within Europe, there currently appears to be little political risk premium priced into the single currency and with monetary policy encouraging euro weakness as well, we would anticipate the downtrend in the EUR against the US dollar to resume.”
State Street Global Markets head of global macro strategy Michael Metcalfe
A� ershocks“More so than ever, trustees should now be actively thinking about how they can protect the scheme in downside scenarios. � is may include additional hedging to reduce the potential for additional demands on the sponsor. It should also include investigating the potential for the employer to provide downside protection, for example through security over assets or guarantees from stronger entities within the sponsoring group. � is kind of protection can reduce the risk exposure of the scheme, which in turn may also allow them to be more sanguine about potential short-term cash easements requested by employers.”
Lincoln Pensions managing director Matt Harrison
“First o� , accept you can’t future proof. � e situation is too uncertain to do this properly. However, there are things trustees can and should do. Don’t focus on legislative change. � e vast majority of pensions law – even if prompted by EU law – is contained in UK legislation and won’t change on Brexit. Whilst it can be amended in future, it won’t be top priority for government. So apart from seeing the back of Solvency II, and probably GMP equalisation as well, there will be little short-term change here.
Instead, focus on covenant and investments. Ask the employer what its internal planning for Brexit has been, and what the implications are on the employer’s business. Ask to have a seat at the table with the employer when it comes to Brexit planning negotiations so schemes can be fully prepared. Also, monitor investments closely, and take advice (the investment adviser may have a cunning plan!) But don’t panic – schemes’ investment strategies are usually long-term, so short-term changes are probably unnecessary.”
Hogan Lovells partner Edward Brown
“It is clear from our initial analysis that di� erent pension schemes have been impacted quite di� erently by Brexit thus far, depending on the de� cit they started with, the nature of risk they have in the scheme and the type of business their sponsor is in. � e key short-term actions trustees should take are to establish which camp they fall into and identify what can and should be done.
It is necessary that trustees view this in an integrated manner, that is by having a joined-up view across funding, investment strategy and covenant support. � e Pensions Regulator is putting particular emphasis on such an approach.”
Mercer Financial Strategy Group principal LeRoy van Zyl
What is your pensions career CV?It’s long! I came into the industry on 2 January 1985 at a little after 10am. I started on the coal face: a pension admin department for Legal and General. It was dull but with the benefit of hindsight really useful. I learnt that pension schemes are about one thing only: the members. Trustees, and advisers sometimes forget that. I’ve worked for a
number of pension companies and done all sorts of jobs. I also worked for myself for eight years until my business was bought by PTL in 2008.
What is your greatest work achievement so far?I’m quite proud of surviving and thriving for eight years on my own, but my proudest achievement would be being
part of the team that has made PTL one of the largest, most successful and best independent trustee companies there is.
What is your biggest regret within your career?I’m not sure I have regrets. There’s not much point to them. You can’t change the past, only the future. That said, we all make mistakes – we are all, after all, only human – and I usually agonise over those whether big or small. I pacify my agony to some extent by doing what I can to make sure the same mistake isn’t made a second time.
If you could start your career again, what would you do differently?If I’d have done things differently in the past, I wouldn’t be where I am now – and I’m happy where I am now. I’ve alwaysworked really hard.
Excluding your current role, what would be your dream pension job?The pension industry is a great place to work. I have freedom, choice, responsibility, I’m pretty well rewarded, I can spend time being creative, I meet great people, I have fascinating debates, I work with a great team, I have understanding shareholders and I know of really good coffee shops near all four of our offices. All in all this is a dream job.
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Professional Services GuideTo Advertise in the Classified Section contact Sam Ridley - Telephone: 020 7562 4386 or email [email protected]
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Data aDminiStration
Barber Harrison & Platt (BHP) is a UK Top 50 firm. Our dedicated Pensions Assurance team comprises 14 specially trained motivated, professional and approachable individuals. We act for over 70 UK pension schemes varying in size from small legacy schemes, to multi-employer hybrid schemes with net assets of over £400m. We excel in giving proactive advice and constructive audit feedback to assist Trustees with their audit compliance requirements. Our team also carries out a wide range of Employer Covenant review assignments for trustees and employers, including desktop reviews, in-depth strategic reviews and advising on the potential impact of corporate transaction activity.
Offices in Sheffield, Leeds, Cleckheaton, Chesterfield, York and Harrogate.
Call us on 0333 123 7171email Howard at [email protected] visit www.bhp.co.uk
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LaSalle Investment Management is one of the world’s leading real estate invest-ment managers with over 35 years of experience. LaSalle manages $59bn (as of Q1 2016) of assets on behalf of institutions and private investors across the world, investing in private real estate equity and debt, and public real estate through a complete range of investment vehicles. Our products include separate accounts, open and closed-end commingled funds, joint ventures, and public securities. From the London office of 167 people we manage £12.1bn assets of which £11.8bn are located within the UK. We have extensive successful experience of managing portfolios to both MSCI relative and real return performance targets as well as assets and strategies targeting index-linked and absolute returns.
LaSalle Investment Management One Curzon StreetLondon W1J 5HDUnited Kingdom
Making the complex simpleExperts in helping our clients meet today’s ever-changing pension administration challenges.
To find out more about our innovative and reliable pensions, payroll and annuity administration solutions call 01293 601 880 or email [email protected]
www.equiniti.com
PENSIONS ADMINISTRATORS
Russell Investments is a global asset manager o� ering actively managed multi-asset portfolios and services that include advice, investments and implementation and is one of the UK’s leading providers of � duciary management solutions. Russell’s core capabilities extend across capital market insights, manager research, portfolio construction and portfolio implementation. Russell has over £174.9 billion in assets under management (as of 31/12/14). Russell has four decades of experience researching and selecting investment managers worldwide.
Russell InvestmentsRex House | 10 Regent StreetLondon, SW1Y 4PE
Colin English, Director, Pension Solutions [email protected]+44 020 7024 6155
FIDUCIARY MANAGEMENT
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Take our quick scheme governance challenge to assess if your scheme is prepared for the journey to Pensions Stability.How well does your pension scheme run? Are decisions made crisply and clearly? Is the trustee board quick to react to opportunities and threats? Are the right tasks being undertaken at the right levels? And does the scheme have a robust business plan?
Operational effectiveness and good governance are vital in order to reach Pensions Stability. At Aon Hewitt we believe that most schemes have room to improve and our research tells us that trustees and sponsors agree with us.
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Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: 4396810. Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN.
Risk. Reinsurance. Human Resources
Aon Hewitt
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