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Join the discussion – The Greatest Good 2

Regular readers of our blog will be aware that in 2015, our sister company, 2020 Trustees, sponsored The Greatest Good, a report from The Pensions Institute which highlighted the acute pressure faced by many companies sponsoring DB pension schemes as they strived to meet their long-term promises. Sadly, the warnings and issues raised in that report were proved correct with the very public issues facing the BHS and Tata Steel schemes.

Two years on and Greatest Good 2 has just been published and again, and once again 2020 Trustees is one of the key sponsors. The Report authors call on the Government to shift UK pensions policy towards delivering fair pensions for the greatest number of people who are members of private-sector DB pension schemes.

The Report says that Government should recognise the reality that some workers will not get their full pension if the sponsor becomes insolvent well before their scheme is restored to full funding. It is concerned that the current policy focuses on binary outcomes of schemes staggering on in the hope of paying benefits in full, or a reduction to PPF level of compensation if the sponsoring company goes bust.

The Pensions Institute recommends a policy to facilitate ‘second best’ outcomes, allowing schemes with weak sponsors at a risk of insolvency to negotiate settlements for their members between full benefits and the level of compensation provided through the Pension Protection Fund safety-net.

It’s younger members who are most at risk of losing out if a scheme staggers on, and the PPF compensation ‘cliff-edge’ is also particularly unfair for these members. We agree that phased rules for PPF compensation levels to remove cliff edges would introduce greater equity between member cohorts. The phased approach should be based on age and length of service.

While we have great confidence in the PPF and its compensation regime, we nonetheless think policymakers and trustees alike should be brave enough to accept that early intervention to secure a better result than compensation may be the right answer– in the right cases. We also think that the PPF and its levy payers should be alive to the increased cost from schemes drifting on more in hope than expectation.

Our advice to our client is always that doing nothing is not an option when it comes to viability. If a pension scheme is in trouble, seek expert advice urgently as there are interventions that can be put in place to help.

The full report Greatest Good 2: Response to the Department of Work & Pensions Green Paper, Security and Sustainability in Defined Benefit Pension Schemes. Available here.

Final FCA report into Asset Management Markets

The FCA has
issued its final report into Asset Management Markets following on from its interim report in November 2016 (see our blog dated 22 December 2016).

There isn’t much comfort for the industry here and the FCA has largely reaffirmed the conclusions from its interim report, namely:

  • There is weak price competition in the industry, which is unacceptable given the large number of investment managers and the size of the profit margin;
  • Higher charges do not lead to better performance, and indeed there is some evidence that higher charges lead to worse performance;
  • Managers’ communications are not clear about their objectives and awareness of charges is often poor;
  • The investment consultancy market is too concentrated;
  • Economies of scale are not apparent – either in the institutional sector where the pooling of pension fund assets is not possible, or in the retail sector where platforms don’t appear to benefit consumers;

  • The FCA proposes a package of remedies, some of which have already been decided upon, whilst others will be subject to further consultation or details about which will follow further work.

    The recommendation to bring investment consultancy within the regulatory perimeter was largely expected, although how this is achieved in practice remains to be seen. Similarly, consistency, transparency and simplification of charges disclosures makes sense, whilst recommendations to remove barriers to pension scheme consolidation and launching a market study into platforms follow naturally from the initial report.

    The report sets out fer consultation in a number of areas:

  • Strengthening the fiduciary duties of investment managers;
  • Requiring ‘risk-free’ box profits to be returned to the fund (these arise when buyers and sellers can be matched at no risk to the manager);
  • Making it easier for investors to switch to cheaper share classes;
  • Proposing to reject the ‘Undertakings In Lieu of a Market Investigation’ into the Investment Consultancy market, put forward by the three big players;

  • Later this year, the FCA plan to publish further consultation into costs and charges disclosures, benchmark and performance reporting and the final rule changes. Additionally, they will make a final decision on whether to refer the investment consultancy market to the Competition and Markets Authority.

    At risk here is the competitiveness of the £7trn asset management industry in the UK, and there is a danger that the new measures will increases costs and drive business away from the UK. The FCA has set its stall out and whilst the continuation of the consultation period will give more time for the industry to react and influence the outcome, there is little doubt that the measures will impact on the profitability of the sector in the long term.

    2020 Trustees CEO wins Trustee of the Year 2017

    We are delighted to announce that CEO of 2020 Trustees – Antony Miller – was last night awarded Pensions Manager / Trustee of the Year at the prestigious Professional Pensions magazine ‘Pension Scheme of the Year Awards 2017’. The event was held in London at The Brewery on Chiswell Street and coincided with the Pensions and Benefits UK 2017 Conference & Exhibition being held at the same venue.

    Pension Scheme of the Year Awards 2017

    Nigel Jones, a fellow Director of 2020 Trustees, said “this award is richly deserved and fully reflects Antony’s hard work and dedication, coupled with a genuinely innovative approach to providing solutions relating to complex and difficult situations. Antony is widely respected within the UK occupational pensions industry and his leadership has enabled 2020 Trustees to become a leading independent trustee firm in just over four years since inception in 2013”.

    Antony, 48, has more than 25 years of pensions, actuarial and trusteeship experience. Much of Antony’s working life has been spent saving pension schemes and their sponsors from demise. He is known as one of a handful of leading experts in PPF related scheme compromises and regulatory apportionments.

    Effective Governance – the art of Balance

    Naomi L’Estrange a director with our sister company, 2020 Trustees, was recently interviewed as part of a report from Winmark and Sackers which looked at effective governance for pension schemes. Effective Governance – the Art of Balance surveyed 84 pension schemes and explores the governance challenges that trustee boards face; the relationship between good governance and scheme effectiveness; governance priorities of trustees; and the impact of rising governance standards on trustee workload.

    These are key areas that 2020 Trustees have spoken of before and key findings in the Report concurred with much of what we have published previously. These include the importance of sound governance structures and that governance should never simply be a tick box exercise. Interestingly, the Report suggests that while significant, compliance is not the primary focus of governance. In fact, spending too much time on compliance may detract from other governance priorities that yield better member outcomes – the emphasis on balance is spot on.

    We agree that skills (including softer skills such as chairing, communication and building rapport) can make an even more effective contribution to the trustee board than technical pensions knowledge, all of which should be provided by professional trustee , while lay trustees should have knowledge of the employer and its business, and of the membership, as well as sound instincts, a different perspective, and an ability to ask the “stupid” question which invariably isn’t.

    Naomi commented: “Trustees are able to be much more dispassionate if they are (a) truly independent, and (b) have seen it before. Being an effective trustee is a delicate balance. Trustees can be too distant and can be too cosy and schemes tend to get one or the other; the trustees either being unnecessarily confrontational or unnecessarily rolling over.”

    The Report has a number of key recommendations and one of which is around reviewing Board membership and ensuring regular training to close any knowledge and skills gaps.

    For both DB and DC schemes, trustee boards should seek to build effective working relationships with employers to deepen their engagement and stimulate information sharing. In this way, trustee boards will gain the best possible understanding of what the future may hold.

    Naomi said: “The common challenge is the low yield environment, which feels much more acute on the DB side because on the DC side you often have longer to address it. Valuation conversations right now are very difficult and we have huge sympathy for the sponsors because they have paid vast fortunes in and are seeing results that are as bad as last time or worse.”

    And finally, the Report recommends that trustees should deploy metrics to systematically measure performance to ensure that providers deliver value for money. Good practice is to review the market and draw on the sector expertise of independent trustees and pensions managers to assess and compare value and performance; and to act on that review on a regular basis.
    We welcome this report and its sensible and pragmatic conclusions which will be useful for trustees of all kinds.

    Pensions & Benefits UK 2017 – London, 27th & 28th June

    Several Mitchell Consulting and 2020 Trustees staff will be attending the Pensions & Benefits UK 2017 event at The Brewery in London later this month.

    Nigel Jones (CEO of Mitchell Consulting and a Director of 2020 Trustees) will be hosting two of the conference sessions on the afternoon of Tuesday 27th.

    Within the ‘DC schemes’ stream, Nigel will chair a session on ‘Freedom & Choice: The story so far’ at 15.10 in conjunction with Scottish Widows.

    After a short break, and within the ‘DB Schemes’ stream, Nigel will oversee a session on ‘Diversifying into alternative investments’ at 16.05 in conjunction with LGT Capital Partners.

    Professional Pensions – Pensions & Benefits Exhibition & Conference

    On the evening of the 27th June, Antony Miller (CEO of 2020 Trustees) is nominated within the Pensions Manager/Trustee of the Year category at the associated Pension Scheme of the Year Awards, also to be held at The Brewery.

    Pension Scheme Awards 2017

    We hope to catch up with many of our contacts (and meet many new ones) over the course of the two days at Pensions & Benefits UK 2017.

    What does the election result mean for pensions policy?

    It’s safe to say that when Theresa May called a snap election on 18th April – none of us could have predicted the result.

    Like most people today, we have been discussing what a hung parliament means – especially for pension funds. Not surprisingly the pound has weakened against the Dollar and the Euro, but we are not expecting a major shift in the underlying position and expect it to rally again once the politicians sort themselves out. Markets, however, are generally up across Europe.

    Some argue that this is actually a much better result for the country – others believe not – but we assume that our friends across the Channel will be delighted to suddenly have a potential reshaping of the terms of Brexit.

    George Osborne described the Conservative Manifesto as ‘a total disaster and must go down now as one of the worst in history by a governing party’ and he may have a point. Many commentators have been discussing how British pensioners have walked away from the Tories after what they saw as something of a savaging.

    The proposed abolition of the triple lock while generally accepted as unaffordable by the pensions industry – was not popular with voters, especially low and middle earning pensioners who relied on the extra funds. And of course, there was the famous ‘dementia tax’ which proved totally disastrous.

    Reforms of pension tax relief and any approach to the regulation of Defined Benefit (DB) pensions are going to be the last thing on a Tory government’s mind – should they actually manage to form a government. On the plus side, regulation of DB pensions did figure prominently in the manifesto’s of all the major parties, so The Pensions Regulator may still benefit.

    The key issue for the new government, Labour, Conservative or Coalition will be Brexit. if Mrs May does partner up with the DUP, we anticipate a condition of support being around open borders – that will imply a much softer Brexit than Mrs May would have liked. There is just over a week before the negotiations are due to start – and this issue, rather than anything else is going to be at the forefront of any new government’s mind.

    The current pensions minister Richard Harrington retained his seat in Watford – but with his previous majority of 10,000 reduced to just over 2,000 votes, and we wait with interest to see if he will still be in the junior ministerial post in the next week or so!

    The next few days, possibly weeks, are going to see a certain level of uncertainly which is never good for the markets but as always in times like these, people should always take a long-term view and not make any hasty decisions.

    Congratulations to Antony Miller who has been shortlisted for a national industry award.

    Antony heads up our sister company 2020 Trustees, and is one of only four people to be shortlisted for Pensions Manager/Trustee of the Year in the Professional Pensions Pension Scheme of the Year Awards 2017. The Awards are the pension industry ‘Oscars’ and it is considered a great coup to be proposed.

    2020 Trustees colleague and fellow Director Nigel Jones, said: “We are really thrilled that Antony’s achievements have been recognised. Antony is renowned for his pensions, actuarial & Trusteeship expertise. He is one of only a handful of leading experts in Pension Protection Fund related scheme compromises and regulatory apportionments and has worked very closely with the Pensions Regulator on many occasions. He is a hugely respected industry professional.”

    The Award winners will be announced at a gala dinner and ceremony in June 2017 at The Brewery in London.

    Antony said: “It’s obviously nice to be shortlisted but the recognition has to be shared with the whole team who work diligently to make our businesses such a success.”

    The now ‘not so new’ pensions freedoms – how are we faring two years on?

    Last month saw the two-year anniversary of the introduction of freedom and choice for pension savers, so what has happened – and equally importantly – what have we learned over the last twenty-five months?

    Firstly, the new freedoms have proved to be very popular, with individuals welcoming the relaxation of the requirement to purchase an annuity policy upon retirement. An article in the Times (13th May 2017) commented that in the last year 80,000 annuity policies were sold, a substantial fall from pre-2015 levels of around 400,000 per year. This is backed up by research from CoreData that found only 22% of pre-retirees’ plan to buy an annuity policy. Pension savers however have been quick to take advantage of the new options that are available to them (remain fully invested, take their full ‘pot’ as cash, flexi-access drawdown, etc.) but the relative current unpopularity of annuities is not unexpected as annuity rates have plunged to historic low levels and offer seemingly poor value at present.

    When the new freedoms were introduced it was expected that the number of transfers from Defined Benefit (DB) schemes would increase, and this has certainly proved to be the case, particularly in the last twelve months. Despite falling annuity rates, transfer values from DB schemes have increased substantially due to market conditions since mid-2016. Many DB scheme members are currently receiving transfer value quotations of 20 to 25 times (or more) of their projected annual pension, and for many individuals (having taken appropriate financial advice) a DB to DC transfer is proving to be an attractive option. A national UK actuarial/pensions consultancy has recently reported a 166% increase in completed DB transfers (within schemes that they administer) in Q1 of 2017 compared to the same period in 2016.

    So, to date, we have seen a large decrease in annuity purchases and a significant increase in DB transfers. These statistics reveal a material change in people’s attitude to pension provision, but will these trends continue in the longer term? Our view is that it simply remains far too early to say. At present, part of the observed trend is driven by a reaction to prevailing market conditions and longer term reversion will undoubtedly play some part. However, we would be very surprised if annuity sales ever recovered to anything like their previous historic levels, and that statement alone perhaps tells us that some of this trend is permanent.

    Whilst the 2015 freedoms have offered individuals greater choice, they have sadly also proved to be popular with fraudsters. In a blog in April 2016, we commented that the spectre of pension liberation scams was certainly not a new one and has been widely reported in recent years. However, despite the best endeavours of the industry, reported cases continue to rise and both individuals and Trustees need to be extremely vigilant. This is very much still the case.

    Research in 2016 from Citizens Advice revealed that almost 9 in 10 people would miss the common signs that might indicate fraudulent activity. Scammers are now operating with increasingly sophisticated techniques to lure unsuspecting pre-retirees, such as cold-calling and texting offering free ‘pension reviews’ and advice. 3 in 4 people interviewed by Citizens Advice said that they were confident they could identify a pensions scam, but when a scam was presented to them only 12% were actually able to do so.

    The Government announced a welcome ban on cold calling in respect of pension investments in late 2016 and this was due to be included in the Finance Bill of 2017. However, following news of the ‘surprise’ general election to be held on 8th June, the rush to get legislation through quickly meant that the ban on cold calling was not included within the rewritten Finance Bill. This is a great shame, but hopefully will be re-introduced by the new Government following the general election.

    The Times recently stated that in March 2017 losses of £8.6m were reported by 24 victims of pension fraud to the City of London Police, a huge increase on the £779,000 reported by 12 people the month previously. This could just be the tip of the iceberg because, as is the case with many personal crimes, a high proportion of the victims may be too embarrassed to report their plight to the Police. So how can this tide of potential fraud be stopped? The onus is on the Government, employers and pension scheme Trustees to educate individuals to spot the warning signs. The Pensions Regulator has provided very good advice for advisers, individuals and Trustees and we would recommend that this is an excellent starting point for anyone that requires further information. Pension Wise also provides very good information for individuals to help them avoid falling for a pension scam. Relevant links are included below:

    The Pension Regulator – Pension Scams

    Pension Wise – Scams

    Finally, the Money Purchase Annual Allowance (MPAA). This was designed to stop the recycling of cash for the purposes of tax relief in respect of those people that had already started to flexibly drawdown their pension pot, and was reduced from £10,000 to £4,000 from the start of the 2017/2018 tax year. Or was it? This was another omission from the rushed through Finance Bill. What isn’t clear at present is whether it will eventually be passed in legislation once the new Government is in place, and if so, will it will be backdated to the start of the current tax year, or if it will simply apply instead from 2018/2019 onwards. If it doesn’t apply until April 2018 then this will provide a valuable additional opportunity for some pension savers to top up their pension pots and benefit from the tax efficiencies that the higher £10,000 allowance affords.

    Neil Barton – 22nd May 2017.

    Manifesto pension pledges part two

    We reviewed the Labour Manifesto last week and so in the interests of equality, we thought we’d give the other two main party Manifesto’s the same treatment and review their plans for pensions.

    Big news from the Tories is that middle class pensioners are going to lose out. Depending on your view point, this is either a brave or foolish move on their part, as there is a danger they could lose votes – and they certainly can’t be accused of trying to bribe the grey vote.

    As expected, they will abolish the triple lock pension in 2020 and replace it with a double lock so that pensions will rise in line with earnings or inflation, whatever is highest.

    The triple lock has largely been criticised in the pensions industry at least, as being expensive and also unfair to younger generations. The OECD claimed the triple lock unfairly favoured pensions over the working population and broadly speaking, most of us in the pensions industry agree with the decision.

    The Lib Dems (and Labour) pledged to keep the triple lock and also said they will review the pension tax relief system with a flat rate. This has gone down well with some in the industry who believe this will address another unfair flaw in the system, while others argue that if this was applied to DB it would hit middle income earners hardest and cause confusion.

    We agree that there is force in the argument that pensions tax relief has not historically been spent so as to provide the most effective incentive to save on those who need it most. But the big reductions in annual and lifetime allowances have already gone a long way to address this. Marginal benefit of further change, when balanced against the complexity and cost, may not be worth it.

    On the back of recent scandals, The Conservatives have also said tPR will get more powers to block mergers and acquisitions involving pension schemes, and similarly Labour wants to amend takeovers for large businesses to ensure a clear plan to protect pensions. There are no arguments from us there. However, it is important that tPR is also given the resources to manage those powers and we would suggest that a requirement for clearance across the board is probably a step too far.

    Of course, we will have to wait until June 8th to see which of the proposed pensions policies we will be working with….

    Pensions & The Labour Manifesto

    So, with a few weeks to go until the General Election, thanks to the infamous leak, we now have an idea of what the Labour Party has in mind for pensions.

    The Cridland Review published in March had some important recommendations that would have a significant impact on all pensions. One was around raising the state pension age. Labour has rejected it.

    From next year, current plans see most of us getting a state pension at 66, but rising to 67 by 2028 with even further rises in the pipeline. Corbyn has said that people in physically demanding jobs in particular, should not be working into their 60s. Labour has also stated
    it will draw up plans to support women who will be adversely affected by any state pension age rises by extending the current means tested pension credit.

    In our view, with life expectancy continuing to rise (albeit more slowly), there is no alternative to increasing state pension age, though government needs to get much better at informing us properly. Supporting those women who have been affected by the failure to do so in the past makes sense (subject to proper costing) – as does supporting the workforce and employers to enable people to keep healthy and working for longer – it is often those least able to afford to retire who are forced to do so.

    It also wants to amend the takeover regime to ensure that there is a clear plan in place to protect workers’ pensions, especially from hostile takeovers. It specifically mentions the nuclear and mineworker’s industries and proposes giving members of local government pensions schemes full trustee status – although that probably needs further explanation.

    Equally important for the industry, Labour has confirmed that it is indeed committed to keeping the controversial triple lock, probably until at least 2025. This will no doubt go down well for older voters, those who are most likely to turn out and vote. Arguably however, this just makes existing inter-generational unfairness even worse, with little economic justification behind it.

    Although their manifestos have yet to be released, the Lib Dems have indicated they too will keep the triple lock, while the Tories have indicated they may not. Many commentators are suggesting a double lock would be more affordable and fairer.

    And finally, it would seem that Mr Cridland’s hard work was for nothing – as Labour also promises a new Review.