Blog | Mitchell Consulting

How secure is your pension scheme?


The speaker at The Society of Pension Professionals Annual Conference raised the topic of cyber security and the importance of trustees understanding their responsibilities around the issue of cyber security.  This is certainly a topic that will be of growing importance over the coming years.

Security experts have cautioned that because pension schemes hold a considerable amount of personal and financial data they are particularly attractive to cyber criminals.  In fact, some colleagues thought it was only a matter of time before a pension scheme suffers the same fate of so many other organisations who have had to deal with these types of data security issues.

The pension industry has been quite slow to consider this issue compared to other financial services and some trustees wrongly assume cyber security is the responsibility of others – such as scheme administrators.   However, it is trustees who are responsible for data control and so it is vital they ensure the relevant protocols and policies are in place. Cyber security is rising up the agenda for most schemes, and rightly so.  It really should be up there along with all your key priorities.

Plans and risk management in relation to cyber security need to be flexible and proportionate.  Before long, schemes may be in the same position as large corporates in that the question is not – has the scheme been attacked or has its security been breached – but rather, how did the systems respond to attacks which may be inevitable?

As a minimum, trustees should rigorously question their suppliers and require regular tests to be  in place which are consistently reviewed.  There should also be a communication procedure to outline what would happen if there was a breach.

Trustees must assess their scheme’s vulnerability to attack and take the necessary steps to protect both member data and scheme assets.  Experts say cyber criminals could sit unnoticed for months, if not years, just waiting for the perfect time to hold trustees to ransom.  If that were the case, the financial losses to a scheme could be phenomenal.

Of course schemes are not alone in facing this threat and should benefit from the learnings of other sectors and indeed other schemes. After the NHS ransomware attack, the National Cyber Security Centre published a guide on Ransomware which provides some useful advice and is a good starting point.   You can download it here.

Are you a glass half full or a glass half empty type of person?


There have been a number of worrying pension stories recently about the size of the black hole in DB pension funding.  Headline one is that pension scheme deficits in Britain’s FTSE 350 companies are now equivalent to 70% of their profits.  Although this comparison is something of a simplification of the overall picture, the financial press has provided some alarming copy.

The glass half empty pundits go on to say that there is a very real danger that just a 0.7 per cent fall in bond yields could see the pensions deficit exceed annual UK profits by 2019.

However, these figures are based on snapshots, which produce wildly differing answers day by day. Yields could improve and cause these deficits to vanish – but equally they could get even worse.  We prefer to take a calm, long-term view which looks at both the needs of the scheme and what the company can afford.

On that basis, we would agree with Government and the Pensions Regulator that the vast majority of sponsors can afford to support their schemes – the glass is more than half full -even if filling it up will require squeezing harder than anyone would really like!

Nonetheless, there are some schemes which have a real affordability issue. Our sister company 2020 Trustees has been a sponsor of two reports from the Pensions Institute. The Greatest Good for the Greatest Number and its follow up Report earlier this year – The Greatest Good 2.  Both reports have discussed what should be done for the minority of schemes in this position and offered some solutions and recommendations.

Overall, we would say that panic is never the answer – but nor is apathy.  Trustees should look with a clear, cool head at the position of their scheme; but be prepared to take action if theirs is a glass that will never realistically be filled.


Not a good week to be a woman

The Institute for Fiscal Studies (IFS) says that more than a million women are going to be £32 a week worse off thanks to changes to the state pension – however, one winner will be government coffers which will be £5.1 bn. a year better off – which is of course, the idea.

Women who were born in the 1950s are hit hardest as this group has had the shortest notice of state pension changes and so have been unable to plan and prepare for the delay. The protest group, Women Against State Pension Increases (Waspi) has been campaigning on the issue for some time and point out that the worst affected households are those where women cannot work, often because they are caring for parents.

The group says it agrees with the equalisation of pensions but the speed of the changes means that many women’s retirement plans have been ‘shattered with devastating consequences.’

And of course, it’s not just on the state pension side that many women are worse off than their male counterparts. Despite equality legislation, the gender pay gap is well and truly alive – and if you don’t believe that, you only have to look at what the BBC pays its female and male presenters for doing the same job.

And of course, it remains mainly women who take career breaks to raise families – again despite legislation encouraging men to do it.

These two fairly significant issues mean that women lose out when it comes to private pensions too, as they simply don’t build up the same pension benefits.

There is no denying the pension pay gap between men and women – and as women still live longer than men, this means that women tend to live in retirement poverty longer too.

What’s the solution? It’s too late for millions of women but governments need to get better at explaining that state pension ages may need to continue to rise with life expectancy, but equally to address the position of those who cannot continue to work nor afford to retire.

In the meantime, perhaps we should be teaching our school age daughters that it’s never too early to start saving for a pension! Unless you have any better ideas…

Are annuity policies still a viable option for some consumers?

We noted the recent publication of an interesting new briefing note from the Pensions Policy Institute (PPI) entitled ‘What is the impact of not shopping around for annuities?’.

As has already been widely reported, the UK annuity market has been through much change since 2015 when the requirement for most Defined Contribution (DC) retirees to purchase an annuity was relaxed with the introduction of George Osborne’s pension freedom reforms. Prior to ‘Freedom and choice’ being introduced around 90% of retirees from DC arrangements secured their pension income through the purchase of an annuity policy of one sort or another.

It has been clear since the 2014 Budget announcement that George Osborne’s reforms would significantly affect the annuity market, and data available since has fully reflected this. In 2013, members of the ABI (Association of British Insurers) sold over 350,000 annuity policies – but by 2016 this figure had reduced by nearly 80% to around 75,000.

The PPI’s research shows that people who are not purchasing annuities are still accessing their DC savings at retirement – the majority through full withdrawal of a cash lump sum. In Q3 of 2016, around 55% of DC retirees took total cash lump sums, nearly 23% invested in drawdown arrangements whilst the remaining 22% purchased annuities. These figures become more interesting (and definite trends start to emerge) when you examine the values of the individual ‘DC pots’ concerned. The average value of the total cash lump sum withdrawals was just under £14,000 whereas people who opted for drawdown had nearly £76,000 to invest. Those opting for annuities had average savings of just over £58,000. Similar results were reported throughout the remainder of 2016, and also for 2015.

One worrying aspect highlighted by the PPI research is that consumers remain reluctant to take (or most likely to pay for) financial advice – around 74% of those purchasing an annuity in 2016 did so without taking any advice. In 2013 the figure was 65%. However, these figures don’t include free to access sources of information such as the Pensions Advisory Service, Citizens Advice or Pension Wise and some comfort can be taken that since 2015 over 130,000 ‘guidance’ sessions have been provided by Pension Wise.

In general, the PPI research shows that it is wise for individuals to shop around for the best annuity deal as quotes can vary widely depending upon the circumstances of the individual and the type of annuity product that is being sought. However, those with products that contain guaranteed annuity rates will most often achieve the best retirement outcomes by simply staying with their current provider. The PPI found that annuity rates can vary by up to 40% depending on the provider chosen and the type of annuity product for which a quote was produced. In 2016 the proportion of people who didn’t shop around was 48%, whereas the remainder purchased an annuity from a source other than their current pensions provider. It is estimated that those who didn’t shop around in 2016 lost an aggregate of £130m of retirement income from not doing so. This equates to around 6.8% of foregone income in retirement per person.

We believe that this research further demonstrates that people approaching retirement need to be better informed of the options available to them. Decisions regarding what to do with a hard-earned pot of DC savings built up over a working lifetime are not ones to be taken lightly. With the correct resources at their disposal, individuals will have a fighting chance of making the right decisions and obtaining best value for money in selecting the correct provider. UK consumers regularly review and compare providers for mortgage, energy, insurance and savings products – the Government, employers and the financial media need to make people aware that pension products are no different to those mentioned above, arguably they are far more important!

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.