a slow burner - pensions age magazine

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 January 2019

GovernmentHas pensions slipped down the agenda?

Pasa interview: The Pensions Administration Standards Association discusses the importance of accurate data

Year aheadWhat will make it into the upcoming pensions bill?

IORP II Directive The impact this EU regulation will have on UK schemes, despite Brexit

PPF interview: The Pension Protection Fund on the latest version of its Purple Book

A slow burner

Despite improved trust in the pensions industry, more work is needed

INCLUDES: TRUSTEE GUIDE 2019

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Sixth � oor, 3 London Wall Buildings, London, EC2M 5PDEditorial Comment

“New year, new me”, so it seems, is the catch-phrase of the

moment amongst my colleagues and friends. � e phrase falls of the tip of the tongue so easily in the month of January that it is hard to take it too seriously. But cliché as it might be, for many, it is loaded with good intentions; usually to eat healthier and exercise more a� er all the festivities.

� e chimes of the New Year are a fresh start for many, a chance to practise a bit of self-care and form new habits. Take the record numbers of people who have signed up for Veganuary, for example; according to the movement’s head of campaigns, Rich Hardy, since the launch of Veganuary � ve years ago, numbers have more than doubled each year and 250,000 people across 193 countries have signed up to take part this month.

People want to be the best version of themselves, and are � lled with hope, of what the New Year may bring, and what they can achieve. With that in mind, January seems like an opportune moment to push the idea of saving, and generally take a fresh look at one’s � nances.

Christmas is o� en a time that people overspend, and come January they may not have much spare cash. However, I see that as even more of a reason to encourage people to review their � nances and savings habits. I believe that more than any other time of year, this month is the best month to focus on being prepared and saving for the future; that the better selves people want to be today can help their future selves.

January, however, should not just be about encouraging the member to be better at saving, it is also a good time for the pensions

industry to review how it can improve. And I believe that it certainly will; 2019 is set to be an exciting time for the pensions industry, and, in spite of Brexit, there are lots of policy developments on the agenda. In this issue we take a look at all these developments expected in the year ahead [p31], and take a look through a crystal ball to see what might happen in the markets over the next 12 months [p34].

Of course there are already regulations coming into force that we’re aware of, such as the European Union’s IORP II Directive, which takes e� ect this month. With the UK set to leave the EU in March (at the time of writing this is still the case), we examine how this new piece of regulation will impact UK schemes [p36]. � is month we also hear from the Pensions Administration Standards Association’s chair, Kim Gubler, [p68], and the Pension Protection Fund on its Purple Book [p66].

But the New Year is also a good time to take stock of what has already been achieved. In our cover feature on the industry’s reputation [p51], we look at the trust it has built up from the public in recent years, but why more work is needed. But I’m sure that 2019 can build on that further. Take it away folks.

Natalie Tuck, Deputy Editor

www.pensionsage.com January 2019 03

comment news & comment

“2019 is set to be an exciting time for the pensions industry,and, in spite of Brexit, there are lots of policy developments on the agenda”

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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 � nancial, that are made as a result of information we supply.

Pensions in 2019 31Pensions could be on the brink of something special in 2019, and with a number of high pro� le initiatives in the wings (in spite of the political turmoil), Pensions Minister Guy Opperman is hopeful that a bumper pensions bill could make them a reality. � eo Andrew looks ahead for the year

New rules 36Sunniva Kolostyak explores the upcoming implementation of the IORP II Directive, how the UK will implement this European regulation in the shadow of Brexit, and the extent of the impact the directive will have on pension schemes

Climbing up or sliding down 38Between 2010 and 2015 changes to the pensions system were high on the political agenda, but since 2016, with the status of Pensions Minister downgraded and more radical reform seemingly delayed inde� nitely, it seems to have slipped down the agenda. David Adams asks how and why that might change in future

Trustee Guide 2019: 55The complete picture

Featuring:• Th e evolution of pension trusteeship• How trustees should prepare for bulk annuity transactions• How trustees can help members understand their options

• Five ways trustees can improve pension administration

PPF purple trends 66Laura Blows speaks to the Pension Protection Fund’s chief � nancial o� cer Andy McKinnon about the latest version of the PPF’s Purple Book

Data is the name of the game 68Jack Gray talks to the chair of the Pensions Administration Standards Association (Pasa), Kim Gubler, about the importance of available and accurate data, how technology can improve pension administration and what the future holds for Pasa

There has been a gradual improvement in the reputation of pensions among the general public. But more needs to be done to win back the trust of the cynical cohorts of the population

51C

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Theme: Context

A slow burner

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08 January 2019 www.pensionsage.com

Rounding up the major pensions-related news from the past month

news & comment round up

Dateline - December 2018

3 December Southern Water will pay a further £50m into its pension scheme with “accelerated payments”, following an investigation by The Pensions Regulator. The regulator decided to take action over what it felt was an imbalance between the funds contributed to the Southern Water Pension Scheme, and the level of dividends paid to shareholders in 2016 and 2017.

4 December A cross-party group of 200 former and current MPs calls on the MPs’ Pension Fund to divest from fossil fuels. The MPs, which include Labour leader Jeremy Corbyn, Liberal Democrat leader Sir Vince Cable, and Work and Pensions Committee member and Conservative MP, Heidi Allen, have signed the Divest Parliament Pledge, which calls on the MPs’ Pension Fund to review and phase out investments in fossil fuel companies.

5 December Over a quarter of the 15 biggest master trusts question The Pensions Regulator’s approach to supervision, a new report from the Pensions Management Institute finds. According to its master trust report, 27 per cent say they would prefer a more principle-based approach, over the regulator’s current prescriptive-based approach, due to “inadvertent outcomes” such as eliminating good providers and short-termism.

7 December A new legislative and regulatory regime requiring defined benefit superfunds to be authorised will be put in place under new plans, the government reveals. Launching its consultation on the Consolidation of Defined Benefit Pension Schemes, the Department for Work and Pensions says that superfunds will “transform” DB pension schemes once the right protections have been put in place.

11 December A hard Brexit scenario could result in a £219bn increase in the aggregate buyout deficit of UK pension funds, according to Cardano. After examining the Purple Book, published by the Pension Protection Fund, it found that the increase would represent a 37 per cent rise from current levels if a Brexit deal is not agreed.

13 December DB pension transfer values increased to £8.6bn in the third quarter of 2018, data from the Office for National Statistics reveals. This is an increase of £0.3bn on Q2 when transfers amounted to £8.3bn. However, both figures are still lower than the £10.5bn reported in the first quarter of the year.

12 December Pension schemes must run a competitive tender before choosing a fiduciary manager for more than 20 per cent of its assets, and if already delegated they must do so in the first five years, the Competition and Markets Authority (CMA) confirms. Publishing its final report on its Investment Consultants Market Investigation, the CMA says that investment consultancy firms will have to separate their fiduciary management marketing and advice to “remind pension scheme trustees of their duty to tender”.

6 December Trustees must open their minds to a different range of investments on patient capital and other illiquid investments, Exchequer Secretary to the Treasury, Robert Jenrick, urges. Jenrick says that the opportunities for investment are “pretty broad” but that they must meet the requirements of the scheme and the savers.

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round up news & comment

17 December The government announces that it will publish a paper setting out “targeted interventions and partnerships” to boost pension saving amongst the self-employed early next year. In its publication, Good Work Plan, the Department for Business, Energy and Industrial Strategy addressed recommendations set out by the Taylor Review of Modern Working Practices.

18 December Automatic enrolment opt-out levels “remained consistent” following the first planned contribution rise in April 2018, a new report reveals. Publishing its auto-enrolment evaluation report 2018, the government said that as of June 2018 opt-out levels remained the same, despite an increase from 2 per cent to 5 per cent, of which the employer pays 2 per cent and the employee 3 per cent.

19 December The Pensions Regulator questions six people in connection with a suspected pension fraud totaling £18m. The regulator says it believes roughly 370 people have been affected, after they were persuaded to transfer their pension pots into eight different pension schemes. The case was opened after a number of schemes received requests from members to transfer their savings into suspicious schemes, thought to be companies connected with the investigation.

20 December The ban on pension cold-calling has been approved by parliament and will take effect from 9 January 2019 to help tackle pension scams. The legislation, originally intended for introduction in June 2018, was launched in the government’s 2018 Budget and its introduction date confirmed by Economic Secretary to the Treasury, John Glen, on Twitter. In his tweet, Glen describes pension cold-calling as “a scourge” and says that “the ban will officially come into force on 9 January”. Firms that have been found to be breaking the ban by the Information Commissioner’s Office could face fines of up to £500,000.

For more information on these stories, and daily breaking news from the pensions industry, visit pensionsage.com

14 December UK DB pension schemes are forecast to pay out almost one-third of a trillion pounds between 2019 and 2021, according to new research by Mercer. Its risk transfer outlook for 2019 found that the amount will be reached from a combination of payments of premiums for annuity buy-ins/buyouts, individual member transfers, pensions and retirement lump sums.

21 December Pension withdrawals through drawdown or cash withdrawals totalled £5.7bn in 2017, new data from the Association of British Insurers (ABI) reveals. In its key facts document, the ABI found that 102,000 new contracts had been agreed to invest a total of £9.2bn in drawdown products, at an average investment of nearly £90,000. This compares to £6.5bn and 85,000 contracts sold in 2016. A total of 6.7m pension annuities were in force in 2017, with £14.7bn payments made. Furthermore, there were 69,000 annuity sales, down from 75,000 in 2016, although the total value of annuity sales increased slightly to £4.4bn. ABI’s research found that 48 per cent of those annuities were bought from an existing provider.

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Pensions Minister Guy Opperman kept his promise to publish as many consultations before the end of 2018 as he

could, with several announcements made by the government and its arms-length bodies during December.

At the beginning of the month, the government released its dashboard consultation and feasibility study, confirming its plans to have multiple dashboards. However, the Department for Work and Pensions (DWP) stated that state pension data will not be initially included in the dashboard, despite industry members believing it would be key to the success of

the project.Furthermore, the

report did not say that legislation would be drafted to force providers to reveal the size of pension pots. The DWP plans to begin with a non-commercial, single dashboard, facilitated by the new Single Financial Guidance Body, before moving to the planned multi-dashboard system.

It will be fully funded by the industry, as the DWP reiterated its commitment to the industry taking a leading role on the project. However, it will help to convene a delivery group to assist in implementing the technology required to operate the dashboard.

Despite the progress, Royal London director of policy, Steve Webb believes there are still obstacles to overcome: “This project is clearly suffering from ‘Brexit blight’ and the slow rollout is a real concern.”

The report argued that multiple dashboards will benefit consumers and they will work with the industry to include state pension information

at some stage. Additionally, the DWP’s feasibility study suggested that financial advisers will have third-party access to the dashboard in the future, stating that the DWP believed this would support the realisation of the project’s key policy objectives.

It also hopes that schemes will provide data from 2019/20, and that most will be supplying data from 2023. The consultation will look for advice from the industry as to how the dashboard will operate to try and ensure its success. The deadline for the consultation is 28 January 2019.

Turning its attention to the self-employed, the government also revealed it is set to launch a number of trials with key pension providers, aimed at prompting self-employed individuals to save. Its report, Enabling retirement savings for the self-employed: Pensions and long-term savings trials, the DWP said it will be working with providers, including Nest Insight, Smart Pension, Aegon and the Association of Independent Professionals and the Self-Employed (IPSE) to find workable solutions to self-employed savings.

The trials, which will have three focus areas, will look at marketing interventions at people who have previously saved, marketing with self-employed trade bodies to promote the value of saving, and behavioural prompts such as text messages to engage self-employed people.

Opperman said: “This report provides the government’s delivery


News focusNews focus

Govt publishes run of policy updates before New Year

In the run up to the New Year, the government published a series of consultations on pensions policy, alongside reports from the Competition and Markets Authority and the Financial Conduct Authority

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plan and complements our agenda to empower and improve the consumer experience, in particular through pensions dashboards and the Single Financial Guidance Body.”

However, the report has no reference to auto-enrolling the self-employed or using the tax system to help them save.

Just before Christmas, the government also revealed that the ban on pensions cold-calling has been approved by parliament, and will take effect from 9 January 2019 to help tackle pension scams. The legislation, originally intended for introduction in June 2018, was launched in the government’s 2018 Budget and its introduction date was confirmed by Economic Secretary to the Treasury, John Glen MP, on Twitter.

In his tweet, Glen described pension cold-calling as “a scourge” and said that “the ban will officially come into force on 9 January”. Firms that have been found to be breaking the ban by the Information Commissioner’s Office could face fines of up to £500,000.

The ban, which includes emails and texts, was originally meant to be introduced in June 2018, but the government admitted it had missed its deadline and issued a consultation in its place. The initial plan to ban cold-calling was announced in August 2017. It was finally approved by the House of Commons on 18 December 2018 in the Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018.

Alongside the announcements from the government, the Financial Conduct Authority also launched its consultation on permitted links, aimed at addressing “unjustified barriers” for defined contribution pension schemes looking

to invest in patient capital. The FCA said it was looking to remove potential barriers for retail investors investing in a “broader range” of long-term assets in unit linked funds, following on from the Law Commission’s 2017 proposal that pensions funds should have more access to illiquid assets.

The consultation is the next step following the Budget announcement that the government is looking to open up DC investment into “innovative high-growth firms”, as well as the wider illiquid market.

In addition, the Competition and Markets Authority published its final report on the investment consultancy and fiduciary management market. It concluded that pension schemes must run a competitive tender before choosing a fiduciary manager for more than 20 per cent of its assets, and if already delegated they must do so in the first five years.

The CMA also said that investment consultancy firms will have to separate their fiduciary management marketing and advice to “remind pension scheme trustees of their duty to tender”.

Furthermore, the CMA confirmed that pension scheme trustees will be required to set strategic objectives for the scheme, after the watchdog found that “below average” quality firms had higher market shares than “above average” quality firms.

In a change of tact from its provisional report, the CMA said schemes will be able to run the invitation to tender process on a closed basis, arguing that it will “achieve similar outcomes with a potentially lower cost to schemes and providers”.



NEWS IN BRIEF

TPG Sixth Street Partners (TSSP) plans to invest £500m in DB pension consolidator Clara-Pensions and become its provider of long-term capital. TSSP has committed an initial £225m, which is expected to increase to £500m as Clara-Pensions “grows to scale”. Following this investment, Clara-Pensions is ready to accept its first pension scheme members, subject to applicable regulatory approvals, it said.

TPT Retirement Solutions has announced that its assets have exceeded £10bn, after enjoying a record year in 2018. TPT chief executive, Mike Ramsey, described it as a “significant milestone” for TPT. “Scale is clearly important when it comes to driving down the costs of investment management and optimising investment strategies for our schemes.”

Salvus Master Trust is to launch a member app on both the IOS and Android platforms. It said this will provide further engagement with members and allow them access to a wide range of digital functionality. Salvus Master Trust, national head of sales, Bill Finch, said: “To complement the current member portal and our pension freedoms portal, Salvus Retirement Bridge, we feel that the time is now right to embrace further technology.”

Brunel Pension Partnership has launched its Authorised Contractual Scheme (ACS), with its first sub-fund, for actively managed UK equities. The Active UK Equity portfolio is worth c. £1.6bn. “We have appointed Invesco, Baillie Gifford and Aberdeen Standard Investments (ASI) to manage this sub-fund, within our ACS operated by FundRock,” Brunel chief investment officer, Mark Mansley said.

Written by Jack Gray and Theo Andrew

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Written by Theo Andrew



Automatic enrolment opt-out levels have “remained consistent” following the � rst planned contribution rise in

April 2018, a new report has revealed. Publishing its Automatic Enrolment

evaluation report 2018, the government said that as of June 2018 opt-out levels have remained the same, despite an increase from 2 per cent to 5 per cent, of which the employer pays 2 per cent and the employee 3 per cent.

From April 2019, contribution rates will rise to 8 per cent, with the employer contributing 3 per cent and the employee 5 per cent. According to � e Pensions Regulator’s latest compliance report, the number of people who have been automatically enrolled into a pension scheme has increased to 9.96 million since the start of AE in 2012.

TPR also said that it issued 61,000 compliance notices in 2017/18, up from 34,000 from the previous year. Commenting on the � ndings, Quilter head of retirement, Jon Greer, said: “� e power of nudging and inertia should not be underestimated though, as the review shows that rates of opt-outs and cessations have remained consistent, despite the increase. However, there is another

increase in minimum contributions set for next year and with economic uncertainty raging rampant, it’s far from clear what the reaction will be.”

Furthermore, the number of eligible employees participating in a workplace pension has increased from 10.7 million (55 per cent) in 2012, to 17.7 million in 2017 (84 per cent). � e total amount saved by employees hit £90.3bn in 2017, a £4.3bn increase on 2016, down to a £4bn increase in the private sector and a £0.3bn rise in the public sector.

Royal London director of policy, Steve Webb, said: “� e amount of money going into pensions through automatic enrolment is up over £4bn in a year and the April 2018 step-up in contribution rates has done nothing to put people o� pension saving. Even where people opt out, over half a million have now been automatically ‘re-enrolled’ which will reinforce the message that saving in a pension is the normal thing to do when you have a job.”

Awareness and understanding has also increased, with 93 per cent of micro, small and medium-sized employers aware of their on-going auto-enrolment duty.

AE opt-out levels ‘remained consistent’ a� er 2018 increase

The number of pension scheme savers that have been automatically enrolled has also reached 9.96 million

VIEW FROM THE ABI

Before we all le� for the Christmas break, the DWP gi� ed us with an early present – its much-anticipated report on Enabling Retirement Sav-ings for the Self-Employed. � is is an issue that is close to the heart of the ABI, which is why we jointly hosted a TechSprint with the DWP and Treasury at Aviva’s digital garage in Hoxton, to try to tackle the issue head on using innovation, tech and a collection of some of the brightest brains in the industry.

� e report rightly identi� es the fact that the self-employed workforce is growing rapidly, whilst their participation in a pension scheme is decreasing even more rapidly. � is is worrying and is in stark contrast to the workplace pension scheme trend.

Some were quick to criticise the report for not moving toward an auto-enrolment style model, but we have to be careful to avoid assuming that what has worked for workplace employees will work just as well for everyone else. An innovative, ever-changing workforce requires innovative, � exible savings solutions. It’s great to see the report take forward a number of trials that include testing communications, marketing interventions and behavioural prompts whilst harnessing technology to make it easier for the self-employed to save – rather than forcing the habit.

As ever, the proof will be in the pudding and we look forward to working with the government and industry to deliver new savings solutions for the self-employed.

ABI policy adviser, retirement and savings policy, Reuben Overmark

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UK de� ned bene� t pension schemes are forecast to pay out almost one-third of a trillion pounds between 2019-2021,

according to new research by Mercer. Its risk transfer outlook for 2019 found

that the amount will be reached from a combination of payments of premiums for annuity buy-ins/buyouts, individual member transfers, pensions and retirement lump sums.

With 2018 ranked as a record year for premiums paid to insurers for buy-ins and buyouts, Mercer predicts the market will grow again in 2019, and remain strong for the foreseeable future. Many transactions in this market are strictly scheme investments rather than payments out of the scheme; but they tend to be irreversible in nature and so are included in the overall amount paid by schemes.

Willis Towers Watson (WTW) also predicts that the bulk annuity market is expected to “remain at historically high levels” in 2019, with up to £30bn worth of deals. � is re� ects the signi� cant amount of de-risking most clients have undertaken, with longevity risk now being the dominant remaining risk.

Its research forecasts that longevity

swaps will double to over £10bn in 2019 and that the value of mega deals will increase further. Commenting on the research, WTW head of transactions, Ian Aley, said: “2018 was a record breaking year in the bulk annuity market, including four mega transactions of over £1bn, and we expect to see this buoyant level of activity to continue into 2019.”

Meanwhile, DB transfers have continued to be popular; for many years, transfer values paid each year by DB schemes in the private sector averaged around £3bn. Last month, the O� ce for National Statistics revealed DB pension transfer values increased to £8.6bn in the third quarter of 2018. � is is an increase of £0.3bn on Q2 when transfers amounted to £8.3bn. Both � gures are still lower than the £10.5bn reported in the � rst quarter of the year.

Mercer forecasts this trend to continue, with broadly £60bn of transfer values being paid over the next three years. It is a result of these costs that Mercer forecasts, that, for the � rst time ever, nearly one-third of a trillion pounds will be paid by UK private sector DB pension schemes over a three-year period, from 2019-21.

Mercer partner, Andrew Ward, said: “A third of a trillion pounds is a huge sum of money and shows how the UK’s DB pension landscape is changing rapidly. In aggregate, UK company DB schemes are expected to be better funded and bear less risk in three years’ time. � ere are headwinds, not least the potential for Brexit to disrupt the landscape, but the direction of travel is clear.”

UK DB schemes to pay out third of a trillion pounds over 2019-21

The amount is due to a combination of payments on premiums for annuity buy-ins/buyouts, DB transfers and retirement lump sums

VIEW FROM TPR

In December we published guid-ance for de� ned bene� t (DB) superfunds seeking to enter the market and made clear they need to talk to us about their plans before opening for business.

Superfunds are DB pension schemes established to accept bulk transfers of assets and liabilities from other DB schemes. Instead of ongoing employer covenant, member security comes from a capital bu� er provided by the former sponsor and investors who expect to pro� t from the arrangement.

� e DWP consultation on consolidation of DB pension schemes, also published in December, proposes a range of areas in which TPR will have to be satis� ed. Our guidance re� ects the consultation proposals.

We have set out our expectations of DB superfunds which intend to operate before any authorisation regime is put in place and whilst the authorisation framework planned by government is under consultation.

In light of the range and potential scale of emerging business models, we will scrutinise all DB superfunds that enter the market to ensure any risks are identi� ed, assessed and mitigated. We have also published guidance for trustees considering transferring to a superfund. � is makes clear the decision must be in the best interests of members.

TPR also expects employers to seek clearance in respect of any proposed transfer to a superfund, even if they consider any detriment is mitigated.

TPR executive director of regulatory policy, analysis and advice, David Fairs

Written by Natalie Tuck and Jack Gray

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3RD APRIL 2019IET

9

3RD APRIL 2019 THE SAVOY

7TH NOVEMBER 2019THE GRANGE CITY HOTEL

After a successful launch of our newly branded Pensions Aspects Live in 2018, we are pleased to announce that we

will be holding the 2019 conference on 3rd April

at The IET (Institution of Engineering and Technology) – followed by the annual dinner

on the same evening.

Contact us at [email protected]

to find out more.

2019 SAVE THE DATES

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Written by Jack Gray



The Pensions Ombudsman is consulting on making a new provision for dispute resolution, in particular “a function for

early resolution of disputes before a determination”.

It is also consulting on how best to allow an employer to make a complaint or refer a dispute to the Ombudsman on behalf of itself, and make changes in relation to associated signposting provisions. It hopes that the results of the consultation will help improve customer service and experience, enable the Ombudsman to centralise decision making and to ensure cost effectiveness.

The consultation was launched by the Department for Work and Pensions, on behalf of the Ombudsman. In its announcement, the DWP detailed that the consultation will help establish how new measures should be legislated for. These measures include an early resolution service, allowing the Ombudsman to “mediate and resolve” complaints and disputes, and permitting it to “make such directions or any awards as he thinks fit at the end of any new process”.

TPO legal director, Claire Ryan, said: “I am delighted with and fully welcome the consultation paper. I am also grateful for the efforts of the DWP in progressing this on behalf of TPO.”

It has also been revealed that Anthony Arter has been reappointed as Pensions Ombudsman and Pension Protection Fund Ombudsman for a further two years. The government confirmed that Arter, who took up the role in May 2015, will continue in the post until 31 July 2021.

Arter is a solicitor and previously

held the position of head of pensions and London senior partner at Eversheds LLP.

Minister for Pensions and Financial Inclusion, Guy Opperman said: “I am pleased to confirm that Anthony Arter will continue as Pensions Ombudsman and Pension Protection Fund Ombudsman. Anthony has brought a wealth of knowledge and experience of pensions to this vital role and has displayed great leadership and judgement. I look forward to Anthony and his team continuing to provide a high-quality service.”

Speaking to Pensions Age last year, Arter highlighted his efforts to “simplify and shorten” the customer journey”, while also making sure that he is “reaching the right outcome and maintaining quality”. In order to achieve this, he planned to set up a consumer panel to “give customers a voice”.

The Ombudsman investigates complaints and disputes about personal and occupational pension schemes, reviewable matters and complaints about the Pension Protection Fund, and appeals about the Financial Assistance Scheme. The Pensions Ombudsman and Pension Protection Fund Ombudsman are public appointments made by the Secretary of State for Work and Pensions.

TPO releases consultation on dispute resolution

It has also been revealed that current Pensions Ombudsman, Anthony Arter, will serve for a further two years, continuing in the post until July 2021

VIEW FROM THE PLSA

“You can’t always get what you want”, as Mick Jagger sagely ob-served. “But if you try some time, you might just find, you get what you need.”

Obviously it wasn’t the pensions dashboard that Messrs Jagger and Richards had in mind when they penned the lyrics for one of the Rolling Stones’ best-known tracks, but the words seem strangely ap-posite anyway.

I say this because, after weeks of speculation that the govern-ment was adopting an increasingly ‘hands-off ’ policy on the dashboard, the DWP’s feasibility study actually delivers most of what we wanted.

Granted, the PLSA remains cautious about what the govern-ment’s ‘industry-led, facilitated by government’ mantra might mean in practice. But the major dose of government involvement that we wanted – to give savers reassurance that the dashboard can be trusted – is right at the heart of the proposals, and that is a big tick for the PLSA.

We are particularly pleased that the first dashboard will be hosted by the new Single Financial Guidance Body and that the ‘SFGB’ will over-see dashboard governance arrange-ments. Launching that non-com-mercial dashboard first is essential. We also welcome the government’s goal of ensuring that state pension data is included.

We do need to be realistic about timescales, but perhaps we can start to hope it won’t be too long before the pensions dashboard reaches the “start me up” phase. Let’s make the dashboard one of the pensions industry’s greatest hits.

PLSA policy lead: engagement, EU and regulation, James Walsh

16-17_News-PLSA-PPI.indd 1 08/01/2019 14:04:45


Written by Natalie Tuck



Firefighters and a group of 230 judges have won their legal case against the government that changes made to their pension

schemes were discriminatory. The two cases were ruled on together

due to overlapping similarities, and earlier conflicting outcomes at Employment Tribunals. The Fire Brigades Union (FBU), which undertook legal action on behalf of firefighters, described it as a “landmark ruling”. Changes were made to the Firefighters’ Pension Scheme in 2015, and the FBU argued that the protection imposed on younger members was unlawful on age discrimination grounds.

The 2015 changes meant that older members could stay in the existing and better pension scheme, and younger members had to transfer to a new and worse scheme, causing huge financial losses. The FBU initiated over 6,000 Employment Tribunal claims alleging that the changes amounted to unlawful age discrimination.

The challenge from the 230 judges, represented by law firm Leigh Day, involved similar circumstances when they challenged the government’s decision to force younger judges to leave the Judicial Pension Scheme. The judges argued that this was discriminatory on the ground of age. Because of recent drives to increase diversity in the judiciary, many more of those in the younger group of judges are female and/or from a BAME background, and so claims were also pursued for indirect race discrimination and a breach of the principle of equal pay.

Commenting on the result, FBU general secretary, Matt Wrack, said: “We

are delighted that we have won and our arguments have been vindicated by the Court of Appeal. This result is testament to the resilience and fortitude of our members - it’s a great Christmas present to thousands of firefighters. The attacks were a disgraceful robbery from hard working firefighters. The Tory/Lib Dem government took no notice of the detailed evidence we provided about the specific nature of firefighters’ work.”

A previous Employment Tribunal on the firefighters’ case in February 2017 ruled that the changes were not discriminatory. However, an Employment Tribunal on judges’ pensions ruled that the changes were discriminatory. As a result, the two cases were combined. The government appealed the judges’ ruling but it was dismissed by the Employment Appeal Tribunal in January 2018. The government then appealed to the Court of Appeal, which has now rejected the government’s argument.

The judgment is expected to have an impact on other public sector groups also being represented by Leigh Day who have seen similar changes to their pension schemes, such as police officers. It also applies to other public sector workers such as those employed by the NHS, teachers and prison officers.

Leigh Day solictor, Shubha Banerjee, who is acting on behalf of the judges, said: “We are extremely pleased with the judgment, which upholds our clients’ grave concerns about the discriminatory effect of the changes that a previous Lord Chancellor made to their pensions in 2015.”

Firefighters and judges win pension age discrimination case

The two cases were ruled on together due to overlapping similarities and conflicting rulings at separate Employment Tribunals

VIEW FROM THE PPI

The DWP has recently published the long-awaited pension dashboards consultation. What has become apparent is that while there is a gen-eral consensus that dashboards are a good thing, the devil is, as always, in the detail.

In considering two of the biggest issues - what should dashboards cover, and when should they be up and running - the DWP can learn a lesson from automatic enrolment (AE). Or more specifically, use the way in which AE has been implemented to give dashboards the best chance of success.

It was quickly realised for AE that not all employers would be able to implement at the same time. A similar situation exists with pension providers and the dashboard. While some large master trusts are expected to be able to start providing information in 2019, smaller schemes might take years. So a staged approach – with larger providers joining earlier than smaller, but eventually rolling out to cover all providers – might make sense.

In AE, the minimum level of contribution has been phased in over time. A similar approach could be used in dashboards, with initially basic information provided, followed a short time later by more detailed information, and potentially then projections.

Such a staged and phased approach might allow dashboards to be useful sooner rather than later, and to be successful even before every provider can provide all of the required information.

PPI director Chris Curry

Page 1 of 2

PPI PENSIONS POLICY INSTITUTE

Chris Curry, PPI Director Do we need retirement targets? The recent PLSA report “Hitting the target” has reignited the debate about adequacy – what do people need in retirement? Things have moved on since the Pensions Commission, which framed adequacy in terms of people not seeing a big drop in living standards in retirement, but which focussed on replacement income. With the advent of pensions flexibility for Defined Contribution pensions, this might seem like a strange concept for many individuals in the future, as they access their pensions through taking lump sums, or perhaps having a more flexible income using drawdown rather than an annuity producing a fixed income. It is also likely – as the Pensions Commission recognised – that pension income (both state and private) will not be all that individuals rely on in retirement. Housing wealth and working longer in particular are likely to play a part as well as the lines between working and retirement become increasingly blurred. But that doesn’t mean that we shouldn’t be interested in the concept of adequacy – far from it. The PLSA report argues that giving a target – ideally one based on evidence of what people might like in retirement – could have a positive impact on planning and saving. And Government needs to have some idea as to what it thinks their pension policies will deliver, and how that compares to what individuals will need to provide themselves. These may not be the same targets, or framed in the same way, but getting a better understanding of what “adequacy” looks and feels like in retirement is an increasingly important issue.

ENDS

16-17_News-PLSA-PPI.indd 2 07/01/2019 11:51:10


People on the move

The London Pensions Fund Authority has appointed Tony Newman and Ruth Dombey to its trustee board.Newman, who was elected leader of

Croydon Council in 2014, has extensive experience in local regeneration, housing and infrastructure investment projects. Dombey, as well as being leader of Sutton Council, a role she has held since 2012, is also one of the vice chairs of London Councils.

The World Gold Council has announced the appointment of David Tait as its chief executive officer.Tait joins the World Gold Council from Credit Suisse, where he

held the role of global head of fixed income macro products. Prior to that, he held senior trading roles at both Credit Suisse and UBS Investment Bank. He is also an independent member of the Bank of England’s FICC Market Standards Board.

2020 Trustees has appointed Nadeem Ladha as the newest member of its professional trustee team. Ladha, a qualified actuary, has previously

been a senior member of PwC’s Midlands pensions practice and has also worked with Hymans Robertson. His expertise is in dealing with “complex funding and investment situations” as well as corporate M&A and specialist pensions risk transactions.

The Pensions Regulator has named Charles Counsell as its new chief executive, taking over from Lesley Titcomb who will leave in February 2019. Counsell, currently chief executive of the Money Advice Service (MAS), will look to build on the clearer, quicker and tougher approach, implemented by Titcomb, and will take up his role in April 2019. Previously, Counsell was executive director of automatic enrolment at TPR, where he helped to design and

implement the auto-enrolment programme.Commenting on his appointment, TPR chairman, Mark Boyle, said: “I am delighted that we have appointed someone of Charles Counsell’s calibre to drive forward our significant change programme. “I know that Counsell will lead the organisation with his trademark energy, determination and passion. Charles is a delivery-focused leader who gets the job done, which is exactly what we need at this crucial time.”

Charles Counsell

Tony Newman

RPMI Railpen has appointed Andrea Ash to the role of investment director in its private markets team.Ash joins RPMI Railpen from Tesco Pension Investments, where she

held the position of alternatives fund manager, having previously held roles at Amundi Asset Management and Pioneer Investments. She will primarily focus on growth investments and will report to RPMI Railpen’s head of private markets, Paul Bishop.

Andrea Ash

David Tait Nadeem Ladha


appointments round up

Mercer has announced the appointment of Bala Viswanathan as its chief operation officer (COO). The appointment will be effective upon the closing of the transaction between Mercer’s parent company, Marsh & McLennan Companies, and JLT Employee Benefits. Viswanathan will join Mercer from JLT, where he was CEO and, prior to that, COO. Viswanathan will report to Mercer president and CEO, Julio Portalatin.

As COO, Viswanathan will work across Mercer to drive enhancements to the company’s offshore, technology and systems capabilities.Portalatin commented: “Pending the outcome of the regulatory process, we look forward to welcoming Bala to Mercer in this strategically important role.“His successful career at JLT and his understanding of both operations and the global employee benefits market will further enhance our industry leadership, client relationships and organisational effectiveness.”

Bala Viswanathan

Dentons Pension Management has named Stephen McPhillips as its new technical sales director. McPhillips has 30 years of pensions experience and has been with

Dentons since 2012. He previously worked for Pointon York, Cofunds, James Hay and Scottish Equitable. McPhillips was also elected a fellow of the PMI in 2018. His appointment follows the departure of director of technical services, Martin Tilley.

Stephen McPhillips

18_appointments.indd 1 08/01/2019 14:06:38



data pensions dashboard

There are a number of key opening gambits embedded within Guy Opperman’s pensions dashboard

consultation:

• Stewardship is via the Single Financial Guidance Body (SFGB)• It will be industry led and fi nanced• Th e government is prepared to legislate for compulsion• A non-commercial dashboard will be hosted by the SFGB• Th ere is potential for innovative o� erings from industry

Th e unknowns though, are troubling the industry. Will the state pension be refl ected on the dashboard, and if so when? Are we merely looking at a ‘pensions fi nder’ service for the foreseeable future, or should we be aiming higher/faster? Finally, who will pay for the dashboard, and what are the costs?

While we as an industry sharpen our pencils and prepare our responses to the consultation, trustees, pension managers and pension administrators should note that there are clear preparative actions that need to be taken to ensure compliance with the known requirements indicated within the consultation document. Interestingly, they centre on Th e Pensions Regulator’s

focus on common and scheme-specifi c data tests.

Th e immediate concern has to be your common data score. Th e Pensions Regulator made its expectations clear in guidance issued in 2010, and raised the ante this year by expecting trustees to report their scores in the annual scheme return. Common data includes all of the key information that is likely to be required for a pension fi nder service: NI number, initial, surname, sex, postcode and date of birth. Many trustees take the common data test score very seriously and this is re� ected in their scores. Th ese trustees are potentially dashboard ready, in its most primitive form. Other trustees have taken a pragmatic view on the absence of certain data, for example, limiting e� orts to trace the addresses of deferred members, who may change addresses again, prior to retirement. However, with the overlap between the requirements of the dashboard and IORP II (which requires benefi t statements for deferred members), trustees would be advised to close this gap.

Scheme-specifi c data is also going to be important for the dashboard. We do not know specifi cally what data will be required yet. However, we can be fairly confi dent that this will be a refl ection of the data required for an annual benefi t statement.

Defi ned contribution (DC) schemes

require near 100 per cent data accuracy and are already required to publish annual benefi ts statements for both active and deferred members. You would therefore expect these schemes to be prepared to share this data with the dashboard fairly readily. However, there may still be connectivity issues to be resolved for administrators. Trustees of DC schemes with less than perfect data should be concerned. Poor data quality on a DC scheme is never acceptable and can be complex and expensive to improve.

Defi ned benefi t (DB) schemes should have fairly clean data for active members, given that they already produce annual benefi t statements for them. Trustees may need to explore the quality of data for deferred members. Have pensions at date of leaving been calculated correctly, are all the pension tranches correct, do the Barber splits exist, and have all special arrangements and transfers been fl agged? In the past, these issues could have been resolved on point of retirement, but the requirements of the dashboard and IORP II will require this data to be available now, and it will need to be accurate.

If the dashboard does merely require these data items, it is not expecting anything other than what should be in place already, or not required under Th e Pensions Regulator’s record keeping guidance. It merely accelerates the process, defi nes the data items and creates a credible business case for why the data needs to be cleaned now.

Th e most important issue for trustees and their sponsoring employers to note is that data cleansing takes time and is expensive. So the sooner you start, the easier it will be to spread the e� ort and costs.

� e dash to clean up data Girish Menezes considers how the pensions

dashboard will accelerate the clean data drive

Written by Girish Menezes, head of administration, Premier

In association with

premier.indd 1 07/01/2019 10:42:25


In my opinion

On the appointment of Charles Counsell as the new chief executive of � e Pensions Regulator“We wish Charles Counsell well in his new role. But this appointment is unlikely to leave unscrupulous company directors quaking in their boots. As someone who was part of TPR’s board while it failed to prevent the directors of BHS and Carillion running their pension schemes into the ground, he will have a long way to go to demonstrate that he really is the new broom that’s so desperately needed.”Work and Pensions Committee chair Frank Field

“I am delighted that we have appointed someone of Charles Counsell’s calibre to drive forward our signi� cant change programme. I know that Counsell will lead the organisation with his trademark energy, determination and passion. Charles is a delivery-focused leader who gets the job done which is exactly what we need at this crucial time.”TPR chairman Mark Boyle

On the CMA’s � nal recommendations on investment consultants and � duciary managers“� e CMA market investigation has

been an exhaustive and comprehensive undertaking that has been helpful in dismissing myths and misconceptions about the industry. � e CMA analysis has shown that these markets are not highly concentrated, that con� icts are well managed, that barriers to entry are not signi� cant and that the vast majority of clients are satis� ed with the service they receive.”Mercer UK CEO Fiona Dunsire

On the government’s solution to pension saving for the self-employed“It is also a call to action. Developing and testing potential solutions relies on the development of new partnerships within and across sectors including payment systems; accounting technology; self-employed workspaces and growing � ntech � rms providing new services. � e government calls on organisations within these sectors to work with us to co-design and test interventions.”Pensions Minister Guy Opperman

On the potential £219m increase in buyout de� cit following a hard Brexit“� e risks to schemes’ funding positions should not be underestimated and we would encourage UK schemes to think critically about the scale and scope of risks that Brexit may present and act now – before it’s too late.”Cardano UK chief executive o� cer Kerrin Rosenberg

On a guaranteed annuity cash upli� “� is has been a long and careful process designed to give members the option of exchanging their guaranteed annuity for an upli� in the value of their pension fund, a pro� t from it, but without taking any responsibility for its pension scheme.”Royal London director of policy Steve Webb



VIEW FROM THE SPP

� e administration market had an inter-esting 2018. It was busy to say the least and now the year has culminated with the recent GMP equalisation ruling, which has le� many an administrating problem.

So, if you’re unhappy with your current administrator, what do you do? You could break-up and � nd a new partner. If the relationship is beyond saving, then this may be the right decision.

However, another option, perhaps, is counselling – working together to save the relationship and consigning issues to the past. You’ll need to work collaboratively to set sensible objectives, which may have changed since you � rst appointed your administrator, and timescales.

A� er all is said and done, what should the relationship and service be? What is missing now and how can the hole(s) be repaired?

If counselling works, you’ll need to monitor progress and communicate regularly. And make sure the additional work doesn’t a� ect the day-to-day as well.

If you reach the elusive nirvana of good administration and harmonious relationships together, you should still frequently take stock and ask how you’re doing? Are your objectives and service criteria still being met? Having repaired the issues, you can move forward in partnership.

If only it was as simple as this column suggests!

SPP Administration Committee member, Barry Mack

“If you reach the elusive nirvana of good administration and harmonious relationships together, you should still frequently take stock”

20_word-on-the-street.indd 1 08/01/2019 14:07:54


news & comment round-up

Soapbox: Frank’s Field day at TPR’s expense

T he Pensions Regulator (TPR) recently named its new chief executive as Charles Counsell, taking over from the departing Lesley Titcomb

in February 2019.Some individuals were positive about

the appointment, including Pensions Minister Guy Opperman, who said: “Counsell has outstanding pedigree and a wealth of experience.”

However, this sentiment was not echoed by Work and Pensions Committee chair Frank Field, who was criticising Counsell before he’d even taken up the position.

Citing Counsell’s time as a member of TPR’s board, when both BHS and Carillion collapsed, Field said that Counsell “is unlikely to leave unscrupulous company directors quaking in their boots”, and “will have a long way to go to demonstrate that he really is the new broom that’s so desperately needed”.

Although being a TPR board member during the public collapses of those two huge companies does not reflect kindly on Counsell, it also does not justify the individual criticism that he has faced before he’s got his feet under the table.

Are there other reasons Field was so quick out of the blocks to voice his opposition? Some believe that Field is not happy about both the government and TPR rejecting the Work and Pensions Committee’s request of having a ‘pre-interview’ with the favourite candidate to land the chief executive role.

In September 2018, Field wrote to then Work and Pensions Secretary, Esther McVey, requesting a hearing with the proposed candidate for the position. However, McVey replied in October, stating that it was a “cross-government decision” and the decision would not be taken by one single department.

TPR chairman, Mark Boyle, also rejected his request, saying in a letter: “It

has been established government policy that executive appointments such as this aren’t appropriate for pre-appointment scrutiny.” He also previously wrote to the former Work and Pensions Secretary, Damian Green, in October 2016 requesting influence on the decision, which was also rejected.

TPR did deserve some criticism over its handling of Carillion. After all, the regulator did fail to safeguard Carillion employees’ pensions. However, it is hard to argue that Field has not been overcritical and rash in his comments.

Commenting on Field’s criticism following the Carillion collapse, Hargreaves Lansdown head of policy, Tom McPhail said: “It is easy to criticise the actions of the trustees and the regulator with the benefit of hindsight. It was far from certain to outside observers the company was about to go bust.”

This is not the first time Field has criticised TPR and its leadership. When called to a meeting with the Work and Pensions Committee in March 2018, Field said that he did not believe that Titcomb could achieve the “necessary cultural change” that TPR needed.

One thing that is clear is that TPR is not meeting Field’s standards. In August 2017, Field accused TPR of prosecuting the ‘sprat’ rather than the ‘whale’ in the BHS scandal. Royal London director of policy Steve Webb described the comment as “a bit harsh”.

“TPR got hundreds of millions off Sir Philip Green; something tells me they won’t be seeking so much from Dominic Chappell,” Webb added. Although TPR is not perfect and it must take some responsibility for the pension failings at both BHS and Carillion, its issues will

not be resolved by criticising Counsell before he has even taken the role.


VIEW FROM THE PMI

In this period of political turmoil, only one thing is certain – the indus-try is going to change. While 2018 was a quiet year for pensions, it will be remembered for its

ongoing flurry of consultations. But despite the relative calm, Guy’s Op-perman’s promise of a comprehensive pensions bill should put an end to the quiet period.

The bill is expected to address the issues raised in the recent consultations, notably DB consolidation. Concerns over financial stability and funding for the new breed of consolidators are also expected to be addressed in the bill.

Other exciting developments on the horizon include the pensions dash-board. We have finally seen progress, as the first single dashboard is set to be established under the Single Finance Guidance Body. However, experience from overseas has shown that it would work better with specific legislation. But will our preoccupied parliament have time for that?

The final outcome of the CMA report will also bring about several changes to the world of investment consultancy and, in April, the outcome of the Master Trust Authorisation process will be revealed.

The process, which appears to have been more stringent than many expected, sparked debate at the PMI. The PMI MT survey found that much of the industry welcomes authorisation. However, they also felt that the number of providers is set to shrink, with most believing there would be no more than 20 left in five years’ time. This has led to concern around the providers that do leave the market, so we are comforted that TPR is on hand to provide guidance and support.

There is a lot to look forward to in 2019 – bring it on.

PMI president Lesley Carline


21_soap-box.indd 1 08/01/2019 14:08:58




VIEW FROM THE AMNT

‘Risk comes from not knowing what you’re doing’ - Warren Buffett

In doing some rudimentary research to find a suitable quote for this article I was struck by the fact that almost all quotes on risk, in various ways, say, that only through risks can one succeed. There are very few mentions of mitigating or eliminating risk.

In investments there has always been the maxim ‘the greater the risk, the greater the return’. So investment funds tend to categorise themselves based on risk and return. Pension fund members are learning this dictum as more and more employee defined benefits are becoming discretionary contributions.

The recent government consultation paper on CDC lays down the basis, for what has been described as a ‘half way house’ between defined benefit (DB) and discretionary contribution (DC). But rather than some form of shared risk between employer and employee the paper seems to suggest a method of mitigating the loss of defined benefits by simply sharing the risk burden amongst all employees, whilst abrogating the risk from the employer.

The transfer of risk from employer to employee has been gathering pace. Placing the burden of risk solely on the employee or fund member means that ‘knowing what you’re doing’ is more important than ever, otherwise future financial security/retirement burden may not rest with the employer or employee, but with the state.

Association of Member Nominated

Trustees member, Stephen Fallowell

Overall the markets performed well over 2018, but with warnings that the bull-run may be ending, global trade

wars ongoing and increasing political turmoil in Europe, what does 2019 have to offer?

Mercer head of research, Deb Clarke, believes that 2019 will offer a multitude of challenges.

Clarke said: “We expect global economic growth to slow down over the year. Trade tension remains uncertain; a resolution could lead to stronger growth but further escalation could have the opposite impact.”

According to Redington director of consulting Sebastian Schulze, any investment strategy has to be able to cope with a number of different future scenarios.

“Calling markets and economic cycles remains very difficult, with the track records of even successful fund managers showing they ‘get it wrong’ 40 per cent of the time or more. Any market call should be sized with the knowledge that there is a meaningful probability of it being wrong,” he said.

Schulze added that for pension schemes, buy-ins or longevity swaps should be considered in the overall investment strategy.

For Kempen Capital Management head of investment strategy, Nikesh Patel, 2019 will be a year of uncertainty, but suggests that equities should still remain an anchor of portfolios throughout the year.

He added: “Within bonds, we expect to see greater focus on credit markets, with a focus away from high yield (where we do not think there is enough reward for the level of risk) and hence towards more investment grade holdings.”

Union Investment chief investment officer, Jens Wilhelm, is weary of any late-cycle hangover.

“We expect yields on safe-haven investments such as US Treasuries and German Bunds to continue edging up. More specifically, we expect yields on ten-year US government bonds to peak at 3.4 per cent in 2019 and then to fall again before the year is out,” he explains.

Patel expects CDI to be an “ongoing theme” throughout the year, as it “begins to loom over the established order of liability driven investing (LDI)”.

Bonds are expected to deliver inadequate returns over the year and won’t offer the same stability, according to RBC global asset management chief economist, Eric Lascelles.

“The portfolio stability normally secured by pairing stocks with bonds could prove less reliable at this late stage of the cycle given the distaste that both asset classes share for rising inflation,” he said.

Newton Investment Management multi-asset portfolio manager, Paul Flood, agrees: “We believe it is therefore prudent for UK pension funds to be highly selective when investing in bonds, given the risks of them decreasing in value should US-led interest rates continue to rise at a faster pace than investors expect.”


Market commentary: Outlook for 2019

22_market-analysis.indd 1 08/01/2019 15:07:14



investment dividend yields

The UK equity market can’t seem to catch a break. Any good news is almost immediately swamped by the latest glum

Brexit headlines.Some market commentators have

gone so far as to argue that toxic politics makes British equities “uninvestable”. No wonder savers have pulled $1.01 trillion from UK equity funds since June 2016 when the British voted to leave the European Union*.

The latest gloom centres on whether Prime Minister Theresa May will ever manage to convince enough of her party to buy into the deal she’s struck with Britain’s EU partners to win a House of Commons vote. Or whether the country will face the prospect of a disorderly divorce on Brexit day at the end of next March.

In our view, investors with robust risk appetites might consider the market a buy whatever the outcome.

That contrarian take is supported by the handsome dividend yield British equities now offer, not just relative to government bonds and other developed stock markets, but relative to the market’s own history.

Apart from a short period during the great financial crisis, the 4.1 per cent dividend yield currently offered by UK stocks is the highest it’s been since the mid-1990s.

That also happens to be bang on its average since 1900, which includes the 1970s when dividend yields rocketed into the double digits with inflation.

Historic returnsMeanwhile, relative to yields on 10-year British government bonds, the dividend yield is close to as high as it has ever been. Indeed, that positive differential of 2.7 per cent is nearly 4 percentage points above its 118-year average.

So what’s going on? To begin with, the big premium on equity over bond yields is bound to have more than a little to do with financial repression. Quantitative easing and regulatory demands that pension funds more closely match their liabilities with secure income flows have forced up the price of ‘safe’ government bonds – which is to say, driven down their yields. And with the 10-year gilt yielding 1.3 per cent when markets are also anticipating a 3 per cent inflation rate, this merely means investors in UK government bonds will grow steadily poorer.

But in the UK, this isn’t just a fixed income story. British companies have always tended to have high dividend payout ratios. The latest data show that British firms are paying 60 per cent of earnings to investors as dividends, against 38 per cent and 42 per cent for German and American companies respectively.

That could be because, historically, the UK has had more favourable tax treatment of dividends, or because of large institutional demand for income versus capital appreciation, or because the composition of the UK market is tilted towards mature, defensive companies.

At the same time, Brexit has forced up the implied equity risk premium on the UK equity market to close to 10-year highs, in essence projecting a corporate earnings growth rate of just 0.8 per cent on average over the long term. That’s well below the 6.1 per cent average annual growth firms actually managed over the past quarter century. In other words, the UK equity market looks exceptionally cheap to anyone expecting the equity risk premium to drop back towards more normal levels.

In a world where investors are routinely starved of income, a 4.1 per cent yield starts to look fetching – especially considering that companies tend to be loath to cut dividends and payouts rarely fall across whole markets. Investors – like us – agnostic as to the source of return, whether it comes from income or capital appreciation, should find the UK’s dividend yield in an environment of weak economic growth attractive even if Brexit turns out to be of a harder variety than the one the government is aiming for.

Dividend yields cast UK stocks in favourable light

Relative to government bonds, UK equity dividend yields are more generous than they’ve been for 60 years. That’s something investors can’t ignore, Brexit or no Brexit

*Data from EPFR cited in the Financial Times. https://www.ft.com/content/bd81b917-658a-3b99-a810-7f1b343ecb1eData sources: Pictet Asset Management, Thomson Reuters Datastream, Barclays Equity-Gilt Study, November 2018.

Written by Andrew Cole, head of multi-asset, London, Pictet Asset Management

In association with

Pictet.indd 1 07/01/2019 10:43:54


NEST video interview


Over the past year there have been many stories about the di� erences in pay between men and women in their working lives. Does that continue into their retirements as well, and if so, why?Th ere absolutely is a gender pensions pay gap. It is about 30 per cent. Th at’s a really substantial gap. Th is is for lots of reasons. Th e basic state pension is starting to equalise this though. It’s quite a long road but women’s employment records and the way the state pension is designed means that women are starting to get more state pension in comparison to men, although they are still some way behind.

Also, participation in auto-enrolment is really strong. So in 2016 we saw for the fi rst time the same number of women contributing to a workplace pension as men. So that’s incredibly positive. But obviously that mainly aff ects younger women. Th ere are systematic things in the way that women are saving for pensions that suggests the gap isn’t going to close any time soon. Looking at at women’s earnings; you have a gender pay gap. Th at means you are going to have a pensions pay gap as women are contributing less throughout their careers. Women are more likely than men to take career breaks for caring responsibilities. Th at means that they are taking time out from contributing, which reduces the amount they have at retirement. Women are

also more likely to work part-time, so they may not be eligible for automatic enrolment as they might not reach the earnings trigger of £10,000.

So there are quite a few issues contributing to this, such as lifestyle factors. But are we absolving women of responsibility, in terms of their awareness of the need to save into a pension. How motivated are they?It’s a mixed picture. It’s been very diffi cult for women, if you look back a generation, to follow all the changes to policy, making sure they are doing the right thing, such as being credited into the state pension. It has been really complex, so I think for that generation of women, it’s a bit of a shame they have ended up with quite substantially less than men.

For this generation, I think women have got more of an opportunity to save, with automatic enrolment prompting saving. If you look at younger women nationally, they are more likely to be not saving at all – to opt out or have broken records. Also if you look at our NEST

members, younger women are less likely to be engaged with their pensions. But then interestingly, NEST Insight, our in-house research unit, earlier this year did a piece of work with Vanguard, called How the UK saves. As part of that, they found that of the people that were proactively opting into saving, so not enrolled by their employer but making the choice to save in NEST, a higher proportion of those people are women.

So I think it points to there being something potentially motivating women to make those additional contributions, and we need to do more research to understand that better. But it is encouraging that those women are making those choices for themselves.

Have you found that the tide is turning with a change in attitudes towards pension saving emerging?As part of NEST’s research of members we do an annual survey called � e voice of the customer, with about 3,500 NEST members. Th is year we found an ongoing trend that pension saving across both

Laura Blows speaks to NEST director of strategy Zoe Alexander about the gender gap within retirement incomes

Bridging the gap

NestVideoInterview.indd 1 08/01/2019 14:10:13



genders is normalising. We give people the statement: It’s normal for people like me to save into a pension. In 2014, about 25 per cent of that 3,500 group agreed it was normal. In 2017 it was 46 per cent. So that is a really signifi cant shift and shows that automatic enrolment is doing what it was intended to do by starting to create cultural norms around saving and giving people a really good base to save on.

I think this is essential for this generation because if you look at the last generation where people oft en had large DB pots to draw on, it might have been ok to just have the one partner’s pension to rely on. It’s not going to be ok anymore. People are still saving quite small amounts within automatic enrolment, even when we get to 8 per cent, so it’s really important that women engage and think about their own independent futures, even if they are in a couple.

� ere is the need for growing engagement and awareness from women to save into a pension. But I’m sure even these younger generations have obstacles to saving. What would you say are the barriers?First of all, as an industry, we need to be a bit careful about always talking about the barriers to saving. Th ere is nationally a general undersaving problem for retirement, if you look at people’s expectations and needs at retirement compared to how much they are saving. But a lot of people are saving at around the right level, where they are on quite low incomes. So we need to be careful about always pushing women into more saving. If they are earning around the earnings trigger of £10,000 then it might be enough for them to be contributing 5-8 per cent, and it really depends upon their personal circumstances.

But that said, there are barriers to saving and and looking at it more holistically in terms of pensions, there is still a trust issue with the industry, which goes back to failing schemes and lots of high-profi le cases over the past couple of decades. It’s really important as an industry that we make the case for what’s

diff erent about the larger, well-governed master-trust schemes out there, which are doing a lot to safeguard members’ interests, have strong governance and a solid attitude to risk management. So it is a diff erent vehicle for saving, but getting that message across is quite diffi cult and complex. So trying to make that message cut through is really important.

Th e other barrier I would highlight is around attitudes to risk. Looking at our membership, women tend to have a more cautious attitude to taking risk in investment than men do. To the extent that women understand that their money is invested – and sometimes people do not understand that that is what happens to their money – it can sometimes be off -putting to them to think that they are taking any risk with their lifetime savings. I think it’s contingent on us to try and communicate those things in a way that helps women understand the benefi ts of long-term investment, the growth they can enjoy and the ways we are managing that risk for them.

Th e other thing is that if women have a perception issue with pensions, there are things we can do to turn that around, by communicating with them about things that do engage them better. For instance some of our research into responsible investment, which NEST is very committed to, found that proportionately, younger women were more engaged in responsible investing than men. So that’s another way we can have a conversation with women about saving, telling them about the value of their savings and their money going towards a greater benefi t, delivering strong outcomes for both their pot and for the economy.

You mentioned the importance of the industry delivering positive messages. So what positive messages do you think should be highlighted, and what practical steps would you recommend to help women save into a pension?Th ere are some really powerful things we as an industry can do on the engagement

side. We need to be careful with how we communicate and try to fi nd things that prompt action from women and encourage them to save more.

Also looking at the system, there are things we can do that might make an impact in terms of closing the gender pensions gap. Th ere was a Scottish Widows report into women’s pension saving recently, which spoke about fi nancial hardship and the idea of liquidity appealing, having access to a portion of their savings. Th is is why we are running a sidecar trial, which looks at having a savings account linked to your closed DC pension, and you allow that to reach a certain level and the extra savings fl ows into the DC pot. We are seeing if having that small accessible pot of cash would make people feel more comfortable saving into that pension and improve overall fi nancial well being.

I also think that for industry and government, collectively, there is still thinking to be done about how we can recognise people’s periods of caring. Whether it’s women or men taking breaks from their career to care, it has previously been credited in diff erent ways, such as in the state second pension you would get a carer’s credit. At the moment with automatic enrolment it’s simply when you are working you accrue a pension, when you’re not, you don’t, and I think there’s a discussion to be had over how to recognise those periods of care. As long as this issue still exists, and as long as women continue to take on most caring responsibilities, women will continue to lose out on some of their pension. Th at’s a medium-term problem, but one we should all be thinking about.

To view the video, please visit pensionsage.com

video interview NEST

In association with

Written by Laura Blows

NestVideoInterview.indd 2 08/01/2019 14:10:13




Diary: January 2018 and beyond Society of Pensions Professionals Roundtable – Defined Benefit Consolidation30 January 2019Gowling WLG (UK) LLP, 4 More London Riverside, London SE1 2AUThe emphasis will be on how to consolidate, rather than whether to; a consultation on DB consolidation has now been published by the government. The roundtable is accredited with up to 2½ hours under the PMI CPD Scheme, and might be relevant to other professions’ CPD requirements.For more information, visit: https://the-spp.co.uk/?post_type=events&p=17121

Pensions Age Awards 2019 28 February 2019London Marriott Hotel, Grosvenor Square, LondonThe Pensions Age Awards aim to reward both the pension schemes and the pension providers across the UK that have proved themselves worthy of recognition in these increasingly challenging economic times. The awards are open to any UK pension scheme or provider firm that serves pension schemes in the UK.For more information, visit: http://www.pensionsage.com/awards/index.php

Association of British Insurers Annual Conference 201926 February 2019155 Bishopsgate, London, EC2M 3YDThe ABI Annual Conference 2019 will be the standout insurance event of the year, bringing industry leaders, politicians and regulators together to debate the major issues affecting the insurance and long-term savings industry. For more information, visit: https://www.abi.org.uk/events/annual-conference-2019/

Sustainability Summit 201912 March 2019The Waldorf Hilton, LondonThe Sustainability Summit offers pension funds, insurance companies, charities and corporates the opportunity to both learn and network alongside their peers at such a key time for the sustainable investment industry. This one-day conference, now in its second year after its huge success in 2018, is open to all those concerned with the investment of assets into this asset class, and will offer delegates the up-to-date knowledge and guidance they need to help them understand all aspects of the sustainable market – from negative screening to impact investment.For more information, visit: http://pensionsage.com/sustainability/

Month in num

bers

63 years According to the latest figures, which looked at

health and mortality rates during 2015 to 2017, males can expect to live 63.1 years in “good health”, compared to females 63.6 years, 79.7 per cent and 76.7 per cent of their lives respectively.

57 per cent Workers aged between 35-49 are the least likely

to think that they will have adequate savings in retirement, with 57 per cent worrying that they will run out of money.

9.04 million The number of workers aged 50-64 has increased

by one million in less than five years to a record high of 9.04 million. The ONS found that the rise in workers from that age group represented more than half of the overall employment increase. since the beginning of the state pension age equalisation process, the employment rate for women aged 50-64 increased by 15 per cent, more than double the 7 per cent rise for men in the same age group. UK labour market statistics found that there were 207,000 more women in full-time employment.

Visit www.pensionsage.com for more diary listings


VIEW FROM THE ACA

Our annual pension trends survey, published at the turn of the year, points to the need – part of which we see as an essential addition to the government’s ‘next steps’ pen-sions strategy – for a gradual, but essential increase in the default level of savings into DC schemes.

This is needed to ensure that many more people save sufficient amounts for both an adequate retirement income and one where they have real choices to spend some of their ac-cumulated savings as they approach or reach retirement.

In our recommendations within the report we favour earnings from the first £ being eligible for AE by 2021 as proposed by the 2017 AE Review. At the same time, actions are needed to draw the self-em-ployed into AE, beginning with the gig economy’s quasi-employers. Then, from 2025, with due notice having been given, there is the need to gradually phase in rises in total contributions until they reach 12-14 per cent of earnings.

It would be good if the forthcom-ing 2019 Pensions Bill mapped out a programme to build AE participa-tion and pension contributions for years ahead, alongside the greater defined benefit ‘flexibility’ we have called for rather than it be a Bill that is largely dealing with the protection of members in legacy DB schemes. We believe in many areas there is cross-party support for broader and swifter action than presently seems to be envisaged.

Association of Consulting Actuaries chair Jenny Condron

26_Diary.indd 1 08/01/2019 14:12:10


https://the-spp.co.uk/?post_type=events&p=17121

https://www.abi.org.uk/events/annual-conference-2019/

http://www.pensionsage.com/awards/index.php

http://pensionsage.com/sustainability/

rethink retirement

Just is a trading name of Just Retirement Limited. Registered Offi ce: Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey RH2 7RU. Registered in England and Wales Number 05017193. Just Retirement Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Please note your call may be monitored and recorded and call charges may apply.

For professional fi nancial advisers and pension trustees only.Not approved for use by pension scheme members, employees, or any other persons.

over 150DB scheme

buy-ins...and counting

But rest assured we’ll never treat you like a number At Just we know how to help trustees looking to de-risk, thanks to our specialist team and strong track record of delivering innovative solutions. In fact we’ve managed over £5bn worth.

Regardless of size or complexity, whether standard or medically underwritten, it’s about ensuring trustees and schemes get real value from our expertise. So when you’re ready to transact, you can count on us.

For further information: go to wearejust.co.uk/defi nedbenefi t, speak to your EBCor call Rob Mechem on 01737 233307

JRL436760_Defined Benefit Ad_271x204_V6.indd 1 04/01/2019 11:16

http://wearejust.co.uk/definedbenefit

asset allocations bulk annuities


It’s often helpful to take a new perspective and look at the world through a different frame of reference. This can improve

understanding, even when we’re looking at things we believe we know well.

Buy-ins are a case in point. For many schemes they’re a means to the ultimate destination of a buyout. But in the meantime, buy-ins are an asset of the scheme. So it’s valuable to consider them as an investment, look closely at what they aim to deliver and the assets that underpin them.

The investment challenges for schemes and insurersThe investment challenges facing DB trustees can be very different from those facing insurers. I’ve seen trustees transition from open funds with equity investment and little by way of cashflow matching (a standard technique for insurers) through to LDI as trustees realised they needed to employ a dynamic hedging approach.

As funding levels have improved and schemes approach maturity, they need to hedge the assets against fluctuations in rates, inflation and credit spread widening. This perhaps explains why there’s increased interest in cashflow driven investment as investment strategies for pension funds and insurers begin to converge. But this has always been insurer territory and comes with the additional headache of counterparty and collateral risk management. We’re DB consolidators, aggregating the assets of many schemes, and also retail policyholders, across our c£19 billion annuity asset portfolio to guarantee over £1 billion of annuity payments every year. So how we invest is very different from all but the largest schemes.

The recently implemented Solvency II regulatory regime for insurers (January 2016) continues to encourage insurers to follow a disciplined cashflow matching approach and to source assets with long dated and secure cashflows. When coupled with our ability to lock in a proportion of the associated illiquidity

premium that compensates us for tying-up capital, we are able to write attractively priced bulk annuity business.

How asset classes can deliver cashflow matchingThe basic principle behind asset liability management is to use a portfolio of fixed income assets to meet the expected annuity cashflows at different maturity points.

Our ability to medically underwrite some bulk and retail annuities and our reinsurance of much of the longevity risk we take on when we write bulk and retail annuities means that we’re able to predict with some certainty the annuity cashflows we’re required to fund. We also hold substantial capital against a variety of risks, including demographic, market and operational risks. This protects us against the risk of members (buy-in) or policyholders (buyout) living longer than expected.

We fund, manufacture and distribute lifetime mortgages (LTMs) – so we have access to a steady stream of these assets and the market is forecast to continue to grow strongly.

The UK public bond market is relatively small and insurers will look to non-sterling issues, hedged to create a synthetic sterling bond. There’s increasing competition for other assets such as

municipal bonds, commercial mortgages, private placements and infrastructure debt. We have to be particularly careful which long credits we invest in as we require counterparty security extending into decades. I can think of many brands that would have seemed a safe bet 20 years ago but are no longer trading. A critical part of our thinking is to consider issuers whose business model will be valid in 30 years (say) or for which there is the security of an underlying income stream or asset.

And of course utility, infrastructure and social housing have been very attractive and fulfil several important criteria – their durations provide a good match for DB liabilities, some have government guarantees and many have an ethical component – making them highly desirable. But they’re in limited supply so there’s competition to secure them.

So what assets have my team been sourcing?As well as sterling public bonds, overseas public bonds and LTMs, we have invested in infrastructure debt, private placements and commercial real estate debt.

During 2017 we secured a significant initial financing, over £150 million, for the Walney Extension Offshore Wind Farm which is located off the coast of

With record levels of DB scheme assets being transferred to bulk annuities, Gareth Collard, chief investment officer at Just, looks at the investment challenges for insurers and some of the assets his team have secured for their annuity asset portfolio

The asset strategy behind a bulk annuity portfolio

JustPages.indd 1 07/01/2019 10:51:12



Cumbria. It’s up and running now and the 87 turbines are generating power for 600,000 homes in the UK. All construction risk was passed to Orsted, a consortium of six Danish utility companies that own and operate the wind farm and is majority owned and guaranteed by the Danish government.

We liked the investment because it was infl ation linked (and therefore a good match for pension liabilities) and achieved attractive spreads with limited credit risk as a proportion of our investment had recourse to the Danish government.

During 2018, we invested over £100 million in fi nancing the construction of the Hornsea Off shore Wind Farm in the southern North Sea off the coast of Yorkshire. Th is is also operated by Orsted, so it benefi ts from some of the same protections enjoyed by the Walney fi nancing.

In 2017, we invested around £50 million in a loan to Wheatley Housing Group, the largest registered social landlord in Scotland. Th e funds enabled them to refi nance existing debt and provide capital to build new homes.

My team also look to secure private placements, which typically provide structural protection through covenants, and have invested over £0.5 billion. Separately, in 2018, we bought a Cambridge University 50-year CPI AAA bond and also a US municipal bond issued by Harvard University. We deliver security by selecting counterparties that we believe will be around well into the future. In making long-term investments

there are always risks, we seek to manage these by looking at the security and protections in individual investments and seek diversifi cation by not putting too many eggs in one basket.

ESG and ethical investingWith ethical, social and governance and sustainable investment becoming increasingly important for our shareholders and for trustees investing in buy-ins, we have formalised ESG analysis as part of our investment due diligence process. We’ve created an ESG framework for sustainable investing that we follow when analysing investment opportunities. Th is aligns with the social purpose that’s at the core of our business.

We’re also signatories to the UN Principles for Responsible Investment, the fi rst UK insurance asset owner to have signed, which demonstrates our commitment to responsible investment.

Walney and Hornsea with their green credentials meet the criteria of our ESG policy. Th ey exemplify the social purpose that can be derived by harnessing assets ethically and sustainably. Such investments can drive engagement with members when they understand how their pension funds support infrastructure.

Of course ESG also requires us to divest some assets and as an example, we’ve sold out of all long-dated tobacco exposure.

SecurityAs you’d expect, I’ve got strong views on the security we off er to trustees through

the UK insurance regime. My view is that insurers off er the ultimate consolidation because the solvency capital buff er that we’re required to hold is equivalent to a DB scheme being spectacularly overfunded on a technical provisions basis. Imagine the luxury of such surplus if enjoyed by the trustees of a DB scheme?

In association with

Written by Gareth Collard, chief investment offi cer, Just

bulk annuities asset allocations

JustPages.indd 2 07/01/2019 10:51:14


Malcolm McLean interview


What is your pensions career CV?I was CEO of the Pensions Advisory Service (TPAS) between 1997 and 2010, and senior consultant at Barnett Waddingham from 2010 until now.

What other areas have you worked in and what roles have you held prior to joining the pensions industry?I was a civil servant in the Department of Social Security, now the Department for Work and Pensions. I was also general manager of the now defunct Occupational Pensions Board (OPB).

What is your greatest work achievement so far?Over a period of 13 years, building up TPAS from what was originally a very limited and low pro� le dispute resolution operation into the much wider, quality guidance service it has since become (and hopefully will continue to be as part of the new Single Financial Guidance Body).

What do you still wish to achieve?To remain happy and ful� lled in both my work and home life.

What is your biggest regret within your career?� at despite regular pleading for simpler and more consumer-friendly pensions we still have a ridiculously complicated system that is frequently di� cult to explain in a way that ordinary people can understand.

Excluding your current role, what would be your dream (in or out of pensions) job?I would love to front a radio programme on the lines of Jeremy Vine’s on Radio 2, which combines current a� airs and popular culture. Being able to put questions to politicians in a live broadcast as opposed to having to provide answers to them is something I would really relish doing.

What was your dream job as a child? Driving a double-decker bus.

What do you like to do in your spare time?Play table-tennis and go for long walks in the countryside – not both at the same time obviously. In my younger days

I was a very keen cricketer with my main claim to fame being the only batsman in the near hundred years that the Ribblesdale league (up in Lancashire) has existed to have scored all his side’s runs in a single innings. Not quite as good as it sounds, however, as I only scored ten runs and those came o� the � rst three balls of the match (four, four and two).

I was caught behind o� the fourth ball and then amazingly enough all the remaining wickets fell without addition to the score. I was a little disappointed to note in a recent edition of the league handbook that it is looked upon not as an achievement but rather a day of shame for the club, which all the players involved prefer not to talk about. Some records are clearly not worth having.

Any particular skills or party tricks? Not really. I am usually content these days to watch others at parties do the tricks whilst standing or sitting around with a glass of wine in one hand and a sausage on a stick, or something similar, in the other.

Who would be your ideal dinner party guests? Barack Obama, Christine Lagarde and Andrew Pierce and Kevin Maguire (Sky papers reviewers).

Do you have a particular phrase or quote that inspires you? “Always remember, there is no such thing as a stupid question about pensions.”


Next stop, pensions Theo Andrew talks to Barnett Waddingham senior consultant,

Malcolm McLean, about his pensions CV, his biggest regrets in the industry and how some records are just not worth having

interview.indd 1 08/01/2019 14:13:51



industry year ahead

Single Financial Guidance BodyThe Single Financial Guidance Body (SFGB), which will merge Pension Wise, The Money Advice Service and The Pensions Advisory Service, formally came into being in October 2018. However, it will be throughout this year where it really comes into force. A transition period will take place throughout 2019, as well as an official name sought, and we will likely see the body’s new outreach strategy, giving us an indication of what to expect. The body’s executive board is also in place, however there are still a number of key appointments to be made, which the Department for Work and Pensions says will be announced shortly. We also know that part of the new SFGB’s responsibilities will be to facilitate the development of the pensions dashboard.

Pensions dashboardTowards the end of 2018 the pensions industry finally saw some sort of progression through the implementation of the long-awaited pensions dashboard feasibility study. The study, which looked like it might be killed off earlier in the year, revealed that the government plans to have multiple dashboards, and that state pension data will not initially be included, but phased in over time, which many believe will be key to the success of the project. The Department for Work and Pensions said that it will begin with

a non-commercial, single dashboard, which will be facilitated by the Single Financial Guidance Body, before moving to the multi-dashboard system. Responses to the DWP’s consultation are expected by the 28 January 2019, from which we will await the next steps. While it wasn’t what everybody was looking for, it did offer hope.

Patient capitalWith a flurry of consultations released at the end of 2018 around permitted links and fund types, all eyes are on what the DWP are looking to do around the charge cap issue, expected in the first half of this year. 2019 should see a considerable amount of development around defined contribution schemes, which are expected to have assets under management of £1 trillion by 2025. The working group of several of the largest pension schemes, looking into the framework of how DC schemes can invest into illiquid assets, which will also assess key governance issues, may take a little longer. Nest, Aviva, HSBC, L&G, The People’s Pension and Tesco’s Pension Fund are working with the British Business Bank to explore options for pooled investment. In the meantime, Exchequer Secretary to the Treasury, Robert Jenrick, has urged trustees to “open their minds” to illiquid assets.

Pensions in 2019 Pensions could be on the brink of something special

in 2019, and with a number of high profile initiatives in the wings (in spite of the political turmoil), Pensions Minister Guy Opperman is hopeful that a bumper pensions bill could make them a reality. Theo Andrew looks ahead for the year

Editorial credit: chrisdorney / Shutterstock.com

year review.indd 2 08/01/2019 14:16:41


Auto-enrolment levels upThe un-yielding success of automatic enrolment continues to reach new heights. Following the first initial rate rise in April 2018, opt-out levels remained “consistent”, however all eyes will be on the final hike to 8 per cent in April 2019. Employees will be asked to contribute 5 per cent to the employers’ 3 per cent, and it remains to be seen how they will react to a pinch on their take-home pay packet. Furthermore, the amount of people who have been auto-enrolled into a pension scheme, currently at 9.96 million since 2012, is likely to break the 10 million barrier. Prepare your bunting. Employers will also experience increased pensions costs, however early data suggests that they too are coping with rate rises, while also growing their understanding of what is required of them. The latest figures showed that 93 per cent of micro-, small- and medium-sized employers are aware of their ongoing AE duties.

TPR powersThe DB white paper, published at the end of 2017, brought a raft of proposed changes to the pensions sector, and in particular the powers of The Pensions Regulator. Amongst the remedies, changes to TPR’s funding code were recommended, which we should see outlined fully throughout 2019, while implementation is not expected fully until 2020. The code is still in the development phases, but we can expect the regulator to take a more prescriptive approach to regulation, getting trustees to focus on the long term, with more accountability. There will also be an element of flexibility to TPR’s new framework regulatory approach. TPR’s responsibilities will increase throughout the year, as we finally get a look at what the master trust market will look like; it will also be assessing potential superfund market entrants. Perhaps the biggest change the regulator will face this year is the appointment of its new chief executive Charles Counsell. Announced that he would be replacing current chief executive, Lesley Titcomb, in December, the former TPR director of automatic enrolment has already come under fire from the Work and Pensions Committee, which believes his appointment doesn’t go far enough to effect change at the regulator.

A year in the courtsWhile 2018 was a busy year in the courts, 2019 is set to be another frantic one, according to Sackers. Despite the High Court ruling in April 2018, Burgess vs BIC UK will be heard in the Court of Appeal on 5-6 February. The High Court ruling found that the recovery of overpayments is not subject to a six year limitation period where it is an equitable recoupment, under which trustees seek recovery by making a reduction from future pensions payments. Another case which rolls on is Safeway vs Newton, which is set to hit the Court

of European Justice (CJEU) after it was referred by the Court of Appeal. The Court dismissed the argument that the normal pension age between men and women was equalised at age 65 for men and women in 1991. The question around the power to retrospectively amend the scheme rules to equalise normal pension age is prohibited under European law.British Airways vs Airways Pension Scheme is expected to be heard in the Supreme Court this year, after the trustees appealed the decision handed down by the Court of Appeal in July 2018. The Court of Appeal held that the function of the trustees was to manage and administer the scheme, not design the benefit structure. This year could also feel the repercussions of 2018 cases, such as the Hampshire vs Pension Protection Fund (PPF) decision. Following the CJEU ruling that the PPF must pay at least 50 per cent of member pension entitlements to individuals whose employers have fallen


year ahead industry

year review.indd 3 08/01/2019 15:10:21


industry year ahead



into the fund following insolvency, the PPF said it would be implementing the changes “as quickly as possible”. Another landmark case saw the High Court rule that pension schemes must now equalise pensions benefits for men and women, meaning schemes will be working throughout the year to understand how much it will affect their liabilities. Year of the consolidator The new kids on the block, so to speak, commercial consolidators have been on the brink of taking off throughout the second half of 2018, and if you believe what they are saying, they are ready to push go. The government launched its consultation in December 2018, focusing on the regulatory framework around the funds. TPR will see its powers beefed up and an authorisation process akin to DC master trusts will be implemented. However, in October, TPR warned that it could be two years before the regulatory framework is ironed out – but both Clara Pensions and The Pensions SuperFund expect to get a share of the action sooner. Collective defined contribution (CDC) schemes were also a hot topic throughout 2018, and something the government seems to be throwing its backing behind. Like Marmite, CDC seems to split opinion. The consultation launched in November 2018 said the government is looking to keep the 0.75 per cent charge cap, and that any CDC scheme should be subject to an independent annual valuation. The deadline for the industry’s consultation responses is on 16 January, but it will be the government’s response to this that will hold all the detail.

Pensions billPromised by the Pensions Minister, Guy Opperman, at last year’s Pensions and Lifetime Savings Association (PLSA) Annual Conference, a bumper new pension bill is expected at some point this year. It’s anyone’s guess as to what this is going to include, however many things have a chance of being in there.

Pensions dashboard legislation is likely to be included, as is part of the framework that will facilitate how patient capital will work. The Pensions Regulator will also expect its funding code to be included. The enablement of CDC schemes and defined benefit consolidators could also make an appearance, in what would be a massive change to the current pensions landscape. Of course, much of these developments rest on the current government staying in power, and with the bill not likely to receive Royal Assent until 2020 it is not beyond the realms that some of these initiatives fall through. Tune in next year to find out.

Pensions for the self-employedMany in the industry have been banging the self-employed pensions drum for years now. The ante was upped in 2018 and the government has finally moved to do something about it. The government, along with a number of key pensions providers, will be trialling a number of initiatives to help find a solution to the self-employed pensions problem. It will involve direct marketing campaigns and behavioural prompts to nudge the

self-employed into long-term saving. Hopefully, at some point through the year, we will get an indication of how these initiatives have gone and what we can expect for next steps.

Continued political turmoilJust as in the past couple of years, political uncertainty is set to reign throughout 2019. Unless by publication time the country has miraculously secured a Brexit deal that pleases everybody, I’d fasten those seat belts. The ever growing prospect of a no deal Brexit leads to all manner of scenarios. A new government, meaning a new minister and likely an emergency Budget. According to an estimate by Cardano, a hard-Brexit scenario could result in a £219 billion increase in the aggregate buyout deficit of UK pensions funds. It can be hard to decipher between the scaremongering and what the picture might actually look like once we leave the European Union on 29 March, but whatever the weather, it is more important than ever for trustees to implement contingency plans in order to safeguard the future of their pension scheme.

year review.indd 4 08/01/2019 15:10:23


asset allocation investment


Crystal ball gazing is never easy but the general consensus for 2019 is that the year could be even more volatile than

the end of 2018. Diverging interest rate policies, a potentially spluttering US economy, Brexit and other geopolitical tensions could continue to cast a pall and impact investment making decisions. Selectivity will be key going forward.

“My advice, especially to pension clients, is to look through the short-term political noise and think more about the long term and not the next year or so,” State Street Global Advisors head of strategy and research Altaf Kassam says. “However, one of the problems with 2019 is that the short term is impacting the long term whether it is trade wars or the rise of populism. Th e outcome raises important questions for capital markets and the shaping of portfolios”.

Amundi Asset Management group chief investment offi cer Pascal Blanque and his deputy Vincent Mortier also believe the tide is turning. Th eir research shows that from 2009-17, on average, 76 per cent of major asset classes including diff erent regional government bonds, equity, infl ation-linked currency and commodities recorded positive performances for each year. Th e story changed in 2018 with markets ratcheting up an unprecedented year in which less than 20 per cent of asset classes were in positive territory.

Although the future is uncertain, many fund managers agree with JP Morgan Asset Management managing director, chief market strategist for EMEA, Karen Ward, who warns investors not to be too over-reactive and dramatic. “For one, decisions and sentiment can change quickly,” she says. “Th e US and Chinese authorities could yet return to the negotiating table and stem trade tensions. Indeed, the more that bad news builds in the near term, from either the economy or the markets, the higher the incentive for politicians to consider a more amicable conversation.”

Against this backdrop, Ward says: “JPAM would consider relatively small

changes to improve the resilience of a portfolio. Within equities, look for regional diversifi cation and consider moving to larger cap stocks, with a bias towards quality and value styles over growth. Fixed income should play a greater role, but be selective and consider

alternatives such as macro funds to add ballast to a portfolio.”

Columbia Th readneedle Investments deputy global CIO and CIO EMEA, Mark Burgess, on the other hand, favours capital-light, high-return businesses on the equity front that are capable of

With experts predicting that 2019 will be even more volatile for markets than 2018, due to geopolitical events, Lynn Strongin Dodds looks at what the New Year might bring, and the asset classes pension schemes should consider

Looking through the crystal ball

Summary• Geopolitical tensions including Brexit and trade wars will continue to cast a shadow over markets, with experts predicting that 2019 could be even more volatile than 2018 for markets. • Investors are advised to look through the short term and think about the long term, rather than just the next year. • Emerging market equities are expected to make a comeback due to faster growth in China. • Credit is still attractive but through industry and issuer selection.

MarketPredictiion.indd 1 08/01/2019 15:08:44



investment asset allocation

growing market share and sustaining pricing. He also believes that the technology segment, which has taken a beating over the past few months, remains an attractive hunting ground but investors will have to take a wider view.

“While the technology sector has garnered much of the focus during recent years, this phenomenon is present across industries, with the profit dispersion between the highest quality companies and the lowest becoming ever more pronounced,” he adds. “As value chains continue to evolve, traditional business models are challenged, and technology comes of age, those companies that are able to innovate should continue to grow.”

The credit spectrumIt is also a transition year for credit, according to Schroders head of US credit Martha Metcalf and lead fund manager global Rick Rezek. They note that after nearly a decade of expansion, September marked the first time since the crisis that central bank balance sheets contracted. This is expected to continue as the ECB announced it was going to end its corporate bond-buying programme at the end of 2018 while other central banks are beginning to cut back asset purchases.

They both believe that credit fundamentals are strong heading into the New Year, while the likely decline in supply is a positive somewhat offset by uncertainty around demand. “We think attractive valuations and a strong macro backdrop, particularly in the US, could lure investors into corporate bonds across the credit spectrum, Metclaf and Rezek say. “Overall, we see idiosyncratic risk persisting and becoming more of a theme in 2019, bringing increased opportunity to generate returns through issuer and industry selection. That said, despite the broad improvement in valuation, it will be important to remain disciplined and selective to ensure adequate compensation for risk.”

In general, many analysts are cautious on European peripheral sovereign credit as well as corporate risk due to

the challenges posed by Italy’s populist government as well as the longer-term threats of a recession to the Eurozone more generally. “Italy’s political situation remains the biggest unknown,” says Invesco chief strategist and head of multi-sector fixed income Rob Waldner. “However, while the situation continues to evolve, we assign a very low probability to Italy leaving the euro. As we move into 2019, we expect friction over Italy’s budget deficit to continue to weigh on investor sentiment, likely creating bouts of market volatility but also presenting opportunities.”

UK markets are also a cause for concern due to the uncertainty over Brexit. “Our base case for Brexit is that a deal will be agreed upon at the expense of a longer transition period,” says Waldner. “Accordingly, we believe current valuations present opportunities in certain parts of the UK corporate bond market, namely among issuers with a strong international presence that may mitigate the potential growth challenges of a hard Brexit.”

Ward adds that the challenge for UK investors is most acute. A good Brexit deal may be good news for the economy and coincide with a bounce in growth in 2019. But it will pose significant challenges for those in search of asset returns, because stronger sterling will likely drag on the FTSE’s international revenues, while a faster pace of interest rate normalisation will weigh on government bonds.”

As for the US, many economists expect the economy to slow as 2019 progresses and that the yield curve will continue to significantly flatten. In this scenario, floating rate notes such as leveraged loans or short duration strategies would be the best instruments to help minimise the risk of rising interest rates and inflation. If the curve inverts as some expect might happen by the end of the year, high quality global as well as taxable municipal bonds that have longer duration would help to protect against an impending downturn. The latter would also offer UK investors

exposure to the US infrastructure story.As for other investment strategies,

fund managers are bullish on the prospects for emerging markets due to a confluence of factors – faster growth in China, the world’s second largest economy, thanks to policy easing, a Federal Reserve pause in mid-2019, which dampen the dollar and perhaps some resolution to the U.S.-China trade war. Emerging market equities could be the main beneficiaries with JPMorgan Chase & Co. strategists among those projecting the MSCI index to climb, with a year-end 2019 call of 1,100 – a roughly 13 per cent hike on current levels. The gauge is down almost 16 per cent for 2018, the third-worst performance since the global crisis in 2008.

Real assets are also in favour. As Amundi Asset Management global head of real and alternative assets Pedro-Antonio Aria puts it: “The drivers for real assets in 2019 are set to remain broadly unchanged from this year. In a low-yield environment, especially in Europe where the ECB remains broadly accommodative, investors are structurally more inclined to invest in alternative asset classes that, thanks to their ability to capture illiquidity premia, can potentially deliver higher income and returns while diversifying risks”.

He adds, real assets investments, in particular infrastructure and property, potentially act as a structural hedge against inflation, an important feature for investors since this remains a high probability in 2019. Brexit, of course is hanging over the UK and investors are currently standing by the side lines, particularly on the commercial real estate front. However, Aria believes “that the current economic outlook in Europe could favour real estate due to the demand for space and the expected increases in rent - expected to be the main driver of performance - as anticipated in France, Spain, Germany and Benelux.”

Written by Lynn Strongin Dodds, a freelance journalist

MarketPredictiion.indd 2 08/01/2019 15:08:44


IORP II regulation


About 15 years ago, the initiative to stimulate cross-border pension funds growth was implemented.

Th e original directive on the activities and supervision of Institutions for Occupational Retirement Provision, or so-called IORPs, was meant to grow together with the European single market. But parallel to the UK’s reconsideration to its EU membership, the IORP Directive is having its own revision – IORP II.

Th e IORP II Directive, which comes into eff ect on 13 January, includes provisions regarding eff ective system of governance for trustees, transparency and disclosure of information to scheme members, ESG practices, amendments to the cross-border regulatory framework, encouragement of risk-based regulation and transparency and protection of data and information held and used by TPR.

Th e regulations, confi rmed by the UK parliament on 23 October 2018, do not apply to master trusts and public service pension schemes that fall under the 2017 and 2013 Act defi nitions, but do apply to all other occupational pension schemes like defi ned benefi t and defi ned contribution.

Th e Pensions and Lifetime Savings Association (PLSA) has worked closely with the government on the IORP II Directive for several years, seeing

it go through the European Union’s legislative process to discussing it with the Department for Work and Pensions and becoming law, PLSA policy lead, engagement and EU, James Walsh, explains.

He highlights that while the deadline might be this January, this is very much only for the government. “We have been keen to avoid a scenario where the IORP II Directive leads to substantial new administrative requirements on schemes and although we await to see the details, it looks like that’s the direction the government is heading in.”

Business as usual“Schemes will only have to act when the government, or rather Th e Pensions Regulator (TPR) is telling them to do so. And that won’t be anytime very soon,” Walsh says.

TPR interim executive director of regulatory policy, Anthony Raymond, said in a recent speech that the regulator will make clear what is expected of schemes in suffi cient time, to make any changes with minimum cost and disruption.

“From our point of view, for those schemes that continue to operate poor systems, we will be able to take more targeted and timely action against them as there will be clear and enforceable legal requirements in place,” Raymond

said, anticipating a consultation on the implementation around late spring 2019.

Walsh says the PLSA expects changes to be quite modest. “Th e government is really stressing that it wants to implement IORP II by pointing to existing practice, things that schemes already do, rather than introducing many new requirements.”

An unavoidable change is the annual benefi ts statement, which pension funds will be required to send all its members, something which UK defi ned benefi t schemes are not required to at the moment.

Th is is a major new requirement, Walsh says. However, he notes that the government aims to have this covered by another disputed initiative with its own timetabling issues – the pensions dashboard.

“Th e government is saying that once the dashboard is in place, that will provide members of DB and DC schemes alike, including deferred members of DB, with suffi cient information to satisfy requirements in the IORP II Directive.”

Enhanced governanceHowever, the most signifi cant part of the directive is perhaps the focus on enhanced governance. Sackers associate director Ferdinand Lovett says it will be a case of codifying policy directions that have been on the agenda for UK pensions

Sunniva Kolostyak explores the upcoming implementation of the IORP II Directive, how the UK will implement this European regulation in the shadow of Brexit, and the extent of the impact the directive will have on pension schemes

New rules Summary

• Th e IORP II Directive comes into eff ect on 13 January. It includes provisions regarding an eff ective system of governance for trustees, transparency, ESG practices, amendments to the cross-border regulatory framework, encouragement of risk-based regulation and the transparency and protection of data.• While the new regulations should still mean ‘business as usual’ for UK schemes, one major change is a requirement to send an annual benefi t statement. However, the upcoming pensions dashboard may cover this requirement.• Th e most signifi cant part of the directive is expected to be its focus on enhanced governance.• If the UK gets a withdrawal agreement on Brexit, the IORP II Directive will still apply for pensions. However, this is more uncertain in the event of a no deal Brexit.• Implementing IORP II has been in the shadow of GDPR and GMP equalization in 2018 but is likely to come to the fore in 2019.

IORPII.indd 1 08/01/2019 14:21:28



regulation IORP II

for a while, in terms of systematizing and creating a structure around governance.

“I think it is fair to say that we will not know the full detail until the code has come out but I think it is a question of communicating to clients that it is business as usual in terms of good governance,” Lovett says.

“It will be a question of checking what they are doing is in line with the new requirements. What the new regulations do is for those schemes that could do better, it puts a structure in place and gives some direction in terms of what good governance looks like.”

In his view, IORP II provides a structural backbone off which the changes to the Pensions Act 2004 and the codes of practice will hang off. In addition, it will align with TPR’s 21st Century Trusteeship programme.

The directive also brings in the own risk assessment (ORA) for outlining key risks. According to TPR, schemes will need to perform an own-risk evaluation at least once in every three years and immediately following any significant change in the scheme’s risk profile, considering integration in different processes, funding, operations and ESG.

BrexitWith most questions relating to politics, the uncertainty caused by Brexit affects the IORP II Directive too. The elephant in the room, as Walsh describes it, will however not act as an immediate obstacle.

“Obviously there is a huge amount of uncertainty, but what the government has always said is that as long as the UK is a

member of the EU, then we will meet our obligations in full.” This would of course include the 13 January deadline, which arrives before the start of a transitional period, so the United Kingdom will still be an EU member state.

However, if the Prime Minister’s withdrawal agreement gets passed through the House of Commons, “and that’s entirely uncertain”, Walsh points out, “then that really maintains things pretty much until the end of December 2020. So we would then expect the process of going ahead with implementing IORP II to continue.”

“If we don’t get a transitional phase, perhaps because we leave on a no deal, then that’s a different situation and the government then has to decide what it wants to do about implementing IORP II. That would be influenced, I’m sure, by other factors such as what contingency arrangements we put in place, and what continuing relationship there might be between TPR and EIOPA,” Walsh speculates.

“Despite Brexit, the directive does apply to us,” Raymond said in his speech at Pensions Research Accountants Group. “The good news is that because the UK was influential in drafting IORP II, and so it aligns with the direction of UK policy, DWP were able to transpose IORP II without lots of new legislation,” he said, pointing out that the new legislations cover effective governance systems and the cross border regulatory framework.

The two GsDLA Piper partner Matthew Swynnerton explains that in 2018, Brexit has not been the biggest matter up for discussion for schemes. He says that on the trustee side, it is the introduction of the GDPR, and addressing issues in relation to GMP equalisation in light of the Lloyds judgment earlier this year, that has ruled the conversation.

“Due to the fact that the publication of TPR’s codes of practice on IORP II regulations are not expected until 2019, and the government stating its intention

to give schemes sufficient time for familiarisation with and planning for the implementation of IORP II, this isn’t high on many trustee meeting agendas at the moment, especially given that there are more pressing matters,” Swynnerton says.

Lovett agrees that IORP has ended up in the shadow. “To be brutally honest, I think clients have been grappling with the two Gs, GDPR and GMP equalisation. I suspect it is going to be more on business plans for 2019.”

However, Lovett points out the new regulations will be an opportunity for schemes who are not entirely sure that their governance is fit for purpose to review policies internally.

The cross-border side of IORPs has faced long-standing issues as the original directive required cross border schemes to be fully funded at all times – “that’s possibly one of the reasons there are very few cross-border pension schemes”, Walsh says, as the regulatory requirements are demanding.

Spurring the development of cross-border pension schemes was the main point of the original 2003 IORP Directive, as part of the development of the European single market. This has, however, not happened.

The PLSA has been keen to see the funding requirements relaxed in IORP II and indeed it has been, Walsh says. The language, however, has the “classic euro touch” where it in one sentence says schemes need to be fully funded, while in the next one it says it does not. However, the PLSA takes this as a relaxation of the rules.

“I think that’s sensible, it will make it a little easier to set up an operative cross-border scheme,” Walsh says, however barriers such as different tax regimes must still be taken into consideration.

While the consensus seems to be similar across the industry, that the expected changes will be mellow, Walsh says elements are still uncertain. “We await to see what that means in practice.”

Written by Sunniva Kolostyak

“What the new regulations do is for those schemes that could do better it puts a structure in place, and gives some direction in terms of what good governance looks like”

IORPII.indd 2 08/01/2019 14:21:28


government agenda politics


Writing a politics-related article that will be published several weeks into the future feels

rather foolhardy at the moment. But while we have no idea what the next few weeks and months hold in relation to Brexit, we do know much of the government’s plan for pensions policy; and we can make educated guesses about what other pensions-related policies might be implemented during 2019.

Pensions has been a high-profile policy issue in recent years, with major reforms to the state pension, the introduction of auto-enrolment, and George Osborne’s freedom and choice reforms. But since 2015, despite some high-profile problems related to large-scale schemes, the subject seems to have slipped down the political agenda. In 2016 the role of Pensions Minister was effectively downgraded; the Pensions Minister is now only a parliamentary under-secretary. The Treasury maintains a keen interest, mindful of the potential value to society of the investment capital held in pension savings, of the potential savings that could be realised if the pensions tax relief rules were changed, and of the costs of funding the state pension and social care. But when and

how might pensions become a more important political topic again?

It seems almost certain that there will be a pensions bill during 2019. Based on announcements made by the Department for Work and Pensions (DWP), we can be fairly sure the bill would include further changes to auto-enrolment based on recommendations in the 2017 review of the policy, measures to assist establishment of the pensions dashboard and the Single Financial Guidance Body (SFGB) to support implementation of collective DC (CDC) pensions; to boost the powers of The Pensions Regulator, and to encourage scheme consolidation.

Political causesThere are other changes that many in the industry would like to see; former Pensions Minister Baroness Ros Altmann picks out the need to solve the net pay problem that affects low earners enrolled in pension schemes that use a net pay arrangement (thought to include a majority of occupational schemes), meaning low earners miss out on tax relief. Research from Now Pensions has suggested that more than 1.2 million

workers may be collectively missing out on £78 million – “a major social injustice”, says Altmann.

The government may also be forced into further action as a consequence of the ongoing campaign – known as Waspi (Women Against State Pension Inequal-ity) – to compensate women born in the 1950s for changes to the state pension. In late November 2018 the BackTo60 campaign was granted a judicial review into the way the government managed raising the state pension age in 2010. The group’s aim is for all women born in the 1950s to be given the same amount of state pension they would have received had their pensions been payable from the time they turned 60. The government claims this would cost more than £70 billion, so there is certainly potential for a huge political row if the campaigners win the legal argument.

Policies related to auto-enrolment may make pensions a more prominent political issue, because they will affect so many workers and employers. The December 2017 review of auto-enrolment recommended lowering the age at which employees can be auto-enrolled from 22 to 18 and calculating pension contributions based on an employee’s full income, rather than from a lower earnings limit. The government has said it plans to implement both recommendations, but not until the mid-2020s.

B&CE director of policy and external affairs (and former shadow Pensions Minister) Gregg McClymont describes government policy on auto-enrolment in 2019 and beyond as “the big unknown”, because it is currently so uncertain which changes it will implement and when. In December 2018 the government announced it would also publish proposals for “targeted interventions and

Between 2010 and 2015 changes to the pensions system were high on the

political agenda, but since 2016, with the status of Pensions Minister

downgraded and more radical reform seemingly

delayed indefinitely, it seems to have slipped down

the agenda. David Adams asks how and why that might change in future

Climbing up or sliding down?

GovAgenda.indd 1 07/01/2019 11:07:47



politics government agenda

partnerships” to boost pension saving among the self employed during 2019.

A need for guidanceAnother issue likely to be seen as in-creasingly urgent in future is the need to improve access to and uptake of fi nancial guidance and advice for people exercis-ing their right under freedom and choice to access their pension savings. Pensions Policy Institute head of policy research Daniela Silcock notes that the concerns the Financial Conduct Authority (FCA) has expressed about people switching to drawdown products without taking fi nancial advice. “Many have been put-ting that money into all cash-invested drawdown pots – you might as well put it in a bank account and pay less,” she says. Th ere also continue to be concerns about the threat posed by fraudsters to people accessing their pension pots.

One important change that is already underway but may get more attention in 2019 is the creation of the SFGB, which merges the capabilities of the Money Advice Service, Th e Pensions Advisory Service and Pension Wise. Evaluations of the effi cacy of Pension Wise have been very positive about that service: 92 per cent of users were satisfi ed in 2017/2018, including 69 per cent who were very satisfi ed, while only 3 per cent were dissatisfi ed. But, as Barnett Waddingham senior consultant Malcolm McLean notes, only small numbers of people are using the service. “More people have got to use it if it’s going to succeed,” he says.

Th ere are some other major policy issues related to pensions that we are unlikely to see addressed by the government in 2019, but which have the potential to push pensions back up the political agenda. Tax relief for pensions costs about £38 billion currently, about 40 per cent of which is given to the top 10 per cent highest earners in the country. Moving to a fl at rate system could save the Treasury around £10 billion per year. Both the current Chancellor and his predecessor have considered reforming tax relief, but neither has found enough political strength to do so.

Another policy area that may receive more attention in future is the triple lock that guarantees increases to the state pension and means that over time it will probably increase more quickly than earnings. But most observers believe neither of these areas will be addressed directly, or in any kind of radical way, during the next year.

“You need a government with a big majority to carry out radical policy changes, because you create too many losers,” former Pensions Minister and Royal London director of policy and external communications, Steve Webb, says. Th ere seems little prospect of any political party winning a strong parliamentary majority at present.

Webb believes that the downgrading of the Pensions Minister shows that, at present, “pensions aren’t even a policy priority within the DWP, let alone the government”.

DoublespeakMcLean believes there is another fundamental problem that hampers the development and successful implementation of policies relating to the pensions system. “Th e government speaks with two voices on pensions,” he says. “Th e DWP is there to encourage people to save more privately, but you sometimes get the impression that the Treasury is trying to stop people doing that, when it’s clawing back on the annual allowance and so on. We don’t have joined-up government.”

But things could get also worse.

Hargreaves Lansdown head of retirement policy Tom McPhail highlights a suggestion made by Home Secretary Sajid Javid in autumn 2018 that in the event of a no-deal Brexit it might prove necessary to scrap auto-enrolment to protect the economy. “We might see pensions pushed further down the political agenda,” McPhail warns.

On the other hand, he continues, the election of a Labour government might alter the tone of pensions policy.

“I think if we saw a Labour government come in, we’d see a shift away from individual responsibility back to paternalism, with more emphasis put on the trustee boards and governance bodies to take responsibility for looking aft er scheme members.”

Whoever is in government, the consensus view seems to be that pensions will remain low on the political agenda for the foreseeable future. But it will be a big issue again at some stage, McClymont insists. “Whatever happens in the next couple of years, the long-term reality of an ageing population structure is going to force pensions into the forefront of policymakers’ minds,” he explains. “And one of the great things about auto-enrolment is that you’re giving lots more people a stake in the pensions system. As the assets in that system grow there will be more and more attention paid to it.

“In the long term, pensions will be an important political issue.”

Summary• Aft er a series of major reforms in recent years, pensions has fallen down the policy priority list in government.• Th ere will probably be a pensions bill in 2019, including measures related to a range of subjects, but further radical reform is very unlikely unless a government has a strong parliamentary majority.• A range of policy areas, including further development of auto-enrolment, access to and effi cacy of fi nancial advice or guidance and challenges to state pension changes all have the potential to push pensions back into the public eye.• In the long term, pensions will surely be an important policy area, as government seeks to fund the state pension and cope with social needs created by an ageing society.

Written by David Adams, a freelance journalist

GovAgenda.indd 2 07/01/2019 11:07:47


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EM roundtable


In association with

Emerging markets roundtable

Daniel Fox, Associate Director, River & Mercantile Solutions Daniel is an associate director within the investment team at River

and Mercantile, responsible for asset class research and manager selection for use within fi duciary and advisory portfolios. He co-leads the dedicated manager research team, which is responsible for manager selection and monitoring of external funds and also leads on research within fi xed income and alternative asset classes. Additionally, he is a member of the investment strategy committee, insurance investment committee and fund rating committee.

Reza Mahmud, Head of Investment Research, PwC Reza represents PwC’s pensions investment consulting business, which focuses on trustee and

corporate advice. He helped establish and is a member of PwC’s multi-disciplinary investment committee (pensions, insurance, sovereign wealth funds, private wealth). Prior to PwC he was a multi-asset investment manager at Aviva Life and Pensions, and before that he served with Brunei’s sovereign wealth fund as a portfolio manager and asset allocation analyst. Reza has an LLB law degree from Exeter University and an Investment Management MSc from Cass Business School.

Derry Pickford, Principal Consultant (Asset Allocation), Aon Derry has been a principal in Aon’s asset allocation team for

two years. He previously spent fi ve years at Ashburton Investments, where he was co-head of asset allocation. He worked for 11 years as an economist including eight years at hedge fund manager, Sloane Robinson, where he became chief economist. Derry is a Chartered Financial Analyst and a holder of the Investment Management Certifi cate. He lectures on the University of Edinburgh Business School’s ‘Practical History of Financial Markets’ course.

Nick Samuels, Head of Manager Research, Redington Nick joined Redington in September 2015 as a director in the manager research team. Now

head of manager research, he leads a talented team who help institutional and wealth management clients around the world allocate to the funds that get them closer to their strategic goals. Nick is also a voting member of Redington’s investment strategy committee and works directly with a number of the fi rm’s clients in the UK and Europe. Nick began his investment career in 2000 at Schroders, where he worked on the Asia and Emerging Market equity teams.

Michael Bourke, Fund Manager, M&G Investments Michael was appointed fund manager of the M&G Global Emerging Markets Fund in

October 2018. He joined M&G in 2015 and has managed the M&G (Lux) Emerging Markets Income Opportunities Fund since its launch in May 2017. Before this, Michael spent 10 years as an emerging markets equities analyst and portfolio manager for Legg Mason and FPP Asset Management. He also worked at Deutsche Bank in roles related to equity derivatives trading. Michael has a BSc in Computer Science and Accounting from the University of Manchester.

Graham Wardle, Managing Director, BESTrusteesGraham joined BESTrustees as a trustee executive in 2006. Th is followed a 30-year career at a

major pensions consultancy where he was responsible for some of their largest clients. He became a director in January 2008 and was appointed managing director in June 2010. Graham is a trustee of a range of occupational pension schemes, in terms of size and degree of maturity, and has considerable experience on covenant issues, negotiating with scheme sponsors on funding, strategic pension benefi t reviews, scheme mergers, reviews of asset strategy and investment manager selection.

CHAIR PANEL

about emerging market equities. Th ey can aff ord the illiquidity that may or may not come with that, depending on how the equity product is constructed. So for equities I’d put it probably at about – for the right scheme – six or seven.

On the debt side, it’s more challenging. Trustees try not to time things but there have been so many shocks recently that the currency eff ect can be quite overwhelming on that side of things, so probably a bit lower on that.

Chair: From an Aon perspective, we

liked emerging market equities in 2017. We trimmed, but not enough, at the beginning of this year. We think that the fi nal sell-off in the summer did represent an opportunity in the emerging market equity space.

On the debt side, we’ve been underweight hard currency debt for about two years now. We’ve cut back to neutral in terms of local currency debt. We’re still a little bit cautious on local currency debt at the moment. Most of our clients are probably more cautious

than we are. I think that the short-term volatility, even though there tends to be a degree of mean reversion, has really put them off emerging market assets.

Where are we now? I would probably put ourselves at around a six to seven on emerging market equities, maybe fi ve on the local currency debt and, even though spreads have widened a bit, we’re still a little bit more cautious on hard currency debt, so I’d put ourselves at a four now, having previously been around a two.

Bourke: We’re very optimistic about

EMRoundtable.indd 3 07/01/2019 18:06:44


roundtable EM

In association with



the potential for future returns, especially given where we are with valuations. From my perspective, within my time looking at emerging markets, there have been points in the cycle where we would have been quite open with investors and said, “we think spreads are really tight”. Certainly, at the tail-end of 2017, we were at that point. We were approaching very low levels of spread across, particularly, investment grade but reaching into the wider end of the EM credit spectrum. That’s no longer the case.

When I look across currencies, EM currency valuations are at considerable lows, lows that have not been reached outside of crisis periods. I don’t believe that’s sustainable.

We’re in a peculiar situation whereby the macro fear and trade protectionism adds up to an environment where investors are very fearful of what that amounts to, because it’s relatively unprecedented within our investment lifespans. The world is very integrated. The global economy’s very integrated. The global investment universe is very integrated. Then suddenly, you’ve got a US president who’s apparently keen on smashing that to pieces. It’s very peculiar. It’s put EM currencies at very distressed levels.

Chair: In real terms it is back to interesting levels.

Bourke: Yes. One of the points we make to investors is that we’re very wary of generalising. The habit we fall into, even as EM investors, is that we generalise across these asset classes, because we realise our investors in the UK, Europe and US are looking at this as one big asset class. We encourage them to break that down and to really think through the very different facets of that. On the debt side, that amounts to reminding them where the savers are in EM – broadly in Asia; where

the borrowers are in EM – EMEA and LATAM, and how that might affect your valuation opportunity. The commodity influence was historically very strong names, much less so today.

My last point would be just looking at EM equities, the EM value is very attractive today. That’s in absolute terms.

It also looks very attractive relative to what investors have been sitting in, which is EM growth names for the last three to five years. It’s incredibly attractive when you think about it relative to developed markets, certainly the US which has been the headline grabber. The pressure point I would say for any non-US investor in the last three years has been that you’ve had a rampant bull market alongside a very strong dollar. It’s made the comparison very difficult. But the valuation today on EM equity, certainly on the value side, is extremely attractive.

Chair: Nick [Samuels], what are your thoughts on emerging markets? Has Michael [Bourke] managed to make you feel more positive?

Samuels: We’re very long term in our asset allocation, so we think very strategically in terms of how we view EM equity or debt. Where those views do change at the margin is on valuation, things like spreads particularly.

We are definitely seeing some attractive opportunities on both the equity and the debt side in emerging markets. They’re not necessarily without risk and so you do need to take that into account. Certainly, we’d agree on EM value as being in an interesting place. Once you take out those lofty tech-type valuations, there’s actually quite a lot of opportunity in the rest of the emerging market space that’s perhaps not as well picked over, so we’re definitely interested in EM value type strategies.

On the debt side, corporate debt is slightly more interesting and particularly

the hard currency corporate debt. We’ve seen overall portfolio yields of 9-10 per cent in some of those strategies, which is attractive, certainly relative to what else you can get around the world.

Chair: How much of that is Chinese property developers?

Samuels: There will be potentially some of that, but a lot of what we’re seeing are well-diversified portfolios that are digging down and getting into some of this stuff. You just can’t necessarily allocate enormous amounts to it, though, that’s the downside.

Local currency is okay; we don’t want to be buying an index in this sort of situation, so we’re looking at being a bit more unconstrained on the debt side.

Chair: Reza [Mahmud], your thoughts on EM?

Mahmud: We’re bullish long term on EM, currently neutral, but we’ve seen some flows coming into the asset class recently. It’s a good value play, but I’d like to see some stability before becoming a bit more bullish on the near term.

We’ve seen that, on the client side, most tend to be a bit more cautious but that’s a general impression of EM being riskier.

The issues surrounding the US dollar and Fed have been pressurising the asset class too. Surprises from the geopolitical issues as well as the trade wars have impacted EM fundamentals and exports. A lot of those things can’t really be predicted, especially around geopolitics, but as a value play, I like the long-term economic story for EM.

Chair: Nick [Samuels] made a point which I’m sure a lot of people around the table concur with, which is that you don’t want to be benchmark constrained at the moment. There is a huge amount of heterogeneity in valuations, both in equity and debt. Where do you see things which are totally mis-valued at the



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moment? Debt or equity. Bourke: We have had quite a low

turnover of portfolios in 2018 – we were very quiet through to mid/late summer, when we started to see quite a volatile environment and we were approaching levels of valuations where investors were starting to throw in the towel in various different parts of EM; and parts that we have probably avoided before, so Turkey’s prominent there. Turkey is a market that we’ve had concerns about for quite a while, in fact, mainly on the macro side.

We’re very much bottom-up investors, but we’re keen to understand those sectors where macro’s a considerable influence. That might be commodities, for example, where people worry a lot about the sustainability of pricing. It might be much more to do with the capital cycle and which economies are heavily dependent on foreign capital to finance their level of economic activity thereby exacerbating the current account deficit and creating

an external financing vulnerability.For a long time, Turkey was guilty of

that. It had a very aggressive, procyclical economic approach. It worked well for them. But when you saw the problems being stored up – and last year, Turkey’s GDP outpaced that of China, with the second largest credit expansion in the globe after China – it just felt and looked like it was overheated to me. The banks to my mind there were ones to avoid, even when they were reaching levels of valuation that at headline levels looked really attractive.

That of course all fell apart in 2018 and so we, rather defensively, started adding, in late August, to conglomerates – companies that we think in the long-term will withstand the problems that are now happening in Turkey and may even take advantage of them.

Elsewhere, in markets like India, Philippines, Indonesia, we have long been underweight on the equity side. That’s a lot to do with valuations. Our

approach wouldn’t naturally lead us there and we’ve struggled to find opportunities in those markets that would fit. When we’re looking across the universe, we find much more attractive ideas in China or in Latin America. Saying that, in 2018, we started adding to a certain extent to conglomerates in the Philippines, names that we’ve known and had on the radar for quite a while but have not been attractive valuation-wise. We’ve seen the currency fall out of bed there, so we feel that we’re on the right side now.

Also, India is a super interesting market. The pace and scale of reforms that have been happening under the Modi government are reminiscent of what we saw in China over a decade or so ago. I think it puts the country in a very good state.

Opportunities Chair: What are the most exciting opportunities you’ve heard about in emerging markets at the moment?

Mahmud: In general, we want to be diversified. There’s a lot of uncertainty in the world, so we just want to have decent coverage in emerging markets.

Samuels: We’re very excited by China A. We think there’s an interesting long-term case for that. Obviously, you have the MSCI and FTSE index inclusion for those shares and you have a pretty undemanding level of valuation as well. But, actually, the bottom-up case is probably the most interesting one here – the alpha potential for a direct allocation to China A, because 85 per cent of the volume in the two exchanges is driven by retail investors – retail guys trading on WeChat on their phones. So, with a very short-term mentality.

We went to China for a research trip in September and we met a number of investors onshore, and even the professional investors there had a very



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short-term mentality. A 300-400-500 per cent portfolio turnover per year was common. We look at that and think there’s an interesting case there for traditional investing in China, with a longer-term perspective.

So, we’re looking to supplement an EM allocation with an actual dedicated China A allocation, because you’ve got this confluence of the top-down and the bottom-up coming at the same time. We’ve been doing some work on that. We’ve come up with a couple of interesting ideas of local China managers that we’re hoping to supplement client allocations with.

Wardle: From a trustee perspective, I’m very keen in the equity space in real bottom-up investing. You need some diversification obviously across markets, but I certainly wouldn’t want to follow any index or that sort of thing. I think you should be looking for strong companies and have a long-term investment outlook. You have to accept that there will be blips along the way, but pension funds should be able to accept blips along the way.

Fox: As I mentioned, we’ve been underweight EM, but we are currently looking for opportunities as valuations fall further, and we think that there may be some significant buying opportunities out there in the near future. In China, there are obviously the market developments in terms of A-shares and the general ownership impact that will have around the world, but even more generally China’s stimulus may leave the nation and indeed region looking quite attractive. So, we quite like the developing Asia story as well, so not just focused on China.

Chair: Are your clients interested in having a separate China mandate to a more general EM mandate?

Fox: It varies quite considerably

depending on the governance budget of the client. On our fiduciary side, where we have the ability to go and take individual regional bets – and we have always been a big advocate of doing country-specific work given that’s where we think most of the alpha is in emerging markets – there’s scope to do that. But some clients will tend to outsource that their equity manager, or their DGF, for example, to take some of those regional calls.

We definitely think, however, that there is value in getting those country regional calls correct over, say, passive investing. Of course, the passive investing route has its place in portfolios, when you’re just looking for broad beta and wanting to get involved in the rallies when valuations are extremely low, but we would also strongly recommend the country selection model too where applicable.

Chair: Graham [Wardle], would you prefer a separate allocation for China or do you just think about EM as one big asset class?

Wardle: I think a separate allocation will come for China at some point, when they actually join a bigger index. But at the moment, I don’t think trustees are concentrating on that at all. Most will be looking at EM as one asset class at the moment.

Bourke: It’s interesting to hear some people are looking at China as a standalone proposition. From the perspective of a provider, we think long and hard about what makes sense from an investment perspective and what would be a credible product for investors; and we often think the industry can be guilty of over-marketing.

But we now have a standalone China fund, which we manage internally for our multi-asset team and we’re proposing to launch a listed standalone China fund

next year off the back of that. Before now, we felt that it wasn’t the

right time. When we’ve met in the past with Chinese companies, we felt there wasn’t enough bandwidth to invest in companies which met our requirements. That’s changing. I wouldn’t say it’s where we’d like it to be. Our China fund reflects that, where the balance of the fund remains in A shares. We feel the very fact that you have a share listing in Hong Kong or an ADR listing reflects the higher quality nature of the business or certainly of the manager team that will be able to understand and converse with foreign investors. But as I say, it is changing.

But I do think it’s interesting to see how the industry’s evolved to offer solutions. There have been times where people have just launched China funds, but I don’t think it’s been the right time. We spend a lot of time thinking about innovation; thinking about what’s a good product for investors and what might be interesting. China is one. EM Small Cap is another. There’s a fantastic, interesting and varied opportunity there but it has to be done in a closed-end format. Liquidity’s a real material constraint to doing that in an open-ended fund. So, we are thinking through those separate ideas and China is very much one that’s on our radar for 2019.

Alpha generationChair: What do you think is realistic in terms of generating alpha at an individual stock level within countries?

Bourke: We don’t think of it in terms of the absolute level. We put together portfolios much more in terms of how the portfolio’s positioned and how we think of that relative to the broader market and why we think that should therefore perform.

It’s part and parcel of investing in



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EM that your alpha will tend to be quite lumpy, because you’ve got that very strong positive correlation between a currency and the local equity exposure.

We had a very strong 2016. Last year was a bit more difficult. 2018 has been much more in our favour as well, because the value’s been more resilient through this tough market environment. But we think of it much more in portfolio terms.

But to your question, I think the alpha potential in EM today is always a function of your starting valuations. Today I think it’s at one of the most attractive levels I’ve ever seen in the time I’ve been investing in EM because of where we are in terms of valuations.

Mahmud: Are you having to churn the portfolio more as it’s been a bit more volatile recently or is your process helping you hold on through the tough times?

Bourke: We’ve had a higher-level of turnover in the last year more because we’re transitioning managers. I’m taking over the portfolio, so there’s been a level of turnover that’s been associated with that. It’s not been that material, because as a team we’ve obviously worked closely on the portfolio for a number of years.

In terms of our investors, especially the large investors, it’s been very interesting to see how resilient they have been. If anything, we’re now getting to the point where I start to see people actually adding to their allocations. That’s quite gratifying, because we think there’s a maturity there about EM investing that’s spreading. Five years ago, the kneejerk reaction was always to sell at the first sign of volatility, because people always talked about EM crises and so on.

Mahmud: Are you seeing the rise of ETFs helping? All the “hot” short-term money goes into ETFs and so the active managers can hold on to the longer-term sticky money, or is it not a factor?

Bourke: Maybe a small factor – ETFs are taking a lot of inflows in the EM space. There are a lot of investors who, because of the nature of emerging markets, are less committed to it. Therefore, they feel that allocating to ETFs is easier – easier to get in and easier to get out – and they don’t have to think about allocating to an active manager. But that’s very dangerous.

We constantly try to highlight to investors that the index is wildly misleading now. The bifurcation of the index is extreme. If we look at the returns we saw in 2017, more than 50 per cent of the index returns were from the top 10 names. But you look at the levels of valuation that people were paying for those names, a lot of that was because of the passive element. That’s come unstuck in 2018.

So, it’s worth reminding investors that the ETF market here is still very nascent, because of how volatile it is. We’re now seeing China A-shares inclusion. We’ll see that rise. China will become a much more material part of that because of the inclusion of ADRs. There’s a lot of volatility in the index composition that the ETF will pick up.

Asset allocationChair: Do UK pension funds know how to take advantage of the opportunities in the emerging market space today?

Wardle: The honest answer to that is that most of the pension funds don’t. Hopefully their investment consultants do. We’ve got to bear in mind that although trustees are responsible overall for the investment strategy of pension funds, most of the composition of an individual trustee body are lay trustees with not necessarily any investment experience whatsoever, hence the rise actually in professional trustees over recent years. But pension funds are still

very much reliant on the consultants.Chair: Do you think that there’s

a difference in attitudes to EM from professional trustees to the lay trustees?

Wardle: Yes, without a doubt. Lay trustees don’t like to see the volatility that can exist or does exist in EM and therefore they get scared by that. Whereas if they started to think about it in terms of how much illiquidity can they actually stand and what is their time horizon, then it wouldn’t be such a problem to them.

Fox: That’s interesting. That’s something we’re engaging with clients on now, because it’s important to have spoken with clients ahead of when there’s an actual strong buying opportunity (which we believe may be coming) to make sure that things are set up and they understand the risks and the drivers of return ahead of time, because when it comes to the actual point where you want to be buying, that isn’t the time to then educate your end client. That’s when they need to be ready to act.

Samuels: Yes, we agree with that. There’s always risks in emerging markets. There’s always a reason not to buy, but when you look back, the actual best times to buy were the Asian crisis or the Tequila crisis, something that was putting off a lot of people investing. That’s just the behavioural nature of stock markets. Your best returns are when you buy when everybody else is selling or hopefully after everybody else has sold. So, Dan [Fox] you’re right – you need to frame that earlier and try and explain that this is a long-term allocation.

The question with DB pensions, though, at the moment is do they need to take the risk in emerging markets? Because it is inherently risky. It is more volatile for sure. That hopefully then comes with an expected higher return, but actually, some UK DB pension



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schemes have found themselves in a much better space over the last year or two, so perhaps now they’re looking more at de-risking rather than actually putting on risk. EM is probably one of the last places they’ll need to go in some cases.

Wardle: It depends on how mature the particular DB scheme is. The less mature schemes with longer time horizons will still need to allocate to asset classes that could generate more return.

Samuels: Yes agreed. But then there is the DC side. If you’re a 20-year-old just entering the workforce, emerging markets have surely got to be the best place to be investing right now, based on current valuations.

Similarly, our wealth management clients need to grow a pot and therefore they need to invest in things that are going to give you a good return.

Wardle: Certainly, all the DC schemes I’m involved with will have an allocation to EM.

Mahmud: For younger investors, investing in EM can be beneficial longer term. The world is changing and if the growth continues at today’s pace, in 30, 40 years’ time, emerging markets will become more of an equal partner to developed markets.

Chair: We’ve talked about UK pension funds, but how do they compare to their European counterparts? Do European clients think differently about emerging markets?

Samuels: Our European clients seem bullish on emerging markets from a long-term point of view. They’re not really the DB pension type clients, though, they are more growth seeking and alpha focused in nature, but they do view EM positively.

Evolving strategiesChair: What are the different strategies

that come to market to assist pension funds in allocating to the EM space?

Samuels: We tend to see the same styles coming to us. We see quality growth-oriented equity managers - they are the only ones that ever bring themselves to us in the EM space. They tend to be buying the same sorts of names that are pretty richly valued. The reason they’re coming to us is because they’re the ones that have got good relative performance over the last three years.

Generally, we’re discounting them. We’re trying to find some differentiating strategies and to be differentiated, you’ve probably not had a great few years, particularly in emerging market equities. So we’re looking for people that have managed to somehow survive through a tough period and still offer a strategy that’s perhaps more valuation based, that’s perhaps smaller cap based and so on.

Fox: We’d probably all agree that clients have been underinvested in EM, if you believe the valuation story, the long-term growth story versus

developed markets. But because of the very high volatility, they’ve naturally been underinvested.

What we have seen coming to market a little bit more are strategies that try to mitigate some of that volatility and perhaps are more total return based. We see that on the credit side and also on the equity side.

For example, we have been building a strategy which does country allocation and then conducts stock-picking underneath. But it also has a hedging overlay, which naturally dampens some of that volatility and allows clients to remain invested and removes the need for excessive, expensive, trading.

Chair: Is that hedging with index futures or the currency?

Fox: That would be hedging mainly with index futures to protect when we believe markets looks vulnerable.

Mahmud: In terms of innovations and emergent trends for EM, there are three things I’m hearing. The first is ESG – there is a lot more chat about ESG in emerging markets and there have been huge improvements in ESG and



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engagement. The second is smart beta – quantitative ways of investing in the region.

Finally, I’ve been hearing from private equity managers that they’re keen on Asia for opportunities there as it is a big deep market if you know how to access it.

Chair: How important is ESG at the moment?

Wardle: It’s increasingly important, because The Pensions Regulator is putting a big emphasis on it. It will be a factor in manager selection for trustees. It won’t be the overriding factor, but it certainly will be a factor.

In answer to the strategy question, what I’m seeing is more of an interest in the absolute return type approach to EM investment rather than the traditional indexation type approach. That’s really taken off.

Bourke: As EM investors, how we invest in EM has moved forward a lot. There are now a plethora of products out there.

We launched a new product last year, which is an EM capital structure fund across just corporate debt and equities, which has got an absolute return outcome in mindset, whereby we’re targeting 4-6 per cent income plus.

We’re going out to investors saying: “This is our new product; it feels unfamiliar, but you’re asking us for innovation. We’re giving you a new

product here.” There is an educational exercise needed, to explain to them why it’s just corporate, why we think it’s an interesting way of delivering income. We also think it’s valid for maybe a DB pension scheme that’s now perhaps thinking about cash flow, more income generation.

Evolving definitionsChair: Let’s discuss frontier markets. If you have an emerging markets pot, should some be going into frontier markets?

Samuels: Given unlimited governance, then why not? Frontier markets is an interesting allocation. It’s not very well covered. It’s not very popular now. It’s barely ever mentioned, to be honest, in terms of a potential allocation, which must make it interesting on that basis.

Wardle: But it does come down to governance. From a trustee perspective, it must come down to governance.

Samuels: Exactly. At the moment, it would be a very small allocation realistically in a DB pension scheme portfolio.

Mahmud: The problem is, if you’re getting that minimal exposure, then you are exposing yourself to more risk on the return, because you’re not going to be looking at it very well. You have enough trouble looking at emerging markets. You’re unlikely to have enough time or attention to monitor small allocations to frontier markets very well. If the asset managers think there’s an opportunity, though, then delegate to let them make that decision.

Fox: I think frontier markets are probably where EM was 20-30 years ago - it’s great in that it is uncorrelated in nature and the fact it’s not covered much means that there are probably more opportunities out there. But then

it’s very difficult to allocate in size to those markets given how thin liquidity is. You have to bear that in mind when considering your overall risk.

Wardle: Thinking of it from a trustee perspective, if you went to lay trustees and told them you were going to invest in some of these frontier markets, they’d throw a compete wobbly. They wouldn’t be interested at all.

Bourke: It’s interesting to think about where the term came from and why it still exists somewhat oddly, because when you look across the EM debt investors, they don’t have this differentiation. With EM credit, whether you’re sovereign or corporate, generally it’s all one. Because there are far more countries in their indices, they often have a greater allocation to what we would call an equities frontier market i.e. Africa or in Middle East, et cetera.

I have a suspicion that MSCI has made a decision to downgrade frontier from any kind of promotion, because we’ve seen in a very rapid timeframe the decision to include and upgrade Pakistan, Argentina and now Saudi Arabia to emerging from frontier. What that leaves you with is a hollowed out definition of what frontier actually is, if the main countries in it now go into emerging.

I’ve heard rumours that the asset managers’ feedback to MSCI has been that with the rising prominence of China




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and China A shares, the index becomes far too much China and Asia Plus. You need a greater degree of balance, so how do you achieve that balance? Well, you upgrade the most mature frontier.

So the universe is expanding. It’s expanding into China A shares. It’s expanding into parts of the universe that used to be known as frontier, but are now on our radar. Pakistan for example is very interesting in that respect.

Samuels: I think MSCI have been promoting and relegating people for the last 30 years. Portugal used to be an emerging market. It’s been promoted up to DM. Greece has gone up and got relegated. Argentina’s gone up to EM, back to frontier, et cetera, so I think this is just the nature of emerging markets. It’s just one of the intriguing parts of the asset class, to be honest.

Chair: What about the blurring of the distinction between EM and DM?

Samuels: That’s been talked about for a long time as well. I remember the BRICs argument – those four economies were supposed to then be fast-tracked to be DM. None of them really have, to be fair. There are some countries that certainly look like they should be DM to me, like a Korea or a Taiwan potentially. I’ve probably been saying that for the last decade though! But EM does generally seem to behave differently to DM.

Bourke: Many investors have quizzed the blurring for a long time. Where it’s Korea and Taiwan, should they really be an emerging market definition? Probably not.

Wardle: Well, it depends whether you talk about the economy or the market, doesn’t it? In terms of the economy, Taiwan is, in terms of GDP per head, higher than some of the developed market economies. But there’s a difference between the two, isn’t there?

Bourke: That’s a very good point, because our global guys are very reluctant to envisage that their index includes Korea and Taiwan. They see that as what the EM guys do. It’s part of North Asia, and therefore heavily linked to China outcomes. So they see that as our job. They don’t want to touch it.

Samuels: In the last decade, you saw a lot of global equity investors cheating by buying emerging market names. Particularly up until the financial crisis, that was a great thing to do. There probably was a bit of blurring there, because your global equity guy was buying the same stocks as your emerging equity guy. Since then we’ve had the financial crisis. We’ve had years of EM equity underperformance. The global investors – who were tourists really in the EM world – have pretty much stepped back other than buying small allocations. The two terms have separated even more in many ways.

Chair: Looking ahead, are there any other emerging trends we are seeing?

Fox: We have spoken today about China. That’s going to continue to be a huge one. Something we touched on earlier that we are going to see increasingly is also an increased focus on ESG. That’s not unique to emerging markets by any stretch of the imagination, but I think it’s going to come into more searches encompassing

EM. Given that the data perhaps in EM is not as transparent maybe as it would be in DM, there might be more onus on the asset managers having to dig deeper.

Mahmud: The ‘G’ has always been important anyway, the governance side of how companies are run – wherever in the world they may be.

Samuels: Yes, any emerging market investor will always looks at the G. You wouldn’t buy Russia without thinking really hard about governance and things like that. I don’t think it’s too hard an answer actually for your average active emerging market manager to explain how they integrate ESG. It’s just a reframing of probably what they’ve been doing for a very long time. Social factors in South African mining have always been there; environmental factors with all the various oil companies and gas companies in emerging markets. I think most people will have a good answer. I think the job for us as allocators is to find the genuine ESG players versus the ones that are just reshaping the marketing pack a little bit.

Chair: How closely will trustees look at ESG?

Wardle: In some DC funds, if the membership of those funds is very active and very keen on ESG issues, then trustees will look at that in more detail.

Bourke: I think with ESG there’s been a quantum shift in investors’ inclusion or awareness of those factors. More and more investors are asking us how we incorporate ESG into our processes, and corporates are too. It comes up in conversation far more than it ever used to. Most EM investors have always been mindful of governance factors, but the environmental and social factors have risen in prominence. We’re very mindful of that and it’s fair to say that it’s rising in prominence and going to become more important.



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in a more meaningful way with savers have enjoyed minor success at best. He advocates more radical thinking. “We are seeing steps in this direction through simplified statements prescribed by TPR, but there is definitely more to be done,” he says.

Rather than trying to simply upgrade old systems, Finch is adamant that the pensions world needs to think more innovatively if it is going to capture people’s attention and portray a more positive image.

“If the pensions industry does want to be more appreciated by people then it needs to stop treating them as policy holders and start to treat them as customers,” he warns. “That means speaking their language and engaging with them in a way that makes sense to them.”

Innovation was one of the calling cards of the 2010-2015 coalition government, which introduced pension freedoms, now widely regarded as having had a positive effect on how people perceive pensions. However, as Altus Consulting’s head of retirement strategy Jon Dean points out, it has also, perversely enough, highlighted the ongoing deep-seated mistrust of pensions.

“Many people feel they have benefited from pension freedoms because they have been able to get their hands on more of their money earlier,” explains Dean. “However, given that many consumers are withdrawing it and putting it into bank accounts, cash or investment ISAs, this suggests many still don’t trust their pension provider like they do their bank.”

Room for optimism?The good news is that there remains a solid base to work from. Since 2010, the Office for National Statistics’ Wealth and Assets survey has consistently found that more employees identify a workplace scheme as the best way to save for their retirement than any other, with property and a personal pension the second and third most popular choices. ISAs come

in fourth. “We always talk largely about the

public being anti-pensions but I don’t agree,” Finch says. “People aren’t anti-pensions. The issue is just a lack of understanding about the full benefits that pensions can provide and the general importance of long-term savings.”

Secondsight’s business development director, Ian Bird, is also optimistic. The employee benefits company’s stance is that pensions are viewed more positively than compared to 10, or even five, years ago. He believes that the 0.75 per cent administration and investment charge cap and 1 per cent limit on exit penalties have played a significant role in this improvement. “You originally had very expensive personal pensions and some horrific penalties built into older pensions,” Bird says. “Hopefully the realisation by most people that most pensions are penalty-free has helped the industry quite a lot.”

Reducing complexity, streamlining choicesAuto-enrolment has also gone some way to building trust. Despite having an advertising campaign headed up by a D-list of celebrities, the message that pensions are secure and fully supported by employers and the government has started to seep through into individual members’ consciousness, according to Redington’s director of DC & financial wellbeing, Jonathan Parker.

“The feeling that I get from talking to clients that we advise, typically trustees, pension managers, employer representatives, is that they have definitely seen an increase in the amount of activity and questions that come through from members of their schemes over the last three years,” he says.

Another benefit of auto-enrolment is how it has stripped away some of the bewilderment that the public feel when approaching pensions. As State Street Global Advisors’ head of EMEA pensions

“Anything that makes matters simpler helps the reputation of pensions”

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industry reputation trust in pensions

and retirement strategy, Alistair Byrne, says, many people know that they need to save for retirement but struggle to do something about it, so they value the help that they get from being auto-enrolled in a good workplace scheme.

“Anything that makes matters simpler helps the reputation of pensions,” Byrne says. “There’s too much choice and people not knowing who to trust or who to go with hurts that. Auto-enrolment simplifies that. It takes away some of the decision.”

What’s more, says Royal London’s pensions specialist, Helen Morrissey, the continued growth of auto-enrolment has the ability to increase the reputation of pensions further as more people are enrolled and begin to understand the importance of tax relief and the employer contribution.

Lurking dangersThe UK’s soft compulsion regime does, however, still have some hidden dangers.

Brooks predicts that the next pensions sector’s scandal could actually emerge from its current success story. “When people start to retire on minimum contributions and find out that that’s not enough, whose fault is that going to be? Is it going to be the government’s for not getting it right? Or the industry’s for not pushing for higher rates and allowing the government to push back the auto-escalation phasing?”

Avoiding such a scenario – and making sure that it does not coincide with other bad headlines – can only be done by increasing levels of education and regulation, Morrissey says.

“We need to help people understand the importance of contribution levels, the role of fees and the consequences of their choices in retirement,” she says.

“It is also important that lessons are learned from the situations seen at BHS and Tata Steel. Sponsoring employers must understand they cannot dodge

their pension obligations and that people taking advantage of their pension freedoms are not taken advantage of by unscrupulous people. With this in mind it is important that regulators are seen to take strong action where necessary and that more work is done to make people aware of the hallmarks of scam activity. If people feel they are protected by regulators and empowered to make good decisions then they will view pensions in a more positive light.”

The ISA threatIncreasing confidence in pensions gains importance when set alongside the growing role of the ISA. This is particularly true in the case of personal pensions, whose captive audience appears to be dwindling. In contrast to its findings with the employed workforce, the ONS has discovered that self-employed people view both property and ISAs as safer bets than pensions.

Three years, ago, the Centre for Policy Studies’ research fellow Michael Johnson, called for ISAs and pensions to become blended products. Part of his reasoning was based on evidence that the lure of 20 per cent tax relief on contributions was insufficient in the eyes of many basic rate taxpayers to overcome pension products’ complexity, inflexibility, and general poor image. He also argued that pensions were “increasingly at odds” with Generation Y, which values ready access to savings above tax relief.

Then, in December 2018, workplace savings platform, Smarterly, advised by Johnson, launched what it believes to be the first Lifetime ISA available through payroll deduction. Should this become a popular employee perk over the next few years, then workplace pensions may well suffer, particularly if young scheme members start to feel the pinch from contribution auto-escalation.

With the ISA’s untainted brand on the march, the pension has much work to do.

Written by Marek Handzel, a freelance journalist

“The slow revolution taking place in pensions is leaving trustees with more questions than answers”

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Recently, I participated in a pensions debate when the host introduced me as such: “Our industry is known for being

pale, male and stale, so our next speaker is a breath of fresh air.” Despite his generous intentions, I felt a tad awkward. And not just because I am actually the palest person you’ll ever meet (blame the double-whammy of Scottish and Irish genealogy).

I also worried that his introduction unwittingly traduced the other panellists - all brilliant experts who just happened to be older males - while also focusing undue attention on my � oral skirt and youthful demeanour.

But his introduction raised some valid, if uncomfortable, issues. I o� en feel like the odd one out at these events – and I have come to understand why that is deeply problematic.

Millions of young people have been nudged into workplace pension saving since 2012 – from 24 per cent to 77 per cent of all 22-29 year olds, according to the Department for Work and Pensions. Yet the average trustee is a 54 year old university educated male, according to a 2017 report, Mapping the Trustee Landscape, by Aon Hewitt.

� ere are so many brilliant young people working in pensions today: Tech innovators, consultants, policy experts, lawyers and, yes, some pioneering trustees. Yet we experience major barriers. Few young people even know they could (and should) become trustees, let alone receive the requisite support.

Recruitment processes favour older, experienced people of a certain background, who also get picked to speak at or attend important conferences and networking events over their younger colleagues. When we do make the cut, we feel daunted, under-con� dent and isolated. � ere are few visible pathways into pensions for young people, with most falling into the industry by accident rather than design. And even someone who wants to turn (or return) to the pensions industry later on can struggle to � nd a way into this insular world.

� is has to change. Decisions about our futures are being taken by very narrow groups of people, largely without our input. How fair – or wise – is that?

And it’s not just about DC. Young people can provide much insight when working in DB too. And here is the crux: � e next generation matters because we bring fresh ideas. Our value lies not in how we look or sound, but how we think. I o� en have di� erent views from other pension commentators, maybe because I’m young, or female, or even come from a creative background, and research shows that listening to di� erent voices will ultimately improve decision-making and drive innovation. And how else will we communicate e� ectively with young auto-enrolled workers, unless those very workers are informing our approach?

� is is where Next Generation Pensions comes in. Last year, a group of young pension professionals established a voluntary initiative to encourage and promote younger voices in the industry. Around 20-25 of us have formed a committee and we have attracted dozens more members from across the pensions world.

We help each other to enter industry awards, circulate speaking invitations and refer media opportunities. � e Pensions and Lifetime Savings Association’s

last conference had an unprecedented number of young speakers, including a whole session on young trusteeship. Much of this was down to Next Gen’s e� orts. And we have already hosted two events, including an oversubscribed panel discussion at Curzon Bloomsbury – but this is just the beginning.

We want senior supporters from the industry to help us reach our key goals. We want to see more young people becoming trustees, being considered for senior positions and invited to take part in crucial debates on policy and products.

It’s going to take some time to establish mentoring, networking and career progression opportunities for the next generation, from school leavers to older career switchers. But it’s crucial that this happens, so we can foster greater representation but also create the pipeline of talent that the pensions industry urgently needs.

� ere is much to admire about the world of pensions. It takes on the complex but vital job of securing the nation’s retirement � nances. Next Gen is determined that this industry’s pro� le will accurately re� ect the nation it serves – and that my days as the millennial novelty at pension events are numbered!

Not so new

Written by Next Gen Pensions committee member and Young Money Blog founder Iona Bain

next generation spotlight

Iona Bain talks about Next Gen’s efforts to ensure

that younger people in the pensions industry are no

longer a novelty

NextGen.indd 1 07/01/2019 11:27:28


Sponsored by


Trustee Guide 2019:

The complete picture

supplement

Featuring:• The evolution of pension trusteeship• How trustees should prepare for bulk-annuity transactions• How trustees can help members understand their options• Five ways trustees can impove their pension administration • Company profiles

Trustee-guide_Jan2018.indd 1 07/01/2019 11:36:50


Guidance for pension scheme trustees on upcoming regula-tion or best practice guidelines have become a regular feature

of fi nancial sector coverage. With news that the long-awaited pensions dashboard is fi nally set to launch in 2019, further additions are promised to an already lengthy list of duties and responsibilities.

As Independent Trustee Services (ITS) director, Rachel Croft , notes, the typical trustee of an occupational pension scheme 20 years ago would be astonished by today’s additional demands on a trustee board. Croft adds that openly asking the sponsoring employer of a DB scheme whether they were both willing and able to meet its cost would still have been considered as beyond the pale. Only over the past decade has it become an essential question.

“Th e trustee’s role has, of necessity, become more onerous,” Croft says. “While that might also make it less attractive for some, we see very many lay trustees who are ready and able to rise to the challenge and add value to the board, whether they be company-appointed, member-appointed or independent.”

Th e balance of hard and soft skills required by the 21st century trustee has also evolved, Aon partner and principal consultant, Susan Hoare, says. “Th e skill set traditionally required of trustees – and which we would have looked for ourselves – focused on the knowledge and understanding of their duties and responsibilities, as set out by Th e Pensions Regulator (TPR). Th is meant we had very technically-focused candidates.

“Th e role’s very diff erent to that now and has become more high-level. We’re looking more for people who can drive forward strategy and are able to think longer term.” Th e selection process involves reviewing the personality profi les of trustee board members, asking which particular skills either are missing or need reinforcing and which areas succession planning and future recruitment should focus on.

“Once you’ve picked these out, then you start to advertise the role somewhat diff erently,” Hoare notes. “So if the trustee board doesn’t have the communications aspect covered, you’d include it in your succession plan, and, when advertising, state that you’re looking for someone with good communication skills.”

Encouraging soft skillsTh e Pensions Management Institute (PMI) president, Lesley Carline, who was appointed last July, believes that the duty of the professional pension trustee to always act in an appropriate manner means that running the trustee board is increasingly similar to running the company board. Th is makes it unsuitable

for any individual approaching or at retirement and seeking to scale back their activities. Instead, it is more of a career choice and “the make-up of the trustee board should refl ect the same diversity – and the same skill sets – as that of the main board,” she suggests.

TPR, which in 2016 announced a programme to raise governance standards across all pensions schemes, has been developing an accreditation programme that professional trustees will be expected to achieve. Launching later this year, it will take account of trustees’ soft er skills in addition to their measurable knowledge and “the PMI will be part of the process, which will mean greater uptake of our qualifi cations,” Carline says. “Th e programme is voluntary, yet at the same time it will be pushed hard by the regulator.

“It’s welcome as many trustee boards have professional trustees as members, although non-professional trustees can also apply for accreditation. So if the board is looking to make an appointment, they should make an individual who’s accredited their fi rst choice.”

Aon is one of a number of advisers that has developed new tools for trustees with the expressed aim to “balance delivering routine and compliance items as well as tackling the actions to deliver their longer term strategy.” Its team has worked both with colleagues in the group’s Talent & Reward practice and behavioural insight agency Behave London to develop tools addressing specifi c areas that include 10 questions for trustees to put to their advisers; a framework for trustee meetings; a behavioural checklist for chairing meetings; and a ‘better boards’ research paper.

“Over the past 18 months, we’ve also worked with Cass Business School on the broader skills that trustees would benefi t from and how we can make some of this available to them,” Hoare says. “Together with the leadership programme within Cass, we’ve off ered topics such as how to


trusteeship

Today’s ideal pension scheme trustee will demonstrate a mix of ‘hard’ and ‘soft’ skills as the technical aspect becomes less central, reports Graham Buck

Rising to the

challenge



trusteeship


develop better negotiating skills via a free one-hour breakfast seminar.

“It’s a topic we’re looking to revisit in the first quarter of 2019 to coincide with people having valuations around the time of the UK’s exit from the European Union, when negotiations on funding positions will be key.”

New challengesCroft reports that a couple more trends have been evident in recent years. One is the increase in sole trusteeships instead of the traditional board composed of member-appointed, company-appointed and independent trustees. “Many organisations are looking to appoint a professional person and have him/her serve as the sole trustee and run the board,” she says.

Another, seen in “a sprinkling of cases” is where the trustee board delegates to the independent trustee specific duties and responsibilities they think he/she is well-placed to perform. “That can work very well, for example, for the trickier negotiations with the company such as on scheme funding levels.”

Another likely challenge for trustees in 2019 will be in the area of investment, where deciding strategy has already become more demanding. At the same time, as Carline observes “the halcyon days of strong investment returns appear to be ending” with stock markets recently ending their prolonged bull run.

“True investment risks have become more discussed among trustee boards and dug into in greater detail – often due to lower funding levels and perhaps weak employer covenants,” Croft notes. “In other cases it can be because schemes are getting closer to self-sufficiency, which means considering what that means in terms of residual investment risk.

“Along with greater appreciation of investment risk and its impact, there’s also greater complexity in solutions available from the market and the options for asset allocation.”

Countering this has been the growth of fiduciary management solutions, which has involved trustee board members in agreeing the scheme’s long-term objectives and risk parameters with the fiduciary manager – and then monitoring performance against those objectives – which “can be a better use of the board’s time and easier for members to grasp”.

Last July saw the Competition and Markets Authority (CMA) issue its proposed pension investment reforms and underline its belief in environmental, social and governance (ESG) policies to guide appropriate investment strategy, an indication that deciding appropriate investment strategy is to become more challenging.

Will the advent of the pensions dashboard – in particular the duty of trustees to inform members of their benefits and about the scheme – also

make an impact? “DC scheme trustees have a head start as they’re already well aware of the challenges and most trustee boards have been thinking about how best to communicate with their members,” Croft says. “There is a variety of great solutions out there involving technology.

“DB scheme trustees might struggle a little more with the challenges, because firstly it poses the question of ‘what do you say?’ – it’s all around messaging – and secondly how do you provide access to the right technology?”

Appealing or repelling?A deteriorating economic outlook suggests that there may be further corporate casualties over the coming months in industries such as retail. Carline says that it’s incumbent for scheme trustees of companies that look potentially vulnerable to work both with the employer and TPR and note lessons learned from the demise of Carillion and British Home Stores (BHS).

Lastly, given that the trustee’s role has become more onerous, has that also made it unattractive? In some cases, it continues to be a struggle to get the right people to put themselves forward for member-nominated trustee positions – and even employer-appointed positions,” Croft admits.

“But the reverse is also true. So using the right kind of language and making the role sound as it is – an interesting challenge – actually has an appeal for many individuals. So in certain cases we’re seeing increased numbers of candidates for member-nominated trustee positions.”

Hoare agrees that the situation isn’t all gloom. “I regularly hear of companies who use the pension scheme as a way to bring on their high flyers and help them learn boardroom skills around operating as a director.”

Summary• The skillset needed to be a 21st century trustee has evolved from times gone by, with the role now requiring a mix of technical and soft skills. • A trustee board should reflect the same diversity, and skill-set, as the main board, and becoming a trustee is more of a career choice now. • There has been an increase in sole trusteeships in recent years, and schemes delegating certain duties to independent trustees. • Investment has become a bigger challenge for trustees recently, due to market volatility. • With such challenges, it can be hard to get the right people to put themselves forward to be a trustee, but companies are appointing high flyers to the role, as a way of teaching them boardroom skills.

Written by Graham Buck, a freelance journalist



Trying to predict the future is a thankless task at the best of times, but never more so than the present, with Brexit

continuing to cast a shadow over events. However, any attempt to explore trends for 2019 has to begin by firstly addressing this.

BrexitIt’s hard to know what the impact of Brexit will be from where we are today, but for Aviva’s defined benefit team managing director Tom Ground, whatever the next steps in the process may be, there will likely be an increasing near-term turbulence for those trying to de-risk their DB pension scheme.

Pricing levels are likely to fluctuate throughout the year, but this presents opportunities for well-prepared trustees who are ready to transact. Looking to the longer term, both hard and soft Brexit bring uncertainty and the potential for further volatility in asset prices – either through changes of spreads on corporate credit, future volatility in equity markets or through the market impact of any potential future Quantitative Easing in the face of a hard Brexit. Having said that, much of this is already factored in but there is potential scope for further ‘unexpected news’ that drives market volatility.

Of course, we should remember that Brexit-fuelled uncertainty is hardly a new trend for 2019 and Ground believes it’s

no reason for trustees to step back from de-risking plans. In reality, its more a case of existing trends continuing from the past year into this: 2018 saw a record-breaking £30 billion in de-risking deals executed.

“Regardless of how Brexit plays out”, Ground explains, “Insurers have the scale of funds and investment expertise to monitor risk and react quickly, delivering the certainty of results their end pensioners deserve”.

De-risking volumeIn spite of the familiar uncertainties, there is also cause to look forward to the year ahead with something approaching genuine excitement. Ground is quick to note that there is a strong pipeline of de-risking deals at present – a higher number in fact than this time last year.

According to Ground, a conservative

projection for deal volumes coming to market next year would be in excess of £40 billion – exceeding the record-breaking year of 2018. This is expected to comprise a larger number of deals coming through earlier in the year compared to this time last year.

This, Ground attributes to the favourable deal execution backdrop experienced in 2018 carrying on into 2019 – that of schemes having enjoyed a “good run” on investments, combined with a slowdown in member longevity increases, seeing attractive pricing creating the right environment to remove risk.

Another trend that raised its head as 2018 progressed and may well develop further in 2019 thanks to new players entering the market and the on-going government consultation, is DB consolidation. The focus of this initiative is on helping schemes that are unlikely to achieve buyout in the current environment.

According to Ground, Aviva recognises the potential benefits of consolidation but emphasises the requirement for a robust regulatory framework. As the potential consolidation market continues to develop, trustees will need to consider the potential risk of exposing members to a new structure against the potential benefits superfunds could provide through lower running costs and potentially enhanced levels of

Be prepared for interesting times

Aviva explores how 2019 is set to be another record-breaking year for the pension de-risking market, despite market volatility, and how trustees can adequately prepare for bulk annuity transactions.


Aviva



Aviva


management professionalism. While the superfund market is

expected to continue to develop over the year, Ground believes that 2019 will be too early to really see what impact DB superfunds might have on the bulk annuity sector.

Going largeIt may be early days for consolidators or superfunds, but their emergence is indicative of the wider trend across the retirement savings market where the DC market appears to be following an agenda of ‘bigger is better’.

Th is love of all things large is expected to show itself within the bulk annuity market this year. Ground noted that around 90 per cent of current deal pipeline is for ‘larger’ transactions (over £500 million) compared with circa 60 per cent at the same time last year.

Th is isn’t surprising, as ‘large’ DB schemes “represent circa 70 per cent of total liabilities”, Ground explains. “We are just beginning to see the emergence of ‘large’ schemes looking to de-risk. Previously, they may not have seen insurance de-risking options as relevant to them. But, following a good run on investments over the past 10 years, more and more schemes are now concluding that now is a good time for removing DB liabilities by entering into a de-risking trade with an insurer.”

However, given the scale of ‘large’ sized DB schemes looking to de-risk, is there a chance that smaller ones may be overlooked by insurers? Not at Aviva. It has always been a ‘whole of market’ insurer, so while a portion of the team focus on helping larger DB schemes looking to de-risk, Aviva is still focussed on catering for the needs of smaller-sized schemes - “it’s business as usual”, he says.

To ensure this remains the case going forward, Aviva continues to drive initiatives to streamline the quote and administration processes to ensure it can continue to service the whole of market in an eff ective way for all parties.

PreparationTh e sheer volume of activity next year means insurers will need to be more selective to manage their pipelines throughout the year.

With more ‘large’ schemes now entering the de-risking market and attracting attention, ‘smaller’ schemes may need to make eff orts to stand out to insurers. Th ose ‘smaller’ schemes that are best prepared, with clean data and a clear de-risking strategy on which all stakeholders are aligned, will be most attractive to insurers, Ground advises. Exclusivity and streamlined processes on smaller deals are likely to be a feature in 2019.

In addition, in preparation for a buyout, schemes generally try to make their investment portfolio ‘attractive’ to insurers. By working with schemes of all sizes, Aviva is well-placed to give insight and guidance to those schemes ‘large’ and ‘small’ looking to de-risk.

Ground also highlights that ‘larger’ schemes have tended to go more ‘off piste’ with their asset allocation strategies in the past, for instance by holding illiquid assets that are hard to transfer to insurers. “Tidying up a large scheme’s portfolio in preparation for buyout can involve far more ‘heavy lift ing’ compared to small schemes, which can in turn, cause delays”, he warns. However, help is at hand. Ground suggests speaking to insurers early in the process to agree what a good outcome looks like and then work

together towards that goal. Ultimately, he says, trustees of schemes of all sizes need to think holistically about the potential transaction.

Looking at the bulk annuity market as a whole, Ground predicts that investment markets will be more volatile than in previous years. Th erefore, schemes should consider positioning themselves to transact de-risking deals quickly. An “extended price lock where assets are tidied up to match insurers pricing before the transaction completes, will be more problematic (and expensive) in a volatile market”, he warns.

So, ‘large’ pension funds are expected to dominate a record breaking year for the de-risking sector generating headlines, while ‘small’ schemes continue to quietly remove DB liabilities through bulk annuity transactions away from the public eye. Schemes of all sizes will need to be able to navigate volatile markets while executing these transactions. Th e future may always be uncertain, but one thing seems clear; the de-risking market will undoubtedly be living through interesting times in 2019.

In association with

Tom Ground is the managing director of Aviva’s Defi ned Benefi ts Solution Team



Latest insights are a worrying sign that there is a continued lack of understanding around the pension freedoms. Research

shows that the over-55s spend more time buying a car than deciding how to use their pension, and that 23 per cent of individuals are unclear about what represents ‘good value’ on the income from their pension. Th e FCA also found in the last report of its Retirement Outcome Review series that 62 per cent of individuals in drawdown were unsure, or had only a broad idea, where they were invested.

Our own research found that 61 per cent of employers believe that their employees are unaware of the risks they face when accessing their retirement savings. So, with this in mind, let’s take a look at some of these risks and consider their impact.

Paying too much taxOver a quarter (27 per cent) of individuals over the age of 55 didn’t

realise that they have to pay tax on their pensions if they take the whole fund as a cash lump sum. Th is lack of awareness perhaps suggests why the Offi ce for Budget Responsibility recently reported that the revenues raised from the pension freedoms in 2018 will be 50 per cent more than forecast and indicates that individuals are oft en paying tax when it could have been avoided with careful planning.

Scams are rifeNot only this, members face the continuous threat of pension scams, which have been rife since pension freedoms came into place. Th e FCA reported a fi ve-fold rise in pension scam enquiries over a 55 day period last summer with 173,000 individuals visiting the ScamSmart website. It also estimated that victims of pension fraud lost on average £91,000 each in 2017. So whatever members are planning to do with their retirement savings, it’s really important that they

understand the risk of scams and how to protect themselves.

Many are hoping that the new legislation to make pension cold calling illegal, will help the situation. However, members will still need to be alert as it’s not going to stop all fraudsters including those who are calling from overseas. Members need to understand that taking regulated advice and getting the additional consumer protection it off ers should not be underestimated.

Defaults at-retirementSome in the pensions industry

Th e big gaps at-retirement There is no doubt that

freedom and choice in pensions is liked by members, yet this has also increased the risks and complexity for all pension stakeholders. Members now face a whole host of issues such as falling for a scam, paying more tax than necessary, running out of money in retirement and not understanding the risks around defi ned benefi t pension transfers. Jonathan Watts-Lay, director, WEALTH at work discusses these issues and addresses the big gaps at-retirement


WEALTH at work



WEALTH at work


have the view that default retirement pathways o� er the solution to protecting individuals from making poor investment and decumulation choices. But in reality, I don’t believe anyone should be defaulted at-retirement without some type of guidance and a proactive decision being made.

Speaking at the Personal Investment Management and Financial Advice Association annual conference, the Treasury Select Committee chair Nicky Morgan called for the introduction of default guidance before individuals are allowed to access their pensions.

� is stance was supported in a recent poll by WEALTH at work which found that 86 per cent of respondents believe that employees should not be defaulted into a decumulation pathway at-retirement without � nancial guidance.

A� er all, defaulting individuals into something without a positive choice being made raises questions over if it is actually within the pension provider or the member’s best interest. Many will argue that it’s a win for the provider because they keep hold of the member’s assets but it may not be a great option for the member.

Not only this, there’s a danger that freedom and choice in pensions will be destroyed if individuals don’t make active choices at-retirement. And, as many retirees will have more than one pension, if they all default based on individual pots rather than the collective value, the likely outcome for many will be sub-optimal and less income at-retirement.

Default retirement pathways also discourage shopping around, which again suggests the winners are the providers. Consequently, many could end up with less money in their pocket at-retirement than could have been the case. For example, the FCA found last year that those who go into income drawdown could increase their annual income by 13 per cent by switching from a higher cost provider to a lower cost provider.

DB pension transfersBut there is another consequence of the pension freedoms which is impacting many.

De� ned bene� t (DB) pension transfer failures involving BHS, British Steel and Carillion have hit the headlines over recent times, bringing the support that members receive under the spotlight.

� is was followed by much scrutiny of the advice given to members to transfer, with much of it being deemed unsuitable by the FCA.

Elsewhere ‘high’ transfer values are seeing other DB scheme members transferring to DC pensions, and inheriting the future risks involved in managing pension savings and retirement income such as longevity, in� ation, tax and investment risk.

Even though regulated advice must be sought to transfer a DB pension if its value is £30,000 or above, there is no requirement to take ongoing advice once the transfer has been made and no guarantees that future income needs will be met unless the transferred money is managed well.

� e numbers who su� er these risks are likely to be exacerbated by members with transfer values of less than £30,000, as they don’t need to take advice on the initial transfer or on how to manage the money going forward.

O� ering partial transfers can be an e� cient way for schemes to manage liabilities and can also help members avoid the cli� edge of total transfer or no transfer. At the moment only about 15 per cent of schemes o� er it but there is certainly an appetite for this. For example, we carried out a poll during a recent trustee and employer event which found that 85 per cent of respondents thought that all DB schemes should allow partial transfers.

Guiding the wayAll these issues lead to one solution for me.

Before any decisions are made at-retirement, individuals really need to

understand what their options are and the generic advantages and disadvantages of these, as well as considering any associated risks such as tax ine� ciency, longevity or losing money to scams.

Financial education and guidance at-retirement can help with this and will enable members to make informed choices, including being able to decide if they need further support such as regulated advice.

Although there are concerns over the take-up of Pension Wise, 9 in 10 customers who have received guidance are satis� ed with their experience of the service overall. Our experience is that following � nancial education and guidance, individuals emerge more con� dent, knowledgeable and more able to make informed decisions; it has been no surprise to see signi� cant numbers changing their retirement plans, increasing pension contributions and seeking out regulated advice as a result.

Trustees have buying power and access to professional advice from consultants and so are perfectly placed to facilitate access to a breadth of services to help members fully understand their options. � is would ensure that any support provided is by a � rm who has been subject to thorough due diligence including ensuring robust compliance processes, as well as agreeing consistent and fair pricing.

Whilst there are schemes doing this now – there are still big gaps in the support available for members. � erefore, we are calling for trustees to take note and make � nancial education, guidance and regulated advice the norm.

In association with

Written by Jonathan Watts-Lay, director, WEALTH at work



Administration gets tougher every year. Changes in legislation, data security issues, increasing member

choice, all add to the pressure felt by administration teams that are already being stretched. And on top of that, members now expect levels of service that reflect their experience of retail finance and insurance. If they’re not met, their trust in their pension is eroded. And all the time, sponsors are looking for greater efficiencies and the media’s scrutiny of schemes intensifies.

Here are five ways schemes can work with their administrator to improve both member experience and efficiency.

1. Anticipate changeLegislative change is a fact of life. Pension freedoms, rulings around GMP equalisation, the latest Statement of Recommended Practice (SORP), are just a few of the changes that add to the administration burden. Add in GDPR and preparations for the pensions dashboard and it’s easy to see why workloads are about to soar.

These changes have big implications for systems, processes and communication. That’s why it’s important to make sure you have people with the insights and experience to anticipate and prepare for change rather than just react to it. It’s also why schemes need to make sure that the different disciplines are working together effectively and seamlessly. Do you have all the right

people in place? Do you need to find technical, systems, administration or project management specialists to improve your in-house team? Given the need for specialist skills, would it be better to outsource some or all of your administration to a team of specialists? If you already outsource, are you making the most of your provider’s expertise?

Make sure your scheme has the skills, experience and resources it needs to anticipate industry changes. That way, you can be proactive rather than reactive and adapt in time to handle them.

2. Interrogate your technologyPensions aren’t immune to advances in technology or shifts in the way people interact with it. But we often lag behind best practice. So future-proof your systems – from your communication channels to the platforms that underpin your operations. Ask some tough

questions.• Canyoursystemskeepupwith legislation changes?• Cantheyreachmembersintheway that members want?• Aretheyflexibleenoughtointerface with other systems?• Cantheycopewithmembers’ increasing demand for digital communication?

And, if you’re using multiple platforms, weigh up the cost and benefits of investing in a single, integrated system.

Recently, we helped a pension scheme create an automated function that allowed members to request and receive information online. This meant members got what they needed in two hours instead of two days. It also freed up the customer service team to deliver more valuable work. Investing in technology like this doesn’t just improve the member experience, it can also free

This year, resolve to make your good administration great

Geraldine Brassett, client relationship director at Capita, proposes five New Year resolutions to help your pension administration get into great shape in 2019


Capita



Capita


also free up vital resources. Whatever state your technology

is in, put together a clear roadmap for developing it, covering levels of investment, functionality, digitisation and cyber-security risks.

3. Scrutinise your dataPension schemes hold huge amounts of member data. But it isn’t always accurate. And too oft en these inaccuracies only come to light when there’s an urgent need to contact members about a problem they’re facing or a choice they need to make. Recent rulings around GMP equalisation are likely to uncover data shortcomings in many schemes that have so far gone unnoticed. One problem can be a scheme’s approach to tracing its members:

• 1in4schemeseitherdon’tactively trace members or have no formal process in place• 1in8schemesuseonlytheDWPto trace members• 28percentofschemeswithassets over £300 million don’t use a specialist tracing agency

As a result, schemes are at risk of not paying members or of making fraudulent payments. Th ey can also fail to update members about their benefi ts, investment performance and retirement options.

Just like groceries, data has a shelf-life. Th e moment you do a data cleanse or update, it begins to ‘go off ’. And as the workforce becomes increasingly mobile–25percentof25-34-year-oldshave already amassed six employers – the need to keep on top of data becomes even more important.

So, don’t just regularly check your data, but continuously monitor and update it. And if you haven’t assessed your data in the past two years, don’t put it off any longer.

4. Put members in the picturePension freedoms mean members have more choices to make about their future

than ever before. It’s our job to help them. Our surveys consistently reveal that almost half of employees fi nd pension terminology to be complicated and confusing. But improving the language we use is just the fi rst step.

We need to fi nd out more about what people need from us – as opposed to what we think they need. We also need to identify demographic splits. For instance, oursurveyshowsthat47percentof16-34year-oldswouldlikepensionscommunications quarterly, but this drops to14percentforover55s.Similarly,research suggests many members now prefer to get communications digitally.

Member feedback can help you work out what people need to hear and how they want to hear it. Microsites – small, tactical websites designed for a particular audience – are a great and increasingly aff ordable way to help members engage with their scheme. Th ey can be easily tailored to the needs of just one group of members – actives, deferreds, even potential employees – and accommodate interactive tools and modellers that help build people’s confi dence around decision making.

But there are simpler ways of helping people too. One of the most eff ective ways to reach members is email. In a recent campaign for Sky, we sent out adevice-responsiveemailto12,851employees.57percentofthemopenedit and over 2,000 of those people clicked through to fi nd out more. Th is compares to an industry average email open rate of just 21.5 per cent and a click-through rate of2.4percent.

Th e more you know about members, the more targeted and tailored your communications can be. Once you understand your members, put metrics in place to measure their behaviours. You can then evaluate your communication strategy based on the changes in behaviour that it’s delivering – or failing to deliver.

5. Increase value for moneyWhether schemes are administered in-

house, by a third party or a mixture of both, they’re increasingly under board scrutiny. Th is is particularly true of larger schemes. In a recent survey, we found that all 36 schemes with assets over £300 million had faced pressure from their boards to reduce costs. And only one in fi ve schemes with assets under £300 million said they hadn’t faced this pressure.

To reduce that pressure, schemes need to ask themselves:

• Couldtimeandmoneybesavedby using a single third-party provider rather than multiple providers, or by outsourcing more services? • Isthereanopportunitytocontainand predict outsourcing costs by clearly defi ning core services, capping transactions or changing how your provider charges for non-core work?• Couldcommunicationcostsbe reduced by moving from print to digital and by adopting industry- standard communications, like the new Standard Annual Statement?

To keep cost down and quality up, look to use industry standard processes where possible, question budgets regularly and look for economies of scale.

Th ese resolutions aren’t just for 2019 Whether you’re looking to improve your technology, your teams, your communications – or all of these – it’s important to reassess them regularly. Th is isn’t a one-off to do list, it’s a yearly, quarterly, or even monthly checklist. It will help you stay ahead of the challenges your scheme faces in 2019 and in the years to come.

In association with

Written by Geraldine Brassett, client relationship director, Capita




profiles

AvivaAt Aviva, we provide life insurance, general insurance, health insurance and asset management to 33 million customers worldwide. We’re one of the UK’s largest insurers and a leading supplier of services to the corporate marketplace, servicing 5 million customers, including 21 per cent of the workplace pensions market.

Aviva Investors – our asset management business – provides asset management services both internally and to external clients, and currently manages around £350 billion in assets.

A financially strong companyWe take a prudent approach to capital management and have a strong regulatory balance sheet with Solvency II coverage of 187 per cent for Aviva plc (H1 2018).

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WEALTH at workWEALTH at work is a specialist provider of financial education and guidance in the workplace supported by regulated advice for individuals.

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CAPITACapita is a leading provider of technology enabled business services.

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Capita is the UK’s largest outsourcer and pensions administrator. We help organisations fulfil all of their pension requirements; from managing pension risks to supporting and engaging their pension scheme members.

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expertise from investment and administration to actuarial and risk management strategies.

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Pensions AgePensions Age is the leading title targeting UK pension funds and their consultants. Published monthly in print since 1996, and daily online, we invest heavily in our circulation and content to ensure we are the clear market leading title. Our in-house editorial team of Francesca Fabrizi (Editor in Chief), Laura Blows (Editor), Natalie Tuck (Deputy Editor), Theo Andrew (Senior Reporter), Jack Gray (Reporter) and Sunniva Kolostyak (Reporter) ensure we cover the latest news and topical industry issues to help our readers make the best informed decisions.

www.pensionsage.com is the leading website for pension funds, and we look to cover the breaking stories as they happen. With over 24,000 subscribers to our email newsletter service; we offer our readers an unrivalled service. At the core of this is high quality, news-breaking journalism combined with in-depth knowledge of

the target market and heavy research into data.

Pensions Age also runs highly successful conferences, and the Pensions Age Awards.

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PPF video interview


The Purple Book provides an annual overview of the PPF-relevant DB landscape. What would you say were the key findings for this latest version? For instance, I was quite pleasantly surprised to see that the aggregate funding levels had improved. The Purple Book is something the PPF publishes every year. It’s very useful for us for analysing some of the risks we as an organisation face and we do hope it’s helpful to others as well. It is very encouraging to see funding levels improve. I think it’s worth noting that this is at a particular point in time and funding levels over the past few years have been quite volatile. But it is good that March 2018 compared with March 2017 has been an improvement.

That has come from broadly two things. One is the influence of the markets and in particular the movements in gilt yields that have happened over the past year, meaning we have seen liability values fall, which has been encouraging. Equity markets and risky assets in general have also improved, so that has helped on the asset side, and the funding level is the difference between those two.

Another thing that has happened is

that we have updated our assumptions, in particular relating to improvements in longevity, which has shown some increase in the funding level, as well as some new data that has come through that we use to prepare these figures.

On the subject of assumptions, many of your viewers may have seen that we’ve been consulting on new assumptions over the past year. The figures that we are looking at in this book do not reflect these new assumptions and there has actually been some further improvements in funding levels that come from further updates, which was apparent in early December when we published the PPF 7800 Index for November 2018, which does show a further increase in funding levels.

So that all sounds very positive, but at the same time there is still a lot of risk out there. At the PPF we are providing

protection for almost 5,500 DB schemes and a significant number of those remain in deficit. Even with the new assumptions I mentioned, we are seeing 3,200 schemes in deficit of almost £150 billion. So there is still a lot of risk in the DB universe. So the PPF is still pleased to be here to protect them.

You mentioned about the risks the PPF faces and how the Purple Book helps you analyse what those risks are. However I believe when this latest version was launched you had said about being careful not to lose sight of the challenges ahead. What challenges do you mean?I mentioned a couple of things, such as scheme funding positions and interest rates, which have been very volatile over the past few years. If we were to go back to summer 2016, just after the

Laura Blows speaks to the Pension Protection Fund’s chief financial officer Andy McKinnon about the latest version of the PPF’s Purple Book

PPF purple trends Laura BlowsEditor, Pensions Age

Andy McKinnonChief Financial Officer

PPFVidInterview.indd 1 07/01/2019 11:49:24



Brexit referendum, we were looking at a combined deficit of over £400 billion at that point in time. So certainly the yield environment has since been a little bit more benign but remains unpredictable. Also I mentioned improvement in asset values has helped scheme funding positions. But over the past 10 years we have seen a bull run of asset values continuing to increase. I suppose many would say that it can’t go on forever, but over the past few months even, things have got a bit more volatile in the markets, so it would be difficult to forecast what may happen in the future with asset values, so there are still risks there.

The PPF is in the business of protecting schemes when sponsoring companies become insolvent, so we are very dependent on the economic environment. It is fair to say that we do live in slightly uncertain times and it might be difficult to predict what might happen in the future to the companies that actually sponsor the schemes.

So I think there is still a lot of uncertainty, and with a combined deficit of around £150 billion, there is still a lot of risk in the system and therefore we continue to be cautious.

Sponsoring companies becoming insolvent is a very high-profile example of the risks that you face, and in recent years there have been a number played out in the news. Every time a high-profile example has occurred, the PPF has always expressed its strength and confidence in absorbing these liabilities. However, the fact there has been so many over the past couple of years or so, is that making the PPF’s view start to change? For instance I believe your chief executive, following the Johnston Press case, mentioned his concerns for schemes being ‘dumped’ into the PPF. What are your views on this?We have shown some data on insolvency rates in the PPF, which confirm that over the past few years, insolvency rates have in fact been lower. But that’s numbers of insolvencies and recently there has been

some very high-profile and large schemes. The PPF is financially strong; we have assets in excess of £30 billion that we are managing currently, and we model our risks over a long period of time and we do assume over time that some large deficits will come in. That’s what we are here to do. It is fair to say that we cannot have unlimited capacity but our modelling looks at a very wide range of scenarios. We use a long-term risk model, which models almost a million credit risk and insolvency scenarios and in the significant majority of those we continue to be funded as we would hope to be.

You mentioned the comments about Johnston Press and pre-packs. Pre-packs are not a large part of the landscape that we operate in and there are lots of circumstances where that is an appropriate way of restructuring a company. We will naturally be concerned if we think that particular route is being used in any way to leave a pension fund with us unless there isn’t a better alternative, but in general there are lots of circumstances where that is appropriate.

Another trend that emerged in this latest version of the Purple Book was that it revealed the highest number of transfers, from DB schemes to DC schemes, to have occured since the launch of freedom and choice a few years ago. What impact do you think this may have on DB schemes? On the one side it may remove some liabilities for them but on the other side, may it cause cashflow constraints?Of course if the asset outflow of schemes is changing significantly, that is something trustees would have to reflect in managing the schemes, and in particular scheme actuaries have to determine precisely what values will be given to individuals transferring out. But in terms of the overall universe, whilst the level of transfers out does look high - £10.6 billion in the first quarter of 2018 is a significant figure - we have to put that in the context of £10.6 trillion of liabilities as a whole. So it is a long

way from significantly changing the pensions landscape.

But for individuals, it sometimes can be difficult to appreciate the value of the guarantee that comes with a DB pension and it often isn’t the case that it would be best advice for individuals to transfer out. I would say for anyone considering this to think very carefully and to take some good-quality advice as to whether it is right for them.

Another trend that has occured over the past year is that of DB consolidation and I’m sure it is something the Purple Book will be looking at in future editions. As it is still early days it is difficult to predict how it may shape the future DB landscape. However, would you care to try?There are a number of organisations that are looking to bring consolidation propositions to market. Certainly none of that activity is yet reflected in the Purple Book. We have had close conversations with several of those firms and certainly there were several interesting ideas. But we have yet to see any live transaction come to market. From the PPF’s perspective, we welcome another opportunity for pensions to get the best value out of their schemes. There certainly is a role for consolidators; it will be interesting to see how that landscape develops. But it is very important that those schemes are well managed, well funded and in particular, well regulated. The regulator has put a consultation out on that recently.

From the PPF’s perspective, we will have to make sure that we do charge a fair and proportionate levy on those schemes, fair relative to the risks they pose to us, and to continue to ensure we charge a fair levy for all of the schemes in the PPF universe. That’s important for us and for the schemes we protect and we will continue to be able to do that for many years to come. So yes, I do think we live in interesting times.

To watch this video, please visit pensionsage.com

video interview PPF

PPFVidInterview.indd 2 08/01/2019 15:06:12



Pasa interview


How important is technology for the progression of pension administration?Technology is moving so quickly at the moment that you can’t ignore it. What we want to try and bring into the administration space is a bit of real world. You see pockets of technology being leveraged by administrators to deliver good administration but there’s still an awful lot of administrators which are quite old school. People, particularly members, need to have a choice of connections and you can only really do that if you have intelligent technology. So whilst we are focusing on the technology, people are just as important and you need both. That’s what’s important: What sort of things are being used and how those things are being used.

However, you can have two administrators use the same system and they use it in a different way. One effectively uses it as a repository, the other might use all of the functionality and the enrichment within that, so they are able to deliver is much more. We just want to bring out the best practise.

Would you recommend certain types of technology and how to use them?We would steer clear of advising on

particular technologies, but certainly some of the things we are looking to explore is, when you are using a certain kind of technology, what the key things you can do are. We shouldn’t dictate things like you must use technology, or you must have qualified people as long as the outcomes are ‘this’, because we are trying to create a level playing field across all administrators. Say you don’t use technology, some of the smaller in house departments could leverage some of the technology that their sponsoring employer could use. That’s one thing you will hear quite a lot about in the near future.

One of the things, particularly with DC, is you have around 30,000 schemes and a lot of them are small. Many of them don’t know whether they’re doing enough or not. It’s like: Who to ask, what to ask, what’s to be expected, things like that. So that will be developed as the data working group starts to deliver its outcomes, we will make sure that the data piece within the DC guide takes on board anything that’s different. We don’t want to have this piece of discreet guidance and that piece of discreet guidance, with the data saying one thing in there and something different in the other, we need to make sure we have a

consistent message and that’s actually quite difficult to do.

So it’s not one size fits all in administration? The difficulty in the past is, if clients say ‘I know you do things one way but I want to do this and that’, and administrators have been a bit too accommodating, when you look at schemes that have got legacy, you find that things are difficult to track. So you can’t have standardisation without automation. We had our strategy day earlier this year, thinking about all these wonderful things and it comes down to if you do not have good data you can’t automate, you can’t do all those wonderful things. So you have to come down to the boring stuff.

You talk to big administrators, they might say a class of 400 members is not big enough to automate, but if you talk to another admin they will take a whole scheme on and automate the lot. They say that if there’s calculations that are complex and low volume, quite often they won’t be automated within the systems. But it’s trying to encourage them that automation can be utilised, so you can have a direct feed out and a direct feed in to stop that.

Data is the name of game

Jack Gray talks to the chair of the Pensions Administration Standards Association (Pasa), Kim Gubler, about the importance of available and accurate data, how technology can improve pension administration and what the future holds for Pasa

68-69_interview.indd 1 08/01/2019 15:23:08


Have you seen much progress?Data is improving but if you speak to TPR it is not improving quickly enough. Th ere is still lots to be done and trying to encourage administrators to be able to facilitate that can be diffi cult because it generally has a cost to it. Trustees in particular will say, ‘why is the data so poor? It’s not my fault so why should I pay for it?’ It’s almost like we have to draw a line under that because poor data can be down to the employer, it can be down to administrator, or it could even be down to an administrator 12 years ago.

See it as an investment rather than a cost, because if you’re putting the data right, it might cost a bit, but there’s been examples where people may have paid a few thousand pounds for a data exercise and it’s reduced their liabilities by £10 million. Until you move peoples’ perspective to that it is an investment, you can’t have that conversation.

Is this your initiative at the moment?It underpins absolutely everything that we do. It may not be sexy but it is vital.

What do people need to do to be

ready for the dashboard?It’s something we want to get as right as possible the fi rst time so it’s useful, but it might not have everything. If we wait until it’s perfect we may not get it at all because you can keep on fi nessing it. But if we give people the opportunity to be able to see what pensions they’ve got then they can start making decisions. Once you see your pension value is more than what you earn you start to take notice of it. So if you can put it in one place so that even those little pots that people may have, they see them together, and hopefully that will get people to start to pay more into their pension.

Our job from a Pasa perspective is that when people are collecting benefi ts they are correct, because it’s usually at a time of need when people engage with their pensions. Someone last month said: “Can we stop talking about good outcomes because if you put £10 in each week, you’re not going to get the best outcome”. What good administration can do is that it can ensure that you have the best outcome you can have with the amount you are paying in. We’ve got quite an ongoing job in that sense, and what we want to concentrate

on is thinking about how the pensions industry isn’t here for its own benefi t, it’s here because people are relying on it and administration is the conduit.

You took on your new role as chair this month, what do you have planned for the future?In December we had our fi rst meeting with the master trust working group. What we’ve always done in the past is we’ve seen a problem and we’ve thought about ways to solve that problem to have a better outcome. What we want with the master trust working group is to solve the problem before it arrives.

Th ere’s a view that there will be around 12 large master trusts and then we see the market working in the way it does now with third party admin and occupational schemes so you have employers moving from one to another. Now a lot of these master trusts don’t have those skills and resources on how to transition single trusts. It’s taken third party administrators decades to get where they are now and it’s still not perfect, so what we want to try and do is give guidance that enables employers to know what happens and what their responsibilities are.

Nothing is broken at the moment, but we want to give guidance so it doesn’t break. It’s the fi rst time we’ve done that and were quite excited about it, although we’re probably not going to get the guidance out until the summer.

We’ll be watching what happens to the dashboard and what we can do to facilitate that working. Th ere’s dissent, and we just have to acknowledge where we are and make it work. Th ere’s no reason we can’t make this work. As long as you’re authenticating the individual so it’s the individual getting the data, it is entirely feasible. My aim is to get much better informed on that, because it is going to have to happen and it’s about enabling people to make choices.

interview Pasa



68-69_interview.indd 2 08/01/2019 15:23:16


C O N F E R E N C E S

28 March 2019 I Hilton Tower Bridge, London

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DC roundtable

roundtable DC

Chair: As always, there is a lot going on in DC at the moment. To start with, what’s happening on the regulatory side to keep those working in DC up at night?

Swynnerton: First of all, we’ve got The Pensions Regulator saying that they’re going to be adopting a more proactive approach; that they’re going to be a very different regulator. This is partly coming out of the TPR Future report that was published in September whereby they’re attempting to address risks sooner through a new range of interventions.

Chair: It will be interesting to see how that pans out.

Swynnerton: Indeed – they’re rolling it out incrementally, with larger schemes being targeted first. They’ve indicated that there are going to be 25 higher-risk

schemes who will be subject to one-to-one supervision or assigned a nominated contact, which is quite unusual. In addition, they are also saying there’s going to be more supervisory approaches to influence behaviours in a broader group of schemes.

We’re more used to seeing this kind of approach in the DB space with the new clearer, quicker, tougher approach to regulation from TPR, which is being more proactive in the DB arena, particularly in relation to transactions and valuations. It will be interesting to see how increased regulatory supervision works when rolled out into the DC space, especially one-to-one supervision. So, that is probably keeping some trustees up at night.

Alexander: I am concerned about the implementation of the changes around value for members and value for money – explicit charges, for example, that members have to now be able to see. It’s sometimes very difficult for them to understand those charges and how they’re applied. I have a concern that, because of the lack of understanding, they won’t really understand whether it’s value for them or not. They won’t understand what’s included in the overall costs and expenses that are being charged on their schemes and, dangerously, might vote with their feet in some ways.

Doyle: From an investment perspective, one interesting area that we’re watching is collective DC – what that actually means, what role that’s going

DC: The good, the bad and the CDC

Our panel of experts offer their thoughts on the biggest trends in DC today and ask what’s in store for the coming months

In association with

DCRoundtable.indd 2 08/01/2019 11:37:58


DC roundtable


In association with

DC roundtable

Catherine Doyle, Head of DC, Newton Investment ManagementCatherine joined Newton in 2015 as head of DC for the UK

and is responsible for delivering investment solutions for some of the UK’s largest pension schemes. Catherine fulfi lled a similar role from 2008 at BNY Mellon Investment Management, the parent company of Newton. She has been involved in all aspects of DC, supporting the long-term investment goals of a broad range of institutional clients across diff erent sectors. Catherine is a prominent spokesperson in the DC pensions press.

Jerry Gandhi, Pensions Manager UK & Ireland, Schneider ElectricJerry is a seasoned freelance pensions & benefi ts professional

currently working as Pensions Manager UK & Ireland (Contract) for Schneider Electric to manage legacy Invensys and Schneider UK and Irish DB Pension schemes structures. In addition, he is driving visibility and value of the DC off er as part of the overall reward proposition. Jerry assisted with the set up of NOW: Pensions (as COO) in the UK and was group pensions director for RSA Insurance prior to that.

Chair for the event: Andrew Cheseldine, Client Director, Capital Cranfi eld TrusteesBefore joining Capital Cranfi eld, Andy acted as an adviser to

trustees and employers at Watson Wyatt, Hewitt Bacon & Woodrow and latterly as a partner at LCP. Using his experience of over 30 years in consulting on both DC and DB pension arrangements and liaising with regulators throughout the pension and fi nancial services industry, he is able to use his wide knowledge and understanding for the practical benefi t of trustee boards. He has served on the PLSA DC Council since 2013.

Gregg McClymont, Director of Policy and External Aff airs, Th e People’s PensionGregg joined B&CE, the provider of Th e People’s Pension, in 2018.

He believes that pensions for the many are best delivered by profi t to member funds with scale. Gregg is the co-author of two volumes on global pension system design. Previously Gregg was an MP 2010-15; shadow minister of state for pensions 2011-2015; and a member of the Prime Minister’s commission on further devolution to Scotland. Gregg previously held a fellowship at St Hugh’s College, Oxford, before entering parliament.

Lesley Alexander, Strategic Partner, Ferrier PearceLesley is the strategic partner at Ferrier Pearce Communications, a creative consultancy that

specialises in pensions and employee benefi ts communications. Lesley’s career in pensions has spanned more than 36 years and she has held a number of senior pensions management roles. Prior to joining the fi rm, she was the CEO of the HSBC Bank (UK) pension scheme and has also enjoyed working with EMI, Motorola and Reed Elsevier. Lesley is oft en quoted in the pensions press and is a regular speaker at industry events.

Matthew Swynnerton, Partner, DLA PiperMatthew is a partner at global law fi rm DLA Piper. He advises on all aspects of pensions law, including

corporate and bulk annuity transactions, reorganisations, benefi t redesign and liability management projects, reviewing and updating scheme documentation and advising trustees and employers on their legislative and trust law duties. Matthew draft ed key legal sections of the Combatting Pension Scams Code of Practice, which received widespread praise from Th e Pensions Regulator, the Pensions Ombudsman and the Pensions Minister.

CHAIR PANEL

Lynda Whitney, Partner, AonLynda has a strong interest in seeing things from a practical member perspective, despite

her actuarial training. She is editor of Aon’s DC Survey, leading the research into what members want and how schemes are responding. She has nearly 20 years industry experience across the breadth of DB and DC. She qualifi ed as an actuary in 2001, became a scheme actuary in 2004 and became a partner in 2010. She is a leading spokesperson on all things DC.



roundtable DC

In association with


DC roundtable

to play in DC, what it’s going to look like and some of the finer detail around how it’s going to be structured.

Also, the topic of illiquids is on our radar. We have had Guy Opperman, the Minister for Pensions and Financial Inclusion, pushing for illiquids to have a role in DC and, from an investment perspective that would make sense, as many of these asset classes are appropriate for a long-term investor. However the mechanics and the delivery of that need thinking about.

Finally, the charge cap on the default is related to this – how that’s going to work, because it’s quite a stringent cap. It doesn’t leave a lot of room for illiquids, so will they sit outside of that, or how will it play?

Whitney: I agree with Matthew [Swynnerton] that a big concern is around how the regulator interacts with trustees, particularly around what trustees need to put in the chair’s statement. Each year, we’re seeing the regulator ramp up what they’re expecting in the chair’s statement, and then also the actions that trustees need to be taking in order to write a good statement.

Then, another issue is GMP equalisation for DC schemes who’ve got underpins. It is something that, for those who have it, is keeping them up at night.

Gandhi: From a company point of view, we are focusing on trying to deliver quality outcomes. From an employer point of view, you want your employees to be able to comfortably retire at the right time. Anything and everything in legislation is mitigating or pushing us towards questioning fundamentally what we’re doing. We have a standalone trust. The more paperwork, the more process, the more risk involved challenges why we are doing it. Add to this the whole issue around disclosure, communication, information flows to members – all we’re

doing is pushing out more papers, again, which is more of a turnoff.

Chair: Gregg [McClymont], as one of the largest DC schemes in the UK, what are your thoughts on trustee pressures?

McClymont: We now have more than four million members and more than £5 billion of assets; £120 million a month coming in cash flows; and with next year the contributions going up to 8 per cent, it’s probably going to be around £200 million a month, broadly.

The key thing about the regulatory space from our point of view, as The People’s Pension, is how does the system deliver value for members in the semi-compulsory auto-enrolment (AE) space, and that semi-compulsory dimension of AE is really important, because it demands that the member is put first all the way through.

Master trust authorisation is a very welcome process – it is clearly going to drive consolidation and, given that scale is crucial to value for member, consolidation has to be a good thing. I would add that the big challenge is how to ensure that the economies of scale savings accrue to the member. I’ve just come back from Australia and there is a huge debate there because every scheme in Australia is trust-governed, yet it turns out that trust law has not been enough to protect members from being ripped off by bank and wealth management-run super funds, and more widely the long-term returns delivered by not-for-profits have been much higher.

There’s a series of quite complicated reasons, but I think that lesson from Australia is really important to absorb – that even trust law in some circumstances isn’t enough to deliver value for member if the sponsoring organisation doesn’t take the right approach.

Chair: I would add some tactical points – things like the chair’s statement,

the impact assessment, fees, transaction costs – particularly around the difficulty in getting transaction costs from fund managers. I’ve been deeply disappointed by the industry’s approach so far. I don’t think I’ve had one set of accurate transaction costs. We, as an industry, need to get our act together a whole lot quicker.

Trustees’ fiduciary dutiesChair: What do we think the DWP clarification on fiduciary duty means for trustees of DC schemes?

Swynnerton: We know that from October 2019 trustees are going to have to change what they publish in their SIP policies, and in particular the extent to which they take into account financially material considerations over appropriate time horizons, and the extent to which (if at all) non-financial matters are taken into account in their investment policies.

Chair: What does that really mean for trustees?

Swynnerton: There was a lot of concern, originally, following the consultation on SIP content requirements that trustees might have to survey members and find out their views. That has been clarified now – that’s not going to be a requirement, although SIPs can say to the extent to which the trustees take into account member views. But it is going to cause some changes in relation to setting out how trustees take into account social and governance issues.

That said, the primacy of the trustees’ decision-making power in investment decisions has been acknowledged by the government, and that is probably a helpful acknowledgement.

Nonetheless, I think it could result in quite a big change to the way trustees look at their investment policies.

McClymont: My suspicion is that trustees who are looking to the long-



DC roundtable

DC roundtable

In association with


term are probably already considering financial risks in the round. Of course, the action which follows consideration is a matter of judgement but taking into account these factors is obviously very important. How does one actually deliver an investment approach which takes long-term financial risks, e.g. climate change, into account? Our investment team are hard at work.

For us, the first step is to have greater control over how we invest, by moving from pooled to segregated account investing over time. We’re currently just completing putting that facility in place and that will allow us, for example, to not invest in the things that we think won’t provide a sustainable return in the long term.

It keeps coming back to the consolidation and scale point. You can’t generally get control over what you invest in unless you’ve got a segregated approach. Asset managers in pooled funds have to juggle with different views of different investors, none of whom are usually big enough to call the shots.

Gandhi: When it comes to ESG and sustainability I struggle because, in a

pooled environment, as a trustee board, you have limited scope to influence it. But then, if you think about it further, if you’re investing in a pooled vehicle, surely the manager of the pooled vehicle has to consider that anyway? My challenge is, what is sustainability? If risks are inherent in investment, sustainability forms a fundamental part of it. So, surely, shouldn’t sustainability be a core to any form of investment? Because if it’s not sustainable, it’s a bad investment, in theory.

To focus on climate change or other things, I think, is too micro. You have to be bigger-picture. Sustainability is much more about an investment which is and does factor into account those risks that are inherent in bad industries.

Whitney: There are still some trustees who need to understand whether this is about being green and fluffy, or whether this is about risk and return. That is the challenge for some trustees over the next year as they build out their policies. That kind of risk/return dynamic is a different conversation about sustainability to the conversations we would have had five or 10 years ago where it was all around an

ethical stance.Doyle: Things have moved on

somewhat. While trustees may have once paid lip service, this is now something that has to be taken more seriously – it has certainly moved up the agenda. As an industry, though – and I don’t just include the asset managers in this – we need to be clearer about definitions. We need to have some common definitions in place. There’s still a lot of misunderstanding out there and people get confused between sustainability and ethical screening.

That clarification is important and, more generally, embedding ESG considerations within strategies will become a basic hygiene factor. Saying that, there will be a place for schemes that feel more passionately about this, who may choose to invest in a pure ethical or sustainable fund. But obviously, the challenge remains in terms of pooled vehicles versus segregated because obviously, with a pooled approach, you can’t tailor the portfolio to individual client needs.

The younger generation, millennials in particular, say they’re worried about this, particularly aspects such as climate change, although we haven’t seen many, necessarily, translating that into choices, but I think that will come. It’s also a great engagement tool in terms of getting them interested in their pension, which would be quite an achievement, given the sort of apathy that we observe.

Alexander: I really welcome the change that is taking place in this area because, as the outgoing chair of UKSIF, we’ve been working very closely both with the Law Commission and government over the last four years to get this up their agenda. So, clarification that trustees should be taking into account material financial factors and can take into account non-financial matters as



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well is very important; and removing words like ‘ethical’ from the regulations is important too, because one person’s ethics is not another person’s ethics.

There’s still much more scope to make ESG meaningful, and requiring proper reporting on what the trustees’ policy is will make a difference to member engagement. The fact that trustees have actually got to say, very clearly, what they are doing with members’ money, and how that fits into the long-term sustainability of members’ savings for their retirement, is a very good thing, and I would like to see trustees really taking advantage of that to tell a good story.

There will be some challenges with that, because a lot of lobbying goes on at individual member levels around divestment from fossil fuels which is a very narrow area. We need to broaden things out into a much bigger debate about sustainability. We all know there are issues around plastics. We know there are issues around fast fashion. We know there are issues around pollution in the chemicals area. So, there are lots of areas where we can actually start to use the weight of pension schemes and trustees’ buying and decision-making powers to really start making a difference.

Doyle: We also need to bust some of the myths around sustainability – there’s a misconception that you have to give up return if you’re investing in these vehicles; or that it’s a very niche area that’s just reserved for experts. We need to clarify some of these points.

Alexander: The Eurosif survey that came out recently actually shows that the UK is well ahead of most European countries on ESG integration. So, while you need to be a bit wary of greenwashing (because in the past six months I’ve had lots of emails from asset managers who apparently now are experts in this field despite the fact that

a little while ago they didn’t have a clue about it), I am hopeful of the general direction of travel here in the UK.

Gandhi: When we talk about ESG to members, what does it really mean? It is actually much more helpful to say “we invest in companies that we think are understanding the risks associated with not doing the right thing”, and that’s the important message.

Alexander: It is important though that it doesn’t come over as being all negative. It isn’t all about exclusions, but also about actually engaging and trying to alter behaviours.

Chair: You can invest 100 per cent in a not-perfect stock, but you then just engage by stewardship.

Doyle: That’s a really important point, because things like the oil and gas companies wouldn’t tick the ESG box necessarily today, but they’re venturing into areas like renewables, which means that actually their direction of travel is positive.

McClymont: That stewardship point is a very good one. Governance is a process. It’s not an outcome. To do governance properly you have to have scale, and you have to have ownership of the assets. Without that, you’re talking rather than doing, in many instances.

Financial wellbeingChair: Financial wellbeing – is this a trustee’s job?

Alexander: In its purest sense I would say no, except perhaps if you take the question in its broader sense of worrying about people’s retirement outcomes. There are some organisations where the sponsors and trustees might work together, holistically, to look at someone’s overall financial wellbeing, and it would be part of a benefits package as a whole. There is a very important joining-up process that needs to take

place between savings for retirement and the other benefits that employees are entitled to by virtue of their employment, so that they are actually creating wealth throughout their periods of employment.

But is it a trustee’s responsibility? In its purest sense, I’d say no.

Cheseldine: Is it the employer’s responsibility?

Gandhi: I think that’s too strong a term. Wellbeing is a very important part of any employer’s HR infrastructure, and part of the benefits/rewards package, looking after and supporting employees across the wellbeing piece, which includes the medical services that we offer and stress management too. My understanding from statistics is that financial stress and financial issues create a lot of wellbeing issues for people, and if the employer is not considering that as part of the overall equation, that’s an opportunity that they’re missing.

At Schneider, we are keen on looking at wellbeing in its totality, and financial wellbeing is a part of that. We’re exploring opportunities to integrate financial education opportunities, which ultimately drives better financial planning and works towards better opportunities to invest in pensions. That integration is the bit that is hard and working with the trustees there is important. It’s not a trustee duty, I wouldn’t think. It’s the trustee’s responsibility to get the outcome. But if the employer works on wellbeing with finances as part of it, that helps the outcome. So, it is an end-to-end.

Whitney: I’d argue that yes, absolutely, trustees do have a role to play with financial wellbeing, and it is about putting those retirement savings in context. Working with the employer I’d agree is important; it’s definitely a joint communication effort that is needed. But people don’t think about pensions in isolation and we often, as an industry,



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don’t think about pensions in isolation when you start talking about death benefits, you talk about discretion, you talk about life insurance, and actually, there are quite a few things around the edges of pension schemes and broader benefits packages that do start to come together.

This is where the economies of scale of what the trustees can access through scheme providers can help support the employers’ projects. So, it very much depends on the size of the employer. If the employer is large, then they are able to invest in that directly, and the trustees play a supporting role; if it’s a much smaller organisation and the pension scheme is one of the drivers of financial wellbeing, for some age groups, or some aspects, or some time periods, the pension scheme is taking the lead for that smaller organisation.

Doyle: I’d agree more with Lesley [Alexander], in the sense that I don’t see financial wellbeing as the trustees’ responsibility. It’s interesting to note that many single trust schemes have not opted to get involved post-retirement. They’ve drawn the line there, and if we’re talking about financial wellbeing in the wider sense, then they clearly don’t see that as part of their fiduciary role. I think it’s a much broader responsibility for society, actually, that we should embed all the good things like financial education at an earlier age and think about the big picture.

I do agree that it’s all becoming a lot more joined up, and so it’s harder to look at things in silos, but I do still see the trustees as having quite a clearly-delineated role.

McClymont: It’s an interesting discussion. The way I think about it is, down the line, is there a way that you start segmenting default asset allocations based on information that you have

about member cohorts, and QSuper in Australia does that. It does so only based on age, sex and salary. Before I spoke to them, I’d assumed they had a lot more information as a public-sector DC scheme, but it turns out they just do it based on these three areas.

So, I can see a context in which, when one’s thinking about what’s the appropriate way to invest on members’ behalf, at some point in the future, TPP and other providers with the appropriate scale will be thinking about how to do that.

Data, of course, is a huge issue. We’ve got more than four million members. At any one time, significant numbers of those are deferred. AE was set up on regulations from the 1980s, and understandably to try and make the compliance as simple as possible from an employer point of view, which means less rather than more information about individuals. From that perspective, it takes us back to the plumbing of the system. We built an AE system on top of fairly old pipes, and if we want it to take financial wellbeing into account from a default perspective, then government and the industry will have to focus on redoing the plumbing.

Chair: What would be the lawyer’s perspective on this?

Swynnerton: Trustees’ duties are owed to the members of their scheme, so if the employer feels they should, for whatever reason, take into account the more general financial wellbeing interests of an employee population that is wider than just the members of their scheme, that can become a bit of a challenge for them.

That said, in the DC environment, trustees would generally acknowledge that it’s the employer’s decision, primarily, as to what level of pension benefits and contributions they provide for their

employees. So, I don’t think trustees would

be precluded from taking part in that; indeed they may well think that part of their duty to those employees who are members of their scheme would require them to be actively engaged.

Gandhi: The problem you have got here is the DPA, and the data protection regulations; you need data, as has been highlighted, to do a lot of this stuff, but the trustees hold that data for a particular purpose and sharing it back with the employer for a wider context has some issues. More holistically, it’s right for them to work together, but you need to be careful you don’t breach some of the tripwires of the regulations.

Whitney: Back to that data point, and that plumbing point, the pensions dashboard comes to mind and the question of how individuals can get hold of their data, such that they can look at retirement savings in the round, and hopefully then move that into that context of the broader financial wellbeing space, too.

Doyle: Most of this is actually a technology discussion, because what Gregg [McClymont] was describing is almost a default fund nirvana, which we as investment managers would welcome. We’d love to be in a position whereby we could define cohorts and design appropriate strategies. But today, with the current ‘plumbing’, that’s quite a challenge.

Default strategiesCheseldine: Should DC schemes be rethinking their default strategy in the current environment?

Doyle: If we’re thinking of this in the context of, for example, the recent market volatility, I would argue that it’s too late to react. You should have the appropriate strategy in place prior to the volatility.



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What concerns me at this particular point in the cycle is that there’s been less emphasis given to capital preservation because, until very recently, we’ve been in the most protracted bull market that we’ve had in history. In such an environment, the value of some of these strategies that are focused on mitigating the impact of the market sell-off is perceived to be relatively little, because people operate on fear in these situations, and they feel relatively safe – or at least they felt relatively safe until recently.

Also, there’s been some misunderstanding about the role of some of these strategies, because there was an expectation that they would deliver positive returns in all market environments. But when asset classes sell off across the board, so correlations go to one, there’s no place to hide. If these strategies are multi-asset in nature, they will be hit. But you’d hope they’ll be hit to a lesser extent than the market.

Whitney: My advice to clients would be, don’t over-react. You’re thinking about a long-term horizon here. You’ve hopefully set up your thinking already to consider the possibility of market

volatility.Having said that, there are always

developments that you can make to your default strategy design to improve it, and schemes should keep that default design under review. Trustees should look at the new developments coming through to make sure that they’re making the best of those opportunities to avoid concentration, and be thinking about whether there are more efficient ways of investing.

Gandhi: As a trustee board you should be thinking long term. A short-term reaction is wrong, fundamentally. Short-term awareness of what’s going on, and understanding the implications, of course is important and constant review definitely forms part of the structure that any trustee board should be adopting.

Cheseldine: Gregg [McClymont], you’ve told us you’re moving to segregated. Have you taken the opportunity to change the default, and was volatility anything to do with that?

McClymont: Our approach is to try and deliver similar returns to what we’ve achieved in the first phase of auto-enrolment, while reducing risk.

There are a few points I would like to make. Clearly the nature of your scheme membership matters, and we have some confidence in having those cash-flows coming in regularly in significant volumes. That allows us to take a more efficient approach. For example, we’ve just launched our first factor-based allocation within our default and fund it via cash-flow contributions rather than having to sell down existing assets with all the costs that incurs.

We also intend to build a to-and-through-retirement offer for our members, and that clearly affects the way one thinks about one’s default strategy in the round. We need to think about the asset allocation through the

lifecycle not just from an accumulation perspective.

Alexander: Most of the providers are already thinking about the to-and-through, and therefore where I’ve seen default strategies’ performance recently, while they’ve been impacted on the one-year numbers, they’re still looking positive on three-and five-year numbers. So, I’m not seeing, necessarily, a lot of reaction in that area to what’s happening with current market volatility.

Chair: Where you have seen this stuff, has it been articulated effectively to the members?

Alexander: I don’t think it’s been articulated at all, let alone effectively.

Whitney: We don’t want the members being their own CIO because they’re exactly the ones who do respond to the market volatility and over-react to it. Statistics from Aon’s work with clients in the US show that when members make decisions themselves, they’re getting over 3 per cent per annum worse outcomes, because they see a news story that says the stock market has fallen, and then they sell equities at the bottom.

McClymont: When the Swedes



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opened up their premium pension system, i.e. the part of the state pension that is self-select, they did a huge engagement exercise, and many people actually made a choice of fund. Academic research evidenced that those who didn’t know anything and understood they didn’t know anything did fine, because they didn’t do anything and the default has outperformed heavily. A small group of very expert investors did fine, too. The people who lost out in terms of returns were those in the middle who thought they were investment experts but weren’t.

Patient capitalChair: How would you define patient capital? Is it likely to play a part in DC?

Doyle: If you look on the British Business Bank’s website, they give quite a specific definition of patient capital, as fledgling businesses. I would argue that what should drive this is the desired outcome for members. This should not be a way of providing a floor for funding to promote business interests in the UK. That would be the wrong way to

approach it. Patient capital is a term to encompass alternatives more broadly.

I think it is appropriate for DC as long as members, and trustees in particular, appreciate that this will be a more illiquid part of the portfolio, and with all the caveats that comes with. The same stringency and due diligence on the underlying investments should be carried out as for any other investment in the portfolio, and it shouldn’t be a vehicle to promote national interests, or whatever else. So, you have to be rigorous, but I do see it playing a part.

Saying that, we will need to do some work with the plumbing, because even the fee structure of some of these areas is not really appropriate for DC. Performance fees, for example, are a challenge and it’s going to be difficult to get some of these strategies within the charge cap without cutting corners in other parts of the default strategy, assuming they form part of that.

But I’m glad the spotlight is on this area, because long-term investment is what pensions is all about.

McClymont: It’s a very good point that Catherine [Doyle] raises about the definition of patient capital in the venture capital context because there’s a focus of late-stage venture capital in the context of payoffs coming later, then you’ll see companies listing further down the line, and there’s a feeling from government that the UK’s not finding that capital easily enough to allow these companies to really take off.

But our observation on this, and what we’ve been saying to government is, this kind of investment will be a part of our allocation in the long term as we scale, but fees are a big challenge, and there will be other asset classes, and sub-asset classes, that we’re

also interested in. I hate to sound like a broken record but, again, it comes back to scale – it’s going to be tough to get small schemes invested in this kind of asset class. If the government really wants to get this stuff going, you better build quickly a world where there’s a fewer number of larger DC funds, and that’s the quickest way to get this to really take off.

Collective DCChair: Collective DC. Is it relevant, other than for specific employers?

Doyle: It could have a place – and clearly the Royal Mail thinks it does have a place – and it would be alongside what I would call mainstream DC. If you look back at when this was originally on the table some years back, a lot of the original arguments for it have been supplanted by developments in DC – for example economies of scale, lower charges and better member outcomes. Arguably, by having greater consolidation in DC, particularly through the master trusts, you’re managing to achieve that.

So, will collective DC be bringing




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anything different? That’s debatable. But I could see it being supported by, perhaps, heavily unionised companies who are attracted by the intergenerational sharing aspect.

Gandhi: CDC is in its early stages. We are not quite sure where it’s going to go. My first view of CDC was that I didn’t understand what it was and where it fits. But, having explored it further, I can see there is some merit in the ability to pool money, to share risk, and the concept of doing this in the annuitisation phase could make a bit of sense.

For the very large employers, it can be done as a standalone. For the middle and smaller employers, running it is hard. So, this starts to move into the realms of the master trust environment, being able to, with the economies of scale they have, create some kind of CDC in–retirement pooled vehicle where people could choose either to go it alone, buy an annuity, hedge completely, or another option in that space would be some form of CDC-style structure.

The challenges are communication – what does it really mean? Bad times mean you could get scaled back. All these are challenges that need to be thought through. But I do believe some sort of duality in that environment could work.

McClymont: CDC can mean lots of different things. Royal Mail and the unions wanting to do CDC is a really interesting development, just from an industrial relations point of view in the UK – that they want to go down that approach. Our view is that many of the benefits that CDC seeks to provide, certainly accumulation, can be provided by the kind of scale we’re likely to have.

Where there is an interesting question is in the retirement phase. What’s the most efficient way to carry market risk in retirement, and pool longevity? There’s a question worth exploring about whether

CDC offers something potentially attractive in that space.

We will continue to work on our own to-and-through-retirement proposition that doesn’t demand that sort of risk-sharing, but I do think there’s something worth examining in the retirement space.

Where does CDC work, globally? The Scandinavians do it, and that’s through mutual insurance companies; and the Dutch do it through sector-wide schemes, which were originally DB and are now collective DC, because the employer contribution is fixed. In both those instances, they’re done on a mutual and not-for-profit basis. CDC’s hard enough without working out how to distribute to shareholders as well.

In my book Towards an International Pensions Settlement vol I, there is a fascinating account of the New Brunswick experiment with CDC in Canada written by its architect a former Federal politician and leading actuary.

Whitney: CDC certainly brings challenges to the actuary. It also brings challenges to the trustees of those schemes. The actuary will be providing the advice and the background, but actually we expect it’s the trustees who will make the final decision as to whether there is enough money to continue paying out.

I think they will need clear and transparent rule structures, and so the governance structure is really important. We’ve got some of those difficult decisions already in a small number of shared cost schemes, with challenges in terms of the dynamics of decision making.

Alexander: CDC will be a real challenge to communicate. We currently have DB and DC, and we have a lot of people who actually don’t know whether they’re in DB or DC, and then once you’ve told them which one it is, they’re

still – particularly on the DC side – challenged to understand exactly what it is they’ve got.

So, while I agree that CDC might have a place at some point within the master trust environment (because scale is massively important in this), and in the post-retirement rather than accumulation phase, actually trying to explain to people that they have an income stream, but that it is not guaranteed; that if there is a shortfall, the employer has no obligation to fund that shortfall, and that potentially – because there’s a possibility of having an arrangement with or without a buffer – there could be some intergenerational transfer between the active members that are currently paying in and the pensioners who are currently taking out, will be challenging.

There’ll be so much complexity around it, so many risk warnings that we will have to put in for the members, that they’re potentially going to be left quite confused about what it is that they have.

Swynnerton: I think the hardest part, putting the members to one side, will be the sell to the employers because, having existed in a DC world, and having got used to DC working from an employer perspective – and many employers who’ve gone from DB to DC have generally been surprised at how accepting the employees were – the level of additional administration and complexity that CDC offers will be very unattractive.

So, from an employer’s perspective, why would they do this? We’re in an established DC world, with many employees auto-enrolled into DC arrangements, and we have been for some time so why would they want to engage with something that is more complex, more risky and might be more likely to lead to member complaints?




net pay opinion

� e net-pay tax relief anomaly

Pensions Minister Guy Opperman announced in December 2018 that the AE earnings threshold will remain at £10,000 for 2019/20. With the personal allowance rising to £12,500 in April, more members could be caught up in the net-pay tax relief anomaly. So what needs to be done to address the issue? Should the AE threshold be increased, or lowered? And, how important is it that the net-pay tax anomaly is resolved?

Based on these changes, two people on £12,500 could � nd themselves paying di� erent amounts in contributions depending on whether their employer has selected a net or at source pension scheme. � is anomaly will leave the person in the relief at source scheme £125 per year better o� , for no other di� erence than their employer selecting a di� erent type of pension scheme. If we want an industry where we are working hard to do the right thing for the people that need it the most, it’s clear that something needs to be done around this.

With regards to the threshold for a person on £10k per year being auto-enrolled, there is an opportunity to generate a savings pot of £100k over 45 years and it also provides them with a payment from their employer of £300 per year extra. � is would make a huge di� erence to their retirement outcomes. However, it is also important to consider how this will impact on their pay packets and to make people aware of the options available to them such as opting out if they feel they can’t a� ord to make pension payments on their current salary. With these options possible to the individual, lowering the threshold presents a saving opportunity to more people, which must be a good thing.

Bravura Solutions retirement specialist Natanje Holt

It seems to me that there are a range of options. Firstly, the thresholds for AE and tax could be aligned. But this would reduce the amounts being saved, and that can’t be a good thing.

Secondly, the AE threshold could be done away with altogether. � is would be good in that it would mean people would be contributing more to their pensions, but it wouldn’t solve the issue of non-tax payers getting tax relief. And thirdly, the government could make it clear whether or not they want tax relief to be available to non-tax payers. And if they do, they should o� er a very simple way for relief to be claimed through self-assessment.

Salvus Master Trust head of sales Bill Finch

opinion.indd 1 07/01/2019 11:58:12



opinion net pay

� e announcement by the government in October that they are looking at ways to address the net pay tax relief anomaly is a good step forward, however, in the meantime over a million individuals are

losing out due to the quirk in the tax system and therefore in my opinion the quirk needs to be addressed as a matter of urgency.

� e raising of the personal allowance to £12,500 and the AE threshold remaining at the current level of £10,000 means more individuals are undoubtedly going to be le� out of pocket. A logical and arguably fairer approach for the short term, whilst the wider more complex issue is addressed, would be that the AE threshold is aligned to that of the personal allowance. � is would mean it therefore should be increased to £12,500 for 2019/20, however this goes against the grain of the purpose of AE. Auto-enrolment was introduced to encourage individuals to save and to take greater responsibility for their retirement future, yet the anomaly means that the lowest paid workers, arguably those that need the most support for saving, do not get the same bene� t as those earning over the personal allowance. Raising the AE threshold exacerbates the problem of not supporting those that need it to save.

Mazars partner and head of � nancial planning Sarah Lord

In the interests of fairness and the reputation of automatic enrolment, it is essential that the net pay tax relief anomaly is corrected. 2019/20 will be the sixth successive year in which the AE earnings trigger has remained � xed at £10,000. � e number of auto-enrolees into net pay schemes who have been denied tax relief on their pension contributions has grown every year since 2015/16 as the personal allowance has risen above £10,000.

While the simplest solution is to re-align the earnings trigger with the personal allowance, this would exclude a signi� cant number of low earners altogether from pension saving via the auto-enrolment regime (unless they opted in).

� e Low Incomes Tax Reform Group some time ago put forward a costed alternative proposal that would see HMRC using Pay As You Earn (PAYE) Real Time Information (RTI) data to identify those making pension contributions under net pay arrangements. � ey could then provide tax relief (where appropriate) through an annual reconciliation process – whether that is through self-assessment or – as is more likely – the informal P800 process. HMT and HMRC are well aware of this.

Aries Insight director Ian Neale

Increasing the AE threshold is one option. However, this must be approached with caution. Whilst it may solve the net-pay anomaly, it would mean that less people are eligible for auto-enrolment and would miss out on the bene� t of employer contributions. Recent statistics from the DWP show that if the threshold is raised to match the Income Tax Personal Allowance, an estimated 600,000 people would miss out, equating to around £360 million in ‘lost’ pension contributions. � e recent government review of AE policy demonstrated that the direction of travel is to bring more people into pension saving, not less.

However, there are alternatives. � e government could pay the missing tax relief by way of additional contributions for the a� ected members directly to the providers of net-pay schemes. Adjustments could also be made through the employer’s PAYE return to HMRC. HMRC could then pay the tax relief to the employer for them to send on to the pension scheme alongside the contributions. � e government should also look to review the current rules which restrict pension schemes to provide tax relief on only one basis. If schemes were allowed to operate on a relief at source and a net pay basis, they could ensure that the members are treated in the most appropriate way depending on whether they are a low or high earner.

LGIM head of product policy strategy Colin Clarke

opinion.indd 2 07/01/2019 11:58:16


final thoughts coffee break


I know that face... Answer: Upcoming TPR chief executive, Charles Counsell

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Fun and games

In a paper dated 7 January 1964 titled Pensions and Politics, George Ross Goobey wrote: “In an election year the subject of pensions

tends to receive more prominence as this is one of the policy items put forward by the three major political parties, often one fears, simply for the purpose of vote catching.”

The Labour Party had come up with a scheme offering pensions of 50 per cent of retiring salary, which increased in line with increases in the cost-of-living, so that their purchasing power would be maintained. He claimed that Imperial Tobacco Pension Fund, of which he was

the manager, had been one step ahead of the politicians, as its general target for pensions for long serving employees had been two thirds of retirement salary (including state benefits). In 1960 and again in 1963 current pensions had been increased to keep the purchasing power of pensions in step with increases in the cost-of-living.

He pointed out that the cost of such pensions and especially the increasing of existing pensions to keep pace with inflation was very expensive. Cost, and whether the economy of the country could stand it, did not seem to be the concern of politicians before a General Election. Referring to a meeting attended by some of the architects of the Labour Party’s pension plans, at which they were

elaborating on their schemes, all questions on the costs of such schemes were evaded, giving the impression that they either had not bothered to calculate the costs or if they had, it would not be politic to divulge them.

The General Election held on 15 October 1964 was won by Harold Wilson who unseated Alec Douglas-Home’s government with an overall majority of four seats.

The full text of George Ross Goobey’s paper can be found in the Pensions Archive under “Collections” www.pensionsarchive.org.uk reference LMA_4481_A_02_024_d

Written by The Pensions Archive Trust, chairman, Alan Herbert

Pensions and politics

Pensions history

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To Advertise in the Classified Section contact Camilla Capece - Telephone: 020 7562 2438 or email [email protected]


TRACING COmPANIES

TRUSTEE LIAbILITy INSURANCE

OPDU is a specialist provider of pension trustee liability insurance covering trustees, sponsors and pensions employees in a stand-alone policy. Our policy covers all risks including GDPR, Cyber and Regulator Investigations. We can also provide cover for: pursuing third party providers, theft, retired trustees and court application costs. Benefits include our own claims service and free helpline and free CPD training covering trustees protections and how insurance works for groups of 6+

Please contact us for a free no obligation premium indication to see how we can help.

OPDU90 Fenchurch StreetLondon EC3M 4STwww.opdu.comContact: Martin KellawayTitle: Executive DirectorEmail: [email protected]

TEChNOLOGy PROVIDERS

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http://www.pension-software.com

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To � ll your vacancies fast email [email protected] or [email protected], or telephone us on 0207 562 2421.J O B S

www.pensionsage.com/jobs

Finding you the perfect fit... Pensions Finance Officer (P/T or F/T) £50k papr London, Contract DB14507

Pensions Administration Assistant £40k papr London, Contract DB14509

Pensions & Benefits Administrator Up to £40k London DB14445

Payroll Administrator & Manager £DOE North England CE14486

Head of Compliance & Op. Risk £DOE Derbyshire CE14457

Business Analyst £DOE London CE14511

Head of Technical Services £DOE Derbyshire CE14470

Senior Pensions Administrator £DOE Essex TD14400

Pensions Consultant £Competitive Leicestershire TD14517

Technical Services Manager £DOE Derbyshire TD14513

[email protected] Call us on 0207 243 3201 Abenefit2u Specialists in Pensions & Benefits Recruitment. We can assist with ‘one-off’ recruitment needs or ongoing staff requirements; on a permanent, contract or temporary basis. Abenefit2u recruits from trainee administration level upward through to executive management, providing both contingency and executive search services.

www.abenefit2u.com

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LEADING THE WAY IN PENSIONS RECRUITMENT01279 859000

BranWell Ford Associates [email protected] | www.branwellford.co.uk

Ground Floor, 3 Ducketts Wharf, South Street,Bishops Stortford, Hertfordshire CM23 3ARFax: 01279 859009BWF Recruitment Consultants

TH

Pensions Profund Analyst (6-12 Month Contract)Ref: HB16370 | London | £40,000 - £48,000 pa You will play a critical part in a major work management system project within this in-house pensions team; migrating Profund Classic onto a cloud version. You will need to have both Profund and strong SQL experience and be up to date with current pensions’ legislation.

Head of Service DeliveryRef: HB16716 | W. Sussex | £80,000 - £90,000 paReporting to the Head of Group Pensions you will provide full leadership to the Pensions Administration teams, Finance and Trustee Service functions and will be responsible for providing high quality member focused pension services to both trustees and members.

Pensions Admin to Pensions Manager (All levels) HB16849 | W. Midlands | £20,000 - £39,000 pa + DB PensBe part of this new DB benefits operations team within a large in-house department. Recruiting at all levels from Pensions Administrator, IT Support, Projects to Management. Experience of DB pensions is essential. Employer offers flexi time, DB pensions plus more.

Senior Communications Consultant PS16853 | London | £55,000 – £65,000 paOur award-winning client is seeking an experienced Senior Pension Communications Consultant to manage an impressive portfolio of clients. You will deliver creative and forward thinking communication strategies for DB/DC pensions, and have digital exposure.

Assistant Consultant (DC) Ref: PS16855 | Glasgow | £30,000 - £45,000 pa Working with Senior Consultants, you will prepare agenda packs, attend meetings, take and distribute minutes, draft member communications, collate investment performance reports and conduct group member presentations. Ideally commenced PMI qualifications.

New Business ManagerRef: PS16771 | London | £75,000 - £90,000 paWe are seeking an engaging and experienced pensions business development manager to build relationships with existing and prospect clients. Ability to discuss cost effective service for Cons, Act, Inv and TPA as well as the penalty for terminating current fee agreements.

Pensions AdministratorNH16854 | Surrey | £22,000 - £26,000 pa + bonusSeeking an experienced pension administrator who is looking for their next step up, to join this award winning third party administrator. You will be responsible for both member and scheme events for a portfolio of DB pension schemes. Flexible working hours are on offer.

Pensions Systems AnalystNH16785 | Essex | £Competitive, bens & trainingYou will be responsible for all aspects of configuring and supporting the pensions platform. This will include configuration of workflows, data maintenance screens, interfaces with other systems, data migrations, reports and automating calculations. SQL is desirable.

Pensions Administrators (6m FTC – Perm)NH16838 | Liverpool | £Competitive, great officesA joint venture consultancy is seeking a number of pension administrators to join their growing team. Working with a large public sector scheme you will perform manual DB calculations, review member data and assist with a large ad hoc project. Great benefits.

4C Twyford Court, High Street,Great Dunmow, Essex, CM6 1AETel: 01279 859000BWF Recruitment Consultants

[email protected] [email protected] [email protected]

Communications Consultant Ref: PR17264 London £40,000 to £50,000 paYou will deliver creative, forward thinking communication strategies for pension scheme clients enabling employers to engage with staff on pensions and employee benefi ts. This is a client facing role, managing projects, client budgets, services in the digital market space.

Pension Trustee Manager (Part Time)Ref: PR17290 London £80,000 to £90,000 pa (FTE)Seeking an experienced pension professional able to act as a professional independent trustee and provide services to DB/DC schemes. A commercial thinker who can also identify new opportunities to grow business through new appointments. PAYE for a 2.5 day week.

Senior Pension ConsultantRef: PR17209 London/Bristol £40,000 to £55,000 paYou will demonstrate CRM for larger clients in your career. This role will manage one high profi le DB client with a variety of different schemes. Regular attendance of Trustee & Sub Committee meetings this role has full support of 2 Ass. Consultants whom you will manage.

Pensions Fund Accountant Ref: NH17225 Surrey To £33,000 pa + Bonus & BensJoining an award winning consultancy, you will prepare pension scheme accounts within the corporate pensions function and ensure audit requirements are met. Managing a portfolio of clients, you will have experience in a similar role.

Pensions AdministratorRef: NH17215 Derby £25,000 paYou will process renewals, leavers, divorces and deaths, draft routine correspondence, manage bank accounts and calculate retirement quotes. Assisting with project work for pension increases, renewals and benefi t statements is also part of this role.

Pensions/ Senior Administrator Ref: NH17095 Manchester £23,000 to £30,000 paOne of the top employee benefi t consultancies is looking for an experienced Pensions or Senior Pensions Administrator to join their team. The successful candidate will have current experience of cradle to grave DB pensions scheme administration.

Senior Pensions AdministratorRef: HB17238 Warwickshire To £40,000 paYou will be the fi rst point of contact for all queries in respect of the administration of the Group pension schemes and be in charge of the day to day activities of the department ensuring the effi ciency is maximised through supervision, training of staff, including staff appraisals.

Scheme Secretary Ref: HB17128 Berkshire To £DOELead the provision of operational support to the schemes sub-committees and contribute to strategy and policy development. Experience of scheme management, and supporting the operation of complex schemes providing guidance of Trustee Boards is essential.

Part time Pensions & Data AnalystRef:HB17270 London £28,657 to £34,363 pa (pro rata) You will work 21 hours a week producing monthly HR and Payroll data reports enabling the assessment of staff for automatic pension enrolment purposes and provide an effective pension administration service, liaising as necessary with the external pension provider.

J O B S

Pensions Age JOBS service – getting the best candidates for your key roles

Pensions Age is the leading media for the pensions market (please see our main media kit for circulation statistics and breakdowns).

We can o� er recruiters:-

• Vacancy advertised on our daily email newsletter which reaches over 25,000+ subscribers every day. • Vacancy advertised at www.pensionsage.com the leading news portal for the pensions sector. • Vacancy advertised in Pensions Age print, which has a circulation of over 15,000+ in print and 25,000+ tablet.

Please contact us for details.

John Woods +44 207 562 2421, [email protected] Capece +44 207 562 2438, [email protected]

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