Controlling wealth is not the same as generating wealth

WealthIFAs Control £591m of Britain’s wealth

So runs the Citywire headline (Alex Steger on Jan 26, 2012 at 14:39)

This research is brought to us by Scorpio Partners; a research organisation whose website declares

A decade of experience in the wealth industry has left us with a clear contention: the wealthy are being let down. Many businesses court them, few understand them, fewer still are valued by them. Until now.

I suspect that most generators aren’t losing too much sleep about all this and certainly aren’t going to consider the research of Scorpio partners as their means of redemption; if they are being let down, it is because they are being told to hoard their money and not put it to good use. By “good use” I mean purposeful use, investments in things that bring genuine happiness to both the investor and those invested in. Wealth brings its own responsibilities.

“Control” of this wealth is a very important issue not just for the owners of the wealth but those who benefit from its use and responsible investment  is at the core of all fiduciary management.  Here is Alex Steger’s excellent article. Read it as if it was your wealth being talked about!

IFAs are a crucial part of the UK’s wealth management industry, controlling over a quarter of the assets it holds and employing just over a fifth of its workers, according to new research.

The research, by consultants Scorpio Partnership, showed that of the £2.2 trillion of assets managed by advisers, private banks, high street banks, and private client investment managers, IFAs advised on £591 billion.

This was second only, by sector, to private banks, which managed £886 billion, with high street banks responsible for £501 billion, and private client investment managers handling £217 billion.

The survey also showed that financial advisers servicing clients with between £100,000 and £1 million of assets typically enjoyed gross profit margins of up to 35%.

The UK wealth management industry employs 124,000 people, with the IFA sector accounting for the second most of any sector, with 22,611.

Only private banks employed more people than the IFA sector with 22,700. High street banks employed 20,000, and private client investment managers 17,900. Life companies employed 5,800 people and platforms 4,237.

The survey showed the UK’s wealth management industry generated 1% of GDP, employing 12.5% of financial services workers, and influencing the wealth of nearly 9% of the UK population.

Andrew Fisher, Towry chief executive, said the aim of the research had been to show the importance of wealth management to the UK economy.

‘The industry needs to communicate in concert. This initiative is aimed at determining the core value of the wealth management industry and clearly shows the important worth of wealth – both personal and corporate – to the wider future story for the UK economy,’ he said.

Andrew Fisher is a very influential man. He is one of the most influential IFAs in the UK and as he points out , IFAs control a very large amount of wealth. However, his arguments are circular. The value of the wealth management industry is not judged by the amount of wealth that industry generates for itself but by the value of the management of that wealth to the national interest.

The various tax shelters offered to wealthy people are not there to ensure that IFAs continue to generate 1% of Britain’s GDP but to ensure that the wealth they managed is directed towards worthwhile projects.

Rather like horse trainers who value themselves for their winners and forget that the horses are owned and their fees paid by enthusiasts, IFAs can be in danger of forgetting that the money they manage was generated by someone’s hard work and their endeavours are first  for their clients and not for the linings of their pockets.

I noticed a number of comments around this article (which can be read at ). They were from IFAs who managed their client’s money. These IFAs were embarrassed by the word “control” and in differing ways self-deprecating about their work.

From the limited experience  I have of having wealth managed, I reckon that I would rather engage with an adviser who put my interests first and talked to me of the value of my wealth in terms of what it could do for my and others happiness, than an adviser whose primary concern was to assert his own sense of importance.

So long as the “wealth industry” continues to parade it’s profitability rather than its utility and promote wealth management over wealth generation, it will, for all its boasting, get short shrift from people like me.

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by henry tapper on January 26, 2012  •  Permalink
Posted in Bankers, corporate governance, Fiduciary Management, Horse racing, Management, Retirement
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Posted by henry tapper on January 26, 2012

http://henrytapper.com/2012/01/26/controlling-wealth-is-not-the-same-as-generating-wealth/

10 infrastucture opportunities pension funds cannot ignore!

The Government has announced that it wants UK pension funds to invest in UK infrastructure. This week we saw a slice of Thames Water purchased by the Chinese. I live on the Thames and as dawn rises this morning I’m on “Junk Alert” on “the partially yellow river”.

I shouldn’t jest.  “Infrastucture  for pensions” is a major policy initiative so I’ve been thinking of ”family silver” we still own that could be rebranded to deliver a gilts + income stream to our needy pension  trustees.

Here are my top 10 picks

  1. The TARMAC M25; Tarmac laid it, widened it and relaid it. If you’d been laid as often as the M25, you’d want to conceive a private/public partnership (if not a civil wedding).
  2. The RFU Channel; The Rugby Football Union is about the only organisation that can still use the word “English” without racist undertones. As most of the water in this country is owned by the French (oh and the Chinese), it seems right that we maintain our rights to the English Channel by aligning ourselves to the core values of the RFU (greed, incompetence and middle-class ineptitude). The RFUis a past master in charging a fortune for a load of old rope so I look forward to the blazers setting an exorbitant congestion charge for the straits of Dover (renamed the Twickenham turnstile).
  3. The Church of Branson; We really do not sweat the commercial potential of the Church of England as we should. Richard Branson looks like Jesus and has a sharp eye for an income generating opportunity. Look out for the unleaded church with a polythene roof and leaded windows replaced by digitally projected images of the Virgin Richard . The COE Pension fund needs  divine intervention.
  4. The Towers Watson Bridge; The fine consultancy Towers Watson is omnipresent in the pantheon of pension advisers in corporate Britain. The gatekeeper’s gatekeeper should be offered the opportunity to make central London a ”Tower’ed” community, the bridge needs to be down to those Chinese Junks .
  5. The House of British Gas; apart from a measly income stream from hapless tourists, the House of Commons has been a drain on public coffers for many years. It is time it was sold to and re-branded by British Gas along with the House of Lords, Courts of Justice and most of SW1. Considerable hot air is generated by politicians and civil servants in pursuit of the maintenance of their privileged status as guardian and beneficiary of the guaranteed pension.This should be used in UK to provide the renewable energy that we pay British Gas and its parent Centrica to sell. It would be good to see Centrica’s guaranteed pension schemes kept afloat by Whitehall waffle.
  6. Ecosse Diageo. Scotland needs to be floated off as soon as possible. The EU is the natural home for this basket case that is currently supported by Westminster taxes raised via the revenues from our fine banks (RBS and HBOS). Diageo make some of their money from highland malts and are past masters of re-branding. A new name, harping back to the “bel-alliance”, would surely hasten the de-merger of Scotland into the Euro zone albeit with a hefty section 75 debt. Scotland owes much to its whiskey makers and should think it a small favour to sell it’s identity and tax revenues to Diageo.
  7. “Royal Mail Rail”- this catchy title is not as stupid as it sounds. In the past the Royal Mail and the nationalised railways were the subject of one of the most succesful robberies ever. Both have continued to drain the public and its Treasury  ever since. While transferring what’s left of the Rail Network into the Royal Mail’s pension scheme might still not plug the Royal Mail’s pension scheme deficit , it would provide some pleasing synergies.
  8. The Isle of MAN GLG; The IOM ’s a nightmare to get to and  it is horrible when you arrive. Currently it is full of offshore insurance groups but the Manxmen also want an influx of Hedge Funds.  MAN GLG is a fine organisation , its revenues are derived from getting pension investment into hedge funds and it keeps many pension fund advisers in a job. We say get MAN GLG to manage the Isle of Man as a “safe haven for financial chicanery” . Their overseas institutions (who pay no UK tax anyway)  can pactice tax evasion , call it tax avoidance and MAN GLG can package a a slice  of the revenues as the gilt + income stream to small pension schemes.  Ringfencing such practices on Manx could create a new Alcatraz for arbitrageurs - we would happily see them staying out there in their retirement!
  9. Monarch-e The budget airline need a corporate makeover, it really is a shoddy brand. What better way to realign its public persona than for it to purchase the Monarchy including the Crown Estates and the marketing rights to Princess Di and the (semi) live ones. While a reverse takeover of this size might look outlandish, the “e” tag should change your mind. We do not need a monarchy or any of their accoutrements. Buck Palace, Windsor Castle and Sandringham form the basis of a superior hotel chain while the Queen and her retinue can easily be virtualised (I follow the fake Queen on twitter). Monarch can vastly improve revenues from the Crown by digitalising it and in the process keep their pilots in the kind of pensions previously reserved for BA.
  10. The RBS National Debt. While our national debt can hardly claim to be an asset, it’s management could offer a lucrative basis point opportunity and who better to hand it to , than its principal contributor, the Royal Bank of Scotland. Government economic policy is too important to be left to elected officials and besides, there is a serious conflict of interest in getting civil servants to have to work for their pensions. Let’s deal with that issue by giving all at the Treasury maxed out early retirement pensions without further delay. Hand over the national debt to RBS and keep bankers in Fred-like pensions for ever.
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by henry tapper on January 22, 2012  •  Permalink
Posted in annuity, Bankers, Church of England, corporate governance, dc pensions, de-risking, religion, Retirement, social media, Treasury, Twickenham, twitter
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Posted by henry tapper on January 22, 2012

http://henrytapper.com/2012/01/22/10-infrastucture-opportunities-we-cannot-ignore/

The Racket of the Lambs – 20 things you never wanted to know about Pension Rocks III’s top band

  1. The Racket of the Lambs is the house band of the Pension Play Pen- Europe‘s fastest growing pension group (unverified).
  2. It is led by the Jackal – Simon Kew
  3. Its musical director is the Legend (that is Dick Strattan)

4.   Our Drummer is the mighty TC Jefferson

5. Our axeman is the boy – Ben Mulroney

6. Our rhythm man is slowhand Mike Patti

7. Kitchen,Tapper and Eastwood do the backing vocals

9. O’Malley does Roy Orbison

10.  You can get all the bios on the band and more good stuff at

http://www.pensionsrocks.com/bands/2012/pensions-playpen.aspx

13. You can come and support us by buying a ticket. the procedes of which will go to the Pension Rocks III charities and to our nominated charity – St Francis Hospice (thanks Jeff Prestridge). Tickets are £30 (£20 on the door-except they’re all sold out!). Seriously, we’re asking for a voluntary £10 supplement cos we don’t get much sponsorship.

14.  Our opposition on the night are a bunch of no hopers from AJ Bell, LGIM, NEST, MHP Comms and Lorica.

Don’t watch them, watch us

We are the very geriatric sound

So if you come off Oxford St

And you’re beginning to feel the heat

Well listen buster- you’d bettter start to move your feet

Tothe whackest unsteady beat

Of Play Pen’s

Racket of the lambs….

15.       The evening will be hosted by the Pensions Monkey

 
16. Judges are @OvationChris @psafloyd  and the fragrant @Loueezal (all in the Play Pen)

17. You can join the Pension Play Pen by http://www.linkedin.com/myGroups?trk=hb_side_grps_top  this gets you priority tickets access.

18.   WE ARE THE PLAYPEN – THE FAMOUS PLAYPEN! 

19. We get sponsorship from the NAPF, Plenum Group, First Actuarial, Jackal Advisory for which we are extremely grateful.

20. If you are in a band called the Racket of the Lambs and are thinking of sueing us – sod off- The Jackal’s name – sue him.

 

Oh and Triangle Simon plays the Triangle

 

 

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by henry tapper on January 19, 2012  •  Permalink
Posted in pension playpen, Pension Rocks III, pensions, The Racket of the Lambs
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Posted by henry tapper on January 19, 2012

http://henrytapper.com/2012/01/19/the-racket-of-the-lambs-20-things-you-never-wanted-to-know-about-pension-rocks-iiis-top-band/

Rose Metcalf- dancing seafarer to the rescue.

Did anyone hear the full interview on Radio Five Live this morning with Rose Metcalf?

The 22-year-old dancer told of her night helping passengers, staff and herself off the stricken Costa Concordia with a poise and understatement that suggests she has rather more strings to her bow than dancing in front of European cruisers –  if that’s what you call floating round the med in a town that sounds like a coffee shop.

I was particularly taken by the gag she had written as her farewell note to her Mum and Dad had she not survive. Apparently she had been parted from her luggage for a month after her flight out to the cruise. Her parting note would have read

Ironic that I am returning without the luggage

Tragic as the events on this boat are, the sinking of this Euro superliner on the very night of the downgrading of the Euro zone may be remembered more for the parallels between the two than for the human suffering involved.

Watch out for the jokes on “mock the week” and “have I got news” and remember we dissed them here first.

However, amidst all the recriminations that are bound to follow the massive ineptitude of those managing the boat’s navigation, Rose Metcalf will be remembered - at least on this blog - as a sound , witty and self-deprecating seafarer who put her passengers, fellow-staff and family first.

Rose Metcalf- we salute you! And here’s a rather more flattering photo of you than the one published in the Daily Mail this morning!

Update ***Update***Update***Update

Whooah! Now we discover Rose is a Dorset girl from Wimborne where my relations are the funeral directors (you can step down lads).

The fine rag “the Bournmouth Echo have celarly doorstepped Mr and Mrs Metcalf and got this great interview from their brave daughter.

“It was very dramatic,” Rose said.

“Men came down in harnesses and took us off.

“The worse thing was the thought of jumping into the cold water in the dark.”

All her personal possessions, including passport and money were left on board.

Rose called home at 3am on Saturday morning to tell her parents she was safe.

Dad Philip picked up Rose’s phone message a few seconds after she left it but had no way of getting back to her immediately.

Rose was having a coffee when she heard a loud bang and then the lights went out.

At first they were told it was an electrical fault.

Rose said: “It was about nine o’clock and I was in the restaurant having a cappuccino when there was a huge bang.

“Water started coming in and the lights went off and everybody was running around not knowing what to do.

“I was still in my dance clothes and I dashed off to my cabin where I had a hangar of dry clothes and I put them on with a life jacket.

“Then I had to go to a station point because I was staff. The ship was listing almost immediately.

“When I got to the station point they said it was an electrical problem and told me to go back and put my dress on, but I said no way.

“I then went off to help calm the passengers and helped do a roll call. People then started getting into the boats and by this time it was quite full of water.”

 

 

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by henry tapper on January 16, 2012  •  Permalink
Posted in costa concordia, Cruise boats, Henry Tapper blog
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Posted by henry tapper on January 16, 2012

http://henrytapper.com/2012/01/16/rose-metcalf-dancing-seafarer-to-the-rescue/

Is Fiduciary Management right for small DB plans?

Fiduciary Managers have tended to market themselves to plans with substantial assets (say £100m +). My interest is in the smaller plans where the need for Fiduciary Management is probably greater but the means to pay for the complex strategies commonly promoted lacking.

Talking with advisers and trustees of the smaller plans, I am struck by the reluctance of trustees to outsource decision making despite their acceptance that the strategies they are currently employing are sub-optimal.

Coming form an insurance background, I remember the days of the fully insured DB plan and can quite understand that today’s fiduciaries are wary of “insurers bearing gifts”.

The parallel with the DC landscape in the late 1990s is an interesting one. At that time there was a concensus that the bundled offerings of UK insurers were a little shabby and that the conscientious trustee would look for best in breed investment choices on third party administrative platforms.

Ten years later, the vast majority of new DC arrangements, even for FTSE 30 companies, are being established with insurers. The insurance companies have raised their game and delivered on their promises.

Yet the UK insurance industry has, by and large, ignored the opportunities to manage substantial residual assets in small UK DB plans, despite their capabilities.

Of course insurance companies will only provide  95% solutions. They will use passive pooled funds to  provide better liability matching and packaged diversified growth funds to smooth the journey towards proper funding but these will not provide the precision of a top-end fiduciary service.

However 95% solutions  can provide substantial risk savings on  the liability and growth pots and insurers can deploy the expertise in fund administration they’ve established in their DC operations to lock-in gains and provide excellent reporting at a cost that small plans can afford.

The last point should not be underestimated. The UK insurers have massive buying power with the fund managers. They have embraced open-architecture becuase they can offer corporate DC plans funds, especially passive funds, at lower prices than many individual plans can buy directly. The impact of aggregating across their book has led to DC plans being offered on a fully bundled basis at a price that is uttelry compelling to sponsors and trustees.

Whether froma fear of annoying consultants,  from lack of confidence in their communication skill set or whether they still mart from being driven from this market by the fund managers, insurers are missing an easy win. More importantly, small DB plans which need their help, are suffering from under-supply. How long before the insurance industry recognises the opportunity to manage out the long-tail of small scheme DB liabilities and provide some effeciency in what is one of the lest effecient area of UK Financial services?

As you may have guessed , I am posting with a degree of self interest. We are a boutique UK insurer and will be launching a Fiduciary Management service from July. I can give you a sneak preview of the approach we will be taking by referring you to a presentation we have put in the public domain.
You can view it on http://www.slideshare.net/henrytapper .

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by henry tapper on April 28, 2009  •  Permalink
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Posted by henry tapper on April 28, 2009

http://henrytapper.com/2009/04/28/is-fiduciary-management-right-for-small-db-plans/

Contract based DB- Redington v Cardano- no blood!

Full house in St Albans for the Redington/Cardano match-off. Morinho v Ferguson, Ali v Fraser, Cowell v Walsh-we had been promised blood.

Things started poorly, a weak show of hands from the audience on who was supporting who (needed some hand helds to give us anonymity). Central theme of the evening was established- pension people can’t take decisions.

Kerrin delivered a laid back presentation, careful stuff as half the people in the room had worked with him (the other half were busy tweeting Robert). Common ground was established- pension schemes aren’t doing very well – poor governance- lack of good and timely decision making. Then a chart talking us through the various shades of Fiduciary Management defined by “scope” and “implementation”. Then the good bit, a line in the sand drawn between implemented consulting (Redington) and Fiduciary Management (Cardano). Fiduciary Management is implemented consulting with an investment management agreement.

My take-Fiduciary Management is contract-based DB.

Then Robert, sporting preppy jumper and all-american smile. Lots of shadow boxing- talk of common ground- mutual respect tra la la- audience getting restless- where’s the blood? Then the killer blow. “Fiduciary Managemnet is like a parent outsourcing the bringing up of a child to a nanny for eighteen years”- visions of Oliver in the workhouse- nasty Beedle Kerrin -”can I have some more” etc. Not a dry eye from the one or two trustees in the audience.

Kerrin’s having none of it. Back he comes- ”totally inappropriate analogy, you have no kids- I have 5 etc.”- things hotting up. Talk of partial outsourcing- boarding school. Kerrin claims Robert is playing emotional games, Robert stands his ground- fun!

The analogy becomes a conceit “what would you do if your child became sick?”- Avgi Gregory. Where’s this going? The PPF decamps to Great Ormond Street? Both combatants pick up on this as “injury in the kindergarten”, Kerrin plays the accountability card- sick kid on my watch- litigation- end of Cardano. Robert backs off, he doesn’t have an IMA to do childcare- the line in the sand becomes deeper.

Robert tells the tale of the Northern Rock MD not knowing what a CDO was and the Goldman Sachs MD who could explain a CDO and a CDO squared. His point- don’t employ new technologies if you don’t understand them.

(Guess the Goldman Sachs guy didn’t see the taxi*.)

Options to throw my curveball-”what have fiduciary managers learnt from Bernie Madoff -Kerrin?”, “what have we got to learn from investment bankers re governance -Robert?”. Not the time and place. More questions, summings up- another vote- hung vote- honours even.

A good test for NAPF meetings is what happens afterwards- normally docile chats about who has met who- not tonight. There may not have been blood but there was engagement. Two heavyweights- sadly no video of the event and no hand-outs so this may be the only public record.

Events like this happen too infrequently. Well done Hewitt for getting it organised and well done NAPF North for providing the platform. Well done Kerrin and Robert for a proper debate. You wouldn’t have expected less from these two but how many consultants would have taken the risk of getting it wrong?

* This is the last line of a song called “the day I died” which is very good (and very relevant to Lehmans et al).

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by henry tapper on October 21, 2009  •  Permalink
Posted in de-risking, Fiduciary Management, redington
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Posted by henry tapper on October 21, 2009

http://henrytapper.com/2009/10/21/contract-based-db-redington-v-cardano-no-blood/

Linked in- a powerful force for good (or bad)

The chances are that you use Linked-in, over 50 million people do. For some it is just an extension of their Rollerdex, a deeper view into “Outlook contacts”. For others is is a two way street connecting recruiters to the jobless and job-movers. For me it is an essential platform which organises my prospecting for new business, my client relationship management and my learning.

When I started work I was given a booklet called “Prospecting self-starter”. Its message was that in the network of relationships I had built up as a child and young adult, I had a personal resource which, if used responsibly, could generate revenue and allow me to build an advisory business over time. I learnt to recognise where there were immediate opportunities to earn and where, by referral, I could build on this network to secure future sales.

Over time, I outgrew the filofax. The history of my relationships with my clients needed to be stored in a more complex database. It wasn’t till 2008 that I found Linked-in.  Linked-in took my relationship management into 3D. Not only could I see and record my interractions, I could begin to see how my contacts interracted with others.

As I became more familiar with Linked-in’s functionality, I could see that people were using the network to share information and learn from others. People asked questions and answered questions. These interractions lead to the creation of new relationships based on gratitude and trust.

Now I can establish groups where others with common interests can congregate and participate in wider discussions. I can see where people are coming from and, in their desire to understand, where they are going to. Where I can help them get to their learning destinations, I try to help, realising that this may offer me an opportunity to do business with that person at some time in the future. Often I need help myself and I find that those who help me do so for the same reasons. I have been able to refer some of them to solutions which have created goodwill for third parties who have themselves become contacts.

In my business, the end users (trustees) cannot use my products without fully understanding their problems (for which they need actuaries) and without due diligence being carried out on my product (for which they need investment advisers). Decisions are complex and often the process is stymied through lack of information, too much information or through conflicts created by poor communication, Linked-in goes some way to reducing these obstacles .

By creating a network of individuals who are Linked-in, people who are thinking of working with me can see that they are not alone. They can contact people who they know know me and this creates confidence. While Linked-in does not use external ratings in the way that e-bay does, it has implicit metrics for  probity and there are opportunites for explicit reccomendation-solicited or otherwise. Quantity of relationships can easily be measured by the number of individuals linked to someone, the quality of those relationships is much harder to assess but it is the quality test that is critical if Linked-in is to be used as a springboard to getting things done.

While building my network, I have become aware of the capacity of Linked-in to damage reputations. Occasionally, someone with whom I was connected breaks that connection. When this happens I need to retrace my steps and understand what I could have done better. Some of my invitations to people to join my network have met with no response or a negative response “I do not know this person”. It is through these experiences that I have learned most about the manners needed to manage my relationships well.

Companies are right to worry about the collataral damage to their reputation that can be created by bad use of Linked-in, I would strongly advise companies to adopt a policy for Linked-in useage which clearly states what is acceptable and what isn’t. The information posted on Linked-in has the same impact as information in conventional media.

Linked-in is only a platform and a portal. As a platform it connects disparate people and can be a powerful means to enable good decision making. As a portal it offers opportunities for its users to find information, compare experiences and most importantly create face to face relationships , the nuances of which Linked-in can never capture. It is a means to an end but not an end in itself.

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by henry tapper on October 31, 2009  •  Permalink
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Posted by henry tapper on October 31, 2009

http://henrytapper.com/2009/10/31/linked-in-a-powerful-force-for-good-or-bad/

And then I woke up….

I arrived as usual for the cross channel ferry.   As I passed reception on the way to the lounge,  a steward asked me to “step this way”.   I followed her into a special lounge where a number of distinguished people were assembled.

“Congratulations Sir, you have been chosen by your fellow passengers – you will be taking this ferry to France”.

“But why me?”

“Because you told us you wanted the job”

” I’d had a few when I filled in that questionnaire!”

“Never mind Sir- Congratulations”.

I was introduced to the people in the room.  There was a nice lady who told me she was in charge of the “passenger resource” : apparently she was rewarded for identifying that they were resourceful.   There was a man who knew about money who told me he controlled the cost of ferries by overseeing the “amount of cheese in the baguettes”.   Another man had been immensely successful in getting passengers to claim  this “was ther best way to Calais”.

Once we had all been introduced, there trooped in a series of business people in suits.  An accountant told us he would be auditing our every wave and would be telling the fat controller of our progress.   A fellow called “the actuary” told us he had predicted exactly where we should be going and how long it would take us and as long as everything worked as we he predicted- we would be fine.   A lawyer told us that he would keep us out of trouble with passengers and a clever person told us that he’d chosen the right fuel mix and the correct amout of fuel according to the actuary’s calculations.  Surely with such a wise group of suited men we could have no problems.

Everybody was nodding sagely- so I nodded sagely though I didn’t understand any of this.  Then an old man in a beard arrived.  He nodded more sagely than anyone else so we voted him Captain and Chairman.   We were shown to the wheelroom which was full of flashing lights and dials.   Although all the men in suits had gone,  we weren’t too worried as we  had the men in suits behind us.

With that there was a great roar from the engines.   People ran around on the deck throwing ropes around and getting excited.  The ferry floated out through the harbour gates and everything was fine.   Everything was fine for about two minutes before a great wind sprang up.   The boat went sideways and everyone in the wheelhouse went quiet.

“Eh up Captain-what do we do now?”   said I

“Damned if I know” said the old sea dog (not)…”let’s put it to a vote”.

We voted and decided to do nothing.  Reports were coming in of passengers revolting as the boat swayed from side to side.

A voice came from the intercom  “The passengers are revolting”.    “Aren’t they always” quipped the passenger champion.  We decided to discuss the quality of the baguettes and concluded that they were the problem.

“Put the stabilisers on” boomed the intercom –  the Captain identified the voice as the Fat Contoller who controlled the fleet.   We had another vote and agreed we didn’t understand stabilisers so we decided to put the stabilisers on when we got into port at Calais.

The Fat Controller wasn’t happy.   “You are now 20 miles off course.   I will have to use the reserve fuel supplies to get you back –  this is costing us a fortune – heads will roll and they won’t be mine”.

Things went from bad to worse.   A strong tide pulled us down towards Cherbourg, we nearly hit another ship and then we ran out of fuel.  We drifted towards the Channel Isles,  got caught in the Alderney Race and before we knew it we hit a rock.

“You’re sinking”  boomed the intercom.  We called the lawyer. “You’re f*****”" said the lawyer.  “Thanks” we said.

As the ferry went down,  passengers jumped like lemmings into the sea.  We had another meeting and concluded that we would sue the men in suits before following the passengers.   The last thing I remember was being hauled from the water by a man with a peaked cap,  I remember around the rim the words “HMRC  PPF”.

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by henry tapper on November 6, 2009  •  Permalink
Posted in de-risking
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Posted by henry tapper on November 6, 2009

http://henrytapper.com/2009/11/06/and-then-i-woke-up/

Social media and the corporate dilemma

It’s a common moan- “my company won’t let me access Facebook/Twitter/You Tube at work“. The work/life balance debate rages but is deepening as employers explore the corporate risk of what their employees are typing.  This corporate risk  endangers a  company’s reputation and in extreme cases  the company’s ability to trade.

While all businesses can be exposed to rogue employees overstepping the line, problems are most likely to occur within highly regulated sectors- such as Financial Services. The rules governing financial promotions laid down by the FSA extend to the promotion of products and services via social media- there is no “new technology” exemption.

The explosion of interest among financial services practitioners in on-line forums and particularly in Linked-in makes it almost impossible for compliance and marketing teams to control the content being wafted through the blogosphere. When “in my opinion” is interpreted as “in our opinion”, the corporate reputation is on the line and when “our opinion” is interpreted as a “financial promotion”, the corporate regulatory status is on the line.

Take as an example Linked-in. While Linked-in is not a transactional site, it is intended to stimulate non-line activity- interaction that leads to transactions. Most of us are used to being recorded when using company telephone lines where we leave a compliance footprint. However our  footprint if we actively engage in on-line forums is as indelible and considerably more visible. If you use Linked-in, look at the “my recent activity” box on your profile.

Learning the rules of on-line etiquette is a first step but your fully understanding the rules that govern B2B on-line relationships is what most matters to your boss. Not just your reputation but the reputations of your colleagues and perhaps shareholders are at stake. Managing the transition from “I” to “We” is no easy thing. especially when there are no written rules!

The corporate dilemma is deeper than whether to ban social media from the workplace- it is how to control employee behaviours. The challenge of controlling risks where the risk-controllers are in unchartered waters cold prove too great leading to social media exclusion or job exclusion (the sack). The risk for those using social media at work is that even with the best of intentions, social media can get you into trouble. The best way of managing that risk is to ask for help. Specifically ask your compliance team to review your activities and give you guidance.

Inappropriate behaviors can take many forms- most of the unwitting. The speed of social media publication is such that errors will creep in. Last week I thought I tweeted that I was “using linked-in” only to be told I had actually told the world I was “suing linked in”. Lesson learned- think before you text as your company cannot and should not expect anything less than perfection.

Compliance people are doubly scared because they are not naturally social media mavens . Their antipathy to social media may be amplified by inexperience. It is no use saying “they don’t get it“. It is up to you to help them to get it. When they  know what you are up to, they may initially adopt heavy-handed tactics. This is natural. In my experience light-touch regulation is born out of confidence but there may be ”hump” of heavy-handed regulation or “tough love” that is a part of the process.

As corporates catch up with the activities of their staff , there will be pain and frustration on both sides. Toys will be thrown..there will be blood! You need to be aware of the corporate dilemma and help manage the process of employer buy-in if you are not to become a casualty.

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by henry tapper on November 7, 2009  •  Permalink
Posted in de-risking, Facebook, pensions, social media, twitter
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Posted by henry tapper on November 7, 2009

http://henrytapper.com/2009/11/07/social-media-and-the-corporate-dilemma/

The Ilford ruling-who won?

A recent high court ruling stopped the trustees of the Ilford Imaging pension scheme protecting their best pensioned members by purchasing them  guaranteed annuities- an expensive luxury. The Court concluded that trustees could not indulge in what is known as moral hazard -”heads we win-tails we don’t lose” or more properly-’heads we win, tails the PPF picks up the tab”.

The PPF is a Government organised safety net which will, should it fail,  need the public purse to put things right.

Most of what has been written on this  has concentrated on the employer’s and trustee’s interest. This article concentrates on the interests of two other stakeholders- Joe the tax-payer and Joe the member (recently deferred).

Joe the tax-payer is already underwriting a large portion of the UK’s pension debt and has every reason to be concerned about picking up debts from schemes such as Ilford’s. Joe the member is the vulnerable beneficiary of an income in retirement promised by his company (with varying degrees of certainty).

A few years ago, the States of Jersey entered into a Faustian pact with its pension scheme. The Trustees released their sponsor, the Jersey tax-payer, from an obligation to guarantee pensions:  in return they got a guaranteed contribution to the scheme of 16% of active member salaries for 82 years. While the Trustees continue to pay pensions at the old defined benefit rates,  benefits will be cut, as and when the money starts to run out.  According to the actuary- everything will be ok in 82 years time.

Once the Trustees had concluded the pact, they upped the equity exposure of the funds arguing that they now had DC liabilities and could run a DC type strategy relying on the long-term equity premium. The Trustees considered 82 years would give shares a reasonable chance to prove themselves.

There is a place for such carefree enthusiasm and that place is Jersey.

The interests of Joe the tax-payer and Joe the member are, in Jersey, well aligned. Most tax payers are current or deferred members of the scheme and if there is a risk transfer , it is an inter-generational transfer to the Jersey citizens of the 22nd century.

The interest of Joe – the member of a UK regulated company pension scheme - is not aligned to those of the PPF (which represents a much larger population of Joes) . It is still less aligned with Joe the tax-payer who is extremely unlikely to have any interest in Joe the member’s plight.

And the obligations on the management of a private company to re-pay its pension debt is much more urgent. A 5-7 year recovery plan is in line with the average Director’s time in office, there is no 82 year End-Game for him.

There is neither the time, nor the money, nor the public inclination to let trustees play games with the funds of their membership.

The Ilford ruling will need trustees to pay more attention to getting themselves out of trouble rather than relying on the Government lifeboat.  Trustees will have to concentrate on sound investment strategies and there will be no scope for the  practice of securing tip-top pensions at the expense of Joe the tax-payer.

The Ilford ruling will protect Joe the tax-payer from reckless trustees and it will let Joe the member feel a little more comfortable about the future of his retirement income . It should encourage the trustees to pay more attention to risk and it will motivate employers to pay more attention to the risks the trustees are taking.

Who won?  The common man won. The Court delivered a sensible ruling.

Common sense won.

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by henry tapper on November 14, 2009  •  Permalink
Posted in de-risking, Jersey, pensions
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Posted by henry tapper on November 14, 2009

http://henrytapper.com/2009/11/14/the-ilford-ruling-who-won/

Post not that ye be not judged

EMPLOYERS have been warned against using social networking sites to vet job candidates. Jersey’s data protection commissioner, Emma Martins, said that relying on the internet was a ‘scandalous’ and unreliable way to recruit employees. She added that businesses should have higher standards when it came to hiring staff. ‘The internet is a pot of unregulated space,’ she said. ‘It can be a source of useful information but is equally a source of inaccurate information. To base any decision that affects someone’s life on information from the internet is, I would go so far as to say, scandalous. Employment can affect the direction of someone’s life and their ability to do a job should not be based on random information. ‘If you are a professional organisation, you should have high standards when you source information on potential employees. When you search online for someone you could be using inaccurate data. In which other areas of your business would you rely on inaccurate data?’  This is Jersey-20th Nov 2009

If Facebook was a country it would be the fourth most populous on the planet. What makes us want to share our lives with others in a way that might prejudice our employment prospects? It seems that individuals have voted with their fingers on that one! The right to proclaim our identity through photos, contact lists, blogs and comments has been asserted across the Western world and beyond.

Emma Martens’ comments were made to a newspaper in Jersey but were read by me in Windsor and read by you where you are. I have put some context to her remarks by leaving the rest of the article. There is a wider context that those living and working in Jersey will be aware of but cannot be explained here.

Emma was able to comment in a controlled environment but the comments have become, through on-line publication, a catalyst for this post. Many people’s on-line profile is controlled by forces of which they have no control- think of the chap brushing his teeth at the Chelsea v Man U game- television translating to You-tube will shape the way many people think of the fellow for months and years to come- that the camera panned to him brushing his teeth while watching the game may be the most significant moment of his on-line life!

In fifty years time, Generation Y’s on-line profiles will be replete with such on-line incidents, indelible to their on-line and off line reputations.

We will not be able to stop this process with data protection rules. The force of the web tsunami will wash them away. Emma’s advice leads me to the old proverb”judge not that ye be not judged!”. “Relying” on on-line profiles is a problem that needs attention from us all, not just those in Government.

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by henry tapper on November 21, 2009  •  Permalink
Posted in Facebook, Jersey, twitter
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Posted by henry tapper on November 21, 2009

http://henrytapper.com/2009/11/21/post-not-that-ye-be-not-judged/

Opinion is not a dirty word!

“You don’t get paid to have opinions ” ….”If I wanted your opinion I’d ask for it”. Two stock put downs that were turned to by television scriptwriters in the 60s and 70s to tag the workplace bully.

Of course we’ve moved on from there. Now the  phrase is  ”I value your opinion but..” , which is as loaded as “we have every confidence in our manager..” or “with all due respect”. Value, confidence and respect too often get lip such service in the workplace. An opinion from a subordinate is as popular as a computer virus.

An opinion box is installed to lance the boil of employee discontent and the contents may be used to add some innocent merriment at the next staff management meeting. More IT-savvy companies may  create bulletin boards which the occasional naive subaltern will post to. This  to the amusement of colleagues who watch the post  sit indelibe and isolated,  to the embarassement of the hapless contributor.

All this of course creates resentment. The disempowered workforce gathers around water coolers- or more properly in the pub and vents their collective rage, they return to the workplace to get paid, not to contribute. Productivity drops, people leave, businesses fail.

The human spirit being what it is, people retain value, respect and confidence in themselves and find alternative means for self-expression. They sing, play football, do stand-up. Recently they have gone to social websites where huge numbers express the opinions that have no place at work!

And herein lies a great truth that should be embedded in the HR policy of every organisation.

When people feel free to express themselves without constraints they do so constructively. If you don’t believe me- look!

Twitter, LinkedIn and You Tube are jam-packed with information, advice and goodwill freely posted for the benefit of others.

It’s amazing- people leave work, go home and then post the things they wanted to say at work but couldn’t… and it’s all positive!

It suggests that social media is the pressure valve that releases our frustrations and allows millions of us decent people to walk back into our work places with our heads held high.

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by henry tapper on December 5, 2009  •  Permalink
Posted in pensions, social media, twitter
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Posted by henry tapper on December 5, 2009

http://henrytapper.com/2009/12/05/opinion-is-not-a-dirty-word/

Join us at Cheltenham in March for the National Hunt Festival of Racing

You are cordially invited to join our house party during the Cheltenham National Hunt Festival between 16th and 19th March 2010.

We are the Pension Playpen sports and social committee, Bill Whitehead (bursar), Dick Strattan (entertainment),Henry Tapper (headmaster),  Kim Gubler (equine) and Karen Wake (matron).

We have upgraded our property to a rather better place, http://www.manorcottages.co.uk/cottages/home-farm–13-.html

We have purchased tickets at a group rate for the Tattersalls enclosure on all four days of the Festival and have arranged transport to and from the course. We now offer you to join us for anything from a day to a week in the Cotswolds with us.

You can choose to join us for as many days as suits. The full package will include

  • Transport to and from the Farm from London
  • Accommodation at the Farm
  • Transport to and from the course
  • Tickets for the racing
  • Breakfast
  • Supper either in the House or at a local pub (not included in the price)
  • General jollity including our usual sing-songs around the piano with Dick etc.
  • Drinks at the House

Who can come?

This is an open invitation but we have sent it to you because we know you-like you and are sure you will fit in well. You may have come on similar trips organised in previous years or this may be new to you.

Most of the people who want to come are involved in pensions but we have always had a lot of our friends and family coming along and this has worked really well.

We strive to have a great time and do everything possible to make this a fantastic, stress-free occasion!

How can I find out more?

Just get in touch with one of your hosts , our details are on Linkedin. Henry is the obvious first choice, he can be contacted at henry.h.tapper@googlemail.com or by phone on 07785 377768.

Costs

We are a not for profit group. All revenues raised will be ploughed into the week – your hosts will take no wages!

The cost of a full  week Monday 15th to Sunday 21st  will be  £600 per person.

The cost of “the full racing package”= Arrive Monday evening, leave Saturday morning is £450 per person.

The cost of a single day package is £120 per person (one night at the house).

We can provide any other combination of nights and days racing on request.

What do we want you to do?

You should register your interest immediately by replying to henry.h.tapper@googlemail.com..or you can contact one of the other  hosts if you know their details!

To guarantee your stay you need to send us money by TT or cheque to our bank account. We’ll give you all the details once you’ve contacted us and confirmed all the details you want.

You will recognise that this is a social function and not a business venture. Bill is a hugely respected banker (oxymoron?) and a professional trustee. We have priced the packages with a contingency for unexpected events. If by happy chance we have money left over at the end of the week we will either return the balance or roll it into the subsidy of another event later in the year.

Places are strictly limited. The maximum number we can have in the house on any one night is 18 and we will be allocating places on a first come first served basis with priority going to those coming for all four days.

Once we have received your cash we will confirm your stay and keep you regularly updated.

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by henry tapper on December 12, 2009  •  Permalink
Posted in Horse racing
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Posted by henry tapper on December 12, 2009

http://henrytapper.com/2009/12/12/join-us-at-cheltenham-in-march-of-the-national-hunt-festival/

Long live workplace savings

Hands up if you own shares in the company you work for.

You are either

1.Excited and proud to be participating in the fortunes of your company, or…

2.Worried that you have too much of your wealth tied up in your primary source of income

I suspect that for most people it’s a bit of both.

The chances are, especially if you work for a company with “British” in its title,  that you’ve got a substantial amount of your wealth tied up in share save schemes of one sort or another.

There are two threats to the conversion of this paper wealth to cash in the bank

1. A fall in the value of the share price

2. Tax (and transaction charges) when you cash in your shares

Statistics suggest that most people hold the shares they have been granted form employment through to retirement. Do you?

Conventional wisdom suggests that relying on the performance of a single share is a bad thing. Diversification’s the name of the game:- which is why most people save through collective investment plans which spread  risk across a range of investments.

Conventional wisdom suggests that (unless you are about to cash in your shares) you should use the tax incentives available through pensions and ISAs to shield them from the taxman’s scythe.

Companies with substantial amounts of employee wealth invested in their own shares are worried. They are worried about the same things as you..

Worried from a paternalistic viewpoint about the risks to your wealth.

They are also worried that your morale (and productivity) will be aligned to the company’s share price- with an asymmetric risk (the company is blamed if things go wrong and receives little thanks if things go well!).

They are worried that when you come to need the cash- when you retire, the value of your shares will be diluted by tax and transactional charges.

Finally they are worried that you are expecting rather more from your  pension than you are likely to get (if it’s DC that is!). In other words they worry that they are going to have a lot of disgruntled pensioners unless they can better manage expectations.

The stats show that many employees will have more in these share plans than in their pensions when they come to retirement.

While companies agonise over the structure of their DC pension plans, they are also worrying about these share plans- for very good reason.

Look forward over the next few years to innovative structures from your company that allow you to pass shares you own into workplace pensions and ISAs with the option to exchange your shares for collective investments.

Look out for clever ways to minimise transactional costs through the use of “in-specie” transfers.

Look out for your company negotiating great deals with asset managers to get you cut price collective funds.

Look out too for the introduction of ”clever technology” that gives you the option to see the value of your shares and your workplace savings schemes in a single glance. What are being called “employee portals”.

The future of workplace savings may just be getting a lot better.

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by henry tapper on January 8, 2010  •  Permalink
Posted in de-risking, pensions, Retirement
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Posted by henry tapper on January 8, 2010

http://henrytapper.com/2010/01/08/pensions-are-dead-long-live-workplace-savings/

What’s my “NEST” egg going to be worth?

The Government’s working group, PADA, have come up with a new name for the pensions scheme they are launching between 2012 and 2015. It will be called ”NEST” rather than the working title “Personal Accounts”. The obvious reference is to a “nest egg” -which is a bit misleading. NEST will need to provide a series of nest eggs delivered to you every month from the point you reach retirement  to the day you die- this is more commonly known as a pension- but UK pension people are a little ashamed of the word pension as they think it puts people off.

In Australia, they are a little more brutal. Their version of NEST is called ”Superannuation” or “Super” for short. It’s a compulsory tax on earnings and is as much a part of your pay cheque as National Insurance and PAYE. Perhaps we can learn a lesson from a system that is working and stop mincing our words!

UK people don’t have much trust in pensions which is not surprising as they have been kicked about by successive Governments like footballs. You never seem know what you are going to get or when you are going to get it- even with a Government guarantee. Right now, if you are 65 you will get £95.50 pw or about £5,000 pa  from the Basic State Pension (Old Age Pension as we used to call it). That’s as long as you’ve paid the stamp for 44 years.

This Basic State Pension was famously described by Michael Portillo as “nugatory” -which is Portillo-speak for being worth SFA. That’s not the case. If you wanted to buy this pension for yourself from an insurance company it would cost you about £125,000 which isn’t SFA at all.

Now most of us will get a little more than £5,000 pa  when we retire, we may have private pensions, company pensions and the State Second Pension (formerly SERPS) but there is a minority, reckoned to be about 5m people in the UK, who struggle to get the full £5,000. They have to rely on means tested bail-outs (Pension Credit) and various allowances just to heat their houses, buy basic food etc. The number of people falling into this category is going to rise rather than fall because state benefits are being cut back, companies are offering less generous  pensions and because people are saving less not more into private pension savings schemes.

So these NEST eggs are going to have to go some if they are going to get us out of our current predicament. If you are looking for an income from 65 onwards, the stats suggest you are looking for on average 240 monthly or 1100 weekly payments as you are likely to live till you are 85; these payments need to increase at least in line with inflation and that’s why you are going to need one big NEST egg to kick this off!

Even if you built up a NEST egg of £125,000, combined with your Basic State Pension , you’re still only on £10K pa for the rest of your life.

Back in January 1998 an organisation called DEMOS suggested that the Government has an obligation to force people to get themselves an income in retirement that would keep them from being an obligation to others. They reckoned in 1998 this would be about £8,500 pa. Today that would be about £12,500 pa. They suggested the Government introduced a national employer based savings scheme which had contribution levels remarkably similar to those proposed for NEST. You can read this report here http://www.demos.co.uk/files/reasonableforce.pdf?1240939425.

12 years on we have done little to sort this issue. The majority of lower earning households are still not properly saving for retirement. We still have pensioners having to choose between eating properly and heating their houses.

Meanwhile we see massive pension inequalities. Many low paid families are paying more (through their council tax bills) for others pensions than their own. Even then they struggle to get to work through ungritted roads because Local Government pensions are strangling Local Government  finances.

It’s hard not to be cynical. The noise about NEST eggs is disguising the dismal failure of Government, the pensions industry and the people of this country to get to grips with the retirement problem.

The cost of delaying a proper National Employment Saving Trust (NEST) will be felt by its future participants for generations to come. My estimate is that to get people out of pensions poverty, NEST will need to deliver one and a half times the basic state pension. To do this, your NEST account will  need to be worth (in today’s terms) just short of £200,000. Talk is cheap, achieving this level of savings is getting harder by the day.

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by henry tapper on January 10, 2010  •  Permalink
Posted in NEST, Personal Accounts
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Posted by henry tapper on January 10, 2010

http://henrytapper.com/2010/01/10/whats-my-nest-egg-going-to-be-worth/

Can pensions find a unified voice?

There was a time when the NAPF spoke for pensions. A time when final salary schemes  could be coined  ”Britain’s economic miracle” by a cabinet minister, a time when the policy and advisory agenda was controlled by a handful of super-consultants, a time when information was disseminated through a small group of pension magazines.

In the last five years, the consensus ahs been shattered. Final salary schemes are now in an “End Game” for all but the public sector. For many employees, the idea of company trustees is a memory, their pensions are with insurers or the PPF and increasingly they will be delivered through “Nest”. The hegemony of the big consultants ahs been challenged by a new kind of adviser whose primary focus is on solvency- not benefits.

Who do the NAPF speak for? Do they speak for the insurers, the corporate sponsors, the PPF or Nest,? Do they speak for the holders of personal pensions?

The NAPF has done and continues to do sterling work. But it no longer speaks for the pensions community as its unified voice.

There was a time when you awaited your pension news till the monthly magazines arrived on your desk. Now yo can expect today’s news to be delivered to your desktop within minutes of its creation.

There was a time when you waited for an annual conference to meet with your colleagues, chew the fat and get updated by the great and the good. We can now ask questions on websites that give us a fix on difficult topics within hours.

There are no great and good anymore- the availability of information has meant a democratisation and demystification of the pensions hierarchy.  The information revolution has done for the pensions oligarchy what usury did for feudalism and it’s not taken 100 years, it hasn’t taken 100 months! 

But at the speed that the consensus collapsed, so we can expect a new consensus to emerge.  But where? Here is my prediction.

By this time next year ( I am writing in January 2010) the pensions consensus will have reformed and the new NAPF will be found at a pensions forum called Mallowstreet. I am a member of this site and if you are as passionate about getting pensions to speak with a unified as I am, your next move will be to click on  www.mallowstreet.com and join me.

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by henry tapper on January 16, 2010  •  Permalink
Posted in pensions
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Posted by henry tapper on January 16, 2010

http://henrytapper.com/2010/01/16/can-pensions-find-a-unified-voice/

You don’t always know what you’ve got till it’s gone

So I’m 48, 15 months older and I’d be able to buy an annuity-but they’ve paved paradise and I’ll have to wait till 2016 which sucks.

Paradise  for this child of the seventies is a gilt-edged promise of income for life and “we’ve never had it so good”. Britain has an efficient annuity market with low distribution costs and strong competition arising from compulsory annuitisation from private pensions.

Academic research suggests where annuities are compulsory,insurers are proteced from self selection and can offer better mortality terms. Since the introduction of income drawdown, we have seen the richest (potentially the longest living cohort) defer annuity purchase which has further improved annuity rates by concentrating annuity purchase at normal retirement age on the less well pensioned (and shorter lived).

The rich are perversely selecting against themselves!

Were I 15 months older, I would be taking advantage of these “super-rates” and I suggest that there is an opportunity, especially where small DB schemes see liabilities dominated by a handful of pensioners in payment to buy such  members out (subject to approval from the Regulator).

But here’s the rub. Those beastly bureaucrats in Brussels are insisting that insurers from 2012, increase protection for annuitants to an extent that these super-rates disappear. Insurers suggest that the impact of EU Solvency ii will be to reduce annuity rates by as much as 20%.

They’ll pave paradise and put up a parking lot.

1 Comment
by henry tapper on February 17, 2010  •  Permalink
Posted in annuity, dc pensions, EU Solvency II, Liability Driven Investment
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Posted by henry tapper on February 17, 2010

http://henrytapper.com/2010/02/17/you-dont-always-know-what-youve-got-till-its-gone/

Who says modern life is rubbish? Ne-Yo at the Apollo

He's mad and sick of love songsLast night I was hussled into taking my 12 year old son to the Hammersmith Apollo to see Ne-Yo (a slick RnB  idol).

I first went there in 1977 (to see the Clash I think). In those days the air was heavy with nicotine and ganja and latent violence. Young men wore leather, black kids meant trouble, there was a lot of sweat-a lot of police outside. We still had the SUS laws, the riots were starting, we knew nothing about Asian kids.

Things have moved on. I didn’t see an angry face all night, 90% of the audience were female, black and white mingled together as Londoners on a good night out.

There were no police nor need there have been.

We sat with a group of black girls from Stoke Newington. They laughed with us and sang every word (MP3s have given kids such understanding of what they listen to).

Downstairs 3000 people danced and shared their water bottles and went wild for Ne-Yo.

When the DJ asked for a shout from the over 25s, I shouted- people looked round- I think I was on my own.

As I walked back across Hammersmith Bridge at midnight, Olly and I   talked about Beyonce, Michael Jackson, Mary J Blige and we talked about JLS ,Alexander Burke and Leona Lewis and we talked about Ne-Yo.

Things have moved on a long way from my days as a 12 year old. London is a safer, kinder more tolerant place and while there is still bad stuff, I’m proud and happy for this town and  pleased that my kid is growing up to enjoy its many delights in the right way.

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by henry tapper on February 18, 2010  •  Permalink
Posted in Uncategorized
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Posted by henry tapper on February 18, 2010

http://henrytapper.com/2010/02/18/who-says-modern-life-is-rubbish-ne-yo-at-the-apollo/

DC pricing- the fund manager’s dilemma

Once upon a time when the world was young and 10% returns fell into your lap like apples in autumn, no one worried about product costs

And then John Denham MP started digging and invented the 1% world of stakeholder pensions.

And he was right to call an end to the skullduggery of with-profits (even if it just morphed into the skullduggery of hedge funds)- the black art of charging everything to the policyholder had to stop - and it did.

And some insurance companies woke up to price constraints and the stupid ones soldiered on till they became extinct.

And the smart ones revamped their admin systems, introduced self-service, STP and paperless offices and cut their admin overhead to next to zero.

And the stupid insurance companies continued to market inefficient proprietary active funds and the smart ones bought passive funds at next to nothing.

And the stupid ones continued to pay commissions untill they were derailed by successive waves of regulation culminating in the RDR 

And the clever ones sold their pensions on a no-load nil commission fee.

So within ten years, the cost of your DC pension fell from 2% per year to about 0.35% per year which, because of the impact of compound interest, is the difference between a rubbish pension and a good pension.

And the stakeholder pension had done its job.

Which is where we’ve got to today. Dirt cheap pensions- no advice- passive defaults and a load of pension people looking around for a job-especially pensions investment people who need a job more than most because they’ve got their kids in private schools and they need £100k pa just to meet their overheads.

Cue the rise of the DC investment consultant, bright-eyed and bushy tailed, fresh from de-risking the last DB portfolio and keen to bring LDI to DC through target dated funds.

Hard luck guys- you missed the boat. If yo want to get your DGFs and LDI based DC defaults and your stochastic models back into play you are going to have to sell that stuff through the insurers.

You’re going to have to ski uphill like a crazed biathlete in Vancouver because you are going to have convince a bunch of employers that they want to tell their employees their pensions aren’t going to be dirt cheap anymore.

And their super low charged passive defaults aren’t the thing anymore.

And in fact the thing to do is to invest in hedge funds and private equity and swaps and all of that.

And this ain’t going to happen.

This ain’t going to happen because you can’t bounce a bowling ball, you can’t ski uphill, you can’t put up the price of a contract based pension.

2 Comments
by henry tapper on February 23, 2010  •  Permalink
Posted in dc pensions, Liability Driven Investment
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Posted by henry tapper on February 23, 2010

http://henrytapper.com/2010/02/23/dc-pricing-the-bowling-ball-bounce/

Join us for a weekend in the Cotswolds (March19th-21st)

I was doing the accounts for our week at the races in Cheltenham and realised that we (I) was going to be a little out-of-pocket and then I looked again..

Blimey! We own an 11 bedroom Manor House in the most lovely bit of the Cotswolds for the weekend and nobody’s going to enjoy it.

We can house up to 16 people, we have a huge kitchen, stacks of food and wine and we are only 55 miles from London.

Then I thought we have 283 people in the pensions playpen and there’s 750 people I know through Linked in and there’s about 50 of you a day who read this blog and even if we’ve only met on the web I’m sure you are fun.

Then I thought, for £50 a day, we could all have a great time and a whole load of friendships could be made and fun had and wine drunk and food cooked and walks walked and tennis played and songs sung.

So if you would like to come on the evening of Friday March 19th or on Saturday or on Sunday and if you’d like to stay on Friday or Saturday or Sunday night or all three then why not? Bring your wife, lover, kids- (sadly not your dogs because we can’t do pets).

We will eat communally but if you’d like to eat out that’s fine. We’ll divvy up the meal costs and settle between ourselves.

All the details about our house are on http://www.manorcottages.co.uk/cottages/home-farm–13-.html and there’s a map showing how to get there.

All you have to do is contact me on 07785 377768 or mail henry.h.tapper@googlemail.com.  Bill,Karen, Kim and I will give you all the payment details and manage everything.

You just turn up and enjoy!

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by henry tapper on February 25, 2010  •  Permalink
Posted in pension playpen
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Posted by henry tapper on February 25, 2010

http://henrytapper.com/2010/02/25/join-us-for-a-weekend-in-the-cotswolds/

Enhanced transfer values-is there a middle way?

Many UK pension schemes have seen an opportunity to offer members an attractive exit route from the scheme by offering an attractive transfer often combined with a cash bung.

These “ETV“ arrangements are attractive to Finance Departments as exiting members reduce the strain of the pension on the corporate balance sheet which more than compensates for the upfront cost of the bung. Members get excited about some cash in hand and a chance to be shot of any dependency on a past (or even current) employer.

But for many Trustees and employers, ETVs are a step too far. After all, the DB company pension scheme was set up to give members with a guaranteed pension and the Trustee’s job is to ensure those pensions are paid in full. Why should Trustees duck such a responsibility? The Company may want to get rid of its obligations but they must also be mindful of their reputation , especially where industrial relations may be strained. Unions do not generally look kindly at ETVs. David Norgrove- the Pensions Regulator doesn’t either

So ETVs tend to polarize opinion and the argument is currently very”black and white”.  A deeper examination of the nature of the liabilities that a pension scheme has when guaranteeing someone’s pension reveals that much of the problem is associated with guaranteeing pension increases to members once they have retired.

In fact, the impact of guaranteeing pension increases is huge, disproportionate to the perceived or even the real benefit to members. Put another way, members would be amazed at how much more pension they would receive if the Trustees were to offer them the choice of either a level or increasing pension (and if the value of the uplifted pension was deemed fair).

It is a lot more palatable to Trustees and employee representatives to offer a choice of an enhanced level pension or an increasing pension, especially where the choice is accomapnied by proper advice (of course the longest living members would do better from an increasing pension).

Some Defined Benefit schemes have looked at this “middle way” and a few have offered this choice to members. The results have encouraged with members splitting 50/50 between those who wish to retain their increases and those who want more money in their early years of retirement.

Even with 50% of members declining the offer of a level pension a Defined Benefit pension scheme’s liabilities are likely to reduce by 3.5%. That may not sound a lot but in accounting terms it is a massive advantage to an employer. It is enough to give an employer breathing space – perhaps the opportunity to invest in a new strategy- perhaps enough to keep the employer in business.

There’s a lot of talk about “risk sharing” between employers and members of DB pension schemes. “Risk sharing” has become a euphemism for booting members out of the pension scheme- a middle way is needed.

2 Comments
by henry tapper on February 27, 2010  •  Permalink
Posted in de-risking, pensions, Retirement
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Posted by henry tapper on February 27, 2010

http://henrytapper.com/2010/02/27/enhanced-transfer-values-is-there-a-middle-way/

Twickenham stinks

Twickenham has become the headquarters of corporatism in the UK and it stinks.

This is what you get as a spectator.

  1. The double banks of pitchside advertising constantly distract from the action.
  2. The top-tier of pitchside advertising is digital and flashes out rubbish including the ludicrous “core values” of the RFU
  3. Pre and mid match entertainment is pretty well non existant – replaced by pathetic advertising stunts by O2 – we were even treated to a demonstration of Wii on Saturday.
  4. Every participant from the “ball carrier” to the military band to the plastic beaker of beer is now officially sponsored

The dead hand of Woodward and his motivational seminars smothers any sense of spontaneity. Martin Johnson sits grim-faced in the stands, the joyless inheritor of Woodward’s legacy.

Then there’s the game. England emerge without enthusiasm or humour and play with torrid intensity but without joy. Every move is a drill.

The pace of the game is now so slow that the ball is in play for a fraction of the half which extends from 40 to 55 minutes due to injuries and video replays. A set scrum can be taken five times as both teams struggle to destroy the free flow of quick ball.

The 81,500 spectators pay huge sums for this twaddle; because they are generally paid for or have paid such extortionate sums for the privilege of a ticket, no-one is going to call the Emperor’s new clothes but you can tell by the mooted rounds of “Swing low” and the absence of any form of chanting that these fans have no base. There is no barmy army here and even the odd cries of encouragement from genuine fan are strangled by the corporatism that prevails.

The RFU have become so obsessed with making money and by their partnerships with sponsors that they have lost sight of the common fan and even the point of the event – presumably to have some fun.

Rugby union is not rubbish but it’s rubbish at Twickenham at the moment.

1 Comment
by henry tapper on February 28, 2010  •  Permalink
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Posted by henry tapper on February 28, 2010

http://henrytapper.com/2010/02/28/twickenham-stinks/

Public sector pension debt

This is an extract from a blog posted by Corin Taylor on the IOD website,

Final salary pension membership in the private sector has already fallen 40 per cent since 2000, and the recession will only intensify this trend, as pension funds perform poorly and companies no longer have the cash to keep schemes going. If private sector employees have pensions at all, they are now more likely to be riskier “defined contribution” arrangements, where retirement income will depend on investment performance.

The public sector, however, stands out like a sore thumb. Most public sector employees still retire at 60 on generous final salary pensions. While new employees will have to retire at 65, by the time they reach retirement the state pension age will be 68. The scale of the divide between the fifth of employees who work for the government and the rest is now staggering. Nine out of ten public sector employees are members of final salary schemes, compared with just one in ten in the private sector. This pensions divide costs taxpayers serious money. In addition to employer (taxpayer) contributions worth around 14 per cent of salary, the Treasury has to find an extra £4 billion or so each year to ensure that payments to retirees are met. And with the unfunded liabilities of public sector schemes exceeding £1 trillion on some estimates, these annual payouts will only get bigger.

Two arguments are often put forward to defend the pensions divide: firstly, that generous pensions are a fair reward for a lifetime of moderately paid public service, and secondly, that just because the private sector has cut back on pension provision doesn’t mean the public sector should do the same. But these arguments no longer hold water. Pay in the public sector is now higher than in the private sector at all but the highest levels, and the enormous sums the government is currently borrowing mean that serious efforts will soon have to be made to reduce public expenditure, including the pensions of state employees. It is surely unfair for taxpayers to pay dearly for pensions that they cannot afford for themselves.

As we approach a general election we see the Sovereign Debt ratings for Greece downgraded because Greece has persistently refused to confront the problems of its public finances.

How long before the ratings agencies catch up with us and require us to take action over our public sector pension debt?

It is highly unlikely that any political party will take up the challenge without such a kick in the jacksee and while I’ve no wish to see a downgrade, I’m beginning to think it is what is needed to wake us up!

2 Comments
by henry tapper on March 6, 2010  •  Permalink
Posted in pensions, Treasury
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Posted by henry tapper on March 6, 2010

http://henrytapper.com/2010/03/06/public-sector-pension-debt/

Public sector pensions- who cares?

My Dad was a Doctor, in his later years he became a politician, by a fluke of politics he became leader of Dorset County Council- the first liberal (socialist) leader .

 For Dad it was about fairness and he always thought first of the people who had no voice. This blog is for Dad and for the people who don’t get pensions.

Corin Taylor has written a great paper on The Pensions Apartheid which argues that the Government’s failure to tackle the divide between the haves (public sector employees) and the have-nots (the rest of us) is socially divisive and will be ruinous to the public purse.

He argues that the Government are misleading us by underestimating the cost of unfunded pension liabilities by 40%.

I had an argument about this yesterday.

 ”It’s a tax/Government borrowing issue …. not a pensions issue” said a good friend of mine. She gets pensions;

I spoke with my Dad . He was the taxpayer’s representative in the management of the Dorset CC Pension Scheme, He made a proper point.

“When budgets are squeezed Council Pension costs are ring-fenced- they cannot be reduced. Pension costs in Dorset have led to a reduction in the basic services pensioners need to have a decent life.”

You don’t think public sector pension decisions matter? Take a look at your council tax bill - these things are becoming second mortgages to many of us!

This is how crazy it gets. My local paper reported this week that a senior officer of our local council got a £250,000 pension pay off. The details aren’t reported but I can work it out. That person had been in his council pension scheme forty years, he was given an increase of salary of 10% just before he left…that gave him a lifetime pension increase of £10,000pa which will cost us £250,000. That’s how ruinously expensive public sector pensions can be;- and the vast bulk of the cost goes to a few fat-cats at the top.

It’s not just us every day Joes who should be concerned..the cost of poor public pension policy decisions will feed through to higher corporate taxes, which will impact on the ability of companies to support their pension schemes. It will reduce public spending for the poorest pensioners in those schemes (who need it most) and it will create increasing anger and social division which will bring the pensions  into (further) disrepute.

As and when the ratings agencies pick up on the Government’s dodgy pension accounting it will be too late. Just like British Telecom which has seen its credit rating and share price collapse following the disclosure of the real state of its pension finances, UK plc will get a mauling from the likes of Standard and Poors that will relegate us to the Greece/Ireland/Iceland category of European States.

This matters to all of us, a credit downgrade means that the third mortgage we are paying (Government debt) will go through the roof as Britain gets its version of a  County Court Judgement.

We will feel the pain of not tackling pension decisions through higher VAT, higher national insurance, higher fuel bills, higher income tax and higher booze and fag costs.

There is a huge body of pension experts in this country who are keeping remarkably quiet at time when the public policy debate is at its keenest. The General Election is currently being fought on the price of white cider and the Government are doing a great job of keeping this dark and dangerous issue out of the public eye.

I hope one or two people who read this blog will be prompted to start asking a few awkward questions.

4 Comments
by henry tapper on March 30, 2010  •  Permalink
Posted in Retirement
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Posted by henry tapper on March 30, 2010

http://henrytapper.com/2010/03/30/public-sector-pension-debt-who-cares/

I am weary of being weary of politics

Today is the day that Gordon Brown announces there will be an election.

I am weary of being weary of politics.

It is surely wrong to turn our faces away from the great issues of world,national and local politics and to disenfranchise ourselves from the political process.

On Sunday I cycled through Runnymede and stopped at the Windsor Gate to contemplate the words inscribed upon the pillars. In 1215 political change was effected by the organisation of the people to curtail the powers of an oligarch through the establishment of a democratic process.

We live in the greatest democracy in the world and should cherish our live tradition of debate and tolerance and our capacity to change our lives and those of others through a process which , though flawed, remains the envy of other countries.

Over the next four weeks there will be a chance for us to make our feelings felt through the new media, old media but most of all through our individual votes in the ballot box.

I hope that those reading this will use our combined voice and our individual voices to good effect.

Here error is all in the not done, all in the diffidence that falters….

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by henry tapper on April 6, 2010  •  Permalink
Posted in ezra pound
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Posted by henry tapper on April 6, 2010

http://henrytapper.com/2010/04/06/i-am-weary-of-being-weary-of-politics/

Delivering a pension

It is a part of adulthood to assume responsibility, for putting a house over your head, for building a family, for providing for yourself in your old age. These are the things that adulthood is about.

Some people take on more responsibility than others, they choose to be school governors, become football coaches, serve in their church.

Some people choose to be godparents or  executors of others wills. Some people choose to be the trustees of pension schemes.

These voluntary responsibilities whether civic or private are to a degree altruistic though they provide purpose and self-worth which compensates for the absence of physical reward (pay).

The trustees of pension schemes, especially those that offer a promise of a percentage of final pay have been under immense scrutiny of late since many of the schemes they officiate have not delivered to expectations-indeed many of the schemes have failed or are failing.

Trustees of schemes that fail suffer a triple whammy;

  1. they are likely to be  member of the failing scheme and so they lose their personal security in retirement
  2. they feel responsible for their colleagues and former colleagues who are also suffering financial loss
  3. they have let their scheme fall into the Pension Protection Fund, a safety net for failing pension schemes, but in doing so they have put a strain on a much wider group of members, those of other schemes and ultimately the ordinary taxpayer… the insurer of last resort.

This triple whammy is the worst possible result for a trustee, you can imagine analogous situations for the other types of “fiduciaries” I’ve mentioned above.

The analogy I find closest is that of delivering a child into the world. In taking on the responsibility of parenthood we need to manage the risks both before and after the birth and sometimes it goes wrong, For all the advice and help of medics, things can go horribly wrong. Ante-natal classes prepare us for such eventualities. We learn to evaluate probabilities through Amniocentesis and similar procedures, these help us to assess the risks of childbirth but ultimately we know that the decisions we take are our decisions. We take calculated risks.

Until recently trustees tended to manage their pension schemes with little regard to the risks of things going wrong. As is well known, the happy coincidence of favourable economic conditions made for healthily funded pension schemes. Unfortunately, when the music stopped  many schemes found they had no chair to sit on.

Trustees now have to evaluate the risks of their pension scheme not delivering its promises and have developed a new culture and a new language to understand the problems they are facing. The term used to describe this new way of looking at pensions is “Liability Driven Investment”. It starts by looking at the promises and developes strategies that minimise the risk of things going wrong.

This is in contrast to the previous method employed by trustees which looked at accumulating as much wealth in the pension scheme as possible and distributing promises based on that accumulation continuing ad infinitum.

The ordinary member of a pension scheme will not be aware of Liability Driven Investment, however he or she is acutely aware that their pension may be at risk.

Members have two choices. Either they can put their trust in trustees to see them through, or they can take their money out of the schemes and manage it themselves ( in a personal pension). The majority of people keep their money in the pension scheme despite of their anxiety.

One of the things that I marvel at with childbirth, is the way in which doctors and midwives keep parents in the picture, sharing scans and keeping parents appraised right through the childbirth process. We are hugely fortunate in the medical assistance we get (just think of other countries).

I marvel at trustees of pension schemes for shouldering the burden of responsibility that the do. But like the expectant parent i would like to be better informed of the progress of the pensions delivery.

The system of analysis that underlies Liability Driven Investment is extremely complex but the outputs of that analysis are fairly simple. They tell trustees the likelihood of the scheme going bust, the factors they have to watch out for and-importantly- the things trustees can do to lessen the risks. Of course many of the risks are outside the trustee’s control an employer going bust, a stock market crash, even a quick shift in interest or inflation rates – and trustees can do nothing about us living too long.

If we are to get people to understand their retirement provision better, we need to start with the risks. The basic risk of people not having enough to meet their retirement expectations and the sub-set of risks that they take on the way.

People have gone off glossy brochures of sun-tanned pensioners lying on sandy beaches and want hard facts. They don’t want projections of what happens when things go right, they want factual information to ensure that things don’t go wrong.

I am a pension practitioner who struggles to find the right language to help people to understand the risks they take. That’s why I write pieces like this it helps me get my head round the problem. If you’ve got this far and my “word count is approaching 900″ so I must shut up, perhaps you’d like to leave a comment. Learning to get the message across is important.

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by henry tapper on April 7, 2010  •  Permalink
Posted in de-risking, Liability Driven Investment
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Posted by henry tapper on April 7, 2010

http://henrytapper.com/2010/04/07/delivering-a-pension/

Why do some workforces accept DB pension closure and some strike?

In the UK, defined benefit schemes have moved from closing to new hires to closing for future accrual (pension build-up) for all members.

This has resulted in a number of strikes , most recently the AA workforce has committed itself to industrial action for the first time in 108 years.

By contrast, other organisations, who understandably are keeping their heads down, have managed to convince their workforces that switching from DB to DC accrual is in the long-term interests of the workforce and have managed the transition without industrial unrest.

The focus of corporate pension schemes has switched from wealth accumulation to liability management. Investment policies now target the solvency of the scheme and benchmark performance on the percentage of liabilities covered by assets. Sophisticated techniques have evolved to immunize schemes from the impact of increasing member longevity and interest rate and inflation rate fluctuations.

Despite these efforts, companies have been forced to divert huge sums into these DB schemes to shore up their finances, money that has been diverted from investment in the future of its workforce training, job creation and job retention.

I have recently had experience of seeing a large company explain to its workforce through a program of seminars, conference calls and other direct communications, how the company’s DB plan was effecting the share price , growth prospects and its capacity to remain competitive.  The company managed to explain quite complex economic issues to their staff in a way that I had not thought possible.

The communications program convinced me that we have greatly underestimated the capacity of non pension people to understand how pensions work.

What struck me most was that the company kicked off discussions by explicitly stating that the alternative pension arrangement that had been put in place would not be as good as the DB plan the members enjoyed. This extremely honest statement seemed to do two things

  1. It generated a degree of trust between the company and the workforce
  2. It intellectually engaged members

Once trust and engagement had been achieved, the company was able to explain the problems that the DB plan was creating. The company could explain complex issues such as the volatility of liabilities and the impact on the company’s overall strategy; people attending the events (and attendance rates grew as the roadshow ran its course), asked questions and got honest answers.

The demographics of the organisation I observed seemed pretty typical of most large UK workforces, a mix of races, classes and economic groups.

The members I spoke to after these events were not happy but at least they understood the corporate dilemma. It seems that over time they have reached a consensus that it is in their long-term collective  interest to accept the proposed changes and move on without unrest.

Addendum- 

A happy secondary consequence of a DB based education program 

Helping members to understand the management of their DB plans has a two-fold benefit. It creates the trust and engagement necessary for change and it provides the educational platform necessary for members to properly manage their pension affairs in a DC environment. Perhaps we have got things the wrong way round, perhaps we need to get people interested in what they have got (a DB promise) before we talk about what they might get (a money purchase benefit).

5 Comments
by henry tapper on April 9, 2010  •  Permalink
Posted in de-risking, Liability Driven Investment, pensions
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Posted by henry tapper on April 9, 2010

http://henrytapper.com/2010/04/09/why-do-some-workforces-accept-db-pension-closure-and-some-strike/

The CEO and the janitor

Brian Scythe was engrossed in the latest draft of his triennial pension valuation when a face appeared around the door of his office.

“Mornin sir” said the face- an old grizzled face that appeared out of an unflattering set of overalls. “I was wondering, seeing as you have an open door policy, if I could have a word”

“I’m sorry, I don’t have the pleasure…”

“Drudge sir- Harry Drudge- I’m your janitor you see and we’ve just had a meeting downstairs about you closing our pension scheme…”

Scythe reached for the telephone but realised his secretary Mrs Allison would not be in yet. What was Plan B?…”look I’m busy now Drudge, perhaps…!

“Perhaps you could spare me a few seconds to explain why you’re having to close the scheme sir?”

Well it’s like this Drudge, we’re doing this in the best interest of the staff, the company has engaged some very talented advisors to ensure that you have an equivalent benefit going forward so you’ll be none the worse for it…”

“Don’t buy that sir, I’m 57 sir and 8% of my pay ain’t going to buy me a 60th of my salary sir”

“Well no Drudge, there will be winners and losers but overall…”

Drudge had now  advanced sufficiently into the room for Scythe to see he had no intention of leaving, Drudge sat himself down beside his desk and produced from his pocket what appeared to be a set of accounts …….the pension scheme accounts.

“You don’t need to patronise me Mr Scythe, you see I understand about the deficit and that, and I know you are working on our funding plan because I read what you said in the last newsletter. What I wanted to know was what you’d done to take precautions..”

“Precautions?” Scythe didn’t like the sound of this- it was what his wife had asked him on discovering his latest peccadillo.

“You see I’m a gardener and I show vegetables Mr Scythe; so I know about these things. Every winter I look at my patch and work out what I’m going to grow next spring, some crops grow well when it’s wet and some when it’s dry and there are greenhouses and cloches and so on and what I’m about is having a good range of crops so whatever happens with the weather I’ll have something to show in the summer”.

“We call it diversification” smiled Scythe, relieved that his premonition had been wrong.

“And another thing Mr Scythe, I always take precautions with the other lads on the allotment so as I have what my wife wants each week. If my courgettes don’t flower I can have a word with Bill whose got plenty and I can swap something I’ve got too much of for his courgettes, I keep tabs on all my produce every week and me and the boys have got a right good system for keeping the women happy – if you know what I mean..”

“Yes, well we’re much the same with our pension scheme” replied Scythe, we have far too many pensioners who don’t seem at all willing to die on time, I’ve just arranged for an investment bank to take them off our hands for a small consideration”.

“You referring to a longevity swap Mr Scythe  – or had you something more brutal in mind?”

Scythe considered this comment, did Credit Suisse offer a contract killing service? If so he would put this man at the top of the list.

Then something rather strange and awkward happened. Mr Drudge undid his overalls to reveal a natty Hermes tie and a smart tailor-made shirt. He pulled from his chin a rubber mask to reveal Stephen Hawthorne, Scythe’s new assistant, an accountant blessed with youth, good looks and extraordinary humour.

“Don’t be taken aback Mr Scythe” said Hawthorne in his usual assured fashion. “Mr Drudge may be a figment of my imagination but there are many like him among our staff, Mrs Allison for one. Don’t think for a moment they buy this line you are spinning. We all know that we can’t afford this pension scheme, I’ve told them that you have problems planning any long-term project for us because the pension scheme gets in the way.

Mrs Allison made the point beautifully, she told me “it’s not Mr Scythe that’s running the company it’s the pension scheme”. You and I have been pouring over the details of this valuation, we know the risks, we have done all we can to reduce them but still we can’t afford to rack up these debts.”

“So what should I do” said Scythe, startled by Hawthorne’s plain speaking.

“This sir. You should go to your staff and explain the situation. We are a family firm, we’ve been around for 120 years, the staff want jobs and they want their friends and children to have jobs and they want our product to be competitive and not have this pension deficit hanging around our necks.”

“You tell the staff that the new DC plan requires them to understand pensions and do it themselves but you refuse to share your knowledge of running the Final Salary scheme. They don’t get it- they don’t trust you.. they think you are pulling the wool over their eyes.

Every man jack out there understands risk, they weigh up decisions just like you do- to take out a mortgage, to have a child, to buy sausages or steak for the Thursday meal- we just have to find the language to explain our decisions in a way that makes sense to their everyday lives.

Scythe seemed to be gripped by something between panic and elation. Sharing his work with others was not something that came easily to him. Discussing the pension scheme with his staff in terms of what really mattered was something neither he, nor his trustees nor his advisers had even contemplated.

There was another knock on the door, it was Mrs Allison who had just arrived. Mr Scythe looked at her from under his glasses and said something he had never said before

 ”Mrs Allison, can I have your opinion on something?”

3 Comments
by henry tapper on April 9, 2010  •  Permalink
Posted in pensions, Retirement
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Posted by henry tapper on April 9, 2010

http://henrytapper.com/2010/04/09/the-ceo-and-the-janitor/

Linkedin

Linkedin claims 65m users worldwide and has become the business network of choice for the planet.

The utility of Linked-in is so immense that it figures in most forward thinking organisation’s marketing strategies:  but its primary function is to empower individuals to look beyond the boundaries of their limited business circles and interact with disparate communities for profit and pleasure.

While Linkedin forges ahead with its corporate business strategy, its users are free to develop their business networks as suits them. I doubt whether many Linkedin users have got as far as formalizing a Linkedin strategy for themselves since the fluidity and novelty of social media puts spontaneity and not careful planning at a premium.

I have devoted sufficient time over the past two years to Linked-in to realise much value from my network and thought to share how this cam about and how I intend to go forward.

I joined Linkedin late in 2007 through a chance invitation. I quickly learned the basic navigational skills but it wasn’t until about a year in that I started exploring the Groups and Answers functionality.

Late in 2009 I established my own Group “Pension Playpen” which is open to people with an interest in pensions who wish to congregate and organise events both for business and social reasons,

My network has c900 members of whom c320 are in the Pension Playpen. I actively contribute to around ten groups and passively sit on a further forty groups. Linked in is a useful database for  contacts, I regularly use the bulk e-mail facility and post articles from this blog both on my page and into groups.

My use of Linkedin has not always been positive, a previous employer considered it both a distraction and a potential source of risk both to myself and to the organisation. I am aware that my activities are regarded with suspicion by some who see my approach to knowledge-sharing as a negative. However, the positives have so outweighed the negatives that I intend to continue exploring Linkedin as a means of finding personal and business fulfillment.

My three strategies for Linkedin are

  1. To provide thought leadership in my areas of expertise with a view to enhancing my profile within the pensions industry
  2. To share opportunities that derive from my activity with others to develop business opportunities,
  3. To maximise the fun I can get from knowing such a smashing selection of people.

Tactically, I will continue to build my wider network both in terms of quantity and quality. I will continue to promote the Pension Playpen and create good reason for repeat usage through arranging and advertising social events that happen outside of hyperspace.

I am actively looking for partners who can help me maximise the value of my networks and would greatly appreciate any assistance from readers of this blog on steps I can take to achieve my goals.

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by henry tapper on April 14, 2010  •  Permalink
Posted in social media
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Posted by henry tapper on April 14, 2010

http://henrytapper.com/2010/04/14/linkedin/

The divine comedy (a pensions joke)

So God’s up in heaven and it’s just another boring day in paradise so he decides to pop down to purgatory and see what’s going on.

And when he gets there, there’s a big new enclosure marked “PPF ” so he pops inside and finds all these lugubrious souls walking around with big packs of debt on their backs.

“What’s going on?” says God to the first of the trustees

“I’m walking off my pension debt“

“How did you get into debt?” asks God

“It’s all the fault of the liabilities”, says the trustee “we had a brilliant investment strategy, beat the markets by 3% per year and then we got killed by some dodgy accounting standard“.

God’s not too impressed so he goes on to the next fellow.

“So what’s your problem?“

“It’s all down to our managers, they told us we could get 4% above the gilt yield by investing in Greek sovereign debt” replied the trustee

God goes up to a third trustee –  ”so who are you blaming?”.

“Oh God” , he sighs – “we were a just a small scheme, we didn’t know what we were doing and when we did get a bit of advice we were too afraid to act on it“

“This is awful” thought God, “I’d better have a word with the bloke in charge“. Up sprang a Regulator – God could tell he was a Regulator as he had a smile on his face.

“What’s going on , Regulator?” asked God. “Haven’t we got any of this lot into paradise yet?”

“Fat chance” smiled the Regulator “these are the lucky ones, you should see what we’re up to in hell!”

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by henry tapper on April 14, 2010  •  Permalink
Posted in pensions, Retirement
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Posted by henry tapper on April 14, 2010

http://henrytapper.com/2010/04/14/the-divine-comedy-a-pensions-joke/

The Uniq Pension Scheme – what would you do as a member?

If you are a member of the Uniq Plc Pension Scheme with a reasonable deferred pension you ought to be worried. The employer’s covenant is weak and ,on the face of it , the scheme is bust.

Members  are faced with the unenviable choice faced by the Equitable Life’s membership some years ago… to take a reduced benefit (cut and run) or to tough it out hoping that some Deus Ex Machina will appear to provide the benefits with a lifeboat.

As with the Equitable decision, members are having to take a shot in the dark.

But information which is of great importance to members in taking such a decision is currently being withheld.

 ”In line with best practice“, the Trustees have published the 2009 accounts.The 2009 actuarial valuation has not been published. The assumptions within this valuation are critical to understanding just how underwater the scheme’s funding is and members cannot be expected to take informed decisions without an understanding on whether these assumptions are sensible

The 2009 accounts make mention of the actuarial valuation being published in 2010- member’s might reasonably ask “when?”

Lurking on the shareholder’s register is a sizeable holding from the Pensions Corporation whose modus operandi is to purchase companies that become basket cases because of pension deficits .

Something is going on here. Is the share price of Uniq being purposefully driven down?

Are members (especially deferred the 11.000 deferred members) going to be panicked into taking poor transfer values?

If you follow this line of thinking, it  suggests that many ordinary people members and shareholder (often both) are likely to be deliberately diddled out of their entitlements.

But  should we take the opposite Machiavellian view that it is in the greater good that Uniq is rescued by Private Equity and that its Pension Scheme is secured as part of the deal to the benefit of those hang on and to the wider community who could be spared another claim on the PPF?

An excellent exegis of the Recovery Plan agreed by Uniq, the Pension Scheme- (but not yet by the Regulator) is available here.

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by henry tapper on April 20, 2010  •  Permalink
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Posted by henry tapper on April 20, 2010

http://henrytapper.com/2010/04/20/the-uniq-pension-scheme-what-would-you-do-as-a-member/

Clegg4pm- strange things happen.

My Dad retired as a GP in the late eighties. He’s a lifelong liberal , his politics grounded in Methodism, the protestant work ethic and a sense of public duty.

As a County Councillor with time on his hands, he fell into the role of Leader of Dorset Liberals… a title with “impotence” escutcheoned ” above it- the Dorset Liberals had been out of power since Local Government began in the 1800s.

Strange things happen and by a series of happy chances the Liberals were within a few months in command of an overall majority on the County Council. Dad became leader of the council and to quote a phrase from the then Liberal leader he “became the most powerful Liberal since Lloyd George“.

The parallels with Nick Clegg are interesting. Both then and now the Liberals are benefiting from disillusionment with the major parties and profiting from an absence of mistakes rather than any great understanding of policy.

Cameron and Brown are constrained by the burdens of what they have done and said they will do before, shackled by the expectations of parties with entrenched views and the funding of powerful vested interests. Clegg is unconstrained and it shows in his light and easy manner. It is not just that he has less to lose, he has the freedom to say and do what he considers right.

Dad didn’t pursue a radical agenda when he assumed his position. He formed a voluntary alliance with the conservatives from whom he took over and was prepared to include them in decision making for the first years of his administration. Like Clegg, he was familiar with the infrastructure of government and was able to be accepted by the council officers who perform the function of the cicil service- at a local level.

Over time he introduced his more radical ideas, concentrating particularly on the needs of the elderly and isolated in a very rural constituency. He retained his position for many years without scandal or major contention.

There is a very real possibility that Nick Clegg will become our next prime minister albeit with no overall majority. Whether he will or not comes down to whether voters will retain their current sense of adventure or take fright at the prospect of something quite new.

Now Dad writes poems and he’s proud to have won a Spectator poetry prize with this bit of Hardy inspired whimsy.

Dear Tess, you modest maid of Marlott,
When I created you I thought
Of you as virtuous, not a harlot.

Dear Tom, my life was always fraught.
I gave my all to Angel Clare,
But shared my favours everywhere.

I wish, dear Tess, your soul to rest
In peace. But Clare no angel seemed,
To me at least. I wrote with zest
The story of a doomed affair.
Throughout it all your beauty gleamed.
Although I had to change the plot,
I never lost it totally.

Dear Tom, your novels hit the spot,
If only anecdotally.
Dr G.W. Tapper

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by henry tapper on April 22, 2010  •  Permalink
Posted in Liberal Democrats, Nick Clegg
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Posted by henry tapper on April 22, 2010

http://henrytapper.com/2010/04/22/clegg4pm-strange-things-happen/

Establishing the infrastructure to help “small” DB plans regain solvency.

A series of fortuitous events has slightly eased the funding of funded UK pension plans but this shouldn’t mask the fundamental problems that persist among the majority of the smaller schemes

  1. Poor governance
  2. Inappropriate benchmarks
  3. Unrewarded risk
  4. Non-diversified growth assets
  5. Absence of longevity management
  6. Poor investment administration
  7. Poor record keeping
  8. Unconsolidated reporting
  9. Inappropriate advice

Not all small schemes suffer from all these problems but my definition of a “smaller scheme” (undefined by the TPR) is one where at least three of these problems persist.

I advocate the need for a platform approach, joined up advice, delegated authorities, data cleansing and LDI for smaller schemes.

Standards are improving but they are moving too slowly.

Small schemes need to have a plan.

Realistically, small schemes need to work with the insurance industry which has the capacity and scale to deliver what small schemes need.

PLAN A   is to find an insurer with the ability to provide;-

  1. An investment platform with high quality investment administration
  2. A range of funds necessary for various sophistications of LDI (including a full suite of bond funds and access to diversified growth assets)
  3. The capacity to deliver pre-agreed TAA within an IMA (Fiduciary Management or DB lifestyle as I have called it)
  4. A service priced to provide a margin for the insurer but value for the trustees from cross-scheme aggregation.
  5. A flexible pricing structure to accommodate the commercial needs of advisors and their clients.
  6. A capacity to manage the end game through buy-out/ buy in as required

There are a number of insurers able provide the infrastructure on which trustees and their advisers can construct their glide path strategies. At this juncture it is difficult to see any of them taking an immediate decision to build a small DB proposition along these lines. There are three reasons for this:-

  1. They are absorbing the changes to the EU’s position on Solvency II
  2. They are absorbing the latest position of the FSA on the RDR
  3. They are awaiting the outcome of the General Election.

Consequently, the needs of small schemes are not on the horizon of the strategic planners within the insurers. There is a need for someone to create a business case to take to the insurers to get their attention.

PLAN B; accepting that the insurers will not build the product without further motivation, small schemes need to provide such motivation by working together.

It is not relistic to expect trustees to do this for themselves.They need help from their advisors. These are independent investment consultants , scheme actuaries and professional trustees who are not conflicted by proprietary product

Insurers need to be convinced that this will fit into their strategy on their terms.

  1. Does this line of business enhance their Solvency II strategy?
  2. Does it enhance or conflict with their RDR strategy?
  3. What is the break even point from a cashflow perspective?
  4. What does it deliver to their embedded value (share price)?
  5. How does it enhance or detract from its brand positioning?
  6. What are the probabilities of it meeting its targets?

Essentially insurers are looking for a strong covenant with low acquisition costs , short pay-backs, low reputational risks and long-term strategic value. Not much to ask!  But a well run portfolio of DB schemes that sits exclusively on an insurers’ balance sheet is potentially highly attractive and could tick all the boxes.

So Plan B is to deliver on a silver plate, a book of business sourced from the stakeholders of small DB plans to an insurer to put the trustees of those schemes in a better place.

Most advisory firms acting for small schemes have not got sufficient schemes or a sufficient mandate from their clients to give the quality of covenant an insurer requires.

Consequently the business model may need  smaller firms with limited capacity to work with  other firms to deliver that covenant.

I estimate that to motivate an insurer , a minimum covenant of £1bn AUM would be required (delivered over a three-year valuation cycle). This represents a tiny fraction of assets under the control of small scheme trustees. PLAN B need not be overly ambitious

If you are an Advisor reading this, you could start by auditing your DB book and establishing;-

  1. The potential assets that could be transferred to the insurer’s balance sheet
  2. The likelihood of those assets transferring
  3. The quality of the book in terms of its potential tail..eg would it stick with the insurer.

In summary

  1. Small schemes are missing a trick by not using their collective clout
  2. It is the advisory firms who can drive change but they too may need to collaborate
  3. The insurance industry is best placed to deliver the infrastructure needed.

 My aim is to focus my activities to bring these ideas to fruition. I would welcome your support.

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by henry tapper on April 22, 2010  •  Permalink
Posted in Liability Driven Investment, pensions
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Posted by henry tapper on April 22, 2010

http://henrytapper.com/2010/04/22/establishing-the-infrastructure-for-small-db-plans-to-regain-solvency/

The Liberals and Conservatives have to work together

 

There are some clear dynamics at work which make a Liberal/Conservative Alliance inevitable.

  1. The Tories cannot go it alone and get their Queen’s Speech away- they don’t have the numbers (quite).
  2. Labour and the Liberals do not have sufficient combined seats either.
  3. If Clegg does not throw his hat in with the Tories, he will simply force a second election within weeks.

These are simple political matters but there are wider issues that are more important to the Common Weal.

The markets will not stand for further prevarication with our getting to grips with the deficit. As a Liberal it hurts me to say it but The Conservative position is the most credible economic policy. I believe that Cable is sufficiently aware of the urgency of the current global cris (and our local  structural problems) to embrace the Conservative agenda.

The animosity from Liberal to Conservatives is at the grass-roots level and concerns itself with local politics, in particular the way Conservatives behave at a micro level. This is not a material obstacle to a macro alliance at Parliamentary level.

The perceived “showstopper” is PR. The Conservatives have less to lose from PR than Labour and though small c conservatism is rigidly anti-change, the large C Conservative Central Office is likely to be sanguine about the impact of electoral reform relative to the horror of political and financial meltdown that might result from either going it alone or a new LibLab pact.

Brown’s goose is cooked, the Labour Party sidelined. I see no reason, political or economic for Clegg and Cameron  putting them back into play.

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by henry tapper on May 7, 2010  •  Permalink
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Posted by henry tapper on May 7, 2010

http://henrytapper.com/2010/05/07/the-liberals-and-conservatives-have-to-work-together/

The day when everything changed

This was an awesome day in the life of Britain.

We will look back on today with awe because it was a day when the political mould cracked and a new order emerged.

Today the old politics finally broke and a new very different political order emerged.

Faced with the challenges of a debt crisis across Europe and a realisation of the severity of Britain’s budget deficit, Nick Clegg , David Cameron and Gordon Brown acted with great dignity and considerable personal bravery.

The spin doctors stopped spinning and we saw genuine leadership of a kind we had forgotten amidst the miserable and tortuous political machinations of the past fifteen years,

For once we can be proud of our political system and the integrity of our leaders and I look forward to next week when I hope to see a genuine coalition of parties working towards a common goal.

I may be wrong, I hope I am not wrong, tonight I am proud to be British.

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by henry tapper on May 7, 2010  •  Permalink
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Posted by henry tapper on May 7, 2010

http://henrytapper.com/2010/05/07/the-day-when-everything-changed/

We need to do something about annuities

Compulsory annuitisation is a political  issue in the UK and in the USA.

However the tectonic plates are grinding in opposite directions.

The Fed is making noises to introduce compulsory annuitisation while the Conservative and Liberal Election manifestos promise an end to the compulsory annuitisation of pensions at 75. These have now been repeated in the ConLib agreement.

An extreme view from the States is that the Fed is trying to nationalise retirement savings by seizing inheritable wealth in the 401k system to fund the US budget deficit!

Philosophically, the argument is between those advocating freedom of choice and those advocating “Reasonable Force” to ensure reckless investment strategies do not dump pensioners back onto state hand-outs. 

The argument for annuitisation is based on LDI. There is no logical reason for deriving a stable lifetime retirement income from equities. Nor is there logic in regarding a pension as a means of passing wealth between the generations. As Paul Sweeting puts it,  ”Removing annuitisation by 75 is fine but guaranteed income in extreme old age is good”. He quotes Moshe Milavi’s work on Advanced Lifetime Delayed Annuities.
What surprises me is the number of pensions experts who support LDI as the obvious end-game for Defined Benefit Schemes but oppose annuitisation within DC.

This confusion may be as a result of distrust of compulsory annuities in the UK. Noel Fitzgerald has recently suggested that the “Moneysworth” value of annuities has significantly fallen over the past ten years.

While the fundamental arguments for annuity purchase are strong, there may be a timing issue that has distorted annuity pricing as insurers ponder the implications of solvency II and the current uncertain picture for bonds.

There has been a decoupling between gilt yields and annuities which has driven annuities to historically low levels

Annuity rates graph

Blue- annuity rates, gold- corporate bond yield, red- gilt yield

Thanks to Tom Mcphail of Hargreaves Lansdowne for the graph and permission to publish

Put one way, if you can get as many pension pounds from investing directly in gilts as buying an annuity-why sacrifice your capital?

Put another, there is something fundamentally wrong with the annuity market that needs to be fixed.

To date, the majority of thinking on “LDI and DC” has concentrated on improving the accumulation phase of DC pensions. Since many people will be drawing their DC pensions for as long as they accumulate, perhaps the emphasis should now shift to creating better value from the annuities that DC pensions should be buying..

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by henry tapper on May 10, 2010  •  Permalink
Posted in dc pensions
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Posted by henry tapper on May 10, 2010

http://henrytapper.com/2010/05/10/scrapping-compulsory-annuities/

All changed,changed utterly: a terrible beauty is born

It seemed such a dull election in prospect; the manifestos, the personalities, the stultifying sameness.

I have been a voter for 30 years-my father for over 60. Neither of us has seen a Liberal in Government.

The prospect of meaningful change in the way that Government operates seemed slim to non-existent to us.

And yet there has emerged over the past five weeks a new vigour to politics and a sense of genuine engagement amongst us.

Whether on the blogs, or the tweets or from the television there emerged a positive roar of disapprobation for the old and a clamour for a new way of dealing with issues.

Nick Clegg was at the heart of this and he dragged Cameron with him and he dragged Brown of Downing Street.

And while the tectonic plates of British politics ground into new alignment we have seen the catastrophic disintegration of order in Greece creating contagion across the Mediterranean belt of European Member States.

Currency, bond and equity markets have spiked with each dramatic twist. The markets have consistently reacted favourably to the prospect of a ConLib Coalition.

Tonight Simon Jenkins claimed he did not expect this coalition to last a year. The press has consistently underestimated the power of Clegg’s new way and I confidently predict that we will look back at these few weeks as the turning point as British politics finally moved on.

All changed,changed utterly: a terrible beauty is born

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by henry tapper on May 11, 2010  •  Permalink
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Posted by henry tapper on May 11, 2010

http://henrytapper.com/2010/05/11/all-changedchanged-utterly-a-terrible-beauty-is-born/

What chance have you got against a tie and a crest?

“Thought you were clever when you took them on..but you didn’t have a look in their artillery room..”

The Clegg/Cameron combo is shaping up to be a pretty combative fighting machine. Cameron clearly enjoys his feisty Westminster running mate and with Osbourne a Pauline we now find our political leadership properly “toffed up”.

It’s one thing to see off Brown and co, holed up in the Downing Street bunker, another  to beat the beastly bosh lined up in the public sector trenches.

On on you noblest English! Now for the Scots,Welsh and Northern Irish we’ll show those Celtic fringeists the flip side of devolution!

As for Johnny foreigner Jean-Pierre Jouyet and his call for us to bail out the PIGS,Go for it boysif you think we are going to bail out your sun-kissed Euro-buddies with one more penny of our hard-earned LSD then meet Judge Eric Pickles.

I see them stand like greyhounds in the slips,

Straining upon the start. The game’s afoot:

Follow your spirit, and upon this charge

 Cry ‘God for Harry, England, and Saint George!’

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by henry tapper on May 12, 2010  •  Permalink
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Posted by henry tapper on May 12, 2010

http://henrytapper.com/2010/05/12/what-chance-have-you-got-gainst-a-tie-and-a-crest/

Pension Rocks- the photos you didn’t want to see

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by henry tapper on May 14, 2010  •  Permalink
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Posted by henry tapper on May 14, 2010

http://henrytapper.com/2010/05/14/pension-rocks-the-photos-you-didnt-want-to-see/

More Pension Rocks Photos

Typical, you post massively erudite pension blogs all week and no one reads them

Shove a couple of silly photos on the net and people go wild!

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by henry tapper on May 14, 2010  •  Permalink
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Posted by henry tapper on May 14, 2010

http://henrytapper.com/2010/05/14/more-pension-rocks-photos/

Satya in London

Shopping in Kensington

 

Twickenham chicks

 

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by henry tapper on May 31, 2010  •  Permalink
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Posted by henry tapper on May 31, 2010

http://henrytapper.com/2010/05/31/satya-in-london/

And then the sun came out.

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I’ve mentioned before the deep delight I have in living in multi-racial London and the largely unremarked upon improvement we’ve witnessed since the dark days of SUS laws, riots and the rise of the NF in the 70s and 80s,

Today I went to Lords to watch the 5th day of the 1st test between Bangladesh and England and the SUN CAME OUT!

The pictures tell the story of how a crowd of 10,000, mostly children and parents mixed together on the pitch at lunch and saw the sun come out both physically and metaphorically.

Again and again I heard white people getting excited about Bangladeshi kids – in the queue, in the stands and on the hallowed turf of Lords itself!

Another loop was loosened in the old school tie and i found myself laughing with stewards, MCC members and Lords groundstaff who I congratulate for opening their doors to the 21st Century hey guys …..it was good!

Two days before i was at Twickenham watching Saracens and Leicester battling out one of the best games of rugby I have ever seen. Everywhere I looked were kids and women as well as the old lags like me.

No jingoistic nonsense, no limp versions of Swing Low only two set scrums in the first half and a game that flowed because both sides had decided that they want to put on a spectacle and enjoy themselves in the process.

Another loop in the old school tie loosened

That everyone I talked to after the game was delighted with the day (including the Saracens fans) is in marked contrast to the deflated mood after recent home internationals.

Quite clearly Twickenham, like Lords, can get it right- the lesson is to put the crowd first not the corporate boxes nor the RFU’s Six Nations pomposity.

As a nation we are getting better, as a City London has got better. We are now a shining example to all cities in the world of how to tolerate, integrate and ultimately not even notice the differing groups who form part of our wonderful wonderful city.

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by henry tapper on May 31, 2010  •  Permalink
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Posted by henry tapper on May 31, 2010

http://henrytapper.com/2010/05/31/and-then-the-sun-came-out/

My pension superheroes

Mischievously, Steve Bee has deemed 32 contributors to his website “pension superheroes“. As they number some of us, I won’t call this totally inappropriate; but it adds piffle to his claim to taking the piffle out of pensions!

At least it got me thinking on what a pensions superhero really is.

I spent last night with two of my pension superheroes. One, Hilary Salt, is a Founder of First Actuarial and known to many reading this. The other, Bill Day is an ex fund manager,ex Nicaraguan freedom fighter and ex GMB pensions supremo.

We talked of old friends, Sue Ward, Bryn Davies and the late John Shuttleworth. I thought of others; the sadly diminished John Quarrell, the evergreen  Alan Pickering and , though I have only heard speak of him, Frank Redington.

Listing these names make it easier for me to understand the qualities they have or had in common.

  1. They knew their mind, spoke their mind and practiced what they preached – with compassion and precision.
  2. They tolerated and encouraged those with different opinions and lesser abilities.
  3. They listened to people. absorbed the undercurrents of groups and reached out to find new and diverse experiences.

It’s curious but these attributes are like what my friend Dave Hunter reckons you need, to have wisdom from a crowd . Perhaps our conversations have affected me more than I thought!

Perhaps, thinking about it, the pension superhero embodies the wisdom of the crowd and is essential to it. Maybe the pension superhero’s gift is to inspire those around so that some of their superhero rubs off.

We’ve all got our own superheroes and if you think you are one of them, you probably aren’t!

We are going through a rocky patch as a nation as we pay the price for some folly earlier in the Century and we can console ourselves with the words of a literary hero of mine…

In the gloom the gold gathers the light about it.

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by henry tapper on June 3, 2010  •  Permalink
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Posted by henry tapper on June 3, 2010

http://henrytapper.com/2010/06/03/my-pension-superheros/

Gavin Henson – a proper father

In an excellent interview in the News of the World on Sunday, Gavin Henson states that he split with Charlotte Church because of the damage their relationship was having on their children.

Having witnessed Henson’s demolition of Matthew Tait (and others) on the rugby pitch, I would not have credited this statement had I not spent Saturday afternoon in conversation with the man himself. What I found was a considered, intelligent and sorrowful man who struggles to come to terms with the loss of his marriage and the dislocation of his children.

Fatherhood is a little spoken about subject, I find it hard to discuss the emotions I have about losing daily contact with my child (something that happened ten years ago). Nevertheless, the loss of my son is something I feel every day, even though he lives three miles from me.

I can scarcely imagine the pain of losing a child completely. The sections of Ulysses when Bloom muses on what his dead daughter could have been are some of the most poignant I know and have taken me closest to understanding the bereavement of an only child.

Henson’s loss is notable because it seems to overshadow in his mind his splendid achievements in his own life.  He has a reputation for being vain and consequently superficial. He may be vain but he is not superficial.

Though I have nothing in common with Gavin Henson’s talents, I deeply sympathise with his predicament and wish him well.

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by henry tapper on July 20, 2010  •  Permalink
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Posted by henry tapper on July 20, 2010

http://henrytapper.com/2010/07/20/gavin-henson-a-proper-father/

The German Grand Prix and fixed results

This weekend two Ferrari drivers were ordered to swap positions rather than race against each other – in the interest of the Ferrari Team. The decision to put the Team first, rather than the spectators or the sport (this behaviour is outlawed) has created an outcry as has the limp response of the sports governing body in handing Ferrari a token fine.

Apologists for Ferrari’s actions suggest that without the Ferrari brand and Ferrari’s money, we would not have the Formula One spectacle and they are therefore Ferrari are  entitled to do as they will. This certainly seemed to be the message from Ferrari as they smiled to the cameras after the race.

There are a number of instances of large corporations doing as they will recently, BP being the most topical. If you rely on the arguments that your Brand and your capitalisation allow you to behave as you like then sooner or later you will run into a brick wall…the spectators, the shareholders and in BP’s case the citizens of the US.

Rules are rules, we may not like them but we need to obey them whether they are set by the FIA, the FSA, the EU or by that amorphous but powerful lobby called the public.

There is a space in society for the maverick who exists at the fringes of legality. Historically the dissenting voice has had to be marginalised. Dylan’s dictum “to live outside the law you must be honest” could have been re-written “to be honest , you need to live outside the law”.

Mavericks inform on society like the Fool in Lear or Dylan or William Blake or the satirists at Private Eye. They exist to keep society honest but they are not of mainstream society –  at least when they become so, they lose their point.

In immature democracies this is how it has to be.

Western Society is now informed by thousands of people who can now express their opinions by writing blogs, posting comments on forums, exercising voting rights or lobbying governments by physical demonstration. The freedom of expression we enjoy in Britain to speak freely about these things should be very precious to us as it allows us to directly inform on the governance of the society in which we exist.

While our spokespeople will continue to be the most eloquent and dynamic commentators, we all have a right to voice our opinions and forums for those opinions to be heard. I have no doubt that Ferrari will have to bow to the pressure of the spectators who demand “racing” not team orders. Senior Executives who forget their wider stakeholders would do well to learn  that the media in which their decisions are judged is now truly “social”.

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by henry tapper on July 26, 2010  •  Permalink
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Posted by henry tapper on July 26, 2010

http://henrytapper.com/2010/07/26/the-german-grand-prix-and-fixed-results/

Wacky races, corporate governance and Mr Hayward’s boat.

“Brand”,opined my former CEO, “is what we aspire to be, or at least to be seen as being”. I guess this is the actuarial equivalent of “corporate identity” which is the accounting version and refers to what companies actually are.

Fernando Alonso, who has clearly been modelling himself on Dick Dastardly is redefining the Ferrari brand. I suspect that the angry telephone call witnessed by BBC viewers between the Ferrari team manager and some Marinello mandarin suggests that it is not the brand that Ferrari would like to project. Therin lies keyman risk folks.

There is of course a deal between the “keyman Risk” , Fred the Shred, Cedric the Pig ,Tony Hayward which tends to disappear as the individual gets shunted off with the usual pension (nice one Tony) and a more fundamental or systemic corporate risk

The brand damage that has been inflicted on BP will last so long as people think of the blighted Florida shoreline rather than the bright and energetic logo we encounter as we enter the petrol station. It is up to a Regulator to find out whether the systems and controls at BP was an aberration or an accident waiting to happen.

The point of governance is ultimately to control brand values. When governance breaks down, brand risk soars. Regulators are the superbrand governors, our perception of Formula One depends on the FIA bringing Ferrari to heel. If no individual is bigger than the team then no team is bigger than the sport which is why the FIA will lose out big-time if they don’t punish Ferrari for flagrantly breaking the rules.

Wacky Races relied on a different type of governance. There appears to have been little direct regulation of Dastardly and his peers. The results depended on the resumption of a natural order which meted out “just deserts” to the fiendish villain and regularly promoted Penelope Pitstop and her ilk to the podium despite Dastardly’s bet efforts. This is how Comedy works (in a classical sense). Comedy is a vision of the world that tells us that things will work out right. Woody and co will not slide into the fiery furnace and will be saved by a Deus Ex Machina -but that’s another (toy) story (3) -  very good-by the way.

The other-tragic- vision of the world suggests that as Leon Durocher  put it- ”nice guys finish last”. Corporate Governance is about reasserting the natural order by intervention in the affairs of a company to assure that brand aspirations are realised. When corporate governance breaks down, s*** happens.

I hear that Tony Hayward’s boat- to which he retreated when he decided to get his “life back,” is not solely his. It is co-owned with the Chairman of Centrica, Roger Carr. As Roger is currently being fingered as a successor for Tony, that craft takes on a special place in the iconography of British Corporate Governance.

Watch this space for outcomes- is it the ship of fools or the loveboat?

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by henry tapper on July 27, 2010  •  Permalink
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Posted by henry tapper on July 27, 2010

http://henrytapper.com/2010/07/27/wacky-races-corporate-governance-and-mr-heywards-boat/

Pensioner poverty- higher taxes or auto-enrolment?

Here’s a question for anyone interested in pensions in this country

What would you prefer?

  1. Higher taxes, a bigger state pensions and no requirement to save into a private pension.
  2. Same taxes, same state pensions and impulsion to save into a private pension.

This brilliant question was put to a group of the “great and the good”  by economist Paul Johnson at a recent meeting at the Department of Work and Pensions.

Out of an audience of 50, 48 voted for option 2 and two lost souls (of which I was one) voted for option 1.

It is almost certain that Britain will adopt auto-enrolment and  it is better option than sticking with our current system (which isn’t working). This blog’s about the big policy decisions and why auto-enrolment is not a panacea to pension poverty.

 We face a big and growing problem with poverty in old age. It’s big because many of the poorest (and some of the most feckless) members of society have built up no retirement savings and are now finding themselves living on a relatively poor state pension.

It’s going to get bigger as the “gold-plated” final salary schemes on which the current crop (cohort to actuaries) of retirees fall away.

The Government’s big idea has been to shift the risk for retirement provision by devaluing the state pension and by making it easier to save into private pensions.

 The first shot was the Stakeholder Pension, which was a big flop, mainly because the insurance companies really didn’t want to offer sophisticated pensions at tight margins to people with no money to save.

They are now having a second shot at the problem by requiring all employers to offer people who don’t have a proper pension scheme a decent pension and  pay something into it.

The Government’s other big idea is to create a decent pension for this money to be paid into. This decent pension is going to be called NEST- it’s designed not to  discriminate against people with little to save.

But a large number of people don’t have very little to saves they have nothing to save. For the people on very low incomes either because they are part-timers or carers or unemployed or long-term sick, it’s going to do nothing at all.  because you can’t save out of income if you don’t have an income.

For another group of people, the self-employed who are notoriously bad at saving,  it’s not going to be an option.

For a third group of people, who’ve pinned their hopes on their property or business  or children providing them with a retirment income, there will be an option to opt-opt of these ideas.

The group of people who will benefit from the proposed reforms are the people who have ducked retirement saving because they couldn’t be bothered.  The third and most important strand of the proposed reforms is called ”auto-enrolment” and it’s being phased in  from 2012. Auto enrolment means that you are going to have to work pretty hard not to find yourself saving for retirement.

It works like the software update  that flashes up on your screen. If you can be bothered, you can get rid of the pop up message and soldier on. But you’ll feel a little guilty that you might be missing out or exposing yourself to a virus so the vast majority of people will just accept the update. Even if you turn down the update first time around , the message comes up again and again….and again.

In order to avoid being in a pension a good existing one or this NEST pension, you are going to have to fill out a form saying

NO I DONT WANT YOUR PENSION AND I DON’T WANT LOTS OF FREE MONEY FROM THE TAXMAN AND MY EMPLOYER.

 Even if you do this once, the chances are you will have to do it again in three years time, or when you next change jobs .

There will soon be three certainties – DEATH TAXES and AUTO ENROLMENT.

Now you might ask what is wrong with that;- it is the option 2 that 48 out of 50 people voted for.

This is what made me say I’d rather see higher taxes and a decent state pension

  1. Auto-enrolment is going to be complicated-it will make pensions more complex not more simple
  2. Most people don’t need auto-enrolment to be sensible about joining a pension
  3. People who are not sensible would almost certainly do better by paying more tax and getting a proper State Pension
  4. It will leave many people who don’t earn enough to be properly auto-enroled  with the same old rubbish State Pension.

We are chosing to put clever  pension ideas in front of boring but sane collective provision as Beveridge originally conceived.

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by henry tapper on July 29, 2010  •  Permalink
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Posted by henry tapper on July 29, 2010

http://henrytapper.com/2010/07/29/pensioner-poverty-higher-taxes-or-auto-enrolment/

In place of strife

It now seems unavoidable that structural change will be introduced to the various pensions that rely for their employer covenant on the taxpayer. These include LGPS, the various unfunded government pensions and even the large corporate schemes such as the Royal Mail, BT and certain utilities where there is a captive consumer.

All of these organisations have labour issues in common, well organised unions, an expectation of a high level of pensions and historically poor labour relations.

When my car broke down on Friday, the AA man who came to fix it saw that I worked for a pensions firm and we got into a discussion. I wanted to know why members like him of the AA scheme voted for a pensions strike. His answers were fascinating,

He had little good to say of either the AA’s current owners or their previous owners (Centrica) but he said that at least when at Centrica he and his colleagues felt they could express their views.

I asked how they got their views across and was surprised to hear that it was through social websites organised by his union and by his mates. He said he regularly posted comments on pension issues and while he didn’t think his personal voice had been heard, he had felt that the groups he had joined had been heard both by Centrica and (eventually) by the AA’s current owners.

In his view, the ability to participate in debates and understand the issues was vital to him. Once he understood all the points of view, those of his fellow members, of the sponsor and of the trustees he had become a lot more comfortable with the changes being made to his pension benefits.

Listening to him the same arguments came up again and again

  1. He hadn’t the time to attend meetings or counselling but was prepared to log-on to electronic debates
  2. He did not want to put his views forward on sites controlled by his employer but valued independent discussion boards launched by the unions or by his colleagues (these included Facebook)
  3. He recognised the need for balanced debate.

This third point was most interesting of all. He had recognised that most debates started with rants from disaffected employees which, once members had run out of steam gave way to more moderate and constructive posts.

He described the classic “thesis-antithesis-synthesis” process that we learn about at college.

He was keen to point out that while he wanted his employer to be listening to the debate, he did not want it to try and influence the process which he told me had to be “organic”.

This resonates with my experience as an influencer. “Sell don’t tell” was the catchphrase of those who trained me. They explained that you influence people not by arguing but by getting your client to articulate objections, listening to the objections and allowing your clients to engage with your point of view for themselves.

As we contemplate the impact of industrial strife as the structural changes to pensions (and elsewhere) are rolled out, we need to be looking to the solutions that have worked. Perhaps this is one of them. 

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by henry tapper on August 26, 2010  •  Permalink
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Posted by henry tapper on August 26, 2010

http://henrytapper.com/2010/08/26/in-place-of-strife/

The Value of Advice to BBC Pension members

The BBC are reported to be considering offering “pensions advice” to the 18,000 active members of their Pension Scheme

To most people “financial advice” means being given ” a definitive course of action” or, more simply put, “being told what to do”.

This is not what the BBC seems to be suggesting.

If the proposed changes are implemented, the BBC will provide additional help for staff to make informed decision on their pensions. Scheme members will have the opportunity for a one-to-one session with an external pension consultant to discuss all options in detail.

…says the BBC spokes (person).

Note the precise language..”help”…”informed decisions”…”opportunity”….”discuss all the options”

This suggests that the BBC are going to lead their horse to water but not make them drink. “External Pension Consultants” will be extremely wary of being seen to influence decisions, their role will be to help make informed decisions- the decision will be the member’s to make.

If I was a member I’d have three reservations

  1. BIAS

If you are employed to provide members help on say – an ETV exercise, you will be employed by the sponsor of the exercise who will have clear expectations- the more liabilities you can rid of, the better.

The same goes here  for the BBC. This advice may be ”free” to members but there can be no question of what the sponsor’s underlying agenda is.

BBC managers hope that the promise of free financial advice will help deflect support for a strike.

Member’s may feel they are speaking to an external pension consultant but so long as the meeting’s paid for by the BBC, I doubt they can be sure of independence.

      2. COST

“Advice” or more properly “help” is expected to cost £1m (based on someone’s estimate of the take-up of these consultancy sessions). The bet the BBC is taking is that these sessions will prove very popular (otherwise they won’t ward off a strike). If they were hour long sessions and were to be fully taken up, it looks like that they’d either be charged at £60 per hour or the bill would be considerably higher than £1m.

As the going rate for an external pension consultant is likely to be rather more than £60ph we can assume that these sessions will not be universally popular.

The true cost of a mandatory program would be many times that quoted, the actual cost of a voluntary program could be considerably less.

     3.  WORTH

I wonder whether the BBC membership really know what they are being offered. Will members be able to ask what the likely impact of the ongoing options will be relative to what they were previously promised? Will they be given a definitive course of action? If the answer to these questions is “yes” then I think the BBC have offered something of real value.

If however the answer to these questions is “no” then members may feel that what they’ve been offered is little more than they could have got from a website with some fancy modelling tools….unless they consider time spent with an “external pension consultant” valuable in another way.

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by henry tapper on August 26, 2010  •  Permalink
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Posted by henry tapper on August 26, 2010

http://henrytapper.com/2010/08/26/the-value-of-advice-to-bbc-pension-members/

Member advice

When I came back from Iceland in 1984 I met an IFA and asked him what his job was about.

There are two types of people I talk to- those who have money and want to hold onto it and those who don’t and are scared.

I was only 23 and was interest in what scared people.

People are scared of three things …dying, losing their income through ill-health and living too long.

Shortly afterwards I became a financial adviser. Because I didn’t know anyone in London , I worked for the first two years knocking on doors and meeting people in Oxford Street with a clipboard. I hardly spoke to anyone who had wealth.

The job was about getting people to sit down and confront the “three financial elephants” that sat in the back of their consciousness. We used primitive psychology known as “disturbance”. We told the widow’s story and other tales of woe that got people to relate to the plight of the long-term sick and the elderly.

This type of financial advice is seldom talked about these days. I guess the welfare state provides greater security than it did in those days but the majority of IFAs I meet these days talk to me about Enterprise Investment Schemes, SIPPs and offshore trusts.

I can see why, it’s hard to make a living selling £5 per month term assurance plans. Most employed people have life and income protection through work and those in self-employment can buy protection on the web. Those who have little or no pension are unlikely to benefit from personal pensions, the outcomes of which will do little to improve net income in retirement.

As my career progressed I started to advise small and medium-sized companies on how to provide meaningful retirement benefits to staff. As I moved up this food chain, my link with the “three financial elephants” became more tenuous. Today, I do little face to face work with the members of pension schemes. I attend seminars where we discuss NEST and its impact on the pension poor, I consider de-risking strategies for derelict occupational pensions and grapple with abstract investment concepts designed to keep the sponsors of these schemes solvent.

On Wednesday afternoon I sat down with a group of IFAs who gave me a wake up call. We talked about meeting members of the schemes we run to discuss with them the financial elephants ”how long they expected to live” ,”what would happen if they took a higher pension in exchange for no pension increases”, “whether it was better to have cash today or income tomorrow”, “what you could realistically expect from a DC plan”.

These were people who had never lost sight of the financial elephants that people face, they talked as if these problems were their problems, expressing a passion for the dilemmas the hard financial decisions their clients were being asked to take. They also recognised the needs of sponsors to offload pension liabilities and the impact the schemes they worked on could have on the livelihoods of their clients.

These guys won’t be front-page news, don’t expect Goldman Sachs to be hiring them tomorrow. They are part of a small but dedicated group of pension professionals who are making an immense difference through hard work, high ethical standards and by telling people how it is.

I take my hat off to them.

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by henry tapper on September 11, 2010  •  Permalink
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Posted by henry tapper on September 11, 2010

http://henrytapper.com/2010/09/11/member-advice/

Bish bash and off to the pub -DC fund governance

Well that’s how it is isn’t it. You do your admin report which is tickiteeboo, have a discussion about how few or your members are using the OMO and then do the bit about investments noting that for another quarter no-one has joined the expensively researched Sharia law fund and that the default lifestyle fund is- well the default lifestyle fund.

Not so fast DC governance committee

You may think you’ve got it all sewn up; you’ve got your global 50:50 tracker lifestyling in the accepted manner into long dated gilts and cash

WHAT COULD GO WRONG?

Well let’s start with that tracker fund. You think you are buying a BlackRock or L&G Fund that’s going to do just what it says on the packet but wait-what’s this- it’s consistently underperforming or outperforming the index -often by 50bps a quarter…

How can this be?

Tour fund may invest in a tracker my friends but it is not “the tracker”-it’s a reinsured version of the tracker with a little cellophane wrapper round the outside that means its a n XYZ or an ABC life tracker. Therein lies the rub.

The difference in the performance track between your lifestyle fund and the index may not matter in the early years- swings and roundabouts- one quarter you win , one quarter you lose. But it matters a lot if you’re close to retirement and you’re being forced (through lifestyle) to transfer out of your fund- you sell when the price is artificially high-you lose. Losers get cross-winners never seem to notice. Who do losers whine to- your trustees, or your sponsor who’s accountable – you are- and you are off to the pub.

Where did this tracking error arrive from? The chances are that it’s the result of poor cashflow management - contributions to DC plans come from all over the place- the DWP, employers, transfers in, even the odd random cheque. While almost all DC funds deal daily, not all the money is invested- money sits around in cash within that little cellophane wrap I mentioned before - and cash and equities seldom perform in the same way.

The dangers of tracking error are as nothing to the perils of transitions. In DB, transitions are a rarity and dealt with care. In Dc they happen every day as members chose to switch or more commonly - get switched from fund to fund as part of the lifestyle device. Here there’s the opportunity for real trouble. Many trackers have the most odd dealing cycles which rarely tally with those of active gilt or cash funds, it’s like putting a ford engine onto a Vauxhall gearbox- don’t expect synchroicity-expect out of market risk- especially where those nasty reinsurance wrappers are in use.

And before you slope off for your  rather “guilty “pint, let me give you one more thing to think about- charges. In the USA there is a small industry of forensic accountants busy working out whose taking what and where. Over here-despite the best effort of regulators to abolish ”soft commissions” there are still all manner of admissible expenses that can be charged to the fund as “additional fund expenses ” and all manner of odd places to hide them in fund accounts.

Wheer there are fund expenses there are two set of accounts (each chargeable)- one for the underlying fund and one for the cellophane wrapper and fund expenses lurk within each. Unlike the issue of cashflow management where there are swings and roundabouts- charges only create a negative drag on performance -like seaweed on the bottom of a racing yacht.

If you are reading this and your job is DC governance-whether as an adviser or as a trustee or most likely because you sit on an investment committee, think about this.

I’ve presented to over a hundred of these committees and I cannot remember once (as an insurance rep) being asked a pertinent question about tracking error- out of market risk or about additional fund expenses as they relate to the default lifestyle fund.

Considering this fund typically carries 90% of the investment risk within the DC plan this is frankly flabbergasting.

I can only assume that one day investment consultants will wake up to these realities but that will be the day that they start to think as DC experts and not as DB consultants looking for something to do.

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by henry tapper on September 21, 2010  •  Permalink
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Posted by henry tapper on September 21, 2010

http://henrytapper.com/2010/09/21/bish-bash-and-off-to-the-pub-dc-fund-governance/

Interested in pensions? – I don’t think so

I went to a pensions conference on Wednesday and couldn’t believe what I was hearing - a replay of a debate that I’ve heard for the past fifteen years – pensions experts wringing their hands about why people didn’t want to save for their retirement.

People join pension schemes for one of four reasons

  1. They get the need to save for the longest holiday of their life – that’s about about 60% of us
  2. Joining’s not going to impact their standard of living so they might as well
  3. Not joining may actually harm their pay packet
  4. It’s harder not to join than join

 

You might think the third one spurious but it’s not. There was a time until ten years ago when you got higher net pay from joining a non contributory contracted-out pension scheme. The workers at Kingfisher cottoned on to this and accepted auto-enrolment into the Kingfisher Retirement Trust because their pay packets went down if they opted out. Forget the fact that the KRT was dubbed the worst occupational pension scheme of all time by one union.

At the other extreme, we hear a story on Wednesday of a company that offered staff a 10% contribution into a pension with no obligation on the employee to pay anything - amazingly they were only getting 60% take-up. I suspect that the Company may have adopted a particularly difficult joining procedure which may  have pleased the FD who could claim to offer a quality non-contributory pension scheme at little cost to the shareholder.

However most companies claim, and believe, that getting their employees to save for their retirement in a smart way is a good thing, if only as it releases them of the obligation to employ them for ever because they can’t afford to give up work.

If the point of having a non-contributory staff pension scheme is to get everyone to join, then I’d argue that 40% of this company’s staff are unemployable and should be sacked or at least put on the minimum wage until they’ve learnt their lesson and joined the pension – but that’s why I don’t work in HR.

On a more positive note -Scottish Widows told us that 70% of employees believe that companies who offer a good quality pension scheme should be giving its members the financial education to make the scheme work for them. With this in mind –  clever pension providers are building financial education packages that get members to think through what they are doing and pay attention to their pensions.

This is fine and dandy in theory but experience tells us that after euphoria when such plans are launched, the educational plans usually fall into dereliction over time and rarely sustain interest.

This brings me back to the “behavioural motivation” points at the top of this blog. The problem with financial education programs is that people are naturally short- termist. I do look at certain pieces of financial information my paycheck which enables me to pay next months bill -my bank balance, which enables me to draw cash from the ATM and my monthly bills which impair my ability to go out to the pub/club etc.

There is no such motivation for looking at my pension cash balance.

In order to make me concentrate on my financial planning, I need discipline and as I - like most people - have little self-discipline, I need to be told. As I don’t use an IFA  to beat me around the head I would very much like someone else to do it- not the taxman- maybe my employer.

For people to get interested in their pensions - and we all know we should be- I need either to be compelled or impelled to do so.

The difference between compulsion and impulsion is that the latter springs from enlightened self interest, the latter from dictat. I favour impulsion.

An example of impulsion is auto-enrolment which is simply a means of making it harder to leave a pension scheme than join it- I’m pro that. But auto-enrolment does not make me pay attention to my pension, monitor its growth and make tweaks to my contribution rates or my funds from time to time to keep it on track. It doesn’t make me manage all the legacy pensions I’ve built up  with other companies and it doesn’t help me plan against nasty surprises like long-term ill-health or unemployment.

To get people interested in managing their finances, especially their pension we need to look encouragement on an ongoing basis.

  1. For those who are self-disciplined we need to make good quality financial planning tools readily available and I applaud the steps of companies like Scottish Widows and CSC who are doing this
  2. We need to impel people to go back to these tools on a regular basis.

If you send me a letter I will throw it in the bin (unless it says “warning-not opening this letter will lead to you going to prison”)

If you send me a website address with a logon and password I may visit it but will lose the password and won’t go back- no matter how good the site.

If however you send me my updated bank balance by text on a Friday afternoon I will say thank you as you are giving me just what I need to plan for my weekend

If  you send me a snappy little note on my Facebook page telling me how much had been paid into my pension over the last three months and what I’d built up in my plan I’d be gratified – I’d certainly consider going back to my website

If you told me that I was only going to get my next quarter company payments into my pension if I did my annual on-line financial review, I would do it (bit harsh but you get my drift)

If you told me that I would get a months’ supply of bananas in the staff canteen if I completed my annual financial review I would also do it.

Getting people to do things requires a basic understanding of human behaviour and a local understanding of delivery mechanisms. Delivery mechanisms change- Facebook and text are currently the answer- in five years it will be something wonderfully different.

At the conference people seemed stunned to learn that there are 23m people in this country who get their regular daily info on Facebook. In fact one of the “pensions leaders” who had claimed it was a small minority was visibly shaken!

The truth is that the pensions industry is so up its own about communication and the value of saving for retirement that it is in denial of common sense. Until it wakes up to to these hard truths- it will continue to seem as foolish to the general population as it does today.

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by henry tapper on September 24, 2010  •  Permalink
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Posted by henry tapper on September 24, 2010

http://henrytapper.com/2010/09/24/interested-in-pensions-i-dont-think-so/

Paying for a Citizen’s Pension

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The Citizen’s Pension is a big idea of Steve Webb, our Pension Minister and is a bolstered state pension that lifts people out of pensioner poverty and does away with means tested benefits.    

I think it’s a good idea.    

The Citizens Pension would have to be paid for by Treasury Funds and as the outgoing Chancellor famously commented – there isn’t any money left.    

Economists see sense in a Citizen’s pension and are beginning to wonder how it could be afforded.    

Michael Johnson is such an economist. His ideas have been widely listened to and adopted by Government. If I can simplify his arguments they run as follows    

  1. It is a good thing to have a Citizen’s pension
  2. We can’t afford it
  3. To afford it we need to cut higher rate tax relief for those saving into pensions

We can be grateful to Michael Johnson as he can be credited with introducing the idea of  the Pensions Allowance – it curbs the super rich from getting pension awards of more than £40,000 per year without those awards being treated as taxable. While there have been a few small fish getting caught in the big fish net, most reasonable people think that the Pension Contribution Allowance is a good thing.    

But his idea of restricting tax relief on pensions to 20% will fall flat on its face. It won’t raise the required revenues he says it will because companies will encourage higher rate taxpayers to swap salary for pension contributions. This will be a pain for companies in terms of administrative and legal costs and a pain for the Treasury to legislate against. We shouldn’t go there.    

Most especially we shouldn’t go down the route of further pension and savings reform until we have bedded in the reforms that are on the table and are about to be enacted after extensive consultation.    

The idea is also unfair as pensions attract higher rate tax in payment meaning that you might pay more rather than less tax by saving through a pension. Michael argues that the long-term goal of government should be to abolish higher-rate tax for pensioners. This will be scant comfort to those affected by his proposals today.    

Either tax-avoidance measures will nullify the revenues or the public outcry will lead to a mass desertion from pensions. Bottom line this is a half-cocked measure.    

I think Michael knows it. At the recent FT pension conference he more or less admitted as much when he reluctantly endorsed the need for compulsory retirement savings. Compulsion is a draconian measure and in its wake comes a number of other “nasties”. Once you compel people to save, you can get rid of tax-relief altogether as you have broken the social contract between the state and the citizen. Compulsion is the easy cop-out.    

If instead of compulsion we have impulsion through auto-enrolment, it will undoubtedly come at a cost to the Treasury as Michael accepts. Auto-enrolment actually defers the implementation of a Citizen’s Pension as it takes yet more revenue out of the system. Millions of new savers will be getting tax-relief rather than paying tax. This is why Steve Webb has reluctantly accepted he cannot have both.    

Michael accepts the value of auto-enrolment but rejects the needs for NEST. He is wrong to think that the private sector can take up the slack created if NEST was not to be pursued. There is no appetite among the insurers of personal pensions to cross-subsidise the pensions of the low paid.    

Ultimately Michael must accept that we can’t afford to pay for the Citizens Pension  by scrapping NEST or by abolishing  Higher Rate Tax on pension contributions or even by scrapping means-tested benefits in retirement. Not with the current state of the country’s finances.    

If we had embarked on a wholesale reform of our country’s pension provision when we had the chance-specifically when Frank Field was given the mandate to think the unthinkable in 1997 or when Brown and Blair went to war on this in 2004 or in the glory years that preceded the credit crunch, we might have seen something happen. That we didn’t is one of the failures of the Blair years.    

We do not have the money to make wholesale reforms today, we must make the best of the    limited resources at our disposal, the opportunities of auto-enrolment and the investment already sunk into NEST.    

When we have digested auto-enrolment and introduced NEST then we can look again at the Citizen’s Pension.    

When we have got that sorted, we can start looking at the ISA/pension harmonisation issues that form the basis of Michael’s current thinking.    

BUT NOT TILL THEN.    

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by henry tapper on September 26, 2010  •  Permalink
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Posted by henry tapper on September 26, 2010

http://henrytapper.com/2010/09/26/paying-for-a-citizens-pension/

Whose (mis)taking my pension?

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In a stunning piece of forensic journalism, the BBC have been reading personal pension disclosures and discovered that someone paying £120,000 over 40 years into an HSBC all singing and dancing personal pension could pay the best part of £100,000 in charges for the privilege. 

Thanks to Jennie Kreser for bringing this to the attention of our lunch group yesterday and correctly identifying structural weaknesses with auto-enrolment and NEST that unreasonably excite expectations of a prosperous retirement for all 

Thanks too to Mark Rowlinson and Susan Anyan for the maths- yes – if you get 7% growth per annum you get a big pension pot in today’s terms and with 1%pa + charges the nominal costs between 2040-50 will appear high in today’s terms. 

Thanks to Charles Tatham for pointing out that by using a less elaborate L& G personal pension, the costs could be reduced by 40%, 

Thanks to Chris Brown for pointing out the value of group personal pensions that can bring AMCs on personal pensions down by 60% of the RRP quoted by HSBC 

Thanks to Tony Woodward for helpful thoughts about the likely impact of the RDR which will require independent advisers to concentrate their work on high net worth clients effectively abandoning many to inappropriate pensions offered by the banks. 

Thanks to Owen Walker for keeping us temperate (good journalists like Owen listen!). 

Thanks to Des Hogan for moving the debate on to NEST and the value it brings both in terms of charges and inclusiveness. 

Thanks to Ben Mulroney for his insights on investment strategy- in particular the cost of providing appropriate pension strategies in a DC environment 

Thanks to Emma Craig and Holly James for providing valuable input from Generation Y on their buying priorities debt reduction, property ladder stuff and ISAs. 

Thanks to Richard Hayes for his unsuspected attendance and excellent contributions. 

So what did we conclude? 

  1. Sensational reporting is not helpful in getting people to save for retirement
  2. There is a wide range of charging structures between personal pension providers
  3. There are substantial discounts that can be created through group personal pensions
  4. For all its faults NEST will deliver lower price pensions to part of the market stakeholder pensions could not reach
  5. That the pensions landscape will change post RDR and that the banks are seen as predatative in their approach to pension sales.

Such a truncated and dislocated report cannot do justice to what was a lively and informed debate. We’d urge all reading this to join the Playpen and add to our limited but growing awareness. 

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by henry tapper on October 5, 2010  •  Permalink
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Posted by henry tapper on October 5, 2010

http://henrytapper.com/2010/10/05/whose-mistaking-my-pension/

This is Liverpool – this train terminates here

Jo Segars- exhausted

When Lord Hutton announced this week that he would recommend the Government adopt a more conservative discount rate to value its liabilities , we witnessed a defining moment in pensions policy in the UK.

 
Here was a labour politician accepting that the long-term cost of public pension is nearer the £1.2 trillion estimated by Watson Wyatt  than the £780m that is the current Government estimate.
 
This discount rate is supposed to reflect the cost of Government borrowing which we know to be measured by the gilt-rate, if the gilt - rate is applied to the debt we the tax-payer have created from the over-generous final salary pensions we dish out to those in Government employ then we own up to the big skeleton in the cupboard.
 
The train has hit the buffers. A £450 bn increase in our long-term debt will come as no surprise to people in pensions but it remains to be seen how it will play with the financial markets. We can only hope that those who bankroll UK plc- the capital markets - will recognise this new found candour as a positive.
 
In the context of this financial bombshell, it is easier to understand the Treasuries’ determination to drive through a change to the way our pensions increase in retirement. There’s no doubt that linking pensions in payment to CPI rather than RPI will substantially reduce their long – term value but it will also reduce the impact of the restatement of liabilities. This is a sign of things to come.
 
That the switch from RPI to CPI was taken without consultation suggests that the Government mean business this time and after years of dithering we can expect the forthcoming spending review to be equally ruthless in tackling the growing inequality between total reward in the public and private sectors.  Steve Webb was unapolagetic and more or less told the Conference to “get ovier it”.
 
Another restatement, the gravy train has hit the buffers.
 
The new realism among pensions folk was evident throughout the NAPF’s autumn conference in Liverpool. I had tweeted on my way up that occupational pensions are “incompetent, insolvent and in decline” I don’t take that back, though likening them to Liverpool was a mistake. Liverpool is  a great town!
 
Away from the mandarins who have presided over the demise of our defined benefit industry, the conference was full of people getting on with reconstructing our pension industry. Steve Webb MP , Paul Johnson and Laurence Churchill were not able to say much but what they said was clear and to the point. Auto-enrolment will happen, NEST will probably happen and we have a pensions minister who both knows his subject and understands the context in which pensions policy is developed.
 
Webb was pretty brutal, making it clear that we cannot expect pensions policy to be created in a vacuum. Paul Johnson was even more direct,  denying that the consideration of a Citizen’s pension had ver been on the agenda of his review. The fact is that a proper reform of tier one benefits will not happen in this economic climate.
 
The NAPF got most things right this year. They cannot expect to provide the platform for the big policy statements but they can give their members and those observing through the media, an insight into the state of the pensions nation. Throughout the conference, senior pensions people were openly stating that the final salary culture we have enjoyed for thirty years had come to the end of the line.
 
We may have hit the buffers and we aren’t derailed. We can be thankful for that.
 
 

 

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by henry tapper on October 9, 2010  •  Permalink
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Posted by henry tapper on October 9, 2010

http://henrytapper.com/2010/10/09/this-is-liverpool-this-train-terminates-here/

“No one uses e-mail anymore”

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A comment on a very interesting Mashable survey which suggests that Social Media is now more popular than e-mail on mobile devices.

That comment in full

I would agree with this because who checks their email any more. All i do is get on Facebook which to me is pretty much the same thing except without the spam

The Mashable report states that

Mobile users spend 1.4 times as many hours using social networking sites than reading and responding to e-mail, according to a recent study by research company TNS. On average, users spend 3.1 hours per week on social networks, versus 2.2 hours on e-mail.

In most mature markets — such as the U.S. — the trend is reversed on PCs; consumers spend more time on e-mail (5.1 hours per week) than social networking (3.8 hours).

The study, which tracked the online activities and behaviors of nearly 50,000 subjects between 16 and 60 years of age in 46 countries, cited “the increased need for instant gratification” as well as “the ability to offer multiple messaging formats, including the instant message or update function,” for the popularity of social networking platforms on mobile devices. More consumers, both in the U.S. and abroad, expect to spend even more time accessing social media on their mobile devices in the future, rather than their PCs.

The less on is relevent to those pondering how to get people to engage and take responsibility for their retirement planning – especially those in the UK who will be entering into pension savings arrangements for the first time, people who do not use PCs but use the internet via 3G devices.

It confirms something that has become  apparent to me in the past twelve months. There are an increasing number of people who are determining what information they receive by taking control of the information feeds, prioritising what they chose to read and selecting information feeds that suit them.

The battle to get on people’s information feeds is intense and it is one that the UK pensions industry has so far failed to join.

With limited space on a mobile screen and a demand from consumers for instant gratification, there is no opportunity to provide complex financial information.

The pensions industry is going to have sell its information feeds against pure entertainment games ,videos, jokes and smut. It will have to compete for space and time with other financial feeds - the bank balance, the council tax bill as well as the plethora of junk that people will mistakenly subscribe to.

Make no mistake - the doormat is not working. What arrives through people’s letter boxes is bad news - bills. Delivering pensions information by surface-mail may work for generation X (just) but it won’t work for Generation Y or Z.

If you are in the business of engaging with your customers, whether you be running NEST , the pension scheme of an SME or a personal pension for the self-employed you need to re-think your strategy and targets.

You are going to have to understand your customer base, understand what information they want and how they want it. There is no point in sending mail to those who throw it in the wastepaper bin nor is there any point in requiring e-mail addresses from those who don’t read their mails. How many pension databases have up to date information on their customer’s mobile phone accounts and how many pension operators have considered asking let alone asked members whether they’d like their pension account balances delivered to them by text?

If you can deliver a text, you can deliver a TinyURL and a link to your educational website but don’t expect the majority of your customers to press on that link anytime soon.

The key lesson is to pander to the need for instant gratification and the only bit of good news you can feed most people about pensions is that they have a pensions balance. However small someone’s pension savings, the regular notification of a DC account balance builds engagement.

For many people, their personal pension, occupational pension or NEST account will be the only account balance they have in the black. Seeing that figure as it accumulates could become a source of comfort, a point of engagement and the first small step in getting people involved in planning for their retirement.

We are in the middle of a revolution in communications that embraces all social classes and all age-groups but the pace of change is fastest among the very groups who have had least to do with pensions in the past - the young, the recent immigrant, the mobile employee and the partially employed.

Those of us who are interested in increasing pensions literacy and helping people to build pensions savings have a major opportunity to take advantage of this revolution. We should recognise the opportunity, rethink our strategies and implement without further delay.

The major changes in pensions surrounding auto-enrolment and the introduction of NEST provide us with a once in a generation to get things right.

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by henry tapper on October 13, 2010  •  Permalink
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Posted by henry tapper on October 13, 2010

http://henrytapper.com/2010/10/13/no-one-uses-e-mail-anymore/

How to boil a frog- tax changes for pensions

We’ve been puzzled at how the Treasury think they can extract £3.5bn pa of tax savings from the 100,000 people likely to be impacted by the new Annual Allowance and why they consider the changes to the LTA will only bring in £0.5bn pa. That’s until we read GAD’s paper on reducing the Annual Allowance.

In section 1.6 of his Overview, the Government Actuary states

Using the same assumptions as  were used to derive the 16.1 factor recommended in the Report, the equivalent factor on retirement at age 60 (for the LTA) would be 23.6:1 and at 65 would be 22.1. That is, I am effectively assuming that pensions are more valuable than implied by the existing 20:1 Lifetime Allowance Factor, since I am assuming higher life expectancy and lower discount rates. In my opinion, this seems appropriate compared to the position 5 to 10 years ago when the previous factors were adopted.

Surprisingly, the Treasury have chosen to adopt the 16:1 AA factor but not the recommended LTA factors. It’s  statement on the matter comes at the end of a very obscure discussion on age-related valuation factors which it dismisses as too complex an idea. This section  makes no mention of GAD’s recommendation but baldly concludes.

The Government is minded to make no change and for the LTA valuation factor to remain at 20, but it will continue to monitor
this issue. (my italics)

Did the Treasury consider the implications of GAD’s recommendations too much for us to stomach right now? Is the door ajar to adopt them when the dust settles?

These questions should be of particular interest to those likely to retire from 2012.  Were the Treasury to adopt the GAD recommendation to use an LTA factor of 22.1 then the notional LTA Cap would fall to £1.36m (20 times a pension of £68,000 pa) , if they adopted the 23.6 factor the CAP would fall to £1.27m (20 times a pension of £63,500pa).

Adopting GAD’s recommendation could impact a lot of people. The Baby Boomers hit retirement in the next five years. As Frank Field puts it in a recent article (on Schemexpert)

 

.. more than 800,000 people will celebrate their 65th birthday in 2012, up 150,000 on the 2011 figure.

In case you have forgotten, this is 800,000 of a total of a little over 12 million. This massive increase, which stems from the post-war spike in births as the troops came home after the war, will lead to significant rises in government spending on the state pension.

They are of course the generation that have most to look forward to from occupational pension benefits (and most to lose from changes in the LTA).

For those interested in the cost of providing an equivalent DC benefit, GAD reckon the factor for buying an RPI annuity at  32:1 factor and a CPI variant at 28;1. Put another way,GAD are saying that the maximum RPI linked pension they’d expect to get for the £1.5m cap would be £47,000, (£53,500 if the link is to CPI).  An LTA of £1.5m- frozen till further notice, is not good news for DC savers either.

The best way to boil a frog is to put it in cold water and heat the water to boiling point, putting a frog in boiling water will result in the frog jumping out of the pot.

Does this matter? You bet it matters. Pensions are so complicated that they offer  those in Government numerous opportunities to take revenues by stealth. This has happened again and again to the point that Government has lost the trust of pension practitioners and more importantly, the wider population. If we are to get behind the current Government’s pension agenda- we must trust them. In this matter the Treasury appears to be behaving in an underhand manner and they should be called to account.

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by henry tapper on October 15, 2010  •  Permalink
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Posted by henry tapper on October 15, 2010

http://henrytapper.com/2010/10/15/how-to-boil-a-frog-tax-changes-for-pensions/

Treasury- stop messing with pensions

Since it was revealed that Fred the Shred’s pension was worth north of £17m, the issue of senior executive pensions has been much in the public eye. We have cottoned on to the Boardroom abuses that have allowed Remuneration committee’s to dish out obscene amounts of shareholder’s funds to their cronies and in as much as the worst abuses will now be the subject of punitive tax, the measures announced by the Treasury on Thursday are most welcome.

The adjustments the Treasury has made to their much trailed proposals have concentrated the impact of the new measures on the super pension rich who will now pay super pension taxes and this is a good thing.

What is not such a good thing is that the supposed £4bn pa saving to public funds is not justified by the measures taken.

There are two revenue raising measures. The capping of contributions to £50,000 pa known as the Annual allowance or AA and the capping of the maximum amount that can be drawn from a pension known as th Lifetime Allowance or LTA- this has been reduced to £1.5m.

The Treasury state that there only 100,000 people who contribute or have contributions on their behalf to their pensions in excess of £50,000 pa.

The Treasury say that they will only be raising £0.5bn pa from reducing the LTA.

We must assume they expect the changes to the AA to generate £3.5bn. They are proposing that above £50,000 contributions do not get marginal tax relief (eg the difference between the 20% rate and the individuals highest rate of tax - either 40 or 50%).

Even if we assume that the Treasury could recover 30% of these excess contributions (which won’t be the case as many of the contributors don’t pay the 50% super tax). They would have to see total contributions of 3.33 X £3.5bn to hit their revenue target. That’s over £11.6bn from a constituency of 100,000 people. It assumes that the average super rich pension contributor will be paying £116,000 above their £50,000 limit or £166,000 in total. As the Treasury know, the super-rich are super clever – this is not going to happen.

So where is the balance of the Treasury’s revenue forecasts going to come from. Not from the LTA according their numbers – are we missing something?

Well yes we are. Hidden in the Treasury’s report is the following statement.

The Government is minded to make no change and for the LTA valuation factor to remain at 20, but it will continue to monitor
this issue. (my italics)

That’s the Treasury’s get-out clause and you may think that the LTA valuation factor is a pretty obscure number – well it isn’t.

Put simply, the LTA valuation factor is the multiplier that converts the amount you get as a pension into a cash value.

For instance, your basic state pension pays you £5000pa. Using the LTA valuation factor it is worth £100,000.

But what if the Treasury was to use an LTA valuation factor of 23.6? Well your basic state pension would now be valued at 23.6 x £5000 or£118,000. Your pension wouldn’t be any bigger but it would be £18,000 more valuable.

So why did I chose 23.6 – is it a random number? Well no. Accompanying the Treasury Press Release and Report was a report from the Government Actuary which includes this;

Using the same assumptions as  were used to derive the 16.1 factor recommended in the Report, the equivalent factor on retirement at age 60 (for the LTA) would be 23.6:1 and at 65 would be 22.1. That is, I am effectively assuming that pensions are more valuable than implied by the existing 20:1 Lifetime Allowance Factor, since I am assuming higher life expectancy and lower discount rates. In my opinion, this seems appropriate compared to the position 5 to 10 years ago when the previous factors were adopted.

Now the Government Actuary is no fly by night figure - he is in charge of a non Governmental Organisation that provides independent advice which is supposed to be authoritative.

The Treasury have simply ignored his recommendation.

They have chosen to ignore his advice that people are now living longer and that the forecast for long-term inflation and interest rates is lower than it was a few years ago.

Well not quite ignore - they have actually agreed with the Government Actuary when on these things with regards to annual allowance and ignore him with regard to the the Lifetime Allowance.

Now there’s nearly 20% more about 23.6 than 20 which means that the Treasury have the option - simply by adopting GAD’s recommendation to hike up the impact of the LTA by 20% which, given the fact that the baby-boomer generation is in the midst of retirement will hit a lot of the very rich - if not super-rich and might get the Treasury to their £4bn revenue saving.

I may not be bothered with regards to the amount of tax that the super-rich or even the very rich are paying but I am bothered that the Treasury can play fast and loose with the Government Actuary’s recommendations and with our understanding of the value of pensions.

Because if they behave like that with the rich, they can play like that with the poor and with “me” and I’m neither rich nor poor. It’s a matter of credibility - of integrity and of trust.

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by henry tapper on October 16, 2010  •  Permalink
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Posted by henry tapper on October 16, 2010

http://henrytapper.com/2010/10/16/who-gives-a-damn-about-the-pension-rich/

Hapless man tries to buy a pension

A man walks into a shop, goes to the counter and asks the shopkeeper for a pension…

Certainly sir, and what kind of pension would you like?

An old age pension please - like I’m getting this month from the Government.

Ah that would be our platinum pension - linked to Average Earnings- absolute beauty. Trouble is we’re fresh out of stock.

And when are you likely to have some new ones in?

That depends of the Debt Office and when they decide to deliver us some Earnings-Linked Gilts.. you’re looking at a couple of years.

The customer, a little disappointed asks..

Well alright, what do you have in stock?

We’ve got plenty of gold plated and silver-plated pensions sir.

Alright, what’s this gold-plated pension and how much is that going to cost?

Beautiful pension, goes up with the Retail Price Index –  let’s look at the price tag - £5000 X 32, that’ll be £160,000.

£160,000? You’ve got to be joking, haven’t you got anything cheaper?

Well you could have our silver-plated pension, that goes up with the Consumer Price Index and that’s only £140,000. They’re brand new and you can pre-order one now.

A relative bargain - said the customer cynically – what’s the difference between Retail and Consumer Price indexing?

Housing sir, the CPI ,as we call it, doesn’t go up so fast because it doesn’t include housing costs.

The customer takes a step back , ponders then asks…

So what about my works pension, it’s going to pay me £5000 pa, is that silver or gold- plated?

That depends…- replied the shopkeeper - it could be either , depends on what the Government tells the trustees they should pay.

So it could be worth either £160,000 or £148,000 depending on what the Government decide?

Well not exactly sir, it’s a bit more complicated than that but to make things simple we’ll say it’s worth £100,000.

That’s ridiculous –  says the man - you told me I’d have to pay between £148,000 and £160,000 for my pension but now you’re telling me my works pension is only worth £100,000.

I’m only going by the prices the Government give me sir…

So who makes the prices up then..?

Well for the most part the Government Actuary, except when the Treasury choose to ignore him.

Is that why all these numbers are so confusing?

Indeed sir. But there is a logic to why your works pension is cheaper than a pension you can buy in a shop. Your company gets economies of scale and can pay your pension out of their pension fund –  that’s a lot more efficient. Mind you it’s not as efficient as the Treasury says it is. Your works pension should be valued at well over £110,000 but the Treasury forgot to revalue it.

Forgot? How can the Treasury forget? They don’t forget to send me tax bills.

Well I’m being kind to them sir, there’s some that say they’re on the fiddle.

This all seems very strange – said the man, – you are telling me that my pension is worth anything between £100,000 and £160,000 depending on what it’s linked to, where it comes from and what bit of Government I’m talking to?

Strictly speaking the Government Actuary is part of a Non-Governmental Organisation – the shopkeeper interrupted.

This didn’t make things any clearer but as he had gone to the shop to buy a pension he decided to press on.

Ok , I’ll pre-order one of your silver-plated pensions at £148,000; can I pay in cash?

Of course sir, but I must advise you that only the first £50,000 will  get you the usual tax-relief and you will be taxed at your marginal rate on the benefit arising.

As these  said, the man felt a sharp jerk on the back of his collar. He turned to find the stentorian figure of PC Plod confronting him.

Alright my old china, perhaps you would like to accompany me to the station. I am arresting you on a charge of money-laundering.

It had not been the easiest of purchases.

All rates and calculations have been made with reference to recent Treasury and GAD papers relating to adjustments to the Annual Allowance and Liftetime  Allowance. Some rounding has been applied to the Basic State Pension currently in payment.

This story is fictional; any likeness to persons or situations unknown is entirely coincidental

 

 
 
 
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by henry tapper on October 17, 2010  •  Permalink
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Posted by henry tapper on October 17, 2010

http://henrytapper.com/2010/10/17/the-hapless-pensioner/

Automatic for the people

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No need for lengthy intros- we knew this was coming and most of the detail had been flagged- the DWP leaked and leaked well.

The consultation was excellently managed and the report makes good reading.

 It’s a shame that it caught some of Britain’s best journalists on a bad day.

 Bad day for BBC reporting

 To be eligible, staff will have to earn at least £7,475 a year.

 Good day for FT reporting

 However, individual employees earning less than £7,500 will be able to opt in to Nest, triggering an employer contribution, and they will be able to do the same during the three-month waiting period.

Indeed, those between the NI and PAYE lower-earning limits can opt-in to employer contributions without an obligation to pay for themselves (according to a report on Schemexpert).

Bad day for BBC reporting (2)

 Nest is due to start next year, with all firms joining by September 2016.

What the Paper says

There should be a simpler system by which employers can certify that their defined contribution pension scheme meets the required contribution levels.

Bad day for the Torygraph

The plans mean that firms with more than 50 employees will be required to provide a company scheme.

What the Paper says

 The automatic enrolment duties should apply to all employers regardless of size, as now.

 Enough of such pedantry ;- who says the truth should get in the way of a good story.

 Some observations;

 The Paper is good news;

•The three month waiting period will increase opt-outs but does reduce refunds and silly sized pots- it reduces the burden on employers and is overall a good thing

 •The certifcation regulations are complicated but in the right way, giving flexibility to employers to get the right benefit structure without undermining the general principles of Auto-Enrolment.

•There is no slippage im the implementation timeline

•There is a sensible easement on the earnings limit with the option to manually enrol for those between the lower NI and PAYE limits.

 •There are useful suggestions about integrating the regulation of trust and contract-based schemes- especially with regards refunds

 •There is scope for the collar on NEST contributions and the embargo on transfers-in to be lifted in 2017

  • There will be Android and iphone apps acailable for those who want to keep track of their NEST pension -who knows- they may even use Facebook as I suggested earlier this year!

If only all Government policy could be implemented this well….l

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by henry tapper on October 27, 2010  •  Permalink
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Posted by henry tapper on October 27, 2010

http://henrytapper.com/2010/10/27/automatic-for-the-people/

Spend don’t save.

Victoria Derbyshire is one of the best presenters on the radio. On one of her Radio 5 programs she came out with a little jewel about her Dad telling her to spend on pensions and not save into them.

I’m no fan of the “pensions” is a dirty word school of thinking that suggests that if we could dress retirement planning up in some woolly counterfeit semantics, we’d go some way to sorting the massive gap between pension saving and pension expectations.

But Victoria was spot on with her suggestion, especially as she pithily explained that spending is a positive decision she takes to commit her hard-earned while saving is a negative expression related to denying more positive actions.

I’m heartily sick of the word “saving” especially as its being applied in the public spending sense.

If one way out of the current dilemma facing this country is to turn negative thinking about saving into positive thinking about spending then three cheers for that.

I am pro investment and against speculation. Let’s spend on long-term projects like abolishing means-testing by bumping up the state pension and let’s spend on satisfactory retirement plans like the excellent pension schemes offered to civil servants, firemen, doctors ,nurses and local authority workers.

Let’s rid ourselves of the speculation culture that looks at delivering short-term profits for institutions by driving wedges into the cracks in the finances of nations, companies and other speculators.

Let’s spend our money on providing ourselves with a great second half to our lives through the new Government pension (NEST) and let’s make good use of the workplace pension schemes which we’ve been developing over the past ten or fifteen years to replace the defined benefit pensions that smaller companies can’t manage and therefore can’t afford.

Let’s adopt a spend mentality to the future that embraces a better Britain for our kids and ourselves.

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by henry tapper on October 31, 2010  •  Permalink
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Posted by henry tapper on October 31, 2010

http://henrytapper.com/2010/10/31/spend-dont-save/

What has happened to our pensions?

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Never before in the field of UK pensions has so much been done so quickly for so many.

The past six months has been like an exploding spot for UK pensions - the pressures building up for years from the facts that people are living longer, markets have stalled and companies have been required to fund their pensions on a stricter basis - have been lanced The result has been messy , the sore is very visible but ultimately we probably feel relieved.

Let’s look at the big picture in terms of “what”, “when” and “to whom”

What?

Workplace Pensions will now rise in line with CPI rather than RPI. This will lead to lower increases in your pensions in payment and will ease the pressure on the finances of pension funds that provide a defined benefit. As the majority of people in defined benefit schemes (including those currently receiving their pensions) are in the public sector, this will benefit public finances most.

The exception to this is the Basic (old)  Age Pension which will go up in line with Average Earnings and will go up faster than previously. This is particularly good news for the poorest pensioners and will hurt the public finances.

Not only will those in the Public Sector see lower increases in their pensions, they are likely to see a different formula for calculating the amount of pension they receive. Details of this will not be published till next Spring but it’s likely that the new formula will hurt the better paid and least effect those on low incomes. It is possible that these cuts could effect pension already built up (as the BBC are proposing to their members) but it’s more likely that this will only affect rights on future earnings.

Almost everyone not in a workplace pension will be required to join a pension which they will have to opt out of if they meant to avoid making personal contributions. As part of this change, the Government are introducing a new state organised pension called NEST, the benefits of which will not be guaranteed but will depend on the markets.

Finally Vince Cable and Steve Webb have also announced it is the Government’s long-term goal to increase the Basic State Pension by about 35% and do away with a lot of the complicated rules governing the Second State Pension (formerly known as SERPS, now called S2P. A lot of the messy rules on Pension Credits and other means-tested benefits will also be simplified

When?

The changes to the way that pensions increase are almost immediate.

The Basic State pension is going to be delayed for those drawing their Basic State Pension which means those in their late 40s and early 50s will have to wait till they are 66 to get their first payments. This is particularly hard on woman who were expecting to retire a lot earlier than men (though there’s some consolation that they continue to live longer than the male of the species!)

We don’t quite know when the changes in public sector pensions will take place but we do know that the new rules requiring people to join pensions under “auto-enrolment” will be phased in between 2012 and 2017 (bigger organisations will go first).

Whether the proposed changes in The Basic State Pension envisaged by Webb and Cable see the light of day is dependent on a long-term political consensus but are unlikely to be introduced till the final years of the decade at earliest.

.

“To whom”

These changes are sweeping, they will impact everyone to varying degrees though the biggest losers are likely to be those with high or potentially high earners.

Because pensions are hard to understand and take time to be felt- all this may seem a little unreal – certainly compared to the immediate issues with jobs, housing and public services. However the scale of these changes is likely to be enormous both in terms of how but also in terms public finances.

Politics

Many of these changes have been considered unde the previous Government, the plans for auto-enrolment and NEST were instigated by Labour while the changes to state pensions have been advocated by various Labour politicians - particularly Frank Field without getting Cabinet support.

If there is to be cross-party support for these changes , it will require support from the general public and the Unions. The Coalition have been working hard to soften the blow by introducing changes to the tax-regime for the super-rich and stressing that the changes will be progressive, benefiting those on poorest incomes at the expense of higher-earners.

Again, much has to be taken on trust. The wider picture of public sector cuts is relevent. The high interest rates being paid by Governments like Greece and Ireland on their debt is partly attributed to the runaway costs of their pensions and it’s not gone unnoticed by those who lend us money that the cost of public sector pensions is estimated by non Governmental experts at £1.2trillion rather than £0.78trillion by the previous Government.

There is likely to be close scrutiny on what the changes really mean to public finances by rating agencies and global banks and their economists. There is also likely to be scrutiny of some of the claims made by Government on the impact of changes on the rich.

Support for the short, medium and long-term changes announced will be generated from trust that the Government numbers are real and not spun for effect.

As we see more of the changes and have a chance to check the numbers, those who are pension experts outside of Government will have an important job either to win support from those impacted or to warn them that they are not what they seem.

If you’ve read this far, you can probably guess I see a part of my job as doing just that so I hope you keep reading my blogs as they will return again and again to these big issues which are so important and so hard.

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by henry tapper on November 5, 2010  •  Permalink
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Posted by henry tapper on November 5, 2010

http://henrytapper.com/2010/11/05/what-has-happened-to-our-pensions/

You don’t know what you’re doing

DAVOS/SWITZERLAND, 29JAN10 - David Cameron, Le...

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The doleful cry from the stands, or in Yeovil Town’s case the terraces, implies that there is a stock of referees who are competent. Quite who these referees are is not clear - we sing the chant to them all . We are as certain of the referee’s inability as that we follow  “by far the greatest – team the world has seen”.

Such delusions are not confined to football . They are no more extravagant than some Government thinking on pensions , in particular an imagination that people can manage their accumulated pension fund to match their weekly cashflow requirements through later life(through what is known as income drawdown).

Working in a firm of pension actuaries, I am aware of how difficult it is to manage a pension fund to pay “the right money at the right time to the right people”.

This is what occupational pension schemes find hardest.

The easy solution for them is simply to outsource the problem to an annuity provider  who will guarantee to meet the pension promises in full in return for a fat wedge upfront. “The fat wedge” is usually considerably more than the trustees of a pension fund have anticipated or can afford which is why most pension schemes haven’t chosen this route.

Instead trustees generally choose to do the job themselves but to do so they have to recognise that they need to be extremely careful. They cannot afford to be reckless and risk the value of the fund falling suddenly, especially when they need to draw money out of their funds to pay their pensioners. Put simply, if a pension fund invests recklessly and sees its value drop dramatically, it has to cash in assets at a low price to pay its pensions, this creates a hole in the fund and no matter how the fund may recover when things get better - the damage has been done.

Trustees, understanding this , avoid investment strategies that are volatile. They do not invest recklessly. To some extent they have no choice, their behaviour is monitored by their advisers who can report them if they are behaving stupidly to the Pensions Regulator who can force them to behave sensibly.

Behaving sensibly means investing in low volatility assets like Government and perhaps Corporate Bonds. This way means sacrificing the prospects of long-term growth for the certainty of steady of growth. Even though they are adopting a “risk-based ” approach - not all trustees manage these cash flows right – many schemes have failed and many more will fail.

So if it’s hard for the experts - the professionals what chance for the rest of us? What chance have the “mass affluent” to get it right on their own?

Earlier this year, the Coalition – and David Cameron was central to this - took away the need for people to buy-out their accumulated pension fund (using an annuity) and we are now allowed to do the cashflow management ourselves. Philosophically this is in line with “small Government” and allows people greater choice and greater flexibility in how they manage their affairs.

But do we “know what we’re doing”? I’m not at all sure.

If it’s hard for the trustees with the help of professional advisers, then it’s darn near impossible for us to manage our individual funds into the income streams to meet our monthly requirement needs. What’s more – the financial advisers I know, know very little about the risk management techniques to manage volatility and give regular secure income. Most financial advisers are wealth managers whose principal interest is capital accumulation and not liability driven investment.

The mass affluent are delusional about their pension funds. Take a look at this recent research from Sun Life of Canada.

Almost half (49%) expect to generate between £20,000 – £40,000 from their pension and other savings (21% expect an income of over £50,000).

Yet 59% of respondents have less than £300K and 33% less than £200K saved. 

So their expectations of likely income from their pension savings are unrealistic.

 

Certainly unrealistic- the Government Actuary who is the principal supervisor of the process of drawing income from an individual pension fund reckons that it costs some £30 to give a £1′s worth of inflation linked retirement income, so a £300,000 retirement pot is likely to yield an income of not much more than £10,000 pa. 

There was a time when we could reasonably expect a 10% return on our assets and could expect to get a £1′s worth of income from £10 out of our pot – in fact I’ve got some of that money - guaranteed by an insurer. But that was in the days of high inflation and lower expectations of life expectancy. Those days are long gone.

I suspect that many of the mass affluent are still subliminally believing in the 1 for 10 rule and still believing that equities will grow by 10% per year as they did in the 80s and 90s.

Worse still, I think that many advisers have not moved on from these assumptions.

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by henry tapper on November 6, 2010  •  Permalink
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Posted by henry tapper on November 6, 2010

http://henrytapper.com/2010/11/06/you-dont-know-what-youre-doing/

NEST For the self employed?

           

                 

                       

 

NEST will be available for many individuals to use outside of the workplace, in particular the self-employed. FSA  Conduct of Business Changes published 09/11/12.

  

  

  

  This is what the DWP’s Pensions Advisory Service has to say about the structure of NEST

 

 

This is how the FSA define occupational schemes

It’s not clear how a self employed person becomes a member of an occupational pension (have I missed something here!). The notion is as strange as the FSA’s assertion that the self-employed are “outside the workplace”!

It may be that the FSA have got the wrong end of the stick as might be suggested to the references in their consultation paper to NEST as a product (not how we normally think of occupational pensions schemes).

If however they are speaking for Government as a whole, then the Pensions Landscape for those advising the self employed is going to change radically.

  

When giving advice on pensions, advisers should take into account whether the person could use NEST and whether it is capable of meeting their needs. COBS 6.2A17 G states specifically that:  
  

 

 

 ‘In providing unrestricted advice a firm should consider relevant financial products other than retail investment products which are capable of meeting the investment needs and objectives of a retail client, examples of which could include national savings and investments products and cash deposit ISAs.’…..We would consider NEST to be a ‘relevant financial product’ in the context of advice on pensions. (FSA- Conduct of Business changes)

One of the main thrusts of the FSA paper is to ensure that financial advisers do not recommend their clients opt-out of auto-enrolment in favour of independent provision. This is clearly sensible for employees who would otherwise stand to pick up a contribution from their employer.

The FSA are therefore minded to make it as onerous for an adviser to opt someone out of an automatic enrolment scheme (eg a GPP being certified for auto-enrolment)s it is for them to advise someone to leave or not join an occupoational scheme.

 

If financial advisors are also going to have to benchmark personal pensions “sold” to the self-employed , it is hard to see how the new “Pensions Landscape” offers them any real opportunities to recommend traditional  personal pensions at all.  It remains to be seen whether the market for SIPPs will expand to support the IFA community’s aspirations.

The “pensions landscape” ,as the FSA calls it, looks as barren for traditional financial advisers as a first wold war battlefield.

The landscape is hardly more comfortable for traditional providers who are asked to consider the impact on their legacy  book of personal pension business.

(Auto-enrolment ).. may lead to high levels of individual pension policies becoming paid up or lapsing as the reforms are introduced.

If firms cannot structure their charges so that the business is economical for the firm and consumers can get value from the product, then they should consider whether it is appropriate to provide a GPP in these circumstances

The triple whammy of these proposed strictures, the Retail Distribution Review and the FSA’s Consumer Protection Strategy, (not to mention  the proposed creation of the Consumer Protection and Markets Authority) are likely to all but wipe out the opportunity for the traditional pensions salesman.

 

 

 
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by henry tapper on November 9, 2010  •  Permalink
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Posted by henry tapper on November 9, 2010

http://henrytapper.com/2010/11/09/nest-for-the-self-employed/

Advice and leadership

National Liberal Club. London.

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As students protested outside, Danny Cox and I sat down to a club sandwich at the National Liberal Club. Danny is Head of Advice at Hargreaves Lansdowne and my question was how he defined advice.

I was expecting a long explanation of process, instead I got one word,

Leadership

Danny explained to me that the majority of his clients were aware of what they wanted and had a pretty good idea of what they needed to do, Hargreaves Lansdowne deal with people who are financially literate.

The majority of their clients do not need advice and Hargreaves encourages its clients to take decisions on an “execution only” basis, giving them the information to take these decisions in a digestible way.

Those who need advice are typically looking for validation of a course of action they have worked out for themself.

Leadership for Danny and his colleagues was the process of confirming and refining this course of action.

Danny, like me, started his financial career selling life policies, a tough world that involved spending large amounts of time being told to go away (in not such polite terms).

I wanted to know whether his approach transferred to people who didn’t have the wherewithal to work things out for themselves - whether this concept of validation could be applied universally.

My conclusion is that it can’t. This is not a class statement, whether in organising wealth ,household budgets or  managing benefit claims , there are people who can and wish to act independently, those who are willing but need leadership and a great bulk of people who simply need to be told what to do.

We have a very small number of people who are skilled financial advisers. Increasingly they are focussing their attention on areas where wealth is concentrated those with High Net Worth. The Wealth Management business is lucrative because it is supported by the wealth on which advice is given. Here financial advisers are effectively given discretionary powers to make sure tax is minimised, volatility reduced and growth and income maximised.

For the mass affluent,  the kind of advice that Danny advocates is needed by those who feel insufficiently confident to take decisions without guidance, validation and occasional instruction.

But with limited advisory capacity , can the vast majority of the population expect even the level of support that Danny provides his customers? The Retail Distribution Review , the introduction of auto-enrolment and the various pronouncements from the Pension Regulator and the FSA that we have seen in the past few weeks suggest that the Government’s policy has been shaped by a realisation that where there is insufficient capacity and  insufficient means to pay for high quality advice, the leadership role must be assumed by employers and ultimately by Government itself.

Behind this realisation is a fundamental shift in policy. The social contract, as defined by Beveridge and successive Governments could briefly be described as “the State will provide”. At it’s most extreme, the position of many right-wing thinkers that have developed since the Thatcher years is that the State should withdraw and leave people to manage their own affairs. Both these political positions assume that a dogmatic approach can shape the behaviours of the people and both have been exposed as we recognise that we neither have a State Welfare System that is fit for purpose nor a population able to fend for themselves.

I’m struck by Danny’s simple idea about Leadership. His firm has recognises the need among some people for their decisions to be validated while expecting the bulk of their clients to act independently.

Across our society we are moving to a place where the majority of Companies are going to take independent decisions on what they need to do about pensions  while the Government are going to confirm a course of action for Companies needing that helping hand.

This mirrors the advisory model installed by Hargreaves Lansdowne. Those on the left will argue that this is not an inclusive model - there will be the opportunity to opt-out of what is going on and it is still unclear how the Safety Net for those who can’t or won’t provide for  themselves will work.

Those on the right will criticise the level of Government involvement through auto-enrolment, Regulatory interference and most especially the introduction of auto-enrolment as an affront to free-market economics.

However, I believe the balance that is currently being achieved, relying as it does on firm and clear Government policy and a recognition of the differing needs of Companies and the people they employ, demonstrates that the Government has finally found a way forward.

 

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by henry tapper on November 12, 2010  •  Permalink
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Posted by henry tapper on November 12, 2010

http://henrytapper.com/2010/11/12/advice-and-leadership/

Bunnies, Bears and Badgers

On a day when the NAPF announced that only 44% of us think a pension the best way of providing for themselves in retirement, I sit at my desk contemplating yet again how we can get people to understand what they can do to make sure they have a financially secure later life.

While it’s encouraging that the numbers who understand the value of pensions has increased (up from 35% last year), it’s worrying that

 less than half of respondents (48%) said they were confident about pensions, while 43% said they were not.

Put bluntly, there are three things people can do to help themselves, spend more on their retirement, invest wisely and work longer. As the first and third options depend on personal motivation, I’ll not bang on about them here. For three decades , most people have been lucky enough to have employers who not only spent generously on our retirements but also took the trouble to manage the investment of our money, guaranteeing us cash and income according to an agreed formula.

Although there have been one or two cases where these arrangements have failed, the vast majority have paid out in line with the promise- some in excess of the guaranteed amounts.

But those of us who are not close to retirement are unlikely to be so lucky, we will progressively receive less as the employer spend reduces and as we find ourselves in charge of managing our own investments.

It seems that the craze for investing in residential property is waning as people work out for themselves that you can’t buy a sausage with a brick, that the value of a house can fall as well as rise ad that the incidental costs of managing a property erode income to a degree that make it a poor source of retirement income for most of us.

Similarly, the much heralded rise of ISA investment seems to have stalled, the NAPF report that only 12% of us see them as the best way to save for our later years.

This brings me on to Bunnies, Bears and Badgers. Over the past few days I have been participating in an interesting discussion on this, you can read it here.

There seems to be a misconception among some of my colleagues that people should be engaged with the investment of their pension fund. I do not share this view.

The vast majority of us are investment bunnies who have no more interest in the value of shares and bonds than of the intricacies of the internal combustion engine. We want a car whose motor is reliable and takes us from A to B in a safe way, we might chose a racier or a slower version but we generally accept the performance of our car and leave the rest to the mechanics. Investment bunnies will accept the standard investment approach (usually referred to as the default option) and there is nothing wrong with that- so long that is as the default option works.

There are however investment Bears, those more curious about investments who are prepared to do a little research and make investment choices. We call them Bears because, like Pooh, they have insufficient confidence in their own expertise and will usually seek guidance on what they are doing from people they trust, these could be the company pension experts, family or friends or a professional financial adviser.

Finally there is a small and nerdish group of people who we call Badgers who obsessively rummage through the financial press and take decisions on their own account. We all know such people – they are few and far between and they are not always as right as their certainty might suppose.

Statistically, the vast majority of people are Bunnies . Typically 80% of people use the default investment option and while I suspect that they include many lazy Bears and even a few Badgers, I think it unlikely that we can turn most Bunnies into anything else.

It’s the responsibility of pension experts, those who manage the default options of personal and company pension plans to make sure that they work as well as possible. The NAPF tell us that only 35% of their respondents said they were confident that their retirement plans would give them enough to live on which tells me that there are a lot of frightened Bunnies around (me included). There is a huge job to be done- firstly in making sure that the funds people are asked to invest in work properly and secondly promoting these funds as worthy of carrying people’s retirement ambitions.

It’s also probable that many of the Bears find themselves lacking in the guidance they need to feel confident in their decision making- in a previous blog I have talked about guidance as leadership and this is what is needed- advisers who will help those needing validation of their plans to be decisive and confident in their decision making and decisions.

But at a more fundamental level, we all need to know that the retirement planning we make, builds upon a solid foundation of support from the State that repays the tax and national insurance contributions we have made over a working lifetime. We need solid leadership from Government whatever kind of animal we are. As Joanne Segars of the NAPF puts it

We need a simpler state pension that provides a solid foundation of basic retirement income and which lifts people off means-testing to ensure that people keep what they save. That would be a major step forward in restoring confidence in pensions

Behind these wise words is an implicit acceptance that to get people to engage in managing their retirement, those of us responsible for leadership in pensions, had better win back the respect of those we serve - be they Bunnies,Bears or Badgers.

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by henry tapper on November 13, 2010  •  Permalink
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Posted by henry tapper on November 13, 2010

http://henrytapper.com/2010/11/13/bunnies-bears-and-badgers/

Who should be managing DC defaults?

Robert R. Livingston

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I’ve written recently about the DC population in terms of Bunnies, Bears and Badgers. The Badgers, those who have the inclination to choose funds or stocks and manage their pensions according to their own rules are taken care of - products such as Hargreaves Lansdown‘s SIPP are as advanced as anything I have seen in the USA and considerably better value.

For many Bears- those with the inclinations of Badgers, but the need for guidance (or Leadership as HL would have it), the SIPP is also appropriate.

This article is for the Bunnies – those who do not want to self-invest but who want the security of an investment option decided upon by a Fiduciary, either a provider (generally an insurer) ,their employer or by Trustees. Since defaults are used by about 85% of us (though carrying a smaller percentage of total funds invested) , they are massively important.

When an individual joins a trust based occupational DC plan or a contract based DC plan, he is entering into a relationship with one or more Fiduciaries who offer him a duty of care. The Duty of Care may be taken on by Trustees or by employers or by Providers but ultimately the responsibility for the security of members is deemed to be the same - however shared - the total responsibility should add up to 100%.

100% in a perfect world equals perfect Governance, however distributed.

In practice, the more the stakeholders in the management of a default fund, the less likely it is that perfect governance will be achieved.

Which is why a strong Trustee Board with direct control of their subcontractors  – investment managers, investment administrators, record-keepers , performance measurers and  communicators is an ideal model. It is the model that NEST has adopted along with a handful of DC Trust Boards in the private sector (think O2, Accenture, Logica).

At another level, Trust Boards delegate to insurers who e bundle many of these functions into one contract. The platform provides a series of funds reinsured by the provider – investment administration , performance measurement and perhaps member record-keeping – effectively a Fiduciary Management Service that simplifies the process of sub-contracting. What Trustees lose in terms of control they gain in terms of operational efficiency - or so the argument goes.

Contract-based plans established by employers simply transfer the residual fiduciary responsibilities of the Trustees (using such a bundled arrangement) to themselves. This is not properly understood.

By offering a GPP or Group Stakeholder Plan to its staff, an employer is making itself accountable to a greater or lesser degree for the outcomes of that Plan. If the employer - like a swift-handed centre - simply passes the ball to the Provider, he is only accountable for the Provider’s selection but if the employer gets involved in the selection of the default fund (and other investment options) then it becomes to a degree accountable for the outcomes of those selections.

In America, where employers have and can still be sued for malfeasance when a fund does not perform to an employee’s reasonable expectations, the Government has stepped in and created “safe harbour” rules, compliance with which, ensures that the employer has been seen to discharge its Fiduciary obligation to its employee and cannot be sued.

In creating NEST, the UK Government is effectively going a step further by creating a “Safe Harbour” Scheme, participation in which allows the employer to fully delegate all investment duties. NEST and other mastertrusts offer a Trust based solution without the duties of Trusteeship.

Ultimately NEST is paid for by its members and underwritten by the taxpayer (of which participating employers are a sub-group). If NEST fails – the liability reverts to all.

But I come back to the point of this article - no matter how responsibilities are delegated  – the sum total of those responsibilities adds up to 100%- 100% being perfect Governance.

Where we are going to have problems with DC Governance and in particular with the management of defaults - the Bunnies trusted choice, is where none of the “Governance Stakeholders” assume leadership and where , when a problem occurs, every stakeholder points to the other accusingly.

We need to be absolutely clear, before we do something about defaults , to whom governance of the default ultimately reverts - who ensures the 100%.

It can be the Trustees

It can be the Employer

It can be the Provider

The first step in sorting out DC defaults is to establish where the buck stops and focussing appropriate resource at that point. In my next article which will be called ”What can be done about defaults 2″, I will press on with what I consider the key risks of default management hoping to establish a framework from this Risk Register which may help the Fiduciary organise a governance framework to protect the Bunnies and themselves.

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by henry tapper on November 16, 2010  •  Permalink
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Posted by henry tapper on November 16, 2010

http://henrytapper.com/2010/11/16/what-can-be-done-about-defaults-1/

The Risks of DC Default Options

In my earlier blog on this subject, I argued that while the responsibility for the choice, construction and management of the default option could be shared between a number of Fiduciaries , there should be a defined outcome of this work – a target of a perfect default.

The starting point for any DC Governance Committee working on the default is a Risk Register. The Risk Register is constructed from the various answers to the question “what could possibly go wrong?”.

The difficulty that most DC Governance Committees have is they are not experienced in anticipating the problems that surround the investment and operation of default options and receive insufficient help from those who are.

So here are my top ten default perils.

  1. Out of market risk on fund switches (lifestyling)
  2. Lifestyle targeting the wrong retirement age
  3. Overly expensive fund management costs
  4. Tracking error on index funds
  5. insufficient diversification of accumulation fund (too much volatility)
  6. Inappropriate matching funds prior to de-accumulation
  7. Mis-management of members expectations (poor education)
  8. Inability to receive proper information on the above
  9. Inability to influence the behaviours of managers (funds and administration)
  10. Incapacity to carry out and document the control functions to manage the above.

Which is why we have Fiduciaries - there is no way that the average bunny is going to carry out that level of due diligence for themselves. We’ll leave it to the Badgers (and perhaps some bears who have good guidance) to decide their own investment strategy , us bunnies are putting our trust in our trustees, employers and ultimately default providers to make sure that defaults are properly managed.

I know that there are organisations that are addressing these questions and doing a good job on our behalves. I have a great deal of confidence that this is precisely what NEST are up to as they design and implement the default option for the great new Scheme that will be available to us all from next year.

I am not so confident that many of the providers of group and stakeholder pensions have either the internal controls or are being properly monitored by their clients or their client’s advisers.

If you are in the default fund of your group personal pension you have the right to ask these questions. Go on - try it! Why don’t you ask your trustees, or if you are in a GPP or Stakeholder Pension your employer, whether these issues are being monitored and how?

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by henry tapper on November 19, 2010  •  Permalink
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Posted by henry tapper on November 19, 2010

http://henrytapper.com/2010/11/19/what-can-be-one-about-defaults-2/

Big-Up for NEST’s investment strategy

Stork

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There’s a great article on Citywire from Stuart Fowler- you can read it here.

Although Stuart is critical of NEST for not showing leadership in design - I’ve been growing ever more confident that NEST is going in the right direction - especially with regards investment options.

In a comment I’ve left on the post I detail why

Stuart- what a good article. The Glide Path is a flexible beast and the more assets a target dated fund has within it, the greater the glide path flexibility. Glide paths for DB plans have been constructed around the fairly complex cashflow profiles of each scheme. By comparison, the liability profile of target date funds should be easy to define. The default fund’s default liability cashflow profile is 25% cash and 75% CPI linked lifetime income payments.

As you point out “it is theoretically possible to have all internal prices, and the exchange rate, perfectly indexed for inflation”. The Glide Paths of DB schemes attempt to get rid of unrewarded risks (such as inflation) by swapping out these risks at the right time. This use of “swaps” is standard practice among larger DB plans and there’s no reason that NEST shouldn’t use market opportunities in the same way (providing the funds are of a proper size and there continue to be organisations who want to do the swapping - counterparties).

In theory, target date funds could become “whole of life” funds provided that a counterparty could be found to insure the longevity risk. Put in everyday language, the target date fund could simply distribute a quarter of its value on the target date then morph into a deaccumulation fund paying out regularly to its membership (with the last payment being made to the last survivor). I’m sure there are people in NEST who have considered this!

I’m not sure this idea is that far from the original conception for with profits pension funds – (mutuality being replaced by a reliance on the financial markets).

As regards the “reckless conservatism” of an under-volatile accumulation fund, there is a trade-off that needs to be created between highly volatile high return characteristics (that scare members along the way) and lower volatility low return funds (that deliver below reasonable expectations).

The fund managers ”philosopher’s stone” is the fund that provides equity like returns without the volatility - which is a great marketing phrase for DGFs . It relies on the free-lunch of diversified uncorrelated returns. I am sceptical about alchemy and about DGFs but I think there’s mileage in NEST exploring that concept too.

I’m interested in my pension but I’m not interested in managing the investments (I drive a car but don’t often open up the bonnet). If NEST can offer me a target date fund that is better managed, better governed and not overly-priced- I’d seriously consider transferring my personal pension pots into it (assuming they open for “transfer-ins” post 2017)

 

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by henry tapper on November 20, 2010  •  Permalink
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Posted by henry tapper on November 20, 2010

http://henrytapper.com/2010/11/20/big-up-for-nests-investment-strategy/

NEST- the irrefutable case for “Scheme Pensions”.

NEST is due to launch in April 2011 and it’s high time that we got some answers on a key question

just how are NEST pensions going to be paid?

There are two options available to the Trustees.

  1. People can be given the option to buy an open market annuity or - if they have the means - drawdown from their accumulated funds - of which their NEST account may form a part
  2. People can be paid an income from their accumulated NEST account – “A Scheme Pension”

This is what the Pension Regulator has to say about Scheme Pensions.

A pension is paid by the trustees direct from the scheme. An actuary calculates how much pension could be provided directly from the scheme using the member’s money purchase fund and a scheme annuity rate chosen by the trustees.

There is a risk that the member (or dependant) outlives the scheme retirement savings, ie the pension has to be paid for longer than the trustees anticipated when the annuity rate was determined.

Spot on! Few trustees of DC occupational pension schemes are going to offer Scheme Pensions – there is too much risk - insufficient accumulated capital and no apparatus to do so.

NEST, which will be an occupational scheme will be different. NEST will be accumulating pensions for upwards of 5 million people. The vast majority of money will accumulate in target dated funds which will mature at set dates. A conservative estimate suggests that the target dated funds will mature with over £250,000,000 from 2020 onwards. Once the scheme has reached maturity, the target dated funds will be worth upwards of £1,000,000,000. Each year, hundreds of thousand of us will be drawing pensions from NEST.

NEST is likely to be so different in terms of its economics from the typical occupational DC scheme of today that Scheme Pensions are not only an attractive option THEY ARE THE ONLY OPTION.

Firstly, there is no way that a conventional annuity option will work

  1. There is not market capacity to support conventional “insured annuities” from NEST
  2. There is no infrastructure necessary to support a viable annuity broking service to support an open market option
  3. There is insufficient financial awareness among the UK public for the Open Market Option  to operate and there is no default annuity option
  4. Conventional annuities give poor value  to those with small pots.
  5. There seems to be no appetite from Government to underwrite a default annuity option (though the apparatus for doing so is there).

On a more positive note, there is every reason for NEST to pay pensions from these target date funds.

  1. NEST is a nationwide scheme that is ultimately underwritten by the UK taxpayer. It is capable of taking risk because it has recourse to the covenant of the UK taxpayer, past , present and future.
  2. NEST, as mentioned above, has sufficient funds arising each year to afford , apply and manage the complex risk management techniques successfully used by large DB plans.
  3. The time horizons of the payments (cash flows) from the accumulated DC target date funds are long - we currently assume that a substantial proportion of those of us living to 65 will live to 100. Annuitising (either individually or on a bulk basis involves an inappropriate investment strategy for such a timeframe).
  4. The logistical issues surrounding paying pensions from the fund are within the scope of NEST’s administrators, especially if they were to work with the UK Government’s existing pension payment agency (who pay our state pensions).

With less than six months till the launch of NEST, I find the reticence of the NEST Corporation to make any statement on how NEST pensions will be paid, to be at least, surprising.

Since the payment  of Scheme Pensions would require the target dated funds to remain invested in NEST for many decades, Scheme Pensions would form as important a part of NEST’s function as the pre-retirement phase of its operation.

That we have spent no time discussing the deaccumulation of NEST funds is a scandal. It is time for this subject to be put on the public agenda - if it is not, then NEST should be branded a half-baked project.

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by henry tapper on November 22, 2010  •  Permalink
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Posted by henry tapper on November 22, 2010

http://henrytapper.com/2010/11/22/nest-the-irrefutable-case-for-scheme-pensions/

The Grand old Duke at NEST- he had 5 million men

NEST has spent a good deal of time telling us how it will get its 5 million plus members up the retirement hill but very little on how it will get them down again.

While we ponder the accumulation strategy, have we really thought through what happens when the default funds reach their target date?

Conventional thinking supposes that they will disperse 25% of their value as cash and offer the 100,000 plus who have made it to the top an open market annuity.

But this presupposes that

1. there is capacity to  absorb the huge sums into keenly –  priced annuities,   

2. that individuals will be able to chose sensibly the right type of annuity to protect their retirement income

 and

3. that there will be advice to hand to secure best rates via the open market option.

DB trustees know only too well, that the easy bit is going up, it’s when you are on your way down and the money on its way out that it gets tough.

If you were trustee of a £2bn pension scheme (the size of a NEST default at the target date), would you tell your 100,000 members to “go buy an annuity”?

Perhaps these target date funds should be targeting death not retirement?

NEST is due to open its doors in less than 6 months. There has, till now, been very little debate on how NEST will manage the pensions in payment of its membership.

Thinking on this, I’ve written an article on “Scheme Pensions” which you can find here.

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by henry tapper on November 23, 2010  •  Permalink
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Posted by henry tapper on November 23, 2010

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A massive failure of nerve – the sad state of our DC pensions

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Last year 460,000 people bought annuities from their DC pensions.  

Two thirds of these people did not bother to get the best rate for their accumulated funds and as a result suffered on average a 10% lower pension than those who did.

86% of the pensions purchased by-passed the CPI/RPI debate and were purchased on a NOPI basis (eg the pension purchased will remain level  ad mortem).

Only 64% of those buying an annuity chose to take a smaller initial pension in return for providing a pension for their partner and only 10% of people elegible for an impaired life annuity bought one.

The DWP predicts that 800,000 people will hit 65 in 2012

Stats courtesy of Tom McPhail - Hargreaves Lansdown

This is a shocking state of affairs. The annuity purchase decision is one of the most important decisions we take it is irrevocable and the implications of this poor decision making will be felt for many years to come.

Buying an individual annuity is not an efficient thing to do. If you follow the logic of a recent piece of work by the Government Actuary which accompanied the Governments recent announcement on Annual and Lifetime Allowances you can see what I mean.

Trevor Llanwarne, the said actuary, has estimated the amount of money needed to provide a pound’s worth of lifetime income increasing by the RPI at around £30. The cost to an occupational pension scheme providing this pension from an existing fund is estimated to be £22.40.

Individuals annuities are 25% less effecient than pensions paid out of occupational pension funds.

So the 260,000 or so people who bought without comparing are compounding their own problem. They are getting pensions almost 50% lower than they could be.

And here’s another sad thing. A lot of the pensions being so poorly purchased  arise from occupational DC pensions or company sponsored personal pension plans.

So some of  the companies who have worked so hard to get their staff a better pension scheme than they could have purchased independently are seeing this work undone at the point of retirement.

Our Government that has consulted, deliberated and eventually regulated on stakeholder pensions, is allowing all of this good work to be dissipated by annuities.

Now I’m sure you are as shocked as I am about all this. It may not come as a surprise as this elephant in the room has been lurking at the back of our minds for some time. Over ten years ago, I listened to Roger Urwin’s impassioned plea for us to do something about this at an NAPF Conference. Mike Wadsworth and the Watson’s insurance division made a concerted effort to wake up pensions people to this problem; we were not listening and kicked the problem into the long grass.

Instead of going away, the problem has grown.

Why?

You can perm from a number of reasons.

  • continued improvements in our life expectancy
  • increased pressure from the European Union  on life company reserving requirements (EU Solvency II)
  • limited availability and competition in the long-dated gilts market (especially for RPI and CPI linked bonds)
  • limited improvements in the payment process for lack of advice on the OMO  (honourable exceptions such as Kerr Henderson and Hargreaves Lansdown)
  • inadequate pension pots requiring individuals to take “jam today” by purchasing inappropriate annuities.

To this sad list of issues we can add the failure of both occupational and contract based schemes to find a better way. Before you say “income drawdown”, I am not advocating people with insufficient funds go that route.

What I’m arguing for is collective drawdown, precisely what allows occupational DB pensions to provide equivalent pensions on a 20:1 basis.

The failure of Fiduciaries to adopt collective DC pensions is  “a massive failure of nerve”. Bitten by the impact of mark to market accounting, companies have turned their back on any form of guarantees on pensions and you will not find more than a handful of employers in the land who will be prepared to guarantee pensions from their DC plans – even though this is permissible and known as the payment of “Scheme Pensions”.

Even if employers were to offer Scheme Pensions, it is difficult to see how they could operate them in a meaningful way. To do so , we need collective funds from which Scheme Pensions can be paid. Most individuals build up their DC pensions in individual pots which de-risk using lifestyle. Were Scheme Pensions to be paid, they’d have to be managed by the company or their trustees on an inividual basis. That’s not going to happen.

Now here at last is hope.

There is a new kind of fund under construction, known as a Target Dated Fund which instead of accumulating individual pots using the established ”lifestyle” method, does much the same thing on a collective basis.  Target Dated Funds will mature on set dates and will offer large groups of members the opportunity to club together and have their pensions paid out from their fund - Scheme Pensions.

I very much doubt that individuals would be able to do this for themselves. There will need to be an organisation, the pension provider, the pension sponsor or some other Fiduciary body who will organise payment and ensure that the Target Dated Fund does not run out of money by the time that the last surviving pension (or pensioner’s partner) dies.

There was a day when employers would have looked at providing this service to their staff as a worthwhile enterprise. This is  a much less onerous obligation than guaranteeing not just he benefit but the payment of the benefit. But as I mention above, employers have lost their nerve – an unintended consequence of the way we account for DB plans.

There is further hope. From April 2011 NEST will open its doors. By 2012 it will start receiving massive contributions from employers required to contribute on behalf of themselves and staff through auto-enrolment. By 2020 this system of auto-enrolment will be fully etablished and by 2025, the Target Dated Funds which NEST will employ for 90% of members, will be maturing with hundreds of million if not a couple of billion pounds in them.

I know these dtes seem a long way away but we are talking a sea-change in DC pension provisionhere and the time for us to plan for that change is now.

We cannot expect to see DC pensions become Scheme Pensions until these Target Dated Funds get up to size. Size matters in pensions- the risk of managing out a Scheme Pension with 100.000 members and a couple of billion in funds is a whole lot smaller than you might think. We know how to do it and I challenge the NEST Corporation to show the leadership over the next ten years to make sure this happens.

If  NEST successfully fulfills its early promise and continues to operate the sensible investment strategy it has embarked upon

If auto-enrolment works and NEST is properly funded

If , from 2017, NEST opens its doors to those of us who have small DC pots we would rather be managed collectively

If NEST decides it has the nerve to manage out the Target Dated Funds as Scheme Pensions

If DC operators and the trustees of DC occupational penions follow suit

….we may have finally have a way through this problem.

In the meantime, I understand that NEST is putting in place an annuity selection mechanism that may ensure that those who retire from it get best annuity rates and are guided towards sensible annuity structures. That is the best we can hope for in the short-term.

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by henry tapper on November 27, 2010  •  Permalink
Posted in corporate governance, dc pensions, de-risking, EU Solvency II, Fiduciary Management, Liability Driven Investment, NEST, pensions, Personal Accounts, Retirement
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Posted by henry tapper on November 27, 2010

http://henrytapper.com/2010/11/27/a-massive-failure-of-nerve-the-sad-state-of-our-dc-pensions/

Trans-global joy

The best part of the Christmas story was the Magi rocking up at Bethlehem following a global sat nav and a lot of hope..

For those left stranded on planes,trains and automobiles over the past couple of weeks, the logistical challenges of getting from A to B made this a tricky Christmas.

Three moments over the past seven days leave me with a memory of  Christmas that fills me with trans-global joy.

  1. The last ever Pogues’ Christmas gig at the Brixton Academy- 3000 of us dancing to Sally MacLennane and swaying to Fairytale of New York
  2. The crowd at Eastlands last night applauding for a minute for all those who’d died over Christmas
  3. The Barmy Army singing “Swan will tear us apart” as our lads in Melbourne retained the Ashes

The boundaries of race, nationality and creed that bind our terrestrial existence cease to exist when we come together with a common purpose - that’s  what links my three favoured moments.

My new years resolution is to continue to participate in that sense of common purpose and I hope all who read this blog that they will join me in that!

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by henry tapper on December 29, 2010  •  Permalink
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Posted by henry tapper on December 29, 2010

http://henrytapper.com/2010/12/29/trans-global-joy/

Peter Freebody (1934-2010)

Peter died in his kitchen from a heart attack at the age of 76. It was just before Christmas.

Stella and I first met him at the Boat Show some years ago, he was demonstrating how he restored and built classic Thames boats.

Shortly afterwards we bought a little slipper launch from him - Minivet.  A few year later I purchased a semi-derelict motor cruiser - Lady Lucy which Peter re-built in his Hurley yard. Lady Lucy lies in the Mill Pond at Hurley today.

Over the past few years I have got to know the Freebody family, his wife Elizabeth and the children. I have seen the way Peter has run his business and have had the usual arguments that all who dealt with him have had.

Once I found him arguing with Michael Parkinson in his yard- rarely have I seen such passion or obduracy. Those words, together with “fun” are the words that I associate with Peter. He was afraid of nothing and had prodigious energy which expressed itself in boundless enthusiasm. I’m sure no one won that argument- he and Parky were a match.

He was quite simply the best boatbuilder on the Thames. There is not a craftsman building or restoring boats who does not know him, most were taught by him.

People like Peter are very rare. He was not conventionally kind - he was ruthless, shameless in pursuit of what he wanted. But to him, what he wanted was what was right – perfection. In his unerring sense of what should be, he could be frustrating beyond measure.

But when you needed his help, he was always ready to give it and his generosity and nobleness of spirit have been passed on in his legacy, his wonderful family, his most excellent workforce and his magnificent fleet of boats.

Thanks Peter for making our lives that much better these past ten years.

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by henry tapper on December 30, 2010  •  Permalink
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Posted by henry tapper on December 30, 2010

http://henrytapper.com/2010/12/30/peter-freebody-1934-2010/

UK Pensions – How Lucky We Are

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There are two certainties in life - death and taxes to which most older people would add the payment of their pension. But not if you live in Prichard Alabama. In the words of the New York Times (full article here)

 This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009.

Right on schedule, its fund ran dry.

Last week, retirees asked the City Council for some help before Christmas.  Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber.

This is shocking stuff, made worse by the failure of the Alabama Judiciary to take steps to turn things round. The Linked-in Group “Pensions and Investments” (recommended) ran a thread on the issue. I suggested that this incident brought shame on Alabama and the USA. One commentator responded.

the judicial system does not tolerate this. The attorney general of the state of Alabama should have interceded on behalf of the pensioners. The fact that public officials fail to do their duty sometimes is a problem I know is not unique to America.

Does he means us?

Since the Maxwell Scandal in the 90′s, the UK has gone a long way to clean up its act on Pensions. The Government introduced a pro-tem measure, the Financial Assistance Scheme which was replaced by the very excellent Pension Protection Fund. The regulation of occupational pensions now rests with The Pension Regulator, a body that does a good job in ensuring that Schemes stay solvent. Meanwhile the FSA are introducing new rules governing the marketing of DC pensions via the Retail Distribution Review. We have a judiciary that protects pensioners as witnessed by recent judgements against Nortel and Lehmann Brothers (both North American Companies).

While there is still much to do, more and more Defined Benefit Plans have adjusted their investment strategies to ensure liabilities are met. The costs of DC pensions are falling and though we have yet to tackle the central problem of annuities, we have retained a “pensions culture” where pensions are guaranteed till death.

Like many others, I will be working in an industry that is working to increase the efficiency of pension fund accumulation. We should be proud of our pension system and I for one go into 2011 believing that America and other nations can look to the UK for leadership in this field.

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by henry tapper on December 31, 2010  •  Permalink
Posted in annuity, pensions, Retail Distribution Review, Retirement
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Posted by henry tapper on December 31, 2010

http://henrytapper.com/2010/12/31/uk-pensions-how-lucky-we-are/

Ten Top Pension Pairings

 

Morecambe and Wise, Bogart and Bacall Ant & Dec – great couples all but who would you choose as you top ten pension pairings?

  1.   

 

Gubler and Mudge               Kim  Gubler and  Hayley Mudge are an unlikely partnership bonded by a common love of animals  (they like me).      

Do not be deceived into thinking their kindness to horses and dolphins makes them any kind of pushover. Kim Gubler Consulting is where you go when you need judgement , experience and a cool head.

In the pantheon of pension eccentricities, the Gubler/Mudge partnership ranks high.

O’Boyle and Huss- Smickler

Kevin and Leslie are the corporate strategists at BT responsible inter-alia for keeping this mega-corporate comfortable with its pensions scheme’s massive deficit.

This takes a little doing. But in Kevin (aka Bumble) and th admirable Smicklemeister are nothing if not up for that challenge. They have the rare mix of food humour and extraordinary technical talent that goes down well both with trustees and the hard-nosed sponsors of a pension scheme better termed an insurer with an IT company in tow.

apologies for the fadeless mugshot of Leslie. HE has yet to supply the internet with a representation of his visage.

Mingle and Charles

Though now reclusives in Witney Oxon, Paul and Steve can never be far from our hearts. Steve came to our notice as Bacon and Woodrow’s AVC loving actuary who  could re-type the instruction “to re-draw Cox” into Hewitt’s supremo’s nick-name “red-raw”.

Nowadays, the cuddly twosome work out of Witney in Oxfordshire for the strangely name Isinglass Consulting.

Isinglass (pronounced /ˈaɪzɪŋɡlæs/, /ˈaɪzɪŋɡlɑːs/) is a substance obtained from the dried swim bladders of fish. It is a form of collagen used mainly for the clarification of wine and beer. It can also be cooked into a paste for specialized gluing purposes.  (thanks Wiki))

Steve has written two fine books; Lows Highs and Balti Pies and Alison in Wonderland. They refer to Steve’s lifelong adoration of the light blue side of Manchester. I had the gall to criticise the former on Amazon and deeply regret the impact this had on our personal friendship May 2011 see a renewal of our former camaraderie. Charles sprang to prominence as the rounded Lothario  of the West midland Pension Scheme, working alongside the legendary MikeWoodall. He is but half the man he was in those days (stomach-wise) but his endearing bonhomie and spectacular intellect remain as evident as ever.

Sadly we have no pictures of this pairing to draw from the intellect so we show instead the lovely phizzog of Alan Davies who bears an uncommon resemblance to our lovely couple. We have also included a copy of Steve’s masterpiece in the hope that you will track it down on Amazon and purchase a copy.

Gardner and  Konotey-Ahulu

This lovable duo were formerly bankers with the truly horrible Merrill Lynch where they flogged their Bank’s dodgy wares to unsuspecting Pension Schemes as what ahs become to be known as Liability Driven Investment.

More recently they have become embroiled in social media and have picked up the cudgels of the pension industry to re-brand the NAPF/PMI/ACA/ IOA et al as mallowstreet.

Mallowstreet is the natural home of controversy on such arcane subjects as the RPI/CPI debate, the  market for ver the market derivatives and the need or not for mark to market accounting.

We love them well and well have they earned their place in the pantheon of pension pairings.

Bretnall and Alexander

Philip Bretnall and Lesley Alexander are a new pairing, so new that you may not have gathered that they are respectively COO and CEO of HSBC Bank Pension Trust (UK) Ltd. This reads pretty well on Linked-in where they appear as CEO and COO of the Bank itself.

Lesley was formerly Pensions supremo at the troubled EMI while Philip has seen his share of pension troubles at the Pensions Regulator and latterly ITM.  We attach what Dorset Folk humorously refer to as “a silent women”, to boot a representation of a headless torso in the hope that we do not excite Lesley’s wrath and remind her that we do need love Alexander. Philip, known to us all through his support of various Pension Playpen lunches is noted for his caustic wit and brevity – qualities to be admired in a COO - we wish them well in their new roles.

  

  

 

Salt and Hulme-Vickerstaff

Hilary Salt and Michael Hulme-Vickerstaff are an unlikely pairing. 

Mick comes from Leeds and Hilary from Manchester. Hilary support the Reds and Mick supports another tem (guess). That they are mates and co-founded First Actuarial shows the power of actuarial alliances that conquer everything.

That they had the good sense fo hiring me to represent their fine company speaks volumes for their judgement.

The world needs more plain speaking, pragmatic, pro-active, professional (that’s enough p’s(ed)) actuaries like them.

The world needs independent actuaries, independent in means who  ow no favours to insurers, banks or other shareholders. Independent in though, independent in spirit and independent of the legacy of actuarial thinking that besets so many firms. Hats off to Hilary and Mick for their independence.

Whitehead and McClean

When I was a kid in this business, Bill Whitehead looked after me when and many others. He’s never asked for anything back but here’s this- coming back at you Bill – you’re a top man.

Bill and Simon set up Pentrus in 2009 to provide some solid trusteeship to firms that understood the need to keep the lid on risk. We’re happy to see things going well for them

Simon’s a fearsome blogger and a good mate who knows how to cook a sheep on an open fire and a fair bit more I’ll be bound.. Bill is the Treasure of the Pension Playpen and a fine man of the turf

They have earned their place in the hall of fame.

Kemp and  Callaghan.

It takes a lot of guts to open up a mastertrust in the middle of a banking crisis but that’s what Dennis Kemp and Malcolm Kemp did. Now unknown as Superturst UK, their multi-employer DC pension scheme is a fine example of what can be created by forward thinking determination sprinkled with the star-dust of courage.

Cracking men both, we salute you as a tope pensions pairing and wish your trust well in this crucial year.

Sadly , though we have been able to positively identify Malcolm, we can only head that the goalie of the Canadian ice-hocky team picture above is the same Dennis Kemp who manages Carillion’s pension and Supertrust UK.

We have but two pairings remaining.

Young and Wasserman

These two scallywags are the Pension Regultor’s two strategic directors with responsibility for formulating pensions regulations in a tricky time for pensions.

They’ve had no shortage of practice. Andrew Young was the architect of the excellent Pension Protection Fund while Simon Wasserman has in his own words “

 Applied technical ability and professional experience on strategic compensation, employee benefits and pensions, demonstrating innovation and creativity. Has particular in depth expertise on all aspects of pensions provision.

 Not shy in coming forward – our boys in Brighton! I love them dearly!

Webb and Duncan-Smith

Last but not least we must tip the hat to the two ministers who currently run the pensions and wider welfare briefs.

We have suffered for many years from incompetent, uncommitted and weak pension and welfare ministers. It is time that these important roles get the ministers they deserve. For th first time in a generation we have a pair of politicians who put the strategic interests of those in old-age above the short-term interests of their parties and themselves.

Let’s hope that their big pension projects, auto-enrolment, NEST and the Citizen’s PEnsion reach fulfillment and are the success they promise to be.

The boys from Whitehall are welcome at the top table.

 
 
 
 
 
 
No doubt I’ve missed a few key pairings and no doubt you’ll be so good as to remind me of them in the comments box below- HAPPY NEW YEAR!

 

 

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by henry tapper on January 2, 2011  •  Permalink
Posted in NEST, pension playpen, pensions
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Posted by henry tapper on January 2, 2011

http://henrytapper.com/2011/01/02/pension-pairings/

Fat cats can’t diet

Aston Martin 2-Litre 2/4-Seater Sports 1937

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This isn’t an apology for banker’s bonuses but I hope it gives an insight into why the bonus culture exists and persists.

As I drove out of the car park of my son’s posh school in South West London, my thirteen year old commented

Dad you are such a loser - why don’t you drive an Aston Martin?

I did the only appropriate thing, cuffing him round the ear and telling him not to be such a spoilt brat.

In his part of the world, you are the school you send your children to, the car you drive, the house you mortgage , the lifestyle you display. To do the package properly you need to be earning upwards of £200,000 pa

It’s hard to escape the conclusion that the Reward policy of many of the City‘s financial institutions is designed to keep senior executives in this lifestyle package. Any reduction in annual reward would be considered an affront to the exec’s self-esteem. In practice the club is self-perpetuating as successive Government’s are finding out.

Some argue that the level of pay and bonuses meted out to those is criminal - but it appears at first sight a victimless crime.  To some extent this because the way financial services work is far from transparent. Money is earned on a “basis-point” basis.  A basis point is 0.01% of the  value of a transaction. Such fractional margins may seem small but when the values in question run into billions, a basis point becomes a large amount. The combined impact of several transactions pays the salaries but at the expense of the ultimate consumer – those who bank, save and borrow.

It’s important that people understand that these little clips add up. A few years ago it was seen as a “good thing” that the maximum basis point charge for a personal pension was 100. Today people can buy a pension where the charge is a tenth of that - 0.1%pa. If you could improve the fuel-effeciency of your car from  5 mpg to  50 mpg , you’d be feeling pretty happy and the lucky employees of Logica who get a pension at a tenth of the retail price should be feeling pretty lucky too!

Now you might be asking why one personal pension might charge ten times more for a roughly equivalent product than another. Returning to my original theme, it’s because rather than feeding Fat Cats, Logica has chosen to cut out all the unneccessary basis point charges and deliver its employees a hugely efficient savings vehicle.

No advisers, no active fund managers, no manual administration, no marketing fluff.

Anyone who has been to Twickenham/Wembley/Wimbledon recently will have seen the massive spend on corporate hospitality, this is marketing fluff and most of this is coming from financial services companies.

Anyone who walks around the West End or City will notice that the finest buildings and most expensive restaurants are occupied by the financial services organisations whose services we purchase.

The chances of getting Fat Cats to diet are zero . But it is a function of capitalism that market forces will eventually redress the balance. The ultimate market force is consumerism and when consumers of financial services choose not to feed the Fat Cats, then they will slim.

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by henry tapper on January 6, 2011  •  Permalink
Posted in pension playpen, pensions
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Posted by henry tapper on January 6, 2011

http://henrytapper.com/2011/01/06/fat-cats-cant-diet/

Why England can’t have won the Ashes

 

Thanks to the Aussie Telegraph of this excellent analysis of why England could not beat Australia in the recently completed Ashes series

England

1 Overrated

They walked around The Oval after their dominant home summer like they were God’s gifts to Wisden. Here’s who they really beat. No one. Nuffies and cheats. England clean-swept the worst team on the planet, Bangladesh, and then won three out of four Tests against rotten Pakistan. Now they’re portrayed as superstars.

2 Kevin Pietersen

He might be growing a moustache for a very good cause but he’s still getting around looking like Dirk Diggler out of Boogie Nights. His most recent Test efforts have been the biggest joke. John Buchanan was right with his assessment of Pietersen. Buchanan was panned because the truth hurt. There’s more than one ‘I’ in Kevin Pietersen and it hurts morale.

 

Jimmy Anderson, Stuart Broad and Steve Finn are respectable quicks. But they lack the fear factor. Every truly great attack has someone pushing 150km/h, like Mitchell Johnson does for Australia. None of the touring fast bowlers are frightening. Away from swing and seam-friendly England, that doesn’t leave them with much.

4 Passive captain

Andrew Strauss has to lead by example because his introverted demeanour doesn’t get the blood pumping too much. Only his scores do. He leads with quiet assurance when things are going well. But he comes across as introverted and submissive when things start going pear-shaped.

5 No superstars

Pietersen is as good as anyone when he’s in the mood, but he hasn’t been in the mood for a long time. He couldn’t make a hundred against Bangladesh – his 99 was close but no cigar – and Doug Bollinger, Ben Hilfenhaus and Johnson can smell blood. Graeme Swann is the only Englishman to make a world XI right now.England are successful because they know their limitations. Which means there are limitations.

6 Over-analysis

They’ve faced bowling machines with footage of Australian speedsters running in at them – and still didn’t want to know about Mitchell Johnson. They’ve given themselves three weeks in Australia to acclimatise but haven’t played on pitches like the monster they’ll encounter at the Gabba. Every breath they take is a part of a suffocating plan. There’s no freedom, nothing instinctive or adventurous. Paralysis by over-analysis.

7 No depth

In such a cramped schedule, injuries are bound to hit both camps. England are in serious strife if they lose any of their first XI. There’s a vast gulf between their top-tier players and those on the standby list. Australia can only hope and pray that off-spinner Monty Panesar is called in for Graeme Swann. Australia have eight Test-standard speedsters in the queue.

8 Chokers

This is England we’re talking about. Losing is a tradition. Think soccer World Cups. Think Tim Henman at Wimbledon. Think every cricket tour of Australia since 1986-87. They always arrive talking themselves up, vowing they won’t wilt under the heat and pressure and scrutiny, then wilt under the heat and pressure and scrutiny. They’ve hired a self-described Yips Doctor – because they need one.

9 Warm-ups

Everyone keeps rattling on about England’s perfect preparation. They must be having a laugh. A few of them made runs at Adelaide Oval. It’s like batting on the Hume Highway. Anyone seen the scorecards? Western Australia rolled England for 223. South Australia dismissed them for 288 on the Hume. And Australia A ripped through their top order in Hobart A yesterday. Perfectly prepared? Piffle.

10 Scars

Five of their top six batsmen are the same lot who stumbled and bumbled through the 5-0 loss on England’s last trip to Australia. The scarring is deep and real. Jimmy Anderson’s memories of Australia are all nightmarish. He averaged 45.16. Broad and Finn are yet to play a Test series in Australia. Hard surfaces jarring bones and muscles, oppressive heat – they won’t know what or who has hit them.

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by henry tapper on January 7, 2011  •  Permalink
Posted in The Ashes
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Posted by henry tapper on January 7, 2011

http://henrytapper.com/2011/01/07/why-england-cant-have-won-the-ashes/

A definitive solution to the annuity crisis.

Crisis – what crisis?

  • The DWP estimate that in 2012, 800,000 people will reach the age of 65.
  • In 2009 460,000 people bought guaranteed individual annuities from DC pensions
  • 86% of these annuities wer purchased on a level basis and had no inflation protection
  • Forget RPI/CPI – the pensions we purchase these days are NOPI

We’re not being foolish purchasing NOPI pensions, we just can’t afford better. A combination of low gilt yields, the reserving requirements of EU Solvency II, the high operational costs of individual annuities and the opportunity cost of not being exposed to real asset growth mean that the average punter goes for jam today because he can’t afford jam tomorrow.

A stark illustration of the costs of individual annuities is contained in GADs supporting document to the Treasury‘s LTA consultation document in the autumn, GAD suggests that the annuity cost for a CPI linked individual annuity purchased at 60 on a joint life basis would be 28:1 (were they available). However, the cost for an occupational pension providing the same thing is reckoned to be 23.6:1.

Put in layman’s language, individual annuities are nearly 20% less efficient than pensions paid from occupational pension schemes.

The only way that we can make a tangible difference to the pension in payment of those with DC pots is to give them access to scheme pensions.

In years gone by, occupational schemes did buy back money purchase pots – especially AVCs. They are not sufficiently solvent to do so any more, in fact they’re busy trying to switch DB liabilities to DC liabilities using ETVs.

In years gone by, insurance companies allowed annuitants to participate in the real asset growth of their funds by offering with-profits annuities. It is unthinkable that insurers would re-open such funds for this purpose given the costs of the underlying guarantees.

Sadly, it is unrealistic and unreasonable to expect the private sector to provide scheme pensions. However there are two quasi-public pension that are fit for purpose, The first is NEST and in the longer term NEST will have the assets and numbers of pensioners to operate collective dc decumulation. BUT NOT YET.

In the short-term we have the Pension Protection Fund, as Defined Benefit Pension that provides guaranteed pensions from its funds to distressed pensions and pensioners.

It is realistic and reasonable for the PPF to open its doors to DC annuitants. It is an organisation set up in the public interest, has the assets and the infrastructure to manage both the assets and the liabilities of scheme pensions. It is well run.

While the PPF is supported by a levy on occupational schemes, it’s sister organisation the Financial Assistance Scheme is supported by the tax -payer. I’d like to see a similar structure being established to provide scheme pensions, leveraging the PPF’s investment clout but underwritten by UK plc.

So, by taking on the role of the nation’s default annuity provider, the PPF will  be  transferring long-tail longevity risk back from the private sector to the tax-payer . But is this anything new? Let’s face it, the 86% of annuitants buying level pensions are going to find themselves so impoverished by inflation that they look a much greater liability.

Crisis – this is the crisis; the decision to purchase level individual annuities is irreversible. Currently those retiring with DC pots have two choices, income drawdown and guaranteed annuities. Income drawdown will never be a mass market solution, individual annuities are an inadequate solution.

It is time that we started using our existing infrastructure, the PPF, the DWP pension payment system and the ultimate covenant  of the UK tax-payer to sort out this mess. 

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by henry tapper on January 8, 2011  •  Permalink
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Posted by henry tapper on January 8, 2011

http://henrytapper.com/2011/01/08/a-definitive-solution-to-the-annuity-crisis/

A blueprint for DC pensions

Low DC pots, inefficient individual annuities and short-sighted buying patterns meant that 86% of annuities purchase last year were purchased without indexation. We are storing up problems for our society for generations to come.

While we cannot increase the DC pots of those buying pensions today, we can offer those converting from accumulation to decumulation, a better pension by buying their pot back into a collective pension fund. The Pension Protection Fund was set up by Government to salvage occupational schemes that had become so underfunded that without its help, would have led to members receiving dramatically diminished pensions.

In this article I am arguing that the Pension Protection Fund can be used to provide pensions today for those ill-served by the individual annuity process, namely those whose pots are above the level of commutation (£17.000) but below the levels where income drawdown becomes viable (£200,000).

Inevitably, such a structural change to the pension conversion process requires consultation and detailed investigation into its impacts

Concerns will be voiced on a number of fronts

  1. Will the longevity risk transfer from private insurers to another generation of taxpayers be politically acceptable?
  2. Will the transfer of pension liabilities from the private to the public sector materially damage the UK life insurer’s business models
  3. Will such a transfer contravene wider EU legislation
  4. What would be the impact of a reduction in the purchase of gilts to a more balanced funding approach using corporate bonds, equities and other real assets.
  5. Can the tax-payer be protected from the risk of occupational pension schemes off-loading longevity risk through such an arrangement
  6. What will be the impact of financial advice and will such an arrangement damage the burgeoning income drawdown products

Set against such considerations are the obvious attractions of such a reform

  1. The operational costs of paying a scheme pension through the PPF- especially for smaller pots, should be considerably cheaper than through individual policies
  2. The infrastructure for a state run pension payment system already exists
  3. The covenant offered by a state pension, especially to those unfamiliar with pensions is likely to be considered better than that of an insurer
  4. The ability of the PPF to maintain the assets backing such pensions in real assets offers scope for more appropriate investment strategies
  5. The capacity of the PPF to operate unconstrained by the restrictions placed on insurers by EU Solvency II provides it with further advantage.
  6. The scale of the existing PPF fund allows it to provide scheme pensions immediately – effectively providing a seeding service for NEST which may be able to take on this role once it has established sufficient funds to take on the role independently (in line with the proposed review of NEST’s scope in 2017)
  7. The 2008 Pensions Act offers scope for an occupational fund to absorb transfers-in from a variety of sources including protected rights, GMPs and self employed DC arrangements
  8. While no market currently exists to provide CPI linked annuities, it is possible for the PPF to escalate pensions in line with CPI as a default indexation rate
  9. The Government Actuary has the capacity to set commutation rates and monitor the solvency of the collective arrangement
  10. Similarly GAD can build in a solvency margin for the fund to ensure it is ring-fenced from the PPF and does not risk negatively impacting on occupational scheme levies.

Historically we have seen a gradual transfer of risk from the public to private sector, initially through contracting out. The Initial system of GMPs has been superceded by “protected rights”. This risk-transfer has been predicated by the assumption of an efficient annuity system. This system does not currently exist and the option to buy-back money purchase benefits into occupational defined benefit arrangements has all but disappeared as DB solvency rates have plummeted.

The reversal of the long-term trend towards individual annuitisation and towards collective provision has been argued for by a number of parties - implicitly by GAD who have published relative annuitisation factors for individual annuities and scheme pensions with a 20% improvement in rates for scheme pensions. A recent paper by the Royal Society of the Arts suggest that a proper system of collective DC decumulation could enhance current individual annuity rates by as much as 50%.

The need to test these assertions, explore the issues outlined at the outset of this article and analyse the regulatory options available to protect the various stakeholders involved is very urgent. It cannot be achieved without the support of these stakeholders.

If you wish to add your support to a campaign to initiate this analysis , please contact me at henry.h.tapper@gmail.com or leave a message on this blog.

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by henry tapper on January 15, 2011  •  Permalink
Posted in annuity, NEST, pensions
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Posted by henry tapper on January 15, 2011

http://henrytapper.com/2011/01/15/a-blueprint-for-dc-pensions/

Advice where advice is needed

AEGON, reclame op gebouw in Rotterdam

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I’ve been reading Aegon’s latest report into Incentives for Saving and the consumer research that backs it up. It makes pretty dismal reading.

Im depressed that after so many years of producing such reports, pension providers still seem unable to see beyond their own narrow agenda – “how to encourage people to save into our products”.

The headline finding is that people don’t value financial advice preferring to take their own decisions. Predictably they see their houses as their pensions and trust their employers pensions more than personal savings vehicles. Despite the sums invested in financial education the surveys reports show people have only the haziest idea of how pensions work and for the most part aren’t bothered if they do or don’t.

Where advisers figure in the consumer research they are referred to as “persuading” or “selling” – advice is little more than cajolement.

This is not surprising. Financial advisers are rewarded on results. They are not rewarded for giving people a clear understanding of their choices but on the size of the cheques and direct debits that accompany the application forms signed by their “clients”.

They are only incentivized to see their customers again if there is a reasonable chance of getting more “business”- eg cheques and new or bigger direct debits. Unsurprisingly “advisers” are rarely seen twice.

The report makes certain suggestions as to how pensions can be better presented, acknowledges that most people save for their pensions through employer sponsored schemes and agrees that in a world where most people can’t be bothered with pensions, auto-enrolment is a good thing.

It stops short of acknowledging that by promoting the commissions that have created the perverse incentives that have led to disillusionment with their products,  the insurers are largely responsible for the lack of trust both in pension products and pension advice.

While the report makes certain suggestions surrounding annuitisation and equity release – it makes no mention that the reports sponsor - Aegon, has withdrawn from providing annuities in the UK concentrating on making money from income drawdown, an advised product that is not suitable for the vast majority of the savers who have provided the report’s research.

 The combined impact of the Retail Distribution Review, NEST and the introduction of Auto-Enrolment will make the traditional role of financial advisers – to bludgeon their clients into personal pensions, redundant. Advisers will in future concentrate on that small tranche of retirement savers who have the interest and resources to use SIPPs and income drawdown.

But what of the 460,000 people who bought individual annuities in 2009 or the 750,000 people who will reach 65 in 2011? These are the people who really need financial advice, they are the people who have the accumulated pension funds and the immediate prospect of unfunded liabilities and they hardly get a look in!

And where is there any sense of contrition from the insurers or a sense of responsibility for restitution? Insurers like Aegon are currently sitting on a vast pile of this nations pensions savings, wringing one’s hands and calling on regulators and the Treasury is not good enough.

Aegon both in its current guise and as Scottish Equitable has traditionally supported financial advice , perhaps it can start thinking of ways to ensure that advice is available to its mature policyholders now that it is needed.

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by henry tapper on January 22, 2011  •  Permalink
Posted in dc pensions, pensions, Retail Distribution Review, Treasury
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Posted by henry tapper on January 22, 2011

http://henrytapper.com/2011/01/22/advice-where-advice-is-needed/

How do 540 pension people look on one page?

We are all fascinated by our looks but how do our looks compare?

Here are 540 photos of people in pensions, and one or two that aren’t.

It’s fascinating to see how certain poses predominate – and what eccentrics do to keep ahead of the received idea.

If you aren’t here, perhaps you should be linked in and have a Gravatar ..there’s no better way of getting noticed!

Perhaps the gallery will grow in time and if you’d like your phot included- mail me on henry.h.tapper@gmail.com and I’ll do my best.

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by henry tapper on January 23, 2011  •  Permalink
Posted in NEST, pension playpen, pensions
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Posted by henry tapper on January 23, 2011

http://henrytapper.com/2011/01/23/how-do-we-look-the-pension-facebook/

The vision of Pension Plowman

From the Old Hills looking out to Great Malver...

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William Langland was a 14th century hippy who wrote a poem about the vision of Piers Plowman that contains a section where Piers sits on a hill near Malvern surveying the industry in the villages and fields below him – the “fair field full of folk” . He is inspired by the commonality of purpose of his fellow men (and women)

Since I read the poem when at college, this section’s come back to me a few times- it did so yesterday as I wandered the 400 yards from Griffin Park to my house delighting in Yeovil‘s 2-1 victory over Brentford.

Rather than getting bothered by the randomness of the diverse world he sees in front of him, he tries to make sense of it, delighting that rich and poor get on with it – there’s no chippiness from the humble plowman.

Which brings me on to the light I see at the end of the DC tunnel. Those who read my blog know that I’m fed up with the inefficiencies of DC, especially at the point where market driven accumulation is exchanged for inappropriate guaranteed annuities midway through adult life.

Everywhere I look I see our fair field full of folk engaged in little projects which though diversely motivated lead me to the same pleasurable conclusion as Piers. 

My friends at Mattioli Woods tell me that they are busy finding ways to provide scheme pensions for their high net worth SSAS pensioners. These pensioners are rich enough to want to preserve their pensions capital , they are more concerned by tax than pensions poverty and the scheme pension is a means for them to manage their affluence most efficiently.

My friends at Alliance Bernstein are busy extending the concept of target dated funds to provide a collective drawdown which will enable the members of well-funded occupational DC schemes to defer the annuity process till there really is a need for a guarantee on income, your 75th or even 80th birthday,

My friends in Government are busy looking at ways to use our £5bn pension protection fund to provide scheme pensions for the majority of us not protected by occupational pension trustees or private wealth.

Now what I like most about Piers was that he dreamt when he should have been ploughing (a well merited criticism of myself). His words inspired me when I was a student and continue to do so.

I hope that my words inspire you just enough to have a little smile on your face when you finish reading this. The pen is mightier than the sword and a lot less dangerous!

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by henry tapper on January 30, 2011  •  Permalink
Posted in pensions, poetry
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Posted by henry tapper on January 30, 2011

http://henrytapper.com/2011/01/30/the-vision-of-a-pension-plowman/

Personal Pensions – why competition didn’t work

John Denham at Innovate '08

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Efficient markets thrive on competition – that’s the market theory.

But for financial services in the UK and the personal pension market in particular it has been a case of less (competition) being more (effective).

Throughout the post-war period, the accepted wisdom has been that Government can encourage long term-saving through fiscal measures - primarily the granting of tax relief on selected products.

The withdrawal of Life Assurance Premium relief in 1984 was the pre-cursor to a slow withdrawal fo these tax advantages and we can chart the gradual erosion of the privileged status given to pension through the imposition of the cap on contributions to high earners through Gordon Brown’s infamous  withdrawal of dividend reclaims and the various erosions of higher rate reliefs culminating in the AA/LTA legislation late in 2010.

In an excellent study “Savings Sense” Ben Jupp and Steve Bee argued that tax relief, while important to higher rate tax-payers did little to increase overall savings rates, merely skewing the savings market in one direction or another.

When John Denham introduced the idea of a charging cap in 1995, his motivation was a realisation that most of the Government fiscal incentive to contract-out of SERPS had been passed on to financial advisers rather than benefiting those taking out appropriate personal pensions.

Government has realised that it cannot get to the majority of UK citizens who have inadequate pensions, by offering them fiscal incentives.

The second aspect of Government Policy that has underpinned pensions thinking is that competition between commercial providers will result in better deals for consumers. This credo was at the heart of Thatcherism and had its full expression in the introduction of the personal pension in 1987 as a mass-market solution to the perceived problem of an over-centralised system of pension provision (Old Age,SERPS,Graduated etc.).

What this theory did not take into account was the thorny issue of distribution. Pensions do not sell themselves. While people are prepared to insure against tangible risks such as crashing your car or your house falling off a cliff, they have difficulty with insuring against a desireable - living too long.

To get people to comit to long-term savings into a process they do not fully understand (annuitisation) and into markets they dimly understand (equity/bond), some form of sophisticated persuasion is known. The pensions industry calls this advice, everyone else calls it selling.

The providers of pensions had always recognised that their advisers needed to be rewarded with commissions and as wave upon wave of regulation made the sale of personal pensions more expensive, commissions rose. Agreement to cap maximum commissions came and went and as competition for distribution increased, so did the charges on personal pensions. Far from improving the lot of consumers, the expansion of competition among financial advisers between 1980 and 2000, actually increased charges.

The introduction of a 1%pa charging cap on stakeholder pension in 2001 was the first effective step in reducing unwanted completion and bringing genuine efficiencies into personal pensions. Pension providers divided between those who wished to continue to provide commissions at something close to previous rates and those who decided to distribute on a wholesale basis through large actuarial consultancies.

By and large, those who continued to finance distribution through individual advisers found the model unworkable and have by and large withdrawn from the market. This has created a vast legacy of providers who have been consolidated by the so-called Zombies- companies that consolidated failed or failing life companies with little incentive to improve the lot of policyholders and every incentive to maximise shareholder value by passing on savings to those with their equity.

If stakeholder pensions heralded the start of the demise of individual advice on mass-market pensions, the Retail Distribution Review announces its death knell. From 2012. The abolition of commission from personal pensions spells a massive reduction in the number of distributors of these products and their confinement to a small sector of the market which has the wealth both to need and pay for advice.

The RDR is effectively an admission that the free-market in pensions, most in evidence through the sale of personal pensions, is over. Instead of pensions salesmen we will have a system of auto-enrolment. Instead of high-cost, then low-cost personal pensions we will have a collective occupational scheme -NEST. Instead of a plethora of personal pensions we have but a handful still actively in the market.

Competition didn’t work and we are left with wreckage it wrought. Sorting out the debris of the past twenty five years will be the job of those left behind. It will take many years to reorganise Britain’s private pension provision and many will arrive at the point where they have to draw their pension with massive disappointment before the positive impact of this reorganisation is felt.

It is now the urgent job of those left standing to do something about this legacy and an equal responsibility to ensure that the future continues to look a little brighter.

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by henry tapper on February 6, 2011  •  Permalink
Posted in annuity, pension playpen, pensions, Retail Distribution Review
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Posted by henry tapper on February 6, 2011

http://henrytapper.com/2011/02/06/personal-pensions-why-competition-didnt-work/

The State can take longevity risk.

Olga Rudge with Ezra Pound — the cover of Anne...

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“[The government] pays interest to private organizations for the use of its own credit . . . So that actually the government is getting itself into debt to the banks for the privilege of helping them to regain their stranglehold on the economic life of the country.”

Senator Bronson Cutting   New York Times 1934.

I read this article at college – referred  by that poetical blogger Ezra Pound. Pound’s fury was not at  money but at greed which he considered the true evil.

Yesterday I read this from Michael Johnson on a mallowstreet thread.

This house believes that the only place for the state to assume longevity risk is via an enhanced state pension

I’ve consistently argued that it is not the State‘s responsibility to tax people into financial solvency in old age. People should have the right to opt out of the communal mechanisms that act as the default for retirement savings whether through self-employment, through personal pensions or deliberate fecklessness. The State has an obligation to ensure that even the feckless have a minimum retirement income in old age and if we fix this at the Basic State Pension or  better the enhanced Citizen Pension then that is the State’s obligation met.

But by the same standard, the State has an obligation to ensure that those who wish to provide for themselves, can do so as efficiently as possible. I am convinced communal or collective pensions deliver better outcomes than individual pensions. Studies by John Shuttleworth in the 1990s showed that pensions organised by companies and paid from communal pension funds wer up to 50% more efficient than pensions accumulated and decumulated through personal pension plans and individual annuities.

Since John’s death, the inefficiencies of individual policies have reduced in accumulation (the management charges of personal pensions) but increased in the decumulation phase (the impact of solvency regulation on annuities).

Indeed, despite a lot of talk about longevity swaps, there is no evidence that the private sector has found the secret to insuring the cost of people living longer. It has merely found ways of insuring itself against the risks of ruin.

What has happened and is happening is that people are swapping inflation linked retirement income steams written on a joint life basis for single life level income streams.

The traditional sources of scheme pensions have dried up;-  it is virtually impossible to find a DB plan that will take in transfers from DC in return for a fixed pension. When this does occasionally happen, the fixed pension is set at the open market rate, making the option pointless.

In short, the private sector is unable to provide longevity cover to the nation and is effectively offering those wishing to convert accumulated retirement savings, Hobson’s choice; income drawdown (beyond the means of most) or guaranteed annuities (with all their inefficiencies).

The impact of this market failure will not be fully felt for many years to come , but as inflation eats into the level annuities and as the annuitants die leaving their spouses and partners with no residual income, the extent of the current failure will become evident.

The outcome of this market failure will be general and will ultimately require state intervention. Either th State will be required to take up the strain by increasing unfunded pensions or there will have to be an extension of mans tested benefits (which in economic terms amounts to much the same thing).

Here is the rest of Michael’s post

Consequently, all public sector pensions should be moved to a wholly DC framework. Furthermore, we should start tip-toeing to a funded framework, starting with compulsory NEST participation for all public sector workers.

The link is clear;-  DC is seen as a means of off-loading longevity risk from the state to the private sector;-  ultimately the individual annuitant.

But why should the State do this if the private sector are failing to efficiently  provide longevity insurance?

Why instead don’t we turn this problem around and ask whether the DC accumulation system (which is becoming efficient) could not convert to a state insured decumulation? There is already over £10bn in the PPF, there are established state pension payment systems and we have the actuarial talent within the PPF, tPR, DWP and GAD to create a new state pension which can harness the economies of scale the state provide not just to current annuitants but to the millions of annuitants forecast to be arising from NEST.

Self sufficiency in retirement is a right that every citizen should be offered the state can facilitate self-sufficiency by giving hand ups not hand outs (a horrible resonance I know). It can do so because we still  have a state pension apparatus that is strong, well run and fir for this purpose. Let’s not look this gift-horse in the mouth.

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by henry tapper on February 22, 2011  •  Permalink
Posted in ezra pound, NEST, poetry, Retirement
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Posted by henry tapper on February 22, 2011

http://henrytapper.com/2011/02/22/the-state-can-take-longevity-risk/

Tell them the truth (a ridiculous notion)

Elders from Turkey

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I’m doing some work on the Pension Regulator’s recent paper on DC outcomes. The Regulator wants to know how we can get people relying on DC pensions for a decent retirement to get a better deal.

There are plenty of things that employers can do to make their DC pensions more efficient for their staff without much or any cost. Most companies have negotiated poor deals for their staff and need to go back to their DC provider and re-negotiate terms, If there is a commission going to an adviser they need to ask themselves whether they are getting value for money and if they aren’t they should move to a “Direct Offer” contract with the insurer. If they have an unbundled contract, they need to think long and hard on how much of the pension spend is going on separate contracts- we have a checklist of over 20 fundamental inefficiencies that need to be addressed before a company can confidently say to their staff

 ”we have done all we reasonably can to make your pension as efficient as possible”.

“Reasonably”. Even if a company has negotiated provider charges to a minimum , instigated a proper “at retirement” broking service and established sensible default and core investment strategies, they are still walking away from one historic obligation - the insurance of longevity.

Since the premium an individual pays to provide such insurance for themselves is some 25% of the resulting pension, one would have thought that this disclosure would be of considerable interest to those being required to pay it.

If the company sponsoring the DC arrangement has a DB plan it has the option, trustees permitting, to buy back these DC pots at retirement and pay members scheme pensions considerably more efficiently than the individual’s annuity provider can afford to do. I do not know of any DB schemes that still accept “transfers in” at retirement (there are still options to exchange money purchase AVCs either for cash or pension – amounting to the same thing).

The company’s point is that it is simply not reasonable for them to take the longevity strain of these DC pensions. I can understand why –  there is nothing in a widget manufacturers constitution that states that it should act as a life insurer. Nevertheless, in running a DB scheme with a pensioner payroll, that’s what widget manufacturers have done these past fifty years.

The point at which companies decide to close their DB schemes for new hires or more drastically, future accrual, is the point at which affected employees should be made aware that in future they have a new job – they are in charge of their own retirement.

In using the phrase “new job”, I do not feel I am exaggerating. Many of us are likely to spend as long in retirement as we did at work, certainly if we take the at retirement fulcrum as 65. The impact of taking an enforced 25% pay-cut for the second half of my adult life is not one I am particularly relishing. But that is the message.

We have done all we reasonably can but regret to inform you that by abandoning our policy of insuring your old age, we have just given you a 25% pay-cut for the rest of your life.

Well that’s the ridiculous notion I’m talking about! But it’s the truth!

Now by way of a coda, I will set out my stall on what I think companies should be doing to make sure their staff are properly educated on retirement matters.

They should assemble their staff and explain a few home truths. Instead of shilly-shallying around talking about investment options and the like, they should explain that the DC scheme they have set up is likely to be hopelessly inadequate in replacing the income their staff were used to while in employment. They should explain that they have done all they reasonably can do but that still leaves the majority of staff with inefficient at retirement options about which they can now do very little.

They should explain the consequences of DB closure.

They should point out that the majority of staff should prepare themselves for a radically less wealthy retirement than they might previously have supposed and short of these staff reorganising their finances to make pensions a major priority, they should be preparing themselves for enforced austerity in old age.

I suggest that such an approach would lead to considerable workplace unrest, maybe some short-term disruption to production as staff engaged with the radical concept that somebody was actually telling them some home truths and wasn’t trying to sell them the value of their employee benefit program/pension policy.

However, it would lead to the kind of engagement between staff and retirement that is needed if we are to move forward from the current deadlock of distrust.

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by henry tapper on March 19, 2011  •  Permalink
Posted in EU Solvency II, NEST, pension playpen, Personal Accounts, Retirement
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Posted by henry tapper on March 19, 2011

http://henrytapper.com/2011/03/19/tell-them-the-truth-a-ridiculous-notion/

What we can and cannot do (to provide our staff with better DC pension outcomes)

The Pensions Regulator has challenged us to establish what can practically be done for staff with DC pensions.

In my most recent post I argued that an employer has an obligation to tell its staff the truth and that the honest truth about DC pensions is that pound for pound they will deliver considerably less than DB pensions, that the majority of staff are probably overestimating the value of their DC pensions and that even if the employer has done all it can to maximise the efficiency of its DC arrangements, staff should be considering reorganising their finances to comitt considerably more to retirement savings than up till then.

That’s the tough part.

The easy part is getting to grips with the DC plan itself. I’ll start with a table of numbers which come from a recent peice of work we did for a charity.

  SMPI (1% expenses) SMPI (0.55% expenses) Current
Age band TOTAL EE ER TOTAL EE ER TOTAL EE ER
Under 30 16.0% 6.5% 9.5% 14.0% 6.5% 7.5% 16.5% 5.3% 11.2%
30 – 39 21.5% 6.5% 15.0% 19.0% 6.5% 12.5% 16.5% 5.3% 11.2%
40 – 49 29.0% 6.5% 22.5% 25.5% 6.5% 19.0% 16.5% 5.3% 11.2%
Over 50 39.0% 6.5% 32.5% 34.5% 6.5% 28.0% 16.5% 5.3% 11.2%

The percentage figures in the boxes are the estimated percentages of salary that need to be paid into a pension to provide certain defined outcomes. I need to add that these are only estimates and the actual outcomes will depend on market returns.

 The current arrangement on the left is a defined benefit pension scheme into which the employer is paying 11.2% of total salaries and staff a further 5.3%.

The current DC scheme which is a stakeholder pension where the pension costs are 1% of the accumulating pension fund requires roughly equivalent pension contributions for those under 30 but considerably more in contributions as staff get progressively older. If you average the costs across the range of employees of this charity you find that the average cost of providing the same estimated outcomes as the DB plan has gone up from 16.5% to 24% telling us that even a stakeholder pension is about 50% less efficient than a DB plan.

The middle set of numbers shows what happens when the member charge reduces from 1% to 0.55%. By making the plan more efficient, the Charity could b ring down the equivalent funding cost by about 13%. This plan would still be a lot less effecient than the current DB plan but it’s a whole lot better than the current DC arrangement.

Those of you who’ve followed me through this boring bit should be feeling a little surprised. If you consider that there are DC pension plans with member charges of around 0.1% pa then you can see that some employers are providing DC plans that are 26% more efficient than those written at the stakeholder 1%pa. My friend Jeroen Wilbrink tells me that historically the Dutch collective DC plans have charges on the accumulation funds of 0.1% so to answer the Regulator’s question -  an 0.1% TER looks the floor for DC charges, with a 26% enhancement possible relative to stakeholder charges.

With NEST looking to establish its charge at 0.30% (I’ll ignore the contribution charge which I assume is a temporary blip), we can see that there is scope for large employers to provide considerable efficiencies beyond the capacity of NEST. This may seem counter-intuitive since NEST is likely to become the largest DC plan in the country in only a few years, but it does make sense. NEST’s charge represents the cost of dealing with small employers and many of its fixed overheads (such as its payroll collection system) will be considerably more expensive than for the larger employers.

I will (for once) leave aside the issue of decumulation (where there are other efficiencies to be made). My point in this blog is that if employers are going to be ruthless and drive down the costs of their staff’s DC accumulation, then outcomes can be improved from the stakeholder charging benchmark by between 13 and 26%.

In order for these savings to be increased, we need to accept that DC provision will be concentrated around a small number of super insurers who are up to the job of providing efficient product, that adviser commissions and other unnecessary advisory fees are a thing of the past and that there is a collective will among employers to negotiate directly or through corporate brokers to get best value for their staff.

That’s a big ask and  a big challenge,

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by henry tapper on March 20, 2011  •  Permalink
Posted in annuity, corporate governance, dc pensions, de-risking, NEST, pensions, Retail Distribution Review, Retirement, twitter
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Posted by henry tapper on March 20, 2011

http://henrytapper.com/2011/03/20/what-we-can-and-cannot-do-to-provide-our-staff-with-better-dc-pension-outcomes/

The Pension Play Pen on good DC outcomes

The City of London

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The Pension Regulator has asked us the question and though the questions asked in a rather woolly way, it’s interesting to see what the Regulator it (him?) self considers the main priorities.

  1. Appropriate contribution decisions
  2. Appropriate investment decisions
  3. Efficient effective administration
  4. Protection of assets
  5. Value for money
  6. Appropriate decumulation options

Each month, a group of like minded people, generally members of the Pension Play Pen, meet in London to thrash out what they think on questions like the one in the title. On Monday (April 4th) we had a cracking debate …

In attendance

Stav O’Doherty
Stephen Cohen
Peter Weiner
Jennie Kreser
Ben Mulroney
Jeremy Askew
Alan Higham
Nigel Ferrier
Nicole Pichler
Rothna Miah
Matt Ashton-Smith
Henry Tapper (12)

 The meeting sought to prioritize the Pension Regulator’s 6 positive DC outcomes into those most urgent, those of value and those which tPR could frankly do little about. After an extended voting process involving both alternate and single transferable votes we concluded that

 

1 tPR needed to concentrate on getting “appropriate contribution decisions” and “efficient and effective administration (6 votes each)

2. tPR could positively influence “appropriate decumulation decisions” and get consumers better “value for money” (6 votes each)

3. It was generally agreed that there wasn’t much tPR  could do to influence “appropriate investment decisions” or provide “protection of assets” beyond what was already being done and this was not an area it should prioritize.

Excellent contributions all round, the next meeting will be on Monday May 9th- same time , same place.

There was an interesting comment from Phjilip Bretnall (formerly at the tPR) which echoes both the substance and structure of the conclusions we came to.

“A good outcome is that members of schemes are informed well enough to have a basic understanding of the need to contribute as much as they can afford as their life progresses. It is incumbent on the so-called experts to ensure that good governance prevails and that when benefits crystallise they can benefit from a minimum of a “guided choice” to ensure they have at least thought of the matters that can influence their income into
retirement. From what I see smarter investing may add some extra income at the end but the main driver HAS to be get contributing!”

Nigel Ferrier made some interesting points about the need for good communication . We concluded that without awareness of and engagement with the Regulator’s six issues, any improvements in points 2-6 would not feed through into higher contributions (the main driver of better outcomes).

My own conclusion is that without the communication of the improvements that are being made in the quality of the DC plans –  including investment, administration, charges and in decumulation, DC pensions will continue to be regarded as a necessary evil . So I agree with Nigel that the 7th positive DC outcome should be the communication that the other six are being addressed!

To finish - two insights from Alan Higham which add a little extra texture and a bit of fun!

The Regulator’s greatest opportunity to make a difference is in helping people to make appropriate decumulation decisions.

Teaching people how to invest is like teaching a pig to sing

So what do you think? What is the role of Government in establishing better DC outcomes, do you agree with the conclusions we came to or have we got it all wrong?

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by henry tapper on April 5, 2011  •  Permalink
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Posted by henry tapper on April 5, 2011

http://henrytapper.com/2011/04/05/the-pension-play-pen-on-good-dc-outcomes/

Jimmy there’s still so much to be done

He said I ate the last mango in Paris

 Took the last plane out of Saigon

Took the first fast boat to China

And Jimmy there’s still so much to be done …

The greatest of all the great things about Jimmy Buffet, is his music takes you out of the fast lane and parks you firmly on the beach with a Marguerita and a couple of pretty girls and nothing to do.

I’ve taken to singing these lines to myself to de-stress myself – I suppose writing these little articles is another way of getting that stress out of my system.

Truth is that none of us is going to change the things that we see around us much - not on our own –  even a David Cameron or a Nick Clegg can’t do much on their own.

But when there’s a crowd of folk that get together - whether at a lunch, or a conference, or an online forum and agree some stuff about what needs to be done, and then organise themselves then- no matter how much there is to be done- it gets done.

Take my friend Tom McPhail who has got a bunch of people together to lobby for better annuity making decisions (or at least a regulatory climate where good annuity decisions are the norm rather than the exception.

Tak Dawid at Redington who has organised a proper lobbying group down to the DWP to explain the impact of the RPI/CPI change and get Government thinking about both the decisions they are taking and how to consult on future decisions.

Then I think of my bunch of guys at First Actuarial – who I am so proud of! We’ve just had our best month ever – not just out biggest turnover month but a month where we did so much good work and got our heads round so many big problems we’d been wrestling with.

Jimmy Buffet isn’t a loner and he’s not a loser. His group , his shops, his life is an inspiration!

harnessing the power of fun to get things done.

Maybe that’s going to be the strapline for the Pension Play Pen!

 

 

 

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by henry tapper on April 13, 2011  •  Permalink
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Posted by henry tapper on April 13, 2011

http://henrytapper.com/2011/04/13/jimmy-theres-still-so-much-to-be-done/

Is personality an unrewarded risk?

Ken Dodd: sculpted by Victor Heyfron, M.A. 2008

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I love this phrase “unrewarded risk“

An unrewarded risk is one which is not associated with any benefit for the party accepting the risk.
So it is never rational – in terms of profit maximisation – to accept an unrewarded risk.

The big question for employers is whether personality, which carries the risk of people screwing up, ever brings demonstrable value or profit.

If, as I suspect, most employers would sooner hire a moulting baboon than a  “personality” then my goose is already cooked. Through to the finals of the not very prestigious Professional Pensions Awards “Pension Personality Award”, I am debating whether it is better to win or lose - maybe the phrase  “no win situation” was coined for this.

My competition is worthy and with one exception - my mate Kevin Wesbroom, gonged up. Kevin doesn’t need a gong as he has hair as big as his smile. He’s pension‘s answer to Ken Dodd.

I don’t know Stuart Southall too well though I like his various companies - he has always come across as a bit grumpy to me. Still if you team up with someone called Punter and you are in the liability management game, I reckon it would pay to be dour.

Ronnie Bowie is a sort of fantasy name, he’s done some pretty good things for the actuarial profession and despite them all moaning at him, I find him a pleasant and jovial soul.

I love this guy Chris Nicholl- this is what the press release said about him

Stephen joined The Pensions Trust as Deputy Chief Executive in January 2002. His varied pension career includes spells at Express Dairies plc as Pensions Manager, at Burmah Castrol plc as Pensions Administration Manager and at consultancy firm Lane Clark and Peacock. He is an Associate of the Pensions Management Institute.

It’s that phrase “varied career” that kills me – only an industry so totally up its own backside could conceive of Stephen’s career as anything other than “focussed”- (note the restraint).

A further “gongmeister”" is Mike Sullivan - PMI president and pension manager of Britain’s premier (French owned) rubbish collectors (sorry Mike).

That leaves me. Like Big Hair, I’ve no gong but I’m not managing partner of the world’s biggest human resources firm. I am a total imposter, the fool, Puck at the court of Thebes.

And you..wasting your time reading this - shame on you! You should be working… studying….admit it, you’re reading this out of a pure prurience hoping that I’m going to let out some expletive - demonstrate my unworldliness - my unemployability.

Face it – I am your unrewarded risk.

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by henry tapper on May 4, 2011  •  Permalink
Posted in Liability Driven Investment, mallowstreet, pension playpen, pensions
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Posted by henry tapper on May 4, 2011

http://henrytapper.com/2011/05/04/is-personality-an-unrewarded-risk/

Couldn’t have put it better myself

It’s a referral world

Could a professional firm really achieve double-digit organic growth throughout the economic downturn? UK-based First Actuarial is doing it, thanks to its low overheads and fees, oldfashioned concentration on the client and use of LinkedIn and blogs. Neasa MacErlean finds out how it is done.

Henry Tapper, business development director of First Actuarial, is unusually forthright. “We’ve always worried that when consultancies like ours grow they become obsessed with themselves”, he says. “They forget they are there to serve their clients”.

Its only non-actuarial director, Tapper joined the £9.5 million turnover firm last June. Since then, the consultancy (based in Manchester, Basingstoke, Tonbridge, Leeds and Peterborough) has broadened its reach to take in larger clients than in the past and to cover all of the pension market (not just the ‘defined benefit’ sector it had worked in before).

These moves are not that surprising, perhaps. But, in many other ways, the firm is out on a limb. “We don’t go in for pension awards”, says Tapper, calling them “a lot of nonsense”. And he adds: “Submissions cost a fortune and say more about the PR agency than the service provided”. He is not at all surprised that many professional firms are having to cut their fees now. “Their fees are much too high”, he says. “They have corporate overheads which are unsustainable”. First Actuarial does not have “PR agencies and marketing budgets”.

Tapper is admired by the pensions community for his directness and spontaneity. Getting into LinkedIn was almost “accidental” and Tapper was, as he admits, a relatively late adopter. It happened only two years ago, when he was 47, as he began building his database of 2,000 pension contacts and realised what “an incredibly useful tool” LinkedIn was. “There was no plan. One thing led to another”. It led quickly to his creation of a shared interest LinkedIn group, the Pension Play Pen. Tapper’s much-followed blog (now heading towards 20,000 hits) followed in 2009, and Twitter was tacked on in 2010.

The Pension Play Pen and Tapper’s LinkedIn list of contacts belong to Tapper, even if they are very closely linked to the firm. Many of the First Actuarial directors and staff are members of the Play Pen and active within it. Tapper began using LinkedIn to set up lunches. Now there are three lunch groups (in London, Leeds and Manchester). The get-together usually takes the form of 20 or 25 people meeting in a pub, paying £15 each, discussing pensions and going away until the next time. “It’s not corporate hospitality, no-one is sponsoring it”, he explains.

There is also a thriving Play Pen discussion group whose lively threads are often stimulated by Tapper’s entertaining blog. A recent discussion thread tossed around the idea of pensioners being able to get long-time care in low-cost but sunny locations such as the Caribbean. “It’s got to be spontaneous”, says Tapper, talking of the blog which he tends to write at 5 or 6am. “If there’s nothing there, don’t do it”.

About 1,000 people now belong to the Play Pen. “The Pension Play Pen will get so big one day that we will have to do something with it”, says Tapper. “But you mustn’t allow it to become a corporate tool. It’s too early to say what we will do. I’m a keen believer in serendipity”. Tapper is the first to admit that “We don’t really know what we are doing on Twitter”. His Twitter site is really an index for his blog at the moment. But he has ideas and he knows who is handling Twitter well (the Mallowstreet pensions meeting place, for instance). “Mallowstreet are brilliant users of Twitter. They get information out super-quick. That’s where we see Twitter, as a way of getting information into the market in real time”.

But what are the difficulties of handling these developments? I, for instance, was able to find Henry Tapper’s Facebook site which tells you more about his private life. He accepts that social media could be a challenging way of marketing for people who want to keep their personal lives private. But Tapper is not a reserved person (as can be seen from the old-fashioned, bright green receiver attached to his mobile): “I’m unusual in being extremely extrovert and not being worried about the division between private and public”. A great user of Facebook is First Actuarial’s actuarial director Hilary Salt who is also head of the Manchester office. She is in contact this way with many of her clients. “If they know a bit of your hinterland, and you know some of theirs, it tends to lead to stronger relationships”, she says.

And how does Tapper find the time? “It’s using up bits of time that would otherwise be wasted”. A very modern example of a worker, Tapper is often on trains and trams and meets people in pubs or coffee bars or hotels more frequently than in an office. He manages the Pension Play Pen in those moments, and he prefers taking the train to driving so that he can work on the laptop.

While Tapper is developing LinkedIn, his blogs, Twitter and, undoubtedly, other similar ventures in future, First Actuarial is still doing its more traditional forms of marketing. Founded only six years ago, it began with five housing association clients and has now worked up to 250 with whom it works or has regular contact. Important in this development has been First Actuarial’s low overheads (and therefore low fees), its eagerness to meet clients and contacts face to face and its surveys of the sector. “Surveys bring people together”, he says. “People want to know what other people are doing”. He puts the firm’s impressive growth in this sector down to human factors: “They speak to each other. This is a referral world”. Other surveys are planned soon in other sectors.

Hilary Salt is optimistic about the future despite the many challenges facing the bigger actuarial firms. “The economic downturn means that clients are very, very focused on fees and good value, and we are very good at that”, she says. And, more than ever, clients want pragmatic advice, she says.

Despite the fact that Tapper is fascinated by the latest technology, he also stays firmly convinced that nothing beats simple human contact. “We go out and see an awful lot of clients. It’s about creating an environment where you can phone people up and say: ‘You know a little bit about us. Can we come and talk to you?’ and they say yes”. The Pension Play Pen contributes hugely to this. “If people know you as people who enjoy life, they say ‘Of course, we’d like to see you’.”

Professionals who want to work to achieve certainty and stability in their marketplaces could be in for a difficult time. But Tapper is entirely relaxed when discussing the future and its possible effects on the technological channels he is using. “In a year’s time”, he says, “it will almost certainly look totally different to this”.

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by henry tapper on May 11, 2011  •  Permalink
Posted in dc pensions, de-risking, Facebook, pension playpen
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Posted by henry tapper on May 11, 2011

http://henrytapper.com/2011/05/11/couldnt-have-put-it-better-myself/

The plan behind Munich Re’s corporate orgy

In a BBC report  on Munich Re’s sales party in Budapest in 2007, I discover that the revered reinsurer hired one tart for every five salesmen. Tarts were wrist-banded white,yellow and red depending on their availability and desirability. White banded tarts were reserved for senior management. Girls would be  branded after each interraction, notching up to 10 interractions in the evening. An interesting approach to getting feedback.

The BBC stops short of reporting the complex motives of the insurer. For the first time, I can reveal on this blog the true story behind Munich Re‘s HR strategy and how it was implemented through its corporate events team, I have seen a transcript of the meeting that agreed the corporate orgy. It has been translated from its German into English. For the sake of verisimilitude I have re-inserted certain Germanic phrases familiar to the English reader - taken as they are from the captions of Commando magazine and the dialogue of German erotic cinematography.

The Scene; Munich Re’s Hanover Boardroom; the participants, Munich Re’s senior HR and corporate events teams.

Brunhilde von Reeperbahn (HRD); so now ladies we move to operation “shaft the sales schwein”. Here is de plan. Ve deploy ze ladies of no virtue over ze entire front. Se ladies mit de big boobies ve vill call de white ladies. Zey will target zebig  boys at ze top, ze yellow and red girls vill target ze lower ranks.

Cluadia von Damned (CFO) ; Ve vill take photos on ze beaches, ve vill take photos in ze bedrooms , ve vill stitch up these filthy pigdogs . Gott und Himmell ve vill make their little winkels into frankfurters.

Assembled lovelies from corporate events “ah das is geil” assorted grunts and so forth.

 We are led to believe that the hapless sales force were marched into the Budapest baths where they were set upon by the hired sirens. Powerless to resist their blandishments they were carried into ante-rooms where their every thrust was recorded digitally, downloaded to corporate intranets and used in subsequent weeks, months and years to suppress sales bonuses, expense claims and extravagant behaviour.

Speaking from his Bavarian rest-home , retired sales star Otto de Wonger claimed

Ve had no chance, these Hungarian super vixens came at us like de Valkerie. I  blame Herr Clifford. I blame Max Moseley, get me a superinjunction now.

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by henry tapper on May 20, 2011  •  Permalink
Posted in corporate governance
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Posted by henry tapper on May 20, 2011

http://henrytapper.com/2011/05/20/the-plan-behind-munich-res-corporate-orgy/

CDC pensions could happen – if we put our minds to it.

hippie sister of Margaret Thatcher

Image by . . ..::PATO::.. . . via Flickr

An amazing post from one of my pension heroes “Big Hair”.

let’s pick up on collectivism and intergenerational solidarity. If you cut through the crap on CDC (collective defined contribution) these are the real reasons why it would fail. And much as I am a fan of CDC I think this is ultimately why they will fail in our current society.

 I see no evidence of intergenerational solidarity elsewhere. What about house prices being ridiculously high for young people – shall we reduce them. Certainly not, because that would be a transfer of wealth from old to young. And collectivism?? Ever science the blessed Lady Thatcher, I’ve seen nothing to persuade me that it’s not just “all about me”.
Don’t try to convince us that DB has the good merits at its heart, and hence it’s a good system. DB worked because people didn’t understand the real cross subsidies – or more likely didn’t want to understand because, as the pale, stale, males making the rules, they were the ones who benefited!

CDC is a great idea – but we need to face up the some of its central issues. BD doesn’t face up to them – it just hides them.

Now Big Hair spoke at a mallowstreet DC/DB debate on Wednesday and told us he’d not seen a major advance in pension design in 30 years.

I think he knows that CDC is the great leap forward. I also think he’s pulling the wool over our eyes on this intergenerational transfer issue. Another friend of mine, Deborah Price (twittering as Gerontology UK) has suggested that younger people need to spend more time hanging around their grandparents and being friends with them. I think I know what she’s getting at.

 I’m pretty sure that Deborah’s pushing at an open door. People I know want to look after their parents. The problem is acute right now with Long Term Care, its chronic with retirement income. 960,000 people reach 65 in this country this year - the first of a series of baby-boom Tsunamis. We have laid out the retirement carpet but the carpet’s faded,and full of holes. We’ve failed to come up with a collective drawdown system that provides pensions as effectively as DB  -Big Hair’s right on that.

Big Hair’s wrong to blame this on selfish youth or selfish oldies. It’s a matter or organisation and a matter of leadership.

And this is where I’m going to have my go at Big Hair who is a natural leader. If he troubled his mind to it, Big Hair  could work with you and me,  and a whole bunch of others to get CDC on the road.

IF- we put our minds to it we could organise NEST‘s TDF funds to provide collective DC, we could organised the PPF to provide collective DC , we could even get the bigger solvent occupational pensions to buy back some of their DC funds and pay them as scheme pensions.

How are we going to organise ourselves? This will not happen conventionally, it is going to happen because a bunch of guys and girls say, enough is enough, we can’t go on pouring good DC money down the drain on a hopelessly outdated, inefficient unworkable system of annuitisation.

Thought leadership is easy -  anyone can spout on blogs like this. Putting good ideas is hard, it requires determination, focus and ultimately time.

The reason we haven’t done anything about CDC in the past 30 years is not because we didn’t think it a good idea- it’s because we didn’t organise ourselves effectively and have the courage of our convictions.

That is going to change!

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by henry tapper on May 23, 2011  •  Permalink
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Posted by henry tapper on May 23, 2011

http://henrytapper.com/2011/05/23/cdc-pensions-could-happen-if-we-put-our-minds-to-it/

You can’t buy a sausage with a brick

Thanks to Simon McLean and JP Morgan for this excellent bit of work.

I am not an economist or an estate agent. I take what economists say about the housing market seriously. I do not regard estate agents as economists and regard their comments on markets with suspicion.

The comments on this slide are intuitively right. We can only just afford our mortgages with interest rates depressed. Valuations are being kept high by subdued demand, caused by little credit and little confidence.

If mortgage rates rise but are no easier to get then we’ll see more defaults driving prices down and less purchases driving prices up.

As JP Morgan has it, best case of a 10% falling housing prices is hope for on the basis that the impact of inevitable rate rises (driven by inflation) will be slow to arrive. This just tells me that the depression in house prices will be longer.

The message is that the days of easy money in property speculation are and will remain a distant memory. Time to start saving for your future lads  – you can’t buy a sausage with a brick - never could. You certainly can’t fund your retirement from negative equity.

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by henry tapper on June 1, 2011  •  Permalink
Posted in Retirement
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Posted by henry tapper on June 1, 2011

http://henrytapper.com/2011/06/01/you-cant-buy-a-sausage-with-a-brick/

fudging, nudging (and attitude budging)

I’m getting frustrated by the latest buzzwords in the savings (pensions) debate.

“education” and “nudge”.

“Education” is wheeled out as the soft-soap solution now we don’t “sell pensions”. It’s nicer to dress up the business of persuading people to defer spending with a polysyllabic but it’s not very helpful.

Education works well enough when we are dealing with youngsters who have the innocence to accept new ideas without the experience of knock-backs.

But education can be a two edged sword. This week we witnessed the reaction of a group of students faced with an A level question that had no answer- an impossible question.

The reaction? – Frustration leading to anger. As one commentator put it..

Screw up a kid’s education and you get screwed up kids. Screwed up kids don’t want to learn.

Impossible questions which have no answers are common enough to those involved in pensions

Should I save or pay off my debt?

Should I save if by saving I lose out on state benefits?

Should I contract out of the second state pension?

Should I join my company pension if I’m thinking of leaving the company?

What happens when we are forced to take decisions on life-changing matters for which there are no right answers is that we take no decision. Faced with 1000 fund choices in a DC scheme, behaviourists will tell you most people will take no decision. Most savers view default investment options with relief

thank God I don’t have to decide!

When people approach retirement they are faced with a slew of choices – some seem easy (tax-free cash or extra pension), some harder (do I leave my spouse a pension or gamble on my dying after him/her). We may have choices to draw-down income rather than to buy a guaranteed annuity. Is that a choice most of us understand – is it a choice we really want?

The trouble is that we get disillusioned. We take choices when we are young and things don’t always work out. We join the company but leave before our pension “vests”. Many people took financial advice to opt-out of their company pension scheme, or buy an FSAVC rather than a company AVC or invest in a personal pension that is now shrinking by the day under the weight of charges.

When we get disillusioned, we spread the bad news. We moan to our family, our friends and work colleagues and create a little “cloud” of disillusionment. This cloud merges with other people’s clouds till we get local prejudices. These local prejudices build into general prejudices which articulate themselves in some version of the phrase “pensions are a rip-off”.

In other words, what starts out as a wish to get educated , realises itself in a sales experience and detoriates into disillusionment, is the standard experience of many members of the public. Frustration leading to anger

Screw up a saver’s education and you get screwed up savers. Screwed up savers don’t want to save.

Reseach suggests the public are only too educated on the problem of retirement income. as a recent Scottish Widows press release puts it

awareness in the importance of saving is not translating into action.

The buzzword “education” is comfortable to organisations like the NAPF and other trade bodies. It implies that there is a willingness to learn. This may be the case by those at school but it is not my experience of those of my generation who are cynical of educational programs which are no more than sales pitches.

Which brings me on to “nudge”:-  a phrase out of the New Labour spin cabinet if ever there was one. The idea is that you can persuade people into good behaviours by nudging them an inch at a time – but regularly enough to get them there in the end. The idea is supposed to work because we are dealing with long-term financial planning (very nudgeworthy).

Like “education”, “nudging” makes the pensions industry comfortable. It’s a cosy way of pulling the wool over people’s eyes for their own good. We put hoods over horses heads to get them into the starting stalls -for their own good. The guards at Guancanamo Bay did the same thing – for the public good..you get where I’m heading.

The public are wary of education, wary of being nudged and I suspect that they will be extremely wary of auto-enrolment (which will not sneak into our lives unnoticed). If the default positions we are establishing on savings, accumulation and decumulation work – and can be shown to work – then in time experience will be good and confidence will return. But the opposite could also be true. If we tell people why they should do something without warning them of the risks we sell.

If we are to educate- it needs to be an education on how to take decisions, not on what decisions to take.

We will not be able to educate people to take impossible decisions , nor should we regard what is going on with defaults as education. Nudging isn’t education- it’s impulsion.

Buy-now; understand later.

Education, certainly for people of my generation needs to take second place to action.

There’s no harm in well-managed defaults, maintaining the DIY option makes for a more sustainable concensus. But let’s not dress up what we are doing in fancy clothes. We are not educating. Can we take out the spin and (self) deception and accept inertia selling for what it is?

As long as the end justifies the means- but that’s another story.

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by henry tapper on June 11, 2011  •  Permalink
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Posted by henry tapper on June 11, 2011

http://henrytapper.com/2011/06/11/fudging-nudging-and-attitude-budging/

Kids stuff – what HR and Pension people can learn from Generation C

Driving home from cricket with Olly last night – we turned on the radio -”what’s that crazy music” I mumbled to myself

“James Brown , Payback  Dad – it’s 8 minutes long – do you want to buy it?”

“How do you know that Olly?”

“I’ve got an app”

Get home, turn on the computer - there’s a mail from my friend Matthew who’s out in San Francisco. Turns out he’s written a paper on Generation C. This is how it starts.

In the course of the next 10 years, a new generation—Generation C—will emerge. Born after 1990, these “digital natives,” just now beginning to attend university and enter the work-force, will transform the world as we know it. Their interests will help drive massive change in how people around the world socialize, work, and live their passions—and in the information and communication technologies they use to do so.
 
 
Having owned digital devices all their lives, they are intimately familiar with them
and use them as much as six hours a day. They all have mobile phones and
constantly send text messages. More than 95 percent of them have computers,
and more than half use instant messaging to communicate, have Facebook
pages, and watch videos on YouTube.
If you want a copy of this paper, you can donload the PDF here -  Booz & Co is a management consultancy not an off licence .
 
Matthew and Booz’s point is that kids  like Olly will inhabit not just the real world of football and school and college and work but a “cloud world” where he and 2-300 of his associates will hang out in a state of almost constant connectivity.
 
I say “will” though I think this has already happened for my son. He’s had an iPhone for nearly a year, he runs countless Facebook campaigns. As Head of the School Council he canvasses opinions on what his schoolmates want for dinner, timetable changes – even teacher performance.
 
He can speak authoritatively on how he and his friends feel about certain songs, videos, films simply by posting a question via Facebook.
 
We (I mean the HR and pension professionals who I work with) say we want to communicate with our staff – tell them stuff about pensions, get their views on HR matters, understand where we as business managers are going right or wrong.
 
We will be competing for their interest with a whole bunch of others trying to get some space on their cloud.
 
That’s why I think that “education” is the wrong word - we don’t educate kids like Olly, they educate themselves. All we can do is try to get the things we feel important in their line of sight.
 
In the battle to catch their attention we need to go to school to learn about  search engines and how to do this.
 
 
 
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by henry tapper on June 18, 2011  •  Permalink
Posted in dc pensions, de-risking, pension playpen, pensions, Retirement
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Posted by henry tapper on June 18, 2011

http://henrytapper.com/2011/06/18/kids-stuff-what-hr-and-pension-people-can-learn-from-generation-c/

Buy now while IFAs last?

I went to a seminar given by an IFA active in setting up corporate pension schemes for small and medium-sized companies. These are the kind of schemes the Government are relying on to manage the contributions of millions of new pension savers.

One speaker explained to an audience of small company executives that the  system that paid for education and promotion of these schemes was about to go;- as a result of Government intervention.

He explained that the practice where the insurers paid the IFA for promoting their schemes and educating a company’s staff was on its way out. The implication was that the member was going to have to pay directly for this by way of a fixed monetary amount which “with all the other things on their plate” the member wouldn’t do.

That was the bad news. The good news was that companies had between now and December 2012 to take advantage of the insurer’s generosity and to build up a huge bank of communication credits that would make sure their members received proper education on pension matters for the foreseeable future.

Those of you smart enough to question why insurance companies would want to give large amounts of money to IFAs may be feeling a little sceptical and with reason.

The educational and promotional payments are in fact commission. This commission is paid by raising the charges on a pension. The impact of those charges is felt not now but when the member of the pension retires and that impact can be enormous.

I hear anecdotally that this “buy now while stocks last” pitch is a regular feature of such seminars . I should add that some IFAs never embraced the commission model , many have already moved away from it and most have accepted that the commission model will die from 2013. Nonetheless, the next 15 months are going to see a spike in commission selling of this type

So whether covertly or overtly the member pays . The only difference is that when a company sanctions commission the member doesn’t have a choice. There is of course a third way, where the member is neither charged an overt or covert fee but the company deals directly with the insurer, or in years to come – with NEST.

At the same seminar, it was stated that what a member gets out of a personal pension depends on how much gets paid in, how long the money is invested and the investment return the member gets. This is not entirely true; the amount a member gets as a pension when he or she retires also depends on the conversion of a pension account into a lifetime income and the amount taken out of the member’s account in charges.

Over 40 years , taking an extra charge of 0.1% pa from a member’s account makes a difference of 5% in lifetime income.

A pay cut for life of 5%.

But 0.1% pa is nothing compared with what many members whose pots are being charged for “education and promotion”. Typically (and I’m grateful to Legal and General‘s Adrian Boulding for this number) the impact of the education and promotion is 0.5%.

That means that these advisory fees are costing members up to a quarter of their retirement income. The situation can be even worse for job hoppers who are typically paying even higher charges on pensions they joined with previous employers.

If you were asked to take a 25% pay-cut you’d be asking what you’d be getting in return.

But no such enquiries seem to have been made.

This is why the Government have determined to close down this system of “closet” charges. The Retail Distribution Review (RDR), which has dragged on for  several years, will require advisers to charge for their services not from a seemingly small charge on the fund but from an agreed monetary amount.

 Typically IFAs will be charging £300 to you to promote the company pension scheme and educate you on how you should use it. What’s more you’ll be asked to pay that £300 each time you enter anew scheme (and you’ll be auto-enroled into these schemes in year’s to come)

Not surprisingly, many IFAs have worked out that not so many people will be prepared to pay a flat amount. Indeed many companies won’t let their staff be charged that amount.

The charges for people joining workplace savings schemes after the introduction of the RDR should be a lot lower, the pensions a lot higher. Except if you joined a commission paying scheme before 2013 - where you are stuck with higher charges – at least till you leave to join a new scheme.

IFAs argue that taking them out of the equation introduces new risks.

When you ask what these new risks are, the answers tend to centre on people not contributing enough into their pensions and secondly on them taking the wrong investment decisions.

I’m in pensions so can’t speak for the average person. But I sense most people  are able to prioritize savings when they need to and they don’t need to pay an IFA to take a decision to save or to use a default investment option.

The introduction of auto-enrolment will make it very difficult for most of us notto save into a workplace saving. It may not need us to save as much as we need to but for most of us at least 5% of our wages will be going into a pension very soon. They will be going into a default fund designed to be a proper choice for the majority of savers.

People who pay that much into a savings plan (and you’ll get at least 3% more from your employer) will expect to see that money work as hard for them as possible.

I expect that the majority of pension schemes set up post 2013 will be set up directly with insurers or with NEST or some other collective provider. IFAs will have a place in the process but they will be paid by the employer and not the employee.

However, and this is a big “however”, people who are required to save into a plan set up by an IFA on a commission basis before January 2013 will be stuck with a plan with higher charges, charges that could cut their pension by 25%.

So if you are a corporate pensions procurer, before you rush to buy now while advice last, you might like to consider whether your staff are going to thank you for rewarding your IFA at your staff’s cost.

 You might like to ask the IFA just what education and promotion staff are likely to get post RDR and ask your staff whether they are ready to give up a quarter of their pension to buy the company a bank of communication credits.

There is an alternative, you can contract directly with an insurer or NEST or with other mastertrusts. You need independent advice on how to go about this. There are firms that offer independent advice to employers and I work for one. 

IFAs can and should be operating in this space but to do so they need to leave behind the conflicts created by commission and do so now and not in 2013. 

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by henry tapper on July 17, 2011  •  Permalink
Posted in corporate governance, Retail Distribution Review, Retirement
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Posted by henry tapper on July 17, 2011

http://henrytapper.com/2011/07/17/buy-now-while-ifas-last/

Be aware – IFAs at work!

I hadn’t realised that a lot of IFAs read let alone like my blog . A fellow called IFAblogger (twittername) asked me yesterday to a web-seminar he was giving on blogging. To my surprise  he gave www.henrytapper.com as an example of how an IFA should blog!

It might sound a little ungrateful not to sing IFA’s praises but blogs should be balanced and I’ll try here to give a balanced view of how we find them as they touch upon my work and the work of my clients.

IFAs – (Independent Financial Advisers) are a contradiction in terms (oxymorons). To be independent as Paul Bradshaw (pictured) keeps pointing out they would have to know every product on the market and recommend without bias. The primary systemic bias in financial markets is personal gain aka “the commission rate”.

I started my life as an IFA and had a scripted presentation whose first question went

The kinds of people I advise fall into two categories, those who have money and want to make the most of it, and those who don’t but want to – now which category do you fall into.

Today, this is known as market segmentation, then it was known as the “either/or” close since I was either going to make money from your wealth or your aspiration to wealth!

To this day, IFAs still divide into two camps, distinguished by the way they make their money.

Those who concentrate on wealthy people earn trail commissions, essentially a tiny slice of a large amount of wealth usually held on a platform managed by an insurer or a custodian. These IFAs are called wealth managers effectively they are fund managers who know how to talk to their customers.

Those who advise on an aspirational basis used to be rewarded not by trail commission but by initial or back-end loaded commission. These commissions are based on the anticipated amount accumulated in a savings plan or the sum of the premiums paid into a contract of pure insurance (a plan that only pays out on a specified event like death or critical illness).

I say “used to be” because the practice of rewarding someone on the basis of the aspirational behaviour of customers is now frowned on. Unfortunately, while a savings plan (pension, endowment or pure protection) may have been designed to last ten or more years, most people gave up on their plans early. Because a commission had been paid on the anticipated payment of premiums over much longer, the insurance company would deduct a penalty from what had been paid to meet the cost of the commission.

This kind of thing is frowned upon because it has led to public disillusionment. People say this wasn’t explained to them at outset and IFAs say we did explain it but not very hard (why should they) and the result of all this is embarrassed Regulators, the Retail Distribution Review and a supposedly more open means of charging for advice.

My firm , First Actuarial is not an IFA as we don’t give personal advice, writing about and introducing advisers is about as close as we get! As institutional advisers (eg we advise companies and the trustees of their pension funds) we don’t have any trouble charging fees for what we do and we don’t take trail or upfront commissions. It doesn’t make us saints but it does at least divorce us from one set of issues concerning which product to recommend. A cynic would say that as we “sell our time” we simply overcharge out hourly rates or invent work for ourselves (Paul Bradshaw would tease us on that!).

We used to see a clear divide between IFAs and EBCs (Employee Benefit Advisers). EBCs were paid by companies by fees (and often were part of actuarial firms like ours), IFAs were paid for by employees and tended not to be seen at work.

The change in the pensions landscape from Defined Benefit – where fees were paid by employers (via trustees) to DC where members pick up the costs from charges on their pension pots, has opened the door for both types of IFAs to make money in the workplace. Unfortunately some of the IFAs like kids in the sweetshop, simply went crazy, charging as if they had all the costs of dealing with individual customers when they had their clien’s staff queueing in the aisles making no brainer decisions (well would you turn down a 10% pay rise?).

So the Regulators have taken a long hard look at how advice is being charged for when delivered though Group Personal Pensions and other products that started out as individual savings plans and are now sold as company pension schemes.

The Government have been told for many years that people trust their employers to protect them from unscrupulously sold products. Statistics have been produced to show that people will buy things in the workplace they wouldn’t buy from a high-street IFA. People assume that employers will do a job of work selecting the IFA who delivers such products and generally they do. The days of deals done on the golf-course are fading and instead IFAs are having to behave in a more professional and open way - especially in the light of the RDR.

That said – and here I may offend some of the IFAs (and maybe Mr IFAblogger himself), I am not convinced that IFAs have properly learned how to behave at work. The standards of behaviour are variable and the standards of procurement and monitoring of the service IFAs give within the workplace is equally variable. Employers do not always have the experience to spot dodgy practices and occasionally they are even complicit in those practices.

For that reason a warning should be placed in the workplace “Be aware – IFAs at work!”. Ultimately it is the role of the employee to make sure that what’s been delivered whether it is advice on pensions, shareplans, corporate ISAs, annuities or just general financial advice is delivered to a high standard.

However, employees trust their employers and the representatives they have in the workplace  -unions, works councils, trustees, personnel or HR departments to protect them from unscrupulous practices.

In order for employers to get value from their employee benefit plans they had better be absolutely sure that they are delivered by advisers that need carry no wealth warning!

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by henry tapper on August 13, 2011  •  Permalink
Posted in corporate governance, dc pensions, de-risking, Retail Distribution Review, Retirement
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Posted by henry tapper on August 13, 2011

http://henrytapper.com/2011/08/13/be-aware-ifas-at-work/

What to do with pension trustees

I hate saying this  but the Trustees of Occupational Pension Schemes really need to move on.

 I’m not saying they haven’t got a big job ensuring that the long-tail of Defined Benefit plans isn’t managed through and that the solvency issues they face today aren’t worthy of their outstanding skill sets (these guys are generally the creme de la creme of the workforce).

I am saying that I agree with a friend of mine , an MNT of one of this country’s great DB plans who has written this to me…

So in these changing circumstances what can and should the Trustee do – remembering, as always, that the Trustee’s primary duty is to Fund members? I would argue that there is a moral if not a statutory duty on Trustees of DB schemes closed to new members to at least ask the question about how a sponsor can help new employees plan for their retirement future.

I have written back

I take it you see trustees having an oversite and input to
the company’s reward strategy perhaps morphing into some kind of
benefits committee that ensures staff make use of all the employee
benefits including DC pensions, sharesave, tax wrappers like corporate
ISAs as well as financial education programs pre and at retirement.

My friend, who has spent a lifetime as a trustee has seen right to the core of the matter. Trustees aren’t here just to make sure solvency of legacy promises , they are here to see that employees of companies who care about these things, can leave work or their dependents with properly funded incomes.

Elsewhere  he bemoans the distraction of the quick gains of the housing market that led many employees to think they didn’t need their pensions (this in turn led to many companies to think they didn’t need to fund them either). As we know today, not only are these people “housing equity lite” today but they are faced by the grim reality that you”can’t buy a sausage with a brick.

The skills, the committment and the experience of trustees is undoubted. They are a resource that is given for free for the good of all. IF David Cameron‘s Big Society is expressed anywhere it is in the noble behaviour of these people, whether CEOs, shop stewards or ordinary members.

It is time that we re-thought the scope of Trustee’s activities. IF we are serious about employee benefits being part of total reward, we should consider governance of those benefits , as well as the information (and sometimes education) that go with their delivery, as the proper stuff of trusteeship.

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by henry tapper on August 15, 2011  •  Permalink
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Posted by henry tapper on August 15, 2011

http://henrytapper.com/2011/08/15/what-to-do-with-pension-trustees/

There are better ways to de-risk than ETVs

This morning’s headline in the Daily Mail is that millions are being tricked out of their “gold-plated” cash by the lure of upfront cash in hand. A KPMG report, a precis of which can be found here sets out to prove that ETVs are now a mainstream product used by a high proportion of the Gold-Plated schemes in question to keep them solvent.

If I was Mike Smedley, a KPMG partner promoting the report I’d be surprised that it had made front end news and more surprised for reasons that were incidental to the findings I was promoting.

But there you are, memories of pension mis-selling are long and any story that suggests the Daily Mail’s core readership – who are the golden generation benefiting from defined benefit pensions – are the passive victims; is going to be promoted by the Mail’s editorial team.

The only pension schemes which you cannot transfer out of are the Basic State Pension, State Second Pension and NEST (yes odd that a DC plan is in that mix).

People have been able to take transfers from defined benefit pension plans is they are insistent enough (these days you have to prove yourself a financial kamikaze). The point of ETVs (Enhanced transfer values) is that they sweeten the poisoned pill but be assured, there is no such thing as a free lunch. The advantages of ETVs are based on assumptions on what will happen in the future - especially what will happen to stock markets, inflation and interest rates. If you are comfortable that the assumptions haven’t turned out that way over the past ten years.

  • Stock markets have fallen and not risen over the last ten years – assumptions assume steady growth of at least 5% pa
  • Interest rates have fallen consistently over the past ten years and show no immediate sign of increasing.
  • Meantime inflation has proved volatile and so do predictions of its future rate.

Of one thing we can be certain – uncertainty. Unless you are in a defined benefit pension plan that is. Short of your pension scheme going bust (when a bailout fund exists to protect the majority of people’s pensions), you can feel certain of getting a pre-determined retirement income which is protected against stock market volatility and the impact of rampant interest rate and inflation hikes.

Since the vast majority of your financial assets are “at risk” including your income, the value of your house and the value of your savings, the promise of defined benefit pensions (including state pensions) is all the higher. Like marriage it is not something to be taken lightly.

Taking a transfer value means giving up that certainty and trusting to assumptions on markets inflation and interest rates against which you have little protection (unless you want a guaranteed loss).

Nevertheless , individuals need to have choices. Let’s look at a few scenarios where people might find themselves better off having their pension paid privately and not from a company pension scheme

  1. If you aren’t in the best of health and able to get more pension from an “impaired” or  ”enhanced” annuity – this will probably be the case if you are a heavy drinker or smoker,
  2. If a large part of your defined benefit is spent on providing benefits to your family – if you don’t have a family.
  3. If a large part of your defined benefit is spent on providing you with increases in your pension when you’ve worked out you don’t need an increasing pension.

In all these cases, you may feel you get a private pension than the pension you’ll be getting when your take your benefits from your company scheme.

The key word being “when”. There’s a strong argument that the time to be making choices about opting out of your company pension is not at some random point when an ETV exercise is underway (buy now while stocks last – hurry only x working days till offer ends!). Instead it’s the point when you retire.

When you retire you are properly focussed on your financial planning for the next stage in your life, you are able to take decisions on the basis of what you have (not what someone assumes you are going to have) and most importantly, you can take decisions in your own time without pressure (Assuming that is you start thinking about these things in advance of you actually leaving your employment).

We’re working with some of the great annuity advisers in the UK to develop services not just for those retiring from Defined Contribution Plans but from Defined Benefit plans too. From the perspective of the Trustees and the sponsors of the DB plans (the employers), the advantages offered by de-risking persist through retirement, theoretically companies can benefit from members moving to private pensions for many years after retirement (though they of course dwindle).

Of course people need to be cautious. As I’ve said many times on here, private pensions are inherently less efficient than the pensions paid directly from company schemes and the “efficiency gap” is still far too wide.

But private pensions are catching up and my firm First Actuarial are doing everything we can to closing the gap faster and more completely.

And of course , de-risking doesn’t need to involve people taking out private pensions. The options to swap one type of pension for another (increasing for level for instance) can be managed using Scheme Pensions (I wrote about this last year in a spookily similar blog).

The Daily Mail is of course right in warning people not to be influenced by cash bribes when giving up valuable “gold-plated” benefits. However, the choice of how your pension is paid to you and the bet you take on your life expectancy are your choices and your bets.

I reckon there are three important matters that need to change

  1. People should take decisions when they are properly focussed on the impact of their decision-retirement
  2. People should not give up guaranteed benefits unless they are totally sure about the assumptions used to calculate future “non-guaranteed” benefits
  3. The decisions people take should not be based on special offers including short-term cash incentives which necessarily skew rationality.
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by henry tapper on August 18, 2011  •  Permalink
Posted in corporate governance, customer service, dc pensions, de-risking, EU Solvency II, Liability Driven Investment, NEST, Retirement
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Posted by henry tapper on August 18, 2011

http://henrytapper.com/2011/08/18/there-are-better-ways-to-de-risk-than-etvs/

Seafaring

Ezra Pound in 1913. Photograph by Alvin Langdo...

Image via Wikipedia

I learned something about the sea today. The DWP want to include Seafarers in the happy throng in line for a pension and unless the seafarers who venture to and from our ports object, they will be enrolled into a pension plan of their employer’s chosing to delight in the prospect of defered pay in their dotage.

It strikes me that seafarers are the kind of self sufficient folk who are provident and need little cajolement to put aside money for their final years. Most seafarers sailing out of British port are Polish and Philippine and could teach us Brits a little about thrift and self-control.

It occurred to me that these goodly people are most in need of a savings vehicle that can carry them across the stormy waters just as we need their help when passengers in their craft. “For those in peril on the sea“, sang I to myself as I cast my mind back to the few months when I was a merchant seaman.

Perhaps it is the peril of the seas that I miss most about my later days. I studied some Anglo Saxon when I was young which took me to Iceland where I worked on the fishing boats. A friend who was and still is a sailor introduced me to this translation of a famous poem written around the 9th century. If you have some time please read it – the translation is by Ezra Pound and I am struck by the rigour of the language and the harsh muscularity of its rhythms.

The Seafarer by Ezra Pound
(From the early Anglo-Saxontext)
 
May I for my own self song’s truth reckon,
Journey’s jargon, how I in harsh days
Hardship endured oft.
Bitter breast-cares have I abided,
Known on my keel many a care’s hold,
And dire sea-surge, and there I oft spent
Narrow nightwatch nigh the ship’s head
While she tossed close to cliffs. Coldly afflicted,
My feet were by frost benumbed.
Chill its chains are; chafing sighs
Hew my heart round and hunger begot
Mere-weary mood. Lest man know not
That he on dry land loveliest liveth,
List how I, care-wretched, on ice-cold sea,
Weathered the winter, wretched outcast
Deprived of my kinsmen;
Hung with hard ice-flakes, where hail-scur flew,
There I heard naught save the harsh sea
And ice-cold wave, at whiles the swan cries,
Did for my games the gannet’s clamour,
Sea-fowls, loudness was for me laughter,
The mews’ singing all my mead-drink.
Storms, on the stone-cliffs beaten, fell on the stern
In icy feathers; full oft the eagle screamed
With spray on his pinion.
Not any protector
May make merry man faring needy.
This he little believes, who aye in winsome life
Abides ‘mid burghers some heavy business,
Wealthy and wine-flushed, how I weary oft
Must bide above brine.
Neareth nightshade, snoweth from north,
Frost froze the land, hail fell on earth then
Corn of the coldest. Nathless there knocketh now
The heart’s thought that I on high streams
The salt-wavy tumult traverse alone.
Moaneth alway my mind’s lust
That I fare forth, that I afar hence
Seek out a foreign fastness.
For this there’s no mood-lofty man over earth’s midst,
Not though he be given his good, but will have in his youth greed;
Nor his deed to the daring, nor his king to the faithful
But shall have his sorrow for sea-fare
Whatever his lord will.
He hath not heart for harping, nor in ring-having
Nor winsomeness to wife, nor world’s delight
Nor any whit else save the wave’s slash,
Yet longing comes upon him to fare forth on the water.
Bosque taketh blossom, cometh beauty of berries,
Fields to fairness, land fares brisker,
All this admonisheth man eager of mood,
The heart turns to travel so that he then thinks
On flood-ways to be far departing.
Cuckoo calleth with gloomy crying,
He singeth summerward, bodeth sorrow,
The bitter heart’s blood. Burgher knows not –
He the prosperous man — what some perform
Where wandering them widest draweth.
So that but now my heart burst from my breast-lock,
My mood ‘mid the mere-flood,
Over the whale’s acre, would wander wide.
On earth’s shelter cometh oft to me,
Eager and ready, the crying lone-flyer,
Whets for the whale-path the heart irresistibly,
O’er tracks of ocean; seeing that anyhow
My lord deems to me this dead life
On loan and on land, I believe not
That any earth-weal eternal standeth
Save there be somewhat calamitous
That, ere a man’s tide go, turn it to twain.
Disease or oldness or sword-hate
Beats out the breath from doom-gripped body.
And for this, every earl whatever, for those speaking after –
Laud of the living, boasteth some last word,
That he will work ere he pass onward,
Frame on the fair earth ‘gainst foes his malice,
Daring ado, …
So that all men shall honour him after
And his laud beyond them remain ‘mid the English,
Aye, for ever, a lasting life’s-blast,
Delight mid the doughty.
Days little durable,
And all arrogance of earthen riches,
There come now no kings nor Cæsars
Nor gold-giving lords like those gone.
Howe’er in mirth most magnified,
Whoe’er lived in life most lordliest,
Drear all this excellence, delights undurable!
Waneth the watch, but the world holdeth.
Tomb hideth trouble. The blade is layed low.
Earthly glory ageth and seareth.
No man at all going the earth’s gait,
But age fares against him, his face paleth,
Grey-haired he groaneth, knows gone companions,
Lordly men are to earth o’ergiven,
Nor may he then the flesh-cover, whose life ceaseth,
Nor eat the sweet nor feel the sorry,
Nor stir hand nor think in mid heart,
And though he strew the grave with gold,
His born brothers, their buried bodies
Be an unlikely treasure hoard.
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1 Comment
by henry tapper on August 23, 2011  •  Permalink
Posted in ezra pound, poetry
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Posted by henry tapper on August 23, 2011

http://henrytapper.com/2011/08/23/seafaring/

Some of our pensioners are unwell

I’ve  not  read anything so silly as this  http://www.professionalpensions.com/professional-pensions/news/2105510/stv-slashes-liabilities-bespoke-mortality-exercise for a long time.

If you can’t read the story via the link, KPMG are delighting in having got the STV Trustees to change their mortality assumptions after they’d collected eveidence that most of its pensioners are likely to live a lot shorter than would normally be expected. The result of this is that scheme liabilities have been restated as £5m lower than previously.

NB!  The liabilities have not changed- they have simply been re-valued.

Are KPMG really claiming they have reduced the Scheme liabilities by £5m? They have done nothing of the kind.. The Trustees have the same financial obligations to the same people as they had a year ago when this expensive “exercise” began.  All that KPMG has done is bag the glory for some hard work by a firm of advisers who I have a great deal of time for and net a fat fee in the process.

The fat fee will of course be paid by the sponsor STV with money that otherwise could have gone to beefing up the Recovery Plan of its Pension Scheme.

There is something very distasteful about the relish with which KPMG announce that they have uncovered  poor health and life expectancy among Scottish Televisions pensioners . Perhaps someone should remind them that the reason the pension scheme was set up in the first place was to give financial comfort to these people.

If I was one of the pensioners who had been given a £50 M&S voucher to reveal my true state of health, I’d be feeling pretty hacked off reading

It’s a win-win situation,” he said. “The company is stronger because its liabilities are reduced, trustees improve their governance because they increase the accuracy of their data, and it doesn’t affect employee benefits.”

Whatever next?   Press releases such as this?

We are delighted to announce the further de-risking of our pension plan following another untimely death. The trustees continue to strive for the premature termination of ongoing liabilities and will keep the company and its shareholders appraised of any further fatalities.

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5 Comments
by henry tapper on September 2, 2011  •  Permalink
Posted in corporate governance, de-risking
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Posted by henry tapper on September 2, 2011

http://henrytapper.com/2011/09/02/some-of-our-pensioners-are-unwell/

Martin Lewis and the “real world”

Internal rate of return, twp solutions

Not from www.moneysavingexpert.com!

If you want to know what people are bothered about (financially) check out Martin Lewis‘ www.moneysavingexpert.com.

The site is a distillation of the things people actually go to sleep worrying about - student fees, motor insurance premiums and the rate of return you can get on your savings. (among many other things).

There is a little bit on pensions there but it’s not about the things that the NAPF or the PMI or mallowstreet or the big actuarial firms are talking about. No great dissertations on employer covenants, the RPI/CPI debate or GMP equalisation.

The stuff on pensions is all to do with making the most of what you’ve built up in various pension savings plans when you come to retirement “managing the decumulation” as Martin would definitely not put it!

Here’s how he introduces the subject

Buying an annuity is life’s most important single financial decision. Most people who save into any type of private pension will have to do this, so if that’s you, read this free guide.

An annuity is a contract guaranteeing you an annual payment each year until you die. However, you can’t change your mind once it is done, so get it wrong and you will lose out year after year.

As this is a major decision that needs real thought, this full guide which takes you through how to boost what you get, getting advice, alternatives to annuities, other types of pensions, benefits and more.

There’s only a limited supply of the printed copies so please download the PDF version if you’re able to

Isn’t that easy, simple , authorative – doesn’t it make sense?

I’ve kept in the last paragraph as it introduces my friends at Annuity Direct, Bob, Kath and Alan who have invested heavily in supporting Martin and get a flood of business from Martin’s site.

People seem to regard Martin, as many regard Which? as an authoritative and genuinely independent source of financial information. The numbers of people that go on Martin’s discussion forums are recorded and publicised. Here are his all time stats

The top 20 most thanked forum boards

1. Game Over (competitions board) 55,852,353
2. Old Style MoneySaving 11,175,828
3. The Money Savers Arms 5,424,978
4. Debt Free Diaries 3,721,594
5. Discussion Time 2,347,202
6. MoneySaving in Marriages, Relationships & Families 2,281,659
7. Debt-Free Wannabe 2,082,407
8. Discount Codes ‘n Vouchers 1,798,571
9. Special Occasions & Other Celebrations 1,498,332
10. Competitions Time 1,274,334
11.Debate House Prices & the Economy 1,131,220
12. Health, Beauty & Fashion MoneySaving 1,094,072
13. It’s Gone, but was it any good? 1,043,453
14. Freebies (no spend required) Board 714,826
15. I won! I won! I won! 616,863
16. Freebies gone but not forgotten 547,317
17. House Buying, Renting & Selling 534,106
18. Quick! Grabbit while you can 474,321
19. How much have you saved? 424,223
20. Bankruptcy & Living With It 395,395

“thanked” is his way of recording what geeks call a “hit”.

If you added all these numbers up you’d find that he’s had over 100m hits on his site, that’s about 3 hits for every working person in this country.

Now a lot of the people I work with would like to feel they are authoritative and frankly they are. But do they have 100 million “thankyous” to their name?

Couldn’t we all do with spending a little less time wondering how we can create this elusive financial engagement and a little more time finding out how Martin has actually done it?

People talk about the “real world” where liveth the “engaged investor”. In reality the vast majority of people will get the financial advice they need from the portal of www.moneysavingexpert.com.

His site is not pretty and it isn’t hugely clever but it speaks to the people that wealth managers and IFAs and actuaries and pension managers and communication consultants want to speak to - the public.

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6 Comments
by henry tapper on September 10, 2011  •  Permalink
Posted in Martin Lewis, pensions, Retirement
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Posted by henry tapper on September 10, 2011

http://henrytapper.com/2011/09/10/martin-lewis-and-the-real-world/

Green shield stamps ( how to buy a pension)

Lawrence Churchill of NEST and John Hutton (of the report) spoke eloquently yesterday of the need for people to focus on a desired retirement outcome (for instance;-”I want an income of £15,000 pa”) work out what it takes to get it and then save like crazy.

As I listened  my mind went back to Green Shield Stamps. I used to look in the catalogue, decide what I wanted, work out how many books I needed to complete and then make my parent’s life a misery till I got what I wanted.

Typically this meant long detours to out of the way petrol stations that gave out quadruple green shield stamps and shopping at rubbish supermarkets like International Stores in return for stamps which kept me quiet.

My son still plays with the Dunlop golf clubs that I got from all my badgering ane the taste of those stamps that I neatly aligned on each page (never cheating) still tingles my tongue.

Enough of nostalgia –  what of the future?

There’s plenty to learn from Green shield stamp books.

  1. They were tangible. Pensions aren’t tangible but savings tokens can be. We don’t need Chilean style savings books but a monthly text telling me how my savings are going would serve the purpose better. Like the stamp books (pictured), I want something to focus on!
  2. They offered certainty. The deal was simple and immutable. The targets were definite and the means of achieving them in my hands.
  3. They delivered. We may not have needed the pressure cookers, garden hoses and rubbish jewelry but we got them without snags!

 

If we could make pensions savings as simple as collecting Green Shield Stamps and the annuity purchasing decision as simple as handing over the books and collecting the goods, we would not be in the state we are in today!

If we could get the British public as enthusiastic about pensions as the vouchers we collect from moneysavingexpert and other parts of the net we would not be in the state was are in today.

What brings my memory of Green SHield Stamps back to me with that warm glow? Because saving green shield stamps was fun.

Now there’s a challenge for the Pension Industry……….. Maybe the Pension Play Pen can help!

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6 Comments
by henry tapper on October 7, 2011  •  Permalink
Posted in customer service, de-risking, NEST, Retirement, social media
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Posted by henry tapper on October 7, 2011

http://henrytapper.com/2011/10/07/green-shield-stamps-how-to-buy-a-pension/

NEST LIVE “Their hands in our pockets”

With this phrase Tim Jones, NEST’s CEO and presiding genius thanked his six principal suppliers for funding the drinks reception that concluded proceedings at NEST’s big bash. Freudian slip, deliberate tease or simply a slip of the tongue it initiated unmuted hilarity from his audience.

The elephant in the very fine room in which the great and the good had once again gathered was  and is the £200m odd drawdown on NEST’s £600m loan from the DWP. Everything that NEST displays by way of plugging its “public service obligation” needs to be tested against the debt it has created on public finances. “Their hands in our pockets” indeed.

This was in fact the Tim Jones show; from the moment he announced to gasps of disappointment from his female staff that “after teasing us all summer he intended to come out this autumn” through the delayed arrival of Lord Turner (who was accidentally attending a Harley Davidson convention next door) to the banshee cry he uttered to summon us back to the hall (forsaking our cupcakes), Tim was star of the show, He even brandished an IPAD to demonstrate icons that said NEST.

The IPAD was about as good as it got. NEST has quite embraced the new communication technologies. I found myself explaining twitter to one of its top execs, clearly she hadn’t thought of the event as online and it’s worth conference organisers recognising that situating a conference in a hotel’s basement, precludes tweeting. The sight of irate journalists with no 3G signal for their handhelds was only too clear.

NEST have a lot to do to fully embrace new communications and I was not convinced that the information available on handhelds will be the information people really need, When NEST can promise us personal account values on the phone, I’ll be impressed.

Moving back to the conference, the two key speakers Lord Turner and Steve Webb had their moments. It wasn’t quite the world-wide Steve Webb, we were only 400 yards from the house and this looked one of his less “key” speeches but he acquitted himself alright. The journos all wanted to quiz him on Beechcroft’s recommendation to delay auto-enrolment as part of his red-tape cutting exercise. Stevie was having none of that.

Turner was scathing about private sector pension coverage calling it a “myth”. This kind of thing goes down rather better at an event where most employers are looking for a pension than at an NAPF Conference where most employers are struggling to survive the weight of pensions debt they have taken on. The reality is that the private sector is riven by a divide between companies who cared about their employees’ retirement welfare and those that didn’t. He didn’t quite say that, presumably because the room was full of the latter.

We did hear from some employers. You could tell they were real employers because they mainly came from Teeside, a point of the English Empire as yet untouched by pension consultants. Or so I thought till I discovered that the delightful actuary sitting beside me was from Stockton upon Tees. All the employers spoke with strong Northern Accents about how NEST was changing their lives. This was surprising as NEST has only been going a couple of months but who am I to say southern softy as I am. Bill Dennison of F2 Chemicals revealed himself in the audience is he the acceptable face of NEST’s customer base – sure looked like it.

To be honest I cannot really say my understanding of auto-enrolment was seriously enhanced. The panel of consultants , neatly suited , very male and arranged on “crooning stools” appeared like a middle aged JLS. They were all delighted that NEST was still around and demonstrated suitable gravitas till finally being outed as the pseudo boy band they resembled, The various case studies from Pizza Express, Sodexo The Spirit Group and Travelodge demonstrated that none of these organisation have made up their mind how they were likely to proceed indeed the opinion from those sitting near me was they looked as far from understanding what was going on as we were.

Apparently NEST are sharing their eggs with that notable cuckoo Aviva which has agreed to provide a top-up scheme for those in a NEST pension with a wish or a contractual right to have more than £4,800 pa in contributions. It will be interesting to see how many of NESTcorp’s own employees fall into this category.

Perhaps the biggest disappointment was the absence of any comment about decumulation. If there was a baby elephant in the room, it was the fate of the 40,000 people a month cashing in their pension savings and buying pensions. We saw signs of NEST’s annuity providers but clearly this was not the time or place to discuss the biggest pension issue facing the UK general public today.

So there we have it, two hours of endorsements from consultants, Lords, ministers, large employers and customers. Demonstrations of the various IT interfaces in development (employer journeys to you and me) and a big piss-up at the end that I missed.

To return to my beginning, this was the Tim Jones show. Without Tim NEST Live would have been pretty ropey - with him, it worked. But with only 100 employers on the stocks and a business model that relies on picking up the scraps from the rich men’s tables, I remain to be convinced that NEST has really changed anything. If you want to see an example of the PR Puffs on which NEST’s reputation is being pinned, try this.

Towards the end, a shadowy figure slipped through the conference-room  door…..Morten Nilson on NOW Pensions. Tim Jones noted his arrival – so did we.

Britain's greyest boy band!

NESTLIFE launch

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5 Comments
by henry tapper on October 12, 2011  •  Permalink
Posted in annuity, corporate governance, customer service, dc pensions, Martin Lewis, NEST, OECD, pension playpen, twitter
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Posted by henry tapper on October 12, 2011

http://henrytapper.com/2011/10/12/nest-live-their-hands-in-our-pockets/

DC Risk sharing aux etats de Jersey

États de Jersey and arms on the original termi...

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A year ago I wrote of the NAPF 2010 gig as our train departed Lime Street. I’m writing as my train pulls out of Piccadilly-Joanne may be aboard. I hope she’s not bought another first class ticket as this train has been declassified and she’s not going to get that vacant seat anytime before Euston.

 Looking at the photo I took that afternoon (above), I’m reminded f just what a spectacular conference her organisation pulls off year in year out.

This year I and my colleagues decided we could not justify the impact of the cost of attendance on client fees . Nonetheless a few of us were in Manchester and the feedback I get from delegates ( by twitter and everyday conversation) is that this was every bit as good as last year’s. I hope our clients are grateful!

A recurring theme appears to have been a new focus on the plight of the DC annuitant. It was great to hear that there were questions in many sessions about why the OMO wasn’t better used, worries about impaired annuities but best of all Stevie Webb Webb Webb made an unequivocal statement that he would be investigating risk-sharing to provide more certain DC outcomes.

Jo took this to mean a smoother investment track (the holy grail of the diversifiers) but Steve seemed to be thinking more radically. He has Holland on his mind …and the efficiencies of collective decumulation where retirees create a mutual fund of their own.

Talking about this this morning with Derek Benfield, possibly the person who has thought more about this than any person on the planet, we strayed into an area where hidden  elephants abound. He looked at me as he does and stated placidly.

I would be interested in asking a serious pension lawyer  whether an actuary can unilaterally and universally reduce a scheme pension in payment.

Such a simple idea that it took me a few moments to grasp it. What Derek is asking is whether the person responsible for the solvency of people’s pensions can, when he thinks it sensible,cut the year on year pension – just like that.

It’s something of a sacred cow among pension people that in terms of pension payments, what goes up can’t come down and the majority of pension schemes have it written into their rules that pensions are guaranteed in this way.

But Derek’s question goes beyond this legal nicety, he’s saying supposing I set up a defined benefit pension today with no rules, could I give myself the right to give people a pension pay cut from time to time. He doesn’t know – I don’t know but if you could – how cool could that be?

I’ve always seen the most sensible pension scheme in the UK as that run by the people of Jersey for their public servants. As just about everyone in Jersey works for the “States” at some point in their lives and to be a “crapaud” (Jerseyman) means giving up your life to live on the rock of the south, it’s fair to say that the States pension is Jersey’s pension. A few years ago the pension found itself in severe deficit and for this generation of Crapauds to guarantee the next generation of Crapauds that their money wouldn’t run out would have meant a hike in corporate contributions to over 20% of payroll. This would have imperilled the tax privileges of the uber-rich which is the only reason anyone would want to go and work there in the first place.

So the States decided to convert their scheme to DC. Not the DC that you and I know but a form of collective DC that works like this. The States stick at a 16% contribution for their staff for the next 84 years (the notional period a clever actuary predicts it will take to recover solvency!!!). Meanwhile the States continues to pay out full pensions in line with the Defined Benefit Promise (regardless of the day to day solvency of the Scheme). If the money runs short, a decision will be taken on who won’t get the full promise but that decision will be taken by everyone in the Scheme – in other words all the Crapauds.

What Derick’s saying is that the Scheme Actuary of a scheme like the States of Jersey could take it upon himself to set the pension for each year on the basis of what was affordable and cut out any bickering between the differing groups,

This has profound implications for the way that scheme pensions are governed. It’s well worth Stevie taking the Flybe to Jersey and not to Amsterdam. The Dutch are screwing up a perfectly sensible pension system as they become more and more hung up on the guarantees. Each time they try to reinforce the guarantees they make their schemes more complicated. Eventually they will become so complicated that they will all close down like the ones in mainland UK.

This really brings me to the la Grande Dame of collective insurance -Con Keating who, were he reading this, would point out that the only effective guarantee is that you’ll treat each other fairly (the Jersey way). If you accept this then your only worthwhile investment is in ensuring that the guarantee is maintained. In the corporate world this means insuring against the organisation paying the pension going bust. In Jersey I guess it means that everyone pensioners, former employees and current members has an active interest in the management of the scheme – all have much to lose even if the pension scheme ahs been immunised from bankrupting the taxpayer.

I guess where this is leading is towards a new way of looking at pensions and it probably leans more towards’ Con’s vision than to the system of individual annuitisation that is being exposed as entirely inadequate for the mass-market.

For every guarantee there is a risk and without guarantees there is differing risk. Ultimately we need people with level heads like Derek Benstead to assess the liabilities, look at the risks and direct us to take sensible decisions. After a couple of years working for First Actuarial- I’m beginning to get it!

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12 Comments
by henry tapper on October 21, 2011  •  Permalink
Posted in annuity, EU Solvency II, mallowstreet, pension playpen, Retirement, Salford Quays, Treasury
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Posted by henry tapper on October 21, 2011

http://henrytapper.com/2011/10/21/dc-risk-sharing-aux-etats-de-jerse/

Now Pensions – Danegeld ,fools gold or a new beginning?

We are a nation with long memories. The arrival of ATP who run the Danish workplace savings system in the UK under cover of “Now Pensions” prompted @robertjgardner to tweet “the vikings are coming”.

Another day, another pensions launch – Now Pensions unveiled their master trust in a relatively low-key fashion. Without a bell or whistle in sight, Morten Nillson outlined the philosophy and modus operandi Now will provide

  • Unconditional acceptance of applications from any employer ready to use Now’s digital interfaces (payroll -member communications etc)
  • Unbundled charging structure 0.3%pa  on your assets as an investment fee , £1.50pm to cover administration
  • Life Cover option
  • No negotiation on charges
  • Will take transfers in and give transfers out
  • Single investment fund with growth assets in a Diversified Growth Fund with low equity exposure (rumoured to be c5% currently)
  • Lifestyling into a cash and annuity protection fund with the option to accelerate or decelerate lifestyling (but no option to revert to growth)
  • Administration from Xafinity using a simplified version of Compendia.
  • Assistance with identifying relevent jobholders (though this appears to be at an extra cost)
  • Mastertrust in place and advisory board present and correct
  • Open for business from January 1st

Detail is skimpy, there were no takeaways and no press releases. The Q & A were conducted with the Advisory Board  who included John Monks (lately of the TUC, Chris Daykin (lately the Government Actuary) Nigel Waterson (Tory Grandee) Imelda Walsh (of WRIC fame) Lars Rohde (investment guru) and very expertly compared by Sarah Pennells (@savvywoman).

Clearly the Monks/Waterson pairing is designed to provide political balance and there was a strong political undercurrent in the room with Lawrence Churchill and Tim Jones prominent in the audience. Michael Johnson of the awkward squad asked what would be the political implications if ATP outnested NEST and became the go to pension for the majority of employers. The question might better have been directed at the DWP who must have been squirming in their seats as the bill for NEST passes £300m.

Certainly the epithet “the pension NEST wanted to be” sits easily on Now’s shoulders. Without the contribution constraints and the restriction on transfers that shackle NEST, many advisers will find NOW a considerably more flexible than it’s more illustrious sibling.

The Federation of Small Businesses were concerned that many of their members were not internet literate and would not be able to manage the digital interfaces. I hope that Now keep up their tough stance, small businesses that cannot transact using the web are fewer than they were and will by the latter stages of auto-enrolment be looking distinctly archaic. We cannot allow them to dictate the rate of progress for the majority of businesses that have embraced new technology.

Legal and General via the omnipresent and omnicognescent Adrian Boulding asked the panel to discuss the question of decumulation to which there were no new answers. While Now uses collective clout on the way up, it is (like NEST) not providing collective decumulation solutions – yet. Let’s hope in the meantime that they are talking to the better end of the annuity broking market so we get good quality at retirement decision bolstering good quality pension accumulation.

An interesting question came in on pension accumulation. Morten’s response was to point at ATP’s Danish experience which implies that small Danish DC pots are few and far between. As Stephen Nicholls of the Pension Trust pointed out after the session, if ATP have £73bn under management and 4.7m members, then the average DC pot in Denmark is only £1500. If that experience is repeated here then the £18pa administration charge is going to take the total Now charge to an average over 1% pa. As ATP have been at it in Denmark for 45 years, let’s hope that Steve Webb’s small pot to big pot consolidation initiative is a little more effective.

The unsaid question elephantising the room was who would sell Now. My mind went back to the ill-fated magazine of James Goldsmith which for all its glossiness, sat on the newsstands for a year before being withdrawn to the general derision of Private Eye. It would be a shame indeed if NowII  suffered a similar fate.

For Now to succeed , there is going to need to be a new trend of direct purchasing from employers or an increase in the number of genuinely independent advisers prepared to recommend a pension scheme that pays no commission or any other form of financial inducement and – unlike NEST- does not have a state seal of approval.

The question posed in the title of this blog is relevent. ATP should be wary of sitting on its reputation in Denmark and with the pension literati. 200 people enjoying Carlsberg and canapes in a posh hall in Westminster may look like success but it’s a very different world in Telford, Rochdale, Lees and Abergavenny (where I have pension meetings next week). For ATP to reach anything like the volumes of business it anticipates , I suspect that it will need to address the distribution question and quick.

I like the look of Now Pensions and I like the team of people they have assembled in the UK. Philosophically they seem to be in the right place but they need to accept that the UK is still and will remain an intermediated market and they will need to work hard to use and develop the advisory infrastructure if they are to achieve their ambitions. The sooner they can publish the detail the better.

2 Comments
by henry tapper on November 1, 2011  •  Permalink
Posted in annuity, corporate governance, customer service, dc pensions, de-risking, mallowstreet, NEST, pension playpen, pensions, Personal Accounts, Retirement
Tagged , , , , , , , , ,

Posted by henry tapper on November 1, 2011

http://henrytapper.com/2011/11/01/now-pensions-danegeld-fools-gold-or-a-new-beginning/

DWP – Do some Work for your Pensions.

It’s been a week of protests, bewildered Greeks, campers on the steps of St Pauls, a strike ballot on public sector pensions.

Direct action is seldom harmless, its victims are all too often the vulnerable in society for whom protestors seek protection.

For that reason, the majority of us will seek to use “the usual channels” to achieve change, trusting the system’s capacity to listen and understand.

We’d reckon that beat camping on the steps of St Pauls.

But what happens when the usual channels are blocked?  Here’s the testimony of Terence O’Halloran.

I spent 31 years as a volunteer endeavouring to liaise with the DWP and its predecessor organisation DSS. From 1997 onward the level of knowledge in their representation went down and their political bias went up. All through the Stakeholder consultations, and I use the word advisedly, they pursued their own agenda and shunned genuine concerns and comments from practitioners and HR departments in the submissions discussed.

O’Halloran & Co hosted groups of DWP senior managers, at their request and our cost in order to bring them up to speed on private pensions. They abused our time and effort.

In 2003 I was attending one of eight (as we later found out) meetings of specialists (all volunteers) to discuss pensions. When I asked a question regarding state pensions I was informed that the subject was not on the agenda.

I called a halt to my attendance at that point and subsequently resigned as the national pensions spokesman for the Federation of Small Business, a position that I had held for 31 years.

These are politicised, wet behind the ears, representatives of no one but themselves and their prescribed theories.

Gordon Brown went out of his way to populate the Treasury, HMRC and DWP with Government can do it better activists and what you are now witnessing is the fruit of his labour.

IFAs are anathema because they really do care about their clients’ welfare and argue their corner. Supplication always finds favour with government officials; we simply do not bend to fit that mould.

The context a thread of comments from an article on Citywire reporting Alan Higham’s outrage at obstruction from the DWP as reported  by Will Robbins.

Adviser Alan Higham has hit out at the Department for Work and Pensions (DWP), claiming it revealed its opposition to paid-for financial advice on annuities in an email he received from the government department.

Higham, founder of specialist adviser Retirement Angels, said he noticed the line from a DWP official in an email exchange about his proposal for a shopping around and pension transfer code of practice.

The email, apparently unintended for Higham, stated: ‘My team were following up on the earlier email as although we didn’t like the proposed solution which drives people to seek paid for advice, we thought there was merit in talking to him about when information should be provided regarding changes in schemes.’

Higham said it was a ‘disgrace’ and asked the DWP for an explanation but said he had not received a satisfactory answer.

‘They do not like the idea of people seeking advice at retirement. I have asked them why and they do not want to engage further on the subject. Why is there not more transparency on the issue?’

A DWP spokesman said: ‘We want to encourage people to shop around for the best shape and rate of annuity for them. We have no concerns about people taking paid for advice, however, making it compulsory isn’t the only way to get people to shop around. The OMO review group is considering a range of measures to do just that.’

He said the DWP were also ignorant of moves by the Financial Services Authority to reform advice.

Independent pensions expert Ros Altmann said the DWP had always been wary of IFAs.

‘That has always been their position. They do not trust IFAs and they do not regard annuities as risky products. I have spoken to them about this and they do not want to know,’ she said.

‘For some people annuities are the highest risk product there can be because of inflation. They [the DWP] do not think it’s a problem or they think advice is not worth paying for. The DWP is beholden to the insurer and banking lobby.’

There are 40,000 people buying annuities every month, the majority are buying unadvisedly at a time when DC pension pots are depressed and annuity rates on the floor. They need advice like a patient needs a doctor, like a house purchaser needs a solicitor.

To suggest that “a solution that drives people to take paid advice” should be buried is not open Government. When people like Alan Higham and Terence O’Halloran voluntarily give up their time to provide the DWP with ideas, we as tax-payers should be grateful and DWP mandarins should be shames when they “punch the gift-horse in the mouth”.

When fine upstanding members of our community get pushed back in this way, it devalues the legitimate processes of Government and legitimises the alternative means of protest – camping on the steps of St Pauls.

The gap between the public and private sectors is likely to widen during November as we prepare ourselves for November 30th and the first public sector pension strike, the irony is lost on no-one that the one sector of society that do not need to worry about annuities are the public sector workers who have their pensions paid for by the taxpayer.

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by henry tapper on November 5, 2011  •  Permalink
Posted in annuity, Church of England, dc pensions, de-risking, Facebook, Martin Lewis, pension playpen, pensions, Retirement
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Posted by henry tapper on November 5, 2011

http://henrytapper.com/2011/11/05/dwp-do-some-work-for-your-pensions/

Fifty not out – to Choggia and beyond

To those who consider 50 a distant memory, I salute your sagacity, for those for whom 50 is a way away, I applaud your vivacity but from where I am sitting, overlooking the Rialto Bridge on a crisp November morning with a rich Italian coffee and a beautiful English rose by my side, I wish everyone my happiness!

The business of congratulating someone for reaching a certain age may seem to you a little odd. The industry that surrounds ageing creams, health and fitness spas and the cult of youth has put a downer on the proper business of growing up.

Now that I am 50, I will do what all good batsmen do, raise my bat, take the plaudits of the crowd (such as it is) and get my head down for the next fifty.

In the meantime, here is a risky limerick devised on our epic journey across the Lido .

I once had a lodger from Choggia

Who wed an codger called Roger

When I asked her why

She made this reply

“It’s down to his wonderful todger“.

Choggia, as well as being a wonderful rhyme, is where Pepin, Charlemagne‘s son, ran aground with his Genoese fleet on his way to sack Venice. It is worth a visit and I’m grateful to Mr Andrew Young for his recommendation.

Getting across the Lido involves a combination of walking, boating and bussing. Below is a visual record of Stella and my journey to Choggia and beyond.

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by henry tapper on November 11, 2011  •  Permalink
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Posted by henry tapper on November 11, 2011

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Pension power! Is your employer doing enough?

Most people who read articles about pensions earn their living from pensions – managing the benefits or the investments, setting the things up or closing the things down.

Most of the people who benefit from pensions do not (sadly) read this blog. Although those of us in the pensions industry talk about “engagement” with pensions, typically we want the participants in our plans to engage with their pensions on our terms. We don not want people writing in to us telling us we have done a rubbish job at protecting them from the stock market upheavals. Nor do we want them phoning up to complain that they are getting half of what they were expecting based on historic projections. Nor do we want them questioning why one of their mates got a better annuity deal than they did by shopping around.

Those kind of behaviours are not what we want at all.

So what happens if you run a pension scheme for thousands of people and you need to make changes. Recently, one FTSE 100 company managed to make important changes to their largest scheme by getting over 98% of their total workforce to vote for change. They achieved this by getting all the affected staff in meetings and encouraging them to say what they really thought.

Then they wrote down all the questions (verbatim) and produced a massive document. Every question was answered and the answers circulated as a true and honest account of what had been asked and what the company’s response had been.

The unions that represented the staff called the company’s behaviour exemplary, instead of calling the members out on strike, staff are being encouraged to think of their employer as responsible , responsive and reasonable.

In this case the employer and the unions deserve much praise, but most praise goes to the members who bothered to turn up to the meetings, to ask questions, to read the answers, to vote and to continue to press for information that will enable them to plan to make sure they get the pension they hoped for. This will involve them having to sacrifice some immediate income for a better income later on.

The Pension Regulator published last year a document listing six things a company could do (either directly or via its pension trustees)  to improve the pensions their staff got. Some are obvious pay more in… others less obvious;- reduce charges, improve at retirement decision making and make sure people make sensible investment decisions.

The Regulator’s emphasis is on the company and the trustees to do this for staff. The Regulator doesn’t talk much to staff themselves. Public awareness of what makes for a good pension is woefully low as I’ve found out through some work I’m doing with the owners of what are now being called micro-employers (small businesses as were).

However public awareness that there is a difference between a good and bad pension is pretty well universal. It’s “outcomes driven” as the Regulator would say. Put in the language of everyday people a good pension is a pension that pays a decent income in line with what is expected and a bad one is the other way round.

Given that people know that pensions matter and that the way the pension is set up decides the quality of pension received, it’s sad that not more pressure is being put on employers and trustees to make sure the pension plan set up for them, is doing its stuff.

The experience of the company I mentioned earlier in this article suggests that if an employer really does want a free and frank discussion with its staff, staff will respond. The lesson I’ve learned by being tangentially involved in that consultation is that employers can create the conditions for engagement but to ignite the debate there needs to be more. In this case there was strong leadership , principally from the unions but there was also a strong grapevine between employees who were organised and able to work things out between themselves using new technology such as electronic forums.

Perhaps we’ve missed an important change in the way that organisations talk within themselves. The old top-down strategies where information was delivered from on high through “desk-drops” and employee mailings is yesterday’s news. The news is that employees chose to talk with each other, compare notes and take collective decisions on things as varied as the Christmas lunch to their reactions to pay rises.

Employers who try to control this process really are on a hiding to nothing. Ultimately these social networks are the new unions and those who chose to moderate and deliver the feedback are the union leaders of tomorrow. The wisdom of the crowd is not something that CEO’s can mange through Human Resource and PR departments. Turn that round, PR and HR departments will increasingly need to tap into the new networks however they might develop.

Pension people like myself have to adapt to the changes and accept that we need to present ourselves to these new networks as trusted experts and to win their recognition on their terms not because we have some job title.

Would you be comfortable to set up a Facebook page for your staff to comment on your company‘s pension arrangements, or a linked-in group? Would you be comfortable enough to ask your staff how they’d like to talk with you and with what level of anonymity? Judging by what I’ve seen recently – perhaps you should.

 

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by henry tapper on November 16, 2011  •  Permalink
Posted in annuity, corporate governance, customer service, dc pensions, Facebook, mallowstreet, pension playpen, pensions, Retirement, social media, twitter
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Posted by henry tapper on November 16, 2011

http://henrytapper.com/2011/11/16/pension-power-is-your-employer-doing-enough/

Sacred cows at the abattoir

Sometimes someone challenges a “received” idea in a way that quite unsettles your equilibrium. That’s what happened when Debora Price spoke with a group of us at the Pensions Network meeting yesterday.

Our “received ideas”?

  1. The Government’s Financial Capability Agenda
  2. Housing Equity

A brief synopsis of Debora’s big idea.

Government uses language to dictate the agenda and governments are very powerful. Over the past thirty years our Government Agenda has promoted the capability of everyday people to understand the ways of financial markets so that we can be self-sufficient in retirement.

Unfortunately we have failed up to Government’s expectations and most of us are not self-sufficient in retirement. In fact we look as if we will be as dependent on other generations as any other generation. Recognising we have screwed up in saving our way to self-sufficiency, the Government is now reverting to Plan B which involves unlocking the equity in the UK private housing stock to get us back on track.

Unfortunately for Government, people like you and I do not like the idea of “equity release” where we sell our houses to financial institutions to have enough money to pay for the long-term care we will need when we become incapable of looking after ourselves.

In fact the language that the Government uses and the language we use to talk about the twilight years of our lives are characterised by reticence and embarrassment. Debora talks not just about the third age - that happy vision of those in the early stage of retirement enjoying lengthy cruises but also of the fourth age “a dark place” spent in nursing homes “wasting” our accumulated housing equity , unfit to live or die.

In her 45 minute talk, Debora led us to an abattoir of sacred cows where we saw , strung up on meat hooks . our most cherished hopes.

  • Our houses, statements of our self-worth, pawned to bankers
  • Our inheritance, not cascading down generations, but dissipated on bedpans and colostomy bags
  • No dignity in death but a shambolic descent into a dark world on non-being

Was it for this that Thatcher’s children sold their birthright? For this that we abandoned the collective values of  Beveridge for the brave new world of personal pensions? For this that we sold our collectively held housing stock at a deep discount? For this that we slaved at the altar of capitalism?

Debora Price is an extraordinary woman. She is not strident, she is good humoured. She does not do the Ros Altmann glamour puss nor the Nicola Horlick supermum, she’s just an ordinary girl whose brain turns over at 17,000 RPM.

As we filed out to lunch , my colleagues had that defeated look you get when having thought you’d got a big contract in the bag, you are told that you hadn’t even made the shortlist.

This morning I hear an obituary for Basil D’Oliviera. His family had warned off his friends and former colleagues from visiting him in his later years, for fear that he would not recognise them in his nursing home bed.

We do not cherish or love old people it seems, we cherish and love the memory of how we want them to be remembered.

In this we seem to be as delusional as we have been in believing that we could trust ourselves and savings institutions to finance our retirements. As delusional as trusting that our value was in the promise of the gift of our house. As delusional as believing that we were not going not to glory but to the degradation of the nursing home.

In Brick and Mortar we have put our trust. We must now re-learn the old adage “you can’t buy a sausage with a brick”.

 You can follow Debora @gerontologyuk

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by henry tapper on November 19, 2011  •  Permalink
Posted in annuity, corporate governance, customer service, dc pensions, Fiduciary Management, NEST, OECD, pension playpen, Retirement
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Posted by henry tapper on November 19, 2011

http://henrytapper.com/2011/11/19/sacred-cows-at-the-abattoir/

Meaningless choice

“Choice good… no choice bad” – unless you’re a utility company offering a plethora of tariffs in which case – “too much choice… bad”.

Choice - good for mums wanting childbirth options….bad for the new breed of pension saver who’ll be given a default option or in the case of NOW Pensions -no choice at all.

Investment choice, like tariff choice - can be overcooked.

Confused? You now have the choice not to read on, or the choice to concentrate!

In this (long) piece, I talk through how we ever got to thinking that getting everyone to make regular sophisticated choices about investments and savings was a “good thing”.

I conclude that we let ourselves get sidetracked by idealogues who have valued the choice of outcomes above the quality of outcomes.

People do not need to make investment choices to have a happy retirement. It is strange how this seems a “new idea”.

How can something so obvious seem radical?

How can we have moved so far from common sense for common sense to seem a new idea?

We have become victims of a dodgy teleology (look it up!).

The history of western thought is plotted by free-thinkers who redefined how we see things;- Copernicus and Galileo, Wittgenstein and Einstein, Darwin and Newton. The challenge of a genuinely new idea on “how things are” is generally met with brutal rejection from those who guard the status quo.

The words that we use to label such notions – “heresy”, “sedition” and  ”blasphemy” assume a world order from which deviation is evil. The moral and religious language that supports orthodoxy has faded in the past fifty years. We have moved from absolute certainties to localised belief systems -”Western Democracy” is one example of a phrase which is a short cut for a belief system. Another such shortcut is “Financial Capability” which defines the capacity of people to take sensible decisions about their financial welfare.

When I worked for Eagle Star, I and a colleague responded to a Government consultation on stakeholders by pointing to research by the late lamented John Shuttleworth. This demonstrated that stakeholder plans couldn’t even aspire to the efficiency of State Pensions (and hinted that a revamp of SERPS would be a better solution than an extension of personal pensions).

Barbara Castle, who told me she read every word we had written, went on record in the Upper House to quote our words, praising Eagle Star for putting common sense before ideology.

For this we were soundly reprimanded and told that our views were not only non-commercial but also  “anti-social”!

Those who challenge a State supported belief system shouldn’t expect any less. The labour party marginalised Barbara Castle and in doing so demonstrated how deeply  Financial Capability has influenced mainstream political thinking.

Financial Capability is a concept that supposes a degree of collective financial literacy.

Financially capable groups of people will take rational decisions individually.

 Individual decision making is good not just because it empowers the individual but because it absolves the group from blame if the outcome is not good.

In this world order, there are no risky outcomes as even bad outcomes are properly chosen and result from the Financial Capability the Group has assumed  its participants possess.

If you notice a certain circularity to this logic, do not be surprised! It’s part and parcel of the teleological approach.

The other way of taking decisions works the other way round – and it  has a much longer pedigree.

Some call it Fiduciary Management , some call it “trustee” or “collective” governance. It is an approach to financial decision making which depends on those with the greatest expertise and sense of leadership volunteering to take decisions for the Group.

We know this system best as the way that organisations have chosen to organise our retirement planning over the past 60 years. In fact Trust Law goes back to the start of the Anglo-Saxon legal system.

There have been various attempts of late to marry the big idea of Financial Capability and the established system of trust based decision making. We see it at work in the management of occupational defined contribution pension schemes.

A hybrid approach  is for the  trustees to organise  the financial products used to get people a healthy replacement income in retirement but for individuals to select which of the products they use through the carious stages of their working life cycle.

The trust-based occupational DC scheme is in fact the mutton of Financial Capability dressed as the lamb of collective decision making. It is small wonder that this bastard son of trust law consistently produces even worse outcomes than the contract based “personal pension”.

People just don’t seem to want to play ball and take the right choices!

The obstinate failure of people to play their part in the process is a source of great confusion and frustration to those pursuing the Financial Capability agenda. Nowhere is this frustration greater than with default strategies.

There is nothing that so peeves  evangelists for Financial Capability than when,with every conceivable fund choice on the table , they see 95% of a group of people taking no choice and relying on a default option.

You hear various arguments put up to abolish default positions and make sure people take their own decisions. On the one hand, there are those wishing to protect an organisation from litigation who argue that default positions suggest that advice has been given and choice suppressed; they argue that the default represents a risk to the management of the group because they could be seen as acting in a fiduciary way - delivering a definitive course of action.

On the other hand we hear the argument that “no decision equals no engagement”. “Without engagement”, the argument runs -  ”those within a sponsored arrangement cannot value it”.

Some consultants have gone as far as suggesting that the measure of the success of a defined contribution scheme is the extent to which people vary from the mean solution - the default. The wider the scatter plot of differing decisions, it is argued, the greater the degree of engagement.

To my mind, both these arguments lack common sense. Common sense tells us that we will  take a personal decision on something only  if firstly we feel qualified to do so and secondly we are comfortable that we can live with the worst outcome from that decision – (hence the question “what’s the worst that could happen”).

If we don’t have answers to those questions, common sense tells us not to take any decision.

But even if we are capable of taking a decision and reckon that we could live with its consequences, we don’t feel any great incentive to do so - provided there is an expert out there who we feel we can rely on. There is a huge appetite among us all to rely on experts whether financial or spiritual or whatever. We are happy to follow their recipes, tips, strategies and creeds.

It’s not surprising, we are not infinitely capable and most of us prioritize other capabilities than “Financial Capability”. Indeed, thought of like this, it’s hard to understand why we ever thought that people would want to thoroughly understand all the hundreds of fund choices presented to them in most personal pensions let alone the “bells and whistles” that surround product design. The imposition of meaningless choice, referred to by Todd Rupert as “the wish to make us all our own CIO” is one of the great failings of th Financial Capability agenda.

In practice, most of us are willing and capable to engage with financial matters only not all the time. This is clear from the studies of internet usage to use information to do with a DC pension account. Activity tends to surround certain events the start of the investment, life changes - changing jobs or occasional financial reviews and the point when retirement is met and accumulation turns to spending. hardly anyone, it would seem, has the wish to check the progress of an investment over the timeframes of a retirement plan on a more regular basis.

However, those who have selected their own investment strategies , rather than exercising the default, have more or less committed to reviewing those strategies. Since the default strategy is a hands-off approach, “self selected” strategies ae by definition “hands on”. What is deeply problematic is that the majority of self-selected strategies become hands off strategies because they are never reviewed.

This is why we hear from annuity brokers that the vast proportion of funds to purchase annuities today are the funds that members started out with - equity based funds sold as appropriate for long-term investment, but entirely inappropriate to the years preceding annuity purchase.

The disastrous state of affairs for those annuitising today is that they have shot funds (because of the equity markets) and no annuity purchasing power (because of quantitive easing). By comparison, those retiring from lifestyled defaults are enjoying strong performance from their long-dated gilt fund and no exposure to falling equity markets. At this moment, default strategies are doing their job and the Financial Capability of the self-selected is being found wanted.

So there we have it. One portion of the “financially incapable” slope off throw in the towell and abandon themelves to the mercy of the tax-payer.

A second group keep the faith but fail to manage their affairs, ending up disillusioned by rubbish results.

And there’s a final group, the professional complainers who make up the bulk of the Equitable Life Action Group and many class actions beside. These have learned to play the system. Claiming to be Financially Capable, they play the game - reap the rewards if success comes their way and litigate if things go against them, They have learned just how rotten the system has become and learned how to exploit it.

There will of course be winners, we see them smiling at us from the covers of the insurance policy brochures. Doubtless they live in a parallel universe where the sun always shines, suits are freshly pressed and markets behave rationally!

If you’ve followed this tortuous argument from the beginning, you’ll recognise that I am heretical, blasphemous and seditious. It’s taken me a long-time to work out why I think this way and it wasn’t till my Road to Damascus moment with Debora Price last Friday that I fully understood my own position.

Now I have my terms of reference in the right place and my moral and financial compass properly aligned, I’ll stop gabbing clichés and say it straight

“choices should only be offered where they are meaningful, timely and can be taken in the full understanding of both up and downside”.

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by henry tapper on November 25, 2011  •  Permalink
Posted in annuity, corporate governance, customer service, de-risking, Fiduciary Management, Liability Driven Investment, NEST, Retail Distribution Review, Retirement
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Posted by henry tapper on November 25, 2011

http://henrytapper.com/2011/11/25/meaningless-choice/

A necessary strike

If there’s one area of consensus among the politicians this morning, it’s that the national pensions strike called for today (30th November) is unnecessary and something this country can ill afford. I disagree – this is a necessary strike, not because the unions are right, or the Government is right but because we need to get out of the trenches of ignorance and have a proper debate in no mans land.

If it costs £500m to engage the nation then so be it- it may cost £15 per tax payer today but if it helps us to get our act together tomorrow that’s a small price to pay.

Good arguments are presented on both sides; if you want to hear an argument from a private sector trustee in solidarity with the public sector pensions, then read Paddy Briggs’ piece.

If you want to hear the argument of a private sector pension advisor pointing out how lucky the public sector are with their pensions, read Mark Polson’s  piece.

If you want to see how the private sector could re-engage its employees in the new type of DC pensions, read Jenny Davidson’s  piece.

If you read my blog, you will know that I have sympathy for those who argue that defined benefit plans are affordable if only we were to give them a chance and I have sympathy for those who have followed Corin Taylor in pointing to the pensions apartheid - the have’s of the public sector, the have not’s – the rest of us. You’ll also have read about Debora Price’s research on the shortfall between the presumed financial capability of the general public and the financial incompetence with which most people display.

We need to give pensions more attention- more particularly the way we organise our retirements in a fair but sustainable way. We cannot point to the past to answer tomorrow’s problems.

The world is still the same as it was 50 years ago - it has not spun off its axis, the seasons still follow each other etc. However, the demographics of Western Europe, of which we are apart have changed radically. We are effectively ten years younger than we would have been in the 1950s. We can expect 65 year olds to behave like 55 year olds (if our expectation of 55 year olds is based on the 55 year olds of yesteryear). Yesterday I discovered I would have to wait till 67 to draw my old age pension, five years ago, I expected to be retiring at 65. These changes are not exclusive to people in the private sector the demographics effect all of us!

It would be great to think that the nation’s wealth had grown sufficiently to have enabled us to afford the extra years of life that we have been granted by better lifestyles. Unfortunately, it has not. That lesson needs to be learned.

Mark Polson points out that to get a pension of 2/3 the average wage costs way over £500,000 – a sum way beyond the dreams of most in the private sector who rely on poorly funded DC plans. For us today is a timely reminder that we either need to get ourselves a Plan B -(house, lottery, criminal plot) or reprioritise how we spend our money so that £500,000 becomes attainable.

Paddy Briggs reminds us that by forsaking the mega mutual defined benefit plans established for employees in large companies, in small companies (where they clubbed together) and in the public sector, we are losing the most efficient way of delivering dignity in retirement that this country has ever had.

Jenny Davidson argues that the new agenda for employers who have given up on funding proper retirements is to teach employees how to do it for themselves.

Today could be a massive wake up call for the citizens of the UK. A day to consider just how we intend to support ourselves in retirement and how we intend our children to do the same. Instead of sniping at the public sector, let the private sector get on with sorting a new settlement. Instead of moaning about their loss of benefits, let the public sector get on with planning how to sort out their shortfall. May all of us profoundly wish for a better set of tools going forward to enable us to save and spend our savings in a way that maximizes our retirement income and not lining the pockets of the pensions industry!

Oh- and if you just want a laugh – try this from the Daily Mash

 

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by henry tapper on November 30, 2011  •  Permalink
Posted in annuity, corporate governance, dc pensions, Liberal Democrats, NEST, Retirement
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Posted by henry tapper on November 30, 2011

http://henrytapper.com/2011/11/30/a-necessary-strike/

Beyond belief – investment philospohies in the DC world

Until my friend Mr Yusuf Samad asked me for some comments on them, I had not come across “investment beliefs“. Yusuf had passed me an investment questionnaire from NEST which inter alia asked if I considered there was a difference between a set of investment beliefs and an investment philosophy. I couldn’t see one and said so.

I ended up getting an invite to a discussion that would enlighten me on what investment beliefs were and how they worked for DC schemes.

I turned up at Schroders this morning to find out if I’d answered correctly. No sooner had I engaged with a complimentary cup of tea than I was set upon by a man from NEST complaining that my  Mothball NEST till 2017  blog would do little to promote NEST till 2017. I restated my view that between now and 2017 NEST was about as much use as a chocolate teapot and things didn’t make things better.

Fortunately I was saved from the wrath of the uncivil servant by David Hutchings of Alliance Bernstein, a man passionate about improving DC outcomes. David’s been putting his balls upon the block for some time in the hope of getting collective drawdown from target dated funds (see blogs passim).

Yusuf Samad arrived  out of breath, apparently he’d been delayed by a woman fighting his bus driver. I was sorry to see him puffed out but glad that like me , he’d arrived by bus. I’m for collectivism in transport too.

Yusuf did his stuff, filled us in on “investment beliefs” and gave some good examples from the USS and the BBC pension trusts. Then he pushed off.

Pauline Skypala hosted a panel discussion. She had the answer to the difference between investment beliefs and an investment philosophy. The sceptical might put it like this;-

Investment Philosophies are what Asset Managers use to justify fees- Investment Beliefs are how trustees justify paying them.

What followed was a litany of DB stuff from the great and the good. This kind of high level investment talk is meat and drink to the senior fund managers and investment consultants, but much as I like the like of John Belgrove and his views, they are not relevent to this stage of DC development.

With the exception of Ray Martin , nobody seemed to keep to topic.

You could see Ray, who has written the book on occupational DC, getting frustrated. He  pointed out that DC trustees should be focussed on maximizing DC outcomes;- but his was a lone voice. I got the impression that the investment experts were playing on a different pitch.

Ray’s clearly bought into the line that the smoothed investment path ensures members continued participation while the rocky road of a pure equity based accumulation sees many members jacking in savings.

If this is the case, I’ll sign up to the DGF approach espoused by the DGF managers. However I haven’t seen any empirical evidence to support the hypothesis. Au contraire (Rodney), during my time with Zurich sitting in DC call centers and doing “member education” , I saw scant evidence that people jacked in saving because their funds had gone down (hence my second investment belief -below). People jacked in saving when they were skint and though they moaned a lot when markets were against them, they persevered.

Most people aren’t as stupid as some people suppose.

I’m going to dig further here and have put out a call on twitter for hard fact on the matter. By “hard”  I mean evidence that people actually have voted with their feet and jacked out of their DC pension when the going got tough- not some soft feedback from “focus groups”.

There were plenty of complaints that there was little formal governance for contract based plans (personal pensions). If I hadn’t lost the will to put up my hand I would have pointed out that personal pensions were invented in the discredited belief that people could do their own governance. The retrofitting of default funds can’t paper over the cracks. Personal pensions are mutton dressed as lamb.

As I understand it, the point of NEST and the Investment Management Association, getting together was to see whether the idea of investment beliefs could be transferred to a DC world.

As we got nowhere near getting an answer on the day, here are my six beliefs which may not be to the taste of the fund managers, investment consultants but might resonate to one or two who know a little about defined contribution pensions.

1. The business of DC fiduciaries is to maximise the retirement income of those they care for.

2. Volatility of account values is acceptable prior to the start of the lifestyle glide path.

3. Any fees paid in excess of the beta price need to be justified in terms of excess returns achieved (and should be reviewed in that light).

4. Fiduciaries are obliged to understand the intentions of members with regards to the timing and nature of decumulation.

5. Fiduciaries should look to work along collective lines wherever possible and seek to extend collectivism into the decumulation phase.

6. Members should be aware of the DC investment beliefs of their fiduciaries and should be able to override them when they wish to exercise their personal beliefs.

As various NEST officials appear to read these blogs let me be clear. I have nothing against NEST’s long-term aspirations but until it is allowed to take and give transfers, members will only have limited scope to exercise their beliefs.

NEST has provided a fallacious justification for removing volatility (at the cost of returns) for those in the opening years of saving.

NEST has shown no interest in exploring opportunities for collective decumulation and judged by their continued reckless spending, they seem to have little regard to the long-term outcomes of their members (who are now obliged to pay off the debts currently being incurred).

I have recommended NEST to several of my clients as one of a number of mastertrusts, for the most part, clients are putting off a decision till they can fully understand the other new entrants to the market (NOW, B &CE  et al). I suspect when they have the opportunity to make an informed choice - they will not be chosing NEST.

According to my investment beliefs – NEST as it is,  makes little sense to me!

Between now and 2017, NEST looks hamstrung by the ABI forged manacles on contributions and transfers. The longer it continues to market its sub-standard self, the greater the debt it incurs.

My argument that NEST should pull in its horns and wait makes perfect sense, most especially if it brings to the public’s attention the extent of the debt already incurred. If it forces the Government’s hand and allows “our NEST pension” to compete with other mastertrusts (and GPPs) on a level playing field, well and good.

As for investment beliefs, they clearly are needed, but they need to be linked to the outcomes of DC pensions. Until we have got over the messages about how fees and poor “At Retirement” decision making destroy retirement income, nuances such as the deplayment of socially responsible investment strategies , the avoidance of unwanted risks and the benefits of genuine diversification- take second place.

I’m glad I took a morning out to get this straight in my head. I suggest anyone involved in advising DC fiduciaries or beneficiaries does the same.

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by henry tapper on December 7, 2011  •  Permalink
Posted in annuity, corporate governance, customer service, dc pensions, de-risking, NEST, pension playpen, pensions, Retirement
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Posted by henry tapper on December 7, 2011

http://henrytapper.com/2011/12/07/beyond-belief-investment-philospohies-in-the-dc-world/

My five big challenges for twenty twelve

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If I thought I’d be here twelve months ago I wouldn’t have bothered. I’d have gone straight to jail, not passed go and not collected my £200. I reckon most of us would have preferred to be on the subs bench this year. At least I’ve given up smoking even if I feel a decade not a year older.

Looking at 2012, I’ve given myself five challenges which might resonate with you.

  1. This year I turned 50, with that milestone I realised that I am now the head of my family, I need to step up to the plate and accept responsibility not just for my children but my parents who are now are going to get back some of the support I’ve got from them for five decades.
  2. 2012 is going to be the year of pension awareness- I’m going to do my bit to make Government, providers, trustees and advisers uncomfortable about the lack of understanding people have of what they need to do to insure their retirements. That means getting better savings vehicles, better decumulation vehicles and more prioritization of pension saving by both people and those who pay their wages.
  3. 2011 was the year I turned into a Tappertubby, 2012 will see me drinking less, eating better and getting back on my bike
  4. In 2012 I’m going to up my Klout score by 50%. If you don’t know about www.klout.com, press the link you almost certainly have a Klout rating, I’m going to get a Klout rating on everyone I interview next year. What’s a Klout rating - it’s a measure of your social influence derived from your social media activity and if you are too stupid or arrogant not to care about that, I don’t want you working with me.
  5. Last but not least , 2012 is going to be they year that I hold on to my driving licence. Since attending my “drivers awareness course in May, I have committed a number of driving crimes including overtaking an unmarked police car in a 30 mile an hour zone. 2012 will be the year I won’t speed, won’t drive dangerously and won’t talk on my mobile when driving. Thanks to the good magistrates at the North Oxfordshire magistrates court for their clemency on Monday, much appreciated.

I’m not sure how much of this resonates with you so I’m attaching

">a little poll which allows you to vote for the challenge that most resonates with you. There is one further challenge which I won;t articulate as only I can meet it. I’ll tell you if I met it this time next year. According to word press , my blog has been visited nearly 30,000 times this year which is up 250% on 2010. Thanks to everyone who bothers to read my stuff, I look forward to posting regularly next year and to reading what you lot have to say in “comments!” and through your own warbling.

 

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by henry tapper on December 22, 2011  •  Permalink
Posted in annuity, Bankers, corporate governance, customer service, dc pensions, NEST, Retirement, Salford Quays, social media, Treasury
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Posted by henry tapper on December 22, 2011

http://henrytapper.com/2011/12/22/my-five-big-challenges-for-twenty-twelve/

Christmas naif

“Driving home for Christmas“…

singing the song…..

there’s a service station at Fleet….

you know there’s a service station from the blue motorway signs telling you there’s a Kentucky Fried Chicken , a Waitrose and a Burger King just over the horizon.

In case you haven’t got the message , the brands are re-displayed at quarter mile intervals till Fleet services hoves into view – brands a-neon.

Watch out DAD!  If you don’t get grief from the kids over burgers and chicken wings, you’ll be hassled by the wife to get that last-minute present for the in-laws she forgot to pick up on shopping trip #49. Sing it!

Hark the M£3  brand names sing

“Glory to the Burger King”

May your kids grow fat and sicken

On the Colonel‘s popcorn chicken

Joyful see their prices rise

Profits pointing to the skies

Proletariat proclaim

Marks and Spencer‘s sacred name

Hark the Christmas bankers sing

“Santa’s mortgaged everything”

Christmas is not about giving, it is about buying.

It is not about receiving , it is about finding the receipt to exchange your presents for the cash with which to pay your February credit card bill.

La Senza is in administration, failed by Britain’s lingerie lovers. Worry not for Theo Paphitis has established an alternative brand to seduce loving couples into intimacy.

13% of retailers need a “super Christmas” to pay their quarter bills in January. Worry not for tomorrow it is Christmas and today we are quantitively eased.

 George Osbourne  should be holding up a sign saying

“don’t do it”

Lizzie should be broadcasting to her subjects..

Don’t pull off the M£3 to pay over the odds for fast food you can’t digest, don’t buy her those lacy underpants she’ll never wear.

You know you cannot afford it, you know you cannot remember a single present you got last year….don’t don’t don’t don’t.

Do go on a big long walk on Christmas day…

Do  cancel your Sky subscription and get back to playing those parlour games.

Do break out the sloe gin you made in October with a thousand sloes and ten thousand pricks with that darn(ing) needle!

Go to Church, love thy neighbour, read  “A Christmas Carol”…. but my people – do not spend the money we haven’t got!

Christmas naif that I am!

 
 
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by henry tapper on December 24, 2011  •  Permalink
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Posted by henry tapper on December 24, 2011

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“A million maybe two million died – nobody knows”

This from BBC Radio 5 live this morning; a reminder of the North Korean famine that is thought to have wiped anything from 800,000 to 3.5m people between 1995 and 2002.

This from Wikipedia

 In 1998, US Congressional staffers who visited the country reported that: “Reliable sources estimate that of North Korea’s 23 million people, between 300,000-800,000 people have died each year (peaking in 1997) as a result of the food shortages.” They went on to say: “Other estimates of the death toll by exile groups are much higher.”These higher estimates are sometimes considered problematic as they are based on the experience of North Koreans in the province of North Hamgyŏng. The province was one of the most devastated due to its urban environment and lack of agricultural production. Additionally, the original study warned not to extrapolate the death toll of the famine to the whole of North Korea. The same source goes on to say “The most reliable evaluation, carried out in a doctoral thesis at the University of Warwick by South Korean economist Suk Lee, shows that up to 660,000 people died from starvation and malnutrition-related diseases.” It then goes on to say: “However, the truth is that nobody — including the government — probably knows the real figure.”[

And again

In 2011, during a visit to North Korea, US ex-president Jimmy Carter reported that one third of children there were malnourished and stunted in their growth because of lack of food. He also said that the North Korean state had reduced daily food intake from 1,400 calories to 700 calories in 2011(by comparison, a normal food intake for a healthy European is 2,000-2,500 calories per day). Some scholars believe that North Korea is purposefully exaggerating the food shortage, aiming to receive additional food supplies for its planned 2012 mass celebration by means of foreign aid.

Escaped North Koreans report that starvation has returned to the nation.A study by South Korean anthropologists of North Korean children who had defected to China found that 18-year-old males were 5 inches shorter than South Koreans their age. Roughly 45 per cent of North Korean children under the age of five are stunted from malnutrition. Most people eat meat only on public holidays, namely Kim Il-sung and Kim Jong-il’s birthdays.

It is in this context that we should view the impressive ceremony surrounding  the late Dictator’s death. This the price of ~North Korean self-determination.

I am troubled that I ignored this great catastrophe as it unfolded and that it has taken recent events for me to focus both on historical and current calamity. The scale of suffering cannot be discounted by use of the remoteness of the country nor the unfamiliarity with the culture. The agony of starvation is no greater in Britain than it is in Africa than it is in North Korea.

Philosophers have struggled with this kind of relativism and failed to find absolute answers. Is it racist that we demote genocide in Cambodia or implied genocide in North Korea below the news of David Beckham’s metatarsal?

I am also troubled that we claim to have no means of knowing. If we know that North Korea is investing in nuclear weapons, we must have sight of the nuclear plants and the infrastructure being built to launch the rockets. It follows that we must have sight of the interior of North Korea where this famine is taking place. This scale of de-population is more than a Malthusian statistic, it involves the disposal of bodies , the emptying of villages and a change in the way life is lived.

We know more of the Black Death, over 700 years gone than we know of the fate of our fellow mortals who have been dying these past twenty years.

Yet, and you are right to ask the “question what am I doing about it?”. ….”Writing a few words that will be read by a few people”.

In an age where we feel we have mastered nature in many ways, we stand powerless to comprehend or intervene – our response is to mouth the statistic and move on.

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by henry tapper on December 29, 2011  •  Permalink
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Posted by henry tapper on December 29, 2011

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2011 in review

The WordPress.com stats helper monkeys prepared a 2011 annual report for this blog.

Here’s an excerpt:

The concert hall at the Syndey Opera House holds 2,700 people. This blog was viewed about 30,000 times in 2011. If it were a concert at Sydney Opera House, it would take about 11 sold-out performances for that many people to see it.

Click here to see the complete report.

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by henry tapper on January 4, 2012  •  Permalink
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Posted by henry tapper on January 4, 2012

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Can we have a word Mr Webb?

Here’s a letter I’ve sent this morning to a civil servant who is listening to the various people hoping that we will at last get proper pension reforms that ease the lot of the squeezed middle and restore some pride in our crumbling private sector pension provision. It has a few references to other documents which I can’t publish and references to various people who quite publicly have called for change. I don’t speak for them, I speak with them.

Hi

I’ve read Derek’s paper and I’ve read the 2009 GAD paper and it will be of no surprise for you to hear that I am 100% in agreement with Derek, not because he is a colleague but because he has a much more important connection common sense.

You say that DC will produce very uncertain outcomes but we contend that the DC outcomes will be certain – guaranteed by AAA UK bonds, SolvencyII, FSCS, et al. They are certain to be much lower than they could be without the cost of the protection that has done for DB and will do for DC.

 There is an assumption within Government that the level of retirement income from annuities must be protected. As Derek points out, this is inconsistent with DC accumulation but also with income drawdown. I struggle to understand what the public policy justification for the need for guarantees actually is. It may be hard for those who have been protected by defined benefits throughout their career to empathise with the level of uncertainty that the rest of us live with.

Our primary asset is our capacity to earn, this is sometimes protected by PHI but often not.

 Our secondary asset is the equity in our house which some believed could only go up and which is currently being protected by artificial interest rates.

Otherwise we have some financial security from directly held equity in businesses ~( no protection) and cash which is wasting away as a result of the Government chosing to protect the value of housing.

 While the Government chose to insure the pensions of public servants on our common balance sheet, it seems fearful of accepting any form of risk from DC. The concerns that we hear about the Dutch experience are groundless. Even with the anticipated reductions in pension income that many Dutch people in their CDC system will have to suffer, the total income they are receiving from their DC accumulation is still well in excess of their British neighbours.

I was speaking with a group of Dutch people on Thursday night about they and those that they know are bearing up to a real cut in their retirement income and the impression I got was that they accepted this as a necessary consequence of that part of their retirement income being market-related. Bearing in mind everything that we in the squeezed middle get is market related , I see no reason why we cannot be equally sanguine about our pensions provided – our expectations are properly managed.

 Here the with-profits endowments analogy makes some sense. Annuities are non-profit and non-profit endowments went out because the cost of the guarantee was unacceptable.Iinitially people chose to pay lower premiums in return for a market related endowment on a with-profits basis. The problem, as Derek has pointed out was that with-profit pay-outs were distorted by unscrupulous marketeers who over-distributed and by poor sales techniques which failed to point out the risks that with-profits took (relative to non-profit).

You mentioned that there should be a default position (on mallowstreet). I have argued that there is a default decumulation position, it is a level single life annuity provided by the insurer that managed your pension accumulation. This is a “pot-luck” position and many are buying appalling annuities as a result. This is at the root of what we, Robin Ellison, Con Keating, Alan Higham , the AMNT and Kevin Wesbroom, (to name but a handful of those calling for change), are trying to address.

The social injustice of weighting the pension agenda towards public servants and the low paid at the expense of those who are increasingly relying on DC is astonishing. I am quite sure we will look back at the past few years (hopefully not the years to come) as years of astounding complacency by those in Government who have completely failed to come to terms with the seismic shift in private sector pension provision that Derek’s graph and paper so well charts.

So what are we proposing - we don’t all have the same method but we have the same aim, is to use the power of collectivism to create a national mutual which pays better pensions as the default decumulator of our DC pots. I contend that the default annuity position should be a state run scheme pension , backed – if backing is needed – by the PPF (Con would argue it should be off-balance sheet and effectively be a pension gilt).

I agree with you that industry wide schemes are not going to be able to pull this off and here we have something to learn from the Dutch, It’s beyond me to work out whether the pension pounds that people earn from their DC accumulation should be paid from a collective fund or as additional state pension from the Treasury…the latter seems more efficient, the former more acceptable to those who have memories of what happened to SERPS.

 Either way, a national solution to the annuity problem, if only for a part of the problem (we can limit access to “Government pension pounds” as we do Premium Bonds), is what is needed. Andy, this isn’t a new position. I first argued for state support for the smaller annuitant in a paper called Pension Pounds which I wrote in 1999. As Kevin Wesbroom has pointed out, there has been no structural advance in DC in the 35 years he has been advising on it.

It really is time that Government sat down with us and looked at the proposals that Derek has spelled out and compare it with Con Keating’s solution and those put forward by others. The answer to this problem does not rest solely with the DWP or GAD or the Treasury. It needs a public/private partnership. It is us, the private sector who need the help and our beef is that it is you, the pension privileged public sector who are standing between us and a better way of getting our private pensions.

People like us are not going to shut up so can we be allowed to organise a proper public debate (call it a symposium) where the aforementioned can petition our minister. I have a budget to organise it and I believe the capacity to bring the various parties to the table. Can you be the portal to Steve Webb and the civil servants at GAD, DWP, tPR and Westminster? I hope that we will be able to take this forward without delay

Yours in anticipation

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by henry tapper on January 14, 2012  •  Permalink
Posted in annuity, auto-enrolment, corporate governance, customer service, dc pensions, de-risking, Fiduciary Management, Liberal Democrats, NEST, Nick Clegg, pension playpen, pensions, Personal Accounts, Retirement
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Posted by henry tapper on January 14, 2012

http://henrytapper.com/2012/01/14/can-we-have-a-word-mr-webb/

A hunger to educate – more on Popcorn Pensions

The Hunger for More (Special Edition)

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Hunger is not a word you’d associate with actuaries.

One of our clients described the team working for her as “happy puppies” who approached the task of educating members with ” hunger“.

These are not words that exist in the actuarial lexicon! You do not read these words in business manuals! But I know just what she means.

I wrote a blog earlier in the year called Popcorn Pensions, it discussed a change in mindset in our work, a movement from telling our clients what they have to do to helping them achieve what they want to do.

Inspiring enthusiasm in people for  retirement planning is not easy and needs a few core ingredients. It needs an efficient pension plan that gives its participants confidence that saving is worthwhile. It needs available funds either from the employer or the employee and preferably from both. It also needs a genuine enthusiasm for pensions saving right through the process.

It’s that last bit that’s been missing. I’m not talking about beaming  photos on brochures , fancy websites or alluring TV adverts (though all these things help). More like I’m talking about the hunger of the pension professionals who advise companies on their retirement strategy.

I’d go so far as to say that part of the function of professional advisers is to recreate a passion for the job in their clients. It is in their interest to do so.

Unless we can educate employers and trustees of the massive opportunity they have to make a difference to their member’s retirement, we as consultants are failing in our duty. The “lock-down” mentality among those who simply regard pensions as “unwanted risk” is and will be self-fulfilling. It will kill pensions.

If we can educate employers and trustees, then we can help them to instill this enthusiasm and endeavour into their workforce. I have absolutely no doubt that staff who go to work with the intention of doing a great job with the certainty of a happy ever after will be more productive and more stable than a staff who have no long-term strategy and who go to work without purpose or conviction.

Our client seems to have been invigorated by dealing with us. Right the way through the organisation, in the HR and Finance functions, the pensions department , among the business heads, the unions and all levels of the workforce, we think we’ve made a difference.

And this is the really interesting thing. The enthusiasm we have found for the job, since our Popcorn Pension moment is infectious within our organisation. The enthusiasts have taken over the asylum and the things we wanted to happen with our client are happening in our company.

Enthusiasm is infectious. It may not sit within the actuarial lexicon but it should be.

What drives the enthusiasm? My answer, from observation, is the desire to teach, to educate, to help others to take control of their lives through sorting our their finances in their later years. This enthusiasm depends on advisers who believe they can make a difference working together with our clients and their members to make it happen.

Education is at the heart of the process but it is based on the principles of Popcorn Pensions – that is a hunger to help  people get what they want .

 

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by henry tapper on January 25, 2012  •  Permalink
Posted in annuity, auto-enrolment, customer service, dc pensions, happiness, Henry Tapper blog, mallowstreet, Management, pension playpen, pensions, social media, Treasury
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Posted by henry tapper on January 25, 2012

http://henrytapper.com/2012/01/25/a-hunger-to-educate-more-on-popcorn-pensions/

THE PHILOSOPHY OF TRUST – Onora O’Neil

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I came across this on mallowstreet and thought it relevent to many of the discussions on this blog.

I’ve written about ethics and political philosophy all my working life, but until the last two years I did not write on trust. If anyone had asked me why I didn’t, I would probably have said that trust was important, but that it was a social attitude.  

My work was on basic philosophical and practical questions about justice.  I wrote about reason and action, principles and practices, duties and rights, but not about social attitudes. Trust, as I saw it, was mainly of interest to sociologists, journalists and pollsters: they ask regularly whom we trust.  Some of our answers  (lookat the MORI website, http://www.mori.com/polls/) show that many of us now claim not to trust various professions.

Yet I noticed that people often choose to rely on the very people whom they claimed not to trust.  They said they didn’t trust the food industry or the police, but they bought supermarket food and called the police when trouble threatened.   I began to see that there is a big gulf between saying we don’t  trust others and refusing to place trust, between (claimed) attitudes and action.   Bit by bit I concluded that the ‘crisis of trust’ that supposedly grips us is better described as an attitude, indeed a culture, of suspicion.   I then began to question the common assumption that the crisis of trust arises because others    untrustworthy.    I began to notice that there were lots of news
stories about breach of trust, especially about supposedly scandalous cases, but that there was surprisingly little systematic evidence of growing untrustworthiness.

Two years ago I was asked to give the Gifford Lectures in Edinburgh for 2001. I chose trust in medicine, science and biotechnology as my topic. These lectures are about to appear under the title Autonomy and Trust in
Bioethics (April 2002, Cambridge University |Press). When I finished writing I knew there was a lot more to be said about trust and mistrust.  I had come to think that our new culture of accountability, which is promoted as the way to reduce untrustworthiness and to secure ever more perfect control of institutional and professional performance, was taking us in the wrong direction.
So when the BBC approached me to see what I could offer for the Reith Lectures, I suggested that I could look more broadly at trust and accountability, particularly in the professions and the public sector. In the lectures I argue that having misdiagnosed what ails British society we are now busy prescribing copious draughts of the wrong medicine. We are imposing ever more stringent forms of control. We are requiring those in the public sector and the professions to account in excessive and sometimes irrelevant detail to regulators and inspectors, auditors and examiners. The very demands of accountability often make it harder for them to serve public.

Our revolution in accountability has not reduced attitudes of mistrust, but rather reinforced a culture of suspicion. Instead of working towards intelligent accountability based on good governance, independent
inspection and careful reporting, we are galloping towards central planning by performance indicators, reinforced by obsessions with blame and compensation. This is pretty miserable both for those who feel
suspicious and for those who are suspected of untrustworthy action – sometimes with little evidence.
In the Reith Lectures I outline a much more practical view of trust. The lectures are not about attitudes of trust, but about actively placing and refusing trust and the sorts of evidence we need if we are to place trust
well. Far from suggesting that we should trust blindly, I argue that we should place trust with care and discrimination, and that this means that we need to pay more attention to the accuracy of information provided to
the public.  

Placing trust well can never guarantee immunity from breaches of trust: life does not provide guarantees. There is no total answer to the old question ‘Who shall guard the guardians?’, and there is no way of eliminating all risk of disappointment. Nevertheless, many of us would agree with Samuel Johnson “it is better to be sometimes cheated than never to have trusted”.
If we are to reduce the culture of suspicion, many changes will be needed. We will need to give up childish fantasies that we can have total guarantees of others’ performance. We will need to free professionals and
the public service to serve the public. We will need to work towards more intelligent forms of accountability. We will need to rethink a media culture in which spreading suspicion has become a routine activity, and to
move towards a robust configuration of press freedom that is appropriate to twenty first century communications technology.

This won’t be easy. We have placed formidable obstacles in our own path: it is time to start removing them.

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by henry tapper on January 23, 2012  •  Permalink
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Posted by henry tapper on January 23, 2012

http://henrytapper.com/2012/01/23/the-philosophy-of-trust-onora-oneil/

“Making Pension Charges Clearer” – good on the NAPF

English: "Revenue reform" train stop...

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The NAPF, as I’ve mentioned a few times on this blog, are a rather better trade body than you’d expect . Revitalised by Joanne Seagers and Dan Torjussen-Proctor they appear a more progressive member centric organisation than in years gone by.

Ambitiously, they have decided to take on the vested interests of the fund management industry and issue a consultation on “transparency of fund charges”.

Here are my thoughts , you may have your own.

I welcome this initiative from the NAPF and in particular the idea of an industry Summit on  fund charges. The Pension Regulator has determined “Value for Money” as one of the 6 key driver of DC outcomes, the question is not just whether there is value arising from fund management activities but what “money” is being paid by the DC account holder for the fund management.

As the NAPF’s paper of November 2011 makes clear, a member of a DC plan is unlikely to get a clear view of what he or she is paying, how the payments affect the outcome of their pension saving and whether this payment represents good value.

The NAPF have wisely decided not to discuss the “value” question and to concentrate on ways of “making pension charges clearer”.

I’m going to be polite and make the following observations and close with three recommendations that I reckon would make for the basis of an “Industry Code of Practice”.

Observations

 1.       DC outcomes are subject to the same influences whether arising from contract based or trust based pension saving vehicles. There is no    sense in having differing disclosures for each.

2.       Fund management charges form a part of the total charges levied on a member’s account but are rarely separately disclosed. There is only so much information a member can take in and charges should normally be expressed in total. Where a member wishes to find out in more detail how the charges split , the information should be accessible for instance through a hyperlink or in paper form through an appendix.

 3.       Members of Dc savings plans are not really concerned  about how the charges on the fund are sliced and diced, they are concerned as the paper confirms, at the total impact of charges, especially when they can see it properly explained. However , a statement of the impact of the charges is meaningless unless it can be benchmarked. You can dmeonstrate the impact of charges to those purchasing funds by using comparative charging structures to demonstrate their impact. 

For instance, in the table below we show how the reduction in yield decreasing from 1.0% pa to 0.55%, has the same  impact to a 30 year old (retiring at 65) as an increase of 2%pa of salary to the employer’s contribution rate.

 

 

 

 

  SMPI (1% expenses) SMPI (0.55% expenses) Current
Age band TOTAL EE ER TOTAL EE ER TOTAL EE ER
Under 30 16.0% 6.5% 9.5% 14.0% 6.5% 7.5% 16.5% 5.3% 11.2%
30 – 39 21.5% 6.5% 15.0% 19.0% 6.5% 12.5% 16.5% 5.3% 11.2%
40 – 49 29.0% 6.5% 22.5% 25.5% 6.5% 19.0% 16.5% 5.3% 11.2%
Over 50 39.0% 6.5% 32.5% 34.5% 6.5% 28.0% 16.5% 5.3% 11.2%

 

 

My recommendations to the NAPF fall out of these three observations

 From observation one, our recommendation is that disclosures should be consistent across trust based and contract based plans. They should be expressed as the total charge including the fund expenses impacting the unit price and not expressed in the AMC.

From observation two, my recommendation is that the primary information should be simple with the breakdown of where the charges go being readily available for those who wish more information.

From observation three, my recommendation is that the charges be expressed in a relevant way. It may be relevant to express them in relation to the reduction in pension purchasing power they create, or in the reduction in the value of the employer contribution or it may be better to show how a lower charge improves matters. Simply stating charges as an AMC or TER or other such irrelevant measure is not good enough.

I have a fourth recommendation, arising from our thinking on the charging of “fund expenses both at the fund management level and at the policy level. Our recommendation is that fund expenses be quoted as part of the annual management charge and not in addition to it. Details on this obscure but important issue are found in the addendum to this document.

 

 

 

 

 

 

  Addendum

Fund managers have the right to pass on all manner of costs to their customers; these costs are levied as “fund expenses” and are not normally included in the quoted annual management charge. They are taken directly from the fund and their impact is felt in a reduction in the unit price which determines the eventual pay out.

These charges can be found in the published accounts of a fund and can make interesting reading. Typically the charges include the fund manager’s standard fee (which can be supplemented by performance related fees) but also auditor fees, registration fees and then the transaction costs which can include the costs of derivatives, commissions and other transactional expenses. Then of course there are further deductions relating to trading, most notably stamp duty and non-recoverable VAT.  

Taken together, these costs can add up to a substantial proportion of the total revenues generated by the fund. We have no evidence that these expenses are being badly managed and there is an incentive for managers to minimise the costs to accelerate performance. However, the complexity of the charges that can be levied as “fund expenses” gives scope for managers to pass on costs that should be borne by the manager. There is also scope for the practice of paying “soft commissions” where fund managers will use expensive services from third parties which are passed on as fund expenses and in return received subsidised goods and services such as software from the third party.

The complexity that exists within the accounting policies of individual funds is also prevalent in the policies of the insurers who wrap these funds within insurance and reinsurance agreements.

L&G have a clause in their policy (5.12) where they can charge anything they deem reasonable at their discretion (all charges, expenses, taxes, levies, regulatory fees, reinsurance premiums and other outgoings..).

Undoubtedly, many trustees of occupational pension schemes, faced with their bill for the PPF levy would wish for the sake of their scheme’s solvency that they could insert such a clause to offset their scheme liabilities in a similar way.

These costs are on top of the expenses already incurred by the fund manager. We should point out that both at the fund level and at the policy level, L &G and LGIM have an admirable record of not passing on costs that should reasonably be charged to their shareholder

As a general observation, the more active the fund management, the higher the level of the fund expenses and the greater the opportunity for obfuscation, bad practice and even fraud.

Conclusion

The opportunity for bad practice among managers, especially active managers with complex fee structures, makes the auditing of fund expenses problematic. If the quoted annual management charge to be levied by the manager was to include these expenses, as sometime happens, the incentive to keep costs to a minimum would be greatly increased.

So long as the only impact of these expenses is to dilute the return on the fund, the opportunity for poor cost containment or even fraud, will continue to exist.

3 Comments
by henry tapper on January 21, 2012  •  Permalink
Posted in annuity, auto-enrolment, corporate governance, dc pensions, de-risking, EU Solvency II, pensions, Retirement, social media
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Posted by henry tapper on January 21, 2012

http://henrytapper.com/2012/01/21/making-pension-charges-clearer-good-on-the-napf/

You can’t please everyone so please yourself

Some people live for themselves, others live selflessly but most of us find our worth in the value others place in them.

If you depend on the value others see in you for your sel-worth, your life will be an emotional roller-coaster where every imagined slight can tip you into depression and supposed praise becomes the fuel to coast you back to the top of the roller.

The solace of religion is that it allows you to live neither for yourself or for others but for a being not of this world.This third way , especially when spiced with a heaven laden with virgins, is appealing to those for at the bottom of the pile who can imagine themselves equal in the eyes of the Lord, to those on top. It is also convenient for those on top as religion that preaches deferred gratification declares injustice as temporary and inconsequential compared with future gains.

Was it Bob Marley who wrote these lines?

You preacher man don’t tell me, heaven’s not on this earth

You aren’t happy and you don’t know – what life is really worth

Cos if you knew what life was worth- you’d look for it right here on earth

And now we’ve seen the light- we’re going to stand up for our rights.

 

I find myself spending a lot of my working life trying to please a disparate group of colleagues who have different measures by which they judge me. Even if I was to succeed with the majority, I would fall our with the rest so my pragmatic solution is to run a dashboard where I target 50% of my partners are happy  and less than a quarter are pissed off. The toxic 25% need to turnover and my second target is to make sure no partner is in the toxic quadrant for more than a couple of months. This is known as pragmatism.

I think this dashboard idea is jolly good. There are all kinds of measures that we can use to check how others see us, I think of obvious ones like google searches and Klout but there are other tangible statements open to me as I lead such an open life with so much of my thinking in the public domain. The numbers that read my blog, follow me on twitter, are linked in to me or join my pension play pen me valuable data on what I am doing that works or does not. They are not howevr a measure of my self-worth. My integrity is what I am not what I am doing.

What I am finding, and this may be connected to my having given up drinking alcohol and smoking cigarettes, is that I am less bothered at the moment by how others see me, than I have been for a long-time. This detachment from other’s opinion has, I believe, its foundation in a sense of personal self-worth which in turn is derived for a sense of purpose and achievement.

It is as close a definition as I can find to happiness.

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2 Comments
by henry tapper on January 20, 2012  •  Permalink
Posted in happiness, religion, social media
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Posted by henry tapper on January 20, 2012

http://henrytapper.com/2012/01/20/you-cant-please-everyone-so-please-yourself/

To get better pensions we need to share risk

Yesterday, Steve Webb announced he was  to review the level of protection that needed to be provided to private pensions in payment. His  intention is to help the solvency of defined benefit schemes which might need to reserve less for future guarantees. He is advocating that more risk be born by members if they are to continue to benefit from certain outcomes and this will mean less protection of guaranteed increases to some pensions as they get paid.

Any suggestion that member protection be reduced causes concern among those whose job it is to protect member interests-trustees. However, as this brilliant discussion document from my friend and colleague Derek Benstead demonstrates, the consequences of over-regulated member protection are often unintended. Over regulation leading to too much member protection (here in the protection of guaranteed increases in retirement) can kill the golden goose leaving a “ perfect stadium with no one watching the game”.

Many trustees, union officials among them, understand this and recognise that just as DB can best be supported by easing the burden or retirement guarantees, so DC outcomes can best be improved by allowing DC to share in a managed drawdown from a collective fund – as DB pensions would become if the new Government thinking was adopted.

Derek’s comments are a critique of an argument put forward in 2009 by the then Government Actuary that what we today know as “collective DC” was prone to the same flaws as the recently discredited “with-profit annuity”. Derek comes at pensions from a very different angle than we are used to.  He genuinely understands the principle behind mutuality and he believes we can, as the Dutch have, employ to a system of not for profit pension provision based on a society that sorts its problems out for itself. Though his thinking is contrarian, it is expressed with such clarity, integrity  and vigour that I find it utterly compelling.

I include his arguments unexpurgated and without further comment –  for your edification and enjoyment.

 A discussion document on CDC

Equating non-commercial CDC schemes to commercial with profit funds is misguided. As a former Standard Life endowment policy holder I know how my maturity payment was much reduced by Standard Life’s overspend on maturities before mine. With profit payout overspends are decided by a board of directors most of whom are not actuaries and who are motivated by payout league tables and sales drives. But a CDC fund run by trustees on behalf of an employer who simply wants his staff to have pensions does not have such commercial pressures. Trustees seeking to fulfil their normal duty to be fair to all members should alert to intergenerational issues and the risk of overspending.

I have found the attached DWP summary paper of GAD’s CDC work. I can’t find a full GAD paper on the internet and I changed jobs in late 2009, so if I had a GAD paper it is likely I left it behind at my last job. However, there is some interesting material in the DWP’s summary paper.

First, the description of a CDC scheme on page 5 is on the whole a good definition. But in the rest of the paper it is clear that GAD’s modelling is of much narrower scope than the broad definition on page 5.  Several things suggest to me that GAD’s modelling was misguided.

One, on page 17, there is a sentence which says “An absence of new members coupled with poor investment returns can lead to a scheme failing, with some members (both active and deferred) being left with no assets at all.”  There is something very wrong with GAD’s modelling if the money is running out even while there are some non-pensioners left.  I could perhaps understand it if the money ran out because the last handful of pensioners lived unexpectedly long, but in practice I would expect a running down CDC scheme to fully annuitise sometime after there ceased to be any non-pensioners.  The modelled decision making must be very wrong.  The correct conclusion must surely be, not that CDC doesn’t work, but that GAD’s modelling doesn’t work.

On page 6, one of the listed characteristics of the model is “Both pensions and pension increases are reserved for on an estimated buyout basis”.  On page 7, another is “The CDC scheme is invested 100% in equities”.

Why is GAD reserving for CDC pensions on a buy out basis? The pensions in a CDC scheme should not be guaranteed so there should be nothing to reserve for on a buy out basis.  Second, the modelled scheme is invested in equities.  Buy out pricing, which is driven by bond yields (or swaps), tells us nothing about the income to be expected on the equities.  Managing pension awards in an equity invested CDC scheme by reference to the bond market is a nonsense: the state of the bond markets tells us nothing about the pension payments that can be afforded from equity income.  So while the DWP report is not detailed about the modelling GAD did, it is clear that it has not been done well.

An equity invested CDC scheme should be managed by estimating the expected future dividend income and future contributions, and balancing expected pension payments for past and future service to that.  Clearly whatever the GAD modelling was, they didn’t equate the expected income and outgo, and for that reason in some scenarios they ran out of money.

To construct an up to date example, suppose a CDC scheme has a pension increase policy before and after retirement of RPI + 1% per annum, say, and is wholly invested in UK equities.  It would have seen its dividend income fall by 27.5% in real terms over the period July 2008 to June 2010. That doesn’t mean the pension has to go down 27.5% overnight. A new increase policy of say RPI – 0.5% pa would be more than sufficient to adjust benefit payouts over the life of the scheme to match the reduced dividend income (if the average duration of liabilities is 20 years, then a 1.5% reduction in annual increases is a 30% saving). The unprecedentedly severe reduction in dividends we have seen recently is easily handled in a CDC scheme.

No doubt it will be very difficult to wean the DWP off their misguided ideas about member protection. I don’t find the “regulatory own funds” regime very helpful and CDC is a wider idea than RoF.  Yet the DWP seems to have reached a position in which they think CDC = RoF.

Something close to CDC could be achieved in the DB arena if only the DWP would remove statutory minimum pension increases in payment.  We could then have a DB career average scheme with entirely discretionary pre-retirement revaluation and post retirement increases.  A DB pension cannot be decreased so there is a benefit guarantee to be met and this design is not CDC.  However, even the recent economic difficulties need not come close to triggering a need to reduce a pension in this model, as my example shows. The only step needed to turn such a scheme into CDC is to permit pensions to go down if needs be.  

Considering member protection, the important point is that CDC is better than money purchase DC, not that it is worse than DB.  Of course CDC is worse for member protection than DB, CDC is DC after all.  The point to focus on is that the defined contributions paid into a trust will be spent on the members.  The promise is the contribution, not the benefit.  Whatever the benefit outcome is, for better or worse, it will be worth what was paid in, and the DWP agrees that the benefit outcomes in CDC will on average be bigger and less variable than in money purchase DC.

The DWP needs to realise that DB member protections only protect members if they are in DB schemes.  The ONS occupational pensions survey shows that the number of active members in private DB schemes open to new entrants is about 1.0m, down from nearer 6m in the mid 1990s.  Member protection is not a function of regulation alone. It is the product of regulation and employers’ willingness to provide DB schemes.  We are surely at a point that employers’ declining willingness to sponsor DB schemes has more than offset the effect of “member protecting” regulations, and increasing regulation now has the effect of reducing the number of open schemes and reducing the number of protected members.  I suggest we’re in the position where the arrow is on the graphical illustration below.

 

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1 Comment
by henry tapper on January 17, 2012  •  Permalink
Posted in annuity, corporate governance, dc pensions, de-risking, EU Solvency II, Fiduciary Management, Management, NEST, pensions, Retirement
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Posted by henry tapper on January 17, 2012

http://henrytapper.com/2012/01/17/to-get-better-pensions-we-need-to-share-risk/

Who made that choice for you?

Question mark

Image via Wikipedia

Put the question “why are pensions guaranteed?” into google and you will not get an answer. I reckon it’s because no-one asks the question.

Why is nobody asking the question?

Is someone guaranteeing the value of your house?

Is there a guarantgee that your share portfolio won’t go down in value?

Are you guaranteed a job for life?

Of course not?  If you were guaranteed all that lot , so would everybody else and the cost would mean a communist state whee there was no incentive to get out of bed.

So what makes your retirement income any different?

Somebody has chosen that you needed those guarantees why?

Suppose we in the UK did what the Australians and Americans do and pay all the money you’ve buit up in your pension as a big lump into your bank account – would that be better?

What would you do then? Would you go out and blow the money, or sit on it  or invest it or would you buy yourself a guaranteed pension?  I suspect that most of us would not chose to buy ourselves a pension.

So when we get to retirment and go and buy a pension, we are doing something strange to us and we’re doing it because that’s what you have to do.

Almost all the problems we have in this country with pensions are created by the guarantees that are offered in retirement. Sure, from time to time, the marekts in which pensions are invested don’t give the expected returns but this is small beer compared with the problems created by pension promises.

The question is really relevent today as we are in a period of crisis created by the economic crisis. The low interest rates which we are enjoying as mortgage payers are crucifying the guaranteed rate at which insurance companies and company pension shcemes put aside money to cover the pension promises they are making. The cost of reserving is driving some companies offering staff guaranteed pensions out of business. For those of us who have to buy the guaranteed pensions ourselves (eg all of us in DC pensions), it’s us who will have to pay for these guarantees and we have to do so by taking less retirment income than we were expecting.

Now it may be that you are prepared to pay this price but it may be, when you are told that these guarantees are costing us a 30% cut in our retirement income, you may think again.

The 30% figure refers to the anouunt of pension that you can get by buying an annuity in the UK compared with how much pension you’d get from an equivalent Dutch pension which you can’t buy into (unless you live and work in Dutchland -sorry Netherlands/Holland whatever).

Now I’m led to believe that certain high-ranking pension people including the minister for pensions Steve Webb, have been looking into these Dutch pensions and have decided they are a little flakey for us in the UK. Why? Why- because the Dutch pension doesn#t have guarantees.

Let me provide you with a difficult choice.  I wll pay you £70 for certain for next five years – £350 in total. Or I will pay you £100 this year, £105 next year, £110 the year after, £115 the year after but only £100 in year five- that’s £530 altogether or £180 more overall. You’d take the £530 over £350 wouldn’t you?

You wouldn’t worry too much that your payment in the final year was £30 less than a year before.

Now I may exagerate a little -  ok a lot – but it’s for a reason. I would like you when you finish reading this to ask yourself just why we Steve Webb and the Government Actuary and the civil servants at the DWP are so worried about us adopting something like the Dutch system where we seem certain to get more money overall, albeit in a slightly less certain way.

Because the Government seem quite happy for us to have all kind of uncertainty about houses, jobs and not least the funds we build up in these DC pensions but they are adament that our pensions should never be allowed to go down.

This looks like something you should be looking into eh? Something worth asking some questions about? I don’t know the answer but I’m going to keep asking the question.

2 Comments
by henry tapper on January 15, 2012  •  Permalink
Posted in annuity, auto-enrolment, corporate governance, customer service, EU Solvency II
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Posted by henry tapper on January 15, 2012

http://henrytapper.com/2012/01/15/who-made-that-choice-for-you/

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