The curse of the transfer value!

bear 2

“at my analytic best”

There is a curse to having money that was bequeathed us by the later Chancellor. It is called “freedom” and it applies to the rights that  baby boomers have in final salary schemes. It’s not just those in their fifties, many younger folk have defined benefit rights but most of us don’t really pay attention to their pension till they’re able to take the money.

The curse is choice and the choice is particularly acute right now. There’s a “transfer now while low bond yields last” feel in the house. Meryn Somerset-Webb writes in the Financial Times, “If I had a Final Salary Pension , I’d cash it in now“.

Imagine you had invested in something back in 2009 and it had returned 25 per cent every year for the past seven years — a total return of about 480 per cent. Then imagine that the value of that investment was 100 per cent linked to the bond market. What would you do?

Meryn choose her words carefully, your defined benefit may not be invested in bonds but it is valued by the cost of buying expensive bonds to pay you a promised income. The value of those bonds is falling daily as the world wakes up to the probability of future interest rate rises and the chances are that the value of your (defined benefit) pension will fall from its current valuation.

Transfer now while (low) bond yields last?

Except you can’t without permission from a regulated financial advisor who will give you a piece of paper you can show your pension trustees proving you have taken advice. The price of these pieces of paper is extortionate. Very few advisers will issue them for less than £1000 and typically they cost anything from 1-3% of your transfer value.

With bond yields so low , transfer values are (as Merryn points out), typically 40 times your prospective pension. So a measly pension of £80pw might be worth over £200,000 in transfer value. That would typically trigger an advice bill of between £2k abd £6k.

You might call this profiteering on behalf of IFAs, they will point to the manual process they have to follow to get to know you and issue a personalised recommendation.Advisers qualified to recommend on transfer values are also subject to a higher degree of regulatory supervision and have to take extra exams

But the truth is that the biggest headache for an IFA is the threat of being sued by you if the advice turns out to be mis-selling! You are in fact helping to pay for the professional indemnity insurance needed to cover the IFA’s potential liabilities if he or she gets it wrong.

Transfer now if you can afford it?

For many people, entering into an advisory process which may spew out the answer “no” for the hefty advisory fee, is unattractive, a barrier to exit. But like refugees from the third world , many investors will stop at nothing to get their freedom. And like those refugees, baby boomers waiting for their freedom – are getting frustrated.

Like those dispersed from Sangatte, the exiteers are now dispersed with no common voice but a common frustration that while they wait the value of their transfer value may be slipping.

One of my actuarial colleagues has pension rights he is waiting to access. He knows the value of everything but he is yet to find the right price to get it!

I am working with people who are trying to reduce the cost of transfer advice but fear that by the time we find a solution, the transfer values will have fallen faster than the advisory costs. The exciteer cannot seem to win!

Should we panic?

It’s a rhetorical question to which you’d expect my answer to be “no”, but I’m not so sure. The absolute value of your defined benefit is the benefit and that will not change with the prospect of interest rates. So if you are rewarded less for a slight up-tick in bond yields, you are an absolute loser. In pure economic terms – Meryn is right

My friend is taking the money — and his chances with it. It is, he says, the last gift he expects from the great bond bull market. But it’s a good one.

The real returns needed to beat the guarantees of the defined benefit seem to make taking a transfer an economic “no brainer”.

But pure economics was not enough (for me)

As regular readers know, I recently took my defined benefit pension, not as a transfer value as a pension. I didn’t even take my tax free cash – I just took a pension. It wasn’t huge as incomes go- it certainly doesn’t replace my current earnings – but it’s a pension that is guaranteed to increase whatever the markets do and is backed by a strong employer which continues to fund the pension scheme from which it is paid.

The alternative was potentially more from my transfer value, but with that potential for more, was a potential for less (if I screwed up the investment, the potential for my underestimating my capacity to survive on this planet and the potential for me to worry about the markets with the management of my money doing me more (mental) harm than good.

The size of my transfer value also brought with it an unwanted tax liability against the Lifetime Allowance with my transfer value exceeding the technical valuation (for tax purposes) by nearly two and a half times.

So the answer for me was – don’t panic and draw your pension

I resent the amount that I was being asked to pay for advice on what I have to do. I resent the amount of time I was spending worrying about whether to transfer or not. In fact I resent to the curse of pension freedoms altogether.

I look forward to the day- in 12 years -when my first state pension payment arrives in whatever will then pass for my bank account. Hopefully i will not have to spend time deliberating on transfer values for that and can get on with having a damned good time as a pensioner.

We have cursed ourselves with choice, the baby-boomers are cursed with transfer values and with the need for costly advice. Those – like the refugees – who make it, find that their drawdown policies are cursed too with high charges, high volatility and a high risk of pounds cost ravaging where market falls  deplete the pension at an unforeseen rate.


While I can sit back in comfort , allowing someone else to drive my train, I still have an aching wish for that superhigh transfer value I never took. I too am cursed- by the negative capability of what I could have won.

But I am learning to live with certainty. It is a cheery if unexciting friend. I suggest to myself that – as the years go by – I will learn to love my boring decision.

Sometimes the best advice is to do nothing at all. Despite understanding Meryn’s arguments that’s what I did – I suspect that most like me would do well to be as boring as me.

Bear 5

silly me


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Advisers turn the key to the FCA’s fund governance condundrum.


One of the recent themes of this blog is  “What rights we have over “our money”. John Kay’s book – “other people’s money” argues that the money held on account by asset managers should always be considered as held in trust with the manager of the account of pooled fund “a fiduciary”.  But in practice, the person for whom the money is managed is so distant from the fiduciary that neither side has any meaningful relationship.

I have noticed this in other areas where assets are managed by third parties. In horse racing for instance, the owner of a horse and its trainer appear to have a direct relationship but increasingly owners are syndicates and it is syndicate managers and other intermediaries who act for those putting down the money. It is left to the owners to have a few minutes with the horse before and after the race.

There was a famous debate between the man who ran an investment consultancy and the man who ran a fiduciary management company which ended up as an argument about whether you should put your kids in boarding school. The debate focussed on whether you fully outsourced the management of your child to a third party or shared the management with the school. The debate ended up, as debates on equine stewardship do, with intermediaries squabbling between each other while the owner is excluded from the room.

The FCA’s recent Asset Management Study is very good on this question.

It’s  main suggestion is that the FCA places a duty on asset managers to act in customers’ best interests. 

While Authorised Fund Management  (AFM) boards have duties to act independently and in the best interests of investors, they do not currently have an explicit and well defined obligation to seek value for money for them.

We (the FCA)are considering:

• Placing a duty on asset managers to demonstrate how their funds deliver value for money to investors

• Reforming governance standards for UK authorised funds to ensure asset managers are held to account for how they deliver value for money. In doing so, we might draw on the US model for fund governance

• Supervising and referring for investigation issues related to any new duties and governance standards.

My suspicion is that this reporting is not going to be directed at the consumer but at the intermediary. Funds are generally owned by insurance companies who re-sell the asset management to consumers from a platform. This primary relationship is like that of the trainer and the syndicate manager.

Wholesale money

As can be seen by my frustration at understanding what the hell is going on at People’s Pension, there can be a range of intermediaries and governance structures between the member and his money. It is difficult – even for an expert – to know who to address the question to. In the case of People’s Pension, there is an insurance company (B&CE) insuring an insurance (pooled) fund , created by the insurance division of an asset manager (State Street Global Asset Managers). The Trustees of People’s Pension are themselves a long way from the managers of the money, the members of the People’s Pension are even further.

I fear that these long reporting lines are going to make the FCA’s task (detailed above) all but impossible. The State Street AFM may disclose to the board of B&CE (who are Governed by the B&CE Independent Governance Committee)and B&CE may disclose to the Trustees of the People’s Pension Master Trust, but the member of People’s Pension will be dependent on three separate fiduciary mechanisms to be sure his or her interests are best served.

There may be investment consultants acting for the members (in the pay of employers) but – as my own experience highlights – even they may struggle to penetrate this miasma of governance arrangements and agreements.

Retail Money

The issue is exactly the same in the retail space where an investor relies on an adviser, a discretionary manager of funds, a platform manager as well as a fund manager (+custodian) to deliver in his interest. Here the pot-pourri of governance structures might include a number  of IGCs, and  AFMs as well as the terms and conditions of the advisory agreements. The complexity of these agreements makes what started transparent- opaque and what was meant to be clear, obscure.

The problem with these retail chains is that there is no ultimate fiduciary and no look through to the next level of governance. While we might reasonably expect the trustees of the People’s Pension to escalate an issue (such as my questions about stock lending fees) through to source, the same cannot be done at a retail level. There simply is not the level of expertise working for the end user.

Comparative levels of care

My worry about the FCA’s governance proposals rest with the complexity of the reporting chains, not with the reporting itself. If for instance the asset manager’s AFM reports accurately to an insurer, can we expect the insurer (and it’s IGC) to treat the next customer fairly. If that next customer is an adviser rather than the end user, can we expect the regulations around advisory behaviour to ensure that the relationship between the AFM and insurer/IGC is clean? Is the member getting value for money from all levels of the intermediary chain and who is there as the ultimate fiduciary?

Although the problems are fewer in the institutional world (where there is greater economy of scale), the problems are the same. They are systemic – there is too much intermediation.

A model for the future?

I was speaking recently with someone hoping to offer next year a simple product which allows people to buy funds straight from the source (Vanguard,Fidelity and BlackRock). The idea was that for an all in fee of around 0.5% , an individual would get a solution to the problem “what do I do with my money?”. The value of the proposition was not in what was in the product, but what wasn’t. The AFM statements of Vanguard, Fidelity and BlackRock would be the only statements you’d have to read.

This simple way of managing affairs means that the specific duties that the FCA want to entrust to fund managers might be explicable from one end of the chain to the other.

• among other factors they decide,

. considering the reasonableness of the fund’s fees, including any performance fee

• considering all direct and indirect expenses and charges met by the fund, including transaction costs

• considering whether it is in the interests of investors to institute tiered fee breakpoints at specified asset levels, or alternative fee arrangements, in order to share economies of scale with investors more effectively

• considering whether there are practices happening in the fund which are not in the best interests of investors, such as the fund manager taking ‘risk-free box profits’

• to perform an annual, arm’s length reassessment and, where appropriate, renegotiation of the investment management agreement (IMA) with the asset management company

• to make public an annual report detailing its activities in reassessing and renegotiating contracts and how it is ensuring value for money on behalf of the fund and its investors

Who’s money is it anyway?

The fundamental questions of ownership (addressed at the start of this blog) are critical to the FCA’s Asset Management Study.

In my view, good governance need only be done once and if we are worrying about assets, it should only be done at the asset management level. The FCA’s proposals for asset managers are sensible and enforceable. But though they may bring value for money from the fund, they do not ensure value for money for the consumer. For that to happen the various agreements between funds-platforms-DFMs-custodians – Advisers and clients have to all work.

There are just too many agreements and too many governance bodies for regulators to properly regulate and consumers to be properly protected.

The end result is the proliferation of fees that adds up to an amount so far north of 0.75% to make workplace pensions look- even in their most expensive form, a VFM haven.

Adviser’s are the turn-key to the problem and its solution

Ultimately there needs to be a sense check on the propositions being brought to market and here I see the Regulator having a crucial role. If advisers (whether wealth managers or investment consultants) are delivering solutions to client problems at a cost that renders those solutions patently unworkable, the Regulator needs to call those advisers to account.

For that reason, I am ultimately a fan of the FCA’s approach. Advisers are the problem and the solution. The referral of the investment advisory community to the CMA is something that I wholely support.

Advisers have the capacity to shorten or lengthen the intermediary process. They can ensure or destroy value for money, they can solve or create the problem.

The obligation on advisers should be very simple; show us your value or get out of town.

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Taking possession; how’s Workie performing ?

There’s an urban (pension) myth that it’s not until your pension is worth as much as your car that you take any notice of it. My car has been written off twice and has a scrap value of £1000 so I pay a lot of attention to my pension.

Ask me to describe the way my pension is invested and I’ll bore you for hours, I look at the fund value every day and wake up in the middle of the night worrying about emerging market bond yields. I’m a pension freak/nerd/geek and there’s no denying it.

But most people I know haven’t a clue about any of their pensions. They couldn’t tell you what they are projected to get from the state (or even when), they can’t even remember what private pensions they have (let alone how they are doing) and most struggle to find a way of working out what kind of a future they’re heading for.

So roll on the pensions dashboard – which will help some people to get back in touch with their pots and pension rights and should give them an idea of how much work they’re going to have to do (both investing and working) before they can say the word “retired”.

When your pension’s worth more than your car

There comes a point (perhaps when your pension gets to be worth more than your car), when investment takes on a new meaning. This year, my pension rights grew by more than the amount I earned from work. My pension is working harder than I am!

For most people who are in a workplace pension for the first time (from auto-enrolment), finding out how your pension is doing will be quite new and I doubt more than 1% of us know how to go about comparing our experience with other’s.

So I was really pleased that the rating agency Defaqto published last week a study of the various workplace pension provider’s investment performance over the period that auto-enrolment has been running (3 years this July). Their work was sponsored by NEST and unsurprisingly it is heavily focussed on NEST’s performance. I won’t say influence by NEST as I have insufficient understanding on how some of the number’s were arrived at but the thing is that for the first time a study of the performance of the leading providers exists


Source Morningstar/ONS/NEST ; calculations defaqto

The survey is firmly pointed at advisers but as most people who are in workplace pensions don’t have advisers , I think we need a version for employers.

You’ll notice that Defaqto/NEST weren’t able to get numbers from NOW and People’s Pension – I don’t know why not. This makes the research incomplete and we at First Actuarial will be filling in the missing boxes and coming back with a set of numbers updated to this quarter which will allow employers/accountants and members to see what has happened to their money since they invested.

Now we come to the million squillion provisos that have to be shouted out to avoid people getting the wrong end of the investment stick. The point of these investment funds is that they are long term (marathon not sprints). A horse that started the grand national at the back- may finish at the front – which is why we shouldn’t be too upset about Standard Life’s lacklustre start. Some people (including NEST in their introduction) warn against using three year performance tables- we say that three years is too short to judge but long enough to be interesting!

The second thing to note is what defaqto publish on the next page of their report (which I’m not republishing as I can’t check the numbers and how they are calculated and whether it is really appropriate to use their particular methodology . What deqato publish are the information ratios for each of the numbers published above. These show the amount of return achieved for the amount of risk. These are known as “risk adjusted measures” and show the efficiency of the returns. If you’ve wasted all your energy to keep up with someone who is running effortlessly, the chances are you are not running very well. Your performance in the later stages of a race may fall away. You can see why publishing information ratios is a dangerous thing, you aren’t just looking at how the horse is running, you are giving an implicit judgement on which horse you think will win and that is very close to giving advice!

We think people want a little narrative to explain what each provider has been up to and why there are outlying numbers (like LGIM’s one year number).

What we’re going to do

First Actuarial is a very responsible actuarial consultancy and we don’t want to publish numbers which may be misinterpreted but we do think that employers and business advisers and especially interested members, have got the right to see plain simple numbers and make of them what they will.

So we will be building on the work started by NEST and defaqto and publishing performance tables like the one published above (only with all the numbers). We will be publishing these numbers with a commentary which we at First Actuarial will publish through Pension PlayPen so that “ordinary” employers and business advisers and interested members can see what is going on.

We intend to help people ask questions though we want to give enough commentary for most people’s immediate needs.

Any questions?

We will be hoping that some of the people who read these numbers will be prompted to ask questions and we will be giving them some places to go and ask those questions to.

We will be encouraging those in group personal pensions to get in touch with the Independent Governance Committees and questions of them.

We will be encouraging those in master trusts to get in touch with the trustees and ask questions of them.

We will be suggesting that members who want to understand things which aren’t specific to their provider contact the Pensions Advisory Service.

We will  be suggesting that employers who want regulated advice on what is going on, speak to a regulated adviser.

And in the new year we will publish a more detailed piece of work (which we may charge for) which looks at these numbers in a more considered way and we are going to feed that research into the Value for Money debate. Because the IGCs are due to be reporting again on value for money in April 2017 and we want them to have some proper help on just what their insurers are getting by way of results (for what they are paying for their fund management). Likewise, the chairs of mastertrust trustees are going to have to make similar pronouncements.

Pension pots are your assets.

At a recent meeting of the PPI, Jeannie Drake spoke up for auto-enrolment and called for those in the room to engage with employers, business advisers and members so that they got interested in what their pensions were actually doing.

Most providers now give members access to the value of their workplace pension on-line but none (to my knowledge) allow the information they give out (fund values, fact sheets and investment guides) to be compared to what you could get from the provider next door.

The history of consumerism is plotted against breakthrough points when comparative data was made accessible to ordinary purchasers in an accessible way. Which did it in the 70’s, Autocar did it in the 90’s, the price comparison sites arrived in the 90s and in the last fifteen years we have websites that not only enable you to find out how your purchase is faring, but gives you the chance to do something if the choice you made turns out to be a bad choice.

Pension pots are your assets, they are for your benefit, you have property rights on them and First Actuarial and Pension PlayPen will find a way (compliantly) to make sure you have access to the information you need and deserve.




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Michael Johnson – 80% of fund management industry is redundant


Michael Johnson has responded to the FCA’s Asset Management Study for the Centre for Policy Studies. Here  is his paper is in full.


The Financial Conduct Authority (FCA) is to be congratulated on its recent interim Asset Management Market Study. Its robust, independent and damning evidence skewers any justification that active fund management of listed assets is worth the candle.

The consequences for the asset management industry are potentially devastating, but radical surgery is long overdue. Its failings have serious implications for the health of the country’s pension funds, reflected in Melbourne Mercer Global Pension Index. This shows the UK’s pensions landscape continuing to slide down the global ranking.[1] In addition, the UK’s defined benefit schemes now have the weakest funding position in Europe. Britain has the highest proportion of company schemes (38%) flagged as being in the weakest 20% of their industry peer groups, and UK company schemes are also the most underfunded relative to revenues.[2]

Simplification is the key. In respect of listed assets, over any meaningful timeframe, passive management should be embraced. The Government, acting through the Department of Communities and Local Government (DCLG) as sponsor of the Local Government Pension Scheme (LGPS), has a great opportunity to exhibit leadership, in the interests of all members of funded pension schemes. It should resuscitate and implemented its May 2014 proposals that:

  1. all of the LGPS’s externally actively managed listed assets (some £85 billion at the time) should be moved to passive fund management; and
  3. all “fund of funds”, which incur multiple layers of costs, should be replaced by one investment vehicle for alternative assets, to be managed in-house.

The Government is in no position to enforce similar proposals on private sector schemes but, in light of the FCA’s report, many would consider it irresponsible for them not to follow DCLG’s lead. The FCA should be encouraged to meet DCLG to discuss the implications of its findings.

The FCA rides in

A few years ago the author wrote an article chastising the active fund management industry (and the consulting accoutrement). In light of the FCA’s interim report, there is no need to apologise for reiterating what was written back then.

Evidence continues to mount that active fund management is underpinned by a web of meaningless terminology, pseudo-science and sales patter. For too long, active managers have been allowed to shelter behind their standard disclaimer concerning the long-term nature of investing. But the long term never arrives: it merely shuffles forward: there is never a day of reckoning. In the meantime, ludicrously expensive talent is deployed in the pointless pursuit of continually trying to out-perform one another. Worse, it is a giant negative sum game in which the savers pay the price, their hard won capital being persistently, and innocuously, eroded by high recurring charges and fees.

One consequence of this, as described by the FCA, is high operating profit margins for asset management firms, consistently averaging around 36%. The FCA contrasts this with the average margin of the FTSE All share companies, at some 16%. The FCA also commented on how charges for active funds have remained stable over time, whereas charges for passive funds have been falling in recent years. It also identifies price clustering for active funds for sale in the UK, and concludes that “there is little evidence that firms compete on the basis of price.” The FCA’s conclusion is clear: competition is not functioning properly.

Performance: no consistency

But what of the so-called “star” managers? Every quarter, F&C Fund Watch publishes consistency ratios measuring the proportion of funds in the 12 main IMA sectors that produced top quartile returns each year, over the prior three years. In the third quarter of 2016, of 1,137 funds, only 28 consistently produced top quartile returns (i.e. 2.5%). Using blind luck, one would expect 18 funds to achieve this, which leaves only 10 fund managers, 0.9% of a universe of 1,137, who could legitimately claim that their success was down to skill.

Over the same three year period, only 161 funds (14.2%) consistently produced above average (i.e. top half) returns. Statistically, this includes 142 who would achieve this through luck, which leaves 19 funds (0.2% of the total) that performed through skill. The other 976 funds (85.8%) failed to achieve what should be considered a modest objective, that of delivering top half performance over three consecutive years.

The FCA report comments on fund performance, finding that:

  • institutional active investment products, on average, outperformed their benchmarks before charges were deducted. After charges there was no significant return over the benchmark for institutional products;
  • active funds for sale in the UK, on average, outperformed benchmarks before charges were deducted, but underperformed benchmarks after charges on an annualised basis by around 60 basis points; and
  • there is little evidence of persistence in outperformance in the academic literature, but there is some evidence of persistent underperformance.

Data shows us that the dominant contributor to total returns is the asset class mix, not individual stock selection. In practice, as the FCA has now confirmed, many so-called active managers are actually “closet trackers”. Once their high costs are deducted, the outcome of sub-index performance is no surprise. To misquote Sir Winston Churchill, never is so much being taken by so few from so many, and for so little in return.

Investment consultancy: pointless?

Costs are controllable but, by and large, investment performance is not. This is not a recent revelation. Nobel laureate Daniel Kahneman: “there are domains in which expertise is not possible. Stock picking is a good example”. And Warren Buffett: “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”.

The FCA’s report supports these sentiments, stating that investment consultants are not effective at identifying outperforming fund managers. Perhaps this is because a stunningly small number of funds beat their peers on a regular basis, over any meaningful timeframe.

But the crucial point is that at the start of any three year period, say, no one knows which funds they will be, including the consultants. The mantra that “past performance is no guide to future growth” cannot be faulted.[3] Hindsight being useless, this is active fund management’s Achilles heel, and the crux of the debate.

The FCA proposes to consult on whether to refer the investment consultancy industry to the Competition and Markets Authority (CMA). In light of the above, it is not clear how this would help clients. Apart from reiterating the benefits of diversification (by asset class, and market exposures such as currency and term), and giving consideration to liquidity needs, what else is there to say? 

On-going opacity

The FCA is also critical of the difficulty that clients have in monitoring their consultants, and holding them to account. According to the report, the information presented “was at times difficult to understand and important factors were not always highlighted. This could lead to poor performance not being communicated or being easily disguised.”

The FCA is picking up on an all-too familiar theme, the industry’s cultural attachment to opacity around fees and performance. It is often hard for clients to identify added value.

Fiduciary management

The FCA has rightly raised concerns about the conflicts of interest in fiduciary management (consultant and fund manager being from the same firm). While this is important, it is not the key point, which is that the rise of fiduciary management consultancy is symptomatic of the abject failings of some of those with governance responsibilities. Resolve this, and there would be no need for (the growing) fiduciary management business.

And what of the LGPS?

The LGPS is a disparate collection of 89 predominately sub-scale funds (in England and Wales) with total assets of some £214 billion (March 2016): it is one of the world’s largest occupational pension schemes. It matters.

In May 2014, DCLG, the scheme sponsor issued a consultation paper[4] proposing that:

  1. all of the LGPS’s externally actively managed listed assets (some £85 billion at the time) should be moved to passive fund management; and
  2. all “fund of funds”, which incur multiple layers of costs, should be replaced by one investment vehicle for alternative assets, , to be managed in-house.

These proposals emerged after extensive analysis of LGPS data.[5] This found that on average, across the 89 funds, any additional performance generated by active management of listed assets (relative to the benchmark indices) is insufficient to overcome the additional costs. The conclusion is that it is better to invest passively, tracking the appropriate index.

Total cost savings of £660 million per year were expected, and £6.6 billion over the next 20 years, monies that would no longer reach asset managers’ pockets: ultimately, a saving for taxpayers. Predictably, the (deep pocketed) industry fought back and, shamefully, the proposals were shelved.

Conclusion: resuscitate the DCLG’s proposals

The FCA has laid bare the nonsense that is the active fund management of listed assets. It is time that DCLG’s proposals were resuscitated and implemented, in what would then mark a seminal moment for all occupational pension schemes. 

If private sector schemes were to follow DCLG’s leadership, the implications would be profound. Millions of scheme members would benefit, and it would become apparent that we do not need 80% of the industry. The remaining 20% should focus on adding value in the unlisted asset arena that lacks the indices required by (passive) tracker funds to replicate investment performance: principally “alternative” assets, property and emerging markets and smaller companies funds.

Michael Johnson

Centre for Policy Studies

The CPS is the liberal, pro-markets think-tank, influential in shaping Conservative policy.” The Times

Number 1 UK Policy think tank for “Most Innovative Policy Ideas/Proposals” – 2015 Global Go To Think Tank Index Report


DISCLAIMER: The views set out in the ‘Briefing Note’ are those of the individual author only and should not be taken to represent a corporate view of the Centre for Policy Studies


[1]      The Index scores each country’s pensions landscape on the adequacy, sustainability and integrity of its publically funded and private pension systems. The UK gets a C+ grade and is now ranked eleventh (of 27 countries), way behind A-graded Denmark and the Netherlands.

[2]     Global pension underfunding concerns; MSCI AGR Issue Brief, October 2016

[3]     Indeed, paragraph 6.46 of the FCA’s report states that past performance is not likely to be a good indicator of future performance.

[4]     Local Government Pension Scheme: Opportunities for collaboration, cost savings and efficiencies, Consultation; DCLG, May 2014.

[5]     See The Local Government Pension Scheme: opportunity knocks; Michael Johnson, CPS, 2013, and LGPS structural analysis; Hymans Robertson LLP, published 2014.



Michael Johnson is a Research Fellow of the Centre for Policy Studies and a highly regarded pensions analyst. He originally trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. More recently he was Secretary to the Conservative Party’s Economic Competitiveness Policy Group.

He is the author of more than 35 influential pensions-related papers for the Centre for Policy Studies (all of which can be freely downloaded from He is occasionally consulted on pension reform by serving Ministers and shadow Ministers, the DWP Select Committee and the House of Lords Select Committee on Public Service and Demographic Change.


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In denial and in disgust – investment consultants and the FCA.


I went to the Vuelio blogger awards last night, which was fun, young, female and loud. I learned that I am unusual in not making money out of my blog and that I could make this a mobile advertising platform for everybody. So you know, I have yet to take one penny from this blog and have no intention of doing so. The pleasure of not having to worry about conflicts of interests outweighs whatever I could coin from advertorial.

No sooner has the phrase “conflicts of interest” appeared on my screen then my mind is strangely distracted by investment consultants -specifically their reaction to the demolition job delivered on them collectively by the FCA in last week’s Asset Management Market Study.

Helen Morrison, writing her “editor’s view” in Professional Pensions , puzzles over a “market that just isn’t working”. It is indeed a puzzle. If you want a truly impartial view of why Aon, Mercer and WTW own 60% of the investment consulting market ask an investment consultant! Here’s Tim Giles of Aon.

“We make up a large part of the consulting market but we are in this position because people want to work with us. There are a large number of companies operating within this area and there are no real barriers to clients moving if they wish to”.

As I work for one of those companies working “within this area” let me explain why it is no good coming to us if you are a trustee

  1. You won’t get a corporate headquarters in the Cheese Grater at £100+ a square foot
  2. You won’t get lavish client parties
  3. You won’t get a champagne soaked stand at every investment conference you go to
  4. You won’t get fiduciary management
  5. You won’t get manager of manager funds
  6. You won’t get a vertically integrated master trust
  7. You won’t be recommended active funds when passive funds will do
  8. You won’t get price negotiation on the funds you buy
  9. You won’t get a proper analysis of the hidden costs and charges within your fund
  10. You won’t get a massive bill for not very much

Helen Morrison archly remarks

Apparently the key stumbling block is the time taken to find a new provider. However, those investors who did consider switching but decided not to, often said they could not find a good alternative provider.

It’s not that First Actuarial can’t compete, we simply don’t want to compete. If you are looking for 1-10 above – stick with the big three. They offer you the equivalent of a fully monetised blog, you’ll have a lovely time and end up skint!

In disgust

There is very little real debate among asset managers and investment consultants about this paper. I spent a part of a day last week at the Aberdeen Asset Management Conference where the audience appeared to be investment consultants and wealth managers. Not only did the conference agenda not address the FCA market study, but no one I spoke to seemed even to have read it!

The status quo is far too rosy to allow some criticism from a bunch of lawyers in Canary Wharf to spoil the party (see 1-10 above). But here is the point, the solution to the problems set out in such detail by the FCA do not lie with the all-knowing investment consultants, the solution is likely to lie with the Competition and Markets Authority who might take a slightly different views to (1-10 above) than those who use them to maintain the status quo.

Rory Percival, who when at the FCA was vocal about retail investment advice , has no problem expressing the views of his former colleagues..

He told  Money Marketing:

“No advisers really compete on price. Advisers and consumers are completely non-price sensitive around investment and pensions.

“From an economic sense, they need to be the buyers on the clients’ behalf so they need to do that thinking about cost and providing competitive pressures on costs and that is a kind of mindset that I don’t think necessarily all advisers are tuned to.”

The harsh truth is that we as consumers are bad buyers (see OFT on pensions 2014). Advisers are only too ready to exploit this. The exploitation of bad purchasing increases exponentially when it is other people’s money that is being taxed by high charges and costs.

The abnegation of responsibility for the value of “other people’s money” by investment consultants and wealth managers is often truly disgusting.


In denial

When you are in a successful business – such as those of the big investment consultants and the large asset managers, it is hard to see how disgusting things are for those “other people” who own the money.

I recently saw an investment recommendation from one of the big three consultants that was so expensive -everyone, actuaries, trustees and the employer who ultimately picked up the bill, threw up their hands in despair. But the bill will be paid, because the client is global and the agreement with the consultant is global. But the pension scheme is in deficit and the employer could easily be pre-packed into administration and the pension passed to the PPF. No part of the deficit will ever be attributed to the investment consultant’s fees, the trustees, actuaries and the employer were powerless to resist.

The reasonable people who run Mercer, Aon and WTW do not know life at this kind of level. They have long since handed in their scheme actuary certificates and don’t do much more than review the level of billings of their various offices and departments as part of their reporting. The owners of the money are now so distant from the people who manage the strategy that governs how they are treated , that these consultancy owners can remain entirely in denial.

They are in denial about us too. They have no idea that we have offices on the edges of unfashionable towns like Basingstoke and Peterborough, we have hard-working people who often charge less than a third we see for similar work from the big three. They forget that for our clients, a party is in a pub and that we’ll  share the cost of the round.

We do exist, we don’t compete, we don’t want to compete.

We are waiting.


In disgust




Posted in investment, pensions | Tagged , , , , , , , , , | 3 Comments

Why a 12% pension saving rate is wrong.



PLSA’s forecast for Retirement Income Adequacy



I had hoped to talk yesterday with and  today about Lord Turner and the meeting of minds at the Pension and Lifetime Savings Association.

The change of title a year ago had, I hoped , heralded a more open discussion on issues such as Retirement Income Adequacy, the title of yesterday’s hot topic debate.

Unfortunately, I was presented at the door with a bill for £610 +vat for what amounted to 3 hours talks and a bit of debate (and that’s with a fund member’s discount!). The rows of unused badges from journalists who had  been given free places suggest that the PLSA wanted publicity – but maybe not debate!

I have however spent some time reading the research carried out by Hymans Robertson on behalf of the PLSA on data collected by the PPI. The report itself is excellently drafted and has some really good analysis, the data is as good as could be.

But the conclusions (as illustrated by the chart above) ridicule what we are doing with auto-enrolment, suggest that even when we get to 8%, we aren’t doing enough and suggest we will need to work five years longer and save 50% more to have any chance of getting out of the red and into the green.

Two small flaws – flaw one

The report is seriously flawed. If we look at its findings as pension people we must question the comments on family status at its end. Most people start retirement in a relationship and become single the longer they live. Most people don’t expect to be supported by a partner, but they do rely on someone else. The PLSA report makes no allowance for this, it assumes in its “replacement rate” calculations , that we go alone into that deep night.

Relationships that start when we are at work , continue in retirement – this is why many women work part time. Divorce is on the up in retirement, perhaps suggesting that many older people are self-sufficient on their own, but self-sufficiency (financially) is not something that people with very low private pensions aspire to.

My question to the PLSA, Hymans and the PPI, is have you dodged this? It is of course hard to model, but I suspect that the poorer you are in retirement, the more you depend on others – particularly your life partner.

The findings of the report do not take into account partnerships and families

Two small flaws – flaw two

The modelling assumes the purchase of an RPI linked annuity at today’s (depressed) rates. Is this a luxury those on low retirement incomes can afford? People already have earnings linked state pensions – can we not model around a flat-lining income in retirement – people’s income needs in retirement do not generally follow retail price inflation

The assumptions are what you would expect from old school actuaries, but they do not engage with the new world of pension freedoms and they pay scant regard for the dependencies we have in retirement (which extend beyond pensions).

The report presents DC as if it were DB – and the most expensive version of DB, the costs of pensions are over-estimated.

One big flaw – one big fat micro flaw

Perhaps I am disillusioned by not being able to afford to attend the debate, but I wonder what world the folks at PPI/PLSA and Hymans are living in. I suspect it is one of high incomes, stable employment and good prospects of income growth. In short – a world where financial hardship is not a day to day factor.

It was unfortunate that the day on which this paper was published, coincided with the publication of the IFS’ analysis of the Government’s projections for people’s incomes over the next few years.earnings-2

This chart shows that people’s average earnings (the black line) are projected to fall between 2008 and 2021.


This is down to new (post Brexit) projections from the ONS and OBR


Worse, the impact on income levels will be worst for those on low incomes (10th to
50th decile, than those on high incomes (those on the right hand side of the graph).


You can see the reason for this by looking at the tiny changes the autumn statement will have (relative to the blue boxes representing what had previously been announced in Osborn’s austerity budgets).


This graph is not from the IRS but the Resolution Foundation and it shows that for this fall in income is massive , a disaster in terms of people’s earnings expectations.

To suppose (as the PLSA do) that people can simply save 12% on top of all other deductions and work 5 years longer does not play well to ordinary people. I am not arguing that we hand over the reins of pension policy to populism, but I think we need to be realistic.

Now is not the time to be telling people that the slow progress they are making is not progress enough. The charts above show just what a huge challenge we have ahead , getting our savings from 2 to 8% of the band. The last thing we need is to be told that this is insignificant!

Two micro balls ups and one macro cock up

It is time for the PLSA to wake up to real world issues. People aren’t going to pay over £700 to hear someone explain their report, people aren’t going to save over 12% of earnings they just about make do with.

We need to wake up to the way people support themselves in retirement by studying actual spending patterns. People on low retirement incomes get by without large occupational pensions because they always have, they find ways round. Auto-enrolment is about adjusting the balance between dependency and self-sufficiency but it is not (yet) about making us all self-sufficient.

Ideological solutions to pensions, the ones that suppose that we should pack up work and put our feet up , are both unrealistic and dangerous. They are unrealistic because they assume people have a limitless capacity to scrimp today to splurge tomorrow and they are dangerous because they alienate pension people from those in Government.

Frankly, if I was Richard Harrington , reading this document, I would not be impressed.




PPI data;

PLSA report;

Appendix methodology (Hymans Robertson’s assumptions) ;

Posted in pensions | Tagged , , , , , , | 5 Comments

People’s Pension admits undisclosed charge-hike.


Last week I published an article “Power to the People”, calling on People’s pension to tell their members what their asset managers were charging for stock lending on trustee’s assets.

People’s Pension has responded with a comment on that blog.

The People’s Pension comment on this article can be found at:

Kind regards
Andy Tarrant

The answer is 30% of the revenues.

 Income generated from securities lending is allocated 70% to the funds (ie the members) and 30% to the lending agent as is the case for all State Street’s Managed Pension Fund clients

Previously the fund was invested with LGIM (part of Legal & General). Legal & General do not charge separately for stock lending, the cost is born by L&G as part of the service.

Though People’s Pension does not say this, I will. Members of the People’s Pension – when invested by LGIM did not pay a charge for stock lending, now they do. There is a further question – one not answered by People’s Pension which is “how much”.

How much of the stock owned by the trustees on behalf of members is being leant and what are the revenues in £sd terms that State Street are making from this money?

Why was this change in practice not disclosed by the Trustees to the members and why is there still so little transparency in the disclosure of the impact of the change of policy?

Why is it left to this blog to be asking these questions and why has this not been raised  by any of the investment consultants who are analysing the People’s Pension on behalf of their clients?

These are precisely the questions that the FCA is asking asset managers and investment consultants as part of its recently published Asset Management Study (interim).

I suspect that the answer to these questions goes to the core of what is wrong with the system of checks and balances on asset managers. If you read People’s blog (and I’ve published it at the bottom of this article), you’ll sense affront in every line.

Henry Tapper’s article makes some specific points which are either not accurate or not appropriate.

Well it is not just me that is concerned about People’s Pension’s poor transparency. Here is Share Action’s March survey on People’s and its position relative to its rivals.transparency-share-action

It should be noted that the only organisation at the same rating (Scottish Widows) similarly employs State Street Global Advisers to manage the bulk of its assets.

I’m not sure whether the findings of Share Action are similarly to be dismissed as neither “accurate or appropriate” but as the Pensions Regulator specifically requires Master Trusts (along with other DC pension trusts) to have a stated policy on the matters Share Action were asking, I suggest that it is People’s who need to look to their practices.

Similarly, in failing to disclose the price-hike to member funds occasioned by the switch to State Street, I believe that the trustees are failing in their duties to members. I have  read the B&CE IGC’s Chair’s Statement and it is – like the Trustees, silent on both the price hike and its impact on members.

Is it inappropriate for me to raise these matters?

Well my simple answer is “if not me – who?”. The FCA’s market study returns again and again to the failure of consultants to act for members in pricing matters. This is precisely what I am doing.

Not only have I challenged , but it turns out I was right – members are now paying 30% of stock lending revenues to State Street when before they were getting these services at no cost from Legal & General.

As to my point about the ineffectiveness of B&CE’s IGC, well where are they on this? What were they doing to ensure that the interests of B&CE’s vertically integrated master trust were being protected when B&CE moved £2bn of assets from L&G to SSga?

And why is it inappropriate for me to ask these questions?

As for my accusation that the big winner out of this stock lending price hike is the management of B&CE – what other conclusion can I draw?

Since the member’s are paying more, might I reasonably expect B&CE to be paying less?

They have not disclosed the terms of the Investment Management Agreement with SSga (nor the former agreement with LGIM) but the market is well informed and knows it to be offering B&CE better terms.

I am inferring that the better terms for B&CE are at the expense of worse terms for members. People’s are not denying this, I think this is a reasonable inference.

People’s Pension has not reduced its member charge when switching from LGIM to SSga; in a “not-for- profit” enterprise like B&CE, who else can benefit from this than the management of B&CE and their master trust People’s Pension?

If People’s want to refute what I am saying, let it explain the pricing  implications for members in moving from the LGIM IMA to the SSga IMA. Let it practice what it preaches in its blog.

we expect to be amongst the earliest adopters of full transparency of transaction costs to our members.

I hope that this transparency will extend to “value” reporting as I am utterly confused about this statement (on State Street’s performance – in their blog)

From when fund management was changed to State Street (20 January 2016) up to 30 June 2016 the net contribution to the performance of our default Global Investments (up to 85%) Shares fund was c. 1.8 basis points


What is so weird about People’s Pension’s blog is that it is utterly devoid of contrition. Nowhere does it accept that it is anywhere at fault in all this. Instead it points the finger at me for exposing its failings.

As I hope I have explained (twice), B&CE, through People’s Pension, are almost certainly profiting from lower fees for asset management while members are paying fees for the first time for stock lending.

This has not been disclosed either by B&CE’s IGC or by the trustees or management of People’s Pension.

We do not know the impact of this because we cannot see the IMA and know how much of the stock SSga are lending. We do not know what the IMA says because it is not made available to the public. B&CE is a mutual, as it tells us in its blog

With no shareholders, the interests of our members have dominated B&CE’s (the provider of The People’s Pension) decision-making for 75 years and this remains the case

That I know to be true. I have a very high regard for the People’s Pension as is evidenced in its generally high rating in

The fact remains that if it cannot distribute to shareholders, who else benefits from price hikes than management. There is nothing wrong in management being rewarded so long as it is done in a transparent way!

I remain puzzled and disappointed

Why is an organisation that I fundamentally like, behaving in this high-handed untransparant and unpleasant fashion. Why is it failing  to disclose the price hike on Stock lending? Why is it not saying sorry to its customers?

Text of People’s Pension blog published on B&CE website.

A response to Henry Tapper’s Blog

We at The People’s Pension like to challenge, and be challenged. Holding each other to account is key to improving pensions for everyone.

However, for this dialogue to be effective, it needs to be accurate. Below we set out why Henry’s article is potentially misleading in both the general light it casts and in the detail.

General comment

As an organisation we are passionate about transparency and keeping things simple for our members – these are the foundations on which The People’s Pension has been built. Since its launch, we have been one of the only schemes which operated a single annual management charge for members inclusive of all operating expenses (known as the Total Expense Ratio) with no other fees or penalties.

In addition, we are supporters of the disclosure of transaction costs incurred by fund managers with whom pension providers invest their members’ money.

We are working with the third-party fund manager with whom we invest our members’ money, State Street, to ensure that all transaction costs incurred in managing that money are disclosed. However much as we might like it to be the case, delivering the full transparency of costs for which we have asked is not an overnight exercise. We invest our members’ money in a fund of funds. This requires a more complex disclosure process than fund managers’ systems have in the past been designed to deliver.

One might imagine from the article that we were being singled out because we are behind the industry regarding transaction cost disclosure. In fact, we expect to be amongst the earliest adopters of full transparency of transaction costs to our members.

Specific comment

Henry Tapper’s article makes some specific points which are either not accurate or not appropriate.

“State Street tend to retain stock lending for their own purposes” [Phrases are paraphrased for brevity]

This is not correct. Income generated from securities lending is allocated 70% to the funds (ie the members) and 30% to the lending agent as is the case for all State Street’s Managed Pension Fund clients. State Street takes on all the counter party risk and pays all the costs associated with the lending programme.

“These stock lending fees do not benefit the member”

This is not correct. The 70% revenue allocation goes to the members’ funds. From when fund management was changed to State Street (20 January 2016) up to 30 June 2016 the net contribution to the performance of our default Global Investments (up to 85%) Shares fund was c. 1.8 basis points. This was of direct benefit to members whose funds are slightly larger than they otherwise would have been.

“B&CE are the only IGC whose IGC statement I have not read (I can’t find it)”

The B&CE IGC Statement is located on the B&CE website in the section that deals with the relevant pension scheme, Easybuild. The People’s Pension is a trust-based scheme and does not have an IGC.

“LGIM are transparent. State Street aren’t”

We disagree. State Street are transparent. The People’s Pension members get 70% of any revenue, the costs are taken care of separately by State Street and do not fall on the member, and, critically, State Street bear all the counter party risk. A percentage division of profits is clear and transparent.

We invest with Managed Pension Funds Limited (SSGA’s UK vehicle for pension fund investors). They produce a quarterly fact sheet that provides full details on the State Street Lending programme, including details of what percentage of the fund is on loan and the contribution to the performance of the funds over the period. They also state how the revenue from securities lending is split. So we know exactly what is going on.

“We must assume that no news is good news”

We are working hard on plans for full transparency of transaction costs which we believe will advance the whole transparency agenda and our Trustees are fully committed to supporting this work. We will talk more widely about these when we are ready to do so.

“Management are being over-rewarded”

We work at a not-for-profit for many reasons, but financial ones certainly are not top of the list. With no shareholders, the interests of our members have dominated B&CE’s (the provider of The People’s Pension) decision-making for 75 years and this remains the case.

Posted in pensions | Tagged , , , | 2 Comments

Where does all our money go?


Two of the big three revenue sources are income tax and national insurance, they’re the ones who hurt the well off. The third biggie -VAT is the one that hurts the poorest. Poor people pay VAT at the same rate as the well -off and there’s no getting round it.

Cuts in income tax and national insurance are good for the kind of people who read this blog but it’s cuts to VAT and duties on cigarettes and alcohol that help poorer folk.

The same can be said for spending promises. Promises to cut welfare benefits, like the taper on Universal Credit are going to matter to those just getting by while giveaways on capital gains, inheritance tax and pension saving play well to those who have and are meaningless to those who haven’t.

So when you get to see those little charts that journalists produce at the end of the Autumn Statement that show the impact of Philip Hammond’s policies… realise that everyone (except you) has a nice fat spreadsheet into which they punch the changes.

Which brings me to the interesting bit of being a Chancellor of the Exchequer -lying. George Osborne is perhaps the best liar of any recent Chancellor – his trick was to smile sweetly , give selective sweeteners out on air and then slip in the nasty stuff (that hurt the most vulnerable) in the wedge of paper that accompanied the autumn statement/budget.

Osborne seemed to think that getting away with it was a key performance indicator. This proved to be the case as when he got called (on BREXIT) he got pulled. He was back yesterday , at the Aberdeen Conference, fortunately Andrew Neil was asking him the question and reminded him (twice) that he was talking bollocks.


Talking bollocks

We all know that Philip Hammond has a tough gig. He has to manage the Brexit rollercoaster, deal with the wild card that is Trump and still manage around Theresa May’s promise to help the JAMs (Just managing).

There are loads of ways that Philip Hammond can square the circles, but I will be judging him not on Osborne’s KPI but on standards of decency that centre on “telling the truth”.

If the bollocksometre switches to red as Hammond talks, then he will have gone down in my estimation. I don’t want jokes, I don’t want smirking  smiles and I don’t want creepy grins, I just want an autumn statement straight between the eyes which does what May said on the steps of Downing Street.

Where does all the money go?

Top of the integrity pops would be a big chart like the blocky thing I’ve nicked off the BBC website (at the top). It would show just how much of the money that comes in is going out the door to pay interest on our debt, how much is going to the EU, how much is going on benefits, on pensions and how much is being invested to make Britain more prosperous and a better place to live.

Then I’d like another big blocky thing that shows how this will look when all these measures in the budget kick in. To be really good, I’d like to see one side of the blocky thing relating to the things that help or hurt the poor most and the other side – those things that help or hurt the well-off most and the stuff in the middle – things that help or hurt  us all.

Please Philip – tell us like it is – no bollocks – no lies – no spin. Tell us how you’re spending our money.


oh yeah? – for who?

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Why there is no “opt-out” for the self-employed.


self service 4I get annoyed when I hear pension experts opine on including the self-employed in auto-enrolment (1). I don’t see much self-employment on their CVs, I certainly don’t see many of them being self-employed out of necessity. But most of the people they want “in” are “out” for a good reason. It’s not because they have opted-out of pensions but because they are marginalised from the kind of employment that pension experts take for granted.

If you have been self-employed , you’ll know you are responsible for a lot more than your pension , you pay your sick-pay, you don’t get paid or holidays and you don’t get your tax and NI sorted for you by payroll.

Whether you’ve opted out or been excluded is not the point – the point is that you are out and to suppose that you can be defaulted “in” supposes an infrastructure that the self-employed just don’t have. If – as has been suggested – you invented a new form of national insurance from which the self-employed would need to opt-out, you will have to point to the collection agency that NI from these people.

If you suppose that there is an agency that sets up direct payments from the self-employed , from which they must opt-out, then you suppose wrong.

There is only one way to include the gig-economy in auto-enrolment and that is to put it “on-payroll” and that is a very difficult matter which will take more than a few lines in a future Pensions Bill.

At a recent meeting of the Friends of Auto-Enrolment, I asked the 50 or so payroll practitioners and accountants in the room whether they enrolled anyone who wasn’t on payroll. They looked at me blankly. Despite all the slides from the Pensions Regulator about personal service workers (the self employed contractors who should be considered workers for AE), not one practitioner was auditing the employer’s contractors for potential eligible job-holders (etc.)

Which begs the question why not – it is the law that employers consider their contractors to establish whether they are “PSDs”, very few are doing so and their accountants and payroll advisers are letting this sleeping dog lie. I don’t like sleeping dogs; they have a habit of waking an inopportune moments and they both bark and bite!

The proper way of dealing with the issues surrounding the self-employed, is through a thorough understanding of how these gig-economy contracts work, why so many workers are not on payroll and to realign the tax and national insurance system for the way we work today.

I am pleased that the Prime Minister has already set a taskforce up to do just this. Matthew Taylor of the RSA is tasked with looking at the issues of 21st century employment and making recommendations to Government. The Automatic-Enrolment Review, to happen in 2017, will be going on concurrently with this work as will the ongoing work in the Treasury’s HMRC on the way we levy and collect taxes.

It is important that these strands of work are conducted collaboratively so that whatever is said by the DWP, is in line with Taylor and the HMRC. What we do not need is three sets of recommendations on how to solve the problem from three Government agencies.

And I would strongly suggest that the pension experts who are bemoaning the fact that as many people are avoiding auto-enrolment as are still to be enrolled, keep their moans to themselves.

The people in the room at the FofAE were right to be worried, they are caught in the middle of an intractable problem. It is not for accountants, payroll advisers or even employers to determine the status of contractors. The contractors themselves are hardly in a position to determine whether they are PSDs, indeed the current situation is so messy that the best thing the Government could do right now is declare a moratorium on the eligibility issues I’ve outline.

I am worried that lawyers will arrive with class action law-suits in their brief-cases. I don’t want to see contractors demanding back-dated claims for pension contribution on the basis that they “looked and smelt” like workers. I have seen those slides by the Pensions Regulator maybe thirty times and I am still confused about when a contractor is genuinely disconnected or a pseudo-employee.

So let’s give employers, advisers and the self-employed a break and put this issue in the too-hard box for now. Instead of fanning the flames, let the pension experts work with the DWP, HMRC and Taylor and in the meantime, let’s get on with the job in hand- to engage around one million more employers into setting up workplace pensions for their staff.

Finally, a word from a regular correspondent who knows much more about payroll and employment issues than me…


Forgive me if you know all this but from April 2017, the whole of the public sector (which includes anyone with a government stake such as the BBC or channel 4) has to put its personal service workers on to payroll if the assessment is that their ltd company is just a fig leaf to disguise employment. The hirer will then deduct tax and NI and pay only the net and VAT via the invoice. This is a big deal as in my opinion it flushes out those who should be auto enrolled. I met with HMRC last week who said they don’t need to be assessed. I replied that it’s not in their gift to rule on this, in my view they have always been workers for AE but as your blog says today just under the radar.


(1) See;


Posted in accountants, advice gap, auto-enrolment, dc pensions, pensions, Pensions Regulator, Politics | Tagged , , , , , , , | Leave a comment

Strong on “money”- weak on “value”; the FCA and asset management.



In previous blogs I have looked at the FCA’s Market Study’s position on investment consultants and what it has to say about transparent measures to help us understand what we are paying for funds.

But the bulk of the paper is concerned with what value investors are getting from the asset management industry and here I think it is (relatively) weak.

There is an absence of first principle of thinking underlying the FCA’s approach. I mean by this , a failure to engage with the question of why we need “funds” what role a “fund manager” plays and how @asset management” delivers something more than simply buying and holding a portfolio of stocks and shares.

In the past, it was quite usual for private individuals to purchase equities and bonds (stocks and shares) and hold them with no more than a pile of certificates to show for it. Prices were tracked in the newspapers, dividends and fixed interest payments received by cheque and capital gains tax calculated at the point of sale.

This DIY approach to asset management might be assisted by a stockbroker who could recommend rudimentary tax-planning through bed and breakfasting but who never aspired to the status of “financial adviser”.

This disinter mediated approach has been a reduction in direct investments, an increase in the use of funds and the employment of fund managers, investment platforms, tax wrappers and financial advisers replacing the simple ways of our parents.

It is easy enough to point to what has been gained – an army of professionals, online access to fund values , a myriad of funds, best buy lists and model portfolios. But at what cost? When a private investor chose to buy Cadbury, it was a decision based on the Cadbury business model, management ethos, on the financing of Cadbury and it’s dividend policy.

Direct ownership had a clear purpose, there was an alignment between the stocks and shares people bought and their view of the world. Sometimes people bought on a stockbroker’s recommendation, sometimes they even followed share tipsters in their newspaper, but for the most part, people were investing “their way” and expected to be accountable for the success or failure of their decisions.

This aspect of investment has been entirely lost by intermediation. Where people chose funds today, it is because of the reputation of a Neil Woodford or a Terry Smith, or because a fund is 5* morningstar rated or because it appears on the Hargreaves Lansdowne 100.

The FCA report looks at these measures and concludes that by and large people would be better investing passively. This is undoubtedly empirically right. One is left wondering why morningstar ratings downrate passive funds and why best buy lists typically include no more than 20% index trackers. Even more puzzling, why 80% of advised retail investment is still going into active funds.

I think the answer to this question is because people still believe that asset managers are important and provide a valuable service, though they have no idea what that is.

The FCA paper is weak on this. It does not properly engage with the end investor and ask what he or she is looking for by way of value. Instead it relies on a consumer survey from an organisation called NMB which has delivered a series of charts that I find very difficult to relate to.

This for instance is what influences the decision of a retail investor to buy one fund over another.

Screen Shot 2016-11-20 at 16.59.10.png

According to this , where the fund invested in , is only a medium ranking factor (30%). Far more important at 45, 44 and 43% respectively are the charges, past performance and the likely future performance of the fund. Indeed the reputation of the fund manager is more important than the assets being purchased.

There is a real problem here, what Con Keating , David Pitt-Watson, John Kaye and others refer to as the “problem of agency”. Put simply, we are buying reputation and hunches about performance and our only meaningful risk measure is the level of charges.

I am not entirely sure that retail investors properly understand “charges”.


If less than half of retail investors don’t believe they are paying charges, what credence can we give to their assessment of “reputation” and “likely future performance”. Of all the measures they assess for value “past performance” seems the one that is quantifiable. Though the FCA spend much time discrediting it.

Things are little better when we look at what institutional investors choose funds by


This differs only marginally when investment advice is taken.


What is notably absent in any of the research of consumers (retail or institutional) is engagement with what asset managers actually invest in and why.


Why ownership matters

Going back to the first principles, it’s worth looking at the “problem of ownership”. Let’s take a stock – Raytheon – Raytheon makes (among other weapons) cluster bombs. It is not illegal to sell cluster bombs though it is illegal to drop them on people. It is entirely possible that cluster bombs will become very popular in the future and you may think that Raytheon is entirely the kind of stock you want in your portfolio, then again you might not. But for many people, a portfolio that avoided investing into companies that thought cluster bombs were a good thing to make and sell, might be a good portfolio.

Let’s take as another example, the carbon footprint of the company you own in your portfolio. It might generally be thought that companies with low carbon footprints relative to their rivals would be better placed to prosper in a low-carbon emission world than companies that do. This is the commercial justification for investing with environment social and corporate governance (ESG) in mind.

ESG “factors” are only a few of literally hundreds of factors that you could choose as your principals to choose stocks by. Going back to the portfolios people put together for themselves, factors were all important. My Dad bought London Brick (now part of Hanson) because he thought that there needed to be a lot of houses built in the 1960s and 1970s. It was a good call.  My mother’s father bought into Guinness shares (now part of Diageo) because there was a baby in every bottle (not such a great factor – though holding proved a good investment).

If we are going to understand the value of asset managers, it has to be from an understanding of how they choose and hold assets. As importantly, it has to be about how they act as our proxies in asset ownership. Increasingly we are seeing asset managers exercising voting rights to ensure that the managers of the companies they own, behave in an acceptable way.

Is the value of ownership  suffeciently recognised in the FCA’s paper?

To my mind, the FCA is adopting a reactive approach to “value”. Both the NMG retail research and its proprietary institutional online survey simply don’t frame questions to consumers in such a way, that consumers can comment on what the asset managers were actually doing with the money.

Reading the methodology employed in the online survey, it was as if the factors that governed stock selection and retention were simply not of interest. The same could be said of reading the NMG technical report.

NMG are currently conducting a survey for IGCs on the value of a workplace pension. I fear that – like its survey for the FCA – it will frame questions about value in terms of what the industry sees as important, rather than the end investors.

There is ample evidence that when framed another way, most investors would much prefer to have their money managed with an eye to environmental, social and corporate governance principles in mind. For corporate evidence, read this report by Share Action. For consumer reaction, read the research conducted by HSBC on its own DC scheme members.

I suspect that if you asked ordinary consumers what asset managers do , they would say they managed assets and if you asked them what made them good or bad, they would talk about how well they managed assets. They would not talk about past performance, future performance or even costs and charges, they would be thinking about the assets and how they were managed.

If past performance is not the measure – what is?

Performance measures – whether risk adjusted or not – whether published net or gross of fees, do not measure what an asset manager is doing. The alternative to looking at past performance is not laid out by the FCA- but it clearly needs to focus on how asset managers manage assets.

Until we have clear measures about what good management of assets looks like, we will not get a long way towards a metric for value. That is the next challenge!

In my view we need to go back to the first principles, look closely at the problem of ownership and then work out what factors matter. If we can only understand factors by building index around them, then there is no future in active management.

But if we believe that asset managers can materially improve the markets whose assets they manage, we need to understand how.


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“Blindsided!”-investment consultants caught by FCA’s rabbit punch

Nobody saw it coming. I went to a conference of investment consultants earlier in the month, the FCA’s Market Review was not on the agenda of any of the day’s sessions.

But the FCA’s proposal to make a MARKET INVESTIGATION REFERENCE about investment consultant to the COMPETITION AND MARKETS AUTHORITY has come as a complete surprise to the investment consultants I know.

They have been (to use one of their favourite pieces of jargon) “blindsided”.

As readers of this blog will know, I have very little time for investment consultants who are male, pale, grey and stale. They are generally overpaid, lazy and complacent. They have operated in a regulatory penumbra between the Pensions Regulator and the FCA and have generally considered themselves above the law.

The FCA’s damning report of their slack processes, inadequate controls, poor reporting, lack of customer focus and ignorance of what value for money might mean to their customers is laid out in a sustained assault that occupies pages 140 to 170 of the report. The specific remedies suggested to address the inadequacies of investment consultants is addressed on pages 197 to 200 of the report and again in MS15/2.2a.(with detailed reasons in chapter 2 and 3).

I’ve read reports that this is a case of “here we go again”. This misjudges the tone of the review and the severity of its proposals.


In many ways the findings mirror those of the OFT – the FCA identify

  • A weak demand side
  • An inability (among investors) to assess the quality of advice provided by consultants
  • Persistent levels of concentration and relatively stable market shares among investment consultants
  • High barriers to entry and expansion, particularly the inability of smaller or new consultants to develop their businesses outside of niche and specialist areas
  • Vertically integrated business model (fiduciary management)

If anyone within investment consultancy (and that includes those in the smaller or new firms (like mine), underestimates the impact of an MIR then they are foolish. This was precisely what the Insurers were so desperate to avoid following the OFT report into workplace pensions in 2014.

I contributed both to the main review and to the Tilba research that fed into it. I did so on my own behalf and as part of the Transparency Task Force teams that visited the FCA over the period of the review. I am a grain of sand on the beach.

It would appear that the FCA have had direct access to advisers and investors. It would seem that rather than being supported by asset managers, investment consultants have been damned by them. This appears to be because of the increasing conflict between asset managers and advisers offering fiduciary asset management).

It would be wrong for me to focus just on investment consultancy. The bulk of the paper deals with the shortcomings of some parts of the asset management industry, specifically the high value active management which is clearly not delivering value for money most of the time.

There are a number of very interesting suggestions within the body of the paper, most specifically around strengthening the governance of funds by asset managers, the measurement and disclosure of costs and charges and the strengthening of the buy-side.

But these are relatively minor in their severity by comparison with the opprobrium dished out to investment consultants.

Why pick on the consultants?


This may be the question considered over the Saturday morning breakfast. The answer is in the title of this blog. That investment consultants didn’t see this coming is because of the extraordinary complacency that has developed amongst their cosy club.

The report picks out Willis Towers Watson, Mercer and Aon as controlling 60% of the market, there are some challengers -Redington, LCP , Punter Southall, Hyman Robertson, Barnett Waddingham, Russell and then a group of much smaller actuaries and freelancers who feed at the bottom  (of which my firm is one).

On the buy side, the independent trustees, have also been complacent, allowing this oligarchy to perpetuate. The principal trade bodies, the Investment Association and PLSA have done little to raise the bar. Finally the trade press have been particularly supine in challenging the practices of investment consultants.

Of course there are exceptions (and regular readers of my blog know I consider them to be) but for the most part, investment consultants have been regarded as an essential ingredient in the gravy train that has kept so many in the pensions industries in Ferraris (and in pension terms – in Lamborghinis).

Why pick on the investment consultants? Because almost every point in the 30 pages of the FCA’s interim review is right.


The FCA expect to publish their final version of this review in 2017. I hope that we will not have to wait till the “autumn” of 2017. In the meantime we will have a consultation on whether the FCA are being unfair on asset managers and investment consultants. No doubt the trade bodies and the trade papers and all the other dependencies of the Investment Consultancy “industry” will “welcome” the report and spend the next three months undermining it (we have till Feb 20th 2017 to respond).

I am not in the pocket of the investment consultants , nor the asset managers or indeed in anyone’s pocket. I believe First Actuarial (my firm) have much to think about following the publication of this review and hopefully we will review what we do to make sure we are not liable to censure.  But I would be very surprised if we did not agree with the body of the report and support the MIR to the CMA.

The insurers got themselves off the hook by adopting IGCs and excepting a charge cap. I do not see the investment consultants having similar wriggle room. For too long, trustees (both DB and DC) have not got VFM from investment consultants. Investment consultants have abused their considerable powers to advise and often fallen way short of the standards that should be expected of them.

The interim should be a period of reflection not of protest. I see investment consultants as awaiting trial. They can use the interim to clean up their act , looking at each clause between pages 140 and 170 and asking to what extent they are guilty.

I have no doubt in my mind that the vast majority of investment consultants have failed their clients – the question is in degree. It is not their individual but their collective problem. It is a problem that the FCA has rightly identified and is taking the right steps to remedy.

If any investment consultant wishes to take issue with me on these pages, you are welcome, but like the FCA – I am in no mood to pull my punches.



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Power to the people (now we’re taking the risk).



If the People’s Pension , is really the people’s pension, why aren’t the people who are members being told what they are paying for membership?

For some months, I have been saying privately to the management and Trustees of People’s Pension and the management and IGC of the B&CE insurance company (People’s parent) that we need to know the true cost for members of membership.

For some months I have been fobbed off with “limber vows”, so I will now broadcast my complaint a little more vociferously.

Earlier in the year, B&CE swapped their investment management  agreement (IMA) with Legal and General Investment Management for an agreement with State Street Global Adviser. This means £2,000,000,000 +of policyholder and trustee money transferred management.

Under the old agreement with LGIM, when the underlying stock was lent to third parties , the revenues for the “stock-lending” returned to the member funds. Typically this is not the case when State Street lend other people’s money. State Street tend to retain stock lending fees for their own purposes.

These fees can represent a lot of revenue. They can actually provide the fund manager with a way of offering fund management charges to B&CE at considerably less than cost, the cross-subsidy from stock lending making what appears unprofitable – profitable.

Ah – but here’s the rub…

Those stock lending fees are no longer benefiting the member, meaning there is a reduction in performance of the member’s funds.

But the reduction of costs in the IMA to B&CE does not benefit the member either, it benefits B&CE. So were People’s to be offering State Street funds within the 0.50% cover all charge rather than LGIM funds, the member may be getting 1- 5 – 10% less for their money!

Put another way, the equivalent price for the People’s Pension could be anything between 0.5% and 0.6% – depending on how much State Street are stock lending, and what percentage of stock lending fees they are retaining!

So why aren’t The People’s Pension responding to my requests?

The People’s Pension recently finished plum last in a Share Action survey of workplace pension governance. B&CE are the only IGC whose IGC Statement I have not read ( I cannot find it).

Over the summer, People’s promised to get their act together and appointed Gregg McClymont’s excellent researcher – Andy Tarrant – to bolster it’s failing corporate governance team. But Andy’s arrival has made no difference (in this respect).

The People’s Pension and B&CE continue to avoid making a statement on how much stock lending is going on with member’s funds and what percentage of the stock lending revenues are retained by State Street. This is in sharp contrast to LGIM who were transparant in this matter.

What can be done?

Because we cannot get the information, cannot currently give a conclusive rating on the People’s Pension’s investment product. We must assume that no news is bad news – at the very least for People’s investment governance, but quite probably for member’s investment prospects.

The People’s Pension overall rating has fallen substantially because of its failure to be open and transparent in its governance, this matter is a matter of prime importance.

For this is no small deal- in the long term, it is the investment performance of People’s Pension that will determine the outcomes at retirement for its members. While reduced performance in the short-term will not harm People’s marketability, it would ultimately be a critical success factor of what People’s are doing.

All that can be done , in the short term , is flag the problem and ask People’s for the kind of transparency that their name and status as a “master trust” suggests. B&CE is a mutual insurer so , without shareholders, has only its policyholders and its management to reward. If the policyholders (of which People’s is one) are not being fully rewarded, then we can only conclude that the management are being over-rewarded.

So it is in the B&CE senior management’s best interests to prove to us that they are not using stock lending as a means of transferring cost from their balance sheet to member’s returns.

I call upon the management of B&CE and the Trustees of People’s Pension to make a clear and conclusive statement as to what its IMA with State Street says about the distribution of revenues from stock lending activities and how (if at all) this differs from the IMA with LGIM.


Thanks to Andy Agethangelou’s

transparency symposium

for another opportunity to discuss this and other matter’s yesterday.

Transparency is not tactical, it is strategic, you cannot choose to be transparent – you either are or aren’t. People’s Pension currently aren’t.


don’t make me laugh

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Shouldn’t Pension Schemes CREATE jobs? #CIPD


News that ballooning pension deficits are hitting profits and leading to hiring freezes is both unwelcome and unacceptable. Pension schemes should be benefiting UK businesses, enabling them to retire those becoming less productive and hire the best new talent.

But that the CIPD has found that 60% of more than 1000 large British employers reported having to pay more into their pension scheme to meet inflated scheme liabilities. Liability inflation was created by low interest rates, a by-product of Quantitative Easing.  The report also found that 1 in 10- businesses had dealt with increased pension costs since 2013 by restricting pay rises with a further 10% saying that pensions had led to a reduction in  profits. 2% even claimed to have reduced their dividends (clearly the shareholder has been relatively well protected as 6 times that number of employers reacted to hire pension costs by reducing future pension benefits.

The survey was carried out in September. The feedback from British business is at odds with the Bank of England, that claimed QE had had little impact. Looking at the granularity of the survey , it is clear that it is the larger employers with the greatest pension liabilities which have been hit hardest. 17% of businesses with 2-5,000 employer had seen pension funds reduce profits and more than a third of the largest employers (20,000+ employees) had cut pension benefits for existing staff.

It’s great that the Chartered Institute of Personnel Development has done this work but I take issue with the finger being pointed at the Bank of England. Ros Altmann is reported in the Financial Times as saying

“Anyone involved in pensions who is speaking to employers and trustees already knows that QE is having a damaging impact. I hope the Bank of England will finally wake up to the damage its policy of artificially depressing long rates is having on parts of corporate UK”.

The pension industry has dug a hole for its pension funds and is now asking them to lie down and be buried- at great expense to employers. But as I said at the top of this blog, it is now when these funds are reaching full output , delivering pensions to the baby-boomers. Now is the time when we should be congratulating previous generations of management for deferring profits to fund for the pensions being paid today.

Why make “pensions” into a business pariah?

Why blame a short-term monetary measure for an artificial inflation of pension liabilities?

Most of all, why allow artificial manipulation of interest rates to drive not just pension deficit funding , but the management of the companies that need to fund those deficits?

The survey (and Ros Altmann) accepts the causal chain; low interest rates – higher pension deficits – lower profits – less jobs.

But we don’t!

The pension industry has been looking at pensions as “problems” for too long. If you decide to adopt a positive mental attitude (what my friend Kevin Wesbroom refers to as “la-la thinking” (thanks Kev), then you get to see a different picture. The First Actuarial approach to pension liabilities is to consider pension funding as part of Britain’s “Business as Usual” and not as some kind of “school fees” liability designed to end as soon as the little mites (sorry pensioner liabilities)  can be kicked off the corporate balance sheet.

We don’t see DB pensions as bad, we see them as good. I am now receiving one- I can tell you they are good. We don’t see pension funds as having to value liabilities with relation to the gilt rates and we don’t see the needs for the draconian deficit funding plans that result from gilts + valuations.

We would like to see pension funds investing in the economic future of this country which is the employers large and small that drive economic growth. We see such investment as long-term and equity based. Pension funds should neither be seen as a problem or ignored as a solution. The current rush for gilts starves our employers of investable money and drains the cash flow of the same companies in demands for deficit funding.

Suggesting that companies return to a system of funding on “best estimate” returns from the pension fund, First Actuarial have shown that in aggregate our pension schemes would not be bust, that pensions would be paid and that pensions could return to being seen as part of Britain’s business success story.

Our FABI index shows the long-term funding position of the type of companies interviewed by the CIPD is considerable more rosy than would be supposed from most gilts + based funding reports.


It shows that on a “best estimate”, the aggregate position of the PPF7800 largest DB pension schemes has always been positive

The CIPD reported the pension perception in the Boardroom as it is. But it has no reason to be; and the doom-mongering that has already accompanied this morning’s publication of its findings and the inevitable calls to either reduce pension benefits or stop Quantitative Easing are unnecessary and misguided.

Pension Schemes Should create jobs

Companies with strong pension schemes see older workers retiring. With no fixed retirement age, a well funded pension scheme benefits productivity allowing new blood to replace old, without a pension scheme, older workers will hang around and new jobs will not be created.

Pension Schemes and their funds can invest in long-term projects that created lasting jobs for people.

But these positive outcomes of proper pension provision can only happen, if pension schemes have the support of employers. The CIPD is only reporting on the mood of large employers in pensions. They are reporting a lack of confidence, there is no courage and no conviction.

We should not be arranging our short-term economic policy around long-term pension scheme funding, nor should pension funds be arranging their funding strategies around a short-term measure – QE.

As anyone who has ever considered financial planning will know, you adopt a different strategy for you long-term liabilities than you do for your short-term cash flow. It is time that our industry stopped poo-pooing this truism. It is not “la-la thinking” at all.

I put the blame for the current situation firmly at the feet of those actuaries and consultants who advise pension funds that the sky is about to fall on their head, it isn’t and it won’t. This CIPD report shows the damage scare-mongering does.



FT Article here

Further links will follow.

Posted in accountants, actuaries, advice gap, pensions | Tagged , , , , , , , , , , , | 6 Comments

Is Farage the EU’s US Ambassador?


I am  cross with the post US election consensus in British politics. There seems to be a role for Britain “taming” the American right – that starts with neutering Donald Trump. This is total nonsense. Not only is it silly and impractical, it is fundamentally arrogant and disrespectful of the American people.

Meanwhile Trump is putting down markers on who in Britain , he is prepared to talk to. That list includes Theresa May who Tump regards as the New Thatcher (Casting him as the new Reagan?).

Despite our Foreign Minister’s determination to get himself into the argument. I have not heard any reports of Trump being interested in talking with him. Johnson is falling over himself to distance himself from the “collective whingorama” and be “overwhelmingly positive” about the opportunities of a Trump presidency. I suspect that Trump may remember Johnson branding him “out of his mind” a couple of months ago.

I am not at all sure that Britain is using Nigel Farage as a “go-between” – as reported by the Telegraph. As far as I can see, the only person who currently has a “special relationship” with Trump is Farage (though May has again skilfully avoided the Johnsonian banana skins.

As I’ve mentioned before, I had a chance. a few days ago to talk with Farage in a pub and ask him about his view on Trump.

“an imperfect candidate but a necessary agent for change”.

That strikes precisely the right balance for me. Trump is often distasteful, sometimes disgusting and rarely someone who I like. But he is the next President of the United States and he is the businessman icon that the American people have chosen to change things for them.

It strikes me that Farage is speaking from personal conviction and that Johnson is speaking the kind of inflammatory nonsense that makes matters worse.

If we are to have an ambassador to America, Farage may be the right man. Not only is he out of British office but he is in Trump’s office.

We need to be grown up and accept that working with Trump does not mean condoning what he says and does.

On the things that matter to all of us, the global issues of Climate Change and Trade, we have leverage on the United States only through co-operation. There is no reason for Trump respecting the Paris treaty , he can rip that up as he can build a wall between him and Mexico, or stop Obamacare. The point we should be making is that it is in the mutual self-interest of both our countries not to destroy the planet for our children.

My conversation with Farage did not suggest that he wasn’t interested in his children nor that he disagreed with the aims of the  Paris agreement.

More importantly, Farage is someone who is greatly respected by a huge number of British people and an increasing number of Americans.

If we really care about people “just getting by’  or the “rust-belt blue collar workers”, then we cannot dismiss Trump and we cannot ignore Farage. We should recognise that they are part of an answer rather than the problem.

I speak as a Liberal, someone who has spent the last few weeks seriously questioning my liberal values and asking whether they are in fact self-serving. I have come to the conclusion that I am deeply out of touch with most people in Britain and that the world has moved on (and I haven’t).

Which is why I am more interested in Farage representing our interests in the States than Johnson and why it is time we started taking Donald Trump as more than a pantomime villain.



Since publishing this blog we have had the awkward  sight of “Brussels and Berlin” convening a supper to discuss what to do about Trump (or perhaps Trump and Farage).

High on the agenda were issues of security; but the two chief military powers within the 28 (France and Britain) snubbed the event. So did Hungary whose leader dubbed the EU response to Trump “hysterical”.

The supper’s  failure illustrates another issue: diplomats and analysts have repeatedly called for Germany to show more leadership on European topics. Yet when it does, others fail to follow.

Instead, the EU leaves a vacuum – a gap that a grinning Mr Farage is happy to fill


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Remembrance day – let’s stop fighting.

Fire 12



Today is the anniversary of the day we stopped the war on November 11th 1918. Two sides stopped the war and though the peace was a poor one, the relief of ending hostilities is remembered. More importantly the loss of life is remembered.

On a happier note, this is also my 55th birthday for at just after 11 am on 11th November 2016, I popped out. My father says Mum broke the minute’s silence.

This week saw the end of hostilities in America and we will have some kind of a peace. There has been some kind of change in the world order, we are not quite sure what it will mean but only a year ago, the prospect of the UK leaving the EU and America being governed by Donald Trump would have brought the cries of “the world turned upside down”.

When you are in the thick of it, it may not seem so strange, the sun is coming up this morning.

I am about to leave Santa Lucia high up in the mountains of Gran Canaria. I will do so with a happy heart as I am returning to the First Actuarial Conference which I will catch the end of (the party).

I am also happy because I have spent a week thinking about making myself happier and concluded that this has got a lot to do with being kind. Kind is a great and underused word, it is related to kin – which is about the empathy that people have through blood. I consider kind to be an extension of the natural feelings we have to our own family.

The extended family that I have could be variously defined  but one definition is the 4000 or so regular readers of this blog, who have the fortitude to withstand what Paul Lewis refers to as the “Daily Tapper”. It has been a long time since I have not started the day with a blog.

There is no better place to start a new resolution than in public, so – for those who I have hurt- I apologise and those who I might have hurt – I will try to be more careful.

It is important that people are accountable for bad things, but they should not be humiliated for mistakes. Where there is deliberate intent to create disorder and harm, I’ll go on shouting.

So long as you go on reading!

It seems that my pension freedom has arrived. One of my first happy birthday’s was from the lady who has done more than anyone to explain these freedoms – my friend Michelle Cracknell.

Michelle and a few others provide this blog with its chief moral compass, but every comment I read and take on board. So thanks for the support and thanks for using and working with First Actuarial. Even if you don’t and violently disagree with me, let’s remember this is armistice day-and what that means.

Leonard Cohen

Leonard Cohen has informed this blog. Though he will no longer touch me directly through his wonderful concerts , his music and performances live on digital media.

Here he is, singing  a song that is particularly relevant for today.



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The Pension Dashboard – all dressed up with nowhere to go.


looks good – but will it help?

The number of pension providers who’ve paid to join the Government’s pension dashboard initiative has risen to 17. The initial pilot will be more complete because legacy pension providers like Phoenix have joined the hard core who offer new pensions either as SIPPs or workplace pensions.

Am I alone in seeing this as a project in search of a strategy?

A couple of years ago, I listed all my pension pots and divided them into three; those I could merge, those I could leave where they were and those which might be merged in the future if the promised ban on exit penalties came into effect. My DB rights are remaining untouched (a big decision with transfer values so tempting, most of my pension pots are in one big pot and the rest (with Allied Dunbar) is awaiting “release”. I can see my pension pot at any time thanks to the Legal and General workplace pension portal and I know my defined benefit pension rights from correspondence with my trustees and from the Government Gateway which gives me access to my state pension rights (still 12 years away).

I am someone who, in the teeth of opposition from insurers intent on my using the services of an IFA, has sorted a pension pathway for myself. I doubt there are many like me – with the energy , experience and confidence to press the necessary buttons.

The Government’s Pension Dashboard initiative is designed to make it easier for people to do what I did and manage their pension affairs using a single digital ledger.

All dressed up and nowhere to go

But what happens when you can see all your retirement wealth on a single screen? Does it empower you to manage your affairs any better? There are some excellent financial modelling tools which, once you’ve scraped the information together, tell you- based on various assumptions, what you can draw as a pension with degrees of certainty that your money won’t run out.

But these models are hypothetical, they do not take into account the actual costs of turning a pension pot into a pension (unless that pension is guaranteed as an annuity). The options available to people to organise their later life income are still very basic.

  1. create income from work
  2. take pension from defined benefits
  3. drawdown capital
  4. convert capital to guaranteed income
  5. rely on state pension and benefits

A dashboard may help you to organise the phasing of these options, but it will not magic money where no money is available nor will it help solve the most intractable problem of converting capital into income.

One of the key strategies employed by many defined benefit schemes is “de-risking” which typically means persuading people to convert income into capital. It is a lot easier to visualise £100,000 than £3,000 pa inflation linked for the rest of your life. So it is easy for defined benefit schemes to pass the capital sum across and leave the income problem to the person with the capital.

The pension dashboard will allow people to see their pension capital but will these dashboards help to make the money last? The cost of replacing half the income of an average person retiring at 60 is around £400,000 (single person increasing annuity (3%) offering £13,500 pa).

Frankly most people are not going to get near to saving that kind of pension pot. They simply will not have the luxury of a guaranteed lifetime income. Nor will they have the means to drawdown their capital in stages without considerable worry. Just the political events of the past 18 months including the Scottish referendum, the General Election, the Brexit vote and now the rise of Trump, have provided uncertainty to bond , equity and property markets.

Every drawdown is subject to the particular market risks associated with these “shocks”. Anyone relying on drawdown needs now to be aware that unless they convert to a risk-free asset allocation, they are chancing it. And if they move to a risk free strategy, they are little better off than buying an annuity.

The two major initiatives (other than the pension dashboard) to make life easier for those who are drawing or planning to drawdown income have both ended in failure.

Last month, the Government abandoned plans for a secondary annuity market which could have enabled people locked into inappropriate annuity, to switch to capital drawdown.

Over a year ago, the Government mothballed work being done to create alternatives to annuities and drawdown, specifically the setting up of collective drawdown arrangements which might have reduced the risks people take of living too long or getting blitzed by unfortunate timing of drawdown.

To me, these plans, were of considerable greater importance to those retiring in the next few years with capital and to those in retirement with insufficient income. I am very pleased to hear that the current Pension Minister has – instead of closing doors- started opening them.

There is an opportunity for us to revisit the Defined Ambition agenda and ask whether the current polarised choices of annuity and drawdown properly meet the needs of ordinary people.

There may be some who argue that the pension dashboard is a step in that direction and I don’t want to discourage the work that is being done to provide the portal on our wealth.

But I would not like people thinking that giving people a view of their money (or the lack of it) – will – in itself – solve anything.

To have a retirement strategy based on pension freedoms, we need better products. Those products need to include collective solutions for the ordinary saver – as well as the existing options we have today.

Posted in auto-enrolment, drawdown, pensions | Tagged , , , , , , , | 1 Comment

I believe in a promised land

Being on a rock mid-Atlantic gives you some new perspectives.

Santa Lucia.jpg

Santa Lucia – Gran Canaria

Like why our jam doesn’t taste of fruit – and how we manage to keep our dogs quiet in the morning.

Listening to the dogs of Santa Lucia shout accross the village at each other put me in mind of that Springsteen epic from Darkness on the Edge of Town

The dogs on Main Street howl

‘Cause they understand

If I could take one moment into my hands

Mister I ain’t a boy, no, I’m a man

And I believe in a promised land

I have been reading a long essay by John Mauldin sent by email by my correspondent Per Andelius (thanks Per). I have published it here (the Election; making difficult choices).

You may not have time to read it (I have). It is a call for an end to partisan politics and a call for the tribes led by Clinton and Trump to get behind good economic behaviour to make America great again.

In the end, what Maudlin is asking us to get behind is sound management and his belief is that America can work its way out of its problems. Anyone who thinks that the populist discontent that Trump taps into is anything new, should listen to the frustrations of Springsteen.

I’ve done my best to live the right way

I get up every morning and go to work each day

But your eyes go blind and your blood runs cold

Sometimes I feel so weak I just want to explode

Explode and tear this town apart

Take a knife and cut this pain from my heart

Find somebody itching for something to start

This was written and published in 1978.

America’s sense of entitlement comes from the promise of a land -if not full of milk and honey- at least fit for all. As Mauldin’s analysis shows, it patently isn’t. Nor – I suspect has it ever been. Nor – I suspect – will it ever be.

Obama’s lament

My sadness is for the progress that America has made over the past eight years under a good and just president. The frustration of Obama in seeing the prospect of this work undone is sadder than the abstract notions that Trump is putting forward as policy.

Bigotry against Mexicans and the building of a wall will not improve the plight of white Texans, it might make them happy in the short term – but it won’t give them their promised land. (I take one of the many targets I could have a dig at)

My sadness is that Trump (and Clinton) have points of view that don’t brook opposition (and here I am with Maudlin). It is not enough to say that those who support Clinton are party to her  criminality nor is it enough to say that those who support Trump are party to his bigotry.

I have put no adjectives like “supposed” or “real” next to the charges laid against each candidate since it is precisely these judgements that are dividing America.

How do you build a promised land like this?

Promised Land ends with its chorus and the assertion that a promised land can be attained. I never bought the song , nor that assertion. The only action that the singer has in mind is mindless destruction

Gonna be a twister to blow everything down

That ain’t got the faith to stand its ground

Blow away the dreams that tear you apart

Blow away the dreams that break your heart

Blow away the lies that leave you nothing but lost and brokenhearted

Even as a 16 year old , listening in my bedroom on a Dansette, this did not make sense. It didn’t then and it doesn’t now. You build a promised land, you don’t destroy it. I am sure Springsteen knew that too.


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“It’s not what you’re saying, it’s what we’re hearing”. DB needs clearer messaging.

farmer and the cowboy

I hate falling out with old friends so I wasn’t happy when Raj Mody phoned me and told me that I’d pissed him off. Well he put it more mildly than that but when an actuary says he’s disappointed, you know they’re pissed off, and when they’re disappointed with your personal comments – you hear “I’m pissed off with you”.

Now Raj has been criticised by me for allowing PWC’s Skyval index to make a fool of him. Before I go on, I’ll admit that I went in to that tackle with two feet and I’m giving myself a yellow card (could have been a red!). I’ll keep the blog up for a few days (as an act of penance) but this blog  will supersede it

The Guardian reported in September that the valuations of DB Deficits had collectively grown by £100m. In October PWC tell us they’ve decreased by £60-90bn (depending on what side of the bed you got out of). One month we breathed in, another out. One month we were sad, the next happy. Get out on the “funding” side of the bed and it’s £60bn, get out on the buy-out side of the bed and it’s £90bn. The Guardian’s October version of the Skyval story does not comment on this volatility. But the only conclusion a non-pension person could draw was that the Skyval numbers are good for nothing.

Now here’s the problem. What Raj was saying to himself and to his colleagues and what he thought he was saying to me was that these numbers were ludicrous and that the basis of these valuations was crazy.

What Pension Plowman and (I suspect) a lot of Guardian readers who had not read the PWC source material were being told was that deficits were on a billion pound yo-yo and that pensions were totally out of control

Raj has told Professional Pensions that

“There may be more appropriate measures that are better tailored to a scheme’s own funding strategy, I would advocate going back to the main principles of understanding how the deficit is calculated in the first place. This will give a more realistic view for trustees and sponsors helping them to make more effective decisions.”

I so agree that this is a good thing to do. I so want to understand why it is that these numbers are all over the place (including the numbers that come from the First Actuarial FABI index, but I find the numbers are making a fool of me too! Here are the October numbers


and here were the September numbers


I have read and re-read the source material that goes out with the PWC numbers and I am not much wiser about the “sides of the bed”

Even after reading the notes, I am not at all clear about the definition of funding


 These numbers don’t speak for themselves!

If I wasn’t able to understand them, how will non-pension folk people reading articles in the Guardian take these numbers at anything other than face value.

There are two things that are going wrong

  1. We have released information to the market which has been represented. The message seems to be too complex and the nuance of the message (these are the numbers- we’ll leave it to you to make sense of them) too subtle.
  2. We are not talking to our readers in a language that an everyday Guardian reader, can understand.

Part of this is the tone of the communication which is too dry, too lacking in emotion and too bloody boring. Where is our sense of humour?

I hope we will find a way to talk to the market for that is all important. Mark Scantlebury and I were talking yesterday morning about how bad pension people at making people laugh. Infact we think it is a virtue to make people bored so we write dull prose in a dull way.

Both Raj and my lot  that current methods of valuing pension liabilities aren’t properly understood. Clearly – with such huge variations in results – they’re not all fit for the same  purpose. We both come at this from the same place and it’s only the way we try to get our ideas across that differs.

First Actuarial and PWC are like the cowboy and the farmer in the musical – Oklahoma. We are not quite the same and we may make much of our differences, but we are both frontiersmen working under the same sky on the same plains. As the song goes “the farmer and the cowboy should be friends”.

Here is what Con Keating wrote to me when I asked his advice

Raj is one of the more reasonable people in this market. He certainly is not married to the status quo. I have read all three documents also and there is really no salvation for him there. All that said: Is it crazy that deficits go up and down like yo-yos – yes. But those are the standards in place. They are crazy and bear no resemblance to what is going on in a pension scheme, or for that matter its fund. My advice – buy him a good lunch – peace and reconciliation is the order of the day/week/month -another case of smoothing

There’s no point in deciding who’s a cowboy and who’s a farmer. The idea is that we should be friends.

I am going to buy Raj a lunch – I know what he likes – he likes Argentinian steaks, we should eat at Ranchos. I’m going to ask Raj for his hand in forgiving me my over- aggressive blog and I’m going to ask if First Actuarial can work with him to make sure trustees “go back to first principals”.

When people read this stuff they just turn off, which means the important, subtle and deep message we want people to get- is never heard. This is so important right now, because we have our new Pension Minister Richard Harrington commissioning a green paper on all this and what we say about valuations and deficits and funding needs to resonate with people like Richard – why by their own admission, are at ground zero in their technical understanding

It’s not what we’re saying, it’s what they’re hearing that matters. We need to get better at helping people like Richard hear what the numbers are really saying!

cowboy and cowgirl


If you want to read the source material behind PWC’s calculations, it is here




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Pension deficits down/up- last month/yesterday -WHATEVER!

chicken licken

Skyval is falling/rising – ?whatever?

PWC have published their monthly survey of the state of British pension funds. It shows that pension fund deficits have fallen markedly, not because lots of pensioners have died, or because the stock market went through the roof, but because marginal adjustments in the gilt yields.

You can read all about it in this Guardian article where the ever youthful Raj Mody explains that the £80bn fall in pension deficits in October was due to

“Slight improvements in gilt yields”


However Raj goes on to warn us that

 liability measurement by gilt yields does not necessarily represent reality, given pension liabilities are mainly affected by longevity and inflation.”

You can also read the September article in the Guardian that shocked us by finding that pension deficits had risen £100bn in a month. You can read the doom-mongering blog that PWC put out with it here – thankfully, despite Chicken Lickin’s concerns- the sky has not fallen on our head.

In September our pensions went down £100bn and in October then went up £80bn and we are all supposed to be devastated/delighted accordingly.

Well I am mystified and so will Anthony Hilton be- and so will any sensible human being. Because the people we are paying these pensions too are the same people as in August and pretty much the same people as in December.

By a bizarre coincidence, I become a pensioner today as I am 55 in 10 days time and my pension is payable from the beginning of the month. I do not feel £80bn better off for hearing Raj’s news nor was I unduly upset when he told me pensions were £100bn worse off last month.

This is because I subscribe to a different way of looking at the future that does not value things on the minute fluctuations of gilt rates but on the long term prospects of pensions getting paid.

I know that sometimes gilt valuations overestimate pensions liabilities and sometimes they underestimate them, I am seeing some very interesting research on this from the Con Keating research institute. I know too that asset bubbles occur and that asset valuations are sometimes too high – and sometimes too low. I know too that economies grow sometimes and shrink sometimes.

In order for me to take a long-term view, I do not look at the gilt yield and work out what it will do to my pension in fourty years time.  I look to the long term market trends and I work out whether I will have enough money to pay myself the day before I die!  The gilt yields in October or September 2016 do not matter to me in October or September 2056.

I subscribe to a view that the earnings of a pension fund are based on the investments it makes and that those investments should be long term in nature. So I am happy for my pension fund to be invested in shares , feeling confident that the long term future of the British and world economy is bright.

I believe that DB pension fund valuations (and DB pension transfer values) should reflect the long-term nature of investing rather than the marked to market buy-out position. Unless, that is, my pension scheme is about to buy-out its liabilities by giving them to an insurance company. I have no intention of buying an annuity right now and can’t see why my former employer should be buying a bulk annuity either -so I hope that the Zurich staff pension scheme continues to invest for the long-term in real assets which bring real benefit to the world economy.

I am not an actuary but I think I have more common sense than all the actuaries in PWC put together. I trust in the good sense of men like Carsten Staehr (below) with whom I intend to get drunk at the Payroll World awards on Thursday night!

I believe that life is for living and it belongs to those who are able to sieze it by the throat and make it work for them!

Which makes me feel, no matter how clever my good friend Raj is, that he is making a fool of himself; or rather his index is making a fool of him. Which is not as it should be!

Perhaps Raj, who’s offices are close to where I live, will join me this lunchtime for a pint of beer to celebrate my being a pensioner and the sky not falling on our heads!

carsten -chicken

the sane man counting  his chickens

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Anatomy of a scam; lessons from Providence and Lumiere


Fraud’s victims are usually faceless

If there’s anything good that can come out of the Providence Group’s global network of deceit, it is that it is exposed and offers us its full anatomy. Yesterday I tried to lay out the anatomy at length – I won’t do that again- you may want to refer to my blog on Lumiere.

The manufacturing hub for this scam is Brazil, though mission control was in Miami, Guernsey was used to legitimise the Brazilian fund and Jersey used to sell it. There were even outposts in London used to neutralise UK regulators.

The scam seems to have been sold in the States by unauthorised broker dealers and was eventually detected by the US Securities and Exchange Commission who blew the whistle on it this summer. In the meantime the scam was being sold in the UK to retail customers through micro bonds and in the Channel Island through a dedicated sales team in Jersey. We suspect that there may have been a fair bit of pension liberation going on though details of the victims are sketchy.

There are two and a half regulatory failures here ( I take the FCA’s failure as partial since they  had only indirect oversite). The main failures were at the Guernsey Financial Services Commission which allowed Providence to use protected cell legislation to legitimise the Ponzi scam and the Jersey Financial Services Commission that legitimised the selling of the Guernsey product.

Lessons for regulators

It is clear that Providence abused the GFSC’s trust and convinced them that the financial gain to Guernsey justified the risk of a product marketed as giving a 12-13% guaranteed return from Brazilian factoring. To me it is hard to credit that such a claim could have been believed by anyone, let alone a regulator. Why did the GFSC believe Providence?  We can only speculate, but I have seen the pressure that the Channel Island Regulators work under, they are asked to maintain the reputation of the Islands’ good governance, protect the local population but also ensure that the Islands are seen as good places to do business in. On this occasion, the GFSC clearly got it badly wrong.

Their failure had a knock on failure for their Jersey counterparts who simply took the product on trust (trusting what appears non-existent due diligence from Guernsey). But Jersey’s failure is worse , for by the time Lumiere Wealth was being authorised in St Helier, the scam was already being exposed both on the mainland and in the United States where the SEC investigation would have been well under way.

Did the JFSC behave recklessly or just ignorantly? The outcome was the same but it is up to the local population to find an answer to that question. My worry (having lived on Jersey and worked in Jersey and Guernsey) is that the population are by and large complicit in the failures and beneficiaries of the successes both of the financial services community and its regulators.

Wider lessons for the Islands

It is very hard to speak out against your Regulator on a small island like Jersey or Guernsey. The people who can are outside the financial services industry and they generally have no money or power and are therefore marginalised.

Most people on mainland UK regard Jersey and Guernsey as quaint holiday destinations for their parents (or now their grandparents). If you work in mainland financial services, you may have dealings with the channel islands but they are guilty pleasures -rewarding in an awkward way. There is little confidence in the diligence of the Channel Island finance industry.

Change cannot come from without. The peculiar status of the Islands as Sovereign Dependancies means that they must change from within and so long as the cost of a better reputation is denying the likes of Providence a licence, the conflict is obvious. Jersey and Guernsey cannot afford not to do business with the wrong people (without a drop in GDP and living standards).

But they cannot expect the wider world not to notice. The activities of Lumiere both as fund managers and as wealth managers impacted on Britain and though we did not take a direct hit on the Financial Services Compensation Scheme, there were many people who lost out in the selling of mini-bonds in the UK -and perhaps some whose pensions were liberated into Brazilian Factoring.

This advertisement that appeared in January this year concludes with the footer

“Lumiere Wealth is regulated by the Jersey Financial Services Commission”.


Screen Shot 2016-10-30 at 08.03.33.png

Lessons for the UK mainland

There are a lot of financial services companies in the UK which have channel island arms. Lumiere Wealth  was staffed by ex-employees of RBS International, whose name appears on much of their marketing material. It is beholden on these companies to push back to the GFSC and JFSC about how this kind of thing goes on under their noses.

Part of the advertising literature of Lumiere Wealth related to pension transfers. The Pensions Regulator needs to make it clear to the JFSC and GFSC that products like Providence can easily find their way into the marketing literature of the scammers who are trying to liberate UK pensioners not just of their guarantees, but of their money purchase transfer values.

Lumiere were clearly alive to the possibilities.


The Channel Isle local schemes (and RBSI has one of the biggest) are particularly vulnerable.

The Pensions Regulator and the FCA need to be alive to these risks and the FCA (and SEC) needs to be informing both the JFSC and GFSC of evidence of scams and enquires into them. We have inter-pol and I hope we have inter-reg.

So not just the UK pension regulators but those with responsibility for UK pension schemes (especially those with CI sub-schemes), need to be pushing back on the JFSC and GFSC to ensure that there are not more legitimised scammers both in fund marketing and in “wealth management”.

liberation fraud

Lessons for us all

There has been some strong reaction on yesterday’s blogs from those with liberal attitudes to regulation. Their argument is that people should get wise to the old adage that if it looks too good to be true, it is too good to be true. That is the position in the US where regulation is light and the buyer bewares, it is civil litigation not the SEC that is most feared by brokers.

But it is not the situation in the UK where we trust our regulators and have a financial services compensation scheme which protects us where a scammer gets through. Jersey and Guernsey have no FSCS and they have only Regulators. If their Regulators fail, then those who have bought locally regulated products and services can rightly ask why they were not protected. After all, part of the costs of the financial products and services they buy is a compliance cost.

Whether we are in the UK or in Channel Islands, products and services  that are regulated by the GFSC and JFSC must be viewed with a degree of caution. Until we have got proof that these regulators are competent in their work, our conclusion must be that CI products and services are best avoided.

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The pernicious effect of NEST’s market distortion

nest offset

Yesterday I wrote about the unsatisfactory outcome of an industry discussion with NEST. The PLSA debate on mastertrusts at their annual conference failed to properly engage with NEST’s ongoing role in the UK pensions market and the ambiguity of its status either as an Non Governmental Organisation or as a competitive market participant.

It is hard to think of similar ambiguities. Even where Government holds golden keys as in BP, the privatisation process has broken state monopolies and ensured shareholders rather than tax-payers take risk and reward from the party. But NEST has no shareholders and the taxpayer is a bondholder, being paid virtually nothing for its money and with every prospect that its loan will be written off, whether NEST is successful or not.

Could NEST be privatised?

In a thread generated from yesterday’s blog on the Pension PlayPen linked in group, David Harris asks a key question;

Does NEST have value if privatised or is it a vehicle for ‘social good’ through expansion and research ?

Clearly Damian Stancombe of Barnett Waddingham regards NEST’s debt as money well spent

we need to create urgently a meaningful, well governed and collective saving vehicle …that supports all types of infrastructure build from houses , roads to world class education in the UK ..This is to me can be NEST through either a sovereign wealth type fund/ safe harbour for employers. Write off the debt and lets create a legacy to be proud of.

This is very like the vision for auto-enrolled savings put forward by Nigel Wilson of L&G and is in line with the original vision for NEST at its conception. It pre-supposes that this cannot be achieved within the private sector.

Tony Filbin who now chairs independent trustee firm Capital Cranfield , is not so convinced.

Quite apart from it being illegal under EU law it would encourage the wrong type of behaviour (who cares how much is spent when someone else is paying).I am in favour of an expanded role for NEST incorporating decumulation but they and their partners (TCS in particular) should do this on a commercial basis with real accountability for spend.

It is one of the ironies of NEST’s infrastructure, that a large amount of its work and the destination of much of the debt is to TATA – the Indian conglomerate (that incidentally is else wise in the news today for losing its chairman and is majorly in the pension news for its management of its steel subsidiary’s pension debts.

No-one would call into question this relationship were NEST not being promoted as critical to UK infrastructure.Outsourcing is not a problem so long as NEST is perceived as an operational entity transacting within constrictions, it becomes a problem when NEST is promoted as a sovereign wealth fund.

Ironically NEST’s debt is of an order to Tata’s and BHS’ pension deficits. I don’t see these debts being written off against the public purse or member’s pensions.

What a mess!

There are many other contributors on an excellent discussion , including a former shadow pension minister (who is ironically now working for a firm competing for NEST contracts and competing with NEST for long term savings.

The picture is – as one senior correspondent put it to me – confusing!

With the exception of Beveridge, the Barbara Castle reforms and the Turner report, I regard most of the rest of UK pensions policy as a mess –

Is this NEST’s fault?

HElen dean nest

NEST CEO – Helen Dean

The NEST operational leadership team headed by Helen Dean are great, the NEST governance board are great, NEST is doing a great job for SMEs and supports it as a good choice for most employers.

NEST is in itself a great pension scheme. But it is doing damage to the future of Britain’s long term savings because it is confusing. This is not NEST’s fault. There are clear bias’ from both the DWP (whose head of private pension strategy has told us “no one could be criticised for choosing NEST” ) and the Pensions Regulator that continues to circulate mail shots at our expense promoting NEST over choice.

The implication for policy of choice is equivocal. On the one hand we have the “freedom and choice” agenda promoting active engagement and on the other the “nudge brigade” promoting passivity.  The difficulty with passive choice by employers and their business advisers is that they are making choices on behalf of people who are not only passive but powerless. If your employer chooses NEST, you get what you are given. If your employer chooses NEST without thinking of the consequences, your money is being invested without thought. If you get an unsatisfactory outcome, who are you likely to blame?

The DWP and tPR can speak for Government Regulations but they cannot speak for the civil courts. The class actions we see today against the banks and insurers were not brought by Government and Government is powerless to intervene in issues such as PPI.

In my view, the behaviour of the DWP and tPR in promoting NEST over choice is reckless and destructive. It corrodes the good behaviours among employers we are trying to encourage and it shows a reckless disregard to the infrastructure of providers (other than NEST) who are making auto-enrolment a success.

Why so little noise?

Sometimes I think this blog is a one man protest group. There are very few people (including the CEOs of Peoples and NOW) who will openly argue against the recklessness of the DWP and the corrosive impact of NEST’s £600m loan from the DWP. Is this because most of the market participants are dependent on the grace and favour of the DWP to continue trading? Or is it because no-one can quite believe this state of affairs is going to last?

I am convinced that NEST is creating big problems in the auto-enrolment market through its financial muscle. I can cite two examples

  1. operational– the NEST API is now implemented in the majority of payroll software packages meaning that NEST is easier to use than most of its rivals in most cases.
  2. marketing– NEST is free to use unlike most of its rivals

But this has happened, not because of any vision – all the other participants have had the same idea, but because NEST has bullied its way to the front of every queue.


How has NEST achieved operational supremacy?

When the industry was trying (belatedly) to create the common data standard to create a universal means of transferring data between payroll and provider, NEST did not join in. Infact NEST scuppered PAPDIS because it wanted its own protocol and was unwilling to share its work with the rest of the market. Far from being Damian’s vision of a “Force for Good”, NEST split the market -leaving those without its clout to flounder.

The operational hegemony that NEST has established for itself has been bought and not earned. It has been achieved at the expense of other providers and suppliers of service. Those providers and suppliers have every right to argue that NEST has abused its position.


How has NEST achieved marketing supremacy?

Quite apart from its huge marketing budget that sees NEST at every event with fully manned stands, NEST has bought its way to the front of the queue by maintaining its free to use pricing structure. This infuriates other providers who are being asked to submit business plans to the FCA and tPR showing they are commercially viable.

NEST’s pricing policy is destroying choice as Graham Peacock of Salvus points out on the Pension PlayPen thread.

Nest has become a market disruptor by insisting on charging members and NOT the employer. All of the other major mastertrusts have realised that in order to be viable employers need to foot the bill. Otto the only way I can see that the tax payer (DWP) will get its money back without penalising members is by charging a fair price…to Employers!

NEST puts it about that changes to its pricing need to be achieved by changes of statute, this is not the case, NEST’s Terms and Conditions allow it to charge employers for the services it provides them. So why doesn’t it.

Why doesn’t NEST recover the cost of its API from employers?

Why doesn’t NEST recover the cost of its Marketing from employers?

Why doesn’t NEST recover the costs of its central London offices from employers?

Why doesn’t NEST recover the costs of its otiose mangement structure from employers?

Why doesn’t NEST recover the £500m odd drawn down the DWP loan from employers?

No noise please -politicians at work big-fish3

The answer is , I fear, political. The Government is terrified of removing the cross subsidy that NEST is providing from the tax-payer to auto-enrolment and NEST is the back-door through which the cross-subsidy is delivered.

But auto-enrolment does not need that cross-subsidy. There is plenty of choice in the market (and the means to make informed choices too). There are great alternatives to the NEST API for  payroll software suppliers  in pensionsync , eAsE and other technology solutions.

We have now reached a tipping point where the politicians need to make a choice

Either they let NEST carry on as it is, a great whale hoovering up small employers as if they were krill.

Or we look to the future and create an auto-enrolment eco-system which continues to offer choice and the means to make those choices effectively. The system needs “nudge” to get going, but it needs engagement to be sustainable. NEST does not encourage engagement, it is the ultimate default.

It suppresses choice by jumping to the front of every queue so that small employers cannot see who else is there.

It suppresses innovation by driving out the value in the market to allow firms like pensionsync to build alternative infrastructure.

It creates an erroneous and pernicious impression that workplace pensions could be and should be free for employers to use. It has simply converted the member subsidy into at tax-payers subsidey.

Most worryingly of all, it delivers to the market a vision that is quite contrarian and does so as if this is what the market demands. The inept conception, implementation and impending  dismantlement of the NEST default strategy demonstrates that even with all its money, NEST could not get the simple thing right. It’s insistence on suppressing volatility for young people flies in the face of all experience of DC in the UK and abroad.

The NEST default investment strategy was another political mistake

The NEST default strategy may have been well intentioned but it has not delivered. It was supposed to become the new normal but no-one has followed NEST down this route.

When we are able to analyse its impact, I suspect that we will see just how detrimental it has proven to young savers and there is absolutely no evidence that NEST has seen lower opt-outs because of it. What is even worse, the NEST defaulters, who number over 99% of NEST members – know nothing of all this.

That this act of supreme folly was allowed , was as a result of NEST not being subject to the same scrutiny as purely commercial enterprises. This stupid strategy would never have been given the light of day outside of the wall garden in which NEST’s investment team lives.

The pernicious effect of NEST’s market distortion

NEST has been allowed to have its cake, eat it and spit the nuts out in its rivals faces. It has and is destroying value both in and outside its purlieu. It is eating up taxpayers money and using it to push in at the front of the queue. It has been doing the same behind the scenes.

Now NEST wants to expand the scope of its activities, effectively trading its way out of insolvency. This should not be allowed to happen till it has put its house in order and demonstrated it can repay its debt to society (tax-payer).

I want the Pensions Regulator to ask NEST for its business plan to balance its books and to publish that business plan. I want that business plan to show how it will repay the debt and by when and I want it to be as credible as any other business plan submitted to tPR as a result of the requirements of the Pensions Bill.

Nothing less will do!


Otto – show us your recovery plan!


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Put up or shut up Otto – how are you paying back our money?

If you weren’t in Liverpool for last week’s PLSA conference, do not slit your wrists. You can watch the sessions on youtube.

If you want to hear how product providers see the challenges on them and us- from the remaining phases of auto-enrolment, you could do worse than spend a few minutes watching this.

By the by, if you are looking to chair a panel session, study Jo Cumbo’s chairing – it’s awesome.

NEST justifies its expansion plans


Otto in power mode

Send the slider to 25.45 ,and hear Otto Thoresen justifying NEST’s plans to create a default way of spending NEST pension pots over time.

Otto does a pretty good job of justifying a spend on building a spending product at the back of NEST and thinks he’s got away with it before he’s mugged by Moreton Nillson and Patrick Heath-Lay (CEOs of NOW pensions and People’s Pensions) on “competition issues”.

Of course he’s well rehearsed, we’ve seen this careful sidestep a few times this month and the next few minutes on the video show Otto under as much pressure as he’s had since appearing at the DWP Select Committee.


Or did the sidestep work?

Well not exactly! Heath-Lay and Nillson spoke expertly. Those listening could hear the annoyance both have for NEST’s evasion and exploitation of its privileged position. NEST really is trying to have its cake and eat it and the questions from the floor should have pinned Otto to the point – “where’s the money?”.

Having spent some time in the rather less precious context of the Battle of Ideas, where I was accused of being a paid up member of the Wankerati, I long for a proper discussion about “competition issues”.

The competition issue lurking in the room like an overfed elephant, was the £450m currently outstanding as NEST’s debt to the tax-payer. The late lamented national audit office is still waiting for a proper answer on how and when that money’s coming back.

As I have written on this blog, all future spend on NEST product must be predicated on NEST having a clear recovery plan so that within a reasonable number of years (no more than 20) we have our money back.

I suspect that the debt is rather more than the £450m in last year’ accounts and rather too close to the maximum drawdown prescribed by legislation of £600m. In any case, the financials of running pensions where the average pot size is £350 (Moreton Nillson’s number), suggests that NEST is going to have to put up its prices or reduce its costs.

Moreton and Patrick’s sub-text was clear, NEST is not going to reduce its costs by introducing a drawdown facility for existing customers. £350 does not buy a pension, it hardly buys you a week in Skegness.

A proper discussion of NEST’s finances is long overdue. It sounds like we have our chair (her offices face NEST’s) and it sounds like the people missing from the debate are members of the tax-payer’s alliance.

If we are to have open transparent pensions that people can trust, we cannot have NEST skulking about behaving in this clandestine way.

Put up or shut up Otto – how are you paying back the money!


A very nice man – but where’s the plan?

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Pensions for real – Even DC pensions!


All week we have been discussing how best to manage and measure Britain’s “pension deficits”. The FAB index which First Actuarial introduced last weekend has made quite an impression. My friend Rob Hammond will be on MoneyBox tomorrow lunchtime ; our press cutting box is crammed full of comments and articles about our radical proposition that UK pension funds could be as much as 133% funded.

The Pensions Regulator is now openly talking about a more balanced approach to scheme funding

The conversation has crossed continents, I got an email this morning from an American academic who had been listening to the arguments of Baroness Altmann and senior figures in the Bank of England about whether or not Quantitative Easing was the cause of our pension woes.

Here are her conclusions

My interest is primarily on the monetary links between debt (bond issuance) and pension schemes’ investments. At a very basic level after reading on the debate on the impact of QE on pensions, I’ve arrived at 3 rather obvious (?) conclusions:

1) indeed, not only have the lines that were meant to deliberately separate, in the late 1980s-early1990s, debt management from central banking become more blurred, but given QE’s arguably ambiguous (as per allowing different interpretations) impact on pensions, the BOE’s decision making process has become more politicized. In an aging society that under-saves (like most) and is contending with increased market volatility, perceived pension losses in the short term are subject to (over) reactions that cast monetary policy as necessarily distributive and likely detrimental.

2) at the root of the matter is this “ambiguity” (or, rather, lack so consensus) when it comes to actuarial estimates. DB pension schemes are running a deficit if calculations use traditional gilts plus or corporate bond yields to calculate discount rates. DB pension schemes are running an aggregate surplus if calculations use the new monthly First Actuarial Best estimate index, based on data underlying the PPF 7800 (as per a Professional Pensions piece – Oct 19). Even though I cannot appreciate the subtleties of this differentiation, it is clear (and ironic) that quantitative tools meant to produce some technical specificity have contributed to what are unquestionably very political disagreements. 

3) in a context marked by unconventional monetary policy,  pension funds and long-term bond issuances’ seminal co-dependence fuel increased skepticism about a regulatory framework that emphasizes de-risking for deficit-running DB schemes. This may (or may not) usher a call for more diversification as a way of life for schemes that tend to mimic each other’s investment strategies.

Whether any of this is either accurate or relevant I am not sure, Henry. My apologies if the lines above are still plagued with the amateurism of a new student of these very contextual dynamics. In any case, I shall remain a curious observer of the ways in which debt and pensions seem to endlessly challenge “conventional wisdom”  in unconventional ways.

Well I’d say that this is “accurate and relevant” to DB.

The lady was asking me whether it was accurate and relevant to DC. It is ironic that this has also been the week that we have jettisoned the (secondary annuity) baby with the bathwater .

My initial response to her question about the relevance of QE to DC was a little bland

DC is organised by consultants for large employers who do what they are told. There is very little variety between large employer schemes. 90% of investments are defaulted into a lifestyle fund which move from equities to bonds over time. These schemes make no effort to provide a pension, they rely on people exercising choices at a notional retirement age at which point they switch from saving to spending their pension pots.

Smaller companies do not have their own schemes, they participate in multi-employer master trusts or multi-employer contract based plans known as GPPs, the default investment options are similar to those for larger schemes though typically they are not so extravagant in investing in active funds nor as ambitious in asset allocation.

These smaller schemes aren’t advised upon, employers tend to sign up to mastertrusts or subscribe to GPPs without much thought or any due diligence. Very often they look for an IBM type safe harbour. The Government’s scheme (NEST) is often thought of as such a safe harbour.

The very largest of these multi-employer schemes – such as NEST and NOW are quite ambitious in their asset allocation strategies with clear investment philosophies, however most of the insurance schemes and smaller master trusts ape big company pension strategies.

Because there is so much defaulting and so little ambition, it is possible to say – without doing much research or gathering data, that UK DC is primarily invested in equity strategies for the accumulation of assets and bonds for the final years of accumulation (there is a phasing from one to another). Investment in alternative assets is very limited in DC – probably accounting for less than 5% of assets.


But encouraged by a positive response , I warmed to my theme

I agree with you about the spat over QE. Where QE has been destructive in the DC world has been in forcing down annuity rates so that people locked in to artificially low pensions with no restitution.

This situation was partially remedied when the Government removed the requirement for DC savers to annuitise the bulk of their pension pot, but “pension freedom” has been a shabby solution. There has been no alternative to the annuity except cash.

Most small savers have been cashing out and the bigger savers are attempting DIY drawdown with great peril of financial ruin. The construction of the investment portfolios for drawdown are often bizarre and usually far too expensive to achieve the stated objectives. 

We have been at the forefront of trying to create a lasting solution to the problems of how to spend your pension pot (we use the word decumulation). The same problems with bonds and equities persist. Some of my colleagues at First Actuarial have suggested that high allocations to equities – with a collective and long-term approach to investment – can achieve more than a high allocation to bonds.

This penchant for investment in real assets appears to be gaining ground in the new Government. A very important document called Beveridge 2.0 was written for Nigel Wilson by John Godfrey. Nigel is CEO of Legal and General, John was then his head of policy. John is now Head of Policy in the Cabinet Office – effectively Theresa May’s policy adviser. here it is

I listened to the new UK Pensions Minister’s recent address to the PLSA and was struck by it sounding like an articulation of what Wilson and Godfrey are saying. Essentially the message is that pensions have become too abstract as investments have been divorced from real things. People investing for themselves need to have some ownership. 

If I can see a way forward for people in the DC world that’s been thrust upon us, it’s in a re-connection with what they are investing in and in the production of a means for them to spend their savings that is not based on abstract and intangible products such as ‘annuity” and “drawdown”. People want pensions (the research tells us that- so do my friends – so do I) but they want confidence that pensions are “real”


For too long we have stood at the top of the ladder of abstraction exchanging derivatives with each other in the hope of magicking the problems of pensions away.

Pensions will only become adequate when people have confidence in them and save enough into pension plans so that those plans pay adequate income streams till the end of people’s lives. We need to make pensions real for people, investing in debt or cash deposits is not real, investing in companies and offices and shopping precincts and hospitals and housing is.

The debates around hedging out inflation and currency and interest rate risks are quite beyond the ordinary saver. They serve only to confuse and reduce confidence. We need to get back to the simple concepts of saving by deferring pay, investing in real assets and drawing pensions from collective pools using the social insurance that pension schemes can create.


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Con Keating on Pension Valuations

Mr Pension

Here’s one of two articles of Con’s he’s publishing here today; this appeared in Professional Pensions yesterday. Con reckoned he’d draw some flack and he’s been proved right (see the tweets at the end). But as Jonathan Stapleton points out, Con’s not the only one who sees a need for change.


After many years of festering in the background, the pension liability valuation arguments have recently flared up publicly again. A wide range of commentators has expressed disquiet with the status quo. The valuation of liabilities is fundamental to pensions management, and so is the nature of the problem.

Much of the debate, which is very much a dialogue of the deaf, consists of shouting around whether the yield on gilts, or the yield on AA corporate bonds, or the expected return on assets should be used. It should not surprise that this debate has found no resolution, as all are wrong.

It is surprising that discount rates of any kind should appear in the valuation of pension liabilities since they do not figure in determination of the pension payments promised and projected. Longevity, wages and earnings do, but not interest rates or yields. They also do not appear in contributions; they are a simple proportion of current pensionable salary. This has led to the correct description of interest rate hedging as hedging of the measure, the discount rate, not the liability itself.

It is worth examining the treatment of liability valuation in insolvency procedures; the courts have been valuing liabilities for a very long time. These operate from the ground up; the valuation of a liability, which is known as the admitted claim, consists of the principal originally advanced plus the accrued unpaid interest on the obligation. ‘Acceleration’ is not about bringing some projected, or even promised, future to the present but about making the principal previously advanced and unpaid accrued interest as originally promised under the terms of the obligation immediately due[1]. So the holder of a 10% coupon bond issued at par entering insolvency six months after the previous coupon was paid, now has a claim for the amount advanced, £100, plus unpaid but accrued interest of £5 (0.5*£10.00).

No creditor has any right to look to the future and base their claim on what might have been, even if such ‘might-have-beens’ were explicitly promised by the company. If that were possible, all creditors would have created visions of wishful ‘unicorns’ and become billionaires, and, as it implies no meaningful recoveries for the honest creditor, that would have the result that credit would simply be unaffordable or entirely unavailable for just about all. The debates and disputes over the equity risk premium and similar arguments around the use of the expected return on assets should be seen in this light.

Let us consider two zero coupon bonds, which mature at the same time five years from now. One was issued twenty years ago, at a price of £9.23, implying a yield to maturity of 10%. The second was issued ten years ago at £48.10, implying a yield to maturity of 5%. In insolvency, the admitted claim for the first would be £9.23 plus the accrued unpaid interest of £52.86 making a total of £62.09. For the second, the admitted claim consists of £48.10 plus the accrued unpaid interest of £32.25, making a total of £78.35. Here we have two claims which mature on the same date, with values today which differ markedly. These values retain the specific information of the company promises made in support of their issuance. Markets in distressed securities reflect these differences in their pricing. Any single discount rate, no matter how chosen, will return a single value for these two bonds, discarding information.

Pension liabilities may be valued in a similar way. The principal is the contribution made. Together with the projected value of benefits promised, this determines an accrual[2] rate. This is the rate of return which equates contribution with projected benefits. It is unique. It is fixed at time of award in just the same way that the rates of return of the zero coupon bonds were fixed at issuance. It does not gyrate with the animal spirits of any market or any portfolio of assets.

This makes explicit the fact that the cost to the corporate sponsor has two elements; the contribution made and the rate of accrual of that contribution, a fact which is usually lost on scheme members. In this view, the role of the pension fund is to offset or defease the accrual cost to the sponsor employer. The pension fund also serves as security for scheme members.

Pension liabilities may be valued without reference to or use of any external discount rate. Moreover, this valuation will retain all of the information implicit in the contributions and promises made by the sponsor employer. This proposed method reports accrued liabilities at the time of measurement, while current-employed protocols return a discounted present value of liabilities, of which there infinitely many. By any test, the accrual rate is objective; with market-consistency, the objectivity is in the process of selection, not the item selected.

The accrual rate possesses one further, but very important property; it is time-consistent. This means that if it were to be used to discount future benefits, it would return that same value as is calculated by accumulation from the contribution forward. Neither market-consistent yields nor expected asset returns are time consistent. Put another way, rates chosen in these ways will not return the correct value of the original contribution if used in a backwards projection. A consequence of this is that changes in the scheme valuation are unreliable, and form a very poor basis for any decision. Time-consistency is an important property if a company’s accounts are to satisfy their statutory requirement to be “true and fair”; most notably that earnings statements be accurate and reliable.

It is clear that the volatility of liabilities arises principally from its introduction through the discount rate utilised. The accrual rate may change, but that requires revision of the benefits projections, or of the contributions made.

The question which arises immediately is how wrong can these current methods be? I looked at a section of a particular DB scheme. The total liabilities projected amount to £365.29 million. Using a discount rate of 2% the present value of these liabilities amounts to £260.28 million. The scheme has assets, at market value, of £207.44 million, meaning that under the current convention, it is regarded as being 79.7% funded.

Going forward these assets need to earn a return of 3.58% to be sufficient to meet all benefit payment liabilities as projected. The portfolio of investments has achieved a return of 8.21% p.a. historically. The accrual rate implicit in the contributions made and awards of benefits outstanding was, and is 6.07%.

The accumulated or accrued value of the contributions made, the current, accurate value of scheme liabilities is £153.37 million. The level of funding of this, the commitment as originally made, albeit implicitly, is 135.5%. Put another way, the investment portfolio has done extremely well, exceeding the rate of accumulation promised, and with which we were comfortable, by a total of over 35% or £54.067 million.

The discrepancy between the ‘market-consistent’ discount rate based valuation and this rate of accrual method is £106.90 million, or 69.7% of the accurate liability. This is the magnitude of the error introduced by this ‘market-consistent’ discount rate. It is 29.27% of the total liabilities ultimately payable.

The amount which needs to be reported in order to satisfy the statutorily required ‘true and fair’ view of UK companies law is £153.37 million. It is the value which is equitable to other stakeholders, other creditors and shareholders. Clearly, the market-consistent present value of £260.28 million is materially different from this, and would fail any ‘true and fair’ view test.

While the error in this case is that ‘market-consistency’ overstates liabilities, the converse is also possible; in the 1970s when market yields were extremely high, had these conventions applied, the present value of liabilities would have been understated to similar, and sometimes larger, degree. With error on this scale, it is scarcely surprising that occupational defined benefit schemes are widely regarded as unaffordably expensive, and that perverse actions and management strategies should have been undertaken and adopted. Many of these actions have themselves raised the cost of the rump of occupational DB provision.

The current accounting or valuation practices have done more than any other genuine risk factor to destroy the UK occupational DB system; the current methods are simply not fit for purpose. Once we have resolved this, then and only then can we address scheme funding and member security properly.

I expect and await an onslaught of protests; I recognise that the vested interests are substantial.

[1] This abstracts from the ‘stay’ element of an insolvency proceeding which precludes action by a creditor to collect due amounts,

[2] This is quite distinct from the traditional use of the term accrual rate, which refers to the proportion of a pensionable salary payable in retirement, accrual rate of 1.5% of, say, final salary for each year of service.




To prove Con’s point – the protests duly arrived. Thank goodness we have a strong and open press that will not be bullied in the shameless fashion detailed below.





Thank goodness for balanced journalists!



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“Why do we see pensions like that?” Assumptions behind the FAB Index


This week we published the FAB index (FABI) which shows the way we see the state of this nation’s defined benefit pensions. “We” means First Actuarial, I work for First Actuarial.

We want to paint a picture of the pensions landscape. If you go to a gallery and look at a Turner or a Constable, you immediately recognise a unique sensibility. Turner looked at the sky one way, Constable another; the same sky -different eyes!

Two actuaries can look at a state of affairs and judge how it will turn out differently, because they have different assumptions. Some of those assumptions are minute- collectively, all the small assumptions can make a big difference- especially over time. But sometimes the assumptions are paradigmatic; meaning that two actuaries are seeing things from the opposite ends of a telescope.

The paradigm shift in the way that First Actuarial is asking you to look at the issue of defined benefit pension funding is away from a world where we want to stop paying pensions as soon as possible, to one whether we want to continue to support pensions over time. Those who want to stop paying people’s pensions are the trustees and sponsors of defined benefit schemes who want to buy out their liabilities (or see them transfer to the protection fund). Those who want to keep them open are trustees and employers who see a benefit in paying pensions to people to the very last payment due!

We are trying to encourage people to see the payment of pensions to the very last payment as being preferential; from a societal, economic and personal basis!

But there is a temptation among those in the opposite camp, to think that we are twisting the facts, frigging the numbers and hiding our assumptions to make our position look better than it really is.

Now you didn’t ask Turner or Constable to write down why he saw clouds the way he did but you can ask an actuary why he sees the future the way he or she does. So for all the people on this blog and for all the journalists and for the civil servants and for the actuaries in the opposite camp, here are the assumptions that lie behind the blue lines.





Just Fab -remember!



The FAB Index is calculated using publically available data underlying the PPF 7800 Index which aggregates the funding position of 5,945 UK defined benefit pension funds on a section 179 basis, together with data taken from The Purple Book, jointly published by the Pension Protection Fund (“PPF”) and the Pensions Regulator (“tPR”).

The liabilities are calculated by switching the data underlying the PPF 7800 Index onto a set of assumptions derived using First Actuarial’s in-house “best estimate” assumptions (see below), and adjusted to allow for full scheme benefits.

First Actuarial’s in-house “best-estimate” assumptions as at 30 September 2016

The “best estimate” assumptions as at 30 September 2016 used in the FAB Index are described below. All of the assumptions exclude any allowance for prudence.

The discount rate is set equal to the weighted average of the expected future investment return on the assets actually held by the 5,945 DB pension funds included in the PPF 7800 Index, using the average asset allocation published in The Purple Book as weights.

As at 30 September 2016, the weighted average discount rate was as follows:

  Average asset allocation in total assets


Source: Figure 7.2, The Purple Book 2015, PPF and tPR

First Actuarial “best estimate” expected return as at 30 September 2016
Equities 33.0% 7.47%
Gilts and fixed interest 47.7% 1.53%
Insurance policies 0.1% 1.53%
Cash and deposits 3.5% 0.25%
Property 4.9% 7.47%
Hedge Funds 6.1% 7.47%
‘Other’ 4.7% 7.47%
Weighted average discount rate 100% 4.4%

Other key assumptions:

  First Actuarial “best estimate” assumption as at 30 September 2016
RPI 3.43%
CPI 2.43%
Post-retirement mortality 100% S2PA

CMI_2015 [1.25%]

Proportion married 85%

What should you make of that?

For the average Joe, like the Pension Plowman, it is hard to challenge these assumptions, because Joe has neither the data nor the analytic skills to do so. I expect that some actuaries will look at these numbers and challenge them as either too optimistic or too pessimistic, but there will be general accord that they are reasonable. Actuaries are reasonable people who do not take outrageous positions.

Why the blue line and the red line on the graph are so divergent is not because we are using different assumptions, not  because we are looking at the world in slightly different ways, like Turner and Constable.

It is because we see the social purpose of funding these defined  pensions as being  positive to our society, economy, to our way of life. We don’t see these pensions as socially divisive , a limiter on growth or as obstructing personal financial empowerment.

We want defined benefit pensions to have freedoms too!


In our opinion, the voices of those who want to see pensions level up to the quality of the best have been drowned by those who want them dumbed down to the worst. The risk transfer to DC has been badly handled so that we do now have a them and us culture.

In political terms , those “just getting by” aren’t getting enough of the pie and we’d like to see people looking at private pensions, the way we do – as making a meaningful contribution to people’s later life income. That cannot be achieved without efficient distributive structures (which these kind of pensions provide) or without a great deal of pay being deferred.

People and employers will not tolerate a great deal of pay being deferred unless they have confidence in the method of deferral. The Gilts + valuation methodology does not give employers  that confidence, it just gives them big bills. It does not give people big pensions, it loses them their jobs.

The only way we can return to the days of confidence in pensions – is by having confidence that pensions work. Consigning pension strategies to the shackles of the gilts + funding methodology that drives the red line is to put not just our pensions but our aspirations in chains.

We see the world as we do, because we want the world we live in – especially the world we are going to live in – to be a better place.


Targeting a better pension





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Doesn’t pension freedom extend to Defined Benefits?

The debate about the assumptions we use to decide the state of our defined benefit schemes is in full swing.

On the one hand you have those, like John Ralfe who use an approach which ensures that there’s always enough money in the pot to pay future pensions from an insurance company (a mega annuity policy covering everyone).

On the other hand you have those, like my colleagues at First Actuarial, who favour an approach which in the DC world we’d call  drawdown.

Of course it’s not quite as simple as that- but you get the picture.

Now when you’ve made a promise to people that the “annuity” will be at a defined level, somebody has to be on the hook for any shortfall between the price of the annuity and the amount in the pot to pay the pension. In practice defined benefit schemes don’t earmark parts of the great big pot to pay individual annuities. Actuaries value everyone’s benefit with one number and everyone’s pot as one pot. This is called pooling and is the basis of collective pensions.

Extremists dislike collectivism on principal. Collective pensions are crypto-Marxist wealth re- distributors. We’d all be better off making our way home. The stragglers at the back will be picked off by the wolves.

Extreme collectivists would have no competition but simply state benefits. There were attempts in the 70s to remove the private sector from providing pensions and to run one big national pot from the national insurance fund. Vestiges of this philosophy are still evident in the DWP and tPR’s championing of NEST.

As every, there is a happy medium that neither denies the merits of collectivism, nor disempowers people from making the best of it for themselves. I suspect that that’s what the pensions debate has been about since the War.

But I am , as my friend Vince puts it – talking from the top of the ladder of abstraction.

As regards the nitty-gritty, there have been calls for First Actuarial to provide the detail of how it has produced its FAB Index – how it has magically made DB pensions so much better off.


I am not a party to the detailed calculations. There are requests both on and off this blog for us to show our workings and I will supply the nitty-gritty to those who want it – on request. We are nothing if not transparent. But I only want to climb down that ladder one rung at a time.

Let me play you instead a debate being played out inside the mallowstreet wall-garden. I have kept the debate anonymous as it’s very Chatham House in there (you can report on what’s said but not saying it).

If you don’t want the technical argument, go to my summation below the quotes

Ralfean chappie

As you say, these regulatory numbers don’t drive Trustee action. On a TP (technical provisions-ed)  basis the cashflows are discounted by gilt (swap) yields a spread reflecting a conservative estimate of the assets’ expected return. A scheme only moves to gilts flat if they’re targeting buy-out, in which case you have to play by the insurer’s rules: if they discount at gilts flat, you should too.

As I said, I’m not sure Hilton understands risk in an asset-liability context.

Your points on sponsor strength and drawdown risk are well made. My colleague wrote a piece on that. To summarise: “Expected returns don’t pay benefits!”

An investment chappie

Hilton is quite correct, we don’t have to do it this way. We can build a growth investment portfolio which we expect will have a much higher return and we can discount on this higher basis – resulting is less money needed today. But there is no risk transfer involved. If something goes wrong with this investment strategy, the trustees have to look at going back to the employer covenant to make good. The employer also has to worry about how much damage the scheme could do to the company in the process.


First Actuarial chappie

I agree that TPR does not call for bond based discounting, and the funding regulations do not either. Nevertheless, a look at TPR’s Scheme Funding Statistics Appendix of June 2016, tables 4.1 and 4.2, show that average single effective discount rates for technical provisions have stayed remarkably close to gilt yield 1 % throughout. Although there is no requirement to follow gilt yields, it is clearly what most actuaries and trustees are doing.

If gilt based funding plans cause a problem, there’s an easy answer: stop preparing gilt based funding plans, it’s not required.

There are three arguments here

1. Investment returns don’t matter (the annuity approach)

2. We should move to a drawdown approach – if the employer can stand the risk of it going wrong. (drawdown without conviction)

3. We should trust the investment markets and have confidence (drawdown with conviction).

The Pension Plowman’s view.

I am in camp 3. I am about to enter drawdown with my own money – with conviction. I believe that with good husbandry , my drawdown plan can last me a lifetime and meet my financial needs.

The arguments put forward by FA chappie are no different. He is simply talking collectively and about other people’s money.

Here is FA chappie, a little later in the argument.

The funding regulations, as Simon and I have been pointing out, allow for the discount rate to be based on the expected return on the assets. The expected return on the assets is, by another name, the internal rate of return, which is the rate of return which values the expected income on the asset at the asset’s market value. The internal rate of return is a term which is accepted universally in all financially related professions: actuaries, accountants, surveyors, business managers, economists are all taught what an internal rate of return is.

Having worked with “gilts plus” and “internal rate of return” discount rates from before the SFO began, I’m confident that “gilts plus” is a rubbish model which is unsuitable for both long run planning of the cash flows of a pension scheme and for short term solvency valuations. And that an internal rate of return based discount rate provides a better model for long run planning.

We now have to deal with Einstein’s fourth dimension -time. As FA Chappie later accepts, you cant put a + to a gilts place funding model or use an internal rate of return if you are hoping to buy out tomorrow.

This is really the nub of it and I wish (as one Linked in poster put it) to “nip this argument in the butt!”. If you are pursuing a short-term strategy over pensions, then pensions become very expensive indeed as you have to value everything at annuity rates. Hence the deficits in PPF7800 (they’re even worse in the Hymans Robertson index).

If you are accepting that your pension scheme is going to be around for a decent length of time, then you can adopt an internal rate of return approach. .

FABI is adopting the internal rate of return approach because it is assuming that schemes are not looking to buy-out tomorrow but will continue till the last payment needs to be paid.

My view is that the problem is being caused by a rush to buy-out which is quite without economic justification. It is precisely the opposite view of John Ralfe’s.


Making sense of it all

If you’ve read this far, then you are probably an expert, but I hope there will have been a few amateurs (like me) who have followed me down this little road.

We have two views of the pensionworld – Ralfe’s and First Actuarial’s; they are very different views of the world.

John Ralfe wants to annuitize. We have conviction in drawdown.

John’s view tends to gilts- ours tends to equities.

It really isn’t any different to the conversations we are having as part of our personal pension freedoms.


Do you want to be free?



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Calm down – calm down! Pensions are in better shape than “they” think.


They think – we think!


Some weeks ago , Anthony Hilton, finance writer for the Evening Standard, used his common sense to question whether the deficit emerging at the Daily Mail Pension Trust (DMGT) was real.

The pensioners he represented did not seem any more of a liability than they had been three months before, they drew the same pension and drank the same beer. Why then were he and fellow trustees, being told they had become a whole lot more expensive.

In truth they were the same people, drawing the same pensions, but because the notional cost of buying gilts to match the expense of paying their pension had increased, the capacity of his pension fund to meet this demand had diminished.

Anthony saw no logic in this. He and his trustees didn’t want to buy gilts and didn’t want to measure their deficit using assets which were patently not fit for purpose.

Anthony’s common sense view is not one shared by the Pensions Regulator which wants schemes to be invested in and value liabilities in gilts . But this approach  comes at great expense to the employer, indeed at the risk of the jobs of  journalists and paper distributors, the organisers of the Ideal Home exhibition and all the others who work as part of Anthony’s enterprise.

Infact, demanding that liabilities be valued with reference to gilts is like setting the average lap-time for Silverstone in a tractor.

So the good people at First Actuarial decided to re-cut the numbers and look at the deficits of the occupational DB schemes in the Pension Protection Fund’s 7800 index , using more realistic investment returns.

It shows that if we allowed the trustees of our defined benefit pension funds to run their schemes using common sense, rather than the twisted logic of mark to market accounting, we could all calm down and relax. Pensions were supposed to bring comfort not angst!

Here’s what they have to say,  This is the first of a series of “FABI” reports, they’ll be producing to counter the professional doom-mongers making such hard work of pensions.


UK defined benefit (“DB”) pension funds probably have more than enough money to pay all their pensions due.

Today, First Actuarial launched its First Actuarial Best estimate Index (or “FAB Index” for short). The FAB Index shows the financial position of the UK’s 6,000 DB pension funds on a long-term basis allowing for realistic future investment returns.

At the moment, using realistic future investment returns, UK DB pension funds have never been better funded and have an aggregate surplus of around £358bn and an overall funding level of 133%.

The chart below shows the FAB Index plotted alongside the PPF 7800 Index, an index calculated by the Pension Protection Fund (“PPF”) to determine the aggregate level of Section 179 underfunding across all pension schemes in the UK eligible for PPF compensation in the event of employer insolvency.

FABI graph.png

As at 30 September 2016, the asset, liability, surplus/deficit and funding ratio of the PPF 7800 Index and the FAB Index were as follows:

10th September 2016 Assets Liabilities Surplus/(Deficit) Funding Ratio
PPF 7800 Index £1,450bn £1,869bn (£419bn) 78%
FAB Index £1,450bn 1,092bn £358bn 133%

Rob Hammond, Partner at First Actuarial said:

“Historical low gilt yields have led to historical reported deficit levels of DB pension funds. But, a reduction in gilt yields doesn’t necessarily translate into an increase in pension fund deficits, particularly if that pension fund doesn’t invest solely in gilts.

“The FAB Index is an attempt to provide a more realistic measure of the value of pension fund liabilities in an attempt to combat what we see as scaremongering within the pension industry and to help trustees better understand the true value of DB pension fund liabilities.

“Whilst we recognise that pension funds should be funded prudently, we challenge the traditional ‘gilts plus’ approach to valuing DB pension funds. This starts from a position that arguably bears no relation to the likely long-term cost of paying the pensions. Instead we would encourage trustees to consider a ‘best-estimate minus’ approach so that they can start from the expected return on the assets they actually hold and deduct an explicit margin for prudence.”

The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension funds. all the assumptions for the blue lines are to be found in this blog.



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“The Gold Star DC Pension Plan” – awaiting conception!




That good chap Jonathan Stapleton  Jon Stapleton   who runs mags for Incisive has asked me for my view on what makes for a gold star DC pension scheme. I’ve submitted 150 words which I hope will find their way into a future edition of Workplace Savings and Benefits;

A gold star DC plan is one that delivers its promise to its sponsors. The plan converts regular contribution into a string of regular payments called a pension and a gold standard plan is one that does this effeciently. Efficiency means “no friction” (low charges, easy  contributions and prompt payments in decumulation). Gold Star also means “value” delivering market-beating performance , smoothed investment returns in drawdown and convenient interfaces for the sponsors (both employer and member)

“Gold Star” shouldn’t be defined in terms of sponsor contributions. The level of sponsorship is to do with the sponsor’s covenant – not the plan .The plan should encourage sustained contributions from sponsors by delivering efficiency and value.

A gold star pension plan achieves sustained support from sponsors so that it can make payments throughout retirement . A gold star plan ensures money does not run out either through annuitisation or through self-insurance.

I’m with the Americans in not using the word “scheme”, it’s not a word that has positive connotations elsewhere and “plan” is much better.

As I have a blog, I have the luxury of expanding whereas others, submitting their ideas may not (if you are offering Jon your thoughts – (or if you aren’t!)- perhaps you can put them in the comments boxes below

The big idea

Most quality standards on this subject – in particular the PLSA’s PQM – make the chief criteria for a good DC Pension Plan, the contribution of the sponsors (member and employer). This has caused the PQM to become a badge for a club of well heeled employers who can afford a reward strategy whether 10%+ of salary goes into a pension. Nice if you are in that position but not much good if you are one of 95% of employers who are not and may never be in that position.

The big idea is this

We can judge pension plans , not by their input but by the quality with which they transfer the input to the output. More specifically, by the quality of the promise made at outset and the pension plan’s ability to deliver on that promise over time.

This is my big picture idea of Value for Money.

Laurence Churchill has got it right as IGC of the Prudential Pension Plan. His benchmark for success is to achieve a set level of return for policyholders (after all costs). If – over time- the plan exceeds this return, it is achieving value for the money the Prudential is taking for managing the plan, if – over time – it isn’t – it isn’t! It is that simple.

The little ideas are these


Dave Brailsford

The Dave Brailsford way to make our cycling team successful was to set it a high level goal- win lots of medals – and then to focus on lots of little things that could be done well or badly , work out what “well” meant and do them well. Together, these little things made champions.

The gold star pension plan has to do all the little things well to achieve the big idea, the big idea is dependent on the little things but the big idea comes first.

Value  and efficiency

There are only two ways you can deliver profits to shareholders of a business. The first is to generate revenues and the second is to minimalise costs. The two need to work together  and whether we talk of them in pension plan terms as growth and risk control , alpha efficiency  or simply value for money, it’s the same thing. I used value and efficiency as they seemed the closest to an engineered process.

Value – as defined by growth comes in two forms – contributions from sponsors and investment growth (above what can be expected from the financial instrument employed).


Pension Plans can get more contributions from sponsors  by winning trust that the plan is worth using. Government can help here by giving the plan an even break – tax relief, the kicker of salary sacrifice, pension freedoms and so on. It can also keep sponsors minds on the plan by not introducing rival ideas like workplace ISAs.

People will put more money in when they see the Plan performing well. Unfortunately “well” is often defined as “going up in value” and clearly this can’t happen all the time without being invested in risk-free assets (which don’t help achieve the long term goal of a pension. So education about the long-term goal and the short-term issues of the stock market is part of the value that the Plan managers should be aiming to deliver.

That said, there is more to winning trust than lectures on the equity risk premium!


Fiona Dunsire

Fiona Dunsire – UK CEO of Mercer went on Wake up to Money this morning to tell listeners that the keys to getting people saving into the Gold Standard Pension Plan were to be purchased from UK Mercer. They took the form of individualised video statements where you were told the likely outcomes of your pension and invited to contribute more to make up shortfall. This is of course a very good idea though I suspect one that is beyond the means of all but Mercer clients!


More generally, the Gold Standard Pension Plan can aim to keep members informed of the value and the money being generated and given and taken and they can do so quite cheaply through the proper use of data and technology. It is unusual for this service not to be available, it is unusual for it to be generally used. Gold Standard Pension Plans will get the reporting on the progress of a plan and the models for shortfall calculations in the hands of members in a way that suits the hands of members and the pockets of sponsors.

Investments aligned to expectations


Critical to the delivery of the overall objective – the long term objective to deliver targeted outcomes, is the correct investment strategy. I do not mean the range of investment options but the investment strategy for those who do not want to choose their investment strategy.

I do not think there’s any doubt that the plan needs to be aligned to the investment strategy. If you choose a bond based strategy, you can expect smaller but more certain returns than an equity based strategy. If you want to provide an optimal strategy for everyone – you may want to diversify between the two and even use wider diversifiers. The point is that you should be able to demonstrate that the objectives of the Plan are in line with the strategy of the default investment.

Clearly the investment strategy needs to be aligned not just to the overall objective , but to the specific needs of each member, it must be dynamic to their lifecycles.

A Plan is for life, not just for saving

A DC pension plan that simply provides a cash sum to its participants is not a pension plan at all, it is a tax-incentivised savings plan and is ducking its primary responsibility, to offer participants a lifelong income (known as a pension).

As Pension Plans (Gold Star or not) become more mature, their capacity to provide a pension for life will be more scrutinised. Pension PlayPen is already downgrading a lot of DC schemes that are not taking up this challenge and we expect to see some real innovation in this area. At the moment we don’t see many Gold Star Pension Plans for those trying to spend their pots, we just see Pension Plans passing the buck to third parties.

Those advanced strategies – such as Alliance Bernstein’s Retirement Bridge – are still only half the way there – they still bale out into annuities rather than more ambitiously running scheme pensions, no one has yet tried to replicate the efficiency of DB pensions in payment.

To a large extent this is because DC Plans are suffering a collective failure of nerve, no-one is prepared to insure longevity , nor even establish self-insured mortality pools from the pots of the thousands of participants in some of our bigger plans.

I have yet to see a Gold Star DC Pension Plan. I will tell you when I do

target pensions


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(Positive) thoughts on the state pension


John Cridland (ex CBI)



The state pension , next to our capacity to work, is most of our greatest financial asset. Conservatively valued at £250,000, the new state pension of £155.65 p.w. is worth more than most new Lamborghinis. So why do we dismiss it as a pension Trabant?

Talking with the Pension Minister last week in Birmingham, I sensed he was embarrassed to hear that it’s purchasing power is almost ten times the median DC pension pot. For those just getting by, it is getting close to a safety net, indeed – when supported by other benefits – and the age-related personal allowance, the elderly can now enjoy tax free benefits from the State of which we should be proud.

This seems to me to be something to celebrate. That those benefits are no longer ours by right at 60 or 65 is a consequence of their revaluation. The Government’s continued commitment to the triple lock (at least until 2020) is in the teeth of austerity. We are doing something in Britain to reduce elderly poverty and I’m very glad we are.

The bill to the exchequer for pensions will be around £157bn in 2017 of which around £110bn will be directly from the state pension. This bill is estimated to rise regularly over the remainder of this parliament (as a result of the triple lock).

Is this fair?

For much of my working life I have been selling private pension saving because of the inadequacy of the state pension to replace lifestyle or even provide a safety net. The upgraded state pension (paid tax free to those relying on it) can no longer be dismissed as nugatory (Michael Portillo’s description).

But I am hearing people saying that this is unfair. Today John Cridland will be publishing his report into intergenerational fairness and I hope he does not reinforce the prevalent prejudice that our elderly are being treated too well.

There is, in most cultures, a wish to treat the most elderly with the most respect. Society works like that. This recent idea that baby boomers are all take take take is being used against those in retirement who were the children of the war years. The frugality of my parent’s generation was fashioned from rationing and their capacity to look death in the eye was shaped by the horror of living in Britain (or of evacuation) when your young life was under threat from a wayward bomb or a torpedo.

The obligation that a younger generation owes to those surviving from the generations above them is often referred to as “inter-generational solidarity”. It is earned by the older generation by preparing, nurturing and educating the young.

That I pay a marginally higher national insurance contribution or income tax payment to ensure that my parent’s generation enjoy higher standards of living in poverty seems entirely right.


Daniela Silcock- Pension Policy Insitute


Inter-generational and intra-generational solidarity

My friend Daniela Silcock is on the radio this morning (Radio 4 7.50 and 8.50 if you missed her on Wake up to Money explaining what the State Pension would look like if we were to pay it absolutely “fairly” between our generation. We would have to pay more to those with poor medical records than good ones, we’d pay people in Chelsea less than those in Walthamstow (there’s a 15 year difference in life expectancy), we’d pay more to men than women and we’d pay less to the well educated than those with no qualifications.

I suspect that Daniela has her tongue in cheek, it is ludicrous to suppose that a pension can be paid fairly. Even the most healthy, well educated female can die unexpectedly. If life is unfair, death is unfairer!

Which is why we regard the state pension as an insurance against living too long and not a right to a proportion of a national savings pension pot. This is what we mean by intra-generational solidarity- we accept some unfairness in the concept of national insurance.

Just as it is wrong for us to discriminate payments to our current pensioners, so it’s wrong for us to suppose that each generation coming along behind us should be treated progressively better. The increase of the state pension age is merely a reflection of the increases in the age at which we die (and stop getting our pensions).

The management of the increases in state pension age may not have been perfect (we all accept the WASPI anomaly) but the principal of linking state pension age to average mortality is a proper one reinforcing generational fairness and creating intergenerational solidarity.

Stop this unseemly bickering!

We have a job in hand which is to improve lifetime savings so that the state pension we receive is supplemented by proper lifetime pensions. For a diminishing number of us, the employer promise of a defined benefit remains but it is generally accepted that this cannot be a universal promise. The genuine unfairness of two people doing the same job – one on a proper DB pension and one with pence in the pot remains and is one that needs addressing. But I see little point in wasting energy levelling things down when there is an opportunity to make more of the workplace pensions we are setting up under auto-enrolment.

Whatever John Cridland’s report into the state pension age ends up saying, I hope that it will acknowledge that the state pension is valuable and becoming more so. The big picture is looking brighter despite the plight of the WASPI women and the remaining levels of pension poverty that still exist.

I hope that Cridland will make it clear that the financial  fate of pensioners to come is a  lot rosier than it was , without lulling any of us into a sense of security that it is what it should be. Our state pension needs supplementing by private pensions and those pensions should be properly funded throughout our working lifetime.

Our working lifetimes have to be longer as our non-working retirements are longer. There is nothing unfair about that.


intergenerational solidarity – medieval style

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It’s the L&G IGC forum – I’m not going for tea and biscuits.

tea and bisuits.jpg

L&G have championed the idea of the Independent Governance Committee. Before they were a twinkle in the FCA’s eye, L&G had got going and today is the third forum for members of their workplace pension plans.

I haven’t been before but I’m going today and I’m not going for the complimentary tea and biscuits. I’ve a number of questions to put to the IGC, not least when they expect to announce a new chair after “Tricky” Paul Trickett hoofed it to Aviva and resigned. Zurich has got itself a new chair of the staff pension scheme (David Sims replacing Tricky), the IGC should have their’s in place too.

So what’s bugging me? My workplace pension has had a great 2016, Martin Dietz called the Brexit vote and left the fund unhedged – getting default investors a nifty 7% currency kicker, our fund continues to be managed at an ultra-low 13bps (with perhaps 1bp dirty charges to be declared). What’s more L&G seem to have become flavour of the month in UK corporate governance circles, evidenced by former policy supremo – John Godfrey – making it to 10 Downing Street.

Shouldn’t I be smiling happily? Well no! I am arriving this morning with a shopping list of improvements to my Legal and General Workplace Pension that I want the IGC to take to the LGIM and LGAS and L&G Group.

My shopping list


I want to see some of this clever thinking at Group level (Beveridge 2 – infrastructure – long term income streams – ESG +SRI =social purpose) being introduced to the £2.7bn multi-assset fund (MAF) default.

I certainly want to see a version of MAF for those who are at the tipping point between saving and spending their pot and I want that a lot more thought through than the current options.

I’d also like to hear a coherent exposition of the Brexit protections that Martin Dietz and his boss John Roe have in place for us defaulters.


Spending my pot

I want to know what the plan is to help me spend my pot, what effort L&G are putting in to helping me treat my pension pot as my bank account and how L&G is engaging with new payment systems to make my life easier.


Administration and integration with payroll

I want to hear an update on how my workplace pension is being integrated with payroll using the pensionsync and eAsE links. I want to know what strategies L&G have as their plan B if these links don’t work and how L&G are planning to help my companies and the many others we’ve introduced to L&G , in bringing their enrolment costs down.



L&G costs are low, especially for medium sized employers; but how sustainable is this 50 bps price promise? Are L&G investing in the new technologies to replace the archaic systems on which the Workplace Pension Plan is housed? What are they doing in the Blue Sky areas such as the BlockChain? When can we expect to see genuine progress in modernising their creaking systems architecture?



Just how committed are L&G to the workplace. What is all this we hear about their taking a stake in a rival workplace pension provider (Smart). Is this a sign of them pulling out of the market or an admission that they cannot operate profitably in some sectors?


These may sound the questions of a hooligan,  I’d like to think that the hooligan and the constructive disruptor are the flip sides of the same coin. One man’s hooligan is another’s disruptor, but unless we get questions tabled and answered, I see little point in calling today’s event a forum.

Look forward to tomorrow’s blog when I hope to have answers to some – if not all – of my questions

Ever the optimist!






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How do we auto-enrol workers in the “gig economy”?



A gig economy is an environment where temporary positions are common and organizations contract with independent workers for short-term engagements. The trend toward a gig economy has begun

The consultancy McKinsey  reckon that some 162 million people in Europe and America work independently. That’s up to 30% of our working-age population. Official UK figures bear this out, with almost five million people in the UK employed in this way.

At one end of the British gig economy are firms like Deliveroo and Hermes. They rely on energetic youngsters to deliver everyday items like parcels and meals. Mckinsey reckon that about 70% of these independent workers are choosing this work-style either as their main job or to top up earnings. The other 30% are either “reluctant”, working this way faute de mieux, or so cash-strapped – this is all they can do to scratch a living.

Frank Field is concerned about the 30% who are in the gig economy because they have no other choice. He’s concerned because they are potentially exploitable and – as Chair of the Work and Pension Select Committee, he feels in the front line.

Frank Field is a Labour MP but he has taken his concerns to Theresa May and she had set up an enquiry – to be headed by another Labour stalwart, Matthew Taylor who heads the Royal Society of the Arts. The Taylor enquiry is going to look into the way we work and will have important messages for Payroll, Pensions and Auto-Enrolment.

Anyone who has been involved in auto-enrolment – whether in-house or as a service provider, knows the difficult surrounding Personal Service Workers, they are the independent workers who contract with employers to deliver services on an “occasional basis”. The point at which “occasional” tips them into being “workers for auto-enrolment is debatable. The Pensions Regulator asks you to test whether they “look, feel and smell like an employee”.

Among other things, the Taylor enquiry will be trying to establish a better definition for these workers. But as importantly, it needs to report on how these workers are served for the kind of benefits and protections that those in regular employment take for granted.

The answers the Taylor enquiry come up with may not make pleasant reading. Most Personal Service Workers do not benefit from a proper payroll system and most are missed from auto-enrolment altogether. Many are self-employed but no-one knows how many are registered with HMRC for tax and national insurance. The worry is that a large number, especially the 30% of independent workers, working this way out of desperation, are barely getting by on gross earnings.

The worry for employers who regularly pay these workers either through payroll or under invoice is that the income tax, national insurance and pension contributions that may be avoided today, become payable tomorrow, and very possibly retrospectively.

I have written to Matthew Taylor as a member of the RSA volunteering to help with the enquiry and I’m pleased to have had a very positive reply! I want Government to understand the problems not just for independent workers (of which my son is one) but of employers ( of which I am one) , of payroll and of pension providers.

Any enquiry that looks at this problem solely from the buy or sell side will fail. That’s why I’m pleased that conservative and labour politicians and thinkers are working together. I hope that payroll software companies, bureaux and in-house payroll managers will be at the centre of Taylor’s research. I hope too that Taylor will look at the adaptability of benefit providers – from flex to pensions – to ensure that these independent workers are integrated into the world of benefits – as part of the world of work.

A friend of mine showed me a pension statement of one of her clients recently. It showed daily contributions of between £6 three years ago and £9.50 today. I asked what drove the increase – the answer shocked , amazed and delighted. The pension company received payment equivalent to the amount the client would have paid for cigarettes, since he had given up. The amount was paid each day by Paypal into his workplace pension. What’s more the client was getting tax- relief at source from the Government!

Where one leads – others will surely follow!


Frank Field


Matthew Taylor


Theresa May

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My hour with Pension Wise (5 myths dispelled)


Pension Wise is in the news today as it is likely to form part of a new (yet to be named) single advisory organisation covering debt and pensions. 

At a time of uncertainty, I can add some certainty, the Pension Wise service I received through the Pension Advisory Service was certainly better than I had any reason to expect!

Here’s my story.

Being of an age (over 50) and considering options around my pensions and my pension pots, I phoned up Pension Wise to make an appointment.

Phone 0800 138 3944 to book a free appointment

I did so more in hope than expectation, assuming I would spend an hour ticking boxed before being told to see an IFA. It wasn’t like that at all, infact it busted every prejudice about the service I’d allowed to build up in my head. Here are those prejudices (myths) and why they’re bust.

Myth one – “It’s inconvenient”  – in truth it isn’t – it’s dead convenient

I was given two options, to have a meeting face to face or to do it over the phone. I chose “over the phone” because it was more convenient.  I got an appointment at 11.20- 12.00 and my (mobile) phone rang at 11.20 exactly.

Myth two- “it’s all about box-ticking” – in truth- while the meeting is structured- you don’t notice the process and the meeting is more of an adult conversation about money.

Like all good conversations , mine had a beginning, a middle and an end. We moved from getting to know each other, through the meat and two veg and so on to next steps. At no point in the conversation did I think we were wasting time or that my Pension Wise person was going through the motions

Myth three – you won’t get advice. I don’t care what they say- I felt I was advised.

Pension Wise define advice as “the provision of a definitive course of action”. It is true, I was not instructed what to do next. But I knew what to do next, I told myself that. I advised myself of my next steps and I’ve already taken them. Thanks to my guidance, I was able to take informed decisions on my own. I do not think I would have taken those decisions without my interview. Julian- my Pension Wise person, did not tell me what to do, but he made it easy for me to decide that for myself.

Myth four – it’s technical – it isn’t, it’s fun and easy

My financial affairs are complicated in terms of the people I look after, my health, my tax position, my future plans re work and in terms of what I want to spend in many decades I hope will pass between now and the day I die.

The technical matters- tax mainly -became so unimportant as I started thinking about the non-technical matters- most of which are listed above.  We get too frightened by doing the wrong thing to remember the right thing- which is to look at retirement positively, as I spent time with Julian, I started to visualise my retirement and how I could make the most of it. I can honestly say I have never done this before.

Myth five -you have to listen to a lot of nonsense.

I don’t remember much of what Julian said to me and suspect that there wasn’t much said. When I had a technical question he either answered it or put me on hold and came back with the answer from one of his colleagues. The point was that I was bouncing my ideas off Julian and Julian was doing most of the listening.

Having spent most of my life doing Julian’s job, I know that the answers are seldom with the person who’s supposed to be the expert, the answers are almost always with the person asking the questions. The combination of calm confidence and genuine interest I found in Julian made me listen to myself!

Why I recommend anyone over 50 to get a meeting with Pension Wise

The conclusions I came to about my own finances are not the subject of this blog. I’ve made a couple of mistakes in my planning which I am now putting right – these were the material outputs of the meeting. Less material but more a matter of approach, I now am confident of what I’m doing.

Julian was not a brilliant adviser, but he was a brilliant listener. He put me at ease throughout and allowed me to come to my own conclusions. He did not advise me, he let me advise myself. He used the structure of the meeting he had been taught, but I never felt I was part of a process. The meeting flew by and by the time we had finished we were twenty minutes over time. It was fun, the first thing I wanted to do when I had finished was to thank TPAS for making my Pension Wise meeting so rewarding.

As I’ve mentioned above, the meeting helped me to firm up my plans and on two minor points, to adjust them so that I don’t pay unnecessary amounts to the tax man and do have a simpler and easier time of it in the years ahead.

The best news of all is that I now have the TPAS number to call , if I need further help on pensions matters. I expect I’ll be calling them again soon!

Please make that call!

Everyone is different, I was a financial adviser myself for twenty years and I have been in pensions 33 years. I’ve saved hard all my life and will have a financially easy time of it in the years ahead. I don’t need to do much work if I don’t want to, but I am sure I will!

You may be just the opposite and thinking about Pension Wise with dread. I would advise you to make that call.

Because I had no expectation that Pension Wise could help and nearly didn’t bother. It helped me because my prejudices (my myths) all proved wrong.

I would be very surprised – should you have prejudices against Pension wise – if they weren’t wrong as well!


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Value for money – we have won a battle not a war.


The FCA Consultation Paper CP16/30″Transaction cost disclosure in workplace pensions” is a very good piece of work and allows IGCs and Trustees to know what their members are paying to have their pension pots managed.

It unlocks one of the doors to establishing whether members are getting value for money. But there is more that needs to be done before trustees and IGCs can say with confidence that their fund managers are offering value for money.

We will now know what members are paying.

Specifically, while they may know what their members are paying, they cannot tell if they are paying too much. In order for that to happen, they will need benchmarks on what a fair price is , not just on the hidden costs but on the overt costs too.

CP16/30 rightly points to a divergence between fund managers in pricing of stock lending. Some managers charge , some don’t- the amount of the charge varies. The suspicion is that the overt charge for fund management (born by the pension provider out of the AMC) can be subsidised by covert charges for stock lending (born by the members out of fund performance).

But are they paying too much?

Such cross subsidies are rife in the fund management industry. Fund performance can be skewed by loading costs onto legacy funds to boost the performance of the latest “star manager”. There is increasing evidence that NESSIE (what the Investment Association refer to as these “mythical” fund costs) is not only alive and well, but working in service for fund management marketing groups. While star fund managers get fund performance with a free ride- the costs they should have borne depress the price of legacy funds.

The need for benchmarks

So we need a pricing benchmark for overt charges – the basis point charge levied by managers to trustees and insurance companies running trust and contract based workplace pension plans.

And we need a separate benchmark for covert costs- the amount coming out of funds through transaction costs. The criticism that can be levied at the FCA’s approach is that it doesn’t allow transaction costs to be split between those that benefit the fund manager and those that benefit the other intermediaries taking a cut of your money. The FCA argue (rightly IMO) that it doesn’t really matter who takes the money, a cost is a cost.

I would argue that there are specific areas – such as stock lending, that IGCs and trustees should pay special attention too. The rights granted asset managers are in the Investment Managment Agreements and we may need a third benchmark to cover specific items where cost leakage is most prevalent.

The peculiar conflicts of master trusts.

IGCs and Trustees of non-commercial occupational DC pension schemes are relatively unconflicted. Their duty of care is to the member, they do not have any commercial skin in the game. Their only conflict arises if they become dependent on the grace and favour of the fund managers (sports tickets, so called educational dinners and the like).

But the Trustees of Master Trusts can be conflicted between the commercial pressures of those who pay them (and most master trust trustees are paid) and the interests of those for whom they act. I do not see sufficient separation on many master trust boards between the trustees and the pension providers. This is particularly the case in the smaller master trusts where the fight for commercial survival is most acute. Put simply, self-interest is most prominent when their is a threat to you getting paid!

I am very far from convinced that the governance of many master trusts is suffeciently robust for trustees to challenge the kind of cross subsidies mentioned above. This is most specifically about the use by some passive fund managers of member borne charges to subsidise provider born fees (Stock-lending and AMCs).

Winning battles not wars

Of course knowing that the commercial entity behind a workplace pension is getting the right price and controlling costs for themselves and for members is only half the story.

Those costs may be buying services that are benefiting members – or they may not. To understand the value arising from the costs incurred, trustees and IGCs need another set of benchmarks. These “value benchmarks” may sound very precarious but in fact they do exist and are being used in the Netherlands (along with the pricing benchmarks mentioned above).

It is possible to measure the positive impact of fund managers in terms of risk management and market out-performance and that is precisely what the Dutch Authorities do. If you want to see a presentation of these benchmarks  check the Novarca and IBI slides (10-12) in this presentation.

Low cost fund managers tend to outperform

The Dutch IBI transparency index (slide 12) shows that fund managers that have low overt charges and covert costs tend to outperform those which are more expensive. But this is not always the case.

Trustees and IGCs that feel comfortable that they have found a fund that consistently delivers more value for the money than another , are entitled to promote that fund to a default option for the workplace pension, subject to the cost of that fund – together with the other costs of managing the pension – not exceeding 0.75%.

The big question for Government is whether the new found transaction costs should be included in that 0.75% or whether these costs can be added. In my opinion, the evidence of managers with high charges and costs delivering extra value is very sketchy and the capacity of good workplace pensions to offer full services within 0.75% quite common.

For instance the L&G Multi Asset Fund (3) which is offered as the default investment option for L&G Workplace Pension Savers at 0.13% reckons to have transaction costs of 0.01% and has – I am told – no charge for stock lending. L&G could easily absorb the 0.01% extra charge into the total charge for the plan of 0.50% or put prices up to 0.51% – retain margins – and still be within the cap by 0.24%.

How do we know what the best price is?

As members of workplace pensions, we do not know what price funds are being offered to IGCs or trustees of commercial mastertrusts. I have asked and been told by the CIO of NEST that the fees paid by NEST to fund managers are subject to a non-discl0sure agreement (NDA). When  I asked why NEST signed the NDA I was told it was to protect the fund managers who might otherwise have to offer similar prices to other funds.

I find that practice to be anything but competitive. It means that NEST can cross subsidise its commercials against rivals such as Peoples and NOW and the insurance companies. I as an L&G policyholder could be paying more to keep NEST’s fund costs down- not a deal I see as very fair.

In practice, I do not believe that the non- disclosure of fund management fees works in anyone’s interests other than the fund managers. There is a best price out there and by “best” I mean the economic price that offers a fair margin to the manager and a fair cost to the provider and member. Determining what that price is cannot happen if everyone is buying blind. If – and I suspect this is the case – most trustees and IGCs have no idea what the best price for the funds being bought for their members is, then they are evaluating value of money with their finger in the air.

The case for a centralised pricing benchmark

novarca fca

The costs providers pay for funds is well below the price that retail investors pay for that same fund. That L&G MAF3 thing is being knocked out to SIPP punters at over three times what I’m paying.

I can understand that there is a difference between the retail and wholesale price. Workplace pensions should be picking up the wholesale price and passing it on to members with a small turn as margin.

I can understand why fund managers want to keep the institutional (wholesale) prices secret (would you be happy paying three times as much as a retail customer?). That is a whole different argument which SIPP customers need to have with their platform providers.

I’m arguing here for the people using workplace pensions (who are generally just getting by and not in the business of investing in SIPPs).

These people need proper protection by IGCs and Trustees. Those IGCs and Trustees, should be able to see the price their provider is paying for funds, against the best price for that fund – or at least that kind of fund.

The best price index cannot be managed by a vested interest such as the Investment Association. I would argue it cannot be entrusted with consultants who are now so embroiled in fiduciary management as to have generally lost any claim to independence.

The case for a centralised pricing index is strongest when that index is organised by Government with the help of truly independent experts – such as Novarca (who the FCA have already used). The Dutch Government have come up with this solution and we should follow suit.

It may not suit the fund management industry to have best prices generally available to trustees and IGCs and I am quite sure it will horrify the wealth managers who will have to justify the gap between retail and institutional pricing. But if we are going to do this Transparency thing properly, I see no other way than this.

Winning the war by siezing the day.

Before I heard Theresa May’s speech and before I spoke with members of her policy team, I did not believe that we could have an interventionist Government in the near future. Having spent time in Birmingham this week, I have changed my mind.

Not only do I see the publication of CP16/30 as a significant battle won , but I see an opportunity to nail the value for money thing and win the war. The time is now right, the ducks are lined up and I hope that the Transparency Task Force will seize the day.

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Walk on! A panegyric for May’s interventionism.



For ever?

This footpath is not a road – it is a footpath; it is not closed, it has been closed; it is not blocked by roadworks , the footpath is walkable but the pedestrian has to walk past some red tape. If Philip Hammond wants to know how we can increase productivity, he can start with councils like Basingstoke and Deane which close footpaths to pedestrians, drive traffic onto roads, create greater congestion and ultimately stink out the environment.

I have written about Basingstoke and Deane several times on this blog. It is a council only interested in macro projects like the John Lewis store below. If you want to know the reality behind the store read this – it’s about where we work!


Why they closed the footpath for a year!

Regulation is not supposed to close paths but to make them easier and safer to use. The footpath pictured has been closed for around 300 days of the last year. It’s closure has increased the travel to and from work at Basing View and Basingstoke station by around 20 minutes a day.

Government can regulate by investing in infrastructure that allows us to walk from A to B in a straight line.

The frustration voiced by Theresa May at the Tory Party Conference on Wednesday was on behalf of the millions of people who want to go about their daily work without this kind of nonsense. Reading my notes from her speech words and phrases spring out at me


“change has got to come”

“Government can be a force for good”

“if you believe you’re a citizen of the world , your’e a citizen of nothing”.


May referred to a “Global Britain” – an odd phrase; Britain is an island, we can only be global in the sense that we are apart from Europe but integrated with both Europe and the world as Britain. This means taking back devolved power (Sovereignty) but in May’s lexicon, exercising power.

“Change” happens in May’s world because of “intervention”, not because of forces beyond Government’s control. “Government can be a force for good”.

At a fringe meeting at the Conference, I asked the Pensions Minister what the capital value of the State Pension was. He could not answer me; I reminded him it was £250,000. I asked him what the average pot value was – he knew it to be today £30,000. By 2030, pots are expected to have grown in real terms to £49,000. If the triple lock remains for a fraction of that time – the real value of the state pension will be over £300,000. My point is Theresa May’s point – “Government can be a Force for Good”.

For all the hullaballoo about personal pensions over the past 30 years (they were established in 1987), the average personal pension pot (when we strip out the occupational DC pots) from the numbers – is less than £20,000. In pension terms that’s about £80 per month.

The State has been a Force for Good

force for good.png

So while most of us have been worrying about our personal pensions, our state pension has been building up behind us and is – typically worth nearly ten times what the average person’s been able to save for themselves.

To a very large extent that is due to the efficiency of the Pay as You Go state pension system and the hopeless inefficiency of personal pensions. It is because politicians chose to believe in market solutions, refused to intervene over commissions, hidden charges and overt product fees that in retrospect- make the eyes water.

Thankfully, there were civil servants who soldiered on with state pensions. Without the perseverance of the DWP/GAD/Treasury we would not have the capacity to promise people retiring today the Single State Pension – which for many people is there lifeline to financial security in later years.

Some are likening May to Thatcher but in terms of ideology, she is in exactly the opposite corner. The Pensions Minister gave me some spurious clap-trap about the State Pension being an £89bn pa drain on public funds. This is total nonsense, the State Pension is affordable because of Britain’s capacity to generate tax and national insurance and because of the National Insurance Fund which is a reserve that Government can fall back on. The State is merely an organiser, an unblocker of footpaths!

I concluded yesterday’s blog with a Steve Bee cartoon that suggests that what we get out of pensions is dependent on what we put in. Steve is right – but only 10% right. As Con Keating has pointed out to me, the other 90% of what we get out of pensions is down to investment gains – or in an unfunded environment, by the rate of revaluation of the pension promise.


Organising pension governance the FCA way

In the week that Theresa May made her great interventionist statement, the FCA published “Transaction cost disclosure in workplace pensions“. I don’t think the FCA paper will be remembered in the history books (though I do think that May’s speech will).

But I think that the FCA paper, is a revolution and it is a recognition that change has got to come and it recognises that Government can be a force for good – though interventionism.

Margaret Thatcher would have never wanted the FCA’s consultation to be published. She would have closed that road/footpath.

I spoke with someone close to May’s policy making on Tuesday night and asked him who he devised  the policy for. He was quite clear, the person he had been asked to think of when he put forward a policy was the person just getting by, the working person/family struggling to get from A to B because of the lack of help – because of the obstacles in his or her way.



Just getting by?

I get the idea. There is something absolutely right about intervening on behalf of the person just getting by. It is absolutely wrong to assume that global forces and a free market can bring this person to a comfort level we find acceptable. The person just getting by needs someone to clear away the signs that say “Road Closed” and be allowed to walk from A to B in a straight line.

The person just getting by needs to be able to see the footpath that leads to home ownership, to a secure retirement. He or she needs to feel confident that the health service will be both national and sufficient . He or she needs to feel confident that the family can be educated properly and have the same chances in life as those getting by with ease.

In short, the idea is social justice. But not a justice that is created by levelling everyone down through penal taxation of those who generate wealth, but justice by making those who should pay taxes – pay their taxes.

I believe (unlike it seems our Pension Minister) that we can afford our state pension bills, provided we grow our economy through increased production. I would say the same about health, housing and education. The Government can do a great deal and can help us be more productive.

To do so, it needs to pay attention to the real world we live in. I am pleased that it is appointing Matthew Taylor to look at the way we work and ask questions about the suitability of Government work policies.

It needs at the very micro-level, to get into the heads of the silly people who own the transport policy of Basingstoke and Deane that footpaths are there not to be dug up, but to be walked along, because that is how many people  get to work and pay their council tax.


other means of transport are available

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“Transaction cost disclosure in Workplace Pensions” – #FCA



Most people now have a DC workplace pension and if you haven’t got one you’re either very lucky (as you’re accruing a defined benefit) or one of the 6m marginal employees who are reckoned to be “entitled”, “non-eligible” or “self-employed”. (The Government is coming to your pension situation as part of Matthew Taylor’s workplace practice review).

You can read the document here

Most people now have a DC workplace pension which is chosen by your employer and looked after either by trustees or independent governance committees (IGCs). The FCA- the Government’s principal financial enforcer has been uncomfortable about the protections ordinary consumers get for some time. The concern became stronger after the 2013 report by the OFT that concluded.


The OFT report recommended that people not being looked after by Trustees should have equivalent protection through IGCs and the IGCs have been up and running since April 2015. In April 2015 the IGCs reported that they couldn’t properly tell if workers were getting value for money from their workplace pensions because they couldn’t get the proper information out of the investment managers about how much people were actually paying to have their money managed.

I and various other people have been calling for better reporting of costs for some time now as these things matter. Now at long last, the FCA have produced suggestions on how the hidden costs of fund management can be reported consistently to IGCs and (for master trusts and single company pensions).

This matters and matters a lot. The FCA estimate the assets measurable by this proposal will rise from £320bn to £390bn over the next five years, tiny differences in costs measured by basis points (bp) of 0.01% can deliver enormous variations in the pensions we get – over time. These differences can define a good from a bad workplace pension as the costs that the FCA are examining are measurable and manageable. Getting these costs down is something within the grasp of fund managers. In theory getting costs under control is good all round


FCA CP16/30


But in practice, there is likely to be short-term opposition from many fund managers and their trade bodies. Greater disclosure does not just mean more work, but it means – for those with high costs – a lot of extra explaining. Where there is a charge cap , the Government might seek to include these extra costs within the cap, excluding high cost managers from offering services to  workplace pensions.

I hope that we do not have to exclude high cost managers through a cap, I hope we can instead measure whether their high costs produce value for the money. If it can proved they do, I would be happy to see high-cost funds being used by people for their retirement savings.

In order for IGCs and Trustees to work out value for money they will have to look both at the theory of what a fund manager is doing in the process of adding value and the practice. The practice is a lot easier, a simple examination of the track record of the fund’s performance can tell us how well the theory has turned into practice!

It may be that finding value from high charges proves very difficult. If this is the case then a simple charge cap that includes all the costs of investment will be useful. If high cost managers always under-perform and theory doesn’t turn into practice then we should do without high-cost managers.

In future blogs I intend to look in detail at the FCA consultation. It was a long time in the baking but the first reads suggest that it is likely to deliver the right level of information to help IGCs and Trustees determine whether value for money is being had.

If my first feelings are right and I will take steers from those in the Transparency Task Force better qualified to make that judgement, then the publication of this consultative document will be a big step in the right direction.

But – as Steve Bee’s cartoon points out – no matter how low the charges – the main determinant of what you get out of a workplace pension – is what you put in!


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Doesn’t “integrated risk management” set the bar askew?

bar too low.jpg

The buzz phrase for those involved in DB pension management is “Integrated Risk Management” or IRM – if you want to sound familiar with these things. The phrase is a good one as it focuses trustee’s minds on what really matters, paying the pensions. If he investment, benefit and funding strategies are all lined up , then the chances of managing the scheme to eventual solvency are a lot higher than if there’s no such plan.

But my worry when I hear actuaries and investment consultants talking about IRM is that they think of it as an organisation’s pension strategy. It isn’t – IRM only addresses the risks of a funded scheme collapsing under its liabilities and of it dragging its sponsor with it. This is only half the risk, the other half of the risk is that those working for the company and not benefiting from the promise- are forgotten about.

Put another way, considering risk only from the perspectives of the employer and trustee is to neglect the risks being left to the staff no longer benefiting from the promise.

The changing pension contract

The contract between employer -government and employee has – for generations – been about risk sharing. Beveridge brought in a system that allowed everyone the comfort of knowing the State would provide a basic level of support to relieve poverty. Beyond that employers could choose to what extent they wanted to raise expectations to their staff that retirement (if they worked with the employer) could be a better place. This contract was in turn based on risk being shared with the employer (both in terms of contributions and in terms of outcomes). The recent move away from risk sharing and toward risk polarisation has meant that those with a promise take no risk and those without a promise have no share in the employer’s covenant other than a defined contribution.

This shift was supposed to be eased by the financial empowerment of staff to do it for themselves. There were many theories about how staff were going to get savvy. They included the explosion in the numbers of financial advisers in the 80s and 90s, the arrival of easier to understand “stakeholder pensions”, the improved standards arising from the Retail Distribution and most recently the auto=enrolment project. None of these initiatives has yet managed the risk transfer that followed the closure of private sector defined benefit schemes.


“Integrated” should mean just that

In my view, an employer or a trustee board must be mndful of not just those in the scheme, but those staff excluded from the scheme. I exclude from this statement multi-employer master trusts and GPPs which have no  link with the employer covenant other than to ensure that contributions are being collected according to the given schedule.

For Defined Benefit schemes to properly call themselves “integrated” in their risk management, staff should properly be satisfied about what “integrated” means.

I am going beyond the limited remit of defined benefit consultancy and suggesting that a company is only integrated in its pension strategy when it can explain it to all staff in a single room without chagrin. I use that word as I am writing from France – the French have a much better vocabulary for shame and embarrassment than we do!

Very few trustees of a defined benefit scheme have concern for what goes on outside the scheme and most employers sponsoring defined benefits are beginning to regard the scheme as a toxic legacy of previous management. In short, neither employers or trustees are operating pension strategies that are integrated.

Total and deferred pay

For a more integrated approach to emerge, we need to get staff understanding both the concepts of total and deferred pay. Those who are in defined benefit schemes have higher expectations of deferred pay and those in defined contributions should have higher expectations of current total pay- precisely because they are not receiving the same promise of  deferred pay.

For larger employers, establish a reward strategy that fairly balances these concepts of deferred and total pay should not be too hard. It would necessarily mean that those accruing defined benefits would receive less immediate compensation and those outside the promise would receive more. This is particularly pertinent to the public sector where the suspicion is that there is no integration between total and deferred pay so that employees in defined benefit schemes have compensation benchmarked against those in the  private sector getting little or no deferred pay.

To use the language of risk rather than reward. Why should those who are managing their own retirement risks accept that his or her employer running an IRM, unless it can be proved that the risk that he or she is taking on, is being properly rewarded?

Conditional benefits or conditional pay?

We look as if we are about to look again at the idea of “conditional pension benefits”, with the “conditional” being about the employer’s capacity to pay the pension. Perhaps we should be looking at this , not by questioning the benefit promise, but the salary basis against which the promise has been made.

The only way that employers can properly claim to have agreed an integrated pension strategy with the trustees is to include total reward in the equation.


too low , too high or just askew?

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Allardyce- a fan’s eye’s view.

“Money corrupts and wads corrupt absolutely” – anonymous football fan – last night.




I heard about Sam Allardyce’s departure from the England Manager’s job while watching Cambridge United beat Yeovil Town in a Tuesday night league 2 fixture at the Abbey. Actually it’s not the Abbey anymore, the U’s sold their heritage to some Glass salesmen so they refer to where Abbey United used to play as the Cambs Glass Stadium, that too is part of the problem.

The only good thing to come out of Allardyce’s 67 days at the club was his leaving. I heard a vox pop on the radio asking whether the England manager should be accepted to be a saint. The answer is that the job of England Manager should be something you should be so proud to have, that the thought of taking questionable payments from questionable people would be out of the question. We don’t expect our managers to be saints , but we expect them not to be sluts.

To the question “he did nothing wrong”, the answer is that by taking this money , Allardyce broke not just his contract with the FA but his contract with the game, its players and its fans. His statement that he was “disappointed” rather than the hand-wringing apology we should have had, demonstrates what every fan knows, that it is money not the beautiful game , that most people in football are serving.

Let me give you two examples; one of what is good and one of what is bad with football today.

Firstly the good

As we were waiting for the game to start, Pat Custard – our greatest fan – offered us a Ferrero Rocher chocolate. She didn’t just offer us one, she offered all the fifty or so fans who were with us a chocolate. I don’t know who funded the chocolates but I rather think it was Pat. I don’t think she was being funded by Ferrero Rocher.





Secondly the bad

Cambridge United, like most clubs, take away fans for granted. In the end there were 98 of us.

At the Cambs Glass

  • away fans are not allowed to pre-purchase and get the home fans discounts
  • away fans cannot get discounted tickets by purchasing online
  • away fans face an 800 yard walk from their coaches, not much fun for our elder and less mobile supporters
  • away fans can’t buy beverages from official outlets but must pay inflated prices to a concession
  • away fans are subject to the taunts of the Cambridge United Youth team, whose potty mouthed abuse went un-noticed by the club – despite their lads being in club colours.

In short, we were treated like scum, as away fans often are.

British Football is awash with money but the fans never seem to benefit. Instead the money is retained by a small group of managers, agents and other hangers on (with a fair bit going to a few star players). The grass roots of the game is starved of money which is why Cambridge United cash-cow their heritage , their away supporters and probably a whole lot more.

The news in the Telegraph this morning is that 8 Premier Managers are implicated in taking bungs for player’s contracts.

Why this burn of the money coming into the game is so reprehensible – is not just because it leaves clubs in the lower leagues starved of cash but because it shows the absolute lack of any kind or moral compass (governance) at the top of the game.

Allardyce is reported to have been paid some £3m a year for the job. That is enough to satisfy anyone’s financial needs. That money, which came ultimately from the fans – was paid so that we had a full time manager focussing on making the English National team good again. Not “great” – “good” will do.

What an insult Allardyce’s behaviour is to the fans. If proven, and the Telegraph have a good record so far, then the behaviour of the other 8 managers is equally shocking.

The reason why these managers have multi-million pound contracts is partly because there are few of them good enough to do the job that well and partly because such money should focus their minds on getting great results on the pitch.

If great results off the pitch nclude taking questionable payments from questionable people, then fans have got a right to tell these managers to leave. The Football Supporters Trusts, which give fans places on the Board and a stake in clubs, should make it clear that fans expect managers to stick to the job they are paid to do.

We don’t need Saints, just people who think of the people who pay them

As we made our way home late last night and early this morning, my son and I talked about the game, ethics and his future. He will be going back to Cambridge in a couple of days to start as a student. His interests include questions around where the money goes and why there is such social injustice in this country.

The reason is that people like Sam Allardyce are seen to have done nothing wrong. It is good that he is out of a job, I hope any others found breaking their contracts with their clubs and the game will also be out of a job – very soon.

With money comes power, with power can come corruption, but it doesn’t have to be like that. With good governance, the corruption can be curbed. In a properly run club, as in a properly run business, those at the top are paid to set an example, not just at doing their job, but in everything they do.

Sam Allardyce should spend less time with shady agents and more time with the likes of Pat Custard and this lovely lot!

Nottingham Forest v Yeovil 180507

Yeovil Town fans celebrate

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GAD shows you can’t take “company” out of “company pensions” #TATA


More pre-referendum shenanigans revealed

So the mysterious volte face by the Government over the Tata Steel pensions rescue package is a mystery no more.

The FT, led by super-snooper Jo Cumbo have unearthed the GAD submission to the DWP consultation on solutions to the Tata Steel pension problem. It turns out that “if it looks too good to be true, it probably is too good to be true”. Like so much of the lazy slapdash thinking that characterised the Remain obsessed Cameron Government, the Tata Steel rescue plan was a sop to kick a long term problem into the short grass.

It looks like the grass just got cut.

The FT claim to have seen the Government Actuary’s Department’s analysis which suggests that even with the reduced liability (and benefits) proposed, there would have needed to be an injection of £3-4bn to protect the security of member’s rights.

That  £3-4bn is what the ongoing support of a company like Tata ( or another taking on the pension scheme) is worth to members. Put another way, it’s the price of sufficiency.

Which is why defined benefit schemes need an ongoing sponsor. They simply don’t run themselves, they need recourse to emergency cash when times get hard – they are not sufficient (without a huge was of notes in their back pocket).

Pensions need companies  like kids need parents.

I think of my lucky son, off to College with the surety of the bank of Mum and Dad to back him up. He may never go for that emergency loan but he knows that were he to, he’d have a 99% chance of getting it. Those students who don’t have recourse to Mum and Dad have to get credit from the market (i.e ..the Banks or worse).

Of course my son doesn’t value his Dad’s solvency; we never value what we’ve got till it’s gone and I’ve made provision to make sure he has financial protection whatever happens to me. But were he to put a value on the support I may or may not give him, he would realise that it provides him with the peace of mind to carry out his studies without going mad with worry.

The business of running a pension scheme without a sponsor is  tough like going through university not knowing who will pay the next term’s bills.

The PPF, BSPS and risk

The PPF is one of Britain’s financial light-bulb moments. It is a well-run fund which invests prudently and manages its liabilities as it does its administration- with precision.

Sources close to the PPF (Rubenstein et al.) aren’t getting perturbed by the imminent arrival of BSPS. Infact, I hear they relish the opportunity to take on a scheme in good shape in all but parentage. There will never be a time when the PPF will be better placed to take on such liabilities.

If I had the choice as a member of the British Steel Pension Scheme of 100% certainty of reduced benefits being paid by the PPF or a 50% chance of (reduced) benefits being paid in full by not going into the PPF – I would have a reasonable choice to make. I could work out the risk and compare it to the drop in benefits (from the PPF) and make my choice.

The problem is that until GAD came along, both Government and the Trustees of the BSPS were telling anyone who’d listen that the original proposals were “low-risk”.

This is what GAD told the consultation on June 13th (ten days before the referendum).

“To eliminate most of the risk of the scheme being unable to meet its (reduced) liabilities in the absence of any sponsor support (ie self sufficiency) would require additional assets which we have estimated to be in the region of £3-£4bn,”


Political footballs?

Along with the radical plans for redistributing tax relief (which should have been part of this year’s budget), talking tough on pension deficits wasn’t part of the pre-referendum agenda.

may cameron.jpeg


The expressions of Theresa May and David Cameron  suggest zero personal empathy. Perhaps she knew the mess she knew he was leaving her on pensions!

The Government Actuary, like the PPF is a Government institution that works. It was put in place precisely so we did not have to bend the law of the land for political expediency.

The 130,000 members of the BSPS are probably in a better place in the PPF than in the BSPS. According to the FT, GAD told the DWP

” the proposal was “broadly consistent” with a “50:50 expectation” of being able to pay members’ benefits in full, with “no additional reserves to manage materialisation of risks in future.”


Transparency is key

It is now nearly October, in the intervening three months, the 130,000 members of BSPS have heard very little about their pensions. We are told that talks are ongoing between Tata and German steel-maker Thyssen-Krupp. Talks are also ongoing with the unions.

In my opinion, the Government had no business floating the idea of a “low-risk” solution to the problem- till it had had the risk assessment from its own actuaries. That assessment came and the referendum went and it was only in the last few weeks that the plans for a sufficient BSPS have been shelved,

We now know why they were shelved. These plans were not “low-risk), no matter how the Government and the Trustees spun them.

People’s pensions are too important to be treated as political footballs. I don’t know how many votes this fake rescue plan won Remain but if it was one – it was one too many.

People deserve honesty from Government and that GAD report should have been put in the public domain on June 13th, not leaked through the FT on September 25th.


the law of diminishing u-turns


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Too Expensive to Keep? Is it time to break our promises to the baby boomers?

In a stunning lecture delivered without notes to a “senior” audience at the Oxford and Cambridge Club last night, Paul Johnson helped us ask these questions of ourselves.

For his audience was by and large – precisely the entitled class who had already won in the current generation game. In this blog I lay out Paul’s argument , hoping that it will fall on younger ears who may be in time to do something about the injustices we are heaping upon our children!

Baby Seals

Paul set out his argument by establishing

  1. the current uneven distribution of wealth inter and intra generations
  2. why the wealth inequalities matter
  3. a policy framework for doing something about unfair inequalities

1. Wealth today

98-9% of the population find themselves in the same position with regards the wealth of others as they were 25 years ago.

For the very top earners , income rose sharply in the first decade of the century but has levelled off in the past five years.

Divides in wealth inequality are most obvious within a generation, the differences between one generation and another are less easy to see.

The most dramatic social change we have seen in the past 35 years has been in the reduction in pension poverty. In 1980, one third of pensioners were in poverty, today the number is less than half that. Real incomes of pensioners have increased every year in the last 25 and in 2011, for the first time- the average income of people over 65 exceed the average for working age people.

This is new and – according to Johnson – quite unexpected.

Johnson ascribes this phenomenon to three causes

  1. Increased pay out in State Pensions (Johnson called them benefits but I think most of us consider them entitlements). Added to these pensions, many people get means tested benefits – largely introduced by the last Labour Government.
  2. The maturation of high quality occupational pensions
  3. Reduced housing costs for owner occupiers who have paid off their mortgages.

The likely boom in retirement incomes is likely to persist for at least ten years as us baby boomers pick up all the wealth.

2.Why this matters (and is a cause for concern)

Younger people have seen no real wage increases since 2008 and household incomes have hardly changed in the last 12 years.

But while current earnings have stagnated, the prospect of future wealth has diminished. Less than 2% of 20-30 year olds are currently accruing defined benefits in a pension scheme.

What makes this worse is that people in their 20s and 30s are half as likely to be home owners than the 20-30 year olds of 30 years ago.

Those in the middle quintile of earnings are now more likely to look downwards towards those in low earnings than aspire to those in higher earnings.

For the first time since the war we have DOWNWARD SOCIAL MOBILITY

State Pensions and the failure of SERPS

State pensions for those retiring after 2030 are likely to be less generous (than planned). The State Earnings Related Pension introduced in 1978 was 35 years in its disintroduction and has proved a public policy disaster.

Those not in a good occupational scheme are now relying on personal savings to boulster retirement. But savings are not productive. Those saving on deposit have now seen 6-7 years of no growth. With real interest rates less than 0%, people need to save in excess of 50% of their earnings to match the benefits of a good quality occupational scheme.

Relative to the destruction of defined benefits and their replacement by defined contribution pensions, changes to state pensions don’t make much difference.

The housing haves and have nots

The inequalities between the haves (homeowners) and have nots (renters) are greater still. Johnson pointed to an unfair tax stystem as making housing inequality worse. Council tax and Stamp Duty are preventing people from moving house.Monetary policy has widened the gap between the haves and have nots.

The collapse of DB workplace pensions

Nobody expected the promises made in the last century to prove so expensive. In the 1970s policy makers talked about a decrease in life expectancy.Instead we have seen life expectancy increase by 9 years in the last 40.

The expected returns in world stock markets have not – since 2000- materialised.

Together with low interest rates, these unexpected economic factors have increased the value of our defined benefit pension pounds by 40%.

Taken together , defined benefit pensions now seem a massive policy mistake. the cost of maintaining the defined benefit promises (using current accounting methods) has to come from somewhere. It is being met by those (not) enjoying low DC contributions and from the decreased dividends from private companies struggling to pay deficit bills.

3. A new policy framework?

In future the rich will be those who inherit the wealth of the current baby boomers. We are looking at a return to ancestral wealth and a social oligarchy of the wealthy.

Johnson calls into question the sanctity of the promises made to the boomers. There are precedents for Government to move the cheese (within the “reasonable ambit of policy”).

  • For 30 years state pensions were not indexed against wages causing our basic state pension to become “nugatory” (Michael Portillo)
  • The recent change switching occupational pensions in payment from RPI to CIP will be the most significant reduction in the value of Public Service Pensions ever
  • The changes in state pension age – where introduced gradually – have been socially acceptable.

For Johnson, these changes are “annoying but not unreasonable”. For him we can have too much certainty; the rights of past savers should not be protected at the expense of future savers.

Maxwell’s fraud paradoxically made for guaranteed pension payments which companies can no longer afford. The passing of large occupational schemes into the PPF is becoming a weekly occurrence.

Our expectation to the sanctity of a guaranteed occupational pension, like our “right” to future winter fuel allowance, free education , low taxes- is fallacious.

More risk sharing needed

Johnson talked feelingly about the need for trust (both in terms of trustees and in the trust people put in them to do the right thing).

He called for an end to the bifurcation between DB and DC , where those in DB have a right to everything and those in DC have a right to what’s left over.

Similarly with housing, where Johnson called for a reform in the current taxation policy – especially the ham-fisted attempts of this Government to limit tax-relief on buy-to-let.

He called for politicians to resist the pressure “to make bad policy decisions” (though I had to admit I did not hear Johnson talk about what the good policy decisions would be). In the context of risk sharing, I assume this would involve a change to benefit those outside of house ownership.

Johnson called for a change in the taxation of DC pensions , especially what he called the free inheritability of monies from those who die before 75. He berated the National Insurance reliefs given to company contributions to workplace pensions

In conclusion

Johnson’s (generally) brilliant analysis of the inequalities building up between generations ended with three conclusions.

  1. Those (nearly all) of us in the room who were baby boomers are the fortunate generation
  2. Government policy has had unintended consequences which have favoured the old at the expense of the young
  3. The impact on future taxes has yet to be seen but is unlikely to be a happy one

You can read all about Paul Johnson here.



Paul Johnson

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My pension fund manager – reassuringly boring.


I’ve worked out what I want from the person who runs my pension fund – I want them to be busy doing nothing. That’s more or less what Martin Dietz is doing running the Legal and General Multi-Asset Fund which is the default for it’s workplace pension.

Some people have commented on here that I could be more ambitious than to use a default fund for my money. But I say show them another way I can get exposure to 11,500 different stocks all over the world for a management fee of 0.13%.

I’d hooked up with Martin on Linked In as I’d seen him on my fund factsheet. I’d asked if he’d like to meet an investor in his fund and he’d kindly obliged. We met at a posh cafe in the City.

Here’s a rough transcript of my agenda and what Martin told me. I hope that it’s a reasonable record and that my epithet “reassuringly boring” will be  taken as a compliment. I am not looking for pyrotechnics, I want steady growth and limited drawdown.

I wanted to know from a personal and professional viewpoint his and LGIMs viewpoint on a number questions

  1. How does the targeting of MAF at DC savers affect the way you manage the fund?
  2. What are your private benchmarks for success with this fund?
  3. What are the main jobs you have to do as manager of the fund?
  4. How do you interact with the funds into which MAF invests?
  5. Do you see MAF as suitable for all stages of a DC saver’s journey
  6. Is MAF LGIM’s optimum fund for drawdown?
  7. Why don’t we hear about capacity issues with MAF (as we do with GARS and other rivals)?
  8. Do you share the group’s aims of social purpose?
  9. Do you see yourself adopting the ideas behind Nigel Wilson’s Beveridge 2.0 initiative?
  10. What interaction do you have with your IGC?

Here’s how the conversation went

How does the targeting of MAF at DC savers affect the way you manage the fund?

“To give you an example- before BREXIT I wrote to advisers explaining that though I expected Britain to “remain”, the fund was positioned to benefit from leaving. The economic harm of leaving would be softened for investors but they couldn’t expect the fund to pick up the full benefit of remain vote. I wrote this note to help people explain the fund’s behaviour. My thinking was that DC investors probably had enough to lose from BREXIT without their pension being at risk”

What are your private benchmarks for success with this fund?

“I want people to get an equity like return in the good times and have protection from equity performance in bad times. Currently the fund is providing a return that is around 3% less than the equity return – but equities have been the best performing sector of the market”.

What are the main jobs you have to do as manager of the fund?

“Firstly, I look at improving the diversification of the fund by investigating new funds, where we don’t have a fund I want, I help create the fund. For instance, we are looking at a way to access BBB credit funds

Secondly I look to increase the efficiency of the investment strategy by optimising the asset allocation

Thirdly I work on minimising the costs of the fund. This has been easy so far as we have been a small and growing fund but now the fund is valued at more than £2.6bn I expect transaction costs to increase though only to a few basis points.”

What are the restrictions you have in investing in funds?

“I won’t involve MAF in active fund management as it hasn’t got the budget (as a result of the charge cap). The fund is invested only in LGIM funds”

Do you see MAF as suitable for all stages of a DC saver’s journey?

“I’m aware of LGIM’s target date funds which move money from high to low volatile funds over a saver’s lifetime. We look to provide a consistent style of fund management which is very simple for investors to understand”.

Is MAF LGIM’s optimum fund for drawdown?

“There is another fund within the LGIM range (specifically the Retirement Income Multi Asset Fund (RIMA) which are used as defaults for drawdown, this aims to minimise the exceptional loss that can occur when a drawdown happens when the fund is severely depressed. However, we are comfortable with MAF being used for drawdown”.

Why don’t we hear about capacity issues with MAF (as we do with GARS and other rivals)?

“MAF is not invested in derivatives and invests according to market capacity. This gives it the highest level of liquidity- in other words it cannot run out of capacity to invest.”

Do you share your Group’s aims of social purpose?

“The work of our ESG and Stewardship team is to improve the performance of all stocks (MAF invests in 11,500 different stocks). Most of this work is in the UK but the Stewardship team is working more and more on overseas equities. We benefit from their work and decisions on where to allocate money are informed by their research on what markets show best governance”.

Do you see yourself adopting the ideas behind Nigel Wilson’s Beveridge 2.0 initiative?

“Not at the moment! The Diversified version of the MAF does have direct property holdings which may follow the approach the Group is using in the investment of Group Funds. But at the moment, our CEO’s vision for the future is not adopted in MAF.”

What interaction do you have with your IGC?

“I have to present the fund’s ongoing appropriateness once a year to the Chair but I am more accountable to the IGC’s investment consultant. Dean Wetton who asks a lot of searching questions and is vocal in challenging changes to the fund that might not be in member’s interests”

Refreshingly boring

It was good to have breakfast with Martin, he forms part of a team but he spoke of MAF with great ownership and some passion. He told me his own pension money is invested there.

The question of whether a single fund can be right for all investors all of the time is a difficult one. But with the total charges on the fund still at 0.13% and with the fund grown from nothing to £2.6bn in under four years, he is clearly managing a compelling proposition.

Martin is very clear on his objectives, very precise in his language and extremely modest in managing expectations. A big bet from the Diversified version of the fund ended in a 10bp gain from up weighting property.

The very good year we are having with the fund (relative to the ABI45/85 sector average) reflects the BREXIT positioning and the fund’s lack of property exposure.

Martin is the least demonstrative fund manager I have ever met. He seems to make a virtue out of being boring which I suspect is exactly what the L&G MAF needs.

Here’s that pre-Brexit briefing in full




Multi-Asset update: EU referendum. For use by direct LGIM clients and consultants only. For the avoidance of doubt, this communication does not seek (and is not to be regarded as seeking) in any way to influence the outcome of the EU referendum. It is being provided to help clients and intermediaries assess the potential impact of the referendum on their investments.


LGIM Diversified Fund (DF) and Multi-Asset Fund (MAF) update Dear Investors / Consultants,   We are now approaching the UK referendum on EU membership on 23 June 2016. We expect that there will be an elevated level of market volatility both on and after the referendum date as currency and asset markets price in the referendum result.

Any kind of market concerns about UK economic growth, regardless of the result of the UK referendum, could be expected to result in a sell-off in sterling and a decline in UK asset prices. This includes commercial property and equities, although profits of multi-national companies may benefit from a fall in sterling. Similarly, looser monetary policy – to support the UK economy – could be expected to drive down short-term bond yields.

For the majority of UK pension investors, we anticipate that a decline in domestic economic conditions could have negative implications – a reduction in non-investment income for DC investors and a weaker covenant for DB schemes. In addition, we typically expect that any decline in sterling could feed through into imported inflation, thus eroding an investor’s purchasing power.   We believe that the LGIM Diversified and LGIM Multi-Asset Funds are suitably positioned for the elevated level of risk expected at the end of June.

Firstly, we implement an asset allocation that is designed to be diversified across geographical regions, targeting around 20% of overall market risk in UK assets. We therefore expect that the Funds’ underlying assets will show a limited degree of sensitivity to any UK-specific risks.

Secondly, the Funds hold structural exposure to foreign currency of around 50%. In our opinion, holding foreign currency is a suitable way of aiming to provide investors with good results in those scenarios when financial markets predict a negative environment for the domestic economy.   As with every protection strategy, the Funds’ exposure to foreign currencies comes with potential downside if domestic economic risks don’t materialise.

Our current assessment is that sterling may be trading around 5% below its fair value (compared to a trade-weighted currency basket). On the other hand, sterling may fall an additional 10-15% in a negative economic scenario. In line with the Funds’ investment philosophy, we do not look to implement active investment views in the Diversified or Multi-Asset Funds on an on-going basis. At the same time, we are committed to reviewing and potentially adjusting the Funds’ asset allocation to adapt to any structural changes in markets.

Our assessment is that the Funds’ currency positioning implies potential downside of around 2.5% for the Funds versus potential upside of 5-7.5% if the Funds had 100% sterling exposure. With a view to the economic risks borne by the underlying investors and the long-term focus of the Funds, this performance trade-off seems appropriate to us.



Yours, Multi-Asset team


Key risks Investing in financial markets exposes investors to risk. These Funds invest in a wide range of asset classes, typically by investing in other funds. While this diversification aims to lower risk, each asset class has risks that may impact the value of the Fund. Any objective or target will be treated as a target only and should not be considered as an assurance or guarantee of performance of the Fund or any part of it.Further details (including relevant risk factors and fund specific risks) are available in the Description of Funds document, which can be obtained from your usual LGIM contact or by visiting



  Multi-Asset update: EU referendum



Legal & General Investment Management Limited (Company Number: 02091894) is registered in England and Wales and has its registered office at One Coleman Street, London, EC2R 5AA (“LGIM”). The information contained in this e-mail is strictly confidential and may be subject to legal privilege or protected by other legal rights. Access, copying or re-use of this e-mail (or any part thereof) by anyone other than the intended recipient is strictly prohibited. If you are not the intended recipient of this e-mail, please notify the sender immediately and delete all copies from your computer. To the extent permitted by law we do not accept any liability for any virus infection, malware or for the transmission of harmful content through this e-mail. LGIM reserves the right to monitor, and retain e-mails as permitted by applicable law.

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A lunchtime lesson about pensions for millennials – Guest Blog- Claer Barrett

This blog is from Claer Barrett, it was first published in the FT and is Claer’s contribution to Pension Awareness Day. I share it on this because a) it is brilliant, b)Clear has asked it to be shared and c) I wish I could have written this myself. The blurb says that you need to pay for high quality journalism and I agree- that’s what you get in the FT – thanks Clear, Jo, Naomi and all the FT writers for making me more aware of what really matters in pensions.




My eldest stepson started his first “proper” job this month, and as part of his induction day was given a pack of indecipherable bumph about the company pension scheme (note: more time was spent on the health and safety briefing outlining the dangers of using a glass staircase in reception than the necessity to save for retirement). He had a week to decide whether he wanted to sign up or not.

Fortunately, his stepmum knows a thing or two about this sort of dilemma, so we FaceTimed. The principal fact that had stuck in his mind was a negative one: “Saying yes to the pension means I will have to give up a percentage of my pay.” Most millennials, with the looming prospect of student loan repayments, could easily say no to the company pension for this reason. So I tried to do a better job than his employer had by explaining why pensions rock.

A pension, I said, is a bit like a supermarket “meal deal” that you might buy for your lunch. There are three components. There’s the money you put in (the sandwich) which gets topped up with money your employer puts in (the drink) and money from tax relief (the crisps or carrot sticks). So you might have to pay for the sandwich now, but you’re effectively getting the other two elements thrown in.

Now for the price. When my stepson got his job, we had used the excellent website to work out his monthly net pay so he could determine what kind of flatshare he could afford. He was horrified about how much would be lost to tax and national insurance. (Welcome to the club, son.)

The thought of paying 6 per cent of his gross salary into a pension he would not be able to tap into for about four decades seemed a bad deal. The calculator can show the impact of pension deductions (and student loan repayments) on his monthly take-home pay. However, it can’t show you what else is added on. For this, try the pension contributions calculator from the Money Advice Service. It adds up the value of the three “ingredients” — your contribution, your employers’ contribution and the tax relief.

You are lucky, I said, that your employer is prepared to match your 6 per cent contribution. And looking at the totals, he could see instantly that for little more than the cost of buying a supermarket meal deal every day, he would be getting quite a lot of his dough back. One thing to bear in mind with the carrot sticks (the tax relief) is that you will eventually have to pay some tax when you start drawing your pension, I said. But the magic “houmous” on the carrot stick is that your pension savings can grow tax free until then.

Once they’ve cracked how much their total contributions are worth, younger workers are better placed to judge if next year’s Lifetime Isa for the under-40s is for them. This account will give you a government bonus of 25 per cent on a maximum annual contribution of £4,000 (so £1,000 of free money). However, you can only gain access to this money — and the bonus — when you buy your first home, or turn 60. Otherwise, heavy penalties apply.

For those planning on using the Lisa as a pension, a company scheme (assuming you have access to one) will almost certainly be better.

Not everyone will get a matched contribution of 6 per cent. Some being offered Auto Enrolment pensions will get the equivalent of the supermarket “basics” range: you pay in 1 per cent, which your employer matches with an equally paltry 1 per cent. But it’s a start, and the level of minimum contributions will slowly rise.

His next question was what happens to the pension if he left the company.

Group of teenagers sitting outdoors using their mobile phones©iStock

Most millennials, facing the prospect of student loan repayments, could easily say no to the company pension for this reason

Young people today can expect to have 12-15 separate employers in their lifetime, creating the administrative burden of multiple pension pots. As I know from personal experience, trying to consolidate them is a total pain. I have deciphered enough of the jargon to see that my new pension provider has a more favourable fee structure than my old one. But moving my money over has required several trees’ worth of forms, delays and enforced listening to Vivaldi as I wait on hold to chase things up.

There are lots of clever people who cannot understand the complexity of the UK pensions system — Andy Haldane, chief economist at the Bank of England, for one. So it’s encouraging to see the government is trying to do something about it. Plans for the Pensions Dashboard were revealed this week, which will enable savers to see their pensions from 11 of the biggest personal and workplace pension providers in one place by 2019.

This is undoubtedly a good idea. But already, providers are bleating that they cannot possibly be expected to provide all of the data needed for us to clearly compare the type of funds and amounts we are being charged. Judging by my own experiences, the government is right to demand better. Those paying into a company pension have no way of choosing the provider — we have to accept the choice our employer has made for us. If we want to compare and switch at a later date, this process should be as uncomplicated as possible.

Pension providers would do well to remember that it is our money we are paying them to look after. If they can show us they’re doing a great job, we will be more likely to consolidate our pots with them.


First appearing here   


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Where next for pensions transparency?


As illegal drugs to your health so hidden charges to your finances

Imagine that you were tasked to prevent drugs coming into this country. Would you

  1. ask the driver if he had drugs in his vehicle and wave him through if he told you “no”
  2. set up a random search mechanism to show you were trying
  3. instigate a robust process that ensured that all vehicles entering the country were checked with deterrents of imprisonment for those found with narcotics.

Of course the answer would depend on how much you wanted to stop the drugs traffic and what your resource was to do so.

It seems that the pernicious effect of hidden charges does to your finances what illicit drugs do to your health.

What is missing is a robust framework to sniff them out and proper penalties against those who sell products that smuggle charges in through non-disclosure.


Putting the momentum of the TTF to good purpose

The Transparency Task Force had its day in the Committee Room 8 of the House of Commons and it had a goodly attendance from policy strategist from the public and private sectors. We heard that part two of the pensions charge cap would be announced in 2017 (though not as expected in Q1), we heard of further delays in the publication of the FCA’s Market Review which is now due to publish a final consultation in H1 2017 and we heard a number of speakers

  •  Shirin Taghizadeh, Head of Pension Charges, The DWP
  • Becky Young, Manager, Wholesale and Inv. Competition, the FCA
  • Robin Finer, Head of Department, Competition, the FCA
  • Louise Sivyer, Policy Lead, Regulatory Policy Directorate, TPR
  • David Pitt-Watson, Executive Fellow, London Business School
  • Daniel Godfrey, Independent Director and Advisor (and former Chief Executive of IA)
  • Ralph Frank, CEO UK (DC), Cardano
  • Margaret Snowdon OBE, Chairman, PAS
  • Henry Tapper, Founder, Pension PlayPen
  • Peter Glancy, Head of Policy , Scottish Widows

With Government deadlines slipping and with the collapse of anything meaningful coming our of PRIPS , change looks further away than at any time over the last 12 months.

What is needed is a boot up the backside to get consumer interests , rather than the interests of our asset management , platform and advisory industries, to the fore.

The next step is to lobby the DWP Select Committee and its Chair Frank Field.

Here is the letter we intend to send them.

We are a coalition of interested parties looking to help protect the interests of the UK’s pensions-saving public through full disclosure on all the costs and charges they are paying. Hidden costs are damaging because they:-

1. Reduce the net amount pension savers are able to accumulate. Auto enrolment has created an even greater burden of responsibility to treat pension savers fairly and openly. This is a social justice issue.

2. Prevent the market working efficiently; markets need to know true costs to be efficient. The ‘invisible hand’ is ‘being kept in its pocket’ as it were, stopping the public getting the value for money they deserve

3. Inhibit pension scheme trustees and IGCs from carrying out their duties efficiently, because ‘you can’t manage what you can’t measure; and you can’t measure what you can’t see’. This is a governance failure.

4. Lead to adverse publicity. The public’s confidence in the pensions sector is falling; it needs to stop falling ‘below the point of no return’ . There is a serious and systemic risk of this happening

Pension scheme costs are surrounded by complexity, opacity and obfuscation. This is morally wrong, wholly unjustified and of great concern to all saver-centric market participants. Your Committee is uniquely placed to look into the matter in a constructive and inclusive way that will ‘join up all the regulatory dots’’.

In so doing your Committee will encourage the UK’s pensions and investment sector to move out of denial (where that’s necessary) and work supportively with all regulatory bodies to find a sensible set of sustainable solutions that help protect the interests of the UK’s pensions-saving public.


What the DWP Select Committee needs to do

Joining the regulatory dots is perhaps too weak.. we need definite action.

Right now, charges are stowed within the financial products we buy that eat away at the return we can expect to a degree that can make long-term saving  unrewarding. A typical advised funds platform established within a SIPP takes 2.6% pa of your money before hidden fund charges. If we add to that the typical hidden charges within an active fund, the total cost of ownership of money on a funds platform can be over 4% pa. With expected long-term returns on real assets running at around 5%, this is clearly unsustainable.

This is the most extreme and egregious waste of wealth and the more effecient fund platforms charge a lot less.

Workplace pensions are capped at an annual management charge of 0.75% pa.  But the total cost of ownership can be higher as many intermediaries can levy their costs directly to the fund and by-pass the AMC. Similarly, practices such as stock lending can see profits being diverted from the beneficial owners of a fund to the managers of the fund.depriving the owners of what should be theirs.

There is no body properly checking the vehicles we save into to make sure that charges aren’t hidden in the back of the lorry and we are adopting an “ask the driver” policy. Drivers don’t tend to admit they have drugs on board and pension product providers won’t admit that their products carry hidden charges.

The charge cap (part one) has gone some way to stopping the abuses we see from fund platforms but it has “scotch’d the snake not killed it”. I said in 2014 that the real test of the Government’s intent to stamp out profiteering from workplace pensions was to introduce a proper inclusive charge cap.

The DWP look timid and are allowing timescales to slip. I want the DWP Select Committee to be firm. No recidivism, the charge cap needs to include hidden charges and we need a proper way to police it.

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Double Bill; dashboard+transparency


You wait a summer for the pension policy bus and then two come together!

This morning’s the Treasury big reveal when they’ll be rolling out plans for the pension dashboard at Aviva’s Digital Garage in “trending Hoxton”.

This afternoon’s the world’s first ever Transparency Summit held within the walls of Westminster.

There’s a pleasing symmetry; the Treasury’s coming to an outpost of modernity in the financial services sector while the TTF has more in common with Wat Tyler, a sort of peasant’s revolt against king and robber barons.

While we know the agenda for the mainstream fund managers lies elsewhere (see recent blogs), today’s debates will be focussing on what ordinary people have been calling for. a clear view of what they own and a clear view on what they’re paying to have it managed.

Pension agitprop

transparency symposium

Both the pensions dashboard and pensions transparency are issues that are low on the agenda for the fund managers and investment consultants. The PLSA , which has  for the past three decades managed the pension industry’s relationship with the FCA has only marginal impact on the debate.

Instead, it has been those industry figures with the agility and energy to consult, congregate and publicise their point of view, who are turning heads in the lobby.

The TTF has managed what it has through the endeavour and courage of Andy Agethangelou backed by dedicated campaigners including Chris Siers, Con Keating ,David Pitt-Watson,  Ralph Frank and Colin Meech. The major PR firms have not been part of the TTF lobby and the industry trade bodies, most importantly the Investment Association, have become a trampoline to launch the TTF to public awareness.

Here’s a video of TTF head honcho Andy Agethangelou spreading awareness. Thanks to Robin Powell of the Evidenced Based Investor for this;


Skilful use of the press and social media has trumped the established methods of the Westminster village. Those attending the meeting this afternoon include a number of decision makers in Government, Andy and his colleagues are greatly to be congratulated.

The Digital lobby


I mentioned in my blogs last week, how the innovation of Fintech seemed to be passing the asset management and investment consultancy industry by. Delivering information to people – preferably via hand-held devices , has become a preoccupation of the digital lobby.

Whether it be the scrapers such as Moneyhub and Intelliflo , or the plumbers like Altus and Pensionsync or the insurers like Aviva, there’s a hustling mob of digitally savvy , entrepreneurially minded individuals who are every bit as dynamic as the TTF. Good on the Treasury for listening and choosing to make their announcements not in Whitehall but in London’s beating Fintech heart.

I don’t know what to expect from this morning , but I am a lot more hopeful that there will be deliverables, when I’m heading to Hoxton!

Why today’s important

Tower Bridge Thames Reflection and London City Skyline

The City from the other side

Today’s events are significant in a number of ways.

They tell me that innovation in pensions is coming from the upwardly thrusting – consumer driven – independents , rather than the established consultants and asset managers.

They also tell me that the Government is listening to these new voices and promoting their ideas to the fore. Shocking as it may seem to the establishment  for us not to have a Minister of State in charge of pensions, it is doubly shocking to see the only interview Richard Harrington has given so far was to Money Marketing (a retail trade mag).

The retailisation of pensions  from a DB culture to a world of freedom and choice, has caught the established players on the wrong foot. As I found last week, there is precious little innovation coming from the traditional asset managers and investment consultants. Sitting as I do within a traditional consultancy, I know how hard it is for us to reinvent ourselves as relevant to this new retail environment.

But we must.

Today is a litmus test of the Government’s position on two of the great issues of today. It is a litmus test of where the pension industry is heading in terms of its future relevance.

I look forward to reporting more in 24 hours.


Sponsoring the TTF today


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Anger and remorse – how do they help?



I have two important engagements next week. On Monday afternoon I will stand up at the TTF event in Westminster and ask those in Government to do more for workplace pensions and on Wednesday I’ll host a session at L&G’s DC Conference where we will be looking at how to make change happen.

I hope they go better than the blog I wrote after my last speaking slot, where I tore into my co-speakers for being lazily all the same. My blog caused a lot of angst among the conference organisers and has probably annoyed the sponsors. The net result is that I have  lost a useful platform to talk about positives and widened the divide between my position and that of the asset managers and investment consultants.

I have been trying to discover where I went wrong.

Of course some will say I was right to speak my mind but it’s clear it was not good etiquette to bite the hand that fed me. Thinking about how your comments will land is part of the craft of communication.

The first lesson is that feeling right does not give you the right to shout about it!

The second lesson is that people’s feelings matter and while it is sometimes worth kicking an obstinate and brutish thug in the shins, collateral damage has to be avoided.

The third issue relates to the use of anger itself. Examining why I get angry (and I get angry a lot) , I identify two reasons; the first is the frustration with things getting in the way and the second is because I think that my anger can get things changed.

Both are very selfish motivations, in the sense that they are about me, and I think of those people who don’t get angry – or at least exert more control than I do, and I see a sublimation of that selfishness.


I was troubled  by last night’s episode of Coronation Street last night, in which David Platt vowed to stay angry about the death of his wife and was seen plotting revenge against the accomplices of the killer. David has become an avenging fury , using anger as a means of working through his troubles. Bearing in mind the senseless killing of his wife, it is hard not to sympathise.

And yet you sense regret will follow his anger. Cutting off a young girl’s hair- as David has just done to someone bullying his niece is one thing, but we all know the scope and depth of David’s wrath.



The very public spat between two factions of the TTF is an example of anger working in different ways. Andy Agethangelou -who has kept his feelings to himself- has continued to champion Transparency and made this conference happen. Undoubtedly it will be a good conference and will do more good than can be achieved by continuing to be angry with his pact with the Investment Association. This is why I am going and supporting Andy, I cannot be angry with him despite my feelings of anger about his earlier behaviour.

As regards the L&G meeting, I suspect that some of the people I have criticised last week will be there. Will my anger – expressed in the blog- make any difference- I very much doubt it. It brings me only remorse. As with arguments with the IA, there is little to be gained from regret, better to have apologised, learned a lesson and move on.

When our panel met last week , we spent some time discussing how the change we had brought , had happened. It had not happened because of our anger that things were wrong but because of our desire for things to be right. Our conversation was about how we had made things better.

Those who historically have created most change- Ghandi, Mandela, Martin Luther King have changed things because they had a dream, their anger drove them to take positive action. I sense that David Platt- who has no end game other than revenge- will see his anger destroying himself.

Looking back at my anger over the conference and how it created negativity, I can see where I went wrong. Rather than put distance between myself and other speakers, I could and should have worked to bring those speakers to me. This is how Andy has got past the problems his alignment with the IA created. It is how I intend to meet the challenges of next week


I share this blog because I know that many, like me , suffer bouts of anger and feel remorse when that anger spills over and creates unexpected consequences.

Yeats wrote

The best lack all conviction, while the worst
Are full of passionate intensity.

But the world he was talking about was a broken world anticipating apolcalypitic and destructive change

And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

For me passionate conviction is what makes for positive change; we do not live in a broken world but a world that can be mended.

Mending things doesn’t mean breaking things on the way, it takes a different kind of anger than David Platt’s – one that channels effort into making things better.

I hope that is what will happen for Andy Agethangelou and Tom Tugendhaut on Monday and with those people with whom we debate on Wednesday.


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Floundering in the dark – the PP DC Conference


De profundis

It was a beautiful day and it was a great hotel. But I left the Professional Pensions Defined Contribution Conference profoundly depressed. Perhaps I needed  lux in tenebris (see the progress that is being made elsewhere). The problems created by “Freedom and Choice” appeared – at least yesterday – ineluctable.

The problem for the conference going consultancy fraternity (and sorority) is that no-one is making money out of DC consultancy. But this is a function of the current inefficiencies with which we are managing DC – these inefficiencies must be addressed.

We heard from a number of asset managers telling us what Joe Public thought and we gathered that Joe (and Joanne) were totally confused about what to do with their pension pots and had deep reservations about the advice they were getting.

We heard about various solutions put forward by the sponsors of this conference, all of which involved using their services and we heard from the Pensions Regulator, Andrew Warwick-Thompson about what the Government was doing to put things right.

The quality of the debate was poor

Considering the Conference was about thought leadership, we saw and heard very little all day that could be considered emotionally or intellectually challenging.

This was not the fault of the conference organisers – this was down to us – the audience and the speakers.

There was no new thinking about how we might bring the costs of delivering pensions down. No one talked about payments, no one discussed the blockchain and there was no discussion around non-conventional investment structures (ETFs for retail or mutual pooling for collective DC).

In terms of innovatory thinking, this was one of the weakest events I have attended in the past five years.

Why the quality of the debate was poor

This was a conference about making money out of DC. It talked about improving DC outcomes but the consumer was not in the room- save through vox pop videos which we viewed as if the people featured were fairground attractions.

The solutions on offer all hinged on finding ways to help people spend their retirement funds. There was virtually no interest in the savings process which now appears to have been handed over to the “auto-enrolment lot”. The fund managers see money in the accumulated assets.

So we heard from Hymans Robertson about how investment consultants can design decumulation defaults and Aon about what people want in retirement and we heard from Schroders about how diversification can reduce financial ruin and Alliance Bernstein about TDFs and we heard from Intelligent Pensions about how we should all be paying financial advisers to sort this out for us. Oh and we heard from a firm of lawyers about how complicated things are (as if we needed that after 8 hours of complication).

We must do better than this – at the very least we owe this to the conference organisers.

We need profound change to get us back into the light

  1. We need to radically overhaul governance so we start focussing DC not just on delivering good outcomes, but on investment strategies that people can understand
  2. We need to forget this silly talk about freedom and choice and focus on producing collective default mechanisms for the mass of people who don’t want freedom but want a good pension
  3. We need to have a proper discussion on risk which gets past guarantees and looks pragmatically at what level of certainty people are prepared to accept
  4. We need to explore and adopt new technology such as Blockchain, such as messaging and such as digital payments and get beyond the current delivery mechanisms which rival the Houses of Parliament for decrepitude.
  5. We need to look at the regulatory structures of DB and DC and see how a third way can be established (as legislated for in PA15).

We get what we ask for – we asked for more of the same and that’s what we got!

I don’t blame Professional Pensions for the poor quality of yesterday. People turn up to these events knowing full well what the agenda will be and they demand more of the same.

We will continue to have conferences like this for the foreseeable future until we think bigger than the immediate ROI from participating

They are constrained by the lack of innovation within their organisations; the answers to making money all revert to taking a slice of the AUM and therefore the answer is always around asset management.

Infact yesterday was a blindingly well organised event. Thanks to Milly and her crew!

I presented late and the interaction with the audience was a little thin.  I guess having had a free breakfast, lunch and tea, not many of the delegates felt much point in staying!

Thanks to those who did!



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Whatever happened to the reform of pension tax relief?


George now travels by train (thanks Sophie)

The Government’s plans to resolve the injustices of the Pension Tax Relief system appear to have been ditched. Announced in the budget of 2015, expected in that year’s autumn statement and postponed in the months running up to this year’s budge, they now appear a casualty of BREXIT.

For those who don’t remember, they were officially postponed because of the market uncertainty we saw at the beginning of the year. The market is now back to record levels but there is no talk of reigniting the radical reform being worked on by the Treasury.

Of course the real reason that tax-relief was ducked, was to give the Remain campaign a clear run. Of the many thins for Osborne and Cameron to regret, shelving good policy for political expediency will be an after thought. You always got the impression that under Osborne, pensions was a political football to kick around the yard. The kids are out of the yard now- BAU means more unfairness.

The football’s back in the cupboard.

The Government is pressing ahead with its plans for a Lifetime ISA, though the enthusiasm seems thin. Yesterday – at last – we got the detailed regulations for this product, so asset managers and insurers can get on with building the thing.

It’s a bit of an unwelcome smell for those of us who are getting on with implementing the main event- auto-enrolment. I am not in the DWP Select Committee/Ros Altmann camp of seeing the Lifetime ISA doing a lot of harm.I just with that Treasury time was put to better use.

We have terrible anomalies in our pension tax system.

  1. People who are due tax relief (or Government Incentive if we have to call it that) AREN’T GETTING IT
  2. Some people who have saved all their lives now find themselves paying penal taxation rates on income in retirement of over £35,000
  3. Meanwhile, people can have pensions five times that and pay less tax.

The blog’s not long enough to fully explain, but in synopsis; we are denying thousands of people auto-enrolled and choosing to be in occupational pension schemes (that operate under net-pay) even basic rate tax relief.

Meanwhile, those still in defined benefit pension schemes are protected to the point that pensions apartheid becomes more vivid and real every day.

The taxation system that governs pensions is fundamentally flawed so that the pension wealthy get away with blue murder while the pension poor remain so.

There was a need for tax reform- that need has not gone away.

We may have a downgraded pension minister, the Treasury may have the keys to the political football cupboard, reform may be postponed to meet the new agenda.

But the people who are pensions poor will remain pension poor and those who are wealthy will just get wealthier.

The Lifetime ISA is a confusing irrelevance.

Without Altmann in Government, there is no-one saying these things, but these things need to be said.


Posted in advice gap, annuity, auto-enrolment, pensions | Tagged , , , , | 4 Comments

Tax-subsidies on retirement advice; a waste of public funds!

true cost

The Government intends to extend tax breaks on pensions to allow those with pension pots to use them to pay for advice. The details are in this consultation document.

The fundamental premise is that taking financial advice on retirement matters from an authorised adviser is a good thing and should be encouraged with tax-payer money.

There are three fundamental challenges to this premise

  1. Advice has already been subsidised through the commission system on a large amount of money in these DC pension pots
  2. This further subsidy could encourage bad behaviours among advisers
  3. The money being spent,would better be spent simplifying pensions so the need for advice fell away.

  1. The taxpayer has already subsidised advice

Commission was paid on most advised pension products since the seventies and it meant that pension policyholders paid for advice from tax-advantaged savings. There were savings in tax and in VAT. The system of default commissions was banned post RDR and the banning of consultancy charging. Nowadays people have to opt-in to the payment of commissions rather than “negotiate out”.

The reason for this (according to the RDR) was to improve member outcomes, in practice it has also meant that many advisers have left the industry. It’s feared that there is more consumer detriment in not having readily accessible advice than in having funds raided to pay for advice.

In my opinion, the argument that contracts that have already been charged for advice, could be charged again – because the original adviser’s not around to deliver value for money- is totally fallacious. This proposal is an abuse of the tax-payer’s funds.

2. This measure could encourage bad behaviours

I was an adviser for 11 years, the last of them I was a Regulated Adviser. I know the business. Strategists within financial advisory firms will be looking at these regulations and seeing opportunities. The majority will be looking responsibly, but a minority will see this as a thieves charter.

Churn and burn

The measures encourage churning. Financial advisers who are advising on products that do not offer adviser charging are already churning funds to products that are. We see this mostly with workplace pensions, where money is switched out of cheap defaults into expensive alternative investment strategies (from which adviser charges are taken).

The new proposals will encourage advisers to transfer funds from low-cost products into other products that will allow these advisor charges to be taken. The switch of products will create costs which will be member borne, the advice will reduce the potential pension further and the residual investment product has the potential to deliver more “value” to the adviser- especially where the adviser is taking money for managing the product (the vertically integrated master-trust.

De-risking DB schemes

Taken with the increased allowance to employers to offer up to £500 of advice as a non-taxable benefit in kind, the new £500 pension-grab means that an adviser can take up to £1,000 per member without tax-detriment to employer or member.

This makes de-risking of DB plans through advised ETV and PIE exercises very much more financially lucrative to the adviser – and a lot more attractive to the employer (who typically funds advice).

The measure under discussion is effectively a tax-subsidy on the dismantling of DB schemes by financial advisors. High transfer values (occasioned by low bond yields) make the emotional lure of “sexy-cash” irresistible to many. But those who sell their DB pension rights or exchange increases for cash are – ironically – creating the need for more advice.

The advantage for an adviser -who is (under the proposals) able to come back for second and even third dibs of tax-advantaged cash grabs- will prove hugely attractive to advisers and all too easy an option for those with pension pots.

Abuse of the 55% tax rate.

Much of the privately held wealth in pensions is now in pots which are – or will be – above the Lifetime Allowance (at whatever protection level). An easy way of reducing 55% tax problems is for those with these liabilities to pay off taxable funds to advisers.

This will mean that those who need tax-relief most- the pension wealthy will be able to get advice discounted at 55% , while those who are most in need of basic help, may not even get basic rate tax assistance on the money drawn from their pension.

As usual, the pension taxation system, regressive as it is, works against the intentions of Government Policy – which is to deliver advice to the parts of the market for whom it is currently inaccessible -eg those on median and low incomes.

On all three grounds- I see the consequences of the Government proposals as working against the stated aims of the FAMR. I see the proposals as causing yet more product churn, I see further weakening of the DB system and I see the measures being used as a tax loophole for the wealthy and not a tax- assistance for those on meagre incomes


3. This is sticking plaster on a festering wound.

The consultation calls for marketing assistance to promote this new measure. I don’t think the IFA sector will have too much trouble promoting this for themselves without further expense of Government money.

The granting of further tax privileges on already tax-priviledged money is an admission of guilt from those who designed our pension system. They are charged with delivering- over decades- a tax and regulatory system so complex that we need advice to take decisions not just on how to save for retirement , but how to spend our savings.

Rather than having a simple system of taxation applying to all, we now have a wide variety of tax treatments applying to differing claims on our retirement savings. The reason we have to take advice is to avoid becoming a tax-muppet. But to give tax back to people paying to reduce their muppertometry is the logic of the madhouse

Instead we should be investing Government funds in creating simple solutions to the problems of spending our money which rely on the payment of regular income streams, rather than the unlimited freedoms which appear to be the current default.

The sooner the Government accept that most people want a simple and easy way of getting a pension when they retire, rather than endless decisions and expensive advice – the better.

In short

If you haven’t read any of the 1000 words above and want a quick soundbite here it is

The proposal to further subsidise advice on retirement savings is ill-conceived and will be ill-executed. The Government is barking up the wrong tree. It should be focussing on making spending our savings better through encouraging better products.

Posted in advice gap, consultant, dc pensions, de-risking, defined ambition, pensions | Tagged , , , , , , , , | 4 Comments

We don’t need financial chauffeurs- we need driverless pensions.


Paul Lewis helps you find a good financial adviser

In his article “Find a good financial advisor”, Paul Lewis argues that most people do not need a financial advisor at all, and for those who insist on one, there are probably only around 4,500 independent, certified advisers that are worth finding.

The best part of half a million people reaching the age of pension consent (55) this year. The proportion of the population in the “drawdown zone” is in excess of 10m and it will grow as our indigenous nation gets older.

Paul is simply pointing out a market dynamic, if supply is there to meet demand, then the estimated demand for advice is either very low – or there is a massive under-supply.

Advice for all – reduced pensions all round?

The Government has taken a different view. Having given us the freedom to do what we like with our pension pot, they now feel we should be taking advice on how to do it and that it is a worthwhile use of taxpayer’s money to subsidise that advice with tax relief.

They have issued a consultation asking us to confirm the sanity of this madness

The logic is that of the madhouse as is the maths. Here is a worked example.

John has a pension pot of £40,000 with a guaranteed minimum pension of £8,000 per annum.

John takes advice using the Pensions Advice Allowance, also reducing the pension pot to £39,500.

John retires and begins receiving his guaranteed minimum income of £8,000 per year, just as he would have done if he had not used the Pensions Advice Allowance.

This means that the actual value of John’s pension has not decreased.

The FCA rules allow firms to reduce part of the client’s rights under the retail investment product to pay the adviser charge. This means that there is, in principle, no FCA barrier to firms offering the allowance for products with guaranteed features.

Essentially, a firm could pay the adviser £500, as long as the firm is able to reduce the underlying value of the individual’s future benefits accordingly. However, it is administratively difficult to determine what an appropriate reduction to the client’s benefits in exchange for the £500 would be.

The first question is why would John want to pay anyone £500 to be advised he will be getting £8,000 a year in benefit.

The second question is how anyone -even under the most extraordinary benign economic conditions can guarantee £8,000 a year from a £40,000 pot.

The third question is why it is administratively easy to reduce a pot of £40,000 by 1/80th but not a pension of £8,000 a year by 1/80th.

The example is so specious – it calls into question what the purpose of this consultation is.

An obsession with financial empowerment

Of the 40m of us adults fit to drive a car, the vast majority of us hold a licence suggesting we are fit and proper to do so. Only a small number of us understands how a car works.

Around the same proportion of those in retirement know how their pension works.

We do not need lesson in car mechanics to drive a car and we don’t need a financial advisor to receive a pension. However, were we to make the car complicated enough that it was unsafe to drive without additional driving lessons, it could be argued we need a mechanic to teach us how to drive that particular car.

We are building pension strategies that need pension advisers while we are building cars to be driverless. We are obsessed with employing people to solve problems that should not exist. For most people pensions should be like driverless cars, far from needing advice , they should get us from A to B with zero intervention on our part (or anyone else’s).

Building driverless pensions

Of course people will tell you that you can buy an annuity, as if that was a driverless pension. But buying a guarantee of future financial misery is like investing in a car with a siezed up engine. Yes you will be guaranteed that car will never cause any damage- but that’s because the car can’t get you from A to B.

The point of a driverless car is not that it is driverless, it is that it allows people to get on with their lives while travelling from A to B (and it certainly does not mean hiring a chauffeur).

We can build driverless cars and yes we can build adviser less pensions. Infact most people will get a driverless pension from the state. If John, in the example above , wanted to – he could convert his £40,000 and get a little over £1000 a year in extra pension. or he could look for a higher target (without the guarantees). But to do so he would probably have to pay an adviser the £500 a year that the Government consultation is suggesting is a reasonable price for mid-market financial advice.

The economics of the madhouse suggest that any financial advantage in John taking advice, would be eliminated by the cost of the advice. He would be paying a chauffeur to drive his car – hardly within the pocket of the average working person.

The lunacy of our pension system

The FAMR has got caught up in the fallacious logic that has driven the life insurance industry for decades. The assumption is that there will be advisers so the pension products are built complex. The complex products are built but nobody want to pay for the advice. The products become driverless and crash. The Government then recruits an army of financial chauffeurs to keep us all safe.

Paul Lewis didn’t need a thousand words to sum this up.

Screen Shot 2016-09-01 at 06.43.55.png

and don’t get him started on pension dashboards!

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An Apple a day, 700 reasons not to stay!

horse apple

General angst, everywhere but here!

There are a lot of people getting very angry about the EU’s determination that Apple should be paying Euro 13bn in tax to the Irish Government.

Apple aren’t happy at the prospect of corporate profits being slashed

Ireland isn’t happy at having to “eat its seed potatoes” ( a harsh reference to the potato famine)

The United States isn’t happy that not just Apple but the many other companies using Ireland as a tax haven, may find themselves paying as much to the Irish Government as they’d have been paying in the States.

Everyone is very unhappy indeed when they think of Britain, grinning at the prospect of being able to offer Apple and its likes the same sweetheart deals offered by Ireland- with their being nothing anyone can do about it.

The negative capability we reap from BREXIT

This is the negative capability of BREXIT. By which I mean the capacity of Britain to profit from the problems it leaves behind.  One of the forgotten problems (certainly in the debate we’ve just had) is Ireland. From Celtic Tiger to a property bankrupt, Ireland has swung from boom and bust with an agility only matched by Iceland. But unlike Iceland, Ireland is not self determining.

Now Ireland has found its legs, the EU is keen to put an end to the support mechanism that has got it back on its feet. Whether the analogy is to  “eating seed potatoes” or to the kicking away of crutches, Ireland does not feel it is ready and the EU reckons it is milking it.

As for Apple, it is not alone in being brought in line with other more established businesses. Airbnb is under fire in London this morning for non-disclosure of the rental patterns of its landlords (my block of flats is turning into an Airbnb hostel). Uber is seeing its profits slashed as traditional cabbies fight back, demanding a level playing field.

Nor is it alone as a US corporation  operating in Ireland.

The list of major firms operating in the Republic includes Intel, Boston Scientific, Dell, Pfizer, Google, Hewlett Packard,Linked in Facebook and Johnson and Johnson.

Ireland has benefited from $277bn (£182bn) of US direct foreign investment in the past two decades – gaining more from American firms than Brazil, Russia, India and China combined.

Ireland is riding two horse, the US corporates and the EU’s subsidies. Unlike Britain, Ireland does not have the economic confidence to ditch either. The idea of Ireland exiting the EU to keep its sweetheart deals will fill the ordinary Irish person with dread, the thought of losing those deals, will fill the Treasury with dread.

To put this in perspective, the taxes it would charge Apple to comply with the EU would more than double its corporate tax revenues. The chances of it retaining that windfall for any time are rated as zero

Given the choice, where would you choose to register your company?

I’d wager that of the 700 US companies currently registered in Ireland , the vast majority would sooner be registered in the UK, if we could offer the same sweetheart deals. Even if we offered our current eye-watering low rates of corporation taxes against the EU prescribed rates to be imposed on Apple, we would be deluged with inward investment.

The EU has handed those who voted BREXIT a remarkable validation for their decision. The bet on freeing ourselves from the inherent weaknesses of the European Union (the weaker members) looks like it may pay off.

Meanwhile Germany and France may be realising that for all the tough talking they are promising, they are playing with a diminished set of cards, their hands are looking a lot less strong and the capacity of the UK to play its aces, all the higher.

Where would you like to live and work ?

If I worked for one of the 700 US companies in Ireland, I would choose to work in Great Britain for a whole load of reasons but mostly because Britain is Great and Ireland (I’m afraid isn’t).

That may be a nationalistic statement that gets the likes of Con Keating’s neck-hairs standing up but I note that even Con is living in Britain and not Ireland. The diaspora – the Irish brain drain- continues.

If I was Ireland, I’d align myself with my old master. But that might be a little Gladstonian for 6 am on a summer’s morning in Newcastle!

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We took the plunge, now we must swim

Thames 7


I doubt if SoftBank had launched its take over bid for  ARM holdings today rather in the weeks following the referendum, it would have found life so easy.

Recent comments from Theresa May suggest that Britain will, for the first time in three decades, be prepared to intervene on behalf of long-term stakeholders (e.g. everyone but the traders).

Meanwhile, ARM’s employees and the companies that depend on ARM will have to hold their breath and hope that SoftBank’s promises are worth more than “the paper they are written on” (which Paul Myners doubts).

This morning we heard that the EU are going to twist the Irish Government’s arms to collect up to $19bn worth of back taxes from Apple. The Taoiseach will be in the happy position of getting a huge windfall for winning , and an Iphone for life if he wins!

But Ireland’s status as a corporate tax-haven for American companies looks challenged, and Britain looks the new Tiger economy, self-determining and self-confident. The question is “how much do we value British ownership?”.

Take Sage and L&G

I have dealings with two British companies of which we – as a nation- should be very proud. L&G is a great fund manager with a strong social purpose – it is an ok life company lacking much purpose. But together it is a challenger to its less upright competitors -BlackRock and State Street and (as Vanguard) it actually manages assets.

Sage is an amazing organisation that has vision and scope. It is a market leader for payroll and accountancy software and is increasingly moving into applications of its business model in education and (say it quietly) pensions. It is not just big in the UK , it is big all over, Sage North America is a challenger.

But how valued are these two great companies? Are Stephen Kelly and Nigel Wilson the household names they would be in other companies? I doubt that more than a handful of people for whom they are not CEO- know who they are?

We do not value our business leaders but worse- we do not value our businesses- until it is too late. When was the last time that we heard Big Government – Our PM and Chancellor – really banging the drum for British owned companies. I am not talking about trade delegations, I am talking about promoting the importance of these organisations to Britain’s economic progress and pride.

And what about succession?

An important point was made by a commentator on Wake up to Money. The reason we have no young pretenders to ARM’s crown, is that when a British start-up emerges from its chrysalis, it is not floating as a British company, it – typically – is part of the private equity of a fund manager’s portfolio or becomes a subsidiary of an overseas parent.

There is a fine line between nationalism and protectionism. I don’t claim that Britain has all the answers. But I strongly believe we should back ourselves as business leaders, owners and managers so that those who work within our organisations feel a sense of common social purpose.

We are succeeding from being a member of the EU to being Britain alone. We are stepping up to the plate- ready or not. The decision has been taken and though I doubt Nigel Wilson or Stephen Kelly welcomed the choice we made, they have been on the front foot ever since, talking up their companies and talking up Britain’s capacity to deliver great products and services to the world.

We jumped- now we must swim

Whether we know how to swim or not, Britain has jumped in at the deep end. We can flounder or we can apply ourselves to learning the rules of the pool.

I hope that ARM will not set a precedent for Sage and L&G. I hope that the next incubating ARM is in pupation and that behind it – many start ups – Pension PlayPen among them, are speaking with greater confidence. Britain should be a place that attracts overseas investment and I hope we see more Nissans and Hondas setting up and delivering. But I want us to have our own global businesses that we can admire and love as we admire our Olympic champions.

Being Great isn’t about being little Englanders, our greatness is largely about our diversity. When I walk the streets of London, Leeds or Slough I see a diverse nation and I see our prosperity being increased because our immigrant population – whether Eastern European, Caribbean, African or Asian, has the capacity to set up and succeed.

They jumped and they swam. So must the rest of us!


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The IGCs must not slip into the pocket of their provider


I hear worrying reports of various IGCs meeting and pronouncing their tasks “too hard”. Phrases such as “I don’t know how this would play with my provider” have no place in an IGC’s lexicon but they are reported as littering these conversations.

Lest we forget;-

IGCs represent the interests of the member and not the provider.

Equally worrying is the appointment of sales guys to be the corporate representatives on IGCs. I absolutely oppose this and am extremely disappointed to hear that Aegon have appointed Paul Bucksey (Head of Workplace) and Dougy Grant (MD of existing business) to the IGC Board.

Paul and Dougy are good guys, their job is to drive profit from the books of business they look after and to get new business. They are salesmen; which means that their day jobs are about profit maximisation for the shareholders of Aegon, how can they possibly represent the interests of the member over the provider?

Their appointments have passed un-commented on in the press. I am disappointed. Once again, I am left to ask the obvious question, who cares about these IGCs?

Where are IGCs going on value for money?

The FCA’s asset management survey asks searching questions about value for money. It asks why questions are not being asked by investment consultants to ensure that value for money is obtained. The truth is that there is no one prepared to hold the IGCs to account.

Without ongoing scrutiny, the IGCs will slip back into the pockets of the providers and the governance that they were supposed to promote, will be pocketed too.

If the investment consultants of the actuarial consultants and the advisers working within corporate IFAs and Employee Benefit Consultancies were not so supine, this would not happen. But advisers take their cue from the press and the press is prepared to publish press releases issued by the insurers without comment.

Let’s be clear – there is now a clear expectation that the 2017 Chair Statements will deliver a clear message on the value for money of the provider and if we can’t see how the statement was derived, you’ll get a good kick from this blog and I don’t want a nasty legal letter or phone call if I call for better.

There will be no reason to hide behind the FCA’s lack of guidance this time. Nor will there be any excuse for letting your provider off the hook on early exit penalty fees.

Governance – who really cares?

There are good organisations who care about good governance, Share Action, PIRC, Manifest and they are prepared to stick their head above the parapet and call bad practice.

I’m pleased to see providers like People’s Pension promising to be more transparent. I am quite sure that without the efforts of Catherine Howarth and her team, the dire standards of governance we’ve seen from People’s so far would persist.

But where is the pressure from the consultancies, what sanctions are being applied to those providers whose IGC reports last year just didn’t make the cut?

As I prepare for another round of IGC chair statements (and trustee chair statements) in the new financial year, I am wondering just how much scrutiny these IGCs feel they are under right now.

The answer, from everything I’m hearing right now, is pretty well none at all.

Taking the FCA seriously?

Well guys (and it mainly guys), I hope that you have read the FCA Asset Management Study and I hope that you have absorbed the recent pronouncements on measuring money and I very much hope that by April you will have decided your measure for value for money and be able to give us a proper estimate of how much value we are getting from our workplace pensions.

While I am happy that you are looking at soft factors with NMG, customer satisfaction survey is of more interest to your provider’s marketing department than it is to me. I am prepared to put up with a hell of a lot of poor customer service provided my investments are performing.

I want some tough action between now and April and I want to see statements in April that show that you haven’t been (as reported) slipping back in your provider’s pockets.

One final thing – if I google “IGC”, I have to go to page three before I find anything (other than by me)  about Independent Governance Committees. Perhaps you should be worrying about that too!

You’re supposed to be accessible and relevant !


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How to get out of auto-enrolment (without a penalty notice)




As everyone knows – I am a fan of auto-enrolment and have made my living through helping employers engage with workplace pensions and encouraging compliance.

The rest of my blog is not an encouragement to small businesspeople to jack in workplace saving but a route map for employers who would rather not set up a workplace pension.

How to get (your company) out of auto-enrolment

Pension auto-enrolment is slowly becoming a reality for the UK’s smallest companies, with the vast majority of small businesses required to be operating pension schemes by early 2017, and every business in the country required to be auto-enrolled by early 2018.

Unlike large or medium-sized businesses with hundreds of employees, freelancers, contractors and micro-businesses may be exempt from pension auto-enrolment. If your company has employees – even one – you are legally required to operate a pension scheme. However, if your business is comprised only of directors you are not legally required to operate a scheme. Many director-only micro-businesses already operate private pension schemes which may not meet auto-enrolment criteria, so declaring your company exempt will make sure you have no bureaucratic hoops to jump through, and can continue your pension contributions as normal. However The Pension Regulator will not know you are exempt – so they need to be told!

To opt-out you can inform the Pension Regulator that your company is exempt by emailing using the following template:

1. I confirm that My Limited Company Name is a not an employer for the purposes of automatic enrolment for the following reason – (select one option from the list below):

a) There is only one director and there are no other staff working for the company
b) The only people working for the company are directors and none of them has an employment contract
c) The only people working for the company are directors and only one of them has an employment contract
d) The company has ceased trading (including date ceased)
e) (if there is some other reason why you believe you do not have any automatic enrolment duties, please provide a brief explanation)

2. The letter code for the company is: The letter code is a 10 digit number which can be found on all letters sent from The Pensions Regulator

3. The PAYE scheme(s) reference is: XXX/XXXXXXX

4. The companies house number (where applicable): XXXXX

5. The name, email address, address and telephone number of contact at the company.

If you have any queries please do not hesitate to get in contact.

The Pension Regulator should then confirm your exemption, and you’re all set!

So what do you think?

Well there are two schools of thought.

School 1

If you are the kind of person who wants to avoid bureaucracy at all costs, then you probably declared yourself self-employed and only run your limited company because it was tax-preferable to pay yourself via dividends. As dividends don’t count as earnings, you many not even be eligible for auto-enrolment even if you didn’t declare yourself exempt.

There are many who would say you are a fool to yourself but what do they know about your financial prudence or lack of it. You couldn’t be bothered less – you are a self made man and you’ll be a self-made pensioner.

School 2

You are just getting by and you’ve got a mate/accountant/book-keeper who has been keeping your head above water by managing your tax affairs. One moment you are working for Uber , the next you are a computer contractor- you don’t know anything about pensions and don’t want to. But you are scared to even think of the future.

You’d like to be in a workplace pension and put away something for the future but your life is in such a mess right now that you’d prefer to put things off. If there is a letter you could sign which would make the problem go away for a bit, you’ll sign it.

School 1 or 2 – which are you?

If you are in control and don’t want Government or anybody else screwing you around, auto-enrolment is not for you – use your exemption.

But if you are in the second school and you’re using self-employment and Director’s exemptions to kick the can down the road, get in touch – 07785 377768 or henry.tapper@pensionplaypen. I’ll have  a chat and point you in the direction of TPAS.

Or you can contact TPAS at or on 0300 123 1047



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Pension Policy Institute – the NEW pensions landscape


Back in 2003 when the Pension Policy Institute was born, it produced a report on the pension state of the nation . PPI now means a bung from a bank and any google search for it’s likely to compromise your internet account! Hence the laborious title (above).

Now in 2016, for no immediately obvious reason, PPI’s revisited the old landscape and looked at what’s happened since. You can read the report here

It’s 100 pages long, so here’s the Plowman’s ten point summary

  • Today’s pensioners are better off than they’ve ever been
  • Future pensioners are unlikely to get current levels of pension income
  • Auto Enrolment and the triple lock are likely to make things better
  • Increases to the state pension are likely to make things worse
  • Between 2016 and 2046 the amount the Government spends on pensions increases from 5.3% to 7.2% (triple lock and State Pension increases)
  • Pension Inequalities between rich and poor, men and women, have decreased (since 2003)
  • The short term dip we’re about to see in retirement incomes will be reversed by AE
  • 1.6m pensioners are still living in poverty
  • The New Pensions Landscape shows there’s a clear strategy in place for pensions 
  • The new strategy that’s emerged from the Pension Commission has yet to settle in

Things have got better!

What is weird , is that over the period , Britain’s defined benefit pension schemes have been closed first to new entrants and lately for “future accrual” and Britain has slipped down the accursed Mercer index – to general shame.

The PPI point out – quite rightly – that Britain has not collapsed as a pension provider but got on with the rectification of the state pension and put in place a new private savings system. Despite blips (WASPI being the best known), pensions are fairer and pensioner poverty has decreased.

Jeannie Drake, who spoke at the PPI’s “NEW pensions landscape” launch yesterday , suggested that having got to 20 now was not the time to twist in the hope of getting an Ace and 21. We should consolidate the gains we’ve got and not push for a 12% + contribution to people’s pensions. I’m not allowed to say who- but there was a fair amount of support for this from the floor, and of course from me.


Things are going to get worse

Just as we might have got used to things getting better, things are going to get worse as we’ll be seeing less people retiring on good Defined Benefits. Well that’s what the modelling says, but I think the long-term problem is that we’ve failed to convince employers (so far) that they have a commercial and moral responsibility for organising workplace pensions that actually work for staff.

Much of the debate focussed on just this point. The old contract between Government , staff and employers – which prevailed between 1960 to the early years of the new millennium worked – because each party respected the other.

What has gone wrong since then has been that Government has dumped on employers so much pension baggage that the metaphorical camel has collapsed and is refusing to go the extra mile. The Government continues to pile on the agony, only yesterday we saw the publication of a horrendously difficult paper from the DWP on how employers should put right Guaranteed Minimum Pensions for staff – come on -give employers a break.

And instead of inspiring employers to get involved with providing new fluffy workplace pensions so that staff can see work as a means to an end, the Government has sold auto-enrolment with the wonderfully exciting slogan

It’s the law

Things may get better after that

Jeannie Drake, who is for my money, the #1 person in Government for pensions -was spot on yesterday. Until we get employers inspired to really sell this pension saving malarkey to their staff, auto-enrolment will be a compliance exercise which will fail, the moment the Pensions Regulator’s back is turned.

We need bosses to fall in love with pensions as they did in the second half of last century, or at least to see them as a key part of how they reward staff. Simply telling employers they have to have a workplace pension is not going to achieve this.

Some kind of pension evangelism is needed, along the lines of what Ros Altmann was trying to do in the latter days of her reign as Pensions Minister. But the push needs to come from higher up the governmental food chain.

The Treasury has, so far, been far from helpful, encouraging the LISA as a competitor to workplace pensions – undermining the tri-partite consensus between employers, Government and staff before it’s settled in,

It is Hammond time and May time and time we had a proper statement from the CBI and the FSB and the Unions getting behind workplace pensions and auto-enrolment.

Finally, and this is the most important thing of all – for fairness and equality. The rosy picture being painted by the PPI of the NEW pensions landscape, is painted in the light of the triple lock. It assumes that the triple lock remains in place after 2020 and long after at that.

This means a massive hike in GDP spending on pensions from 5.3% to 7.2% (around 40%). We can only do this, if we accept a new contract between generations which assumes we will look after our older people financially through pensions.  I don’t see that contract being discussed at the moment (though we touched upon it yesterday) and at a Westminster and City Conference earlier in the day.

That contract will have to consider more than just income – it will have to consider the capital costs of long term care which is a social problem aligned to pensions and one that is returning to the debate.

My view is that Britain can (despite all the uncertainty) afford proper pensions and we can find a way of funding long term care within the pensions framework. I urge the Government to say this and to continue the direction of travel of the past 13 years.

The Point of Publication – the NEW Pensions Landscape

I like the PPI, they do things for good reasons. As I have been writing this blog, I have been understanding better the point of publishing the NEW Pensions Landscape.

It is to remind us that – in the absence of a NEW Pensions Commission, it is up to those who have an interest in pension policy  (within and without Government) to work out just how seriously we are going to take our promises to future generations.

The decisions we took in 2003 have (surprisingly) been implemented. We now have to make sure that these decisions stick and that the direction of travel we set out on then, is maintained.

This document, which I urge you to read, is an important stopping point along the road.



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I hate marketing but I like this man

Of all the black arts, marketing is the most insidious. Marketing can make monkeys of us all and as we grin with pleasure at our inane purchasers, the marketers and their clients sip fine brandies and snigger. I’m holding that thought – I come from fine Methodist stock and will not be appeased. But last night I was sorely tempted to buy Mr Rory Sutherland a pint of fine claret and be beguiled.


Central to the appeal is the man’s epicurean bravado. There is nothing about him that medical science would approve of

He appeared last night in a pair of scarlet strides that Lucifer would be proud of

Got it! @rorysutherland is a genius- can I have a pair of his trousers? @howtoacademy

— Pension Plowman(@henryhtapper) November 28, 2016

It is almost impossible to deny this man – he is the human equivalent of a West Highland Terrier


Could you deny this dog anything?

Placebos – the guilty truth

“Doctorshack our body’s unconscious procedures: we should encourage placebos” @rorysutherland #bullshit works

— Pension Plowman(@henryhtapper) November 28, 2016

I remember talking with my Dad (when he was still a practicing GP) about the value of his visiting. My Dad – in his final years in practice – did as many as 40 home visits a day. He spent five minutes here and ten there, mainly with geriatrics and he brought comfort to the villages of the Blackmore Vale in Dorset. What few drugs he prescribed were non-generic and he hated with a passion the sales guys with their bribes to use the branded product.

The value of visiting was in giving people the confidence in their bodies and minds and Dad would never give neurotics and hypochondriacs an inch. He prescribed them placebos and they got better. He knew that the best way to deal with neurotics was to take them off drugs.

Sutherland discussed this last night, I found myself grunting assent when he said we should have more placebos. I thought of my father who knew that “les maladies imaginaires” could only be cured of their dependencies by bread pills! Sutherland knows that human happiness can be cheaply maintained with a diet of thin air (properly packaged).

The Doctor knows best

My father was a humanist and a Methodist, at one moment he was a scientist and the next a homeopath, he was pragmatic enough to be both marketer and economist.

Do not get fooled, Rory Sutherland is a smart cookie who runs a big business and plays with our hearts. Like my Dad, he gets pleasure out of giving us pleasure but he sells a dangerous commodity, an alchemic process that can turn bullshit into an essential purchase.

I spent last night watching him deliver intuition on a trowel. I was furiously tweeting the pearls as they were strewn..

Rory 2.PNG

In the clear dawn of day, these lose the precision of Sutherland’s delivery, but you get the picture.

To get from Brixton from Lewisham with a tube map takes hours – it’s what an economist would do, to ask a local (and get a train) is what Rory would do.

Infact, Rory Sutherland was reclaiming the right for us to abandon our spreadsheets and live a little. I’m fine with that.

But I’m the son of a Methodist local preacher and the grandson of a Methodist Minister, don’t think because I like Rory Sutherland, I encourage the black arts of marketing – that way lies perdition and the horrors of the financial services industry!

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Why we can’t dissolve fund management like monasteries



If you had to pay for advice – would you pay for judgement or luck?

Con Keating makes an important point in response to my blog, in denial and in disgust

it is required by statute to retain an investment advisor. It is not so much that clients want to work with consultants but that they have to work with one or another. This needs to be changed.

Michael Johnson has today called for 80% of the fund management industry to be considered redundant. I do not disagree with his argument. But it ignores Con Keating’s point. You cannot simultaneously make 80% of investment consultants redundant without putting yourself the wrong side of the law.

This seems the single strongest argument for referring investment consultants to the competition and markets authority. Johnson may not know of the requirement on pension scheme trustees which might explain his comment

“It is not clear how (a referral to the CMA) would help”.

One alternative to a referral is to change the law and give trustees the freedom to take decisions by themselves with regulatory and commercial impunity. But the FCA report paints no more optimistic picture of trustee competence than the OFT did of employer’s capabilities with workplace pensions.

Experts are needed to advise on and help deliver diversification and ensure liquidity (as Johnson points out), but these experts are not embedded in most occupational pension schemes or other fiduciary structures in the UK.

Another alternative is to follow the PLSA’s recommendation to collapse occupational schemes into large pools which can be managed with the interests of all in mind. This is what Johnson wants too and he spends much of his paper praising the Department of Communities and Local Government for its leadership in bringing Local Government Pension Schemes in just such structures.

The difficulty of extending the LGPS pooling model to private schemes is inherent in the terms “public and private”. Public pensions are heterogenous in benefit structure and in sponsor (we the tax-payer pick up a general tab). Private schemes have different benefit promises and each sponsor is different both in its capacity to support the future promises of the pension scheme.

The logical argument for Michael Johnson , would be to nationalise pensions and place the burden for private defined benefits in one great pool (under the management of Government agents such as the PPF). This may be a step too far for a right leaning think-tank like the Centre for Policy Studies, but there are some sane experts calling for a “living PPF”.

Evolution not dissolution.

Johnson argues for the dissolution of the fund management industry with 80% of its structure being dismantled and the remaining 20% targeting genuinely valuable activities.

But we don’t have to treat asset managers and investment consultants like medieval monasteries!

There is an opportunity, with a referral to the Competition and Markets Authority, to clip the wings of the fund managers and investment consultants so that they focus on the jobs that Johnson properly wants them to do.

Licenses to manage money actively, or manage managers within funds or fiduciary management agreements , can currently be obtained with virtually no regard to the value for money offered to the consumer. The CMA has powers to link the performance of those in asset management (including consultants) to results, thereby asking asset managers to underwrite their activities.

The evolution of fund managers into risk sharers suggests that they may well return to where they came from – the insurance industry.

Ironically, insurance companies initially managed funds for policyholders as a risk management activity, in the purest sense, the guaranteed endowment or annuity is a fully insured fund management activity. We now have insurance companies that take no investment risk at all and fund managers who will point to insurers (they use for distribution) as the risk takers.


Payment by judgement rather than luck

It may be that the answer that the CMA comes up with, if investment consultants are referred to them, is to make investment consultants pay linked to the outcomes of the advice they offer (or for their activities to be limited as Johnson suggests). I would support such a proposal.

I do not mean by this an “ad valorem’ approach; this means that the quantum of the reward is based on market performance with the majority of the fee payable in any market condition (a beta approach). I mean a fee based on the “alpha” of investment consultants, payable only where it can be shown that the consultants added value by judgement rather than luck.

I suspect that few asset managers or investment consultants would back themselves to consistently get paid on that basis.

do ya feel lucky?

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Miller time! A crunching analysis of the FCA’s Asset Management Study.


True and fair?


Asset managers and investment advisers stand accused of complicity in lining their pockets at the expense of unwary and helpless investors. One asset manager (now an adviser) who has never stood by and has always shouted for truth and fairness is Alan Miller, together with his wife Gina (she of the Brexit court case), Alan has been a consistent force for good , educating many of us in where change needs to happen.

Here is a short press release from Alan and Gina’s True and Fair Campaign which links to a long exegesis of the Asset Management Market Study. I take one paragraph from the longer document which sums up Alan and Gina’s generosity of thought and precision of expression.



A Summary of the FCA’s Report Revealing Shoddy Practices in the UK Investment and Pension Industry


The 208 page FCA paper is a comprehensive and informed analysis of the numerous dubious practices that have dogged the UK fund management industry for decades.

An industry that has lost its moral compass and the principle of putting customers first.

The FCA has rightly exposed:

  • Lack of price competition in active funds
  • Failure to pass on economies of scale
  • Hidden transaction costs
  • £109 bn of closet index funds
  • Near useless broker ‘buy lists’
  • The crucial importance of increased transparency and standardisation of costs and charges
  • The 0.6% pa under-performance of active funds
  • Numerous conflicts of interest operating within fund managers, pension consultants and pension trustees that result in detrimental outcomes for prudent, hard-working savers and investors.

The report clearly exposes the Investment Association (IA) recent paper “Hidden Fund Fees: The Loch Ness Monster of Investments?” for what it is – a shamefully amateurish and wholly misleading piece of industry propaganda, not worth the paper it is printed on.

Read SCM’s summary and added analysis of various major UK companies – the company that shows how well it’s fund is doing against just cash even when it actually targets cash +5% pa or the household name UK index tracker charging 1% pa or the major company earning millions of pounds risk-free from box profits.

SCM / True and Fair Campaign Summary Review of the FCA’s Report into UK Asset Management


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