In this article I look at the legacy of old company pension schemes, set up by employers for staff as an alternative to defined benefit schemes. In a report in 2018, the Pensions Regulator looked at these schemes and found that most of the problems were with small schemes which had little or no value to employers. I call these schemes company pensions, most pre-date the arrival of auto-enrolment in 2012 and the workplace pensions that dominate the market today.
Do employers have proper choice when choosing a pension for their staff?
We are now two years on from the end of the auto-enrolment staging period , it is getting on for eight years since staging began and, other than the loss of a few minor contenders, the make-up of those offering services to employers is much as it was when Smart entered the market in 2015.
NOW Pensions wobbled, Salvus and Carey went to the wire on authorisation and Legal & General radically restricted its market by not taking small employers. But only SuperTrust had to withdraw its application for authorisation. Contrary to expectations – there remains a wide range of providers competing for the 10.5m new members from 1m new employers, as well for those schemes set up in advance of auto-enrolment by mature employers.
Employers can now choose from 37 authorised master trusts which have more than £36bn in assets under management between them, 16 million memberships, and total financial reserves of £524m.
They can choose from 5 insurers, Aviva, L&G, Aegon, Standard Life, Royal London and Scottish Widows who offer Group Personal Pensions as workplace pensions and there remain a handful of SIPP providers , most notably Hargreaves Lansdown, who offer SIPPs to employers under auto-enrolment.
There is a proper choice for employers choosing workplace pensions today
A market increasingly dominated by master trusts.
The trend towards consolidation continues. The master trusts that did not apply for authorisation are being absorbed into larger master trusts.
HSBC has been authorised as a master trust but has yet to state its intentions for new business. It is generally assumed it will seed with the HSBC staff scheme and there’s considerable speculation as to where it will predate. HSBC may well disrupt the existing order but has yet to show its hand.
Master trusts have the capacity to absorb new business through bulk transfer where deals can be signed off by employers and trustees without the consent of the transferred members. Groups of Personal Pensions (GPP’s) cannot transfer pots from one provider to another without member consent. Setting up a new GPP involves setting up a new policy for each member of staff, for consolidation to happen, each pot needs to transfer at the individual policyholder’s consent.
When it comes to consolidation (which is the commercial driver for change) it is the master-trusts and not the GPPs which are on the front row of the grid. The last time that HSBC made a predatory play was as a personal pension provider – some fifteen years ago – times have changed.
… for most employers with a failing scheme, master trusts will be the obvious answer
How are master trusts competing?
There are large numbers of workplace pension schemes which look inefficient and ripe for consolidation. The competition for consolidation is driven by consultancy owned master trusts, primarily those of Aon, Willis Towers Watson and Mercer, but followed by a range of others – including Salvus, Creative , Atlas and Nations owned by Goddard Perry, CBS, Capita and XPS respectively.
These schemes are today building their business plans around expansion. They see the low hanging fruit as the 41,000 occupational pension schemes established as DC plans and maintained by employers under their own trusts.
For the workforces of large employers like Tesco, competition is fierce. But for the fat and long tail of legacy DC schemes (including GPPs), I already see the likelihood of market failure
My worry is once again about the consultants (and to some degree the insurers) . They compete for these schemes like whales compete for plancton, they open up their mouths and the schemes swim in , primarily because the employers have used the consultancies as advisers or have no adviser and are in the hands of the insurers.
Insurers are keen to compete with their master trusts. Aviva, Scottish Widows, Legal and General and Aegon all have master trusts and HSBC will join them.
NEST, People’s Pension , Smart and NOW are potentially competitive in this plancton hoover-up. However they don’t have the pre-existing relationships of the consultants and insurers and may struggle to repeat in the hoover-up what they achieved during the staging of auto-enrolment – when they had most of the market to themselves.
The big four, are either suffering from indigestion – from a surfeit of new business in the past eight years, or (in the case of Smart) looking abroad.
Competition for old DC company pensions is more likely to come from younger entrants than the big four
How far does competition go?
What I haven’t seen develop in the UK is a utility that puts the employer in control of the purchasing decision.
If an employer wants to tender the scheme it has established (occupational or GPP), it is pretty well bound to use a consultant. But most consultants would rather compete as providers of master trusts than as the organisers of tenders. Those few consultants who are independent of master trusts (Hymans Robertson, LCP, First Actuarial and the accountancy practices) are likely to prosper where competitive tendering is going on. But much of the acquisition of “plancton” is not going through the competitive tendering process. DC schemes are simply passing into the mouths of consultants like Krill.
I suspect that the mistakes of fiduciary managers in the DB space are being repeated and very much hope that tPR and FCA will have a look at what is going on – especially where schemes are unloved, employers uninterested and the money of members is a secondary consideration.
In such cases – the secondary market for failing DC schemes may not always be competitive.
What needs to change?
The Pensions Regulator recognises that many occupational pension schemes are unfit to meet today’s challenges. Many are overly-expensive, poorly governed and badly managed. They are struggling to deliver value for money to members, to comply with rules for tougher disclosures and worst of all, they often have poor data controls meaning many members may not have accurate records. These problems will come out when these schemes are mandated to participate in the digital data-sharing with the pensions dashboard
For such employers to be in control, three things need to happen
Employers need to recognise (or be told) that the schemes they set up , are their responsibility
Where employers aren’t prepared to sponsor their own scheme they need to access a secondary market of providers which enables employers to tender their schemes to the benefit of members.
Someone needs to set up such a tendering facility on-line for the benefit of employers, members and competition.
For orphaned schemes (where the employer is no more), tPR needs to become the tenderer and should use this service.
Access to a competitive secondary market for employers wishing to dispose of their DC pension schemes is limited.
Lessons to be learned
Millions of us have pension pots in schemes run by former employers. These schemes are hard to find and harder to get information on. Many of these schemes are ripe for change and they will be absorbed into master-trusts.
Members will have very little say in the matter and there is insufficient impulsion on employers to get a good deal for our money. This is a recipe for poor practice and it is easy to see competition failing as it did with fiduciary management.
The FCA and tPR should look into the market and in particular the tendering process for schemes where the employer is reluctant to pay fees.
There is a market opportunity for the industry to set up a tendering utility for the disposal of failing DC schemes into viable authorised master trusts.
We are delighted to announce that former Pensions Minister Steve Webb will be joining LCP as a partner. He will be working on our client service offering & spearheading LCP campaigns to help the pensions industry stay apace with member needs. Read on here https://t.co/WrSOM58euKpic.twitter.com/mbTNC1qt5b
Most people who know Steve Webb now knows he works for Royal London, but many people who know that won’t know Lane Clark and Peacock. Why does Britain’s longest serving pensions minister find his CV so varied? Where is the continuity?
It’s cheeky of me to assume Sir Steve’s motivation, but i think he is following what he sees as goodness, and goodness knows there’s not a lot of it about. There aren’t many people I know in pensions that exude goodness, Phil Loney, the former CEO of Royal London was one of them. Steve and Phil are both Christians and though they do not evangelise at work, they are clearly driven by the same conviction.
I do not know of any strong Christian conviction at LCP , but of all the pension consultancies , it has a culture of kindness. Bob Scott and others see to that. LCP is very successful and like Royal London, makes sure its staff are properly rewarded, there is a strong inclusiveness about their culture. They were the first and to my knowledge only pension consultancy to give an employee the chance to change gender. LCP don’t just tolerate diversity, they promote it.
LCP are progressive not just in what they say and what they do. They are silent witness to the values that I know Steve and Phil stick to.
This is why I am not surprised to see Steve Webb joining Lane Clark and Peacock and why I am happy he has.
Though my first loyalties are to my former employer , First Actuarial, a rival in some ways to LCP, LCP is a firm I like to see prosper and this marriage of a good man and a good firm can only be good for pensions.
In this blog I talk about the failings of the financial services industry – the pensions industry in particular – to answer the questions people have. I look at this at three levels – at big data level – through the lens of a pensions dashboard, at the employer level, through the frustrations they can find getting data about their workplace pensions and at the personal level, getting the data we need to work out if we’re getting value for our money.
Big data talk
I was in conversation last night with Gavin Littlejohn, who’s well know in open finance circles as the Founder of the Financial Data and Technology Association. He’s created a global network of organisations participating in the open sharing of data in banking and he’s one of the drivers behind the FCA’s open finance initiative, about which I’ve written lots.
Gavin’s take on the pension dashboard is simple. It is not going well.
Rumours were confirmed that yet another senior figure involved in the delivery of the dashboard has been sacked. The scope of the dashboard is now reduced to pretty much finding pensions and even that limited ambition is not expected to deliver anything until 2022 and nothing substantial till at least 2025. My worst fears are being realised and there is not much that worthy souls like Chris Currie and Guy Opperman can do about it.
The public have simple questions ; they want to know who is managing their pension pots, what their pots are worth, how their savings have done and what their options are going forward.
Meanwhile the insurance industry seems to thing our questions are
what will our pension pots be worth when the schemes mature
what will they buy us in terms of an insurance annuity
how much must I save to be alright
where do I sign to pay more
Meanwhile in a basement room in Clerkenwell
While I had dinner with Gavin, I had lunch with Andy Angethangelou and a symposium of pension communicators and their clients keen to work out how to be more transparent.
My answer was simple, talk to people about what they want to talk about and give them facts. Do not talk to people about what you want to talk about and speculate.
The pensions dashboard is a case in point. people want answers to their questions not to be told what they should be thinking by the ABI.
Andy likes to show a chart which sees Financial services languishing at 58% on the Edelmann Trust Index and Technology prevailing at the other end of his scale with 78% of people trusting the data they get , generated by machines.
The lesson is pretty simple, the dashboard should be communicating facts delivered by technology, not marketing delivered by insurers.
Answering the question
On numerous occasions over the past nine months, I have seen individuals ,trustees, employers and even IGCs asking for data and being denied it. My favorite response was from one data controller who suggested that the client was asking the wrong question. The question that the individual should have been asking is how much more she should be paying , not what had happened to her money she started investing nearly 20 years ago.
Past performance may not be a guide to the future but it is a good guide to the past, and most of us want answers as to what has happened to our money and whether decisions taken on our behalf worked out.
I fear that people have been cowered into believing that knowing past performance is not only irrelevant but actually damaging to them.
Most shockingly of all, there is a school of thought amongst insurers running GPPs that the people who appointed them and pay the money to them (the sponsoring employers) are not entitled to know how the money they’ve collected and sent, has done.
Their questions are repulsed with statements that include
It’s not your data – even though the data they are asking for is anonymised
It’s not your business – even though the employer has set up a governance committee
It is within employer’s call to sack providers and appoint another provider to run its workplace pension.
It can justify doing so by telling impacted staff that the incumbent provider does not want to share the data which can enable it (the employer) to independently assess performance. In short it can tell its staff the insurer will not answer the question.
A simple lesson in communication
I had a conversation earlier this week with Ros Altmann and congratulated her on her idea for a birthday card which fell on the mat in a brightly coloured envelope and gave the recipient a birthday surprise, a meaningful simplified pension statement.
I expressed admiration for the idea but expressed scepticism that insurers would change their systems to issue statements to delight the customer rather than the scheme/plan renewal date. Ros sadly agreed, such a move was unlikely to happen.
Organising what we say to people around when they want to hear from us is not something that is in most pension communicator’s DNA, people get what we want to tell them when we want to tell it.
“Knowing what those questions are…”
The gap between what people want from a dashboard and what insurers want to tell them is wide. People want access to data and their money, insurers want more of their money and are prepared to sit on the data people ask for.
The simplified pension statement should include a statement in “pounds, shillings and pence” of how much has been charged them for managing their money. As Ruston Smith of Tesco says, “people – when they get a shopping bill itemising what they’ve bought, expect the cost of those items to appear at the bottom”.
Unbelievably, most simplified pension statements don’t contain this information and the Government is still having to consult on whether they should. The answer given by the pension industry to that consultation will be interesting. The consensus so far is that if we told people the cost of saving, they’d stop saving. I doubt people stop shopping at Tesco when they see their shopping bill, unless they can see they could buy the same items cheaper elsewhere. The dashboard has an answer for that too.
Value for money
The pensions industry has convinced itself, the regulators and the sponsors of the workplace pensions they manage, that it is too hard to give people an assessment of the value they’ve provided for the money invested and instead of answering that question, they’ve chosen to answer another question.
The question they have chosen is “do we think we have provided value for money?”. They have set up IGCs which are packed with experts and those IGCs have agreed with the providers (on every occasion but one – pace Virgin Money) that value for money has been given.
The bar for “value for money” has been set so low that everyone has jumped over it. That is because the question has been answered by the people setting the question!
When individuals were asked how they measured the value they got for their money, they replied that it should be measure on the outcome in their pension pot. (NMG 2017).
Once again the question people ask and the answer they get are quite different.
We will only get to a the answer to people’s legitimate question “how have I done” when we tell them how they have done. That doesn’t mean delivering a factsheet with gross and net performance figures but it means delivering the return that person got on their money and even more importantly, the return they got relative to the average return, so they can see if they have done well or badly.
That is their value for money figure and it happens to be their AgeWage score. Frankly until we start answering the questions people have with facts not speculation, with history not speculation and with total honesty, we aren’t being much help.
I was a silent remainer. I have been a Liberal most of my life, voted Liberal in #GE2019 and am proud to know Ros Altmann and Gina Miller as friends.
Yesterday I bowed in front of the Throne in the House of Lords, Ros Altmann beside me and saw this great place of parliamentary democracy for the first time.
Last night, shedelivered this short but powerful speech wishing the Lords not to stand in the way of Brexit. It was the right response. She quoted Martin Luther-King
“We must accept finite disappointment and live with infinite hope”
This is a blog about Gareth Morgan, Greggs and about how we meet the needs of all people in retirement, not just the sufficient
Here is Gareth’s blog – AgeWage will be integrating Gareth’s analytics into our work on retirement plans. If you are a provider , consultant or reward strategist, we hope you do too!
Greggs, the well-known bakers, have been in the news this week because they are giving their staff a bonus because of good financial results. It’s always good seeing employers rewarding staff, and Greggs already have a generous profit-sharing scheme.
Just asked my Greggs inside informant if everyone is chuffed about their ~£300 bonus?
“Not really. Most of us are on Universal Credit. We’ll get the bonus end of Jan & it will be taken out of our UC payments in March. They’ve basically just handed £7m back to the govt.”
They’ve basically just handed £7m back to the govt.
I have two questions about this. The first, widely shared as can be seen from a number of comments to the tweet above, is ‘how much will people actually get in their pocket?‘.
This is the same question, in many ways, as my post a few days ago about the increase in the National Living Wage; https://benefitsinthefuture.com/national-living-wage-cui-bono/ . It’s the problem of what is called Marginal Deduction Rate, or perhaps more accurately, the effective marginal tax rate. That is the amount of money taken away from the extra earnings or bonus by such things as tax, National Insurance (NI), reduction in state benefits, reduction in local benefits, and the loss of other means-tested entitlements, such as free prescriptions because of low income.
This can be a very complex calculation. It also depends a great deal upon individual circumstances. There are some relatively straightforward parts of such a calculation; for example, a 20% deduction for income tax where somebody’s earnings are above the personal allowance level and a similar assessment for NI. It gets more complicated when looking at Universal Credit which depends not only upon what’s left after tax and NI but upon the personal details which are used to assess the benefit, where some people will have different amounts of earnings that are disregarded, so that the extra may have more, or less, effect. Some people may find that the extra leaves them with less benefit, while others may find that they lose their entitlement altogether, and might have done so with even a smaller increase. The causal chain continues with local benefits, such as Council Tax Reduction, dependent upon the Universal Credit result and low income or ‘passported‘ entitlements following on again.
Universal Credit, in particular, is affected by this kind of bonus payment, because it uses “when the payment is made” in its calculation and doesn’t spread the impact over a year. That magnifies the problem for many people.
Unlike my figures for the National Living Wage note, where I was looking at the government’s assumptions for people in full-time work, Greggs staff may have a wide range of hours of work and pay scales. Some of them may have earnings above the tax or NI thresholds, while others may not. Some may be claiming Universal Credit, while others may not, etc. etc. The value of the bonus to different people will be worth different amounts.
What I have tried to do, is to break down the effects of tax, NI and benefits in a way which might offer some illustrations of the results.
First, what happens to people whose existing overall earnings, averaged over a year, will be above or below the tax and NI thresholds. I’m using the 2019/2020 figures throughout.
Earnings below the tax and national insurance thresholds. Less than £165.55 a week, (£8,632 a year).
Earnings between the tax and national insurance thresholds. More than £165.55 a week, (£8,632 a year) but less than £239.07 a week (£12,500 a year)
Earnings above both thresholds. More than £239.07 a week (£12,500 a year)
No deduction
NI deducted at 12%
NI deducted at 12% and tax deducted at 20%.
Bonus
£300
£300
£300
After deduction
£300
£264
£204
I am, of course, ignoring the more complicated, but very real, cases where the bonus takes people’s earnings above threshold values, so there is a part deduction, and where people are taxed at different rates for various reasons. I’m also not taking any account of pension contributions here.
If people are not receiving, or entitled to, any benefits then that will be the end result for those people. That often applies to people with higher earnings, or partners with higher earnings. Many Greggs staff, as pointed out in the tweet above, will be claiming benefits and increasingly that benefit will be Universal Credit. That introduces another stage and another serious problem.
As pointed out earlier, Universal Credit, unlike the legacy Working Tax Credit it’s replacing, looks at earnings, including bonuses, when they are paid and not averaged over a year. That means that the bonus paid this month reduces the Universal Credit paid next month.
Universal Credit, unlike other legacy benefits such as Job Seekers Allowance, does allow people to keep some of the extra earnings, including bonuses, that they get. It lets them keep 37% of the extra. The government claws back the other 63%. That gives the following result.
Earnings below the tax and national insurance thresholds.
Earnings between the tax and national insurance thresholds.
Earnings above both thresholds.
Bonus
£300
£300
£300
After deduction
£300
£264
£204
Universal Credit Reduction
£189
£166.32
£128.52
Worker
£111
£97.68
£75,48
The reduction figures apply to those people who don’t have any disregarded earnings for Universal Credit, called Work Allowances, or whose earnings are already higher than those allowances. If people’s earnings are below those work allowance figures, and they have children or disabilities, then some of the net bonus will also be disregarded.
It’s striking though that roughly two-thirds to three-quarters of the bonus, for those people on income support, is being taken by the government.
Whatever the amounts that are taken into account, they will affect the Universal Credit the following month. They will be added to the existing earnings to recalculate entitlement. Universal Credit already has problems with the way it assesses monthly earnings figures. People paid weekly, as is common with low paid or part-time employment, will find that sometimes five paydays taken into account and sometimes four, with very serious effects ( see https://benefitsinthefuture.com/universal-credit-and-patterns-of-earning/ ).
Universal Credit is not a high-paying benefit; benefit caps, rent caps, limits on the number of children supported, sanctions as well as the freeze on the level of benefits for the last four years have driven down the real level of support. That means that often it does not take a big increase in earnings to stop entitlement altogether.
If that happens then people must claim the benefit again in the following month, using a shortened process. If they don’t, or aren’t able to for some reason, then their benefit won’t restart.
If they’re also claiming Council Tax Reduction then that will be reduced as well and, because for most local authorities it’s linked to Universal Credit, if Universal Credit stops then Council Tax Reduction can be thrown into confusion. It’s not possible to illustrate the effects of the bonus as there are different rules across the country.
Greggs generosity to their employees might seem, in practice, to be generosity to the government. Not only is the bulk of this bonus money likely to end up in the pockets of central or local government but Greggs will be paying an additional 13.8%, or £41.40 by way of extra Employers National Insurance contributions, although there will be a corporation tax offset to take into account.
So, to my second question, is there a better way to reward employees?
While a bonus is probably administratively simpler, because it doesn’t require much individual consideration, there are other alternatives that might be more welcome, once the real value of the bonus is taken into account. Additional holiday entitlement or pension contributions spring to mind. A bonus sacrifice into their workplace pension would save most National Insurance, for example. Pension contributions are disregarded completely from Universal Credit.
While the bonus clearly isn’t a booby prize, it’s still depressing that a government which talks non-stop about work incentives and encouraging people to work longer and earn more, still insists on grabbing as much as they can of any increase that people get.
Retirement plans should focus on what people need…
My retirement plan is to stay healthy, wealthy and wise. It involves me finding the right balance of work, play and support from my financial investments. If I was not as lucky as I am, it might include further support from the state. Pensions play a part, my property might play a part and my businesses may still be supporting me into my later years.
To stay healthy I am changing my nutrition, cutting down on alcohol and participating in a range of fitness activities including travelling around London on Santander Bikes.
As we revise the AgeWage business plan for the next five years, I am coming under pressure to focus on the “monetisables”. I am clear that there are a number of financial products that lie at the end of user journeys which could make us profitable immediately. All we need to do is to drive out profit and AgeWage could become a leading lead-generator for the financial services industry.
It’s not going to happen! We are in the business of helping people turn pension pots into retirement plans and that means offering services to people that reward them rather than us.
Yesterday I visited my old friend Ben Jupp, with whom I and Steve Bee worked in the mid nineties. 25 years later Ben is a Director of Social Finance, an organistion that spends money on integrating not for profit services like the NHS into the retirement plans of the UK population. I will be writing a lot more about this because occupational health should be about the NHS as well as BUPA and Axa PPP.
I also read a fine piece of writing by my friend Gareth (the Ferret) Morgan, probably Britain’s greatest expert on how the package of benefits collectively known as Universal Credit (UC) integrate with our private finances. While I have a lot of respect for organisations such as AgeUK, who provide help from charitable status, I find in Gareth’s entrepreneurial zeal , a spirit that chimes with what I am doing at AgeWage.
It is right that Gareth’s Ferret Systems gets the commercial reward it deserves and the reason for including this blog of Gareth’s on mine, is to encourage readers who take decisions on reward , to think of how the reward they offer plays out, not just to executives but to those in the workforce on low pay.
I’m not writing as a pensions expert or actuary (I’m neither). I’m writing as a parent of a 22 year old completing the Cambridge Geography Tripos. He , and his contemporaries are facing considerable disruption to the teaching they’ve paid for.
I don”t know any students who aren’t supporting their teacher’s right to a decent pension at a fair price and I don’t see bleating about VFM for the student loan they are extending. Students have been tolerant of the poor deal they have got and I’m proud of my son for his tolerance.
But there comes a time when someone has to stand up and say enough is enough and that should not be the students but people like me – so here goes.
The hard line of the UCU’s Left is now the dominant force of the University College Union’s policy making. This doesn’t give moderates much room for manoeuvre. UCU left’s positions appear to include demanding the USS executive resigns or is sacked. This is not how to resolve the dispute. Nor is its vilification of the JEP for not demanding Bill Galvin’s head upon a platter. I am far from happy about the influence of militant left-wingers on the UCU
But the JEP, ably led by Joanne Segars, has produced a strongly worded report that should be giving the UCU confidence. The UCU has in Jo O’Grady a powerful leader. The cards are stacking up in their favour, why risk further unnecessary action by adopting such a confrontational approach. The answer appears to be a return to 1967.
And time is the UCU’s friend, USS are still suffeciently invested in real assets for it to have benefited from the recent market upswing. Future valuations may look a lot more rosey, especially if the current Government adopts an inflationary economic strategy that drives down USS liabilities.
But surely the clinching argument for some peace and quiet is the progress that has already been made by the UCU in winning the intellectual argument. As an open scheme there is no rationale for the proposed de-risking strategy that has caused so much strife.
I can, as a former First Actuarial employee, point to the absolute good sense of exploiting the sweet spot that USS is and will remain in.
USS should remain invested in real assets, teachers should remain teaching and the long-suffering students should be allowed to complete this year without further disruption.
The change I am suggesting would turn pension taxation on its head, it would mean pension contributions would be taxed at more than 60% for high earners but that the lowest earners would be exempt from pension taxation. Pension providers would need to pay attention to their low-earners who would become more valuable to them, providers whose models were focussed on wealth management would suffer from these proposals. Read to the end to understand why I see such change as needed.
In recent articles, I , Ros Altmann and Jo Cumbo have been grappling with pension tax reform. There are three solutions to the issues.
The first is to deny there is a problem , or at least to put off accepting we need to tackle the problem (this sounds familiar in the context of climate change).
The second is to look at a partial solution, the solution favoured by unlikely bedfellows in John Ralfe and Ros Altmann, here the key is to limit tax relief to a flat incentive.
The third is what I propose which is a phased transition from the current system where contributions get incentivised to a system where pensions are paid tax free.
In this blog, I look at the available numbers, published by the Government – that show us – on an accounting basis, how the amount that Government loses in tax relief exceeds the amount it rakes in from taxing pension saving by £35.4 bn (2017). Ros Altmann estimates that the real cost today has gone up since then to around £50bn, but I’ll stick with the lower estimate, as detailed below.
The table has been converted to a graph which shows where the £35.4 bn is lost
DB funding costs best part of £18bn,
The graph shows that the biggest cost by far, is the £18bn a year lost in tax revenues from employers with occupational pension schemes. This may seem odd to those who see pensions through the lens of auto-enrolment where employers pay 3% of a band of earnings and employees 5%. But in 2017 the rate was still 1+1. and more importantly, the weight of pension contributions is still with DB schemes. The deficit contributions to keep DB going are enormous, the ONS estimated that the 360 largest DB plans paid £13.5bn in special contributions in 2018 (and they paid ongoing contributions and the PPF levy on top).
DC costs to the pension system are smaller but growing
But we should also be aware that ongoing contributions to Defined benefit schemes dwarf what’s going into workplace DC plans.
Look out for the yellow and blue blocks on the right to shoot up as the 2018 and 2019 numbers come in, that’s when the real cost of auto-enrolment to the Treasury arrives.
Lates estimates from the Treasury suggest the cost of income tax relief for registered pension schemes in 2019/2020 will be £20.4bn, (“income” covers personal income and corporation tax). Most of this increase is expected to come from DC
Why national insurance is so important
People and employers pay national insurance on salary and bonuses but not on pensions in payment. Employers do not pay national insurance on contributions to pensions. Although national insurance is not a headline grabber (like income and corporation tax) it forms a big part of the £35.4bn gap between what Govt. gives up and what it grabs back
The figures in Table 6 at the top , need no graph, in terms of “give and grab”, the Government gives up £16bn in national insurance and grabs nothing back. National Insurance makes up nearly half of the gap between give and grab.
Although Table 6 is the last complete figures , we do have provisional data. The latest data from the tax office reveals national insurance relief for employer pension contributions will amount to £18.7bn, higher than the 2018/19 figure of £17.4bn, and the 2014/15 figure of £13.8bn figure.
So what can Government do?
On the face of it, the ongoing cost of funding DB and the cost to the exchequer of lost NI revenues are the two biggest ticket items, The DC costs are yet to feed through.
The current plan is to cap the amount of contributions that those with high net disposable incomes can make and punitively tax breaches . This is through the annual allowance, the taper and to some extent the money purchase annual allowance. Coupled with a cap on the value of lifetime pensions benefits this has produced an increased “grab” from the wealthy illustrated below.
But these breaches aren’t really netting much in “grab” compared with the “give” elsewhere.
What the Government has to do is to find a way to stop giving away so much upfront and boost the impact of the “give” by not grabbing back in retirement.
The reason for this is that 50% of the benefit of the current “give” is going to 10% of the population and the 90% of the rest of us , are sharing in only half that £35.4bn giveaway.
The beneficiaries of that big employer spend are those still getting DB accrual and those benefiting from DB pensions that increase each year. There is an argument that DB pensions should be liable to national insurance by way of “grab” . I don’t see such a measure as being popular, but it may be a short-term fix to keep the show on the road and pay for removing the annual allowance taper. These tinkerings are not the long-term solution
Making DB accrual benefit low-earners most.
What needs to happen is that we need to gradually remove all the perks of accruing DB (both in the private and public sector) and charge those who are in receipt of DB accrual the cost of both the income tax and national insurance give , in exchange for paying this accrual tax free at retirement. This can be done , not by increasing payroll taxes but by offsetting the upfront tax and NI reliefs by a promise that this part of the DB accrual will be paid tax free – effectively a tax-exempt pension.
Why this works is that it redistributes the incentives to stay in to those who pay small amounts of tax and NI and takes away from those who are the big winners today, those 10% of top earners who are scooping the pool.
Preventing DC becoming a national insurance arbitrage.
As for DC, we have to be aware that most DC contributions will ultimately be paid by employers
Employers are cottoning on to salary sacrifice/exchange and can see that they can boost pension contributions by up to a quarter by simply paying employee contributions in lieu of salary.
This graph shows how fast the switch is happening and when the vast new cohort of employers (1m +) who have recently set up workplace plans, cotton on to this, the amount of personal contributions will fall further.
If Government chooses to cap tax- relief on personal contributions to the lower rate , they will see that blue line accelerate towards zero as employer contributions protect all employees from income tax (as well as NI).
This is why a flat-rate solutions as proposed by most pension experts is flawed.
As with DB, the solution is to treat pension contributions as tax- able and liable to national insurance as if they were a benefit in kind. In the short- term, contributions could carry on getting tax-relief but would be “docked” by providers who would send the tax and national insurance on to HMRC.
This could mean that a higher rate tax-payer would only get around 39 p invested for £1 received by the provider. (45% income tax + 2% employee national insurance and 13.8% employer national insurance would be returned).
By contrast, 100% of the contributions for those on the lowest earnings (below both tax and national insurance thresholds would be invested.
Both the highest and lowest earners would see 100% of their savings available to them in retirement tax free, but the lower earner would benefit to the tune of 61p in the pound over his or her wealthy colleagues.
Impact on pension savings
The impact of my proposals will be extremely unpopular with most people reading this blog, who will benefit from the status quo and could stomach a flat rate incentive system.
Not only will it dramatically reduce pensions for the rich but it will slash revenue projections for many pension providers that depend for their profitability on an ad-valorem fee on wealth. Put simply , it will turn round the pensions value propositions from rich to poor, from wealth management to social insurance.
One test of this Government will be to see whether they will actually sort out pension tax relief as dramatically as I propose. I propose that if they do, they look at incentivising people to convert their pension pots into pensions by providing tax-breaks to CDC schemes to manage people’s pensions as an alternative to annuity, drawdown or simply cashing out the pot and putting the money in the bank.
The incentives for CDC provision could be equally geared to benefit those with small transfers so that the Government can make CDC viable for everybody, with the option for the wealthy to go their own way without imperilling the CDC scheme. As I have mentioned earlier, the first national CDC scheme could be seeded by the PPF and run by the PPF’s outstanding investment and operational teams.
I believe that in the long-term, my proposals will strengthen the UK pension system and return it to its former state of being the envy of the world. It will make pensions more inclusive and more relevant. Instead of being a “tax-wrapper” , the DC pension pot will become measurable by the CDC pension it can buy. DB pensions accrual will be valued for whom it is valuable and will increasingly be swapped for a CDC benefit based on a defined contribution.
Those who these proposals would benefit, won’t realise at first just how much they will get from this change. Those 1.7m people caught in the net-pay rip-off , don’t know how they are being ripped-off and have no voice. Those caught by the taper are the other way round, they have a loud voice and get their way.
But – with proper promotion, I believe these proposals will receive popular support. It will take a lot of time, energy and bravery to see these proposals through and the people who have most to lose from these proposals are going to be a huge barrier to change.
Those who will see the value of their future DB accrual , their future DC savings reduced, will not like my proposals. They will argue that it will destroy confidence in the pension system and many will opt-out and prefer to be paid salary in lieu.
Impact on employers
But employers will not be impacted by my proposals and will be under no obligation to feather-bed these cuts in top-earners pensions. As this system would be imposed on a national basis, the high-earners wanting out would need to find a country where they could get better. As far as I am aware, no country is currently giving away more in tax relief to the wealthy than Britain, so they will be hard pushed.
Employers will not be taxed on their DB funding (or indeed on special contributions), they will not be impacted by the administration of the tax rebating which will fall to pension administrators not payroll.
My proposals should be welcomed by employers and their trade bodies , the CBI and the FSB alike.
Impact on the Health Service
My proposals will generate a substantial reduction in the cost of pension tax relief. It will especially negate the cost of tax-free cash (all future accrual or savings to pensions will be tax-free). The money saved can be recycled to encouraging the use of CDC pensions and to help pay for the cost of long-term care of our fast dementing and physically detoriating elderly. This proposal will go some way towards increasing the £230bn a year we spend on the NHS.
In a brilliant article , which you may be quick enough to access via this link, the FT’s Damian Fantano explores what is going on with robo-advice – or what robo-advisers like to call “putting the AI into financial advice”.
My take, and the thrust of this article, is that we can already see in the new ways of doing things, a way to navigate what seems complicated – so that it becomes simple.
What “artificial intelligence” is supposed to do is to lead you from screen to screen with the deftest of nudges to a leading question, that question leads to you making a financial decision.
There is nothing new about the “user journey”. TS Eliot explores one at the beginning of the Lovesong of J Alred Prufrock
Let us go, through certain half-deserted streets,
….
Streets that follow like a tedious argument
Of insidious intent
To lead you to an overwhelming question …
Clearly tired of beating around the bush, Prufrock blurts out
Oh, do not ask, “What is it?”
Let us go and make our visit.
What Robo- Advice should do – is allow ordinary people who do not want to see a financial advisor in person to get on with it.
People know what’s going on…
In its call for input on RDR and FAMR in May last year, the FCA sounded confident
There was a statistically significant increase in the number of people taking regulated financial advice since 2017, with an additional 1.3m people taking advice. There was also a significant increase in the use of guidance services, and automated-advice services, to help with financial planning decisions.
In the detail of their findings it’s clear people are confident too
Of people who have not taken regulated financial advice in the last 12 months, but whose circumstances suggest there may be a need for advice (defined as people who have at least £10,000 in savings and/or investments):
– the most frequent reason (50% of responses) was that they did not feel they had a need to use an adviser during this time
– a further 37% said they felt able to decide what to do with their own money (significantly higher than the 28% who said the same in 2017)
– less than 1% said they had not been able to find an adviser,
2% they did not know how to find an adviser
and 5% said they had doubts about whether they could find an adviser suitable for them
Is lack of advice really the problem?
On the face of it – there doesn’t sound like a huge unsatisfied market here. People are making their way through the streets and taking on the “overwhelming questions” with their own resources.
The answer to that question is that it depends where you look. If you read the FT you are looking in the right place, you generally have more than £10,000 in “savings and investments” and the people who consult the AI – advisers featured in the article are financial journalists who are very aware of what is going on.
This is Damian Fanato’s personal experience
AI Advisers or Robo lead-generators?
Buried in that user journey are a number of “monetisable” opportunities for the advisers to make money via referrals, on top of the £2 per month licence fee to get more of the same.
The inference is that robo-advice was little more than a shop-window for Alexander Hall. No doubt, proprietary solutions are also available where there is “wealth” on offer, as the robo- adviser – Eva – is a “wealth-wizard”.
There is a difficulty here and it’s about the audience. The FT is talking to its own and as such it is allowing us to smugly dismiss Eva as a financial tour guide. Damian suspects that Eva wasn’t ever going to arrange a mortgage herself and that when it comes to the “overwhelming question” , we are not in the world of driverless – underwriting.
This is not always the case, artificial intelligence is being employed in insurance and much of the rate-setting on the price comparison sites recognises good and bad risk with reference to big-data and even the applicant’s behaviour. Sinister as it sounds, getting cheap life-cover like maximising your annuity, is all about knowing the right answers.
It’s time to stop this dissing
We lead busy lives and the advantage of a trusted robot, may at present by little more than Siri, Alexa or Eva’s capacity to navigate us to the right articles or (in Eva’s case) adviser.
Robo-advice may excite in the 50% of FCA responders, a recognition that it might be worth paying a little more attention to their financial planning and maybe take Eva’s advice and trot off to a mortgage broker.
But I suspect that it is considerably more helpful for the 37% of people who said they knew what they were doing, to get a second opinion. For the small remnant who couldn’t find an adviser, some might find Eva invaluable.
And not all of us are FT readers. The knowing tone of the case study suggests that Keith Richards of the Personal Finance Society is preaching to the converted (here he is quoted in the article)
“Given the communication skills and empathy needed to fulfil the entire role of a professional financial adviser, it is unlikely that AI will be able to replicate this any time soon, understanding [a client’s] goals for themselves and their wider family; how their finances fit in with their career; educating them about their investments and helping them understand how they are going to manage different risks.”
For the richer more sophisticated FT reader, this is undoubtedly right, but this empathic advisory service is something that Eva could develop, given a chance to get to know her users.
I suspect that the lifetime advantage of having Eva , in your phone , could become every bit as valuable as the empathic adviser, because Eva has certain key advantages.
Eva does not take holidays and so long as you have battery , she is on hand to help. She is cheap at £2pm and the more you ask her, the better she gets to know you. If Eva really is an AI tool, she will not just become trusted, but more trustworthy, as you get to know her.
Having read through the article, I’m getting to the point where I would like to have Eva in my pocket, and if I’m proved wrong after a couple of months, she has cost me what I pay for most of my interesting conversations – a cup of coffee.
So I’m not dissing Eva, or robo advice – I am asking the question – “how do I meet Eva?”
How do I meet Eva?
It would appear my best chance of meeting Eva for free is by joining a firm like Unilever, who make her available to their staff – presumably as an employee benefit. I may be able to find Eva by myself (I do know some of the good people at Wealth Wizards) and I’ve even got a link to visit myEva
And I’m sure that I can get hold of other versions of Eva at Multiply.ai, or one of the firms using the Abaka platform
If J Alfred Prufrock was alive today, I am sure he is the inquisitive cove who’d be asking overwhelming questions with artificial intelligence. I felt like this – which is why I started AgeWage.
I am quite sure that vast numbers of people today navigating the treacherous waters at retirement will look for whatever online friend they can.
There is an urgent need for Eva, or those like it. Our customers are impatient and like Prufrock, they want to get on with it.
In case we had any doubt what the answer should be, the Financial Conduct Authority asked for “proposals on how open finance could transform financial services”. There were other words for ‘how’ such as whether or if, but how was chosen.
I will go a stage further than the regulator and transform that ‘could’ to ‘will’ – open finance will transform financial services.
Open finance is defined by the FCA as “the sharing of data that provides new ways for customers and businesses to make the most of their money”. The most obvious manifestation of open finance is the proposed pensions dashboard, a concept that assumes that we will be able to find, compare and aggregate our savings, turning pension pots into a retirement plan.
The success of open banking has already inspired first-movers. Abaka, the open finance platform, recently announced a successful $6.2m (£4.7m) funding round. Other open finance ventures such as PensionBee, AgeWage and Multiply AI have similarly received substantial funding.
The key to unlocking data is the mandating of those holding data to make it available on demand in machine-readable format. This will require the adoption of data standards and the use of application programming interfaces by all who manage pension data.
Supply side takes first steps
This process of standardisation is already under way. Last year, customers of Lloyds Bank with Scottish Widows policies started seeing pensions on their bank statements.
A further manifestation is the simplified pension statement being proposed by the Department for Work and Pensions after work from Ruston Smith. The DWP’s consultation paper on how we get standardisation ties in with work on cost and charges disclosure, which itself has been greatly simplified by the FCA.
But this momentum on the supply side is in advance of, rather than because of, consumer demand. The public’s apathy towards pensions is reinforced by each pension information pack stuck in the letterbox. This doormat debris is generally returned to sender – marked “gone-away”.
While progressive providers like Phoenix aspire to universal digital contact with policyholders, most occupational pension administrators know no more of members than the members know of them. Pensions are strangers to our phones.
There is no effective pension-finding service and – in its absence – the DWP estimates that by 2050, Britain could find itself with 50m abandoned pension pots. Last year the Pensions Policy Institute calculated £20bn of pension savings had gone unclaimed. The public’s expectations from their pensions are so low that this appalling state of affairs is allowed to continue without outcry.
Open pensions gather little enthusiasmThe financial services industry knows very well the consequences of depriving its customers of information. Payment protection insurance has been to the banks what pensions mis-selling was to the insurers. Having swallowed such bitter pills, you would have thought lessons would have been learned that full upfront disclosure is a risk mitigator.
Despite this, there is little enthusiasm among pension administrators for open pensions. PensionBee’s Robin Hood Index has shown that even a customer’s letter of authority can be routinely ignored by providers who care more for internal protocols than meeting customer requests.
For many administrators, empowering consumers with data means a mailbag of complaints about data quality, and a threat to revenues when service-level agreements are breached.
But returning to my optimistic theme, I see change. The various barriers put in the way of data requests, including calls for independent financial advisers, ‘wet’ signatures, and even proof of identity will be swept away when the dashboard standards are implemented.
When they are, I suggest people will start regarding their pension pots as every bit as real as their money in the bank or under the mattress. When people take back ownership of their money, they will probably ask questions about how that money has been managed, costs and charges extracted, and whether the value has been worth the money.
Behind the FCA’s open finance agenda is an assumption that financial services will need to “come clean” and be held accountable. Whenever it happens, open finance will open a window to sunlight, and sunlight is the best disinfectant.
Plenty of us have been thinking about how to make that annual statement that we get about our pensions stick in our minds, so that we understand what we have. One person speaks to and for the nation on pensions and she is Ros Altmann.
Government needs to require all pension providers to produce standardised, simpler statements, so people can at last have a fair chance of understanding their pensions, rather than being baffled and bamboozled with jargon https://t.co/89hzZNXggr@FTAdviser
Maybe I have Ros Altmann on the brain, which is no bad thing if your job is to find ways to reach ordinary people who don’t care for pensions.
Those thinking I’m a signed up member of the Baroness’ fan club need to appreciate I don’t always think she’s right, but when she’s wrong, she’s wrong in a constructive way!
And when she’s right, she’s big-time right, as she is in this amazing article in This is Money. Those who know Hank Williams, will know his songs are right in a Ros Altmann kind of way.
She’s written an article in This is Money about birthday cards. The idea is simple, if we sent personalised simple pension statements as a birthday card, they would get read. And we know she is absolutely right;
This is what happens when someone with a powerful emotional intelligence is a genuine pensions expert and likes people.
Birthday cards get read
Walk into any stationers and the array of colourful cards reminding you to have a happy birthday is the first thing you see.
Writing on his Genesys blog, Paul Richer talks to those in the travel business
Asked which channels or routes to market deliver the best ROI for your business, respondents put Facebook Advertising in first place followed by Google Adwords. What was surprising was that in third place was Direct Mail, slightly ahead of Email. Now, I have always thought of Direct Mail as one of the more expensive marketing channels. Compared to the almost zero cost of email distribution, there are the significant costs of print and postage. However, if successful marketing is about cutting through the noise then direct mail has characteristics that make it stand out compared to conventional digital channels:
A piece of direct mail has innate visibility. It needs to be picked up off the door mat so it will definitely be seen.
Direct mail does not need to compete for attention alongside your competitors calls to action. Your message is more than just a listing or one of many adverts on Google.
It has staying power. Provided it is compelling enough not to be immediately put in the trash, it can sit around for days, providing many opportunities to attract attention.
To translate this into the language we use in our own homes. birthday cards get noticed on the doormat, get stuck on the mantlepiece and get read and they stay in our faces many days after the birthday’s finished.
Why Altmann is head and shoulders the best ambassador pensions has
I was so busy with my ideas about “Open Finance” that I didn’t stop to listen, as Paul Richer listened, to the people he was writing to. I dissed the DWP’s ideas of sending statements in coloured envelopes and missed the opportunity that Ros intuitively spotted to link a pension statement to that great notification of maturity and longevity – the birthday card.
A standardised, pension statement in simple language, accompanied by a birthday card message ‘many happy returns’!! Might that interest customers more than the current baffling, impenetrable paperwrok they get each year and never understand? https://t.co/P3JdDcVrho@MailOnline
Ros Altmann is not writing here to the DWP, or pensions experts but to the people who get pension statements, and she does so with ideas and words that mean something to the readers of the popular press, of whom she is the financial doyenne.
She uses ideas that sniffy people like me pass by, and all too often , we walk away from the simple brilliant idea of the birthday card pension statement, because we’re off chasing fairies on Instagram or Tic-Toc.
That is why this bold, brilliant woman is Britain’s number one pension personality.
Ros Altmann refreshes the hearts actuaries cannot reach.
If you listen to the news, you may be carrying a heavy load to work today. The US has just committed what Europe considers a reckless assassination of the most popular person in Iran, bushfires rage in Australia and we’re rolling over our local issue -Brexit and our global issue – a sick planet, into another year of grief.
But we are also working into something new and fresh. This is the first proper working day of the new decade, the day when most of us return to our offices wearing what we got for Christmas and a couple of pounds extra round the waste. It may not feel like we’ve had a holiday, but we are probably as fresh now as we’ll be all year! Fresh to kill it at work.
For those who observe the twelve days of Christmas, like us, the decorations are still up, working in the twenties is a novel experience. Many of us will be thinking back to their first working day of 2010, has much really changed?
Water flowing underground
I hope that if you’re reading you can complete this sentence
I’m going to work because….
Whether it be to put food on the table or to save the planet, the purpose of your going to work is why you do it, and love doing it . And if you have no purpose – then you won’t enjoy your days this week.
I’ve thought a lot about my purpose over the past decade. While you spend most of your career building towards its fulfilment, I – like many of us – reached the top of my mountain and found there wasn’t a lot to see. I had the wrong goals. Rather than slink off into half-hearted retirement , cadging a few quid here and there with an inconsequential portfolio career, I did that full-on thing and started first Pension PlayPen and now AgeWage.
I no longer define success in terms of what I can do for myself (a good part of my career I was either self-employed or sole trader) or what I can do for my career. I have earned enough and saved enough to be independent and achieve something that I can look back on with a real sense of pride.
My reason for working in the twenties, a decade I never thought I’d be working in, is to deliver on those things that I thought I’d be doing when I started as a financial adviser early in 1983. I thought then that i could use the privildge I had of a good university education and a stable upbringing to help people make better decisions with their money and that is what I’m doing, hopefully on a larger scale today.
Into the blue again?
If your reading this- thanks. I’m thinking of you, on your way into work, reading these words on a tiny screen on your phone, you may be asking yourself “what the hell am I doing with my life?”
If you can’t answer that question, I suggest you get off at the next station, cross the track and take the next train home.
But you won’t do that – because something inside you will remind you that there is a much worse alternative to going to work, and that is not going to work – on this day.
You can kick that question down the road, day after day, but until you answer it properly, you will be a slave to work.
After the money’s gone
This is the season when we will be assailed by recruitment companies looking to capitalise on our work insecurity. Many of us will be promised a new and happier life in a new job by people who really seem to care about your “wellness”.
Let me share with you, the benefit of being 58, you will not get better inside because you work for a new company, you will get better because you want to go to work because you know why you are going to work. And that does not mean you have to change jobs.
You may find your purpose and determine that you must change jobs to achieve it, but simply changing jobs to get a pay-rise or more holiday or a shorter commute is not going to change the big things.
Back in 1983, I was asking – “what do I want to do with my twenties?” , 37 years later I’m asking what do I want to do in the twenties and – weirdly it is the same thing. That at least tells me I have has some kind of focus in my life.
But when I look back – so much of that time could and should have been better spent.
Go on linked in – look at your CV and then ask yourself again – “why am I going to work in the twenties?”
I grew up in a rural area of Dorset where the farmers were considered rich but acted poor. The farmers explained that though they might own the land, they could only extract from it the income that came from dairy and arable products they could sell. The farms were generally in the family and – even when the land was not owned but rented from the County Council, it was not seen as a realisable asset.
That was how I learned about how businesses worked. You were successful on the basis of your husbandry, the land remained much the same.
Of course the land wasn’t all the same. Some of the most valuable land in the area of North Dorset I grew up in , is the \Gore Farm and Springhead Estate, which was farmed by Henry, Gardniner – Rolf Gardiner and then his son – the conductor – John Elliot Gardiner – organically.
Rolf Gardiner founded the Soil Association which has been improving our land for sixy years.
The Gardiner’s land has not seen pesticides since the war. John was known as “uphill gardener” for farming the wrong way but that was some time ago, people now see the family as visionary. The land is valuable because what it produces is pure and sells at a premium.
I hope that farms such as the Gardiners continue to generate good income and do not get “realised” for short term gain. The rural heritage of North Dorset is valuable to the nation as well as the local community. The downs around Fontmell are owned by the National Trust and support the most delicate eco-system of orchids, butterflies as well as magnificent vistas of Melbury , Wind Green and in the distance Hod and Hambledon.
They are a great treasure, enjoyed for free by people like these.
On Fontmell Down
How we value our wealth
I give North Dorset – and in particular Springhead – as an example of wealth which is shared by family , community and nation. It is not realisable wealth, such is much of the wealth of this nation. Recently there have been attempts to analyse how our wealth is owned. This chart is from the Office of National Statistics and has caused some comment on social media.
In a nutshell, the flat line for 45-54 is plain wrong. Everyone’s wealth is increasing (as in a better chart from the IFS) pic.twitter.com/gryvBjd40u
The chief source of wealth for the older generations in property and pensions. The former is inheritable, the latter less so (and in the case of DB – not at all).
But what this chart does not show is entitlement. I don’t mean by this the entitlement to roam on Fontmell Down (which has no economic value) but our general entitlement to the State Pension, which is based not on what you’ve earned but on how long you’ve been available for work.
The economic value of the State Pension is probably around £270,000, based on the cost of purchasing an annuity as its replacement. One of the reasons that the boomers are so OK is that they did not have to pay so much for their parents pensions and are about to get supported by their kids to an unprecedented degree. Indeed , if you add in the cost of healthcare, today’s boomer (represented by the blue line) is entitling itself to a further claim on their children that eats into the inheritable wealth transfer. I fully expect to see housing wealth paying for the NHS and social care for the rest of my life.
The taxation of excess inheritable wealth is tiny. Although Inheritance tax receipts hit a record £5.4bn in 2018/19, (up from £5.2bn the previous tax year, they are still only expected to reach £10bn per year by 2030. These are tiny amounts compared to the wealth of the nation.
The boomers are so “ok” because they are getting a free ride , not just on pension and healthcare but on the property transfer. The question is whether they have earned this free ride or simply bestowed it upon themselves by means of grants from the public purse.
The sustainable model I grew up with
My childhood economic model saw most people working and taxation looking after those who couldn’t work , through sickness or age.
It saw property as both the platform for earning (my Dad was a doctor and worked from home as much as surgery or hospital) and as a source of income for the farmers.
This is not as feudal as it seems, farmers went bust and farms were sold, people bought and sold houses, but there was a solidity about this rural society and it’s still there today.
The economic stability of the society I’ve grown up in , in post-war Britain, has been entirely based on work and on the income it produces to citizens and – through taxation- to the exchequer.
It is entirely right that the IFS and others question whether we are living within our means or living on someone else’s. It is absolutely right that we do not over spend as we could on state pensions. It is right that we have a grand economic model which is explainable to people like me. It is absolutely right that we have people like Veronica Humble and Stuart McDonald chew the numbers in public.
Valuing what we’ve got.
John Ralfe , as usual, asks the critical question,
Then value should be included in annual statements?
I take it , he’s asking whether we should be showing the economic value of a pension in payment to the pensioner, or annuitant, in the same way we show the cash balance of a DC account.
Would it be helpful for an estimate of the residual value of your state pension be available to pensioners? It might be a very good idea for it to be accessible on your pensions dashboard, if only to make you wake up to the genorosity of your children for paying it. The same might be said for public sector pensions and for corporate DB pensions in payment.
We massively under value the pensions we have and over-value the economic value of the property we own. We over value DC and under value DB and it’s usually for the same reason, we confuse wealth with income.
Farmers always feel poor
It was (and still is) a standing joke that farmers always moan about how little income of they get. I suspect that they are partly to blame, they know their assets rarely return them the income they see ripped out of the investments made by those in private equity.
That is because of the sustainable husbandry they pursue, if they wanted to get rich they’d sell land for golf-course, industrial units or housing. Many farmers do.
But many, like the Gardiner family, have found the long term social impact of good husbandry pays dividends over time.
We can see the impact of poor husbandry in the current state of the planet, but I’m pleased to hear that thanks to Britain’s efforts to reforest-ate, we are now returning to the levels of woodland we last saw in Medieval times.
Farmers are the guardians of this heritage and we owe the good ones a big debt of thanks.
So do pensioners
Like farmers, pensioners enjoy wealth which they cannot access, especially if it’s the wealth of the nation paid to them through pay as you go schemes.
Those who have their wealth in DC pensions , are now able to use their money as they like. They can choose to invest in Australian coal-ming or in sustainable housing in Salford. They are like farmers.
The wealth of pensioners is in the time they have to do things like walk the downs at Fontmell or to ride the 50 Breezer round Poole Harbour – they enjoy and should value their time, they have earned it and they have earned the right to healthcare, free at the point of delivery.
But pensioners, and those – like me- who are about to be pensioners, must take the responsibility to leave the planet as they found it.
And we must not be too greedy in their demands on their children. We must be prepared to pay more taxes on our wealth if it turns out we are getting too much of the pie. We have to accept that being an “OK-boomer” is not acceptable, if we show no husbandry.
In short, this is a message to my generation – to act as farmers and not spoil the heritage we leave our children.
Last year’s stories about Japanese pensioner’s focussed on their propensity to shoplift , get caught and end up in jail (which they favoured over living solitary lives at home).
This blog looks at the problems of financial exclusion faced by Japan’s elderly and the people who look after their money. I’m grateful for much of the content to this excellent article by Mitsuro Obe, which deals with the issues in more depth
Japan has the oldest demographic in the world. Its over 75’s hold over 50% of Japan’s private wealth (a percentage expected to increase to 60% in ten years).
The situation is one that poses interesting questions . Only 28% of Japanese personal financial assets are held by people under 55, in Japan the mainstream market is actually the ageing market
Japanese savings have traditionally been held and managed by its banks , these banks are nervous that their most vulnerable customers are both their most valuable and their greatest risk.
Japan’s Financial Services Agency predicts that $2 trillion in personal financial assets, or over 10% of the nation’s total, will be in the hands of people with dementia by 2030.
Unsurprisingly , 78% of the cases dealt with by the Japanese police involving personal scamming, related to the over 65s.
So far, Japanese financial technology has been employed mainly to protect the elderly. One bank is developing an app whose end goal is to identify early signs of cognitive decline by analysing spending patterns using open banking data. The app will also send out alerts to family members if it detects unusual spending, in order to protect them from fraud.
Where there are families to manage the situation, such software is helpful, but the deeper problem lies with the elderly who live alone and without family.
Vast amounts of capital has poured into creating payment systems and financial products for millennial users, but the sector as a whole has often neglected their parents and grandparents — who, in reality, own far more assets.
There are thought to be two reasons for this. Firstly, there is an enduring belief that the over 65s don’t “do tech” . Secondly, the Japanese banking sector clinging to its branch banking network . Ironically, the branch network becomes increasingly inaccessible as customers age.
The issue is creating frustration amongst Japanese Fintechs. I hear this frustration echoed in the UK. But I side with one Japanese commentator whose opinion is
“If you’re a Fintech and people can’t use your product because they don’t understand it, it’s not their problem, it’s your problem, because your solution is not good enough”.
The problem is not unique to Japan, just more acute. Older people are always the main clients of financial services because they are the ones with money. If they become unable to transact, it means the industry loses its most important customer base.
In the UK , most pensioners don’t use financial advisers. As in Japan, it’s isolation from good support that gives the fraudster the opportunity
Advisers often talk of “succession” in terms of giving customers more of the same. In practice, customer’s needs change with age – shouldn’t we be thinking of succession in our ageing customer’s terms?
One Japanese friend likened banks’ response to ageing customers as boiling a frog. The water warms so slowly that the frog never knows it’s in trouble – and then the frog is dead.
Conversations I have in the UK with Fintechs like Multiply AI and Abaka, focus on how to use technology to engage the millennials. This is of course the easiest group to engage with, but it may not be the most urgent.
The fastest growing Facebook demographic is grandparents, where elderly people see the need – as in speaking to their grandchildren, they become technologically adept. The challenge of the financial services industry is to find ways to get elderly clients to feel that need.
Whether the purpose of technology turns out to be fraud protection, or – more positively – to enable older people to cope with the issues of later life – we need to find better products that they can use.
By way of example, my Mum has learned to text only after she got her mobile provider to find her a large key phone.
At 87 she is now sure of what she is doing and finding ways to my children’s hearts with the sweetest of messaging. Pentech needs large keys!
Empowering their old to manage their finances using technology, may not solve the problems of the “pensioner crime wave”, which appears to be more about loneliness than penury.
But it may go some way to including older people into the society they feel excluded from. There are easier ways to find other people than prison, and technology can help there too.
When asked “have you got a pension”, most people now say yes. That’s because most people (not all) who are in workplace pensions see the amount paid into a savings account as a payroll deduction that says “pension”. There are some who get pensions and some who don’t even know they’ve got one, but most people think of their pension as the thing that clips their income so that they’ll be alright later on.
All the tra-lah-lah about investment strategies, tax-efficiency and investment pathways is for the pension experts, most people just do the equation, “I save so I can spend”.
This apathy is why auto-enrolment has been successful and this apathy could also be the “savings revolution’s” undoing.
Because the amount that comes out of an auto-enrolment pension is no more than a top-up on the real deal, the State Pension.
The economics of advice
Were I to walk into a financial adviser’s office with pension statements totalling £100,000, I – a 58 year old male would expect to find out I could get a guaranteed pension of around £3,500 pa , around £70 pw. I could improve the tax- efficiency of this income by deeming that 25% of it be paid tax-free (under UFPLS) or I might take a 25% cut in the income and bank £25,000 tax-free.
Even after getting this far, I would have probably exhausted my adviser’s patience. To get a recommendation of what I should do, the adviser would have to do the full data capture , working out my net worth (assets and liabilities) , my state of health, my role within my family and most problematic of all “my attitude to risk”.
The provision of a definitive course of action would come after discussing the various options available to me, but one option that should become very clear, very quickly is that there is no magic money tree that can allow me to retire at 58 on anything like a retirement living wage- not from my “pension”.
Any good adviser should , early in the conversation , explain that simply getting to the point where the adviser has to tell you that, will cost him at least £1000 in time and overhead.
The economics of advice mean that an adviser looking to do his job properly will turn to me as a prospective client and tell me that I cannot afford the advice and that the best advice is to find another way.
The other way – hand to mouth
For most people, the services of a qualified financial planner and/or wealth manager are beyond their means.
There are people who execute a financial plan knowing exactly what they are doing. For example, ff they know they want a guaranteed annuity , they can go to a good annuity broker and get fitted up with the right annuity, the cost of which will be paid for from within the annuity rate.
But the people who want to exchange their pension savings for an income for life are a small minority. Most people want the freedom to spend their savings as they want. We know that what most people do is to take from their pension pot what they can – tax-free, and leave the rest till later
At no point do most people start asking questions about investment strategies, or drawdown rates, or life expectancy, or the cost of long-term care, or any of the other issues that people like me write about. Most people are busy doing the day to day equations about how to balance the books and wind down from work and go on holiday and buy the Christmas presents and so on.
This other way is “hand to mouth” and it’s what you get when you don’t do financial planning.
There is a problem with hand to mouth
IFAs aren’t wrong in saying that financial planning is vital. Leaving retirement to your pension pot is not the same as having a financial plan. You will find that even if you have £100,000 in savings, that money will be burned away pretty quick
Charlotte Richards, writing in Money Marketing, tells us that in 2016, 40 per cent of Australians had exhausted their pension savings by age 75, that Americans draw on average 8 per cent each year and manage to make their savings last for 17 years.
Spending your pension savings in 17 years isn’t a problem, so long as you have a plan B. The problem is that if you are doing things hand to mouth, plan B’s amount to Mr Micawber’s “something will turn up” and Mr Micawber ended in debtor’s gaol.
Five home truths about pensions
The State pension would cost you and your partner around £300,000 each to buy,
Your pension savings are unlikely to match the state pension and are not your retirement plan
Unless you have £250,000 or more “liquid”, you’ll be lucky to find a good financial advisor to manage your retirement plan
Unless you know what you’re doing, you will run out of money in old age
Currently their is nothing for it but to keep working, keep saving and hope that something you like better than an annuity comes along.
Why I like Charlotte Richards’ article (which you can read here) is that it tells us what we’ve long suspected. That there is no silver-bullet investment solution. She tells me that
The Lang Cat found that more than 70 per cent of adviser firms do not change their investment models to suit clients drawing income in their retirement.
I don’t think this is because advisers are lazy, or stupid but I think this is because they just don’t have to worry about their client’s cashflow planning. Most IFAs deal with the people who are so wealthy, they worry about things like higher rate tax when breaching their lifetime allowance and inheritance tax when they die with too much left over.
The sixth home truth
There is a sixth home truth, which isn’t for ordinary people but for the very clever people in the DWP, Treasury, FCA and tPR.
That truth is that – so far, Government has done nothing to help ordinary people define the ambition of their financial futures when reaching the time when they want to wind down.
For most people hand to mouth future beckons. It’s a future with no certainty of income, beyond their entitlement to the state pension, no retirement plan, no plan to face the uncertainties of failing health. The home truths are that we are currently on our own.
The Government support mechanisms in place (MAPS) are inadequate, the choices from pension freedoms too complex and for most people there is no obvious plan B to “hand to mouth”.
For all the talk of dashboards and financial inclusion, we are really no further to replacing annuities as the default pension mechanism, than we were in 2014 when George Osborne told us we never need buy them again.
Three things we need in the next decade
We need to free up financial information so that people can create retirement plans with the help of technology.
We need to loosen the stranglehold on “advice” and encourage people to act on what their data tells them
We need collective pensions that provide people with a wage in retirement and a degree of certainty in the face of the imponderables of growing really old.
We have known throughout human time that their is wisdom in crowds. Hunters followed paths created by their ancestors , ignoring the paths that didn’t help and focussing on those that did. We have ways of developing things from arrowheads to computer chips by learning from previous ways of doing things.
It’s the same in finance. To take an example, theory tells me what the average person has invested in for his or her retirement. I can construct a fictional fund and create a fictional unit-price track, I can compare the progress of my investments with this fictional track and see if I have done better or worse than the fictional average.
But if I repeated that process, not just with my data , but with the data of say 5 million others, I would find that the fictional price track might not be the average, in fact I could create a “non-fictional price track” which would be the average daily experience of all who are investing for retirement.
This is an example of artificial intelligence at work. We start with real intelligence and test it against reality and then end up with a bigger broader , more accurate construct, that is really fit for purpose. “Artificial” does not do this intelligence justice, this intelligence is based on the wisdom of the crowd,
The pathways we tread
I’ve been looking at a technology platform called Abaka. They’re the people who’ve trade- marked the phrase Artificial Financial Intelligence that you see at the top of this blog.
Which is comforting reading if you are looking to take ideas to market without the money to build your own platform.
What a technology platform does, is replace the human voice with the intelligence of a crowd of people who have come before you. Now you may think that crowd wise or you may think them foolish. “Herding” is a most dangerous behaviour (ask the Genezarine swine who collectively through themselves off a cliff into the sea.
“In and with” confidence
But normally we tread the trodden path because people like us do.
And the point about conversational AI is a good one, provided we trust the bot we’re sharing with, we talk with them in and with confidence
And we’re prepared to get pushed around by a bot,
So long as the bot’s talking our language
And so long as it’s a nudge not a barge
Incidentally – all these images are nicked off Abaka’s website
But back to pathways
As many readers will have experienced, the Lady Lucy plies her way throughout the spring, summer and autumn, up to Sonning. It passes Wargrave as it does where the river loops almost into a giant horseshoe.
For sure, were this 2520, that horseshoe would be no more and the river would go straight from Shiplake lock – down river to Marsh lock, but for now we enjoy the meander.
Sometimes it makes sense to go with the flow, sometimes, when we have a map to hand , we choose to go the direct route. Artificial intelligence can tell us what the quickest route will be, but human intelligence may over- ride – that loop is a wonderful boating experience!
That is why a conversation with a bot is instructive but not definitive. Many of us will choose the less effecient but more enjoyable way and many will choose to be guided by the hand of a human.
Hope for me yet!
This interaction between the effecient and the suitable pathway is what AgeWage will be testing over the coming months.
I’m impressed that Abaka have recently raised $6.2m from the market to deliver the platform to people like me. And I’m really pleased that they are thinking like me about how we can bring AI to the rescue of people who need to turn pension pots into retirement plans.
Ok – so this is not the language of the common man, but this is stuff that ordinary people need to make the difficult choices and avoid the perils of the Strait of Hormuz.
And there’s enough in this to leave a revenue stream that makes the enterprise viable.
Because if all this kit doesn’t amount to a definitive course of action , imprinted in the user’s financial DNA, then it won’t have worked.
An API (officially an “application program interface” is the kit that brings data together.
In the vast flow of the Lower Thames is the water from all the tributaries from the upper and middle Thames which have been integrated by the Daddy river .
When you use an App that works, it is like the Thames, it brings all the little streams of information and of knowledge to it so that you can eventually get to Reading, or Windsor or London or even the English Channel.
I know all the little rivers. There’s the Ferret and his system to work out what we can get from universal credit. There’s Retirement Line with their expertise in getting us the best annuity rate and there’s a local expert like Pension Bee that can bring your pensions together with the help of the bee-keepers. There are many undiscovered streams and culverts which can integrate to a central flow , and data and water have a lot in common!
Which I guess means that small but bright organisations like AgeWage , can plug into bigger and more developed organisations like Abaka and deliver the kind of dashboards on the kind of apps , that get people excited about their pensions.
We know what front ends look like, they’re what make people buy and they have to be as glamorous and sexy as Harrods’ shop window.
Artificial intelligence is about turning the eye-grab into getting things done. AI only adds value if it “imprints into the user’s DNA” a desire to take action so strong that something gets done.
Of course that “something” could be good or bad. But if we trust our intelligence to deliver pathways that are based on well-trodden ways, we can set AI to work for us as Google Maps works for us, as Siri works for us.
I sat with my doctor in the week before Christmas and we discussed aspects of my health: four times my doctor asked his phone the questions he could not answer himself. Each time he chose the credible answer presented by Siri and each time I asked myself why I needed the doctor.
That doctor gets paid a lot of money, I don’t begrudge him a penny!
If anything good comes out of the Australian bushfires, it will be an understanding of their impact on our planet . There are still those in Australia who claim that the bushfires could have happened at any time, but the voices of reason, the voices of science, are being heard.
For an independent commentary on matters Australian, I tune into Radio Cumbo -Jo’s twitter feed as she is in the country over Christmas and promotes an independent view that I trust.
The rest of this blog is given over to Bodie Ashton, an Australian micro-blogger who in gobbets of 280 characters, leads us down a pathway of understanding.
One-seventh of the state of Victoria is on fire. The fire front in the state of New South Wales is so long that, if you made it a straight line, it would stretch from Sydney to Afghanistan. The fires are being fought by volunteers.
Many of the volunteer firefighters are unemployed; their benefits have been suspended because, while they’re saving people and habitats and homes, they can’t apply for the requisite number of jobs per week the government expects them to to continue receiving benefits.
The New South Wales emergency services minister has also gone on holidays. And in the midst of this, the prime minister has declared that the country should take heart from its brave and courageous…cricketers, who are playing against New Zealand.
It is true that Australia has bushfires every year, but the sheer scale of this event is unprecedented, as well as the fact that the fire season is now so long that typical preventative initiatives, such as backburning, are far too dangerous.
Public buildings have been forced to close in Sydney and the capital, Canberra, because the smoke is concentrating in the ventilation systems, and is setting off building fire systems.
And that firefront? Imagine an unbroken line of fire, stretching from New York to Los Angeles, then back to New York, then heading back to Los Angeles and getting at least as far as Indiana. That’s the firefront in JUST ONE STATE.
Also this, concerning distances. I said that New Zealand is still a way away from Australia, yet is affected by the smoke. For non-Aussies or non-Kiwis, this might help you visualise it a little better: https://t.co/m7efTtAQXX
I have to mute this thread for a while—there are just so many responses that I simply can’t keep up! BUT some people asked what you can do to help. Please consider donating to the firefighters on the frontline; @GuardianAus has some good info at this link. https://t.co/IcjClp0O1Z
This kind of journalism comes not from a Bloomberg or an FT, but from a mild-mannered guy who has caught the mood in the way of Greta Thunberg
So um I seem to have picked up a lot of new followers (more than 1,000 in the last few hours!), so… Hi! I’m Bodie. I’m an identity historian, chiefly focused on Germany, and I’m Australian. I love sci-fi, our cats, and coffee. I’m also loud about LGBTQIA+ rights. Welcome! pic.twitter.com/FQwyjbnaT2
Every December 31st, a time-honored tradition brings Americans of all backgrounds and faiths together: making New Year’s resolutions that won’t last. It happens in business and government all the time, too – and on a much larger scale.
Business owners and managers often think they need a long-term plan, sometimes because a consultant told them that. And politicians often set goals for many years or even decades after they’re gone from public office – without detailing interim targets that the public can hold them accountable for achieving.
It’s easy to make long-term resolutions, and there’s a certain escapism that comes with it. Why roll up your sleeves and get down to work when you could be mapping out an exciting plan for incredible levels of future success? It’s tempting to let your mind fast-forward to the finish line, but projecting to step one hundred can limit your ability to execute step one. Successful athletes don’t focus on winning the championship – or even on winning the first game. They focus on preparation.
Issues like climate change and gun violence can’t wait for decades-long timetables. We need leaders who will attack the problems facing our nation as soon as they can, however they can. I refuse to wait for the perfect solution before making a move. The hardest challenges require action that begins today, not tomorrow—forget long term.
That’s not to say there’s no value in thinking ahead. My advice is to conduct the following exercise:
Think logically and deliberately about what you’d like to do. Work out all the steps of the process – the entire what, when, where, why, and how. When you know it cold, write it out on a piece of paper. The act of writing forces you to confront questions you hadn’t before. Address those things that you forgot, ignored, underestimated, or glossed over in your mind. Make sure your written description follows, from beginning to end, a logical, complete, doable path.
Then tear up the paper – and get to work.
It’s a good exercise in planning while also being a good reminder about what matters most. Real life doesn’t follow big, carefully laid plans. Setbacks happen. Surprises arise. Small opportunities lead to unforeseen bigger ones. Conditions and opportunities change in ways we can’t anticipate – and that can change the direction of our work, and how we define success. You’ll inevitably face problems different from the ones you anticipated. Sometimes you’ll have to zig when the business plan says zag. Plans are only as useful as your willingness to toss them aside.
A reporter once asked me what I thought Bloomberg had failed at, as opposed to the successes that have allowed us to grow. I gave it some thought, then answered: “Nothing. But what we accomplished wasn’t always what we set out to do.” A failure leads to a new insight or idea that leads to new products and customers. We’re flexible and adaptable. If we had stuck to a rigid plan, we might not be as big or as successful today.
Don’t let planning get in the way of doing. I once saw the classic cart-before-the-horse error during a presentation by a potential Bloomberg competitor. His slides had great-looking mock-ups of the company’s future shipping department, showing conveyor belts shipping out thousands of the units. The problem? They hadn’t yet built the first unit. And they never did.
I’ve always focused on what’s next, not what’s way down the road. And I have always believed in playing as many hands as possible, as intelligently as I can – and working like crazy today, and getting up and doing it again tomorrow.
People have a lousy record of predicting the future, and they aren’t much better at planning it out. By all means, set high goals and dream big. But then get down to work, and as the months and years pass, be ready to change course. The path to success is not a straight line, and the destination may be a place you haven’t imagined. The best resolution is to get started on the journey now – and to charge ahead with deliberate speed.
I’m in the business of turning Pension Pots into Retirement Plans. I guess the point John’s making in sending me this – is that whatever you start out trying to do, you’ll end up doing a whole load of stuff as well, and maybe instead of.
What we can be sure of though, is that without a plan in the first place, you won’t have the platform on which to build.
I urge all my readers to think hard at this moment about what their plan is for a happy retirement, and what they intend to do – to make the planet fit for it.
Everyone’s favorite pension quote is Andy Haldane’s admission he was not “able to make the remotest sense of pensions“. If the chief economist of the Bank of England is baffled, then the stigma of our not “getting pensions” is a little easier to bear.
Another economist has tried to make sense of pensions.
pension cuts always seem to get people to the streets. but the retirement people expect never actually existed https://t.co/A5y3Uc9TLB
Allison Schrager is an American economist who writes stuff that I can understand. If I can understand it, so can you! She challenges our received ideas .
This blogpost challenges the assumption that there was a golden age of retirement which has left us with a $400tr shortfall in assets to meet future expectations. Her argument is that we’ve extrapolated the retirement income enjoyed in previous decades by those few enjoying DB lifetime incomes, to everyone. We’re making people feel bad about not having what they could never have expected.
She argues that economists have created an expectation of universal comfort in retirement that isn’t met by American DC plans, Chilean DC plans – and by extension UK DC plans. This is small wonder (she explains), the cost of securing a full replacement ratio is beyond Government – let alone employers and least of all ordinary citizens.
People making their own way home
According to Schrager’s numbers, the average American with a retirement plan heads out of work with $300,000 pouched in retirement savings, which is higher than in the UK but likely to be rather less effective in paying the post-retirement bills than over here. Schrager estimates the average American has $183,000 more in later-life medical bills than can be covered by their Medicare system.
But not all Americans have a retirement plan and accross the board, the average American only has $20,000 in retirement savings in 2016, happily up from $9,000 25 years before but pitifully low to meet expectations of retiring on a comparable standard of living – people had in work. Taken together, the low level of savings and the higher costs of healthcare, make for an unappealing cocktail for the average American. While they may not be rioting as they have been in Chile, or striking as they are in France, the citizens of western democracies like US, UK and even Australia, should be thinking of the future without the expectations of a 2/3 replacement ratio.
That is Schrager’s point and it is interesting to consider whether the social consequences of removing DB from the UK pensions system will be as benign as Schrager says they have been in the US. It’s a variation (for non DB beneficiaries) of “if you ain’t got nothing, you ain’t got nothing to lose”.
There remains, however, an expectation created by “experts” that the three pillar OECD pension system will provide by now, a retirement plan for most of us. That expectation is not being met and people are having to make their “own way home”.
Adapt and go
When I look at how people adapt to a post-work environment, I see a lot more going on , than “meets the eye”. What meets the eye is the bald statistic that the average Brit reaches retirement with combined retirement savings of around £35,000. If this was all we had to live on, then we wouldn’t get close to the Retirement Living Wage, promoted by the PLSA.
Which is why modern-day retirement plans are a lot more sophisticated than some economists tend to thing (I’m excluding Schrager from that slur – and a few others!)
What most people do when they get to retirement is to work out how much work they can afford not to do , not assume they are stopping work. Most people go down in days worked and use pension savings to take up the slack.
Some people do some longer term cashflow modelling, tying to work out how things will change when their state pensions cut in. Some are sophisticated enough to work out what they can get from the state from “Universal Credit” and others start thinking how they can convert liabilities (like housing) into income producing assets.
Getting it wrong
In short, people look for ways to turn the disappointment on learning that their pension savings aren’t going to be enough, to relief at working out out alternatives. Listen to the stories of those who are scammed out of their retirement savings and almost all of them involve them trying to resolve the shortfall issue.
This process of adaption makes people vulnerable, sometimes they feel able to take financial decisions that impact the rest of their lives , with little proper support, the scammer can provide the fake support at a time of vulnerability. We liken the period of adaption to navigating the strait of Hormuz.
However the numbers of people getting it wrong, looks to be dwarfed by the number of people not getting it very right.
Not getting it very right
One of the most bizarre aspects of “austerity” has been the low take up of benefits.
Of the various income-related benefits on offer , pension credit is the least claimed.
This may not amount to a scam, simply a matter of people not getting to know their entitlements. But the onus on promoting the entitlements varies depending on to whom you talk. To those who believe in self- sufficiency, low take up is an example of poor research, to those who consider benefit provision, the responsibility of the state, the problem is with Government.
Either way the problem exists and it’s a problem that no-one is talking much about.
The stigma of not knowing enough….
Returning to Allison Schrager’s argument, I suspect that for many middle class people living in Britain today, the chief emotion they have when thinking about the future is guilt.
People are always getting embarrassed by their ignorance about pensions and I suspect they are much more ignorant about benefits. People are also scared or embarrassed to ask. When my father died, my mother – who was entitled to half his pension, waited a year – to a point where she had no more money – before asking me what she should do. The matter was sorted in a few minutes via a phone call, a backdated payment was made and she now gets her dues.
And yet many pension benefits like my Mum’s are never paid. We know from the PPI that there are around £20bn of unclaimed DC assets and I would be surprised if there weren’t unclaimed DB liabilities amounting to the same. It is not just the Government that is “getting away with it”.
But the question of “onus” remains. It it incumbent on those with promises of money to pay, to find beneficiaries or is it the other way round? Lost pensions or pensioners that can’t be found?
Comes from the stigma of not having enough
I am of the view that the financial services industry has created an expectation that people will be looked after by the retirement savings plans they join and that people do not understand why this expectation is not met at retirement. In truth, it was the expectation that was wrong and what is compounding the problem is the inability of these financial services companies to come clean.
People are therefore feeling bad about themselves for not saving enough and ending up feeling too guilty and embarrassed to claim their income benefits (wherever they arise).
We are in danger of shaming a generation into feeling they are financial failures. The point that Allison Schrager is a good one, but it needs to be extended.
Not only were the expectations given our generation wrong, but these expectations are still being promoted. Hutton’s famous formulation, “save harder, work longer or expect less” missed one further instruction “ask for help”.
The stigma of asking for help, with pensions, benefits, lifetime mortgages and healthcare results in poor decision making and unnecessary hardship.
Have we created a stigma about asking for help on pensions?
There’s a lot of mind-casting going on, us thinking how things things have changed since 2010. But my mind is casting back further, back to the 1920s, the roaring twenties – where Britain emerged from a terrible four years of war and austerity and decided to live again. Put aside that this wasted decade hit the buffers and resulted in a second calamity, I am thinking of my great grandparents and grandparents waking up on the morning of 1920, to a new decade, certain that it would be better than the last.
And I imagine they did so with the optimism of survivors and the hope for something better. the 1920’s kicked off in the great metropolitan areas on London, NewYork, Paris and Berlin. They were known in France as the “crazy years”, where social, artistic and cultural dynamism spread out from the cities and created a “Zeitgeist” defined by jazz, fashion and technological advance.
I hope that we will manage the 2020’s with similar energy, though being the sober pension specialist that I am, I would like to think it left a better legacy than its historic forebear. The roaring twenties were brought to an end by the Wall Street Crash of 1929, it would take 90 years for the world to be brought to its knees again by the financial system.
The decade we have just outlived , lived in the shadow of the Financial Crisis of 2008-9 and paid for that crisis through austerity. We may not have had a war, but we’ve been through a bruising battle for Brexit , concluded by a resounding vote that the referendum of 2016 – should end referendum (unless you are Scotch).
Thinking back not just over decades but accross a century into a previous millenium, allows us some perspective but is a luxury we only allow ourselves at certain times.
Waking up on new year’s morning January 1st 2020 , I felt the need to take advantage of a free day on the south coast of our amazing island.
It gives me an opportunity to think forward , as some of those proto-flappers must have done, to imagine the world in January 2120. It will be a world without me I suspect, though there may be younger readers who can aspire to outlive this century and maybe live well into the next.
What will our planet look like then?
We have a hellish vision of what it could be – in Australia. A lightening fork ignites the countryside into bush-fires, people shelter on the beach as their world is engulfed in flame. Their wold is no longer hospitable to them, they are vulnerable to natural calamity that has overtaken them.
Australia at the end of 2019
The fires that roar in New South Wales and Victoria could define the roaring twenties for us.
Driving back to London earlier this week, I listened to Radio 4’s today program with guest edits from Greta Thunberg. You can still listen to her father’s caring explanation of how he is living his life for his daughter, the touching bond in her conversation with David Attenborough and her interview with Michal Husain.
Put in the historical context, Greta describes the same lunacy in our complacency to the climate crisis as we ascribe to the political complacency that led to their being two world wars in the first five decades of the 1900s.
The lesson that we can learn from those decades is that mankind has the capacity to inflict self-harm upon itself in unimaginable ways. The trenches of Flanders and the death camps of Nazi Germany, stand witness to that.
For those of us who think we have progressed through our grasp of technology, beyond such harm, let’s look at the way part of our world is aflame, part melting, part under threat of imminent flood.
As Greta tells us, we need to change the conversation.
It inspired me, as did Greta’s Radio 4 today program, to at least write this blog. It made me question why I was driving a car when I could have been on the train and it prompted me to think through a number of personal actions that form my new year’s resolution.
GO AND SEE OLAFUR’S STUNNING EXPERIENCE – ON TILL JANUARY 5TH
I do not claim to be an activist, I am more like Greta’s Mum and Dad, but I think that by not doing things, by being inactive, I can at least stop making matter’s worse.
I am finding that by thinking about my activities of daily living , I am seeing opportunities to reduce the net carbon footprint in everything I do.
I was pretty shocked to find that London Transport’s “responsible” strategy to getting people to the fireworks on the Embankment last night, was to close all the Santander bicycle racks. The sooner we make central London car-free, the better.
Greta’s Dad is not proud of his daughter…”Pride ” is the wrong word- he says, though he says he is proud for himself that he listened to her.
My son is studying Geography. He passed his driving test four years ago but has never driven a car on his own. He is part of a generation that we can support and not hinder. If my son chooses to devote himself as Greta has, I would not stand in his way. My pride can come from listening.
He warned that stocks dependent on the use of Fossil Fuels may become worthless in a short time. There can be no clearer message to those who invest on our behalfs.
I was pleased to see Guy Opperman write in the Telegraph in support of Carney. Opperman is our pensions minister and he can influence the debate. Even in my little way, I can keep the conversation going and in my new year’s resolution, I have my plan.
“Something has to change” – says Carney, I know what has to change in my life – do you?
The Government’s announced that for pay periods starting on or after 1st April 2020 the National Living Wage (NLW) will increase by 6.2% – four times the rate of inflation. The NLW (for over 25 year olds) will increase from £8.21 to £8.72.
The Low Pay Commission estimate that nearly 3 million workers are set to benefit from the increases to the NLW and Minimum Wage rates for younger workers.
This is a rare and welcome case of a Government keeping its promises. The rise means Government is on track to meet its current target for the NLW to reach 60% of median earnings by 2020. With Britain pretty well at full-employment, it means that pressure on businesses to improve pay and conditions for those who historically have had little bargaining power, will increase.
The new rate will mean an increase of £930 over the year for a full-time worker on the NLW. The £930 increase in annual earnings compares the gross annual earnings of a person working 35 hours per week on the new NLW rate from April (£8.72) versus the 2018/19 NLW rate (£8.21).
However, closer investigation suggests that the cost of this measure is going to be spread in unexpected ways. It is clear employer are paying but who is benefiting and what help will small employers get for compliance.
Pay rise or stealth tax?
Thanks to Gareth Morgan for this further information.
The NLW may be £930 headline a year for full time work, but it’s £631 after tax and NI on current rates. The NPW is only worth £233 if you’re getting Universal Credit though as it reduces the benefit.
In case the Ferret’s precision analysis needs unravelling, let’s look at the pay rise from the employer’s point of view.
Employing someone for 35 hours on minimum wage? The wage bill goes up £930 a year in April. The employee on Universal Credit will get £233. The other £697 goes straight to the government in tax, NI and lower benefits. Add to this £128 employer NI if no Employment Allowance applies.
So, the measure supposedly aimed at helping the lowest paid gives them £233 and the government £825.
In many cases , it is not the Government paying for this increase, it’s everyone but. In cases such as this, NPW is little more than a corporate and personal stealth tax.
And it takes more than pay rises to alleviate workplace poverty
The mention of Universal credit for those in work is no idle detail, According to research by the IFS , increased in-work relative poverty rate in Britain over the last 25 years, which has risen by almost 5 percentage points from 13% to 18%.
The IFS analysis shows that those in work on low incomes face higher housing costs, lower in-work benefits and a widening gap between their and standard of living and those of higher earners and even pensioners (who have caught up on incomes over the past ten years.
But a pay rise nonetheless
Never the less – this “pay rise” will be a welcome relief to all on low incomes, including the working poor.
Not only do those on NLW benefit, but so do those younger earners on the New Minimum Wage (NMW)
The NMW extends the headline rise. It will rise across all age groups, including
A 6.5% increase from £7.70 to £8.20 for 21-24 year olds
A 4.9% increase from £6.15 to £6.45 for 18-20 year olds
A 4.6% increase from £4.35 to £4.55 for Under 18s
A 6.4% increase from £3.90 to £4.15 for Apprentices
The Accommodation Offset impacts those who have “live-in” jobs and restricts employers from getting round paying proper wages by over-charging for lodging.
The increased rates were recommended by the Low Pay Commission, an independent body that advises the government about the NLW and the NMW
These increases are greatly to be welcomed – provided they are paid for in a progressive way
What does this mean for pensions?
With the auto-enrolment earnings threshold set to stay at £10,000 , it means that there will be another tranche of savers in 2020. Many will find the extra £930 pa they get means they’re earning more than the £192 p.w. or £833 p.m. that triggers them saving 5% of pensionable earnings into a workplace savings plan.
For most of them, the cost will be cushioned by a Government incentive that saves them 25% of the pension cost, but – until Government adopts the “oven-baked” solution handed it by the Net Pay Action Group, pension inequality from a payroll lottery will remain.
We want pension saving to be the norm when most individuals start work. We therefore want young people from age 18 to benefit from automatic enrolment and our ambition is to lower the age criteria from 22 to 18.
Our ambition is to change the framework for automatic enrolment so that pension contributions are calculated from the first pound earned, rather than from a lower earnings limit of £5,876 (in 2017/18). As part of the proposals in this review, we would also remove the ‘entitled workers’ category
This wage rise should not be paid for by compromising planned pension contribution increases – nor should it be used as an excuse not to sort out the net pay issue.
More to come
The Government has accepted the Low Pay Commission’s recommendations after they consulted stakeholders such as unions, businesses and academics, before recommending the NLW and NMW rates to the Government.
In September the Chancellor pledged to increase the NLW towards a new target of two-thirds of median earnings by 2024, provided economic conditions allow, which, on current forecasts, would make it around £10.50 per hour.
Since 2016, the lowest paid will have wage increases of £3,680.This £3,680 increase in annual earnings compares the gross annual earnings of a person working 35 hours per week on the new NLW rate from April (£8.72) versus the 2015/16 minimum wage rate (£6.70).
According to Treasury forecasts the living wage is set to increase to £10.50 by 2024, fulfilling a pledge from the Tories for the lowest paid to be on at least 60% of average earnings.
And there’ll be more for younger workers. The Chancellor has also announced plans to expand the reach of the NLW to cover workers aged 23 and over from April 2021, and to those aged 21 and over within five years. This is expected to benefit around 4 million low paid workers. But…
Who pays?
The majority of the cost of these rises will fall on employers and they will fall hardest on small businesses for whom wages form a high part of their overhead.
Many of these businesses do not have the capacity to put up prices or draw on reserves and are vulnerable to this squeeze on margins. Without the promised fall in corporation tax, many SME’s will be having to adjust their profit projections for 2020/21 and face an uncertain future.
To some extent, the Government is easing the load and the tax-payer is helping out. Increases to the National Insurance Bands and the lower rate income threshold means that more of these increases will stay in the hands of low-earners making working a lot more lucrative than claiming benefits.That is no doubt the sub-plot to the Government’s policy.
With the squeeze on benefits for the low-paid still in place (the price the poor are paying for the financial crisis), they have little choice but to work. The worry is that poverty being reported by the ONS, the IFS and a host of independent research has persisted amongst those who are being moved into work.
Let’s hope that the people who pay for this increase in real wages aren’t those who can’t work, who continue to see their benefits frozen or cut.
Who will benefit?
Britain is booming , but it’s booming for some people more than others.
The TUC research suggest that there are disproportionally more women and “black, asian and minority ethnics” (BAME) on the living wage.
The low and low and middle earners that should benefit most from the NLW 6% pay-rise are groups of earners who have yet to be properly integrated into working life and yet to participate in workplace pensions.
We shouldn’t underestimate the high rates of employment in this country and the economic and social benefits they bring. They are a genuine policy success of Governments over the past ten years.
But amongst the very poorest, those who have nothing but benefits to claim, the proportion of women and BAME is still very high. Real poverty exists in Britain and it is not at acceptable levels.
In my view, the increase in NLW by 6% is to be welcomed , wherever you sit on the political spectrum. But it needs to be paid for by those who can afford it – not by those who can’t.
Britain is booming, those of us who earn most , have the means to meet the cost of this pay-rise.
This pay rise for low earners , should not be funded by those who cannot earn.
As the decade closes , it’s a time to look back as well as forward. For the vast majority of us, our financial health depends on valuations of assets the price of which we cannot directly control. We may build an extension on our house but we are making a lifestyle decision and the utility of that investment is less in the realisable gain on the property as in the space it gives us and our family.
As regards the investments within our pension pots, ISA pots or general savings accounts, we are entirely dependent on how the markets fared and we do not control those markets.
If we look at how the markets have performed in recent times (I’m looking at Morningstar sector averages) we see what we would expect, that riskier assets have produced better returns, and that more pedestrian assets have returned less.
This is particularly the case in 2019 when the gap between the average return on shares and cash has been enormous. Not to put too fine a point on it, if you weren’t in equities over the past five years, you have missed out.
Some will already be interpreting this blog as advice to invest over one , three and five years in shares. Which it isn’t. It is however pointing to a reality which many DC trustees, pension providers and IGCs will have to face – when reporting to members.
That reality is this.
Diversified strategies that intend to smooth the returns delivered to savers have fared considerably worse than simpler strategies investing purely in shares. Disinvestment into cash from anything has been a disastrous strategy over the past five years and all kinds of de-risking – whether through diversification or disinvesting , have reduced savers’ outcomes.
For all the talk of volatile markets, returns for equity investors have been consistently higher than for bond investors and just about anything that aimed to provide a cash- plus type of return is providing pretty sickly outcomes.
While the leverage supplied by Liability Driven Investment , (where the bond return is magnified by what is essentially borrowing), has worked out for huge investors like the PPF, the private saver has not got as much out of saving into corporate or government bonds as by investing purely in shares , absolute return and money market funds have produced very little real return and when Morningstar measure blended portfolios, the lower the allocation to real assets , the lower the return.
And yet if you are over 50, the chances are your pension savings were moving in 2019 away from equities into lower returning investment strategies. And if I were to show you the impact of that by way of AgeWage scores, you would see your scores reducing over the year, because the average pension pot in the UK (the benchmark) has been investing predominately in equities and has not been “de-risking”.
De-risking carries its own risks
One of the arguments against giving people information on how their pension pot has done, both in absolute and relative returns, is that it gives rise to discontent.
If the result of measuring a saver against other savers is to show that the saver has fared less well , then there is a risk that saver is going to turn round to the person who made decisions on his or her behalf and ask “why?”
Collectively, the cohort of defaulted pension savers between 50 and 65 will almost all have paid dearly last year for de-risking.
For some, that price may have been worth paying, if you were cashing out your pension, that your pension had been moved into a money market fund, may have reduced the chances of you being caught by a short term drop in the market.
But these cases are exceptional. Most of us have paid twice for de-risking, firstly in the cost of moving from fund to fund (through the hidden spreads of the “single swinging price”) and secondly through the under-performance of bonds and other diversifiers – especially cash.
This year, de-risking has been a risky strategy for pension savers and few have benefited in terms of what their pot is worth at the end of this year.
Most people over 50 would have been better off outside a lifestyle strategy.
We need to seriously review how lifestyle works
In 2020 , we will see a new kind of life styling with multiple options available to savers – known as investment pathways. These pathways could take you to a number of destinations, including “cash-out”, “annuity purchase”, “drawdown” or just rolling on as an investor with no plan for the pension pot.
Working out how these investment pathways work is the easy bit, but the saver needs to start thinking , well before exercising his or her choice, which pathway to take and how fast to walk along it. In technical terms , we all need to tell our pension provider when we want our money and how we want it paid.
I am very far from clear how people will go about making those choices. Ideally it would be face to face with an adviser who is genuinely independent. In practice it may be a decision taken by an algorithm based on what little your provider knows about you.
But there is a big problem in this, and it brings me back to where this blog started. We are taking decisions on other people’s money – blind. We do not know what most people want to do (neither do they), we don’t know how the market is going to treat them and we have no idea what the consequences of those decisions might be on the people we are trying to help.
2019 was not a year to hedge your bets.
People who stayed invested in shares last year did well and those who de-risked, lost out.
Old Mutual run a sentiment indicator for financial advisors who want to know the views of the fund managers.
This is how they saw the world in January 2019
and this is now they see the world now
and this is what has actually happened
If you want to, you can see which managers had a lucky crystal ball and which didn’t.
In 2020, we may see things turn the other way round. but there is no more certainty that you will be better off de-risking than there is consensus among the managers as to whether the equity bull run will continue.
But one thing we do know, there is no point in cashing-out on a long-term strategy to hedge against supposed short term volatility.
Pay attention to your pension
I would advise any DC saver over the age of 50 to find out what is likely to be happening to their pension pot next year and to ask the question, “how have I done so far”/
I can help you with the second question – just mail henry@agewage.com and we’ll get you an AgeWage score showing how you’ve done against the ordinary saver.
But I can’t help you with the first question, because the only person who knows what you are likely to be doing with your money over the next decade – is you.
A good reason why pension dashboard infrastructure should be open … any payroll provider could then include pension information directly on payslips. I expect that is far more effective than signposting a single government provided dashboard
One of the risks that the FCA identifies is “closed loops” where data is exchanged between a small group of data managers in something that could be deemed a data cartel. I fight shy of calling it a cartel as I get lawyers from industry bodies dropping me notes, but that’s where the risk from closed information loops takes us.
A dashboard for the providers, by the providers ensures we see what providers want to see. We are told that this cannot happen because the Government has entrusted the Money and Pension Service with the job of setting up and running a dashboard implementation committee. This committee exists, though what can do right now is anybody’s guess.
The implementation committee
This implementation committee is supposed to deliver the Government’s vision of a pension dashboard “ecosystem.
it forms part of the pension dashboard governance ecosystem
And all this has arisen out of four years of consultations, consultation responses, prototypes, launches and now a Pension Bill. The upshot of all this is that we may have legislation to mandate data managers holding our pension data to make that data available to the dashboard “ecosystem” by 2025.
When two sevens clash
When Joseph Hill had a vision of an impending apocalypse in 1977, the result was Culture’s album When Two Sevens Clash. The apocalypse never happened but 1997 – the year of the “punkie reggae party” – changed the direction of pop music till today.
I predict that 2020 will be the year that the two competing visions – for a closed loop and for open pensions – clash.
And on that implementation team are those for a controlled close loop and those who want to see open pensions and they will clash as well.
Let’s empower payroll
As with the DWP’s other data sharing initiative, the simple pension statement, the dashboard is at risk of being bogged down in yesterday’s thinking.
The “big idea” for delivering single pension statements is to provide them in distinctively coloured envelopes. The big idea for the government Dashboard, is to embed it in an ecosystem so complete that nothing can possibly go wrong.
Meanwhile people are retiring and doing so with incomplete information. People have no way of finding pensions other than through google and some hand cranked search engine on the DWP’s website. The PPI estimate that £20bn of our pension savings lies unclaimed.
Pension pots proliferate, the DWP estimates by 2050 there will be 50 million abandoned pots, unless some way is found for us to find them and bring them together.
Support is minimal, depending on what survey you read, between 80 and 94% of us won’t pay for financial advice, Pension Wise reaches only 10% of its target audience and most of them are already advised. For most people, advice on what to do with the pension pots comes from friends and family and from the world wide web.
In this denuded landscape, we should look for help where it is available. Alan Chaplin is right to look at solutions that can deliver information today, rather than wait for another year of wrangling from the open pensions and closed loop factions.
Payslips are more read than a Government Pensions Dashboard will ever be. If payslips are allowed to deliver the basics of pensions then they will be in people’s line of site every pay period. Here, thanks to Robert is a vision of the future that is happening today.
Yesterday I talked about the importance of reporting, both to and from employers. Employers want to understand how their workplace pension is working and savers want to know how their money is doing.
The purpose of this reporting is to maximise the efficiency with which money saved is converted into money paid in later life. For employers , the question is who provides the saving apparatus, the questions for savers are how much to save and where the money goes.
There needs to be choice for employers and savers and that means competition for those savings. The primary market has formed and we now know the winners and losers. We now need a secondary market which gives fresh choice, rewarding providers who innovate and taking money from providers who sit on other people’s money.
To make sure we have a properly functioning secondary market in which workplace pension providers can compete. Behind competition is a recognition that it drives innovation , increases efficiency and passes cost savings and value creation on to the end users- Britain’s savers.
There is an alternative school of thought that sees competition as bad for savers, that the cost of switching investments or even providers makes it better to have a stable market built around a handful of providers with the Government’s great intervention – NEST – as the default for employers great and small.
I am firmly for a functioning secondary market and I think that workplace pensions should engage participating employers and savers with progress – in all senses of the word,
The Trust based occupational pension scheme is the standard route for most employers to organise participation in workplace pensions. This is because of multi-employer master trust structures which have been the big growth area of pension provision resulting from the introduction of auto-enrolment.
In practice , we have the market for small employers dominated by four master trusts – Smart, People’s , Now and NEST with a number of commercial and not for profit master trusts biting at their heels. There are still (after the dust settles on authorisation) 38 choices in the market. The 39th choice for employers is to set up a new occupational pension scheme exclusively for their staff. In practice, setting up an occupational DC scheme from scratch is almost as rare as setting up an occupational DB scheme.
The 40th choice is to set up a group personal pension, either with an insurer, or – more rarely – with a SIPP provider like True Potential or Hargreaves Lansdowne. Here there is no formal fiduciary structure for staff who have to access their information either through an employer governance committee (where the employer can be bothered) or from the provider and the provider’s independent governance committee.
How do providers get their messages accross?
Auto-enrolment has brought a great deal of change to the way businesses great and small organise the destination of the moneys they pay on their account and on account of their staff.
But the mechanism for communicating about the progress of workplace pensions in meeting their proper function (helping to provide security in retirement) has not changed.
The DWP are consulting on what paper statements should tell people as if nothing much had happened in the past two decades. Re-reading the DWP’s consultation on simplified statements, I think it could have been published in 1999 and made as much sense as it does today. And the simplified statement makes a lot of sense.
The statement itself should be timeless. DC “pensions” , at least for those not spending their savings, are simply pots of money being managed by other people which grow fast because of Government savings incentives. Statements should be simple because there is not a lot to say.
Once we have accepted that the message is simple and should be confined to things people really want to know, we should ask the second question – how do we make this message “clear, vivid and real” and this is where we are currently hitting the buffers.
We simply aren’t asking the question, “what do workers read?”
How do people read things?
One simple answer is that people tend to read stuff that impacts on their pay. They read their payslip and letters that tell them of pay-rises and changes in their benefits. Where the communication is material to their standard of living, people will read it.
People read utility and tax bills and letters from the DVLA because if they don’t, they will be cut-off or at worst, prosecuted. They also read letters which tell them about things they may have won, occasionally they may read marketing literature from trusted sources and they will read pension statements that arrive in the post – but only if they think there’s a point.
But mostly we ignore paper. Mostly we concentrate on those things that make it through the spam-filters in their inboxes and they read direct messages on their chosen social media.
Learning what our staff read is one thing, learning how they read them is another.
The critical success factors
I follow the simple mantra of Quietroom , communications should be clear, vivid and real.
Clear – we know the pension statements can be real and thanks to Ruston Smith and others, we now have a clear template which can communicate the important facts.
Vivid – means producing powerful feelings or strong images in the mind. People need to be presented with the facts, not only clearly, but in a way that touches their emotions
Real – this I think the hardest of the three, these statements have to be statements of fact, not imagined or supposed.
But there is a fourth dimension which is as important as time was to Einstein. We need to get these clear, vivid and real communications in people’s lines of sight when it suits people and how it suits people.
Pensions are a part of pay
And that means making sure we deliver pension messages in the workplace as a part of pay. The people who communicate pay are the payroll people, whether in-house or in outsourced payroll bureau.
Almost all the companies listed are capable of and prefer to supply payslips digitally. Many can provide them through messaging systems other than email, but company emails are now the main way of delivering payroll information.
We might well ask the question why company payrolls are not the main way of delivering payroll information. I suspect there is a simple answer to this. Nobody ever asked payroll whether they would do the job.
A good reason why pension dashboard infrastructure should be open … any payroll provider could then include pension information directly on payslips. I expect that is far more effective than signposting a single government provided dashboard
Alan is right, getting payroll to participate in workplace pensions through the dashboard , is a matter for Open Finance and I hope to contribute to the FCA’s call for input by following up on this tweet.
So why doesn’t electronic payroll delivery, mean electronic pension delivery?
The question begs a much more important question for workplace pension providers. Between 2012 and 2018, payroll invested heavily in making themselves payroll compliant. In 2016 the CIPP asked its members how employers and payroll companies were getting on with auto-enrolment. These were the key findings
Typical costs incurred due to automatic enrolment were several thousand pounds, with one respondent stating they had implemented a new HR and payroll system costing £290,000
● More than nine in ten payroll agents (92%) anticipate that their clients will need some level of advice and help with necessary actions for automatic enrolment
● More than half of agents (52%) believe the biggest challenge facing their clients in regard to automatic enrolment is that clients do not realise that it applies to them
● Three quarters of agents believe that their clients are not prepared to pay the necessary fees for services relating to automatic enrolment
And yet payroll complied with auto-enrolment – to a very large part because of payroll software companies upgrading their products, providing support and creating awareness.
Why do workplace pension providers not learn their lesson?
If you want a job done, give it to payroll. Payroll software companies are commercial and will find ways to charge for the job. One way or other the cost will be absorbed or passed on to employers or providers.
If pension providers can integrate their communications with what payroll send, their chance of getting their stuff read increases dramatically.
If pension providers can convince themselves and payroll that what comes out of payroll as a pension deduction goes to providing a wage in later age, then combined payroll and pension statements may become a reality.
The lesson is being missed, pension contributions are deferred pay
This very important statement is at the heart of the problem and the solution. We have come to think of pensions as part of wealth management and the pension agenda has been hi-jacked by fund and asset managers to the point that the concept of “pensions as pay” has been almost forgotten.
In muddling this message, we have broken a critical mental link between work and pensions, downgrading pensions to a kind of expensive “perk” – an employee benefit.
Our first and primary reason for going to work is to earn a living and a part of this is to earn the right to stop working and rely on an income being paid to us from our savings.
Payroll has transformed its communications into clear, vivid and real payslips which get read electronically by the vast majority of people on payroll.
The challenge for pensions people is to make friends with the people in payroll , learn their lessons and use their route to market.
Christmas is a time for dreaming, walking in the air and ding donging merrily on high.
So my Christmas day blog describes a dream that could become reality, only if the world turns out a special way.
And maybe it will. I went 5 times to see Olafur Eliasson’s exhibition at the Tate. He talks about the possibility of looking back at this *soon to be gone* decade as the years when we put the brakes on climate changed and the next as the decade we put that train into reverse.
So it could be with pensions. For the first two decades of this millenium, we saw the new dawn of second pillar defined benefit pensions fade from corporate life. Pensions became liabilities , not the hope for the future that we’d built in the late twentieth century.
Now we celebrate 2019 being the year of the insurance buy-out, that net collective pension deficits are only £71bn and that we have 10.5m new savers into DC pensions pots, which may never pay a pension.
My vision for pensions may seem as unrealistic as Olafur’s for climate change but- as Olafur points out in every room of his Tate Modern “In real life” exhibition, “real life” doesn’t have to be the way it was, it can be shaped by our actions.
Which is what I mean by wishing us a “happy Christmas and a happy new year!”
In real life
Yesterday my pension pot for the first time reached a target I had set it in 2000
I have saved hard throughout my life and have not “de-risked”, I am 100% invested in growth assets, my primary investment fund is the LGIM FutureWorld fund that invests for environmental, social and governance “good”.
I have also a very good DB plan, I’m an #OKboomer and I’m proud that I have made the most of my career so I can have a long and happy retirement. Many people – like my son Olly, could do as well as me, if they put their money where my mouth is and saved as hard as me and with my conviction. I am damned proud of myself.
But I am in the top 1% of retirement savers. My savings are real life but they are not (yet) a pension. They become a pension when I buy an annuity or concert to flexi- drawdown or use UFPLS . I doubt that 1% of the population will understand this paragraph and that is why we need a better way to turn our pension pots into a retirement plan
Yesterday I hinted at what is to come…
In yesterday’s blog, I hinted at a way of using the PPF to make my dream of a “future world of later-life content” come true.
Here is some more detail.
At present , the PPF invests , not in real assets , but in various abstractions called derivatives which take positions to take advantage of shifts in the valuation of Government and Corporate debt. Almost half of the £32bn in the PPF is invested in derivative contracts. This gives rise to a question from one of my readers
Henry, is the whole thing not a bit self-fulfilling and self-congratulatory – one leg of government (PPF) relies upon a derivative strategy that benefits another leg of government (HMT), the net effect being to ensure the compression of gilt yields and continued access to cheap borrowings. That’s more than convenient. Then the comparative impact of this endless supply of cheap debt (otherwise known as future taxation), artificially increase the prices of any assets with a yield, and sets unsustainably low hurdle rates, denying the economy access to growth.
My response is “yes”, the PPF is currently restricting rather than creating growth in the economy and for it to move from lifeboat to sovereign wealth fund, it will have to make a change in the way it looks at itself, as fundamental as the way that Olafur Eliasson has changed the way I look at climate change.
What I am dreaming of is a PPF which is strong and confident enough to move beyond the limited ambition it has set itself (to be sufficient by 2030 and move towards a vision of itself as the lifeboat that carrie ordinary savers to a “future world of later life content”.
I dream of a PPF which allows not just distressed DB schemes but distressed DC pension pots to be absorbed. A PPF where people approaching their retirement can exchange their pension pot for a wage for life paid from the public fund , backed by the £6bn reserves the PPF has already built up and funded for the future – as all state pensions are – by our future money.
The PPF is already CDC in nature – it can cut benefits
We must get used , in a future world of later life content, that our retirement income is subject to market forces, just as our past income was. I have never relied on my wage for future security in work, for I know my next month’s income could be my last, my next bonus dependent on many matters beyond my control, the existence of my company, now I am back being my own boss, dependent on my health and aptitude.
Living with conditional indexation and the 2% chance of nominal cut in my pension income is not a fearsome prospect to me and i don’t believe the risks of a properly maintained CDC plan, risks that many could not embrace- if the alternatives created equal or greater risks.
The PPF could offer a “transfer-in” CDC scheme to compete against drawdown, cash-out , annuities and commercial CDC and do so as a genuinely public service on a genuinely not-for-profit basis and it could do so within the next five years.
My dream of a future-world of later life contentment
IF you are reading this on Christmas day, happy Christmas, if post Christmas I wish you a a happy year and if in 2020 , I wish you a prosperous new decade.
The PPF is a diamond in a coal mine, that rare thing, a properly run funded pension run by the Government for the people.
I believe it is lacking in ambition and that its success should make it aspire to more, I think it should aspire to solve the issues that people have with their DC pension pots.
I think it suited to morphing into a dc as well as a db lifeboat and of offering people scheme pensions in return for their pension pots.
One of the enduring features of the last ten years is Andy Young texting me “this is all getting too much, I think I’m going to retire”.
Among the many things that Andy has created – he is a great procreator – is the PPF. Thankfully Andy has seen his baby grow from a twinkle in the DWP’s eye to a robust teenager which will be 15 in April.
Andy is married to Sara who is the Chief Customer Officer of the PPF. She is his boss and the kind of boss I’d be happy to work for. She actually works for Oliver Morley who is the CEO and the PPF is a happy child.
In its last 2018/19 report , the PPF showed just how fast it was growing up
It’s school reports show it’s doing what is asked of it
and this against a background of falling gilt yields which have catapulted liabilities ahead of assets
The PPF has grown strong by hedging its liabilities using a derivative strategy which accounts for around 45% of its assets, the “return seeking assets are in bonds and a small amount of equities”.
This baby-food has been nutritious and has kept the young child healthy despite the economic headwinds it faced in its early years (it was only 2 in 2008).
The economic climate impacting Britain’s DB schemes is still unhelpful and – despite a brief period in positive territory in 2018, Britain’s DB schemes are still an unhealthy lot.
But every month, the PPF publishes its numbers, telling us how the rest of the class are doing and reporting on the financial health of our funded DB plans
Published November 30th 2019
Britain’s other pension success story
We are getting used to being told what a great success story auto-enrolment has been. But the PPF could equally deserve that title. While auto-enrolment is still a toddler, the PPF is proving year after year, its critics wrong.
There are many (including me) that it is over-fed by levies and could easily become lazy and obese from over indulgence. This pie chart does not show it sufficient.
from the 2018-19 report
That 23% subsidy from “the levy” has been at the expense of the solvency of the rest of the funded defined benefit sector.
However , there will become a time when the PPF will be off its parents hands and ready for its adult role. The thought back in 2005 was that the PPF would be sufficient by 2030, When Oliver Morley took over in 2018 he told the FT that the PPF should easily meet its target and might even start to give back money to the remaining DB schemes not in its care. As I wrote five years ago, the PPF is a great British success story.
What will the PPF grow up to be?
I look forward to the day when the PPF can get to adulthood, reduce its levy to nothing and start working out what it’s going to do beyond paying a dividend to its funders.
I have some ideas about that , that I haven’t talked about on this blog for a long time. My hope is to find some new Andy Young , with that man’s insane energy , vision and charisma , who will turn round to Government and convince them that the PPF is the natural home of the CDC pension.
If you’ve read this far, you won’t be shocked by my optimism. I am optimistic that in decades to come, the PPF will pay DC savers scheme pensions at a rate above the prevailing annuity rate and that these scheme pensions will be available as the destination of an investment pathway.
I won’t go into the detail here, you may want to try to think through the mechanism (if you are an aspiring Andy Young). But if we are to see the PPF for what it could be, then it has to have a place for all pension savers.
a lifeboat for us all
The PPF could grow to be a CDC lifeboat over time.
Andy Young , father of the PPF and a whole lot more!
This is a most unusual blog as it starts with an apology – an apology to John Ralfe . It is also an apology to any of the people who were offended by my early morning rant at John.
I lost my temper with John for comments he made about my former colleagues Derek Benstead and Hilary Salt, bogging your frustration is not the way to sort things out.
As regular readers will know, I frequently quote John where his views and mine are the same. His position on WASPI is one I have adopted, I am sure there will be many areas in 2020 where I will quote John again.
For the record I was not drunk – infact I’ve dunk since I found my lungs were clotted last month, nor will I for the foreseeable.
I was pissed in another way, and I allowed my deep affection for Derek and Hilary to get in the way of my better judgement. I should not fight fire with fire and the blog serves no useful purpose by publication.
You may ask why keep it up, there is a simple answer, over 1000 people get my blog by email and once those mails fly, there’s no retracting them. There is a more complex answer and that is that while the blog does me no good, it does at least explain the anger.
Sorry John!
An introduction to John’s dystopia.
Since I’ve left First Actuarial I have had less to do with John Ralfe. John has moved on and even the famous @Ralfebot , John’s amanuensis and doppleganger has had a quieter time. John has not however stopped his trolling and this Sunday morning I bring you new hope that in 2020, this extraordinary man will continue to light up our lives.
To understand the dystopia, you must understand it’s root cause
I will try to keep this blog non-technical but will start with an explanation of John’s primary motivation , the exegesis of the “open scheme heresy”.
I give you by way of example, this microblog on my friends Derek and Hilary
Derek and Hilary’s are not “dishonest charlatans”. They have a different view to John’s but that neither makes them dishonest or a charlatan.
A charlatan (also called a swindler or mountebank) is a person practicing quackery or some similar confidence trick or deception in order to obtain money, fame or other advantages via some form of pretense or deception
John cannot should not call people dishonest or charlatans without good reason. Both are actuaries and abide by the actuarial code of ethics. An attack on their honesty and professionalism is a serious matter.
2020 – let’s hope we have a more peaceful year
Many sound views and excellent insights that John does have, are often lost on people who take his vulgarity seriously. This is a quote from my recent blog on WASPI
Ralfebot’s genius is to confuse parody and the real thing to the point that nothing that John says is worth taking seriously.
But this is a minor issue, the sheer delight John Ralfe’s twitter account has brought me over the years is a blessing. The genius of his mindset is – to me at least – undiminished by it being warped. Amidst all the nonsense there is enough in what he says, to make him an essential read and I wish John and his Bot a very happy Christmas.
I am aware that these six hundred words will be considered twaddle , because -after all – we are all idiots – save the master.
1.”You have asked what action can we take to help ensure the potential of open banking is maximised”.
AgeWage was set up to help people make sense of their retirement saving and to convert “pension pots” into a retirement plan. We need you to help savers get access to their data – specifically their contribution histories and the current value of their pots (Net Asset Values or NAVs). The ecosystem that makes open banking work, could make open pensions work. You can intervene to unblock the pipes that make it hard for our users to get the information they need to make decisions and make it easier for us to act as their agents.
2. “You’ve asked for our views on what open banking teaches us about the potential development of open finance.”
We have learned from open banking the power of dashboards that offer consumers the chance to see data in a helpful way. We see people who start small , building a fuller financial picture of their saving and spending and in doing so learning how to spend, save and borrow in a more sensible way.
These lessons can be applied to retirement where people need to save for the future, organise the spending of their savings and sometimes raise capital against assets such as their house, in order to enjoy their later years and protect against extreme old age and a deterioration in health.
3. ‘You have defined Open Finance as the re-use of people’s financial data for their benefit’.
Open finance is based on the principle that the data supplied by and created on behalf of financial services customers are owned and controlled by those customers. Re-use of these data by other providers takes place in a safe and ethical environment with informed consumer consent”.
We agree with this definition. Consent is essential and those using other people’s benefits need regulation. Within these constraints open finance is a progressive way to make financial services work better for consumers. Defining open finances in terms of consumer rights is helpful.
4.“You’ve asked if we agree with your assessment of the potential benefits of open finance and whether there are others?”
You define the benefits of open finance in terms of consumers and service providers. We would add a third stakeholder, the trustee or IGC who stands as a consumer champion and needs access to data that tells them what individuals or groups of individuals are getting by way of value for their money. Employers are increasingly taking an interest in how the workplace pensions they are sponsoring , are working for their staff. Open finance can provide bottom up governance that explains concepts like value for money in terms that consumers can understand. We could define this additional benefit of open finance as “fiduciary reporting”.
5.You ask what we can do the maximise these (4) benefits. We think that pensions should fully participate in open pensions.
The Call for Input mentions the Pensions Dashboard and this will be the primary driver for a change to “open pensions” but there is a danger that the dashboard could become a closed loop in which a small amount of what consumers need is made available and the prescriptions of Government actually prevent rather than encourage innovation. The delays in implementing pension dashboards have resulted from arguments over the involvement of “for profit” organisations, as this document suggests, the interests of consumers and businesses can both be served by removing the impediments to free-flow of data. Open Finance has a role to play in demonstrating to all pension dashboard stakeholders , the maximum benefits that they can bring.
6: You ask if there is a natural sequence by which open finance would or should develop by sector?
We have asked this question when thinking of dashboards and have concluded that a gradual approach is better than a big reveal. In the pension ecosystem there is data that is dashboard ready and data that still sits on microfiche or paper. We recently analysed the data of a bank which had archived its pre 2015 pension data. They were suffeciently exercised by the work we did on recent accessible data that they have commissioned the de-archivisation of earlier data. We use this as an example of how a gradual approach works, the trustees told us we would not have got any data if we had insisted on getting everything up front. We support mandation on holders of pension data to share data – but we don’t want mandation to force those who can go now to wait.
7.You ask if we agree with your assessment of the potential risks arising from open finance and whether there are others?
Over the summer we invited 120 of our investors to test a value for money scoring system we have developed. We were surprised by two things; firstly we were unable to get simple information (contribution histories and NAVs) from providers; we had to tell nearly a third of our investors why they couldn’t get the information they’d requested and there was considerable frustration among this group. We fear we may have put them off sorting their pensions because open finance didn’t work. Secondly we found that telling people what had really gone on with their money had alarming impact on our saving investors. One was so pleased with the value they were getting from their workplace pension that they said they were considering moving their defined benefit pension to it. Another saver, who had been investing in a cash fund for fourteen years threatened to sue his trustee because his fund had performed the average return for someone with his contribution history. On the back of these kinds of reaction, we’ve decided to apply to enter the FCA Sandbox and better understand whether the support we need to provide to our open finance metrics needs further levels of authorisation. We consider that unsupported information carries risks of its own.
8. “You asked if we consider the current regulatory framework adequate to capture these risks?”
We don’t know; our conversation with Direct Support and Sandbox managers suggests that open pensions will present challenges to the regulators that they are yet to face. I was involved in trying to avert mis-selling in Port Talbot to BSPS members after having tried to warn trustees of the dangers their Time to Choose project were creating. The agility of the regulators to meet this challenge was tested and I expect that lessons are being learned where they fell short. The Sandbox looks to us like an opportunity for both the FCA and those participating in open finance projects, to presage the risks.
9. “You asked what barriers established firms face in providing access to customer data and what barriers TPPs face in accessing that data today?”
We have submitted to Guy Opperman, the minister for pensions and financial inclusion a report on all the barriers we , as a TPP, faced in getting data from providers. These included a refusal to deal with AgeWage for not being on the FCA register, not accepting Letter of Authority submitted with e-signatures, not passing the data to us in machine readable format or simply refusing to acknowledge customers requests. We are not alone in this, we know of other organisations who report similar barriers. As mentioned earlier, we are also aware that much personal data which may have been accessible at one stage has been archived and isn’t “available” today. We have also had discussions with providers who tell us whole books of DC business are not digitised at all. Some of these problems are easy to overcome but most aren’t.
10. You asked do we think the right incentives exist for open finance to develop, or would FCA rules, or any other changes be necessary?
On some issues – such as e-signatures – there is legal guidance in place (in that case from the Law Commission) but in others providers seem to be interpreting FCA guidance in different ways (for instance whether we as a TPP need to be FCA authorised). Some providers have different interpretations from department to department. It seems to us there is a need for the FCA to clarify what the legal obligations are on data providers in dealing with consumer requests and with TPPs. The incentive to meet these obligations is their compliance imperative to comply with the law and with regulatory guidance.
Beyond the incentive to stay compliant, there is a commercial imperative to participate. We have found providers who feel they will be net winners as aggregators and others who see TPPs as taking money away from them. The latter are disincentivised and the former incentivised. Without a regulatory intervention, we expect that those who see themselves losing will continue to put up barriers to open finance. We see similar issues with third party administrators (TPAs) of dc pensions who see the transfer of pots from their management as a threat to their revenues (as they are paid by the record). We have seen many TPAs refuse to co-operate in data sharing, most notably the Origo transfer hub, where is was not in their commercial interest to do so. This was despite it being in the interests of Trustees and members of their occupational schemes , for data to be shared. We call this “dog in the manger”.
11. “You asked if we have views on the feasibility of different types of firms opening up access to customer data to third parties?”
Our view is that for open finance to work , it must be overseen by regulators with the capacity to intervene and that those interventions should be consistent. In the world of pensions, there are two regulators – FCA and tPR. We see those firms whose services are regulated by the FCA objecting to different treatment being shown to tPR regulated firms. We need joined up and consistent policies that put all data providers behave consistently.
12. “You asked what costs would be involved in opening up data access and that you are interested in views on the desirability and feasibility of developing APIs”.
For firms like ours, developing APIs to access our database is very quick, simple and cheap. But our experience working with Pensionsync in creating APIs for the sharing of data as part of auto-enrolment showed that accessing insurer’s databases can be a long and time consuming business with no certainty of success. This is not necessarily the insurer’s fault, APIs were never a consideration when their databases were created and the technical architecture used in the 1980s and 1990s is typically incompatible with Open Pensions. Our view is that many of these databases will struggle to integrate to dashboards and other data interrogators.
13. “You asked if we have views on how the market may develop if some but not all firms opened up to third party access?”
We are sanguine about some non participants. Consumers – when searching for financial products are used to hearing that some providers could not quote on-line and recognise that sometimes it won’t be possible to have perfect information. Many pensions offer a defined benefit or are hybrid where the benefit is a guaranteed annuity or a with-profits pot value that may need manual calculation. Many legacy pension contracts are not set up to provide on-line values and will never do. But this is not a reason for abandoning open finance – 90% solutions still work.
14.”You asked what functions and common standards are needed to support open finance and how should they be delivered.”
We are encouraged by the work of the OBIE and see much of it as replicable in other areas (such as pensions). We know several members of the Open Finance Advisory Body and are very encouraged by their analysis of what standards need to be in place; specifically- the technology architecture (eg open APIs)
• operating principles, processes and practice
• security protocols
• certain areas of user experience design
• service level agreements for performance
• liability models
• dispute resolution
• consent management and data rights
• authentication and identity management
To these we would add the need for training of those who run the customer interfaces at data providers who have been inculcated by a culture that says “compute says no”. We don’t just need standards, we need training to ensure they are met and maintained.
15. “You asked if we support the BEIS smart data initiative”
We do.
We favour introducing individual Smart Data initiatives across all “regulated markets”, i.e. utilities, communications, rail, and financial services. These initiatives would essentially be separate from one another and subject to specific rules, albeit with a high degree of coordination . We see this each initiative as mutually supportive and supporting public confidence in GDPR and data protection in general.
16.”You asked to what extent should the standards and infrastructure developed by the OBIE be leveraged to support open finance?”
We don’t feel well equipped to speak in detail but see that the OBIE infrastructure and standards are transferable to open finance and indeed open pensions. We support the principle of TPPs being FCA registered, which is one of the reasons we have applied for FCA registration.
17.”You’ve asked if we agree that GDPR alone may not provide a sufficient framework for the development of open finance.”
We do not see GDPR in itself as capable of enabling Open Finance to deliver on its potential. We need more detailed intervention from regulators (for pensions both the FCA and tPR). These interventions are needed both to free up data and to ensure that consumers are protected from potential abuse from those interpreting data and using it for commercial purposes.
18.”You asked what other rights and protections are needed and if the open banking framework the right starting point.”
We think the open banking framework is the right starting point for establishing the consumer rights and protections needed to establish and run pension dashboards and other initiatives needed by people saving for and creating adequate personal retirement plans . There are a number of particular risks faced by the long term investor, notably the risks of being scammed by unscrupulous investment managers who recognise that long-term investments can easily become Ponzis.
19. “You asked what are the specific ethical issues you need to consider as part of open finance”.
We are mindful of recent scandals relating to the selling on of personal data to those who can exploit it for commercial gain. While much of this commercial activity is acceptable, risks from identity theft are all too real. The privacy of data is a matter for each individual but those who are managing data must be aware of decency levels and abide by the general principle of treating customers fairly.
20.”You asked whether we have views on whether the draft principles for open finance will achieve your aim of an effective and interoperable ecosystem”.
We believe that the FCA get help create an effective and interoperable ecosystem for open finance. Our confidence is based on the platform that has been created by open banking and on the capacity of parts of the industry we work in to adopt open standards when required to. We are thinking of the way in which payroll and providers have developed interoperability to manage the challenges of auto-enrolling 10.5m workers through over 1m employers.
For Open Finance to take off, there need to be clearly laid out problems which open finance can be used to solve. We can see the problems that need solving in our niche in the larger market, we suppose that other sectors such as general insurance, mortgages and consumer credit will find their problems too.
For all the sectors who could use open finance to work together, the general set of principles will be helpful. But we the need granularity in regulations that go beyond general principles and ensure that initiative such as the pensions dashboards can flourish. That granularity needs joined up regulation.
21.”You asked how should these set of principles be developed and whether we have views on the role the FCA should play”.
We have found this call for input very helpful in developing our strategy. The development of these principles need to incorporate the input from all respondents. The FCA have the resources to do this properly and your proven ability to work with organisations such as the CMA and BEIS gives us confidence that Open Finance could be an example of truly joined up government. We want to see initiatives such as digital identities incorporated into the pensions dashboard and the FC can be the interface between cabinet office and the pensions community.
22.”You asked if we have views on whether any elements of the FCA’s regulatory framework may constrain the development of open finance”.
As we have mentioned, we have seen examples where the FCA’s regulatory framework haven’t worked to the consumer’s interest. We give as an example the handling of DB pension transfers where we feel the FCA were too ready to listen to intermediaries and did not listen to trustees , employers and consumer advocates.
Another example where the regulatory regime comes up short is in engaging with collective pension schemes. We think that initiatives from other parts of Government, such as the DWP’s work on CDC, have not been properly embraced by the FCA’s policy teams and this has given rise to an “us and them” perception of regulators. We think that pension initiatives like CDC should be better embraced by the FCA. We say the same things to tPR about FCA initiatives like Open Finance. It is natural for financial services to work in silos, it is a broad industry, but we need more regulators who take a holistic view of consumer issues.
Share Action’s Master Trust survey starts with the question “IS REGULATION ENOUGH?” and through the 26 pages of Lauren Peacock’s survey that remains the key question.
But there are secondary questions…
Can we trust our trustees , should they delegate to asset managers, should asset managers exercise their voting rights or pass them on, what does “stewardship mean in practice?
Ultimately, what choices do we have as investors in how our money is managed?
It’s helpful to establish what we’re studying here and the report helpfully does just that.
What is responsible investement?
Responsible investment (RI) is an approach to investment, which takes into account environmental, social, and governance (ESG) risks. It is characterised not only by addressing these risks in investment strategy, but also by activities such as actively engaging with investee companies on their ESG practices and seeking to steward them over the long-term.
I guess my house view is “If you have to be told this stuff, then something is wrong” and what I found in Lauren’s report is that despite all the noise, more’s wrong than right.
Do we have to be told? I suppose we do.
What’s wrong?
The report divided the 16 master trusts studied into four groups
In judging the development of RI within these propositions, Peacock doesn’t use a heavy hand, but it’s hard not to feel amazed that NOW pensions with its strong Scandinavian heritage , its segregated investment fund and its relative seniority, should lag younger , less well-funded rivals.
It is good to see NEST leading the way, we have paid for it to do so with a subsidised loan from the tax-payer and we appear to be getting value for that money. NEST and NOW bookend a number of commercially funded master-trusts that have moved at different speeds.
From my independent research, I find few surprises. I am really pleased to see Smart at the front of the pack as frankly their initial investment proposition in 2016 was rubbish.
I’m not surprised to see Legal and General leading the insurers (alongside People’s Pension – who have an insurer behind them). People’s appointment of Nico Aspinall as CIO is clearly bearing fruit.
I am surprised to see so many lagging insurers in the “Building phase”. I will be looking particularly closely at their Chair’s statements and the IGC statements to better understand whether the lag is occurring.
It’s good to see two consultancy driven master trusts – Atlas (Capita) and Lifesight (WTW) reflect well on the capacity of the ESG consultancy units that sit behind. Mercer and Aon will clearly be concerned not to be in the van.
What’s wrong is that we have such dispersion and the rest of the report makes it clear that if regulation is working, it’s not working hard enough.
A lack of conviction
Peacock makes it clear that even those within the financial industry taking climate change seriously, appear to view it predominantly in terms of how it poses risks to, and opportunities for, maximising their investment returns.
By framing the problem of climate purely in risk terms and not considering impact, market participants focus their efforts on resilience, instead of working on mitigation.
In terms of the exam question, we should think of responsible investment as a means of rewarding the planet , not just ourselves. This might sound impossibly altruistic but it is precisely what surveys from Ignition House and Investec are showing. People, especially younger people, are prepared to pay for responsible investment in terms of increased risk of reduced returns.
For trustees this represents what seems an impossible dilemma: are they here to maximise pensions (at least pension pots) or are they here to make our “future-world’ a better place. This week’s events in Australia suggest that that continent may not be habitable in the lifetimes of many younger savers.
I suspect that the debate about whether adopting ESG policies adds to investment returns has done more harm than good. If people are prepared to pay to reduce climate risks and improve society and the governance of business, then whether that payment leads to improved performance is secondary. What matters is that ESG gets done.
There appears to be a lack of conviction both among the trustees and the providers about what is the responsible investment strategy.
To the report’s method
The report limited its scope to the largest 16 master trusts by assets (with Smart replacing BlueSky by dint of its large membership). Some notable AE master trusts aren’t represented – Salvus, BlueSky and Creative could have, and I hope they will next year.
The report took trustee boards seriously, pointing out that unlike IGCs (who now have a duty of oversite), trustees are actually asset owners and have a duty to implement.
The scoring of providers put double points on providers who published policies and marked down providers with policies that only emerged after investigation. Share Action clearly see the promotion of ESG as critical to responsible investment and I support this. It does mean that many who lagged will feel they can move up the leader-board if they adopt a more transparent approach in 2020.
But only if people take Share Action’s work seriously – which is what this blog is doing.
And it’s findings
Once the report moved out of “exec summary mode”, it became a lot more clinical in its findings.
It found the weakest-scorers were following the lead of others – and delegating strategy that should have sat with them (trustees as “asset owners”)
It found that many master trustees were not exercising stewardship directly but delegating to others
It found that most providers were not engaging Government on policy but engaging with regulation. Rather than driving regulation, they were reacting to it.
Half of the group had adopted “tilts” in their asset allocation to in time for the publication of the survey.
“Time” was an important word in the survey. Peacock pointed out that by the time that some trustees get round to adopting ESG tilts, any leadership advantage will have been lost. It implicitly criticises strategies that await evidence of financial advantage as leaving members exposed to under performing assets.
The report ends on the front foot with a call to action
What we need to see next is action and hopefully the implementation policies, which schemes have to produce next year, will show this. Rather than delegating, asset owners have an opportunity to embrace responsible investment and secure future sustainable returns as well as create a better world for their members to retire into. Trustees need to be responsible for setting the tone, and integrity of all stewardship undertaken on their behalf.
But I will give the defining statement of this report to Atlas Master Trust
“It isn’t possible to ignore the fact that investing in the global economy necessarily contributes to the environmental threats that our planet faces – global warming, deforestation and desertification, pollution, species extinction, extreme weather patterns and rapid exhaustion of natural resources”
Do we have to be told?
We are going to save this planet when we want to, not when we’re told to and until the trustees – who own the assets of these trusts become aware of their responsibilities, no amount of regulation will be enough.
It’s not often that the phrase “lost in translation” is more than a glib cliche , but yesterday’s *fake news* on the impending catastrophe from the ECJ ruling on the PPF has given if fresh currency!
The breaking news was preceded by this seemingly prescient warning the day before.
While Ed saw the moment of Superfund’s greatness flicker, the trade press (with notable exceptions such as the FT) piled in behind. The story could be summed up as
“The PPF was holed below the waterline as the EC judgement demanded it pay benefits to all its members at 100% of the levels promised by the originating schemes.”.
The British press had been sold a dummy and had put through their own net. The story SKY and they had printed – and which Eddy had gloried in – was a load of tosh – lost in translation from the original pronouncement (in German).
I suspect a lot of journalists were not as honest as James and that the twitter cutting room is littered with deleted tweets with #pensions hashtags.
*Fake news* of fatality, wake up to reality
It turned out that the EC was only requiring the PPF (and other lifeboats) to top people up to a minimum “poverty” level of £10,000 pa. The number of PPF members who won’t have outside income (state pension) sufficient to get to the poverty level is very small and while this and the Hampshire ruling , will make the job of super-pouting PPF ops supremo Sara Protheroe a little more exacting, the net impact on PPF solvency will be a lot closer to £0m.
News of the death of PPF has been somewhat exaggerated.
News from the source please!
This PPF story is a salutary lesson for journalists relying on newsfeeds for their story. Check your primary sources – journos… or risk ignominy!
So it’s Christmas and we’ll all have forgotten this in the new year. But had the PPF been a stock, it could have seen some pretty violent trading yesterday. There would have been big winners and losers and you can be sure that the losers would not have been as forgiving as Mike Harrison !
And for those unfamiliar with the oeuvre of Poly Styrene and X Ray Spex, here (without adverts) is her top of the pops performance of the original “The day the world turned day-glo”.
Pension Dashboards got a much needed shot in the arm from the FCA yesterday , with the publication of a “Call for input” on Open Finance from the FCA yesterday.
The document sets out a route-map to better financial services through the unlocking of data currently held and not shared by market participants.
In short, the FCA’s Competition and Markets division (headed by Christopher Woollard sees this sharing of data as a step forward for the consumer and ultimately the financial services providers who participate.
There are of course risks and these are outline in the document; chiefly
Mis-use of data
Homogenisation of products
Cartel like behaviour by providers
Operational cost (passed to consumer)
Frictionless decision making leads to bad decisions.
The FCA looking at these opportunities and risks are asking four key questions
Incentives – Will open finance develop without intervention? Crucially, do the incentives exist for established firms to provide access?
Feasibility and cost – Can all firms develop and offer the access needed to support open finance? What are the costs and barriers involved?
Interoperability and cohesion – What common standards are required for open finance to develop?
Underpinned by clear data rights – Is an adequate framework of data rights in place? If not, what would it be, and how would it be provided?
The FCA clearly see Open Finance as an extension of Open Banking where there was Government intervention (through the CMA, where most banks were able to participated in data sharing, where the CMA were able to create and implement common data standards and where the rights of consumers were underpinned by the Data Protection Act and GDPR.
You sense that the FCA’s questions are rhetorical, the call for input an affirmation of what is bleedingly obvious.
And yet…
Shortly before parliament broke, AgeWage wrote to Guy Opperman, the once and former pension minister explaining how difficult it had been for it to help a group of around 150 investors get their contribution histories and current fund value for their pension pots.
Several large organisations including the Government’s own pension scheme – NEST and the largest occupational scheme in the country – USS, refused to honour the letters of authority given them by their members. The members did not get their data and did not get an AgeWage score.
True 90% of participants did eventually get the information they’d requested but it often took over 6 weeks to get information that – under Open Finance – would be available at the click of a mouse.
The acceptance of digital signatures, despite being a pre-requisite of handling personal data (according to the Law Commission) was often refused.
Providers often considered the provision of data acceptable only if the party authorised to receive the data was FCA regulated.
Some providers simply were unable to satisfy data requests as contribution histories had been archived or were held on microfiche or even paper.
Our experience is reflected in the FCA’s Call for Input.
The barriers to open finance are manifested in our report, the scale of the challenge that the FCA is posing to the financial services industry is mammoth. “Mammoth” is an accurate characterisation of some of the financial behemoths we spoke to, if they do not evolve, they may face the mammoth’s fate.
The nitty gritty
The FCA paper is not just about high level strategy. It has created an Open Finance working group which has identified what needs to be created for Open Finance to be properly rolled out. technology architecture (eg open APIs)
operating principles, processes and practice
security protocols
certain areas of user experience design
service level agreements for performance
liability models
dispute resolution
consent management and data rights
authentication and identity management
This is pretty well a blue-print for the development of a pensions dashboard and it’s good to know that some of the FCA Open Finance team also sit influential in the Pension Dashboard’s implementation
Open investments and open pensions
The document considers how open finance can help the long-term saver, whether in or outside a pension wrapper.
Here’s the business case for investments
and here’s the business case for pensions
Next steps
The FCA’s call for input is an impatient document. The document outlines at length the work of the Open Banking Implementation Entity (OBIE) and explains how Open Banking has already
developed API standards and security protocols
developed Customer Experience Guidelines for TPPs. These are minimum standards for certain elements of the customer journey which are key to use, adoption and competition
maintained the Directory – a ‘whitelist’ of participants able to participate in the open banking ecosystem. This is underpinned by the FCA Register, since all TPPs must be FCA regulated
The document also talks of the progress that is being made towards establishing digital identities which will unlock so much of the interoperability of a pensions dashboard
The FCA sees its immediate function as facilitating change and lays out the principles under which it will work
Developing and agreeing the principles set out below and driving their adoption.
Supporting and recognising other relevant industry codes of conduct.
Providing an industry forum to help identify opportunities and risks for open finance.
Supporting the development of a common API standard.
Identify regulatory and commercial barriers to open finance through our crosscutting policy work. For example, our evaluation of the Retail Distribution Review and the Financial Advice Market Review is exploring how the market can meet consumer needs for advice and wider forms of financial support. This is likely to be of interest to a wide range of firms wishing to provide new forms of support services.
Considering its existing regulatory framework and how it currently supports open finance. For example, different sectors have particular rules which will need to be met by all firms which provide financial advice. We would be interested in views as to whether the FCA’s regulatory framework might constrain the development of open finance. •
For nearly four years , public policy has been blighted by the continuing crisis of how and when we would leave the European Union. The December election has created certainty that we will leave in January and , though 2020 will continue to be overcast by negotiations over trade agreements, we can at least expect politicians to focus again on the great social issues.
For people facing retirement there are two principle issues, health and finances.
Our changing demographic means we will have in the next decade , more strain on the NHS – principally due to demand from those who are 60 and above. The strain on the NHS is acutest at this time of the year and we are all aware that A and E waiting times are deteriorating, waiting lists extending and morale in the medical profession reducing.
People reaching their sixties are facing an uncertain future, despite numerous consultations, the Government has yet to establish a policy that properly addresses the chronic problems of those who can no longer look after themselves and become dependent either on the NHS or on residential or social care.
This lack of policy is in part a by-product of the Brexit paralysis, but there is a more fundamental issue – there is not enough growth in our economy and in tax revenues to meet the increased financial demands of people growing old. Money is going to have to be found from somewhere.
Writing in the Times, Jim Coney points to the large Government majority as an opportunity to take on the second great policy casualty of Brexit. This is the appalling value for money that the tax-payer is getting from incentivising people to save. The VFM is appalling is that the majority of the £40bn dished out each year in pensions tax-relief is benefiting the wealthy and very little of it is providing social insurance against people living too long and becoming a burden on the state.
Two problems , the cost of growing old and the failure to target tax incentives at that cost.
One opportunity – a stonking majority and Brexit already “oven-ready”. Forget keeping back-benchers happy, forget the lack of manifesto promises, the Government is now in the remarkable position of being able to do something positive about our growing old.
So here are the six things this Government could do right now.
See the Pensions Bill through the Queen’s Speech and onto the statute book , providing us with the legislation for a CDC system, mandating participation in pension dashboards and granting tPR a limited increase in powers.
Provide a “throw money at it” -fix (within 30 days) as a sticking plaster to the AA taper
Fix the Net Pay anomaly by adopting the over-ready solution worked out by the net pay anomaly group.
Consult immediately on the financial issues surrounding long-term care
Dig out the remedies to the problems set out in the 2015 consultation on tax-relief- mothballed in 2016
Read , inwardly digest and learn from the Parliamentary Ombudsman’s finding on the WASPI problem.
With such a large majority , it could be easy for Government to kick the problems of later life into the long grass. It’s been done before. It’s vital that the pension community does not let this happen.
While support for Liberals is consistent over ages, the vote for the binary propositions of conservative and labour governments is highly dependent on age.
The old chestnut
“If a man is not a socialist by the time he is 20, he has no heart. If he is not a conservative by the time he is 40, he has no brain.”
appears to have truth in it, at least in identifying changing voting trends.
Ashcroft polls also suggest that people voted Conservative for management reasons – getting Brexit done and managing the country, while those who voted for other parties did so out of and for conviction.
Pension people will discover in this , elements of the lifestyle matrix established by many pension schemes which will invest youngsters in illiquid assets invested for the long-term but “de-risk people into short term investments in bonds or even cash as they get older.
But is this a case of people getting wiser as they get older, or are they simply conserving the gains of their youth and depriving the next generation of jobs and wealth and pensions?
Is risk aversion the same as conservatism and did this election witness an extreme example of intergenerational conflict?
So why did young voters care so much about the NHS?
The NHS is overwhelmingly the most important issue for Labour voters (74%) who we have identified as typically younger people. But younger people do not use the NHS. The support for the NHS by Labour voters appears to be for idealistic not pragmatic reasons.
We know that the users of the NHS today, are older people, yet the NHS seems a lot less important (41%) to them , than to the youngsters.
I wonder whether my generation of boomers will be as generous back.
Lesson for pensions – for youngsters emotion matters
Franklin Templeton’s recent report “The Power of Emotions – responsible investment for Generation DC” – is the latest in a fast-lengthening line of arguments for commercialising the green pound held in the pay-packets of the under 35s. (you can access the paper here)
It may sound despicable to those fearful of green-washing, but financial services companies need to grab the millennial and make them theirs and the big asset managers have worked out that responsible investment is tomorrow’s meal-ticket.
They should be looking at the results of the election as validation for their adopting RI strategies, at least for the growth phase of workplace defaults. But I suspect that we have more to learn from #okboomer than to throw a few crumbs.
Lessons for pensions- seniority matters more
We are often have to take binary decisions in business. For me there are choices such as whether to satisfy the conviction of younger people and engage through responsible investment, alternatively appeal to the conservative needs of people my own age who are concerned about losing money through scams or their own poor decision making.
These choices are biased by the fact that older people have more in the way of money and therefore pay more attention to the ideas that I am selling. In political terms, the grey voter appears to have been more effective in achieving its result than the young one.
There is a lesson for business one and it’s not very pleasant. While you may be able to get by selling plastic sandals on Instagram (or RI to millennials) , it’s a lot easier to get rich selling financial products to people over fifty.
And here is where I doff my cap to Pension Bee and Multiply AI, Fintechs that target the millennials. In business terms , they are swimming against the tide, they do however have the estuary to themselves!
The wealth management industry is sipping cocktails by the heated pool.
There are a number of ways of looking at voting patterns and Ashford Polls looks at a good few. They include voting on single issues (such as Brexit), voting by personality (or lack of it) and voting tactically out of hate for a particular party.
But none of the patterns seems as conclusive as the pattern we started with.
The Conservatives won because the old people made more difference in terms of votes cast and in particular in seats won. Never has the phrase “we are an ageing society” – been so graphically and frighteningly depicted,
The question is whether my generation will exercise the power we have responsibly, or whether we will plunder our nation’s wealth and exclude future generations from our prosperity.
If we do , we will deserve the message on the hoodie.
Ask a 7 year old what a Trustee does and a 7 year old would say “do trust”.
This is the verdict of chapter 7 of the second Joint Expert Panel on the Trustee of the USS pension scheme.
The press statement from the Joint Expert Panel is available here and the full report is available here
Before diving into the intricacies of dual discount rates and risk budgets, it’s worth asking ourselves why many students last term went without lectures or tutorials or any kind of teaching, why they got nothing for the money they borrowed or spent to be taught.
The breakdown in trust has resulted in the kind of feuding which the general public has rejected in favour of getting things done and I think it time that someone listened and acted on the Joint Expert Panel’s recommendations. If the current trustees and the stakeholders (USS executive, employers and unions) cannot come to an agreement, I would like the JEP to be backed by the Pensions Regulator to take control.
The USS should be run as a mutual and the views of all parties – including the JEP, should be taken into account.
It has come to something when the Trustee of the USS is recommended to come to the table to discuss getting things done through mediation. This suggests a failure of trust that would amaze the 7 year old.
The USS Trustee no longer “does trust”.
What has happened?
I have hinted at parallels with the breakdown in the political process which resulted in us having to have a third general election within five years.
What has happened at USS is that instead of mutual endeavour to provide university teaching staff with promised pensions, we have two sides who have adopted quite different views on how those promises be met.
USS wants to adopt an approach which makes the possibility of a shortfall in funding impossible by adopting a conservative investment approach and demanding more in contributions from stakeholders. This approach has been adopted by the Trustees.
Members, represented by the teacher’s union (UCU) want lower contributions and a less conservative investment proposition, resulting in lower contributions for members and employers.
The JEP appears to be siding with the members in recommending alternative investment strategies that would result in higher discount rates and lower contributions. It claims that these strategies would meet the approval of the Pensions Regulator which acts as a referee in what has become a fiscal boxing match.
This is all that has happened in the last three years. Like Brexit, the resolution of the problem has become bogged down to the point that force majeure is now required to get things done
Let’s get USS done
The answer to the problems created by the USS dispute cannot be resolved by the Trustee, which has lost the trust of its members. If this happened it cannot – as any 7 year old would confirm – be called a Trustee. The Trustee has to go and be replaced by an independently appointed body, the JEP. Indeed the JEP should be employed to moderate the dispute and (with the blessing of TPR), impose a solution to the issues surrounding the forthcoming valuation.
I cannot see any useful purpose to be served by keeping the current Trustee which has lost all credibility with its members and is – in the second JEP report, being severely criticised for its governance failures.
Implicitly, the report is saying as much and it is also asking stark questions of the USS executive too. It is hard to see how the current USS executive can continue in their posts if the implications of the second JEP report are taken on board.
A proper adoption of risk-sharing – a price UCU will have to pay
Getting USS done is going to mean an acceptance from the UCU too, acceptance that ultimately risk-sharing means more than a grudging acceptance that members will have to pay more. To me “risk-sharing” means accepting in adopting a more aggressive investment strategy, some of the benefits of that strategy become conditional on it working.
It has been suggested that to reach a point where levels of risk and contribution rates are acceptable to all parties, it could be necessary to allow flexibility in benefits. A range of possible alternative means by which active members could share the risk could be explored, recognising that contribution levels may already be deterring some potential members from joining.
(thanks Mike Otsuka for pointing this out).
This kind of risk-sharing is practiced by most people in their pension saving and ultimately it leads to fixed contributions and variable benefits.
The paradigm shift away from a guaranteed to a best endeavour approach need not be adopted overnight, it may happen over a valuation cycle or over multiple valuation cycles. It is the long-term solution to the problem.
Again an analogy with the current political situation is helpful. When Labour finally accepts that it has lost the trust of many of its core supporters, it will accept that the ground on which its principles are built has shifted. I suspect the same has happened in pensions.
The principle that a pension scheme produces a guaranteed benefit has shifted with common practice. Those who argue against ideas such as conditional indexation or even reductions in nominal pay-outs now look as out of kilter with popular thinking as the leaders of the Labour party.
The adoption of mutuality
The old governance model which involves trustees acting for members has broken down at USS. Trustees are now seen as supporting the USS executive and this idea of “them and us” has broken the concept of mutual endeavour to the point that young people are not getting the education they have paid for – because of strikes.
Both sides need to come together and change their positions. This is what the JEP is calling for. If both sides cannot back down, they need to walk away and we need a JEP imposed solution – with the blessing of the referee – TPR.
It is not enough for the UCU to dig in its heels, it must accept that for the USS scheme to be run as the UCU want it to be run, there must be more risk-sharing and that – if the more aggressive strategy doesn’t work, the cost of failure must be born not just in higher contributions but lower benefits,
Risk-sharing is at the heart of mutuality. The breakdown in trust is two way and poor as the performance of the USS executive and Trustee has been, UCU must bear its part in the blame for a generation of students not getting the teaching they’ve paid for.
We’re not as dumb as experts make out. The average Brit has a fairly clear idea about cashflow and recent research from Canada Life shows that for the man or woman on the Clapham Omnibus, the concepts of retirement are only broadly coincidental with “retirement ages”.
The average UK working adult plans to start taking benefits from their private pension from age 62, according to new research from Canada Life.
The research has shown that despite not expecting to receive their state pension until age 67, the average UK worker plans to retire from work at 64, using private pension savings as a stopgap.
The report also stipulated that “age has a significant role to play”, with adults under 55 seeming more ambitious in terms of their financial goals.
Those under 55 on average planned to access their private pension at 62, and subsequently retire at 63. Respondents over 55 meanwhile stated that they planned to wait until 63 to access their savings, and wait a further four years until age 67 to retire from work.
Commenting on the findings, Canada Life technical director, Andrew Tully, said: “Working till you drop clearly doesn’t appeal to the average UK worker who has plans to slow down in their early 60s, typically retiring from work three years before their expected state pension age.
“This ambition is helped by an expectation that they will begin to access their private pensions before they retire, at age 62. This creates a clear financial planning issue and people need to take positive steps early to mind the pension’s gap. Whether that be saving more, moderating their ambitions or considering working longer.
“Product choice can also play a role as a solution which ensures flexibility, for example a lower income while working, increasing as you move towards state pension and then dropping again can prove beneficial from a tax planning perspective.
“As people approach retirement, it’s clear from our research the financial reality kicks in. If you are looking to retire on your terms a regulated financial adviser will be best placed to help you build a plan to meet your goals.”
Working things out for yourself
If you can find a financial adviser who can help you turn your pension pots into a retirement plan, you should use him or her.
But speak first to Pension Wise who will give you your options on the phone, on a web-chat or face to face. You can speak to Pension Wise for free and all you need to do is book an appointment for a forty minute session. Use this link.
Thinking ahead is a good thing to do. Turning your pension pots into part of your retirement plan can be hard work – but rewarding.
If you want to find out what AgeWage is planning to do to help thousands of people in 2020 , drop me a line on henry@agewage.com. I respond to all genuine emails!
Insurance markets do not lie, they reflect perceived risk. The cost of professional indemnity insurance for IFAs is rocketing (I know – I’ve been quoted). This is as a result of increased perceived risk of claims against insurance from those who consider they have been ill-advised to transfer and ill advised as to what to transfer to.
IFAs may consider such premium hikes punitive and to some extent they are. The collective failure to police the behaviour of the advisers against whom claims are now being made is now being punished by insurers who feel let down by the “professions”.
Keith Richards has written in Money Marketing suggesting that PI could be provided through the Government levy, effectively extending FSCS cover.
This is a sound way of insuring the public sector but a lousy way to deliver the competition that the PFS prizes. In a competitive market, advisers should be competing on the basis of their track record, those who have a poor track record find themselves at a competitive disadvantage. That is what underwriting does – insurance markets do not lie.
A levy which spreads the cost of insurance beyond those who are insured is asking for the king of behaviours that insurers are keen to stop. It effectively creates moral hazard, reduces competition and encourages the sloppy behaviour that caused the PI problem in the first place
If IFAs are serious about being part of a profession, they need to arrange their own professional indemnity insurance and ensure that the underwriting properly reflects risk.
“Sadly, reports show that more firms are exiting the pension transfers market”.
Again I am confused by what the PFS is referring to. If IFAs form a profession, then the last way they should be talking about advice about DB transfers is in terms of a “market”.
If the PFS are representing vertically integrated wealth managers, then a “transfer market” makes some sense in terms of competition for new business.
My understanding is that PFS stands for advice rather than wealth management but it is unclear from the language of the article whether PFS is lobbying for better advice or more wealth to advise on. IF the main source of wealth to fuel the competition that the PFS desire, comes from DB transfers, I think the PFS are hopelessly compromised.
There should be no market for DB pension transfer advice.
Professional indemnity insurance is the market regulator
I have said that PI will catch up with IFAs since I spent time with the steelworkers.
Two years on from “Time to Choose”, it has.
The insurance market is reactive not proactive, the FCA needed to be proactive and they were found lacking. PI is the second line of defence and it is an effective one.
To dismantle that line and replace it with what is effectively social insurance, is to transfer risks that should be born by individual IFA firms onto the industry as a whole.
Since the costs of levies are inevitably passed on to customers, the impact of reducing PI and increasing the levy would be to spread the cost of mis-selling to all customers in the interests of protecting firms which otherwise would have gone-under.
I don’t see this as competitive or in the interests of the general consumer. I simply see it as special pleading from a very profitable part of the financial community.
Tried to show @BorisJohnson the picture of Jack Williment-Barr. The 4-year-old with suspected pneumonia forced to lie on a pile of coats on the floor of a Leeds hospital.
I shuddered when I watched Johnson’s reaction to an unpleasant photo. Johnson refused to look at it and I know just how he feels. We all have shoved the letter from HMRC under the table, not opened the email you dreaded, refused to take in the bottom line of the spreadsheet.
We are of course lying to ourselves, creating a reality for ourselves which is unique to us, cutting ourselves off from the realities of others.
Which is not what leaders do – or certainly should do.
Mankind can only stand a little reality and Johnson fails in leadership by hiding the journalists phone in his pocket, he is showing a characteristic in ourselves we do not admire.
This is what general elections do to leaders, they tire them to the point where they are seen naked. Johnson recovered enough to struggle on, but yesterday had one of those “thick of it” moments which are salutary and chastening – that is why I shuddered.
How we treat our future selves.
Our promises to ourselves can only be kept if we face today’s tough decisions. That doesn’t mean a token trip to the gym in January or a month off the booze, it means strong and determined action to change our current lifestyles to meet our future promises.
That’s what some of the people we watched last week on Channel 5 seemed capable of and it’s what we know we are capable of too. We have it within ourselves to meet the challenge of our future selves and change our ways.
Many of us won’t – for some the choices are gone.
The homeless who live around me bear witness to the failure of our society to catch those who don’t make it. Witness my Scottish friend never fails to say “hi” to me from his bed on the pavement outside the Grange Hotel St Pauls. He knows and I know he is dying. I cannot give him enough for the hostel he needs, because whatever I give him, goes on stella and fags, that is his pathway.
Yesterday, I went for a diagnosis of why I have pulmonary embolisms, the blood tests alone cost £1500. As I got off my bike coming back from the hospital he was there, we chatted for a couple of minutes, I looked death in his eyes and thought what that £1500 could do – for that man and for Jack Williment- Barr.
I will be diagnosed, I will recover and I will go on to live and work another 30 years, as my Dad did. Many will not get the treatment I have got and will die early and vicious deaths – as I fear my friend will – this winter. As Jack Williment-Barr might do too.
Compassion as your BAU
It is easy for politicians to put on shows of compassion to order. I watched Johnson’s face at the vigil for another Jack , a few days back.
Pietas?
But compassion needs to be your business as usual, it needs to inform all that you do, if you are to lead a country.
Compassion in leadership
I will respect Johnson as a leader when he faces his crucial moments when he is confronted by reality, and – rather than putting the phone in his pocket – weeps openly or privately for Jack Williment-Barr.
That emotion needs to come from the heart – not from the political playbook.
There is no strength in bluster, there is mighty strength in compassion.
The lessons of Christianity are of pity, compassion, forgiveness and above all love.
Without these qualities are leaders are nothing but hot air. There is something very wrong in having privildge and abusing it, Johnson yesterday was found wanting
Johnson failed yesterday as a leader, he showed himself not up to the challenge of reality. But we should not throw rocks at him, we should recognise we are just like him at our worst.
We can show we can be better in leadership than him, by governing our own lives with greater honesty , guts and determination, in these little matters of compassion.
Then went the devils out of the man, and entered into the swine: and the herd ran violently down a steep place into the lake, and were choked. Luke 8:33
The City regulator is investigating funds worth more than £15bn that have holdings in Neil Woodford’s collapsed investment vehicle as it seeks to prevent the liquidity crisis surrounding the fallen stockpicker from spiralling.
The Financial Conduct Authority is closely monitoring multi-manager funds with holdings in Equity Income — Mr Woodford’s flagship vehicle that was suspended in June — over fears that investors in these products are vulnerable to contagion spreading from the failed fund. – FT 08/12/19
The question for me , is not what multi-managers have done with Woodford’s Equity Income Fund as what they are doing at all.
The idea of an investment fund is to pass direct control of an investment portfolio to an asset manager who can obtain economies of scale by managing your money in the same way as he/she does others.
At some point , a further level of intermediation was introduced because, it was felt, people needed to have a wider diversification of investments than could be achieved by one asset manager. Instead of appointing multiple asset managers to one fund, it was thought better to have multiple funds under a single umbrella, managed by a super-fund manager.
Multi-managers are not managing your money any more, they are simply managing the people managing your money and it is very likely that in this complex pyramid , there are more than just the two layers. I have heard of hierarchies of funds with eight layers and I have heard the multi-managers within that hierarchy boast of the complexity of what is on offer.
There are three immediate questions behind my big question (what do multi-managers do)
How are they managing the proliferation of costs from employing so many people?
How are they managing governance (voting rights for instance)?
Who is ultimately accountable for outcomes?
Cost proliferation
Over the weekend we learned that leading US universities endowments struggle to beat tracker funds. It turns out that the decade of great returns enjoyed by equity funds have been enjoyed by Private Equity and public stocks alike. Ludovic Phalippou,. Professor of finance at Oxford university pithily explains why private equity – held by endowments – has underperformed.
“QE has also favoured private equity big time, but unlike Vanguard, they captured it all in fees,”
I do not get the maths, pay five people to do one person’s job and your outcomes are reduced.
Governance
The further you are from the voting rights, the harder it is to influence the the management of your assets. It’s common sense. If you have fully outsourced your voting rights through multi-management, you are relying on others to vote your shares and if those “others” aren’t exercising their rights, there is not much you can do about it.
The layering of fund management described above makes it harder to see what is going on at the coal-face. There is an issue of agency with all outsourcing of asset management , but that issue proliferates as layers of fund management proliferate.
Accountability
It is often said that the only free lunch available to investors is diversification. This phrase could be rephrased , the only free lunches are those enjoyed by asset managers within a multi-manager hierarchy.
A multi-manager hierarchy can quickly become a club. Clubs are great for members but they tend to be exclusive and some would say that multi-manager funds have the capacity to exclude the asset owners.
There is also a natural bias within clubs to protect those within the club and this is presumably why the FCA feel they need to get involved with multi-manager funds which have exposure to Woodford’s Equity Income Fund.
The idea that such funds may, as a result of write-downs in the value of their Woodford Holdings, fall off the perch of the league tables they sit in, is a marketing concern.
The idea that multi-manager funds might themselves become suffeciently illiquid to be gated poses an existential risk to such funds.
Multi-managers do nothing except diversify and the judgement call of any investor is whether the diversification of management justifies the costs of proliferation, the weakening of governance and the lack of accountability.
Since multi-manager’s can only be judged on their capacity to deliver out-performance, confidence among investors is especially important. The contagion that the FCA should be worried about is only too obvious.
Then went the devils out of the man, and entered into the swine: and the herd ran violently down a steep place into the lake, and were choked. Luke 8:33
Private pension wealth is the largest component of household wealth, marginally bigger than total property wealth, and its value has increased by more than that of property wealth too. This reflects a slight cooling in the housing market, while the valuation of pension assets has been pushed up by rising longevity and continued low interest rates (affecting defined-benefit schemes), and more people being auto-enrolled into workplace pensions.
Of £6.1tn pension wealth in the UK, c. *half* is pensions in payment (stuff being paid out to retirees), rest is stuff being paid into, or preserved (after a job move or smthg). https://t.co/btpiZV0nuFpic.twitter.com/GEvVDpmrLs
For pensions in payment, the *median* pension wealth numbers are large – particularly if you are male. They grew by 17% over the last 2yrs (almost all growth accounted for by falling bond yields). pic.twitter.com/jy2MpD5Owa
So difference (call it £3.5tn?) is going to be the promise to pay UK DB public sector occupational pensions. But UK Whole of Govt A/cs put the number at £1.9tn. Missing £1.6tn? Dunno. https://t.co/AL5MdFtoC5pic.twitter.com/kUzqhfGBsT
But wait – didn’t DB schemes all shut down? Here’s a chart from the Pensions Regulator’s most recent Purple Book. Only 12% of private sector DB schemes are still open. https://t.co/pBzGdHukwPpic.twitter.com/T0pHmnDXUn
But public sector DB schemes are open. So there are actually many members of DB plans. Slightly more than DC plan membership, even after auto-enrollment. pic.twitter.com/R7jzQMQ4vt
Here is the statement from the Secretary of State for Health and Social Care – Matt Hancock.
I have agreed to support this proposal from NHS England and NHS Improvement for reasons of urgent operational necessity.
The scheme involves employers making binding contractual commitments to be given to every affected NHS clinician so as to ensure that this commitment is honoured. Full details of the terms of the payment arrangements are set out in letters that are being sent to each affected clinician by their employer including the terms and conditions of the offer.
This contractual commitment contains the provision that in order for it to be operative, the affected clinician must make a Scheme Pays election in relation to the tax charge for 2019/20 only relating to accrual in the NHS Pension Scheme excluding 2019/20 additional voluntary contributions (AVCs) that is accepted by the NHS Business Service Authority.
These binding contractual commitments will provide for payment to be made when the clinician takes their pension, at which point the employer (or its successor) will be liable for the payment. NHS England has undertaken to provide funding to the employer (or its successor) in respect of those liabilities as the payments are made.
There are long-standing precedents for how the liabilities of NHS bodies are met and the government will act in accordance with these.
Should the NHS trust or foundation trust employing the clinician cease to exist, there are statutory provisions to ensure its liabilities, including commitments to staff, would be transferred to one or more existing NHS bodies, or the Secretary of State. The Secretary of State ultimately takes responsibility for the liabilities of NHS bodies including NHS England and NHS Improvement.
Legislative changes to NHS structures by successive governments have previously made provision for the liabilities of organisations that cease to exist to transfer to successor bodies or the Secretary of State. The commitment to make these payments will be contractually binding and if either (a) there is no employer or other NHS body to make this payment at the time the clinician retires or at any later time when a payment falls to be made, or (b) any NHS body to whom these liabilities are transferred does not have sufficient assets to make the payment, the Secretary of State undertakes responsibility for making the payment, or securing that it is made.
Therefore, these payments will be honoured even if the NHS body no longer exists in the future. In order to provide the same level of assurance to clinicians who are TUPE transferred outside the NHS, NHS England undertakes to ensure that the financial responsibility for meeting any employer’s liabilities in relation to this commitment is transferred or remains with an NHS body as part of a future transfer process.
Clinicians are therefore now immediately able to take on additional shifts or sessions without worrying about an annual allowance charge on their pensions.
Matt Hancock, Secretary of State for Health and Social Care
Reactions
It’s good that clinicians (and doctors in future) will be able to earn without fear of penal pension taxation, but this is not a long-term fix to the problem. This blog has constantly complained about the repeated failure of Government to act on recent consultations on pension tax incentives. This crisis is a result of this failure.
Specifically mentions NHS and foundation trusts but omits to mention organisations providing NHS services where employees are members of NHS pension scheme eg GPS, not for profits etc. Needs urgent clarification @JosephineCumbo@goldstone_tony@TheBMA
I strongly advise all senior doctors to ignore BMA’s backing of this offer on #NHS pensions. Laws can change & do change, especially when the political economy changes. Doctors would be daft to accept this. We are winning the argument. Stick at 10PAs or less. #scrapthetaperhttps://t.co/ncjGM99NxA
The most consultants will not sign up to a ‘take a high interest loan now to pay off a punitive tax bill in the hope that the government reimburses you 30 years down the road’
Politically, we are now in a climate of “zero trust” and this statement, though made by an active secretary of state, is being classed as a political promise.
We cannot use tax-payers money to pay-off one group of voters at the expense of another. The doctors have a very real grievance (as this blog has promoted for some years). The timing of the first proposed solution to a problem we have known about since 2017 is less than a week away from an election.
Pensions last a lifetime and pension liabilities stretch indefinitely into the future. Responsible Governments legislate for permanence , not for votes.
The NHS pension scheme is unfunded and is paid by the tax-payer as we go; so you can insert “tax-payers” for “assets” – but you get the idea
The black one is your pension scheme liability value.
If you would like to see details of the offer and the frequently asked questions on subjects such as AVCs, added years, scope and timeframes – read here
1.5m of us are working beyond the retirement age with 90% reliant on state benefits alone. One in five of us have no pension at all.
Gavin and Louise have no plans to be working beyond 60. Gavin would like to retire at 55 having been in the army since 1989. This would mean them retiring together.
They are “seizing the day” but they haven’t ever sat down to work out what their dream would cost.
Louise has £22,000 in a pension pot and a buy-to-let income of £400 pm. Gavin has a military pension of £12,000 a year and a lump sum to come.
They are hoping to spend 3 months a year travelling abroad. Having been taken to the travel agent it turns out one holiday in a lifetime in New Zealand would cost them £15,000. They want to spend £10,000 pa but their pension planning tells them their combined holiday budget would be £2,500 – one dream holiday every six years.
You can’t buy a sausage with a brick (the rent trap)
Nearly 4 million Brits plan to sell their properties to fund their retirement. But they will still need to find somewhere to live.
Denni and Graham moved into rented accommodation , having sold their property to buy a salon. They are trapped in the “rent-trap” meaning they are working for their landlord, not their retirement.
Renters are stuck paying more for their rent on falling (real) incomes. The number of older people in the private rented sector has doubled in the last ten years and the vast majority of them are people on low incomes renting in the private sector.
“Once the kids leave home”
For retiring sergeant- major Gavin White, what’s critical is getting another job when he leaves the army or face a drop in income of £17,500.
Far from retiring when the kids leave home, he is looking at living on subsistence levels – not exploring the joys of the new found freedom .
For Gavin and Louise to retire at 55 and 60 , they could also consider down-sizing.
Felicity explains it how it is
At least Gavin and Louise have the option to compromise on the dream.
Juggling as a single parent
Single mother 44 Clare Craig splits her time three ways. There’s no money to save for a pension , no money for a holiday and she can’t see beyond the life she’s not properly living on now.
Two thirds of the people who rely on the state pension in retirement are women and most are single.
Clare has no option to save
The retirement outcomes of single parents are half the comparables of those who spent an equivalent time in a stable relationship.
Can you afford your retirement- now?
Just over half a million of us are approaching their retirement age this year.
Ivor is one such fellow, at 59 he is still working the clubs on ever diminishing earnings. He’s washed-out by his own admission – what can he do but retire? But he’s too scared to do anything else , because he has nothing to fall back on.
For Gavin White, the option of earning after he leaves the army is now the only option if his and Louise’s comfortable retirement is to happen. Hostile environments not luxury holidays – it’s not what they wanted.
Carol May is a 64 year old cookery teacher who has worked out that there won’t be a time when she won’t go to work. Nowadays she works three days a week which exhausts her- she’s a Waspi Woman.
With 40 years national insurance behind her, she only have a roof over her head thanks to charity. She relies on food-banks.
Carol is back at work at 64
The problem is partiularly acute to women like Carol – relying on benefits and low-paid work. It’s harder to find and keep a good job as they grow older
Big ideas – need big plans
Felicity Hannah points out that for people like Gavin and Louise, it’s not enough to just save for retirement, they need to plan for their retirement.
They don’t just need a pension pot – but a retirement plan – in financial terms an AgeWage.
Gavin and Louise have used the program to create a ten year plan which involves working longer and saving in a purposeful way so retirement expectations are met.
The grim message of the program was that Gavin and Louise appeared to be the only couple over two episodes who had done just this.
A crisis created by a lack of planning?
So was this two part documentary worth it?
There’s a lot of talk on social media about it focussing on doom and gloom. But in the gloom the gold gathers the light about it.
I found the program has given me a kick up the backside to get back to what I should be doing – “converting pension pots into retirement plans”. So I’ll give the last word to Felicity Hannah
My favourite review of tonight’s episode: ‘Felicity, a smiley, curly-haired harbinger of perpetual misery, visits them every now and again to administer another kick’ On at 9:15 tonight, channel 5 https://t.co/cijiKL9RtW
