Why a vaccine can provide better immunity than an actual infection

Thanks to Nicola Oliver for highlighting this article from the Conversation in Linked in. At a time of increased anxiety, information about roads to immunity give some comfort, but this article by Maitreyi Shivkumar manages to underpin optimism with medical science and do so in a way a non-scientist can understand.


Maitreyi ShivkumarDe Montfort University

Two recent studies have confirmed that people previously infected with SARS-CoV-2, the virus that causes COVID-19, can be reinfected with the virus. Interestingly, the two people had different outcomes. The person in Hong Kong showed no symptoms on the second infection, while the case from Reno, Nevada, had more severe disease the second time around. It is therefore unclear if an immune response to SARS-CoV-2 will protect against subsequent reinfection.

Does this mean a vaccine will also fail to protect against the virus? Certainly not. First, it is still unclear how common these reinfections are. More importantly, a fading immune response to natural infection, as seen in the Nevada patient, does not mean we cannot develop a successful, protective vaccine.

Any infection initially activates a non-specific innate immune response, in which white blood cells trigger inflammation. This may be enough to clear the virus. But in more prolonged infections, the adaptive immune system is activated. Here, T and B cells recognise distinct structures (or antigens) derived from the virus. T cells can detect and kill infected cells, while B cells produce antibodies that neutralise the virus.

During a primary infection – that is, the first time a person is infected with a particular virus – this adaptive immune response is delayed. It takes a few days before immune cells that recognise the specific pathogen are activated and expanded to control the infection.

Some of these T and B cells, called memory cells, persist long after the infection is resolved. It is these memory cells that are crucial for long-term protection. In a subsequent infection by the same virus, the memory cells get activated rapidly and induce a robust and specific response to block the infection.

A vaccine mimics this primary infection, providing antigens that prime the adaptive immune system and generating memory cells that can be activated rapidly in the event of a real infection. However, as the antigens in the vaccine are derived from weakened or noninfectious material from the virus, there is little risk of severe infection.

A better immune response

Vaccines have other advantages over natural infections. For one, they can be designed to focus the immune system against specific antigens that elicit better responses.

For instance, the human papillomavirus (HPV) vaccine elicits a stronger immune response than infection by the virus itself. One reason for this is that the vaccine contains high concentrations of a viral coat protein, more than what would occur in a natural infection. This triggers strongly neutralising antibodies, making the vaccine very effective at preventing infection.

The natural immunity against HPV is especially weak, as the virus uses various tactics to evade the host immune system. Many viruses, including HPV, have proteins that block the immune response or simply lie low to avoid detection. Indeed, a vaccine that provides accessible antigens in the absence of these other proteins may allow us to control the response in a way that a natural infection does not.

The immunogenicity of a vaccine – that is, how effective it is at producing an immune response – can also be fine tuned. Agents called adjuvants typically kick-start the immune response and can enhance vaccine immunogenicity.

Alongside this, the dose and route of administration can be controlled to encourage appropriate immune responses in the right places. Traditionally, vaccines are administered by injection into the muscle, even for respiratory viruses such as measles. In this case, the vaccine generates such a strong response that antibodies and immune cells reach the mucosal surfaces in the nose.

However, the success of the oral polio vaccine in reducing infection and transmission of polio has been attributed to a localised immune response in the gut, where poliovirus replicates. Similarly, delivering the coronavirus vaccine directly to the nose may contribute to a stronger mucosal immunity in the nose and lungs, offering protection at the site of entry.

A boy in Pakistan being given an oral polio vaccine.
The oral polio vaccine elicits an immune response in the gut. Rehan Khan/EPA

Understanding natural immunity is key

A good vaccine that improves upon natural immunity requires us to first understand our natural immune response to the virus. So far, neutralising antibodies against SARS-CoV-2 have been detected up to four months after infection.

Previous studies have suggested that antibodies against related coronaviruses typically last for a couple of years. However, declining antibody levels do not always translate to weakening immune responses. And more promisingly, a recent study found that memory T cells triggered responses against the coronavirus that causes Sars almost two decades after the people were infected.

Of the roughly 320 vaccines being developed against COVID-19, one that favours a strong T cell response may be the key to long-lasting immunity.

Maitreyi Shivkumar does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

De Montfort University provides funding as a member of The Conversation UK.

Posted in pensions | Tagged , , , , , | Leave a comment

Andy Cheseldine’s VFM assessment is just too good!

Andy Cheseldine gave , in 21 minutes , one of the most complete and articulate expressions of what makes for good value in a DC pension scheme. I hate the word “masterclass” but on this occasion it is appropriate and I hope that Pension Age will publish the recording of this session of its Annual Conference.

It was, as it was billed.

Value for (Member’s) Money is the crucial criterion for trustees and IGC members. It encompasses everything – not just the basic charging level in a DC scheme. In this session, Andy will look at what trustees need to consider; what should be measured, and with what relative weightings (not all features are of equal importance), against which criteria; how your own services rate against those benchmarks; and how to articulate the results to members, regulators, employers, service providers and, where relevant, advisers/intermediaries.


The balanced scorecard – the impossible dream

Andy is trustee chair at a number of schemes, most noticeably Smart Pensions. The approach he suggests is a very sophisticated version of that we adopted at the Pension PlayPen where you take the characteristics of a good DC pension scheme and weight them according to the relevence to your membership to get a scheme score that tells you how well your scheme is working towards delivering good DC outcomes.

Getting to a common definition of a balanced scorecard is an impossible dream. When we are trying to help small employers choose their workplace pension we found that whatever level of sophistication we employed in researching the providers, the scorecard became weighted towards the employer’s agenda – compliance, ease of use and headline cost.

The agendas of employers, regulators and members of workplace pensions should be aligned but they are not. The member wants the scheme to pay as much to him or her in retirement as possible. The employer wants to keep its costs to a minimum. The Regulator is primarily concerned with the risk of failure. So within the balanced scorecard , there are at least three versions of value for money for the trustee to tell and three audiences that might listen.

And there are not enough Andy Cheseldines to go round!  While Smart Pensions benefits from this inclusive governance , what of the thousands of DC schemes not covered by the authorization framework, failing to meet the minimum governance benchmarks laid down by the Pensions Regulators?

While the major workplace pension schemes get the benefit of the high quality IGCs, what of the long tail of legacy that cannot benefit from the sophistication of Andy’s approach?

My issue – and I mentioned it in my question to Andy, is that the all inclusive balanced scorecard approach is actually a measure of how well the trustee is doing his/her job. It is not something that can be easily explained to anything other than a group of experts and by anyone other than an expert trustee. The approach has its place, but it cannot be the final word.


The final word

The only attempt I have seen from a regulator to formulate a common definition of value for money appears in the FCA’s CP20/09 document

The administration charges and transaction costs borne by relevant policyholders are likely to represent value for money where the combination of the charges and costs and the investment performance and services are appropriate

This definition looks at the issue of VFM not from the top down (as Andy’s does, as the Pension PlayPen did).

But the FCA – and the DWP in its recently published consultation on better DC outcomes, are looking at VFM from the member’s perspective. “By your fruits shall you be known..”.

Being brutally honest, however good the endeavors of trustees or IGCs, if they cannot improve member or policyholder outcomes , they have failed. What we need is not a means of measuring good scheme governance (which we have had within TPR for decades) but  a means of measuring outcomes.

This is what both the FCA and DWP are edging towards, by focusing on what members are paying and getting from the pensions they invest into. For quality of service, read the confidence members have that whatever statement is made by the scheme that it provides quality is realistic. After reading IGC and Trustee Chair statements for the last five years, I do not expect to ever read that a scheme is giving poor quality of service.

There are independent measures, especially as regards data quality, that can be employed to measure service quality and people like Holly Mackay and her Boring Money team are busy finding them.

Customer satisfaction with service is temporary, but the impact of poor performance and of unnecessary charges is permanent. We should not make the mistake of ignoring the data. One of the reasons I hold Pension Bee in high regard is that their high service quality is backed up with a deep understanding of the quality of their data , their costs and their member outcomes.

The final word on value for money is not in a definition but in the phrase. We need to make “value for money”, the standard by which we judge our pensions and in that we need Andy, Holly, Romi and  we need regulators with open ears.


Thanks to Pension Age for Andy’s session and a good day on Thursday

 

Posted in age wage | Tagged , , , , , , , | 1 Comment

“Shape up or shape out” – DWP give small DC schemes one year’s notice

 

 It is not acceptable for savers to be enrolled in arrangements that do not deliver value in terms of costs, investment returns or secure and resilient governance. Government would expect trustees acting in the best interests of their members to take appropriate action to wind up and consolidate without TPR needing to exercise its powers.

This is how the DWP have responded to its 18 month long consultation on DC scheme consolidation. In case such schemes think they can spin this out for as long again, the DWP continue

It is proposed that these regulations will come into force on 5 October 2021.

Trustees will be required to assess their scheme for value for money on a basis prescribed by the Pensions Regulator. The consultation’s assumption is that most small DC schemes will fail their own assessment.

Trustees with failing assessments  can be given grace to improve but their homework will eventually be marked by the Pensions Regulator.

 If the trustees fail in this attempt to improve they will be expected to wind up the scheme and consolidate the members into a scheme that offers better value.

In case trustees are in doubt, the DWP end their summation

TPR has the power to issue an order to wind up the scheme, to remove trustees in certain circumstances, or to appoint new trustees to properly manage the scheme’s assets.

The Government has widened the scope of the schemes that concern them (previously schemes with less than £10m). It’s scope now includes all DC schemes with less than £100m that are more than 3 years old


A new Value for Money/Member assessment

Lurking behind this is a new and much tougher VFM test.  This is aligned to the proposals in FCA’s CP20/9 VFM policy statement and calls for the same three legged stool approach with the test focusing on returns , charges and ” governance and administration”. The FCA opt for “quality of service” instead of governance but a peek behind the curtain suggests that the terms amount to much the same. This is an unusual and most happy alignment between the Regulators.

The risk remains however that Trustees , IGCs and GAAs can continue to argue that in their opinion “their provider continues to offer value for money”. To mitigate the risk that the opinion is biased by a conflict in favor of self-survival, both regulators appear to be moving towards a quantitative assessment where opinion is based on evidence and evidence based on data and benchmarking.

This assessment is variously described as “new” and “more holistic” but it’s clear from the sub-text of the consultation that for occupational DC schemes with less than £100m in assets that have been going for more than three years life is going to get a lot tougher. That includes commercial master trusts, some of which will fall need to take the new assessment.


So what of the new assessment?

Reporting will be against net returns

The key new idea is that of a “net return”.

We agree that while costs and charges have a significant impact on member outcomes they are best understood in the broader context of what the scheme delivers. The net returns received is a crucial factor in measuring value for members

The net return of a scheme may be measured by the quoted performance less stated charges but the DWP seem to be pointing at the return experienced by members in “various age cohorts”. This suggests a move towards measuring returns experienced by members. The illustrations in the Statutory Guidance (published in annex E)explain how this will work and it looks very complicated and makes comparisons between schemes all but impoosible

As I’ve noted on this blog several times, it is not what fund managers and trustees report as their estimate but what members see in their pot values – that matters. This blog will continue to press for the full transparency of actual experienced returns and not a proxy created using assumptions rather than outcomes.

The DWP are suggesting that

 in order to provide greater transparency to members all relevant schemes, regardless of size, must publish net returns for their default and self-selected funds in the annual chair’s statement.

This suggests that net returns will become a common feature by which members, employers and fiduciaries can judge workplace pensions. I would suggest that they are also relevant to SIPPs and to value assessments from fund platforms.

Shortcomings of the net return approach

However, if we are to have proper transparency, we need to move beyond net returns and look at the internal or individual rates of return achieved by members. This is the only true way to measure the value a scheme can measure value delivered and it can be bench marked.

scheme dashboard showing average IRRs achieved against benchmarked IRRs – a simple way of comparing returns.

People are rightly concerned about whether they are getting value for money not at scheme level but in their pocket.  While we agree with the thrust of the consultation to use value for money to help schemes consolidation, trustees need to be looking at value for money experienced by individual members.

The only way to assess returns that does this is bottom up, by measuring scheme returns by averaging the individual returns. The Net Return approach does not do this, it assumes that everyone’s experience of funds is the same – it never is.


Reporting will be against governance and administrative metrics

measures of administration and governance include:

  • promptness and accuracy of financial transactions
  • appropriateness of default investment strategy
  • quality of investment governance
  • quality of record keeping
  • quality of communication with members
  • level of trustee knowledge, understanding and skills to run the scheme effectively
  • effectiveness of management of conflict of interest

Some of these metrics are easily measurable- (a study of internal rates of return will provide evidence of the quality of record keeping).

Excerpt from an AgeWage report showing suspect data items identified by anomalous IRRs

Others will rely on a finger in the air. How for instance can trustees measure the effectiveness with which they manage conflicts of interest without declaring a conflict? TKU similarly needs external measurement as does the quality of investment governance, but there are no authoritative independent agencies to establish good from bad. There is no standard, let alone a certified standard for any of these measures. As for the appropriateness of a default, what board of trustees is going to call itself for running an inappropriate default?

These are not matters that can be measured by net promoter scores from members of by trust pilot, attempts to provide DC schemes such as the PLSA’s Pension Quality Mark have struggled to gain acceptance for measures beyond the bar set for contribution rates.

The worry is that a liberal interpretation of value for these measures  will be used to justify value for members even where net returns are poor. The DWP  is cute in its observation.

The outcome should be a holistic one but made with regard to government’s statutory guidance

It is going to be important for TPR to take a strong hold on the term “holistic” and not allow consultants and lawyers to deflect focus on the main event – the outcome of pension saving in the member’s pocket.


Bench marking

As in the FCA’s CP20/9 , the purpose of the VFM assessment is not just to establish an absolute measure of VFM but to allow the trustees to see the scheme in the context of others. As with the FCA, the bench marking is proposed to set the scheme against comparison schemes that span the options available to employers when choosing a workplace pension.

41. For the purposes of the assessing costs and charges and net investment returns as part of the value for members assessment, each specified pension scheme must compare itself with three “comparison schemes”.7

42. We expect trustees to have a clear rationale for the schemes they have chosen as comparators. The comparators should include a scheme that is different in structure to their own, where possible. For example, bundled corporate pension schemes should look at an unbundled example, and pension schemes not used for Automatic Enrolment should not limit their comparison to other such schemes.

This will only work if the comparison are simple. Here is an example of net performance reporting from the Guidance.

In this example, the scheme applies different charges to different employers, meaning that returns may vary between employees. Trustees do not need to produce multiple tables of returns but can instead provide additional information for each group of employers. The example below shows a scheme with four groups of employers who are charged differently:

Table shows employees in Group A.
Employees in Group B: add 0.05% to returns
Employees in Group C: add 0.15%
Employees in Group D: add 0.20%

Annualised returns % (if available):

Age of member in 2021 (years) 20 years (2001 to 2021) 15 years (2006 to 2021) 10 years (2011 to 2021)
25 x.y % x.y % x.y %
35 x.y % x.y % x.y %
45 x.y % x.y % x.y %
55 x.y % x.y % x.y %
65 x.y % x.y % x.y %

Annualised returns % (expected):

Age of member in 2021 (years) 6 years (2015 to 2021) 5 years (2016 to 2021)
25 x.y % x.y %
35 x.y % x.y %
45 x.y % x.y %
55 x.y % x.y %
65 x.y % x.y %

Much the same can be said for costs and charges and indeed governance and administration. I will be strongly responding to the consultation to suggest ways of simplifying this reporting.


What is the DWP’s big picture?

The consolidation section of the consultation comprises only one chapter of a 6 chapter consultation with 7 annexes and 2 impact assessments. Small wonder it was 19 months in the making.

The other chapters mainly deal with the introduction of alternatives into DC funds which is seen by Government as a positive. Alternatives include private equity investments and investment into what is variously known as “patient capital”, “infrastructure” and “impact” investments. The Government argue that these forms of investment cannot exist within the defaults of small schemes and that consolidation can ensure that more members get exposure to new forms of growth (with the positive social impact they can bring).

The consultation uses the imperative of getting these investments into DC defaults to dismiss calls for a more inclusive charge cap. Indeed the consultation into the charge cap is summarily dealt with in chapter 5 of the consultation and annexes F and G.

It would be easy to read this consultation as a whole and consider the point of it no more than to placate certain asset managers who are excluded from DC investment. This would be to miss the bigger picture.

Of much more relevance to pension savers is that pensions produce good outcomes by making their money matter. The requirements for TCFD reporting look beyond all but the best funded and most committed trustees.

Better returns need to be allied to better investment and implemented through better governance. By linking consolidation with an extension of the impact of workplace DC investment, the DWP may have pulled off something of a coup. For once this reads as a joined up document and let’s hope that when the FCA reports on its VFM consultation, the messages are equally direct and aligned.

Something of a coup for Guy Opperman and the DWP

 

Posted in advice gap, age wage, DWP, pensions, Pensions Regulator | Tagged , , , , , , | 1 Comment

Weathering the Storm

Iain Clacher & Con Keating

As part of our Funding Code research, we searched for academic or practitioner papers covering long-term expected returns forecasts. We were particularly interested in the ex post accuracy of these forecasts. We found none which used historic market performance[i] other than for short-term concerns such as corrections to market bubbles and periods of boom and bust. There were a few, macro-economic in nature, where long-term returns are functions of growth and demographics. To use an analogy, this is climatology rather than weather forecasting. We shall revert to this later.

What we do know

There are a few things we do know about gilt yields – they are strongly predictive of future long-term gilt returns, but that relation is tautological. They are not predictive of equity, property, or other asset class returns at any holding period horizon. This renders their use in gilts + presentation of expected returns highly questionable. To misquote Ralph Nader, they are unsafe at any horizon.[ii]

We have spent much of the past week trying to reconcile various claims and figures cited in the latest USS valuation consultation with UUK as these two things seem inextricably linked. We have had little success.

As best we can tell, the single equivalent discount rate for USS would be less than 2% nominal and the required rate of return on scheme assets would be around 3.2% nominal. These seem to us to be low and readily achievable. With that in mind, we looked to the long-term expected returns forecasts of other long-term financial institutions. The expected returns of other UK pension funds are not a valid comparator as they are subject to the same regulatory panopticon.

Looking further afield, The Norwegian Fund for Future Generations publishes its expected returns – they expect 3% real above their CPI which has averaged around 1.75% in recent decades, so a nominal of around 4.75%. The risk (volatility) of their portfolio is 12%. The most interesting aspect of all of this is that in 2017, in response to declining government bonds yields globally, they moved their target asset allocation from 60/40 equity/bonds to 70/30 equity/bonds and increased the expected return to 3% real from 2.75%. In the context of this shift in investment strategy and return expectations, it is worth bearing in mind this is the largest of the sovereign wealth funds (with circa $1.2 trillion of investments as of July 2020)[iii]. This is a fund that has access to the best advice in the world. Moreover, it has  achieved these types of returns over the long-term[iv].

By our calculation, if USS were to use this rate, it would not be reporting any deficit but rather a surplus of similar order to the headline-grabbing £18 billion deficit.

Intergenerational fairness

This issue of what do future returns look like (and what returns do we need) is also linked to the recent blogs on cash equivalent transfer values.

If we fund a scheme to the levels of liabilities arising from low rates of interest, we are effectively pre-funding those liabilities relative to their contractual values. This also has the effect of lowering the required rate of return on the asset portfolio, and with that, the potential future cost to the sponsor employer. If a scheme is fully funded at this rate, the required rate of return on assets is that rate.

In these circumstances, if a member takes a transfer based on these values, albeit that the transfer may be limited to the degree of funding of the scheme, then it is crystalizing the employer’s cost to that date. Crucially, this transfer enables the employee to extract all of the pre-funding, and denys the employer the possibility of recouping the costs of this prepayment,  as any future outperformance of the asset portfolio relative to this low return, is no longer possible on the assets that have been removed from the scheme.

While it may be the case that transfer transactions throw up gains in accounting terms when those accounting liability values are inflated by the use of low gilt rates, but that is a short-term accounting gain, which comes at the expense of longer-term real gains from higher returns than those we currently observe in the market.

Moving to a gilts-based de-risking strategy has the same effect of crystalising the elevated sponsor costs while removing any possibility of recouping them.

Another comparator

It is worth comparing these transfers with the size of the PPF; at £80 billion they are four time the liabilities of the PPF, and  in reality, the PPF is rather small relative to the overall DB pensions marketplace. In its 15 years of existence, it has assisted just 2% of scheme members and less than 1.5% if measured by liabilities, and it has done so at eye-watering cost. It is apparent that the fear of sponsor insolvency greatly exaggerates the actuality.

The Funding Code consultation makes much of protecting members. This raises the question of just how much of members’ pensions is at risk. The answer is rather little. If we consider the scheme we used in illustrations in earlier blogs, we have 63% as pensioners in payment and 37% deferred. The pensioners in payment are fully covered by the PPF so the risk exposure is limited to the 10% haircut applied by the PPF – so just 3.7% of future pension payments. These have a total future value of just £756k – a small fraction of even the minimal present-day funding cost of the proposed code. It is not difficult to conclude that this funding code strategy is more about protecting the PPF than members.

A final thought

The ‘lower for longer’ view of interest rates is now conventional wisdom. As such, it and its associated returns expectations are suspect. The shifting global demographics imply that we are moving over the coming three decades from the deflationary environment of the past three decades to one in which inflation and higher interest rates will prevail and with that low growth. This unconventional view is explored fully and coherently in Charles Goodhart’s latest book, ‘The Great Demographic Reversal’; we recommend reading it. This is a change in the financial climate that is perhaps as important as the change in the natural climate.

One consequence of that would be that this is surely the wrong time to de-risk in the manner proposed in the DB Funding Code.

Postscript

In the brief time since we wrote this blog, we have had some very productive discussions with some of our peers. Our attention was drawn to the Canada Pension Plan which publishes 75 year return expectations for each of its two funds. These are 5.95 % (CPI + 3.95%) for the ‘Base’ fund and 5.38% (CPI + 3.38%) for the more conservatively allocated ‘Additional’ fund. Obviously, it is too soon to evaluate the accuracy of these forecasts but the indications to date are supportive. It is notable that both CPP and the Norwegian employ peer review of their assumptions. We feel that the Pensions Regulator’s prescriptions should be subject to similar peer review.

It has also been pointed out to us that the large Canadian funds have proved able to harvest ‘illiquity premiums’ very successfully, with which we agree. However, we will make just one point here, though we will return to the subject in our commentary on the proposed second Code consultation. That point is that it is liquidity in the sense of tradability which has a cost rather liquidity which receives some extra compensation. The means that if you buy liquid securities you pay this cost regardless of whether you exercise the option to use it by selling in a market. Gilts, of course, are the most liquid and most expensive of securities from this perspective. One of the effects of quantitative easing is to lower the cost of liquidity, though relative value differences should persist between on and off the run securities should persist, This lowering of the cost of liquidity should also result in a greater reluctance by dealers to hold large inventories of bonds in pursuit of their liquidity provision role – the returns to capital are less attractive.

Finally, we have had much commentary on the prudence of buying gilts at times when their expected returns are negative in real terms[v]. However, as we have been promised a definition of prudence by the Regulator in the second consultation, we shall leave further discussion until that point in time.


[i] The long-term memory literature results for UK markets are mixed.

[ii] The original comes from Unsafe at Any Speed, Ralph Nader, 1965.

[iii] https://www.statista.com/statistics/276617/sovereign-wealth-funds-worldwide-based-on-assets-under-management/

[iv] Those interested in more detail should read their White Paper (in Norwegian) available at:

https://www.regjeringen.no/contentassets/114c28f5daba461e95ed0f2ec42ebb47/no/pdfs/stm20620170026000dddpdfs.pdf

[v] For more on this aspect see:  https://www.bankofengland.co.uk/statistics/yield-curves

 

 

Posted in actuaries, advice gap, age wage, pension genome, pensions, risk | Tagged , , , , , | 2 Comments

L&G shows we can all innovate if we try!

FCA sandbox

 

I have been reviewing the performance of various pension providers responding to  over 500 letters of authority issued by the 300 testers as AgeWage progresses through the FCA’s regulatory sandbox. The performance is mixed.

This blog looks at how some pension providers are rejecting innovation and how one has built a powerful business – by embracing smart contracts and the block chain. The lesson is clear – we can innovate if we try.


Abuse of our right to use e-signatures

ipo 2

A large number of pension administration teams still consider digital signatures as insecure and demand we print out digitally signed authorizations. Some go so far as refusing to accept or pass any data using email meaning that information requested under the GDPR arrives by post and has to be scanned back to digital format.

The most egregious example of these  breaches  of data rights is from an insurer whose email footer reads;

We’ve made a number of changes to make it easier to do business with us online, including submitting paperless instructions, removing the need for client signatures and managing your investments safely and securely online. 
We have a series of emails with this footer which begin
Unfortunately, we are currently unable to process your request as the provided Letter of Authority (LOA) has been electronically signed.

Providers who still take this approach might want to read the 124 page document from the Law Society or read this abridged summary entitled

“Electronic signatures legally valid, Law Commission confirms”

 

The impact of refusing to acknowledge this determination is that customers do not get to see the rates of return they have enjoyed from their savings in real time and can’t apply this data to get bench marked performance to compare  their pots.


Abuse of our right to be delivered portable data

Let’s remind us what the GDPR says about our rights to portable data.

  • The right to data portability allows individuals to obtain and reuse their personal data for their own purposes across different services.
  • It allows them to move, copy or transfer personal data easily from one IT environment to another in a safe and secure way, without affecting its usability.
  • Doing this enables individuals to take advantage of applications and services that can use this data to find them a better deal or help them understand their spending habits.

These rights are not recognized by many of the administrators we deal with.  They re-interpret them for their own convenience.  One of our major insurers has decided to limit the data they will provide their policyholders to the last two years, arbitrarily creating an internal rate of return that starts in 2018 whenever the policy was taken out.

I could go on. The point is that insurers cannot fight innovation by hiding behind security issues. It is up to them to make sure they comply with the rules without breaching data protocols.


But insurers do not have to behave like this

When there is a commercial case to adopt technology, insurers can and do. This is an extract from an article in Forbes magazine from Maarten Ectors, Legal & General’s Chief Innovation Officer

maartenectors1_avatar_1576179778-400x400

One challenge faced by the reinsurance market is the high degree of complexity inherent in these contracts. What’s more, setting them up can be a labor-intensive exercise. Parties and counterparties must verify and agree to complicated business rules. Contrast this with consumer insurance policies that can be set up in a few clicks.

At Legal & General (L&G), we use blockchain to break through these challenges to make complex reinsurance more efficient, affordable, and effective.

We are .. a provider of reinsurance for the pension risk transfer business. In pension risk transfer, an insurance company provides a guarantee to pay the annuities for members of a pension fund for the rest of their lives.

L&G has demonstrated an in-depth understanding of mortality trends and longevity risk, and proficiency in payroll, administration, and communication services. As part of our passion for moving the industry forward, we are pursuing innovative approaches to setting up contracts using blockchain.

Even though property and casualty insurance has been an early adopter of blockchain, we believe it is equally suited to the life and annuities sector and particularly the pension risk transfer business.

We considered several existing systems, but none could deliver the combination of security, flexibility, and auditability of the blockchain. We are convinced that blockchain is uniquely suited to the long-term nature of annuities, as it allows data and transactions to be signed, recorded, and maintained permanently and securely over the lifetime of these contracts, which can span more than 50 years.

It enables parties to exchange and agree upon data, to digitally and cryptographically sign the data, and to ensure that the data is perfectly traceable over any period of time—all without the need for a centralized authority. All members maintain a copy of the ledger database, providing greater transparency and independence.

Numerous benefits flow from this approach. First, blockchain provides a single version of the truth that remains immutable for the entire lifetime of the contract. At any point in the future, we can “turn back the clock” to any point in the lifetime of the contract, whether 5 years or 50 years in the past. We will be able to clearly understand what happened: who made which changes and when, who agreed to them, and the effects they had on the agreement. Given that pension contracts can last for decades, this is an essential feature.

Second, blockchain enables the use of smart contracts, which embody the business logic of a contract in code. This enables rapid execution of agreements and reconciliation of transactions, which are not possible when tracking contracts in Excel spreadsheets or using a ledger database technology with SQL-like interfaces. With a smart contract, we can automate complex transaction logic, enabling one-click execution. In our solution, we use smart contracts to manage pricing, claims, financial reporting, and collateral, providing an end-to-end ecosystem to streamline the reinsurance marketplace.

Our solution, known as Estuare, replaces multiple processes and systems traditionally used to support each function of reinsurance. The participants are L&G, direct insurers, and other reinsurers we partner with. We are exploring extending the system to more partners and insurers. Estuare has proven to cut monthly reconciliation from weeks to minutes. We expect it to lower costs, increase agility, and reduce risk for the pension risk transfer market. For the thousands of individuals whose pensions depend on risk management, this is exceptionally good news.

Feedback from clients that have piloted the system has been positive, especially about the simplicity and clarity of the underlying smart contract and the auditability it creates over any period. We are tremendously excited about the potential of blockchain to transform the life and annuities marketplace—and working closely with AWS to realize it.


Innovation where it suits

I totally agree with the approach adopted by L&G through Estruare. I suggested to its head of workplace pensions when some years ago she was exploring a new record-keeping system.

“Adopt smart contracts and move forwards” – said I

Right now, L&G are struggling to meet data requests from their workplace pension clients – corporate, trusts and individual. If only workplace pensions could have access to the technology that has revolutionized reinsurance!

The selective adoption of new technology seems to select against the customers who need innovation most – the DC savers. I do not single L&G out in this, indeed they have been a force for good through auto-enrolment.

But we have an immediate and pressing requirement for the sharing of pension data. We are in the midst of a consultation on data standards for the pension dashboards.

Whether it be through the adoption of the smart contracts – which are at the heart of the blockchain or by simply accepting the value of e-signatures and portable data at this difficult time, it is time we saw innovation for pension savers.

 

Posted in pensions | Leave a comment

Value Assessments and False Prophets

 

sermon

You shall know false prophets by their fruits

The FCA are said to be unhappy with the results of its first round of value assessments.  They could do worse than re-read the sermon on the mount and in particular Matthew 7 15-16.  But more of that in a moment.

There seems to be a gap between what a consumer sees as good value and what fund managers do. To be blunt, consumers do not want to judge a book just by its cover. They want to know what really happened to the money they handed over and how it  “did”.

These simple questions have to be the priority for value assessments, but once again financial services companies, left to their own devices have proven deficient in providing a common definition for value and too little practical help on working out what our funds are really costing us. The latter issue is particularly concerning for vertically integrated fund managers like SJP where the fund is paying for advice.

The lack of prescriptive guidance from the FCA on how managers should define value means that the first round of assessments vary widely from manager to manager. Why can’t they just tell us what we got?

Of course the absolute return of a fund is not the only standard by which a fund should be judged. If your fund claims to be invested for social purpose , you expect to see how that purpose was followed. If you decided to invest in technology , you want to know how you did compared with investing in the technology benchmark index. But the alpha and omega of value assessment has to be based on consumer “experienced” outcomes.

I think I speak for most consumers in saying that at the heart of any value assessment, we expect to see what we got for our money . The chief indicator of that is the internal rate of return on our investment over the period we gave our money to someone else to manage.


Beware false prophets

The review said the FCA was probing the process and governance behind the value assessments rather than the statements themselves.

And pleased to read co-founder of AgeWage, Chris Sier’s comment that that while cutting fees was eye-catching, it was only meaningful if accompanied by concrete steps to improve performance.

“Only if you do both will you get good value for money –  cutting fees on an underperforming fund just makes a bad fund cheaper.”

The famous phrase – “you shall know them by their fruits” would seem to be one guiding principle the FCA could follow. As the FT points out

The fact that some managers with high-profile performance issues did not identify a single failing fund raises questions about whether some groups have taken a wide-ranging interpretation of what constitutes value. For example, Hargreaves Lansdown’s value report was blasted as a “whitewash” by investor campaigners for giving a clean bill of health to its multi-manager funds, despite their large exposure to the failed Woodford Equity Income fund.

Clearly many funds that failed to deliver rates of return to consumers in line with expectations they gave in their prospectus and marketing literature made claims that turned out, at least for the period of the assessment to be false.

Thinking about the context of “you shall know them by their fruits”, I went back to Matthew 7 and re-read the Sermon on the Mount

Here is verse 15 which warns of false prophets

Beware of false prophets, which come to you in sheep’s clothing,

but inwardly they are ravening wolves

and here is how you can conduct a value assessment

Ye shall know them by their fruits.

Do men gather grapes of thorns, or figs of thistles?


Value assessments on the consumer’s terms

For the consumer, the idea that a fund manager can set the homework , do the homework and then mark the homework, is difficult.

Currently only a quarter of the fund boards who do the value assessments are independent of the fund manager. Indeed, their independence is compromised by their being paid by the fund manager.

As with IGCs and commercial master trusts, the incentive to stand up for consumers when it puts at risk your burgeoning “portfolio career”, is greatly diminished.

The consumer is looking for a champion but the fund management industry seems reluctant. The Financial Times ends its report on this year’s assessment , quoting the CEO of the Funds Board Council (representing fund directors)

“The Cadbury report [on corporate governance reform] was published in 1992 and we’re still talking about it today. If we expect the fund industry to make such fundamental changes in the first year [of new rules coming in], we’re asking too much.”

Many will be reminded of the wayward prayer of a follower of Chris, St Augustine

Lord make me pure  but not yet


Changing expectations in 2020

2020 has been a year when we have expected delivery on promises quickly and authoritatively.  The pandemic, climate change and Brexit have made us less tolerant of prevarication and more definitive about what we want.

If fund managers think that the slow implementation of the Cadbury report can be considered a comparator for the delivery of proper value assessments, then the FCA should intervene.

I as a consumer have no  difficulty in paying the right price for something, but if I can’t see what I’ve bought, how can I know if I paid the right price?

The process and governance of value assessments needs to meet consumer expectations and the value assessments I have read are simply not telling me what I paid and what I got.

We need a way to find out what we’ve got for our money and that means giving us access to our own experienced internal rates of return..the benchmark rate of return for our investment and a way to make sense of the difference.

Investors deserve no less.

augustine

Augustine by Sandro Botticelli (1480)

 

Posted in pensions | 10 Comments

Covid-19 actuaries give us their monthly medical update

Monthly medical update – Issue 2

4 September 2020

By Nicola Oliver and Joseph Lu for

COVID-19 Actuaries Response Group – Learn. Share. Educate. Influence.

Given the pace of change with ‘all things COVID’, it can be hard – even for those who follow all the updates – to know what the overall state of play is regarding medical developments in particular, as opposed to just the most recent news.

In this new type of Bulletin, we provide a summary of what we believe the current medical position to be. We will aim for these summaries to be accurate as at the date of publication but they will of course date rapidly, so we plan to issue an updated summary each month.

Vaccines

As at 3 September 2020, the following potential vaccines were in clinical trials[1]:

Stage Phase 1 Phase 1/2 Phase 2 Phase 3
Vaccine Candidates 12 11 3 8

In addition, there around 140 preclinical trials in progress for vaccines to tackle SARS-CoV-2.

Clearly, the vaccines in the more advanced stages of clinical trial development hold the most promise. The compound under investigation by the University of Oxford has demonstrated the ability to provoke both an antibody and T-cell response. However, the durability of this response is still unknown. Results from the larger phase 3 trials will shed more light on its potential success.

A candidate vaccine developed by U.S. biotech company Moderna and the National Institute of Allergy and Infectious Diseases (NIAID) was the first to be tested on humans in the U.S.. Results from this ongoing study also report evidence of neutralizing antibodies in participants.

The compound being developed by CanSino Biologics, in collaboration with the Beijing Institute of Biotechnology, has also demonstrated promising results. The study has reported that around 90% of the participants developed T-cell responses and about 85% developed neutralizing antibodies, according to the study.

 

 

Treatment

  • Corticosteroids have been shown to be effective in severely ill patients hospitalised with COVID-19 who are receiving mechanical ventilation. A recent prospective meta-analysis of clinical trials of critically ill patients with COVID-19 concluded that administration of systemic corticosteroids, compared with usual care or placebo, was associated with lower 28-day all-cause mortality. (steroids)
  • Results from trials using the antiviral drug remdesivir indicate that patients who received remdesivir had a 31% faster time to recovery than those who received placebo. A phase 3, randomized, open-label trial showed that remdesivir was associated with significantly greater recovery and reduced odds of death compared with standard of care in patients with severe COVID-19. (remdesivir)

 

Testing

  • There are currently two types of diagnostic test available. The molecular real-time polymerase chain reaction (RT-PCR) test detects the virus’s genetic material, and the antigen test detects specific proteins on the surface of the virus.
    • RT-PCR tests are almost 100% accurate if carried out correctly.
    • Antigen tests are less accurate but have a faster turnaround, potentially under one hour. However, false-negative results from antigen tests may range as high as 20-30%
  • Antibody tests are not diagnostic tests and are used primarily to identify whether you’ve recovered from COVID-19. Antibody tests also are subject to false-positive results. Research suggests antibody levels may wane over just a few months. And while a positive antibody test proves you’ve been exposed to the virus, it’s not yet known whether such results indicate a lack of contagiousness or long-lasting, protective immunity.
  • Unfortunately, it’s not clear exactly how accurate any of these tests are. Development in all test types is ongoing.

 

Antibodies

  • There is emerging evidence that those who have previously been confirmed positive for COVD-19 may not develop a sustained antibody response and are susceptible to reinfection.
  • Several cases have been reported (reinfection); this has implications for vaccine development and strategies to contain the virus.

 

 

[1] https://www.who.int/publications/m/item/draft-landscape-of-covid-19-candidate-vaccines

Posted in actuaries, coronavirus, pensions | Tagged , , | Leave a comment

Reasons to be excited about Marcelo Bielsa’s Premier League arrival

Guest post from Oliver Tapper

If you hadn’t heard of Marcelo Bielsa when he became Leeds United manager in June 2018, then you almost certainly will know his name now. In just two seasons at the club, Bielsa has been involved in a spying scandal, won a FIFA Fair Play Award, and been promoted to the Premier League.

On 12th September Bielsa will manage in his first top-flight game against the Premier League champions Liverpool, in what is likely to be one of the most anticipated opening games in Premier League history. But what is it about Bielsa that has given him cult status in Leeds, and why should you be excited about him managing in the Premier League?

He is ‘The Crazy One’

In 1992, Marcelo Bielsa suffered a 6-0 defeat to San Lorenzo in the Copa Libertadores while managing the prestigious Argentinian club Newell’s Old Boys. That night a gang of around twenty enraged Newell’s supporters travelled to Bielsa’s house and demanded he come outside to explain the team’s performance.

Bielsa did go outside; however, it was not to talk about the game. When Bielsa opened the door, he was holding a grenade and allegedly told the fans that if they didn’t leave he would pull the pin. This was the moment that led to Bielsa becoming known as ‘El Loco’ or ‘The Crazy One’.

English football has seen many characters in its time, from Mario Balotelli to Paolo Di Canio, the Premier League is rarely short of eccentric protagonists. But stories about ‘El Loco’ make Balotelli letting off a firework in his own house look about as dangerous as a cosy night in with James Milner.

Marcelo Bielsa turned up to Leeds United 100 year celebration black tie dinner in his Leeds tracksuit

In 1985, while working as a youth development coach for Newell’s, Bielsa went on a scouting trip to Sante Fe to assess and hopefully sign a promising young teenager. Except, this was not the usual meet the family and talk to the young player scouting trip. Bielsa arrived at 2am and asked the teenager’s parents if he could see their son’s legs to check whether they were ‘footballer’s legs’. After inspecting his legs while he slept, Bielsa signed the teenager on the spot in perhaps the most bizarre transfer agreement of all time. Oh, and by the way, as if this story couldn’t get any weirder, that teenager was Mauricio Pochettino.

More recently, when the Leeds board contacted Bielsa in 2018 he spent the rest of the night watching footage from Leeds’ previous season. By the time a face to face meeting had been set up, Bielsa had watched every single game of that season in full, that’s 70 hours worth of footage. To call Bielsa an obsessive is to massively underestimate the man’s attention to detail, even if it is a bit crazy.

It does not seem like Bielsa’s entertaining antics and methods are likely to change anytime soon. It’s for this reason that everyone should be excited about a season of Premier League football with Marcelo Bielsa. ‘El Loco’ is effectively a supercharged Jose Mourinho, so we should all be ready to expect the unexpected when the season starts in September.

Bielsa vs Lampard Part Two

As if the historic Chelsea vs Leeds rivalry didn’t need any extra spice, well try adding to the mix an unhappy personal history between the current managers of both clubs. Chelsea vs Leeds on the 5th December is definitely a fixture you should be circling in your calendar and clearing your plans for.

If you’ve been living under a rock for the last couple of years and don’t know why Marcelo Bielsa vs Frank Lampard part two is such a big deal then let us explain what happened in part one.

In January 2019, Leeds United were caught ‘spying’ on Derby County ahead of a crucial Championship fixture. Marcelo Bielsa had sent an intern to the Derby training ground to observe then manager Frank Lampard’s plans and tactics. The spy was caught and reported to the police, resulting in a mass media hurricane referred to as ‘spygate’. Bielsa was widely criticised for his major part in the scandal and Leeds were eventually fined £200,000 by the league.

 

Frank Lampard’s response to the scandal was to go after Bielsa, who he said had ‘violated fair play rules’. The comments were water off a duck’s back to Bielsa though, who even gave an unprecedented press conference explaining why he spied and his meticulous process for preparing for every match.

It’s fair to say that there is no love lost between these two managers which makes both fixtures between Leeds and Chelsea particularly mouth-watering prospects for the coming season.

He doesn’t fit the footballer mould

Whether you like him or loathe him, one criticism that cannot be levelled at Marcelo Bielsa is that he fits any stereotype. This will perhaps become most clear when Bielsa becomes a Premier League manager. The Premier League, much like any other major European Football league has become associated in recent decades with money, glamour and fame. Staggering weekly wages, flash cars, and luxury mansions are now part of being a top flight footballer or manager.

Who could forget when Manchester United funded Jose Mourinho living in the Lowry Hotel between May 2016 and December 2018 for 895 nights in a $1,040 per night room. Now contrast that with Marcelo Bielsa, when Bielsa moved to Leeds the club housed him in a high end spa close to Harrogate that was probably not dissimilar to Jose Mourinho’s living situation at the Lowry. However, Bielsa quickly got tired of living in a hotel and instead decided to move to a modest apartment in Wetherby because it was within walking distance of the training ground. Bielsa walked the 45 minutes to the training ground every day, spent time with locals in coffee shops, and did his weekly shopping at Morrisson’s. There is nothing ‘Premier League’ about Bielsa and his lifestyle and that surely is something that we should be excited by.

For all of El Loco’s eccentricity and sheer weirdness, he is a man of principles and values and that must be respected in him. Bielsa refused to let Leeds pay the £200,000 fine for spygate, instead funding it himself. In 2018, he donated 2 million pounds to Newell’s Old Boys calling it a repayment for all that the club had done for him. This is a man who once took time out of football to live in a monastery, and on other occasions to retreat to relative anonymity on his farm.

Bielsa’s different approach to life is one that we can all look forward to seeing in the Premier League next season and his philosophical outlook should provide plenty of food for thought for players, managers and fans alike.

His teams play amazing football

It’s not just Bielsa’s approach to life that is different: Bielsa-ball and his approach to football is unique and it’s an exciting prospect to see how it fares at the top level. ‘The Bielsa-way’ has a cult following among football fanatics and coaches within the game. Pep Guardiola is among one of many world-class managers who see Bielsa as a trailblazer for modern footballing tactics.

Leeds fans have bought into the ‘Bielsa Way’

While you will see a few of Bielsa’s trademark tactics in every game he manages, he demonstrates a great deal of strategic flexibility, thinking deeply about each match like an intricate game of chess. Against teams with a lone striker Bielsa typically uses a 4-1-4-1 formation; however, when an opponent plays two up front Bielsa opts for a Football Manager-esque 3-3-1-3. This unusual formation serves as a means of overloading the wings and creating tactical interplays that allow his teams to get through even the most congested areas.

Perhaps the most famous aspect of Bielsa’s style that has become a staple of the major European teams in the last few years is the ‘high press’. Bielsa is widely accredited as the instigator of the high press and it makes his teams a joy to watch as they play each match at a frightening pace.

As a result, Leeds training sessions are intense and involve constant running. This relentless intensity has led to various commentators referring to Bielsa’s style as ‘Murderball’. In the last few seasons newly promoted Wolves and then Sheffield United have had major success with their relatively new tactical approaches. Bielsa’s Leeds will offer something new and they are at the top of our ‘ones to watch’ list this season.

Predict Premier League games in the new season on Tenner!

It might be pretty pointless trying to predict what Marcelo Bielsa is going to do next, but one thing that is definitely worth predicting are next season’s Premier League matches on Tenner. Our free-to-play predictions games offer you the chance to win cash prizes for free! You can read more about what Tenner is here or check out more information on our homepage.

Posted in football, pensions | Leave a comment

Sam Marsh’s response to TPR’s DB Funding Code

db code

sam marsh

Sam Marsh is a lecturer and branch president of the Sheffield UCU. He has responded on his own behalf to TPR’s consultation.

My initial reaction when reading the consultation was “why consult?”. At that time we were concentrating on staying safe and Government had effectively assumed a state of martial law. We had voluntarily agreed to abide by its rules so when the Pension Regulator laid down its prescription for Defined Benefit funding, it seemed (to coin a phrase) that resistance was futile.

I have been proved wrong. The consultation has brought forth some great thinking from Iain Clacher and Con Keating and some great responses from Ros Altmann and now Sam Marsh. I am pleased to see more great responses in my inbox, keep them coming they are getting read (send your submission to henry@agewage.com).

They don’t have to disagree with the new funding code (though most submissions do), you will be guaranteed a non-edited publication.

Thanks to Sam and to all he and the UCU are doing to support the cause of open DB pensions, thanks too to dissenting  voices like Sharon Bowles in the House of Lords and thanks to David Fairs at TPR for his urbane gentility throughout.

We are lining up a lamb to the slaughter David – in support of your efforts to raise money

Keep on running everyone!

This slideshow requires JavaScript.

This slideshow requires JavaScript.

Posted in age wage, pensions, USS | Tagged , , , , , , | Leave a comment

Ros Altmann’s response to TPR’s DB funding code consultation.

db code

I have asked for responses to the Pension Regulator’s consultation questions and Ros Altmann has obliged. If you have submitted a response and would like your replies to be publicized in a similar way, I would be delighted to assist.

Clearly as a member of the House of Lords and former Pension Minister, Ros’ replies will be of particular public interest .  I have split them into two slideshows for ease of viewing.

This slideshow requires JavaScript.

This slideshow requires JavaScript.

Please forward your consultation responses in word or PDF to henry@agewage.com.

Ros Altmann new

Ros Altmann

 

Posted in accountants, actuaries, pensions, Pensions Regulator | Tagged , , , , , , | 1 Comment

They don’t do plagues like they used to

Defoe_Journal_of_the_Plague_Year.jpg

Daniel Defoe’s Diary of the plague year was published in 1722, over 50 years after the 1665 plague that struck the City of London. They don’t do plagues like they used to.

All the same, it has been a bizarre few months for those of us who stayed in the City and the manager of the Cockpit pub tells me he has not left the City boundaries since early March.

All the better then that the pub is open now and looking no different than the day it closed on March 19th. (I lie – the carpets are cleaner, the brown is browner).

 


The pubs of Blackfriars

Legend has it that when Henry VIII dissolved the monasteries (Blackfriars priory among them) , the land remained with the Church, even it the church was removed from the land. While the City of London swung to a puritanical lockdown, church land was outside the control of the City fathers.

The site of the Cockpit (now and then in Ireland Yard) was church land and the string of pubs that led up from the river were known as the four castles, each echoing Baynard’s Castle, a Norman stronghold and residence of Edward III that still gives its name to the ward to the East of Blackfriars.  Edward decided to move his glad-rags up to the Kings Wardrobe which gave our neck of the woods some glamour in the middle ages.

The Cockpit was nicknamed the fourth castle being the furthest from the river. Those who work in 60 Queen Victoria Street will be pleased to know that the BNY Mellon’s building is built on the sites of two other castles.

Pubs were able to flourish on church land as were brothels and playhouses. Twelfth Night and the Winters Tale both had their first performances in the Winter Playhouse, situated in what is now the Apothecaries Hall adjacent to Playhouse Yard.

For Defoe, this was a depraved but most enjoyable part of London, It was of course cursed by the plague and destroyed by the fire that engulfed the City in 1666. When Shakespeare bought property in Blackfriars (probably the other side of Ireland Yard from the Cockpit), it would have been inside Blackfriars . Shakespeare’s theaters in Bankside, Moorgate and Blackfriars, were even then handily sited for pubs and whore houses.


They don’t do plagues like they used to.

COVID-19 might well have been a plague had it arrived in 1665.

Week after week I bashed pans in the intersection of Ireland Yard and St Andrews Hill (formerly Puddle Dock Hill) at the entrance to  Wardrobe Terrace (marked in green)

11464_rocquemap.jpg

The  street plan for my building in “Fryer Street” is that of the sixteenth century (above) It survives though the church was gutted in 1666 and 1940.

StAndrewWardrobeChurch

St Andrew by the Wardrobe , the Wardrobe Terrace is behind

There is a priest hole in the church and in the pub, many eminent punters would not be seen entering Blackfriars by the gate but preferred the subterranean passage between the ale house and the prayer house (for obvious reasons).

As I stood banging my pan at this little cross-roads , I thought how little our danger compared with our forefathers for whom life was rather less than half as long.

“Solitary, poor, nasty, brutish, and short”. Hobbes described the natural state of mankind in Leviathan and we would do well to remember that we never had a plague so good.

Posted in coronavirus, pensions | Tagged , , , , | 2 Comments

BONFIRE. Keating and Clacher conclude their articles on the DB funding code

bonfire

Con Keating and Iain Clacher

After critically reading and re-reading the consultation on the new DB Funding Code and its associated documents several times, we decided that we would not submit a response to it.

Our principal reason was that it read to us more like a marketing document than a true consultation.

But having engaged with numerous consultations to see no meaningful change in approach or willingness to steer a different course, regardless of the facts, we thought it would be better to write extensively and hopefully spark some meaningful debate in the run-up. We are always available if anyone including the Regulator wish to debate and discuss.

Regarding the consultation itself, it states that it has been prepared in compliance with the government’s consultation principles. It even lists nine key principles. By our reckoning, the consultation breaches more of these principles than it complies with.

The problem with marketing documents is that they do not invite challenge and criticism; in this case they strongly suggest that the Regulator is not interested in listening to or changing anything. Their reported reaction (one of being less than happy) to the Bowles Amendment supports that view. In other blogs we have criticised the use of misrepresentative language such as “objective”. The dominant question that a marketing document seeks to provoke is: ‘Where can I get it?’ It is the setting out of a stall.

One major issue with the current consultation is that there is no cost-benefit analysis in either the consultation or supporting documents, though we are assured, in the Executive Summary, that: “We will take account of…our assessment of impacts.” This naturally raises a question: if this has been done, why not share it with us? If it has not been done yet, on what basis is the support for so many of the assertions and assurances in the Consultation?

The Introduction of the Consultation implies an objective to: “…ensure DB schemes’ efficient run-off phase”, which naturally raised concerns for open schemes and led to the Bowles Amendment. Taken together, these points led us to investigate the cost, impact, and efficiency of the proposed Code.

We began by attempting to model the cost to the entire universe of pension schemes, which the Consultation tells us have current technical provision liabilities of £1.9 trillion [as at 31st March 2019 – para 98 of the Consultation Document]. Unfortunately, there is insufficient information in the Consultation or the public domain more generally to do this reliably.  With many heroic assumptions and inferences, we simulated ranges of possible total cost outcomes.

The results ranged from £10 billion to £600 billion, with the 5% – 95% range being £80 billion – £200 billion and the most common outcomes lying in the range £100 – £120 billion. Perhaps the only significant result was that there was no instance of a net gain rather than cost. These results also take no account of the higher costs of administration, which we would estimate to be of the order of £500 million per year. We note that these simulations are far higher, perhaps orders of magnitude higher, than the risk exposures reported by the Pension Protection Fund. Given our low confidence in these results, we concluded that they could not form the basis of any further research or analysis and decided that instead we would investigate the costs and impact on a few small DB schemes[i]. We report here the results for one of these as it is extremely informative. We do not claim that this scheme is typical or representative.


An illustration

We consider one small open scheme, which is large by comparison with its sponsor employer. It has technical provisions and assets of £25.8 million at December 31 2019, while the sponsor has equity of £8.3 million with annual sales of £11.25 million and pre-tax profits of £1.24 million. The sponsor employer is small but of prime credit quality.

Although the scheme is open, we treat it as if it were closed to new members and future accrual, and then consider the position 25 years from now as the long-term objective (LTO) horizon. The scheme is today in balance with an expected rate of return on assets of 6.1% pa; this is high by comparison with other reported discount rates, but it is lower than the scheme’s twenty-year historic returns performance of 7.6%. We report this historical investment performance figure for completeness but do not rely on it in any of the analysis which follows.

At this 25-year forward point in time, it should be funded to a self-sufficiency basis, which we take to be a discount rate of 1%. The amount outstanding at this future date is 30.4% of today’s total projected benefits but only 10.9% of today’s present value. At a 1% discount rate the scheme would be funded at 97% of the buy-out level and 91% of the ultimate projected liabilities would be 100% funded.

It is immediately apparent that the proposed Code is a far from comprehensive solution for any scheme, focusing on a small tail of member benefits.

At this time, the Macaulay Duration[ii] (at 1%) of the scheme would be 9.23 years and pensioners in payment would account for 63% of the projected liabilities. The scheme would be mature.

As an aside, we do not believe that duration is a suitable measure of scheme maturity, as its value is dependent upon the prevailing level of interest rates. The duration of a perpetual is the inverse of its yield, so a perpetual yielding 1% would have a duration of 100 years, while that same perpetual would have a duration of ten years at a 10% yield.

The present value of the residual liabilities at this future date using a 1% discount rate is £18.6 million. This is an increase of £5.7 million on the current projected funding required (a 45% increase). This has a present value at 6.1% of £1.3 million. This is the amount of special contribution required today to arrive at a 1% funding level, 25 years from now.

This is slightly more than one year’s pre-tax profits. It is 1.7 times current annual contributions. It would require shareholders to forego any dividend. This is well within the employer’s current liquidity of £1.1 million and existing unutilised overdraft facility of £2 million.

But the Code does not end here; it requires the scheme to have transitioned to a low risk, and low return portfolio (1%), in 25 years from now when this level of funding is required. This will further raise the cost to the employer. For modelling purposes, we choose a uniform rate of transition over the 25-year period. The portfolio’s expected return declines from 6.1% to 1% and estimated one-year volatility from 20% to 10%. We then make a very important choice: we assume that only the assets currently supporting these future claims (£ 2.8 million) are ’de-risked’. If we ’de-risk’ all, the cost rises dramatically.

The cost in this limited case rises to £11.9 million in future terms (2.1 times the earlier cliff-edge case). This would require a current special contribution of £4.97 million, four years’ pre-tax profits, and 44% of total annual revenues. In the opinion of management, with which we concur, this would simply not be supportable. It would preclude any new investment for at least three years, damaging future productivity and sales.

If we were to ’de-risk’ the entire portfolio, the position becomes even more dire. It would be a future shortfall of £15.7 million requiring a current special contribution of £6.6 million, 5.3 years of current pre-tax profits. This would be truly catastrophic; to quote one director: “If we liquidated the remains of the business, we might just be able to cover employees’ redundancy payments.”

These costs are material given the size of the scheme; respectively 19.2% and 25.5% of total scheme assets.


How much risk to the employer would be removed by ‘de-risking’?

We use as our metric the expected loss given loss. We assume one-year volatility of 20% for the existing portfolio and 10% for the ‘de-risked’ portfolio. In the current situation, the risk to the sponsor at the future date is £916,955, while for the ’de-risked’ case it is £1,068,535. In other words, the proposed new Funding Code would increase the cost to the employer of pension provision by a very substantial amount while also adding to the employer’s risk exposure. We wonder how this could be considered compatible with the Regulator’s duty to employers to minimise any adverse funding impact on the sustainable growth of an employer.

The employer and trustees are comfortable with a current risk exposure of £1.9 million, arising from the volatility of the asset portfolio; particularly so, given its odds ratio of 2.65 :1 (Expected gain given gain: Expected loss given loss). By contrast, they are not comfortable with £1.07 million exposure given its odds ratio of 1.35: 1. The employer has equity capital resources of £8.3million; its risk exposure is 4.3 times covered in the present case. By contrast, the risk exposure coverage in the two ‘de-risked’ portfolio circumstances are respectively 3.12 and 1.59 times. This is a deterioration of the sponsor covenant equivalent to that from AAA to B.

We find it incredible that the 30% tail of the distribution of projected benefits should be so risky that it requires an increase in funding of 20-25%.

The claims to efficiency of TPR’s approach are surprising and it is well-known that pure funding solutions are sub-optimal; as the age-old adage has it, prevention is better than cure.

With this in mind we next examine the cost of an insurance solution. This is a policy with deferred effect where, if the sponsor fails, the insurer steps in and pays the full benefits as originally promised. This is the cover which the PPF could and should have provided.

It has been suggested to us that it is not wise to provide the top cover via the PPF. However, we see the precise form of arrangement for the provision as a matter for later discussion. (See endnote[iii]) )

The cost today of this pension indemnity cover[iv] is £343,609.10. The policy also has a value as an asset of the scheme. The value today of the policy is £1,370,423.12. This policy asset will increase in value until the date at which cover commences and then decline rapidly as pensions are discharged. In addition, its value moves in a counter-cyclical manner; its value will increase when scheme assets fall in value. Perhaps the greatest attraction of such an approach is that it would allow the scheme to follow return-optimising investment strategies.

It is clear that TPR claims to ‘efficiency’ are, at the very least, open to debate.


Conclusions

If we return to our earlier attempts at macro-level estimations of the costs of the code. The most extreme outlier, £600 billion, would correspond to the apocalypse of all schemes failing entirely unfunded at the objective date. In fact, the low estimates of cost are as high or higher than the highest estimates of the risk posed by schemes. It appears that this low-dependency ‘solution’ costs five to six times as much as the likely losses arising from expected sponsor and scheme failure. The cost to the taxpayer in lost corporation tax receipts is also substantial (as tax relief is given to these ‘costs of the code’), and particularly meaningful in the current pandemic circumstances.

The Regulator has failed to make any case for a special regime for schemes in run-off, let alone open schemes.

We began this series of blogs and articles with a call for a bonfire of regulation; at the very least we should start with this proposed Funding Code.


[i] We examined four scheme in total, varying in size from the £25 million of the reported scheme to a maximum of £180 million of liabilities. The results for these other schemes were broadly similar to those reported. For two of these schemes we do not have access to sponsor financials.

[ii]https://www.investopedia.com/ask/answers/051415/what-difference-between-macaulay-duration-and-modified-duration.asp

[iii] A range of issues have been raised and some suggestions made. For example: All of the current members in the PPF will ask for an upgrade. Better politically to require a compulsory mutual insurance or support fund – perhaps with 10%-25% of the annual premium being born by scheme members and collected by reducing future revaluation/ pension increases- should be weighted by value of pension – and can put in a exemption for small pensions.

[iv] The cost of this cover may be calculated in a variety  of ways from the complexities of forward start strips of credit default swap contracts to differences in single premium current start policies. The results are not highly sensitive to the method, though  they might be relevant in an active traded securities market. The figures quoted in  this blog are derived from the difference between two policies – one covering the entire period and one covering the entire scheme tenor.

 

Posted in actuaries, advice gap, pensions | Tagged , , , , , , | 2 Comments

Has our attitude to wealth changed with Covid or with Brexit?

 

Covid brexit.jpgIt seems that we are in for another round of will he won’t he over wealth taxes. He being Rishi Sunak and the taxes in question surrounding business profits, wealth in excess property and the distribution of pension tax relief.

And once again the argument is being couched in terms of an internal discussion within the Conservative party about votes.

Of all the things that needn’t worry the Conservative party right now, it is votes. They have a massive majority and they are dealing with a series of issues resulting from the pandemic, all of which are immediate and some of which are existential.

But there is another good reason for Sunak to ignore the squeals of the backbenchers and that is the votes that won him the election weren’t from the wealthy but from the relatively deprived areas of the country which had traditionally been known as working class. Many of these people will not be working right now and for them , paying more tax on pensions, second homes and business profits will play out well. They quite rightly point to increases in VAT and council tax and the cuts in benefits and social services and are saying “we’re not paying again”.

Because they paid last time and while the pandemic can’t be blamed on corporate greed, there is an underlying resentment that while services have gone down, pay has not gone up and most people feel cheated – even if they don’t know why.


Cheated and you don’t know it!

What is amazing about there being 1.7m people in this country overpaying their pension contributions by 25% is that the only people who understand why are tax specialists.

The traditional spokespeople for those on low earnings – the unions – have been quiet about the net pay anomaly. The Labour party has hardly mentioned it. Ironically it has been those like Ros Altmann, in the House of Lords who have become the champions of fairer taxation for those on low incomes.

The great pension rip-off is the redistribution of tax opportunties from the poor to the well off and if Sunak wants to have a go at pensions he should appeal directly to the voters who got him his job.  They’re the ones who are owed.


Labour, Liberals and Greens are now the parties of the mass affluent.

And this is why there is political capital for the conservative party in pensions. They are not fighting their voters, they are fighting Labour votes. London, where average incomes are noticeably higher than anywhere else in the UK , is Labour’s heartland.

And I have absolutely no time for the whingeing of the homeworking classes. The homeworkers are the lucky ones, they are not having to worry about the end of furlough, they don’t have to ride public transport, they can choose how they organise childcare when the kids go back to school. Financially they have been convenienced by the pandemic with nothing to pay for commuting and with the perks of Government give-aways none of which have been means-tested.


Has our attitude changed to wealth because of COVID

The pandemic may not have changed us as much as we think. I suspect that attitudes to money are strongly ingrained in families and communities and that the fear of losing the tax priviledges around pensions , property and business equity is as strong among the mass affluent as ever.

What has changed is the empowerment of those who don’t have money in the political pecking order. The Conservative party is still run by Wickhamists and Etonians but it can see its power base being in the Brexit loving communities who voted for it last year.

There is an opportunity for Sunak to deliver a radical redistributive solution to the challenge of COVID and I suspect that it will be his confidence in his party’s appeal to low-earners , not the appeal of social justice , that will give him courage.

That said, I have learned not to underestimate the power of the shires and of the funders of the Conservative party. Sunak will need to be a stronger chancellor than any of his recent predecessors to tax the rich, and I include Labour chancellors in that estimation.

COVID may be the excuse, but the political swing occasioned by Brexit is what may drive change.

Posted in advice gap, Brexit, coronavirus, pensions | Tagged , | Leave a comment

Dangling temptation in our way – DB transfers in a time of pandemic

Final salary transfer

I read this and my heart sunk.

It sunk for the hundreds of thousands who have taken their transfers and must now be wondering why they didn’t wait for ol’man Covid.

It sunk for those advisers who have either been barred , blocked or chosen not to offer transfers.

And it sunk for those deferred pensioners with the right to a cash equivalent transfer value who are going to read the LCP research in the FT and go on a hunt for an advisor to unlock their treasure chest.

Bart 2

It simply doesn’t make sense that while markets have fallen, DB transfers have risen by 30% in the pandemic. It exposes the nonsense of DB pension valuations for what they are, academic exercises uncoupled from reality.


Why oh why?

This is the lunacy of pensions lock-down, the mania for self-sufficiency, the drive to de-risk.

All the prudence that has been built into  DB pension schemes has been at a cost to jobs, investment as George Kirrin pointed out in a comment on a recent blog on DB scheme funding  by Keating and Clacher 

And where does this prudence go? It is transferred to the wealth management accounts of those who by accident, have got lucky with a pension windfall.

Merryn Somerset Webb said a few years back now “If I had a  DB pension I’d take my transfer now”.  If it wasn’t for the economic nightmare that is upon us, interest rates should now be rising as we finally kicked off the shackles of austerity. Transfer values should be going down and the insanity of discount rates set at 1% or even lower would be a thing of the past.

Why oh why do we continue to dangle these over-inflated DB transfer values? They aren’t prudent and are an offence to the millions who face personal hardship at this time.


The details

Here’s an excerpt from the FT report

Analysis by Lane Clark & Peacock, the pension consultants, showed the average value of defined benefit pension transfers reached £556,000 in the second quarter of 2020 — an increase of 30 per cent compared with the previous quarter — and the first time in three years that the average transfer has exceeded half a million pounds.

Only about one in five of those who received a transfer value quotation from their pension provider in this period opted to take the cash; the lowest quarterly take-up rate since 2016, according to LCP.

Although average pot sizes increased dramatically, the analysis also found that overall levels of transfer activity in the period fell by 25 per cent — partly because some pension schemes paused transfer quotations under lockdown, in line with regulatory guidance.

But we are also in that period before the arrival of the ban on contingent charging where advisers are reconsidering the economics of transfers. The risk of getting it wrong are substantial (which is why PI premiums for those still advising on them are so high). Coupled to this, pressure on fees, now they can’t be cushioned by contingent charging, mean that advisers may decide their boots are full enough.


So what can be done?

Many trustees still see CETVs as the victimless crime. They get liabilities away at below buy-out cost and please employers who can book the technical accounting advantage into their short-term reporting (often with positive impacts to management’s remuneration).

But there are victims. The true discount rate for these liabilities is what Con Keating and Iain Clacher call the CAR or the underlying rate of return needed to meet scheme liabilities over time. If the CAR was used as the discount rate ,  CETVs would be slashed and schemes would retain pensioners.

Of course that isn’t going to happen , but if we took a long-term view of our DB liabilities we would continue the ability of trustees to voluntarily ban transfers. Indeed we might decide to put funded pensions on the same basis as their unfunded counterparts and just stop transfers where the discount rate fell below a nominal level (say 3%).

bart 3

Bart (not Ben) Huby. LCP’s actuary with the numbers

Posted in pensions | 4 Comments

Want to live longer? Get a pension!

live longer

Thanks to Jim Hennington for this

I’m writing on a sad morning when a great man died at 43 from cancer. Death can kill any of us in random ways and Chadwick Boseman died nobly cut short in the most unfair of ways

It is easy to let your head go down when someone dies this way. It is easy  to think that you have no control of your own mortality, but statistically and practically this is not true.

Chadwick Boseman’s death was untimely and also unusual, most people live long and healthier lives than at any time in the history of mortality records

life 2.jpg

However you look at the data, we are living longer and it’s for the reasons in the green boxes at the top of the blog.

Below is another chart confirming that life expectancy for women around the world  is increasing in a straight line over a very long period.

life 3

Those little red lines flattening the improvements were projections that life expectancy would not improve – which turned out to be wrong.


We are in control of our own life expectancy

As I write, I am listening to an episode of  “More or less” that is looking at obesity and our capacity to keep our weight down and the fat off our tummies.

Fake fat news. Jamie Oliver’s stat that over a quarter of children’s fruit and veg came from pizza eating, is proved to be fake news. Similarly, Matt Hancock’s stat that if everyone who is overweight lost 5 lbs then we would save the NHS on average 30p  per patient per year. So stats

Fatually correct. Thankfully we got one set of statistics from Stuart McDonald that did make sense. His stats tell us that if the UK hadn’t been quite as obese as we are , we would have had about 600 less deaths than our European neighbors this year and about 1300 less deaths if we had all been Italian (who are notoriously thin)

Stuart put this in context, Britain’s excess death are down to a lot more than our being a nation of fatties


 

Being fat matters but being fat does not mean you will die of COVID-19

This matters to me because I am about 15 kg above my right weight and that is because I do not take enough exercise, because I drink too much in the evening and because I eat a lot of hula hoops.

If I am going to be incentivised to spend more time being active and turning down the second glass of wine in the evening, I am going to need facts I can trust. I trust Stuart and I don’t trust Jamie Oliver or Matt Hancock.

I know that being fat is unlikely to kill me today but it can lower my tomorrows. Presumably why Boris Johnson announced this week he has hired a personal trainer. Boris may be thinking about all his tomorrows


Which is where pensions come in

Although I have saved hard into DC pensions all my life, I am lucky enough to have a DB pension from  my time working at Zurich. I also have the prospect of a state pension in 8 years time. Boris too has a nice civil service pension coming his way.

These pensions become more valuable to me for every year I live , indeed they pay off by the day.

So – being a value for money kind of guy, I see my pensions as my financial incentive for drinking less and going to the gym. I  want to be a happy, financially solvent pensioner for a  very long time – for as long as I live. And I want Stella , who is younger than me (and as a woman has a longer life expectancy than me) to benefit from my pensions when I die. So I bought her a gym membership last month when the gyms reopened!

And this is something that is very peculiar to pensions (rather than pension pots). A pension is an incentive to live longer. A DC pot is a worry.

I am not suggesting that people with DC pensions consciously shorten their lives to ensure their pot doesn’t run out before they do.

But I do think that the security that comes from knowing you have a wage for life coming my  way, is a weight off my mind.

And I wonder, in 30 years time when I will close to 90, if we’ll be adding to that list , pf factors known to increase life expectancy – a proper pension!

Posted in actuaries, Blogging, pensions | 1 Comment

Why your pension records – like your medicals – should be yours by right

right to record 3.jpg

This blog sets out for the first time a fundamental right of the retirement saver, a right to see their pension record in a digitally readable format. The right is fundamental to the “treat customer’s fairly” principal that FCA regulated firms sign up to and it underpins the trustee’s duties in an  occupational scheme. It is reinforced by the General Data Protection Act and it will be mandatory for pension providers to demonstrate when the pension dashboard arrives.

There are two reasons why pension contribution histories really matter

  1. They evidence that the amount you have paid into and taken out of your pension tallies with your pot
  2. They can be used to determine what rate of return you got while your money has been in the pension scheme

The right to see your pension records is as fundamental as your right to see your medical records.


Not all providers recognise you have this right

Over the past year, AgeWage has dealt with hundreds of letters of authority received from savers asking us to get them their contribution histories and the value of their pots.

We find most pots but when we submit the letter of authority we are rebutted with numerous excuses for not giving up the data you have asked for.

A good proportion of the refusals relate to the letter of authority which is often refused because signed with a signature. One provider sent us such a refusal on an email where the footer boasted

We’ve made a number of changes to make it easier to do business with us online, including submitting paperless instructions, removing the need for client signatures and managing your investments safely and securely online.

And other providers either flatly deny the data  or simply ignore the request. I will not mention names on this blog but we are compiling our dossier. Frankly we think these providers are behaving illegally and certainly against the principles of their regulators.

right to record 2


Why does record keeping matter?

  1. Because it is your audit of receipts

In America, those who administrate pensions are known as “record keepers”. Their job is to keep a record of the money they have taken in and the money they have paid out and accurately record the investment. We use a less intuitive phrase- “administration” – an administrator is a record keeper.

If there is no record, you have no way of checking that your money has been invested for you and not for the next person. But it you have a contribution history, a firm like AgeWage can tell you whether your data looks accurate or whether there is something that seems amiss. We can do this by looking at the rate of return you have received and compare it with an average rate of return for those contributions. We have tolerances and if those tolerances are broken, we will call your contribution an “outlier” and will ask that it be checked by your administrator.

Mistakes happen and if you are paid not to make mistakes then you need to be accountable when things go wrong. AgeWage reckons that around 2% of all the data sets it reads , are unaccountable outliers.

right to record.jpg

2. Because it enables you to see how you have done

There is another reason that record keeping matters. It is the means by which you can understood how the choices you made – the choice of provider, of fund and of when you made your contribution have worked out.

For many people these weren’t much of a choice, you may have been auto-enrolled into a default fund of a pension of your employer’s choosing. But necessarily somebody made that choice and you consented and you are carrying the risk of things going wrong or the joy of things going right.

And because there is no other way of checking on the progress of your pension pot, it is enormously important for you to have access to your record so that you or – more likely- your agent – can tell you how you are doing.

agewage dashboard

 


Quality of service

I have been reading IGC , GAA and Trustee reports on DC workplace pensions for the past five years and I cannot remember once, seeing an audit of contribution histories.

For the next round of IGC reports, due in April next year, AgeWage will be sending IGCs a report on the quality of service we received from the administrators of the schemes they oversee  and we hope that this information will be commented on in the reports.  Our reports will also talk to the quality of the data we received , what level of outliers we found and how the administrators went about looking into anomalies.  As I mentioned above, mistakes happen , but it is how you deal with the mistakes that is a mark of good or bad service.

igc2020

I would like to say that our experience so far has been good. But I cannot. every day we receive an item of post from one or other provider who interprets “data in digital format” as a wake up pack. A wake up pack does not include a contribution history, it is not auditable, it does not tell us about how the pension pot has done.

One notable provider has a glitch in the system so that every contribution history is wrong.  I could – but won’t go on. The quality of service we have received actioning the 500+ LOAs we have received in our FCA Sandbox test has been variable trending bad.


What can be done about this?

There are a number of trade bodies in pensions dedicated to ensuring good quality record keeping – most notably PASA .

The Pensions Administration Standards Association exists for a single purpose: to promote and improve the quality of pensions administration services for UK pension schemes.

We will be taking our findings to PASA and asking them to look into the issues ordinary savings have getting hold of their records.

And we will be asking them to take matters up with their members to ensure that we have standards for the delivery of contribution histories in a timely way, accurately  and in a digitally readable format.

If we are to have standards, PASA are the people to establish them and we will be asking PASA to give us their view on what members and policyholders of workplace pensions can expect.

pasa.png

Posted in accountants, advice gap, age wage, DWP, pensions | Tagged , , , | Leave a comment

Changing the way our pensions work

mmm2.jpg

I suspect when we look back at significant events in 2020, pension folk will consider yesterday’s consultation from the DWP;-

Taking action on climate risk: improving governance and reporting by occupational pension schemes

as another small step in the upheaval in the way our pension savings are invested. The consultation covers both those investments that back the promises made by our employers and those that directly impact the money we get later in life. The guidance in the consultation does not yet cover the default investments made by insurers offering contract based workplace pensions nor the fund selections made by SIPP platforms. But we can reasonably assume that TPR is moving in lockstep on this, as it is on matters such as Value For Money.

When the Pension Schemes Bill becomes an Act (we hope in September) it will become compulsory for certain trustees to demonstrate governance and reporting aligned to the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).

This will mean changes to the strategy and risk management of the money which one day be spent by us and the intention is that it is invested for the good of the world in which the money is spent. This is about very real things. It’s about calculating the ‘carbon footprint’ of pension schemes and assessing how the value of the schemes’ assets or liabilities would be affected by different temperature rise scenarios, including the ambitions on limiting the global average temperature rise set out in the Paris Agreement.

It’s about changing the way our pensions work, not just for our benefit but for those of a future world.


Improving the value of our money

Currently we conducted an analysis of the returns that savers are getting on various default strategies employed by workplace pensions, both contract based and occupational. The analysis will be carried out while AgeWage is in the FCA sandbox and will include data submitted voluntarily by our 300 testers (thanks to you).

The bulk of the data (the big data) will come from large DC schemes of the type covered by this consultation. The early signs suggest that since their introduction, funds managed with regard to  the environment, good governance and social purpose have delivered better outcomes than those that haven’t bothered.

Currently the benchmark index for measuring the value for saver’s money is set to “not bothered”.

ms

as a stakeholder in the development of this index, we have- following the publication of the DWP consultation, asked Morningstar to review the rules of the index so that it does in future incorporate ESG criteria. The means to do this are simple enough as Morningstar has created comparable measurement of performance based on ESG and non ESC management criteria.

We are keen that Government policy influences that part of the pension eco-system AgeWage has some influence on. Though this is a small part, we think change needs to happen from the bottom up as well as the top down

The average UK pension pot will – we expect – reflect the impact of ESG and I am happy to say that early work of our analysis suggests that the prospects for British pension savers look better for the changes proposed in this consultation.


Making our money matter

The money we save into workplace pensions is not a tax or even a payment of national insurance. It is a payment to our future selves in a future world. It is an investment in our future so making this money matter is critically important.

Those trustees and those charged with watching over our personal pensions are now protected by the law in exercising the recommendations of the TCFD. Things will no doubt go wrong for ESG funds, there may be failures in the application of ESG principles in the investment of a fund and underlying assets may fail for reasons outside the ESG framework. This is to be expected and we can also expect, when failures happen , that there will be people who call into question the management of money this way.

But we live in a parliamentary democracy that has and is debating the adoption of TCFD disclosures by our pension schemes. Assuming the Pension Schemes Bill is enacted, the law will protect those who follow the TCFD disclosures and the detailed guidance in this consultation. The law will impose penalties on those who don’t.

The maximum fine for a penalty issued for the breach of any of the requirements proposed in this consultation would not exceed £5,000 for an individual trustee, or £50,000 for a corporate trustee

I expect that those few remaining trustees and members of IGCs and GAAs who are in denial of the value of ESG, will – in the face of the forthcoming Act and the detail within the consultation, step down.

The world is moving against them and if you read the consultation you will understand why.

mmmm

Posted in age wage, DWP, ESG, pensions | Tagged , , , , , , | 9 Comments

“Velvet glove- iron fist” – the DWP get punchy with trustees on TCFD disclosures

TCFD

The DWP has published a further consultation to mandate climate governance and risk reporting for large occupational schemes (assets of £1bn+) and all authorised master trusts in line with the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).

It follows the consultation published prior to lockdown on “Aligning your pension scheme with the TCFD reccomendations”

The proposals, which apply to both DC and DB schemes, would require trustees to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities, and to disclose these via an annual TCFD report.

This builds on last year’s Green Finance Strategy, which set an expectation that disclosures would be made in line with TCFD recommendations by large asset owners by 2022.

DWP say their objective in these proposals is to ensure trustees consider climate change and the likelihood that climate change is a financially material risk, as well as an opportunity, for pension schemes. Trustees have a fiduciary duty to act in the best financial interests of their scheme members. Given the likely material impact climate change presents, they think it is vital to accelerate pensions schemes’ governance considerations and disclosure on sustainability.

The DWP are at pains to point out that none of the proposed measures attempt to direct the trustees of pension schemes in their investment decisions.

“Government has no such powers and does not intend to seek them”.

The measures can only be used with a view to securing effective governance and disclosure by schemes with respect to the effects of climate change.


Velvet glove – iron fist

The consultation builds on considerable research carried out by the DWP and the private sector .

Collectively this research suggests that advised pension scheme trustees are
complying with the letter of the law but taking their time on making decisive
changes to strategy.

DWP CC2

At a conceptual level large schemes are supportive. Hymans Robertson  found that 70% of trustees were supportive of the regulations, with 27% strongly supportive, while only 7% oppose them.

More difficulty has been found in the smallest defined contribution schemes.
TPR’s DC schemes survey, carried out ahead of the regulations coming into force, found that only 21% of schemes took climate change into account when formulating their investment strategies and approaches, with the most common reasons being that it’s “not relevant to our scheme” or that trustees were “not required to do this”.

TPR’s research suggests that non-compliance appear to be highest in the
smallest pension schemes and that as yet the TCFD recommendations  have not been adopted

dwp cc 1

The DWP see adoption as a fiduciary  duty and the document makes it clear that the law is on its side.

The same standards will be expected of trustees in relation to estimates and
disclosures about the effects of climate change, as are expected in relation to any
other estimates and disclosures that trustees make about their pension scheme.
Trustees are expected to comply with their existing duties under the Trust Deed
and Rules for the particular pension scheme, under general trust law and under
existing pensions legislation.

First and foremost, they must act in accordance with their fiduciary duties towards pension scheme beneficiaries. This means acting in their best interests and carrying out their duties prudently, conscientiously and with the utmost good faith and taking advice where specialist input is needed, for example about investment decisions and applicable legislation.


 

Who has to do what and when?

Armed with a strong legal case and the provisions of the Pension Schemes Bill, the DWP are proposing an aggressive timetable for adoption

DWP CC times

Conclusion

The bulk of the paper deals with t minutiae through guidance and will no doubt make a number of consultants and lawyers a good living for some time to come.

But the bottom line is that the DWP seem in no move for diluting their ferocious determination to get compliance with the TCFD proposals.

It might be argued that small schemes are off the hook,  small schemes might argue that their days are numbered and the DWP are anticipating their demise.

Look out for some serious stuff in the Pension Regulator’s consolidation consultation response – due in September.

We cannot continue with the current tail of under-governed , under invested and under-performing small schemes for ever. By setting the bar at £1bn for a single employer occupational scheme and including all multi-employer trust based schemes – the DWP is making its intentions clear

It looks like “shape up or shape out” for trustees  and that can only be good news for members and for the planet.

iron

Posted in pensions | Leave a comment

Pension scams reported at just £10m a year?

Shortly after receiving this news on my twitter feed , I had a press release sent me by the FCA reminding me of the dangers of being scammed.

Pension savers claim over £30 million lost to scams as regulators urge footie fans to show scammers the red card

  • Putting time pressure on pension transfers continues to be a key tactic for scammers
  • Many know more about football finances than their own lifetime savings
  • FCA and TPR team up with legendary football commentator Clive Tyldesley to show there is no transfer deadline for pensions

I also got a warning from the redoubtable Pension Bee -Mrs Savova

“There is no doubt that pensions scams are rife, particularly in the wake of the pandemic. Savers should stay vigilant and not feel pressurised into giving away personal information or rushing to complete a pension transfer. As an industry we also need to do our bit to educate people.

There is a wealth of information available, and with so many scams moving online, we’ve decided to create our own online game to raise awareness of scams in an engaging way. It is by learning how scammers operate that we’ll put an end to their ploys”.

You can find Pension Bee’s game, Scam Man and Robbin’ created in conjunction with AgeWage, Nutmeg and Smart Pension here: scam-man.com


The football connection – transfers.

Alternatively you can go to the FCA’s scamsmart site  which is being advertised by football commentator Clive Tildersley.

HMV Football Extravaganza in aid of Nordoff Robbins, Grosvenor Hotel, London, Britain - 29 Oct 2013

For what it’s worth, this is that hook

 

TPR and the FCA  said fresh research showed football fans approaching retirement, notably men in their 50s, were being targeted

Typically scammers are putting pressure on people to transfer their pension with short-term offers to release savings.

The FCA and TPR have launched ScamSmart the highlight the issue, with Tyldesley, 65, fronting it.

The veteran commentator said: “Scammers are very good at breaking down your defences and putting you under pressure with various deadlines. But your pension isn’t a football transfer – there are no deadlines! Your favourite team wouldn’t buy a new striker just because his agent says he’s good.

Football’s transfer deadline may have been responsible for a few dodgy transfers but it is stretching an analogy to suggest that football fans are prey to transfer deadlines for their pensions.

Tyldesley recently said he was “upset, annoyed, baffled” at ITV’s decision to replace him as the broadcaster’s senior football commentator in favour of Sam Matterface.

My advice to Clive is that he makes a better football than pension pundit. The whole idea is far-fetched and faintly ridiculous.


£30.8m – surely the wrong number?

£30.8m is the amount reported to Action Fraud. Out of a total pension savings pool of some £2.5 trillion it does not strike me as a huge amount. I actually had to check the FCA press release to make sure that m wasn’t a bn.

There are around 30.8m football fans in the UK, I am one. The FCA’s celeb endorsement of the Scam smart site hangs on a number that bears no relation to the true size of the problem.

I refer to an early comment on here by Richard Chilton, which I’m integrating into the blog.

I think there is a big messaging problem with pension scams. Scams that are criminal acts do seem to be incredibly rare. By far and away the biggest risk seems to come from financial services organisations that can validly quote an FCA registration number. The compensation awarded by regulators dwarfs the frauds reported to Action Fraud. Perhaps the warning messages to those with pensions should concentrate on the chance of being fleeced, rather than on the risk from criminals.

Let’s take one example of “fleecing” which is generally considered a scam.

If the FCA are serious that at least half of the BSPS deferred membership were wrongly  advised to transfer, then they are saying that at least half the £3bn taken out of BSPS was scammed. That’s £1.5bn. I doubt that any of these transfers was reported to action fraud but the total mis-transferred is around 45 times the total reported to Action Fraud in the past 3 years.

BSPS represents a tiny fraction of total DB transfer problem and that’s before we start looking at the problems with transfers from good quality workplace pensions into insalubrious SIPPs.

For sadly, much of the damage has been done by  regulated advisers who did not follow the FCA’s rules and the fractional scamming, where many organisations take a small cut leaving a big hole in people’s pensions, continues to this day.

The truth is that the FCA do not have a number for the amount that leaks out of the system through dodgy advice.  The resources at their disposal to stop scamming are so small that they cannot even report on the proper size of the problem.


Under- resourced as the FCA are , they should work with the private sector

It would be better for the FCA that they reached out to organisations like Pension Bee and ourselves and promoted the tools that we have curated . It makes no sense to  hang an initiative as important as Scam Smart on a hook as lightweight as this one.

The FCA could and should have participated in the Scam man project and missed a trick not using the Scam Man game.

They should work with Margaret Snowden and the Pension Scams Industry Group, and they should work with the Transparency Task Force who are liasing with the All Party Parliamentary Group on pension scams. And they should be integral to the WPSC’s current inquiry.

They should work with Angie Brooks and others who have the intelligence on the scammers operating out of Southern and Eastern Europe who reside beyond the FCA’s regulatory perimeter.

And they could talk a long hard look at the offshore arms of some FCA regulated firms who appear to be at least complicit with the trafficking of money out of the UK pensions system and into the back-pockets of unregulated advisers.

As the problem is one of resource, the FCA must find ways to integrate with the pensions industry which has (by and large) common intent to drive the scammers away. Weak campaigns based on incomplete data do not solve the problem, they give the scammers courage,

 

Posted in advice gap, age wage, Blogging, pensions | Tagged , , , , | 3 Comments

Open and shut conversations on pensions

BSPS.jpg

As BSPS2 is still up and running I assumed it was an open scheme even though it is closed to new members and future accrual…….I appear to be mistaken?

Even so, I am baffled why The Pensions Regulator doesn’t seem to be supporting the Bowles Amendment to the Pension Schemes Bill which is to ensure that open DB schemes may remain open, continue to provide the high-quality pensions they have provided for decades, and that no new costs or impediments are added to their operations?

This is a comment from a steelworker who has kept faith with the British Steel Pension Scheme. He is as baffled as a non-cricketer is baffled when he’s told he has to go out as he’s “in” .  To him his scheme is open, it is not closed because it has not been bought out by an insurer or been moved into the Pension Protection Fund.

And as a steel worker, taking an interest in pensions, this fellow asks reasonably what the Pensions Regulator is doing to keep high-quality pensions going. I am quite sure that the Pensions Regulator are not saying publicly that they oppose or support the Bowles amendment, it is not its job to interfere with the process of Government. But everything in the DB funding code suggests that the direction of travel, is in their direction of scheme closure, and so far Government is not making its intentions clear with regards the Bowles amendment.

The Bowles amendment is an attempt , by certain members of the House of Lords, to help DB occupational schemes that want to take on new liabilities , to do so.

The steelman’s views, which you can read in the comments section to Iain Clacher and Con Keating’s blog on this subject, can be read by following this link.


The right of everyone to understand their pension

Considering how important pensions become to those in their later years, it is surprising that the kind of debates that happen on this blog are assumed to be  confined to academic and professional circles. Yesterday, in yet another delay to the long term strategy of USS, the Trustees announced they were putting back the start of the consultation on the valuation methodology to Sept 7th, the consultation will not be with members but with the employers . The consultation which will run to October 30th will run in parallel with the debate on the Bowles amendment.

It is sad that voices like that of this steel worker are not informing either the consultation at USS or indeed in parliament. It is thought I suppose that these matters are beyond the interest or comprehension of members who have not been equipped with the Trustee’s toolkit.

This is not the case. I regularly read and occasionally comment on the debates of the steel workers about their pensions future. I am privileged to have been in the British Steel Pensioners Facebook group since early 2017 and have followed the self-education of many steel workers as they grappled with their Time to Choose and with questions about the (lack of ) revaluation of certain pre 1997 benefits, the preservation of scheme benefits such as partner’s pensions and questions about the distribution of surpluses (above technical provisions).

I’ve watched them see their scheme move from the kind of arrangement Sharon Bowles is trying to support to a scheme that is on a “flight-path to buy-out”. Many steel workers feel locked out of any further improvement to their benefits and are fearful of the consequences of buy-out.

The standard of debate on the Facebook page of the pensioners page is extraordinarily high. Take this recent comment from a steelworker from the north east.

I have posted about a buyout and what the Trustees intentions are following the Gov’t consultation in 2016 on the old BSPS.

They have always stated that the long term future of the scheme (which became BSPS2). They said

“33.According to December 2015 figures, the scheme has assets of £13.3 billion and liabilities based on running on with a solvent sponsoring employer of around £14 billion, so has a deficit estimated at around £700 million on a technical provisions basis. However, the scheme is around £1.5 billion short of what would be needed to BUY OUT benefits equivalent to Pension Protection Fund compensation levels (this is known as a section 179 basis in pensions legislation). The deficit to buy out the benefits in full is estimated to be around £7.5 billion.”

This was when they hoped the Gov’t would approve reduction in benefits without members consent – which of course didn’t happen. We had to opt in to BSPS2 thereby giving consent.

Note they say PPF compensation levels which are less that BSPS2 benefits.

Extrapolating to now with fewer members and liabilities, the scheme is in a very strong position with a surplus. We are approaching BUY OUT level for a PRIVATE insurer BULK ANNUITY which requires assets to be at least 103% of liabilities on a different calculation (IAS 19 I believe).

In a nut shell:

1/ We are currently still tied to TSUK as sponsor for BSPS2 which means we could be forced into PPF assessment if they become insolvent.
2/ That would most likely lead to a BUYOUT at PPF levels of compensation (less than we have now).
3/ The Trustees are building the assets through a low risk investment strategy so that they can control the outcome and choose the insurer to give us a better outcome that PPF compensation. (This is exactly the same as Open Trustees Ltd are doing with the old BSPS members who went into PPF assessment).

After a Buy Out our benefits would be paid through an annuity – ie pensioners would see no difference or potentially better than now.

There is still a lot of work to be done and we will not know the details for some time. It was expected that the assets would have grown sufficiently by next April 2021. The Trustees have said they would consider restoration of some portion of pre-97 service benefits at the same time.

(July 2019 – Rothesay Life, L&G and Pension Insurance Corporation are among the parties thought to be interested in completing a deal.)

There are many similar “self-help” posts from members sharing their understanding and some corrections , which are moderated with great delicacy.

So what are we doing for deferred and actual pensioners?

Coincidentally, I spoke with someone involved in  the management of pensions that have bought out yesterday. We discussed what insurers like Rothesay Life , Pensions Insurance Corporation and Legal & General can do for their annuitants.

it seems clear that many of them have a need to be informed about their pensions and will continue to want to be treated as customers of whoever buys them out. They are used to having been in a trustee led community and see the future as a transfer of responsibilities to their new employer. To all intents and purposes that is what a pension scheme is to a working person who stops working.

To the list of buy-out specialists we know about, will be added Clara, Superfund and maybe others, who will become the “new employer” to many more pensioners.

These pensioners and soon to be pensioners do not see their pension schemes as closed because they are still paying them money. A pension scheme is closed when it stops paying pensions.

For pensioners, pensions are very much open. We need to think more about how these DB pensioners are treated and start thinking of their needs for understanding and for financial services.

Port talbot sun 2

A south Wales sunset, photographed  at Port Talbot by Al Rush

 

Posted in age wage, BSPS, pensions, Public sector pensions | Tagged , | 2 Comments

Pension Self Help

self-help.jpg

We live at a time of self empowerment. If we don’t know how to do something we learn, searching for answers from the web. We’ve learned how to do things from You tube, understand things from Wiki and with a little bandwidth – we can generally get there.

Self-help is not encouraged in finance. Generally self-helpers are considered vulnerable by a regulatory system that encourages the taking of regulated financial advice. In the polar thinking that results from a dogmatic belief in regulated advice, those who avoid it are in the hands of scammers. But this is patently not the case.

The vast majority of people in Britain go to the grave never having paid a financial adviser and generally they muddle through.

But there is no doubt that things are getting harder. Although those saving into tax-advantaged retirement savings plans has increased, the numbers in defined benefit plans has decreased. The dismantling of the State Earnings Related Pension Scheme in favor of auto-enrolled pension pots means people have to fend for themselves when selecting their investment pathways in their retirement.

While the numbers saving into auto-enrolled savings pots has mushroomed, support for people in their fifties and sixties has actually reduced. The number of regulated advisers has fallen over the past ten years, primarily because of the RDR but also because of the increased cost of regulation , compensation and professional indemnity insurance.


Time to encourage self-help?

The industry response to the move to self-help has been timid. A new concept has grown up known as guidance. The Pensions Advisory Service is now subsumed into the Money and Pension Service. Pensions Wise and TPAS are offering guidance and doing a good job of it. But this is a long way from what people need to do complicated things like find their lost pensions, compare and combine pension pots and make decisions on how they turn these pots into retirement plans.

Faced with what may look impossible decisions, it is not surprising that many people do nothing, or worse- take outrageous gambles with their money – ending up paying away their savings to the taxman or worse to scammers.

But I am encouraged, when I go on the websites of many major providers, about how much help there is for those wishing to explore their pension options. Many of these providers are dependent on financial advisers and may feel conflicted by providing facilities for those who want to do pensions themselves. They shouldn’t be.

There is no evidence that financial advisers are gearing themselves up to provide mid or mass market advice. The banks – in as much as they want to be involved – are restricting their activities to competing for the mass affluent.

One of the many things that I am considering doing with http://www.agewage.com , is making it a directory of web facilities available for self-helpers. It strikes me that there is ample information and what is needed is a search facility that ensures people end up with information that really helps – wherever it comes from.

Of course, all this is made more urgent by the pandemic and more possible by the way people are learning to use the web as a resource. The acceleration of self-help using the internet will I’m sure be a theme when social historians look back at the year or years of lock down.

I am so very pleased that AgeWage is able to pioneer a self-help website and application at this time, and to do so in the benign conditions of the FCA Sandbox.

 

Posted in pensions | Tagged , , , , , , | Leave a comment

AgeWage is now authorised by the FCA.

FCA Agewage

Getting regulatory permissions for AgeWage has been a journey for both AgeWage and the FCA. We are a firm  offering guidance to our customers on the  value of their pension pots,  and we make arrangements for them to take decisions about their retirement finances.

We are the first firm to commit to the assessment  of value for money as a means to assist savers and employers take decisions about their pension provision.  We would like to thank the FCA for going on this journey.  Ultimately we have found common purpose in Purg 8.28

The provision of purely factual information does not become regulated advice merely because it feeds into the customer’s own decision-making process and is taken into account by them.

We are an internet only service and offer a web-app that can be accessed at http://www.agewage.com.

Currently we are conducting a trial with the FCA in the FCA’s sandbox. We are restricted in what we can do within the sandbox.

FCA restrictions

If there is anything you want to talk about or complain about, please do so to me – Henry Tapper.

FCA Agewage complaint

AgeWage is about a new way of doing things, a way that puts transparent information in the hands of people who want to know what has happened to their pensions and to carry out their business as efficiently as possible.

We are not an advisory business , though we understand the need for advice and promote good advisers when needed.

We strongly believe that having saved your money over the years, you have the right to meaningful information about it. We believe that most people could and should take decisions about how much they save, when they stop working , how they organise their pension pots and how they spend them using their own resources.

We are partnering within the sandbox with Pension Bee who will be our default aggregator, the Better Retirement Group who will be our default source of individual financial advice and Retire Easy who will provide cashflow modelling for those working out what they can afford to retire on.

You are very welcome to join us in the trial, we are limited to 300 trialists but there are still a few spaces left.

You can trial this new service for free at http://www.agewage.com

 

agewage dashboard

Posted in pensions | 1 Comment

Taking someone else’s numbers for it. The shortcomings of AoVs.

parachute

 

I suffer from pension dreams, these wake me up at odd hours of the morning with questions that I cannot answer. This morning’s question was put to me by someone who bought a pension savings plan from me when I was starting out.

“How can I track how my plan is doing?”

It’s the same question as fund platforms are supposed to answer in Value Assessments and the answer I gave 35 years ago is not much different from the answer you can get from the Assessments of Value (AOV). You’ve got to take someone else’s numbers for it.

I have not read all the AOVs , but what I have read suggest that fund reporting assumes that an investor makes a single payment on a given day and takes his or her money back on a single day. These two days mark the beginning and end of the assessment and are determined on an arbitrary basis.

But for most people who save into funds, life is not that simple, money comes in through plans run on a monthly basis with top-ups paid at financial year end and withdrawals made to pay for certain capital expenditure or as regular income. The experienced performance for investors depends on factors that are not picked up in a simple point to point performance figure. The investor suffers the hidden spreads within a single swinging price and the out of market risks associated with inexact investment administration. The investor has to take chances on “sequential risk”, where lumps of money arrive or depart on the wrong or right day for investment or encashment.

As far as I can see, none of these risks is considered , let alone measured, by AoVs. The results of these AoVs remind me of the advertising for MPG figures before road-testing took into account concepts such as the “urban cycle”.  People want to know the MPG they are likely to get, not what can be got from driving on a frictionless track at a constant speed.


So why don’t we monitor experienced performance?

Historically the fund management industry sold through intermediaries (like me). I would point to the newspaper and say – “look at the Hambro Life funds”. And people would look in the newspaper and find something that might correspond to their fund and see 1, 3 and 5 year performance figures and have to work out whether they were in the right fund series and whether these funds were reporting gross or net of charges and then work out what charges were in the fund and what came out of the fund and….. people gave up.

If I saw the saver again , which was usually to try to induce a bigger contribution, I might be asked for an update on what had happened so far and I would whip out a “sales aid” which would show that the vast majority of funds under the management of Hambro Life were outperforming so that there was nothing to worry about.

But the reality was that if the saver asked for a current plan value , they were given two numbers, the first being the notional value of the plan if they didn’t want their money back and the latter being the encashment value.  Even with my poor maths, I could see that the encashment value rarely matched the contributions paid, meaning that the savings plan was paying someone else and not the saver.

This is an extreme example of a problem that still besets the financial services industry, We take  people’s money and then report on it using other people’s numbers.

And the reason is that the fund manager and the intermediary and the saver all have different agendas. Which is why we have platforms.

Fund platforms are there so that investors can see how their investments are doing, not how the funds they invest in are doing – or so I thought.

 

But this doesn’t seem to be the case. Instead of reporting on how the investors are doing , those who manage platforms and produce these Assessments of Value are still reporting on their assessment of the funds, which is very much like reporting on performance on a test track and not at all about the urban cycle.


How hard is it for vertically integrated platforms to report on experienced returns?

I ask this question of fund platforms and wealth managers because my understanding of modern technology is that it’s quite easy to work out the difference between the experienced return of the saver from the reported returns of the fund manager. You simply look at outcomes.

But when I talk with those who do try to road test funds properly they talk to me of abstract notions such as “model points” and of “charging assumptions” from which they create synthetic outcomes. The complicated models used by performance specialists do not capture the actual experience of savers but an artificial view of what is going on.

I know that many of the models that are out there are sophisticated and can determine ranges of synthetic outcomes based on all kinds of simulations. But they are not based on real life. They cannot capture the granularity of a savers experience nor create insights based on what has actually happened.

And I don’t understand why these models persist when the vertically integrated platform manager now has access not just to the inputs but to the outcomes and can see pretty well everything that is happening to the investment using the platform’s technology.

I just don’t get why some platforms cannot tell the investor what is going on with their money. And I don’t get why AoVs are based on simulations rather than experienced returns.


I am asking as an outsider – would any insider care to comment?

Transparency is a very difficult thing. It requires those offering it to be accountable for not just what has happened , but what is happening. Clearly transparency can’t stop fiascos like the implosion of the Woodford funds but it can make it clear to investors where things are going wrong and where right.

Historically we have fought shy of encouraging investors to take the short view . We tell investors to jump out of the aircraft and trust the parachute and typically the parachute opens. When it doesn’t there is a reserve chute – there are few fatalities.

But investors need to have confidence in the governance of their money, just as the parachutist needs trust in the safety equipment and no amount of jump simulations can compare with an inspection of the actual safety record.

It strikes me that with the technology at the disposal of fund platforms, telling investors how they are actually doing, rather than what their funds are doing , is a much better way of inspiring confidence.parachute

 

Posted in actuaries, advice gap, age wage, pensions | Tagged , , , , , , | Leave a comment

A user’s guide to AgeWage.com

henry agewage

I am Henry Tapper and I am responsible for your experience of AgeWage

As regular readers will know,  I campaign for better information to be made available to savers about their pension pots and to help people understand their pot, have formed a company, AgeWage.  AgeWage.com helps people make sense of their pots and take decisions to convert pots into retirement plans.

To do this we have devised a way of using your data, specifically the value of your pension pot and the money that you contributed, to provide you with a score that told you how you have done against the ordinary saver. The result is the AgeWage score and we have produced over one million scores for organisations like your employer, your provider or the people who oversee pensions – trustees and Governance Committees.


How to use your AgeWage score

The AgeWage score is a way of telling how your pension has done and if we believe in history, there’s a lot to be said for following the winners.

AgeWage evolve 2

 

But our score won’t tell you what will happen in the future and there are reasons why your pension may have given you value for money, even if you got a low AgeWage score and there are reasons why a high score may not mean your pension will give you value for money in the future.

AgeWage will help you find your pensions, help you measure how they have done and organise your pots on a dashboard so you can work out what to do next.

agewage dashboard

In this blog we explain the limitations of any scoring system and offer some guidance as to how to get the most out of the analysis that has been carried out by AgeWage


Five reasons why high AgeWage scores may not predict good times ahead.

  1. You have been saving and in the future you will be spending, if you are planning to spend your pot using draw-down, then you need to make sure your pension fund is still suitable for your changing circumstances.
  2. You may have got that high score by taking risks you did not want to take. You should check with your provider how your money has been invested and make sure you weren’t getting lucky backing long-shots
  3. You may have got lucky with your investment timing – especially if you were just investing lump sums. Have a look at your contributions and if they were erratic , speak to AgeWage who whether you got lucky with your timing.
  4. You may have enjoyed the benefit of a star investment manager, that manager may have changed and the fund may not do as well in future.
  5. The world is changing, there are many investment trends today, especially to do with environmental, social and governance issues that your fund may be ignoring – your fund may be complacent – make sure you aren’t.

Five reasons why low AgeWage scores may not mean you did that badly

  1. You may have enjoyed during your time saving protection that was paid for from your fund. Examples are life cover and “waiver of premium”, where your contributions were insured by your provider should you go sick
  2. You may have safeguarded benefits in the future, benefits like a guarantee on your annuity rate or a bonus paid at the end of your savings period. These benefits will have been paid for from your fund and mean that you pot may be worth more in the future
  3. You may have financial advice paid for from your pot. This may mean that your pot under-performed but it may not mean you got bad value for money. The value of the advice may have compensated for the lower performance and you may consider you still got overall value for money
  4. You may have been paying for reduced risk. Even though you might now wish you hadn’t, you may have sacrificed part of your return to get a smoother investment ride.
  5. Your return may be being smoothed. If you are in a with-profits fund, you may not be getting the whole investment return you have earned, especially if we are now in a good period for investment returns. Some of the return may be fed back into the pot if we have bad times ahead.

And what about the quality of your service?

For most of your time saving , you may not have noticed the service you got, this is probably a good thing as we generally notice poor service but not good! But quality of service can have a positive effect on your saving, especially if you are nudged into taking good decisions by a good provider.

We cannot tell if you have had good service from your provider but the AgeWage analysis can pick up if something has gone wrong. Typically we can see if there’s a big difference between how you’ve done and how the average person did.

That difference may mean your data may be suspect and we will flag this with you , telling you your score looks unreliable. In such a case you may want to get your provider to look into your data to make sure they haven’t made a mistake. Data mistakes are bad news and a sign of poor value of service.

On a more positive note, to have produced a score means we have had some co-operation. We will be producing a league table that shows which providers have shown us most co-operation and which have consistently obstructed you. We will be collating information which we will feed back to IGCs , Trustees and Regulators. Our experience of provider service will also be shared with savers using the AgeWage test (available at http://www.agewage.com).

What we do for our test group cannot be used as a proxy for quality of service overall but for the test group if is their  quality of service and informs on their view of value for money.

We’re all different, for some people quality of service will be unimportant , for other’s it may be as important as the AgeWage score. We know all too well from current events, how trying to mark individual performance with a one size fits all approach – can prove disastrous.

However, we think that in the longer term, a measurement of value for money will emerge which will take feeds from a variety of sources, including Trust Pilot, net promoter scores, internal reporting against service level agreements, call answering times and turnaround of member data requests.

Much of this information is available in IGC and Trustee reports, but – other than in my limited survey of IGCs and similar from Share Action , there is precious little collation of the findings of the fiduciaries.

Once such a measure has been devised, it can be standardized and applied across all DC providers. I would hope that a league table will be created to ensure that people can compare their experience with that of others and come to their own conclusions about the quality of service they are receiving.

For now, our limited feedback is the best you can get. We recognize that it is incomplete, but we are mid-way through the journey. We have a way to go till we have a standard approach , indeed a VFM Standard.


Choosing your investment pathway

The AgeWage score is primarily about helping people understand their saving for retirement. When people get to the point where they want to start spending their money,  they are faced with choices

  1. Should I convert to a pension and buy a wage for life type annuity?
  2. Should I leave my pension pot to my family and rely on other income?
  3. Should I draw-down from my pot and create a DIY pension?
  4. Should I take all the money as cash?

If you decide to use options 2 or 3 either for all or a part of your savings then you need to ask yourself why it is that you got a good or bad score and if you feel comfortable that the score is telling you , you have value for money, then you should be using pots with high AgeWage score for your investment pathway.

If you want to buy an annuity or take your money as cash then the AgeWage score is of little use to you in this decision.


The AgeWage default provider

As a rule of thumb, the more interaction you have with your pension provider, the more important Quality of Service is to you. In our opinion , Pension Bee offer outstanding Quality of Service and we promote them both for the high AgeWage scores that their savers get and for the customer experience their Beekeepers give. We use Pension Bee as a default investment pathway, where you feel dissatisfied with your existing provider.

It may be that in time , others pension providers will match or even surpass Pension Bee, but we think it is important – to simplify matters – to offer a default provider going forward and that provider is currently Pension Bee.


To summarize

  • AgeWage scores offer you an insight into how your pension has done and allow you to make comparisons with other experiences (including those of your other pots)
  • Sometimes a low score can predict good outcomes to come
  • Sometimes a high score can predict bad outcomes to come
  • But generally the higher the score, the more value you’ve got from your pension

While you should not rely on your AgeWage score as advice on what to do in the future, it can inform your decision making and we hope it gets you thinking about what to do next

As for your overall estimated of value for money, that is for you to decide, based not just on your view of the score , but on your view of the quality of service you receive from your provider.

Finally, the decision you take in the future is a difficult one and ,unless you outsource it to a financial advisor, it’s one you have to take for yourself. AgeWage will give you access to a good quality source of advice from the Better Retirement Group, a good quality annuity broker in Retirement Line, access to a cash-flow modelling service from Retirement Easy and a default Pension Provider in Pension Bee.

agewage dashboard

If you would like to test AgeWage while we are in the FCA sandbox, you can do so for free and without obligation.

You can test AgeWage here

Posted in advice gap, age wage, pensions | Tagged , , , , , | Leave a comment

How regulation suffocated DB pensions (Pt 3) – Clacher and Keating

Ian con

Iain Clacher and Con Keating

 This is the third of a trilogy chronicling how we’ve messed up our defined benefit pension framework. It brings us from the Pension Act 2004 to date


And suddenly you are doing the impossible (but only if you want to)

Our two previous articles considered the development of occupational DB pensions from the early post-war period until the eve, in 2004, of the regime under which we currently operate. There were over that period many changes introduced and these interventions, sought to increase the quality of the defined benefit pension being offered.

However, this situation has changed to member security and been far from benign. The costs of DB have soared unceasingly, through deficit recovery and much more, with no commensurate increase in pensions.

Moreover, in what can only be the most depressing of ironies,  much of the population  has been left without the comfort of a DB pension and all the benefits of risk sharing that go with it.

The most significant change that led to schemes closing to new members and future accrual was the imposition of the debt on employer legislation. This changed the obligation of the employer from being simply to pay a contribution, to being to pay the contribution and to guarantee the return needed on that contribution to generate the benefits promised.

In turn, this change altered the role and purpose of the pension fund from the stand-alone ‘to pay the pensions as and when due’ to being ‘to secure the accrued rights of scheme members, and to defray the employer’s cost of provision’. Unfortunately, little, if any, of the subsequent legislation and guidance has recognised the effect of this change, with very predictable consequences.

The Pensions Act 2004 introduced a new body, The Pensions Regulator (TPR) and a mutually organised compensation fund, the Pension Protection Fund (PPF). Unlike its predecessor, OPRA, TPR was given a statutory set of objectives.

The first of these objectives

to protect members’ benefits

sets the direction and objectives of its operations but it is somewhat surprising given that the Act was also creating the Pension Protection Fund. At the inception of the PPF, members’ benefits could only be at risk to the extent that the PPF cover was lower[1] than the amount of the member’s benefits[2].

The second objective is ambiguous

to reduce the risk of calls on the Pension Protection Fund

and ambiguity in a statutory objective is never good. As such, TPR has often interpreted and described this as being to protect the PPF. It is worth noting there are institutions, with similar purpose to the PPF, in many other jurisdictions, both publicly and privately organised, and none has need of, or has such a guardian angel.

The payment of only partial benefits to members by the PPF is an important defect in its design. There is no justification for this; there is no moral hazard involving members. It is certainly feasible to pay full benefits, indeed it is the practice in other jurisdictions, such as Sweden. It does, of course, leave TPR with some benefits to protect. It cannot be argued that the coverage of full benefits would be unaffordable. Their excess reserves far exceed the benefit reductions of schemes admitted or in assessment.

By expressing this duty in terms of risk, it opens the door for the Regulator to focus on the pension fund rather than the sustainability of the sponsor employer, as the risk to members is employer insolvency, and exposure to deficits at the time of failure. In Part 3 of the Pensions Act 2004, the Pensions Regulator is simply told  that the valuation assumptions etc. are to be prudent (as determined, usually, by the Trustee and the employer).

However, if the Pensions Regulator does not consider the assumptions to be prudent or the recovery plan to be prudent, the Pensions Regulator has power to substitute its own basis. To the best of our knowledge, this is something the Regulator has so far avoided.

Discipline and Punish (French edition).jpg

The absence of such interventions is not an abrogation of its duties, rather, it seems that this is an exercise in good old Foucauldian disciplinary power. The Pensions Regulator has essentially created the Panopticon for pensions through the publication of distributions of assumptions.

Panopticon

Jeremy Bentham’s Panopticon

As such, professional advisors know ‘what will be accepted by the Regulator’ and so the aim is not be visible lest the wrath of the Regulator be visited upon them, and so employers and trustees dutifully comply. Employers have essentially lost control and been alienated from their schemes.

The funding emphasis has also been embedded in legislation as the scheme’s claim in sponsor insolvency is now the amount of any deficit of assets relative to the cost of buying out the benefits with an insurance company. Of course, this is inequitable to other stakeholders. This inequity has had negative effects on sponsor employers, for example, many venture capital and private equity firms will simply not entertain investing in companies with even closed legacy DB schemes.

A buyout funding requirement is a very poor idea. It provides an incentive for sponsors to lower the quality of the pension offered, since that will have a lower replacement cost[i]. Even if minimum quality standards are introduced, the ultimate end point of this spiral is the cessation of provision.

We should not forget that employers voluntarily choose to offer DB pensions. The emphasis on scheme funding continues to this day. Objectives such as funding to levels of self-sufficiency or buy-out are expressly trying to reduce or eliminate any dependence on the sponsor employer. It is incredibly inefficient. It is the equivalent of putting aside savings to pay for the full rebuilding costs of our homes rather than simply insuring them.

An odd omission when regulating pensions

There is a missing but obvious objective for the Pensions Regulator – to promote high-quality pension provision. This is not a new idea. It was actively lobbied for in the wake of the global financial crisis.  The government did respond, but all that was offered was a consultation.

An additional objective for the regulator requiring it to consider the affordability of deficit recovery plans for sponsoring employers was proposed, but not the stronger objective requested by NAPF, to promote good pension provision and to ensure the health and longevity of schemes.[ii]

As noted earlier, the introduction of the debt on the employer also changed the purpose of the fund; it now serves as collateral to secure members’ accrued benefits. It is the current market value of those assets which should be of interest to members, not their performance over either the short or long term. The scheme member should be concerned solely with the sustainability of the sponsor employer, and for most active members the continuance of their employment is the greater concern.

The presence of the PPF greatly mitigates the exposure of scheme members, and it could, if extended, eliminate it entirely. All of the risk management, scenario analysis and long-term objective formation, promoted by the Regulator, for the scheme to conduct would then be redundant, with unnecessary compliance costs.

The sponsor employer should be concerned with the performance of the fund as it serves to defray the rate of return embedded within the pensions awards outstanding, which it is now guaranteeing. It is concerned with the level of the portfolio returns and their covariance with their earnings.

A hedging strategy such as LDI, which is concerned with the elimination of portfolio variability, is most unlikely to be optimal, particularly so given its short-term nature. Notwithstanding this, in 2019 the Pensions Regulator[iii] was advising trustees to

understand and quantify the liability valuation risks you are running

and to consider mitigating those risks

by investing in assets that move in a similar way to the value placed on the liabilities as market conditions change”.

A belief has recently gained currency that the tails of the distributions of pension projections of closed schemes are, in some sense, riskier and more difficult to manage than a less mature scheme. This is simply not true. Negative cash flows are only a potential problem when the fund is viewed as the sole source of pension service. There is no net gain to the company from contributions.

The cash flows of tails decline exponentially, and the total risk exposure, the residual value of the scheme declines hyper-exponentially, and with this the potential debt service load on the employer. On these grounds the covenant of the employer will tend to improve as time passes as the potential service cost diminishes.

This negative cashflow misunderstanding appears to have driven, at least in part, the Regulator’s desire for a new, separate regime for schemes in run-off. The resistance reported to the Bowles amendment is misplaced. Inclusion of open DB schemes within that proposed framework will certainly lead to their closure.

MOH.jpg

Michael O’Higgins (then TPR Chair) said in a speech in 2012:

There will be occasions when the right thing to do for the employer and the scheme will be to invest in the growth of the sponsoring company rather than making higher pension contributions.”

We wonder if it has ever happened.

 


[1] For completeness, it should be noted that the PPF can adopt measures to “balance its books” by reducing the level of revaluation and indexation and, ultimately, the compensation percentage – albeit with a floor of 50% of the member’s pension each year from that which would have been payable from that member’s scheme before it went into the PPF.

[2] Recent judgements in the ECJ and in the High Court have modified this original position and removed some of the iniquity of the original structure of PPF compensation.

[i] Until the late 1990s schemes commencing winding up were often sufficiently well-funded that they could buy-out the liabilities with an insurance company. This was partly due to the higher gilt yields then prevailing but also to the fact that it was the basic pension with no allowance for discretionary increases which was bought.

[ii] This is an edited quotation from an excellent paper, which we recommend should be read in full:

Deborah Mabbett (2020): Reckless prudence: financialization in UK pension scheme governance after the crisis, Review of International Political Economy, DOI: 10.1080/09692290.2020.1758187

[iii] TPR. (2019). Investment guidance for defined benefit pension schemes.

Posted in pensions | Leave a comment

What MaPS can learn from Australia’s MoneySmart Retirement Planner

super 7

MoneySmart Retirement Planner took me four minutes to use

The Australian Government has built what it calls the MoneySmart Retirement Planner which is a dashboard tool. You plug in your savings in “Super” and tell the planner a little about yourself (and your partner) and within five minutes you are able to see your retirement situation

super 1

The user experience is great; everything I want to know is available quickly and simply. I don’t need to find lost pensions, as the Australian system rolls everything into one. I don’t need to worry about all my other savings because the Australians are clear about what’s retirement income and what’s a capital reserve. All I am focused on is saving enough to stop work and enjoy a decent lifestyle for myself and my partner.

But – and this is even better, there are options , for those who want to use them, to go further.

super 2

These projections show “account based” pensions – where the money runs out if you don’t hit investment targets.  The calculator allows you to look at guaranteeing your income lasts as long as you do.

One of my Aussie friends wrote me

The government’s MoneySmart Retirement Planner tells me I can spent $65,707 per annum when I retire. But buried in the advanced section is an assumption that I’ll totally exhaust all my savings at age 90. I’m not happy with that assumption (and my wife is younger than me too) so I changed it to 99 to be more prudent. It then tells me I can only spend $56,177 per annum.

Ouch! That is a BIG difference and shows what a nasty impact longevity risk has on superannuation member outcomes.

Funnily enough , the Australians are no greater fans of annuities than we are . like us they want the return of an equity based draw down plan with the certainty they’d expect from a defined benefit pension promise and there’s a fierce debate about how you measure financial security in retirement

super 5

For people who want to know more about financial security , there are new options coming to the market which are neither draw down or annuity

super 3

For my friend who wants his pension paid through his and his partner’s 9th decade and beyond, some Australian Super plans are building the equivalent of scheme pensions that provide the protection against living too long from within the fund

super 6

Making Super more ambitious in providing greater security in retirement


So what can we learn from Australian innovation?

  1. A really simple Government modeler is an effective way of establishing trust
  2. That modeler can and is being used to think beyond account based pensions (drawdown).
  3. That innovation is happening in the private sector , with the Government’s modeler as  the rock on which innovation is built

And all this is built around simple messaging. about keeping the idea of a pension distinct from savings and by focusing on pensions as the way to stop work when you get to the age.

The more you move into the back end of the modeller, the more you can find out about the impact of costs and charges, taking career breaks and of living longer than you expect.

But by putting the simple stuff at the front and not getting bogged down with health and wealth warnings, the Australian Government is teaching us a lesson.


Can MaPS replicate?

We need in the UK , a retirement planner that gets to the point as the Australian Government’s does

We need it now, not when the dashboard is delivered.

MaPS has the resources to do this and now is the time for it to deliver.

And if we have this dashboard, we will be able to move forward, as the Australian retirement industry is doing, and innovate.

We need this rock!

Posted in actuaries, advice gap, pensions | Tagged , , , , | Leave a comment

We need to take people and their pension savings more seriously.

FCAtpr

There is a section of the FCA’s rulebook  entitled PERG/8/28 which deals with the vexed subject of guidance and advice.

. When answering the question “do you give advice?” PERG/8/28 is helpful.

The Pension Advisory Service  sees advice as “delivering a definitive course of action” which in less flowery language means telling people what to do. I feel a little responsible for the fancy definition as Michelle Cracknell says I gave it her, I may have done but I didn’t make it up.

People who operate in the unadvised space want to give their customers the information they need to make informed decisions. One of those decisions may be to take advice , referring people to advisers is something that goes on all the time, not least from the Government’s own Money and Pensions Service.

There is a useful distinction to be made between information and “meaningful information”, the latter you can take action on, the former is noise. In a recent conversation on value for money, the FCA wrote me

“in order to be meaningful we need the IGC to obtain data on what each employer’s scheme is achieving for its members”

This is meaningful information about meaningful information. It confirms that value for money is specific to the entity analyzing it. But the statement is also inferring that current IGC VFM information is less than meaningful to employers, because it does not refer to them.

If you take this logic a stage further , you can see that value for money information is only meaningful for savers, if it relates to them. A statement that the IGC considers its provider is delivering value for money is not meaningful information unless a saver considers he or her is typical.

Most people resent being treated as typical, especially when something as important as their financial savings are involved. They want to know about their money and their value and don’t like being lumped together as anonymised members of a scheme. This is fair, they are the people taking the risks of things not going right and even if they opt out of taking control of their investment decisions, they still hold those who manage their money accountable.

At the heart of what AgeWage does is the measurement of value for money through an AgeWage score.  This is not a subjective process, the score is derived from data on contributions and outcomes of contributions and uses an algorithm which assures consistency. The score is information as it shows people what has happened to their savings, but it is not telling them what to do.

As Perg/8/28 puts it

The provision of purely factual information does not become regulated advice merely because it feeds into the customer’s own decision-making process and is taken into account by them.

If  an assessment of “value for money” is ever going to help those who aren’t being told what to do, to take decisions, then it is going to have to be delivered in a way that is meaningful and feeds into the customer’s own decision making process. It will only be taken into account by customers if it is meaningful to then which means it has to be personalized.


Taking customers seriously

AgeWage scores tell people what they have done with their money, how it has grown since they said goodbye to it. But they don’t not tell people what to do with their money.

People are not stupid and they know that there’s more to a pension than the investment of their contributions. People are interested in the quality of service they get and they get that what happens when they start spending their money is different from when they are saving.

People get that their money could run out before they do, that their are other ways to fund their retirement spending than their pension and they know they have choices.

Where they choose to invest their money after they stop saving may be quite a different place than when they were saving for a host of reasons, including tax.

People are prepared to be guided towards options which interest them and we are testing what is of interest and how much guidance people need in our FCA test going on at the moment.

Our view is that if people have been given meaningful information about their pensions , they are more likely to trust the information that comes after because the trust deficit has been repaired. Getting people on your side means treating them seriously.


What we give people at retirement is not meaningful

Most wake up packs struggle to deliver meaningful information because of the delivery mechanism (paper), the format – a lot of words and because simple questions like “how have I done” aren’t either addressed or answered.

Pensions Wise is good but it is only a start – it too struggles to give people meningful personal information

Wake up packs and Pensions Wise simply can’t do the job that people need doing when they are taking decisions on later life finances.

The past is ignored as if it were irrelevant, but for savers, their savings are full of meaning. Each contribution was made at the expense of that money being spent elsewhere. Cars, holidays and items of everyday living weren’t bought so that pension contributions went on. Giving people an idea of what’s happened to the money they sacrificed is about taking them and their savings seriously.

Our view is that value for money scores can help people compare their pension savings accounts and create the engagement needed to get people ready to make the big decisions about aggregation, investment pathways and holistic retirement planning. For many this will mean taking advice, but many will find ways to struggle through themselves.

Giving people meaningful information about their savings is not advice, it’s just common financial decency that takes customers and their money seriously.

Posted in advice gap, pensions | Tagged , , | Leave a comment

93% of advisers put two fingers up to TPR’s Fast Track funding proposals

This is how the Society of Pension Consultants Professionals concluded their survey

Our members’ responses show a widespread belief
that the new code will essentially move the funding
regime from one that is scheme specific to one
where any deviation from the Fast Track standard
needs to be explained. Nevertheless, there seems the
expectation that around half of all schemes will go
down a bespoke route, something that if it occurred
would seem to challenge the central premise of the
new Code (that it allows tPR to target its resource
on a small subset of schemes). Key to the decision
whether to go Fast Track or Bespoke seems to be
concerns about the lack of flexibility in the Fast Track
approach and whether or not it will be suitable for
their clients’ schemes.
That said there is a great deal of uncertainty of
how the new funding code will work in practice,
particularly the calibration of the Fast Track
assumptions and how bespoke the Bespoke route
will be.

 

SPP

The SPP is a trade body representing 15,000 people whose livelihoods depend on providing services to occupational pension schemes. They depend on a diversity of approaches to scheme funding. Should the Pensions Regulator determine a one size fits all approach to scheme funding, that diversity disappears.

The comments of the SPP membership are to an extent biased against the Pension Regulator’s proposals. The main proposal is to Fast Track the majority of pension schemes away from a dependency on the employer and towards either self-sufficiency or buy-out. As has been noted on this blog many times there are drawbacks to this approach, not least the ruinously expensive cost to sponsoring employers of getting there.

Two fingers up to fast track?

First lets look at the numbers in the survey. The survey starts with a challenge  The SPP members see “bespoke” as a myth, less than 10% of members see it as allowing schemes to do as they please , the majority see it as the start of an argument with the emphasis being to “comply or explain”.

What is unclear is the appetite of trustees and sponsors to get into an argument with the Pensions Regulator and to what extent TPR will make the lives of trustees and employers difficult if they do.

SPC1

The survey goes on to survey the advice that SPP members will be giving trustees.

SPC2

There is a very low appetite for advising schemes to accept fast track. As mentioned before this is almost certainly biased by the needs of advisers to advise and fast-track requires precious little advice – just a lot of compliance.

The survey looks at the reasons advisers are giving to justify recommending bespoke. We can assume that “self-survival” wasn’t an option.

SPC3

Unsurprisingly, the short term consideration that Fast Track will jack up scheme funding rates is bottom of the list and longer term considerations about flexibility and suitability head it.  But we can be pretty sure that for sponsors, the considerations are the other way round, the cost of funding for self-sufficiency or whatever the long-term objective is, is not pleasant for sponsoring employers in a pandemic driven recession.

Finally we have a degree of consensus (which means balance) about the degree of prescription tPR should adopt. Although this may look anodyne, it isn’t

SPC4

The SPP are lobbying here for scheme specific consulting with only 7% agreeing with the Regulator that Fast Track should be Fast Track. This really is two fingers up to Fast Track.

With the advisers at odds with the Regulator, sponsoring employers are in for some interesting conversations. As the survey concludes

….our survey shows tPR has a very
fine balance to strike between setting Fast Track
assumptions at a sufficiently prudent level (requiring
only limited regulatory scrutiny) and setting them
such that the significant majority of schemes elect
to go down the Fast Track route.

How influential advisers are in that choice remains to be seen.

Posted in actuaries, pensions | Tagged , , , , , , | Leave a comment

Justice delayed is only just justice. The Avacade judgement is 7 years late

The FCA’s judgement against Avacade and Alexandra Associates is justice but only just.

The FCA is requiring the two companies and three of their directors to pay £10.7m in restitution to retirees who were “induced” to transfer their pensions into self investment personal pension (Sipps) plans between 2010 and 2013.

For many investors, justice will arrive 10 years after the crime was committed.  I quote from the FT reporting.

In a judgment dated June 30 2020, the court found that Avacade’s and AA’s activities were unlawful as they had engaged in the regulated activities of arranging and advising on investments, made unapproved financial promotions and issued false or misleading statements.

The court found Craig Lummis and his son Lee Lummis, directors of both companies, and Raymond Fox, a director of Avacade Limited, which is now in liquidation, were “knowingly concerned in” the breaches. It ordered Avacade to pay up to £10m, AA £715,000, Craig and Lee Lummis £2.5m each and Raymond Fox £1.7m.

However, it added that the FCA could not recover any sum greater than £10.7m.

Avacade’s activities led to 1,943 investors transferring about £87m of pension funds into Sipps, according to the court judgment. Of that, £68m was placed into investment products from which Avacade received commissions and fees totalling £10.6m.

AA’s activities led to at least 59 investors transferring roughly £4.8m of pension cash into Sipps, of which about £950,000 was placed into a single product known as the Paraiba Bond. AA promoted the bond, receiving commission of 25 per cent, according to the judgment.

About £42m of the cash was invested in ethical tree plantations in Costa Rica, which suffered significant damage during Hurricane Otto in late 2016.

This judgement comes as Stephen Timms and the Work and Pensions Select Committee investigate the impact of the pension freedoms. There will be many who lump pension scams together but let’s be clear, this money did not get shipped off because of pension freedoms, it was shipped off because the owners of the money would rather have had their money in Paraiba Bonds and ethical tree plantations than stuck in conventional UK pension schemes.

If this case informs the WPSC’s work it is in the light it sheds on people’s confidence in the regulated pension system between 2010 and 2013. It has become a commonplace for us to blame the pension freedoms for scamming, but these offences pre-dated the announcement of the freedoms in April 2014.

The investment schemes project investments in infrastructure and socially responsible investments that gave investors a sense that their money was invested with purpose.

Meanwhile , investors felt no such sense of purpose in their UK regulated funds. The WPSC must also ask what led to the dissatisfaction  with existing pensions.

What’s the story?

If you want to read the backstory to the marketing of these investments, it has been chronicled for some years by Beat the Banks

Operated by the father and son team of Lee and Craig Lummis along with Raymond Fox, Avacade Limited, trading as Avacade Investment Options, was wound up in November 2015. Although Lee and Craig Lummis continued to trade through Alexandra Associates (UK) Limited, under the name of Avacade Future Solutions.

Both companies operated as unregulated introducers, passing pension transfer business to a number of independent financial advisers (IFAs) including Cherish Wealth Management, appointed reps of Shah Wealth Management and Black Star Wealth Management. They offered potential customers a free, non-advised pension report, the results of which were skewed to entice them to transfer their funds into Self-Invested Personal Pensions (SIPPs) and invest in a host of alternative investments.

It’s believed that Avacade (in both its guises) made arrangements with a number of SIPP providers, such as Liberty SIPP, to introduce and process a raft of Unregulated Collective Investment Schemes (UCIS). Variously these are said to include:

Ethical Forestry
InvestUS
Brisa Investments
Paraiba Projects Mini Bond

Investors will have known for some years that their money had been lost to commissions ,management fees and dissipated by unscrupulous asset managers who never quite got the assets built.


Justice – just

The wheels of justice grind slow. Whether the money will ever be recovered is in doubt. Those who have lost money will be pleased that the perpetrators will not be authorised in future, but as they were not authorised in the past, this appears to make little difference.

Alexandra Associates still trades today and the Lummis and Fox families are still at large. If this is justice, it is partial justice and shows that the punishment for financial crime involving pensions is a lot softer than other forms of theft.

It has taken 10 years to judge the scammers class of 2010. Can today’s scammers consider their end-date 2030? Is the worst they can contemplate, an FCA order to return money to those whose pensions they’ve spent for a decade?

We need swifter and more complete justice as a deterrent. That means more timely investigations as well as the sexy TV ads.

 

Posted in advice gap, pensions | Tagged , , , , , , | Leave a comment

If payroll can integrate to our pensions, why can’t we?

auto-enrolment-traffic-jam.png

Cast your mind back to the back end of 2012 when the big retailers and banks were staging auto-enrollment.

The big employers were spending hundreds of thousands of pounds re-coding their payroll software or were ransoming themselves to “middle ware” – which would soon be renamed “muddle-ware”.

There was a need for a data standard to which payroll software suppliers could build. The standard could save payroll millions and this could be passed on in lower pension integration costs to employers. A group of software suppliers , bureau operators and some pension providers started meeting , convened by Andy Agethangelou’s Friends of Auto-Enrollment and led by Will Lovegrove of PensionSync , watched over by Neil Esslemont of the Pensions Regulator.

They devised a data standard, it was called PAPDIS, but it arrived too late. The PAPDIS data standard was rejected by Nest on the grounds that Nest considered itself the data standard.

Fast forward six years and in the meantime those big red spikes of companies staging from 2016 to 2018 found a way. Payroll software companies found a way and the pension providers found ways to integrate. The great vaccination  – the API is finally happening. But it is happening selectively

integrate

PensionSync integrations

integrate2

AEclipse integrations

If you are a small employer, choice is still governed by the interoperability of payroll and provider and the mainstream providers are those who have invested in interoperability.

Why did they do so? Here is Dave Lunt , commenting on linked in on behalf of People’s Pension.

lunt

Less cost for People’s Pension means prices stay low. Better data quality means less problems at “claim”. More security means less scamming. But how much has been lost by our failing to get data direct from payroll submission. When she worked with PensionSync , Ros Altmann made her feelings clear

In truth , auto-enrollment muddled through and the great Government success story has been achieved with some grievous failures from employers who have over -or more seriously – underpaid contributions. Many payments got lost (we will not forget the cost of rectifying NOW’s middle-ware). many employers chose sub-optimal workplace pensions to suit the needs of their payroll.

Let’s not suppose that auto-enrollment gave us all the answers. But it did at least teach us where we shouldn’t be going wrong.


Lessons for the future

If you look at those advertisements of AEclypse and PensionSync you can see that what matters to future purchasers is integration to some core providers and both products are being targeted at a relatively few payrolls.

Note to the Pensions Dashboard Programme (1): a market will form around the major participants. The Data Application (go live) point is when the market feels that the service is sufficiently inclusive and auto-enrollment shows there is no appetite for 100% inclusion.

Note to the Pensions Dashboard Programme (2); direct integration can involve competition between integrators as displayed but at great cost. It would have been better off for all if a data standard had been adopted when auto-enrollment was young. We do not want to see the same mistake made twice. The pensions dashboard needs the dynamism of the private sector and the co-operation of Governmental organisations to common purpose. That’s why I’m a supporter of the approach being taken by the Pensions Dashboard Committee in getting the common data standard agreed at outset.

Note to the Pensions Dashboard Programme (3); Pensions are payable because people defer present pay for future pay. Pension providers do no more than maximize the effeciency of that deferral. Auto-enrollment is a slight of hand that enables this deferral to happen without compulsion. But auto-enrollment works because savers stay out of the way, it does not encourage savers to get involved with their pensions. The pensions dashboard seeks to reverse that process. Having effectively excluded the saver from the process, we should not expect the saver to be well informed. We need some simple ways to get people engaged with their money. Auto-enrollment data integration has worked where the service has been direct to the customer.


Pragmatic on inclusion, authoritative on data standards and insistent on consumer access to their data.

Auto-enrollment roughed out its solution and it’s not a perfect solution. But it’s got there.

The pensions dashboard was conceived as combined pension forecasts in the early years of the millennium.  AE is about real money, the dashboard is about the data that tells us the money is real.

The dashboard has been slower because money makes the world go round. But … the money we are talking about is our money!


Why can’t we integrate to our pensions?

Those who have managed our money, have held our data and held it close. Rob Mann is not the only member of the public who is frustrated by why his data and his money aren’t more easily available.

It is a crying shame that the priority for pension providers has been  in integrating  with payroll – not with dashboards.  But that is because money talks. No.w we must make our money talk. We must demand better access to our data and our money. We cannot allow the dashboard delivery date continue to recede into the distance. We cannot allow our providers to dictate the service we receive and leave these questions unanswered.

 

Google “pension integration” and you will see hundreds of images of flow-charts. You have to scroll a long way till you get to a human face that isn’t being used to sell software. When you do , this is what you find.

questions

The other face of “pension integration”

 

Posted in age wage, Payroll, Pension Freedoms, pensions, Sage | Tagged , , , , | Leave a comment

“Dragging pensions out of the digital stone age”

I was interviewed yesterday by a young lad from Johnston Greer called Lewis Campbell. I’ll share next week. On several occasions I was asked for examples of people who I admire for promoting pensions and I came back to Alistair McQueen. He has the knack of asking the right question in the right way and here he is at his best.


Back to the age of printers?

It’s been one of those weeks. We’ve been dragging printers out of cupboards and borrowing them from friends. Why? Because if you want to make an inquiry on pensions,  you may have to send it in by post.

I ask you, what good is it the Law Commission requiring British businesses to accept e-signatures, if you can’t send a request to a company by email?

This blog does not contest Alistair’s contention. It asks why the pension consumer is so poorly served by the internet.


A commercial imperative for change?

The problem for pension consumers is that there is no commercial imperative for pension providers to update their processes for a digital age. Whereas other retailers depend on your digital footfall for future custom, pension firms make money on your money when you are not around. The less the pension firm sees of you the better.

For all the talk of engagement, the thought that consumers actually want to know what is going on with their money, fills many pension firms with dismay. That’s because their financial forecasts deliver margin based on a low claims-experience. A claim in this context is any kind of client interaction which gives rise to a manual intervention.

What is worse, rather than investing to eliminate manual intervention, most firms suppress claims by making it as hard as possible for customers or their agents to get to the information needed to work out how their fund has done.

This is not just the case for individual inquiries. It is extremely difficult for employers to find out how their work-forces have fared saving into multi-employer schemes. Only where an employer has set up its own pension trust can it have primacy over staff data and even then they are dependent on service agreements with third party administrators.

In short, our experience is that while most pension firms are uncomfortable with claims either on the money or data they hold on their customers behalf.


The dashboard – our pensions Crossrail?

John Zammit

Recognizing that there is no commercial imperative for pension firms to digitize, the DWP is in the process of mandating change. The Pension Dashboard Programme will be empowered by the forthcoming Pension Schemes Act to demand that data be available first to a Government Dashboard and then to commercial dashboard, on presentation of a digital certificate authenticating the request.

However, the process of unlocking our data is being frustrated by delays in pre-determining what data is available and how it is presented. Arguments are breaking out about how much access to data private sector dashboards should have and the net result is that change is happening at a snails pace. Indeed the delays in the legislative process are meaning that the Pensions Dashboard Programme is becoming our pension Crossrail.

The public was promised Crossrail by December 2018 and the Dashboard a year later. Crossrail now expects to be fully open by December 2022, we have no timeline for the Dashboard. Without a commercial imperative or mandation, the pensions industry can sit on its customers data and cash indefinitely.


The pandemic should have increased digitization – not held it back.

The delays in the Pensions Scheme’s Bill passage through parliament are being blamed upon Covid-19. but Covid-19 should not be holding back insurer’s spend on research, development and implementation of digital access to our pension data.

One senior executive told me last month that her company no longer had the budget to develop APIs due to decreasing revenues from a fall in the markets. Linking customer service to the volatility of the markets is a worrying concept, the executive was in earnest.


The pandemic showed some providers having no digital plan B

The fragility of that service and disaster recovery was exposed by Covid-19. At least two insurers were unable to service basic customer needs in late March and April because they had no capacity for homeworking.

For all the talk of straight through processing, the pandemic showed that some of our largest firms were still requiring manual processes based on centralized call centers working on mainframe systems. The lack of agility was also  worrying +++ as was the lack of accountability for those responsible for the maintenance of services+++as was the acceptance of failure from trustees and IGCs.

The failure of certain firms to maintain telephony in the key weeks of March and April when markets were plummeting should not be forgotten by the firm’s executives, fiduciaries or customers.


Dragging pensions out of the stone age

Managing pensions is a profitable business. Margins may not be quite as high as in the funds industry but it is still possible to make a decent margin from running a funds platform for open and closed pension books. Witness the success of the pension consolidator Phoenix and the inexorable rise of master trusts such Lifesight and Smart and (at a consumer level) Pension Bee

If there is hope that pensions can be dragged out of the stone age, it may be because there is capital outside of pensions that can be committed to researching , developing and implementing new systems that are built with API layers integrated into them.

If the mindset of the new administrators starts with the presumption that every process can be automated, then manual processes will be phased out.home automation Consumers will find that they can view and manage their investments with the automation they expect for their home.

Looking at the ONS data makes sorry reading. Accessing investment or pension data does not figure in the top 20 items. Internet banking is now used by 76% of us , up from 30% in 2007.  Open banking is a reality but open pensions seem further away than Crossrail.

It will be down to a few thought and business leaders, such as Alistair McQueen to change things. I would like to think his firm, Aviva- would be in the van.

mcqueen

McQueen – dragging pensions out of the Stone Age.

 

 

Posted in advice gap, age wage, pensions | Tagged , , , , | 3 Comments

Is value only in the eye of the beholder?

Yesterday’s blog on the capacity of “value” to simplify pensions has solicited some strong comment and a very interesting debate on linked in

I am  interested in the comments of Simon Ellis who has been assessing value in funds

For those us who have grappled with Assessment of Value statements for UK authorised funds over the last twelve months there is nothing new here, and compared to your wish, no rapid adoption of a single simple approach.

The factors that drive perceptions of value have been established, ‘measures’ or opinions of what constitutes value in the eye of the beholder remain disparate.

In a way that’s right- there’s a big difference in expectations or senses of what is good value between an auto-enrolled scheme for a small number of lowly paid shop-workers and the high paid employees of, say, an investment bank.

What I think is more notable is the continuing convergence of thinking and methods between the two lead regulators. Anyone who thinks these two worlds will remain separate is, in my opinion, being naive.

The names and people may stay different (and the reporting into different Government departments too) but the direction of travel and emphasis is getting more common by the day.

Philosophically, I believe value is intrinsic in what is being bought. A can of beans tastes the same in the mouth of a prince and a pauper. There is no reason why a shop-worker shouldn’t be invested in the same fund as the investment banker though the banker is likely to have lower pension costs if the shop-worker’s employer cannot get good terms.

But if you are in Tesco’s workplace pension likely, getting more value than almost any employer scheme we have analysed. I have spoken with several fund platforms who are struggling with value assessment and I agree, the difficulties are in comparing perceptions of funds. It should be remembered that until recently , Neil Woodford was considered to deliver more value than any other single manager.

So long as we measure value as the marketability of a fund, then it will be the capacity of the manager to talk a story that solicit expectations and drives money to the fund. But that is the sizzle and not the sausage. The sausage tastes the same whether you play polo or drive one.


Is there anything new in a single definition?

  • The funds industry relies on value assessments of authorised funds
  • The IGCs rely on value for money assessments of contract based workplace pensions
  • The Trustees rely on value for member assessments of trust based pension

But strip away the marketing and what is being measured is what happens between the money arriving and the point of measurement.  In all three instance we are measuring individual experiences within collective vehicles – whether we define collectivity as a mutual fund or a workplace pension and I think there is something new about measuring and bench-marking the saver’s experience as that is fundamentally the same.

This is radical and disruptive because it denies the rights of marketing to assert “segmentation” as a source of value in itself.


Is there any value in quality of service?

I believe there is. A high quality of service should lead to more targeted outcomes. Take SJP , where perhaps 50% of the money that leaves the fund pays for advice. The advice itself is valued by customers , as is witnessed by high customer retention and high customer satisfaction. The bundling of advice into a management charge is highly tax-efficient and makes life easy. The quality of service argument at SJP has to take into account the old argument that advisers get the right money in the right time in the right place.

Stripping out the cost of advice, SJP may or may not be offering value from the funds they manage and that is what the value assessment should be about. As I have argued on this blog before, a value assessment of funds should be independent of a value assessment of advice and it is up to SJP funds to demonstrate that they offer equivalent of better intrinsic value than promised both by the expectation of the fund holder and against alternatives.


So how does a single definition simplify?

We all look the same without our clothes on and that’s true for our savings too. Much as we like to consider our fund, advisory or tax-wrapper a value-add, what matters to the saver is its capacity to deliver.

There may be a need for a different benchmark for life assurance endowments or for cash ISAs, but DC pensions are homogeneous.  We put money in on the hope we can get money out at a future point and this is a commoditised activity. I believe that a single benchmark can be used to measure a wide variety of pensions and that this presents a saver with an entry point into an understanding of how his or her pots have done.

A single definition – money in V money out of course takes into account costs and charges leaving the pot in the meantime. The saver who chooses an individual rather than a default strategy can overlay their own measures of success, but VFM is really about establishing the average experience.


Towards unified fund governance.

If we accept my assertion that people converge on a default and that a default for pension saving is measured by money in – money out then we can converge value assessments, value for money and value for members.

Quality of service is of course a factor but that is in the eye of the beholder and that will influence purchasing decisions for those who have money to buy advice and fancy features.

But the engine is performance and can be measured by the experienced rate of return measured inclusive of charges.  If we can accept this universality , we will have taken a giant step towards simplifying pensions.


And where is this helping ordinary savers?

The current perception of pensions is that they are hard, complex – even toxic. Many people may think of pensions in terms of the FCA’s adverts about scamming.

To change this perception, we need to make pensions easier, simpler and comparable.

Value for money is a concept which goes a long way to achieving this. It is not a new idea, but if we can apply it so that a wealth management pot can be compared to a workplace pension pot then we will be further on. Whether our idea of wealth is £5m or £5,000,  our fundamental understanding of value for money is the same.

simon and henry

Simon Ellis and Henry Tapper

Posted in advice gap, age wage, pensions | Tagged , , , , , | Leave a comment

Our best shot at pension simplification in a generation!

FCAtpr

Can DC pension regulation align and simplify around VFM?

It’s an interesting time right now for those involved in DC regulation. This blog suggests that if we can find a single definition of value for money that is acceptable to TPR and FCA, then we can massively simplify DC pension regulation and had pension choice back to employers and savers

I  believe the current debate around a single definition for value for money could provide us with our best shot at simplification in a generation,

The current focus is on benchmarking value for money in DC pension schemes. We are  still waiting for the DWP’s response to its 2019 consultation on Investment and Innovation which considered the consolidation of DC schemes.

Trustees and advisers are wondering

“Will changes need to be incorporated into any new VFM guidance and if so , will those changes align with the radical proposals in the FCA’s CP20/9 consultation?”

The FCA have highlighted three areas that contribute to VFM in their recently published consultation:

  • charges and costs,
  • investment performance, and
  • quality of service.

I for one would support this radical simplicity as opposed to the 6000 words of guidance from tPR. The history of  TPR’s thinking of what makes for a good occupational DC scheme is a long one. It started with Ian Costain’s 6 good outcomes in 2010 which ballooned into 6 principles and  36 features two years later. 


How did defining what made for value become so complicated?

Looking back at the original 6 outcomes, I am struck by how easy the are to understand . 10 years ago, we could measure value as simply as this’

  1. Appropriate contribution decisions
  2. Appropriate investment decisions
  3. Efficient effective administration
  4. Protection of assets
  5. Value for money
  6. Appropriate decumulation options

The 36 features were designed to underpin 6 new principles but both the principles and the  features were a different kettle of metrics. If you want to read all the principles and  features, I’ve appended them to the blog. I said at the time and hold to this day that it was the over-complications of the original 6 good DC outcomes that has blighted discussions on value and money ever since.

Neither the features or principles included  “value for money”  but in they form the value for member guidance – and in an unhelpful way – they have moved the agenda away from what mattered to the consumer so that DC governance has become a matter for experts.

Currently TPR regulated entity are required us to look at the services members get for the charges they pay and for us to make our own evidence based assessment of value, based on TPR specified criteria when compared to other similar options available in the market :

  • Scheme management and governance
  • Scheme investment and governance
  • Communications
  • Administration

It is up to each scheme to make  the comparison and provide evidence based conclusions.  Schemes  do not use comparative metrics, other than to consider the publicly available member charges other schemes make. A few conscientious trust based schemes  reference independently rated risk-adjusted returns on the default fund

The  requisite VFM statement, which reflects the VFM assessment is published in the Chair’s Statement in the Scheme Annual Report and Accounts.

One large multi-employer scheme told me that

“it  did publish a member focused version of the assessment for many years but it was hardly ever viewed by members and has been discontinued”.

From October this year , the statement will have to be published on a publicly accessible site and we are already seeing progressive schemes like Nestle ,  publishing their value for members statement within the Chair Statement (it’s at 4.2). The problem is that what is published is not for the common person and I suspect that won’t get read either.


Too complicated for the ordinary person

To my mind, if a concept as simple as value for money has become so complicated that nobody reads a value for money report, something has gone wrong.

Something went wrong with the guidance on VFM 8 years ago and it is not till tPR gives up on the 2012 principles and establishes a simple definition of value for money as suggested by the FCA, that we have any chance of  getting VFM reports read by ordinary people.

I feel that there is now a chance to achieve the radical simplification in the way we present schemes to members and I will be doing everything I can to get tPR and FCA into one “virtual” room.

The prize of creating a single definition of value for money to which we can all sign up, is not just that we can junk the current guidance but that we can offer employers and ordinary savers, a way to compare pensions in a way that improves outcomes and helps ordinary people turn their pension pots into a retirement plan.

 

FCAtpr

 


Appendix; TPR’s  6 principles and 36 features of a good pension scheme

The six principles

Principle 1 – Schemes are designed to be durable, fair and deliver good outcomes for members.
This principle covers the features necessary in a scheme to deliver good outcomes for members, including features such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.

Principle 2 – A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.
This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.

Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
This principle ensures that those who are given accountability or responsibility for a key governance task are able to carry this out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.

Principle 4 – Schemes benefit from effective governance and monitoring through their full lifecycle. This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.

Principle 5 – Schemes are well-administered with timely, accurate and comprehensive processes and records. This principle is informed by our previous work on record keeping, looking specifically at the administration processes required in a DC scheme.

Principle 6 – Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings. This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the Open Market Option.


The 36 features

  1. All beneficiaries within a pension scheme are treated impartially and receive value for money.
  2. All costs and charges borne by members are transparent and communicated clearly at point of selection to the employer to enable value for money comparisons to be made and to assess the fairness to members of the charges.
  3. Those running schemes understand and put arrangements in place to mitigate the impact to members of business and/or commercial risks.
  4. Those running pension schemes seek to predominantly invest scheme assets with entities regulated by the Financial Services Authority or similar regulatory authorities. Where unregulated investment options are offered, it must be demonstrable why it was appropriate to offer those investment options.
  5. Those running schemes understand levels of financial protection available to members and carefully consider situations where compensation is not available.
  6. Products offer flexible contribution structures to members and/or employers (over and above minimum scheme qualifying thresholds).
  7. A default strategy is provided which complies with DWP default fund guidance and scheme investment strategy.
  8. The number and risk profile of investment options offered must reflect the financial literacy of the membership. Different ranges of investment options could be offered to different membership groups.
  9. Investment objectives for each investment option are identified and documented in order for them to be regularly monitored.
  10. A process is provided which helps members to optimise their income at retirement. Principle two: Establishing governance A comprehensive scheme governance framework is established at set up, with clear accountabilities and responsibilities agreed and made transparent. Features:
  11. Sufficient time and resources are identified and made available for maintaining the on-going governance of the scheme.
  12. Those running schemes support employers in understanding their responsibility for providing accurate information, on a timely basis, to scheme advisers and service providers.
  13. Accountability and delegated responsibilities for all elements of running the scheme are identified, documented and understood by those involved.
  14. Those running schemes establish procedures and controls to ensure the effectiveness and performance of the services offered by scheme advisers and service providers.
  15. Those running schemes establish adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks.
  16. Arrangements are established to review the on-going appropriateness of investment options. Principle three: People Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out. Features:
  17. Those running schemes understand their duties and are fit and proper to carry them out.
  18. Those running schemes act in the best interests of all beneficiaries.
  19. Those running schemes are able to effectively demonstrate how they manage conflicts of interest. Principle four: On-going governance and monitoring Schemes benefit from effective governance and monitoring throughout their full lifecycle. Features:
  20. Those running schemes are open and honest with their regulators and regulatory guidance is addressed in a timely and effective manner.
  21. Those running schemes regularly review their skills and competencies to demonstrate they understand their duties and are fit and proper to carry them out.
  22. Sufficient time and resources are made available for monitoring and reviewing schemes to ensure that they continue to meet good practice and continue to include the essential characteristics established under Principle 1.
  23. Those running schemes maintain procedures and controls to ensure the effectiveness and performance of the services offered by scheme advisers and service providers.
  24. Those running schemes maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risk.
  25. Those running schemes take appropriate steps to pursue and resolve all late and inaccurate payments of contributions.
  26. Those running schemes monitor the on-going suitability of the default strategy.
  27. The performance of each investment option, including the default option, is regularly assessed against stated investment objectives. Principle five: Administration Schemes are well-administered with timely, accurate and comprehensive processes and records. Features:
  28. Member data across all membership categories are complete and accurate and is subject to regular data evaluation.
  29. All scheme transactions are processed promptly and accurately.
  30. Administrators maintain and make available their complaints process.
  31. Administration systems are able to cope with scale and are underpinned by adequate business and disaster recovery arrangements. Principle six: Communications to members Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings. Features:
  32. All costs and charges borne by members are disclosed to members annually.
  33. Members are regularly informed that their level of contributions is a key factor in determining the overall size of their pension fund.
  34. Scheme communication is accurate, clear, understandable and engaging. It addresses the needs of members from joining to retirement.
  35. Members are regularly informed of the importance of reviewing the suitability of their investment choices.
  36. Those running schemes clearly communicate to members the options available at retirement in a way which supports them in choosing the option most appropriate to their circumstances.
Posted in advice gap, governance, pensions | Tagged , , , , | Leave a comment

A practical illustration of Contractual Accrual Rates – Clacher and Keating

 

Ian con

Clacher and Keating

In this article Con Keating and Iain Clacher explain an alternative to the current way we require DB schemes to be funded. It challenges received thinking and offers a way forward to regulators struggling to find an acceptable funding methodology to both trustees and sponsors. A must read

Here is Derek Benstead’s comment as a summary

As discount rates have been progressively reduced over the past 20 years, the funding target set in actuarial valuations has been set progressively higher. Pension schemes don’t have a problem of persistent deficits. The improvement in funding achieved over the years has been hidden because the funding goal posts have been moved further away at each valuation.

The major advantage of the method advocated here is the fixing of the goal posts. The contribution to benefit accrual implies a discount rate which values the benefit awarded at the contribution paid. The premise is a simple one. These are the terms on which the benefit was awarded and contributed to, so these are the terms on which we should judge progress since then.

Had we used this method down the years, we would have a better understanding of how pension schemes have actually fared down the years since the original funding plans were made.


Contractual Accrual Rates – A Practical Illustration

In various documents we have described the contractual accrual rate (CAR) of a DB pension award as that rate of return which equates the contribution made with the projected benefits payable under that award. The contribution is the scheme asset and the projected benefits the liability. The contractual accrual rate of a scheme is the weighted average over time and members of these rates.

The CAR is both the correct rate at which pension awards should accrue or equivalently be discounted and is the rate of return on the scheme assets necessary to meet the liabilities on time and in full with a UK DB scheme, and this is guaranteed by the sponsor employer.

To estimate the CAR of a scheme using the historic records of contributions and awards would be a complex and tedious exercise, and for many schemes would not be feasible given the quality of these records. However, we may exploit the return on assets property to establish the current CAR of a scheme. If we take the current market value of assets and the associated projected benefits, we may establish the rate of return on those assets needed to discharge the liabilities; this is the CAR of the scheme, at the current time and going forward.

We shall take an illustrative open scheme as our pedagogic example. This has assets of £25,853,771, which we shall consider as our contribution proxy and projected liabilities totalling £ 67,181,556, which are distributed over the ensuing 70 years as illustrated in figure1. The CAR is 6.1%.

con 1

Although this scheme is open, we consider first the situation with no new awards in the first year. We show, first, the development of scheme liabilities at Table 1. There are no revisions to the projected benefits in this illustration.

Table 1

Amount   (£s) Note
Opening Liabilities          25,853,771
Accrual            1,577,080 at 6.1%
Pensions Paid –          1,537,896
Closing Liabilities          25,892,955

The accrual is the increase in the present value of liabilities, at the CAR rate, due to the passage of time. Next, we consider the income and expense position and the evolution of assets as Table 2. We introduce the asset portfolio income (3.4%), from dividends and bond coupons received, as well as the mark to market gain in asset prices. We see that the scheme is cash flow negative, relying on the sale of assets to pay pensions. This would be the position if the scheme were closed.

Table 2

Amount (£s) Note
Dividend Income                879,028 at 3.4%
Pensions Paid –          1,537,896
Net Operating –             658,868
Opening Assets          25,853,771
Gain / Loss                491,222 1.9% Mark To Market
Net Operating –             658,868
Closing 25,686,124

 

The solvency position is shown in Table 3. Unsurprisingly, there is a deficit as the asset performance (3.9%+1.9% = 5.3%) is less than the contractual accrual rate of 6.1%.

Table 3

Amount (£s)
Assets          25,686,124
Liabilities          25,892,955
Solvency 99.20%

 

The scheme was, in fact, open to new members and future accrual. The stand-alone characteristics of the new awards are shown in Table 4. The assumptions driving the projected values for benefits are the same as those used for the historic scheme.

Table 4

Amount  (£s)
Contributions             733,296
CAR 4.20%
Benefits Added            2,706,706

 

The lower than historic CAR on the new contributions and liabilities added will reduce the scheme CAR marginally. Table 5 presents the asset position.

Table 5

Amount (£s)
Dividend Income                  879,028
Pensions Paid –           1,537,896
Contributions                  733,296
Net  Operating                    74,428
Opening Assets            25,853,771
Gain/Loss                  491,222
Net Operating                    74,428
Closing Assets            26,419,420

 

Next, we consider the liabilities scheme as a whole, including the new awards in Table 6, and Table 7 shows the solvency position of the scheme.

Table 6

Amount Note
Opening Liabilities            25,853,771
Accrual              1,577,080 at 6.1%
Pensions Paid –           1,537,896
New Liabilities                  733,296
Closing Liabilities            26,626,250
New CAR 6.03%

 

Table 7

Amount (£s)
Assets     26,419,420
Liabilities     26,626,250
Solvency 99.22%

 

We now consider a further year in which contributions were made and new liabilities added. The contributions and liabilities added are shown in Table 8.

Table 8

Amount
Contributions 782,182
CAR 4.19%
Benefits Added 2,873,610

 

Comparison of these statistics with the earlier Table 4 shows a substantial increase in both liabilities and contributions, though the new awards CAR is almost unchanged. The cause of this was higher than expected salaries for new recruits and greater than predicted increases for existing actives. This led to a decision to revise the assumptions for the existing benefits to be consistent with those applying to the new awards. We shall return to this later, but first will address the income, expense and asset position, as Table 9.

Table 9

Amount (£s) Notes
Dividend Income                  924,680 at 3.5%
Pensions Paid –           1,475,281
Contributions                  782,182
Net  Operating                  231,581
Opening Assets            26,419,420
Gain/Loss              1,400,229 5.3% MTM
Net Operating                  231,581
Closing Assets            28,051,230

 

The revaluation of projected benefits shows these to have a total extra cost of £ 861,694 and the CAR of the scheme rises to 6.13%. Table 10 shows the liability position of the scheme and the solvency position of the scheme is shown in Table 11.

Table 10

Amount Note
Opening Liabilities            26,587,066
Accrual              1,629,787 at 6.13%
Pensions Paid –           1,475,281
New Liabilities                  782,182
Closing Liabilities            27,523,754
New CAR 6.08%

 

Table 11

Amount
Assets          28,051,230
Liabilities          27,523,754
Solvency 101.9%

 

This illustration has shown how the contributions-based CAR may be proxied by the required return on assets and shown it in practice for a closed scheme, an open scheme, and an open scheme with revisions to the projected benefits.

These illustrations also show the low natural variability of the correct discount or accrual rate. The changes which do occur all arise from real world changes to the benefits offered by the scheme. They are not changes in liability present values arising from arbitrary changes in the discount rate.

Posted in de-risking, pensions | Tagged , , , , , , , | 11 Comments

Pension Bee and the fintech annuity

Legal & General Retail Retirement has agreed a new partnership  to provide annuities to PensionBee customers.

BLAG

From 3rd August, customers enquiring about an annuity with PensionBee will be introduced to Legal & General for further information, or to get a quotation. Legal & General will also help customers find the best rate available through its whole of market annuity comparison service, www.annuityready.com .

Pension Bee are getting ready for the COVID-delayed investment pathways , now due to be launched in February 2021 and including a pathway to an annuity providing guaranteed income

For Legal & General , this is this is the  fifth deal  announced and follows similar partnerships with  AEGON, Prudential and Sun Life Financial of Canada.


So what?

Well so quite a lot actually. “Pension Bee and annuities” wasn’t a combination that many would have expected to think about only a couple of years ago and this announcement shows just how far Pension Bee has come since its early disruptive days.

The partnership developing between Pension Bee and L&G is also interesting. L&G’s Retirement Division is currently a jewel in its  crown and  Emma Byron is building  a formidable team. Pension Bee is also led by a strong and progressive team under Romi Savova and both of the power brokers in this deal have youth on their side.

Annuities are being  purchased in increasing numbers.

Mark Ormston reports that Retirement Line is doing record volumes of business through the pandemic.

Retirement Line, who are a major distributor of L&G annuities report, have been actively promoting the deal

The promotion of annuities is generally through non-advised arrangements and is creating a new and generally under=reported infrastructure. But in a re-emerging market it is good to see brokers and advisers working together. We have been struck by how customer-focused the personal annuity is and the breadth of choice available to people interested in annuity options.


Annuities – and online choice

Five years on from the introduction of pension freedoms ,  annuities are making a resurgence , not just as a means to buy out defined benefit liabilities but as part of the choice architecture people consider when turning pension pots into retirement plans.

People have the choice of buying annuities through a financial adviser or through an annuity broker who can give information about choices but can’t provide a definitive choice of action.

At AgeWage we will now be featuring three routes to an annuity as next steps for people who are interested in the different choices available to them.

  1. Access to Billy Burrows’ Better Retirement Group who offer advice on retirement options and an annuity service
  2. Direct access to Retirement Line
  3. Indirect access to L&G’s Annuity Ready service through Pension Bee.

It seems that financial technology is well placed to promote not just annuities, but ways to access them. We are looking forward to finding out from our test group, which approach suits them best. If you’d like to be a part of this test , you can register at agewage.com and follow our simple journey to these choices.


In marked contrast to wealth management

While the likes of Pension Bee and AgeWage actively embrace annuities as a pension freedom, they appear to be pretty well ignored by the wealth management industry. Referrals to annuity brokers from wealth managers are rare and annuity providers can see from Equifax Touchstone that their business is sourced primarily from Retirement Line, Hub Financial and other on-line and telephony based businesses.

The increasing penetration of Legal & General into the at retirement decision making of organisations such as Aegon and Prudential suggests that the non-advised market is regrouping  in new ways.

Who would have thought that annuities would have embraced financial technology in this way?
Who would have thought that Pension Bee would be promoting annuities through L&G?

 

Posted in advice gap, annuity, pensions | Tagged , , , , , | 5 Comments

Pot consolidation doesn’t need alchemy – it needs common purpose and leadership

Sun Pension Pot

Pot consolidation doesn’t need alchemy

 

The case for Government intervention on “small pots” is made very well by Dirk Paterson

Dirk

It is indeed time for Government intervention, but the choices are many and each has its issues. The danger of relying on Government intervention to solve a private sector problem is most obviously delay.  The politics of the pension dashboard risk not just delaying a public dashboard, but stifling the innovation that could solve the problem independently of Government involvement.

Here are the options , well laid out by the PPI in its paper

Policy options for tackling the growing number of deferred members with small pots

 

ppi table

The PPI conclusion is that

“Policies aimed at consolidating pots are likely to provide a better long-term solution than tackling charging structures”

I quite agree, and say so in our response to the DWP’s call for evidence over the charge cap and restrictions on complex charging structures.

It’s worth asking whether there is precedent for speeding up the process through interim regulations and perhaps policy commentators and makers could look at how tPR has engineered space for superfunds by adapting the secondary legislation for master trust authorization.

Because if we are to wait for primary legislation to force through consolidation , we may get to the scenario Dirk outlines before the remedy is available. The vaccine needs to come from the private sector, supported by sympathetic  and aligned regulation.


The private sector’s part to play

The solutions outlined in the box above come at three levels of intervention

Minimum intervention

If we take politics out of dashboards, then we need no intervention for technological intervention to play a part in the solution. Organisations like Profile Pensions, Pension Bee, Zippen,  and AgeWage are testing solutions that improve consolidation through better pension finding , better safeguarding and better comparisons. As the Pensions Minister told me in July, delays in the dashboard should not be stifling innovation.

Similarly the provider consolidation pursued by Smart and other more acquisitive master trusts is benefiting from the lifting of requirements for actuarial equivalence (GN16) that dogged market consolidation in the past. The master trust authorization  framework encourages consolidation at scheme and platform provider level while the consolidation of insurers should mean over time , that relevant schemes can be combined under the same insurer,

There is much that can be achieved from open pensions independently of intervention. The only intervention needed right now is for Government to clarify this and remove amendments 52 and 63 of the Pension Schemes Bill at the Commons readings next month.


Medium intervention

Pot follows member and member exchange can both work on the principle of auto-enrollment, a nudge and an opt-out beating mandation.  If you find that your pot is stalking you and you don’t like your pot , you should be able to reset the consolidator. If you find yourself part of a member exchange and heading to a provider you don’t like, you have the right to opt-out and consolidate elsewhere. There are start-ups like Zygot encouraging technological solutions for member exchange and Government should be encouraging their innovation.

Here I  see regulation as an enabler and facilitator, not as mandating and i can see regulators finding ways for this to happen without waiting for another Pensions Bill (and all that entails)


Full market intervention

Creating Lifetime Providers and Default Consolidators are the kind of interventions that go down well in Australia but not in the UK. It’s not just the market distortion but the impact it has on personal empowerment. Let’s remind ourselves of a simple statement made recently by NEST

nest guided

This is in the spirit of auto-enrollment. Making Nest or any other pension a default provider or requiring individuals to stick with a Lifetime Provider would not work for consumers or businesses for whom the option to choose remains central to a default culture.


Thoughts for Government

The Pensions Schemes Bill is taking an age, this is mainly down to the pandemic, but also due to differing philosophical positions adopted by the Lords and the Commons (this is not a party thing).

The Government is going to have to decide whether it supports innovation and the adoption of Open Pensions, or whether it puts protecting the consumer as its priority.

If it wants the private sector to sort things out, it needs little or no more legislation, it needs regulators to facilitate and encourage innovation and it needs an open door to the innovators.

If it wants to control the market then it should intervene and set out a new legislative agenda. Frankly, I would have expected this had the Labour party won the last election but I see there being little political appetite for mandated consolidation.

It strikes me Government is best off using its two pension regulators to work in alignment towards a pragmatic, non-legislative solution. It should be reaching out to the innovators and to an extent it is. I am pleased that AgeWage has made it to the FCA Sandbox and please to be helping a large test group tell us how easy or hard they find consolidating their pots.

AgeWage will be feeding back to the FCA and we will continue to respond to Government consultations. We will also work through the Pentech lobby established by FDATA.

This blog will continue to engage with these issues and I hope that worthy organisations such as the PPI will push forward that debate in its even-handed way.

This is about improving the value people get from their pension saving, and in that we should all be on the  same side.

Sun Pension Pot

Posted in now, pensions | Tagged , , , , , , | Leave a comment

Prem Sikka’s peerage – its value to accounting , governance and pensions

prem sikka.jpg

My thanks to Dennis Leech, for pointing this out, I will return to Dennis’ comments in a moment but first need to focus on Prem Sikka, for he is not a person I’ve come across. This is my bad.

Reading various articles and comments by Prem Sikka , I am struck that his twitter timeline makes no mention of the honor bestowed on him, focusing instead on instances of poor corporate governance, weak accounting and the points deduction on Sheffield Wednesday.

His writings consistently question the governance of British governance and its adherence to the principals behind ESG.

The House of Lords has a another peer who is quite contrary.

This is taken from an opinion piece published in the Guardian and written by Prem Sikka in May of last year

BSL (British Steel Limited) is another corporate disaster entirely made in the UK. Despite a string of similar scandals and collapses there has been no reform of corporate governance, insolvency, accounting, auditing or anything else. There is hardly any scrutiny of private equity and its devouring of businesses. None of this neglect can be attributed to the European Union. Rather it is all the consequence of an economic and business ideology which continually seeks to appease the financial industry and oppose the democratisation of business.

Reading the paper tweeted by Dennis Leech, I discover that this man has been talking a huge amount of sense since at least 2006 and much of what he has been saying is directly relevant to the pensions debate. Which makes me wonder why it has taken Jeremy Corbyn to give us his voice in the House of Lords.

Sikka joins a growing number of voices in the Lords dissenting from the received position that pension schemes should de-risk , avoid taking on future liabilities and allow retirement risk to pass from collectives to individuals.  I hope he and Bryn Davies will be given the warmest of welcomes by Baronesses Bowles and Altmann.


But back to Dennis

Dennis Leech ‘s thread is a better tribute to the relevance of  Prem Sikka than you will find from my fingers, so here is the thread started above and concluded below

If the legacy of Jeremy Corbyn to pensions is the elevation of Bryn Davies and Prem Sikka to the House of Lords, then it is a good legacy and the House of Lords a better place for pensions.

Posted in accountants, advice gap, age wage, pensions | Tagged , , , , , , , , | Leave a comment

“That’s an interesting choice”

“That’s an interesting choice” is a statement that interests me a lot. It is an entirely satisfactory response to a test we have just started with the FCA in which we allow people to compare pension pots by way of a single score assigned to each pot

agewage dashboard

an interesting choice?

The phrase should also be welcomed by policy makers when  those not taking advice are offered investment pathways at the point they have to consider their retirement income options.

pathways

an interesting choice?

We could add to this the choice an employer needs to make when choosing or reviewing the choice of their workplace pension.

playpenratings

All of these choices come with varying levels of information , presented in ways that are designed to make the choice meaningful and interesting.

Today’s exam question is – when does  interesting choice become advice?


Interesting and meaningful?

When you scan the price tags of instant coffee on a supermarket shelf you are presented not just with a price, but with a price per 100g. This information is interesting and meaningful but it is only becomes vital if I think that all the coffee tins contain the same powder.

If I have a preference for one coffee of another, I will mark that as my main decision maker and only refer to the price point as a decider where the choice elsewhere is not clear. I am creating a balanced scorecard in my head and though the decision will take me only a couple of second, the coffee hits the trolley with a more satisfying clunk if I am happy with my choice. If I cannot decide, I may not buy and I may have to shop elsewhere.

Looking at the presentation of the choices above, I think I would find some of the choices clearer than others. A lot of this comes down to the clarity of information presented and the logic behind that information. If I am feeling I am being led down one pathway, I will be wary, worrying that I may be being led down the garden path.

Or led down the garden path?

If the point of every comparison is to lead me to the same overwhelming conclusion then we may feel coerced and reject the basis of choice. We may ask are there other pathways of coffees we are not being shown.

This is the risk of comparison and why for decades the concept of “whole of market” was the basis of “independent advice”.

But necessarily we have turned to restricted advice because not all choices may be available. The Pension PlayPen table (dated around 2013) shows that several providers weren’t prepared to offer terms yet, would the purchaser hang on or take a restricted choice?

This is always a dashboard dilemma. The problem for the pension dashboard is whether a dashboard is offering meaningful information if the information is incomplete, or whether there is enough information to be getting on with.

In the AgeWage dashboard, information is incomplete and boxes hang like hanging chads.


Should we be so needy of our customers?

In yesterday’s blog, I was asking what mattered in the game. For the purists, the game will be remembered for the purity of certain moments, or the cut and thrust of the first half or for the empty stadium or the refereeing. But for most people the FA cup final will be remembered for the result – Arsenal winning 2-1. That is the meaningful and interesting information on which we judge the merits of the teams.

We test and innovate around what matters to people and if we can’t provide meaningful information in an interesting way – we fail. I fear that we are failing a great number of the 650,000 people who reach 55 each year for whom the promoted current options are Pension Wise and Financial Advice.

Which is why it is so important that organisations step up and provide default continuation options to people who simply do not engage with their pensions.  I wrote last week about how good it is to see  Nest’s guided retirement fund.


This is why we test and innovate.

For nearly a decade now, I have been focusing on non-advised choice. I have looked at choice in car showrooms, estate agency, supermarkets and on price comparison sites. I have compared tangibles with intangibles and I now see that people spend time on choice if it is interesting, not because it is important.

We may think it is important for a retiree to choose the best annuity rate or an employer to choose the best workplace pension , but that choice will only be made if we can get choice onto the agenda in the first place.

I was talking to some people the other day about the FCA/tPR anti-scamming campaign that compares an unfortunate victim to the jet-ski-ing  scammer. Unfortunately, the interest was with the scammer (Milton gave Satan all the best lines). One of the people watching the advert thought that pension scamming looked an interesting career choice.

My point is that presenting choice can solicit the wrong reaction and sometimes we must accept that no choice will be made (witness the 99% default rates into some workplace pensions). This is why it seems so important that we test whether choice works at retirement or whether a default decumulator is necessary.

All the evidence going back to the days when we tried to promote open market options on annuities, suggests that we cannot be needy of our customers and that our ambitions for getting engagement with investment pathways may be doomed from the start.


The power of collectives

Despite providing individual’s financial advice to individuals for much of my career, I am a believer in collectively delivered decisions. That is why I accept consolidation as natural and (within limits) desirable.

The power of collectives to deliver consistent value for our money is much greater than our power to deliver this individually.  I totally agree with Nest’s strap line

nest guided


When does interesting choice become advice?

To my mind, to have got people’s interest in their choices is an achievement and much more than can generally be hope for (we should not be too needy).

That said, the amounts that people are and will build up in workplace pensions are meaningful and interesting, when people realize they can have the money back.

The responsibilities of those presenting choice are therefore very onerous. For we know the consequences of taking bad choices

scam.jpg

The  choice presented by the man on the jet ski is likely to be a lot more interesting than the investment pathways presented by  pension firms. Which is why we need regulation and why we are spending time in the FCA sandbox testing what engagement we can get from ordinary people.

If you have been interested either by this article or the one I published yesterday, you may want to join our growing group of testers. You can do this very simply by going to agewage.com. All you need to test is to have a UK DC pension pot.

We want to see if you find your pension choices can be made interesting and will be listening to your feedback very carefully

 

To test with AgeWage, press here

Posted in actuaries, advice gap, age wage, pensions | Tagged , , , , , , , , , | Leave a comment

WAITING FOR THE VACCINE. C-19 actuaries new monthly medical update

vacc2

nicola

Dr Nicola Oliver

Given the pace of change with ‘all things COVID’, it can be hard – even for those who follow all the updates – to know what the overall state of play is regarding medical developments in particular, as opposed to just the most recent news. In this new type of Bulletin, we provide a monthly view of what we think the medical state of play is. That said, the main uncertainty at the moment in considering future strategies is the ‘if and when’ of vaccines, and so this first update looks only at vaccines.

vacc1


Introduction

Back in May, we described the state of play with regard to vaccine development to protect from the SARS-CoV-2 virus (link). At that time, several compounds were in phase 2 of the clinical trial process; most were in phase 1 or pre-clinical. Of most interest were those that had been partially developed and then shelved following the SARS outbreak in 2002.

As of 31 July, according to the World Health Organisation, (WHO), there are 26 candidate vaccines in clinical evaluation, (phases 1-3) (link). Of these, six are in phase 3 (the final stage of clinical testing in which safety and efficacy are tested). If successful, this will usually lead to application for approval.

The clinical trial process does not guarantee a final, approved product, even in those that reach the later stages. However, past experience of vaccine development adjusted by the immense pressure and funding to achieve success make us think that a declaration of phase 3 success for one vaccine is likely by end 2020 / early 2021.

If we do get to a final, approved product soon there are additional challenges to consider. The development of an effective vaccine is being widely heralded as a key milestone in combating the pandemic; here we present some concerns regarding this view.


Challenges

Effectiveness

SARS-CoV-2 is a novel virus and so there are many unanswered questions regarding, amongst many things, the generation and levels of antibodies in those who have been infected with it. Whilst some trials have reported the generation of strong immune responses in participants, it is not certain how sustained this response will be.

Furthermore, the pressure to expedite the clinical trial process could raise safety concerns. We should not rely on a future vaccine to be the holy grail of exiting from the necessary social distancing measures when we are still in the dark as to its effectiveness.

Manufacture

As mentioned, there are only a handful of candidate vaccines in the later stages of the clinical trial process. Following successful results, manufacturers will require regulatory approval. Clearly in a pandemic, this process will be shortened as much as possible; but bear in mind the mumps vaccine was the fastest-developed vaccine ever, and that took four years from start to finish.

A potential bottleneck will be scaling up production sufficiently to be able to vaccinate enough of the population to bring the pandemic under control. (There is also the real possibility that more than one vaccine shot will be required across a lifetime). Even if only half of the world’s population are willing, and able, to receive the vaccine (another hurdle), that is still a staggering 3½ billion doses that will need to be manufactured for a one-off dose.

We expect the time from approval to mass manufacture to be of the order of at least 6 months. However, that could be shorter for (eg) manufacture in the UK initially targetting key groups. Given the pressures, it is possible that pharmaceutical firms could start some production before phase 3 trial results are finalised.

Administration, uptake and acceptance

It is likely that an effective vaccine will be offered to the most vulnerable first, and to healthcare workers. It is possible that in the event of a successful phase 3 trial, emergency use vaccinations could commence to include healthcare works and vulnerable people. Following that, the challenge to vaccinate as many people as possible in as short a timeframe as possible will be on.

During the 2018/2019 influenza vaccination programme, 14 million doses were administered in England. It is likely that the vaccination programme for SARS-CoV-2 will be scaled up and ultimately offered to all age groups regardless of vulnerability.

Optimistically, if the vaccination programme was in progress throughout the year, and scaled up, then perhaps more than double could be administered each year through GP practices. In addition, some pharmacists already administer flu vaccines (one million doses in the 2018/2019 season), and this could increase administration capabilities. Widespread vaccine administration will take time.

The second factor here is acceptance and willingness to receive the vaccine. There is unfortunately a growing and vocal anti-vax movement, enabled by social media and the rapid dissemination of fake science with no evidence base.

Ironically, some of this is fuelled by the rapid pace of the vaccine development programme reported in the media; many vaccine opponents are seizing the potential safety concerns as a reason to avoid the vaccine altogether. More caution needs to be applied when reporting on vaccine development progress.


Conclusion

We cannot assume that an effective vaccine will be available (and utilised) at scale before mid-late 2021 and even that may be optimistic. We should therefore be acting in a way that assumes no effective vaccine in the short term for most people. Until that time, a new ‘normal’ should become part of our daily routines. Use of face coverings, sensible physical distancing, track and trace and localised protocols are essential.

As epidemiologist Mark Woolhouse at the University of Edinburgh, UK, told New Scientist in early April: “I do not think waiting for a vaccine should be dignified with the word ‘strategy’. It’s not a strategy, it’s a hope.”

Posted in actuaries, coronavirus, doctors, pensions | Tagged , , , , | Leave a comment

Arsenal v Chelsea – what matters tonight is the result.

ars v che.jpg

Tonight we have an FA Cup final. It may or may not be a great game but that’s not what Chelsea and Arsenal fans are worried about, they are worried about the score!

The score will create an outcome, the trophy. There may be many who see football as a beautiful game , but to the fan it is all about winning and losing.

Now I have to admit that i have brought you to this blog on false pretenses, this blog is not about football but about results and specifically about the results of your saving for retirement.

I guess that if you want season tickets in perpetuity to the Emirates , or Stamford Bridge, or even Huish Park, you are going to need a result on your pension savings. So perhaps you’ll forgive me for tricking you!


What’s the score on responsible investment?

I am much the same with my pension as I am with Yeovil Town, I want my pension to be a winner and I think about what helps me win. Yesterday I published a blog that suggested that pensions that are invested on a responsible and sustainable basis are bigger than pensions that aren’t.

That was not advice, that was fact. Data scientists in Harvard had looked at what had happened to American mutual funds and found that it was responsible investment that had protected people through the pandemic.

Will this information influence some readers to switch their pension pots to the ESG alternative in their fund range. Perhaps. It is certainly more likely to influence people to do this than not. People are free to make up their own minds but if they can see evidence of responsible investment protecting people through a pandemic, they may well choose to invest responsibly.

From the evidence presented in the blog – I can see responsible investment beating “don’t give a shit” investment 3-0.


Evidence based decision making

My friend Robin Powell is a fan of evidence based investing. He is interested in the outcomes of investments and he has spent his career pointing to what works and what doesn’t. in his introduction to his blog “The evidence based investor“, Robin points out

There has, in fact, been a welter of independent, peer-reviewed research dating back to the 1950s on how best to invest, and the findings are remarkably consistent. Yet although this evidence is widely known in academic circles, the investing public remains largely oblivious to it. Even investment professionals and industry commentators are either unaware of it or for their own reasons choose to ignore it.

We have to take decisions on something and it is best we take decision on evidence rather than supposition.  Robin’s job is to separate fact from fiction and help us take financial decisions based on facts rather than superstition.

For the rest of this blog I’m going to be talking about how we can work out winners and losers amongst our various pension pots  and why we need to do these measurements.


We need to pay attention to our pensions

Most adults in the UK are investors, auto-enrolment has seen to that. Many of us don’t recognise we’re investors, we don’t even know we are investing and that is because most investment is made on our behalf, NEST estimate that 99% of its 9m savers are investing in its default fund, the 90,000 who aren’t are the outliers.

But though we are happy to let people invest on our behalf, we have a responsibility, if only to ourselves to check how our investment has done, compared with others. It would be good to have this information to hand but it’s not that easy.

The need for employers to take decisions on their pensions

In it’s recent paper on value for money, the FCA points out that employers – who choose our workplace pensions, aren’t given much evidence on which to take their decisions

We think it is difficult to conduct a meaningful assessment of VFM when an individual provider’s schemes are reviewed in isolation. A review of other options available on the market can provide a point of reference, and may provide better value for scheme members  (CP20/9 4.13)

The paper goes on to suggest FCA and TPR schemes could be benchmarked on a common basis.

The scope of this comparison would be a matter for the IGC. For workplace pension schemes, this could include not-for-profit options such as NEST or The People’s Pension. (CP20/9 4.15)

The need for people to take decisions on their pensions

If it’s tough for employers , it’s even tougher for employees.

If an employee is unhappy with their workplace pension scheme, they have little option other than to continue to make contributions to the scheme, opt out and keep their pension saving in the scheme or opt out and transfer their pension saving to a new scheme (CP20/9 Annex 2.7)

It is only after leaving a workplace pension that employees are able to make a choice as to what to do with their money. In the absence of meaningful information, they will do nothing, which leads to the pot proliferation described by the PPI in a recent paper. This pot proliferation is hugely inefficient and  is likely to reduce the scope of improving value for money over time. As the Now press release accompanying the paper puts it

There are already 10 million small deferred pots, costing £130 million a year in administration. With 27 million small pots in 15 years the bill for servicing these pots will be £1/2 a billion a year.  The report explains that, today, every active member in an auto enrolment pension is supporting one inactive member. But by 2035 the PPI research shows that every active member will be supporting more than three inactive members.

But of course people don’t bring their pots together to reduce the servicing costs to the providers of workplace pensions, they do so to make it easy for them to manage their money in later age, either by consolidating to an annuity, drawdown, onward investment or to their bank accounts. Even without investment pathways, people will take decisions because this is their money and they are free to do so.


Back to scores

As with football matches , so with pensions, what matters most is the result (to use today’s jargon – the outcome). We cannot escape results, in the end the data catches up with us, as my friend Ben Piggott says, you cannot drink performance data.

So how do you score a pension? How can you tell winners from losers? How can you work out if you got value for your money?

You need three things

  1. You need your data – you need to have a history of all the contributions you’ve made since you started (when  and how  much) and you need to know the result, the value of your pot
  2. You need to have something to compare it with – a benchmark
  3. You need to have a formula (an algorthm) which compares how you’ve done with your benchmark

What you need to do with your data is to create an internal rate or return

There is only one measure that tells you how you’ve done. Technically its called your internal rate of return and its unique to you. Only you made the precise contributions, into the precise funds on the precise days over all those years and your result or outcome is the current value of your pot net of all charges taken from the pot over the years.

Then you need a benchmark internal rate of return

Knowing your internal rate of return is a start, but it is unlikely to be enough, you need to be able to compare this number with the next person. The trouble is that you can’t – because the next person did things differently. So you need to compare your return against the average person. The average person , in financial circles is called a benchmark and the way you work out how the benchmark did is by investing your money into the average person’s fund.

There has never been an average person’s fund, till now. And the reason there is one now is because of two organisations, one is AgeWage and the other is Morningstar and together we have created an average fund called the Morningstar UK Pension Index which goes back 40 years and creates a  price for the average investor for the best part of 15,000 days.

Then you need a formula to compare the two and turn the comparison into a result

Just as in football , so in pensions – the result depends on data. While it is quite easy to see the data of a football game – via a scoreboard. it is harder with pensions, because pensions go on for 40 years not 90 minutes and because there can be up to 15000 measurements of both your results and your opponent’s (the benchmark).

But computers are good at doing this stuff and we’ve got some good mathematicians who can arrive at a formula that makes sense of the comparison and simplify it into a single number

AgeWage evolve 2

Infact we could give you a comparison of all your pots

agewage dashboard

And in doing this, we could tell you who has provided you with more value for your money and who less. If you scored 50 out of 100, you would have drawn with the benchmark.

Tomorrow I will move on from creating a scoreboard (dare I call it a dashboard) to start thinking what good knowing the scores does us.

Tomorrow we will know whether Chelsea or Arsenal have won the FA Cup for 2020.

Thanks to all the testers of AgeWage scores, who are beavering away to find out their scores, please feel free to join them by submitting your pension pots for analysis at http://www.agewage.com

 

 

Posted in pensions | Tagged , , | 1 Comment

Bryn Davies ; Our new voice in the Lords

bryn davies 2

Bryn Davies

There were three peerages created yesterday for services to pensions , all three deserved. Frank Field and Helena Morrissey are high profile and  fly their own flags, Bryn is less well known but no less deserving.


Bryn’s career

Brinley Howard Davies, usually known as Bryn Davies (born 17 May 1944) is a British trade unionistactuary and politician who was Leader of the Inner London Education Authority in the early 1980s – so starts Bryn’s wicki entry

During his time at ILEA , Bryn defiantly  opposed the prevailing political zeitgeist returning to pensions in n 1985 as a Director of Pensions and Investment Research Consultants. Later that year he was appointed as a Research Actuary at Bacon and Woodrow, and resigned from the GLC and ILEA.

In 1989 he set up Union Pension Services Ltd., a consultancy on occupation pensions specialising in those for trade unions. He was also director at Pensions and Investment Research Consultants in 1984, chairman of the Independent Pensions Research Group in the 1980s, pensions officer at the Trades Union Congress from 1974 to 1981, and member of the Occupational Pensions Board from 1976 to 1981. He has been a fellow of the Institute and Faculty of Actuaries since 1974.

Bryn  continues to work in and write about pensions and frequently comments on this blog.


Bryn’s influence on me

Although not a left-wing firebrand, I have been influenced by Bryn Davies. He understands how pensions work and is authoritative on unfunded pensions. He taught me how the State Earnings Related Pension worked and explained to me how the original plan for it , devised  by Bryn , Tony Lines and sponsored by Barbara Castle, was diluted and ultimately dismantled first by the Thatcher Government and by a succession of right leaning politicians till it was dissolved into the single state pension by Steve Webb.

Many people, me among them look back at SERPS as a noble vision of rewarding the low-paid with a proper top up to the state pension. Along with the late and lamented John Shuttleworth, Bryn showed me how pensions can be the reward of hard work – for everyone. The cost of delivering a pound of pension under SERPS remains well below the cost of any funded pension. Bryn Davies gave me, a  salesman of funded pensions, a fresh perspective and a renewed sense of purpose to restore people’s confidence in retirement planning.


A reward for a lifetime of industry on other’s behalf

Now in his mid 70s, Bryn is still a force for good. I have drunk beers with him at First Actuarial parties and eagerly read his comments on this blog. Bryn himself blogged on the Union’s Touchstone Blog  

A man of immense integrity and gravitas, Bryn is most generous to those who reach out to him. I can remember conversations with Hilary Salt, Jon Spain, Douglas Anderson and Chris Daykin where Bryn has indeed been the Touchstone

Another actuary wrote to me last night a simple message

“At last I have a voice in the Lords, Bryn Davies.”

Bryn , like Gareth Morgan , speaks for people who have no voice and I am very proud that he has been nominated by Keir Starmer for a life peerage. Bryn’s voice will be heard in public again, 36 years since he last held public office.

Bryn Davies

 

 

Posted in actuaries, advice gap, age wage, pensions | Tagged , , , , | 1 Comment

Did active managers protect us from the pandemic? American research says “NO!”

 

NBER.jpg

The National Bureau of Economic Research

 

Are active fund managers working harder for us through the pandemic?  Not according to an analysis of mutual fund returns and flows. It seems that what has served investors well is being in funds investing in  equities that show “sustainability” – what ordinary people think of as responsible investment.

In a paper published this July, Lubos Pastor and Blair Vorsatz  present a comprehensive analysis of the performance and flows of U.S. actively-managed equity mutual funds during the COVID-19 crisis of 2020.

They find that most active funds  have underperformed passive benchmarks during the crisis, contradicting a popular hypothesis. Funds with high sustainability ratings perform well, as do funds with high star ratings. Fund outflows largely extend pre-crisis trends.

Investors prefer funds that apply screening  and funds with high sustainability ratings, especially environmental ones.

they find that investors remain focused on sustainability during this major crisis suggests they view sustainability as a necessity rather than a luxury good.


Contradicting a popular hypothesis

The authors are surprised that the active fund management industry despite its long-lasting underperformance, remains large, managing tens of trillions of dollars. They are puzzled as an alternative—passive funds—is easily available to investors.

The paper explores a popular hypothesis that investors are willing to tolerate underperformance in a time of “normality”  because active funds outperform in periods that are particularly important to investors.

News that American actively managed mutual funds have under performed in the time of the pandemic will come as a shock to those who believe that active fund management is an insurance or hedge against recession.

Relentlessly the paper tests each of the arguments put forward by the fund management industry in support of itself. COVID-19, the paper argues, presents a perfect opportunity for active managers to prove their worth.

It has led to an unprecedented output contraction and the fastest increase in
unemployment on record. Investors surely want to hedge against such a severe crisis

Under the hypothesis that active funds outperform during recessions,they should find it particularly easy to outperform when markets are rife with mispricing.

What actually happened.

Choosing to analyse the ten week period between February 19th (the first day of falls and April 30th , the quarter end) , Pastor and Vorsatz find that the underperformance of active equity funds is particularly strong when measured relative to the S&P 500 benchmark.

They find that 74.2% of active funds—about three quarters!— underperform the S&P 500 during the COVID-19 crisis. The average fund underperformance is −5.6%  during the ten-week period, or −29.1% on an annualized basis.

The paper goes on to explore performance against other benchmarks and factor adjusted returns and finds the same thing. Despite all the conditions being in place for active managers to show their worth, they have underpeformed.

Where investors were protected over the period was through investment in sustainables. It looks at Mornngstar’s “sustainalytics” which rewards responsible investment with a high number of gloves

High-globe funds (those with four or five globes) significantly outperform the remaining funds within the same investment style by 14.2% per year in terms of FTSE/Russell benchmark-adjusted returns. This result is driven largely by environmental sustainability—funds with higher environmental ratings outperform those with lower ratings


The impeccable behaviour of investors.

In their analysis  Pastor and Vorsatz look at behavioral traits to explain why so much money remains in active equity funds concluding that the weight of advertising and information put into the market by those with an interest in highly traded funds has been influential.

It also explores a widely held view that ESG managed funds are “luxury items” that may outperform in good times but are found out when a recession arrives.

The paper accepts that a ten week period is too short to draw conclusions for all time but concludes that investors may be rather less cynical than some managers supposed, Investors did not dash for cash and net outflows from active funds were only just above 1%.

This  perspective predicts that interest in sustainability should subside during a major economic and health crisis. In contrast, we find that investors retain their commitment to sustainability during the COVID-19 crisis. The research found that sustainable funds actually received net inflows over the period

This finding suggests that investors have come to view sustainability as a necessity rather than a luxury good

If investors are taking a long term view on sustainability,  it may be time for active fund managers and marketeers  to change their behavior too,


Is this the end of the line for active managers?

Pastor and Vorsatz are clear about the limitations of their study. It is time limited and does not take into account much of the data that would be needed to analyse the sources of out and under performance (stock selection v market timing).  It accepts that 2020 nor the pandemic is over yet.

The research did validate research by Morningstar into funds with high risk adjusted returns (Morningstar stars) , these funds continued to do well through the crisis period, which suggests that there were pockets of active management which did provide protection

This is not the end of the story and we should not be selling out of active and buying into sustainable ETFs because of this study

But once again, the claims that active managers as a class protect us in times of trouble have proved false.  Each time active managers fail to deliver, the arguments for a passive approach become more compelling.

It appears that investors did not panic in the crisis. Active funds as a whole saw net outflows of about 1.3% over the period but much of this was to passive equivalents. Sustainable funds actually saw net inflows over the period.

It may be that investors are a wiser crowd than many fund active managers supposed!


Thanks to Richard Taylor for sending me this report.

 

ownership of america equity

Source – Goldman Sachs

Posted in advice gap, age wage, pensions | Tagged , , , , | 1 Comment

Investing in the right place

I am very pleased to hear about a new project designed to get pension schemes investing in the right place. You can read about it here

It’s an initiative that impacts us all, we all pay council tax or at least benefit from those that do and a lot of our council tax goes to fund the pensions of those in Local Government Pension Schemes. It makes absolute sense that the investment of these pension schemes protects the council tax-payer from nasty surprises. The obvious nasty is the failure of an investment which is why strict rules apply to how funds invest and why investments are made by expert.

But there’s another kind of “nasty”, which happens when we find that our money is invested in the wrong place. Investing in the right place is a good definition of what “Environmental Social and Governance” investment sets out to do.


A new initiative that “replaces” investment

Reading about the aims of the Good Economy’s initiative I get quite excited

The UK is a country of extreme and entrenched place-based inequalities. The geography of socio-economic deprivation in England and Wales as well as Scotland has hardly changed over the last three decades.

The North-South Divide, with its roots in the Great Depression and 1980s deindustrialisation, threatens to become an enduring feature of Britain’s
economic development landscape.

Brexit revealed the economic, political and investment risks that these place-based
inequalities can bring.

For decades, UK governments have introduced place-based policies as a strategic approach to tackling place-based inequalities. This approach is continuing with the City Growth Deals and Towns Fund. As of now, the overarching goal of UK place-based policies is to bring about inclusive growth and sustainable development everywhere – to ‘level up’opportunities for people and communities to flourish across the entire country.
The Covid-19 crisis has deepened and increased public awareness of the country’s place-based inequalities. It has made the challenge of ’levelling up’ very much greater and uncertain.

The costs to the nation of rebuilding economies and communities – with an ambition to ‘build back better’ – are considerable and unprecedented. There is an undoubted
need to leverage private capital alongside public sector funding – and to link new investments to place-based policies.

Thus, the Covid-19 crisis has inadvertently moved place-based impact investing (PBII) to the centre of the policy stage.

This coincides with a rising tide of interest in impact investing from institutional investors, including pension funds, who are increasingly seeking to create positive impact alongside a financial return.

Can we exploit this timely market interest to develop a local dimension to global impact investing that can support place-based policies in the UK?

I don’t know about you but I don’t think the financial interests of the council tax payer are compromised by seeing tax paid towards the development of local projects that benefit the communities in which the tax-payers live.

Even if this means a redistribution of investment from down south to up north.


A sense of place and a sense of purpose

Behind the idea of place based impact investing  is  a sense of purpose. People relate firstly to purpose , if they can see the purpose of an investment , then they can understand its value.

My friend John Godfrey said he wanted every investment Legal & General made to feature on Google Maps so as he got around the country he and his colleagues and his customers could be reminded of the purpose of Legal and General investment management. I have written about this many times on this blog , referring back to a presentation delivered by Nigel Wilson some five years ago.

It seems to me that the time to deliver this is now and the place to deliver it is in the Local Government Pension Funds and the people to deliver it are the organisations behind this collaboration.

 

 

This is about making my money matter and though I am not a member of LGPS, I do help pay the pensions!

Posted in ESG, leadership, pensions | Tagged , , , , , , | 1 Comment

Why I’m changing my mind about NEST

Jeremy Cooper is no lightweight, author of the Cooper Review he is one of the key influencers in the Australian superannuation system.

jeremy cooper.jpg

Jeremy Cooper

He comments on Nest’s pivotal role in providing those previously excluded from funded retirement savings with a critical insight which articulates a thought that his been brewing within me over the past few months.

Frustrating as Nest can be (and it can be horribly bureaucratic), it is addressing an imbalance or bias by offering a service that sets out to be self sufficient. Along with  other leading master trusts , it is not dependent on third parties to meet its obligations.

By third parties, I mean financial advisers of various hues. Nest is genuinely distanced  not just from the IFA community but from the actuarial practices who provide high level advice to large employers.

I have often commented on the substantial subsidized Government loan of which  Nest is  a beneficiary

.