Auto-protection from an autodidact (the joy of Johnson).

michael johnson

One of the joys of Michael Johnson’s 40 or so papers on pensions is that you never know what to expect next. Johnson deliberately sets himself apart from the industry to rail at it. He is at his best when dissenting and when he is buried, I hope he finds his way to Bunhill Fields burial ground to lie alongside other those other  non-conformists  Blake , Defoe and Bunyan!

But i come to praise Johnson, not to bury him; I wish him a long and happy life and I hope he will produce many more papers like the wonderful  “Auto-Protection, auto-drawdown at 55, auto-annuitisation at 80”.

There is of course nothing new in thisconcept, it was pioneered by David Hutchins in developing the Alliance Bernstein Retirement Bridge product that sits within many of the master-trusts we use for workplace pensions. It is the solution put forward by NEST to provide its pensioners with a way to spend their savings and it’s the idea that the Cooper report puts forward to save Australians from destitution once they’ve blown their “super”.

As Johnson points out, the idea tips its hat to the paternalists on the left and to the freedom-seekers on the right and it requires little intervention from Government, for we are already there! This might sound like me criticising Johnson for stating the bleeding obvious but the paper accords to Pope’s definition of wit

“true wit is nature to best advantage dressed, what oft was thought but ne’er so well expressed”

Weirdly Johnson is proving a “pension conformist”.

Try as he might, Johnson cannot break away from the pension conventions that have grown up in Britain since the canny Scots initiated provident schemes in the 18th century.

Johnson concludes that from 55, we are on our own, illustrating this with an amusing graphic (well I laughed).


Johnson quotes Warren Buffet’s self-help solution for cliff-jumpers, to invest savings 90% in the S&P500 and 10% in cash and drawdown from cash only in times of equity crisis. This seems utterly reasonable so long as you have a reasonable knowledge of financial markets (as Buffet’s followers seem to have).

But Johnson recognises that people will not choose Buffet’s solution, so he suggests that it is chosen for them (with the substitution of DGFs for the S&P500 and a new cliff-edge at 80 where real assets are swapped for gilts and investment returns swapped for a guaranteed annuity).

The Johnson solution is straight out of the insurance company handbook and is hopeless, but that is the charm of Johnson, he never lets detail get in the way of a good theory and a market solution is an easy short-cut.

How pensions are paid (is not like this)

A very great amount of money is paid out as pensions in the UK. Johnson has not yet made the leap to understanding what it is to be a pensioner, but in financial terms, it is the reliance on a regular stream of payments to meet outgoings. Evidence that Johnson isn’t quite there yet can be found in his paper. He argues that a percentage of the pension pot should be earmarked for drawdown each year and perhaps paid monthly from 55.

Although Johnson hopes that the auto-drawdown process would be moved back to 60 asap, he is still arguing for a tipping point at least 7 and currently 12 years below my SRA and I am 55. Were I to draw any income from my DC pot right now, I would reduce my money purchase annual allowance to well under half my current annual contribution to savings.

This may appear a trivial point in the overall scheme of things, but it reflects a failure on Johnson’s part to engage with the psychology of the thin. Once you start drawing on your retirement savings, you move from save to spend, and for most of us, that financial watershed needs to be at least a decade if not two decades later than our 55th birthday.

What’s more, when we start drawing on our savings, we want a replacement income to what we’ve received when at work- and we’re paid monthly or weekly. Annual withdrawals have no meaning to the average worker, the afterthought that these might be paid monthly is the thinking of a man who has been living from capital for some time.

Johnson is still struggling with collective pensions (but getting there)

One of the bizarre assertions in the body of the paper is the assumption that the individual guaranteed lifetime annuity is what people talk are describing when asked what they want from their DC pot.

Johnson quotes research from Aon and others which confirms that 70% of us when asked what we want at retirement say an “inflation-protected secure income till death”. But this does not describe an annuity, at least not one bought in the UK recently. Only a tiny proportion of annuities bought in the UK over the past 15 years have been inflation protected. What people are asking for is what they get from occupational defined benefit schemes and the state pension.

Johnson actually states that

“lifetime annuities , in particular, possess a unique advantage; as insurance against longevity, they have no competition”

this is of course bunkum, as every state or DB pensioner knows, Johnson doesn’t know what it is to be a pensioner, his thinking is solipsistic and born out of his auto didacticism.

Never the less, there are germs of understanding of how a collective solution to the problems of longevity, at least in the recognition that it might be cheaper to buy-out cohorts of 80 year olds using a bulk-annuity.

Johnson is getting there.

Nearly there Michael.

The auto-didact is the person who considers himself an expert through his own study. Johnson gets to his conclusions on his own, he will not be taught.

The joy of reading his papers is seeing him struggle to the bottom of the ladder and watching others willing him to step up and join them.

At the top of the ladder which Johnson is now climbing are eminent thinkers such as the 70% of the population who have already worked out what they want.

Now Johnson just has to join them!

Michael Johnson’s paper on auto-protection can be found here;

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Who’s kidding whom – on DC pension governance?

time bomb

I was “privileged” to spend a whole day with one of the many employer groups we have in Britain.  This meeting brought together Directors (especially FDs and Heads of HR) of  Research and Technology organisations.

This was a paternalistic group with a history of making high quality DB provision, , and there had clearly been benchmarking of contribution rates so that most employees working for an RTO in the UK can expect a total DC contribution (well above the national average. Partly this is the fall-out from  DB Schemes – where employers negotiated with staff a Defined Contribution Rate designed to be financially equivalent (to company cash flow) to what had gone before.

Good governance of the DC scheme was seen, by many in the room, as clearly a matter over which the employer should take an interest, contrasting the position with the amount of governance effort expended on the now closed DB Scheme.


Do employers have a fiduciary duty of care to staff?

The session looked at this big question from seven different angles.

  1. Does an employer have a duty of care to ensure the DC scheme is suitable for its staff?
  2. How much should an employer be contributing – what is the benchmark?
  3. What obligations are there on an employer to provide workplace pension governance?
  4. What feedback is the panel getting from members of their workplace pension
  5. Is auto-enrolment working? Are there snags?
  6. Does the panel feel confident their staff are getting value for money?
  7. What are Independent Governance Committees and are they any help?


One driver for wanting to do the right thing for the DC contributors was awkwardness engendered by there being “haves” and “have nots”.

time bomb 2

Another driver was peer pressure, there had clearly been benchmarking of contribution rates so that most employees working for an RTO in the UK can expect a total DC contribution in excess of 10%. (well above the national average). Part of this is the fall-out from DB – where employers negotiated with staff a Defined Contribution Rate designed to be financially equivalent (to company cash flow) to what had gone before.

Good governance of the DC scheme was seen, by many in the room, as one way of both assuaging guilt and managing the manifest inequality between those accruing DB benefits and those getting a DC scheme.

Concern about employer specific investment defaults

But when we turned to what could be done to make outcomes better, the room was split. The conventional view – derived from consultants- was that the employer could improve on the default designed by the pension provider. One employer had gone so far as to poll staff about their intentions when they retired (e.g. annuity v drawdown v cash). But, the results had been inconclusive. As the IGCs are finding out, ask people who don’t know , what they want to do, and you get no further.

Other employers admitted that while they had started out with employer specific defaults, these had not been reviewed since the introduction of pension freedoms and there was concern that these employers were driving staff down a road called annuity when the staff had other destinations in mind.

This is a problem picked up by both Standard Life and Prudential’s IGC reports this year (the two I’ve read so far this round). The cost of maintaining these defaults (principally in advisory fees) is not sustainable and these defaults are looking less and less fit for purpose. These bespoke defaults are becoming an embarrassment.

Employers are proud of their pension engagement programs.

Where employers were getting results was in the day to day feedback systems they were putting in place with staff. One employer said that the cost of running a social media program where the staff were able to talk about the workplace pension had been a good investment.  Clearly it could measure outcomes both in member satisfaction and in terms of usage of the workplace pension (enquiries and increased contributions).

But not of their DC pension committees

But feedback cannot be properly called governance – at least not of the workplace pension. Infact, the feedback from the room was embarrassment

“what can we do?”

asked one finance director.

Value for money?

There was embarrassment when I asked whether employers felt they were getting value for money. These are scientists used to measuring things and I could see that a simple benchmark of the AMC was not considered all that Vfm is about.

The embarrassment was at many levels. Could employers get a good idea from their consultants? One doubted that a consultant – who owned the selection decision – could give an impartial answer. Another mentioned that they could not ask the consultants or the providers because they did not have the right questions.

But the biggest worry was that even if they had the right questions , they had no way of knowing they were getting the right answers.

What are IGCs?

The vast majority of the workplace savings schemes set up by employers were GPPs set up with insurers.  Amazingly, only a handful of the employers (and only half the panel) knew what an Independent Governance Committee was.

When I explained the function of an IGC, scales fell from eyes and their were looks of wild excitement (well that might be slightly overstating it) but the relief was palpable.

For these sizeable employers who do not have in-house pension expertise or a meaningful advisory budget for DC, IGCs are a godsend.

The IGC is (for them) a professional source of due diligence which is both cheaper (as in free!) and more effective than the work of the in-house pensions governance committee.

The FD’s immediately got it and since the meetings I have had a number of requests for links to the IGC Chair reports for their schemes (when they come available).

Access to IGC Chair reports

It is a shame that I have to send these links. The publicity that the IGC Chair Statements get from Insurers is simply not good enough.

I was with a member of the Prudential IGC last night and he told me that the statement is going to all their employers. This is not enough, many of the members of the Pru’s workplace pension are deferred and no longer work for the employer, the IGC statements should be going to all members of the workplace pension (regardless of whether they are currently contributing).

igc chair report 2

And if the IGC reports are going to employers, then the employers are clearly not noticing them!

Who’s kidding who?

Whether it be from the dilution of the advisory budget (which happens when things aren’t working).

Or because the commission to pay for governance has “run out”.

It seems that workplace pension advisors are largely absent from the workplace.

This group of employers said they felt that they didn’t have the right questions to ask providers, the right help to ask the right questions – from advisers  , and even if they did ask the right question, they felt they were powerless to change things.

The IGCs really want to help employers like these but they are not getting through to them.

One present asked theirconsultant whether  they should be paying attention to the IGC report and was told that there was no need (as they were already paying for due diligence ).

IGC chair report

Google image – result for IGC chair report!

We shouldn’t be kidding ourselves that DIY due diligence and ongoing governance can be effective. Unless done to a really high standard, it is unlikely to come close to the work that IGCs can do. If done to a really high standard, one has to question whether it can do more!

For large employers (with a minimum of say 10,000 staff) in-house DC pension governance may be worthwhile. But the conclusion I came to , talking to this group was that they weren’t getting Vfm from their consultants and that they had little idea whether their staff were getting Vfm from their providers.

There are plenty of good things advisers can do to help such employers engage with their staff, I suggest that they focus on what is now called financial education.

Advisers – let  IGCs do their job – don’t second best them!

time bomb 3

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Cridland and the price of state dependency


John Cridland


John Cridland’s consultation report into the state pension age, commissioned by Ros Altmann and delivered today, does not say quite what the modernisers wanted it to.

Accelerated pension ages and the scrapping of the triple lock deliver a double whammy to all of us but especially to those under 45, who see their retirement age recede even faster than we expected.

Cridland is brutal, he has not drunk the Kool-aid. He speaks of a society with rapidly diminishing private pension expectations and an increasing distrust in the consequences of putting money by.

His report is not what we want to hear, but definitely what we should be hearing. It is a good report.

Limits to these freedoms

We are in the era of “flex” where we have power to vary our pay, our benefits and our retirement saving to meet our immediate needs.

The freedom to drawdown money from a capital reservoir is now an essential for the modern money saving expert (and advisor). “Time is an ocean, but it ends at the shore” likewise freedom’s circumscribed by the possible.

The possibility of freedom to draw our state pension as it suits crosses into the impossible. At least that’s the conclusion of John Cridland’s review into the state pension age beyond 2028. This comes as a blow to Ros Altmann, who wanted different life expectancies to be rewarded by variable access to state benefits.

The less liberal Liberal, Steve Webb is more pragmatic, announcing that

Having different pension ages for different groups or in different postcodes would create a nightmare of complexity and fresh injustices

It would also ride roughshod over the principles of social insurance that underpin the welfare state. We have winners and losers in state pensions, the winners are graduates who start work in their 20s and live into their 90s; the losers the blue collar workers who start work at 16 and die of exhaustion 50 years later.

State benefits are intrinsically unfair; they cannot be targeted to meet need nor properly reflect money-in, money-out. Even the State Earnings Related Pension could not win popular support. But the State Pension remains a loved institution for all that.

Despite the cock-up surrounding WASPI, the state pension has been integrated with the second state pension (SERPS re-named) without too much fuss. There are winners (the self-employed and the contracted-out) and there are losers, those with high S2P entitlements. But for the most part those viewing their triple-locked BR19 entitlements seem pretty satisfied.

We are drawing to the end of the great state pension deferral offer (effectively a 10% return on capital deferred) and those who’ve taken advantage can look forward to a lifetime reward. It’s all a far cry from the world of wealth management!

But for most people, the state pension is – for all its rigidity – the best pension they’ll ever had. Applying a conservative income multiplier of 30, It is currently worth around £260,000 – as Paul Lewis likes to point out, the price of an entry level Lamborghini.

Should the “flexinauts” tremble at reaching the outer membrane of freedom’s scope? I suspect not.

The Government has its own way of apportioning value to the vast constituency of those in later age. Demands on the public purse from long-term care, winter fuel subsidies, bus passes, TV licence rebate, age allowance and general strain on the NHS from decaying bodies, mark the elderly as a boundless opportunity for redistribution.

And of course, all these benefits are paid out of general taxation without a fund manager in sight.

It is salutary for financial advisors to remember that however subtle their strategies, their clients will continue to rely for the most part on the state for their later life welfare.

There is perhaps an alternative freedom available from the state. It is characterised by ease and distinct from our world of wealth management by needing no advice (other than perhaps Citizen’s Advice or the forums of This is a freedom from the need to worry- at least about the availability and delivery of the entitled benefit.

Perhaps this explains the peculiar affection that we still have for the state as provider – it is utterly trustworthy. I once got into trouble from my then employer (an insurer) for writing that all private pensions aspire to the efficiency of SERPS.

I was right, which explained how little freedom I had to express my views thereafter!


cridland 3

Cridland also recommends:

  • A new system of carer’s leave, allowing older people with caring responsibilities to have time off work
  • A mid-life “MOT” to help people take decisions about work, health and retirement
  • Some vulnerable people in their 60s should have access to a means-tested benefit, along the lines of pension credit
  • There should be no “early access” to the state pension, despite this being raised as a possibility in the interim report
  • People could defer drawing their pension, taking higher benefits later

Put your feet up- why don’t you!

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FAB index up despite fall in gilt yields!


FAB- better lolly


In contrast to the PPF 7800 index and other commentators’ indices, First Actuarial’s Best estimate (FAB) Index improved in February to a surplus of £288bn across the 6,000 UK defined benefit schemes.

This was despite a sharp fall in gilt yields over the month and demonstrates the FAB Index’s resilience to movements in gilt yields.

First Actuarial Partner, Rob Hammond says:

“The FAB Index continues to buck the trend and contradict the doom and gloom headlines that others persistently promulgate. Over February 2017, asset performance was very strong, long-term inflation fell slightly and long-term expected investment returns were relatively stable, resulting in a much healthier state of the UK’s defined benefit pension schemes than we would otherwise be led to believe.

Hammond added:

“Only around 50% of the UK’s 6,000 defined benefit schemes’ assets are held in bonds, so a fall in gilt yields is not the be-all and end-all when it comes to assessing the financial health of these schemes.”

The technical bit…

Over the month to 28 February 2017, the FAB Index improved with the UK’s 6,000 defined benefit (DB) pension schemes increasing their surplus from £275bn to £288bn.

In contrast, the PPF 7800 index deficit increased over February from £196.5bn to £242.0bn.

These are the underlying numbers used to calculate the FAB Index.

FAB Index over the last 3 months Assets Liabilities Surplus Funding Ratio ‘Breakeven’ (real) investment return
28 February 2017 £1,511bn £1,223bn £288bn 124% -0.8% pa
31 January 2017 £1,467bn £1,192bn £275bn 123% -0.6% pa
31 December 2016 £1,476bn £1,206bn £270bn 122% -0.7% pa

The overall investment return required for the UK’s 6,000 DB pension schemes to be 100% funded on a best-estimate basis – the so called ‘breakeven’ (real) investment return – has reduced to inflation minus 0.8% pa. That is, a nominal rate of just 2.9% pa.

The assumptions underlying the FAB Index are shown below:

Assumptions Expected future inflation (RPI) Expected future inflation (CPI) Weighted-average investment return
28 February 2017 3.7% pa 2.7% pa 4.1% pa
31 January 2017 3.8% pa 2.8% pa 4.3% pa
31 December 2016 3.7% pa 2.7% pa 4.1% pa


Notes to editors

The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,794 UK DB pension schemes on a section 179 basis, together with data taken from The Purple Book, jointly published by the PPF and the Pensions Regulator.

The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension schemes.

fab index

Rob Hammond is available for interview. Please contact:

Rob Hammond on 0161 348 7440 or, or Jane Douglas on 0161 348 7463 or


About First Actuarial

First Actuarial is a consultancy providing pension scheme administration, actuarial and consultancy services to a wide range of clients across the UK.

We advise a mixture of open and closed defined benefit schemes with our clients concentrated in the small to medium end of the pension scheme market. Our clients range across a number of sectors including manufacturing, financial services, not for profit organisations and those providing services previously in the public sector.

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The ABI goes FABI on claims!


The Blue Line’s what the ABI want to use for claims, the purple line’s what they’re threatened with.



Readers of this blog listening to the ABI’s Huw Evans on Wake up to Money, may have been spluttering into their tea and biscuits!

The ABI are faced with a cut in the discount rate used to calculate compensation claims on serious injuries (typically from vehicle accidents). The discount rate will move from it’s current 2.5% to (0.75%).

To use less tecchie terms, the expected return on the investment of a claim shifts from 2% over inflation to 0.7% less than inflation. With inflation at below 2%, the ABI would hardly be able to take any investment credit when calculating claims and claims payments are going to shoot up.

Sound familiar?

I’m not sure that Huw Evans had thought this through when he described a negative discount rate as “absurd“. I wonder if those of his members making good money from the ultra high premiums received from occupational pension schemes want him using language like that!

Evans demonstrated that demanding more for long-term injuries and bereavement compensation was not a victimless crime. The impact would be passed on to other policy-holders in increased premiums.

This is a good point – well made. It is the same point that the CBI have been making when arguing that pension schemes should not have to value assets against gilts for the damage it is doing to cash-flow, dividends and the capacity of employers to invest for the future.


But once again we have to ask whether the buy-out and TV payments his members are receiving because of super-low discount rates in pensions come at “no expense”.

Of course they don’t!

The cost of transfer payments impacts the ongoing funding rate employers are asked to make to our closed DB schemes. It can add to the demands to close open schemes to future accrual, it can create such cash-flow problems for an employer that it puts the security of other members existing benefits at risk.

Whether it be through higher insurance premiums, or lower pensions, there is a price that consumer pay for gilt-based valuations and funding plans.

A change of heart or special pleading?

I have every sympathy with this particular argument. His solution is to establish an approach that takes into account “everything that impacts the discount rate“. Since the (0.7%) rate is based on returns on index-linked bonds, then he has a good point.

Nobody is going to invest a sum of money into index linked-bonds at current prices. Evans is actually arguing to adopt FABI, the First Actuarial approach to valuing liabilities which uses everything that impacts the discount rate.

I will be sending Huw Evans the FABI charts to show him how consistent liability valuations are when measured on a best estimate basis and how much easier it would be for insurers to use a best-estimate basis in claim.fabi-chart

Put graphically, the ABI’s claim experience could move from positive territory to negative territory as easily as pension scheme valuations could move from surplus to deficit.

If he wants our support for moving to a FABI style approach to claims discount rates, I want his support for moving pension scheme valuations to a best-estimate basis for funding purposes!

Other wise , it’s just another case of ABI special pleading!

huw evans abi



Further reading and listening

This is what the fuss is about, a recent court ruling that went against the ABI ;

The ABI’s arguments are set out here

The discount rate is a tool that adjusts personal injury damages awards to take into account the return expected when a compensation lump sum is invested and to ensure that claimants are not under or over-compensated.

It has been set at 2.5% since 2001 and governs all compensation awards in England and Wales. In Europe, it is typically between 1% and 4%.

In the past the rate has been based largely on the gross redemption yields of Index-Linked Government Securities (ILGS).  The principle of full compensation, which the ABI entirely accepts, is that injured claimants should neither be under-compensated nor over-compensated. This is no longer served by the linkage to ILGS because the long-term investment behaviour of those compensated is, in practice, very different. The Lord Chancellor needs to conclude the process of finding the right way of achieving the full compensation principle.

ABI blog on the matter;

The Podcast of the Wake up to Money show on which Huw Evans appears is here ; the discount rate discussion starts at 21.15

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FEAR+FRAUD. Does Geneva= Gibraltar? Are SIPPs the new QROPS?


This bog is about fear and how it can be used by the unscrupulous to frighten them into putting their retirement at risk. The unscrupulous fear-monger is the self-appointed UKPension Guru (Clive Skane-Davis) of Swiss Global Consulting; you can see his CV at

Any resemblance to the other Pension Guru (Steve Bee) is entirely intentional, Skane-Davis’ tactics are to mimic and pervert honest endeavour for self-serving intent.

Plausibility assured.

The targets of this intent are expatriate Brits moving to Switzerland with pension rights in the UK. Here is the pitch

UK PensionGuru is for anyone living outside the UK that still has pensions in UK schemes, especially those with ‘frozen’ Final Salary pensions.

If you question this, you can find out more

Pension funds in the UK are in major trouble as the promises made cannot be met and upheld. Out of 5,945 schemes 84% are in deficit and the average deficit is over 20%. That means that the scheme can only actually afford to pay you 80% of what it has promised. Unfortunately, in ‘buy-out’ terms (a straight forward assets verses liabilities calculation) funding of UK schemes is only 62% of liabilities!

Clicking the link gives us a “quote” from the PPF Chair Alan Rubebstein (sic)Slow speed car crash

Or should I say Alan Rubenstein, who made these two statements to the Daily Telegraph last year;—now-it-pays-just-17500/

A litany of half-truths

What follows is UK PensionGuru’s answers to the expat’s frequently asked questions, answers littered with half truths culminating in the triumphant unveiling of UK PensionGuru’s four UK Pension myths.

Myth 1. Final Salary/Defined Benefit pensions are guaranteed

“The only real guarantee with Final Salary Schemes is that they will go bust”

Myth 2. The Government PPF (Pension Protection Fund) will bail the scheme out if there is a problem

“There is no ‘Government Fund’, it doesn’t exist, and the worst part is that the PPF is itself in deficit. So now the Lifeboat is sinking as well”.

Myth 3. A QROPS is the best vehicle for everyone living abroad

“there are other cost effective options to consider”

Myth 4. My Final Salary/Defined Benefit pension MUST pay me the benefits I am due!

People are finding out the truth every day and suffering drastically reduced pensions when it is too late to correct matters

UK PensionGuru is making these outrageous statements from the comfort of his offices in Geneva. But the worrying thing is that he is  extending arguments being put forward by pension gurus in the UK.

If you promote (as tPR/PPF/JLT/PWC regularly do) funding deficits based on a buy-out or gilts plus discount rate, you give ammunition to UK PensionGuru. This crass perversion of this scare-mongering is  (in part) down to irresponsible reporting of deficits. Indeed UK PensionGuru delights in quoting such authorities as his source.

The reporting of the PPF7800 and other collective deficit numbers without proper context is feeding the fraudsters with the bad-news stories they delight in!

Careless talk costs pensions

The allegation that the lifeboat is itself sinking is ludicrous and unsupported. The Daily Telegraph article “My company pension paid £70,000 , now it pays £17,500” contains many quotes from Alan Rubenstein, which in the context of the article are fuel to UK PensionGuru’s fire.

I am surprised that the Telegraph continue to host the article as it is neither balanced nor helpful. Those few executives whose pensions are reduced when their schemes enter the PPF are to be balanced by the hundreds of thousands of pensioners being paid by the PPF with great security at or around the promise of their defined benefit. And weighed against the vast majority of UK pensioners, deferred pensioners and those actively accruing defined benefits who will be paid their benefits in full.

So what of the solution (s)?

Clearly QROPS is no longer a catch all. UK PensionsGuru has two weapons of pension destruction- QROPS and SIPPs. Many of his expatriates will no longer be able to access a QROPS so- as he rightly points out – they may need to get tot he QROPS through another route. The SIPP becomes an  escape tunnel from which the QROPS may be launched later.

This is a complication brought about by HMRC reducing the numbers of recognised QROPS and by the budget’s 25% exit tax on transfers to most QROPS from UK pension arrangements (you can get the details by contacting UK PensionGuru)

Myth 3 suggests that the expatriate financial adviser is already finding ways round the rules, though whether such loopholes will stand the test of time is doubtful. Beware tax-avoidance measures, tax evasion is never far away.

Is the SIPP, the new QROPS?

Thanks to Chris Lean fro bringing my attention to the drivers behind this check out this advert on QROPS adviser zone

Highlights are mine

QROPS have become a lifeline for many companies and they have provided many financial advisors with a substantial income stream by offering a much sought after service that clients actually want.

QROPS transfers are, however, labour intensive and can often take many months to complete.

There is an alternative product that can provide a solution for both the client and the adviser.

A UK SIPP will provide some of the features that a QROPS would have provided such as consolidation of pension schemes, flexibility of benefits and greater access to investment products.

The transfer into a SIPP is invariably processed via the UK ORIGO system and more often than not this reduces considerably the transfer time from the ceding scheme to the SIPP.

Our SIPP is available to non-UK advisers and can provide a similar commission based revenue model to that which advisers have been used to within QROPS.

As Christopher comments “what could possibly go wrong?”.

Pension freedoms await

If you want a flavour of the nirvana awaiting you if you get as far as liberating your UK pensions, take a look at this lnfographic which appears on UK PensionGuru’s website.

Swiss global 1

If it looks too good to be true – it almost certainly is.

And what of Swiss Global Consultants?

It is registered as an adviser by the Swiss Financial Markets Supervisory Authority.

The business is managed and owned by Jonathan Berrar, and  Paul Kavanagh and has 61 people associated with it on Linked In. Most appear to be expat Brits with little experience in UK regulated financial services

A quick search on SGC’s offices suggests that they are in a building advertised as .

The business was set up in 2016 and incorporates Swiss Global Trustees and Swiss Global Holdings. With only 20,000SF as nominal capital, make your own mind up.

Further reading





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Pensions Resurgent! The merit of the CWU’s proposals to the Royal Mail


For the third day I am returning to the CWU’s proposals to the Royal Mail which I now consider the most important break through in pension scheme design we have seen in Britain this century. I base this on three arguments

Argument one

This is a bottom-up proposal that arrives at the doorstep of one of our biggest employers (the Royal Mail employs 130,000 posties). It has been forged by a Union looking for a way out of a bind created by unfortunate (not malicious) decision-making by employer and trustee. It is delivered at a time of deadlock in negotiations over the future pension promise which could lead to industrial strife. The provenance of this proposal is unimpeachable.

Argument two

This proposal is made without need for any concession from Government to make the Royal Mail a special case. It does not rely on the establishment of some new pensions vehicle, an over-ride of existing scheme rules or the application of half-completed regulations. It makes sensible use of existing pension scheme rules and does not rely on special pleading.

Argument three

It returns pension funds to being a source of economic capital for an economy in need of growth. That the proposed SIP focusses on the growth of assets rather than the de-risking of liabilities is a strong statement from its authors of pensions resurgent. This proposal is the first (I hope of many) solutions to the problems of our occupational pension schemes that regards pensions as a source of national benefit, not of liability.

The Purpose of Pensions

I don’t know why he linked in , but link-in Eddy Truell did to me yesterday. I see he is Chairman of an organisation called Disruptive Capital.

I picked up his invitation while listening to a lecture from David Pitt-Watson  Pension Corporation on the Purpose of Finance. While Eddy is no longer involved in PIC (other than a small shareholder) it seemed a happy coincidence.  I hope this is a sign that the steady decline of what we call “private pensions” may be disrupted!

Whether you like him or not, Eddy Truell has been a disruptor in pensions for some time now. I hope that the partnership between Pitt-Watson and PIC indicates a consensus for the need for things to change. Truell and Pitt-Watson are unlikely partners but it is from such collision of opposites that productive reactions can spring forth!

For the CWU’s proposals to work, we need a sensible conversation between those who own the capital (Truell & Co) and those who organise the labour (CWU). And we need a lot of good common sense!

Pitt-Watson’s lecture included a booklet with a handy checklist of characteristics of “purposeful pensions”. The list’s in green, my thoughts on the CWU’s proposals in bold.

  1. It will have an effective return seeking saving system into which the saver can put their money; the CWU plan to invest contributions for the best interests of the members of the scheme.
  2. It will pool longevity risk effectively; the CWU’s proposals treat the current and future workforce of the Royal Mail as a self-insuring pool.
  3. It effectively moves capital through the economy investing in assets which give a real return long term. The proposal is for 100% of invested monies to be in equities,
  4. It has clear and appropriate actuarial information; unlike the with-profits approach of the past, the CWU proposals come with a proper actuarial plan based on prudent assumptions clearly set-out procedures for dealing with bad times and good
  5. It is and is felt to be-trustworthy; the proposal is from an employee representative, it is not dependent on any financial institution’s participation, it is from the people for the people.
  6. It is able to offer a degree of flexibility in the promise it makes and is able to accept a degree of flexibility in its investment returns to allow (benefits) to be higher. The benefits proposal is designed to flex non-core returns based on the investment conditions while guaranteeing a core of returns which form the basic pension.
  7. It has low costs and is likely to be exploring scale economies; this is achieved through the plan being available to all employees, whether currently accruing a defined benefit or receiving a Defined Contribution.
  8. It is adequately capitalised and/or flexible in its promises; the proposals do not require seed capital but depend on an ongoing commitment from employer and from the membership to fund the scheme at equivalent levels to the current DB funding (c 22% pa)
  9. It operates within an effective and appropriate regulatory regime; as already said, the CWU proposals do not require any testing or change to current occupational scheme regulations- the proposals play by the rules.
  10. It has fairly aligned the interests of members with those of shareholders and other stakeholders; the consensual approach adopted to putting forward these proposals gives hope that they will be adopted by the employer’s management and shareholders. The proposal is an alternative to the deep-rooted concerns among the Royal Mail workforce to the DC proposals put forward by the employer and the use of the existing DB arrangement (for future accrual).


At last night’s lecture, several of the questions from the floor were about leadership. I suspect that the leadership needed to solve the pensions crisis will come from without rather than within (despite Tracy Blackwell’s assertion to the contrary).

The CWU are showing leadership. They have determined to be very public in their approach and I am pleased to help give their proposals some oxygen. The FT has set the ball rolling and the pensions media is showing interest.

The idea of running a low-guarantee defined benefit scheme at a defined contribution is not a new one. But finding a way to execute such a scheme is new.

I commend the CWU for its leadership, my firm are pleased to have given the CWU help with the numbers and some of the technical pensions advice needed to ensure these proposals are legally robust.

I hope that as we progress the debate, we can look at these ideas in more detail. For the CWU’s proposals to the Royal Mail, if they are adopted , could be the basis of pensions resurgence.royalmail



You can find David Pitt-Watson’s and Hari Mann’s “The Purpose of Finance” report (sponsored by the Pension Insurance Corporation here

Posted in actuaries, advice gap, David Pitt-Watson, dc pensions, defined ambition, defined aspiration, pensions | Tagged , , , , , , , , , , , | Leave a comment

A with-profits pension for the posties.

Royal Mail 4

One of the most encouraging stories I have read in a time appears in the FT this morning.

The Communication Workers Union, who act for many of the Royal Mail Staff, currently facing a switch from a final salary DB pension to a defined contribution scheme, have come up with a compromise solution.

Jo Cumbo writes

 Instead of offering a long-term guarantee on the level of retirement income, the CWU’s plan envisages an annual assessment of investment performance to decide whether a “core promise” is increased in line with inflation.

Those of us with long-memories will remember that this is how with-profits pensions used to work. The insurance company (rather than the trustees) offered a core benefit which was locked in. The annual assessment of investment returns and the calculation of what bonus could be awarded was the job of an actuary.

The idea was simple enough, the actuary would exercise prudence in good years, so that there was money to fall back on in bad years. Sadly some actuaries got carried away and over-distributed – but that was because of commercial pressures from the marketing department. With-profits worked because policyholders participated in a much larger pool of money managed by the insurer, got economy of scale and got the benefits of a long-term investment strategy that invested in real assets (shares, property and the like).

The CWU idea seems equally simple. It would bring together the 40,000 members of staff who are currently in a DC scheme with the 90,000 in a DB arrangement and offer a single deal for all.

The key issue is with investment. Currently the Royal Mail’s DB scheme is 90% invested in bonds, it is hard to see how such a strategy could produce any kind of acceptable bonus beyond the core benefit plus whatever could be purchased at current annuity rates. Bonds are simply not the right investment if you are trying to accrue benefits for the longer-term.

So John Ralfe would be right if he was talking of a conventional DB arrangement (again a debt is due to the FT)

However, John Ralfe, an independent pensions expert, was sceptical about the plan: “The company would require all of the money to be invested in matching bonds, so there would be no risk of a deficit, but at the same time no potential inflation reward for members.”

But John has missed the key phrase in the CWU’s proposals – “risk-sharing”. For as with a with-profits approach, the fact that the inflation reward is not guaranteed from year to year means that the fund does not have to be invested in matching bonds but can invest in real assets.

This may not appeal to John’s pure asceticism, but it is precisely the kind of pragmatism that appeals to ordinary people. Faced with a choice of taking all the risk or sharing some of the risk with a large employer and its large pension fund, I bet the vast majority would prefer to risk-share.

I am not sure of the details of the arrangement, but this looks to me like the first positive attempt by a union to find a third-way solution between the extremes of DB and DC. I very much hope that the core-benefit includes all rights to date and that the proposals offer a decent degree of certainty going forward.

I await with a great deal of interest the results of the negotiations. If sponsor, trustees and members can move forward on this basis, I will be delighted. in principal the deal appears innovative , exciting and replicable. Dare I say it- it looks like the basis of future settlements elsewhere.

Jo Cumbo’s article can be read in full here ;

Posted in pensions | 2 Comments

Maybe Hammond did us all a favour with his QROPS tax


It wasn’t just the 4m self-employed who faced a tax-hike following the April budget. Expats resident outside Europe now face an uphill struggle to receive their retirement income tax-free via a QROPS.

I follow these offshore pension stories with the peculiar prurience I read Health and Effeciency as an 11 year old, I’m just waiting for the naughty bits to pop-out,

With QROPS, you don’t have to wait long. The offshore British dependencies are populated by online betting companies and financial  alchemists capable of turning Gold into Base Metal through the transformative UCIS structure.

Sadly, the prospect of an Exempt-Exempt-Exempt pension taxation structure blinds mature adults to the eventual destination of their money. I met an Egyptian once who tried to convince me to buy a melon farm near Aswam, when I discovered it was 90 metres under the Aswam dam, he countered I’d be harvesting water melons.

If you want to read this financial pornography, go to Angie Brooks brilliant Angie is in deadly earnest as she protects people from the double whammy of losing their savings and paying tax on their losses.

Hammonds QROPS tax, which means the allure of the QROPS transfer is tarnished by a 25% tax-hit before it leaves the UK, is a blow to the alchemists and a will hopefully be a wake-up call to a few lucky ex-pats whose money has yet to be shipped out to a Cape Verde parking lot.

It may also be a reminder to Brits thinking of retiring abroad that (financially at least) the tax-breaks earned in the UK need to be re-paid in Britain. For the QROPS EEE is not a victimless tax-avoidance scheme – it is precisely the kind of tax-fiddle that got 52% of Brits sufficiently wound up to vote BREXIT. Remember the first and strongest supporter of Remain to be announced that night – Gibralter!

I am sick and tired of the high-cost low value tax-scams which flop into my inbox on a regular basis. They largely replace taxation with an unofficial franking of investments by the QROP conmen (Stephen Ward and pals).

Where QROPS are legitimate, they tend to be organised through employers as an alternative to local workplace savings plans. Employers either exercise fiscal control and investment due diligence or they face the wrath of the employee and the taxman. You need a trusted intermediary and employers tend to be just that.

If you are in any doubt about the direction of travel for UK-expats , look at the American system operated by the IRS. The link with the American tax-authorities is permanent and uncompromising. BREXIT drives the train down those tracks.

I’m not shedding any tears over this tax-hike. Good old spreadsheet Phil has got it right with his 25% tax-shocker. Let’s hope there’s more in the locker next autumn


Thanks to Helen Burgraf for this fine cartoon from 2013


Posted in pensions | 2 Comments

Time to dig this Government out of its hole?


Tax, national insurance and pensions policy should be put in a vault marked “toxic” and should be handled with extreme caution.

This morning I have three toxic issues to prove my point.

  1. The fiasco of announcing an increase in national insurance to the self-employed in the context of a “read my lips- no new taxes” manifesto commitment
  2. The unearthing of a report buried by the DWP confirming that the net-pay/relief at source tax issue is bigger than anyone anticipated
  3. The realisation that NEST carries extreme death-risks for high net worth investors.

What have these random matters have in common? Well they are all issues created through the unintended consequences of well-meaning Government interventions;

and they are all issues can be mitigated through Government working with the private sector.

The National Insurance FiascoDWP

We now hear that the legislative changes for the new NI rates will be pushed back to September from April. This appears to be an intervention from No 10 and a mild slap to the Treasury.

In the meantime we have an auto-enrolment consultation which includes questions on the inclusion of the self-employed in the project. I wrote yesterday about ideas that have been floated to link national insurance increases to auto-enrolment. Here are the thoughts of a sage political commentator on the above.

As they’ve grasped the nettle of increased Class 4, we could suggest that the Treasury get off the hook politically by retaining the Class 4 increase but allowing the self-employed to divert (their own money) into a pension.   It still leaves them with a fiscal hole, but would be less of a u-turn than simply scrapping it!

Challenge one for the private sector, create a mechanism that allows the self-employed to choose their workplace pension and a mechanism by which their money can fund it (rather than the national insurance fund).


The net-pay nightmarenet pay

The very busy Sir Steve Webb has unearthed a report produced late last year from the DWP. This has been well reported in the FT but for those without a sub, let me quote pay

Of course this is absolutely ridiculous, most employers staging now have no chance of even understanding the issue, let alone researching the market to get the right pension. The DWP goes on in equally silly vein

net pay 2

I will not labour the point, the Pensions Regulator’s website is not a user-friendly place. It is a kind of Wikopedia of jumbled information, as useful in choosing a pension as a chocolate teapot is for making a brew.

The private sector can help employers choose a suitable pension, indeed specifically analyses employer payroll data and warns against net pay schemes where the net-pay nightmare will arise.

Unfortunately the Government will not acknowledge this and in a recent reading of amendments to the Pensions Bill knocked out a clause that would have required employers to choose a suitable pension , because it considered the Pensions Regulator’s site contained all the ingredients an employer needed.

Tesco contains all the ingredients to make a banquet, but it isn’t a restaurant. The private sector can get the Government off the hook , but the Government has to work with the private sector.


Don’t die rich with NEST!medieval

A helpful rival to NEST reminds me of this statement mad in 2013 by Graham Vidler, then NEST (now PLSA) spin-doctor.

net pay 3

If you’ve been reading the latest stuff on this blog, you’ll know that I’m pretty keen on NEST’s  “no penalty transfer and a 0.3% AMC” on the funds. I even called it the bargain of the century.

Unless of course you happen to be someone with a bit of property or a business or some shares – in which case you are putting the transfer into NEST in a big box marked (MR TAXMAN -please take 40% if I die).

Now I’m not qualified to give tax advice, but I’m going to make damn sure that employers choosing NEST using are properly appraised of both the good and the bad of the product.

I have not been flagging this issue so far as NEST pot balances have been so low. But if we are to have a system where NEST is going to be acting as a pot follows member aggregator, I think the private sector IFA community have a role to play to make sure that people have their DC pension pots in discretionary trusts and not managed the NEST way.

Or perhaps NEST see the way to pay back its £500m+ loan as through unnecessary Inheritance Tax payments from deceased members!

Politicians and Civil Servants  can be wrong – they need us as much as we need them!

So there you have it, three blogs for the price of one with issues linked by a common theme. Government make pensions, tax and national insurance complicated and difficult. The private sector helps them out by keeping people appraised of the implications of what they are doing.

Except the Government typically doesn’t listen to the private sector because it thinks it knows best and the private sector is out to rip off its fellow man.

To the Government, we are sharks, to us the Government are bumbling buffoons.

This is no way to carry on! To make Auto-Enrolment work, we need to acknowledge our cock ups and work together to right them. The private sector cocks up, so does the public sector.

But to turn down the hand that is trying to help, as this Government has been doing with regards the choice of workplace pension is unforgivable. It really is time that the Government started the implications of the employer’s duty of care in choosing a pension for its staff and started talking to private practitioners doing their best to help.

taps on pension playpen


Great blog from Will Robbins of Citywire on national insurance changes

Jo Cumbo article in FT on net pay issue;

tPR paper on net pay issues (and AE trigger levels)

NEST 2013 newsletter – source for the Graham Vidler quote,PDF.pdf




Posted in auto-enrolment, NEST, pensions | Tagged , , , , , , , , | 2 Comments

Now! – Can we expect the self-employed to join the pension party?

As press releases go, this speculative sound bite  from NOW Pensions’ Policy Director Adrian Boulding takes some beating!

The Chancellor’s announcement today has catapulted the self-employed in the spotlight and, with the increase in national insurance, we believe now is also the time to include self-employed in auto enrolment.  Auto enrolment has been a great success, but the 5 million self-employed in the UK are excluded. With the auto enrolment review taking place this year, the government has an opportunity here to ensure that the self-employed, as well as employees, are able to look forward to adequate income in retirement.”

Turned round at 1.45pm yesterday, only minutes after Philip Hammond sat down, this was opportunistic! But Adrian Boulding is not a cheap publicist, indeed he was (along with David Yeandle and Paul Johnson) one of the troika who (at Steve Webb’s request)  gave auto-enrolment the green light back in 2010.

Adrian is someone whose integrity, intelligence and insight I value.

The Auto-Enrolment review is upon us, we are asked to consider the scope of AE and how it might be extended to nudge our growing self-employed into the fold.

The problem is neatly demonstrated by this graph shared by Aviva’s Alistair McQueen.self-employed

The squiggly line shows the numbers of the self-employed increasing over the past 15 years. The purple columns show the numbers actively saving into personal pensions decreasing.

While the media comment has focussed on national insurance increases as tax-rises, Boulding is focussing on them as a portent of pensions to come (presumably in NOW’s direction!).

It has been some time since the DWP used the national insurance mechanism as a means of funding pensions. Of course state pension rights are based on a national insurance contribution history but the self-employed weren’t eligible for the state second pension (SERPS or S2P) and so have never had a link between the size of contributions and pension accrual.

Auto-enrolment is all about earnings related contributions which are defined by bands of earnings and set tiers of contribution. In a PAYE environment, this makes nudging pretty simple, AE to payroll is just another deduction – a quasi tax.

But the self-employed are not part of the PAYE network and – much as the Treasury would like them to be – they are not yet fully in the RTI reporting mechanism that is doing so much for tax-collection and revenue forecasting.

While the obvious reason to increase see off the messy class 2 and increase class 4 in line with employer NICs is to raise revenue. It gives a joined-up Treasury/DWP team, the opportunity to use the howls of indignation at this tax on entrepreneurship to introduce concessions.

What- for instance – if the self-employed could elect to sacrifice increased NICs into a workplace pension?

What if the 1% increase due for April 2018 could be averted on the production of a contribution certificate showing an equivalent amount had reached NOW, NEST or another qualifying workplace pension provider?

What if, the default position was set this way and the self-employed opted out into higher national insurance contributions?

And in case you are thinking that master-trusts can’t receive contributions from the self-employed, re-read Pensions Act 2008 which gives occupational schemes this provision. NEST already has the capacity to receive contributions from the self-employed.

This is of course highly speculative and I was only prompted into this line of thinking by   Professor Pat-Pending’s  runic utterance

we believe now is also the time to include self-employed in auto enrolment

But my memory had been jogged…..

Here’s Sir Steve Webb, a year ago,  having a similar idea in a report on Britain’s “Forgotten Army”.

The report recommends that the special category of National Insurance Contributions (NICs) paid by self-employed people on their profits – Class 4 NICs – should be charged at a rate of 12% rather than the current 9%. But, instead of the additional contribution being retained by the Government, self-employed people would be able to opt to have that money diverted to a pension or Lifetime ISA, provided that they made their own direct contribution of at least 5%. The combined contribution of 8%, would match the statutory minimum under automatic enrolment.

Whilst self-employed people would not be forced to take out a pension, this would be the only way they could benefit from the additional 3% of NICs that they had paid in. This is very similar to the way in which employed earners can only get a 3% employer contribution if they stay enrolled in a workplace pension – if they opt out, the employer contribution stops.

It is estimated that around three million self-employed people would be covered by the new scheme and it could increase the number of self-employed pension savers by well over two million if opt-out rates are similar for this scheme as they currently are for automatic enrolment.

Spooky huh!



For Steve Webb’s policy report press here.—and-what-to-do-about-it/

For recent discussions in the DWP Select Committee on self-employed AE pensions follow this link.

Posted in pensions | 6 Comments

Are defaults enough? Or do we need compulsion?


A little architectural vision needed!


Well I’m back from 10 days in India where I saw the very rich and the very poor but not much in the middle. I saw some very fine architecture which showed me what can be done when people pull together.

One of the first emails I opened was from a friend wanting thoughts on whether we need to compel good behaviours at retirement or direct through strong defaults.

It’s a question that interests me enough for me to sit in jet-lagged stupor and pour forth!


The Past

The context for the question  is “DC pensions” ( we have a default system of scheme pensions for DB- from which you can opt-out by taking a CETV – provided you aren’t receiving your pension and are in a funded scheme). Whether there are such things as DC pensions is open to question. Most people refer to DC pots and leave the matter open!

The Australian bias towards compulsion is well known, you are compelled to vote and compelled to participate in the Super System. You can screw up your pension in Australia but each new raft of rules makes it harder. The Australians are moving towards compulsory annuitisation as fast as we move away from it!

Should Britain return to a system of strong defaults (as we did with the system of compulsory annuitisation that prevailed before the announcement of Pension Freedoms in the 2014 spring budget)?

Well let’s not forget just how much damage those semi-compulsory annuities did to people’s perception of pensions. The decline in voluntary saving into personal pensions may have been in part to do with the value for money of the savings vehicle, but I suspect it was more to do with the perception that you were locked into buying “rip-off” pensions.

It was no use arguing that you’d have done better if you’d shopped around, if you still felt ripped-off once you had. People looked back on the pension file to the SMPI illustration they were given twenty five years ago, saw they had completed their side of the bargain and asked why the pension on offer was so much lower than that which had been illustrated.

So pension outcomes have been lower than people (including the Regulators who sanctioned SMPI assumptions) anticipated. The markets may have contributed but people don’t listen to that kind of talk. They invest with insurance companies to get an insurance against market failure, not its product.


The Present

If the Pension Freedoms were the political answer for a Chancellor in search of a Rabbit, they have not (so far) translated into a practical answer for those with DC pots.

At the top end of the market, those who have invested in drawdown products where their pots remain invested in equities have benefited by a strong bull run in equities which has protected them not just from the impact of sequential risk (aka pounds cost ravaging) but from the impact of high charges. After advisory, platform and fund management costs, many people in “wealth management” programs are paying over 2% pa of their savings in costs. Add in the hidden fees and the average is estimated by Nucleus to be nearer 3%.

In short , people are having to beat inflation on their investments to break even, clearly this is an unsustainable state of affairs. The cost of advised drawdown will have to come down a long way, and come down fast, if it is not to be the next financial scandal.

At the bottom end of the market, the DC pots are small enough to be considered inconsequential and are generally being cashed out. The perception of “inconsequential” is the financial services industry’s. To those with say £30,000 in a DC pot , that sum is a major windfall in terms of immediate cash-flow. The problem is a pension is for life and not just for Christmas.

In the middle of the market are those with DC pension pots of upwards of £30,000 but below the typical minima for advised drawdown. The minima differ but let’s say £200,000 is typical.

For such savers there are three options if you want your money now, Do It Yourself drawdown, annuity purchase or cash-out. The evidence is suggesting that more people are deferring these choices and waiting till something better comes along, or they can wait no longer!


The Future

Back to the question. Where other countries (notably Australia – though also Obama’s administration) have recently been moving towards compulsory annuitisation, there is no political appetite for this to happen in the UK.

We have no more taste for guarantees in our private than we do in occupational pensions.

It is a well known behavioural phenomenon that when asked what they want from their pension freedom, two thirds describe an annuity (source Aon and others).

People want an annuity but aren’t prepared to pay for the guarantees. What they appear to want is soft annuity, rather like a with-profits fund that promises but doesn’t guarantee.

As those who run pension schemes know, promising may not be the same as guaranteeing but consumers (well at least their lawyers) are good at conflating the two things into one and demanding payment on the expectation.

What is needed in the future is a less burdensome form of annuity with protection for the provider against the kind of class actions that cost them dear with endowment shortfalls, with pension transfer shortfalls and most recently with the gap between PPI expectations and PPI outcomes.

A general answer to the question

I see no appetite in Government to compel people to spend their retirement savings one way rather than another. We are still too close to the policy success of Pension Freedoms for that, the damage of current pot-spending patterns has yet to emerge.

A far-thinking Government would be planning for the future and sinking money into the Research and Development of products that might offer annuity-light structure, either through innovation (the smorgasbord of Defined Ambition approaches considered by the last Government, or by the proper protection of CDC schemes from either failing their pensioners or failing because of their pensioners.

The distinction being that a badly run CDC scheme can (as with-profits predecessors) simply over-distribute. A well run CDC scheme can distribute properly but be brought down by members wanting too much too soon.

A strong Government would recognise that pensions have always been paid by the State or by large institutions with the scale to ride out market calamities. Occupational pension schemes have underwritten calamity and so have insurers. There is absolutely no evidence anywhere to suggest that a default solution of a self-invested personal pension with a drawdown strategy has ever worked as a default strategy for a nation.

A specific answer to the question

Given the very high risk of market failure in individual drawdown, it is amazing that the Government has not promoted (as it started doing in the Pensions Act 2015) a more structured and collective approach to pension decumulation using the Defined Ambition regulations that were worked on from April to July 2015.

By establishing the structure by which a collective decumulation approach could work, the Government could then encourage CDC providers to operate within safe-harbour rules that protected them from over and under distribution. This type of approach would – to a degree- satisfy the thirst from the public for something like an annuity without the costs of the guarantees.

That it would remarkably like a defined benefit scheme prior to the introduction of guaranteed benefit structures, is very much the point.

In answer to the lady’s question, we do not want compulsion, we do not to pay for  annuities as we know them but we want some certainty beyond what can be provided by individual drawdown.

The only way this “product” will appear, is if the Government gives it the safe-haven status accorded to highly-regulated collective schemes. The answer to the problems of pension freedoms are strong collective decumulation arrangements into which DC pots can be defaulted


Henry cheers.PNG

Thanks to all who came to yesterday’s lunch- I was otherwise engaged and sadly missed it!

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

NEST – membership has its privileges.


American Express coined the phrase and it’s unlikely that PADA  (the fore-runner) to NEST could ever have anticipated running a premium product. But that is what NEST is about to become.

The launch of a free transfer service which allows NEST members access to outstanding fund management and first rate administration for 0.3% pa, has introduced the outstanding financial bargain of 2017.

But like American Express, NEST is an exclusive product. You can only access this bargain if you are using a workplace pension where your employer has chosen NEST or if you are self employed.

From April this year, the restrictions on NEST will be lifted, allowing it to take individual contributions up to the annual allowance (between £4,000 and £40,000 pa depending on your circumstances). This will make NEST a product appropriate for the needs of the high earners as well as those on modest means.

Coupled with the amazing free transfer/ultralow transfer management charge and NEST suddenly looks like the aggregator of choice , not just for its intended audience, but for all those people who qualify for the American Express platinum service.

How ,you might ask, can this done? Well the full story on that’s in yesterday’s blog, but in summary, NEST has access to £600m of capital –  £500m+ of which has already been drawn down, these privileges are paid for at the expense of the repayment of the loan from Government.

The market impact

It will only take a perm from Mail on Sunday/Paul Lewis or the Money saving expert to  bring NEST to the attention of the savvy investor.

For one thing – it will make membership of NEST for the self-employed a very attractive option. As a mastertrust operating “relief at source”, even the self employed with modest (declared earnings) can establish NEST as an attractive retirement savings plan with full tax-relief claimable through self-assessment.

But now NEST is more than that, it is a turbocharged investment vehicle with a transfer-out facility if you feel the need to access your pension freedoms in ways beyond NEST.

The professional self-employed will be the first to cotton on. If I was running a SIPP, I would feel seriously threatened by an aggressively marketed NEST (marketed as the Pensions Minister appears to be doing himself).

Once the self-employed pros have got their teeth into NEST , look out for NEST being offered as an executive pension for those who have run out of headroom for substantive contributions but who want a safe home for their retirement savings.

Finally, we may see NEST actively competing for Zombie occupational DC schemes (including the master trusts that can’t make the new rules introduced in the forthcoming Pension Schemes Bill).

In short, NEST has now got the potential to be used against the established pension industry- powered by its enormous financial capability (see below).

Will NEST eat the market?

People are resistant to handing their savings to a quasi-Government body and (let’s face it ) NEST is not a vanity play that you can discuss over a glass of Sauternes on the terrace. NEST will not give you that warm glow that you get when your financial adviser talks you through the progress of your SIPP , or when you get that invite to the AJ Bell box at the cricket.

But there are a lot of very shrewd judges out there, who well know that the cost of managing a balanced portfolio with a clear investment objective and sound investment governance is high. Add to this the security of having a premium investment and benefits administrator, together with high-quality investment reporting and you can see NEST becoming a rival to the premium cost wealth management services.

NEST should be on the menu of benefits of any flex-platform as an executive perk. NEST could cannibalise existing workplace pensions offering what amounts to an individual buy-out service. I will be petitioning First Actuarial to offer a NEST alternative to my workplace pension!

But – and here there is a but, NEST is now competing with the wealth management industry, the pension consultants – most of whom run premium master trusts and of course with the financial advisers who are keen to keep skin in the game.

Here is the rub;

NEST does not pay commission

With no obvious way for intermediaries to collect their fees from member’s funds, NEST is likely to be ignored as an investment option by most advisers.

This will bring up an awkward conversation when an adviser is asked whether funds can be removed from an existing platform, which may be paying the adviser 1%pa of funds under advice to NEST (where no such payment is possible).

Similarly, the Mercer, Aon , WTW, Xafinity, Goddard Perry, CBS, Hargreaves Lansdowne, True Potential and Intelligent Money workplace pensions, pay those consultancies fund-based management fees. These fees will come under pressure from NEST’s ultra low fee structure and from NEST’s stellar investment performance since it launched.

How will this play out?

Potentially, the NEST transfer offer could create a feeding frenzy amongst those with DC pots of whatever size.

Whether this feeding frenzy happens is dependent on the advice put into the market and the capacity of financial advisers to convince their customers to stick with what they’ve got.

As a consultant, I see NEST as an employee benefit – a premium product at a ridiculously low price.

As an investor, I see the chance of giving my money to the NEST investment team in return for such a low-charge as the first serious challenge to my L&G workplace savings plan.

As an employer, I am going to seriously think of NEST , at least for my staff who qualify for the American Express Platinum Service.

That’s what a £600m loan can buy you!


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Are pensions in crisis?


There has been talk of late of pensions in crisis. Infact the opposite may be true. Pensions may finally be getting back on their feet.

News that the retired tycoon – Philip Green has made a voluntary contribution of £363m into the BHS Pension Scheme comes as a relief to the BHS pensioners but also to the pensions system that has been tried and found to have a mechanism in place to deal with egregious behaviour.

Sadly, my colleagues in pensions continue to argue that there are 1000 BHS’s waiting to happen and that our system of occupational defined benefit pensions is an accident waiting to happen. But the actual state of these schemes, measured on what actuaries call a “best estimate basis”, shows that on average most schemes are not in danger of going bust unless the sponsoring employer goes bust.

My company has been publishing an alternative index to the rather gloomy figures put out by the Pension Protection Fund (PPF). The £400bn black hole that the PPF quote is based on schemes being wound up. Our alternative index is based on schemes continuing to operate with their current investment strategies.

FAB Index over the last 3 months Assets Liabilities Surplus Funding Ratio ‘Breakeven’ investment return-real
31 January 2017 £1,467bn £1,192bn £275bn 123% -0.6% pa
31 December 2016 £1,476bn £1,206bn £270bn 122% -0.7% pa
30 November 2016 £1,443bn £1,147bn £296bn 126% -0.6% pa

Our figures suggest that funds on average don’t even need an investment term that matches inflation (a “real” return) to pay every pensioner in full. It is tempting to misquote Oscar Wilde and comment that rumours of DB’s death may have been overstated.

There appears to be some support for this more optimistic view of pensions within the policy units of the DWP. Earlier this month, the Government published a Green Paper which referred to the FAB Index, it questioned whether we were in a pensions crisis and though it discussed the possible dilution of pension benefits where employers were particularly distressed, it didn’t conclude that this was necessary.

The Paper also questioned whether the Pensions Regulator needed to be given extra powers. The BHS settlement will give further credence to this view. There is unanimity that the two major Pension initiatives of the past fifteen years, the establishment of the PPF and the installation of auto-enrolment have been successes in terms of conception and execution. If we add to this the largely successful integration of the State Second Pension and the Basic State Pension into a single state pension then it could be argued that the state of UK pensions has improved markedly in the opening years of the century. Certainly we have moved on and Philip Green has not been a Robert Maxwell.

However there remains a deep issue which troubles politicians, actuaries and pension scheme fiduciaries alike. There is not the confidence among the general public in the pension system to encourage voluntary savings to anywhere like the levels needed to see replacement incomes above the current projected average of 38% predicted by the OECD for 2050.

If we as a country feel comfortable taking a 62% pay cut when we quit working, then the low replacement ration is not a problem. But ask any working person today if they were happy to sustain such a cut and I doubt all but a tiny minority would be prepared to accept it.

In truth, most of us will need to supplement our pension income (the 38%) with part time work or have a successful plan B such as a proper buy-to-let portfolio. The issues of adequacy are not going to go away until people choose to use the generous tax reliefs on offer to those saving using pensions. Working longer may be a solution for those who can works but there are limits to our health and to the labour market for older people. The Institute of Fiscal Studies has pointed out that if older people do not retire, younger people may not be able to get the jobs (let alone the houses) to save for their retirement.

Some point to compulsory pension contributions as the answer, others to an increase in the default contribution rates for auto-enrolment. I suspect that there is no appetite for compulsion in big Government, flies in the face of pension policy over the past 60 years.

Instead I expect to see a focus on the supply side of pension. Increased Government pressure on pension governance, transparency of costs and charges and a drive for greater innovation through the use of the block chain in the settlement of pension investments and payments. Coupled with this I expect to see demand from consumers for better ways to manage their pension savings and in particular demand for non-advised products that convert the capital in pension pots into the income needed to allow us to stop work.

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Nudge nudge , think think!

nudge nudge.png

say no more

I went to an excellent panel debate last night which was asking whether behavioural finance could improve pension outcomes – well DC outcomes – which as one panellist pointed out hadn’t got much to do with pensions!

A lot of the panellists talked about how they’d exploited/used/finessed behavioural techniques to achieve desired outcomes and the evidence of the power of inertia was clear.

It was clear too that “poor” behaviours could be changed to good behaviours through either using smart technology, smart communications or smart salesmanship.

Being smart at understanding how people react to things is of course nothing new. Call it emotional intelligence if you like, but the kind of genius that puts the blue into Persil powder or gets “marmite” as an everyday descriptor is a very rare and special intelligence (and it’s not artificial).

Paternalistic Coercion

Behavioural economics are taught to salesman in their inductions. The various closes I learned when I was taught to sell on the doorstep are now hard coded into me. They are how I get my way.

Interestingly, when I use these closes I am often described as bullying. That is the clumsiness of allowing others to see they are being sold to. The best techniques we saw last night were not obvious , they were so subtle that one of the panellists labelled them “Paternalistic Coercion!!

Behavioural economics informs the salesman and is at the heart of the marketing process. But it is only a tool for implementing strategies. The strategies themselves are all the more in need of proper governance where “nudge” strategies are employed, since their is commensurably less friction in the decision making process.

So for this paternalism to be benevolent, there must be a higher level of governance that ensures people don’t end up with bad products.

I made the point last night

PPI relied on desperate borrowers and was (generally) a bad product sold through inertia

Grooming relies on insecure young people and is a criminal activity that works through minimal disturbance.

Many Workplace Pensions are set up by employers for staff based on ease of use.

What nudge and inertia selling do

Nudge gives the impression that a choice has been made, (7m people have joined workplace pensions). But the choice is not made and the impact of the choice is deferred. You have to nudge a long way for people to notice what being in a workplace pension means.

Nudge and inertia selling assume good outcomes but they do not create good outcomes, they just change behaviours.

The moment that the Government allowed choice into the equation, and employers had to choose a workplace pension for their staff, a new element emerged. There was no qualification on what should be chosen , the employer did not need to chose a “good” or “suitable” pension, they just had to choose a “qualifying workplace pension”.

But the rules of “qualification” could hardly be described as onerous, there was no question about suitability or quality, all that was needed was a vehicle that took money and invested it in a compliant way.

Nudge and inertia cannot define what makes for good

The critical mistake in auto-enrolment was that when choice was introduced, there was no mechanism established to measure suitability, quality, security or sustainability. There was no measure of value for money, there wasn’t initially rules about charges or how workplace pensions rewarded the sales guys. We had drunk at the fountain of behaviourism and got drunk on the cool aid.

I asked a prominent workplace pension provider if he was worried that so many of his participating employers had no idea whether his product was good or bad. He answered “no”, he had great conviction in his product and his fiduciary process.

But I know he does not know his customers – other than through market research. He does not know the employers and he certainly doesn’t know his members.

He is relying on a decision making infrastructure built entirely on trust. But that superstructure is not necessarily to be trusted. PPI was bought on trust, child molesters are let through the door on trust, it is possible for workplace pensions to auto-enrol ordinary people with the same wicked consequences.

There has to be a fiduciary purchaser if Nudge is to work.

In last week’s debate on whether an employer has a duty of care to choose a suitable pension, Richard Harrington (the Pensions Minister) claimed that the information made available on tPR’s website was sufficient for small employers to make smart decisions.

It is not.

The employer is given no practical assistance by Government in choosing a workplace pension suitable for staff beyond some basic compliance checks (MAF, IGC, Charge Cap, contribution process)

This is not enough to prevent a bad decision being taken (let alone to help a good one).

There will come a time when employees will ask why his or her employer chose the pension it did, and there will usually be no answer. There will be

  • no reason why letter
  • no professional sign off
  • no evidence that due diligence has been done
  • no memory of what went on (assuming decision makers move on)

I came away from the meeting , impressed as ever by the power of behaviourism but depressed by the lack of thinking around the fiduciary structures that employ these behaviourists to change the way we do things.

Whether at Government level, at provider level or at employer level, we seem to be measuring success in terms of compliance with the rules and ignoring whether the outcomes are good and bad.

People have choices to opt-out and have every right to ask what they are opting into. They generally don’t because they trust employers to choose carefully.

We must address the question of how our workplace pension are being chosen. We must think while we nudge, we cannot allow auto-enrolment to be unbenevolent coercion. We must introduce friction at some point – some due diligence.

Otherwise AE is simply a marketing trick, a sleight of hand and a recipe for recriminations at a later stage.court

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Unmortgage your kids into home ownership!




I guess most people who read this blog are old enough to own their own house. But what if you were one of those twenty or thirty somethings who have done everything right- and still could not buy your property.

The recent white paper on housing was long on intent, but short on good ideas.

So here’s a good idea courtesy of my friends Ray and Nigel of Unmortgage.

What if, instead of renting a house you could never buy, you lived in a house were busy buying.

What if, instead of worrying whether the blu-tak you put on the wall would lose you your deposit, you were free to decorate the place how you liked.

What if, instead of downsizing to somewhere you didn’t want to live, you started buying the house you and your partner and the sprogs could be really proud of?

Here’s how Ray and Nigel are dreaming of making this happen.

They’re out there talking to pension funds and insurance companies and asset managers who want to invest in residential properties with young striving tenants.

And they’re finding that pension funds and insurance companies like the idea of helping young strivers to a point where those strivers can get a mortgage and the properties they’re renting. And in the meantime, they like the 5% rental yield that the strivers are paying them as they build an equity stake in the property.

They’re finding that the young strivers are dreaming of increasing their equity stake in the property. not by borrowing but by saving money directly into bricks and mortar. Buying into the property brick by brick, month by month till they have got to an equity holding sufficient to buy the pension fund or insurance company out.

A bit of a dream, a bit of reality

The dream is becoming reality, Unmortgage are currently squatting in the offices of Cushman and Wakefield, making plans. They’re collecting data on all the postcodes that these young strivers want to live in and understanding what the profiles of the strivers who most need their help.

Last September, the Times ran a story on Unmortgage. Within days they’d had 4500 hits on their website and 450 strivers applied to do a consumer trial. The average strivers were couples earning £80,000 between them with £40,000 saved. Not having access to the bank of Mum and Dad, they were locked out of the housing market and deeply unhappy with their residential status.

They started sending Ray, Nigel and their friends details of the properties they wanted to buy. They didn’t want to buy studio flats, they wanted to buy properties that suited their lifestyles and those properties cost a lot of money, often £400,000 or more.

The dream of buying these properties remains unrealised. Ray and Nigel and their friends struggle to get the institutional investors to do more than applaud their efforts. This is not enough, they need a Legal & General or a Hermes or an Aviva to press the red button and swing the chair round!

How it works

Go to and find out how it works. It’s pretty simple, you find a property, Unmortgage find the investor and you love your home.

Valuations are arrived at, through the databases of properties Unmortgage are building. These guys are data specialists. Transactional costs can be managed to best advantage, initial investment from each striver can be from as low as 5% of the property value.

Increasing your stake in the property is as simple as overpaying your rent!

So push the red button and swing that chair!


Ray and Nigel need a few consultants to do more than smile, consultants to get Pension Trustees to organise money their way! They need fund managers to invest in the limited partnerships and they need insurers to seed the funds with their own capital.


We need the Government to do more than ask where the innovation is. We need them to recognise this is the innovation! We need them to look carefully at how they can help make these partnerships between investors and strivers work. That means looking at Stamp Duty and taking a view.

Then Ray and Nigel and their friends can start turning dreams into reality.

I know that some readers will be thinking that I really should be writing about the homeless, or those just getting by. These people do need help but it’s not this help.

If you’re of my kind of age, you probably own the bank of Mum and Dad and you may well have kids who are striving and failing. You may well be the kind of person who is either advising, or a fiduciary or even an executive of an asset manager or an insurer.


In short, you may be in a position to help. If so, contact

Ray at


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5 Things I want from today’s DB Green Paper


Why Pension  Schemes matter (Source ONS)

The DWP is due to publish its Green Paper this morning. It’s an important initiative; -our defined benefit schemes are under threat but they have the potential to do much good not just to those in them, but to those who benefit from their investment.

With private annuities in the doghouse, many people have no private pension plan, they simply have a retirement savings plan. We need to get people back thinking about insuring against extreme old age, which is why I’m kicking this blog off with a graph showing how much more likely it is we’ll live too long than die early.

We still have pensions in this country, they are paid from collective arrangements organised to pay a defined benefit.

Of course not all DB schemes are funded, the biggest ones, including the state pension are Pay as You Go and funded from general taxation. My 5 item wish-list relates to the funded schemes and excludes the NHS, Civil Service, Teachers, Firemen and Police Schemes.

I hope that the Government will talk about these taxpayer funded schemes but not make them the focus of the paper; it’s the funded schemes that need immediate help.

My five item wish list

  1. NO DUMBING DOWN on existing promises. It is easy for Government to give away other people’s money. But the promises that have been made to those in final salary schemes can’t be rescinded or diluted. They are what they are, what the trust deeds say they are – even discretionary grants, once made , are promises. So long as there is a company to back these promises, they stay. Judging by the smoke signals (an article in this morning’s FT by DWP Secretary of State- Damian Green), benefit promises on accrued rights are being questioned.
  2. NO ENFORCED CONSOLIDATION of small schemes. The PLSA are still to publish its consolidation report, but the vultures are circling. Yesterday Willis Towers Watson announced that they would be providing a one-stop- shop for large schemes and implied this was the end for small schemes. I say b*ll*cks to that! The beauty of the tapestry is in the weave, of those 6000 Dhope B schemes, perhaps 80% are deemed small, heterogonise them and you’re left with a dull cloth without beauty or ownership. These schemes form part of our corporate culture. Small is Beautiful, read Hilary Salt’s epic blog on this.
  3. YES TO  MORE PRODUCTIVE ASSETS. That so much of our DB funding has been diverted from growth assets into debt financing is a national shame. How can we expect to meet the challenge of BREXIT if we put ourselves on the back foot. Richard Harrington is right to be ashamed that the best assets in his constituency are owned by a Canadian not a British pension fund. Let’s put our pension funds back to work,
  4. YES TO A GREATER PROPORTION OF GROWTH ASSETS. Let’s use this DB paper to nail the idea that Trustees have a choice in how they invest and that buy-out is not the only option. TPR has been guilty in the past on over-enforcement of de-risking and promotion of self-sufficiency. The PPF is a safety net and should release Trustees to invest with confidence , employers to accept risk on the balance sheet and Government to give clear signals to encourage those schemes that wish to persevere – to invest for the long-term,
  5. YES to CDC!    CDC is not a dirty acronym. It’s a way of accruing future benefits with a defined contribution from the employer and with conditional benefits for the employee. It is DC+++ , not DB(minus). If we are to have a long-term contract based on collective endeavour, then CDC is the way forward. If the Government is serious about providing people with an alternative to individual drawdown and annuities as a way to spend the DC pot, CDC is the answer.

So there’s me throwing down the gauntlet and asking Government how it’s going to respond. Of course my agenda won’t be the Government’s and I’ve no idea what the DWP have inside its Green Paper.

Hopefully by the end of the day i will be able to conclude this blog with an assessment of how the Green Paper fares against my wishes, whether I see it as an opportunity secured or lost and whether it shows a Government and Minister with a positive post Brexit strategy or with a strategy that’s a wimpy capitulation towards the lowest common denominator!

Life’s too short for many more consultations, let’s hope that what comes out of this Green Paper is positive and that we use it to restore nor undermine- confidence in pensions.

Or to use Damian Green’s sign off paragraph in the FT

The UK also has a proud history of consumer protection, and this green paper will be another step in making sure that we are delivering a pension system that works for everyone.



Here’s the link to the Damian Green article


Here’s the  opportunity

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Choosing a workplace pension

how to choose

help of a proper firm of actuaries!



Last week, Parliament debated an amendment to the Pension Schemes Bill, suggested by the Shadow Pension Minister and quoting this blog. I am happy to have put words in Alex Cunningham’s mouth, the Government have been cavalier in its policy and is leaving employers exposed to the kind of class actions common in the USA and well known to our banks and insurers in the UK.

Employers are choosing workplace pensions like NEST without being able to give any reason why. If an IFA chose that workplace pension as a regulated activity, the IFA would have to justify the choice in a formal “reason why” letter. But if an accountant or its payroll tells an employer to use NEST or similar, because it is compliant and suits its payroll, the instruction isn’t even recorded.

What is left is a black hole of ambiguity into which employers, business advisors and even the DWP could find itself sucked. If I am sounding alarmist, it is because of the complacency of the DWP downwards

Here is the Pensions Minister, speaking from the position adopted by his department, one that he has inherited. I have written to Richard Harrison and asked him to discuss this. Whether I get the meeting or not, I want to publicly challenge what he is saying;

here is the Pension Minister’s opening gambit

I thank the hon. Gentleman for his contribution with the new clause, but I respectfully give him my opinion that he seems to be fundamentally misunderstanding the whole regulatory system of automatic enrolment.

So what is the regulatory system?

So long as an employer chooses a scheme that meets the criteria—we have been through all the criteria and the whole regulatory and legislative system is behind that—the scheme qualifies for AE. The employer —which may be a he, she or it, if it is incorporated—cannot just decide on any old scheme. There is a significant regulatory hurdle in the Bill.

The hurdle may be regulatory but jumping (or complying with) the hurdle does not mean the employer has completed its duty of care to its staff. The common law concept of duty of care is decided in a court beyond the influence of the DWP or tPR. Common law is common sense and judges are the judge of that

The employers’ duty is met by scheme choice, because that is what auto-enrolment is.

I quite agree, the choice of workplace pension scheme is at the heart of the employer’s duties. It is the decision which will have most impact on its staff’s future and getting that choice wrong has long-term consequences, much greater than the short-term aim of keeping payroll happy.

It is not like a defined-benefit type of scheme, where the employer has to ensure that the contributions are enough to be able to pay out what they are contracted to pay out in the scheme documentation. They have to make a reasonable decision based on the whole authorisation regime. I argue that asking for more would be inappropriate and burdensome for employers.

Here is where I part company with the Minister. The duty of care falling on an employer choosing a workplace pension is exactly the duty of care in meeting its defined benefit promise, it is variously called the exercise of its “best endeavours” or to use an easier phrase “to do its best”.

It may help the hon. Gentleman to see my point if he looked at the regulator’s website—he might have done so already—which has comprehensive guidance for employers.

Here the Minister loses the plot. The page an employer lands upon

choose a pension.PNG

Note that unlike the Pensions Minister, tPR does not place choosing a pension at the heart of what auto-enrolment is. Infact, employers have to navigate a complicated process to get to the screen the Pension Minister refers to.

The same goes for business advisers; choosing a pension scheme does not spring out at you on this list


Under the new clause, a typical employer would be doing exactly what the hon. Gentleman says is inappropriate: they would basically be doing what their accountant or adviser tells them, because most employers, particularly the small ones, by definition do not have this kind of knowledge. They are not professionals in this area; there are there to run their own business.

Here I need to talk with the Pensions Minister. This is what accountants are being told by his Pensions Regulator.


Navigate your way through these links and you come to a two page document which basically says you should make your choice based on what works for payroll. If you don’t believe me , press here

The guidance given by tPR to advisers is totally inadequate and the advice given to employers no better. Employers are being asked to choose a workplace pension based not on what is right for staff, but on what is right for payroll. Here are tPR’s key points on choosing a pension plan for your staff


There is simply no help for employers and business advisers about the “additional help them may need”. The whole navigation is a cul-de-sac which is jammed with confused advisers and employers.

Small wonder then that Richard Harrington concludes

I do not understand, whether from a personal or a Government perspective, how asking them to do meaningful checks after they have gone with an approved and regulated scheme would add anything to the process.

If there was no help to employers beyond the Pensions Regulators website, the Pensions Minister would be right, but there is help of this kind and its available to every employer in the land for (at most) £199.

So far, has helped over 12,000 employers to choose a workplace pension. The only time that this organisation has been mentioned in this debate has been from Alex Cunningham’s intervention.

I will challenge Richard Harrington’s question. Small employers can do meaningful checks through us and we’re backed by £8m of professional liability insurance. We’re inside Sage’s pension module and used by all the large payroll software providers.

Every week hundreds of employers choose their pensions wisely using our software. Perhaps Richard should choose a workplace pension our way – for his staff!


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John Ralfe, Ros Altmann and the cost of central heating.

John Ralfe kindly promoted my article on the lack of diversity in the AE review.


Responsible John

By happy coincidence, I can promote an article of John’s in the FT. You may not have access to the FT online so let me quote John’s conclusion to an article “Don’t cash in your final salary pension scheme (link below)

But most people are not so wealthy and their pension is a large part of their overall retirement wealth, so those guarantees are very valuable. Despite eye-watering multiples for cashing in, do not think now is a clever time to take the money and invest in equities.

The higher expected return of equities versus bonds is just the reward for the risk of holding equities. It is not a guaranteed “free lunch” or a “loyalty bonus” for long-term investors.

John and I agree on how he got to his conclusion, he asks  the $64m question

So how can I decide if the higher expected return of shares versus bonds is worth the higher risk I am taking?

and concludes that most people cannot manage the risks inherent in equity investing – at least not when they’re in need of regular long-term income.

John is writing on behalf of ordinary people, the ones who are beguiled by pension freedoms, freedoms that are already proving illusory. The people who may struggle with their heating bills in years to come.

Irresponsible Ros

Ros Altmann is also writing about transfers this week; she too is writing for ordinary people but her conclusion is radically different. Writing for FT Adviser she concludes

More DB transfers could prevent care ‘disaster’

Ros seems to have adopted the position that the pensions we have been promised from funded DB pension schemes are an unnecessary luxury that had better be dismantled and used for social care. I do not agree with Ros and I’ll focus on just one of her statements to explain why

She argued that a £50 a week final salary pension could be worth around £100,000 as a transfer value.

As an income, she said this might not be worth a great deal, but as a lump sum, it could be “hugely” beneficial in helping to pay for care

But that £100,000 transfer value isn’t exchanged for nothing. That £50 per week will be around for ever, the £100,000 is only around before the pension is in payment.

The direction of travel is obvious, granting property rights on DB pension in payment – a freedom that is as illusory as the prospect of a secondary annuity market.

Ros has, I fear, lost touch with the importance of £50 pw to pensioner households. I travelled on a bus yesterday talking to a pensioner who was about to walk home in the middle of the night for 40 minutes.

You’ll be cold- I said.

Not as cold as when I get home – he said

Haven’t you got central heating – I said

I have but I can’t afford to keep it on – he said

I am not belittling the problem of funding our long-term care bills, I am preparing to help fund those of my parents (which is precisely why I didn’t take a lump sum but chose to draw my pension as pension).

I don’t want to see homelessness , or see those who have homes unable to heat them, I don’t want people giving up their heating money in their fifties and sixties to fund for potential social care.

Meeting the costs of central heating

What we need, is a way to help those who have cash (in a DC pot) convert cash to income. Taken as a workforce, most of us in Britain have only one source of guaranteed income in retirement – out State Pension. Most of us will have a pension pot which is unlikely to afford us the luxury of £50 pw.

We should be focussing our energy on finding ways to give people that £50 pw from an average DC pot. Currently the average DC pot is around £35,000.

There are two ways to do this

  1. Encourage people (and their employers) to put more in so that the pots are bigger
  2. Find ways for people to take more out of the pot, than they can get from bonds (annuities)

The AE review is rightly looking at question one (despite its failings in composition and TOR).

The Pensions Act 2015 put in play the collective mechanisms we could use to create better collective pensions.

We are addressing how to increase the pot, now we must address how to make the pots pay. When we have addressed the primary need, income in retirement, then we can address the secondary need, insuring against rising healthcare costs.

John is right, we must keep our current DB pensions infrastructure in place, both at a personal and societal level, we need pensions

Ros is wrong, we should not swap pensions for cash. We need to find a better way to solve our care funding problems , than by turning off the heating in our houses.

John Ralfe – Don’t cash in your final salary pension scheme –

Ros Atlmann – More DB transfers could prevent care disaster –

Posted in annuity, auto-enrolment, pensions | Tagged , , , , , , | 3 Comments

Small employers need a voice in the AE review


Yesterday I reported on the male hegemony of the three chairs of the advisory groups for the Automatic Review. There is a little diversity in the composition of the rest of the group.


It’s comforting to see familiar names who have been involved in auto-enrolment from the early days, but this is still an exclusive group with a bias towards policy and inexperience with practice.

The organisations making or breaking auto-enrolment in the next five years are not represented. Payroll has no rep, nor the small accountants who will take liability for much of their payroll bureau’s work. Nor is their anyone with an advisory hat on (at least with regards the employer’s duties with regards pensions.

It is good to see the Terms of Reference talking about balancing the needs of employees with the costs to employers (and minimising costs to employers. But it is not obvious that any of the Chairs or panels have any idea what small employer costs really are.

Enough on composition – what of proposition?

Closer reading of the question the review is to answer has not resulted in any greater excitement for it. I spoke with one payroll guru yesterday who has responded to all AE consultations from the outset. He told me he was inclined to ignore this (major) review altogether.

The central theme is of engagement. The review is asking how we can get people to fall in love with workplace pensions. But it doesn’t use those words, instead it uses the periphrastic phrasing of the civil service.


The appropriate response is to be found on our heard on our football terraces

“you what, you what , you what you fuckin what!”

If the review is going to be conducted in these terms it will be completely irrelevant to the needs of ordinary employers and their ordinary people. It is a simple business saving  money; you start with nothing and get to a point when you have a meaningful amount. We often think that amount is when you can buy a reasonably priced family car with the proceeds.

This is well known and has been discussed ad nauseam in conferences decades in decades out. We have a market based auto-enrolment system, the market is intent on increasing member engagement so it can have economically viable auto-enrolment products.

What is needed is clear products which do what they say on the tin. Cleaning up the mess of cheating practices that has marred Dc pensions since the 70s should be the top priority of this review. Instead product (as in a chat about the level of the cap and what it should include) is kicked into the long-grass.

Similarly, the role of the fiduciaries – the people we trust – to make sure member’s interested are represented, is not on the agenda. I trust people like Nigel Stanley and Jocelyn Blackwell to act for the consumers and it’s good to see Jane Vass speaking up for the older worker (and those beyond work). But there is no talk in the TOR or the questions, about how trustees and IGCs can be promoted as savings champions. There is instead a very dangerous couple of  paragraphs.

savings.PNGIn amongst this gobbledegook is a ministerial project waiting to get out. Jo Cumbo is not prone to speculation


This is the kind of nonsense that happens when effective lobbyists get in minister’s ears. The idea that the SIPP providers (who are undoubtedly behind this) can disrupt the orderly progress of people into employer chosen workplace pensions is very attractive and very dangerous.

It is attractive, because it plays to the libertarian right (who brought us personal pensions, freedom of choice and now “other savings” such as the ISA family. It is hugely attractive for the SIPP providers (Hargreaves Lansdowne especially) as it makes them inheritors of the wealth of auto-enrolment (without having to do the nurturing).

It is of course not helpful to ordinary savers at all. They do not want SIPP functionality, they do not want to be choosing their providers – they never have and never will.

A thoroughly bad idea

And of course this dangerous and silly idea would make payroll’s into provider hubs. Payroll are not designed to be carousels for the delivery of profits to financial services providers. Member choice of provider should not be on the agenda.

The hijacking of auto-enrolment by those with an “engagement agenda” is a very real danger arising from the lop-sided composition of this review.

Instead of providing greater freedom, this review should be providing greater member protection. I fear this review is designed to open the door to many of the bad practices that we have been banishing from workplace pensions, over the past five years.

hi res playpen

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The AE review and the pension stitch up.

7 years on from our last review, auto-enrolment is back under the microscope and the Government has published some questions they’d like answering**.

They’d have more chance in getting them properly answered if they put the matter in the hands of people responsible for doing the work.

Instead of reaching out to the small business , their payroll reps and business advisers, Richard Harrington is doing what big Government tends to do, and going to the usual suspects.

  • Ruston Smith, Trustee Director at Peoples’ Pension
  • Jamie Jenkins, Head of Pensions Strategy at Standard Life
  • Chris Curry, Director of the Pensions Policy Institute

Anyone who currently works helping employers stage, will be asking “who”? Here are my alternative bios.

Ruston Smith – serial committee sitter!

Well much as Ruston might like his work at People’s Pension to qualify him, it doesn’t. Ruston has spent most of the past few years knocking around at the PLSA, his day job is head of People and Pensions at Tesco and he also sits on the Standard Life Master Trust. Ruston is a  totemic figure of the pension hierarchy but he is not the people’s champion!

Chris Currylifelong policy wonk!

Chris is ex DWP, ex ABI and now Director of Pension Policy Institute, which is a noble institutions that mines data and is an independent source of research for the pension industry. Chris is a great bloke but he is an observer.

Jamie Jenkins – lobbyist!

Jamie is one of the worlds greatest billiards players and Strategy Director at Standard Life. He is a diplomat, a lobbyist and a Standard Lifer! He is a champion for the insurance industry but not for you or I.

Individually they are great – but collectively they are no good.


Cover -engage- contribute (what the AE will look at)

What is happening today, and will continue to happen in the next few years, is that small employers are complying with a set of rules that cover them , but don’t engage them. The contribution levels that employers are currently making to auto-enrolment are low but they are about to rise.

The DWP has correctly identified the key issues for the review as

  • coverage
  • engagement
  • contribution levels

the second term of auto-enrolment – following the 2010 and 2017 reviews will be measured by how many of the 12m not currently auto-enrolled are covered, to what extent employers and staff are engaged and to what extent we are able to keep people in at 8% rather than 2% of the AE band of earnings.


Great but no good

Three men following the three men of the 2010 review *. Nobody young, nobody female and nobody from outside the pension magic circle!

Nobody from the Federation of Small Businesses, the accountancy or personnel bodies, no one from the CIPP, no Kate Upcraft, Karen Thompson or Ian Holloway. None of the people who have invested their time preparing payroll bureaux, accountancy firms and the small employers to do their duties!

Today I am at the Cintra Payroll Conference in Newcastle, last night I was with payroll people (discussing auto-enrolment over a few ales), tomorrow I will be at the mighty Sage. It is these payroll software companies , their trainers, their clients, that have kept auto-enrolment afloat. The Pensions Minister and the Pensions Magic Circle are pleased to take the credit, but the work is being done by these people.

I am really affronted that they have no representation on this panel. I fear that those who are asked to contribute to this review will consider it for what it looks like – a pensions stitch up.

I know that the people I was talking to last night were mightily pissed off too. If Government is serious about listening to the nation (rather than sitting in a pensions echo chamber) it would have had at least one person representing the interests of payroll.

But it isn’t interested in the views of payroll or of the business advisers, or even of the small employers. It will continue to impose policy on these groups who will have no say in it , no engagement – they will simply be asked to contribute to other people’s CVs.

On behalf of all the people who I know, who will never be heard , but who work ever so hard, I would call on the Pensions Minister to ensure that advisory boards on auto-enrolment in future , comprise of and are focussed on , people who manage auto-enrolment.

A postscript for the consumer

You may remember that this review will also be dealing with the AE charge cap (which is tagged onto the questions as an afterthought). I see none of these three as representing the interests of the consumer. I hold out little hope for a fully inclusive charge cap as intended in 2013.

We will have to wait for the FCA to pronounce and the IGCs to deliver, the DWP are clearly not engaged.

* the 2010 review (excellent) is here.

** questions and TOR here

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We need a home ownership detox!


A home ownership addiction

An important day for British Housing Policy

Today, the Government will publish its white paper setting out its long-term housing strategy. This has implications for everyone living in the UK, including the homeless, those who rent, those who own and those who rent to others. It is a white-paper day for house-builders , those who manage our rental stock and it may even redefine our long-term attitude to saving.

Ever since I left college in 1983, the aspiration and expectation of working adults in the UK was to own their own home. This came before any form of financial security. Home ownership has become a substitute for life assurance, income protection and a retirement income. Household equity is – when all else isn’t – a source of national security.

For my generation, the chance to own a home grew over the 25 years to 2008. Cheap credit, available with minimum borrowing criteria and no deposit down , enable us to get on the housing ladder. Once one house had been purchased, more could follow. There was no need to have a business or even be in business, buy=to-let has become a lucrative hobby for many people.

But as council housing stock diminished and first generation right-to -buy properties became buy to let properties, the numbers of starter homes for future generations slumped. First time buyer prices soared which was ok till 2008; but then cheap and easily accessible credit ran out.

It has been since then that the phrase “the broken property market” has been on people’s lips. The fact is that most of us my generation remain over=dependent on property for our financial security and we have insufficient liquid assets to meet our cash flow needs in later life.

Meanwhile, our children and grandchildren struggle to get out of the family home and are becoming increasingly frustrated with the generational inequalities that have given so much to the baby boomers and so much less to them.

Universal Home Ownership – a broken dream

This is why this White Paper is important. This Government cannot pull the comfort blanket from those who have, nor can they pretend that Margaret Thatcher’s promise of homes for all is still realistic.

But if they are going to inspire another generation to aspire to financial security without home ownership, it will mean a massive detox from the expectation of risk-free equity accumulation created by a highly-geared mortgage.

It will also mean a radical reform of the private and public rental sector. By “public”, I mean “social housing” which must become just that, a type of housing as universally popular as social media. Social housing has yet to achieve this status. As well as this quasi public (not for profit) social housing, we need a properly organised build to rent sector.

I get encouraged when I visit Legal & General and see their commitment to building new homes for rent. Visit the strategy pages of their website and you can read about how they are helping Britain to build more homes which people can afford to rent. But the 131,000 homes we built in Britain last year was nowhere near the numbers needed (est. 250,000).

A high number of those houses were specifically built for the top-end London and home counties market, but I was encouraged to hear this morning of a new development of 4.500 properties in Wembley Park which will be rented by the developer and not put on the market.

The great British ownership detox!

I have never been a great property owner, I have a minority interest in a flat in Central London , most of which is mortgaged, I am a lucky one benefiting from un-naturally low borrowing costs and the prudence of a more financially gifted partner!

I am a great saver and a profligate spender – I have my money saved for retirement and a boat on which I wish to spend much of my later life!  Houses do not feature at the heart of my financial well-being!

So it is relatively easy for me to call on the Government to instigate a property de-tox on Britain as a whole. I mean by “property de-tox” a revaluation of the centuries old exaggeration of rights to the owners of property and an enfranchisement of those renting as fully paid up members of our society.

That means a step down from the top of the ladder (from where our leaders have given us that “hand up”). It means recognising that it is not so bad at the bottom of the housing ladder (where politicians should be spending more or their time) and it means that our businesses, bank, insurers, pension funds and asset managers should be clamouring to get a part of a new kind of action.

If we are to build a million new homes in the next four years (or whatever the target it), then I want my pension fund, my ISA and my direct investments to be directed there. That seems a proper place for me to get long-term yield to match my income needs in retirement.

So I look forward to this housing paper, due to be published at noon today, with a lot of excitement. I now know some of the people who have done the thinking behind this paper and I trust them and their intentions.

We need a home ownership detox, we need to ensure that homelessness is reduced and that not only those who are living on the streets but those who cannot but live with parents, have a place of their own. We need to empty the hostels and find a place in society for those who feel marginalised because they are in social housing. We need private companies and financial institutions to work together “building to rent”.

Above all, we need to wean people from the addiction of believing home ownership , the be all and end all of financial planning. You cannot buy a sausage with a brick, in later life – which we will have a lot of – we need those sausages!


you can’t buy a sausage with a brck

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Forget history, here’s “my story” – SNAPCHAT!


Nobody over 30 gets Snapchat!

Like nobody over 30 got Woodstock, or punk rock or any other self-defining trend of the past 1000 years. I am quite sure that back in the 1730s or the 1510s, there were “snapchats” that made sense to those using them, as their way of stating who they were and how they talked to each other.

The question that people should be asking as they stop to consider Snapchat’s current multi-billion pound valuation – is whether the IPO can buy them more than a disappearing ten seconds of value. I’m not being a boring old fart and poo-pooing a pop trend as the folly of youth.

Punk was for me a way for me to get an identity distinct not just from those older than me, but from those around me. I was my image as a 16 year old, I had the haircut, the clothes, the music and the attitude, I defined myself by these things, most of which I borrowed from the New Musical Express, Sniffing Glue and a couple of friends who went regularly to London (the Kings Road).

The way snap chat works is simple, you start by taking a snap on your phone, you add some chat (if you like) and you share your identity statement with a friend or friends. The most durable aspect of this is that you are building up a story of your day, which you can look at when its finished so that you can make sense of it.

Then it all goes away and you start again, because you want to live in the present, not your past.

Put the snaps together and you have your story, your identity is your snapchat story. That’s who you are, and if you are 16 and trying to find that out, snapchat matters to you.

Hands off it’s my story

The great value of your Snapchat story is that it is “yours”, your pictures, your narrative and it’s entirely free of intervention by those trying to educate you to be something else.

Thankfully, those who are constantly trying to shape our children into being financial automatons, assiduously saving for the future, managing their credit scores and avoiding reckless expenditure have not got snapchat.

It is however , only a matter of time , till they do. I predict that the moment that the financial education/empowerment/well-being brigade arrive on snapchat, will be the moment for the youth of tomorrow to reinvent their ways of defining themselves.

In the meantime, the only decent thing for people over the age of thirty to do with Snapchat, is to let it be. It’s full of crappy stories from people who want kids to redefine themselves their way. You might think you’re reaching out , but this is what your kid’s hearing

When I’m drivin’ in my car
And a man comes on the radio
He’s tellin’ me more and more
About some useless information
Supposed to fire my imagination

You might think you’re doing your kid a favour but this is what he’s saying

When I’m watchin’ my TV
And a man comes on to tell me
How white my shirts can be
Well he can’t be a man ’cause he doesn’t smoke
The same cigarettes as me

And you want to know what’s going on in that kid’s head?

When I’m ridin’ round the world
And I’m doin’ this and I’m signing that
And I’m tryin’ to make some girl
Who tells me baby better come back later next week
’cause you see I’m on losing streak

What Snapchat is , is a place where kids can find out what they’re like with other kids. It’s a place where sex and money and information and all the stuff Jagger was trying to get his head round, are there in front of you. There but not there, available but only on someone else’s terms.

Sorting all this stuff, prioritising it around, is the way kids define themselves and it isn’t helped by people selling satisfaction (or holding it back). Snapchat, helps make sense of things to kids, that is why it is so valuable. It is valuable right now , today, it does it better than just about anything else which is why it is the hottest social media out there.

I predict it will be destroyed, as all the other trends of the past thousand years have been destroyed by kids reinventing the way they choose to define themselves, shaking off the outside interference of those selling them crap – and that includes people like us selling financial literacy.

Snapchat will be history when it becomes somebody else’s story, right now – for millions of youngsters it is “my story”. Let it stay that way.

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Procrustination; Con Keating on JLT’s black hole.


  • Procrustination

If that word does not exist, it should; it is far more appropriate than the current euphemism “consolidation”. This past week we saw the publication of JLT’s paper: How do we get out of this pensions ‘black hole’, and we expect, from its many previews, the final report of the PLSA’s DB taskforce to have as its central theme: “consolidation”.

This week, at the TUC conference, I heard lines describing trustees’ duties such as:

“to ensure that all of their members’ benefits are paid out in years to come”

and to ask the question:

“does an action reduce the level of risk to members’ benefits.”

It even extended to a particular and popular narrative:

“Companies are trying to reduce their covenant obligations”

A more accurate narrative would be that companies are trying to counter the arbitrary and capricious additional costs of the procrustean bed of regulation, embodied in current actuarial and accounting practice.

None of these descriptions is true or fair. The obligation of a trustee is to secure member benefits.

The amount of these benefits at a point in time is a matter of fact; it is derived from the contract with the employer sponsor and the time that has passed since the award. It emphatically does not involve consideration of any future events, other than benefit projections.

The idea that trustees should be concerned with the sponsor covenant, with respect to future developments which may or may not occur, is nonsensical. It is an article of faith handed down by the Pensions Regulator, presumably in pursuit of their objective:

“to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (PPF)”.

This objective conflicts with sound scheme oversight and management.

One of the most perverse consequences is that this penalises disproportionately precisely those employers who offer their employees the most generous pension terms.

The true objective – securing member benefits – is achieved by holding an amount of assets sufficient to discharge the accumulated value of awards made to date. This is not some present value of projected benefits, however derived.

Depending upon the terms of award, and developments in financial markets, on sponsor solvency or other liquidation, it may or may not be sufficient for a member to buy equivalent benefits in some market.

Given the efficiencies of the collective risk sharing and pooling mechanisms of DB schemes, it is to be expected that, on average, it would prove insufficient. In this, the DB scheme member is in the same position as would be a DC scheme member who owns the (secured) public debt of the sponsor company. This does not present a problem for the PPF, though it would require revision of the manner in which they set levies. In any event, they have been setting levies far above those economically or financially justified since inception.

Many courts have opined that DB benefits are deferred pay; they are occupational arrangements. From this it is immediately apparent that the full value of benefits may only be expected to be achieved after the complete passage of time. One of the principal problems with the regulatory, actuarial and accounting standards is that, by viewing the pension scheme and fund as a stand-alone entity which must be funded to provide all benefits, it weakens this linkage.

“Consolidation”, better procrustination, takes this to its ultimate limit.

The specific conclusions and recommendations contained in the JLT report warrant some discussion. The British Steel case is cited as evidence of a deficit-based need for change, when in fact the scheme is now in surplus on a technical provisions basis and if the alteration of the basis of indexation (from RPI to CPI) is agreed by members, will be able to continue as a stand-alone entity.

This has not required any change in regulation. The Brexit decision is also cited, though I worry when I see the specific ‘advantages’: no application of European Directives, or appeal to the European Court of Justice.

The paper notes the disparity in costs between DB and DC; a correct concern.

This week I listened to a very, very long litany of problems with DC arrangements – as savings, they really cannot properly be called pensions. Elsewhere than pensions, such a profusion would usually be taken as strong evidence of a wrong and inappropriate model. It has of course severed the link to the sponsor employer; these are no longer either deferred pay or properly, occupational pension schemes.

Given the relative efficiency of DB versus DC, one of the most remarkable features of recent times has been that the valuations of DB are so overblown that DC may be more attractive for many members, and a transfer flood ensues.

The Regulator is complicit here. Their reported stance, which might be summarised as:

if you believe the employer covenant is strong, then you think stayers will have all benefits paid in full, so you shouldn’t be reducing the benefits of leavers,

is more than a Catch 22; it calls upon trustees go beyond their duty and to consider future events, with the implicit threat that if trustees argue for reductions, they risk requiring the sponsor to contribute more to the scheme.

The proper course of action for a trustee is to consider only the current level of scheme funding and pay no more, proportionately, than that, and even this may exceed the member’s properly calculated entitlement.

The JLT paper recommends relaxing transfer rules and allowing early access to the tax-free lump sum, which flies in the face of pensions as deferred pay. Why not give them access immediately on award?

The paper also suggests that funding should be to the level of PPF benefits and that this would generate a huge immediate gain. It certainly would not have this effect if the basis of calculation was that specified by the PPF for the s179 valuation, which is now calculated on a buy-out basis. The most recent scheme funding statistics report that the median Technical Provision/s179 valuation ratio is 101.6%.

The paper does suggest the use of higher discount rates, such as those based upon the expected return on portfolio assets, but it does so from a bizarre standpoint:

“… imagine pension funds no longer needed to invest in gilts…”.

We do not need to imagine this; it is the status quo. The use of gilts as investments by pension funds stems from their use in determining the discount rates used for the valuation of liabilities; it then becomes a tautological, misconstrued but central part of the so-called de-risking of schemes.

Although the use of unfunded and insured schemes is touched upon in this paper, it lacks the insight and vision to recognise the full potential of these approaches, which incidentally could include massive savings in tax concession costs.

Funding is at best an incomplete solution to DB pension provision; it is certainly extremely and wastefully expensive. The problem of sponsor insolvency is best addressed by insurance, individually and collectively.

An appendix proposes new tests around “going-concern” status. It does not seem to understand that if the Directors believe the company is no longer a going concern, they must liquidate it. It is appalling to find leveraged driven investment being supported; this can only undermine the security of scheme members. It is pure speculation.

There is a case study; (no practitioner report is complete without such a study).

Case studies are a very powerful device for the development of a particular narrative. Academics, of course, would dismiss them as mere anecdotes. This particular study traces the movement of a scheme over time to full buy-out and scheme wind-up.

I cannot help but wonder if legal scholars might not consider this case study to be a confession of complicity in the assisted suicide, or murder, of a scheme.

While we might criticise the report for its highly selective use of evidence in support of its case, the far greater problem is that the authors appear to believe that the situation has the moment of a law of nature, that there is an inevitable “gravitational pull”. This is not the case; this is an entirely man-made mess.

The report may also be criticised for confusing fact and opinion; a fine case in point is the use of opinions from the Intergenerational Foundation and Institute for Fiscal Studies in support of their view of intergenerational unfairness.

I will accept that the nonsense reported as pension ‘deficits’ does influence investor behaviour and the prices of quoted company shares, but this is not an effect of the ‘deficit’; it is a rational response to the diversion of corporate time and resources into entirely non-productive uses, that arise from these ‘deficit’ figures.

We should be thankful that the report does not subject us to any arguments for the commingling of scheme administration, assets and benefits, but that is surely coming in the PLSA report and the DWP’s Green Paper on DB.









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Avoid the ambulance chasers and choose your workplace pension wisely


In America the business of providing staff with a retirement benefits plan (known as 401k) is taken very seriously. Employers have fiduciary responsibility to the participants and to the plan. That means that if employers do not take due care in the choice and governance of the plan they set up for their staff, they are liable to civil prosecution.

If you press this link you can read about the “excessive” law suits taken out against employers and their advisers resulting from their alleged poor behavior

The employer’s duty in choosing a pension plan under the Pension Regulator’s rules is a lot less clear, employers have a duty to choose a workplace pension for their staff but (unlike in America) there is no obligation on employers to choose carefully.

This is causing providers, business advisers and most importantly employers some concern. The past twenty years has seen us lurch from one mis-selling scandal to another. Pension Transfers -Endowments – PPI and Interest rate swaps have all been subject to class actions and massive retrospective penalties on those found wanting in due diligence.

I have been in financial services for 33 years and seen a large amount of bad practice. Even where good advice was given, I have seen action taken against the adviser for not properly documenting what was advised and why. We all remember from our maths exams, it’s not just the answer but your working that gets you full marks.

So when my firm, First Actuarial, were thinking how we could help small businesses through auto-enrolment, providing help on how to choose a pension and an audit trail that showed the due diligence taken, was our number one priority.

Unfortunately, the way we do this for our large employers involves many thousands of pounds worth of our time and considerable investment from our client, we knew we could not demand this from small employers. So we decided to build everything we knew about choosing a pension into a computer program, powered by an algorithm and supported by actuarial certification which we could give to employers who followed the steps to choosing a pension properly.

We called this service Pension PlayPen because we liked the child-like simplicity of the name. has gone on to help many thousands of employers choose a pension.

Recently, we were approached by the office of the Shadow Pension Minister, Alex Cunningham. He had heard of the work we do with small employers through bureaux, accountants and advisers. He has asked us to lay before parliament an amendment to the Pensions Schemes Bill, due to be enacted this April.

Here is the amendment we have submitted to the Committee ratifying the bill.

Employers have a fiduciary duty and a duty of care to members t0 ensure the master trust of their choice meets the needs of their staff

There is of course one easy way to avoid the risk of retrospective litigation and that’s to insure. A minimal investment in due diligence using our site ensures not just peace of mind, but the satisfaction that your choice meets the needs of your staff.

You may feel that this is overly onerous on employers and could give rise to just the kind of litigation happening in the USA. But laying down the law on what should be done is better than letting bad things happen and punishing them retrospectively. If it had been clear to the banks before they sold PPI what the rules were, we would never have had the scandal we did.

ambulance 2

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Poking sticks at LGPS in a “shouty” report – Johnson just isn’t helping.

michael johnson

In 2013 Michael Johnson of The Centre for Policy Studies  published a paper “the local Government Pension Scheme; opportunity knocks”

Today he publishes the sequel, “the LGPS- the lost decade”.

In the intervening period, Johnson has seen none of the ten actionable proposals properly implemented. Instead he has documented the carnal behaviour of the pensions industry , feeding off the LGPS’ corpse. This is all good stuff for journalists but it doesn’t help get things sorted.

Johnson’s proposals have increased from the ten in 2014 to the 2015 today, but they arefundamentally the same, the LGPS should be turned into a sovereign wealth fund, all traces of localism should be expunged and the army of parasitical intermediaries replaced by a single governing body.

Rubbish in – rubbish out

But when you start looking at the tables of statistics that form the basis of the report, what springs out is the inconsistency of reporting.


Taking the combined reporting costs for investments and governance, Johnson demonstrates that the reports of each of the 89 individual LGPS funds,  exhibit an extraordinary range of total annual costs per member.  Enfield’s £592 (2015-16) is a staggering 21 times larger than West Yorkshire’s £28.

Johnson concludes that generally, the larger the fund, or the more in-house the asset management, the lower the cost per member.  He is of course right but with numbers that don’t make sense

One of my friends makes  comment.

 £28 for west yorkshire would make it the most efficient scheme in the country – the best that I have seen is British Steel at £62 – and they have won prizes as the best. The average for medium schemes (100-1000) in the 2014 TPR study was £505.

I think most of us would expect LGPS schemes to operate at a lower efficiency level than a private comparator. The LGPS operates a closed shop on advisers who have admitted a huge range of fund managers into the circus ring.

That the  cost of these consultants and fund managers is higher than it should be is well know. This is being dealt with partly by the new pooling arrangements being interested by big Government and partly by the pressure being put on fund management fees by Unison, through the new reporting requirements which are widely reported in recent blogs.

The system is inefficient and costs are higher. Attempts to break the hegemony of advisers have failed , mostly as a result of the absurd procurement rules of the LGPS which requires a new consultant to demonstrate its track record as an existing consultant. This absurd state of affairs means that there can be no new consultant unless it buys enough of an existing consultant to advertise its track record (for marketing purposes).

But none of this analysis appears in the report. The report shows only the superficial understanding of the deep malaise within the LGPS, ,it talks to reported statistics ,it simply isn’t listening

And are we expected to take note and act on the evidence that Johnson has collected?Johnson himself accepts that many of these numbers are mis-reported, my friend rightly points out that they are incredible, the only purpose of including these numbers seems to be  to grab attention.

Cheap shots at asset managers

If I am being critical of these headline numbers, I am even less  impressed by other parts of the report.


There is a point to be made here but it cannot be made this way. The nominal return of 5.3% on the 89 LGPS funds cannot be compared against 6 arbitrarily displayed returns from indices without considerably more analysis than the reports gives. Again we are seeing headline grabbing at the expense of proper research.

That proper research is being done, by independents such as Sier and Meech, it’s research that doesn’t call for revolution but for each fund manager to re-tender based on a value for money pitch. It may get to the same place as Johnson, but it will do so in an orderly way.

Johnson’s inadequate analysis is an open goal for the investment Association who will do their best to rubbish those doing the detailed work as “all in the same boat”.

Johnson’s big picture is right but…


Johnson is good in disclosing these relative numbers. If we are to believe that there is at least internal consistency in the data he has, then his conclusion that “reported” costs per member within LGPS have doubled over the period seem reasonable.

What Johnson is uncovering is the improvements in cost reporting that see funds such as Middlesbrough, Flintshire and Westminster waking up to smell the total cost of intermediation, rather than what their fund managers would like them to believe.

The conclusion we can draw is not that the LGPS has become more expensive, but that when it fully discloses its numbers, it will be seen to be  more expensive still.

Again, the hard miles that are being put in by Meech and Sier (neither of whose work is acknowledged in this paper, will show that the hidden costs of the LGPS’ fund management mandates are still generally undisclosed.

What can we say about this work?

I very much hope that Big Government is not taking this research seriously. It is headline grabbing but it is not saying anything that we do not know already – and know better. Those who  are trying to fix this problem, are doing so constructively and meticulously. Johnson is charging around in his usual bull in a china shop way, hoping for revolution.

But as with other recent papers calling for an end to the state pension , the replacement  of private pensions with the “ISA family”  and the inversion of pension taxation, Johnson is superficially attractive but not helpful.

We are where we are; people are trying to get by, we are trying to restore confidence inch by inch; each of these loud shouty reports repeats Johnson’s central message, which is that only revolution will work. He is wrong, change has to be incremental, no matter how frustrating that might be to him and his think-tank. It has to be that way because we are dealing here with a venerable and complex mechanism which is a lot easier to break than to mend.



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“Donald Trump… made me an alien”


Our hero – of whom we’re proud

On 1st January this year, Her Majesty The Queen made me a Knight of the Realm. On 27th January, President Donald Trump seems to have made me an alien.

I am a British citizen who has lived in America for the past six years – working hard, contributing to society, paying my taxes and bringing up our four children in the place they now call home. Now, me and many others like me are being told that we may not be welcome. It’s deeply troubling that I will have to tell my children that Daddy might not be able to come home – to explain why the President has introduced a policy that comes from a place of ignorance and prejudice.

I was welcomed into Britain from Somalia at eight years old and given the chance to succeed and realise my dreams. I have been proud to represent my country, win medals for the British people and receive the greatest honour of a knighthood. My story is an example of what can happen when you follow polices of compassion and understanding, not hate and isolation.

Mo Farah, Facebook (Jan 27)

This post is something I, as a British National, feel proud of and – as a human being- I am saddened by.
Putting aside the  arguments about why Pakistan, the UAE and Saudi were not on the list of prohibited nationalities, let’s focus on why countries such as Somalia were. The reason is that to ordinary Americans, most of whom have no day to day contact with nationals of these countries, Trump’s word goes.
When you are appealing to people in such an anti-intelligent way, making intelligent arguments against policies like this, merely deepens the prejudice.
This is not making America great again, it is diminishing it in the eyes of grown up nations who recognise it is not in global interests to put down the weak. It is in all our interests to make countries such as Somalia strong and self-sufficient.
We enjoy diversity, it’s not just sport, it’s business and it’s a social thing. I would give a lot to understand and harness for myself, the spirit that drove Mo to his medals and encourages his countrymen and women to re-start their lives in the UK with such effect.
We do not have a security threat from immigrants so much as from emigrants. The radicals who leave our shores for conflict zones in the middle east, Asia and Africa are a concern, the refugees we are taking from those countries are not.
It was a shame that Nigel Farage and others gave support to America’s new policies on immigration. The origination of people should not, even on a temporary basis, be grounds for their exclusion from any country, America already has the right to ban individuals who pose an existential threat to their homeland- that is quite enough.
While we think of Mo Farah as “a British Somali” or even a “Somali born Britain”, we encourage the alienation. Farah, and millions like him, are as much British as I am. Indeed, his knighthood marks him out as a special Briton who we honour above others.
That the American authorities have now conceded the likes of Mo to enter America from Britain with a British passport makes no difference to this very fundamental issue.
I hope that in the weeks and months to come, British Government, business and ordinary people will make it absolutely clear that the banning of people from entering the United States legitimately, on grounds of origin is deeply offensive to our Britishness and is not something that we consider acceptable in a special relationship.
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Theresa – first in a very short queue?


Steve Bell – Guardian – Gilray above


Sometimes a cartoon will say more than words; this is such a cartoon, these are some times!

Theresa May represents Britain and a set of values that are well know if not well articulated. In recent blogs I have been looking for the right reaction to the new American President. He cannot be ignored but he cannot be adored; I come back to Nigel Farage’s formulation

An imperfect candidate but a necessary agent of change.

I watched the Obamas deal with Trump at Trump’s inauguration and I’ve listened to Leslie Griffiths in the pulpit of the Wesleyan Chapel. For May to be screwed over (as the cartoon suggests), there would needs be an abnegation of all moral responsibility, an abandonment of the aforementioned set of values. This is a test of May as it is a test of Trump, she has shown she can manager her ego, he has not shown he can control his narcissim.

The most shocking thing about the cartoon is its depiction of the point of entry, the shoes tell us it is all wrong. I was at the opening of the White Devil at the Sam Wannamaker last night, it reminded me that the violation of women is intrinsically linked with male power.

There is ample precedent (Gilray and John Webster included) for presuming that May is ripe for the taking. But I am not sure about this assumption. Trump is clearly chauvinistic if not misogynistic, this photo compares the way a gentleman and a chauvinist behaves.


Obama’s attend to Trump’s wife- Trump ignores her


Why Bell’s cartoon is so good, is it incite outrage, not just in its subject matter, but in our own reaction to it. Do we applaud the cartoon, or do we denounce it? Comment on the Guardian website seems to be split.

Brecht claimed comedy should make you laugh in church. Both Gilray and Trump are working at the edge of decency, asking us to consider a bigger picture that will appeal to the salacious and appal the prude. That most of us are both drawn to and repelled by the image, reflects the prurient reaction to Trump. He is both fascinating and revolting.

We demand more from our Prime Minister than such a shallow reaction. Like the Obamas, she must preserve the decency of the “other”, of the world not desecrated by Trump’s lascivious , carnal behaviour.

May must find a way to sidestep Trump and talk with America. My fear, and the cartoon articulates that fear brilliantly, is that May will be forced to adopt the wrong position.

My hope is that Steve Bell has painted an imagining so impossible that it asks us the question “what are you thinking?”.

That most of us will find Bell’s cartoon frightening and funny at the same time, says much about our value sets. Let he who is without sin…

Should we be proud that our Prime Minister is front of the queue? Or furious? Whatever the photographs of the two together show us tomorrow morning, we will not know May’s position – for she is discrete.

But I would much rather she was in that conversation than her predecessor, and that’s not a jab at all male British public schools.

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FCA calls on advisers to take a fiduciary role on transfers.

The FCA has published a very scary note intended for advisers recommending transfers from Defined Benefit schemes .

In its statement published on Tuesday, the FCA revealed further failings in the pension transfer advice market, the regulator said some advisors had not met its expectations over the “critical yield”, a test used by advisers to pinpoint the investment returns needed to match the benefits offered by the existing scheme.

The regulator said some advisers had been recommending pension transfers solely on whether or not the critical yield was below a certain rate set by the firm for assessing transfers generally.

“This does not meet our expectations, we would expect the firm to consider the likely expected returns of the assets in which the client’s funds will be invested relative to the critical yield.”

The Regulator goes on to demand that the receiving product is suitable to the investor.

This is scary stuff. It is only a short step away from making the advisor accountable for the outcome of the investment.

It becomes incumbent on any adviser to know the destination of the transfer payment.

It releases the trustee from the responsibility for ensuring the money is going to a sham investment where the investor will be scammed.

It effectively transfers the fiduciary responsibility for the transfer from the trustees to the adviser who- as I read things- has a stake in what happens next, if only on the liability side.

As my friend and fellow blogger Abraham is pointing out, managing drawdown to achieve a critical yield as low as some of the discount rates used for CETVs is no cinch .

Whether you use a natural yield, total return or just rely on a 4% rule of thumb, any drawdown strategy is running the risk of what is called a black swan event. Take for example a cancellation of units at a point when the price swung against you for 500 bps for liquidity reasons or a trade executed at a point of market panic. It is not possible to predict or insure against such possibilities using unit-linked funds.

So advisers are going to be very wary about being accountable for the outcomes of the plans into which moneys are transferred.

They cannot – if they are referring to this FCA paper – simply ignore the destination, even if they are no party to it. They must do due diligence not just on the critical yield but the vehicle used to manage the investment. Cash is a no-no in terms of a critical yield, but so will many ultra safe bond strategies. Indeed the ruling suggests, what we already know, that to achieve the critical yield, the investor will have to take additional risk.

What is not clear is whether a declaration from the investor that he or she understands the risks of the drawdown product, is a proper protection for the adviser.

Linking the adviser’s reccomendation to the product used to manage the transfer is a scary thing for advisers. It may mean that the high cost wealth managment vehicles often employed are simply too “risky” in terms of yield drag, to be fit for purpose.

I suspect that IFAs will find it harder to reccomend transfers into vertically integrated SIPPS with proprietary investment strategies and easier to reccomend simple products with low transparent costs.

While the FCA paper has been taken as a means to protect transferees from scammers, I suspect it is as much a means to protect IFAs from an over-exuberant confidence in their financial invincibility.




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Of discontents and malcontents


Discontent is the first necessity of progress – Thomas A Edison.

The negativity that surrounds “Washington” and a the feeling that politicians have let America diminish , spawns Trump and the ambiguos promises we had in his inauguration speech.

Trump is taking over an America that by any measures  is great again.


It would be easy to display a series of charts to show that America has been getting great again over the eight years of Obama’s tenure of the presidency. It is hard to rebuild and easy to tear down.

On almost every policy initiative announced by the Trump administration (and set out elegantly in this article) the destruction of the Obama construct will result in life getting harder not easier for his core voters.

But Trump is a businessman who knows from his own dealings, that executives can get away with anything – so long as they have control of governance.

On trade agreements, foreign policy, military expenditure, healthcare, gun-control, tax, mortage insurance and energy, the short-term impact of the Trump reforms will raise the spirits of those who see controls as shackles. But the long-term impact of a protectionist, low-welfare, high-carbon United States will not be an America this great again, but an America divided between its booming cities and its discontended rural and manufacturing bases. The return to a healthare free for all , will hurt the poorest hardest. It will not be great to be sick and not afford the treatment to recover.

In response to yesterday’s blog, Dave – a regular – posted a contract between Trump and the American People which has Trump’s signature on it and space for the signature of the individual citizen who endorses it.contract2

It’s pretty cool to sign a contract with the President of the United States (downloaded from . But the contract’s a fake. Just as Trump the businessman is the fake protector of worker’s rights.

Fake compared to what?

It has become trendy to put Brexit and Trump in the same box. It is not that simple. While there is discontent in Britain about our position within the EU, we are not malcontents.

My problem with Trump’s plan and behaviour is not mirrored by my admiration of May’s plan and behaviour. The way we are changing our relationship with Europe is not with a sledgehammer but with courtesy.

The reason I am focussing on behaviour and language is because these are the aspects of a leader that define the sincerity of the enterprise. Compare the swagger of Trump’s contract with the simple promises made by May when she returned to Downing Street and you will see a difference.

There is a difference between discontent and malcontent, the former yearns for change and for a better world, the latter is permanently seeking the destruction of whatever political order cramps his or her style.

There is no doubt that the Referendum Vote showed that we were discontented. It is not however resulting in a million women taking to the streets to protest about how change is to be implemented.

There is clear evidence with Trump’s election that not only has Trump not got popular support but that America is split between those who want gradual reform and those who will sign the Trump Contract.

The reason that I seek touchstones in this, is that I want to be clear in my own mind, in what I say on this blog and in my behaviours at work and at play, of my position. I think it is beholding on anyone, whether they are from the elite or not, to do the same. I don’t regard myself as elite or expert, I see myself as someone who is looking at society and commenting where I can on what I see (see numerous blogs on Piers Plowman).

Maybe some people will use my position as a touchstone for thiers, Dave clearly won’t – or may help define his position as being different from mine – that does not make us enemies!


I will shortly be going to church (Wesley’s chapel), and – for the first time in my life- I am looking forward to doing so. I follow Lesley Griffiths – not on social media – but for his deeply held convictions which I see as grounded in his faith as a Christian. I generally follow the teachings of Jesus Christ as laid out in the new testament and I can say the creed without too much cavillling.

If this makes me part of a herd, then I must accept that could be a criticism, though I would say it could be a strength, if the herd is moving in the right direction.

Griffiths is a discontent of the first order, he rails against injustice and he stands up to it – he stands side by side John Lewis in condemning the behaviour, language and policies that have emerged in the United States with Donald Trump.

He is not a malcontent, if you go to the Wesley Chapel or listen to him on the radio, you will know that!

I can be discontent but I cannot be a malcontent. As Dave rightly points out, most of my blogs arise from discontent! But I am not implacably opposed to the institutions of pensions, nor those of the State. I can see a lot of good in Jeremy Corbyn (search Corbyn on this blog to see). I can see a lot of good in Theresa May.

I am historically a Liberal , pro membership of EU and keen on social justice. I accept that what I wanted from the EU has not been delivered – eg general harmony in this country, I am a democrat and will accept the referendum.

A discontent not a malcontent!

Trump triumphed (against the odds) and even if he has not got a popular mandate, he won by the rules. I do not question his right to implement what he said on the stump. But I cling closely to my right to shout loudly that his policies are wrong , his behaviour is wrong and his language is wrong.

And that does not mean I feel the same way about those who are taking us out of Europe. I am a discontent – I am not a malcontent!



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Trump #Inauguration – fake views



When I don’t know how to react to something, I follow the behaviours of people who do. It is a very good dictum! Trouble is ,some of the time, I think I know how to react and end up adopting positions which I subsequently regret. The views in this blog are not my own!

I didn’t know how to react to the Referendum Debate or the decision we took to leave the EU. Thankfully I could follow my partner and two noted business leaders (Stephen Kelly and Nigel Wilson) and a conversatin with Nigel Farage. I got a handle on how I felt by watching others.

Similarly with the campaign, the phoney war and now the Inauguration of Donal Trump.

To find the right reaction which dignified those who Trump was dismissing but empathised with those who supported Trump in hope and out of desperation, but mostly to my Minister Lesley Griffiths and Barack and Michelle Obama – whose behaviour throughout the ceremony was in sharp contrast to much going on around them.

An ambiguos message inciting hate through the language of love

Trump’s message is violence;- hostile to Islam, hostile to the political order (Washington) and hostile to the achievements of the previous eight years.

It is appealing, and I have watched and felt for the man who held a flag at half mast for the 8 years of the Obama administration awaiting the mighty leader that he sees in Trump. One woman told ITV news that she didn’t even care what Trump delivered, so long as she felt he was on her side. That is one of the scariest statements of the past few weeks.

Trump’s hostile message is appealing as it is couched in patriotism. But that patriotism is not noble, it cannot justify its prefudice because it puts America first. It is hostility, it is  violence and it will end up demeaning America – not making it great again.

This prejudice springs from  a faith that if something comes out of Washington it cannot be good. This bigotry is encapsulated in a line in Trump’s speech.

“At the bedrock of our politics will be a total allegiance to the United States of America, and through our loyalty to our country, we will rediscover our loyalty to each other -when you open your heart to patriotism, there is no room for prejudice.”

There are two ways of reading this.

The first as a call to national unity where differences of religion, colour or financial status are banished by patriotism.

The second is the opposite; Trump is suggesting that a patriot cannot be seen as prejudiced, putting America first can justify any action.

I heard the second way.

Trump’s vague language allows ambiguity, it is slippery, it is fake.

Fake evangelism

Not only in the language of love, Trump’s speech is written in the language of the bible thumping evangelists who have always held authority over blue collar America.

By couching his speech in this cod evangelistic tone, Trump assumes the role of pastor, exciting messianic responses. I see this as an extension of his narcissism, he wishes to see himself (and to be seen by his flock) as a little like Jesus.

Trump’s appeal is summed up by his swearing his oath of allegiance on his mother’s bible – an act of stunning humility , vulgarity or downright blasphemy – Trump really rolled the dice on that one.

As Trump spoke , my mind turned to Lesley Griffiths and to the treatment of John Lewis on the Selma Bridge and to the words of Trump to Lewis on hearing he would not attend the Inauguration.

My reaction to Trump’s Inauguration speech is to reject any suggestion that Trump is acting as a man of God. I know my men of God and he is not one.

The mighty way

Then there is there is that phrase

“when you open your heart to patriotism, there is no room for prejudice”.

I take the equation in its simplest form – “a patriot cannot be bigoted” and then I looked at Barack and Michelle Obama and followed their behaviour throughout the televisual coverage. There is a telling shot when Trump strides ahead of his wife, it is the Obamas who looks out for her.


This is the lasting image of the inauguration for me – not Trump’s mother’s bible held by his wife. I look to the Obamas as the way to react to Trump. There is a grace and dignity in this inauguration and it is summed up in this picture.

I also look to John Lewis and Lesley Griffiths

Lesley Griffiths walked hand in hand with John Lewis over the Selma Bridge in 1988. 23 years before, John Lewis had had his skull cracked open on that same bridge.  John Lewis led the boycott of the inauguration and Lesley preached of tolerance and inclusion – in a mighty way.



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A suffocating man craves the foulest stench.


Such is the pressure on trustees and sponsors of our defined benefit schemes to appear solvent, that they welcome the transfer of their potential pensioners to “cash” as a suffocating man breathes fetid gas.

It is within the capacity of trustees to reduce cash equivalent transfer values (CETVs) where they consider there is insuffecient money in the scheme to meet the full payment, but very few trustees trigger the “insuffeciency report” that allows this to happen.

The result is that schemes pay CETVs in full that are likely to do long-term damage to the scheme , though the act gives short-term respite. To understand this extraordinary state of affairs, we need to delve beneath the covers and understand how schemes can use different discount rates to value the same liability. In dong this, we can begin to understand the inanity (in not the insanity) of applying a mark to market valuation system to long term liabilities.

I write as a non-actuary, you may read as an actuary – if I mistake, forgive.

Here’s how it works

Actuaries give a long-term estimate of the likely returns on each class of assets. This is based on history and adjusted to the particular circumstances of today. Although there are times when bonds outperform equities, the long-term trend is for the reverse to happen. This is what is called the equity risk premium.

Schemes that invest 100% in bonds get none of the equity risk premium. Transfers that are offered from these schemes are very hight, that is because the “discount rate” that is the rate at which the long term cost of paying a pension is reduced by investment returns is very low. At the moment, the discount rate using gilt returns is lower than the projected rate of inflation. That is what is making some transfer values extraordinarily high.

Schemes that invest primarily in equities have much higher discount rates. This is because the assumptions of long-term returns on equities give for a much higher anticipated return. This means that the future liability of paying a pension is much lower. Schemes which invest in equities give much lower transfer values.

An ordinary person would question why any trustee would deliberately invest over the longer term, in bonds, which are expected to give lower long-term returns. The expert will reply that though bonds give less return, they also are less volatile. Since volatility impacts the corporate balance sheet, companies would rather take lower long-term returns than higher volatility. They will also point out that if a company goes bus, the holders of bonds get paid before the holders of equity, bonds are a safter bet.

You can already see how conflicted a trustee can be. It’s in the long-term intersts of the scheme to be invested in equities but in the short-term interest of the company to have stable funding. In the short term, the scheme is safer in bonds than equities, in the longer term, being in bonds suffocates the scheme which will require artificial respiration (though massive cash injections from the sponsor).

In the CETV – these conflicts crystallise.

Why transfers are such a problem is that they crystallise a long-term liability into an immediate payment.

The transfer value is calculated to the particular asset mix of the scheme. As we have seen, this depends on the bond/equity mix.

However the valuation of the scheme, for the purposes of the company’s account and reports, is based not on the bond/equity mix but on a decision determined by the accounting standards prevailing under IAS19. These demand that the discount rate, whatever the asset mix, is consistent and consistent with the bond discount rate. This makes liabilities very expensive and is why most schemes are showing an accounting deficit. Were schemes able to report using the method used to calculate transfer values (known as best estimates) then in aggregate, schemes would be reporting a surplus of assets over liabilities.

Looking at the chart below, the blue line shows how our top 6000 funded DB schemes would look if they were paying transfer values (best estimates) and the purple line shows how they look for accounting purposes (PPF solvency).fabi-graph

Why trustees will breath foul air (rather than suffocate)

Every time a trustee pays out a transfer value, he/she is paying out less than the accounted for liability (unless the discount rate for accounting and transfers is the same=100% bonds). So the technical solvency (for accounting purposes) is improved by paying transfer values.

But it breaks some trustee’s heart; for trustees want to pay scheme pensions, it’s what they were put on the planet to do (well that’s a bit of an exaggeration but you get my drift). More importanly, trustees have sleepless nights worrying what happens to the transfer value after they’ve given it up.

Trustees will let their babies go because the alternative is even more horrible. They will breathe toxicity rather than suffocate, even if the toxicity means they suffer later. For the money paid out today, will be needed in years to come, and where schemes are seriously underfunded (on any basis) and where the scheme is not reducing transfer values (for whatever reason) then the payment of CETVs today will be to the long-term detriment of the scheme.

Why don’t trustees reduce transfer values (when they could)?

This is a question that the Pensions Regulator ought to be asking right now.

Talking to my colleagues, I think there are two answers.

  1. Trustees are naturally inclined to have confidence in the recovery plans they have negotiated with their sponsors. An insuffeciency report is a vote of no confidence in the recovery plan, and by extension in the capacity of the sponsor to meet deficit payments. Not only is such a plan an insult to the sponsor, it’s an admission of defeat for the trustees.
  2. By reducing CETVs offered, trustees are reducing CETVs taken up.This is simple maths and has nothing to do with discount rates, if you reduce the CETV by 20% you increase the critical yield needed from the investment of the transfer by 20% making the taking of the transfer much less likely.

So trustees will pay transfer values they cannot afford rather than not pay transfer values at all, that’s because of the pressure from mark to market accounting from the IAS19 standard.

And what of the future?

If we see inflation rise, we can expect to see interest rates rise. If Mark Carney decides to stop issuing bonds to fund QE, then the yield on bonds will rise and if he does this as interest rates increase, the yield on bonds will rise quite sharply. This will ease the pain of the value of the bonds falling (the great virtue of a fully matched portfolio). But it will mean that transfer values will fall too, for the bond component will drive up best estimate discount rates. Only schemes with a high equity investment will see stable transfer values.

Ironically, what economic theory tells us, is that all this will happen because the economy is growing again. Equities do well when there is economic growth. But if schemes have sold off their family silver to pay large numbers of transfer values, they may not have the equities to properly benefit from any upturn.

At this point, the long-term toxicity of breathing foul air (paying full CETVs) will be fealt.

We are seeing (with the Royal Mail and perhaps we will see with USS) the impact of moving a scheme fully into bonds. There is no scope to pay future accruals at the Royal Mail (other than to call on the employer to fund the scheme at unaffordable levels).

The reason schemes like the Royal Mail adopt high bond exposures is to reduce volatility for the employer and to please the members. These are precisely the reasons trustees give for paying high transfers (members get “freedoms”) employers get away with paying out on the blue line (above) which improves their purple line (above).

But the future of accruals at the Royal Mail currently looks bleak, and the capactity of many schemes denuded of cash from over-payment of CETVs also looks bleak.

The problem (as a former Government Actuary pointed out this week) is that we haven’t worked out whether we love our DB schemes or loathe them. If we loathe them, then lets buy them out or consign them to the PPF (pre-packing our businesses into administration). If we love our DB schemes, let’s take care of them, let’s use insuffeciency reports where they are needed, let’s live with some balance sheet volatility and let’s get our scheme into equities while we still can.

And for heaven’s sake – let’s stop talking about CETVs as de-risking. What happens to transferred money is fraught with risk!


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Over-consulting ; not a victimless crime!

I was “distressed” to read of a new way of extracting fees from the sponsors of DC pensions, the value for money review/assessment.

Ok – I wasn’t distressed – I was cross! Value for Money is not as complicated as “experts” would have you believe!

Chris Roberts, professional trustee at Dalriada Trustees, said one of the most difficult aspects is “defining what value for money is”. A key concern is getting the best possible member outcomes and encouraging additional contributions while “doing whatever you can in terms of communications”.


and there was me thinking it was about funds- oh wait!

Trustees should also be focusing on investments and making sure they are providing returns, he (Chris Roberts) added

This is clearly beyond the scope of ordinary mortals  – we need experts.

many trustee boards “paper over the cracks” with “a light touch value-for-money review”.

Concludes Chris Roberts (a professional trustee)

 “If you’re not going to do a value-for-money review right, don’t do one.”

Bottom line – as any consultant will tell you, this is tough- you need an expert.

This wheeze, paid for out of whatever pot is earmarked for funding workplace pensions (e.g. the contribution pot), enables trustees to discover whether they are getting value for money. Of course it has to be careful not to be over-critical

“ (trustees) need to be very careful of the messaging to members on anything that could be mistaken as critical of value – unless of course it really is bad value – in which case the trustees have not done a very good job to date”.

It is hard to imagine a Chair’s statement that is going to say “we have a rubbish scheme because we are rubbish trustees”.

The value for money review seems to be an endorsement of the scheme and of the trustees and by extension of the consultants who helped set it up. Like the concerns about IGCs putting members off saving by criticising the insurer, the advice (from Mark Futcher of Barnett Waddingham) suggests the VFM review is a kind of placebo , a part of a communications strategy.

We learn from the same consultancy that the VFM review should have a broader terms of reference.

When assessing value for money, “every aspect which contributes to making DC needs to be reviewed, such as administration, governance, providers, consultants and suppliers, communications and engagement, contributions, costs and charges, investment and at-retirement framework.”

Presumably, those conducting these VFM reviews will be independent of the existing consultants providing admin, governance, comms and er..consultancy. This process could have an infinite regress with the existing consultants auditing the VFM consultants and so on, but that would be silly (or would it – please forward this idea to the DC strategy team -ed.)

The cost of such an analysis could sufficiently erode member value and inflate the “money” spent , to make a good scheme bad. In any event, the process would muddy the transparent waters to no obvious benefit than the consultant’s.

Trustees have no need, no money and won’t find value!

Trustees and IGCs do not need to be using consultants to assess VFM. They need to be using their experience and their conviction. What they need is data. They need to know how much value has been generated by asset managers and how much money this has cost. The cost is of course the hard bit as it involves looking behind the AMC and seeing what has been leaking out of the fund by way of hidden charges (Loch Ness monster stuff).

There are of course a lot of other things that a member pays for than asset management. Members have to pay for communications, admin, governance and er…consultancy though not all these costs are born out of the AMC either, most of them are born out of the employer’s contributions to a member’s pension pot.

There is a project underway to try and benchmark the value for money of these non-investment services, it has been commissioned by the IGCs from a consultancy called NMG. I very much hope that the findings of this research will be made public and not just used by the marketing and strategy teams within insurers for “benchmarking” purposes.

I am far from sure that consultants, who are often part of firms offering services on the broader list, can be expected to be objective in assessing value for money. For “objective”, substitute “deeply conflicted”. Trustees must be able to measure the value of their outsourced service suppliers, independently of those suppliers. Self assessment is crucial ,trustees should back themselves as judges.

Consultancy – who really pays?

NMG will be measuring things within the AMC, those costs incurred outside the AMC, typically considered “DC consultancy” are part of a different conversation, one about the employer’s commitment to the long-term outcomes of the member.

If DC trustees were as tough on employers as DB trustees they would be querying the employer’s covenant (by way of contributions). They would be looking very closely at any expense passed on or incurred directly by employers on behalf of the DC scheme. (for instance the cost of AE middleware or additional payroll software). For these costs are at the expense of higher employer contributions to a scheme.

The Trustees must be aware that  the contribution into a DC plan is the a priori determinant of outcomes. Though investment returns will eventually form a larger proportion of the DC pot, they cannot be achieved if the money wasn’t put in the pot in the first place

Ensuring that there are as few impediments to greater contributions as possible – is within the trustee’s gift. That means being extremely careful not to commission unnecessary reviews.

We aren’t there yet and we won’t be soon; especially if we allow consultants to audit the expenses of consultants.


Value for Money – self assessment preferred

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“Bill it to the fund”- why the TTF calls for full disclosure.


(Brief)case study

I didn’t quite know what the smart gentleman meant when he offered me a drink in a first class carriage coming down from Manchester.

“It’s ok – we’re billing to the fund”. Then it dawned on me, the cost of his round of drinks formed part of an expense claim which (I later discovered) included full price first class tickets and overnight accommodation for a marketing visit to a conference”.

The logic was impeccable, the sales team would not stay overnight for anything less than five star treatment, the fund needed to be primed by “new-flows” generated by the sales team so the fund should pick up the cost.

Somewhere , deep in the back office of the fund administrators, the invoice for the round of drinks would eventually be settled from cash uninvested and earmarked for such tiny claims.

I declined the drink, my ticket was issued at a fraction of full cost, I was almost glad that my ticket was being subsidised by such extravagance, until I realised that I could be a unit-holder in the fund paying for that round of drinks.

A victimless crime?

The dilution of the impact of each individual claim absolves each participant of personal accountability. It is the collective impact of all such claims that makes a difference. The FT runs the story this morning “fund chiefs ‘seek meal expenses from pension savers’. The FT quotes Ralph Frank, an investment consultant, Chris Siers, an academic and Andy Agethangelou an evangelist. But they have evidence on their side. When I worked with Novarca, I was shown hard evidence of the lines in fund accounts dedicated to “entertainment”.

The Investment Association are not denying that personal expenses are being met, not from the annual management charge but on top of the management charge.

 The Investment Association, which represents fund managers, said its members would not charge meal and entertainment costs to consumers and it would be “irresponsible” to suggest they were.

“There are no fees and expenses for defined benefit savers — they receive the benefit they are entitled to,”

There is a deliberate confusion of ownership here, worthy of Donald Trump. The cost of these expense claims is born by the funds into which defined benefit schemes invest, it’s impact is in lower fund performance which contributes to lower surpluses or higher deficits. The cost of meeting these expenses falls on the sponsor – typically the employer who can pass it on to the member in higher contributions or lower salary. The wealth transfer is exactly the same as in a DC scheme, it is simply less direct.

The work Dr Chris Sier is doing in creating a template which will reveal such costs where they are being incurred against the Local Government Pension Schemes is quite outstanding. It will mean that all the individual expense claims and their aggregate effect will be visible to those running the fund. The LGPS represents a substantial chunk of our council tax bills. For many of us, the amount we pay towards LGPS pension costs is more than we pay into our own pension. These fund expenses contribute to that cost. These casual expense claims are not a victimless crime.

Transparency is the only answer

Practices such as that in the (brief) case study are replicated countless times over the course of the year. They are permitted under the slenderest of excuses, that they are legal. That means that somewhere in a 20,000 word investment management agreement, a fund manager has granted himself the right to take “reasonable expenses” from the fund to meet certain costs of the fund. The division between the stated annual management charge and costs made directly to the “net asset value” of the fund can be critical to the commercial success of the fund.

The only way that we can understand this division of spoils is through Government intervention, which is why the TTF is right to call for full disclosure at the fund management level. Even if this means that the overt charge (the AMC) increases, full disclosure will ensure that the bellies of the fund managers and their marketing teams are not lined at the expense of long-term returns to unit-holders.

The complacency of the fund management industry, so evident in the quote from the IA, means that voluntary codes haven’t and won’t work. The asymmetry of information is loaded against the consumer, all the cards are with the fund managers who collect, manage and account for the money. To date they have hidden behind legal agreements, inscrutable accounting policies and the Investment Association. This cannot go on.

That is why I support the work of Andy Agethangelou, Chris Sier and Ralph Frank and why I am a member of the TTF. It is why I am proud we have a free press that can publicise its work. Two articles on this subject appear in the FT today, the links to them appear below.


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FAKE NEWS – eroding the credibility of pensions.


“Yesterday I ran a blog complaining not about fake news but about misinformation accompanying the news. MOMENTUM – hang your head in shame!

The news Momentum has is that the vast majority of people over 55 still don’t know when they are going to retire. There is of course an easy way to find out when your state retirement age is but the Momentum press release decided to ignore the complicated taper that means those over 55 get their state pensions not just down to the year but down to the month.

As the value of a full state pension (already around £300,000 on a free mark to market basis) is increasing every year due to the triple lock, Momentum’s story could have focussed on ignorance of the (relatively) new rules for the over 55s and the importance (post WASPI) of planning around the income the new state pension provides.

Instead, their survey focussed on an amorphous concept “the affordability of retirement”. It is almost impossible to predict.  How people “know” when they can afford to retire from as young as 56 is beyond me!

If you ask someone to predict their financial circumstances in five years time, you are asking a difficult question that calls into question health, capacity to work, inclination to work as well as someone’s financial circumstances. We know for instance that once kids leave home, divorce rates surge – we know too that the workplace for a 65 year old offers a different set of opportunities than for someone ten years younger. But we don’t know how the cards will fall for us.

All that we can readily do in our younger years is establish insurances for ourselves against our later life. I would recommend stability in relationships as a good insurance but recognise that factors such as “love”, “self-respect” and “adventure” can trump financial security. Similarly with health and with personal liabilities like second families.

We can “afford to retire” only when a series of circumstances align themselves, probably the most important of which is that our expectations for the future are matched by our perception of our financial resources. I use the word “perception” because there are a lot of 70+ year olds who return to work either because they cannot live without work or live without work’s wages!


One of the dictums which made sense to me as a young adviser was that a pension “insured someone living too long”. The certainty of a defined income paid till death us do part is the soundest insurance, it is what the state pension offers. It is what is given up if you take benefits from a defined benefit scheme and invest them privately.

There has been very little research done on people over 80 living by their wits on their investment income. I suspect that this is because there are relatively few people with drawdown policies that have survived the past 20 years (both personally and financially).

It would be easy to research what is going on, SIPP providers and insurers can see the financial consequences of decisions taken, but have no idea what motivated the spending strategies of those in later years. I would be pretty sure that the data-set would be limited and distorted by the high levels of financial awareness, advisory support and back-up wealth available to the over 70s with extant DC pots.

So , for the people Momentum are asking, there is no way of knowing whether they can afford to retire – or even that they have the insurances in place to ensure they can live comfortably as long as their bodies let them.


As I have tried to patch-out, the certainty that we can afford to retire is based on a general sense that things will be alright that covers liabilities, health, life expectancy and  (return to work) expectations. It is foolish to expect the majority of  people to have that certainty. The best that we can hope for is that people are financially aware enough of what is likely to happen , to feel they have insurance.

One of the things that the financial services industry can do, which I have yet to see it attempt, is to accept that for most people the insurances against living too long are

  1. The security of home ownership
  2. The expectation of the new state pension (and older age benefits)
  3. On-going capacity to work.

The amount in private pensions will vary, but we know from Unison figures that even those in public sector pensions only average a £4,500 DB entitlement, just a little bit above half their state pension.

The average DC pot is still under £40,000, which would buy a DB equivalent annuity of not much more than £1000 pa.

For most people, even the relatively “wealthy” DC investor, the contribution from their private pensions is dwarfed by the equity in their homes, their state benefits and their on-going capacity to work.

This sense of perspective is sadly lacking in the financial services industry. Why I was so annoyed by Momentum’s sloppy press release was that it implied that people’s retirement savings were key to making retirement affordable; in doing this they dismissed state pension entitlements to a sweeping statement about state retirement ages – which was wrong.

It is in the interests of those selling savings and drawdown products to promote the value of saving and spending these savings as the key to an affordable retirement. But for most of us it is not key. What is key is that we understand our big assets, how they work for us and what we can do maximise the private savings and insurances we have built up – so that we can afford to retire.

Jeff Prestridge has written a brilliant blog in the Spectator this week in which he complains we no longer have a pensions system. (just a mess left by the Treasury). We all know that the Treasury no longer recognises pensions as is evident by their Christmas savings info graphic.


The Treasury’s pension free world


Not only has Government destroyed the private annuity, they have squashed the defined ambition project and mothballed CDC as a collective way to spend our savings. No doubt they do not see the payment of national insurance as part of our “saving for retirement” either – the state pension does not sit easily on this glib info graphic

In the absence of any reasonable way of converting savings into lifetime income, the DC/ISA savings that we have are the last thing that we think about when asked the question “when can we afford to retire”. The technology solutions touted by the “wellness” brigade are glib nonsense, they are no more than a placebo, they are not a cure.

It is time those of us in this game adopted a little humility and respect for our customer’s difficult decisions. The very least we can be is accurate in the information we give them. Momentum should be more careful in future – so should the Government!


enough of this glib nonsense!

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End of the road for LDI?


Thanks to those brave souls who braved “Southern”, the tube strike and filthy weather to attend yesterday’s lunch which asked “has LDI had its day?”.

One answer to that question was clear, I learnt that the top performing asset class last year was index-linked gilts! If this is the end of the road, then the car-crash will be at speed!

What this means is that today, if you hold what the pros call linkers, you are sitting on a pile of notional profit. You could go and cash in your chips and be well pleased with your investment.

Investment? Have you invested or speculated? Or just moved around the furniture?


I have been reading a very worrying article on a blog called Bank Underground (Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies).

The particular article that worries me is this one in which a Harvard economist looks through 8 centuries of history and concludes that we are in one of the longest bull runs since 1200 (AD) created by an almost unprecedented 12% drop in interest rates.



My friend and economic mentor Con Keating has commented on the outlook for interest rates as follows.

“my econometric models have been telling me for a while that we had a turning point in gilt rates back in July/August”

This comment sits in the middle of some very gloomy analysis of the exposure of UK pension schemes to any kind of bear market in bonds, an exposure exacerbated by the derivative positions adopted by schemes supercharging their bond exposures by borrowing through the derivatives markets.

It will be very interesting to see the total derivatives exposure of pension funds when the ONS publishes MQ5 – based on my projection of last year’s exposure growth it should be around £370 billion

Con speculates that the “unravelling” of the derivatives positions may have already have started – if so the ONS (office of national statistics) figure may be lower. But Con is confident enough to make this prediction

If all the money spent on LDI had been invested in the companies as part of their capital, we would have increased this by about 35% – the average credit quality would have improved from BBB to AA-, we also would not have had any of the issues over dividend reserves and covenant compliance

To put it another way, if pension funds had spent their money over the past 10-15 years investing in companies equity rather than in debt, we would have stronger more valuable companies , capable of paying more dividends and (dare we say it) finding it easier to pay their pension premiums!

Computer says “oh no!”

Con’s big econometric model throws out these findings, which many pension trustees and investment consultants may find indigestible….

LDI has stripped between £500 billion and £1 trillion out of DB (Funds and Sponsors)- now a lot of that is opportunity cost but the direct costs exceed £500 billion. In that time the actual cost increases – longevity and inflation – are about £250 billion on the £550 billion that we started with back in 1995. This is a major part of the profitability of the financial services industry over the time

But the question is whether the journey/gravy train is over?

Paul Schmelzing, the Harvard economic historian who compiled the chart at the top, sees three recurring themes that mark downturns in bond market

  1. A sharp increase in inflation
  2. A “bond massacre” where a bubble bursts
  3. A sustained dumping of bonds when investors see “value at risk” from a lack of creditworthiness.

Without going into the UK context in detail, Schmelzing suggests that global conditions are ripe for a kind of “triple whammy”.

Useful equities swapped for useless bonds?

As we have seen with schemes such as Royal Mail, Trustees have recently sought to “immunise” their liabilities by holding bonds (almost exclusively). This is considered a perfect hedge as bonds increase with liabilities.

Con Keating argues that the perfect hedge is the cash needed to meet future liabilities.

The Royal Mail’s bond holdings will have done well in this bubbly market , but they have not been much use to those in the scheme expecting to keep building their defined benefit through “future accrual”.

The problem the Royal Mail has is that because the scheme assets are producing negative yields, the surplus is being eaten to meet future awards, very soon the surplus (created by a change in the benefit structure a couple of years ago) will have run-out and the cost of meeting future accrual will fall on the employer. The cost will increase from 17 to 50% pa of the pensionable pay. In a competitive environment, employers cannot find an extra 50% on the wage bill to pay the pension subs.

The reason that the cost to the employer goes up is that the actuaries recognise that the scheme cannot generate its own returns. All those bonds are useless other than a s defensive measure protecting the risk of interest and inflation going up. And history teaches us that changes in the price of bonds can be affected by more than a reversal in inflation but by panic sell-offs (the bond massacre of 1994) or because an over reliance on debt makes the company or country a risk to lend to (the VAR sell off).

All this should be very uncomfortable reading to trustees and investment consultants sitting on a huge pile of debt, much of it within LDI programs. For schemes with any kind of outlook -e.g. schemes not actually on the glide-path to buy-out, these holdings in bonds look anything but risk free. Relative to holdings in real assets like equities, property and infrastructure, debt-holdings do nothing and can present a very real risk in terms of over-supply and credit.

Liability Driven Investment is supposed to be about “de-risking” pensions, it may be the plague that destroys them. I asked Con to what extent the situation is recoverable, this was his reply

To a large extent the damage is done, but some is recoverable – the lower implicit rates embedded in valuations are positive, for those schemes which continue, but the problem is that many pensions have been paid and the remaining stock is smaller. CETVs are an example of irrecoverable cost to the pension fund

We are busy overpaying transfers and buying out pensions through annuities at huge cost (both real actual and  in terms of opportunity). Con concludes

This has to be the largest self-inflicted wound in the history of finance – but it paid the financial service industry well.

While our lunch ended on less gloomy terms, I could not help thinking that an industry that could congratulate itself on speculative returns from index linked gilts, had rather lost the plot.lost-the-plot


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Is there really a “fail” at the Royal Mail?


Collecting and delivering post is hard work (much pay is deferred so workers can retire in ease)


The Royal Mail is consulting with its staff on closing its final salary scheme to future accrual. This is a public consultation, the Royal Mail are putting it to their staff that an increase of pension contributions to 50% of pensionable pay is unaffordable.

I don’t think anyone would disagree. If you are competing in a market where the market normal is 2% (1+1), it is hard to see how you can remain competitive , pay such contributions and continue to employ large numbers of sorters, postmen , counter staff , even managers. From a business perspective, such pension contributions would result in mass redundancy.

From the staff’s perspective, I suspect most would consider they could do rather better with something like a 50% increase in wages!

With both Unite and the CWU threatening industrial action, it is clear that something has gone wrong – but what?

Royal Mail says that it could not afford an anticipated rise in the annual cash cost of the plan to about £1bn starting in 2018, up from £400m at present, caused by a deterioration in financial market conditions. It is currently drawing down a surplus in the fund to supplement its contributions but expects that to be exhausted in just over a year.

The projected costs increase not because the fund is in deficit, it isn’t – but because the fund has no means of generating an investment return needed to meet future obligations – if the scheme remains open to future accrual.

The fund is almost entirely invested in bonds . Bonds have de-risked the scheme but emasculated it. If it is to close, the scheme should be no burden but if it is to stay open, it will have to become a pay as you go arrangement with the employer paying as the members go.

The scheme is in bonds with good intent. The Trustees have listened to the advice of commentators who argue that it is good economic sense to match liabilities and assets. The trustees have secured the existing members from the perils of the PPF and satisfied the Pensions Regulator in their prudence.

It is hard to blame the Trustees for doing what has become “received wisdom” but it is equally hard not to point to the absence of any growth producing assets in the fund as the root cause of the problem. The £7bn odd of the £7.6bn fund is buying various debt instruments at a time of massive demand and under supply, those assets are over priced and are producing no real yield. This is the institutional manifestation of the transfer value problem we have been looking at in recent days. The Royal Mail transfer values should be looking marvellous with the discount rate trending to zero and no insufficiency report, critical yields should be on the floor.

But the solvency of the scheme today, is at the expense of the viability of the scheme tomorrow. The only way that the Royal Mail can reverse out of this situation is with the help of the Trustees. Were the current bond positions to be unwound and the scheme reinvest with an eye to growth, then a best estimate approach to the funding position would see the eye-watering £1bn a year being demanded in future contributions , drop substantially.

But – and there is a but – this would be to unwind the current plan of the Trustees. It would be to ask people with strongly held beliefs to accept that they have been mistaken in acting with the courage of their conviction. This is a big ask.

A couple of days I met with Nigel Wilson , the CEO of L&G and I asked him what was the cause of the “pension crisis” we were in. I looked around the room expecting him to run to a computer and show me a snazzy chart showing market data. But there was no computer, there were just some books and chairs (and a lot of pictures of Newcastle United players).

Nigel Wilson thought for a second and replied.


If the cause of the pension crisis is “people”, then my computer says the solution to the pension crisis is also “people”.

The problems at the Royal Mail are to do with the Trustee people’s obsession with managing economic risk – an obsession fuelled by the weight of their advisers. But they have acted blind to the long-term market lessons that over tell us that de-linking a scheme from the economic growth of the market will lead to failure.

Failure is an inability to meet what Con Keating calls “the initial grants to members”.

The 90,000 Royal Mail workers and their representatives have been granted rights to pensions based on assumptions of future accrual. When these grants were made, they were considered economically viable. To most ordinary people they still are economically viable. But to the “experts” they are not economically viable, they represent an unacceptably high risk.


Experts (even postmen) can get it wrong (with good intent!)


I worry that, as with the pension scheme of the USS, the risk of failure of the pension scheme is dwarfed by the risk of failure of the Royal Mail (and indeed our University system). Universities have students to fall back on and state set fees, but the Royal Mail no longer has the tax-payer’s long-stop support.

The Trustees have to seriously consider whether – as people – they have got it wrong. The Trustees of the Boots scheme had to do the same after it found it could not afford a pure bonds strategy.

I was asked yesterday whether our FAB index could help, no it can’t!

Simply applying a notional discount rate based on average asset distribution (bonds and equities) to a scheme which has de-risked to bonds is living in lah lah land. the message of FABI is not to be imprudent but to look at prudency differently.

The Royal Mail pension scheme should be aiming to be around in perpetuity and so should the Royal Mail. If someone told me we didn’t need things delivered to our door, I would laugh at them. I would also laugh at the thought that postmen work for their wages on the prospect of being poor in retirement.

The expectations that the pension grants will be paid in full, is as clear as our expectation that the letters will arrive in the right place at the right time. Currently the Trustees of the Royal Mail Pension scheme have lost sight of both these things. They risk damaging the Pension Scheme and the Royal Mail through an investment strategy that however well intentioned – is wrong.

Nigel Wilson is right – people are the problem – people are the solution. The negotiations between employer-staff -unions and trustees can only be successful if conducted with grace and humour and an acceptance that

to err is to be human, to forgive to be divine!

Let’s hope that the pension can be re-set, strikes avoided and most importantly, the pension grants be paid without the destruction of jobs and a great business.


This wasn’t very long ago

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2017 – a year when workplace pensions will grow up!


Restoring confidence in pensions

2017 has dawned on a different pension landscape . There are more than twice as many employers participating in workplace pensions as at any time in British history, the stock market is at an all-time high and even bond yields are beginning to recover as we emerge from the permafrost of austerity.

We may not have achieved some of the macro-economic targets this Government set itself in 2015, but we do seem to had a leadership more ready to invest rather than pursue an abstract agenda based on controlling costs. It has been nearly a decade since the collapse of Bear Sterns heralded the banking crisis, the shards we have picked from the wreckage are lessons of trust. We are building trust from the bottom up.

The trust in financial matters has realigned itself around people and organisations who are seen to be genuinely on people’s sides. The days of trusting banks are gone, PPI was the final nail in consumer confidence, people will not use banc assurance as they did. Instead, they click the URL and see what Martin Lewis is telling them to do. Google is a more effective source of advice, even in an age of fake news. Indeed the sources of trust become the stronger, the weaker the confidence in traditional institutions.

When we look at the induction of some 7m adults into workplace saving we can only marvel. What has an employer that an insurance company, asset manager or financial adviser hasn’t. The simple answer is “trust”. We trust our employer to pay us the right amount, at the right time. To simplify the equation- employer’s run payroll and our pay packet is the most important financial item in most of our lives. If payroll increase or decrease our tax and NI, we accept it as an instrument of the law. Similarly, for 90% + of those enrolled into workplace pensions, the deduction of a small amount (less tax) into a savings account has been considered a lawful and righteous deduction (you can tell I’m going to church!).

But now we face two new challenges.

  1. The numbers of employers participating in workplace pensions this year is set to increase by 700,000. We will be doubling again the significant increases of last year.
  2. We will be preparing for the major test of nudging personal contributions from the low levels of today, by typically four times.

Item one is a test for payroll, item two a test for pensions. The short-term success of auto-enrolled workplace pensions depends on the capacity of payroll and pension providers to work together. I see this as a victory in sight.

The long-term success of auto-enrolment depends on winning the grudging respect of non-savers to the value of staying savers. Here the value of the workplace pension is the measure. There is precious little being done to promote the value of workplace pensions to their members – those enrolled. 2017 must see that change.


Increasing ownership of what we have!

I am pleased that the FT gave Catherine Howarth, CEO of Share Action, a platform to call for more attention to the workplace pension.


For Catherine, part of the answer is to give members more say in workplace pensions. Royal London recently created an IGC elected member from its policyholders. Share Action wish to see more and so do I. There is a great opportunity for pension providers can step up to the mark and become beacons of good government. There are brilliant workplace pensions (such as People’s Pension) with conspicuously poor governance. People’s hate me for calling them on it, but it is the job of people like me to kick arse!

Many millions of savers need some arse kicking done on their behalf!

I hope to build in the new year on the work already done by deFaqto and NEST and help create a universally accepted dataset of numbers which we can rely on test the performance of our workplace pensions. We will seek to work together with the Regulators , the Investment Association , the Transparency Task Force and with the IGCs and Master Trusts. The source of this information must be as pure as glacier water.

A third and vital component in building trust is the work that comes from Government, specifically its help in ensuring that IGCs and trustees can do, and do- their jobs! The Pension Schemes Bill is part of this, the review of transaction charges is part of this and the Asset Management Market Study is a part of this.

While big Government works on restoring confidence in DB, the little clusters of civil servants working in the DWP, Treasury, FCA and tPR on these important initiatives, are of critical importance. The desired outcomes – greater efficiency, better performance  and better pensions flow from better law and better regulation of the law. But there needs to be trust between the private and public sector, we need to deliver too. The consultations going on at present are important.

Helping to see saving as a means to spending!


Finally, we need to think beyond saving to spending. We spend half our lives learning to work and withdrawing from work, the span in the middle – our working lives, is an increasingly amorphous entity! Increasingly, our workplace retirement pots will become a means of helping us out of work without the cliff-edge trauma of a “retirement date”. The freedoms do at least acknowledge that the way we spend our savings should be shaped by us and not by the annuity purchase process.

We have now got used to the idea of freedom, but we have not seen a market development that allows people to regulate their spending in retirement according to their needs. Instead we have the polarities of “cash-out” and “drawdown”, with annuities about as relevant as the liberal democrats (I know- that’s what I am).

We desperately need an alternative to the annuity that bridges the gap between “wealth” and “subsistence” and allows those considered previously as the “squeezed middle” to plan their later life spending in an easy way.

Beyond the workplace

The majority of the Government’s agenda (the savings bit) can be achieved with the co-operation of pension providers and payroll. But the spending of retirement pots, to supplement and (we hope) exceed the value of state pensions, is not yet the focus of most in the workplace.

The key to the whole enterprise of workplace saving is to get people visualising what they are saving for. This may be as concrete as a debt-free lifestyle or as abstract as “financial independence”. The point is that people link saving to definite goals.

For unless we get people seeing these pension pots as their means to getting a decent retirement, they will not continue saving, when saving rates hike in the next three years.

“Beyond the workplace” means – to us – a confidence not just in payroll, but in pensions. Pension PlayPen has helped over 7000 employers choose a workplace pension, we hope we will more than double this number in 2017. We see the starting point for member engagement – as employer engagement. You have to start somewhere!hi-res-playpen


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Let’s put an end to pension transfer privilege.


“Sexy cash” legitimised?

A few years ago , Sir Steve Webb, then our pension minister, stood in front of the PLSA and berated Boots and its pension scheme for tempting members out of the pension scheme with cash incentives. He called the incentives “bribes” and labelled them “sexy cash”.  I wrote about this at the time; Perverse incentives; Sexycash or prudent pension?

What was then a “perverse incentive”, is now fair game and Webb has recently been touting transfers, transfer advice and by extension personal pensions , as a legitimate alternative to a scheme pension. He is not alone; Baroness Ros Altmann has boasted that she has cashed out her two final salary pensions; noted journalist Martin Woolfe is openly advising FT readers to do the same and Jo Cumbo reports a club of executives recently taking £30m out of a large DB plan through 10 individual transfers, with the blessing of Hymans’ John Hatchett, who suggests that they are “de-risking” the scheme.

If we follow the logic, then the encouragement should have appeared in August when discount rates were at their lowest and transfer values were 10-13% higher than they are today.

But the logic is flawed. In an excellent comment to a recent article Five moral reasons I didn’t take my DB transfer, Stuart Fowler defends the advisory process.

As transfer advisers we have to take the fairness of the CETV on trust, relying on the pension regulations. (Note incidentally that the FCA rules implicitly make the same assumption, so the onus on the adviser is limited to comparisons of benefits given the offered CETV – so suitability in terms of personal utility, not fairness.) Whilst there are clearly many cases where deferred pensions are fully hedged and so there is no question what discount rates to apply, and others where all liabilities are matched without equity holdings, we do assume there could be cases where there is an element of equity backing but the CETV nonetheless relies (at trustees’ discretion) on gilt yields. That could bias in favour of members transferring. We have no idea whether that actually arises very often whereas we certainly see cases where the asset mix of the scheme includes equities and the CETVs are not nearly as generous as if using gilt yields – much as used to apply to all cases.

It follows from this that as a firm Fowler Drew does not take the view that DB schemes are generally harmed or otherwise by transfers. The scheme is indifferent. The member may not be but only because of personal utility.

Where there’s no haircut, the discount rate applied to get the transfer value should be aligned to the critical yield, the issues surrounding reduced CETVs are discussed in the comments section of the same blog. All the adviser needs to concern himself with is the critical yield, he or she does not have to concern him or herself about the impact of the transfer on the scheme or with the Pensions Regulator.

I agree with Stuart, though I have never tilted at his windmill. I have a friend who is dying and spending his CETV on making his remaining days delightful. There are plenty of exceptions that prove a rule.

But I spell out my moral rule about the proprietary of taking transfers in Five moral reasons I didn’t take my DB transfer. My rule is that  a pension should stay a pension other than in exceptional circumstances. The  arguments to do with this are based on privilege.

  1. Those privileged to have large CETVs – let’s say over £500,000 – are generally the beneficiaries of high accrual schemes and/or high levels of pensionable pay. Written into these awards are the usual responsibilities of office, to my mind they include responsible behaviour towards the remaining members of their scheme. The privilege here extends to having the means to pay for advice through wealth management (unless the advisory payment is unconditional on the use of the adviser’s wealth management service).
  2. Even those with smaller CETVs (such as those reported to have been taken by Ros Altmann) have privileged understanding. Ros was able to use her familiarity with economic cycles to cherry pick the  timing of taking her CETV to her maximum advantage (and by implication – to the long-term detriment of the scheme). This is a simple market timing issue – not insider trading – but purposefully a “game” against long-term scheme funding. Such people are confident enough to be insistent and can typically look after themselves with regards advice. By definition they regard themselves as special cases and do not recognise they have any moral obligations to others.
  3. Then there are a few with privileged information of the weakness of the employer covenant who take full CETVs in advance of a haircut. This is the behaviour outlawed by the Ilford Ruling. As far as I know, the Pensions Regulator has yet to sanction anyone for being a “rat leaving a sinking ship” and this may be because trustees can take steps to stop this sort of thing.
  4. Finally there is the unfortunate constituency of those “privileged” to have perceived guarantees on the scheme they are transferring to. By this I mean those convinced that they know a way to make a return (net of charges) in excess of the critical yield. For the most part these perceptions are bogus, most are created by scammers but some result from a misunderstanding of the limits of wealth managers.

To simplify, let me characterise the four classes as

  1. The fat-cats

  2. The experts

  3. The insider-traders

  4. The mugs

I have plenty of friends who are proud to see themselves in group two, they know I don’t approve of their behaviour on ethical grounds but let them be, they are not a large group.

The fat-cats are collectively a menace and it’s still not too late to shut the stable door on them. If India can remove high denomination bank-notes, the Pensions Regulator can stop high denomination transfers- they should seriously think of doing so (freedoms or no freedoms). The privileges these people have within the scheme suggest these people should be supporting other pensioners (ideally lending their skills as trustees). These are people who other members should be looking up to, they should be the last people on the lifeboat not the first.

The insider traders are simply desperate fat-cats, lets hope there are few such-and that those who are missed by trustees are brought to book by tPR.

As for the unfortunates who take transfers and find their promised pensions let them down, I know no remedy but for the Pensions Regulator to strengthen the trustees hand.  A few years back, the Regulator was suggesting that trustees were responsible for redress where a scam occurred. This blog argued this was outrageous as Trustees were not given the powers to block transfers , when they smelt a rat. Angie Brookes and her crusaders are right in campaigning for greater action from the Pensions Regulator. There should be a process for whistle-blowing, where Trustees can refer individual cases to the Pensions Regulator or the Pensions Ombudsman or to a fast-track of Action Fraud so that suspicious transfers can be give immediate attention.

Flying in the face of Freedom?

We have something in this country called “corporate governance”, it does not allow business leaders freedom to do what they want. The pension freedoms should be subject to corporate governance. We have a secondary code of behaviour which governs experts, it is called a “fiduciary obligation”.

Lawyers, actuaries and other pension professionals are bound by their professional codes, other experts are bound by their contracts of employment, duties to their regulators and even by their religious bodies. In short, society is made of a matrix of moral codes which are more complex and deeper than the anarchy of “pension freedoms”.

Even the arch libertarians agree with Bob Dylan that “to live outside the law you must be honest!”

To live outside the law…

Transfer values have probably peaked and already critical yields are higher than last autumn. But they are still historically high, reflecting the peculiar conditions we are still facing almost a decade on from the financial crisis.

Those who caused the financial crisis were a combination of fat cats, experts and crooks, (categories 1,2 and 3 above). There were also a lot of scammers in there who may now have moved from selling PPI, CDO s etc. to marketing pension scams.

So long as the financial industry (and its press) continues to consider raiding the pensions larder for personal gain, acceptable, confidence in pensions (and those who manage and own them) will remain low. There are acceptable standards of behaviour and there are unacceptable standards. Some would argue Philip Green did nothing wrong, those people may – at the same time – be feathering their own pension nests with the feathers of the little chickens.


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Five moral reasons I didn’t take my DB transfer.


Jo Cumbo (my journalist of the year) has finished 2016 with a fascinating article on what (her sub editor?) describes as “a stampede to cash in gold-plated final salary schemes“.

I felt angry – a little bit “dirt” when I’d finished reading it. Ros Altmann, someone who I admire, has taken her two CETVs and told Jo

“The sums were attractive to me and it was hard to imagine the offers going any higher,”

Good economic sense or shameless gaming at the expense of others?

The chances are her cash-equivalent transfer value (CETV) has rocketed because her DB trustees took John Ralfe’s advice and invested its assets in bonds, that’ll make the best estimate discount rate trend to zero. Liabilities up, and scheme assets missing the equity bounce – happy new year for the CETV crew, not much fun for the rest of the gang….

There was also an example of a transfer club of 10 senior executives who’d collectively ripped £30m out of their company’s final salary scheme.

I like the honesty of the FT’s Martin Woolfe, who claims he’d have to live to 100 or see the world economy collapse not to do better from a CETV,

“At current ultra-low interest rates, the transfer value of a defined benefit pension has become significantly overvalued. It seems sensible to take advantage of that fact. I have done so”

If you’re going to game, be honest about it! Which is more than can be said for this from a senior actuary (who should know better)

The FTSE 100 company executives “had been speaking to each other and were aware of the high transfer offers”, said Jon Hatchett, partner with Hymans Robertson. “These executives cashing in would have reduced the scheme deficit by millions.”

I am not an actuary but even I know that paying out transfer values which have become “significantly overvalued” is not reducing the scheme deficit, it is reducing the assets within the scheme to make future payments to others by an amount inflated by the freak-enomics of Quantitative Easing.

Taking the CETV is pure selfishness, it is not done for the benefit of the scheme’s long-term solvency. Even Ros hasn’t got the chutzpah to claim that!

REASON 1 – I am a part of a pension scheme!

The scheme I joined in 1995 and became a pensioner in 2016 will be the scheme I am in till I die. If I can prevail on my partner to marry me, she’ll get my pension till she dies! My covenant to the scheme is a social covenant – a moral covenant. I will not game transfer values.

As for the “rats leaving the sinking ship” argument, back in 2009 a gang of execs in the Ilford pension scheme tried to make off with some ‘uncut’ CETV’s. The Pension Regulator caught them in the act. Read about it here

You can no longer bag the life raft just because you’re first to know the ship has sprung a leak! There is supposed to be social solidarity within a mutual endeavour. The leaders of a company are supposed to show moral leadership – that’s why they get paid so much!

REASON 2 – I have no need of my transfer value

My experience of sitting on a big pile of cash is that it doesn’t make you happy. The phrase “money burning a hole in my pocket”, does not sit in the lexicon of a rational economist, but it’s behaviourally spot on! I have some money in DC which results from a lifetime of DC saving, this week the value went down despite the markets going up, I don’t get happy from a big pile of money – I get anxious. People who sell houses don’t sit on their winnings, they reinvest because they want rid of money burning a hole in their pocket

REASON 3  – I have absolutely no confidence in “high-maintenance”  wealth management

As I have written before, wealth managers scare me shitless and I have no time for the high fees and mumbo jumbo of the asset allocators who sell me hocus-pocus theory dressed up in “discretionary fund management” agreements. They can keep their model portfolios, wrap platforms and high fallutin’ tax-advice. My pension pays me a fixed amount that is inflation protected, it protects my family and it is “no-maintenance”. Short of declaring it on my tax-form, everything is done for me – thanks very much Zurich Pensions

REASIN 4 – I want an incentive to live!

I don’t want to die! I want to live a long and happy and productive retirement. A pension which goes up with inflation is an incentive to stay on the planet, a diminishing lump sum is a reason to die. My family will see my lump sum as part of their inheritance but my pension as my means of independence. I bet there’ll be some nervous parents in drawdown in the weeks before their 75th birthday.

I take my lead from Saint Bob who kicked off his fame with the Boomtown Rats – Lookin after #1, containing this powerful advice to take your pension!

When I get old, old enough to die, I’ll never need anybody’s help in any way!

The social consequences of drawdown have never been much discussed. They scare me.

REASON 5 – I don’t want a massive tax-bill!

Ok – I know this makes me sound a gamester but of the five reasons this is the one that matters least. Take those ten execs with average CETVs of £3m. Lets say they were getting £40 for every pound of pension given up. That means they were giving up pensions of £75,000 a year. At the valuation factor of 20 -that’s within the 2014 life time allowance of £1.5m. By busting the DB and going for DC, they will see half of their “cash” subject to penal taxation. If they had kept their 2014 lifetime limit, all of their pension would have been taxed within normal income tax bands.

Why does tax work like this? I suspect there is a social reason, I suspect that there is a moral reason. I suspect that it is best for society as a whole that people take pensions and not cash. I would have to ask George Osborne or Philip Hammond if that is the case, but if I did-I hope that that is the reason why the LTA treatment of defined benefits is currently twice as favourable as the LTA treatment of a CETV,

Economics v morality

This last tax-point is marginal, I am sure that Ros and the execs and their advisers had done their sums and simply slapped on an extra 0.5% on the critical yield. I’m sure that their economist brains had told them that in the long-term, they could expect to bear the critical yield so handsomely that  “this time next year- we’ll all be billionaires”.

In the new year, I hope to be spending time with a nice man I met in the autumn- Rory Sutherland. I have been to hear him talk about behavioural economics, he speaks the language of happiness and he looks like Father Christmas. He is the deputy chairman of Ogilvy and Mather (so he should be a stress bunny).

When I’ve met him and heard him speak, Rory is happy. He rails against economists who he sees as saddoes, they understand the price of everything and the value of nothing!

The economist’s accusation of “being happy” can be made of  Lesley Griffiths, my minister (who I hope will be drawing his methodist pension!) and the same can be said for my Mum and Dad who are enjoying their 31st years as pensioners of the NHS pension scheme.

In its descriptive sense, “morality” refers to personal or cultural values, codes of conduct or social mores. It does not imply an absolute claim on right or wrong, but refers to that which is considered right or wrong.

In my world , taking a transfer value is an immoral act, for the five reasons laid out above. Those economists who take CETVs are behaving – according to my value system -immorally.



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A tale so sad I cried writing it down


Brian not in photo



I had my Christmas lunch with Brian.

Brian is homeless. He is 69. He will not use hostels or night-shelters as this would mean mixing with people who drink. He does not drink as his family was a victim of an abusive, alcoholic father.

He eats carefully, he cannot digest rich food as his body gets so little of it. He eats plums which he meticulously de-stones. He does not complain, except about the Salvation Army who he says do too little to prevent drunkenness in their hostels.

Brian tells me that because he refuses hostels, he finds the normal channels to having a home – are unavailable.

Because he will not go through the hostel system, he is outside the reach of social services. Hi main link to big society is the £148.13 he receives each week as his old age pension, for Brian has a pretty well full NI history and was, till 7 years ago, a householder. He kept the bank account when he was evicted. He was evicted because he could not pay both his rent and his mother’s rent (after his mother died).

I ask him what he wants, he tells me he wants a room to rent which would not be taken away from him so long as he paid the rent.

Brian could afford a modest rent but he cannot afford a deposit. He would need about £500 more than he ever has to go into private rented accommodation.

Ironically, were he of fixed abode, he would more readily qualify for disability and housing benefits. He smiles ruefully when I ask about work. Ruefully – not reproachfully.

For there is another side to Brian that makes it impossible for him to hold down a job. He is mentally ill. He has been sectioned this year after setting fire to himself. He has a history of suicide attempts.

He is a very neat , articulate and softly spoken man, but he is extremely ill.

He shows me a letter from a psychologist explaining his situation , asking that someone did something to help him back into a home.

I only had a lunch with Brian, I only saw one side to him, but what I saw made me cry and is making me cry writing this. Brian has not given up on life, if I could show you how he looked at lunch you would see a man who is trying to survive living rough on the streets of London than share rooms with drunks.

The Crisis site I was at does not allow alcohol through the gates and that is why Brian feels safe there.

Why do I live in a society with the means to house Brian, but will allow him back on the streets later this week? It is wrong. I will see Brian again the day after tomorrow and again the day after that. But I don’t know if I will be able to help him.


Brian not in photo

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Pensions -a benefit – or a threat?


Behold I stand!

This is a record of a conversation had between me and my colleagues Hilary Salt, Rob Hammond and Derek Benstead, there were other parties to the conversation , I won’t name them, but they were interested and interesting.

Essay question

Is the way that defined benefits pensions are valued, encourage undue prudence and cramp a sponsoring company’s room for manoeuvre?

Funding strategy

The received idea is that pension schemes should be funded using a gilts based discount rate. For instance our largest funded DB scheme (Universities Superannuation Scheme) is proposing a discount rate of 0.5% above the gilt rate in its valuation negotiations.

Getting the scheme funded on this basis is extremely expensive to an employer but there is virtually no risk to the trustees that the member’s benefits aren’t getting paid. The problem  for the Universities , is that the cost has to be passed on either in a lower service to students or a higher price (the university fee cap is set to rise above to over £9,000 pa).

Michael O’Higgins , a former chair of the PPF has forcibly argued that trustees and employers agreeing a recklessly conservative funding strategy could be mis-allocating capital that might better be used to fulfil the social purpose of the sponsoring enterprise.

The principal driver for this rush to de-risk is the volatility that a pension scheme presents to an organisations balance sheet. Enterprises wishing the freedom to merge, acquire or even pay dividends are supposed to seek clearance from the Pensions Regulator unless the pension scheme’s funding isn’t at risk. Since this rule has come into force, the number of clearance applications has fallen from 263 to 9. The recent report by the DWP Select Committee, sees this evidence of weak regulation, but it might better be seen as a result of de-risking.

But this freedom for corporates has been bought at a high price. We have seen the various de-risking measures force up pension funding rates to 40-50% of pensionable salaries; the pension funds themselves cannot invest productively, investing in debt that becomes increasingly devalued as demand exceeds supply; finally the capacity for companies to meet future obligations from increased productivity is diminished as cash flow has gone to the pensions and equity markets have dried up as a source of capital. This is the vicious circle created by an unbalanced approach to risk

Accounting standards

There can be little doubt that the reason that Finance Directors have sanctioned expensive de-risking programs has been to avoid the volatility in the annual reporting of its pension scheme against the International Reporting Standard IAS 19. But this reporting is theoretical and creates a mis-alignment between the corporate position and the trustee’s position.

As an example, a company might be concerned about the Value at Risk from a fractional movement in interest rates (PV01= the impact of a 0.01% change in interest rate expectations!). Measures such as PV01 are very important for the finance director but of little interest to the trustee or the member as PV01 is barely touching the business of meeting  cash-flow obligations decades hence.

IAS 19 focusses minds on the here and now, trustees think for the future. It is clear that the here and now is winning the argument at the present, but at a cost.

Pandering to the short-term interest

Say it quietly, but finance directors not only sponsor pension funds, but they pay the bills of those who manage them . Consultants, professional trustees, lawyers and other advisers may act for the member but they are paid by the FD.

This may partially account for what we see as a herd instinct towards de-risking. Not only are professional trustees answerable to their pay-masters, but they are answerable to their insurers (those to whom they pay PI premiums).

The consultants are similarly stuck. At great expense they (we) have created financial models to answer questions about VAR and to model assets against liabilities. These models are based on a “gilts+” approach being “right”. There is very little modelling being done on how cash flows might best be met through a scheme investing for long-term growth.

Pension schemes provide income, the asset value of the pension scheme is a secondary matter. Virtually no monitoring is going on of the volatility of income, all attention is paid to the volatility of assets. The long-term measures of good health are being ignored and the long term assessment of a fund’s vitality are ignored.

The role of the Regulator

It could be argued that there is not much we can do about International Accounting Standards (though Brexit may loosen their hold). But the negative impact of a gilts + mentality is something that Government (through its Pensions Regulator) could be talking about. Alternatively (and perhaps preferably), the Pensions Regulator could promote the choice that exists for trustees to invest using a “best estimate” funding approach.

Recently, this has started to happen. As if we were in latter-day  Narnia, case workers have moved away from “frozen pensions” towards a vivid optimism that assumes pension schemes are an employee benefit as well as a balance sheet liability.

The role of the PPF

The Pension Protection Fund has not shown any signs of thawing. It is still invested as if it were an insurance company, with the  majority of its assets in bonds. But the PPF is not an insurance company. It was set up because it was thought there was insufficient capacity in the insurance market to buy-out failing pension schemes. It is a sponsored occupational pension scheme with an (extremely expensive) levy which it charges across the 6000 schemes not within its purlieu.

So why is it investing as if it was an insurance company and what is this telling other occupational pension schemes? One impact of investing like an insurance company is high demands through the levy. A second is a natural propensity to build up a reserve within itself that is economically unproductive. The PPF is currently 130% funded against its own measure of funding (s179). We are currently looking at what this measure would be on a best estimates basis (the Fab Index approach). It is likely to be well in excess of 130%.

Not only is the PPF replicating the problems outlined earlier in this article, it is setting the tone for this approach to continue. The PPF is not an insurer of last resort, it has recourse to occupational pension schemes and ultimately it can call upon the Government. But its behaviour sets an inflexible example to all the other stakeholders (including the Pensions Regulator).

The PPF is now a (small) sovereign wealth fund with some £24bn of assets, it is time that it started behaving in the national interest rather than the inward-focussed way it currently manages its investment. The PPF could invest more productively and if it did, perhaps the Regulator and the large pension schemes would follow. Richard Harrington asks why the infrastructure assets in his Watford constituency are being bought by the Ontario Pension Fund – he might well ask where were the PPF!

Over insuring

When you buy fire insurance for your house, it is so that you can have an open fire to roast your chestnuts. When you set up the PPF, it is so pension funds can invest for the future knowing there is a fire insurance in place.

But our occupational pension schemes are trying to be self-sufficient with minimum risk and this is akin to double insurance. Not only is this inefficient, it creates new risks. The premiums companies pay to their insurance like occupational pension schemes are supplemented by premiums to their insurance like PPF. The aggregate premium is putting a strain on employers (especially small employers) which ironically may put the employer at risk.

Do we need more Regulation?

The answer that Frank Field and the DWP Select Committee has come up with, is to give the Pensions Regulator the nuclear option of fining sponsors hugely for not meeting trustee demands.

This Field calls the nuclear option, but – as Paul Lewis has joke- pressing the nuclear option wouldn’t do much for anyone.

The Pensions Regulator can do much without a change to any existing regulation. It is within the powers of the Pension Protection Fund to make itself more productive.

If “Big” Government was to adopt a different approach to the problem, we would be able to see what happened at BHS , not as a disaster, but as a limited success. The  majority of those BHS pensioners will be protected to at least 90% of their initial pension and though they may lose some rights in payment, they are a lot better off than in previous times. The PPF should be setting its horizons on reducing the overall haircut to its pensioners (reckoned to be 27%) in total , rather than upping levies and de-risking for “self-sufficiency”. Wouldn’t it be good to see instead the PPF looking to reduce the haircut to 20% of less?

Why no cry of pain from employers?

Any DB pension sponsoring employer reading the DWP Select Committee’s report would be forgiven for crying “no more we have suffered enough.

Why are employers so quiet about the demands placed upon them. This is the subject for a separate (shorter) article. I suspect that having put their pension schemes into lock-down with LDI, many are giving up on them and awaiting the glorious day of buy-out. But this is only a proportion of schemes, many cannot afford LDI and are too small to be bought out.

A big government issue

The truth is they have no voice. Here is cry from the heart of a Director of a medium sized scheme

Henry – just read the piece on the Select Cmt paper. what can those of us with experience of looking after company schemes – those of us in the real world and not politicians – do to stop the madness? Those bodies who purport to be our conduit into the debate don’t seem to be succeeding.

This is a big government problem; it is more than an issue for the DWP or Treasury, it is an issue for our country to deal with, as part of our fundamental review of the way we govern ourselves. This is a task for 2017 and I hope this Government is up to it!


Maybe a cat’s chance?

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Of nuclear deterrents, sledgehammers and nuts – (DWP Select on DB)

The 90 page report on the state of our defined benefit pension schemes is published this morning. From first to last it is the work of Frank Field, it begins with BHS and ends with BHS, the confrontation with Philip Green informs most sections.

“Sir Philip Green’s ownership of BHS epitomised the actions of a bad pension scheme sponsor”

The wider question is whether they epitomise the actions of DB sponsors in general, despite drawing our attention to schemes such as Sir Bernard Matthews’ Turkey Farm’s and the Halcrow Scheme, the report does not provide evidence of widespread bad practice, Nor is there evidence that the PPF is under serious strain. Nor is there any real evidence that we cannot afford our defined pension liabilities;

The report does make some useful contributions. The section on Regulatory Apportionment Arrangements was helpful (especially in the light of the PPF’s decision to defer publishing its levy calculations so it can include self-sufficient arrangements.

The criticism of the Pension Regulator as being too slow to act on BHS and in general too reluctant to issue contribution notices and compulsory wind-up orders is historically valid. I suspect that enforcement at tPR will be tougher going forward but the system of “nuclear deterrents” that the Select Committee propose are inappropriate.

The most eye-catching recommendation was for the watchdog to be given powers to treble the fines it can impose on employers avoiding their pension responsibilities.

Speaking to the press, Frank Field said

“It is difficult to imagine the pensions regulator would still be having to negotiate with Sir Philip Green if he had been facing a bill of £1bn, rather than £350m, He would have sorted the pension scheme long ago.”

I’m not so sure about that. There has to be proportion in our dealings with each other. Going ballistic is seldom a way of sorting out a quarrel and there are other ways of looking at pension deficits than through the prism of a gilts plus valuation method.

I was pleased to see Neil Carberry of the CBI quoted


I do not suggest we are weak with future Philip Greens. But to suppose that they present an existential threat to the British Pension system is wrong, just as supposing that the prevailing valuation methodology (quoted in the paper as “gilts +1” is right.

The arguments from among others Joanne Seagers, Andrew Bradshaw Lesley Titcombe and Neil Carberry is that it is better that we have the complex and sometimes lengthy negotiations on scheme funding than this sabre rattling.

Facile attempts to dumb down benefits

Much of the body of the report concerns itself with the capacity of schemes to rid themselves of liabilities at the member’s expense. Steve Webb is generally very good in his comments. The report states  it costs the prospective  pensioner £20,000 in benefits when a promise changes from RPI to CPI indexation. It is only too easy to give this money away, but it is hard to earn it back.

I strongly object to member’s benefits being used as a bargaining counter in the negotiations between scheme , employer and the Pensions Regulator. There is a very good argument for conditional indexation on DB schemes going forward ( promise on outcomes is generally a better promise than one on contributions – assuming there is some trust in the system.

Gaming with people’s pension rights is not the way to conduct negotiations on schemes such as BHS , any more than pointing a nuclear option at the sponsor. The compulsory haircut of the PPF is the unfortunate price of failure, but it should not become the price of victory too – the member deserves more than that.

From facile to dangerous

If the “nuclear deterrent” is facile the paper’s recommendations to fold small schemes into a “living PPF” is dangerous

Here is my friend Derek Benstead’s quick reaction to seeing the paper

The Pension Protection Fund is, in effect, an employer sponsored pension scheme which need not be any less cost efficient than any other pension scheme. 

The PPF is an excellent solution to the problem of the provision of pensions after an employer’s insolvency.  If an insolvent employer’s scheme is prudently funded, it need not cost anything in levies to provide compensation from the PPF. 

“Calling upon” the PPF should be the normal outcome from an employer’s insolvency.  It is not a failure to use the PPF: it is the system working as it should.

I cannot see why it is appropriate or necessary for small schemes to be consolidated into an aggregator fund.  This idea rather assumes the scheme is already closed to accrual.  The PPF already serves as an aggregator fund of schemes of insolvent employers.  If the employer is not insolvent, the employer is likely to want to keep control of the funding of its own scheme. Cost inefficiency of small scale of schemes is not a major driving force of defined benefit pension unsustainability.

Neither is it the accrued right to pension indexation which is making schemes unsustainable.  Investing increasing amounts in bonds which earn a very low return is making schemes unsustainable.  It is not helpful to make the investment return more certain, if the investment return is consequently too low to support the benefit payments.  It is not right that accrued rights to pensions should be cut in order to afford investment in unproductive assets such as bonds at very low yields.

If, and it is a very big if, cuts to the guaranteed indexation of accrued pensions is allowed, then the following are the minimum terms for the quid pro quo:

  • The statement of funding principles must include a funding plan for payment of the originally guaranteed increases on a discretionary basis.
  • The statement of investment principles must include an investment plan which is likely to earn sufficient return to pay the originally guaranteed increases on a discretionary basis.
  • If the scheme is wound up and insured, the originally guaranteed increases are reinstated.
  • The scheme is open to new entrants and is the employer’s nominated scheme for auto-enrolment.

More than anything else, a sustainable defined benefit scheme is one which is open to new entrants, with a benefit design which is manageable within the employer’s ability to contribute.  A scheme which is receiving cash flow in from assets and contributions has the cash flow to pay benefits, without a major exposure to short term market value risk.

Rather than allowing the cutting of pension indexation on accrued rights, it would be better for the industry to rediscover the benefits of productive investment.

I do not think that fiddling with the timetable for actuarial valuations will help any.  To use the example of BHS, the employer has been gradually failing from before TPR was created in 2005.  Saving a few months on the actuarial valuation timetable is an irrelevance for dealing with events unfolding over 10 to 15 years.

Reducing the length of recovery plans won’t help any.  If an employer is to willingly sponsor a defined benefit scheme, it needs to be in control of its commitment, not have control taken out of its hands.

The PPF risk based levy is not large enough to incentivise behaviour.  If schemes are prudently funded, and the evidence of the First Actuarial Best Estimate Index is that they are, the PPF should not need to raise a levy at all (unless the schemes entering the PPF have lower than average funding, in which case a levy can be charged to raise funding to average levels). 

The PPF should be a satisfactory benefit outcome if an employer becomes insolvent.  There should be no need to seek “better than PPF” outcomes.  If, in general, people are dissatisfied with the PPF as an outcome, then let’s improve the PPF.  Introducing annual pension increases on pensions earned before April 1997 would be a good place to start.

A lengthy knee-jerk reaction that will do no good

I was asked to make a quick comment yesterday evening , based on a skim reed. I have since read the whole paper and am comfortable that my initial reaction was right. Fortunately my knee-jerk is 91 3/4 pages shorter than Frank Field’s.

1.    BHS is not a calamity, it is showing the PPF working as it should. BHS is a broken business, if Britain wants to improve productivity it needs to let the likes of BHS fail.

2.    The proposed remedies to the “calamity” of BHS could be more calamitous, allowing indexation to be conditional (retrospectively) and allowing small schemes to fold into a living PPF risks undermining the good work of trustees over the past few years and could lead to a needless dumbing down of benefits.

3.    There is a Green Paper on the future of DB on its way. It should focus on how we revive the provision of proper pensions. Going forward, conditional indexation can form a part of a new “third way” pension. This was the intention for the Defined Ambition legislation in the Pensions Act 2015.

As our FAB index points out, things are not as bad as some commentators are making out.

This report is an over-reaction to an overstated problem.

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The bonus culture in asset management.


Asset managers pay themselves big bonuses


Now we learn that bonus payments distort the way that active managers trade stocks.

Anton Lines ‘ recent paper draws this conclusion from a manager of managers

“The paper suggests that active managers are putting their own interests ahead of their clients, which is a clear conflict of interest. They are also adding to the volatility of the market by attempting to hug the benchmark.”

Reading the paper makes me realise why their was such a failure among diversified growth funds at the time of the 2008 crash to smooth volatility.

The paper should frighten anyone who is holding active equity funds as part of a drawdown policy. The message is empirical and clear,  most active managers get paid bonuses which reward creating risk rather than managing  risks.


Asset managers reduce active shares as volatility increases (source Anton Lines)

At times of trial active managers, because they are paid to do this, actually increase market volatility through herding.

As active managers herd towards the index, they create greater concentrations of risk, distort the market and lose their clients money in so doing.

Herding is caused by bonus culture  (which encourages herding) and the bonus culture then hits punters with a second sucker punch – in active fees.


Asset trading or asset management?

Meanwhile, those managers not trying to outperform are trying to reform. Here’s Sacha Sadan at LGIM telling shareholders that (via fund managers) they have the power to stop the executive pay arms race.

Asset managers cannot have it both ways. They cannot be the cream of the executive pay crop, and be putting the boot into executive pay. They cannot claim to be the fiduciaries of our money and then pay themselves bonuses for screwing up the market.

These reports are not just coming out of the rent a gob blog-a-sphere, they are the meat and two veg of FTfm reporting. Go onto the FT website and you can surf articles all morning repeating the same message. Fund managers are shamelessly practicing what their corporate governance departments preach against.

The conflict of being a commercial fiduciary

Once again , I am called to question a system that rewards performance over governance, stock trading over stock management and prioritises the interests of the fund management house over that of the customer.

My favourite comment on this comes from Lee Higgins who runs an asset management recruitment firm

“Bonus caps were introduced in reaction to a public outcry and the perception of excessive risk taking in investment banking. That culture does not exist in asset management and therefore a cap would be counterproductive.”

It is impressive , not for its intellectual substance (it has none) but for its chutzpah!

Asset managers -unlike entrepreneurs who set up and run companies- do not take risk! Of course they don’t! They get paid 1% of a billion, billion pounds (do the math) whether they do well or badly. They do not create this wealth, they merely spend it – on themselves!

There are entrepreneurs in fund management (Smith,Woodford,Miller) – who take risks, do things differently and improve capital markets. These people are treated as pariahs by their colleagues because they are so conspicuously better at what they do than their peers.

But the majority of guys who get paid the big bucks within asset management firms are being paid for successfully managing risk, when they are doing no such thing! The quote is wonderful as it not only admits this , but uses it as a justification for this junketing to continue in perpetuity!

The party has been going on some decades, next year the FCA reports definitively. Then the sheep will be sorted from the goats, the wise virgins will have their candles ready, the revellers will find the financial orgy, rudely interrupted!




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What next for the British Steel Pension Scheme?


There must be something in the water at the DWP.

First NEST now the PPF make bids to become our national pension providers. I am not against state run pension funds, but I am against the creation of state oligarchies by stealth. NEST have burnt their way through the best part of £600m of DWP loan to make it to #1 , the PPF are gaining supremacy by buying up liabilities on the cheap.

Now they are re-writing the rule-book. At first sight it looks like they’re doing so  to include the British Steel Pension Scheme in its portfolio of assets, a renationalised pension scheme bought back on the cheap from the private sector with the members taking a substantial hair-cut.

But we look as if we are spared that.

The FT reports today that plans are being drawn up so that schemes (such as Tata’s BSPS) can be hived away from the employer and run on a sufficient basis ,  under the PPF’s auspices. The BSPS will no longer be an occupational pension scheme, it now looks unlikely to go into the PPF.

My spies tell me that there is nothing that the PPF would like more than to have BSPS  in the fold. Tata’s BSPS is a well run scheme with substantial reserves (see below)

The scheme has sufficient assets to stand alone and run-off – a recent  press release states they have a buffer of £2 billion, which is more than adequate to run off the scheme under the current benefit promise  – the scheme size is about £15 billion of assets.

According to one economist friend of mine, the £2bn is modelled on some super prudent assumptions, the buffer may actually be as much as 3bn.

The key to the BSPS’ solvency  is a  variation of section 67 (PA 95) to enable reduction of RPI indexation to CPI. This is a significant reduction in benefits but a better deal for (most) members than falling directly into the PPF.

A formal consultation (of members) is due to begin on 19th December . We thought that there would be  a split of the scheme – assenting and non-assenting. This has happened before – at Kodak as an example. Some members may feel better off in the PPF (older pensioners for instance).

It now looks as is someone has given BSPS a waiver so that it can change its indexation basis from RPI to CPI. On this basis BSPS looks self-sufficient

Tata will undoubtedly pay a premium to be shot of it (BSPS has a charge over a Tata Dutch steelworks reckoned to be worth £600m). Things look good for the scheme which now looks like an annuity provider rather than an occupational pension.

There is a  question is why it should be overseen by the PPF and why it form part of the PPF’s levy calculations. Surely a self-sufficient BSPS has more in common with friendly societies, insurance companies and the like and should be overseen by the Prudential Regulatory Authority.


The consultation may now be redundant.

As far as I can make out, some members might feel they are better off in the PPF, especially older pensioners who may feel more security getting their pensions paid by a Government agency.

That said , things become a lot simpler. Tata has done with defined benefit pension liabilities, jobs remain and the loss to members is marginal. The PPF has a new constituency of schemes from which to extract revenue and the options for “restructuring” available to the major consultancies – broaden.

The member pays

There is another significant issue here; it looks as if we have a new kind of pension provider for solvent pension schemes that lose their parents. We might (say it quietly) think of them as third way – defined ambition – verging on CDC

 This is good news, the PPF is increasingly predating on schemes that might normally be considered solvent. It is doing so by raising the solvency bar.

Actuaries are required to value pension schemes using S179 guidance. The definition of s179 guidance is moving in the PPF’s favour – schemes must now demonstrate a level of funding sufficient to immunise the PPF from risk; the PPF cannot take on schemes that are solvent under s179 so the harder the solvency conditions , the better the quality of schemes the PPF gets; the s 179 bar is now set so;-

 broadly speaking, what would have to be paid to an insurance company to take on the payment of PPF levels of compensation.

The insurance company does of course have to factor in cost of capital and profit margin. To use actuarial parlance, s179 was 83% of technical best estimate and is now aligned to s143  which is  around 106%. This is a considerable hike of the bar.

This means schemes that might have been considered out of the PPF’s reach are now considered basket cases. If you look at this chart (p40 of the purple book) you can see that the PPF is being fed tasty morsels from the occupational smorgasbord.


The assets of most schemes now going into the PPF exceed the present value of liabilities My source reckons that of schemes acquired  over the past year, just 3 have had  genuine deficits  value and 54 have been profitable to the PPF.

Another  expert reckons that the PPF would have made a profit of £4 billion over the benefit liabilities they acquire from BSPS.

Triumph or conspiracy?


We are seeing a new entity being created , the self-sufficient PPF  pension scheme operating under a new set of rules with special governance requirements

This may be a fore-runner for CDC – a member mutual in all but name, that could increase benefits above CPI when times permit.

If this is what is made available to ordinary people, then maybe we do not have such a bad outcome. BSPS is a magnificently managed operation – with stated administration costs of £62 per member all-in and consistently superior fund management performance.

It is the very model of how I would want my pension to be managed. If the plan, was for me to hand over my money purchase benefits in exchange for a BSPS scheme pension -I would seriously consider it.

But like the BSPS members, I would want assurances  that my interests were at the fore. I fear that the DWP/Tata deal, engineered behind closed doors may not have pensioners interests at heart. John Ralfe has correctly pointed out that in the cases of Trafalgar House and Polestar, self sufficiency proved a myth and the members would have been better served had the link to the employer been enforced or even had the schemes entered the PPF day one.

If the examples of Polestar and Trafalgar House are followed, and poor practice prevails, the new entity will have been created at great expense for nothing. It will be  the kind of corporate restructuring that makes everyone money but the pensioners.

Tata/BSPS is a high profile scheme , no doubt the re-engineering of the pension arrangement will be trumpeted as a triumph (and a precedent). But a deal cannot be achieved without proper consent. The consent of other levy payers might be harder to get than from relieved members.

A degree of transparency is needed. There need to be clear protection for employers continuing to sponsor schemes who will be feeling very nervous about their rivals “doing a Tata”.

Otherwise the door could  be open not just to Tata but to any other large corporate who would like self-sufficient pensions overseen by the PPF. That would  take a wide door!

target pensions

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Shift to bonds chokes health of UK pension funds!

One of the best things about working for First Actuarial is our resolute refusal to see the world any way but our way! As common sense (pragmatism) is what guides us, we are happy to have the courage of our convictions.  FABI (or the Fab index for long) is a way of looking at the state of our defined benefit schemes based on common sense.

This is the third month we’ve published the index and I’m pleased to say – nothing much is changing- schemes are still – in aggregate – in surplus. They still need to achieve 3.1% pa growth to stay that way and liabilities remain consistent.

This month we see some dark clouds on the horizon – as the melodramatic title suggests!


All is fab

First Actuarial Best-estimate Index ( “FAB Index” for short) fell slightly over the month to 30 November 2016.  The FAB Index shows that the UK’s 6,000 defined benefit (DB) pension schemes have an overall surplus of £296bn measured on a best-estimate basis. 

Increased bond allocation reduces future expected returns

The slight fall in the FAB Index was due to new data on the average asset allocation of the UK’s pension schemes.  According to the new edition of the Pension Protection Fund’s (“PPF’s”) Purple Book, the average allocation to bonds has risen to over 50% for the first time as shown in the table below.

The higher allocation towards bonds means that less money is invested in equities (which are expected to give better returns in the long-term).  Therefore, although bonds yields increased during November, the lower allocation to equities means that the overall expected investment return on assets actually held has fallen. This accounts for the drop in the monthly FAB Index.

Schemes only need average return of 3.1% a year

Analysis by First Actuarial shows that the overall investment return required for the UK’s 6,000 DB pension schemes to be 100% fully-funded on a best-estimate basis – the so called ‘breakeven’ investment return – has remained at 3.1% pa.  This means that UK pension schemes remain in a healthy position for so long as they keep faith in equities.

The assumptions underlying these results are as follows:

Rob Hammond, Partner at First Actuarial said:

“UK pension schemes are being strangled by an overly cautious investment strategy with the average asset allocation to bonds increasing to over 50% for the first time.  This overly cautious investment strategy is stifling returns on assets and increasing the amount of reserves that pension schemes need to hold to meet their liabilities.  This in turn increases financial demands on employers to meet any shortfalls that arise.

“Our analysis shows that the long-term investment return required to achieve a best-estimate funding position of 100% has remained at 3.1% pa.  This ‘breakeven’ investment return is equivalent to only -0.6% pa in real terms, and should therefore be easily achievable.

“The stability of this return shows the advantages of maintaining a balanced investment strategy.  However, if UK pension schemes continue to increase holdings in bonds, the healthy financial position of these schemes will be put at risk.”

The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension schemes.

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Pensions and the Media

We like to think that the media works well with the pension industry, but it’s a relationship based on our money, not on mutual respect. In this article I look at how the media really view pensions, concluding we have few friends, and those we have – we should cherish!





We are used to redefining pensions – increasingly, they’re defined as what a pension is not – the freedom to do what you like with what seems a great deal of money.

But if you thought we had it tough, talk to the media! You may think the media is defined by press passes and newsprint but they’re as old hat as pensions. The media is now a sprawling morass of digital content – most of it generated by a bunch of chancers with as much in common with Fleet Street as a trivial commutation has with a lifetime income!

Words are being replaced by images – “we talk in pictures” said my son to me the other day.


A picture or 1000 words?

The concept of “writing 1000 words” would horrify content managers at Buzz feed and Vice, so if you make it to the end of this article, the chances you are over 25 – young people are not reading more than 250 words at a time. The lessons are obvious, conventional media alienates most youngsters; the pensions media is having to change to cater for a changing audience.

Facts are being replaced by opinion – I know- I am a blogger and inhabit the “post-truth” world. Opinion is free and readily available in social media. The blogger sits in the bully pulpit, invulnerable to criticism. She or he is above traditional value judgements, the medium has become the message. In the post-truth society, the values that underpin the PMI are under threat by this tsunami of content – unregulated unedited and often untrue.

 Outreach or navel gazing?

For the pensions professional there are two places to go. Outreach to the popular media or into what’s known as the trade press (which is what you are reading today). The trade press is a relatively benign hang-out where authors quickly become familiar, views are expressed cautiously and rancor virtually unknown, This benign environment is conclusive to learning but not to innovation, it may provide an edited window on social media but it protects gentle readers from the ferocity of public opinion.

By comparison, the financial pages of the popular press and the business sections of sites such as cater for a non-specialist audience of those interested in and generally hacked-off by – pensions. A quick search for pensions on most news websites will produce a plethora of dispiriting articles with digital comments reinforcing the view that pensions, if they happen at all, will be paid at a considerably lower rate than savers ever anticipated. The popular press – especially in digital format – demonstrates the challenge facing an industry wishing to restore faith among those it serves.

Small wonder that the Venn diagram representing in one circle “how we see ourselves” and in the other “how others see us”, has a small-to-negligible overlap!


Where overlap occurs is with the few “pension experts” who manage to become spokespeople for the rest of us. Ironically, in creating overlap, these figures are often appropriated by politicians. Ros Altmann became famous in the pages of the Daily Express and Mail because she articulated the concerns of her generation of savers. There are some who see her appropriation into Government as a manifestation of the political maxim “keep your friends close and your enemies closer”. Polemicists such as John Ralfe, Alan Higham and our recent pension and shadow pension minister have all learned to use the popular press but they are the exceptions not the rule. The concept of a pension personality- at least in media terms – generally remains an oxymoron!

Personality in pensions?

Nor has “pensions” as a concept – grabbed the imagination of our dramatists. Margaret de Valois, an actuary who has edited the Actuary magazine declared her new year’s ambition in 2013 to see a pensions related storyline in a soap opera. Perhaps fortunately for the sake of entertainment, this has yet to happen. The value of “financial education” has yet to be prioritized, perhaps this for the best.




However, the popular media has great interest in the profits generated by the pensions industry. The PLSA’s autumn conference included a series of videos made by ITN and sponsored by deep-pocketed providers of financial services. At the risk of sounding cynical, we are a lot more interesting as a source of media revenue, than we are for our intrinsic merit!

This seems unlikely to change. The highpoint of media interest over my career was in 2014 when pensions became George Osborne’s rabbit from the hat. It was a poxy rabbit for the media and interest has subsequently subsided. Pension freedoms have been replaced by the possibility of having no pension at all, the lifetime ISA is a pension that dared not speak its name. The financial press has embraced the LISA as a concept as easy to understand as it is to explain.

In a post-truth society, concepts such as “living too long” and “long-term care” have little resonance. The X-factor for Generation x is tax free cash and that can be generated from the inexhaustible equity of our housing stock. Turn on day-time TV and you will have multi-channel opportunities to delight in other people’s property decisions. The attention span which you are demonstrating as we cruise towards 1000 words is sadly not shared by the general public. Indeed, the majority of articles I am asked to contribute are now less than half the length of what you’ve read so far.

Thanks for your attention, I suspect you are still reading because you expect me to finish with a mighty expletive, but you will be disappointed.


The media does not love pensions but it loves the money in pensions. The reason we have a thriving trade press is that there is advertising revenue to be had from our eyeballs. Most journalists who write to us have little ambition to be pension journalists, they are on the way to better things. Those true heroes of the pension paparazzi, graduate to the popular press or the Financial Times (which is popular enough).

They are few and should be cherished!

Jo cumbo

Josephine Cumbo





Key points

  • The trade press is driven by advertising revenue
  • Wider media does not pay such attention or respect to the pension industry
  • We should not be beguiled by the media – the public is distrustful of us
  • We need to build on our limited successes
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Never mind the quality, feel the width- AE review to nudge coverage not contributions!

goat nudging



The Government has set out it’s stall for next year’s AE review. To the disappointment of providers, an increase in contributions is not on the agenda. But the breadth of coverage of AE is – including consideration of the self-employed.

This is in line with the recent behaviour of other Government departments. In October the Cabinet Office set in train the Taylor review of the Gig Economy, focussing on the new ways we work and get paid. In November, the Treasury announced new rules for employers in the public sector using personal service workers for contracts. The Office of Tax Simplification have in December announced further proposals to align national insurance to the changing needs of the self-employed, abolishing class 2 contributions.

This is a remarkably consistent set of initiatives which suggest that there is a clear strategic direction from the top. Perhaps we have a prime minister who means what she says when focussing on those just getting by.

 Super subtle nudges through the thresholds

Along with the ministerial statement on the AE review the DWP are also announcing three important changes to the auto-enrolment limits

  1. The earnings trigger will remain at £10,000 bringing in a further 70,000 savers (many of whom will be caught in the net pay trap).
  2. The lower earnings limit will be in line with 2017/18 NI threshold earnings (£5,876)
  3. The upper earnings limit will be in line with 2017/18 NI upper threshold earnings (£45,000)

This is further nudging at its subtlest.

Since the lower earnings threshold increased by CPI rather than average earnings, it has lowered in real earnings terms and as the NI upper threshold increased by £2,000, it has increased in real terms. The net impact of the contribution thresholds will be an increase of £61m in pension contributions, the impact of freezing the earnings trigger will drive a further £51m into workplace pensions

It looks like in the years ahead, this is as much compulsion as the Government has in mind- at least on the existing constituency.

It is easy to see why the Government are shying away from more radical increases in contributions. The Autumn Statement made it clear that Treasury forecasts expect to see no real increases in earnings before the end of the decade.

Clearly Government has decided that the success of auto-enrolment is not going to be imperilled by reckless compulsion (even with an opt-out!).

So much for  quality – what of the width?

The Ministerial Statement makes it clear the Government are after the self-employed personal service worker (PSW)  whose contributions to personal pensions have been falling since the demise of the commission-based pension salesman

So far, the Government’s attempts to collar the PSW into auto-enrolment has not been a great success. Little information is available as to the number of off-payroll workers saving into workplace pensions but anecdotal evidence suggests that there is little attempt to apply the Regulator’s test “does he/she look, feel and smell like a worker”. Either the PSWs are too fragrant or employers and payroll cannot be bothered

If there is mass employer disobedience, then there is scope for a class action against any boss who has signed his declaration of compliance without enrolling the PSW who can prove he is an eligible job-holder.

Employers will no doubt plead that not only was the definition of a PSW obscure, but there was no obvious mechanism for collecting contributions or administering opt-outs. The review will incorporate the DWP’s promised review of the workplace pension charge cap.

No doubt, the auto-enrolment review will be looking at the mechanism as well as the principles, the current system is neither working in principal or in practice. Just how the self-employed can be included in workplace pensions seems unclear, but the DWP are putting themselves under no time pressure, it is not aiming to complete its findings in 2017 and there is no deadline for the implementation of the reviews proposals in the Ministerial Statement.

So much for auto-enrolment, what of workplace pensions?

As with the consideration of scope, nothing on workplace pensions is expected to be announced as policy in 2017 but it looks as if the promise to consider transaction costs as part of the cap will be fulfilled. Despite harsh words for asset managers in the FCA’s recent study of them, it seems unlikely that the Government will limit the capacity of providers to maintain their margins.

The Government seems intent on fostering a competitive market among workplace pension providers. Rather than inhibit innovation through a cap on revenues, I expect the Government to focus on requiring better governance, greater transparency and a responsible attitude to dealing with workers earning in excess of the earnings threshold but unable to claim tax relief while in a net pay arrangement.


nod’s as good as a wink




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“Breaking ranks” with a pernicious orthodoxy.


FAB (i)


In a significant interview with the FT, Michael Higgins, former chair of the Pension Regulator and chair of a £12bn pension trust argues that valuing pension liabilities using the gilt yield is leading to a ….

“significant misallocation of resources — for example, from company profits to pension schemes rather than to investment or increased dividends.”….

“We need to find a better way of examining pension fund liabilities, as this is not just an arcane accounting or actuarial issue,”

In the interview O’Higgins is quite explicit over what needs to change, Jo Cumbo reports him asserting

 a more “sensible approach” would be for schemes to assess liabilities based on the expected yield on the actual assets they held, such as equities or property

O’Higgins goes on to directly link this misallocation of capital to the problems Britain , either in or out of Europe, is having with productivity.

Rather than criticising QE for the negative effect it is having on pension funding, O’Higgins promotes the need to reflate the economy through the more productive use of capital.

In doing so, he points out that it is not regulation that is forcing pension schemes to demand more money from employers, but the rigidity of the accounting and actuarial professions.

The article stops short of calling us “self-serving”, but no-one who understands the current craze for LDI will miss the implication of O’Higgins words. Liability Driven Investment has its foundations in a gilts based valuation system and LDI is a monster of the asset managers and consultant’s invention.

Breaking ranks

Last night I published a blog from Professor Otsuka at the London School of Economics calling for his pension scheme (Britain’s largest) to rethink it’s position on liability valuation.

I am happy to say it was a paper from First Actuarial that prompted his writing and we make no bones about it, the divergence of the gilts based funding position (purple) from the best estimates funding position (blue)  clearly demonstrates Michael O’Higgins point.


Our friend Raj Mody is quoted in the FT talking of a their being a reluctance among advisers to “break ranks”, well one adviser has been breaking ranks for some time and First Actuarial will continue to champion what John O’Higgins and Mike Otsuka are calling for.

As with Brexit so with pensions, it is the lens with which we look at the problem that determines the solution. If we continue to fear the worst, we will get the worst. No businessperson would approach a major challenge fearing to fail, our actions are predicated on our belief we will win or fail we will.

Schemes such as John O’Higgins’ or the USS are not intending to fail either, and it is good to see senior brains waking up to the opportunities that what some see as existential threats, might bring.





The original FT article referred to in this blog can be found here

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Fancy finance or cheaper houses?


financial success

All so easy

I recently wrote a blog arguing that we could make more use of the  burgeoning financial education/wellbeing brigade to get youngsters saving for proper housing of their own. My thoughts focussed on finance but of course the Government want the yoof to accelerate savings through help to buy savings products, most especially the lifetime ISA.


Rather more interesting than my blog are the comments it has inspired, especially from Con Keating – who can be relied upon to take a contrarian and informed position. In case you missed his comment – here it is!

Not finance but the price of housing

The problem here is not finance, it is the price of housing. This will not go away unti we start building enough houses to meet demand – the shortage is over one million homes and demand is growing at around 250,000 a year. The roots of the issue are clear, the post-war planning laws, with the issue being compounded by the policy of selling council kousing – littleof the proceeds from those sales went back into new housing, and councils had built a fairly steady 120,000 or so a year – this in fact is remarkably close to the annual shortfall.

It is odd, but we still demonise the inner city council estate, even though the majority of that stock is now owned privately by members of the middle class. Increasingly, that “sink” problem is moving away from the inner to the outer city – and we see the same thing in France with the banlieu.

Solving the finance problem will just exacerbate the price issue. Is there a solution – well the answer is yes – build more houses, lots of them – step up production from the current 130,000 or so to closer to 300,000 (which is probably the upper feasible limit given labour constraints).

Will this happen – of course, not. Do you want to be the politician that tells house owner voters that he or she want to build sufficient housing to make sure their house does not increase in price and may even go down. If you can find a way to get elected with that agenda, you will solve the problem, and be one hell of a magician. By the way, I will vote for you, if allowed

Not housing but proper housing

“Dave C” who is becoming a regular, argues not just for more housing, but proper housing that people want to live in. I am hoping to go up to Leeds/Wakefield and see what Legal and General are doing with these pre-pack houses. We tried that after the war- it’s surprising how durable it has proven .Here’s Dave C….

And they need to make nicer quality, lower density housing too.

These new builds are horrible and purely profit maximised.

While the big builders are all motivated by huge margins consumers get terrible vfm.

There are a lot of new builds going up in Harrogate right now and they’re all horrible.

Gardens west or north facing. Roads a few feet off the front door. No trees. Apparently large designs, but they’re ‘mini’ houses. 4 bedrooms you can’t use with double beds and furniture!

The while system from top to bottom is all about greed and money.

It won’t change while people see a home as an investment and a spineless government perpetuate it.

UK gov should print their (our) own money at zirp, pay off the 1tn debt, and spend the saved ‘interest’ to bank vampires by building housing stock at zero interest rates for all.

Houses/homes are infrastructure, if you want a happy populace buying stuff and breeding and feeding a strong economy, they need cheap homes and low taxes/debts.

Which is one of the best posts I have ever had. Dave goes on to harangue me for supporting spurious Government initiatives ending with a magnificent tirade

These pseudo socialist government incentives that appear helpful, while actually only existing to support a failing ponzi, is a travesty.

Those taking them must be stupid. Those who dreamt them up are as corrupted as the types who run Wonga loans or ‘kneecap finance’

Nudge or kneecap?

As with pensions so with housing, the incremental improvements of “nudge” or wholesale reform with massive Governments intervention.

Do we really care about inter-generational unfairness? Do we care to take a 10-20% haircut on the equity in our property?

Do we really want to be self-sufficient in old-age or are we hanging in there hoping that auto-enrolment will get us there?

Or are we prepared for the kneecap, not of Wonga but of a brutal state that decides it will build 300.000 new houses a year and will introduce a new tax called compulsory savings?

You decide what kind of society you want and you vote for the one suits you. Right now I’d give the knee-cap solution one chance in a hundred, but I didn’t give Leicester City one chance in five thousand!

uk house prices

not so easy

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Helping young staff to a home of their own


There’s increasing help in the workplace for those planning retirement or struggling with debt.  “Financial well-being” is this year’s “financial education” and the healthcare organisations have worked out that a solvent workforce is a workforce less likely to suffer from sickness.

But the financial base on which most of us build is our home. The big problem facing young people is that they do not have a home, only a room in someone else’s home or a flat which they can hardly call a home – so strict are the rental restrictions and weak their tenancy rights.

The numbers are startling. According to the social mobility commission, 63% of 20-29 year olds owned their own home in 1990. By 2015, that number had fallen to 31%.

Unusually, the housing problem is not being solved through work , but through the family unit. More than a third of homebuyers in England depend on money from their family.

Using the latest official data available, from 2013-14, Paul Sanderson and a team from Anglia Ruskin University found 34% of buyers needed cash or a loan from their parents.

That compared with just 20% in 2010/11. A further 10% of buyers relied on inherited wealth, the research found..

Legal and General confirm that a quarter of all mortgages in the UK last year were part-funded by parents. The average amount given was £17,500.

Helping your younger staff get the first foot on the ladder.

It is odd that relativley little is being done in the workplace to promote routes to ownership for the under 30s. The Government are aware of the issues and have put in place a number of initiatives

The Mortgage Guarantee scheme has now run it’s course but the help to buy scheme is going strong.

Help to buy

Help to Buy gives people who are able to get a mortgage the chance to buy a home with just a 5% deposit.

I’m grateful to the Legal and General Website for this explanation of how the help to buy equity loan works.

The Government lends you up to 20% of the cost of your new-build home. It runs until 2020 and is only available in England (though there are similar arrangements for other parts of the UK.

It only applies to new build homes from a registered Help to Buy builder. Your Help to Buy agent should have a list of registered builders for you to choose from.

For buyers in all London boroughs, the Government has increased the scheme’s upper loan limit from 20% to 40% to reflect the current property prices.

How it works:

  • You can apply for the equity loan if you have a 5% deposit and you’re after a new build property.
  • The equity loan can be worth up to 20% of the cost of your newly built home.
  • As the equity loan can be worth up to 20% and you have a 5% deposit, the mortgage you need is therefore based on 75% of the cost of the property.


  • Available to both first time buyers and those moving from another property they have sold.
  • Helps you out of renting and onto the property ladder.
  • The equity loan is fee free for the first five years.
  • You can wait until you sell the property before you pay the loan back.

Need to know:

  • In the sixth year, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year.
  • Loans are available on properties worth up to £600,000.
  • You can’t go on to sublet the house.
  • You can’t part exchange your previous property.
  • You won’t be eligible to take the equity loan if you own any other property.
  • After 25 years or when you sell your house whichever is earliest, you’ll have to repay the whole equity loan. The repayment amount is based on the percentage you borrowed (up to 20%) and not the original loan amount. For example, if you bought a £200,000 house and borrowed 20% through Help to Buy Equity Loan, then sold the house for £220,000, you’ll need to pay back £44,000, not £40,000.
  • The property must be bought on a repayment basis, interest only isn’t available.
  • Not all lenders offer Help to Buy mortgages, so your choice of mortgage may be limited.
  • If you want a further advance or to alter or extend the property, you’ll need to obtain permission from the Post Sales Help To Buy Agent.

How to apply:

You need to speak to a Help to Buy agent, who are supplied by the government. They’ll talk you through the scheme to find out whether it’s right for you. You can find them on

Building new homes

For help to buy to work, we need affordable new homes being built in parts of the country in which people are able to find the jobs to meet housing costs. Work is the vital link in all this.

Sharing home ownership

If we are serious about ideas like inter-generational fairness, we need to treat the housing issue as more than a job for the “bank of Mum and Dad”. I have written on this blog about the good work of unmortgage. They are only one of many organisations aiming to increase shared ownership of property between those who have the money (the big financial institutions looking for a steady income stream) and those who don’t!

The demand for shared ownership is clear. Go to to see the diversity of arrangements which are coming to market.

What are you doing?

We (First Actuarial) are interested in extending the work we do around retirement, to those who are building the platform for their later-life saving (through home-ownership or assured tenancy).

If you work for an organisation that is actively helping younger staff get on the housing ladder, we’d be interested in details. You’ll appreciate that as pension consultants this is not home ground!

We’d be particularly keen to hear from social housing organisations about what they are doing both for their staff and for others.

If you’d like to help us out in this, please contact or .

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Moral hazard – Con Keating


This expression has been widely used in recent pension reports and consultations. It has wide currency in the world of insurance, and academic finance, where it is a term of art. Many of its recent uses are deeply problematic and unhelpful.

Moral hazard refers to the situation where, once insured, we may cease to show proper care in avoiding the incident covered by the insurance. For example, we may fail to check, as diligently as when uninsured, that all windows are closed and locked after we have taken out household contents cover. Policies contain a number of mechanisms to limit this increased risk exposure; such as a deductible or first loss which the insured bears, or a requirement that there be signs of forcible entry.

One important element is that the beneficiary has control or influence over the situation. Although the reductions in pensioner benefits imposed by the Pension Protection Fund have often been presented as standard moral hazard mitigants, they are not warranted as such. The member does not have control over the behaviour of the scheme, fund or sponsor employer.

The scale of those member deductions is also troubling; they are very large. They may be estimated by considering the valuation of the PPF benefits (s179 value) and the valuation of full all risks buy-out of those same benefits. For the most recent (Tranche 9) triennial valuations, the average PPF benefits lie between 65% and 70% of full benefits. The PLSA consolidation paper is right to be concerned by the extent of these deductions.

It also raises the important question of just how much risk is being covered by the PPF. With average scheme funding at 63.7% of full buy-out, and 95.1% of PPF benefits, the answer (on average) is precious little.

A risk process in which such high deductibles were rationally justified, would be one which was extensively under the control and influence of the insured. For this reason, it would be expected to have few underwriters. However, the risk process here is insolvency, and that is the most widely underwritten class of risk in all finance; it features centrally in banking, insurance and investment management.

The prudent valuation, “technical provisions” standards, are indeed prudent, probably recklessly so, at 71.2% of the buy-out price on average. This is 142.4% of the best estimate of liabilities. In the post-crisis period, banks have objected strenuously to regulation requiring coverage of less than 120%.

The fact that we have bought “all-risks” household insurance does not confer on us the right to burn the house down and claim under the policy, though of course burning the house to the ground is within our rights, provided this action is harmless to others. Indeed, such a claim, arising from our actions and intent, would be fraudulent. The householder may be behaving in an amoral or immoral manner, but the circumstance is certainly not one of moral hazard. It is a clear breach of good faith, and as such voids the policy.

With that in mind, it is surprising to see references to “unscrupulous” employers deliberately abandoning schemes. A very strange employer this: prepared to abandon the scheme, but only when members, of which few are likely to be current employees, have some partial degree of benefit protection.

Properly that abandonment behaviour, and its myriad intermediate shades, should be analysed in the context of the employers’ incentives, and there are many such incentives arising from the capricious and arbitrary nature of much of current accounting and valuation practice, and the associated costs.


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Should we be wary of cheap financial advice?

robo human

Robert Reid is a very professional IFA and  someone I like a lot. He represents IFAs and stands up for their interests in Money Marketing. His latest article argues that “cheap advice” especially cheap advice on pension transfers, is wrong.

Those firms offering bargain-basement services cannot be delivering a report that is all that comprehensive

In case you are wondering what “cheap” looks like – it’s £500- £1,000. Robert charges more

On average, we charge between £2,500 and £3,000 for the advice

I know of one case where a friend paid £10.000 for a recommendation to transfer his pension from a DB plan to a personal pension. My friend’s an actuary, he knew the answer, he just had to have the certificate from a Regulated Adviser.

So why these huge fees for a simple go/no-go recommendation?

The answer lies with the Professional Indemnity Insurers who stand behind the advice and are charging premiums based on the risk to them. A £1,000,000 CETV may be ten times more risky than a £100,000 CETV. Which is the justification for charging the fee as a percentage of the amount transferred.

There is something wrong here. There is a breakdown of trust between parties, between the insurers, the advisers and the financial ombudsman who presides over claims.

Robert is right to criticise loss-leading advisers who are effectively working on a no-win no fee basis, banking on making their money from funds under advice. This is no way to carry on and I am with him all the way if that is what is going on with cheap advisers.

But what if an adviser created a process that was neither labour intensive or risky? The basis of robo-advice, is that if the robot’s algorithm is fool-proof , all that can go wrong is the mismanagement of data in or out.

If i was an insurer, my biggest worry in a process-driven recommendation like a transfer value recommendation, would be the amount of human intervention that might get into the way of the robot.

As with transfer advice, so with actuarial advice.

Actuarial firms like mine, have understood for some time, that much of what we do is simply a process that can be defined and coded for a computer to do. The cost of the program tend to zero and the risk of the algorithm going wrong is considerably lower than the risk of a series of manual calculations.

Robert sounds – to me – very much like some of the actuaries i knew ten years ago , who did not embrace the new technologies and are now retired actuaries.

The FCA’s project innovate, with its sandpit – allows advisers to test ideas such as robo-transfer recommendations ,  with the regulator. If the FCA are comfortable with a robo-process, I suspect so will the insurer.

My advice to Robert (and to those who are commenting on his post) is to start thinking seriously about automating their pension transfer process. For the costs of financial advice tend to zero , when you get in bed with a robot.

You can read Robert’s article in Money Marketing here;

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Get a grip and a sense of humour


The sky is full of helicopters and the streets wail with sirens. It is 9 am on the morning after the latest “terrorist” attack and Westminster and the City are on red alert.

One nutter decided to go on the rampage driving down a wide pavement on Westminster Bridge and injured 40 people, he managed to kill three. The nutter then drove his car into the railings outside parliament and killed a policeman with a knife.

Frankly, London should get a grip, the car wasn’t loaded with high explosives, no lethal gas was emitted and the “terrorist” doesn’t appear to have had a gun.

Maximum fuss.

Twitter shows a woman sitting on a pile of bricks , the morning after the blitz

Facebook has a list of my Friends telling me that “they’re safe”.

Get a grip – and a sense of humour.

This is not war

In the eighties terrorism was organised. If you wanted to get out of some pubs in Kilburn and Shepherds Bush, you made a donation to the Fenian collection.

The IRA bombing campaigns were not just well organised, they were well executed and caused extreme disruption.

We were at war with the IRA and if you worked in the City, you were under threat. A glass window fell through the roof of my car when Bishopsgate was bombed.

By contrast, we are facing what Ronald Reagan correctly called

the strangest collection of misfits, Looney Tunes and squalid criminals since the advent of the Third Reich

Reagan was right to be both bold and funny. The one weapon that we have at our disposal is our great British Sense of Humour!

I will not laugh about the deaths or about the injuries, but I am laughing at our over-reaction!

There is more risk of me cycling over Blackfriars Bridge than of being caught up in one of these attacks. The random killer who desperately attacks the public is not the product of a diseased society or of a holy war or even a lack of opportunity. This idiot was deprived of reason.

No free-pass to the heavenly virgins.

Last night I went to see three hours of cursing, substance abuse and sexual violence with Imelda Staunton starring in Albee’s “Who’s afraid of Virginia Woolf. The theatre was half a mile from Westminster. It was full, we laughed a lot.

People still do laugh, and they man and woman up and they just get on with it.

The markets trade as usual, we go to work and we have fun.

Meanwhile the miserable “terrorists” plotting their next incursion into sanity are taken seriously by the army of pundits that appear on our TV and radio stations.

What we saw yesterday was nothing like the Blitz, or even the IRA bombings. It had the tragical/comical/farcical features of the anarchists in Joseph Conrad’s “Secret Agent”.

The only person who should take this idiot seriously is himself. He’s got a bit of explaining to do before he meets his four and twenty virgins.


When we lose our sense of fun- we’ll know the terrorist has won

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Standard Life’s IGC Statement – two greens and a red!


The Standard Life IGC’s chair report was published on Friday. You can find it here

As a note to Standard Life, it would be good if this report could be given more prominence on your home page, you can access the report from a search on IGC but there is no clear path for policyholders and the report is a little hidden.

That said, both the short and long versions of the report make for interesting reading!

It’s not been a great year for Standard Life. The report touches on the poor performance of its GARS product, while this is not the sole component of the default used in its workplace savings plan, it has contributed to the serious underperformance of the default over the past year.

Perfromance FA

To January 1 2017 – source First Actuarial


Rene Poisson, the IGC Chair attributes this underperformance to BREXIT and low interest rate rises. We’d like to see a more strenuous investigation into what has gone wrong. It will take a long time for policyholders to make back over 10% under performance relative to Standard’s principal rivals. Long-standing policyholders and those who have aggregated from other schemes may not be satisfied by the Chair’s statement…


Frankly, if Standard Life were a football club it would have been relegated last year. If Celtic or Rangers had found themselves gong down this season, I doubt their fans would be quite this tolerant!

I have put the performance issue to the fore, in the reports it is buried. I would have preferred the Chair’s Statement to have given this major issue more prominent


The other major news item for policyholders this year came too late for the IGC Statement to do more than make reference.

The merger of Standard Life with Aberdeen Asset Management which is likely to happen in 2017 will complete the journey Standard Life has been on from insurer to fund manager. This is clearly a healthy transition for shareholders who will be operating in a less capital intense space with the potential for less risk and greater margins.

But we hope the IGC considers not just what is gained, but what is lost. There are aspects of the UK Life Insurance industry that have the potential to deliver great certainty to workplace pensions. I am not sure that the new structure will be able to focus on member’s interests quite as the old Standard Life could.

The IGC will be keeping a weather eye on developments. I hope that Rene Poisson (himself an alumni of JP Morgan) will consider what the move means to Standard Life’s commitment to the insurance against his member’s living too long.

Process and legacy – how effective has Standard Life’s IGC been?

I’ve included at the bottom of the blog a list of points we’ve picked out for discussion with Standard Life. The report goes into a lot of detail over minutiae which is extremely helpful for advisers and employer fiduciaries. With 20 pages of appendices and 40 pages of core text this is likely to be (as it was last year) the most comprehensive IGC statement.

For that reason I award the Statement a green for its effectiveness in getting to grips with the service levels, slippage against performance targets and its engagement with the legacy charges paid by longer-standing policyholders

Value for money

I cannot award a green for the Statement’s progress towards a value for money formulation. The Statement chooses to talk not of value for money, but of “value”, which is surprising, as Good for Go is an expensive workplace pension scheme both to member (0.75% +transaction charges) and to employer (£100pm maintenance fee). While there has been some discounting of the employer fee in 2016/17 it still makes Good to Go a premium product that needs to be considered as such. I didn’t get the impression that there had been much benchmarking of Standard Life’s costs and charges against market rivals.

What benchmarking that had been done, had been outsourced to NMG who had looked at Standard Life against 10 rivals and asked questions of 15,000 policyholders. I am a well-known opponent of relying on vox-pops of this kind. The framing of questions can lead to unintentional bias’ in answers and this is particularly the case where those questioned are not familiar with the workplace pensions they have been defaulted into.

My dissatisfaction with basing a value/value for money score on the views of those least capable of explaining their workplace pension is best summarised by the OFT in its 2014 report


The value of the research has been further undermined by what the Standard Life IGC points out is blatant interference by providers in the transparency of reporting




Reading the IGC Statement’s comments on the findings of the research (published in Appendix 8) , one can only conclude the exercise was a complete waste of time and money.


While there is a lot of time in the report devoted to investments, the substantive issue of what members are actually paying for their investments has not been addressed. This is not Standard Life’s faults or the IGCs. We await a definitive announcement on slippage from the FCA.

However, for ducking an exploration of the train-crash of 2016-17 fund performance, allowing itself to be led down NMG’s garden path and failing to establish a coherent benchmark for measuring long-term performance (as Pru and NEST has done), I give Standard Life’s report a red for value for money reporting. It could and should do better next year

Tone of the report

In last year’s report, I was critical of the IGC report as being somewhat in the pocket of the insurer. I am pleased to say that I’m not repeating that criticism. The very detailed examination of what is going on within Standard Life is helpful and interesting. The tone of the report is formal but it makes sense.

On many occasions it expresses frustration with Standard Life (as you would expect) and you sense that Rene Poisson is on the member’s side throughout.

Criticisms of the feeble attempts to benchmark Standard Life against its rivals, expose the truly awful problems with the default and present the reader with a list of potential worries about the merger with Aberdeen are dealt with elsewhere.

For all these inadequacies, this is one hell of a report which sets a benchmark for those to come, in terms of its attention to detail and professionalism of approach. I find its tone spot on and give it a green.

rene poisson

Rene Poisson -IGC Chair




Annexe –

A quick run through the key points we spotted in the report, that matter to those with, or analysing, Standard Life’s “Good to go” workplace pension

  • Although 98% of transactions are processed on a straight through basis on the same day, service levels for non-STP transactions (generally 10 days turnaround) slipped in 2016
  • This slippage has been, in part, attributed to the roll out of a new workflow management system (BPM)
  • Top complaints relate to time to answer phone, time to deal with demand and processing errors
  • IGC have challenged SL to extend telephone opening times. Trial period of extension will be undertaken
  • Cap on early exit charges was implemented on 15 February (ahead of 1 April 2017 deadline)
  • Policyholders paying greater than 1% has reduced from +250k to -50k (99% of which due to ‘expensive’ fund choice rather than commission)
  • IGC have challenged SLI on poor investment performance over 2016 (attributed to Brexit and lack of interest rate rises)
  • Modern QWPS provide no more profit than legacy schemes and both provide value for money
  • There are legal issues with switching member investment strategies in legacy schemes (away from annuity purchase). IGC is disappointed that there hasn’t been legislation to address this issue. SL are considering:
    • Contacting employers/advisors with ‘inappropriate’ defaults
    • Redesigning the Annuity Purchase Fund to be more multi-asset in nature and therefore more appropriate at retirement (an alternative Annuity fund would be introduced for switching to for those truly purchasing an annuity)
    • Changing scheme rules to allow SL to make changes to defaults
  • Process flaw resulted in 0.75% charge cap being breached for a number of members. All are being redressed
  • SL trialled a ‘save more tomorrow’ initiative with a number of large employers. Take up was less than 5%
  • SL have put aside £175m in relation to historic annuity sales pending an industrywide FCA review
  • IGC believe a single investment only offering as a default does not provide value for money ,
  • IGC believes core financial transactions are generally processed promptly and accurately
  • As there is no agreed basis for reporting transaction costs (expected in Q2 2017 from FCA), it has been very difficult to assess these fully


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My biggest financial decision was made with professional advice.


The most important single financial decision facing the baby-boomers of middle England today is what to do with their defined benefit pension rights. It is – alas – a binary decision as few schemes offering split transfer values; the choice is “should I stay or should I go”.

For those who have private wealth, the system used to calculate the transfer value of a right to a defined pension benefit is odd. The value is not linked to the growth of assets within a pension scheme, but to the cost of meeting the pension promise (your liabilities).

In the arcane world of actuarial science, a shift of measure by which these liabilities are re-valued (say from RPI to CPI) can impact a lifetime of payments profoundly. Equally, a fractional  change in the discount rate used to calculate the cost of your liabilities can translate into material differences in transfer value calculations.

Explaining this to people used to reviewing the value of their wealth using an online funds portal can be very difficult! For many baby-boomers (and I am one), the messages we get about our defined benefits and our retirement wealth are contradictory and confusing.

The financial adviser is faced with a number of challenges in helping a client with the binary decision; put in simple terms they are

  1. to explain the risks of relying on capital to provide a lifetime pension
  2. to explain the risks within a defined benefit pension scheme that pensions won’t be paid in full
  3. to balance the certainty of a defined pension paid till death against the flexibility of the capital reservoir available for drawdown.

In my experience, people bring to their decision making a variety of prejudices built up over a lifetime saving. These create innate preferences for one decision or another. Helping people to understand what is an objective assessment of a particular risk and what is a financial hunch is difficult, especially where the prejudice is born out of a shared loss.

People who manage  defined benefit schemes are justifiably concerned about the quality of information getting to their members. At one extreme are the defamatory statements made by expatriate advisers such as this;

Pension funds in the UK are in major trouble as the promises made cannot be met and upheld    source;

This adviser, working out of Geneva, is able to draw on de-contextualised statements from figures such as Alan Rubenstein (CEO of the Pension Protection Fund or PPF) who last year told the Telegraph that watching pension schemes enter his Fund was “like a slow-speed train crash”. This emotive language is picked up by personal financial journalists eager for a story.

Last April, the Daily Telegraph published an article (containing the quote from Rubenstein) that contained in its headline “my company pension scheme paid £70,000pa, now it pays £17,500.

It is extremely difficult for a financial adviser not to side with this prejudice against defined benefits, especially where the bulk of the work that can be done for the client would be done if a transfer value were taken and money managed as part of the client’s wealth.

Indeed, with many schemes valuing pension liabilities with reference to gilts , transfer values now offer a much lower challenge to the wealth manager who may need to get little real return on assets to meet the critical yield.

But the challenge of meeting client expectations increases over time. The initial enthusiasm for a transfer value that can be up to forty times the pension given up needs to be maintained over time.

Defined benefit schemes are used to managing benefits over generations, many of the schemes which my firm advise have had fiduciary responsibility for the management of the pension promise for 50 years or more. These are the time horizons that many facing pension decisions in their 50’s should be contemplating for themselves.

We would urge people approaching the years in which pension freedom first come available, to think long and hard about taking defined benefit pension rights away from the fiduciary care of pension schemes and their trustees.

We would also counter the scaremongering from UK PensionGuru, the Daily telegraph and the pension establishment itself. The vast majority of UK defined benefit pension schemes are in much better health than is reported by the PPF.

The notional deficit of the 7000 defined benefit schemes is calculated using a gilts based discount rate. Recalculate the funding position of these schemes using the best-estimate returns on their actual assets and you find the critical yield needed for these schemes to meet their liability is 0.6% below inflation. (source First Actuarial)

Far from increasing, the number of schemes entering the PPF has actually declined over the past three years. Corporate insolvencies are currently running at 0.4% pa for enterprise employers  (source Brighton Rock).

The worst case scenario can befall someone yet to draw their defined benefit pension , whose pension scheme fails , is that it enters the PPF.  For those with pensions that are more than the PPF compensation cap (for a 65 year old around £37,500) , the PPF will not provide additional compensation above 90% of the cap, these are the people who may consider a high proportion of their pension to be at risk.

But we need to be realistic about this “high risk”. The BHS pension scheme has recently announced that of the 19,000 members who are going into the PPF, only 16 had benefits that exceeded the cap. Ironically, they will be the biggest beneficiaries of the £363m that Philip Green could pay into the scheme.

The risks facing private individuals with DB pension benefits entering the PPF are real enough.Pensioners will only receive statutory revaluation of pensions in payment, those below the cap awaiting their pension to come into payment will receive 90% of the pension they’d been promised. But no-one, can expect to be left bereft if their pension scheme goes bust.

If the risks facing deferred pensioners have been overstated, the benefits of their impending pension have been understated. I am an enthusiast for my pension, so much so that I chose not to take my tax-free cash so that I could take my pension in full.

I now enjoy the prospect of an increasing income paid without any tax complications for the rest of my life (and of providing a reduced pension for my partner if she survives me).

For someone with limited aptitude for managing money, the certainty of this income is already improving my quality of life!

Knowing that I will still be receiving this income in years when my faculties may be deteriorating is a further comfort.

I looked hard at my CETV which needed only a 3.2% return to meet the TVAS critical yield. I decided against taking my transfer value because I had private wealth that I could call on if I needed it but had no access to income were I to choose or be required to stop work.

My binary decision was influenced by other factors, the Lifetime Allowance among them. But above all else, I took the decision based  a holistic view of how I wanted to live my later years.

I am no longer a financial adviser, but I still recognise the value of financial advice. I am very grateful to my financial adviser for the life-coaching he gave me.  It enabled me to see the wood for the trees. Ironically, his work talked him out of a steady income stream managing my pension wealth. For that I regard him as a true professional.


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