Mick McAteer of the Financial Inclusion Centre and Romi Savova of Pension Bee

I have a high regard for Mick McAteer, someone who’s passion is compassion. Mick fiercely believes in the primacy of the public sector in delivering pensions in the UK and he argues against private initiatives that he sees diluting the impact of state sponsored projects.

His Financial Inclusion Centre mobilizes publicly held money to be put to work for social good.

Hear hear.
Financial Inclusion Centre calling on government to issue Social Housing Bonds to raise funds at historically low cost for social housing.
Similarly, let's use NS&I to issue Social Housing Bonds to raise funds – just like post war housebuilding programme https://t.co/TNEL9RyZNI

— Mick McAteer (@MickMcAteer) July 1, 2020

Mick’s view, as the views of others such as Jeannie Drake and Gregg McClymont inform and temper our thinking. Without the interventions of the state, we would follow the dystopian world of unchallenged capitalism which has led to consumers seeing value destroyed.

This position means that even on issues of sustainability, state sponsored initiatives are promoted and private work denigrated

Using more costly private finance (pension funds etc) has a huge cost for society.
– citizens pay more for services
– a transfer of wealth from younger/ poorer to older/ better off
– big fees for big finance
This undermines, not supports, economic and social justice#CIF20 #CIFUK

— Mick McAteer (@MickMcAteer) July 1, 2020

I don’t share this view and though I am not an economist, I see evidence , even in this time of pandemic of the private sector delivering answers to the nation’s problems.

Banking

So let’s look at three areas where the private sector is serving the public interest

Macquarie Infrastructure Debt Investment Solutions (MIDIS) has raised £2.7 billion in commitments from predominantly UK corporate pension schemes, local authority pension schemes and insurance companies in the latest round of fundraising for its UK infrastructure debt strategy.

MIDIS raised more than £220 million via its second UK focused pooled fund targeting investments in inflation-linked debt in essential UK infrastructure businesses. A further £2.5 billion of commitments was raised to invest alongside the fund through separately managed accounts.

Many maturing defined benefit pension schemes and insurance companies have increased their exposure to inflation-linked infrastructure debt seeking to better match their inflation-linked liabilities. Investors have also been attracted to the prospect of higher returns than those offered by other assets with inflation protection and the lower risk profile of the asset class when compared to corporate debt

Insurance (pensions)

In the middle of June, Legal & General released a report called the power of pensions in which it suggested that the massive flows of defined benefit pension schemes to bulk buy out could release money that can plug the £200bn gap in funding for further infrastructure projects.

Data (dashboards)

There is a third area where the public and private sectors can work together and it is in the gathering and distribution of data sharing.

Increasingly our financial affairs are simplified by ready access to data. The open banking initiative, the general data protection requirement and the development of the Government Gateway have meant that we can gather data about our savings and out tax affairs online and do everything from paying tax-bills to consolidating pensions from our phones.

For this to happen, Government has worked with the private sector to establish protocols and police behavior to ensure that the public can do what they need to do in real time without fear.

But I fear that progress towards a goal of consumer empowerment, where people can look into their pensions and make informed decisions on where they want their money invested and how they want their retirement wages paid to them is under threat.

It is under threat from the well-intentioned but ultimately regressive views of those who want to take the private sector out of the dashboard project. Consumers have already seen promises of pension finding, data aggregation and dashboard delivery slip back year after year.

A long history of state and private sector collaboration

There is a long history of successful projects where state and private sectors have worked together to deliver good. That history continues to this day as is evidenced by the banking activities of McQuairie and the Insurance activities of Legal & General.

It is up to those on the skeptical left, Mick and Jeannie and others, to accept that the aims and aspirations of the private sector. People like Nigel Wilson, L&G’s CEO,  of Macquairie’s Alistair Yates (who shared the MIDIS fund with me) and with the data sharers such as Romi Savova of Pension Bee are not financial hooligans but business people who organise wealth to meet the needs of society. Whether this be through private sector investment or the generation of taxable wealth, the business of finance is to mobilise capital.

Those who work in public service must trust these people just as we must respect those who work to protect the public within Government. That is the way it is, has been and will be.

Guy Opperman (Pensions Minister) and Nigel Wilson (CEO L&G)

Iain Clacher and Con Keating

Scheme funding is now the principal risk management tool for DB schemes, a development which has been encouraged by parliament and the regulatory authorities. It appears that the answer to everything is ever more funding of the pension promise and at the heart of this approach is the risk of sponsor insolvency.
The purpose of funding appears now to differ between secured accrued debt and paying pensions obligations. Historically, for DB pensions, this purpose was to provide security for the promise accrued, or earned and unpaid, up to the date of insolvency. It has changed to funding being adequate to pay all pensions as they become due or to purchase a contract replacing the as-yet unearned future benefits promised in the case of DB pensions.

This change of purpose significantly raises the level of funding required, which is costly to the sponsor employer. In previous blogs we have commented on the inequitable nature of this latter interpretation.
In this blog we shall investigate the costs that these funding strategies impose on the sponsor employer and conduct a small thought experiment to illustrate the nature and magnitude of the issue.

We abstract from the complexities of a full DB pension scheme, and consider a zero-coupon 15-year bond issued at a yield of 6% p.a. which we can view as a simplified approximation of the costs (of the employer) and benefits (to the employee) of a pension scheme.

The bond matures at par (£100) and the initial subscription is £41.73 (the discounted present value of the par value, where the discount rate is 6%). We choose 6% as the yield on this bond as our analysis of a small number of DB pension schemes has shown the average contractual accrual rates (CAR) of their stock of undischarged awards to lie in
the 6%-7% range.
If this rate appears high, given current market yields, it should be remembered that it is the result awards made over a history stretching back as far as the 1960s and perhaps even 1950s. One notable feature of DB schemes is that awards made in the mid and late 1970s may have embedded very high accrual rates – in many cases over 14% at the time of award.

Subsequent experience and revised projection assumptions have lowered this rate materially, to less than 9%. This is principally the effect of far lower than assumed wage and price inflation, countered by increasing longevity.
Returning to our thought experiment, we next consider the position after one year, when the accrued value of the liability is £44.73 on the contracted terms. As above, this figure may be derived as the discounted present value of the ultimate payment (benefit) or the accrued value of the subscription (contribution) using the 6% contractual rate.

Let us also consider the effect of using an externally chosen discount rate, say, the gilt yield for the remaining 14-year term. Assuming the gilt-based discount rate is 1%, then the reported value of this liability is now £87.0.
Ordinarily, these values would be immaterial if no action is based upon them. However, to maintain the comparison with pensions we now introduce a collateral security funding arrangement for the obligation, in the amount of these reported values.

The difference in required funding cash flows is stark. It is immediately obvious that these funding strategies cause this obligation to differ in its effective term or duration, and with that their cost.

The original unsecured bond was 15-years. The secured 6% CAR-based accrued liability has a duration of 9.06 years, and the 1% discount rate variant has a duration of just 2.70 years.

The cost to the sponsor company in the unsecured case, where the obligation is funded at maturity, is 6% p.a. This rises to 10.13% p.a. when funding to the CAR level is required, and 38.07% for the 1% discount rate case.
A sponsoring company might well be prepared to accept a 15-year 6% obligation, and perhaps even a 9.06 year 10.13% obligation, but it is difficult to believe that any company would knowingly sign up for a 15 year 6% bond which could be foreshortened to a 2.70 year obligation at a cost of 39.07%.
This thought experiment illustrates the method by which DB pensions have become ’unaffordable’ even though there has been no material increase in the ultimate amount payable. It is the arbitrary application of exogenously sourced discount rates.

Investment returns and funding strategies

To estimate the cost of these different funding strategies to the sponsor company, we have assumed no investment returns. However, if we assume an investment return, we observe a fuller picture.  A return of 6% p.a. (1) is particularly informative.  At this rate, there is no cost to the sponsor beyond the initial contribution made at the time of award.

By contrast, an additional contribution of £42.77 (2) is still needed for the 1% discount rate case at the year one valuation. This contribution like all other assets in the fund will need to earn 6% per annum. This means that, in future, it will result in surpluses relative to the 1% discount rate liability valuation (assuming the discount rate remains at 1% for the remainder of the liability and is not decreased by other exogenous factors such as government largesse and QE).

This contribution is effectively an advance to the scheme on which it will earns the subsequent surpluses. If the excess funding (relative to valuation) can be extracted (3) at the time of occurrence (which is unlikely) the advance has an average life of 7.19 years, and 14 years if it cannot be recaptured before the discharge of the pension(s).

The practice of spreading large contributions over several years as a form of ‘deficit repair schedule’ is now common with changes to average schedules published annually in the Purple Book.

While having a schedule may alleviate a sponsor’s immediate liquidity concerns, it does little other than shorten the term of the advance i.e. . and these contributions still all earn the investment return of 6% p.a. in our example.

It may be that a 6% p.a. return on capital is competitive with the long-term investment opportunities available to the sponsor company, but this has the unique feature that, when market discount rates are used, its timing lies outside of the control of the sponsor employer.

Concluding Remarks

As pension funds are often promoted because of their long-term nature, it is worth noting that any contributions to a scheme, beyond the initial contribution, which constitute part the long-term capital of the scheme come about by extinguishing a long-term liability of the company.

There is no net gain in long-term investment. In fact, it may be that there is a reduction in productive investment as the money that comes into the pension scheme is invested in the financial economy i.e. existing assets e.g. equity in the secondary market or credit that is already in issuance.

This thought experiment is intended to illustrate the extreme dependence of the sponsor company’s cost of provision on the level of funding imposed and the shape of this through time. We have kept this to a single valuation, but it is perfectly possible to extend this analysis to include multiple dates, stochastic variation, and adjustments such as ”prudence”,but there would be little by way of new insight to the logic illustrated here.

Taken together, funding is a very inefficient and incomplete solution to the risk management problem of DB schemes, namely sponsor insolvency.

(1) If the investment return is just 1%, the sponsor cost is the single contribution of 44.85% for the 1% discount
rate case, while the cost for the CAR case is 9.44% p.a.
(2)This figure is the discounted present value at 1% less the initial contribution and the accrual on that of 6%.
(3) We have ignored the taxable nature of withdrawals from the fund.

Pension scheme members can be passionate about pensions!

“How can schemes make ESG compliance meaningful?“

that’s the question Angus Peters of FT’s Pension Expert asked his readership. It may not sound the snappiest of headlines but here’s what followed and after spending yesterday afternoon at the launch of Making My Money Matter, I’m pleased to hear a journalist speaking with some conviction.

How do we get beyond compliance?

The change that is needed is in the mindset of trustees who still see their job as managing the scheme to the rules. The rules say you minimize risk and so you don’t take the risk of embracing ESG as the guiding principles of your scheme. You do the minimum required to comply with the law and that means boiler-plate statements that nobody reads.

Yesterday Make My Money Matter launched a campaign to get some intention into pensions. On its website are two templates, one addressed to employers, another to pension providers, there should be a third , to trustees. Because despite the noise about workplace pension £2trn of the £3trn in UK pensions is under the control of trustees and committed to paying defined benefits.

Dear trustees

I’m getting in touch about my company pension. I’d like to know what impact our pension investments are having, and if that impact is aligned with our organisation’s values?

Through our pension fund we could be investing in things like fracking, arms, and tobacco. I think it’s important we find out if this is the case.

Can you tell me where our company’s pension fund is invested and what it’s doing for the world? And could you let me know what alternative options might be available to us to make sure our pensions are helping create a world we want to retire in to?

If you’d like to find out more about how we could have this conversation please visit Make My Money Matter.

I appreciate your support and hope this conversation will lead to our organisation having a pension we can all be proud of.

Thank you,

In Pensions Expert, Stuart O’Brien of Sackers explicitly mentions Make My Money Matters. Commenting on the failure of many trustees to talk with scheme members about what the trustees are doing, he says this reticence to give members the full picture extends even to schemes that are leading the market in terms of what they actually do:

“There’s a surprising amount of nervousness around putting information out there for members.”

Cautioning schemes to embrace transparency before it is forced upon them, he adds:

“There’s a risk here that if trustees don’t start being more transparent with members, we’re going to have organisations like Make My Money Matter putting pressure on them to do more. Some of that pressure might be well-intentioned, but not necessarily appreciate the environment within which trustees operate”.

As the “G” in ESG stands for “governance”, perhaps it would be in the trustee’s interests to help them understand this environment. Maybe I’m being naive but I thought the direction of travel of the Pension Schemes Bill was directly aligned with the direction of travel of Make My Money Matters.

While I appreciate that ESG can create conflicts between employers and trustees and that sponsors need to have a say in the management of scheme assets, I do not see why these conversations should not be explained to members.

Rather than fearing MMMM, trustees could be reaching out to them. Rather than worrying about receiving emails using the template above, they should be sending out requests to members asking them to look at  https://makemymoneymatter.co.uk/make-a-change/

Indeed the chair of trustees of HSBC, Russell Tricot, was featured in yesterday’s launch and he spoke feelingly of the trustee’s duties. HSBC’s staff scheme, we should remember, has fully embraced the principles of ESG and is largely responsible for the FutureWorld fund run by L&G.

Make Members Money Matter

We are in no ordinary times, we can go two ways. Either we can lock down or look up. Locking down into the old ways of investment risks missing a chance to engage with members on the management of their money. All the research suggests that ESG clearly matters to people when properly explained.

Trustees have the opportunity to reach out to popular movements such as MMMM or to react to them.

I urge trustees to go to Make My Money Matter and make a pledge

It didn’t feel like winning, it didn’t feel like losing. The launch of Making My Money Matter has just over 500 attendees and featured accomplished performances from Richard Curtis, Mark Carney, Helen Dean, Gillian Tett , Tanya Steele and Russel Picot.

Everyone spoke well and there was a chance for pre-selected questions to be answered but something was missing. I realized what it was when I pressed on Quietroom’s video. What was missing was the passion of the people speaking from outside the tent.

This is going to be the challenge for MMMM.  In terms of PR, the event has not registered, even in the pensions trade press.

If you google My Money Matters this morning , the listings are headed by an enterprising IFA whose website leads insidiously to a data capture not to Making My Money Matter but to the servcices of The Path Financial Ltd, Watch Oak, Battle, TN33 0YD.

There is no story, there is no protest, it is all feeling a little over-sponsored and underwhelming.

What is the call to action?

There are three calls to action on the MMMM website but they are going to need to be a lot louder than they are right now for this campaign to catch alight.

You can sign their petition ,

Together, we call on all UK pension funds to put people and planet on a par with profit when investing in our pensions.

Unfortunately doing so triggered me subscribing to an MMMM newsletter and I’m not clear who I’ve petitioned and how our call is going to influence UK pension funds to change their behavior.

You can share the campaign

This link allows you to send tweets mentioning up to ten pension providers which include (bizarrely) AXA, but don’t include L&G, Aegon or any of the 42,000 occupational pensions that don’t have master trust authorization.

Hey @nestpensions, I’m calling for #pensionswithintention. How can I make sure my pension is building a better world while it grows? #makemymoneymatter

— Henry Tapper (@henryhtapper) July 1, 2020

Sorry to sound a little less underwhelmed but I don’t see anything in these calls of action that is going to catch the popular imagination.

This campaign is competing against some pretty powerful grass roots campaigns such as #BLM . It is going to have to speak with considerably more conviction and power than it has so far if it is going to extend the argument beyond the 500 who tuned in yesterday.

You can email your employer (or pension provider)

Here’s the text

Dear employer,

I’m getting in touch about my workplace pension. I’d like to know what impact our pension investments are having, and if that impact is aligned with our organisation’s values?

Through our pension fund we could be investing in things like fracking, arms, and tobacco. I think it’s important we find out if this is the case.

Can you tell me where our workplace pensions are invested and what they’re doing for the world? And could you let me know what alternative options might be available to us to make sure our pensions are helping create a world we want to retire in to?

If you’d like to find out more about how we could have this conversation please visit Make My Money Matter.

I appreciate your support and hope this conversation will lead to our organisation having a pension we can all be proud of.

Thank you,

there is a variant to the pension provider you can access here.

How will MMMM prosper?

It is going to have to tap into the deep wells of passionate support for change in a way that Greta Thunberg has and yesterday’s launch didn’t.

There appear to be a number of PR agencies and communication specialists on board but beyond the Quietroom video, I don’t see much on the MMMM website that is going to get people moving. The under thirties I introduced to the launch tell me the same.

People are going to have to buy into Richard Curtis and Mark Carney for this to happen and the two star turns are conspicuously absent from this blog because I have very little I can remember from what they said yesterday which I haven’t heard many times before.

So what can I share with you this morning?

I wrote this down because it was repeated throughout the morning, I believe the source is an article on Nordea.com

Your pension, savings or investments could have 27 times more impact on your carbon footprint, compared to all other activities combined.

I could also share the blog of Nossa Capital, which is integrated into the MMMM website. But I’m not going to because it is infact a call for you to subscribe to Nossa Capital’s newsletter.

I want to share with you my passionate belief in the power of people to make our money matter. But I do not feel that this campaign has reached out beyond the 500 or so who logged on to the webinar.  I will continue to promote the campaign with what reach my blog has, but right now I feel it has yet to find its spark.

 

Right now it all feels a little too polite

Remember what we’re up against

COVID-19 is really putting Sweden on the map, and maybe for the wrong reasons.

Unlike most EU countries, Sweden did not try to shut society down. It closed schools for the over-16s and banned gatherings of more than 50 people, but otherwise relied on Swedes’ sense of civic responsibility to observe physical distancing and home working guidelines. Shops, restaurants and gyms remained open

Authorities argued that public health should be viewed in the broadest sense, saying the kind of strict mandatory lockdowns imposed elsewhere were both unsustainable over the long run and could have serious secondary impacts including increased unemployment and mental health problems.

These are not the arguments being employed in the United States but the results are similar in terms of infections per 5 million population.

Sweden is now the Covid country of Europe and though Sweden may argue that it’s death rate per infection is low (511 deaths per million against our 650) , it look like popular support for the strategy is beginning to wane.

An Ipsos survey this week for the Dagens Nyheter newspaper showed confidence in the country’s management of Covid-19 had fallen 11 points to 45% since April, with backing for the national public health agency down 12 points.

The proportion of respondents satisfied with the centre-left government’s actions in the pandemic also fell to 38% in June from 50% the previous month, while the personal approval rating of the prime minister, Stefan Löfven, also slid 10 points.

The political consequences of high infection numbers is also important in the United States.

Over the past two months, Mr Trump’s approval ratings have nosedived, first because of his heavily-criticised response to the coronavirus pandemic and, more recently, his reaction to the antiracism protests following the killing of George Floyd by a Minneapolis police officer. Although most developed countries have succeeded in bringing down sharply the number of cases, the US on Thursday saw its biggest one-day total of new coronavirus infections as the pandemic spreads in southern states such as Texas, Florida and Arizona.

All time high in hospitalizations:

California: 5,790
Texas: 5,523
Arizona: 2,577
South Carolina: 908
Tennessee: 484
Utah: 287
Arkansas: 284

— United States Coronavirus Updates (@USCoronaUpdates) June 28, 2020

A lesson for the UK?

The UK has yet to see the kind of surge in cases we have seen in the US or Sweden , but we seem to be doing our best to catch up.

Having had the very worst numbers in Europe through the early days of lockdown, we appear to be putting ourselves “on the knife-edge”. Last night saw a rave on Clapham Common and isolated instances of youthful insouciance are all over social media.

Due to significant disruption being caused by two ongoing unlicensed music events in Clapham Common and Tooting Bec Common dispersal zones have been put in place. These provide uniformed officers additional powers to direct those in attendance to leave the area and not return. pic.twitter.com/ujbASdM0iU

— MPS Events (@MetPoliceEvents) June 27, 2020

We have got to keep ahead of the pandemic and if we do the right things in June ,July and August, medical experts say we can avoid a big second wave.

Public health is based on trust, testing needs to be in place, the vulnerable must be protected.

Perhaps the strongest safeguard that Britain has is the political imperative. Getting it wrong, whether for good or bad reasons, means losing public trust and no politician wants to lose its public.

London busses

It’s almost like having joined up Government. No sooner has the FCA’s consultation on VFM pinged into the inbox when along comes the DWP’s call for evidence on the charge cap. But I’m not complaining; “What Zoom has brought together may no blog tear asunder”.

But whereas the FCA consultation is a crazy-radical consultation, the DWP’s paper is just a call for evidence (which ends August 20th). It is a feisty paper which begs as many questions as it asks. Guy Opperman would like to see DC with social purpose – his department are nervous of the funds industry. The DWP want to protect small pots – HMRC are penalizing small savers. Pension policy isn’t easy, especially now.

I support the proposals in this paper but only if they are implemented as part of a consistent Government strategy which rewards the savers of small pots and makes it easy for small pots to be rolled into bigger ones.

First the important un-sexy stuff

The one new idea in the paper is to protect people with small pots from NOW’s £18 pa admin deduction . The DWP propose that flat rate fees are banned in certain instances

This will be painful. The two levies alone make small pots uneconomic, small pots are already causing a lot of pain to master trusts and they are moving to combination charges out of financial necessity.

People’s Pension has now has a flat fee of £2.50 pa , some Smart members pay flat fees and many of the smaller master trusts have “combination charges”. NEST is not impacted because its combination charge is different, it comes from the contribution not the pot.

There are rules around combination charging already and it’s worth noting that there are occasions when NEST’s combination charges has the impact of breaching the cap. For savers close to drawing benefits, NEST’s 2% contribution charge is very expensive.

The DWP are open to further criticism of market distortion by leaving NEST alone while threatening to remove the spark plugs from its rival’s financing engine.

Government is not in a strong position either as owners as NEST or as the collectors of taxes and the granters of savings incentives .  While the DWP get exercised about combination charging , HMRC are failing to fix an excess 25% contribution charge that  they  promised low-earners in net pay DC schemes – something that’s costing those who are in net pay schemes but pay no income tax around £63pa.

So just why are the flat rate chargers getting singled out? I can hear “disgusted of DWP arguing to the likes of NOW

but hold on: you took all these members on thinking they could safely charge their pots (employer’s money, taxpayer’s money, savers’ money) down to zero? Despite all the noise being made Work and Pensions Select Committee, Pension Bee and others? Why is that OK for you, when it’s not OK for the insurers, who for once are on the side of the angels

I think the flat rate charge on small pots is wrong but I don’t think its fair to demonise Peoples and Now and angelify L&G and Aviva,

The insurers have a culture of mono-charging which arrived with stakeholder pensions. They are set up to take their money at the back end of contracts which is what a mono-charge does.

The commercial master trusts (e.g. everyone but NEST) have done the heavy lifting during auto-enrollment while the insurers cherry- picked business.

Were it not for the commercial master trusts there would have been no choice for most small companies and that would not have played well. The legacy of being open for all is that most of the auto-enrolling master trusts already have more deferred members than active and actual pot sizes are so low as to require flat rate charging.

While the DWP are telling the master trusts, “you entered into this with open eyes”, the master trusts have every reason to feel let down.

The DWP are right to take on the ruination of small pots but there needs to be a quid pro quo in this.

If the Government wants to force People’s , NOW, to a degree Smart and several smaller master trusts it’s got to give them the means to mitigate the existential risk of small pot proliferation.

• It must allow small pots to be exchanged in bulk between master trusts (what is not supposed to be known as prisoner exchange

• It is going to need to detach the pension finder service from the dashboard build so that aggregators like Pension Bee and others can link into the databases of the big auto-enrolling master trusts and grab small pots.
• Its going to make it clear that the rules that apply to DB pensions don’t apply to DC pots – certainly pots which have no need for safeguarding and that means modern workplace pensions.
• Finally it’s going to have to fix the net pay problem because big Government is looking totally idiotic no paying promised incentives into the poorest pots.

Right now the direction of legislation is to make it harder not easier for ordinary people to transfer small pots and it looks as if moves to safeguard DB benefits may have the unintended consequence of slowing transfers down even more (Lords look to mandate guidance on pension transfers)

a proliferation of small pots

Now for the sexy stuff.

All this pounds shillings and pence stuff concerns the little loved pension poor and is  a million miles from where the action is in “the funds industry”.

Here the talk is of whether Guy Opperman’s plans for infrastructure and Private Equity firms plans for private equity are going to be dashed because the DWP impose an all inconclusive charge cap. It should be remembered that transaction charges were originally included in the charge cap.

Back in 2014 the IMA had argued that there was no way to identify hidden charges and indeed there wasn’t. They were hidden for a reason. The IMA went so far as to joke that hidden charges were like the Loch Ness monster

But 5 years later things are different , we can get the hidden costs and the FCA has adopted slippage as the way of measuring them. Of course there are ways of cheating at charges but (like golf) if you get caught cheating, there are ways of excluding you from the party. The charge cap is a way of excluding high-charging fund managers from the party.

So the argument is that the old objection has gone.  But there is a new objection to having an inclusive charge cap and that is it would stifle innovation and mean that the fourth road bridge can’t be repainted at the pension scheme’s expense.

If you’ve been reading Chris Sier’s articles in Pensions Week or on here , you’ll know that as soon as Trustees get a billion quid to play with , they go out and buy expensive asset management which usually turns out to do what cheap asset management does – more expensively.

The argument is that  this privilege should be extended to DC. Fortunately, people who run DC schemes are generally commercial animals that know that anything they spend on fund management is money they can’t spend managing pots of less than £100 for 0.75% (especially when they’re laying out 0.9% to pay the levies).

In short the platform managers of workplace pensions are not going to be buying expensive versions of what they can buy cheaply (for all the undying love of the fund management industry).

Fund management is actually a  pretty small cost for a DC platform manager. But it can become a much bigger cost if the hidden fees which were charged to savers now become part of the cap. That’s because those hidden fees are either going to put up the price (which isn’t going to make friends of employers and members) or it’s going to come out of the provider’s margin. So the provider’s platform manager is going to make sure that whatever’s bought has manageable hidden costs.

Putting hidden costs inside the cap makes them the responsibility of the platform manager. Continuing with the current regime means that firms like Fidelity who have hidden costs coming out of their ears, have to do something about them.

If you don’t follow my gist , here are the disclosed costs for Fidelity’s leading DC funds. (taken from this year’s  IGC chair’s statement which publishes  these numbers without comment). The bulleted numbers represent the impact of transaction costs on Fidelity’s three principle funds. These costs are not included in the annual management charge  which is what is capped.

Now if Fidelity had to declare those transaction costs in their AMC, they would be looking pretty expensive. But because they don’t include them in their AMC, they look very cheap.

If the Government want fund management houses like Fidelity to use proprietary funds in workplace pensions , they had better make sure that disclosure is on the total cost of ownership and not on a lite AMC with most of the charge being under the water.

And if it’s not Fidelity it will be someone else, even the passive managers who can make more money out of stock lending and other rinki-dinks than they can our of AMCs.   Give the funds industry an inch and they’ll charge you for 20cm.

It really does make sense to include hidden costs in the cap and make sure that hidden costs in a default trend to zero. This is not going to bankrupt anyone, it is just going to make sure that private equity and other expensive asset hunters go fishing in other ponds.

It is good that steelworkers are getting compensation

On June 19th 2017 , 500 financial advisers crammed into the East of England showground’s hall to participate in the Great British Transfer Debate. It was originally to be a small meeting between First Actuarial and some IFAs, organised by Al Rush and myself. It’s explosion suggested that pension transfers were a much hotter topic than anyone had previously supposed.

Later that year Al Rush and I went to Port Talbot and reported back on what we saw. Jo Cumbo picked up on our reports, the Work and Pensions Select Committee interviewed steel men , the FCA and the BSPS trustees.

A journey for me which started out picking up @henryhtapper in London one wintery morning in 2017, has ended up costing, potentially, in the region of £350 million to remedy. It has also made me many new friends (and enemies) and reconnected me with wonderful Port Talbot. https://t.co/uAM6wLU0yd pic.twitter.com/Snpv1WVLU6

— Al Rush (@exRAF_Al) June 24, 2020

I got to speak of what I saw, Darren Reynolds failed to show up claiming he had been intimidated by Al, Al failed to show up being banned for allegations of intimidation. It was all rather messy, got a lot of headlines but the transfers went on.

We now know that one in five of those eligible to transfer did so and this resulted in over £3bn moving from a defined benefit scheme to a variety of DC plans, some of them wildly inappropriate for the steelworker’s needs.

The FCA has written to the 7700 steelworkers who took transfer values with a formidable intervention. This from New Model Adviser.

‘Our findings are sufficiently concerning that we have taken the formal step of contacting you directly and encouraging you to act. You should check the advice you were given and, where appropriate, complain in order to seek any compensation you are potentially due,’ Butler wrote.

The FCA provided the steelworkers with a link to its ‘advice checker’ which can help them decide if they should make a claim. It said that claims should first be made to the firm itself, before approaching the Financial Ombudsman Service (FOS). If the advice firm is no longer trading complaints will be considered by the Financial Services Compensation Scheme (FSCS).

Butler also warned steelworkers against using a claims management company (CMC) or a solicitor to make a claim.

‘It is quick and simple to make a complaint and you do not need to use a CMC or a solicitor to do this, if you do you will have to share any compensation you get with them.’

 

Mick McAteer, co-director of the Financial Inclusion Centre, a think-tank, and a former FCA board member, estimated the compensation bill could total more than £350m, on the basis that 80 per cent of members may have been given bad advice. The average value of awards so far made to BSPS members is £56,000.

We cannot allow this happen again – lessons must be learned

In a week when the FCA got a new CEO, it should be remembered that the FCA never went to that first Great Pension Transfer Debate, were nowhere to be seen in Port Talbot until the WPC put the wind under them and that it is now three years.

Although it is good that the FCA has finally taken steps to right wrongs and shut the stable door on contingent charging, it has acted too slowly.

The FCA cannot draw a line under BSPS with those 7700 letters, the cost of the compensation will be met by good advisers through PI bills and higher levies. Those costs will be passed onto people taking advice in the future. This bill could and should have been avoided by quicker and more decisive actions from the FCA and to a degree from tPR.

The club where we first met steelworkers highlighted red

I sat in on a 90 minute Zoom last night hosted by John Moret’s Pension Network. I am allowed to say that the panel consisted of Paul Johnson, Emma Douglas, Jamie Jenkins and Steve Webb. I can’t attribute comments to individuals but can say with under John’s Chair we talked of the impact of the pandemic on people’s retirement planning and discussed pension policy.

One insight that came out of the conversation was the role of pensions policy in delivering or stymieing innovation. The two innovations that were discussed most were the pensions dashboard and the developments of defined benefit super funds.

In this article, I ask if the creation of safe harbor legislation to allow super funds to operate in a regulated environment might not be copied for the dashboard. Let me explain what I mean; it has long been possible to run multi-employer defined benefit schemes (the Pensions Trust is a good example). But only one defined benefit scheme exists where there are no sponsoring employers and that is the PPF, it gets sponsorship from a very large levy on solvent schemes.

Short of declaring insolvency (in which case your DB scheme goes into the PPF assessment period) , an employer has in the past been able to buy-out all or part of its pension obligations with an insurer , but there has not been an opportunity to sell-out to private markets. The two private market funds Clara and Pension SuperFund have been ready for business for some time but without the rules from the Pensions Regulator in which to operate, they have not opened their doors.

Like socially distanced shoppers, interested schemes have formed an orderly queue.

What the Pensions Regulator did yesterday, was offer super funds and prospective clients a safe harbor in which to negotiate terms and transact. It seems that the pensions regulator has applied the same methodology to authorizing super funds as it did DC master trusts. It is raising the bar but providing security for those operating within the authorized perimeter.

I am allowed to exempt myself from the Chatham House so can say that I asked the meeting last night, whether such safe harbor regulations might not be applied to the development of pension finding services – and indeed to those using those services to offer people dashboards.

The risk of not having

Despite not making it into the Pension Schemes Bill, the arguments for having super funds backed by capital rather than insurance have all been around protectionism. The ABI argued (and still do) that super funds provide buy-out on the cheap while pension schemes want buy-out on the cheap. Perhaps the solvency of many employers forced the DWP’s hand , tPR sees itself protecting the PPF and if a number of schemes can avoid the PPF by buying members into a super fund (where insurance was too expensive) needs must! Super funds are now competing with insurers which hopefully brings down the cost of insurance (guaranteed annuities). The risk of not having super funds became too great.

A similar argument could be made for the pensions dashboard. Progress of late has been painfully slow , there is a “new” website that has been published this week by MAPS, but it is just a better brochure but we are yet to see progress on common data standards for the pension finding service , the promised consultation on next steps or the onset of procurement. This cannot be blamed on any part of Government, it is just in the nature of large IT projects managed by Government that they go at the pace of the slowest.

Guy Opperman , the Pensions Minister, is aware of the pressing need. He is reported to have written to pension schemes telling them to be “dashboard ready”. There is much that DC schemes can do to make sure they have clean data to share and there is much that legacy pension providers can do to make sure their systems are ready with what is called an “API layer”. However the PLSA is right in saying that unless the Government makes it clear what data standards schemes are signing up to , there is not much they can do to give the Minister the thumbs up.

Here the slowness of the Government is creating new risks and not just the risk of confusing pension schemes .

It was mentioned last night that now that DB pension transfers are pretty much out of bounds, the focus shifts to DC transfers which are very much in the sites of the less savory parts of the pension community.

I have seen it argued that the creation of commercial dashboards that show people’s policies in one place will increase the likelihood of scamming. The FCA’s pension policy statement PS20/06 mainly focuses on DB transfers but does look at safeguarded benefits with DC schemes (GMPs and GARs  are treated as if DB). There are of course a lot more opportunities to lose money on a DC transfer – they include the loss of terminal bonus from a with-profits contract, exit penalties (especially for the under 55s) and the loss of loyalty bonuses or guaranteed life cover and waiver of premium.

For all these reasons, DC transfers should properly be conducted under the eyes of the FCA , But whether however all DC transfers need to be “advised” is another matter.

The FCA has said that it wants to regulate commercial dashboards and for this reason commercial dashboards have not emerged. Just as pension super funds had to wait for the safe harbor regulations, so with pension dashboards.

But just as the pressure for DB schemes to consolidate has increased, so the pressure from consumers to get to grips with DC pots. I’m pleased to see that we now have nearly 500 volunteers waiting to test our DC aggregation service in the FCA’s sandbox. This is around ten times the size of test group we had originally envisaged.

The risk of not having properly regulated DC aggregation services is primarily because it allows scammers to operate outside of the perimeter in much the way as we saw at the peak of pension transfers in 2017/18. But there is a further risk posed by pot proliferation, some master trusts already have many times more deferred than active members with small pots abounding. The increase in unemployment predicted at the end of furlough will create a further spike in deferred pension pots. The DWP estimate that unless something is done we could see 50m abandoned pots by 2050, the PPI currently estimate that there is £20bn of lost DC pension pots.

So long as there is not a safe-harbor for firms offering people the chance to see their pensions in one place, there will continue to be suspicion among pension providers of letters of authority used to find pensions, Pension aggregators increasingly need to be FCA regulated to properly carry out pension searches and it is only a matter of time before the aggregators find ways of displaying the various pension pots so that pension consumers can make informed decisions for themselves.

Since the cost of advice on transferring a DC pension pot can be more than the value of the pension pot itself, there is clearly a need for ordinary people with pots not subject to safeguarded benefits, to be able to use aggregation services without advice.

The risk of this not being allowed is that frustrated savers find help with those on the fringes of decency.

The right balance

It is great to have MAPS building its dashboard team and I admire the thoroughness with which Chis Curry is building the dashboard proposition. But we still don’t have a timeline for having a timeline and are unlikely to have a clear delivery timetable till the end of this year.

Online pension inquiries are, according to one insurer speaking last night – rocketing. Empowered by their use of new technologies during lock-down, people are using all kinds of financial services online. But there is no pension dashboard for them to use and commercial firms who have the capability to show multiple pensions on one screen are shying away from doing so because they do not want to jump the gun.

So while it is great to have MAPS building a non-commercial dashboard, the speed of progress is creating precisely the problem that we have seen in DB consolidation. It is important that Government looks to DC consolidation services and gives them safe harbor status , as it is doing in the DB consolidation space.

Consumers patiently waiting

and not so patiently waiting

Iain Clacher and Con Keating

This is the third of three blogs co-written by Con Keating and Iain Clacher informing on the current  consultation on the DB funding code of practice,

The other articles can be accessed at the bottom of this blog

Optimal Scheme Management

For the calculation of scheme liabilities this should be done as either the accrued value of contributions, or the discounted present value of the projected (unbiased i.e. with no prudence) best estimate of the ultimate benefits using the contractual accrual rate (CAR). While for scheme funding, we advocate that this should be to the level of liabilities calculated in this manner, with assets being valued using market prices. However, this leaves the scheme facing just one risk, sponsor insolvency at a time when this level of funding is insufficient to purchase equivalent benefits in the open market or alternately, to run off the scheme. There is a solution to this risk – pension indemnity assurance; a specialised form of long term credit insurance.

This class of business is effectively, offered by the PPF but in a manner that can be considered as both deficient and inefficient. The deficiency arises from the offer of only partial benefits; there is no valid justification for these cuts to member benefits. The inefficiency can be seen in the PPF’s excessive levy charges – the evidence for which is the massive reserves they have accumulated in a very short period, and this levy is effectively paid with corporate capital. This therefore raises the question: what is the likely cost of pension indemnity assurance for schemes funded to the level of best estimate? Here the PPF provides a poor guide, given its history of excessive levy charges.

There are many variables which determine the premium in any case. These include the quality of the sponsor covenant, the degree of maturity of the scheme together with its status e.g. whether it is open or closed, and the basis of calculation of the best estimate. Dependent upon these specifics, modelling indicates that the premium will lie in the range 0.2%-0.5% of liabilities for all but a handful of companies that are in particularly bad shape. It is also worth stating this again – this is insurance of the full benefits, not PPF reduced variants. The interval for premium setting may be either fixed for scheme life or set at some shorter period, such as annually.

Business models for writing pension indemnity assurance

There are two classes of business model possible. These differ in the annuity and deferred annuity treatment post insolvency; the indemnity assurer may either purchase these from another insurer/reinsurer at the time of sponsor insolvency or it may write these itself and run off the pension liabilities. Purchasing annuities on insolvency is less efficient from a return on capital standpoint as it reduces the modelled return on capital by between 15 and 25%.

This business model is also not hypothetical, with the most notable specialty insurer of this class of business being PRI-Pensionsgaranti. Several specialty insurers have also offered a related instrument, surety bonds, though these have a fixed pay-off rather being benefits related. PRI-Pensionsgaranti has already written a small number of policies in the UK, mainly in a form qualifying as contingent assets. In Sweden it has written insurance for some 1400 entirely unfunded, book-reserve schemes. It operates the less efficient business model of purchasing annuities from another company on an insolvency event. It charges 0.4% of liabilities as a premium and has been highly profitable. As a mutual, it rebates these as dividends to the member schemes. This premium is not a pure sunk cost; unlike the PPF arrangement, the policy is also an asset of the scheme and not a contingent asset. It is also interesting to note that as in this asset role it is an automatic stabiliser for the scheme.

PR-Pensionsgaranti has even insured funded schemes specifically to allow them to move from funded to unfunded status. This liberates scheme assets for corporate business investment. There are complications with respect to the taxation of such liberations, but the Swedish treatment has been at the generous end of the spectrum; no taxation if reinvested in corporate activities within a specified, short period. If liabilities were to be calculated using the CAR best estimate, many schemes would be materially overfunded and so the liberation of some scheme assets may be both feasible and desirable especially at a time when corporate profits and cash flow are likely to be severely constrained.

Advantages of pensions indemnity insurance for scheme management

One major advantage of the use of pension indemnity insurance is that the duties placed on trustees are significantly reduced. Trustees would be concerned only with the administration of pensions and the current valuation of collateral assets. No integrated risk management, no long-term objective. Consideration of the future performance of assets and all the risk management practices associated with that would be redundant and as such would save significant sums of money for the scheme and its sponsor.

For the sponsoring employer, they would be concerned with the extent to which the assets held as collateral security would defray their future costs. As such, the asset management style they adopt would be a matter of their risk tolerance and would most likely follow a simple risk and return analysis. Liability driven investment would not be necessary as the hedging of the spuriously introduced interest rate sensitivities is no longer required or desirable. As these currently account for around 40% of overall scheme assets in many larger pension funds, the net returns to sponsor employers should, ceteris paribus, be significantly higher than those which have or might be achieved under the existing or proposed models.

Creating a market for pensions indemnity insurance

To ensure a competitive market for pension indemnity assurance, private sector provision should be permitted and encouraged. The PPF should be required to offer full benefits cover and should also be privatised as an industry owned mutual insurance company. Shares in this mutual should be awarded free of cost to schemes in proportion to the total levy contributions they have made. This would augment overall scheme assets by an amount of the order of £6 billion and generate approximately £2 billion in tax revenues.

If the funding to best estimate model is followed, it will reduce significantly, almost entirely, the requirement for special contributions, reducing the tax lost under those arrangements by £2-£3 billion per year. The total cost of pension indemnity assurance premiums would be approximately £3 billion if all schemes adopted it, and the tax cost would be of the order of £750 million. Of course, in this situation there would be no justification for schemes participating in the PPF scheme as is or paying the £550 million of the scheme levy.

If funding were to be to the CAR best estimate, and all sponsors were to liberate their excess assets, the windfall tax gain would be of the order of £45 billion at standard corporation tax rates, and in the range £90-£100 billion at 55%, though at this latter rate it is highly unlikely that many sponsors would wish to liberate. The amounts available to be freed for new corporate investment would lie in the range £150-£250billion.

The DB funding consultation

The proposed new scheme funding requirements carry with them an annual tax cost of at least £1 billion, rising to £3 billion after a few years, and perhaps considerably more. The Regulator has stated: “Our funding consultation is about the balance between member security and affordability.”, which makes the absence of any cost/benefit analysis in the 175 pages of the consultation document noteworthy.

The consultation is principally concerned with management of the ’end-game’ for closed schemes now running off, but open ongoing schemes, though few in number, are not treated differently. The traditional solution of bulk annuitisation has been supplemented by a wide range of proposals and products; some, such as the efforts of the consolidators, have been widely publicised. others, such as surety bonds and Legal and General’s “insured self-sufficiency” less so.

In this series of blogs, we have concentrated on a few of the problems arising from DB pension regulations and the practices they induce. Our coverage was deliberately minimalist, there are many other issues which we might have highlighted. It is true that some people suffered and lost pensions in the pre-Goode days, but they were far fewer in number than the many millions who received their pensions routinely over many decades. The ‘fixing of pensions’ has been completely disproportionate and its cost outrageous – running to hundreds of billions of pounds and the remedy has killed all too many schemes which were in rude health.

Further reading

Pensions need a bonfire of regulation this blog calls for a radical shake-up of the rules governing DB pensions

The following blogs are designed to be read consecutively.

The other way to value DB schemes

A different approach to pension scheme solvency and funding

The best way to manage a DB scheme

Stuart McDonald

By Stuart McDonald for

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

Summary

The Rate of Reproduction

Key to understanding the spread of a virus is the reproductive rate “R”. This rate varies over time so we refer to the rate a time t as R_t (R₀ is the R value at the start of the epidemic).

To measure R_t in real time requires extremely widespread testing at a scale which has not been available in the UK. Instead we can look at the rate at which events such as hospital or intensive care admissions and deaths vary over time.

R is of course a simplification and there are clearly differences in the distribution of the virus by geography, age, sex and other factors. Nonetheless, we believe our approach to estimating R gives us a reasonable picture of how the rate of transmission is varying over time in the UK as a whole. We will provide more detail of our method of R estimation in a future paper, including details of how actuarial techniques can be used to produce a more up-to-date estimate than is used in this bulletin.

Data Sources

Useful sources of reliable data are:

• Deaths of patients in hospitals in England who had tested positive for COVID-19 or where COVID-19 was mentioned on the death certificate produced by NHS England
• Deaths where COVID-19 was mentioned on the death certificate for England and Wales produced by the Office for National Statistics (ONS)

In this bulletin we use data from:

• NHS deaths registered by 8 June (published 9 June)
• ONS weekly deaths registered by 29 May (published 9 June)

These reports contain daily time series which can be used to examine how deaths are varying by day. By choosing the ONS reporting by date of death rather than date of notification we avoid distortions caused by weekends and public holidays. NHS reporting is also by date of death.

Deaths peaked on 8 April with 1,341 deaths total deaths in England and Wales where COVID-19 was mentioned on the death certificate (ONS). 899 of these were in English hospitals (NHS).

We looked also at ICU admissions, applying similar techniques to see if we could get more up to date R_t estimates. The estimates were consistent when daily admissions were high but became noisy as daily admissions fell through April.

Estimating R

We can estimate the reproductive rate of the virus at a historical point by examining how the number of deaths was changing, after allowing for the average interval between infection and death. We assume a 19-day interval between infection and death, consistent with the 26^th Report from Imperial College London (ICL).

R is a function of the ratio between the number of new deaths and the equivalent number at an earlier point. In order to reduce the volatility of our estimate caused by random fluctuations we use a measurement interval of five days and average over a three-day period.

Estimated R_t values are illustrated in the following chart, showing values estimated from ONS and NHS data and a weighted average of the two estimates.

Observations

Several observations can be made from our estimated R_t values.

The estimates are reassuringly consistent with R_t clearly falling over the period in question. It was around 2.5 at the start of March and was in the range 0.6 to 0.8 throughout April.

It appears that R may be rising back towards 1.0 at the end of the period for which we can currently estimate it. This is the weekend in which the VE Day Bank Holiday fell and the emphasis from Government relaxed from “stay at home” to “stay alert”.

There are no clear step changes in the data as might initially be expected in response to the introduction of control measures. There are several reasons for this including:

• Natural variation in the gap between becoming infected and infecting others
• Natural variation in the gap between becoming infected and being admitted to ICU or dying
• Control measures were introduced in stages, often just a couple of days apart
• Different groups responded more or less rapidly to control measures; for example, large employers were moving towards working from home before the instruction to “stay at home” was given by Government
• Our averaging approach smooths the underlying time series
• The transmission rate naturally falls as the susceptible population falls. This has only a very small effect over the period considered.

The relationship between the R estimates is interesting. We know that the average age at death in hospitals is lower than for deaths occurring elsewhere, for example in care homes. We can therefore surmise that when the estimate of R from NHS data exceeds that from ONS data, as in the latter period, then R is higher among the working age population. When the estimate from ONS data is higher then R is higher among the older and more frail.

Limitations

As noted above, this method results in apparently gradual changes in R over time. This means that it is not possible to reliably identify the date at which interventions have had an effect. To demonstrate this we have created an artificial projection of infections and deaths, setting R to be 2.0 until 23 March and 1.0 thereafter. We have then applied our method to estimate R to see how close we get to the actual answer (the actual answer in this artificial exercise being “2.0 becomes 1.0 on 24 March”).

As can be seen on the graph, the estimate produces a smooth transition beginning before the actual fall in R. This could lead to an incorrect conclusion that interventions were unnecessary as R had already fallen before they were introduced.

It is likely that other estimates of R over March may suffer from similar methodological limitations, casting doubt on the validity of statements that R was starting to drop below 1 by 23 March.

Next Steps

Having estimated R at different points in time, we could now produce scenarios estimating how different the number of infections (and ultimately deaths) would be if R had stopped falling.

We can apply similar logic if R_t begins to rise as social distancing measures are relaxed, having been clearly under control for nearly two months. We can also produce regional estimates using the breakdown of NHS deaths (noting that smaller numbers mean these will be less certain).

It is clear that infections and deaths are highly sensitive to relatively small changes in R. Great care will be required, and close monitoring of early warning indicators of change, as we relax control measures. We will continue to update and share our estimates of Rt over the weeks ahead.

References

https://www.icnarc.org/Our-Audit/Audits/Cmp/Reports

https://www.england.nhs.uk/statistics/statistical-work-areas/covid-19-daily-deaths/

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/datasets/weeklyprovisionalfiguresondeathsregisteredinenglandandwales

https://www.imperial.ac.uk/media/imperial-college/medicine/mrc-gida/2020-06-08-COVID19-Report-26.pdf

The initial financial shock of the pandemic was on markets.

and the headlines about mortality

The occasion was a Zoomed up pension conference and specifically a break-out session with Glyn Jenkins .

We were discussing the impact of COVID-19, with concern that the sharp drop in markets in March might have driven savers away. NEST spoke with authority that savers had not panicked  but that they recognized that the pandemic was going to hurt them financially.

Emboldened by stirring remarks from Glyn on the importance to ordinary people of the state pension , I thought it time to introduce the issue of the low paid who are overpaying their pension contributions – (typically by 25%),

Here as I remember is the conversation (anonymised as we were under the Chatham House rule)

Chair: I can see Henry has his hand up and has been asking a question in chat. Henry, I do hope you aren’t going to bore us about net pay?

Me: yes, that’s what I asked my question about.

Chair; is there an investment solution to this

Me; no this is not about investments, it’s about being fair to a group of people who are currently not getting value from their pension contributions because they are over-paying by 25%

Chair; oh go on – if you must…..

I am grateful to the chair as she is one of the very best minds in pensions and she can properly said to care for people.

She wasn’t trying to shut me up on her behalf  but she knew the other people in the room were not thinking of defined contribution pension schemes as they touch the bottom decile of earners in this country.  But pension pots matter to low earners as much if not more than to the people on the call.

NEST’s research on its membership shows a consistent worry about the impact of COVID-19 across age groups, gender , sex and those with and without children. Where there is greatest financial worry is among those on low incomes and where there is leas worry is among those with incomes above 30k.

The question of how we manage pensions for those on the lowest incomes is the more important for these savers, as they feel most vulnerable

Everybody’s pension matters

Here, for her and for all the other bright people who are desperately searching for ways to embed alternatives into DC defaults is the latest information solicited by Baroness Ros Altmann the low paid saving into workplace pensions

‘HMRC estimate that 1.3m individuals earning below the personal allowance in 2017-18 made workplace pension contributions via Real Time Information (RTI) using relief at source arrangements. About 65% of these individuals are estimated to be female and 35% are estimated to be male.  The personal allowance in 2017-18 was £11,500’.

Those in NEST are in a relief at source pension, which means that low earners saving into NEST are getting the promised Government incentive which amounts to 25% of their personal contribution under the 4+1+3 formula set out for auto-enrollment contributions.

However there was another and more sinister disclosure to the Baroness;

HMRC estimate that 1.5m individuals earning below the personal allowance in 2017-18 made workplace pension contributions via Real Time Information (RTI) using net pay arrangements. About 75% of these individuals are estimated to be female and 25% are estimated to be male.

HMRC’s Survey of Personal Income (SPI) and administrative data was used to produce the estimates. The 2017-18 SPI data (published in March 2020) is the latest year available. The SPI is updated annually.

For 1.5m of us not saving into NEST or People’s Pension or into an insurance company GPP or the relief at source section of the L&G master trust, the 25% incentive is still going missing.

It’s a poverty issue and especially a gender poverty issue

From these two disclosures we can get a picture of what is actually going on when the low paid let themselves get enrolled. We should be grateful to Kelly Sizer of the Low Paid Tax Reform Group for crunching the numbers.

Individuals earning below the personal allowance and contributing to pension schemes

(1) https://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Lords/2020-05-18/HL4642/

(2) https://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Lords/2020-03-18/HL2729/

What does this mean?

1. The pension tax system is discriminating against one and a half million low paid people who have been promised a 25% top up on their pension savings and are not getting it.
2. The pension system is discriminating against women who represent 65% of the people who aren’t getting the money promised them.
3. Despite promises in the Conservative manifesto ‘this will be sorted’ and the budget which promised the Government would ‘shortly publish a call for evidence on the subject, nothing has happened. My message to the group on the Zoom call was simple,

Pension’s thought leaders cannot be complicit in Treasury delinquency.

A problem that is going to get worse.

You will notice that the numbers sourced by Baroness Altmann are for 2017. The net pay action group which she chairs estimates that the true number of people who aren’t getting their fare shares is now 1.7m. The Real Time Information system seems to be lagging.

But even if we work on the 1.5m figure, it is  shameful that  this matter is still considered ‘boring’. There is a simple way to sort this important issue and it simply requires HMRC to do some coding of their systems to put the 1.5m right.

But so long as we don’t bring this up at pension conferences or dismiss the issue as ‘boring’, we are indeed complicit in the Treasury’s delinquency. Around the world people are protesting to make every life matter. We need to adopt that attitude to pensions. We should all be concerned about the net pay anomaly and we should not allow COVID-19 to be used as a reason not to reward the low-paid for saving as they’ve been promised

Historically pension costs were none of the savers’ business.

One of the things people find hardest to understand is what they’re paying for when they put money into a workplace pension.

Historically , the answer is a promise of an income paid according to a formula which lasts the rest of your life. That was the DB covenant and it holds good for those in public sector schemes and for a few people still accruing in private sector DB schemes.  In these cases all the costs of paying the promise are taken care of by the scheme itself. The only worry consumers have about costs relate to the employer’s capacity to fund the balance of costs needed to meet the promise. For this reason costs and charges have not historically been a member issue.

I suspect that many savers thought that they got a free ride when paying into a defined contribution plan. Indeed some munificent employers have historically picked up the charges of employer sponsored DC plans, as an extension of the DB pledge. But for the most part, the members of workplace pensions have been expected to pay for their own costs, the employer being on the hook only for the contribution paid into the scheme. This has contributed to the acceptance of the provision of workplace pensions as BAU for UK employers.

In the early years of workplace pensions , there was no charge cap and practices such as active member discounts allowed advisers to take a chunk out of workplace pensions through what was briefly known as consultancy charging. This practice was knocked on the head by then pensions minister Steve Webb who levied a charge cap on default funds of 0.75% pa.

This 0.75% was originally thought to include all costs (what is now known as the total cost of ownership to the saver). But the Government stepped back from this allowing some of the management costs of a workplace pension to be disclosed and some to be hidden (and impact the performance of the fund in a clandestine way).

This ‘partial disclosure’ of the costs of workplace pensions was considered pragmatic at a time when there was no proper way of reporting on the hidden charging. But lately there have been advances in reporting that mean that these hidden costs and the disclosed costs could be reported on in one single charge.

But this has been resisted by pension providers , who see that it could easily become a single charge under the existing price cap, with the provider’s margin picking up the strain of the hidden charges where in aggregate costs exceeded the cap.

But there is another confusion amongst the public about what the annual charge they pay on their fund actually pays for. Understandably, because the AMC is charged against the investment fund, it is thought of as an investment charge – the cost of managing the money.

But it is not an investment charge, most of the money raised from a workplace pension AMC doesn’t go to the fund manager but stays with the pension provider, to meet the cost of supporting the member. Sometimes the amount paid to fund managers is negligible.

We know that fund managers can manage our money at no cost to the investor, so long as the investor gives the manager rights on the investment that make the manager money. For instance, investment managers can make money by lending stock out to third parties and there are all kinds of side-deals going on that mitigate fund management expenses.

The trouble is that the more ways that fund managers find to reduce the cost of their fund managers to workplace pension providers, the more the temptation is to transfer costs onto members through hidden charges.

Full disclosure of cost and charges is only just beginning

Last week, CACEIS published a startling number

It suggested that hidden costs are on the rise (though this may be just because CACEIS are getting better at reporting them).

The worry is that as workplace pension providers try to squeeze better deals out of fund managers, fund managers just bury more and more of their charge into the hidden charges  which – falling outside the cap, means that members end up paying more while providers pay less.

This is why vigilance amongst trustees and IGCs is so important. They should be able to see the Investment Management Agreements between the pension providers and the fund managers and check what is going into the AMC and what is being buried in hidden charges and they should be able to make sure that providers are properly disclosing all the costs of managing funds, including the costs they trigger by moving money from fund to fund (life-styling).

Who watches the watchers?

Just how much access fiduciaries like IGCs and Trustees get to these investment agreements seems to vary, I suspect the amount of close attention to the detail of these agreements also varies. The agreements tend to be long and the bits which allow hidden costs to be passed on to savers – tend to be hidden.

And IGCs and Trustees tend not to want to antagonize providers by probing too deeply into the revenue sources of the fund managers and the providers themselves.

And because the general public are often not aware of what they are actually paying for, when they pay into a workplace pension, there is very little pressure on workplace pension providers not to let the hidden costs creep up.

If the IGCs and Trustees aren’t pushing back on hidden costs, who will?

We may know the answer to this question this summer when the FCA publishes its review of IGC performance. I would like it to cover this question of cost disclosure as the FCA is the organization that watches the watchers.

What further disclosure do we need?

In the past I have pushed for proper disclosure of what pension providers are paying for fund management. This information is detailed in the Investment Management Agreement but this is subject to non disclosure agreements that prevent savers working things out for themselves.

I’ve wanted this figure to be in the public domain so that savers can see that most of the money they pay by way of AMC and other overt charges, does not pay for fund management.

It would also have the benefit of showing just how much of the cost of investment management is hidden and how much is disclosed. If CACEIS are right and the hidden costs are just over a third of the total cost, then the situation is manageable.

But look at this extract from the Fidelity IGC’s 2020 report. It shows that transaction costs for those in the Fidelity default fund are running at 0.31% pa. That is as much again as the cost to members of being in the Diversified Markets Fund.  Here the transaction costs are not 37% but 100% of the fund management cost.

I have urged the Fidelity IGC to push back on what appears to be an unacceptably high level of non-disclosed costs (the saver only gets to see this in the IGC report – which are seldom distributed to savers).

The advantage of full disclosure

Savers into workplace pensions are not good buyers, nor for the most part are employers buying workplace pensions on behalf of staff. That was the finding of the 2014 OFT report on workplace pensions and their findings remain true today.

IGCs and Trustees have the powers to escalate matters to the FCA where they see poor practice. They seldom declare they have done this in their reports and I suspect that most issues are sorted out without escalation.

But I am also sure that many trustees and IGCs are simply unaware of the problems highlighted in this blog, They may not be aware that fund managers can offer better deals (IMAs) to pension providers, without sacrificing margin, by adding extra costs to the hidden charges . They may not be aware that these hidden costs are not capped and can mean savers pay more than 0.75% for a default. Finally , they may not be aware that the choice of fund manager may be influenced by a complicity between fund manager and provider to pass costs on to members through hidden charges.

So the more disclosure IGCs and Trustees can get on IMAs the better. I have given up on being able to see these IMAs myself but I very much hope that the FCA are checking that the IGCs and GAAs they oversee, are making it their business to be very nosey indeed!