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. http://tinyurl.com/ju4ppnp

Ok – I wasn’t distressed – I was cross! Value for Money is not as complicated as consultants 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 (Dalriada is a subsidiary of consultancy Spence & Partners)

 “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 a consultant.

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 http://tinyurl.com/j6466ff 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 http://tinyurl.com/jncw2fx 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 bbc.co.uk 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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Why can’t we talk about investment returns?


There is a crack in everything, that’s how the light gets in


Investment performance has become a taboo – a “no go zone”. This suits the auto-enrolment agenda which is “comply or die”, but NEST has broken ranks and asked defaqto to publish comparative investment performance and it was right to do so. It has opened a debate that I intend to pursue.

Yesterday’s information about the actual performance of workplace pension providers (taken from the defaqto/NEST survey) has prompted a strong response from several people, mainly complaining about the difficulty of predicting the future by looking at the past. I know no other way of looking to the future – other than a crystal ball

One of my regular contributors, Con Keating was prepared to look at the numbers provided by defaqto and suggest that they are telling us quite a lot, but not what defaqto thought they were telling us!

Con objects to the method being used to calculate the risk adjusted numbers; to use Con’s peculiar language , he wants us to understand the difference between an arithmetic or additive process and a geometric or multiplisic process (this is – apparently –  known as a log transformation).

To return to planet earth, he reckons that the calculations done by defaqto do not properly account for the impact of volatility and therefore do too much credit to the riskier providers and do not give enough credit to those who are providing returns without risk.


Now I won’t bullshit you, I don’t understand this table but I will tell you that the numbers are straight from Con and what I want to know is whether they are right.

What Con is saying is that despite the excellent numbers achieved in actual terms by LGIM (as an example) the risks LGIM has taken to get to close parity with NEST, provide a threat to future returns. Con estimates that there is a 1 in a 1000 chance of LGIM keeping pace with NEST in the wrong term, because the risks identified in the performance numbers predict nearly 6.5% underperformance from LGIM and 7.5% outperformance by NEST (taken from the highlighted yellow numbers).

There are enough statistically aware people reading this blog to know the difference between additive and multiplistic. They might even be able to check Con’s numbers from the raw data.


Defaqto had turned these numbers into risk-adjusted returns which looked like this


Clearly the results contradict Con’s rankings, who is right and why?

What’s the point in arguing over numbers?

The point is this. Nobody is asking the fundamental value for money questions of the workplace pension providers  based on the facts. Instead the IGCs are chasing rainbows with ever more elaborate surveys of members , establishing what members want.

Members want good outcomes and “good outcomes” means lots of money in later life. They may be able to define how they want that money and they may point to features of a good pension plan (like portals and dashboards and modelling tools), but ultimately members want the certainty of a good pension – for their money.

We need to be able to use actual performance to predict what is going to happen. Data is what statisticians present, actuaries interpret data intelligently, the public decides.

Totally contradictory information doesn’t help

Now – as you might have worked out by now. If you look at these numbers using a geometric return you get one set of conclusions and if you look at them through an arithmetic lens you get another. The most extreme divergence is LGIM which is either at the top or the bottom the least divergence is NEST, which is top dog whichever way you look at things.

The average person doesn’t do stats to this degree and want a reliable means of seeing not just the returns on his or her money, but an analysis on how those returns were arrived at. They want to know whether the good returns were flukes or earned through skill. Con’s analysis suggests that LGIM are fluking it and NEST are getting real value for money.

We need to have a standard way of calculating the risk adjusted returns , relative to each workplace provider, of each workplace provider. The IGCs and the trustees of the master trusts should be agreeing this methodology between themselves and testing it with the FCA.


Investment performance is all that counts – so why so shy?

If the IGCs and MT boards are to be relevant, they cannot shy away from these hard comparison. The IGCs and MTs must be prepared to accept that the strategies of their provider is failing against its comparators and against a commonly established benchmark.

This should not be seen as a failure of the IGC or MT. But here I come to my central concern about the governance structures of both. So long as the MT and IGC boards are concerned with the reactions of the insurer or master trust owner to what they do and what they say, they will not put the reputation of the provider at risk.

I note that neither NOW or People’s Pension are included in the survey, Defaqto say they now have numbers from People’s but nothing from NOW, if these numbers are being deliberately with held, we need to know for what (good) reason,

My suspicion is that rather than be held up to common scrutiny, providers would prefer not to co-operate in a proper comparison. This suggests that a proper comparison with an agreed methodology is absolutely the right thing to do.

Three years is not long enough to have proper data, but it is long enough to be able to see trends and for serious questions to be asked about what is going right and wrong.

That is why I and my colleagues are looking into ways of creating a common framework for the IGCs and MTs to judge the investment propositions of their providers by. We don’t want to do this in isolation, we want the industry to come together and agree a single method for doing this and to abide by its findings.

That is transparency in action – not in words.


That’s how the light gets in


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Workplace pensions – what really matters.


For the past few years I have provided data and qualitative judgement to NMG, a company that researches insurance companies and the service they provide intermediaries. The information NMG has asked of me has been about my perception of those insurers providing workplace pensions.

Yesterday, for the first time I was able to meet other contributors to this survey; I knew many of the contributors and the companies they worked for.All had advisory hats on and some of the advisers were also providers of workplace pensions.

It turns out that the answer to the question “workplace pensions- what really matters?” depends on who you ask. NMG split their respondents into three, IFAs, Corporate IFAs (CIFAs) and Employee benefit consultants (EBCs). I think we were classed as EBCs.

The data we were shown was longitudinal (changing over time) and lateral (changing with the source). Over time, the value of an insurer has changed from its capacity to pay intermediaries large amounts of money , to its being able to support the intermediary in other ways.

Royal London are generally considered to be the most supportive workplace pension provider because they provide IFAs and CIFAs with most support around implementation. Legal & General on the other hand offer best value for money but little support while Standard Life have gone from being supportive to predatory as they compete for the relationship with the employer and employee previously enjoyed by the intermediary.

The general reader may be puzzled by this assessment of the market. Discussions around the major master trusts, NOW, People’s and particularly NEST was very limited. They were mentioned as comparators but not as competitors.

When I raised the question as to who was recommending NEST, there was some surprise. NEST will set up more workplace pensions this year than the entire insurance sector and is set to dominate the market in 2017 to a point that traditional workplace providers could  be marginalised.

The simple facts that most accountants will now provide a recommendation to employers (generally to use NEST) and that most IFAs , CIFAs and EBCs regard the auto-enrolment market as of secondary importance suggests that whatever is happening right now, is not being monitored by NMG.

The general reader may also be puzzled as to why this assessment of the providers , focussed on the relationship between the provider and the intermediary and not the outcomes of the workplace pensions themselves.

I brought up the elephant in the room, the actual returns delivered by workplace pension providers to those investing in their products (the beneficiaries – AKA consumers -AKA us). Though this table is flawed, it is the only comparative table of investment returns from the group under discussion yesterday (Source defaqto/NEST – default investment funds)


I say (flawed) as the NEST numbers appear to be partial (the initial phase of the growth stage of their TDFs being ignored). They are also flawed as these numbers are declared net of fees from the underlying contracts (which are dispersed over a range of at least 0.5%).

What ordinary people judge a workplace pension by , is not the amount of support the provider gives to the intermediary but the outcomes of the workplace pension to them.

I was really surprised that the wide dispersal of outcomes between top and bottom performing providers was not a matter of interest to those in the room – including the hosts.

I am more than puzzled, in fact I am disturbed that the Independent Governance Committees have commissioned NMG to provide them with the metrics, methodology and data for analysing the value part of the value for money equation that they will be publishing in their Chair Statements in April 2017.

If the analysis of providers is based on soft factors, such as those discussed yesterday, then the analysis would be meaningless. The focus of IGCs must always be on the outcomes to members. My understanding , from yesterday’s conversation, is that the research NMG are doing is into what members regard as important from a pension provider.

Apparently those interviewed have been put into focus groups and required to spend some time answering detailed questions about what features of a workplace pension matter to them. This strikes me as un-natural and slightly bizarre. I can happily spend a couple of hours discussing which features of my smart phone matter, or how Yeovil are turning their season around, but I would struggle to hold a conversation about what I value about my L&G workplace pension – other than it seems to have increased by 15% over the past 12 months.

What really matters

What really matters to me is that the person managing my money is acting for me and my interests. What matters to me as a consultant is that that person is doing it for all L&G members and what matters to me as someone trying to restore confidence in pensions is that L&G are part of a wider movement to improve the standards of stewardship of the investment industry as a whole.

These are the proper interests of an IGC and I regard any diversion into soft values as a distraction from the main event. Yes I am pleased when a provider offers an excellent link to payroll and reduces the cost of the workplace pension to the provider. I am pleased when an insurer makes the implementation and management of a workplace pension easy and profitable to an IFA.

But what really matters is the amount of money in the pot.  If I was Standard Life and (to a lesser degree Royal London) and I would be very concerned about what happened to those in the default investment option of my workplace pension this year. If I was Philip Green or Rene Poisson of Royal London and Standard Life, I would be very concerned to understand what went wrong! Even if I was the soon to be announced permanent chair of L&G’s IGC, I would be worried at just how out of kilter the returns in 2015-16 had been (just what kind of risks were taken).



Trivialising other people’s pensions

I left the meeting with NMG and the other consultants frustrated and saddened. It seems that we are still a long way from choosing workplace pensions on their merits to the people for whom they are purchased.

The decision making typically being made by employers is based on recommendations from accountants and is incomplete. There is no proper analysis of the investment propositions of the various providers freely available in the market (the NEST/defaqto paper is the closest we currently have).

To suppose that the value people see in workplace pensions is any way aligned to the values discussed in the room yesterday would be ludicrous. IFAs , CIFAs and EBCs work to slightly different agendas but they are all self-serving.

To suppose that accountants know best is just as disturbing, the majority don’t know anything at all and their herding of their customers into their favoured master trusts a disgrace.

We are dependent on the IGCs and the master trust chairs to hold the providers to account. These super-fiduciaries are supposed to be acting for us – the members. But if they are relying on the trivialisation of pensions that I saw yesterday, then I am very worried indeed.


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“The pension transfer lottery” – thoughts from a PlayPen lunch.


At a consumer level, the absurdity of pension deficit volatility, seemed to me abstract and notional. But yesterday’s Pension Play Pen lunch changed that. 

One of our party reported that the value of his cash equivalent transfer value (CETV) changed by 13% in a month as a result of fractional changes in the discount rate used to calculate his entitlement.

Anyone taking a transfer needs to second guess the market. CETV quotations only last 3 months; those who applied in the “heady days” after 31st August, when gilt yields hit an all time low, are seeing their favourable transfers expiring fast. It is a race against time for them to get out.

A ready made marketing strategy for the IFA

The lunch threw up another interesting insight

Those funds that can actually afford to switch to a gilts based investment strategy are seemingly immune from the ravages of the political storms blowing around the eaves.

The total deficit of corporate U.K. pension funds fell 7.4% to £414 billion ($517.2 billion) for the month ended Nov. 30, but increased 56.2% over the year ended that date…..

Assets decreased 2% over the month, and increased 12.8% over the year ended Nov. 30. Liabilities fell 3.3% over the month, but grew 20.4% over the year.

And the forecast from Charles Cowling, man in charge at JLT, is not promising

“any current calm in markets may just be a temporary eye of the storm respite before the Brexit negotiations start in earnest.”

Throw in any other political events like French and German elections and the obvious answer is to throw in the towel and either pre-pack your DB scheme into the PPF or stuff it full of gilts (with the help of some expensive derivatives) to make it storm-proof.

But the scheme, if it moves to gilts and is properly funded on a best estimate basis must now offer transfer values based on the gilts rate. As we have seen in previous blogs, this means offering transfer values of more than 40 times the proposed pensions.

By comparison, one member of our lunch group who was in a scheme that was investing primarily in equities, was offered a transfer value (in September) of less than 30 times the promised income.

So not only is your transfer value subject to the vagaries of time but it’s subject to the ambition of the trustees to stay in or abandon a growth based investment strategy.

As one wag concluded,

“If I was an IFA, I would target my marketing at senior members of well funded DB pensions which have de-risked into gilts”.

Incidentally, the information on asset allocation of DB schemes is freely available from AP Phillips “Pension Funds and their Advisers”.


How do you know your scheme is well funded?

Well unless you are a trustee or a senior employee with access to the ongoing actuarial reports on the funding of your scheme, you have to guess as to whether your scheme is properly funded. If it is – on a best estimates rather than a buy-out basis, you get 100% of the buy-out cost as your CETV. If the scheme is not well funded on a best estimate basis, then you get a proportion of the full buy out cost with the deduction determined by the actuary.

To understand the difference between buy-out cost and “best estimate” we can again refer to the brilliant FABI graph (purple-buy-out and blue best-estimate)



The graph shows that best estimates of pension funds are a) considerably less volatile than buy-out estimates but b) considerably more optimistic. Remember that it is best estimates that are used to calculate CETVs – even if the best estimate is based on a buy-out strategy (where the fund would be 100% invested in “risk-free” gilts).

What this means is that a lot more people are getting 100% of their CETV entitlement than you might believe (if you believe the gloomy prognosis of JLT).

This also explains why those in the fortunate position of being in a scheme with 100% funding on a best estimates basis that has de-risked into gilts – may be getting 50% higher CETVs than those who are in a similarly well funded scheme investing in equities and even better off than the loser who is in an under-funded scheme invested in equities.

Mind you – the number of equity invested schemes that are in deficit must be reducing…

Assets decreased 2% over the month, and increased 12.8% over the year ended Nov. 30. Liabilities fell 3.3% over the month, but grew 20.4% over the year

It is these numerical non-sequitors that commentators like Anthony Hilton (and I) struggle with. The absurdities of the market are creating perverse incentives to leave well-funded self-sufficient schemes – at immense cost to the people who’ve paid to ensure you get full benefits!

The numbers just don’t make sense to me, the arbitrary differences between transfer values suggest that something is going wrong, for the “value” seems to be connected to meaningless measures.

When reported at an aggregate funding level for UK Pension Plc., deficit measures seem meaningless to the consumer. But when, (as I hope I have done in this blog), they illuminate the transfer lottery that people enter into, these absurdities seem very real indeed.

Is regulation wrong?

I am sure that the regulations as they stand are well intentioned, but they seem to have been scrambled by current economic conditions. They depend on rational markets and the Government intervention known as QE is not making for a rational market, it is forcing interest rates to absurdly low levels and forcing CETVs – for those discounting at these rates- to absurdly high levels.

If you are in a scheme that values itself against gilts you should be looking at a CETV, if you are in a scheme valuing itself against equity/gilts you should be in two minds, if you are in an equity based scheme you should leave your CETV alone.

I think this sums up the feeling of our lunch party and it is a conclusion that should have been forged in a mad-house. It suggests that the regulations are simply not working and that they are creating bizarre anomalies.

I will come on to other ways of doing regulation in a separate blog- I am off to Bristol now!

But I’d like to leave the argument pending comments from you.. as I am not a regulator, or a lawyer and not an actuary. As I have said in previous blogs, all this stuff is so dark as to need illumination. I was illuminated in the pension play pen lunch as were others in the room.

The insights we had were not lost on the participants which included the head of de-risking of one of our major consultancies. I think his title should be changed to the head of re-risking as all that de-risking seems to do is to move risk around the table- at enormous expense to the sponsor – and to the great advantage of those people well-informed enough to know when and where to take their CETVs.


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Why some transfer values are (ridiculously) high.


A cash equivalent transfer value (CETV) is a right of anyone in a defined benefit pension scheme. The following explanation is taken from the Pensions Regulator’s website.

A CETV represents the expected cost of providing the member’s benefits within the scheme.

In the case of defined benefits, the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member’s benefits.

The normal way of calculating a transfer value us a method based on a best estimate of the expected cost of providing the member’s benefits in the scheme

This is a best estimate of the amount of money needed at the effective date of the calculation which, if invested by the scheme, would be just sufficient to provide the benefits.

So the value of the CETV is based on an actuary’s best estimate of the cost of buying out your pension when he or she does the calculation and it’s based on the likely return you could expect from the scheme assets (net of charges).

Now have a look at this table


It shows the impact of valuing a scheme using the best estimate method (Blue) of a typical pension scheme.  The purple line shows where a risk free investment return is being used . The risk free rate is valuing liabilities by discounting them at the gilt rate while the best estimate discounts liabilities at the rate of the return achieved by a typical pension scheme.

As you can see, the low risk purple route suggests something quite different from the best estimates route. This is because the cost of the  bonds that provide certainty has gone through the roof and valuing liabilities with reference to the negative yields bonds produce is crazy

All this would be theoretical if schemes invested in real assets (as they used to), but invest in gilts to get “negative bond yields”. Amazingly, the best estimate for such schemes is the purple not the blue line- this is having a weird impact on some  transfer values. Schemes that have de-risked are discounting liabilities using a risk-free best estimate and that is sending CETVs sky-high!

Why Pension Transfers are (too) high.

I wrote yesterday about a correspondent (Actuary#1) who is guiltily taking a transfer value out of a scheme where the transfer value is over 40 times the pension he is giving up. The Lifetime Allowance calculation for valuing defined benefits is less than half that (20 times). His CETV is more than twice as high as “normal”.

It won’t surprise you to hear that his scheme is almost totally invested in gilts.

Actuary #1 has a right to be guilty, the reason his transfer value is so high is because investment consultants like him have been advising schemes to load up on bonds through something called liability driven investment. Schemes even borrow money through the derivatives market to get more exposure to bonds.

For schemes that “de-risk” using LDI , the best estimates discount rate is the gilt rate- or something close to it called gilts +. I happen to know the discount rate for the scheme this guilty consultant is transferring from, it is Gilts +1 – or 2.4%.  His ridiculous CETV is based on this ridiculous assumed return on the fund.

To use Ros Altmann’s analogy, this method for calculating Cash Equivalent Transfers makes as much sense as Trump’s wall.

Not all defined benefit schemes invest like this one . Some still invest in a mix of bonds and equities and have resisted the temptation to borrow to load up on bonds (LDI).

These schemes will have CETVs much lower, CETVS based on common sense and not on the logic of Trump’s Wall.  But more and more defined benefit schemes are de-risking and they are the ones that are giving ridiculous transfer values.

It takes an actuary to tell you

Now I am confident in all this because actuaries don’t lie. The information I’ve got on this scheme is from an actuary (who has done his research)- Actuary #2

“My ridiculous TV is best estimate on their investment  strategy.

They’ve derisked and it’s almost all in gilts”.

This confirms what I knew already – that these are artificial transfer values based on the logic of Trump’s Wall. Perhaps we should call them “post-truth” transfer values!

Here is the guilty admission of my original actuary- Actuary #1 ( a member of the same scheme as actuary #2)

I’ll be more than happy with that (£10k advice bill to IFA#1) if we get the 40x on offer.  As you say from there I have a different worry but one I’m wanting to take on (managing his investment pot). The aggregate effect of too many transfers will of course place even more strain on the longer term viability of benefits that I do not see as “guaranteed” anymore

He may not be so happy to be paying £10k to IFA #2 , when he finds out that his fellow scheme member paid £2.5k for advice on his transfer from IFA #2, but as we are dealing here with confidential information – I will not be able to divulge names of IFAs to these two actuaries!

The guilty admission of actuary #1 can be read as follows

  1. This investment strategy (that I’m a party to) is going to bankrupt my scheme and lose future retirees “guarantees” – presumably when the scheme is driven into the PPF
  2. This investment strategy is creating a massive windfall for both actuaries  by way of a super-enhanced transfer value – “ridiculous” to quote actuary #2.
  3. Grabbing the CETV at today’s “ridiculous”valuation is placing a strain on the scheme, the sponsor and potentially all other schemes – if the scheme goes into the PPF).

I’d add a fourth, Actuary #1has clearly got the negotiating skills of a dementing gibbon (but we could have guessed that from reading the FCA’s Asset Management Study).


Transfer now while negative bond yields last!

Provided you are in a defined benefits pension scheme which uses a gilts based investment strategy, you too will be eligible for a Brucey Bonus type windfall so long as interest rates remain low and bond yields remain negative.

But transfer now while stocks last. Pay your IFA his absurd fee and screw the scheme. After all , you are financially astute and the whazzocks who don’t know the name of the game have only themselves to blame when they see their pension benefits taking a hair-cut when the scheme goes into the PPF.

If you are reading this far, it is probably because you are one of the financial elite who allows this calamitous state of affairs to happen. You are both architect and (potentially) principal beneficiary of the destruction of the defined benefit schemes that you consult on.

Take to Gilt-Plated Lifeboat CETV now and leave the ship to go down. Meanwhile make sure in your day job to ensure that all your clients are leveraged into gilts. It’s only fair that your mates can get the Gilt Plated Lifeboat too!

It’s what the asymmetry of information is all about!

What does all this tell us?

The current mania for de-risking is having an unexpected consequence. It is making the transfer value so attractive that the richer members who can afford exorbitant advisory fees , are getting out with a massive bonus.

Meanwhile those who cannot pay the advisory fees and those who have no idea they are sitting on a pot of gold, are seeing the financial security of their remaining benefits being eroded.

The cost of their scheme to their employer is also increasing as a result of these ridiculous transfer values. That’s impacting wages and the contribution rate to pensions.

So this is a scandal where a small number of financially astute people are getting away with the swag and everyone else suffers.

Well not quite- the actuaries who are involved in this are guilt-ridden and what they are doing is perfectly legal and economically reasonable. Why shouldn’t they act in their own best interest?

What is not so good is that  the conditions that enable all this to  happen were created by the actuaries and investment consultants who are savvy enough to take advantage. Perhaps this matter should be added to the long list of conflicts that the FCA are currently preparing as they consider the referral of said investment consultants to the Competition and Markets Authority.



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The curse of the transfer value!

bear 2

“at my analytic best”

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

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

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

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

Transfer now while (low) bond yields last?

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

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

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

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

Transfer now if you can afford it?

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

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

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

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

Should we panic?

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

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

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

But pure economics was not enough (for me)

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

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

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

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

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

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

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


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

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

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

Bear 5

silly me


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


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

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

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

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

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

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

We (the FCA)are considering:

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

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

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

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

Wholesale money

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

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

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

Retail Money

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

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

Comparative levels of care

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

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

A model for the future?

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

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

• among other factors they decide,

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

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

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

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

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

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

Who’s money is it anyway?

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

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

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

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

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

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

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

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

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

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Taking possession; how’s Workie performing ?

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

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

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

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

When your pension’s worth more than your car

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

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

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



Source Morningstar/ONS/NEST ; calculations defaqto

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

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

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

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

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

What we’re going to do

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

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

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

Any questions?

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

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

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

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

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

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

Pension pots are your assets.

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

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

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

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




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Michael Johnson – 80% of fund management industry is redundant


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


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

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

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

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

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

The FCA rides in

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

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

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

Performance: no consistency

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

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

The FCA report comments on fund performance, finding that:

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

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

Investment consultancy: pointless?

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

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

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

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

On-going opacity

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

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

Fiduciary management

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

And what of the LGPS?

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

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

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

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

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

Conclusion: resuscitate the DCLG’s proposals

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

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

Michael Johnson

Centre for Policy Studies

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

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


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


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

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

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

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

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



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

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


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


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

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

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

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

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

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

Helen Morrison archly remarks

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

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

In disgust

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

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

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

He told  Money Marketing:

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

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

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

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


In denial

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

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

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

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

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

We are waiting.


In disgust




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Why a 12% pension saving rate is wrong.



PLSA’s forecast for Retirement Income Adequacy



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

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

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

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

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

Two small flaws – flaw one

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

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

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

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

Two small flaws – flaw two

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

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

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

One big flaw – one big fat micro flaw

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

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

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


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


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


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


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

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

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

Two micro balls ups and one macro cock up

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

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

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

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




PPI data;  http://www.pensionspolicyinstitute.org.uk/publications/reports/adequacy-in-retirement

PLSA report; http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/~/media/Policy/Documents/0605a-%20Retirement-income-adequacy-Generation-by-Generation-%20Appendix-Methodology.pdf

Appendix methodology (Hymans Robertson’s assumptions) ; http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/0605a-Retirement-income-adequacy-Generation-by-Generation-Appendix-Methodology.aspx

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People’s Pension admits undisclosed charge-hike.


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

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

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

Kind regards
Andy Tarrant

The answer is 30% of the revenues.

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

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

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

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

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

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

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

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

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

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

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

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

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

Is it inappropriate for me to raise these matters?

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

I remain puzzled and disappointed

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

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

A response to Henry Tapper’s Blog

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

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

General comment

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

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

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

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

Specific comment

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

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

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

“These stock lending fees do not benefit the member”

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

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

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

“LGIM are transparent. State Street aren’t”

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

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

“We must assume that no news is good news”

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

“Management are being over-rewarded”

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

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Where does all our money go?


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

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

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

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

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

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


Talking bollocks

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

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

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

Where does all the money go?

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

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

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


oh yeah? – for who?

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


(1) See;  https://www.ft.com/content/77f24f6a-ad91-11e6-9cb3-bb8207902122


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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

Screen Shot 2016-11-20 at 16.59.10.png

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

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

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


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

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


This differs only marginally when investment advice is taken.


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


Why ownership matters

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

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

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

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

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

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

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

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

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

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

If past performance is not the measure – what is?

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Why pick on the consultants?


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

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

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

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

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


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

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

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

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

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

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



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



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

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

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

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

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

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

Ah – but here’s the rub…

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

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

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

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

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

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

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

What can be done?

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

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

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

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

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

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


Thanks to Andy Agethangelou’s

transparency symposium

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

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


don’t make me laugh

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Shouldn’t Pension Schemes CREATE jobs? #CIPD


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

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

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

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

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

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

Why make “pensions” into a business pariah?

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

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

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

But we don’t!

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

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

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

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

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


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

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

Pension Schemes Should create jobs

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

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

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

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

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

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



FT Article here


Further links will follow.

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Is Farage the EU’s US Ambassador?


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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


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Remembrance day – let’s stop fighting.

Fire 12



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

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

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

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

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

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

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

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

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

So long as you go on reading!

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

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

Leonard Cohen

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

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



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


looks good – but will it help?

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

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

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

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

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

All dressed up and nowhere to go

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I believe in a promised land

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

Santa Lucia.jpg

Santa Lucia – Gran Canaria

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

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

The dogs on Main Street howl

‘Cause they understand

If I could take one moment into my hands

Mister I ain’t a boy, no, I’m a man

And I believe in a promised land

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

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

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

I’ve done my best to live the right way

I get up every morning and go to work each day

But your eyes go blind and your blood runs cold

Sometimes I feel so weak I just want to explode

Explode and tear this town apart

Take a knife and cut this pain from my heart

Find somebody itching for something to start

This was written and published in 1978.

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

Obama’s lament

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

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

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

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

How do you build a promised land like this?

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

Gonna be a twister to blow everything down

That ain’t got the faith to stand its ground

Blow away the dreams that tear you apart

Blow away the dreams that break your heart

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

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


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

farmer and the cowboy

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

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

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

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

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

Raj has told Professional Pensions that

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

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


and here were the September numbers


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

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


 These numbers don’t speak for themselves!

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

There are two things that are going wrong

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

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

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

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

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

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

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

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

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

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

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

cowboy and cowgirl


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







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

chicken licken

Skyval is falling/rising – ?whatever?

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

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

“Slight improvements in gilt yields”


However Raj goes on to warn us that

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

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

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

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

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

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

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

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

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

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

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

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

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

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

carsten -chicken

the sane man counting  his chickens

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Anatomy of a scam; lessons from Providence and Lumiere


Fraud’s victims are usually faceless

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

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

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

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

Lessons for regulators

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

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

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

Wider lessons for the Islands

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

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

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

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

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

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


Screen Shot 2016-10-30 at 08.03.33.png

Lessons for the UK mainland

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

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

Lumiere were clearly alive to the possibilities.


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

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

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

liberation fraud

Lessons for us all

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

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

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

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The pernicious effect of NEST’s market distortion

nest offset

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

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

Could NEST be privatised?

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

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

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

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

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

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

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

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

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

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

What a mess!

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

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

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

Is this NEST’s fault?

HElen dean nest

NEST CEO – Helen Dean

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

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

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

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

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

Why so little noise?

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

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

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

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


How has NEST achieved operational supremacy?

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

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


How has NEST achieved marketing supremacy?

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

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

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

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

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

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

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

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

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

No noise please -politicians at work big-fish3

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

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

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

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

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

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

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

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

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

The NEST default investment strategy was another political mistake

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

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

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

The pernicious effect of NEST’s market distortion

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

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

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

Nothing less will do!


Otto – show us your recovery plan!


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

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

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

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

NEST justifies its expansion plans


Otto in power mode

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

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

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


Or did the sidestep work?

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

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

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

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

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

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

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

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

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


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

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Pensions for real – Even DC pensions!


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

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

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

Here are her conclusions

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

This penchant for investment in real assets appears to be gaining ground in the new Government. A very important document called Beveridge 2.0 was written for Nigel Wilson by John Godfrey. Nigel is CEO of Legal and General, John was then his head of policy. John is now Head of Policy in the Cabinet Office – effectively Theresa May’s policy adviser. here it is http://www.slideshare.net/HenryTapper2/basis-for-beveridge-20

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

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


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

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

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


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Con Keating on Pension Valuations

Mr Pension

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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




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





Thank goodness for balanced journalists!




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


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

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

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

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

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

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

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





Just Fab -remember!



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

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

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

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

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

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

  Average asset allocation in total assets


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

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

Other key assumptions:

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

CMI_2015 [1.25%]

Proportion married 85%

What should you make of that?

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

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

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

We want defined benefit pensions to have freedoms too!


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

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

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

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

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


Targeting a better pension





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Doesn’t pension freedom extend to Defined Benefits?

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

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

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

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

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

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

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

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

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

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


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

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

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

Ralfean chappie

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

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

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

An investment chappie

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


First Actuarial chappie

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

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

There are three arguments here

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

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

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

The Pension Plowman’s view.

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

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

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

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

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

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

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

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

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

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


Making sense of it all

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

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

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

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

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


Do you want to be free?



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


They think – we think!


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

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

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

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

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

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

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

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

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


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

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

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

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

FABI graph.png

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

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

Rob Hammond, Partner at First Actuarial said:

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

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

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

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



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




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

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

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

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

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

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

The big idea

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

The big idea is this

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

This is my big picture idea of Value for Money.

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

The little ideas are these


Dave Brailsford

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

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

Value  and efficiency

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

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


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

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

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


Fiona Dunsire

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


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

Investments aligned to expectations


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

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

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

A Plan is for life, not just for saving

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

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

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

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

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

target pensions


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(Positive) thoughts on the state pension


John Cridland (ex CBI)



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

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

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

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

Is this fair?

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

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

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

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

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


Daniela Silcock- Pension Policy Insitute


Inter-generational and intra-generational solidarity

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

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

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

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

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

Stop this unseemly bickering!

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

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

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

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


intergenerational solidarity – medieval style

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We don’t believe in “experts” anymore


The phrase in the title is a favourite of my boss – Hilary Salt – if you read this on holiday in California –


Hilary, this blog’s for you


Nothing convinces me more that experts are not to be trusted than my being called a pension expert. I am called an expert because I am active on social media but the bright-thinking is elsewhere. At best I am good at articulating other people’s ideas in a way that makes sense to those who read these blogs, at worst, I regurgitate ill-considered thinking without the perspective to disagree.

Experts are not to be trusted and as Neil Young said of Heart of Gold”, if this blog puts me in the middle of the road, I’ll head for the ditch, you meet nicer people there.


You meet nicer people at the Wesleyan Chapel in City Road. Yesterday’s sermon from an irascible Lesley Griffiths focussed on intolerance, xenophobia and exclusivity. We thought back 88 years to the birth of Martin Luther King and forwards to the inauguration of a new president. We thought about our motivation for Brexit , was it “smart” to turn our back on people wanting to come in? My guess was that about 50% of the 300 people in the chapel had been born in the UK, but that the majority of those who were second generation immigrants.

Jesus was a Jew, so was Simon who was an expert in Jewish law, Simon welcomed the infant Jesus as saviour to the Jews but he added “and for all mankind”. Within 40 years, Paul, Peter and the other early evangelists were being hunted out of Israel by experts who would not have the messianic message adulterated. For the experts , Jesus was a Jew for the Jews; an exclusive saviour.


I am not for exclusion, not in terms of this country’s borders, nor to good quality welfare, nor to private pensions. I do not see why ordinary people like Brian (the man I met over Christmas in a homeless shelter), should be homeless in a society which has so much. I do not see why we should have a crisis in the NHS. In all these things I am for a state that includes those who are down on their luck, whether they come from Syria or Shoreditch.

That does not make me an expert, it makes me sound very foolish, as I am sure that any expert reading the text of Lesley Griffiths’ sermon would call that good man. I am sure that that was how the experts that ran Jewish society considered Peter, Paul and the early evangelists. There’s was a counter-expertise, an overflowing of the spirit of charity and common humanity that seeks in include and not exclude.


A legal expert at work


But I must balance my hatred for the exclusivity of experts against my pride in Britain and in our welfare system, our NHS and “yes” our pensions!

I believe in the positive , life affirming spirit of ecumenical and diverse humanity which underpins the Wesleyan chapel. I cannot understand faith properly but I can see that the focus of this great positive power is the radical teaching and actions of a man who at times was even angrier than Lord Griffiths.

My pride for Britain is not dimmed by our taking ourselves outside of the influence of Europe, an influence that was not healthy for our commonweal. I did not vote to leave but now we are leaving, I intend to play a small part in making our leaving work for Britain.

My vision for this working is the “field of folk” that appears to Piers Plowman in a dream. In that field, people of different backgrounds , skills and economic conditions work together to a common good. It is an entirely inclusive vision that accepted medieval society for what it was and sort to make it better. That William Langland’s vision was held heretical, I am not surprised, he was no expert – he was a poet, a visionary. I am a salesman.


I do not claim a line of succession from Langland or from Blake. I sit in the pew and am inspired by Lesley Griffiths, I think of my father and my grandfather, Ken Waights, Russell- Shearer and Donald Soper – the great Methodists who influenced my childhood and now returning to my thinking after 30 years.

This is a time of great change and a time to hold on to old certainties.

I wave goodbye to Michelle and Barack Obama hoping that they can do as much good out of office as they did “in”.  I look to the coming months and years with fear and hope. I hope that those good people who I know surround Theresa May are right and that she is the person who will lead us with a rod of social justice.


I hope that in the areas of welfare, health and pensions we include not exclude those just getting by (as well as those like Brian). But I believe we will do this by working hard and well and improving our productivity. I hope we will not bury our talent in the ground but invest it so we can bring more talent to the party. I look forward to a pension system that provides for everyone , a system we are moving towards.

In all this I am no expert, merely someone who after writing over 2500 of such blogs, is beginning to know what he wants! I do not want to be considered “expert”.


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How can payroll bureaux profit from auto-enrolment?

I’ve recently been asked by the leading payroll trade publication to answer some questions. I’ve enjoyed thinking about them and have set out my answers below. I’m not a payroll manager and I don’t run a bureau – I’m not even an accountant or book-keeper; I don’t think I speak for payroll but I have worked with payroll for four years and my technology service has now helped over 15,000 employers to assess their workforce and/or choose a workplace pension. So I hope this experience will help in solving the fundamental question “how can payroll bureaux profit from auto-enrolment?”
payroll world top 50

I’m proud to have had this badge for the last 4 years

What kind of service are clients looking for and what should payroll bureaux be doing to more effectively compete for business?
We are at the end of the beginning of the auto-enrolment  project. Over the next twelve months the bulk of employers by numbers,(rather less by members), will be staging auto-enrolment. This is the great challenge for accountants and the payroll bureaux that they manage.
Auto-enrolment is as much a game-changer for payroll as it is for the pensions industry.
For the pensions industry it has created a new kind of pension , the workplace pension which is now being provided by a small number of heavyweight pension providers plus a few specialist players. The services the pension providers are offering are being specifically targeted at accountants, book-keepers and their payroll functions. In the absence of a functioning advisory market, accountants, book keepers and payroll managers are being asked to become “pension managers”.
The debate at all levels of the supply chain, is to what extent will payroll step up to the plate and accept the function of “outsourced pension management”. In our opinion, those that can find a way to offer pension services as part of payroll and manage the many pension issues that arise from auto-enrolment, will be the winners.
Simply providing a “compliance” service, may make your practice fit for purpose , but it will not make you a winner.
How far can payroll bureaux  go when providing pensions advice? Is it something that they’d, ideally, prefer not to get involved in/would seek to ‘dodge’?
To answer this question, it’s worth looking at what pension managers of large employers do. They are not regulated to give advice and while they may be professionally qualified through the pensions management institute or similar, their value is delivered through  experience and technical understanding. These are qualities that payroll managers have in abundance. I think payroll managers underestimate their capacity to deal with member queries and over-estimate the technical gap between them and pension managers.
It is much harder to gain the experience of managing payroll and its staff issues than to get the specific expertise to be a pensions manager.
The critical issue is to understand the dividing line between advice and guidance. We try to keep this simple. Advice is about telling people what to do “delivering a distinct course of action”. Guidance, is about explaining options and the consequences of those options.
For instance, a pension manager knows when asked a straight question, to give a straight answer. For instance
Q. Can you tell me if I should transfer my other pensions into my workplace pension here?
A. I can’t tell you what to do , you need to get an adviser to do that; once you have decided what to do, I can help you do it.
I don’t think this is dodging the question, pension managers should be able to signpost to the information and advice that can ensure the member makes an informed decision, they do not have to take the decision themselves!
Typically, pension managers like process but they hate advice, payroll managers can master process and become pension managers so long as they are clear about their roll.
Should payroll bureaux be doing more to better engage with pension providers? Similarly, would you say pension providers are seeking to actively engage with bureaux?
The elephant in the room is “choice”. While most of auto-enrolment demands no choices, the employer is required – in law – to choose a workplace pension. This begs an important legal question, is the employer liable for the consequences of that choice? Every mis-selling scandal I can remember has centred on the question of who is accountable for the decision.
With auto-enrolment, the answer is simple, the employer is responsible for choosing a workplace pension. However the accountant/book-keeper/payroll bureau will be asked which provider they should choose. We do not think that this is within the competence of most practices, however we know that the majority of practices are giving advice on what to do.
Typically that advice is to use NEST – the Government scheme. The message that comes from the Pensions Regulator via the letters to employers creates an impression that NEST is the default solution. It is not, NEST is not a safe haven, it is one of many choices. Advising employers to choose any pension provider has attendant commercial risks.
Some suggest the solution lies with the pension providers.It is very hard for pension providers to actively engage with all bureaux, the big payroll software providers – especially Sage – are engaging with the major pension providers and ensuring that accountants can engage with all of them using the new technologies.
Where the software houses cannot engage directly, they are setting up links with hubs such as pensionsync which give payroll access to a range of providers. We see software providers having the role of facilitating choice but it is still the employer which has to choose.
The gap in the market is the advice on the choice and the documentation of the decision. We see technology as enabling an appropriately priceed solution, the provision of robo-advice made available for less than a couple of hundred pounds is available to employers. This kind of advice is  the solution that many progressive bureaux are adopting.
How effective are bureaux at engaging and complying with the Pensions Regulator?
In our experience, bureaux find dealing with the Pensions Regulator easy. TPR.gov.uk provides answers to the frequently asked questions and tPR’s willingness to get out and meet bureau either through events or face to face has made for good engagement and compliance. The issues around compliance tend to be with clients who resist all help on auto-enrolment. We know that there is a hard-core of incompetent and unwilling employers who will fail to comply either wilfully or through a lack of engagement and organisation.
We see very few examples of wilful un-compliance or incompetence among accountants/book keepers/payroll bureaux.
The proviso in all this is around the workplace pension itself. The question of choice remains difficult  for the Pensions Regulator , for intermediaries and for employers. If we are to see problems down the line, it will be as likely to be because of the outcomes of the pensions as compliance with auto-enrolment.
payroll 11
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Plugging phoney deficits does no good!


We have become fixated with phoney pension deficits, now a British pension consultancy is suggesting we can plug phoney deficits with real money, the dividends that support “other people’s pensions.

This is what we think of the phoney deficits. Our best estimate of the black hold is that there is (in aggregate) no black hole at all. In December we actually ran a pension surplus of £270m. Infact we can’t find a single month since the  start of our analysis (March 2006), when UK DB pensions haven’t collectively been in surplus.




Slashing dividends to plug notional deficits is as futile as Don Quixote tilting at windmills. If these deficits exist, and we would argue that they are but a product of the favoured minds of risk-obsessed accountants, they do not present an existential threat to British pensioners or to our large employers. Unless , that is, we decide to force feed them with cash that would otherwise – “pay pensions!!!”

For these dividends are generally not used to line the pockets of Philip Green and the Fat Cats on their yachts, they are used to pay pensions to the pensioners of defined benefit pension schemes. Decreasingly so, as the mania for de-risking has determined that the negative real yields of bonds are better placed to do that.

When you starve pension schemes of the oxygen created by the dividends from large employers , you find yourself where the Royal Mail Pension Scheme is today. That scheme, you will remember was bailed out by us taxpayers a couple of years back and – when members accepted a change in the shape of future pension accrual (FS to CARE for the teccies), the scheme went into “surplus” – even under the arcane mark to market accounting formula.

The Royal Mail trustees decided to “lock in the surplus” by reducing the equity exposure of the scheme to minimal levels. But instead of immunising members from nasty shocks, they’ve created an immediate disaster for those still in the scheme and working for Royal Mail. The cost of moving out of equities equates to an increase in required contributions from the Royal Mail to 50% of pensionable payroll!

The employer and unions are now engaged in discussions on how to keep the scheme open without ruining the competitiveness of the Royal Mail. It goes without saying that paying 50% of payroll into a pension does not make paying dividends to shareholders very easy!

So plugging deficits and moving pension schemes into de-risked assets, does not improve the prospects for future accrual. JLT clearly see this as a happy outcome

“We believe that next year’s accounts will show that the majority of FTSE 100 companies have ceased DB provision to all employees” .

their report states  “that paying pension deficits by withholding dividends would help to preserve shareholder value”.

Shareholder value from paying no dividends?

This bizarre concept is new to me. Most shares are valued by the future steam of profits. Plugging notional deficits with tomorrow’s dividends will reduce the value of ownership of a company’s equity and thus the value to the shareholder of holding the equity.

Take the companies quoted in JLT’s survey


These company’s shares are widely owned by the pension schemes of similar companies. The prospective loss of those dividends for a year would materially disadvantage those schemes, forcing them to seek returns in other areas. The impact would be less money for these firms to invest and less cover for their pension payments.

If the long-term aim of our pension schemes is to invest 100% in bonds and take no “notional” risk, then they are going the right way around it.

The FT concludes its report on JLT’s findings with a wry comment

The report noted that the average pension scheme asset allocation to bonds had increased from 59 per cent to 61 per cent, even as the price of these assets climbed to record highs.

Presumably it will be into bonds that the redirected deficit payments would be made. The price of these bonds is sky high because of the already massive excess of demand over supply. A further bond purchasing round might keep the great bond bull run alive for another year or so , but it is crazy to think that the run can last for ever. This chart shows just how extraordinary our current bond bull market is



The argument is that if bonds fall in value, then so do pension scheme liabilities and things will be alright. But that is to assume that JLT’s prediction comes true and we have no future pension accrual in our DB schemes. Actually a very large part of DB plans in the public sector remain open for accrual (much funded by equities).

The pension schemes that have decided to remain in productive assets (mainly equities), would be stymied by any loss of dividends. The consistency of equity dividend payments is one of the few things that pension trustees can rely on. Pulling the plug on dividends would be an act of vandalism, not just against future pension accrual but against shareholder value.

There is another way

The only way that shareholder value would be improved, were if equities were to be considered a short-term trading counter for market speculators. Shares are typically held for long-term investment reasons, no more so than when pension funds buy them.

By resisting the temptation to invest in bonds and “de-risk”, the best estimate returns of a pension scheme can take into account the long-term dividend flow and benefit from the equity risk premium. This is why FABI shows a more optimistic view of the future (Blue not Purple line)fabi-graph

“The other way”, involves taking a long-term view of pensions. It involves buying and holding real assets like equities and infrastructure and not marking those assets to market as if they were going to be sold tomorrow.

The “other way” is called investment, it is the opposite of speculation. Speculation is betting, betting on short-term events such as interest rate fluctuation.

We must stop valuing our pension schemes as if they were items of speculation. The accounting positions of our schemes (on which JLT’s numbers are based) are of little significance to the long-term business of paying pensions.

It is time that we took a longer-term view of our future (as Brexit demands). It is time that the political leadership of this country started demanding (as Richard Harrington is demanding) that pension investment drives economic growth to get us through the change to an independent Britain.

We must not cut dividends, we must invest in and hold real assets.

In summary, the accounting deficits that JLT are talking about are phoney. They are only real if we treat pension schemes as items of speculation. The rush to bonds is economically bad for this country, its pension schemes and the future accrual of member benefits. The call to cut dividends to allow more bonds to be bought by pensions is simply an accelerator to the death-spiral that mark to market accounting has created for funded DB schemes.

We must stop giving credence to these bad news stories. If we want Britain to become an economic Narnia (forever winter but never Christmas) then we will carry on with the program of pension de-risking that we have embarked upon. If we want some sunshine and a more productive and prosperous future, we have to embrace the equity risk premium as our long-term ally.



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FABI says “no no” to the deficit yo-yo!


The First Actuarial Best-estimate Index (FABI) continues on a more predictable flight.

An actuary speaks!

Rob Hammond, who oversees the number crunching behind FABI says:

“Yo-yo deficits do nothing to restore people’s confidence in their pensions. FABI paints a truer picture. If you use our best-estimate approach you see an aggregate surplus in pension schemes with little month on month volatility”.

Smaller print!

Over the month to 31 December 2016, FABI was stable with the UK’s 6,000 defined benefit (DB) pension schemes maintaining a healthy overall surplus of £270bn.

The slight dip was due to a fall in gilt yields over the month, a reverse of the rise in gilt yields seen in November. Because FABI is calculated using returns from a wide return of assets (not just gilt yields), FABI is much more stable.

You can see this in the chart below which compares the FAB Index to the PPF 7800 index over the last 3 months, illustrating the relative falls and rises in the two indices over this short period.

Corporate bond yields also fell over December which will be bad news for companies with accounting year-ends at 31 December 2016. They’ll be showing considerably higher deficits than those with a year-end just one month earlier.



Technical note

These are the underlying numbers used to calculate FABI.

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’ (real) investment return – has remained constant at around inflation minus 0.7 % pa. Such a target return should not present trustees (or employers) with sleepless nights.

FAB Index over the last 3 months Assets Liabilities Surplus Funding Ratio ‘Breakeven’ (real) investment return
30 Dec 2016 £1,476bn £1,206bn £270bn 122% -0.7% pa
30 Nov 2016 £1,443bn £1,147bn £296bn 126% -0.6% pa
31 Oct 2016 £1,438bn £1,132bn £306bn 127% -0.7% pa

The assumptions underlying the FABI results are also consistent:

Assumptions Expected future inflation (RPI) Expected future inflation (CPI) Weighted-average investment return
31 December 2016 3.7% pa 2.7% pa 4.1% pa
30 November 2016 3.7% pa 2.7% pa 4.3% pa
31 October 2016 3.8% pa 2.8% pa 4.4% pa

Footnote: Best estimate transfers

The volatility in the PPF 7800 index is reflected in Cash Equivalent Transfer Values over the last quarter. Transfer values calculated using a gilts based discount rate have fallen by as much as 15% from a September high, whereas those calculated using a discount rate that contains a more typical asset mix of bonds and equities (the constituents of FABI), have been much more stable.

Another reason to say “no-no” to the “yo-yo”!


Notes to editors

The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,945 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.


Rob Hammond is available to talk to. Please contact:

Rob Hammond on 0161 868 1320 or rob.hammond@firstactuarial.co.uk, or Jane Douglas on 0161 348 7933 or jane.douglas@firstactuarial.co.uk.


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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MOMENTUM – hang your head in shame!

The press release demonstrating how ignorant the public are about their retirement income is an instant crowd pleaser, guaranteed to get a place on the website of our trade press. Here’s an example.