5 Things I want from today’s DB Green Paper


Why Pension  Schemes matter (Source ONS)

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

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

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

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

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

My five item wish list

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 But the promises that have been made to those in final salary schemes can’t be rescinded or diluted.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

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

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

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

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

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



Here’s the link to the Damian Green article  https://www.ft.com/content/16d53fda-f526-11e6-95ee-f14e55513608


Here’s the  opportunity

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Choosing a workplace pension

how to choose

help of a proper firm of actuaries!



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

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

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

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

here is the Pension Minister’s opening gambit

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

So what is the regulatory system?

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

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

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

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

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

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

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

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

choose a pension.PNG

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

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


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

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


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


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


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

Small wonder then that Richard Harrington concludes

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

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

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

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

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


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The tale of the “scammed”

scamproof scorpion

This is the testimony of one victim of a pension scam. I cannot verify whether every aspect is true, but it is not the work of a vindictive person. It has been written to help trustees of pension schemes to better protect members and for  Regulators to better help trustees.

There is nothing so powerful as such a personal testimony for it asks us to consider how we might have reacted, both as a potential victim and as a fiduciary. I thank Stephen Sefton (who wrote the piece and is pictured below).

Testimony of Stephen Sefton



The Cambridge English Dictionary defines a scam as: an illegal plan for making money,  especially one that involves tricking people“, source: http://dictionary.cambridge.org/dictionary/english/scam

I’m Stephen Sefton. I am a real victim. I am 60 years old and live in Milton Keynes, UK. I’m the Optimus victim referenced in Angie’s email of 10th Feb regarding Trafalgar Multi Asset & STM Fidecs, and this is my story.sefton

I was a member of a defined benefit scheme in the care of Mercers but I heard of the changing rules coming into effect in April 2015 and I wanted to take advantage of these with a flexible drawdown rather than an annuity. The latter made no sense to me with my current health issues. My ceding provider said I couldn’t have a flexible drawdown in the defined benefit scheme and I would have no option other than to transfer out.

Enter the  confidence tricksters. Wolves, salivating at the opportunity to fleece a victim and line their own pockets with my hard earned pension. No doubt they ordered their luxury cars and tickets to Vegas with the anticipated commission and admin charges that will be syphoned off my pension over the years, until they’ve bled my pension dry. This is what they do – routinely and typically.

The very framework of law and regulations, designed to protect me, failed me spectacularly, letting me down and later, abandoning me on the grounds that because the advisers were unregulated I had no avenue to any redress or compensation! Like many other victims, I would be on my own when I discovered what had happened!

Between March and May 2015 I was illegally invited by an adviser from Square Mile International Financial (“SMIF“), formerly Aktiva Wealth Management, fraudulently posing as a regulated IFA, to participate in two Unregulated Collective Investment Schemes (Blackmore Global and Symphony). It is illegal to promote these kind of investments to retail investors in the UK (Sections 21 & 238 of FSMA)

I was mis-advised by this adviser to transfer my pension to a QROP even though they knew I was a UK resident with no intention of leaving the UK. Their first suggestion was Kreston, which is based in the Isle of Man but my application was turned down by Kreston (reason unknown) and so SMIF switched to a QROP called Optimus Retirement Benefit Scheme No.1 which is based in Malta. There was no explanation for the change of jurisdiction. It seems SMIF were happy to move my fund to any QROP provider that would take it – no matter where they were based.

Optimus Pension Administration Ltd. (“OPAL“) provide back office services to Integrated Capabilities Ltd., Malta (“ICML“), who are the trustees of the Optimus Retirement Benefit Scheme No.1 (“the Scheme“). The SMIF adviser made fraudulent claims of tax benefits on the income I would get via a QROP and also fraudulently claimed OPAL were approvedby the HMRC. Even today,  the OPAL website: http://www.optimuspensions.com/scheme-1/  makes the claim (in the footer) “… is registered with HMRC as an approved scheme.” HMRC DO NOT approve pension Schemes! This misinformation is used to add legitimacy to the Scheme and mislead the client and is typical language used by the scammers.

SMIF used the cold calling back office services of a firm called Aspinal Chase (Albion Wharf, 19 Albion Street, Manchester), and Pensions & Life UK Ltd. (“P&L”) of the same address – the director’s of these companies being, Nunn & McCreesh, who, I later learned, are also the directors of the toxic fund, Blackmore Global in which the majority of my pension fund was invested! I also later learned Nunn & McCreesh are on record for participating in the 2012/13 Capita Oak  and Henley pension scams; cold calling victims to participate in the purchase of worthless storage pods losing in excess of 500 victims over £7 million!

Forms were couriered to and fro to me and in the summer of 2015, and on instruction from P&L, Mercer transferred a sum approaching half a million pounds of my pension fund to the Optimus QROP in Malta.

I received a letter in July 2015 from ICML, advising me 75% of my fund had been invested in Blackmore Global and 25% invested in the Symphony fund. The letter later turned out to be highly inaccurate with respect to Symphony when I compared it to the financial statement I received of my account (10 Nov 2016), which showed suspicious anomalies in the dates of the Symphony share purchase. These anomalies were conveniently explained by ICML as simply “administrative errors” but professional businesses don’t just accept financial anomalies as administrative errors! ICML have continued to evade further explanation of these “administrative errors”.

I began to suspect something was not right in the Spring of 2016 because the Scheme was terribly opaque. I had had no further communication from any party. I had not been provided any audited report from the trustees (compiled to end of Dec each year) even though the trust deed (section 19.3) gives me a right to it. Later, when I asked for it, I received only the first two pages! When this was questioned I never got an explanation as to why I didn’t have the rest of it, nor was I ever given the rest of it. The first two pages did however show that in 2015 the Scheme went from 26 members to 1100+ members – roughly 100 new members per month. It is inconceivable I am the only one invested in illiquid, toxic UCIS’s held by the Scheme, wholly unsuitable for pensions – which must have prudent, diverse, low-risk, liquid investments by definition.

I began to question the OPAL directors, who vehemently denied I was a victim of a scam and bizarrely insisted SMIF were appropriately regulated even though I shared with them the reply I got from the FCA, categorically stating SMIF were not licensed to give investment advice nor transfer my pension. I also shared my email from the FCA with the SMIF adviser who rattled his sabre threatening to set his lawyers onto the FCA. Yeah, ok.

Subsequent communications with SMIF (which I have on file), made claims the funds were suitable for retail clients and I quote one said, (email 27th May 2016) ” … both Funds are properly recognised and audited collectives, regulated in their respective jurisdictions accordingly.” This is yet further misinformation, some would say fraudulent. Neither fund (Blackmore nor Symphony) has published audited accounts to date! I also have it on record that my trustees were totally unaware of this fact until I brought it to their attention and requested (24th July ’16) a copy of the Blackmore audit. ICML replied there wasn’t one and later, in a letter dated 26th August 2016, added: ” The first audited financial statements for the Fund are being finalised for the period from October 2013 to April 2015. We have been advised the audit will be completed in the next month [Sep 2016]. We have asked Blackmore to explain the reason for the delay as we share your concern. ”

This naturally begs the question, just how much due diligence was performed by the Investment Managers of the Scheme (Lombard Bank, Malta) before advising these funds be approved as appropriate assets in the Scheme? My suspicion is Lombard didn’t approve these assets, but they were added to the Scheme on the advice of unlicensed advisers, in breach of Maltese regulations 1.3.8/1.3.9 Investment Advisor. However, when challenged over this, ICML were evasive. If these toxic assets were approved on the advice of unlicensed advisers then it begs the question why the MFSA were not enforcing regulations and taking them to task? Yet another part of the system, designed to protect me from being scammed was letting me down.  The system will only protect victims if everyone plays their part at each step!

I started a blog on the Citywire forum for a number of reasons. One, I wanted to reach out to anyone who might be in the same boat as me and secondly, see if there was anyone that could offer advice as to how I could recover from this disastrous pension transfer. Since I had been abandoned by the UK authorities, I had to explore any source of help I could get! Being alone is devastating to a victim! I was documenting the scam on the forum, as it was unfolding in real time, reporting the facts and giving updates on my progress at extricating myself from this situation. I did get a lot of good advice from that forum. Then …

Enter the blood sucking lawyers.  On 12th July 2016 I got an email from the Lawyer representing SMIF regarding the content of my forum thread! They asserted my allegations against SMIF were untrue and defamatory. Citywire buckled and took down the posts! Citywire missed a big scoop. I was simply reporting what was happening to me; reporting the contents of the adviser’s own self incriminating communications and reporting what I was being told by the authorities (FCA), the Pensions Advisory Service and many legitimate IFA’s. SMIF threatened legal action but gave not one shred of evidence to counter my allegations, just feeble assertions it was untrue. However, undeterred I decided to hit back and when I threatened I would take this to Action Fraud, this was the shocking SMIF’s John Ferguson’s response to his lawyer on 5th Aug 2016: ” All fine as Action Fraud are nobody & have no authority. ” Is this the behaviour of a professional, ethical business? You decide. But it speaks volumes about SMIF’s ethical policy.

However, I did later discover that SMIF were right about Action Fraud since hundreds of victims of other scams such as Ark, Capita Oak, Henley, Westminster, London Quantum etc. have made reports to Action Fraud and yet nothing has ever been done to bring the perpetrators to justice!

Not to be outdone by SMIF, ICML (my trustee when all is said and done) decided they would also have a go at me and their lawyer sent me a letter on 26th Sep also threatening legal action action because, and I quote, “… they [ICML] do not appreciate the tone you have used in recent correspondence” Really? Give me a break! I was at that time, £415,000 out of pocket because a negligent pension trustee had approved toxic assets into the Scheme without adequate due diligence, unquestionably on the advice of unlicensed advisers and sunk my pension into them! At no time were the trustees able to give me an accurate valuation of my assets because the NAV of one of the funds (Symphony) was never updated on the platform. Quite naturally, my tone was at times showing frustration but who’s wouldn’t! I was worried sick about the very real possibility of losing the pension I had worked hard to build up for many years.

Patrick McCreesh (director of the Blackmore Global fund) has very recently decided to object to Angie’s blog describing the fund as “toxic” and threatened legal action. Really? I asked ICML last year to provide a list of sub funds of Blackmore Global. ICML sent me the list on 5th Aug 2016, but I must point out, they had no idea of this list until I asked them for it and they had to do some research. The Blackmore Global offer supplement shows one of the directors being Brian Weal, already on record for his participation in the Blevedere investment scam, but also banned in 2014 by Gibraltar FSC from directorships of professional investor funds because of his failure to operate the Advalorem Fund (later renamed Swan Holdings) in a manner that was not detrimental to its investors. Whilst he is not currently a director of Blackmore, two of the sub funds of Blackmore (according to the 5th Aug email from my trustees) include Swan Holdings and GRRE – both of these are owned by Brian Weal. Furthermore, Swan Holdings bought an 8.36% share in Etaireia Investments who, under the direction of Stuart Black, purchased land in Scotland on the fraudulent promise it had planning permission for a number of residential properties. How toxic does it have to get before the label toxic is appropriate?

The Symphony fund is a sub fund of the Nascent platform that purports to provide a cost effective solution to “budding” fund managers. I have no idea how many funds are under this “umbrella”. I know only of Symphony and the Trafalgar Multi Asset Fund (now suspended and about to be wound up). Richard Reinert is a director to both these funds. The Symphony fund documentation explicitly states it is a professional fund and not to be promoted to UK retail clients. The trustees knew this but still accepted members from unlicensed advisers, who are also the global distributors of Symphony (according to this announcement anyway, http://www.international-adviser.com/news/1007006/symphony-capital-partners-launches ) , targeting UK retail pensions. The directors of this umbrella platform have responsibility for (according to their Symphony documentation ) ” … safeguarding the assets of the Sub-Fund, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. ” The appointment of James Hadley as Investment Manager for Trafalgar and the subsequent winding up of that fund shows this responsibility was clearly not discharged. I allege, the Directors knew the investments for Symphony were being sourced by their distributors from UK retail clients and did nothing about it! The regulators need to start regulating here! Yet another example of the system designed to protect me, letting me down.

On a positive note, I have managed to redeem 87% of my original pension fund (but this doesn’t take into account lost interest and costs of repatriation plus emotional suffering) and repatriated it to a proper regulated UK provider. I have, however, lost a lot of money plus a lot of sleep and would still like restitution.

To give credit where it’s due, OPAL waived their exit fee and one years admin fee; likewise Investors Trust – the Cayman Island Assurance Bond used by the scammers to syphon my money into the toxic funds – waived their exit penalty and refunded some admin charges. NB: I did question the trustees whether Investors Trust were licensed to operate in the EU as they are not listed on the MFSA’s own register ( http://www.mfsa.com.mt/pages/licenceholders.aspx  ) – but I got an irrelevant and evasive answer yet again about membership to the AILO.

Blackmore “promised” a refund of their 7% early exit penalty, almost 6 months ago now in a “gesture of goodwill”, but I haven’t seen a penny of it – an empty gesture. Symphony not only chose to keep their 5% early exit penalty, but after reporting I would make a healthy profit since investing I ended up with just 70% of my investment and no one has seen fit to give any explanation despite numerous requests for one! Symphony has really stitched me up and Reinert thinks it’s not his problem! Yes, it really is, in my opinion!

The website of the cold calling company, Aspinal Chase (owned by the directors of Blackmore) has been taken down; the supposed audit of Blackmore is very late and a director of ICML has admitted he is unable to get hold of the directors of Blackmore. A pension trustee that cannot get hold of the directors of an asset in their Scheme? …  you make your own conclusions about what’s going on there!

There are hundreds of innocent people still invested in toxic funds approved by negligent trustees, totally unaware of the financial ruin they face. Trafalgar has already been suspended and innocent people are staring financial ruin in the face! It’s just a matter of time until the other funds collapse because they are always founded on risky harebrained schemes designed by people who have no idea how to manage investment funds! These people syphon charges and commissions from the funds for their own enrichment and care not one iota about the innocent people who are unlikely to recover from the loss because the money has been squandered by these so called “budding” investment managers!

I have had interest in my story from a highly respected National newspaper and a TV channel. I have been reticent to go to the media as yet because I feel it might not be in the interest of myself or other members of these Schemes. Such publicity would undoubtedly open the flood gates and cause others in the same boat to do a run on the funds. The fund(s) would collapse and wrap up and liquidators would drain the funds dry in admin charges. A controlled unwinding of this mess is what’s in our best interest in my opinion.

There are people on the addressee list with the power to act and clean this mess up. I implore them to do so. The system should no longer let people down, but start redressing the wrong done to so many by arrogant companies that show contempt for the law and think they can do this with impunity because they see Action Fraud as “Nobody”.

What would I like to see?

  • Trustees stop taking new members sourced from unlicensed advisers – immediately!
  • Trustees stop approving UCIS’s into their Schemes – immediately!
  • Proper due diligence carried out on the appointment of Investment Managers
  • Trustees to take stock of the number of toxic funds in their Scheme and the number of members locked into them
  • Regulators in the UK and Offshore start doing some regulating
  • Member’s funds redeemed from these toxic investments in a controlled manner
  • Waiving of early exit penalties by all parties – and laws passed internationally to ban any pension investments with early exit fees
  • Unlicensed advisers, illegally promoting UCIS’s, prosecuted, stripped of their assets which are to be returned to members, and then thrown in jail – the key being dropped in the ocean.
  • Negligent trustees to pay the initial fee for regulated Independent Advice to those members wishing to repatriate their pensions
  • Negligent trustees to pay the set up fee of a new provider for members wishing to rescue pensions and repatriate to UK regulated providers

Angie has told me she has been contacted by another victim of this same Optimus scheme. He was cold called by a firm called Gerard Associates and half his pension invested in The Resort Group (Cape verde holiday flats). She informs me Gerard Associates were acting as introducers  to Stephen Ward of Premier Pension Solutions back in 2010/11 in the Ark case and that subsequently Gerard acted as adviser in Ward’s London Quantum case.

I am a real victim of an organised pension scam and this has been my story.

I thank you for your time.

Stephen Sefton

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

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


Responsible John

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

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

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

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

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

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

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

Irresponsible Ros

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

More DB transfers could prevent care ‘disaster’

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

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

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

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

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

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

You’ll be cold- I said.

Not as cold as when I get home – he said

Haven’t you got central heating – I said

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

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

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

Meeting the costs of central heating

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

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

There are two ways to do this

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

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

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

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

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

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

John Ralfe – Don’t cash in your final salary pension scheme – https://www.ft.com/content/9bfda9b2-ec9e-11e6-ba01-119a44939bb6

Ros Atlmann – More DB transfers could prevent care disaster – https://www.ftadviser.com/pensions/2017/02/10/more-db-transfers-could-prevent-care-disaster-altmann/

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

Small employers need a voice in the AE review


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


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

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

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

Enough on composition – what of proposition?

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

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


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

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

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

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

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

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

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


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

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

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

A thoroughly bad idea

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

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

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

hi res playpen

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The AE review and the pension stitch up.

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

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

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

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

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

Ruston Smith – serial committee sitter!

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

Chris Currylifelong policy wonk!

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

Jamie Jenkins – lobbyist!

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

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


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

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

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

  • coverage
  • engagement
  • contribution levels

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


Great but no good

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

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

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

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

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

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

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

A postscript for the consumer

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

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

* the 2010 review (excellent) is here.


** questions and TOR here


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We need a home ownership detox!


A home ownership addiction

An important day for British Housing Policy

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

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

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

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

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

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

Universal Home Ownership – a broken dream

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

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

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

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

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

The great British ownership detox!

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

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

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

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

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

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

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

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


you can’t buy a sausage with a brck

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


Nobody over 30 gets Snapchat!

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

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

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

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

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

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

Hands off it’s my story

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

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

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

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

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

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

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

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

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

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

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

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

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

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Procrustination; Con Keating on JLT’s black hole.


  • Procrustination

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

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

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

and to ask the question:

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

It even extended to a particular and popular narrative:

“Companies are trying to reduce their covenant obligations”

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

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

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

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

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

This objective conflicts with sound scheme oversight and management.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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









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Avoid the ambulance chasers and choose your workplace pension wisely


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

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

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

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

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

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

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

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

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

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

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

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

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

ambulance 2

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

michael johnson

In 2013 Michael Johnson of The Centre for Policy Studies  published a paper “the local Government Pension Scheme; opportunity knocks” http://tinyurl.com/jru498m.

Today he publishes the sequel, “the LGPS- the lost decade”. http://tinyurl.com/jtz2jwx

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

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

Rubbish in – rubbish out

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


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

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

One of my friends makes  comment.

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

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

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

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

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

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

Cheap shots at asset managers

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


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

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

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

Johnson’s big picture is right but…


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

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

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

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

What can we say about this work?

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

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

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



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“Donald Trump… made me an alien”


Our hero – of whom we’re proud

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

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

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

Mo Farah, Facebook (Jan 27)

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


Steve Bell – Guardian – Gilray above


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

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

An imperfect candidate but a necessary agent of change.

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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




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Of discontents and malcontents


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

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

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


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

On almost every policy initiative announced by the Trump administration (and set out elegantly in this article) https://www.ft.com/world/us/politics the destruction of the Obama construct will result in life getting harder not easier for his core voters.

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

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

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

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

Fake compared to what?

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

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

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

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

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

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

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

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


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

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

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

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

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

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

A discontent not a malcontent!

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

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



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Trump #Inauguration – fake views



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

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

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

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

An ambiguos message inciting hate through the language of love

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

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

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

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

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

There are two ways of reading this.

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

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

I heard the second way.

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

Fake evangelism

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

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

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

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

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

The mighty way

Then there is there is that phrase

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

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


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

I also look to John Lewis and Lesley Griffiths

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



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A suffocating man craves the foulest stench.


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

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

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

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

Here’s how it works

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

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

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

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

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

In the CETV – these conflicts crystallise.

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

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

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

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

Why trustees will breath foul air (rather than suffocate)

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

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

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

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

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

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

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

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

And what of the future?

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

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

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

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

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

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

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

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


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Over-consulting ; not a victimless crime!

I was “distressed” to read of a new way of extracting fees from the sponsors of DC pensions, the value for money review/assessment. http://tinyurl.com/ju4ppnp

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

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


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

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

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

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

Concludes Chris Roberts (a professional trustee)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Consultancy – who really pays?

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

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

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

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

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


Value for Money – self assessment preferred

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


(Brief)case study

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

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

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

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

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

A victimless crime?

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

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

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

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

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

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

Transparency is the only answer

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

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

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

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




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FAKE NEWS – eroding the credibility of pensions.


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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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

Jeff Prestridge has written a brilliant blog in the Spectator this week 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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Elements of Truth – and Complete Misunderstandings (Con Keating and the DB Green Paper).



This is an era of fake news, half-truths and outright lies. Spin and distortion have become the fabric of a false DB pension narrative; their unjustified ruination. Some “fact checking” is appropriate.

We hear again and again that DB pensions are deferred pay[i]. This may be true of the employer contribution, but it clearly isn’t for employee contributions; they are an investment, plain and simple – a deferred annuity. The overwhelming majority of the pension associated with the employer’s participation comes not from the contribution but from the investment returns promised and realised on that.

The investment return promised on the employee’s contribution is implicit in the terms of the pension contract; the pensions payable in consideration of the contribution(s) made uniquely determine this. The return implicit on the employer’s contribution is (usually) the same; this is the contractual investment accrual rate. It is a cost of the sponsor employer.

Suppose the sponsor company decides to issue deferred annuities to investors and prices these at this same rate. For convenience and security, in common with many corporate bonds, this issue has a trustee, with responsibility for monitoring and enforcing employer performance of the deferred annuity contract. Let us further suppose that the credit standing of the sponsor company is such that it needs to secure these securities in order to sell them. The question for the trustee then becomes: what is the appropriate amount of security required at any time during their existence.

The answer is that this should be the principal amount initially advanced (contribution) together with the accrual, from issuance to date, at this rate. DB pensions are, in principle, no different.

There is no consideration by the trustee of any future state of the world, no consideration of the future development of the sponsor company’s “covenant”. This is based entirely on historical fact; what risks may have been faced previously has eventuated, or not. Nor should there be with DB pensions. The DB pension trustee’s duty is to secure the members’ benefits, at a point in time; no more, no less.

The Pension Regulator has invented other views. Their Code of Practice[ii], Funding Defined Benefits, states: “Paying the promised benefits is the key objective for scheme trustees.” It is most interesting that the Regulator’s more extensive descriptions of Trustee duties[iii] do not include this objective. It has been seized upon by many advisors and “gold-plated”; used to promote elaborate, expensive and unnecessary management strategies. Unless this is written into scheme rules, this objective isn’t a duty or even desirable.

If followed it would constitute very poor corporate governance, favouring one stakeholder group above all others. It suffers the further problem that scheme funding can never fully assure that outcome. If the role of the scheme and its fund would have shifted, the occupational link been broken.

But it gets worse. The Regulator’s Code introduces a “Principle”: “Managing risk: Trustees should implement an approach which integrates the management of employer covenant, investment and funding risks; identifying, assessing, monitoring and addressing those risks effectively.” The shift is now total, though entirely unsupported in any of the many Pensions Acts.

The scheme is now to be considered as a stand-alone entity; its assets primarily responsible for generating the returns to pay pensions. It is now an insurance company in all but name. The economic and financial inefficiency of creating almost six thousand insurance companies is self-evident.

Doubtless, the Regulator sees this approach as fulfilling its objective: “to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (PPF)”. As these situations can only arise from either or both sponsor and scheme insolvency, the wording of this objective is unfortunate. The lack of political will for systematic involvement in the financial affairs of private sector business leaves only schemes and their funds available to the Regulator. The problem with the wording is that it precludes allowing the correct, and lower, level of (contractual) funding; it encourages excess funding in schemes. The minutiae of these rules go far further, constraining their asset allocations and management strategies, fostering complexity. The Regulator appears to believe that the increasingly complex financial arrangements, which include leverage, of schemes have made them more resilient, when the lesson of the financial crisis is that the opposite turned out to be true.

The splendidly misleadingly titled 2005 Occupational Pension Schemes (Scheme Funding) Regulations are not helpful; they specify scheme valuation techniques. “…the rates of interest used to discount future payments of benefits future payments of benefits must be chosen prudently, taking into account either or both –

  1. the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns, and
  2. the market redemption yields on government or other high-quality bonds…”

Unfortunately, both methods are incorrect for sound valuation. The first, the expected return on scheme assets, would inform us as to the sufficiency of those assets for the purpose of paying benefits, if the expectations prove correct, but that may be a very big if indeed. The second is appropriate if we were an insurance company considering the price we might demand to assume those liabilities at the time of valuation, given our investment constraints.

Both result in time-inconsistent valuations, making them unsound as a basis for management action. Only the contractual accrual rate is time consistent; the valuations arrived by accrual (of the past actions which have occurred) and by discounting (the future obligations contracted) are the same. Along with the IFRS accounting standard, the scheme funding rules introduce both bias and volatility into valuations; a serious problem for corporate and pension management.

The greater problem is that actions based this view and these figures may bring with them real costs. The list of these costly actions is already long, and it appears that we may shortly be introduced to yet more in the form of DB scheme “consolidation”.


[i]             This description, though, does provide an interesting test for DC “pensions”, where no pay is deferred.

[ii] Code of Practice No 3, dated July 2014

[iii] See: The Trustees Duties and Powers: http://www.thepensionsregulator.gov.uk/guidance/guidance-for-trustees.aspx#s1542

Con Keating is well known to readers of this blog, Con is currently a member of the steering committee of the financial econometrics research centre at the University of Warwick and of the Société Universitaire Européenne de Recherches en Finance. As a research fellow of the Finance Development Centre he published widely on the regulation of financial institutions and pension systems, and also developed new statistical tools for the analysis of financial data, such as Omega functions and metrics.

From 1994 to 2001, Con was chairman of the committee on methods and measures of the European Federation of Financial Analysts Societies and currently is a member of their Market Structure Commission. Con has also served as an advisor and consultant to the OECD’s private pensions committee and a number of other international institutions.

In a career spanning more than forty years, Con has worked as an infrastructure project financier, corporate advisor, investment manager and research analyst in Europe, Asia and the United States. He has served on the boards of a number of educational and charitable foundations and as a trustee of several pension schemes. He is currently Head of Research for the BrightonRock insurance group.


This article is also published in Portfolio Institutional.


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Same old Watsons – taking the p*ss!

The FT is not known for having a laugh but I suspect that Chris Flood was snickering a little when he composed this little beauty

I hope they don’t mind me sharing a great article that exposes the extraordinary arrogance of one of the biggest pension consultancies in the world. Far from accepting the criticism thrown at it in the FCA’s Asset Management Market Study, Willis Towers Watson (WTW) has gone all pedagogic on us!

If you enjoy irony, read on – and if you haven’t read the section of the FCA Asset Management Market Study that deals with WTW, Mercer and Aon, I’ve put the summary at the end of this blog. The sections in italics are directly copied from Chris Flood’s article!

Willis Towers Watson plans to build a team of up to 60 staff to run a new low-cost asset management service it believes will reduce costs significantly for pension funds.

Eh- I thought that’s what their customers were paying for them to do?

Twenty-five staff have already been hired for the service, called AMX, which launches in the UK on Monday following a two-year development period.

Eh – two years to find out there’s far on the bone – this blog’s been saying not much else since 2009!

The unit will be a one-stop shop for large investors, where they will be able to appoint and monitor external investment managers, auditors, lawyers and other counterparties, such as custodians that are responsible for the safekeeping of assets.

The “one stop-shop” from a consultancy that’s been advocating diversification?

The consultancy believes it can achieve substantial cost savings of between 40 basis points and 100bp a year for pension funds, family offices and charities if it acts as the sole overseer of the wide range of professional services these investors currently buy separately elsewhere.

So concentrating your purchasing through the organisation that’s been letting you down decade on decade, is a smart move?

Tell us something the FCA haven’t been telling you!

On profitability, we find that: Average profit margins are around 35% for the period 2010 to 2015 and all the asset management firms in our analysis earn a return on capital employed above our estimate of the cost of capital. When adjusting profitability to reflect the fact that employees of asset management firms can be considered to be sharing in the profits of the firm through wages and bonuses, the estimated profitability of asset managers is even higher. -FCA Asst Management Market Reiew

Tell me why WTW have been allowing this situation to persist- ALL THESE YEARS.


“Other industries have been transformed by having an open marketplace but asset management has yet to embrace this opportunity. Companies such as Amazon offer both buyers and sellers a better deal,” said Oliver Jaegemann, global head of AMX. (https://www.linkedin.com/in/oliverjaegemann/)

And who has been holding back an open marketplace in the UK, Willis Towers Watson ?

The timing of the launch is notable as the UK regulator is busy evaluating how investment managers can improve cost controls.

and wants to refer the said WTW to the Competition and Market  Authority!

The regulator is also examining the influential role investment consultants, including Willis Towers Watson, play in the UK, and the potential conflicts of interest inherent in their business models.

Including the behaviour of WTW in establish vertically integrated fiduciary management products that blur the role of consultants and asset managers.

Mr Jaegemann said too little had been done to address the operational costs incurred by smaller pension schemes that were “all too often” unable to get the same deals as larger rivals from service providers.

Fortunately for them, smaller pension schemes can’t afford the fees of the big three and get the services of firms like mine who really do care about driving costs down.

When we demand better terms for smaller clients , we are reminded that the large consultancies don’t get involved in “haggling”.

If you want to see an inefficient marketplace, go to the exhibition hall of a PLSA conference and watch how well the large consultancies and the asset managers get on.

“Most pension schemes run a portfolio of 10 or more investment managers at any given time. This amplifies the inefficiencies as scale benefits are lost in the current system,” he said.

and under who’s advice did this happen – surely not WTW’s???

Here’s the summary of the FCA’s findings into the behaviour of investment consultants

We looked at the role of investment consultants and their impact on outcomes for institutional investors. We find that:

  • the investment consultant market is relatively concentrated and switching rates are low
  • on average, consultants are not able to identify managers that offer better returns to investors. However, the manager selection process ensures that asset managers meet minimum quality standards and reduce operational risk for investors.
  • consultants do not appear to drive significant price competition between asset managers. Consultants do not place a lot of weight on manager fees in their ratings, although in some instances they can help investors in negotiations on price.
  • the advice provided by investment consultants on asset allocation and investment strategy is significantly more influential in terms of outcomes than the advice on manager selection. However, many institutional investors struggle to monitor and assess the performance of the advice they receive. There is no standardised framework to assess the quality of advice or help investors assess whether they are achieving value for money.
  • for some investors, fiduciary management offers a way to pool their money to achieve lower costs and get wider exposure to different managers and solutions. However, we have concerns about conflicts of interest that arise in fiduciary management, which is increasingly offered by investment consultants and fund managers. These issues are exacerbated because investors cannot assess whether the advice they receive is in their best interests.
  • performance and fees of fiduciary managers appear to be among the most opaque parts of the asset management value chain. A lack of publically available, comparable performance information on fiduciary managers also makes it hard for investors to assess value money.





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Can technology solve our savings problems?


We are putting too large a trust in technology to manage our pensions.

The brave new world of Fintech may give us the pension dashboard, pot aggregation and robo-advised spending mechanisms, but are we ready for self-empowerment?

In this article I argue that behaviourally we still cling to fiduciaries, whether employers, advisers and trustees. We seek safety in numbers and still demonstrate strong collective tendencies.



While Hoxton Square’s digital garages are humming, many ordinary people still have conventional mind sets; they want money for a rainy day, a replacement income as they leave the workplace and the security that there will still be money however long they live.

To a greater extent, the revitalised state pension is meeting this conventional need. But the mass affluent and even those just managing, aspire to more than £155pw. They want a simple contract that links what goes in to what comes out in an explicable way. The link between earnings and pensions has worked for generations through defined benefit schemes. The failure of SERPS and S2P was largely down to a failure to explain how the pension related to earnings.

Defined contribution pensions, initially made this link explicit. The guaranteed annuity contract promised that for every ten pounds saved, one pound of pension would be paid. This 1 for 10 rule of thumb, was echoed in a 10% growth rule. The good years evened out the bad years so you could confidently expect 10% growth on your pension pot. I advised a lot of people in the eighties to think of 10 as a sensible number.,

But people retiring today have no expectations of what to do. Even the 4% rule, which allowed you to divide your pension pot by 25 to get to your “safe” level of income, has recently been debunked by Aegon. Instead of expectations, we have technology. We will have the pensions the algorithm tells us, depending on our stated risk tolerances.

This idea that we get what we want through technology Is hugely attractive to regulators, providers and most of all to advisers since it makes a safe haven of the algorithm. The risk of something going wrong has been mitigated by the abolition of manual process, we have effectively outsourced blame to a digital process.

But it is this contract with an algorithm that has yet to be tested. I suspect it is a flawed contract for the consumer. For ordinary people do not contract with algorithms but with other people. A friend of mine, who is an adviser, was recently asked by a client if she was right. She said she knew she was not right, she expected to be wrong 100% of the time. 50% of the time she would be wrong in one direction and the other 50% in the other. She told her client that the best he could hope for was that she wasn’t ever very wrong!

I’ve had this story verified by the client who was much comforted by the honesty! Infact, the idea of being wrong all the time underpins much actuarial science. It’s the basis for “best estimates” projections. The actuarial approach to managing risk is to pool data and use statistics to give likely answers.

I suspect that I am not alone.

The answers are the same whether you feed them into an algorithm to robo-manage an individual pot or run a 100,000 member defined benefit scheme. The only difference is in the margin for error. If you have a huge pool of people, you can reserve and distribute on a discretionary basis (the idea is called smoothing). If you are managing an individual pot, you have no margin for error, the sequential risks associated with individual drawdown cannot be managed through individual models. The work of Finalytiq is gradually coming to this conclusion!

I am one who at 55 is looking at my options. For me, the attraction of robo-advice is abstract but its risks are demonstrable. I cherish the fiduciaries who offer me certainty – the Government Actuary who ensures that my state pension will be paid, the trustees of my defined benefit scheme. I have a pot of money in a pension which I could hand to a financial adviser or a robo-adviser, but I won’t.

For like many people I know, I have no trust in technology to overcome the issues I see in a market driven individual drawdown approach. I would like to take the step and contract with one of the bright e-vestment organisations that I talk with when at work. But my heart is elsewhere, I am still emotionally attached to collective solutions providing me with greater certainty.

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Which would you rather live in- a house or a car?



I’m fond of our current pension minister; he makes me laugh! He does a good impression of the “pension’s idiot” and enjoys being thought rather less on the ball than he actually is.


But scratch the surface and you’ll find that Richard Harrington “gets it”. I’m not saying that he’s a geek like Webb or a media guru like Altmann, I’m saying that he understands the difficulty people have saving a worthwhile pension.

Harrington knows about money

He’s a businessman and he’s bought and sold businesses in his time as a hotelier. At least one of those businesses had a pension attached and though he doesn’t bring this to his work, I understand Harrington had to deal with pensions issues as a sponsor. It is a lot easier to understand the difficult problems surrounding BHS, Tata and the multitude of struggling small pension schemes, if you’ve had business experience.

Being a businessmen makes you practical and realistic. If the Transfer value on a £10,000 pa DB pension is £400,000, what makes us think that the cost of providing an equivalent pension from a DC pot, isn’t at least £400,000?

So when Harrington told Citywire last week that he wanted workplace pensions to be providing the average saver with a £10,000 pa boost to their state pension , his estimate that they’d need to have a DC pot of £250,0o00 was perhaps low-side. £250,000 should (using the discredited 4% rule of thumb, give you £10,000 pa , in extra retirement income).

Aviva have produced a little table for Citywire which show some projections.aviva2

What the table shows is that projections like this depend on so many moving parts that they are totally unreliable. For instance NEST, over the past 3 years has produced a return of 10% above inflation, Scottish Widows last year produced a return 20% above inflation! Any kind of return above the 2.5% above inflation (real) – illustrated, would substantially  boost the “total saved”

For instance, we know that a 0.5% difference in an annual management charge makes a 15% difference in pension outcomes over a life of a plan. so if the AMC shown on the projections above was reduced to 0.25% (achieved by a lot of large DC schemes) then you could bump up those bottom-line figures by between £10,000 and £20,000.

I am not wanting to discredit Aviva’s numbers, but I wouldn’t like people to draw the conclusion that the article makes

To reach Harrington’s target, an individual whose salary builds up to £27,000 over their career and saves for 40 years with no breaks would need combined employee and employer contribution levels of 25%. This would get them to a pot of just over £230,000.

Harrington knows that if employers and staff were able to afford 25% contributions, we would still be accruing DB benefits.


Setting realistic savings targets

What Harrington actually says to City wire is very revealing and very good.

‘It is very clear to me that, for people starting work today, that has to be their objective….. every day I think of that figure [£200,000 to £250,000] in the morning and it is not a bad way of trying to decide policies’

We cannot go on thinking that having a DC pot of around £35,000 is going to make a  material difference to people’s standard of living in retirement. If DB schemes hold up to £400,000 to pay £10,000 pa , we need to think of £250,000 as a low side pot value to boos incomes by £10k.

Harrington is showing us that we need to think of our pension pot , rather as we do the value of our house.

Every little helps; pension governance give that little extra.

Clearly 8% of band earnings (£6-45k) is not going to get this type of pot – at least if your’re someone   on average earnings. “Average earners” are going to have to save more through greater earnings, a greater proportion of earnings saved or by vastly increasing the efficiency of the savings mechanism.

Increasing national wages is something we have been pretty poor at over the past ten years, a national workplace savings habit is in its infancy, perhaps the easiest win is to focus on the savings vehicles. Bringing overall costs down, driving the real returns up and ensuring that people are invested in assets that can grow in real terms – are the easy wins.

We are used to hearing insurers talking about the need to save more, I want insurers to be able to show they are making those savings work harder. The job of the IGC is to make sure people get the maximum value for money from their savings products. That is why they are so important. We are now only a few weeks till they start reporting on what has happened to our  savings over the past year. I am waiting!

Harrington needs to make pension governance a high priority, it is something he can do something about.

The little the Minister can do

Harrington is a businessman, he is practical and realistic. This is a £250,000 problem and it isn’t going to be solved easily. The next step in getting to £250k is for people to absorb the increases in AE saving (1 to 5% of that band), over the next few years.

Beyond that, we need to see some real growth in world economies driving investment returns, we need real wages to increase faster than inflation, we need interest rates to rise and we need the cost of saving to fall. Of these, the only factor that is reasonably controllable for Richard Harrington- is the cost of saving.

For our country to agree to spend less on today and more on tomorrow will demand a change in behaviours which is beyond the practical and realistic scope of a business minded Pensions Minister.

However, rather than duck the issue, Harrington is being realistic. We need to think of our pension pots being rather larger than a house. The average price of a house is around £300k. For most people the pension pot is struggling to get beyond the average value of a car.

Let’s be practical and realistic, which would you rather live in – a house or a car?



You can read the original article referred to in this blog here


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“People taking their own decisions”?! How the Lewis’ gang up on IFAs.

I don’t know if there’s something in a name, but if I was an IFA, I’d be butting my head against anything called “Lewis” this morning.

There’s Martin Lewis, talking to us on the TV of taking control of our own finances.

There’s Paul Lewis, poking IFAs with a sharp stick, from his twitter bully pulpit.

Now there’s Sue Lewis, (Chair of the Financial Services Consumer panel) claiming

“The industry will not produce straightforward, easy to understand, value for money products because it does not make enough money out of them.”

It looks like “Lewis” is an “anti-IFA” super-brand!

IFA’s doing very nicely thank you.

ifa-1I’d been thinking about IFAs anyway, ever since Per Andelius sent me a report in Money Marketing about IFAs living the high life. The reality is that most IFA’s in the UK are “ex IFA’s”. Numbers of regulated advisers plummeted post the implementation of the Retail Distribution Review in 2013.

Those advisers who climbed over the fence and have practicing since 2013 are a lot more canny , better qualified and – dare I say it – more respected!

They’ve managed to generate revenues not from commissions, but from funds under advice.

On average, restricted advisers say 70 per cent of their remuneration comes from percentage charges, with 24 per cent coming from fixed fees and 6 per cent from hourly charging.

You might say that drawing your revenues from a percentage charge on the funds you advise on is the same as taking commission but that would  be like confusing “advice” with “guidance”.

As Paul Lewis points out, “advice” is a word that IFAs have a virtual trademark on.

Following criticism from advisers for using the term “advice” to describe a service that cannot give personalised recommendations, the Treasury has previously admitted “the name ‘Money Advice Service’ has always been misleading as MAS cannot provide regulated advice.” – (Justin Cash;Money Marketing)

Similarly, the Pension Advisory Service, Citizen’s Advice – even the “Money Saving Expert” Martin Lewis has had to register as a financial adviser!

Lewis 4.PNG

It’s that grumpy Paul Lewis – moaning again!


Advice is a very expensive commodity. It is owned by Financial Advisers.

And  IFAs are not going to let it be devalued by allowing the ABI to produce simpler products following the 2013 Sergeant review.

If you remember, Carol Sergeant, recommended the introduction of a “simple financial products badge for qualifying products via a robust accreditation process”.

But four years on and the ABI has allowed the simple product initiative to wither on the vine.

Enter Sue Lewis , intent on reminding people that

“Financial products are more complex. There is generally too much choice, rather than too little. Terms and conditions are lengthy and incomprehensible and many products have hidden fees and charges.”

I am sure that Paul and Martin would say three cheers to that. But that is not the end of the story. In a wonderfully written article in FT Adviser, Emma Hughes quotes Patrick Connolly , a financial planner at Chase de Vere

“People want more choice and more flexibility, but with that comes more complexity and a greater likelihood that they will make the wrong decisions.

“This opens up the need for advice, because the decisions people are taking are often too important to get wrong. This should be independent financial advice and could be facilitated through employers, which can make it accessible to more people.

“Unfortunately, we currently have a system with complicated products and ever-changing rules and regulations, where too many people are encouraged to make their own financial decisions. This sounds like a recipe for potential disaster.”

Patrick is right, it would be disastrous for financial advisers if we had simple products which we could buy without advice. It would be disastrous to have more products like the state pension , or occupational defined benefit pensions. It would be disastrous if we rolled back the pension freedoms and started offering simple products that paid a lifetime income to people.

We need complexity, we need lots of rules, we need financial advisers and we need them to maintain and grow their standard of living.

Otherwise things would be really awful.  The last thing we want is people to take their own decisions – heaven forbid!


Want to read the articles first hand?

For the article talking about keeping “advice for advisers” read here.


For an article condemning the ABI for capitulating to advisers over “simpler products” read here


For an article showing how well IFAs are doing out of current complexity, read here


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Was DC the only choice for the Tata Steelworkers?



Tata pensions


Speaking on the radio yesterday, John Ralfe called the decision of Tata Staff to accept the loss of future accrual into a final salary scheme in exchange for a 10% contribution into a DC pension fund as “inevitable”. This blog looks back on why he ‘s currently right and questions the sense in the binary decision they were left with.

It is not my choice but were I faced with the job/no job choice when I’d worked in steel all my life, I wouldn’t have thought hard about choosing job +DC pension over no job and no future accrual into any pension.

Nor would I have thought Tata to be putting a gun to my head. They are competing globally against organisations that are not guaranteeing a percentage of final salary to its workforce as part of labour costs.

Nonetheless, knowing what I do about pensions, I would have been deeply saddened to lose future accrual into one of Britain’s best run pension schemes (Tata is reported to be managing membership at an all-in cost of £62 per head). On a pound for pound/benefit basis, the income purchased from the 10% DC contributions is unlikely to provide such value for money. There are no long-term winners in this switch from DB to DC.

I’d be saddened too for those managing what was the British Steel Pension Fund, who have done nothing wrong and plenty right.

I would not be pointing a finger of blame at Tata the company, the pension fund or the unions – but I would be asking questions as to just why steelworkers who have no history of managing their pensions, are expected to manage a DC pot through retirement.

An unusual concession.

The day to day reality for Tata steelworkers will be unchanged, working conditions, pay and immediate benefits will remain the same. What has changed is the future promise in retirement, the capacity of what are mainly manual workers, to enjoy the longest holiday of their lives.

This is an unusual concession for a worker to make, to give up future gratification in return for the right to work today.

I am not one who sees the choice as binary between DB and DC. Had we persisted with the ideas for defined ambition pensions, proposed by Steve Webb and enacted in the Pension Act 2015, we might have been able to offer future accrual of a defined ambition pension scheme which would not have involved financially empowering people having no wish to become their own pension experts.

A defined ambition scheme, operating with a targeted pension promise but using best endeavours to pay rather than guarantees, could have been set up using the excellent infrastructure of the British Steel Pension Scheme. Such an arrangement could have operated as a genuine mutual, tapping into the economies of scale of the £15bn BSPS and its administrative and actuarial resource. Accrual into such a defined ambition plan could have been based on what a defined contribution would have purchased, rather than what Tata guaranteed.

A missed opportunity

The opportunity to convert future accrual for Tata steelworkers from DB to DA was lost when Ros Altmann pulled the plug (or at least mothballed) the DA legislation in the summer of 2015.

In doing so, she consigned the unions, Tata, the BSPS and Tata Steelworkers, to a DC pension scheme. I am sure it will be a well-funded DC pension and that care will be made to give workers every available tool to manage their pension freedoms.

But I am pretty sure that most of these workers will find managing their freedoms problematic, good advice expensive and hard to find and the maintenance of cash-flows through later retirement very difficult indeed.

DC is a sub-optimal solution and Tata could have offered a more acceptable CDC type benefit, if Government had not closed down a third-way pension initiative.

The opportunity cost of  “pension freedom”.

Why this blog grumbleson against the various initiatives to empower us, is because of this opportunity cost. The pension dashboard, the lifetime ISA, even Pension Wise, will have little to offer the Tata steelworkers.

They need job security first, and that (mainly through changes in the economic climate) they currently have. They need a decent post retirement promise second. What they have accrued is safe (there is no question of the BSPS going into the PPF) , but they are being asked to give up certainty for uncertainty, a managed pension for an unmanaged pot of money.

The cost of operating a CDC arrangement, appropriate for the needs of the Tata Steel workforce, could have been capped at the 10% DC rate, but the promise – an undefined scheme pension , could have offered so much more.

If there are winners here, it will be the intermediaries who will now be buzzing around Port Talbot with pension dashboards, aggregation tools, TVAS calculators and cashflow modellers. The Tata Steelworkers will be empowered to take financial decisions about their futures based on all this technology and fine words.

I wonder how many will know what they are doing, any more than they know what they have done in accepting the new conditions of work.


Tata Wales


Of all the critics of the Defined Ambition agenda, and of CDC in particular, John was the most outspoken. I wonder, were he a Tata Steel man today, whether he’d be quite as opposed to a scheme pension paid without guarantees.

Posted in actuaries, advice gap, FinTech, Jersey, pensions, Pensions Regulator, Politics, pot | Tagged , , , , , , , , , | 1 Comment

The employer’s “duty of care” to choose a workplace pension; the parliamentary debate.


In my most recent blog, I expressed a hope that the amendment to the Pension Schemes Bill would be accepted (in the full knowledge that it wouldn’t). It was withdrawn by the Shadow Pensions Minister but not without debate.

I am pleased that Alex Cunningham chose to quote from this blog in arguing that employers have a duty of care and I’m grateful to Colin Meach and his team for bringing our arguments to the attention of the House of Commons!

The debate on New Clause 7 is recorded in Hanson and can be found in full here; https://hansard.parliament.uk/commons/2017-02-09/debates/99a77916-316a-4b54-bf82-ab8673e42e5a/PensionSchemesBill(Lords)(FourthSitting)

New Clause 7

Enrolment in Master Trust scheme: duty on employers

“Before an employer enrols in a Master Trust scheme they must—

(a) take reasonable steps to ensure themselves that the scheme is financially viable;

(b) ensure the scheme is on the list of authorised Master Trust schemes maintained by the Pensions Regulator (section 14); and

(c) take reasonable steps to ensure themselves that the scheme will meet the needs of their employees.”.—(Alex Cunningham.)

This new clause would require employers to conduct basic checks before signing up to the Master Trust scheme.

Brought up, and read the First time.

  • It is almost as if I am doing an aerobics class; I have already warmed up, even in this cold Committee Room.

    New clause 7 would provide employers with a fiduciary duty and a duty of care to members to ensure that the master trust of their choice meets the needs of their staff. The auto-enrolment process in the UK rests on the employer making the choice of scheme for those purposes. The new clause would ensure that, before authorisation, the employer is duty-bound to ensure that the master trust is fit for purpose and has all the necessary information for that choice to have a sound footing.

    We need to ensure that the employer has a defined duty to carry out due diligence when choosing a workplace pension. Otherwise, many employers—through expediency or otherwise—will continue to make choices that may not be in the best interests of the scheme’s beneficiaries.

    The past 20 years has seen us lurch from one mis-selling scandal to another. Pension transfers, endowments, payment protection insurance and interest rate swaps have all been subject to class actions, and to massive retrospective penalties being imposed on those found wanting in due diligence.

    In the US, the employer has a fiduciary responsibility to their staff and chooses their scheme in their best interests. That means that if employers do not take due care in the choice and governance of the plan that they set up for their staff, they are liable to civil prosecution. Employers in the US take fiduciary obligations seriously, not least because scheme members are now taking and winning class actions if they do not.

    A class action can focus on the choice of scheme provider, failure to establish suitable investment options and failure to monitor how funds perform as the scheme progresses. Some advisers in the UK, such as Pension PlayPen, think that the information given to employers to choose a workplace pension is insufficient, and that there is little supervision of the due diligence process by regulators, which is in sharp contrast to what happens in America.

    The other day, Pension PlayPen stated on its blog:

    “The common law includes the concept of an employer’s duty of care to staff, not just for their health and safety but for their financial welfare. This duty of care forms part of a social contract, the implicit responsibilities held by individuals towards others within society. It is not a requirement that a duty of care be defined by law.

    An additional worry is that employers do not see this as their choice. Too often we get answers from employers ‘we did what our accountants told us to’. It is as much in the interests of accountants to ensure the employer states why they have chosen their pension as it is the employer’s.”

    So what happens when the duty of care and fiduciary obligations go wrong? The only option is the courts. According to a Financial Times article last November, there has been an “explosion” of class actions in the USA on the issue of financial detriment to scheme members. These suits have not yet gained much public attention, due to the reputation of the US legal system, but it is also partly because the legal action is fragmented and spread between different courts, and cases are often settled in private with binding confidentiality clauses. What is more, pensions have the unfortunate reputation of being rather dull, even though the sums involved dwarf those of the multibillion dollar settlements seen in banking since 2008.

    However, the basis of the complaints are sound and echo a warning that we have been making about the lack of transparency and engagement for members of schemes. Members may have been charged excessively high fees, the most noticeable or important point being that the investment process may be used to extract wealth.

    As in other financial suits, such as PPI suits, the cases claim that financial organisations have used opaque structures, so that transactions extract money that ought to go to members of schemes. In one case, JP Morgan has been sued by a participant for allegedly causing employees to pay millions of dollars in excessive fees, through a scheme motivated by “self-interest”. The plaintiff claims that JP Morgan, as well as various board and committee members, breached its fiduciary duties by, among other things, retaining proprietary mutual funds from the bank and affiliated companies for several years, despite the availability of nearly identical, lower-cost and better performing funds.

    Not all of these cases are just related to charges in the investment chain; some are also about administrative processes. A website—401khelpcenter.com—highlights that members of Essentia Health in Minnesota filed a class action lawsuit against the sponsor, claiming that the organisation paid excessive fees to their record keepers

  • The hon. Gentleman has mentioned many times the potential for class action, particularly in the US, on various issues. Does he not believe that having the word “reasonable” twice in the new clause that he has tabled actually becomes a licence for class action, rather than closing it down?

  • I certainly do not. I am not a lawyer, but I believe that the new clause is sufficient and does not open the way for such action. What I am trying to do is provide a protection for employers within the scheme, and therefore also for members.

    The latest complaint was filed in January against Aon Hewitt Financial Advisors, accusing the company of breaching the Employee Retirement Income Security Act 1974, or ERISA. That is the fourth lawsuit to target the fee arrangement for services provided by a computer-based investment advice programme.

  • The Chair

    Order. May I ask the hon. Gentleman to move away from discussing court cases in his comments?

  • I am doing that now. We have a clear warning that if a company fails in its fiduciary obligation, litigation may be an option. We know from the FCA report that implicit costs are opaque and likely to be much higher than those that have been explicitly presented. We believe that it will not be long before legal teams from the US alert their operations in the UK of potential opportunities for litigation. I can see the adverts on TV now: “Problems with your pension fund? Have you been subject to high fees and transaction costs that you never knew were there?”

    The most important “don’t” must be, “don’t assign a low priority to your employees’ auto-enrolment choices.” The big lesson of the litigation—albeit US litigation—is that employers must assume that they have that fiduciary duty, as do trustees, and that they always need to have auto-enrolment choices on their radar screens. It is a lesson once again that the lack of transparency in the governance process, the administration process, the investment process and the advice process will lead to the detriment of the member.

    To ensure that we can help build citizens’ trust in the system, we must have transparency for employers and members. We must have the information in front of the employer choosing the scheme to protect them and their employees. I commend new clause 7 to the Committee.

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

    It may help the hon. Gentleman to see my point if he looked at the regulator’s website—he might have done so already—which has comprehensive guidance for employers. Under the new clause, a typical employer would be doing exactly what the hon. Gentleman says is inappropriate: they would basically be doing what their accountant or adviser tells them, because most employers, particularly the small ones, by definition do not have this kind of knowledge. They are not professionals in this area; there are there to run their own business.

    I do not understand, whether from a personal or a Government perspective, how asking them to do meaningful checks after they have gone with an approved and regulated scheme would add anything to the process. It is well-meaning, but it is unnecessary and should not be part of the Bill. I sympathise with the intent. The hon. Gentleman is trying to protect members from people acting in a fraudulent way.

  • Perhaps the Minister can address this very simple question: is he satisfied that employers could not be subject to legal action against them if they end up making a bad choice on behalf of their employees?