Pension Deficits (and Surpluses) – where do you stand on #FABI ?

Rather than kick off with  the FAB index this month, I thought to promote the response it’s publication this morning has received.

Paul Lewis


On the one hand there is Paul Lewis, who (for me) stands  for common sense and the ordinary person.

On the other hand there is John Ralfe, who (for me) stands up for neo-liberal economics and “risk-free pensions”.

John Ralfe


There is here a polarity of opinions that pretty well defines the debate on pension affordability, it touches on the way that schemes like Royal Mail, USS are organised and the benefits they provide.

If this presents the argument at its most polarised, here are the fifty shades of irritation that follow in its wake.





So after all that – here is the First Actuarial FAB index for May

Over the month to 31 May 2018, First Actuarial’s Best estimate (FAB) Index improved, with the surplus in the UK’s 6,000 defined benefit (DB) pension schemes increasing from £361bn to £379bn.



The deficit on the PPF 7800 Index deteriorated over May 2018 from £81.7bn to £94.0bn.

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

FAB Index over the last 3 months Assets Liabilities Surplus Funding Ratio ‘Breakeven’ (real) investment return
31 May 2018 £1,611bn £1,232bn £379bn 131% -0.9% pa
30 April 2018 £1,577bn £1,216bn £361bn 130% -0.8% pa
31 March 2018 £1,566bn £1,215bn £351bn 129% -0.8% pa

The overall investment return required for the UK’s 6,000 DB pension schemes to be 100% funded on a best estimate basis – the so called ‘breakeven’ (real) investment return – has fallen to minus 0.9% pa. That means the schemes need an overall actual (nominal) return of 2.6% pa for the assets to meet the liabilities.

The assumptions underlying the FAB Index are shown below:

Assumptions Expected future inflation (RPI) Expected future inflation (CPI) Weighted-average investment return
31 May 2018 3.5% pa 2.5% pa 4.0% pa
30 April 2018 3.5% pa 2.5% pa 4.1% pa
31 March 2018 3.5% pa 2.5% pa 4.1% pa


The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,588 UK DB pension schemes on a section 179 basis, together with data taken from The Purple Book, jointly published by the PPF and the Pensions Regulator.


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

Fab index may 18 5




About First Actuarial

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

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

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AE Pots must follow workers (Hargreaves Lansdown’s right)

HL Workplace solutiosn

I have just read a policy paper in my hand from Hargreaves Lansdown;  “Putting Individuals at the Heart of the Pension System”.

After some pretty dire submissions to the Work and Pensions Committee on CDC, I hadn’t thought to agree with HL on much, but I do like this paper.

I would link it to the blog  but it doesn’t appear to be linked to its website and it’s too long for me to post. I have a PDF yours – if you mail


New technology – new ideas

Hargreaves Lansdown has, for some time, been looking to adopt new technology to put the individual in charge of their money (and prevent “pot proliferation. In November, they announced they were working with Tex and Criterion to help people move money around the system.

Now they are calling for the adoption of this new technology to allow employers to clear contributions to the workplace pension of the member’s choice – rather than the employer’s choice.

As Hargreaves Lansdown put it

If we forced employees to change their bank every time they changed jobs, there would be an outcry, yet this is what auto-enrolment does with their pensions.

Their’s is a good idea. Employers – especially small employers – are showing little appetite for governing their workplace pensions and are simply sticking to the compliance code laid down by tPR – ensuring they get the right contributions to the workplace pension in a timely fashion.

The Pensions Regulator is showing little appetite to educate employers that not all workplace pension are the same and has – consistently since 2012 – adopted a neutral stance to workplace pensions. Not all workplace pensions are the same, some are better than others and some suit some members better than others. For instance, Hargreaves Lansdown’s workplace pension is as different from NEST’s as chalk is from cheese.

Since the members get the workplace pension they are given, they have to make the best of it. But if they find they are in one they like – they can only rely on employer sponsorship as long as they stay in the current job. Once they join a new employer, they are into a new workplace pension – and it may not be to their taste.

This is hardly optimal. If we want members to “get to know their workplace pension”, why can’t we allow them to take it with them to their next employer?

workie 4

What Hargreaves Lansdown is actually saying…

Hargreaves Lansdown proposes the existing auto-enrolment system should be preserved as it is, with employers selecting a default scheme, enrolling members and making contributions on their behalf. All the current defaults would remain in place. Nothing would change or be taken away from the existing system.

For disengaged members and those without an existing pension, the system would continue exactly as it does at present.

However, an individual who has an existing auto-enrolment pension from a previous employment or who wishes to make an active choice regarding their pension provider, would have a right to choose that arrangement in preference to being forced to join their new employer’s scheme. They would have the right to have their new employer’s contributions paid into the pension of their choice, along with any of their own contributions deducted from their salary. (HL Policy Paper May 18)

There are of course barriers to managing this. Payroll has struggled to come to terms with the new employer duties for auto-enrolment. Despite most employers complying, we know there are areas of non-compliance.

The Pensions Regulator will warn Government that introducing the increased complexity inherent in HL’s proposal, risks some payrolls falling over with the extra burden of administrative complexity. What I and Tom McPhail might argue for at a pension policy level, payroll and tPR might argue against, from the employer’s perspective.

Most payolls are progressive

Talk to Sage about Sage DX and they will tell you that they can already clear – using APIs – to most of the major Auto Enrolment workplace pensions.

Other payrolls such as Star, QTAC and Xero use the pensionsync system, which is effectively a means for smaller payrolls to adopt clearing through a third party.

There may be resistance among other payrolls for whom API data clearance is harder and less readily adopted, but BASDA could take up Hargreaves Lansdown’s policy paper and respond to the challenge..

In my view, we are not far from being to implement clearance, especially if clearance was restricted to providers who committed to common data standards

Sorting tomorrow’s problems now – not later

In the early years of auto-enrolment, when the fear was that the data transfer system employed by most providers was clunky, insecure and prone to error, common data standards could be introduced that made payroll uploads to workplace pensions as simple as RTI.

PAPDIS was an industry initiative designed to provide a common data standard to enable this to happen. Some software has adopted PAPDIS but sadly, it is little used. The idea was a good one, but it came too late. NEST had already a data standard in place and was not going to re-engineer its service. BASDA was behind PAPDIS, but it was also behind the times.

It seems to me that a new data standard for clearing contributions according to member’s wishes, could be established, tested and implemented in a safe environment before the demand for clearing became a commercial and regulatory imperative.

What is needed is some forward thinking. We need (this time) to be getting technology prepared before – rather than after, the problem has arisen. Right now, most people’s pots are small enough for their being invested sub-optimally – to be a small problem. But this will not always be the case.

The DWP estimate that unless we get some way for pots to follow members in place soon, there will be 50m unloved pots by 2050 – resulting from auto-enrolment. This is in nobody’s interest. The time to get this problem sorted is now – not three decades hence!



get to know 2

Do these really include employers understanding pensions ?

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NEST needs you!


Interested in influencing how NEST works for members?

News reaches me that the NEST Member Panel is recruiting and looking for hard working, conscientious , pension loving folk like us. You can apply for this position online up to and including Sunday July 1st 2018, here’s the link

The blurb says

As a panel member you will be part of a small group that has an advisory role to NEST Corporation on a range of matters that affect the millions of members saving in the scheme.

This is an exciting time for NEST and we are seeking two enthusiastic individuals to join our already established Members’ Panel.

We are particularly keen to hear from you if have a NEST pension and can bring the perspective of the large portion of NEST’s membership who are new to saving in a pension scheme. We are also keen to hear from you if you live outside of London.

To be successful in this role you should have a genuine interest in NEST and willing to act in the best interests of NEST’s members. You will also be a good team player with excellent communications skills and a sense of service.

Time commitment including meetings and reading time is at least six days a year.

You can find out details of the member’s panel on the NEST website or by following this link.

The Members’ Panel allows NEST to take the views and considerations of members into account.

The panel is a sounding board for ideas and suggestions proposed by NEST. It provides recommendations on key issues to make sure that specific member concerns are raised at Trustee level.

The Members’ Panel participates in the appointment of future Trustee Members and is consulted when we review the Statement of investment principles (SIP) (PDF)​. This document outlines the Trustee Members’ approach to how they manage members’ money.

The Members’ Panel publishes an annual report. This explains how NEST has considered the views of scheme and panel members.

There is clearly work to be done, the last Member’s Panel report was delivered to the NEST board on 25th July 2017 . Presumably the 2018 version is in preparation.

Here is where you apply, you only have to the end of June to do so, so get your skates on if you want to make a difference and earn £175 pm for doing so.

You don’t have to be a NEST member but it helps, I understand they are particularly interested in having more diversity on the panel, but don’t let that stop you if you don’t tick diverse boxes.

Nigel Stanley (a friend of these pages) is in charge and there are several union members on the list of members. Don’t let that put you off or turn you on – sign up to make NEST a better place for members!

Regular readers of this blog will know there is plenty for the Member’s Panel to bring to the NEST Board’s attention!

Interested in influencing how NEST works for employers?


Nest is also recruiting for new members of the employer’s panel.

As with the Member’s Panel, there are vacancies which can be applied for till Sunday July 1st and you can apply here.

Unlike the Member’s Panel, the Employer’s Panel does not publish details of what is discussed and is subject (according to the TOR to various confidentiality agreements).

This is what the blurb says

The Employers’ Panel enables employers to give their perspective on NEST and contribute to a range of issues and activities.

These issues will vary over time, but could include giving input on whether communications aimed at employers are appropriate and making sure that specific employer concerns are raised at Trustee level.

The Employers’ Panel is also consulted whenever we review the Statement of investment principles (SIP) (PDF). This document outlines the Trustee Members’ approach to how they manage members’ money.

Terms of reference

The panel operates under terms defined in the Employers’ Panel terms of reference (PDF).

Clearly NEST are recruiting in the right direction. A look at its existing panel suggests that a voice is needed for smaller employers  and that’s what the recruitment notice is calling for. Note- you get slightly less per month for sitting on this panel (£150)

As an (Employer) Panel member you will be part of a small group that has an advisory role to NEST Corporation on a range of matters that affect the hundreds of thousands of employers who are using the scheme.

This is an exciting time for NEST and we are seeking four enthusiastic individuals to join our already established Employers’ Panel.

We are particularly keen to hear from small business owners to those working for large corporations or have experience of supporting these types of employers. We are also keen to hear from those who work in the health and social care, construction or wholesale and retail trade sectors.

To be successful in this role you should have a genuine interest in NEST and be able to provide insight from the perspective of our employers. You will also be a good team player with excellent communications skills and a sense of service.

Time commitment including meetings and reading time is at least six days a year.

Regular readers of this blog will know there is plenty for the Employer’s  Panel to bring to the NEST Board’s attention!

Call to action – NEST needs you!

It’s no good our moaning about NEST from a distance. NEST needs people like you on its boards.

It’s part of our public service obligation to help NEST with their’ s!

Apply here for both jobs here!


nest debt

Don’t forget – it’s our money NEST is spending!

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We need to simplify our pension affairs

  • We are told that pensions are complex.
  • We are told that we need advice to manage our retirement finances.
  • We are warned hat we could be scammed if we don’t.
  • Is it any wonder that people look at their retirement with financial foreboding?

Self-perpetuating complexity



But pensions do not have to be complicated. Ask a postman and he’ll tell you that a pension is no more than a wage for life, provided for him or her by an employer who organises pre-funding, investment and the payment of the pension.

This simple way of looking at things has met with vitriol. When I explained this to a crowd of Scottish Accountants last week, Maggie Craig, head of the Scottish FCA claimed that I was not “living in the real world”. I don’t know if she thinks that 145,000 postal workers aren’t living in the real world either.

A savings account geared to paying a wage for life should not be complicated. The account itself is simply an invested version of a bank account with an aim of providing more money than could be achieved by saving the money in a piggy-bank.

All the complexities surrounding tax arise from decades of attempts by the rich to avoid paying tax by subverting the simplicity of pension saving. Pensions are now regarded as a means to avoid inheritance tax (non-drawdown), avoiding capital taxes on a business (SSAS) and of hiding company profits (occupational pension schemes). Of course not all pensions are being used for tax-avoidance, but enough have been for HMRC to have built in the labyrinth of rules that prevent the public finances being abused.

It is not the pension that it complicated, it is the abuse of pension saving by the wealthy and their advisers.

Most pensions are paid very simply

Most people get caught up in this complexity for no good reason. The number of people I have met who tell me they want their pension to survive them is very few.  People know what inheritable assets are – houses, businesses, chattels etc. – and they know what dies with them.

I have never heard anyone complain that the state pension dies with them. It would seem absurd to us , that the state would pay a pension to our children, just because we have died.

The problem is that we have (and this is partly as a result of the pension freedoms) , started thinking of pensions as “wealth” and not a “wage for life”.

So it is that ICAS could have a two hour discussion on the supposed “crisis in pensions” without mentioning that the vast majority of pension payments are met by the taxpayer on behalf of other taxpayers.

Instead we had to agonise about how we could get engagement with our pension saving, as if that failing to do so, would result in a failing of the system.

Financial gravity will do the trick

If people were not to be bamboozled by the complexities introduced by tax consultants, pension experts and the wealth management “industry”, they would see that managing their pension affairs could be very easy.

If people had easy access to the information surrounding their various pension pots and a simple way of assessing what was good, what was bad and what was indifferent- they could employ “financial gravity”.

Financial gravity is my phrase for thinking about bringing lots of small pots into one big pot. Financial gravity is the process by which the money in the less useful pots is poured into the most useful pot and used to pay a pension. Some call this “aggregation”.

For financial gravity to work, people need to see which pot to pour into which pot.

ppp screen 2

There are many people who regard this simple idea with the same distaste as they have for a “wage for life” pension. It is offensive to people because it challenges their firmly held belief – not just that pensions are too complex, but that they should remain too complex.

Because these people are obsessed by the idea that they can create value for themselves from that complexity. If things were so simple that people could pay themselves a wage for life by transferring into a CDC scheme, or aggregate all their pots into one big pot, then we would not have the need for the pension industry at all – and that includes a lot of regulators!

Financial gravity tends to simplify over time. Over time, the complexity of our pension system, with its lock-ins and its guarantees and its tax-penalties will be washed away.

This is because, as we get into the later stages of life, all that matters is the rest of your life. Old people closing in on death should not be worrying about death taxes and the exhaustion of their savings or about stock-market volatility, they should be allowed to live their lives to the full -for the remainder of their days. Financial gravity should drain away the complexity and leave them to enjoy what is left.

The utility of simplicity

We all need to simplify our pension affairs over time, because- quite literally – life’s too short.

For the vast majority of people, pensions are way too complex and could do with a spring-clean. Creating simple structures like CDC schemes or even defaults for spending, simplifies matters greatly.

Creating a way to aggregate pots through dashboards and simple metrics that help financial gravity, is within our scope.

By using many of the great platforms and funds already in place, we can do much to get there; what remains to be done, is within our grasp. I feel confident that we will be able to make pensions simpler and easier and therefore more popular and better funded.

If you would like to join with me in this, keep reading these blogs, and I’ll keep writing them.


the lonely Platonist in his tower

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Why we should not be shut up about pensioner poverty – it exists and it shouldn’t.

unite uc.png

If you’d been at the ICAS “how to avert the pension crisis” debate on Tuesday, you’ll remember that part of the conversation when we discussed the Institute of Fiscal studies’ contention that we were having difficulty spending our retirement savings. I mentioned in my blog earlier in the week – that this did not seem a crisis to me. 

Since then Miriam Somerset-Webb has picked up on the IFS’ research in a blog at the FT. It’s a very good blog but you need to get past the paywall to read it. Miriam picks up on Clare Reilly (Pension Bee’s) comments, that it would be a lot easier to spend your pot, if you had proper technology that responded to your wish to have your money back when and where you wanted it. Clare’s is a good point but it is based on there being wealth to drawdown.

For a very substantial number of people in Britain today, there is no such wealth.

Damian Stancombe, pension guru at Punter Southall, called me on this and reminded me of work carried out by the Joseph Rowntree Foundation (published Nov 2017).

For the avoidance of doubt, the report offers data that shows how  the public policy decisions of recent years mean more money in the pockets of some families, while others are hit hard

It also published this excellent set of slides,

Joseph Rowntree Foundation’s work showed that for a significant proportion of the population, retirement was a time when every penny counted. For those dependent on benefits in retirement, the world has got a bleaker place in the last ten years. For it is our poorest who have suffered the most from the austerity imposed since the financial crash.

I mentioned in Edinburgh (ICAS) that if we had a crisis, it was a crisis not about pensions but about the lack of them; more particularly, we now have a crisis in benefits.

Unfortunately this was deemed “off topic” and we spent much of the debate talking about how to engage the “haves”, rather than what to do with the “have nots”.

To redress matters, I’m thinking about the “have nots” and hope that someone in the DWP will pick up on the matters raised by that presentation

The Joseph Rowntree Foundation made three recommendations in its report


  • As the cost of achieving a minimum standard of living increases with inflation, the Government must ensure that Universal Credit and other support for families is uprated at least in line with prices, ending the benefits freeze.
  • The Government must allow families receiving in-work benefits to keep more of what they earn, so that increases in the National Living Wage are not clawed back through reductions in Universal Credit and other support.
  • As pensioner costs also increase, pensioner benefits should continue to be uprated at least in line with prices, and should continue to keep pace with increases in earnings over the long term.


While I am not proud that our poorest citizens continue to fall behind due to the freezing of benefits, I am proud that we are upgrading the state pension  by the triple lock.

But it’s worth pointing out that it costs a lot less to triple lock Universal Credit, paid to the few, rather than the single state pension -paid to everyone.


The National Audit Office reports DWP in denial.

As Damian did, so the NAO have pricked my conscience on this matter this morning.

Though I didn’t then have a link to the NAO’s report, the edited highlights given us by the BBC’s Hannah Richardson, told me what I needed to know. That Universal Credit, through its flawed roll-out and fundamental inconsistencies, is leaving large numbers of people in genuine crisis.

I now have the link to the NAO press release, which links to the full report – you can find both here.

There are numerous case studies in the report . They cannot be swept under the carpet as “off -topic”. This is from the BBC article..

And yet the Department for Work and Pensions does not accept that UC has caused hardship among claimants, the (NAO) report says.

The report points to a recent internal departmental report showing 40% of claimants are experiencing financial difficulties.

I hope that somebody in the DWP is reading that. The criticism that the fate of our poorest is being swept under the carpet is coming not just from the Joseph Rowntree Foundation but from the National Audit Office.

Whatever happened to social justice?

I’m supposed to be a Tory, I carry their card. I was speaking at a conference of the Institute of Chartered Accountants of Scotland about a pension crisis. I wear a suit, I have a degree from the right kind of University, I am white, male and by any standards, part of the establishment.

And yet, when I introduced the concept of pensioner poverty into a debate about pensions in crisis as one of the panellists, I was told to shut up.

What chance for anyone who has not got all my privileges –  to get heard? Small wonder that the Grenfell march is a silent protest.

We should not be living in a society which shuts the door on such debate. We should allow a debate on pensions crisis to include the impact of public policy on all citizens, not just the affluent.

It is time that more people like JRF, the NAO, Unite and Damian Stancombe, got listened to.





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Lessons from Port Talbot – webinar – 26th June

Port talbot.PNG

Transfer values from DB schemes tripled in 2017 to £34.2bn. Transfer values are fundamentally changing the cashflow profile of many defined benefit schemes and bringing new challenges for trustees and employers.

Last year, the highest profile transfer value activity was in relation to the British Steel Pension Scheme – and the fallout from the estimated £3bn of transfers continues with now ten financial advice firms suspended from pension transfer advice by the FCA.

Henry Tapper has spent time in Port Talbot talking to members and regularly covered the issues around the British Steel Pension Scheme in his blog. In this webinar, he will explain what lessons all trustees and employers can learn from what happened in Port Talbot.
To book your place on our webinar please visit:

The webinar will commence at 2pm on 26th June 2018 and will be chaired by Sam Mullock. It will last around 45 minutes and there will be the opportunity to ask Henry questions.
We hope that you can join us. For any questions please email:

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“Reductio ad absurdum” or a financial “must have”?


Today is a big day for funds disclosure in the UK. It is the day hands to the FCA, the template created by the Institutional Disclosure Working Group. This template  will facilitate the collection of data on the costs and charges we incur when handing our money to fund managers.

This may sound dry stuff but it isn’t. If you can’t measure it – you can’t govern it and we haven’t been able to assess the rate at which fund managers burn our money, in search of value.

Whether that value goes to the owner of the fund or to the manager or is just dissipated is a separate but related matter. We need not just to know the cost but the value we get and we need to know the risk taken to extract that value.

Dr Chris Sier spoke yesterday at the DC Strategic Summit as did Julius Pursaill, who is Chair of the DC Trustees of RBS and an investment guru at Royal London.

What I had not appreciated till then was the extent to which these gents have progressed their thinking from lofty abstractions to consumer applications.

The holy trinity of cost, risk and performance appears set to be launched to ordinary people (like you and me) , in the guise of a number.

ppp screen

the question that Pursaill put to the audience was whether a single number score on your fund or pension contract is a “reductio ad absurdum ” or a financial “must have”.

Sier made it pretty clear that it became the financial services industry to strive for such simplicity. Many in the audience violently disagreed.

The process that such a number could be calculated, was outlined

VFM scoreThis to the consternation of senior investment people who understandably considered this approach over simplistic. “I can understand presenting a number of numbers” said one CIO , but to aggregate everything into a single score, makes things misleadingly easy.

Misleadingly easy?

We had a vote on whether a single VFM measure would be a viable and  attractive development – 72% agreed it would, 28% thought it wouldn’t and not one person abstained.

The most interesting thing for me was that nobody didn’t have an opinion and there were no “don’t knows”.

For the 28% who are against this kind of measurement, we need to better understand why.

It seems to me that such a scoring system is aligned with the aims of the pension dashboard, with the need (identified in the FCA’s FAMR project) to make advice available to the mass market and is critical to pension aggregation (pot follows member).

But is this the way to get a pension aisle in the money supermarket?

What do you think?

Good luck to Chris Sier and the IDWG

The creation of the means to collect information on pensions is critical to the integrity of a single number. It’s a step along the way to empowering people to understand what they own, valuing what they own and managing their money with confidence.

Chris Sier is helping to restore confidence in pensions. The Pension PlayPen wishes him luck.


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Was this the face that launched a thousand Sipps?


Was this the face that launched a thousand sipps, and burnt the topless towers of Ilium? Sweet Mirrium , make me immortal with a kiss



Well we had a debate , not perhaps the debate that George, Derek or John had come to hear, but a debate about engagement and defaults and the like.


There was nothing in the debate that suggested to me that the pensions industry is in the slightest disrupted from its business as usual.

Maybe that discussions will seed further debate in the Institute of Scottish Accountants. I hope so.

Thanks to Merryn, who I hope will take this blog in good heart. Clare Reilly and I got stuck on Easyjet’s last flight out of Edinburgh and got back to London around 4pm.

I’m off to Maidstone to talk with the PLSA this morning and will be at County Hall at the DC strategic summit this pm.

We must not allow the main event to be by-passed. People need pensions – the rest is secondary.




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Averting a pensions crisis?


I’m on a panel of speakers at the Institute of Chartered Accountants of Scotland tonight. The title of our session is “averting a pensions crisis” and were it not the title of the worst album of the seventies, I’d be tempted to open “crisis- what crisis”?

If I was asked this question ten years ago, I might have pointed to the parlous state of the world economy (Bear Stearns anyone), but I seem to remember I was (at the time) promoting fund of funds or manager of managers or some such nonsense.

At that time the state pension was – to use Portillo’s word “nugatory”, DB schemes were in steep decline, auto-enrolment was still a figment of the Turner Commission’s imagination and pension coverage had actually declined from the great stakeholder experiment earlier in the decade. I think it fair to say that pensions were suffering a crisis of neglect , stemming from decades of complacency.

Frank Field’s description of Britain’s final salary pension system as “our great economic miracle” already looked shaky ten years ago. Now “final salary pension” is the financial equivalent of asbestos in your ceiling. The abolition of the MFR and the establishment of the scheme specific funding regime in 2008, presented pension actuaries and trustees with the opportunity to prove themselves. But the financial crisis and the collective funk it engendered, handed the agenda to the neo-liberal economists for whom mark to market accounting was a dogma of death to the pension guarantee.

If you could do without a guarantee from your works pension , you could do without any guarantee whatsoever, and the tax-changes of 2014 leading to the pension freedoms, marked a high watermark for Thatcher’s children.

But other forces were at work and a reassertion of centralised order was happening even as Osborne took to the dispatch box. Auto-enrolment didn’t fall over, there was not mass insurrection from small employers; the state pension triple lock has survived and will survive at least till the end of the decade. 10m new savers have entered the workforce and – with unemployment at a record low – the workforce is bigger than in living memory.

People are not opting out of pensions, though they are opting out of PAYE (gig economy).

Instead people are seeing their basic employer contributions triple within a year and by April 2019, the majority of the British working population will be saving 8% of most of their earnings.

The cost of pension saving has plummeted, transparency of costs improved, pension savers are beginning to wake up to where their money is invested and we even have – with Royal Mail, a new dawn for collective pension provision – open not just to future accruals, but to new members.

It is against all this, that I wonder if the phrase “pension crisis” is really relevant. Yesterday, I read a report from the Institute of Fiscal Studies worried about our having too much money in retirement, complaining that our pension pots were being used to mitigate inheritance tax and asking where the tax incentivisation of pension spending was paying off to the economy in general.

This is not a conversation that smacks of a pension crisis.

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In which Con Keating suggests John Ralfe is put into quarantine

john Ralfe2

In the latest in a long series of rebuttals, Con Keating lets fly with an acerbic missive. John’s blog can be read here.

Hazard Warning: Recrudescent Ralfe Syndrome

The Times Business Section this morning was the scene of the latest outbreak of this pensions pathogen. Some minor mutations on previous outbreaks are evident, including that the prime carriers are now completely deluded as to what is and isn’t reality.

The commentary opens, misleadingly, by stating long-superseded, and now inapplicable, quotations as to the difficulty of completing the enabling CDC legislation. Royal Mail and the DWP are engaged on this task, and the next development we may expect is a DWP paper, on which they are already working, outlining its proposals for CDC. In fact, the required changes for CDC are modest and may be implemented by a simple and brief statutory instrument.

But the creation of an atmosphere of uncertainty, of great apprehension and dread, along with the promotion of remote possibilities to probabilities, is a symptom of the syndrome. Experimentation and innovation are then much simpler to depict as irresponsible and dangerous. It paves the way for millennium bug hysteria at its most extreme. We would do well to remember that if we make precautionary provision against every possible future event then we may well be unable to feed or clothe ourselves adequately today, let alone save for pensions. The comment asserts that: “The department is right to be cautious. Legislation for an entirely new, untested type of pension must be absolutely watertight to avoid creating new problems.” This is a clear misapplication of the precautionary principle. It runs counter to the calls from the FCA, Pensions Regulator and DWP for innovation in the DC space. Make no mistake, CDC is a form of DC; it completes that proposition by offering integral decumulation options. My central objection to the application of the precautionary principle is that it is unscientific, in both meanings of that word.

Sophistry is present: “CDC fans do a lot of arm-waving when asked to explain CDC — they must go beyond theory and produce practical details showing all the nuts-and bolts (Sic).” The advocates of CDC have produced numerous explanations and descriptions of the operations of CDC schemes, but with the enabling legislation not completed, it is not possible to describe the nuts and bolts of any particular scheme, as the author well knows. Indeed, it is likely that the specifics of different designs of CDC will differ considerably. Or is this simply a case of wilful or feigned ignorance?

The commentary contains its share of untruths: “Lobbyists claim that it can deliver average pensions, say, 10 per cent higher than defined-contribution schemes by smoothing fluctuating investment returns via “intergenerational” risk-sharing. We don’t.

This is related to the following paragraph: “But this higher average pension is simply because CDC takes higher investment risk, holding a higher proportion of equities and a smaller proportion of bonds. If an individual defined contribution saver was happy with the same investment risk, they also would, on average, get the same higher pension.” In fact, the disjointed nature of DC pensions, separation of saving and decumulation, means that scheme members are in fact taking very considerable risk – broadly speaking equivalent to holding only equities for their entire lifetime. One confirmation of this is the PPI multi-year study conducted for the TUC where a 60/40 equity/debt savings fund was converted to a life annuity at retirement, at the rates then prevailing. The savings funds exhibited a volatility of 11%, but the pensions a volatility of 18% – a level commonly associated over the long term to equities. By contrast, CDC schemes may hold all equity portfolios perpetually and through risk-sharing lower the volatility or risk experienced by pensioners to levels far below that currently experienced.

Of course, no pensions critique is complete without some wild scaremongering over intergenerational issues, whatever they might be. CDC schemes pool and share risks among existing members, equitably. They are in no way dependent upon inflows of new members; there is no subsidy of prior deficits from new contributions. There are no intra-generational issues, let alone inter-generational.

In this mode, the comment poses a question: “CDC fans should explain what happens when there are no new members and the youngest generation is left holding the parcel?” My answer to this is rather little of note; pensions continue to be paid to members in accordance with scheme rules, and the net asset value of their equitable interest is as likely to be above the promised pension value as it is below.

The author obviously felt that this intergenerational meme had impact for scaremongering purposes. “By definition, the first, oldest CDC generation, has taken no risk for an older generation, but the youngest generation takes risk twice, for itself, and the penultimate generation. End-to end the oldest generation gains at the expense of the youngest.” It shows a profound ignorance of the difference between (cross) subsidy and risk-sharing, where the latter is a compensated activity. End-to-end there is no gain to any member relative to another. There is no double exposure to risk.

The comment asserts, without foundation that: “The annual contribution is the same for all members, regardless of age, building-in a huge structural cross-subsidy from younger to older Royal Mail employees, which again must be properly explained.” The first thing to understand is that age-related contributions are perfectly feasible and may be utilised. I personally favour the age independence formulation incorrectly criticised above. This formulation is a form of ex ante risk-sharing among members. It represents a form of insurance of most value to the young. As insurance, it works both ways when investment returns are high the young support the old, when they can most afford to do so. And when investment returns are low, the old support the young, when the effects of low rates are most deleterious to their long-term savings. In addition, any residual bias there may be is offset by the fact that the young expect to grow old. This has been covered in numerous blogs, articles and published consultation submissions. Wilful ignorance on display?

Then comes a risible suggestion: “If the government does allow CDC, Britain should use well-established Dutch rules (where CDC is standard) to maximise fairness between generations.” We might debate whether CDC is standard in the Netherlands, rather than just a change of nomenclature, a rebranding of a flawed DB model. But the most telling point is that none of the Dutch pensions experts present at the recent CASS/NetSpar workshop, convened to share experience with DC plans, advocated the introduction of Dutch style schemes or regulation. Indeed, most of their advice was precisely to avoid the methods proposed by John Ralfe. And the very next sentence in his commentary, itself actually supports this: “Under these rules the Royal Mail CDC annual contributions could only support “target pensions” of just half the present DB pension.”

“If CDC stands any chance of working, we need both proper regulation and realistic

expectations of what it may deliver in practice, not the overblown claims of Royal Mail.”

Indeed, we will need proper regulation, but that need be little more than authorisation of particular schemes based upon their rules. Realistic expectations are the prime concern of scheme trustees in the contribution pricing/award setting process. As for Royal Mail’s claims being “overblown”; well, the market does not agree with that assessment, but hardly surprising as the quantitative elements of this commentary are all highly questionable.

As we have, as yet, no cure for the syndrome, perhaps we should introduce a quarantine and isolation procedure for its most virulent carriers.

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