Fair, right or honest? The new State Pension Age for Generation Y


If you were born between April 6th 1970 and April 5th 1978 and between 39 and 47, this affects you. You have just slipped one year back from your state retirement age, have another year’s National Insurance Contributions to pay and you’re facing a state pension age of 68.


Fairer for some than others. If you have no intention of retiring this may not bother you much. If the reason you go to work is because it’s one day closer to retiring, this will seem unfair.

By and large the people who love their jobs are the higher earners and in control of how long and how they work. Those who hate their jobs have little control of their career or how they can put an end to the “toad work”.

Simply treating everyone the same is unfair- certainly if you listen to Ros Altmann who would have a state pension age that reflected individual’s longevity. This segmented approach could work if big data could pull together our postcode, our medical record and our lifestyle to tell Government how long we were going to live. Is that the kind of fairness we want? Or would we prefer a fairness where those who die early, subsidise those who live longest. To date, we have worked on the latter model, but don’t expect Cridland to cap out the arguments for personal retirement ages – they have a fairness of their own.


I’m not sure that Cridland was using the right data, the latest mortality data in the UK sheds a different light on future longevity than the 2015 ONS numbers that Cridland used. If there really is a change in direction for longevity, then Cridland will be wrong and the need to push back SPA will disappear. Some people thought that the reason the Government missed its May 8th deadline for publishing its plans was that it was rethinking them in the light of the new data.

Tories kill

I’m not sure you can stretch the argument this far- mind!


They were wrong, the Government just didn’t want to announce bad news prior to the election. This was not right. As I was in the room when the Pensions Minister found out about the next election and as John Cridland was waiting outside when I finished the meeting, I have no doubt that the timing of the announcement was politically motivated! Yesterday was a good day to bury bad news.

I personally think Cridland was right to stick with a universal state pension age, to push back SPA for this cohort of people and I think his idea for a mid-life MOT is a good one.


The Government has been accused of being sneaky in its introduction of changes to SPA in the past. Most vociferously by the WASPI women who campaign against the changes to retirement age of a group of them who weren’t well informed of what were going on and who feel particularly hard done by.

The Government need to try doubly hard to communicate not just the changes but the impact of those changes. The cost of the State Pension has recently been estimated to be about the same as a Lamborghini, it’s a big ticket item for the Government to pay. It is small wonder the SPA attracts attention in the Treasury and DWP.

But this subject did not even trend on Twitter. For most people , pensions will continue to be too hard, too distant and too inaccessible and people will hide under the covers and go to sleep rather than to listen to the arguments.

If the Government is serious about pensions, it has to invest in getting the messaging right. People need to know not just what has changed but how the changes will effect them and what they need to do to get back to where they were.

There’s a good discussion on this on the Radio 5 wake up to money podcast. I’ve just got back from the studio this morning. I’m sure if we could have more of these, we’d keep the Government honest!

You can listen to the Podcast here, the discussion is at 32 minutes.




Posted in pensions | 5 Comments

Why should employers give a damn about their staff’s retirement welfare?

retirement plan

It’s a straight question, a fair question and one that takes John Ralfe to ask!

In our subsequent conversation I introduce a historical context, Benevolent Conservatism- Disraeli- blah blah blah! John is having none of it.

In the course of dealing with small businesses and their advisers I get these questions frequently .

Why should an employer pay above the AE minima?

Why should an employer do due diligence on a workplace pension that already “qualifies” for workplace pensions?

Why pay above the minimum wage?

The answer is of course “you don’t” unless you want to – and we leave it that. Most employers don’t need a lecture they do what they like – which is what they think is the right thing..

After all the BBC can tell the licence-payers, as they are this morning that they are paying below the benchmarked “proper price for the job”, because of the cachet of the employer….that is the right thing for the BBC, the license payers and indeed for staff,

“Do you wanna make tea at the BBC?” sang Joe Strummer – clearly many do – and the BBC know it!

Total Reward

The total reward for working at the BBC is more than the pay, and (to John’s estimate) an over-generous pension; it is the value workers place on their job,

The question Government  should be asking is whether people are so exploitable that they need protecting from “bad work”. Matthew Taylor suggests that Government needs to intervene in the gig economy, as it did to get businesses to pay the minimum wage and auto-enrolment contributions on top. People do not understand total reward, do not benchmark their role against what may be available elsewhere and they may not even know what “good work” looks like.

This is why we have a trades union movement and why Government intervenes in the labour market. The issue is not whether employers have duties, it is to what extent employers need to pay beyond the minima (at the expense of other stakeholders).

Philip Hammond’s assertion that public sector employees get their reward as much after they stop working as when they work is largely right. This is  (certainly on Twitter) John’s #1 issue! His article in the Times “It is time to reveal the cost of public pensions” will require you dip into your total reward and accessing it via his blog is tricky…

john Ralfe2

Fortunately, I have made it through the high security validation process and can reveal in John’s own words…

Cabinet ministers are queuing up to say that the 1 per cent pay cap for public sector workers is unfair and unsustainable, and urging the chancellor to loosen the purse strings. But this  headline figure ignores the value of defined-benefit (DB) pensions to public sector workers, a big part of their overall pay and perks.

DB pensions, an inflation-linked pension for life, based on salary and the number of yearsworked, are all but dead in the private sector. They have been closed to new employees for many years and most smaller companies and many large companies — Marks & Spencer, Tesco, Royal Mail — have closed them to existing employees. DB has been replaced by much less generous defined-contribution (DC) pensions, a glorified savings scheme, leaving all the investment and longevity risk with employees.

Meanwhile, DB public sector pensions are flourishing, with more than five million employee members and all schemes — NHS, teachers, civil service, local government and armed forces— still open to new members.

How much is the annual public sector DB pension perk worth?…..

This article pre-dates Philip Hammond’s remarks, no doubt the Chancellor would like to know how much the “DB perk” is worth too.

I suspect it is what is underpinning public sector worker’s continued loyalty and commitment to public service; but unfortunately you cannot measure this on a balance sheet – until you take it away. Let’s hope no one tries that!

Yet John is right..

John is right to question why employers have to do anything for staff’s later life, after all their retirement negates any obvious value of their future labour.

Just because we have unions and labour regulations does not mean we should have these things and in re-engaging with the fundamental issue of whether an employer has a duty of care, we should not rely on conventional morality. If the mores of this country said yes, then has time moved on – do they now say “no”?

Is Auto- Enrolment a con? As John asserts it is

Is the Pension Regulators “tougher-quicker” stance just management consultant speak? As John asserts it is.

Is CDC a magic money tree? As John asserts it is.

John is right to question the fundamentals of our pension system, for if he doesn’t – who will. There is none other to articulate non-conformism as he does.

But John is also wrong

This is not just me being balanced, it is me at maximum conviction. The morality of this country includes an unsaid rule that employers should give a damn about their staff’s welfare. It isn’t written down – nor does Britain have a written constitution. We do not have to write some things down, we are confident in our own moral skin.

Employers have a moral duty to provide good work and that -to me – is an end to it. Good work includes a good end to work. If you as an employer decide you want to be a contrarian and do as little as possible (within the law), I will think the less of you as an employer. If you go beyond the law , pay below the minimum wage, avoid your employer duties under auto-enrolment, I will whistle-blow on you.

If we did not have conviction about good and bad work, then we would live in the kind of anarchy, Trump’s America could descend into. The breakdown of the morality that enabled Britain to build a welfare state and a voluntary pension system created by employers would be an awful thing for Britain.

John is a trustee of a defined benefit pension scheme and as such , he has a fiduciary obligation to his members. By accepting that role, I assume that he takes this duty responsibly – it is a duty that pre-empts a positive answer to the question on his tweet.

Good employers see the welfare of their staff as part of their business. It has been the same throughout Britain’s emergence and maintenance as a commercial power. John is right to question this, but he is wrong if he concludes that employers don’t give a damn.

The evidence is against him.

John Ralfe



Posted in pensions | 2 Comments

How do you annoy a wealth manager?

Question; how do you annoy a wealth manager?

Answer; ask him about his fund supermarket.

fund supermarket


It may offend your local wealth manager (aka IFA) but that’s what Reuters call these funds platforms the FCA are investigating and if you believe Platforum, most customers (oops clients) asked what a platform was for, replied to get access to funds at knock down prices- avoiding the IFA in the process.

FCA platform model 2

“Paying less in fees than using a professional adviser”

People seem to see Fund Supermarkets as being on their side in getting a good deal on funds.


AJ Bell are campaigning to offer advisers the right to rebates of fund management fees rather than receive lower prices for funds as platform managers. This surprised me as I assumed that the economics of aggregation were dependent on economies of scale. Platforms with billions under management should be best plnaced to drive down price but (according to Hugo T and Stanley Kirk- this is not the case)

Independent platforms (not vertically integrated or ‘closet integrated’) can’t get a better deal for the end client if they have no influence over the funds flow…..The number of advisers or DFMs who choose that fund is independent of the platform so why would a fund manager allow access to a lower shareclass however large the funds on the platform? That’s what the FCA are going to find out after their studies

This sounds like a classic case of divide and rule; fund managers don’t like giving blanket discounts and were platform managers absolved of responsibility to negotiate price then advisers would have a fat wedge of cash to rebate against upfront fees. We would only be an inch from commission again with fund managers able to jack up fees and  offer massive cash discounts so that the adviser can advise for free.

If the FCA are serious about helping the consumer to win, we have to curb the  power of the advisers to manipulate rebates in their favour. We all now how food supermarkets have been required to make pricing clearer, perhaps the real reason wealth managers hate the term “fund supermarket” is that it reminds customers (oops Clients) about the importance of price.

fund supermarket 2



Posted in advice gap, pensions | Tagged , , , , | 3 Comments

Who wins from platforms?



I enjoyed reading the FCA’s Terms of Reference for its Platform Market Study, it posed many questions and I’m looking forward to the answers. Few investors properly understand what platforms are , what they do and  how much they cost. The aim of the study according to the FCA’s Christopher Woolard is tied up in this statement.

Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice.


The “significant benefits of platforms to consumers”

As far as consumers are concerned, the benefits of platforms are various and there is little consensus on what they’re really bringing to the party.

FCA platform model 2

Platforum Consumer Insights, Figure 42 (January 2017)


I would read into these findings that when pressed, more people would point to “security” than “feeling in control” but that the general sense of having investments organised is what makes the packaging of funds on a platform – so attractive.

I don’t see this as a financial benefit, it’s the benefit of empowerment. Platforms empower consumers to “pay less in fees than using a professional adviser and to manage investments independently of an adviser”. These are the financial benefits deriving from platforms.

The least valuable aspects of platforms are the tools and information they offer. These are still valued but they are the means to an end – the end is first of all control and security and secondly money saving. The capacity to be a funds expert , to move money and to have online valuations is only contributory to the main event.

Why and how people buy platforms.

From the evidence selected by the FCA, we can see those investing in platforms as predominately middle aged or in early retirement.

FCA platform 4

age bands of platform users (platforum)


They are income rich

FCA platform 7

household income of platform users (platforum)


And wealthy

FCA platform 8

Net disposable capital of platform users (platforum)


This is precisely the demographic that made the Equitable Life and were so let down by the Equitable. This market study is exploring precisely the issues that the FSA should have been looking at in the 1990s.

If you were to ask the Equitable policyholders before its crash why they invested with that Society, I would be surprised if the answers were much different to those given for choosing platforms (online services excepted)

FCA platform model 3

why people chose platforms (platforum)


And indeed, Hargreaves Lansdowne has the same trust from platform users as the Equitable had in the day.

FCA platform 9

non advised assets on platforms (£bn)

As in the 1990s, one non-advised provider dominates the sector that challenges conventional advised propositions.

FCA platform 10

Advised assets on platforms (£bn)


I am not saying that Hargreaves Lansdown has any of the structural flaws of the Equitable, but I would guess that the comparison between the two has been noted by the FCA.

Who wins from platforms?

Platforms are a profitable business (look at Hargreaves Lansdown’s share price). They are the means that fund managers get their products to the wealthy and they are the way that technology providers have skin in the assets game.

There is a cost to all this and the security and control that platforms offer, comes at a price. The FCA survey mentions the word “value” 49 times. Christopher Woollard must be wondering just how to measure the value that all this money spent on platforms brings.

We can safely assume that the financial services industry is doing very nicely out of platforms.

But at a time when Vanguard are under-cutting the non-advised price of Hargreaves Lansdown by more than half, can Woollard be sure that platforms are really “passing on the benefits to the consumer in practice”?

I suspect that it will be a lot harder to intervene in this market than we might think. The demographic that platforms serve is the Equitable demographic, now the Hargreaves Lansdown customer base. These people do not want Government protection until the balloon bursts, then they form Action Groups and lobby for their money back. It is a particularly insidious form of Moral Hazard.

But precisely for this reason, I would urge Woollard and his team to press on and really test whether these platforms are providing value, or whether they have become the means of ensuring wealth is redistributed from the mass affluent to the financial services industry.

Posted in advice gap, pensions | Tagged , , , , , , | 6 Comments

Pension = Wage for life

wage in retirement

Sloppy journalism confusing readers.

A quick scan of the Daily Telegraph’s Money Pages leaves me hopeless at its hapless reporting of pensions. Somebody should sit down with the whole personal finance team and read them the riot act.

Take Mike Walls

Mr Walls, 64, spent most of his career as a golf club manager and intended to pay for an extension and kitchen refurbishment using withdrawals from his £100,000 pension, held with Royal London

Mike has not got a pension of £100,000, he has saved £100,000 towards the cost of either buying a pension or providing himself with an income. Nowhere on the packet did it say that this was a plan for extensions and new kitchens.

How many people are today confusing the pot for the pension? I suspect many more than we’d like to think. Talking to TPAS, it is a regular confusion and one that is reinforced by this kind of journalism.

Now let’s move on to the second story in the digital edition of Telegraph Money.  Royal Mail’s improved offer of a Pension Plan to staff. What the staff and their CWU union have been asking for is what they have already got – a wage for life. A wage for life paid for from one great big pension pot according to what is in the pot. This is eminently sensible , by-passing extension and new kitchen plans (which can be paid for from tax-free-cash BTW) and focussing on the lifetime need for income – one that is common to most ordinary people.

What the Telegraph does not make clear is that the choice being made to Postal Workers is between a lump of money which depends on investments (defined contribution) and a lump of money paid on a defined basis (cash balance). Neither of these offers is a pension, neither is a wage in retirement. Royal Mail is offering a choice of two things neither of which is what postal workers get today or want tomorrow. Once again the Telegraph confuses between a pot and a pension and let their readers down.

The myth is perpetuated everywhere you look. Here is my old mate Sam Brodbeck talking about cashing in a defined benefit pension and getting a “defined contribution pension “. What is a defined contribution pension? Is it an annuity – read George Osborne’s lips – it’s not an annuity anymore”. Is it an investment drawdown….  ?occasionally, and even more occasionally an advised drawdown.

In case the Telegraph think I’m picking on them, I know it’s the same elsewhere, but that does not make it alright.  Organisations like the FT are reporting responsibly, which shows it can be done!

The macro de-risking agenda

It looks like the idea of a works pension is something you get from the Government. Everyone else gets cash. Philip Hammond is now using this argument to hammer down public sector wages.

On the BBC’s Andrew Marr Show on Sunday, Chancellor Philip Hammond said public sector pay had “raced ahead” of the private sector after the economic crash in 2008.

He added that when “very generous” public sector pension contributions were taken into account, public sector workers enjoyed a 10% “premium” over their private sector counterparts

It is the macro de-risking strategy that takes from the worker and distributes to the shareholder.

  1. Devalue private sector pensions
  2. Make private sector “total reward” less valuable than public sector reward
  3. Devalue private sector wages to compensate for their exaggerated reward
  4. Blame public sector pensions

Guess who are the winners, the shareholders and the Treasury. Guess who loses- everyone who is not in the inside circle where reward is concentrated.

It is small wonder that people don’t trust pensions. One minute you are on a promise, the next minute you have that promised pulled. One minute you are guaranteed a pension, the next you have your wages capped at 1% to pay the guarantee.

Confuse and control

The general public are now quite confused. The media add to the confusion by talking about £100,000 pensions (which are no such things), defined contribution pensions (that don’t exist) and cash plans that purport to being a “wage for life” but are just more of the same.

It is not for nothing that CETVs are being paid at 30 to 40 times the pension forsaken. That is what it costs to guarantee an inflation protected income for life to a family.

A £100,000 pension pot converts to a wage for life of between £2,500pa to £3,000 pa. Infact it’s worse than that as individual annuity rates have to factor in profits for insurers and don’t get an occupational pension scheme’s economies of scale.

All this talk of “sky high transfer values”,  needs be set against the cost of a “wage for life” which can seldom be met from private management. The issues Mike Walls with the tax-man are nothing compared to the issues he’ll have if he’s left with a fine house and nothing to pay his council tax with.

We are confusing short-term financial solvency with financial well-being. When we lose the ability to earn, we need a wage in retirement. The fall-back of the occupational pension scheme is being eroded from every quarter and we are doing little to replace it but boast about new extensions, new kitchens and fine bank balances!

The CWU are being deeply responsible in guiding their members towards a wage in retirement, Royal Mail are badly advised to persist with the Hobson choice of cash or cash. The FCA are waking up to the reality of “pension freedoms”, people like Mike are finding out that freedoms need tax-management beyond them and all this time, the roll-back of pensions continues as CETVs are recklessly promoted.

This confusion must end; a pension is a wage for life!

We must stand up for pensions. We can’t allow this relentless dumbing down to cash to continue. We must get a new affordable way of providing pensions as a wage for life.

The answers are in the rulebook – we just need to do the colouring in . Roll on  “collective target pensions”  and a return to a time when pension risks were understood and shared.

target pensions


Posted in actuaries, advice gap, pensions | Tagged , , , , , , | 4 Comments

@ShareActionUK – so much with so little!



t share action

At the beginning of last week I went to the Institute of Directors to see various “think-tanks” congratulate each other on their thinking- typically carried out in plush Mayfair offices at the expense of a Foundation set up by a grandee. It was hard to tell one thinker from another , especially as the thinkers seemed to swap tanks every couple of years before heading off into a career in politics or public relations. In this world, the best lack all conviction while the worst are filled with a passionate intensity.

At the end of the week I went to an empty shop in Brick Lane where Share Action had assembled a very large number of people to recognise who had been helping them over the past twelve months and to drink some cold beers out of an iced-up dustbin!

The kind of people who get active with share action are various. I enjoyed the company of an elderly couple from Yorkshire who have been leaning on North and East Yorkshire Pension Schemes to pay attention to where their pensions were invested. Elderly people form a phalanx of the voluntary activists that Share Action co-ordinate. It was great to think I might be useful in a few years!

share action

Also at the event were many Millennials, some Share Action staff, some committed interns and one or two little Howarths passing round the bagels!

David Pitt-Watson made the point to me “how do these guys do so much on so little?”  It didn’t need an answer, we just had to look around the room and the pavement outside. Catherine Howarth, Share Action’s CEO brings an energy to the proceedings which permeates.

share action party

It was good to see familiar faces – well done Jon and Steph for recognition of your work with Professional Pensions. The jelly moulds they were presented with are featured in the non-official photo on the left


It was good to meet again inspirational people like John Gray (who took the “official” photo on the right and has published his own thank you blog) – oh and Tony Filbin – who is hanging his head in shame for flying away on holiday (what’s wrong with rowing to the US Open?)

But best of all, it was great to celebrate that the Share Action agenda is winning.

If you want to know what that agenda is, I urge you to spend some time on Share Action’s brilliant website.

If you don’t have the time to be involved directly but want to contribute to the work they’re doing , you can donate.

A winning Agenda

I sort of top and tailed my Thursday by going to the CSFI sustainable finance breakfast in the morning. There I found that Standard and Poors, Moodys and Fitch talking about how a public company’s credit rating could be affected by its positive or negative behaviour with regards ESG (Environmental Social and Governance).

There was a lot of talk about how to make companies take action and then a bloke stood up and handed round a leaflet on how the Thames was being polluted by Thames Water. I know the spots in the photos (Bourne End Marina) as Lady Lucy uses that marina a lot.

In return for being caught dumping the equivalent of 120 Olympic swimming pool’s worth of sewage into the Thames, Thames Water have been downgraded for their debt, now have to pay more to service and have a lot of pissed-off bondholders. That shows that The Share Action agenda is also a Bond Action agenda – and it’s winning!

The great news from the Environment Agency Pension Fund (EAAPF) surplus. May they not be the last! Here is an excellent infographic c/o Pensions Expert/Morgan Stanley showing how ESG is catching on.

Share Action EA

While Thames Water are polluting our waters , the Environment Agency and their pension scheme are cleaning up! A lesson for D Trump and others!

Almost everything we do has a consequence in terms of sustainability. The kids know it, those elderly people from Yorkshire know it and the City knows it. That CSFI Sustainable Finance breakfast was standing room only.

Having the courage to stand up in your workplace

After the Sustainable Breakfast, I was late for a morning with the Pensions Regulator at an event they put on to talk with their Stakeholders about what they were up to. I look back at this as a wasted opportunity. I should have had the courage to ask tPR what it intends to do ensuring  the 40,000 Pension Schemes they oversee to ensure the money invested is invested with a view to the  sustainability of our planet.

Instead I flunked my question and asked something else. This was a case of my share inaction! Infact, if I put down I’ve been to Share Action  on my weekly briefings to colleagues, I get a metaphorical kick up the arse by my boss and I’m  accused of being “tangential” by another!

This is another sign of Share Action winning. The antipathy to the Green agenda from some of my close friends is a sure sign that it is a winning agenda! So – thanks to my recent interaction’s with the people from Crucifix Lane, I’m only going to get more Active!

So much with so little

While the swanky think-tanks swank it up in Westminster, Mayfair and St James, Share Action gets on with it in Brick Lane and  Bermondsey. The evening  was great, their people are great and the cause is great! I believe in action and I support Share Action!

Thanks to Catherine Howarth who makes the difference and to all her team who made for such a great evening.


Catherine Howarth -CEO Share Action

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A wage in retirement or freedom from pensions?


Yesterday I wrote about one aspect of the dispute between Royal Mail and its workers – the difference in opinion between the two sides on how postal workers are financially supported in retirement.

It appears very simple; Royal Mail want to pay a lump sum which they will guarantee to members of its pension scheme, the postal workers want the money paid as a wage. You would not think this a deal-breaker, but it is. Because of the arcane rules surrounding pensions, Royal Mail feel it is a lot more risky to pay members a wage in retirement than all the money up front. Not only is it more risky to their cash flows, it is presented as a risk on its balance sheet making it harder for the management to do the corporate deals they want to do.

The unions argue that they have done what they can to reduce the impact on the balance sheet, they’ve designed a solution that minimises the risk to future cash flows of Royal Mail and in any case, the deal with their members is that they get paid a wage not a lump sum.

Royal Mail argues that anything that ties up the company’s capacity to borrow against its balance sheet, or which could become a risk to free cash flow at a later date is putting at risk the livelihoods of the postal workers. Royal Mail have also got to consider its shareholders who should be mightily peeved that this pension dispute has recently cost them a lot of the value of their shares.

So this is at one level a dispute between workers asserting the right to have their pension rights paid as pensions and at another, the company asserting its rights to put the long term job prospects and interests of the shareholders above the wishes of current and future workers.

There is a more technical dispute going on behind the scenes which is between the pension experts. On the one hand, those advising the company are saying that the prudent investment strategy is to invest in bonds, this is in line with the way the scheme must report its funding position on its balance sheet and it means that the company will have a less bumpy road to its objectives. The member’s advisers argue that this approach limits the objectives to the limited capacity of bonds to deliver real returns over time and that time is what most postal workers have between now and meeting their maker.

The member’s advisers point to the long-term outperformance of shares (equities) over debt (bonds) and argue that because in the short term equity holders take more risk, they should be rewarded in the long-term by higher returns. The member advisers say that their members can withstand short term risk and would prefer to have a more ambitious objective (a wage in retirement), than a  cash payment at retirement.

Where it gets political

The politics of this are played out at a regulatory and governmental level and they are as polarised as anything else in this debate.  Royal Mail can point to the Pension Freedoms given to people by changes in the tax-system by George Osborne in 2015 which allow people to do what they like with their pension rights (though they may be heavily taxed for doing so). Royal Mail can argue that they are playing to these pension freedoms by handing over cash at retirement and that this is what people want.

The CWU, with the bulk of postal workers behind them are saying this is not what they want. They want a wage in retirement, which is what they were always promised by being in a pension not a savings scheme. They can now point to a strongly worded report by the Financial Conduct Authority which claims that many people in similar circumstances to postal workers are making a mess of their pension freedoms, for want of advice and distrust of the pension system.

The politics are polarising between a traditionalist position and a more modern one. Royal Mail will argue that they are on the side of the modern calls for personal financial empowerment while the Members point out that they aren’t up to managing their own wage in retirement – with evidence from the FCA.

How does this get resolved?

A traditional route to resolution of this kind of dispute would be to bring both sides together and hammer out a compromise. Unfortunately this requires wriggle-room of which there is uncomfortably little.

I understand that the CWU and its membership would like to take further risk off the Royal Mail’s table by abandoning the few guarantees that are in their proposal. But to do this , they would have to use regulations that while promised, are yet to be drafted let alone published. The delay in drafting and publication is as a result of a change of Government in 2015 and change of Ministerial outlook.

As for Royal Mail, they may feel they have already compromised by guaranteeing the lump sum and improving its generosity from its initial offer. So long as they are adamant that they can take no further risk, they will be unable to move much beyond their current position. What is clear is that offering a bigger cash sum is not the answer the Union and members are looking for.

Nobody wants a strike, nobody wants the share price of Royal Mail to continue to plummet and nobody wants to see nearly 140,000 postal workers feeling insecure about their retirement.

My blogs on this subject highlight (at least to me), that positions on pensions are currently polarised and that we are deeply divided about how we should invest, value liabilities, what responsibility members should take on themselves and to what extent a pension promise means paying a wage for life.

Personally I would like to see this dispute catch the public imagination so that we can have the proper debate on risk-sharing that we’ve been needing to have for a few years now. But for that to happen, we need to have a bit more listening and co-operation!

I’m not close enough to the dispute to know the detailed rights and wrongs but I’m quite sure  – knowing the advisers involved – that careful and constructive negotiation is better than posturing and that this dispute will best be resolved with a smile.


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

Postmen want to strike – is it any wonder?

postman sad

Maybe it’s because they’ve been reading the FCA’s report on Retirement Outcomes. Maybe the FCA have been talking with them. Either way, the 140,000 postal workers in the Royal Mail scheme don’t want a pension when they pack up their postbags, they want a pension.

Or as they eloquently put it, they want a “retirement wage”.

Yesterday I asked the Pension Regulator’s panel if they really stood for pensions or whether they championed retirement saving or financial wellness in later life or just “pension freedom”. I got a robust and very feisty answer from Nicola Parish. She was old school, she stood up for pensions.

In which case, I rather hope that she will be rooting for the CWU and their members in their conversation with Royal Mail and get behind its proposals, handily laid out here by my colleague, Hilary Salt of  First Actuarial.

Is it so unreasonable that the postal workers should want to receive more pension for each year they work with the Post Office.  That was and is the deal they sign up to. There is nothing in postmen’s contracts about “drawing down investments”, “buying annuities” or “cashing out”. The promise is for a wage in retirement commensurate with the time worked and the amount earned.

Are you watching FCA?

In case you hadn’t noticed, the FCA have been digging at the pensions industry for not coming up with innovative solutions. They may feel miffed that the CWU solution does not involve robots, dashboards or digital tools. They may feel sorry that the CWU is reinvigorating an old idea, using pension language to explain matters and adopting an investment strategy which is very simple.

This innovative approach is as close as a defined benefit scheme can get to being a defined contribution. It could only get closer if it was a CDC scheme, which it would have been had the Government not abandoned the secondary legislation for such arrangements a few months after enacting the primary rules.

The only reason that this proposal is not more innovative is because the Government has slammed the door in the face of the innovation that would have allayed the fears of  Royal Mail and their uber-cautious actuarial advisers.

But it is quite innovative enough. The proposal has been stress-tested and it survived the punishment it was put through. The assets are designed to meet the liabilities and not the other way round. The liabilities can be flexed so that the contribution rate remains steady (in line with the current funding rate from the Royal Mail).

FCA, you should read, understand and wonder that such innovation can exist in such parched a landscape. You could help – so could the DWP and tPR and the accounting standards board. We should not be valuing the liabilities of such a proposal against a corporate bond discount rate (for FRS102 purposes). We should not be requiring the pension to be guaranteed. We should allow members to have property rights even when the pension is in payment.

These are the very things that would have been allowed had we had CDC rules in place, instead of them gathering dust in a DWP filing cabinet.

Postmen are fed up – we all are

The FT is fed up, we are fed up, the FCA is fed up  , the CWU is fed up and the postmen are fed up.

Digital tools are not enough – dashboards are not enough, we do not need robots to tell us how to manage our investment drawdown and we don’t need a big pile of cash on deposit

The 140,000 postal workers in the Royal Mail scheme don’t want a saving scheme that just provides a lump sum when they pack up their postbags, they want a pension.


Posted in advice gap, pensions | Tagged , , , | 1 Comment

Innovative pensions for the mass of us!

In its Retirement Outcome Review (interim report), the FCA were clear on  evidence of a problem


The blame lies not with thick consumers but with lack of competition

If competition is not working effectively and consumers make uninformed retirement income decisions this could lead to different types of harm, such as:

  1. paying more in charges and/or tax
  2. choosing unsuitable investment strategies
  3. missing out on valuable benefits (eg employer pension contributions) or investment growth
  4. running out of pensions savings sooner than expected

We will carry out further work to assess the harm these emerging issues may cause.

In the full report, the FCA point out that

Stakeholders identified several barriers to innovation, including the pace of political change, lack of demand from consumers for new innovative products, overall consumer inertia and lack of engagement and small pot sizes of the current cohort of retirees

The FCA issue a threat to the private market

If the market fails to deliver innovative products for mass market consumers, there may be scope for NEST to fill an important gap.

NEST have published their own blue print, which while limited in scope, offers the mass market who cannot afford advisory fees to drawdown or the limitations of a guaranteed annuity – an alternative. You can read the details in section 14 (NEST blueprint)

The relevance of collective solutions

Until recently, a collective occupational pension was accessible only to employers. However, recent legislation (PO/08) has meant that individuals can choose to invest in master-trusts (if the master trust allows), independently of their employer.

What the FCA and NEST have in mind, is for individuals who have built up a retirement pot (rather than a “DB” right to a pension) to transfer that money into NEST for NEST to pay what amounts to a scheme pension to that person.

Personally I find NEST’s blue-print a little unambitious, it does not employ the kind of collective pooling which it could, but it does embrace many of the principles of Collective Defined Contribution Schemes (CDC) , that could counter the market problems outlined by the FCA.

NEST is structurally no different from any other master-trust, if NEST can take such money, so can the 70 odd master trusts currently being used for DC purposes in the UK.

Is the NEST Blue-Print fit for purpose?

The difference between what NEST is offering in its Blue-print, and what defined benefits offer seems small but is massively important. A defined benefit scheme is managed to provide a pension ( a regular series of payments) till the death of the pensioner (or sometimes a surviving spouse/partner).

Occupational schemes can offer to pay till death because they pool the risks so that people who die sooner subsidise those who die later. This is life insurance in reverse.

NEST cannot currently offer its own pooling and therefore proposes to rely on the annuity market to offer individual annuity products to those getting to advanced years. This creates a cliff-edge which is likely to be seen as a bad thing by ordinary people used to being looked after by seamless products like the state pension and occupational DB schemes.

Even if NEST was to implement its Blue-Print, I don’t think the proposals to annuitize at a set age (say 75) would meet with popular approval.

Why doesn’t NEST just offer scheme pensions like DB schemes?

The DB occupational pension scheme offers certain guarantees, most importantly the guaranteed that there will always be enough money in the great big pot , to pay all the pensions. Traditionally, occupational schemes have had to have a sponsor willing to top up that pot in the case of it not being big-enough to meet the guarantees.

But recently, a new type of collective pension has emerged that aims to be self-sufficient of future funding. Such a pension relies either on an initial injection of cash (BHS2, British Steel Pension Scheme 2) or income from a business it takes over (Kodak) or from pre-funding by the rest of occupational schemes (PPF). Another model is being put forward by the CWU to the Royal Mail which scales down the guarantees of a DB scheme till the sponsor can almost see it like a DC scheme.

All of these models will provide people with scheme pensions (the kind of pensions that last as long as you do but are paid from the central pot rather than by an insurance company as an annuity.

What’s stopping NEST from joining in?

Here is the problem NEST and other occupational DC plans currently have in providing the kind of scheme pension that people want (a pension for life).

As soon as a DC pension promises to pay a pension for life, it becomes a DB pension. NEST cannot be a DB pension nor can NOW or Peoples Pension or Blue Sky or any of the others.

The only way they can take on this kind of obligation is by dropping the guarantees and by moving to a “best endeavours” approach. This would be possible if legislation ,enacted in the Pensions Act 2015, was completed in its detail.

But in 2015, this detailed drafting work was stopped because the Government did not see the need for a new kind of third-way pension scheme. DB might be dead, but employers would not commit to a non-guaranteed version – for fear that at a later date, they became on the hook for promises made on a best-endeavours basis.

This line of reasoning was flawed. It was not employers that the DWP should have been talking to, it was employees and even the self-employed. Infact all the people who are struggling now to know what to do with their pension pots.

These people would benefit from NEST or any of its rivals paying scheme pensions without guarantees. It is precisely the system under which defined benefit pensions were established in the fifties to the late 1980s.  People paid into pensions with the hope of getting their pension paid in full but without the guarantees that were introduced from 1987 onwards.

Can people stand any degree of uncertainty?

We have yet to test the market on this question. Currently people are given a binary choice between certainty (annuity) and uncertainty (drawdown of various kinds).

The non-guaranteed scheme pension provides a higher level of certainty than drawdown but a lower level than annuity. It depends on mortality pooling (the principle that those who die sooner subsidise those who die later), it depends on actuarial prudence and it depends on increased efficiency from pooled investments and pooled administration.

It should not be dependent on capital markets (hedge funds, derivatives and other exotics), scheme pensions should be payable through a clear mechanism which has transparency throughout. Money invested should be transparently invested, the funding position of the great big pot should be totally clear and there should be clear rules about exiting the arrangement so that people who wanted to transfer away, knew in advance how they would be treated.

This kind of scheme can be arranged quite easily on paper, but it cannot currently be put into place, because the secondary regulations, which began to be drafted in 2015, have yet to be completed. I’ve spoken to the people who started the job and they reckon there is two to three years of work left to be done.

Next steps

I nearly typed “NEST steps”,

The FCA are worried there is no innovation, there is no real innovation in the mass market because there is no regulatory space in which to innovate.

In the short-term, master trusts  like BlueSky and Salvus are already offering the NEST Blue-Print through Alliance Bernstein’s Retirement Bridge product. The FCA could see innovation at work. But these products  are still  not offering what people really need which is a scheme pension payable for life (without guarantees on how much).

The FCA need to test whether people will accept more pension ( than an annuity will give) for less certainty. They need to do their market research not on companies but on people.

If they find that people are prepared to give up some certainty (particularly about guaranteed pension increases but also about the fundamental floor of income from the scheme pension), then they should allow products to be built to meet this demand.

This will mean allowing the products to be developed in lock-step with the regulation, so we have a reasonable chance of delivering scheme pensions to the mass market in the early part of the next decade.

If we do not do this work now, then we will continue to come up with partial unsatisfactory solutions which don’t provide people with a real alternative to drawdown or annuities (being a combination of both).

I urge Big Government – as the Pensions Regulator, the FCA, the DWP and the Treasury to take these next steps , resume work on the Defined Ambition regulations, consult with the occupational master trusts and most importantly , start the work of managing expectations of what people can expect in the complicated risk/reward trade offs explored in this blog.

Posted in advice gap, auto-enrolment, DWP, pensions | Tagged , , , , , , , | 3 Comments

This market failure’s not about advice but product.

target pensions

Target Pensions – we need them now


The FCA paper on structural problems with the pension freedoms that I wrote about yesterday, is the first evidence of Government admitting all in this garden is not rosy.

What has happened since 2015 is an increase in people hammering poor pots for cash usually unadvisedly and sometimes foolishly. This is not where there’s a market failure. Most small pots can be drawn down in a few stages to give the over 55s a well earned bonus as they come to the end of their working lives. This may not be prudent, but nobody says you have to be prudent. It may not be sensible to take your money from a tax-free investment account and put it in a (potentially) taxed deposit account, but nor is that disastrous. What happens to the victims of pension scams – that’s disastrous.

If all that had happened since 2015 was the reallocation of  minor savings from pensions into bank accounts then I could be as sanguine as Steve Webb – on this morning’s Wake Up to Money.

What about the £50bn flow from DB Schemes?

The vast majority of the £50bn Mercer estimated has been unlocked from “frozen” DB plans has come as CETVs well in excess of £30,000 and has been advised upon.

This is not money that individuals have saved, it is money that has been accrued by trustees and appears as a windfall to most ordinary people. The cost of unlocking this money is typically the cost of advice. Advisers have found ways of mitigating the cost by deferring the bill so that it can be paid out of the proceeds of the transfer. This is known as conditional charging and has three advantages.

  1. It takes away the need to charge VAT (@20%)
  2. It bundles the cost into an annual management charge rendering it painless
  3. It ensures that the proceeds of the transfer provide annuity income to the adviser

Unsurprisingly, conditional pricing is hugely popular with advisers and clients. It has fuelled the transfer boom. Advice- for those with the money in their pension pots, need not be an obstacle and can be a great help in future planning.

But here’s the problem

Those who have built up these huge DB CETVs have seldom read the scheme accounts. If they had they would see that the costs of investment management , actuarial ,investment and legal advice, custodianship and administration are met by the scheme.

When you take your CETV, these costs do not go away, they are transferred to you. What is more, where the scheme can get economies of scale by pooling these costs – you can’t. You have to pay the majority of these fees as an individual.

This shift of management costs from group to individual is part of the price of freedom. If you are paying 1% pa of your CETV of £1m to an advisor, you are paying £10,000 pa. If you pay a platform fee of 0.6% for fund administration, you are paying another £6,000pa. If you are paying 1% in annual management charges for the investment of your money, that’s another £10,000pa. If you are paying another 1% in transaction costs within the fund(s) in which you are invested, that’s another £10,000pa.

It is not unusual for the total cost of ownership of an advised Discretionary Fund Management contract to exceed 3%pa of funds under management. On a £1m transfer, that’s £30,000 + that you are paying in fees. You can scale up or down depending on the size of your transfer, my point is that these are fees that you would not have paid if you had stayed put in your DB plan and these fees, whether directly charged or wrapped up in the product, eat into the value of your plan.

This is what the FCA are most worried about. They are most worried that in a low-growth investment environment, a 3%pa cost of ownership could reduce a gross return on investment by as much as 50%, that’s either an immediate pension income cut or it’s storing up problems for future years.

The problem that the FCA are most worried about is that much of the £50bn that’s come out of DB plans since the granting of the freedoms, is under management that is so expensive it is almost bound to cause problems in five, ten or fifteen years time.

Should advisers be accountable for the outcomes of their advice?

The simplest answer to the question “should I transfer” is “no”, not unless you have confidence that you can invest the money to provide a better income than that promised by your pension scheme.

But it’s no longer as simple as that. Firstly, the inflated transfer values caused by low interest rates and by schemes de-risking into bond-based strategies, makes it a “no-brainer” for most people to say

“yes we can do better than the critical yield you are showing me”.

But can they do better than the critical yield + 3% ?

Do they have, what pension schemes have, which is a way of pooling risks so they can manage payments without disinvestment – when times are tough?

Can individuals pool mortality risk to protect themselves against out-living their and their adviser’s cash flow projections?

These and many other similar questions are what any adviser should be worrying about. Because the FCA are becoming increasingly explicit that unless advisers are taking into account these risks in their recommendations – and unless it can be made clear that those taking CETVs are aware of and comfortable with these risks, then there is residual risk on the adviser if things don’t work out.

Advisers are increasingly accountable for the decision people take, which is why so many outsourced agencies that provide the basis for that advice are being asked to cease trading.

The problem is not with the advice but with the product

There is of course an element of scale in the transfer itself. The £1m CETV may merit a discount on some fees bringing that 3% down to 2% or less. I can see a point where an advised DFM approach makes a lot of sense.

But like the FCA, I worry that these expensive drawdown solutions are being marketed to people who do not fully understand the cost, nor are willing to pay it – over time.

I mean those people who have £50,000 + in their pension pots – either through saving or through CETV .

These people do not have the means to be considered wealthy, but they are being sold wealth management.

The use of wealth management is as inappropriate as the use of an annuity. Most people unlocking money from DB schemes or investing their lifetime pension savings need something different.

They need something like the DB scheme they left, but with property rights (the right to take money out in emergency), they need higher income than offered by an annuity and they need to take some risk to get all this.

We are failing to provide people with this product.

Ironically, the only financial product on the market which comes close to doing what the ordinary person wants it to do , is the Prudential with-profits fund. This is fast becoming the stand-out option for advisers keen to offload the risks associated with wealth management gone wrong.

The Prudential With Profits fund is not the ideal product but it is closer to the ideal product than much else.

Infact it is a kind of proto-type for a product that should have been rolled out later this year, had the DWP’s then minister not canned the Defined Ambition project initiated by her predecessor.

The FCA lament the failure of the financial services industry to develop an affordable drawdown solution for the mass market, but how could it?

I drew the attention of anyone who’d listen to the folly of canning DA and in particular the rules that would have allowed us to provide the equivalent of scheme pensions from collective drawdown schemes (CDC).

Now, exactly as predicted, we have the need for mass market drawdown arrangements which do as CDC schemes do, providing certain income streams, mortality protection at a low-low cost. But we do not have the product.

Those of us who continue to campaign for the revival of the DC legislation being drafted till the summer of 2015 by the DWP, need to shout again for that project to be restarted.

We cannot wait till the current problem becomes a crisis. We have to have a mass market answer that recognises that CETVs will continue to be taken, that DC savings will be much greater and that neither wealth management or annuitisation properly takes the strain. We need a third way product that builds on with-profits but betters it.

There is no time to waste, we need new and better product now!

target pensions

We need a better pension product now

Posted in advice gap, CDC, pensions | Tagged , , , , , , , | 5 Comments