I received an interesting update earlier today on a fringe meeting at the Conservative Party Conference on ‘Can Pensions Save the Planet?’ One of the people talking was Caroline Escott from Railpen, covering some of the important work Railpen has been doing recently on ESG. The event was organised by the PLSA and featured the Minister Guy Opperman and backbench MP Gareth Davies.
Gareth Davies is a former Investment Manager for Columbia Threadneedle. During his speech he suggested that we should find ways of allowing pension funds to take on more risk so they could invest more in illiquid assets. The Minister later “endorsed utterly” Davies’ comments on risk as “one of the defining things going forward.” In answer to a later question, the Minister said: “Putting it bluntly, the Government has to make it easier for pension funds to take more risks.”
These are clearly interesting statements, contrasting with what TPR is doing in their Funding Code consultation (and the government’s explicit support for allowing the regulator to set that direction of travel).
Indeed, Nigel Peaple from the PLSA picked up on this with his closing remarks saying,
“They (TPR) are in the middle of reviewing the DB Funding Code and that has a very big influence on defined benefit pension schemes and the way they invest their assets. It’s very important that the Regulator considers where it will land early next year on this and that it does allow risk to be taken in an appropriate manner, by which I mean more risk… they are not closing down on risk as they are tending to want to treat open and closed schemes in the same way.”
I think it’s great that the PLSA has picked up this message, although sadly the Minister didn’t have a chance to reply directly.
We now expect we’ll be getting the draft Code of Practice from TPR early next year, perhaps around the end of Q1. Will be interesting to see if TPR was listening!
The R at that time was running at around 2.75, the Oxford report opened its results section with the statement
“Our overall approach rests on the assumption that only a very small proportion of the population is at risk of hospitalisable illness. This proportion is itself only a fraction of the risk groups already well described in the literature, including the elderly and those carrying critical comorbidities (e.g. asthma).”
It was to counter this chaotic thinking that the Covid-19 actuaries were formed. Throughout the early months of lockdown, Stuart, Nicola, Matt , Matthew and a growing band were prepared to explain the data and explain where science and politicians were taking decisions with little or no evidence. Assumptions such as those above, were called out as just that – “assumptions”.
Failures of science and government
Whether it was my doctor or my friends in actuarial circles, there was enough evidence for many of the decisions taken at the time to have been challenged.
The decisions to abandon testing at the beginning of lockdown, the clear out of elderly patients into nursing homes, the failure to follow South Korea and other Asian countries who had experience of recent pandemics is now being publicized. But these mistakes were being pointed out at the time by experts who could see the issues through data. Nicola Oliver’s early paper on mask-wearing – published by the actuaries – changed the way I behaved in the company of others. But it took the UK Government many months to catch up. We continued to see press conferences given by unmasked politicians and scientists, many months after publication.
Looking back with gratitude
I often run along the Thames path beside the Covid Wall, the hearts are already beginning to fade and memories of those early months could fade as well. I remember Stuart’s impassioned cry that “excess deaths” were personal tragedies, not the fatalistic lethargy of “they would have died anyway” a phrase we heard too often.
I look back in gratitude at Stuart’s humanism and his passionately held belief in the right of people to live for as long as we can help them to live. The abandonment of those in nursing homes remains a shocking episode on which Stuart’s tweets stood out. Ros Altmann and Debora Price campaigned to put a stop to putting a sell-by date on older people.
The Government we deserve
We voted in a Government in 2019 which was woefully prepared to fight a pandemic. For this, previous Governments are also responsible. But at the time and again today, the evidence was clear that we should not have been going to Edinburgh, Anfield and Cheltenham. I should have listened to the consultant and to Stuart and not to Boris Johnson and Chris Witty.
We ran extreme risks, there was an outbreak of Covid in the building adjacent to our conference hall the week we were in Edinburgh. Aegon shut down their offices on the last day of the conference, we travelled home in a steel tube without a second thought. This was a conspicuous failure of ours , a failure that was repeated for weeks around the country.
Now we see more evidence of this gung-ho fatalism in the Government’s reaction to the financial pressures mounting on the poorest people in society which will only get worse as the weather gets colder and the benefits smaller.
At some point we will need to put our hands in our pockets, if we are not to see more social injustice. I hope that this report will solicit some contrition from those living in Downing Street, but to date I have seen no evidence that that will be the case.
We get the Government that we deserve? Those who have no voice, do not deserve to be abandoned again.
Con Keating has sent me this post, in reply to Edi Truell’s recent linked in post on his recent blog “Safe as Houses”.
I no longer subscribe to Linked-In (I find its security appalling) but I have been told that Eddie Truell posted the following comment on this blog cross-posted there.
“Thank you – an interesting read. Particularly interested in residential housing as an asset class.
However, Con ignores political risk where left wing governments impose rent controls every other generation ( when they have forgotten the pernicious effect ).
I do take issue with his canard that Private Equity can be replicated by leveraging small cap equities. Totally ignores the long series data sets that show that PE has far better Risk adjusted returns. A diversified PE portfolio demonstrates real Alpha and resilience.”
I did not mention rent controls though they dominated the UK residential rental market throughout my student and early career years. Indeed, they are quite common in both state and municipal form in overseas markets to this day. They are also not solely the domain of left-wing governments – though concerns with social or subsidised housing do tend to be. Clearly this would have had to have been considered extensively (and no doubt expensively) by the various institutions proposing to enter the rental market at scale. These institutions will also tend alter the nature of the UK private rental market which is dominated by small scale landlords – they may even go far in closing the inefficiency gap between gross and net rental returns, which at around 30% -35% are far larger than their European equivalents where institutional ownership is far higher. Institutional landlords are also through their lobbying power likely to lower the possibility of rent controls being imposed. I have not come across any explicit form of regulation of rent to buy – a somewhat convoluted case can be made that they are a form of hire-purchase and clearly these contracts are subject to oversight by the FCA and the principle of treating customers fairly. It does seem likely that private landlords will attract the attentions of HMT and new taxes imposed – perhaps alongside variation of the treatment of carried interest in private equity / venture capital.
My principal reason for not mentioning the possibility of rent controls was that these contracts can easily be recharacterized as partial purchases rather than rentals.
The point left/right division is less obvious in policy terms. Home ownership is supported by all parties in the UK. The population at large is in favour of building more houses and this is evident regardless of gender or political leanings, just not in my back yard. It may surprise but polling also finds that the population would like to see lower house prices, but again presumably not mine. I was absent overseas for the majority of the last great decline in houses in 1990 -1994 but discussion of negative equity and impoverished over-mortgaged house buyers were a staple of both tabloids and broadsheets and reached overseas.
We are currently at something of a turning point in Conservative housing policy – the build 300,000 units annually has been quietly dropped. Brown-fill rather than green-fill is now the planning requirement. The once mooted relaxations of planning procedures are not happening. Now the irony of this about-turn is that the ‘academic’ cover for it, such as it is, is a paper produced by Ian Mulheirn, who is Chief Economist of Renewing the Centre at the Tony Blair Institute for Global Change. This paper “Tackling the UK housing crisis: is supply the answer?” challenges the consensus that the problem is one of supply.
Moving to the question of private equity performance, my earliest discussion of this took place in 1980 in the bar of the Intercontinental Hotel in New York and when I left NYC for London in 1984 my P.A. joined one the major PE houses and made a very substantial fortune before retiring. For the purpose at hand I reviewed as many publications as I could find – going back as far as the late 1980s – and I spoke with a number of their authors. The results were mixed – the trade and sponsor literature was boosterish and universally positive – the academic publications shifted emphasis over the decades growing increasingly sceptical. The quality and rigour of these studies has increased over time – problems such as the conceptual value of assets held, liquidity and the proportion of committed funds deployed have been largely (but not completely) overcome. I would recommend reading the publications of the Private Equity Institute at Oxford’s Said Business School and the work of Ludovic Phallipou in particular.
There have been periods when PE has produced strong performance – this appears to have driven the development of the market is its early days – but there have also been sustained periods of underperformance. The business model of the PE managers could, unkindly, be described as heads I win, tails you lose. With this in mind I decided to do my own analysis – a process which took over a year – that work led to my conclusion that I could reproduce market average performance using leveraged listed small cap – which of course would carry a massive cost advantage.
I was also concerned by the present state of the PE market – dry powder is at an all-time high and the prices now being paid appear to be at a premium to listed equity of the order of 70%. This does not make for an attractive vintage. I wonder and worry about the development of ‘continuation funds’.
I will end by saying that I have been impressed by the power of the PE lobby – notably over performance fees for DC and DB funds, but also in other areas such as the LTAF.
Tyson Fury is Britain’s outstanding sporting superstar.
But he is unloved by the sporting establishment and held at arms length by the politicians and business people only too pleased to be associated with cut icons of tennis, rugby, cricket and the various amateur sports that feature in Olympic and Commonwealth games. We don’t like Tyson and he doesn’t much like us.
He refused to be a part of sports personality of the year last year and I doubt he will this. He is not the stuff of brands, he represents a way of life that has not been assimilated into our new “lifestyle”. I wasn’t able to watch the fight, but I followed it on the text updates on BBC sport and the feeds from twitter.
I’ve read the books and I’ve watched the programs about Tyson, he fascinates me, as do his family and his friends. The racism against the Romany people that exists in Britain is one of the ugliest surviving examples of Britain in the 20th century. There should be no quarrel between the Romany people and non Romany any more than there should be with other cultures.
But that is not the case, they continue to be treated with disrespect and expected to behave criminally. Tyson Fury can and should change that. He is a great person who stands up for boxing, Lancashire, his culture, his family and most of all himself. He is a big man, a top dog , he is champion of the world and I hope will eventually become undisputed champion. But right now that is not important.
What is important is that this great man uses his greatness for good and that will not happen if he remains at odds with organizations such as the BBC. It is time we worked out that though he is British, he is different and that he and Romany culture need to be allowed to remain different. We cannot expect Fury to play nicely, he is not “nice” in the way that Emma Radacanu and Joe Root are nice.
The alternative is that Fury loses interest and purpose which may mean him diving into the self-destructiveness vortex that , had it not been for boxing, would have undoubtedly destroyed him. If I met the man today, I would not know what to say – I don’t box, have never been to Morecambe and know nothing of the gipsy life.
But I would try to show him the respect he deserves. Fury now has to do something with himself and I suspect he will not find enough in boxing to contain him. He is a leader and he is respected as the Gypsy King, let’s hope that we can take him to our hearts and with him, the Romany people.
This piece by Con Keating was first published in Professional Pensions
In early 2020, in order to explore the potential for Collective Defined Contribution (CDC) pensions, I began an extensive project to investigate the investment performance of the major asset classes, products and investment strategies. This has involved wading through a quagmire of marketing hype, greenwashing, and outright misrepresentation. The Competition and Markets Authority’s new strictures on greenwashing seem overdue.
It appears that many commonly held attributes (and marketing staples) of these portfolios do not bear close scrutiny – for example, private equity is replicable as highly-leveraged small-cap listed equity at far lower management cost. Environmental, Social and Governance (ESG) outperformance, such as it is, is entirely explained by the huge recent inflows of capital into these products, which has driven up their price and speculative content.
Investment performance consistency or persistence is problematic. Past performance is no guide with respect to strong performers, but it is a good guide among the poor performers. The best do not remain the best, but the poorest do tend to remain the poorest. Why or how these dogs can continue to exist is a challenge for believers in efficient markets.
On average, passive management outperforms active, though the marketing departments of the active asset managers are quick to promote their ‘stars’ based on a few years success. As the life span of CDC schemes can be expected to far exceed the working lifetime of a ‘star’, these active funds really have no place. Their use would be speculation, not investment.
Measures of Speculation
Of course, speculation is always present to some degree or other in any financial market and it affects the returns realised over a period. This is obscured in standard performance analysis by the focus on total return and benchmarking, as it is present in both.
Fortunately, there is a simple measure of the degree to which speculation has increased or decreased; it is the return due to revaluation over the period under consideration[i]. Following the work of John Woods (New exercises in decomposition analysis[ii]), we may decompose the total real return[iii] into its components: Income Yield, Income Growth and the Revaluation Effect. Table 1 reproduces the calculations by Woods of the ten-year average total real return and its revaluation component for selected dates.
Table 1: Ten-year average real returns at selected dates
Source: J. E. Woods (2020)
This decomposition carries information about the decade past and may be used to inform estimates of the period ahead, but most importantly it indicates current value. For example: the revaluation effect for UK equities was maximal in the year 2000 at the height of the Dot.Com bubble, when it accounted for 9.4% of the 12.2% total real return realised. This was indicating a highly valued market. By contrast in the decade to 2008, the revaluation effect was at its nadir at -5.7% and the total realised real return -1.4%. Here, the market could be considered cheap. These are wild variations of the revaluation effect, speculative boom and bust, which has typically been in the range 0.1% – 0.2%.
By contrast, the revaluation effect for conventional gilts has been relatively tame reflecting, in large part only, the decline in interest rates over the past forty years.
However, this is not true of index-linked gilts. Since 2006, the revaluation effect for index-linked gilts has climbed inexorably, reaching 13.3% in 2018 and dwarfing the overall total real return of 4.6%. Of course, this has been the period in which UK DB pension schemes have been the dominant, apparently price-insensitive, buyer of index-linked gilts – they now account for over 80% of the stock outstanding. The level of speculative interest in index-linked gilts is currently far greater than the speculative interest in equities was at the height of the Dot.com bubble.
With speculative interest this high, it seems wise for CDC trustees to look for other instruments which may provide inflation protection, particularly so given the uncertainty over the path of inflation post-pandemic. However, with nominal conventional yields close to all-time lows, there is little incentive for CPI/RPI linked debt issuance by the corporate sector, even for those whose revenues are CPI-linked.
The one sector of the UK financial system that is large enough to generate inflation-related returns on the scale needed for private pension savings is residential housing. The ONS reported that net property wealth was £5.1 trillion of total aggregate wealth of £14.6 trillion – and private pensions wealth was £6.1 trillion.
Demand for new housing in England is conservatively estimated to increase at some 340,000 dwellings annually until 2031[iv] and production has never reached these levels (243,770 dwellings were built between April 2019 and March 2020). The housing shortfall is estimated as an eye-watering 3.9 million dwellings. The decisions by John Lewis and Lloyds Bank to build large portfolios of rental properties are welcome – but, totalling a mere 60,000 units, these will not make much impression.
The result has been completely predictable. Figure 1 shows the Land Registry house price index from 1990 together with the retail price and consumer price indices. The figure also shows fitted exponential trend lines for house prices and the consumer price index (and the descriptive statistics for these). House prices have increased at almost twice the rate of consumer price inflation (0.41 versus 0.21) since 1990. This implies that structures which share house price gains between tenant and investor should be viable. It should be borne in mind that house prices, though rising faster, are approximately three times as volatile as consumer prices.
Figure 1 also throws light on the highly contentious decision by government to switch the basis, in 2030, of index-linked gilts from RPI to CPI. RPI has produced 123.7% of the returns of CPI over the period since 1990 – an annual loss of 73 basis points.
Just over 4.4 million households live in the private rented sector in England, ie 19% of all households. By comparison, 17% (4.0 million) live in the social rented sector and 65% (15.4 million) are owner occupiers. The number and proportion of private rented households has declined from 20% (4.7 million) in the period 2016 to 2017.
Younger private renters are more likely than older private renters to expect to own a home in the future. More than three quarters of private renters aged 16 to 24 (78%) and those aged 25 to 34 (77%) say they expect to buy a home in the future[v]. These groups account for 41% of all private renters. The expectation to buy tapers off in older age cohorts – just under two thirds of those aged 35 to 44 (65%), two fifths of those aged 45 to 64 (41%) and just over a tenth of those aged 65 to 74 (12%) eventually expect to buy.
Figure 1: House Prices and Consumer and Retail Price Indices
These aspirations suggest strongly that rent-to-buy based investment structures would serve a considerable social purpose, and be attractive to younger cohorts, provided, of course, that they could be created on commercially attractive investment terms.
The essential elements of rent-to-buy are inflation-linked rents and the sharing of house price performance, with many variations in the detail of those terms being possible. While rent-to-buy schemes have been known since at least the early 1980s, they have until recently been small scale, ad-hoc arrangements. However, in August, the new Allianz-Wayhome partnership, combining their financial and property expertise, began buying properties and writing rent-to-buy contracts on an institutional scale. The investment structure is a limited partnership, which has institutional support from several pension funds. The expected returns of this partnership fund are estimated, conservatively, to be of the order of 5% pa nominal.
The reception has been good from both investors and aspiring homeowners:
Conrad Holmboe, CIO at Wayhome commented:
“We wanted to prove that having a positive societal impact doesn’t have to come at the cost of lower returns or higher risk. Being responsible isn’t an opportunity cost. Home-ownership is no longer a pipe dream for aspiring home-owners, including key workers, such as teachers and NHS staff.”
Jason Allan of Allianz Global Investors added:
“Pension schemes have been impressed by the genuine innovation and that this provides access to the residential market efficiently at scale.”
Doubtless, with success evident, many competitors will spring up and, with that, a new capital market, with financial and social purpose embedded within its DNA, will emerge.
[i] There are nuances to the speculation interpretation – see Woods op. cit.
[ii] J. E. Woods (2020) New exercises in decomposition analysis, Journal of Post Keynesian Economics, 43:1, 36-60
[iii] The figures quoted in this article are all rolling real ten-year geometric returns.
[iv] See Heriot Watt University in Commons Briefing Paper 07671, Tackling the undersupply of housing in England, January 2021
[v] English Housing Survey, Private Rented Sector, 2019 – 2020
Back in the early noughties, Watsons had a powerful team of thinkers who had cottoned on to the problems of moving from DB to DC pensions. The insurance and investment teams came up with an idea they called the “unit linked annuity” which , while never quite getting off the drawing board, always seemed a good idea.
The idea was that, where people wanted their pension to be paid based on market returns, rather than the rate deemed by their insurance company, they could float their pension payments, getting a pension that was set each year based on what a unit-linked pension fund had achieved in the year(s) before.
And if enough people were buying into this, the pool of people could self insure their life expectancy meaning that older people would get paid out for longer and people who died younger, could pass on some or all of their pension to their spouses.
The idea was a little ahead of its time but it just about lives on in obscure corridors of the actuarial establishment. You can still see it advertised on the Association of British Insurers website
A unitised annuity is a type of investment-linked annuity where the retirement income paid to you is linked to the performance of units in investment funds. Your retirement income may vary depending on how the investments rise and fall.
I’ve long been surprised that we are prepared to save for our retirement using funds that rise and fall but when we get there, suddenly need a guarantee on the income we receive. Morten Nilsson, then CEO at Now Pensions and now CEO of BT pensions told me back in 2014 that he couldn’t understand why retirement income was the one type of pay that could never go down. He’s right, who’s ever heard of a pensions pay-cut?
The possibility of a pension pay-cut is neatly sidestepped by the wealth management industry who now talk of retirement planning in terms of tax management, wealth preservation and estate planning. The idea of income drawdown is not to pay an income for life but to form part of a holistic retirement plan that does a whole lot more than pay the bills. I get it, this is right for the mass affluent who have the means to both plan for the next generation and pay the advisory fees.
Pension Draw-Down risks people taking more than a pay-cut, it risks people losing their pension income altogether, that’s like losing your job when there are no jobs to go to.
But drawdown caters for an elite section of society who need not fear this risk. For the affluent, pensions are an additional source of wealth while for most people, they’re the wage in retirement. Estimates vary, but no more than 20% of people in retirement have access to a financial adviser and rather less properly use the financial planning services they offer.
Most wealth management drawdown programs end up being set and go with little but the lightest touch on the tiller. Whether they can survive the vicissitudes of 30-40 years at sea on the markets is open to question, but the point is there are lifeboats for the wealthy that means a pension sinking doesn’t matter (so much).
But for the less affluent, the buoyancy of their pension matters a lot
I often think that many income drawdown plans would be better managed collectively as a unit-linked annuity. Perhaps some of the larger SIPP providers will consider this in future but I see no sign of collective solutions in retirement establishing themselves soon in wealth management.
The rest of this article looks at how those with pension savings might find a way to find a retirement solution that offers them buoyancy and a decent income to boot,
Q- Super and the Australian experiment with unit linked annuities
In Australia, where DC wealth is a matter for most households to consider, the issues are more advanced. According to Brnic Van Wik, the problem for Australians in Q-Super, the pension scheme for which he manages assets and liabilities, is working out how much of their pension pot to spend. Many of his members end up less than they could and die rich live poor, others run out of money because they draw too hard on their funds but they are in the minority.
Q-Super has come up with a default plan for the people their members who find it too hard to manage their own affairs. They call it their Lifetime Pension product
Guess what! It’s that old idea dreamt up by Mike Wadsworth and his team (including a young David Harris) that people can collectively insure each other against living too long and pay each other an income for life based on market rates – the investment linked (or unit linked) annuity.
As a sidenote -the only element of external insurance in Brnic’s plan is a guarantee that every estate will get back the price they paid for the annuity (the capital less income already paid to the prematurely deceased). This is insured by a whole of life plan taken out by Q-super , the premium for which is paid from the general return. Apparently this was introduced because of feedback from clients who claimed that Q-Super stood to gain from people dying too soon. I’m not sure that this is needed and a rival to Q-Super – Challenger Super – is setting up a similar arrangement without the guarantee.
Is this CDC?
If you listen to Brnic, and I urge you to do so, you may well ask yourself, what is the difference between the Q-Super retirement solution and what we are beginning to talk about as “decumulation only CDC”. Well apart from the very clumsy title we give DOCDC, not very much. If you think of the Challenger Super variant, nothing at all.
I described it when Brnic was talking live as CDC without the actuaries which was stupid of me because Brnic is an actuary and so was the host , NOW Pension’s Stefan Lundbergh. But the marketing point is that Q Super seem to be marketing their retirement solution without the actuarial guff that bogs down most of the debate
As Stefan puts it in a recent post, lamenting the complexity and over-ambition of Dutch CDC plans,
We learn from our own mistakes, but it is much faster and cheaper to learn from other peoples’ mistakes. The Dutch journey is a priceless lesson for anyone interested in Complicated DC, since they researched every facet of CDC and, as a consequence, took important steps towards a more robust version of it. The conclusion? CDC is not the silver bullet that will solve the UK’s pension issues, but it does offer attractive components for draw-down solutions. Perhaps it is time for the legislator to explore the possibility for UK master trusts to develop pay-out alternatives that include pooling of individual longevity but without capital guarantees?
I would drink to that, and so would Brnic and his competitors in Aussie Super-land.
The dark evidence of the failure of UK retirement planning is in the FCA’s retirement income market data which shows that most people are not even beginning to turn their pension pots into pensions. Further evidence can be found in our large mature DC occupational pension schemes, many of which have large numbers of people in them who have completed their lifecycle and who sit in bonds and cash neither spending their savings or investing them.
I will be writing to the Pensions Minister who tells us he is off to talk to the master trusts, and I will be sending him the link to Brnic’s talk, because the Q-super solution is a solution that could be adapted and adopted in the UK as CDC 2.0.
The Prime Minister, Boris Johnson, and Chancellor, Rishi Sunak recently issued a challenge to UK institutional investors, calling for us “To seize this moment, we need an Investment Big Bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery.”
They seem to have noticed that the ONS estimated UK private pensions wealth, in March 2018, at £6.1 trillion of a wealth total of £14.63 trillion, greater even than property. However, what they don’t seem to have noticed is that it is already invested. So, the first question: who is going to buy the assets these institutional investors would need to sell?
As is to be expected, there is the not-so-veiled threat in the challenge letter: “The Government is doing everything possible – short of mandating more investment in these areas as some have advocated – …” If nothing else, these politicians understand the electoral consequences of that putative action.
The explicit challenge is:
“Whether you are a trustee or manager of a DC or DB pension fund, running an insurance company or advising investors on their investment strategy, we are challenging you this summer to begin to invest more in long-term UK assets, giving pension savers access to better returns(emphasis added) and enabling them to see their funds support an innovative, healthier, greener future for their country.”
Of course, seeing an innovative, healthier, greener future is irrelevant to the discharge of my fiduciary duties. So, the second question: if these investments are going to yield such attractive outcomes, surely, we should finance them with gilts and reap the rewards as a nation? A subsidiary and trivial question: when will you publish the analysis supporting this better returns assertion?
The Pensions Regulator has relaxed its 20% quota for illiquid investments to accommodate this agenda. It is notable, though, that they have not scrapped their proposed DB funding code with its objective of low dependency on the corporate sponsor, run-off and wind-up.
They seem not to have noticed one of the principal effects of quantitative easing had been to lower the price of liquidity to record lows levels – one consequence of which has been that the investment banks now maintain far lower inventories of debt securities than previously. Buying long-dated debt securities at today’s inflated prices will prove extremely costly should normal times return to those fool enough to do it.
There are other worrying statements, such as:
“We are reviewing the prudential regulatory regime for the insurance sector (Solvency II), …”
Playing fast and loose with insurance security is not a good idea. It is bad enough that increased issuance of long-dated illiquid securities will permit even more ‘matching adjustment’ magical accounting and capitalisation.
I am afraid that Boris Johnson’s statements (lies) about the economic consequences of Brexit leave me unable to trust his word or even adherence to treaty obligations. Good faith has been replaced by the politically expedient. The challenge contains the now compulsory reference to “levelling-up”, but I attended Boris Johnson’s much-trailed “important” speech in Coventry on that. It was devoid of any substance, an empty catch-phrase – the sole idea that local authorities are to be given greater responsibility but no funding for fear of “loony left” councils.
And then there is the small matter of index-linked gilts, where government has or will be unilaterally change the basis of indexation to my material disadvantage.
“Our Ministers and officials will be in touch during the coming weeks … to invite those institutional investors who are willing to make specific commitments to invest more (emphasis added) in Britain’s long-term growth to join us at an Investment Summit in Downing Street in October.”
Welcome to the corridors of corruption.
My response to this challenge is to decline. I will continue to exercise my fiduciary duty seeking the best investments for my scheme membership wherever they may arise. And of course, I will not and cannot in the exercise of those obligations buy “green gilts” at a premium to conventionals.
My answer to that question is simple. We don’t need convincing within our pension world that we need to find the £20bn+ of DC pension pots that have gone missing. But we need to convince the public that there are things they can do to find their lost pots and organise their later life financial affairs better. We need the support of Paul and Martin Lewis, the Sun , Mirror, Mail and the Star. Well done to the Daily Express which has already run a peice last month.
We need this campaign to feature on broadcast news and it needs to trend on social media. We need our household names to talk of it, our Ros Altmanns, our Tom McPhails and our Pension Minister.
Of course we were supposed to have a pension finding service as the flagship of our pension dashboards. We know that when we get these dashboards they will be able to search for our pensions like Google searches for keywords. That is the future.
But every year, 700,000 members of the UK public start spending their pension savings and most do so without proper information of what they’ve saved and what their entitlements are. But people do remember where they have worked and generally remember the point of sale for the private pensions they started (with a cheque and a direct debit). What has happened since is that they have moved house, rendering the primary correspondence address redundant, forgotten to inform their pension provider of their new address, found that their pension provider no longer trades under its old name, discover their old company is no longer trading under its old name and given up on ever finding their pension rights again. That is not a good user journey – infact it’s rubbish.
But we are all identifiable and so are our pension pots and if we can persevere and follow a simple plan to its end, we can find the pots of our youth which are hopefully now pots of our later age with quite some money in them. The prize is usually worth it. Alan Morahan told me of someone involved with the campaign who uncovered £23,000 owing to him from a pot he’d forgotten about.
Tracing should not be contingent on consolidation
Importantly, the National Pension Tracing Agency campaign is not being linked to pension consolidation, it is simply helping people find their pensions. In my experience, most people simply to feel they need to know what they’ve got before taking next steps and too much tracing has been linked to commercial activity – not all of it – proper.
My personal experience of finding and valuing my pension rights was so awful that I decided to set up AgeWage as a result. We will be using the learnings we get from this campaign to help our users to find pensions and value them, independently of any conversation about consolidation. Consolidation is a separate subject , tracing should not be contingent on consolidation
What can you do?
Get in touch with Alan Morahan or drop me a line for an introduction (email@example.com). If you are a journalist and want to run a story on this, then now is the time. If you are in PR and want to help with spreading the word, now is the time.
If you are interested in contributing money towards the campaign and becoming a named or un named sponsor, get in touch with the teamnow.
Today, the Prime Minister is going to urge Britain to go back to work. He’s been saying much the same since June. People don’t seem to paying him much notice. I thought to write a little about how I feel, living and working in the City of London but finding my home and workplace changed utterly – and not wholly for the better.
There is a loneliness about my work days that is beginning to trouble me. My partner works for the Lloyds Banking Group and tells me that the return to work is sporadic. She cannot sit with her team because most of them don’t want to come to London and in any case, there are no allocated desks in London, she says she is lonely, even though she goes into an office.
We have been like this this for well over a year and a half and in that time I have seen the City of London prepare for a return to work – now. But it isn’t happening. The City as a financial centre is still empty, especially on Mondays and Fridays, which appear to have been excluded from the new 3 day week.
Meanwhile we continue to mass socialise, I will be watching Nick Cave in the Albert Hall tonight, along with a couple of thousand ageing acolytes (and my son). These are the same people who find going to work – too much. After an empty conference which included a keynote speech from the Pensions Minister, Professional Pensions found the evening awards ceremony packed.
A common complaint in our household is that the people who claim to be frightened of the office , didn’t seem frightened to get on planes from crowded airport terminals over the summer.
There is a frustration growing – especially among those who want to go to work, that they are as lonely in the office as they are at home. With wages shooting up and job mobility on the increase, many of us wonder whether we will ever be working for the teams we locked down from.
I want my team back, I want my office back, my productivity is declining and my morale is sapping as the nights draw in. And as the nights draw in , the City of London becomes a playground for skateboarders, tourists, clubbers and serious drinkers. Without the work, the City is increasingly becoming a kind of financial theme park full of gawpers booked into what were once business hotels but now act as crash pads for anyone with money and time.
Money and time seem in ready supply , judging by custom in City bars and the drinks being bought. Rounds of cocktails regularly cost over £100 according to my waitress friend in Madisons. Sabines, the roof bar above what was the Grange (now Leonardos) has queues every night of the week, the smell of Blackfriars is no longer cigars, it’s weed. When I go to the gym, I queue for my towel behind the London Grime scene. Bling and the latest Galaxies in hand, they head for the jacuzzi the gym is empty,
This seems a metaphor for the City. It’s all glitz and glamour, not hard work. When I run around along the Thamea at lunchtime, the offices are empty.
In the evening there are service workers in to clean up but the bins are never full, the kitchens hardly used.
I know that we are more productive by not commuting, but the City itself is un-productive, I imagine Canary Wharf is the same. The City of London reported the sharpest fall in property prices of anywhere in the United Kingdom, we are a ghost City!
This morning, my partner returns, after decamping to the seaside for a couple of weeks. She doesn’t see the point of her workplace but cannot stop going in. I am not wanting to require my team to commute as I don’t see the point for them of dragging them to me. We are all working remotely, but it’s not remotely working. We need to find a fix for work as ironically , we are bored of play.
The latest statement of intent by the FCA to improve value for money in workplace pensions arrived yesterday as Policy Statement 21/12. This is not a discussion paper but new rules which came into force yesterday and the not so snappy title is not crying out for the document to be read.
Assessing value for money in workplace pension schemes and pathway investments: requirements for IGCs and GAAs
But this policy statement is important, not least for formally creating a new concept in UK pensions “the employer scheme”. Until yesterday, the COBS rulebook did not define the section of an HMRC approved personal pension scheme as relating to an employer. Now we have the concept of the employer pension arrangement
“employer pension arrangements” means an arrangement where eligibility for membership of that arrangement or section is limited to the employees of a specified employer or employers.
Providers of GPPs (and Master Trusts) have for many years, recognised that employers can negotiate their own terms in relation to the charges and the funds made available to their employees and former employees who do not transfer away their rights.
But this has never been formally recognised by the FCA, so when the FCA in its value for money paper CP20/9 suggested that IGCs disclose charges at employer level, some IGCs pushed back, saying there was no legal entity on which to report. Well now there is.
The 18 months since the publication of the FCA’s major Value for Money Consultation have been a testy time for relations with the IGCs who are aware that publishing the charges levied by their provider as the FCA would wish them to, would leave their providers open to negotiation with employers who found their employees paying too much.
The FCA has agreed that as an alternative to IGCs reporting on employer specific charges, they can report by cohort, effectively anonymizing employers. I support this relaxation as it still gives employers a starting point in working out what they are paying relative to their size. Underwriting is on a good deal more than “members in a scheme” but this gives employers a start.
The chart above is the very effective disclosure from Aegon in this year’s IGC report. Employers can begin negotiations by establishing which band they fall into and whether they qualify for the lower charges (by dint of the scheme being used for auto-enrolment). This is precisely what the FCA was asking for.
The other important new definition introduced in this paper is the “scheme comparator”
“scheme comparators” means other pension arrangements (that are not provided by the firm) …and which:
(a) are individual employer pension arrangements; or
(b) are cohorts of similar employer pension arrangements;
IGCs will , in their 2022 reports , need to compare the employer pension arrangements with those of other GPP providers and with the option of participating in a master trust. The FCA has dropped its reference to Nest as a scheme comparator, recognizing that Nest’s charges are established by the state and come with a Government subsidy by way of a long term loan from the DWP.
IGCs will have to challenge their providers where they discover charges out of line with the market and if necessary, report a negative response from the provider to the employer.
This Policy Statement makes it clear that it wishes comparisons to be made not just on charges but on “value for money”, a concept that it is jointly working on with the Pensions Regulator. Last month TPR and FCA produced a Discussion Paper on how to define and measure value for money with the emphasis being on “performance and quality of service” as the measures of value and costs and charges being the measures of “money”. That paper explicitly calls on the pensions industry to come up with a standard for quality of service and invites discussion on how performance is best measured.
It should be noted that the value for money of an employer pension arrangement, can vary not just by its costs and charges but by the default investment option (and accompanying funds). Where employer specific defaults are in place, I hope that IGCs will look to provide a more specific measure of value based on the experienced performance of scheme members.
This discussion paper also informs on the guidance that the DWP has produced to help small occupational defined contribution schemes assess whether they are giving value to members or whether better value could be found by consolidating into a master trust. To a degree, the nudge the IGC gives to the employer could be to “look elsewhere” in just this way. It is however a lot harder to consolidate a GPP than an occupational pension scheme. GPPs need member consent to move assets – not the case with occupational schemes.
What does this mean for the consumer?
Savers do not read IGC reports and sadly not many employers seem to either. Partly this is down to their subject matter being dry and partly because the reports have rarely given consumers or employers the opportunity to improve the value they get from the money invested.
The new rules in this document are designed to make future reports more interesting and more useful. By introducing the idea of “employer pension arrangements” and “scheme comparators”, the FCA is changing the question from “does your workplace pension offer value for money” to “how does your workplace pension’s VFM compare with others?”.
By recognising that VFM is not binary but relative the FCA is making the IGC’s task relevant. Which is why this Policy Statement matters for the consumer. The FCA has found a way past a simple comparison of costs and charges to a point where the IGCs (and GAAs) will be helping decision makers make informed choices on their and their staff’s behalf.
Extending the scope of VFM comparisons to investment pathways
The paper also touches on legacy – non workplace – pensions (which it decides it will look at later) and the new “pathways” which are the investment options people can take when they are moving from saving to spending their savings. These pathways have only been in place since February and are only offered where advice isn’t available (SJP for instance do not offer investment pathways on their SIPP).
Theoretically, pathways are very important but early indications are that they are not being followed by many of the people for whom they are designed. Most people are ignoring the pathways as they are ignoring Pension Wise and stripping their pensions of whatever tax free cash is on offer while leaving the rest of the money for later.
There are big problems looming here, not least because much of the money that is sitting in the pots of the over 60s has been de-risked and is not getting returns from the market (as it would in the relevant pathway). As yet, the FCA has not acknowledged the issues with take-up of pathways but I suspect that this will become a major bone of contention over the next few years with questions being asked of IGCs and providers as to why pathways are not better used.
The FCA want pathways to be compared so we have another new concept
“pathway investment comparators” means other pathway investments (that are not provided by the firm) selected by an IGC
Unlike the misguided pathway comparison site published by MaPS, the FCA is wanting the pathway comparisons to be on a VFM basis, not just a comparison of costs and charges. This is absolutely right, but since the pathways are new, IGCs will argue that there is no investment performance to compare.
The starting date for the comparison of investment pathways could be argued to be the point at which pension freedoms were granted to those saving into workplace pensions (April 2015) or even earlier – if you were rich enough to be able to drawdown under pre 2015 rules.
We now have a large data set – collected by the FCA as part of its retirement income study which could allow IGCs and their providers to model what has been going on with those over 55 and how behaviors are changing over time.
I suspect that the most important questions that need to be answered by IGCs are
To what extent are savers taking guidance and separately advice on how they spend their workplace pensions?
What does guidance and advice do to the behavior of these savers?
How popular are the pathways offered by my provider?
What can the IGC do to improve take-up of pathways by relevant policyholders?
How good are the pathways of our provider, measured by value for money?
My suspicion is that we are only touching the surface of the problem people have converting pots to pensions and that measuring the VFM of individual pathways is less relevant than answering questions one to four.
When we come to assessing the value for money of drawdown, the quality of service issues change as the employer no longer features as the primary interface ; the provider is now dealing with the policyholder directly. Service issues will focus around withdrawals not contributions and the execution of instructions. If guidance is to play a part in the quality of service, it must focus on alerting spenders to their capacity to self-harm. I hope that those offering guidance will feel they can promote the pathways without this being deemed advice and that they can suggest that following pathways will be like ski-ing on the piste, it won’t stop you falling over, but it will save you from falling over a cliff.
The FCA are now coming to the end of their journey helping employers to identify value for money. But – when it comes to the use of IGCs to oversee the conversion of pots to pensions, they are still at an early stage.