Are our train companies accountable – South West Trains?

new and lovely from the south 012

I look out of my window at a South West Trains 8 coacher to London Waterloo. I am 25 miles from that station and to get there I need to pay £10.10. ]

The train is well known to me, it has graffiti inside the carriages, the wi-fi doesn’t work, it has no carpets, no tables  and most importantly it has no toilets.

The last point is important as this train takes 93 minutes to get back to London. That’s an average speedThat  of around 15mph, about 60% of the speed of Stephenson’s rocket.

Normally you can expect two of these trains an hour, but today we only have one an hour. I know because I asked whether I could pay half the fare for half the service! You can imagine the response.

If you ask the train company why it takes 93 minutes to travel a distance of 25 miles, you will get a response – “planned track improvements”.  These track improvements have gone on for four years and have (at least) two years to go.

But track improvements don’t explain toilet-less trains, or 93 minute train times, or the hopeless customer service which has drivers and guards explaining that you’ll have to complain to something called “customer services”.

If you spend enough time and energy, you might get a £5 or even a £10 voucher from customer services.  But you won’t get an improvement in service and you won’t get an apology.

That’s because South West Trains and their compatriots at Southern have got beyond caring what the customer thinks. Frankly, they know they will get the money from the franchise without having to deliver a service to customers.

Coming down from London, there were frequent exhortations from pre-recorded messages on the tannoy, to keep the carriage clean. The passengers were behaving impeccably but i noticed some older people sitting cross-legged.

I noticed a few frustrated passenger trying to use South West train wi-fi and I hear a few comments about the disgusting graffiti we had to see whichever wall of the carriage we looked at.

Let’s be clear – the customer has to come first

It’s not just South West Trains, it’s all the local London commuter networks. They are so used to over-crowded trains that they think treating the customer unfairly is part of the game.

It isn’t.

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The Prudential’s 2017 IGC Chair report


The Prudential’s Lawrence Churchill has published the Prudential IGC’s Chair Statement (the first of the crop).

You can read it here

Last year, I reviewed this Statement and gave it the thumbs up, I’m going to give it a thumbs up again this year. Very sensibly, the IGC is focussing on member outcomes and not on marketing flim-flam. Churchill congratulates  himself for setting his benchmark return at CPI +3% (noting that this is the same return as adopted by NEST – where he was previously Chair). I thought this a good benchmark last year though I am not sure adopting the NEST benchmark gets Lawrence his knighthood!

What the Prudential should now be doing is asking how much risk it took in getting the 20%+ return achieved by most of its benchmarks and asking how much extra return was lost from poor execution of transactions. Right now we know that the Prudential’s fund were in the right place at the right time but was this luck or judgement?

I will give the Prudential an amber score for their work on value for money; they cannot be blamed for having no measure to report on, but some published analysis on risk adjusted performance would have been welcome.

Tough on exit penalties (tough on the causes of penalties)

Lawrence cut his teeth with Hambro Life and Allied Dunbar so knows his way around charges and where they come from. The work the IGC has done for members is exemplary. Here is the summary;pru 1

The section contains a number of case studies showing just how much money has been saved for those picked out. I know Pru charges and these savings are vivid and real.

If this round of IGC chair statements shows such consistent improvements for policyholders with legacy charges, then the IGCs will have done a find job. I am giving the Pru a big green for the steps they have taken and the IGC a big green for getting them to take them!

I enjoy the humour of Churchill’s introduction to the IGC report which asks readers if they have the appetite to read more. He should not be so bashful, the report’s tone is clear and precise, it does not patronise nor does it flinch from criticising the parent (for instance on the communication of benefits to members).

I do wish the Prudential would give the IGC more prominence on its website. The report can be found by inoputting IGC into the search box but it could and should be given a more prominent position. I made this criticism last year and I’m making it again. But as with last year , I give the report a green for the way it engages with its members.

It is a shame that the Prudential have withdrawn from the workplace pension market (at least for new business). As with Royal Sun Alliance we can say “that they were likely, had they been put on- to have proved most royally”.

If I have a comment on the Chair’s report, it is that it fails to deal with the Prudential’s post retirement strategies for members of their schemes. Frankly we aren’t too impressed with the pricing of the in retirement drawdown portfolios we have analysed and remain unconvinced that Prudential are doing the right thing for existing members.

I’d suggest that Lawrence Churchill adds this to the wish-list for the IGC in 2017!

man from pru

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“So what’s the problem?” Con Keating on the PLSA’s consolidation paper.


a case for consolidation



The PLSA paper “The case for consolidation” begs an important question; one far broader than it addresses. The Pensions Regulator and DWP have concluded that DB pensions do not suffer from a problem of systemic risk, but the PLSA Taskforce Chair, Ashok Gupta, while agreeing with this, goes further and is concerned by the cuts to benefits imposed by the PPF on members of schemes.

This is the epitome of the school of belief that DB pension funds exist to pay pensions in full and on time. The precise origins of this self-sufficiency concept are difficult to determine. It is not a consequence of any of the reams of new pension and trust regulation introduced since the Maxwell affair in the early 1990s. This is now a commonly held view and finds expression in many ways in different places. This is scarcely surprising when the Pensions Regulator actively promotes the view. It is seductive view, clothed in benevolent intention; though in the case of the Regulator it may be no more than pursuit of its statutory objective to protect the Pension Protection Fund.

Its origins are shrouded in the mists of time, but the earliest express articulation of it appears to be a 1986/87 Institute of Actuaries paper[1]by McLeish and Stewart: ‘Objectives and Methods of Funding Defined Benefit Pension Schemes’.

However, this paper is a very weak foundation; merely a simple assertion, lacking any supporting evidence or even argument. Following recognition that the employer may cease to exist, the authors, McLeish and Stewart, assert:

It seems to us to follow, therefore, that the prime purpose of funding an occupational scheme must be to secure the accrued benefits, whatever they might be, in the event of the sponsor being unable or unwilling to pay at some time in the future.

If this had been the view and intent of Parliament, then surely the legislation would have made it a statutory requirement in one or other of the myriad of pension acts. Indeed, such an obligation, enacted in law, would have rendered the creation of the Pension Protection Fund entirely redundant.

This view is a reaction to the possibility of sponsor insolvency, and the desire to ensure due performance of this particular class of corporate liability. Obviously, elimination of the possibility of corporate insolvency is not a desirable objective; this is Schumpeter’s creative destruction at work. The problems of ‘zombie’ companies and the resulting misallocations of capital are well known.

Insolvency is a problem faced by all holders of claims on a company, not just pension scheme members. When rescue and recovery are not viable, the solution is immediate liquidation of the accrued claim to date. In addition to the triggering corporate deficiency, the costs of liquidation will usually mean that creditors receive only a fraction of their claim. For this reason, many debt claims are secured on assets which are not available generally to creditors; the pension trust is such a security arrangement with assets ring-fenced for the benefit of members.

The amount of a claim, and equivalently the security warranted, is based upon the performance due from origination of the claim to the date of commencement of insolvency protection. In the case of a conventional bond, it is the sum advanced plus any accrued but unpaid coupons; in the case of a zero-coupon bond, the amount advanced and the accrual on that to date, at the rate promised under the terms of the original contract. In the absence of over-riding legislation, there is no reason for DB pension claims to be treated differently, and many good arguments, based upon the legal concept of equity, why there should not be any such over-riding legislation.

There is no promise, implicit or otherwise, that the amount receivable would be sufficient to buy a replacement security offering equivalent terms, no matter whether the claim was secured or not. There is a separate issue as to whether this situation is satisfactory from a public policy standpoint, particularly given the importance of DB pensions in the wealth and wellbeing of so many individuals.

The US municipal bond market had long had many individual investors holding its securities. Issuer insolvencies and reorganisations prompted concerns for retail investor wellbeing. The solution introduced was insurance of performance of the obligations embodied in the bonds; payment of coupons and principal, fully, when due – technically, the exercise of a right of subrogation[2].

The most elementary point is that performance of an obligation after the insolvency of an obligor, a form of corporate death, requires there to be some third-party institution with the resources to undertake this. Two obvious institutional forms are available: the pension fund itself and independent insurance companies. Both remove the occupational linkage of DB pensions.

Insurance is by far the more efficient form of solution to the problem. It exists in a number of other jurisdictions. We should note, though, that the Pension Protection Fund is a mutual compensation scheme, not an insurer, and that it reduces member benefits. Indeed, it is this reduction that motivates the PLSA “consolidation” paper.

Funding in order to make a scheme self-sufficient, to be able to continue as stand-alone entity which exists to pay the pensions, is expensive. The cost of full buy-out gives an indication of just how expensive. Of course, a stand-alone survivor scheme would not need quite as much funding as buy-out, since it would not have to provide for a profit margin, or other costs such as marketing expenditures, or have the restrictions on investments faced by an insurance company. But it would need the majority of that excess cost.

Funding to stand-alone levels also creates a further issue. If the scheme is funded to, say, the 99.5% probability level, members are extremely secure. Indeed, in 99.5% of outcomes it would have excessive funding, creating a problem of ‘orphan’ assets, which are rightly the property of unsatisfied creditors and perhaps even former shareholders of the sponsor company. The amount may be very substantial indeed, many billions of pounds; on average, it would be equal to the difference between the buy-out level and the best estimate value of liabilities. Restitution of these assets to their rightful owners, twenty, forty or more years after the liquidation is simply not feasible.

Funding to stand-alone levels can also be expected to raise the cost of debt and other capital for the sponsor company, since it lowers the strength of the sponsor balance sheet. Section 75 values, inflation of the proper claim, are also problematic in this regard.

There are further issues in a stand-alone situation – the solvency constraint is binding, deficits would require the scheme to liquidate. This introduces a degree of short-termism into investment policy and practice not present in the corporate-supported arrangement; markedly so when the accounting and regulation are ‘market-consistent’.

[1] Journal of the Institute of Actuaries 114 (1987)

[2] It is interesting to note that the problems of the municipal bond insurers which arose during the financial crisis were not rooted in their municipal bond insurance exposure written in this (subrogation) way but rather in the extension of their activities into financial guarantee more broadly. One of the principles on which the guarantee market operates is that the insurer pays the claim as a lump sum immediately on notification of the trigger event, and any disputes are resolved later.


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Why we are all regulators

scams aware

A regulator is generally a device that maintains a designated characteristic in a system. In a financial sense, it ensures that the rules that govern our dealings are understood, maintained and enforced.

We have regulation because we value a system and want it maintained. If we did not, we would have a different law, a law of the jungle. To make sure that a financial system is maintained, we set up compliant controls and processes to ensure we are playing by the rules and we contribute to the more general rule setting through consultations and feedback.

I had the chance to give some feedback to the Pensions Regulator last week as it looks to understand how well small pension schemes are regulating themselves.

In another context, I wrote yesterday about how two characteristics of our pension system (Pension Freedoms and DB schemes) are under threat from poor behaviours from a recently formed Swiss Consultancy.


There is a self-governing mechanism in most industries which manifests itself in its institutes, livery companies and formal regulators. More recently we have had the phenomenon of social media which has allowed ordinary practitioners (workers) to say it as  they see it. This informal journalism will get picked up by formal journalists and filter up to those in Government.

Indeed progressive journalists now take the temperature of their readers by republishing tweets and other social media posts, and by soliciting polls on topical issues, the results of which are available within hours.

This process can register approval of a system that works or (more generally) disapproval where a designated characteristic of a system has broken down. In as much as we all have access to social media, we are all able to provide the informal feedback that shapes our regulation. We are all regulators.

We cannot abolish fraud

The “us” and “them” aspect of regulation which I grew up (Spaghetti Westerns, Z-Cars, Crown Court) emphasised that law-enforcement was something that happened formally and was best left to experts.

Formal compliance departments reinforce this. Money laundering regulations are strong against “tipping-off”,  where whistles are blown in public.

I feel uncomfortable about this professionalization of regulation , but can quite understand why it happens. The cops and robbers view of regulation requires the baddies to be caught with their trousers down.

But this assumes that there are a finite number of baddies and that a campaign against them, such as the Pension Regulator’s Scorpion Campaign, can be won. Sadly, we are no more likely to eliminate financial fraud than we are to win the war on terror. The best we can hope for is that we protect our borders and make sure our bit of the system is fraud-free.

We can only dis-place bad practice.

The majority of fraud committed on our pension system originates from outside our national boundaries. Boiler-room scandals have for decades used the phone to sell penny-shares from continental havens. The web merely expands the geographical spread of their activities, it is as easy to be scammed from Phuket or Moscow.

Certain countries, which have a reputation for secrecy and low taxation, are particularly prone to financial crime;  Switzerland , Monaco and other tax-havens have the added glamour from the foot-print of the super-rich.

But as Christopher Lean commented yesterday, a legitimate manufacturer can exploit regulatory loopholes to legally distribute a toxic product where 1+1 = <2.

Of concern to me, apart from the obvious points raised in the article, is that there will be a SIPP firm that is facilitating this “lifeline” to the one-trick pony QROPS firms, masquerading as IFAs. Rest assured, some bright sparks will be looking at how to exploit any loopholes after the Budget.

To publish or report

There is a small body of people, most prominent Angie Brooks who are doing their best to rid expats of the threat of pension liberation fraud. This is how Angie publicises the problem on linked in

There is only one thing to say about pension liberation fraud: it is wicked. Dishonest, fraudulent and nothing that any true professional financial adviser would ever consider getting involved in. The victims lose their income in retirement and end up with crippling tax liabilities. Pension trustees in the UK have got to wise up and help stamp this scourge out – because currently they are still handing over innocent victims’ pensions without due diligence.

Angie is fighting a personal battle, but she has many followers and she can count me among her fans.

I do not think that the Pensions Regulator are such fans as they see her as a vigilante. But the scope of tPR is limited and even with the co-operation of other regulators, the capacity to act against fraudsters operating outside our national boundaries is limited.

Angie disrupts the fraudsters by bringing them to our attention, the circle of fraudsters who are behind the scamming is small , the wider group of advisers who are living out the pre-RDR dream of smashing commission targets , are for the most part doing themselves no favours. As always , they are lining the pockets of the owners.

Angie’s focus is on the victims – and protecting them. Whether tPR likes it or not, she is more trouble to the scammers than the UK authorities can be. Without her Trustees and ordinary members with UK rights might never know. Her website Pension Life, is an invaluable resource – as this Scamogram from a couple of years back demonstrates.Scamogram-Oct-2016.jpg




We are all regulators

The traditional societal view of cops on one side and robbers on the other, assumes that we sit in the middle, passively accepting that “shit happens” and when it did, it is someone else’s job to clear it up.

But that is not enough. Angie Brooks, Christopher Lean and others should be embraced as part of the solution and not ostracised.  (and Anglie – you might have to stop referring to  A-WT as  Tinky-Winky!)

Not only are we all regulators, but we must work with those we pay to educate us and protect us. Angie needs enforcement as much as tPR needs her intelligence.

Publicity is critical, though Action Fraud would like hegemony over information, the issue is about flows of capital out of the UK pension system into overseas arrangements today!

We are all regulators.


Angie Brooks

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FEAR+FRAUD. Does Geneva= Gibraltar? Are SIPPs the new QROPS?


This bog is about fear and how it can be used by the unscrupulous to frighten them into putting their retirement at risk. The unscrupulous fear-monger is the self-appointed UKPension Guru (Clive Skane-Davis) of Swiss Global Consulting; you can see his CV at

Any resemblance to the other Pension Guru (Steve Bee) is entirely intentional, Skane-Davis’ tactics are to mimic and pervert honest endeavour for self-serving intent.

Plausibility assured.

The targets of this intent are expatriate Brits moving to Switzerland with pension rights in the UK. Here is the pitch

UK PensionGuru is for anyone living outside the UK that still has pensions in UK schemes, especially those with ‘frozen’ Final Salary pensions.

If you question this, you can find out more

Pension funds in the UK are in major trouble as the promises made cannot be met and upheld. Out of 5,945 schemes 84% are in deficit and the average deficit is over 20%. That means that the scheme can only actually afford to pay you 80% of what it has promised. Unfortunately, in ‘buy-out’ terms (a straight forward assets verses liabilities calculation) funding of UK schemes is only 62% of liabilities!

Clicking the link gives us a “quote” from the PPF Chair Alan Rubebstein (sic)Slow speed car crash

Or should I say Alan Rubenstein, who made these two statements to the Daily Telegraph last year;—now-it-pays-just-17500/

A litany of half-truths

What follows is UK PensionGuru’s answers to the expat’s frequently asked questions, answers littered with half truths culminating in the triumphant unveiling of UK PensionGuru’s four UK Pension myths.

Myth 1. Final Salary/Defined Benefit pensions are guaranteed

“The only real guarantee with Final Salary Schemes is that they will go bust”

Myth 2. The Government PPF (Pension Protection Fund) will bail the scheme out if there is a problem

“There is no ‘Government Fund’, it doesn’t exist, and the worst part is that the PPF is itself in deficit. So now the Lifeboat is sinking as well”.

Myth 3. A QROPS is the best vehicle for everyone living abroad

“there are other cost effective options to consider”

Myth 4. My Final Salary/Defined Benefit pension MUST pay me the benefits I am due!

People are finding out the truth every day and suffering drastically reduced pensions when it is too late to correct matters

UK PensionGuru is making these outrageous statements from the comfort of his offices in Geneva. But the worrying thing is that he is  extending arguments being put forward by pension gurus in the UK.

If you promote (as tPR/PPF/JLT/PWC regularly do) funding deficits based on a buy-out or gilts plus discount rate, you give ammunition to UK PensionGuru. This crass perversion of this scare-mongering is  (in part) down to irresponsible reporting of deficits. Indeed UK PensionGuru delights in quoting such authorities as his source.

The reporting of the PPF7800 and other collective deficit numbers without proper context is feeding the fraudsters with the bad-news stories they delight in!

Careless talk costs pensions

The allegation that the lifeboat is itself sinking is ludicrous and unsupported. The Daily Telegraph article “My company pension paid £70,000 , now it pays £17,500” contains many quotes from Alan Rubenstein, which in the context of the article are fuel to UK PensionGuru’s fire.

I am surprised that the Telegraph continue to host the article as it is neither balanced nor helpful. Those few executives whose pensions are reduced when their schemes enter the PPF are to be balanced by the hundreds of thousands of pensioners being paid by the PPF with great security at or around the promise of their defined benefit. And weighed against the vast majority of UK pensioners, deferred pensioners and those actively accruing defined benefits who will be paid their benefits in full.

So what of the solution (s)?

Clearly QROPS is no longer a catch all. UK PensionsGuru has two weapons of pension destruction- QROPS and SIPPs. Many of his expatriates will no longer be able to access a QROPS so- as he rightly points out – they may need to get tot he QROPS through another route. The SIPP becomes an  escape tunnel from which the QROPS may be launched later.

This is a complication brought about by HMRC reducing the numbers of recognised QROPS and by the budget’s 25% exit tax on transfers to most QROPS from UK pension arrangements (you can get the details by contacting UK PensionGuru)

Myth 3 suggests that the expatriate financial adviser is already finding ways round the rules, though whether such loopholes will stand the test of time is doubtful. Beware tax-avoidance measures, tax evasion is never far away.

Is the SIPP, the new QROPS?

Thanks to Chris Lean fro bringing my attention to the drivers behind this check out this advert on QROPS adviser zone

Highlights are mine

QROPS have become a lifeline for many companies and they have provided many financial advisors with a substantial income stream by offering a much sought after service that clients actually want.

QROPS transfers are, however, labour intensive and can often take many months to complete.

There is an alternative product that can provide a solution for both the client and the adviser.

A UK SIPP will provide some of the features that a QROPS would have provided such as consolidation of pension schemes, flexibility of benefits and greater access to investment products.

The transfer into a SIPP is invariably processed via the UK ORIGO system and more often than not this reduces considerably the transfer time from the ceding scheme to the SIPP.

Our SIPP is available to non-UK advisers and can provide a similar commission based revenue model to that which advisers have been used to within QROPS.

As Christopher comments “what could possibly go wrong?”.

Pension freedoms await

If you want a flavour of the nirvana awaiting you if you get as far as liberating your UK pensions, take a look at this lnfographic which appears on UK PensionGuru’s website.

Swiss global 1

If it looks too good to be true – it almost certainly is.

And what of Swiss Global Consultants?

It is registered as an adviser by the Swiss Financial Markets Supervisory Authority.

The business is managed and owned by Jonathan Berrar, and  Paul Kavanagh and has 61 people associated with it on Linked In. Most appear to be expat Brits with little experience in UK regulated financial services

A quick search on SGC’s offices suggests that they are in a building advertised as .

The business was set up in 2016 and incorporates Swiss Global Trustees and Swiss Global Holdings. With only 20,000SF as nominal capital, make your own mind up.

Further reading





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The CWU pension proposals – your questions answered.

royal baby

Yesterday’s article got a lot of interest and a number of people have asked for the technical details behind the CWU’s headlines; but first the headlines!

  • All 130,000 Royal Mail staff could have access to DB accrual going forward

  • Members would be entitled to lower core guaranteed benefits

  • Additional benefits, beyond statutory minima would be conditional on fund performance

  • The statement of investment principles would be set firmly to “growth”, the fund would invest in equities.

  • The scheme would be set up under a new trust and would not impact on the existing DB and DC schemes (other than the loss of future contributions).

Is this a CDC scheme?

The proposal for the Royal Mail developed with the CWU is for a new scheme for future accrual which incorporates as many elements of defined ambition (or CDC)  as are possible within the current legislative framework.

The scheme aims to provide a basic level of benefits on a CARE basis. There are is no guaranteed revaluation on these benefits but the scheme has a target to pay full RPI revaluation if funds allow.

The position is payment is similar with only statutory increases guaranteed but full RPI targeted.

There are other risk reducing measures such as a pension age moving with State Pension Age.

The exact way in which the scheme would be treated for PPF and accounting purposes would depend on the detailed legal framework but the significant margin between target and guaranteed benefits means that many of the problems with traditional defined benefit schemes are avoided.

There are two key components necessary to make the scheme work:

  1. members need to accept and understand that they may receive less than the targeted benefits,
  2. and the investment strategy, set in a clear Statement of Investment Principles needs to commit the scheme to significant investment in growth assets.

In extreme situations, the scheme does contract into a low level DB arrangement – within the current legal framework, it is not possible for it to contract into pure DC.

So there is a small residual risk with the employer. For members, modelling indicates that worst case outcomes over the last 20 years (that is no benefit increases) would result in benefits better than a DC scheme with similar contributions used to buy an annuity at retirement.

The CWU believe that a key requirement of any pension arrangement is that it provides a predictable and meaningful income in retirement – this principle informed their working name for the scheme – the Wage in Retirement Scheme – with the necessary pensions acronym



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Pensions Resurgent! The merit of the CWU’s proposals to the Royal Mail


For the third day I am returning to the CWU’s proposals to the Royal Mail which I now consider the most important break through in pension scheme design we have seen in Britain this century. I base this on three arguments

Argument one

This is a bottom-up proposal that arrives at the doorstep of one of our biggest employers (the Royal Mail employs 130,000 posties). It has been forged by a Union looking for a way out of a bind created by unfortunate (not malicious) decision-making by employer and trustee. It is delivered at a time of deadlock in negotiations over the future pension promise which could lead to industrial strife. The provenance of this proposal is unimpeachable.

Argument two

This proposal is made without need for any concession from Government to make the Royal Mail a special case. It does not rely on the establishment of some new pensions vehicle, an over-ride of existing scheme rules or the application of half-completed regulations. It makes sensible use of existing pension scheme rules and does not rely on special pleading.

Argument three

It returns pension funds to being a source of economic capital for an economy in need of growth. That the proposed SIP focusses on the growth of assets rather than the de-risking of liabilities is a strong statement from its authors of pensions resurgent. This proposal is the first (I hope of many) solutions to the problems of our occupational pension schemes that regards pensions as a source of national benefit, not of liability.

The Purpose of Pensions

I don’t know why he linked in , but link-in Eddy Truell did to me yesterday. I see he is Chairman of an organisation called Disruptive Capital.

I picked up his invitation while listening to a lecture from David Pitt-Watson  Pension Corporation on the Purpose of Finance. While Eddy is no longer involved in PIC (other than a small shareholder) it seemed a happy coincidence.  I hope this is a sign that the steady decline of what we call “private pensions” may be disrupted!

Whether you like him or not, Eddy Truell has been a disruptor in pensions for some time now. I hope that the partnership between Pitt-Watson and PIC indicates a consensus for the need for things to change. Truell and Pitt-Watson are unlikely partners but it is from such collision of opposites that productive reactions can spring forth!

For the CWU’s proposals to work, we need a sensible conversation between those who own the capital (Truell & Co) and those who organise the labour (CWU). And we need a lot of good common sense!

Pitt-Watson’s lecture included a booklet with a handy checklist of characteristics of “purposeful pensions”. The list’s in green, my thoughts on the CWU’s proposals in bold.

  1. It will have an effective return seeking saving system into which the saver can put their money; the CWU plan to invest contributions for the best interests of the members of the scheme.
  2. It will pool longevity risk effectively; the CWU’s proposals treat the current and future workforce of the Royal Mail as a self-insuring pool.
  3. It effectively moves capital through the economy investing in assets which give a real return long term. The proposal is for 100% of invested monies to be in equities,
  4. It has clear and appropriate actuarial information; unlike the with-profits approach of the past, the CWU proposals come with a proper actuarial plan based on prudent assumptions clearly set-out procedures for dealing with bad times and good
  5. It is and is felt to be-trustworthy; the proposal is from an employee representative, it is not dependent on any financial institution’s participation, it is from the people for the people.
  6. It is able to offer a degree of flexibility in the promise it makes and is able to accept a degree of flexibility in its investment returns to allow (benefits) to be higher. The benefits proposal is designed to flex non-core returns based on the investment conditions while guaranteeing a core of returns which form the basic pension.
  7. It has low costs and is likely to be exploring scale economies; this is achieved through the plan being available to all employees, whether currently accruing a defined benefit or receiving a Defined Contribution.
  8. It is adequately capitalised and/or flexible in its promises; the proposals do not require seed capital but depend on an ongoing commitment from employer and from the membership to fund the scheme at equivalent levels to the current DB funding (c 22% pa)
  9. It operates within an effective and appropriate regulatory regime; as already said, the CWU proposals do not require any testing or change to current occupational scheme regulations- the proposals play by the rules.
  10. It has fairly aligned the interests of members with those of shareholders and other stakeholders; the consensual approach adopted to putting forward these proposals gives hope that they will be adopted by the employer’s management and shareholders. The proposal is an alternative to the deep-rooted concerns among the Royal Mail workforce to the DC proposals put forward by the employer and the use of the existing DB arrangement (for future accrual).


At last night’s lecture, several of the questions from the floor were about leadership. I suspect that the leadership needed to solve the pensions crisis will come from without rather than within (despite Tracy Blackwell’s assertion to the contrary).

The CWU are showing leadership. They have determined to be very public in their approach and I am pleased to help give their proposals some oxygen. The FT has set the ball rolling and the pensions media is showing interest.

The idea of running a low-guarantee defined benefit scheme at a defined contribution is not a new one. But finding a way to execute such a scheme is new.

I commend the CWU for its leadership, my firm are pleased to have given the CWU help with the numbers and some of the technical pensions advice needed to ensure these proposals are legally robust.

I hope that as we progress the debate, we can look at these ideas in more detail. For the CWU’s proposals to the Royal Mail, if they are adopted , could be the basis of pensions resurgence.royalmail



You can find David Pitt-Watson’s and Hari Mann’s “The Purpose of Finance” report (sponsored by the Pension Insurance Corporation here

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Governance – as easy as riding a bike?

governance bike

I sometimes get unsolicited blogs sent me by friends. This one was sent me by Bob Compton, a regular commentator on here. It’s written by Michael Redston who combines an interest in cycling with pensions governance



Innovative art is often remembered for its willingness to break through previously accepted boundaries. Science is driven by a desire to understand the rules but often later proves its earlier conclusions wrong. Religion is built on a belief that all will turn out brilliantly in the end for those who accept handed down rules but with no consensus on what these actually mean.

All over the news, we see examples of bad practises coming to light years too late, followed by enquiries and court cases that take even longer; this is rife in politics, sport and almost every other area, with few seeming able to hold up their heads with pride.

We shall learn from our mistakes’ and ‘lack of good governance’ trip of the tongue but often it is the sheer volume of people and complexity of structures that creates the dilemma as to who exactly the ‘we’ are; who exactly will rectify the mistakes and where exactly does responsibility lie for setting the rules and overseeing good governance?


Cycling is a good example. Whilst numerous people are taking up cycling for leisure purposes, the dominant feature is the desire to win – both individually and as teams. The difficulty, as with most areas these days, is that money plays a big part and a lot goes on behind the scenes. Sponsorship, subsidies and national pride are founded on the need to win. There is of course nothing wrong with competition and quite right to be proud of legitimate achievements – but there should be no pride or financial gain in cheating.

Life for a cyclist cannot be easy at this practical level with harsh training and pressures to perform, but is made worse if there is confusion above with arguments over interpretation of drug and medicine rules and long running enquiries and uncertainty on where the regulations are actually set or over-ruled.


Definition of Definition

I have looked up the definition of ‘definition’ in various places. This is the one I liked: ‘The act of defining or of making something distinct, definite or clear’. The example given also seemed very suitable: ‘We need a better definition of her responsibilities.’

The word ‘clear’ jumps out. Without clarity, no one stands a chance. This is actually what good governance should be all about. Being absolutely clear who is meant to do what and ensuring it is done properly.

There is a dilemma of trust too with vested interests and financial resources. Individuals who have slaved away and sacrificed their own money and time justifiably should have an entitlement to receive their due reward but this is not necessarily the same for big business or those who are appointed to do a job. What are they in it for? Morally, rewards do not need to be equal but the structure and relationships need to be fair. Most people I hope do think fairly but very few would actually turn down money or rewards they were offered and temptation not always easy to resist. So it is not necessarily selfish individuals that are driving this (although there will always be some) but more likely the system.

Solutions and Governance

Whilst the sport itself is competitive and at the practical level can expect a few crashes along the way, it should not be to win at all costs (including illegal means) but to win within clear rules. The potential conflict of working as a team or working as an individual could fall within this scope. Any vehicle is made up of various components all of which need to work but it will not work without joining them together properly. So, for governance purposes, therefore, we are not talking about the top end streamlined racing bike but something more stable and sturdy that everybody can rely on.

This requires clear designation of policies, principles, relationships and responsibilities for all involved to be aware of and comply with. Without this, time and money can be considerably wasted, and the reliability and access to facts and information diluted and dispersed.

This is not necessarily easy but neither should it be that difficult if tackled in the right way.


Michael J Redston

Author, Composer & Pensions Governance Specialist

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Setting your pension free to invest as it pleases.

Royal Mail - Nice one George!

Yesterday I wrote about the CWU’s proposals to keep the Royal Mail’s DB scheme open for all it’s 130,000 members. I then went to watch my equine investment portfolio perform at Cheltenham. Opening my inbox this morning I find it full of requests for information and (maybe coincidentally) a meeting request from the Pension Minister.

While my inbox is full, my wallet is empty – surprise surprise!

As for the CWU’s proposals, I can now declare an interest. First Actuarial have advised on this idea.

But  I don’t want to promote First Actuarial, I want to explore the benefits of adopting the CWU’s approach and address a misunderstanding of John Ralfe’s.

I have been pressed by several friends to better understand John’s positions and we’ve seen eye to eye on a number of matters lately, but I think he’s missed the point of the CWU’s proposals- entirely! Pension Freedom is needed!

Here again is what John was telling the FT…

 “The company would require all of the money to be invested in matching bonds, so there would be no risk of a deficit, but at the same time no potential inflation reward for members.”

If the Trustee’s have no regard other than to secure current promises – no problem!

To avoid balance sheet volatility on accrued benefits, the existing Royal Mail Trustees should do as John suggest. Indeed that is pretty well what they’ve done;  and the Royal Mail Pension Scheme is so bond-heavy it may have to close to future accrual.

But the problem is not about the past, it is about the future!

The issue is whether future accrual to a pension scheme should come without a guarantee on increases in pensionable pay or whether a “core benefit” (say a career average benefit paid at state retirement age ) could be guaranteed without a further obligation on the employer – other than to meet the defined contribution.

I understand the CWU proposal is “revaluation-lite” and uses the statutory minimum increases in payment to avoid balance street strain. What’s more it can use a pretty juicy discount rate as the lack of guarantees frees the trustees to invest as they please! If they consider they are in DC territory, then a DC investment strategy seems right.

As we all know, defined contribution schemes tend to invest in equities as the default investment option just as defined benefit scheme tends towards bonds. I have recently divested my DC pot of all cash and bonds and now pursue a 100% “real asset” strategy as I have no intention of drawing any money for some time. I invest as I please.

The idea behind the CWU’s proposals is that by reducing the guarantees on future accrual, the employer will have less concern about the volatility of the funding position, at least on “non-core” benefits – indeed it might be argued they have no liability for outcomes- only for input (the DC).

This being the case, the Trustees of the Royal Mail scheme would be free to invest as they pleased. Of course the 130,000 posties caught up in this will range from youngsters to those virtually pensioners and the future accrual portion of the pension will have to meet pensions in payment almost immediately. So the “as they please” bit is a little more complicated than my personal situation,

But I hope my point is clear and that John can pick up on it. It is a “good thing” for pension schemes to invest in real things and not just in other people’s debt. Real things mean real investments, real jobs and a growing economy that can support real pensions. It really is that simple.

And if you are working out a funding rate to meet target pension levels, you can use a discount rate that takes account of the higher expected returns from those real assets.

Now I know John will point out that such returns are only achieved at the expense of some security on member’s benefits, but his comparator is with DB and not DC. If I look at my DC promise to myself, I see its value up and down like a yo-yo.

The compromise solution envisaged by the CWU accepts that the risk between employer and member has to be better shared, it does not suppose that by investing in real assets, the risk is eliminated.

But there is one further player, beyond the trustees, employer , unions and members. It is the Government. The Royal Mail knows more than most UK employers how Government can intervene to change the rules of the game. If I was looking at the CWU’s proposals from the shareholder’s point of view, I would be looking for a golden key type promise from Government that they would not allow the DC promise to turn (at some time in the future) into a DB expectation and ultimately into a DB promise.

This is why the DB Green Paper has been regarded as lacking in ambition. IMO, it needed to look again at risk-sharing for future accrual precisely as the CWU are doing.

One seemingly insuperable obstacle facing a DB-lite proposals is that future pensions cannot be paid at the trustees’ discretion but have to be paid according to minimum statutory criteria (CPI up to a maximum of 2.5% pa).

Why DC pensions should enjoy total freedom in payment and DB pensions cannot have the flexibility to revalue at what the scheme can afford – is beyond me!

But hope is not lost! The DB paper is a consultation and the Royal Mail proposals are no more than that! Perhaps I should use my time with the Minister to argue for this change, so that in future we can keep accruing DB benefits on the with-profits basis I wrote about yesterday.

In a wider sense – at last we have a clear case study on which the DWP can focus. Let’s hope that we can use this opportunity to help 130,000 posties and a much wider constituency of DB deprived workers, for whom the CWU settlement would be more than their wildest pension dreams!



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A with-profits pension for the posties.

Royal Mail 4

One of the most encouraging stories I have read in a time appears in the FT this morning.

The Communication Workers Union, who act for many of the Royal Mail Staff, currently facing a switch from a final salary DB pension to a defined contribution scheme, have come up with a compromise solution.

Jo Cumbo writes

 Instead of offering a long-term guarantee on the level of retirement income, the CWU’s plan envisages an annual assessment of investment performance to decide whether a “core promise” is increased in line with inflation.

Those of us with long-memories will remember that this is how with-profits pensions used to work. The insurance company (rather than the trustees) offered a core benefit which was locked in. The annual assessment of investment returns and the calculation of what bonus could be awarded was the job of an actuary.

The idea was simple enough, the actuary would exercise prudence in good years, so that there was money to fall back on in bad years. Sadly some actuaries got carried away and over-distributed – but that was because of commercial pressures from the marketing department. With-profits worked because policyholders participated in a much larger pool of money managed by the insurer, got economy of scale and got the benefits of a long-term investment strategy that invested in real assets (shares, property and the like).

The CWU idea seems equally simple. It would bring together the 40,000 members of staff who are currently in a DC scheme with the 90,000 in a DB arrangement and offer a single deal for all.

The key issue is with investment. Currently the Royal Mail’s DB scheme is 90% invested in bonds, it is hard to see how such a strategy could produce any kind of acceptable bonus beyond the core benefit plus whatever could be purchased at current annuity rates. Bonds are simply not the right investment if you are trying to accrue benefits for the longer-term.

So John Ralfe would be right if he was talking of a conventional DB arrangement (again a debt is due to the FT)

However, John Ralfe, an independent pensions expert, was sceptical about the plan: “The company would require all of the money to be invested in matching bonds, so there would be no risk of a deficit, but at the same time no potential inflation reward for members.”

But John has missed the key phrase in the CWU’s proposals – “risk-sharing”. For as with a with-profits approach, the fact that the inflation reward is not guaranteed from year to year means that the fund does not have to be invested in matching bonds but can invest in real assets.

This may not appeal to John’s pure asceticism, but it is precisely the kind of pragmatism that appeals to ordinary people. Faced with a choice of taking all the risk or sharing some of the risk with a large employer and its large pension fund, I bet the vast majority would prefer to risk-share.

I am not sure of the details of the arrangement, but this looks to me like the first positive attempt by a union to find a third-way solution between the extremes of DB and DC. I very much hope that the core-benefit includes all rights to date and that the proposals offer a decent degree of certainty going forward.

I await with a great deal of interest the results of the negotiations. If sponsor, trustees and members can move forward on this basis, I will be delighted. in principal the deal appears innovative , exciting and replicable. Dare I say it- it looks like the basis of future settlements elsewhere.

Jo Cumbo’s article can be read in full here ;

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