The conflicts of interest facing pension trustees



Robin Powell of the Evidenced Based Investor, interviewed me this week. You can find the original interview here, Robin’s work is important, I hope a few readers will come to his seminar- advertised at the bottom of this piece.

One of the most exciting things about helping to campaign for greater transparency in UK asset management over the past few years has been the chance to be part of a community of highly motivated and principled people.

The likes of Chris Sier, Andy Agathangelou, Con Keating and Gina Miller have devoted huge amounts of time, and most of it totally free of charge, to improving outcomes for consumers.

Very much part of that group is the pensions consultant HENRY TAPPER. Henry is a supporter of the Transparency Task Force, of the growth in workplace pension take-up through auto-enrolment, and of the move towards collective defined contribution (or CDC) pension schemes. His blog, Pension PlayPen, is a go-to resource for everyone involved in institutional investing in Britain.

In this interview Henry discusses the current state of institutional investing and the conflicts of interest that exist within investment consultancy. He also explains why trustees have been so slow to adopt a more data-driven, evidence-based approach.


Henry Tapper, how did Pension PlayPen come about and what was your vision for it?

The Pension PlayPen was conceived as a place for pension professionals to congregate and have fun. It was at the time when the Bribery Act was coming in and many of my friends thought the days of taking corporate bribes were over. We ganged up and did our own entertainment out of our own pocket without having to trouble the corporate gift register!

The PlayPen has a big following and is now an important part of the UK pensions landscape. What’s the secret?

I’m surprised that you think that it is important — that’s very flattering! We’re still going after 11 years and Pension PlayPen has evolved into a website for helping employers choose a workplace pension, a 10,000-strong LinkedIn group and a blog with over one million reads. I think it’s about consistency, sticking to your guns and having a clear vision of what’s right!

I notice you aren’t afraid to speak your mind!

I live in a constant funk that I’ll be taken out! Seriously, I’m like rhubarb; the more you beat me up, the better I feel!

Something else we have in common is our support for the Transparency Task Force. What do you feel the TTF has achieved?

A lot of people laughed at Andy Agathangelou when he started out and he’s proved everyone wrong. Andy brings people together because he’s so positive. He’s consistent, persistent and unremittingly optimistic. That’s a pretty amazing combination! TTF is now a factor in corporate decision-making and that’s the mark of Andy’s achievement.

Human nature being what it is, though, we’re never going to see total transparency in investing, are we?

It’s back to TTF. If those who have the power to change things feel encouraged to do so, then they will. Right now, Andy’s creating the conditions for change and it’s now up to the awkward squad — me, Chris Sier, Gina and Alan Miller, yourself and others — to drive home the advantage.

As you know, I’m an advocate of low-cost index funds. Why do you think trustees still tend to prefer actively managed investments?

We need someone to blame. Choosing an active manager who performs reflects well on trustees, and if the manager fails, it’s easy to blame the manager for the trouble you’re in.

Does the continuing reliance on hedge funds surprise you?

Our governance structures are slow moving, we were slow adopters of hedge funds and we’re late to abandon them.

As you know, private equity seems to be flavour of the month, and yet PE has a big transparency issue, doesn’t it?

The Railways Pension Scheme lifted the lid on the costs incurred by private equity managers. Any fiduciary allocating to this asset class now has to explain why they’re investing in such an opaque form of investment. There’s a lot to be said for private equity, but transparent it is not.

One problem I’ve noticed is that trustee training is often provided by product manufacturers. That’s a clear conflict of interest, isn’t it?

There’s an industry in trustee training and as the question points out, it creates an agenda which points the trustee at investing in products which generate a margin reckoned to be among the highest in any industry in the UK.

The FCA is currently looking into competition in the investment consultancy sector. What’s your view on that?

Investment consultants are important to the proper functioning of occupational pensions. But they have put themselves into a conflict where they find themselves marking their own homework. The Competition & Markets Authority review must help them resolve that conflict by ensuring they are genuinely independent of the products they advise on.

Finally tell me about your latest project, AgeWage?

AgeWage is my new venture to help ordinary people find out how their pension pots have built up and whether they’ve had value for money. I’m very excited by the opportunities this gives ordinary people who struggle to understand what’s happened to their pension savings  — or how to spend them!

Thank you for your time, Henry. And keep up the great work you do on behalf of investors.

Henry Tapper is one of the delegates at our free educational seminar, Evidence-Based Investing for Trustees, in London on Wednesday 17th October, which we’re holding in conjunction with the Cheltenham-based financial planning firm RockWealth.

As well as me, the speakers are Lars Kroijer, the former hedge fund manager turned indexing advocate, and David Jones, Head of Financial Adviser Services (EMEA) at Dimensional.

The seminar runs from 0830 to 1030 at the Amba Hotel, Charing Cross, WC2N 5HX. There are still places left. If you’d like to attend, simply email Sarah Horrocks at

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So what’s unfair about a Pension Wealth Tax?

retirement wealth

In this article I argue that any tax increases levied on the rich are ok by me, and I’m rich.

The bias of vested interest

The vast majority of people get tax relief on their pension contributions. Some people are excluded by being non-tax-payers. This is because of the net-pay lottery (enough said).

I will remind readers that since the introduction of stakeholder pensions, people can get incentives to save – even if they are still children – rich parents have been pre-funding children’s pensions for nearly 20 years. There’s no tax-loophole that those with excess savings won’t exploit. But I won’t carry on about the iniquities of the “information asymmetry”.

I will instead focus on the annual and lifetime allowances which are designed to limit the amount of higher rate tax relief that the top 1% of earners get as a tax-subsidy for their retirement savings. These caps are in place because the Government has not properly tackled tax-relief on contributions, something they last threatened to do as a result of the extended tax-consultation in 2014-15 that came to nothing.

The rules around the annual allowance , the money purchase allowance and the lifetime allowance are complex. The thresholds for contributions and capital sums are still way above the aspirations of most people. The annual allowance is about 1.5 x the average wage and the lifetime allowance still allows us to be pension millionaire’s before being taxed at higher than normal levels.

There is undoubtedly scope for further reductions in both annual and lifetime allowances and if the Chancellor decides to fund the NHS rather than rich people’s wealth pots – so be it. I would rather see a properly functioning health service than a taxation system skewed to the needs of the financial elite.

Proper reform is long-overdue.

The work done by the Treasury in the 2014-15 revenue is not lost. It sits in some digital locker and can be revived at any time. It is possible for schemes to pay all kind of things (including HMRC claims on a fund) and this is how the taxman collects money from those who overpay their pensions at present.

We know that “scheme pays” was an option under consideration , when the Treasury were seriously contemplating a move from EET to TEE (where there’s no tax-relief on future contributions and those contributions are tax exempt on repayment.

People who think that “scheme pays” could not be used to reorganise the allocation of tax relief should be careful. With Real Time Information, the Treasury have much bigger guns to play with.

Tinkering with the Annual Allowance and Lifetime Allowance may be the least worst option for the wealth management industry.

It’s the wealth management industry that’s under attack

Let’s not mince words, the pensions industry is now a “wealth management game”. People are increasingly cashing out their defined benefits into wealth and the idea of converting wealth back into pension is deeply unfashionable. Many wealth managers are now managing money for their clients as a means to mitigate all kinds of capital and income taxes. “Pensions” is no more than the title given to a tax wrapper.

Those organisations who try to reassert pensions as a “wage in retirement” are shouted down by the wealth management industry. It’s happened twice in the past two weeks, firstly when David Leech and Jon Spain argued for risk-sharing at a CSFI event in London and secondly when Con Keating argued for CDC in a posh hotel in Hampshire (CA Summit).

The idea that anything can get in the way of the relentless surge towards treating pensions as a “capital reservoir” is seen as absurd. Wealth managers rail against the 1;20 exchange rate for DB pensions , arguing that the ridiculous transfer multiples enjoyed from schemes with gilt based discount rates, is the new normal.

Some of these people even argue that scheme pays could be used to pay financial advisers for transfer advice if contingent charging is removed.

Small wonder that Chancellor Hammond sees pensions as easy game. Any sense of the social purpose that was originally ascribed to justifying pension tax-relief, has been swamped in the wave of industry euphoria over pension freedoms.

The Chancellor has some justification in taxing the wealth management industry, though whether he dare, in the face of his wafer-thin commons majority, is another matter.

Should we care?

I am beyond special pleading for “no-tinkering”. The wealth management industry is so adept at tax-avoidance that it almost relies on the threat of further tinkering to justify the advisory framework it has created for itself.

Losing a few more tiles off the pension tax-shelter will not seriously harm the wealth management industry which will continue to service the needs of the 6% of us who regularly take financial advice.

Ignoring the needs of the 94% of Britain’s who don’t take advice (and typically use the NHS) is a more serious matter.

If the Chancellor chooses to whittle away at the tax-privileged status of the wealth management industry’s favourite tax-wrapper, that’s fine by me.

unlock wealth

Posted in accountants, Henry Tapper blog, pensions | Tagged , , , , , , , , | 3 Comments

“Should I use my pension to pay off my mortgage?”


David and Fiona Toogood 

This article appeared in the Times on Saturday (Oct 6th). David Byers is a good journalist who allows people’s money issues to be properly addressed . Recently I’ve been helping out with one or two of the answers, so if you want to see what I think, I’ve posted this beyond the paywall! The Times is great – by the way! (Advert)

David Toogood, 65, has a private pension pot of £125,000 that he wants to draw down to pay off the £112,000 mortgage on his house in Market Harborough, Leicestershire. But is this the right decision for him, and what would the tax ramifications be?

Mr Toogood’s mortgage is an interest-only agreement and his loan is on the variable rate. This means he pays an uncompetitive interest rate of about 4 per cent and his mortgage costs him £375 in payments a month.

He would like to pay off the mortgage because he believes that, were he to start drawing a regular income from his pension (which he thinks would amount to about £300 a month), this would go on servicing the mortgage.

Mr Toogood, a motorcycle salesman, says that he feels financially secure, even without a private pension, as he approaches retirement.

This is because his wife, Fiona, who is 29 and works as a buyer for a chemicals company, will be earning for many years to come. Her wage at the moment is £25,000.

“She is much younger than I am, she has a good job and excellent prospects,” he says. Mr Toogood also has a state pension.

Given the circumstances, would drawing down his pension be a good idea to pay off his mortgage, and what tax penalties would he face in doing so?


Michael Owen, director of financial planning at Brooks Macdonald
“Given Mr Toogood’s age, he is able to access the fund, but he should check with his pension provider to ensure that (a) there are no penalties for doing so, and (b) that it can facilitate an unsecured funds pension lump sum (UFPLS).

“While a quarter of the pension fund [about £31,250 at present values] would be payable free of tax, the remainder would be taxable if he encashed it. The taxable income would be £93,750 and would give rise to a very high tax bill — perhaps as much as £25,860, assuming he has no other income, and more if he does. This means that the net pension payment is less than £68,000, plus £31,250 for the lump sum, and is less than £100,000 together; not enough to clear the mortgage.

“Mr Toogood could draw down smaller sums each year and make progressive reductions in the mortgage at lower rates of tax. If he has no other income he could take out £15,800, of which 25 per cent would be tax-free and the remaining £11,850 would also be tax-free, given the personal allowance in the 2018-19 tax year. This would take about seven years to clear the loan and may not be ideal.

“If he merely draws an income sufficient to meet the interest payments, he will never clear the mortgage.

“There is a middle ground, which involves taking out up to £60,000 this tax year; £15,000 would be tax-free and the remaining £45,000 would be set against Mr Toogood’s personal allowance and 20 per cent tax band and would leave him £53,100 net if he has no other income.

“This could be repeated in the next financial year, subject to rates and limits in place. Such a strategy would save about £6,000 more in tax over two years than would be the case taking it all this financial year.”

Steve Webb, director of policy at Royal London
“Mr Toogood could draw a quarter of his pot as a tax-free lump sum and pay off a chunk of his mortgage, while checking for any penalties for overpayments.

“But if he were to take the rest of the fund as a lump sum, this would be added to his taxable income for the year. Given that higher-rate income tax cuts in at gross income of about £46,350 a year, a lump-sum withdrawal of more than £90,000 would take him well into the higher-rate bracket, where 40 per cent tax applies. Worse still, if he were to do this while he was in paid work, even more of the pension withdrawal would be taxed at 40 per cent.

“There is an additional sting in the tail, which is that HMRC operates ‘emergency taxation’ on one-off pension withdrawals, so it over-taxes people and then expects them to fill in a form to claim it back.

“Alternatively, he could put the balance of his pension into a drawdown fund and withdraw smaller chunks each year, keeping within the 20 per cent tax band. The mortgage would be paid off more slowly, but the amount lost in tax would be less.”

Henry Tapper, pensions expert at First Actuarial
“Mr Toogood has rightly worked out his pot will only guarantee £300 a month. That’s not enough to pay the mortgage interest payments, let alone the £112,000 principal.

“David shouldn’t cash in his pot in one go because 25 per cent of his pension pot [£31,250] is tax-free and could pay down the mortgage to £80,750. If he cashed the remaining £93,750 today he’d pay £29,000 in tax. He would take home only £65,000 and still have £16,000 debt.

“Instead, he could consider ‘drawing down’ his pot over three years at about £31,000 a year. This way he’d pay tax of £5,500 a year — £16,500 in total — so his income from cashing his pot would be £77,000, enough to pay off almost all his loan.

“Admittedly, he would have to pay £2,000 extra interest, but that would still leave him £10,000 better off — and that’s ignoring any interest on his pot.”

David’s response
“It seems my pension won’t pay off my mortgage. I might well take it out in instalments and pay off chunks of the mortgage progressively instead. I’ll have a think about it.”

If you would like to appear in our column, email

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34 firms under investigation by FCA for non-disclosure of investment charges



true and fair

Alan and Gina Miller’s True and Fair Campaign

The Times are running this story as a result of a tip-off by professional charge-busters and founding members of the awkward squad SCM Direct. If you don’t know what SCM Direct is, that’s because you aren’t one of their clients, SCM Direct is the wealth management business of Alan Miller (of New Star fame) and Gina Miller (famous for just about everything but especially for “Remaining”).

Here’s the Thunderer with the evidence presented it by the Millers

The rules were first set out by the EU in April 2014, so the industry has had years to prepare, said Miller.

“It’s time for the chief executive of the FCA, Andrew Bailey, to demonstrate that he is willing to be the industry enforcer rather than the industry lapdog.”

In one case, a (Times) Money reader with lasting power of attorney over his 98-year-old father’s affairs asked the wealth manager Canaccord Genuity for the charges on his parent’s £700,000 portfolio.

In an email, an investment director at the firm said its management fee was 1.25% and a flat £30 commission per transaction would also apply. The reader asked SCM Direct to check. It emerged that the 1.25% did not include VAT, underlying fund charges or transaction costs. The overall charge was closer to 2.75%, meaning an additional £10,500 in charges were not initially highlighted.

Canaccord agreed the full charge was nearer 2.75%, but said it was asked specifically for only its own management fee and commission charges and intended to disclose the full cost to the client “ahead of an expected face-to-face meeting”.

David Esfandi, chief executive of Canaccord, said: “If there are any suggestions we have been less than transparent with our fees, we would strongly refute that.”

Research conducted by SCM Direct in May shows the Investec Click & Invest website presented its charges as ranging from 0.35% to 0.65%, depending on sums invested, and underlying fund charges averaging 0.6% (0.75% today). However, this did not include transaction costs, which add a further 30% to the fund cost.

Investec said: “We should have clearly shown the transaction fee within the average underlying fund charges. We have amended our website and apologise if this has caused confusion.”

SCM Direct also highlighted potential breaches by Coutts, Tilney Bestinvest and Wealthsimple.

Coutts said: “We already include details of the platform fees and the main fund charge at several points in the customer journey. In response to Mifid II, we have added the funds’ transaction costs to our Fee Tariff Document, which is readily available to clients. Next month, we are launching an integrated solution, including a personalised digital calculator, to further improve transparency.”

Tilney Bestinvest said wealth managers relied on fund management groups to provide accurate information. “We are currently in advanced dialogue with data vendors to enable us to secure this data and satisfy ourselves that their coverage is comprehensive.”

Toby Triebel, Wealthsimple’s chief executive Europe, said: “Both our management fee — 0.7% — and underlying portfolio charge are visible on our website, in addition to being highlighted through our help centre and magazine.”

Utter Hogwash

Even I , a seasoned watcher of corporate bull, was startled to read such utter hogwash from seemingly reputable organisations.

If you can’t t understand your charges, that is not “true and fair”. Being “in an advanced state” of complying with something you’ve known was coming for 14 years and has been law for nearly a year now is NOT GOOD ENOUGH.

The Miller’s point is a good one. If the FCA are not going to enforce its rules, it shouldn’t make them and we should live in the Wild West of fund management as practiced in numerous jurisdictions round the world (read Angie Brooks for details).

It’s not good enough to stand idly by and allow this bad practice to continue and I’m 100% behind Alan and Gina’s “True and Fair” campaign. Read about it here.

The proof of the (investment) pudding is in the spending.

You might think this article is leaning a bit too much on the Millers, after all they’ve made a fortune from investment management. I don’t doubt that they’ll continue to make a fortune by running a “clean shop”. The point that the Miller’s are making by running a successful business on “true and fair” lines is that you don’t have to be uncommercial to be honest.

I am aiming to be as successful as the Millers by setting up AgeWage to tell people “truly and fairly” how their lifetime savings products have actually done relative to the money they have paid to the financial services industry.  Value for Money is something we think is inherent in the simple equation “money-in, money out”. There can be no excuses in the final reckoning; when it comes to saving the proof of the pudding is in the spending.

We now have the tools

Working out “ongoing charges figures” (OCFs) is good and it’s what should come out of the legal requirements to disclose from MIFID II and PRIIPS. But OCFs and other percentage based measures only play to the people who understand percentages and the way compound interest works.

More important to people when they are judging things are measures that tell them what value they are getting for your money. Which is why I want to turn performance and charges into a single score that relates – not to some abstract notion – but to your understanding of what’s gone on.

Since the Data Protect Act 2018 and (to a lesser extent GDPR), we have all been able to get to the data about ourselves necessary to understand the value and the money we’ve got from our savings. AgeWage is simply a way for people to have this information brought together to tell them how their savings have done and how they are likely to do in the future.agewage vfm

In both intent and practice , AgeWage is born out of True and Fair and this blog acknowledges Alan and Gina Miller, Chris Sier, Andy Agethangelou and the other members of the awkward squad, who are gradually wresting back control from those who intermediate between us and our investments.

Posted in advice gap, age wage, pensions | Tagged , , , , , , , , , | 2 Comments

The net-pay scandal gathers momentum


Key “net pay” (or variations on the phrase) into the keyword search on this blog and you will find over 30 articles going back to early 2015.

It was Kate Upcraft who first put me on to the problem which emerged as the auto-enrolment entry band did not align with the entry level for income tax. She explained that not just the relatively few people auto-enrolled into net-pay occupational schemes then, but the huge number auto-enrolling since, could lose out on the Government promise of 4+3+1 contribution structure (with the 1 being a percentage of pensionable payroll, which earned a Government incentive. To put it bluntly, net pay schemes put 12.5% of your contributions at risk.

Of course the risk isn’t very real for the higher paid who are unlikely to get out of bed for less than £1000 pm; the risk falls on the lowest paid who often are the least advantaged in society.

I argue that those people who don’t get the ‘1’ are in contribution deficit and I’ve told the Pensions Regulator that if they are prepared to

block employers with DB plans from completing corporate transactions until DB deficits are plugged, they should do the same with DC. Whitbread’s sale of Costa to Coca-Cola is a case in point. We do not know how many Costa employers are missing part of their pension entitlement, but – knowing the nature of work at Costa, we can imagine it’s quite a few. I want an audit of DC contribution shortfalls to be carried out now and for the restitution of promised incentives to be completed before the deal is done.

This is why I am proud to be one of the signatories on the letter to the Chancellor, delivered by NOW Pensions.

Progress so far.

The Daily Mail’s This is Money has run its piece which is very comprehensive. You want a link?  Here it is .

The Daily Express has also run a good piece. Here it is

And there are various articles in the trade and political press; here they are

FT Adviser – Altmann and Webb demand tax loophole is closed

Pension Age – Industry heavyweights urge Chancellor to fix the net pay anomaly

Actuarial Post – Now Pensions signs letter to Chancellor on net pay anomaly

Professional Pensions – Govt urged to take action on net pay anomaly as experts sign letter to chancellor – Campaigners press government for action on pension tax relief

Financial Reporter – Campaigners call for government action on pension tax relief losses

CIPP – Campaigners press government for action on pension tax relief

Money Age – NOW: Pensions co-signs letter to Chancellor to prevent AE being ‘undermined’ – NOW writes to the Chancellor on behalf of the pension unloved.

Well done the few – what of the many?

It’s all very well for the pensions industry to squeal about rich people’s problems, (Annual Allowance, Lifetime Allowance, IHT thresholds), but it’s incumbent on all of us to come to the help of those who don’t have financial advisers and aren’t valuable to pension providers.

I’m really pleased to see those who put their signatures to the NOW letter. They deserve applause.

Caroline Abrahams, Charity Director, Age UK

Baroness Ros Altmann, Chair, pensionsync

Troy Clutterbuck, CEO, NOW: Pensions

David Dalton-Brown, Director General, Tax Incentivised Savings Association (TISA)

Anne Fairpo, Chair, Low Incomes Tax Reform Group of the Chartered Institute of Taxation

Helen Hargreaves, Associate Director of Policy, Chartered Institute of Payroll Professionals (CIPP)

Paul Nowak, Deputy General Secretary, Trades Union Congress (TUC)

Nigel Peaple, Director of Policy and Research, Pensions and Lifetime Savings Association (PLSA)

Henry Tapper, First Actuarial and Pension PlayPen

Steve Webb, Director of Policy, Royal London

But where is the ABI on this?

The ABI can generally sit smugly on the right side of the debate, because the GPPs which form the bulk of their corporate pension business operates on a relief at source basis. Though some insurers run master-trusts on a net-pay basis, the ABI declined to sign the letter as they could not mobilise their membership behind it.

What possible detriment could there be to the reputations of insurers , in calling for the low-paid to be given a break? I am saddened that the ABI are not signatories, I hope that they will put their weight behind the campaign within the next three weeks.

All eyes on the budget

In three weeks, Philip Hammond will deliver the 2018 Budget. He speaks for a Government run by Theresa May who pledged, on appointment to help those just getting by.

If Theresa May is reading the Express, the Mail and the many other publications I hope will follow, she may want to nudge her Chancellor a little further. For the untold number of us Brits who participate in auto-enrolment and don’t get the break they’ve been promised are precisely the people who struggle to “just get by”.

Esther McVey and Guy Opperman should be rattling the Treasury Gates. Opperman in particular- he asked to have the title of Minister of Pensions and Financial Inclusion. If you believe in financial inclusion and are happy to take the credit for auto-enrolment , why are you excluding the newly “included” from what you promised them?

Posted in advice gap, pensions | 4 Comments

FCA – kicking the transfer can down the road


£37bn flowed out of DB schemes last year in transfers, the vast majority of the money was transferred with the help of IFAs and the vast majority of IFAs charge for transfer advice on a contingent basis. To ordinary people this means “no win- no fee” and a “win” is defined in successfully liberating money locked up in a pension so it can be spent as the transferee pleases.

The first quarter of 2018 exceeded any previous quarter with over £10bn being transferred in 3 months. This included the bulk of the £3bn + leaving the British Steel Pension Scheme.

The FCA’s own investigations have suggested to them that a high proportion of those transferring did so with questionable advice. I and many like me have suggested to the FCA that when an adviser is paid on a contingent basis, there is a clear conflict. The  “win” for a client is a “win” for an adviser- but the adviser does not face the consequences of something going wrong.

If ever there was a conflict of interest, contingent charging on pension transfers is it. And yet the FCA have ruled against banning contingent charging for reasons so convoluted that I don’t have space to list them here. Instead you can go through them following the link to Olly Smith’s excellent explanation in New Model Adviser.

By far the most potent of the arguments for contingent charging is that it enables people without the cash to pay for advice upfront , to pay for it back to front – when they have cash in their plans.  The money that comes from their transfer plan is tax-advantaged. The tax relief that this money was originally given was granted by the state so that the state was protected from impecunity in old age. Similarly, the VAT exemption on insurance advice is granted so that people can insure against old age.

But the contingent charge, which is paid from tax-advantaged money without a VAT charge is being used to liberate people from the obligation to insure themselves against old-age and is typically combined with ongoing advice on how an individual can minimise future taxes with scant regard to the very real risks that money may run out as a result of the advice going wrong.

The FCA are under an obligation to protect people from risks and for people who haven’t enough money to pay for advice, the risk is that they won’t have enough money to pay for anything at all. The rights to the state pension enjoyed by people transferring into personal pensions are not sufficient to meet the financial needs of most people in retirement. The State Pension is a safety net – it is not a mattress.


Kicking the can down the road.


It seems that all the FCA has done, has been to listen to the arguments of those advantaged by contingent charging (advisers, pension providers and fund managers).

There does not seem to have been any detailed analysis of the advice given under contingent charging or a comparison of that advice with advice given where an upfront fee is charged.

My hypothesis (which needs to be tested by the FCA) is that contingent charging introduces a bias based on the alignment of provider/fund manager and adviser interest in money being transferred. Against this the long-term interests of the tax-payer and those being advised are being disregarded. over-looked or ignored.

The FCA are guilty of a failure of nerve. Once again they have failed to take on the interests of the financial services industry. Consequently, transfers will continue to be promoted , many to the wrong people. There will be outright scamming, fractional scamming and a lot of unsuitable advice about wealth management.

Wealth is an unsuitable term for someone with a £20,000 pa prospective occupational pension. That that pension is worth up to £1m is because guaranteeing a couple an income for life from an early age with inflation protection, is a hideously expensive business.

£1m can easily equate to £50,000 in advisory fees between now and 2020. These sums may only represent 5% of the transfer (2% + 1% +1% =1%) but that’s equivalent to a lifetime pay cut of 5%.

And that 1% fee can go on being charged either as an adviser charge to the fund or as part of the AMC – where the adviser is also managing the wealth, for the rest of the client’s lifetime. Indeed – if the idea is for the pension to form part of the estate, it may be payable beyond the death of the client.

These costs are not incurred by someone drawing a pension from an occupational pension scheme. By comparison, a pensioner like me can look forward to living to a ripe old age without fear of the money running out. A pensioner like me has no need to meet to review investment and drawdown strategy, no need to consider tax consequence; we can get on with enjoying retirement.

The FCA are ignoring all this and listening to the arguments of the financial services industry. They are kicking the problem down the road, they are failing the people they should be protecting. This needs to be called out again and again and again.


Addendum – LCP’s new research (Courtesy of Jo Cumbo and the FT)

Savers in their fifties trading “gold-plated” retirement benefits for cash lump sums are typically being offered half the value of their pension by their scheme, according to new analysis of the booming transfer market.

From 2015, around £20bn-£30bn a year has flowed out of company “defined benefit” plans as 100,000 members annually have accepted cash lump sums to transfer their future pension rights out of their scheme.

Fresh insight into the value of the transfer deals came after new regulations came into effect this month requiring advisers to compile bar charts showing clients how the cash lump sum offered by their pension scheme compared with the estimated cash value of the benefits they are giving up, known as the transfer value comparator or TVC.

LCP, the actuarial consultancy, used this new formula to examine transfer values — the amount offered by a pension scheme to a member to trade a future income stream into a cash lump sum — offered by 200 pension schemes ranging from £100m to £10bn in assets and covering millions of members across all industries. It found that average transfer values made to members at least 10 years from their scheme pension age, were around 57 per cent of “full value” — far less than older savers, who typically got around 73 per cent of full value a year before retirement.

“If this group of clients [in their fifties] is told that they are only being offered half the value of their pension, then this is likely, at the very least, to prompt searing questions as to why there is such a discrepancy,” said the LCP report, which was prepared with Royal London, the mutual pension provider.

Regulators say most pension members would be better off keeping DB pensions, which pay a secure, inflation-proofed income for life, and provide an income to surviving spouses.But historically high transfer offers, and greater freedom to spend retirement cash outside of a DB pension since 2015, have tempted many to transfer to a more flexible pension arrangement.

LCP’s analysis said the transfer values made by schemes varied widely, with some below 40 per cent of full value and others greater than 90 per cent. The report found that this was due to varying investment strategies and different assumptions used by scheme actuaries to calculate transfer values.

Jonathan Camfield, partner with LCP, said the analysis “did not necessarily mean that transferring was a bad idea. But it does show very clearly that those who transfer out are foregoing a great deal of certainty about their future retirement income and that this certainty is of considerable value.”

The Pensions Regulator, which supervises DB schemes, said: “Our primary concern is that DB scheme members requesting a cash equivalent transfer value (CETV) have all the information they need to make an informed decision.“Transfers from defined benefit schemes to defined contribution schemes are unlikely to be in the best interests of most members, although there are certain circumstances where they may be appropriate.”

The Financial Conduct Authority believes the new rules for advisers will help members better understand the deals they are offered, compared with the old system, which focused on investment returns needed from the transferred funds to match what they might have got by keeping their DB pension.


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Tax and “net-pay fallibility”.

papal 2

A curious feature of British middle-class life is the belief in the infallibility of Her Majesty’s Revenue and Customs. The old certainties of “death and taxes” are comforting. When tax-evaders are found out, it reinforces our sense of the rectitude of our public servants – who are – to our eyes – the still point in a turning world.

So it comes as a real shock when HMRC is shown up for being wrong. In the case of the “net-pay scandal”, HMRC are not just wrong, they are deliberately wrong, which – were the boot on the other foot- would see the hundreds of thousands of people denied their savings incentives, tax-cheats.

It comes as a real shock to read in FT Adviser yesterday (and 24 hours later) , these two statements.

  1. Outside Scotland, tax relief is applied at one of three marginal rates – 20, 40 and 50 per cent
  2. If a scheme is an occupational pension scheme, they have the option of using either relief at source or a net pay arrangement  – they can choose. If they are not an occupational pension scheme, for example if they are a master trust or a personal pension provider, then they must use relief at source.

This information – in the context of the article, appears to come from HMRC. Unless we are about to get a new tax-band in the budget later this month, the tax-rates quoted ARE WRONG. The statement on master-trusts having to use relief at  source IS WRONG. NOW is a mastertrust, it is one of a number of such schemes that uses net-pay and it is the reason for the letter published yesterday (on this blog).

HMRC can be wrong

Whether the mistakes emanate from HMRC or the FT isn’t really the issue. The question is can we trust a system that is so complicated that serious journalists and tax officials – don’t understand. The answer is of course “yes”. We will go on paying our taxes and we will go on regarding the FT and HMRC as authoritative.

But we must recognise that HMRC has no divine right to be right, there is no fiscal infallibility.

The case to reform the treatment of net-pay and relief at source is undeniable. It does not take legislation , it takes code, specifically the re-coding of the HMRC systems that adjust people’s tax codes to take into account their pension contributions.

And in case people think this is special pleading for low-earners, it isn’t. There is another group of earners, those tipping into higher rates, who are missing out on tax-relief and could do with a helping hand from HMRC. These are those who pay pension contributions under relief at source and don’t claim higher rate relief (the reverse issue of those on net-pay). Many marginal higher rate tax-payers do not fill out a tax assessment and don’t know they have higher rate relief available to them.

This is handy for HMRC, who no doubt build in the unclaimed money into their revenue projections, but it is not handy for people who are again missing out on incentives that should be their’ s.

It is no more right for Government to hide tax benefits than deny them. Those on relief at source should have a coding adjustment automatically when they make personal contributions.

The Government get real time information and we should get real time tax-relief!

No reason for delay.

The smart people at NOW have cottoned on to the bonnet up at HMRC (to adjust pay coding for those paying tax under the Scottish rates.

They have worked out that if the bonnet is up for one set of changes, it can stay up to sort out the tax-coding for those not getting incentives or tax-relief from pension contributions.

Thankfully, the industry (other than the dilatory ABI) have got behind NOW and spoken in a timely (pre-budget) fashion.

There is no reason for Chancellor Hammond to delay. I expect him, in his budget on 29th October to announce that he has instructed HMRC to make the changes so people get the tax-relief to which they are entitled but currently denied.

HMRC have been wrong too long, but persistent mistakes are still mistakes and should be put right at the earliest opportunity.


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NOW writes to the Chancellor on behalf of the pension unloved.



Now pensions and a host of us  have written to the Treasury and this is what we’ve said.

Automatic enrolment is a policy success story with nearly 10 million people saving into a workplace pension because of its introduction.

The government provides tax relief on pension contributions to help encourage people to save. But more than a million low earners are missing out on tax relief through no fault of their own.

We believe in two principles:

1.           The means by which tax relief is paid (net pay or relief at source) should not affect the amount of tax relief paid.

2.           Savers should receive this relief automatically, without having to ask HMRC for it.


Why does this issue exist?

There are two ways pension savers can receive tax relief – through either ‘net pay’ or ‘relief at source’ (RAS) arrangements.

Under net pay arrangements, the pension contribution is deducted before the tax is calculated. In RAS arrangements, the pension contribution is deducted after tax is calculated and HMRC later send the tax relief, at the basic rate (20%), to the pension scheme.

The vast majority of occupational pension schemes operate on a net pay basis while traditionally contract-based schemes have operated on a RAS basis.

Members of RAS pension schemes who do not pay income tax, typically those earning less than £11,850 each year, are nonetheless, entitled to basic rate tax relief on pension contributions up to £2,880 a year.

However, this tax relief is not available for non-taxpayers in net pay schemes. This means that the lowest earners in net pay schemes are having to pay 25% more for their pensions (by missing out on 20p for every £1 contributed, they need to pay 25% more to achieve parity).

Many are unaware of this, but we urge you to address the situation urgently for these low-paid workers who can least afford the added cost.

Figures from HMRC indicate that in 2015/16, 1.22 million people could have been affected by this issue – that includes those automatically enrolled as well as workers already in occupational schemes.

Somebody earning £11,850, paying auto enrolment minimum contributions, is missing out on £34.91 in the current tax year. By 2020/21, when the personal allowance is expected to have risen to £12,500 (and the minimum contribution rate has also risen to 5%), affected savers could miss out on nearly £65 per year.

HMRC is looking at solutions to resolve an issue which has arisen in RAS schemes as a result of devolved taxation, namely that 21% Scottish taxpayers are missing out on the 1% extra tax relief they are due. We urge government to use this opportunity to put things right for low paid workers in net pay schemes.

To prevent auto enrolment being undermined, it is essential that the government takes decisive action based on the two principles above. This needs a clause in the Finance Bill and utilisation of the system changes that are already underway in HMRC to tackle the devolution problem. We are very happy to work the details through with your HMRC colleagues to make sure all savers are treated equally.


Yours sincerely,

Caroline Abrahams, Charity Director, Age UK

Baroness Ros Altmann, Chair, pensionsync

Troy Clutterbuck, CEO, NOW: Pensions

David Dalton-Brown, Director General, Tax Incentivised Savings Association (TISA)

Anne Fairpo, Chair, Low Incomes Tax Reform Group of the Chartered Institute of Taxation

Helen Hargreaves, Associate Director of Policy, Chartered Institute of Payroll Professionals (CIPP)

Paul Nowak, Deputy General Secretary, Trades Union Congress (TUC)

Nigel Peaple, Director of Policy and Research, Pensions and Lifetime Savings Association (PLSA)

Henry Tapper, First Actuarial and Pension PlayPen

Steve Webb, Director of Policy, Royal London

This is what NOW are saying independently

“Through no fault of their own, lower paid workers in net pay schemes are missing out on the tax relief they would receive if they were in a relief at source scheme. Figures from HMRC suggest that this could be affecting more than a million people, the majority of whom are women, and this number is only going to grow.

“We are pushing for action on this now as we know that HMRC are looking at solutions to solve an issue that has arisen in relief at source schemes as a result of devolved taxation. We firmly believe that the government should make sure that any system changes they make also put things right for these workers.”


And this is what FT adviser have had to say about it.

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Play “Stick or twist” in the workplace pension lottery!


Stick or twist 1If you changed jobs, would you prefer to stick with your current workplace pension or join your new employer’s scheme (leaving a little pot behind you)?

It’s a tough choice, and the more you think about it, the tougher it becomes. For example, some workplace pensions – the ones that have a fixed monthly charge – are particularly tough on small pots, others – which rely on an annual management charge – are easier to leave behind. Pensions are so complicated, isn’t it easiest not to bother? After all, that’s why auto-enrolment has been a success, people didn’t bother to consider opting out!

But what’s good a small pot to you in retirement, you’ll probably want to “aggregate” it into a bigger pot at some time in the future, so why give yourself the problem? Wouldn’t it be easier to take the pension you started with to each of your future employers and hope that you got lucky first-time round?

I know there are people who say “don’t put all your eggs in one basket” but it’s not much fun having lots of tiny baskets when you are managing your retirement finances! The value of diversifying across lots of workplace pensions is at best unproven!

This is why the Pensions Minister, Guy Opperman is consulting with pension providers about operating a clearing system for auto-enrolment, just as happens in Australia. How this idea might work would be for payroll to pay not to a provider, but to a clearing house, which directed the payment to a provider selected by the member.

The member decision could be simplified into the binary choice I gave you at the top of the article and a default could be used “if you don’t choose to use your current pension, you’ll be auto-enrolled into the new plan”. This is rather easier than defaulting into the “current plan” as that assumes that the current plan is still available to the new member and it mightn’t be able to receive contributions from a former employee.stick or twist two

There are then two obstacles to offering the choice to members, the first is the technology, (the extra cost of clearing) and the second is the nagging doubt it puts in people’s minds -“have I made the right choice?”

Of the two, the second is the hardest. When Stakeholder Pensions were introduced back in 2001, the idea was that because there were no exit penalties, people would be able to take one stakeholder pension to another as easily as we exchange pound notes for loaves of bread. It didn’t turn out to be the case as regulations were introduced requiring people to take advice before moving money.

The reason for advice was it was thought that not all Stakeholder Pensions were created equal and that people could do financial “self-harm” if an adviser was not involved. In practice, advisers learned that they could take hansom commissions in helping people switch money, a practice that was banned from 2013. We now have the awkward situation where people cannot move their own money from pot to pot, but advisers can’t be rewarded by commission for doing so. As people are reluctant to pay advisers fees, the pots tend to stay where they are and the result’s the DWP estimate there will be 50m abandoned pots by 2050.

These pots are expensive for providers to administer. They not only have to keep a record, but ultimately, they have to manage a claim on the pot – which wipes the lifetime value of pot management to the provider. One providers told me he wanted to manage an army of well-drilled soldiers, not a “prisoner of war camp”. The analogy is apt, small pots are captives like prisoners, another provider talked to me of bulking the transfer of small pots as “prisoner exchange”.

In order for us to move on from the problems that are building up for providers and consumers, we need to find a way for small pots to be transferred without detriment to member. This means either reducing the cost of advice to zero or going back to the original premise, that once you’ve sufficiently regulated stakeholder or workplace pensions, moving from one to another doesn’t require advice at all.

In the long term, we need a system that allows us to easily “twist” and move our pots from one provider to another, or “stick” with one workplace provider for our savings careers. Tackling the twin obstacles of technology and advice is now high on the Government’s agenda.

stick or twist 3

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Why would management fees be any cheaper for #cdc than DC?

newton blake

Blake’s view of Isaac Newton (see final paragraph)

It’s a question posed by John Ralfe- to me – on twitter. It’s a serious question and one that Jeremy Cooper, doyen of the Australian Super system is clearly interested in too.

The question cannot be simply answered with reference to academic theory. Having just read a short and very understandable academic paper on the advantages of tontines over life annuities, I am in no mood for further academic wrangling. If all CDC was about was rearranging deckchairs, then I’d be looking to the lifeboat!

What is my answer?

If the answer doesn’t lie in actuarial science or in financial economics, perhaps we should look at what creates the inefficiencies’ in DC. What cannot be denied is that people pay a vast range of fees for having their DC pot managed. Last night I was with Quietroom , watching vox-pops of people being shown the fees they were paying, most of the people were not just unaware of these fees, they were unaware that there were charges on their DC plans in the first place.

The comparator two people used was with their bank

“I might as well take my money out and put it in the bank where I know what I’m getting and I won’t get charged”

One answer to the question is “governance”, individual DC plans, especially when they move away from employer funded to individual drawdown, have very little governance. It is easy for an advisor or a non-advised drawdown provider, to charge what they like. There is no-one to stop them.

Another answer is in the nature of a “trust”. If we consider the not for profit principle that has been at the heart of collective occupational pensions for the past sixty years, you can see it as the continuation of a benevolent paternalism that has persisted much longer. It is the paternalism of Joseph Chamberlain and the 19th century industrialists who built Bourneville and Port Sunlight. It is a cultural aspect of our British way of life, it is what is expected of our bosses.

This expectation that bosses will set up trusts for the welfare of their staff – run on a not-for-profit basis, has not gone away. It is implicit in relations between unions and employers and accepted by both sides. These collective arrangements are the inspiration for multi-employer schemes, the Pensions Trust, the Social Housing Pension Scheme, B&CE’s holiday plan – the People’s pension. The concept of the state as a super-employer lives on in the national acceptance of NEST as a good thing.

The alternative to the brutality of the market, is the protection of the trust.

So – for most people – the collective solution is a natural solution. It is part of our culture in a way that the American 401k system isn’t. The Australian alternative – where the state is all powerful and decrees the way Super is managed, is no alternative to the British system of “trust”. The fact that we trust each other and our employers and the Government to provide for us collectively, is of major advantage to the British pension system.

That – since the mania for personal pensions – we have done all we can to destroy that trust in favour of financial empowerment of the individual – has not made that trust go away. The system of collective pensions is still in place, it is simply looking for an upgrade.

Five practical advantages of the collective approach to DC

These five advantages are not specific to CDC, they are advantages that spring from the collective mind set talked of above and can be implemented through trustees because of trust. Those who  don’t believe that trust exists will poo-poo these arguments, I would ask for them to show of proof that trust does not exist.

  1. The investment management agreements that can be negotiated by organisations representing billions, reduce the margins of fund managers and return that value to consumers through the not for profit mechanism – economies of scale in the purchasing of investment services
  2. The recording and documentation of records for a large group can be managed by repeatable processes (smart ledgers) which use straight through technology. The administration of collective pensions is cheaper than the administration of individual plans.
  3. The payment of pensions under a collective arrangement is considerably cheaper when everyone is being paid in the same way (a wage for life). The substitution of a rules based  pensioner payroll for an individually driven drawdown plan, cuts down on payment costs.
  4. The communication of what is going on , is – in a collective DC plan – a one to many job, rather than an agonisingly difficult process of explaining on an individual basis. The advisory costs of CDC are minimal, the costs of advising on individual plans, especially in drawdown, makes drawdown unfeasible.
  5. Finally, CDC – by dint of it being run on a not-for-profit basis , is feeding less mouths. The cost of intermediation of a one to many scheme is intrinsically less than a great number of individual plans.

Can this be proved?

I think it can and will be proved. It cannot be proved in practice till we have CDC schemes and my hypothesis that we can tap into the great goodwill of trust to make CDC happen and keep it going – is just that.

Academics will point to risks in this approach and in as much as I am relying for my arguments on concepts like goodwill, I will be deemed to be airy-fairy by some financial economists.

But if we left the world to Newton, we would have no poetry, if we left the world to the financial economists, we would have no pensions!


Good luck to those debating CDC at the Corporate Adviser Summit today.

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