Investment aspects of CDC – Con Keating

Con 8

One of the less discussed aspects of CDC is the management of the investment fund. This differs from traditional DC where the asset management objective is to maximise asset values at all times. It is intrinsically short-term. Incidentally this conflicts with the desires of individual members, who should prefer low asset prices while they are saving and contributing, and maximal asset prices when they are decumulating their fund in retirement.

The CDC fund has an explicit target to achieve or surpass on average. The target arises from the terms on which trustees made awards to members and the contributions they had received. The averaging arises from the risk-sharing and risk pooling rules of the scheme. These rules substitute for the risk buffers and capital adequacy requirements so familiar in insurance and banking. The open question here, as well as in commercial finance elsewhere, is how large these buffers should be and how might they operate. CDC schemes have explicit target benefits which may be cut if investment performance is inadequate.

When the objective is to avoid cuts, the answer to the size question depends on the volatility of the investment portfolio. The question becomes: how long does it take to exhaust the risk-sharing capacity? A quantitative illustration is appropriate. Suppose we allow, for support to pensions in payment, an amount of up to ten percent of the value of members’ claims, and that the fund is composed of 60% active and deferreds with just 40% pensioners in payment. Then the ten percent support represents 25% of the pensioners claims. At first sight the adequacy of this is questionable. A 25% drop in the value of the portfolio in any year has a likelihood of occurring of around 5% when its portfolio volatility is 15% and over 10% when that volatility is 20%. This is a frequency of cuts that is not likely to prove attractive to members generally or pensioners in particular. It is the frequency which arises in DB scheme solvency based management, which includes Dutch CDC.

Much of the DB de-risking and LDI agenda has been driven by a desire on the part of the sponsor to avoid the calls on their guarantee associated and low volatility investment strategies have been pursued. With fund volatility at 10% calls have a frequency of 0.6% and at 5% are unlikely in many lifetimes.

However, the immediate exposure of the CDC scheme is merely to the current year’s pension payments. This is usually of the order of 3%-5% of the members claims. If the funding level is 75% then the support among members to ensure full payment is simply 1.25%, a minor fraction of the total available support, 10%. Obviously, the largest claim in any year is the full amount of the pension payment, and that is far less than to total support.

Other articles have discussed an important element of a sustainable risk-sharing scheme, the need to maintain an equitable balance among members and proposed mechanisms whereby this may be achieved.

Of course, the greatest threat of cuts comes from sequences of poor returns, rather than from extreme, catastrophic events. Let us consider sequences of losses at the conditional expected loss amounts for portfolios of different volatilities. The conditional expected losses are:

Table 1

Volatility 5% 10% 15% 20%
Expected Loss % -4 -8 -12 -16


The asset portfolio values resulting from repetitions of these losses are rather extreme. These are shown below for the range of portfolio volatilities.

Table 2

Year 5% 10% 15% 20%
1 96.0% 92.0% 88.0% 84.0%
2 92.2% 84.7% 77.4% 70.5%
3 88.5% 77.9% 68.1% 59.2%
4 84.9% 71.7% 59.9% 49.8%
5 81.5% 66.0% 52.7% 41.8%
6 78.3% 60.7% 46.4% 35.1%
7 75.2% 55.9% 40.8% 29.5%
8 72.1% 51.4% 35.9% 24.8%


The total of 10% support is exhausted after five years for the 20% volatility portfolio, after six years for the 15%, after eight years for the 10% and after ten years for the 5% volatility portfolio. No cut is likely within these periods. Put another way, even in these extreme and highly unlikely circumstances, the likelihood of any cut is 1.5% for the twenty percent volatility portfolio, 0.8% for the fifteen percent, 0.2% for the ten percent and 0.04% for the five percent volatility portfolio.

This suggests that the unutilised risk-sharing capacity and the period for which full benefits are assured by this scheme feature are useful metrics of the robustness of a CDC scheme. Certainly, they should inspire member confidence in the scheme.

There is nothing comparable to these simulations in the historic empirical record. The most extreme set of circumstances centred on the 1999 – 2002 Dotcom crisis

Diagram 1

cdc invest

Diagram one



Diagram 1 shows the call upon risk-sharing resources which might have occurred over that period had the scheme assets been fully invested in UK equity using index returns for fund performance. Annual pensions payments were a little under 5% (on average) of scheme liabilities over this period. The cumulative exposure rose over a five-year period and totalled, at its maximum, a little under 5%, but had fully recovered all of that support within two years.

The interpretation of these support periods that is relevant for the fund management objective is that these are the periods over which performance is not pressured by pension payment requirements, that full payment is essentially assured, and the scheme may be managed on the basis of its average return.

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From EasyBuild to Peoples Pension; B&CE’s IGC’s “special purpose”.


Time to pack your bags


BB&CE’s workplace pension empire has changed. EasyBuild  is shrinking its policyholders  and moving their “pots” to  the People’s Pension  with the help of The B&CE IGC.

EasyBuild was once Britain’s largest stakeholder pension scheme, the B&CE flagship. , B&CE has moved with some agility to running one of Britain’s largest master trusts – People’s Pension.

The transition is a result of Government interventions, the stakeholder initiative has been supplanted by auto-enrolment. B&CE has been at the forefront of providing for small employers and their members both as a stakeholder and master trust provider and should be commended for its foresight, responsiveness and operational efficiency.

Over the course of 2017, all but £9m of the £1.2 bn. in EasyBuild moved to People’s Pension , securing lower charges and a more certain future for the rump of stakeholder pensioners. Of the 2000 policies remaining in EasyBuild, 400 are for those who have died (and are awaiting payment) and 700 are in the process of transferring away to other providers, the 900 members left will be looked after by the IGC, though you would hope that keeping an expensive governance committee in place for much longer , can be avoided.

The B&CE IGC has overseen an effective dismantlement of EasyBuild and , though it fights on for lower charges for the remaining members, the work of Delo, Pickering et al is as good as done. Those who were members can thank their IGC for doing an effective job. I give them a green – this transition has no doubt been conducted better for their help, expertise and oversight.


The 2017-18 IGC report still engages

One of the good things about reviewing IGC reports is that none are written to a template  (unlike some GAA reports). Even with such a meagre audience, the B&CE report reads a considered piece of work. Steve Delo, the Chair, is used to working to a tight time and financial budget and though there is a little padding (see appendices), this report is engaging and – for those interested in consolidation of small pots – a fascinating case study. It is to both the IGC’s and B&CE’s credit that this report exists and reads as well as it does ; it too gets a green.

Value for Money

I won’t go so far as give the report green for amber for money. I will give it an amber, since what is happening within EasyBuild is no more than care and maintenance. While the 900 members who choose to stay within EasyBuild may be an irritant to B&CE, they have taken a conscious decision to stay (opting-out of the transfer). B&CE pledged to provide a stakeholder pension through to their chosen retirement date and has an obligation to do so and these members deserve to be treated as fairly as any other customers (including members of People’s Pension).

I fear for groups like this, the pensions equivalent of property tenants and owners , holding up the clearance of sites intended for other purposes. While I am sure they will not be harassed, let’s make sure they leave on good terms. I hope too that they are not holding out for bonus payments to clear off and that B&CE will not buy them out on  special terms. The IGC should not be kept alive as part of a protracted dispute ; it should close itself down as soon as the FCA will let it.

Since the sum of money the IGC is looking after (£9m) is rather lower than the governance budgets of some larger IGCs, I suspect that given time, the IGC will become one of Easybuild’s greater expenses, because of the stakeholder charge cap – that expense won’t fall to the remaining few policyholders, but it will put a brake on greater value for money which no doubt be available elsewhere.

In Conclusion

The transition of almost all assets within EasyBuild to People’s is another quiet success story for People’s Pension and for its owner B&CE.

Because the transition has been successful, it is not subject to the publicity that usually accompanies the wind up of a collective financial arrangement.

Other IGCs should look at the example that B&CE has created and ask whether there may not be arrangements such as EasyBuild within its remit, that could be managed into the equivalent of People’s Pension (a large and growing arrangement offering better value for money for members.

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The Virgin Money IGC has had enough.

virgin money chapman 2

For the first time in three years of reviewing IGC Chair Reports, I sensed an IGC that has had enough. Sir David Chapman’s third report concludes that the Virgin Stakeholder Pension is providing “Fair” value for money. But in the context of other reports, “fair” doesn’t sound enough. The report gives Virgin a red for not renovating its Default investment option.Virgin IGC

This is not a good looking scoreboard. I have met with Sir David Chapman and he is not a man to be messed with. The value for money scorecard is simple enough for any member to understand and on the key areas that impact outcomes, the IGC finds its provider is failing. Instead of taking it lying down the IGC took the matter to the FCA

When the Provider made the decision that no change would be made in 2017, the IGC felt it necessary to share our view with the Financial Conduct Authority (FCA)

We are not told what the FCA’s response has been. I look forward to hearing more.

The Virgin Money IGC is effective and is doing its job; it gets a green from me – the Virgin Stakeholder Pension now needs the support of the FCA  , while Virgin gets a green for being effective, I worry whether I will be able to say the same for the regulator.

Is the VFM work of the IGC up to scratch?

The IGC have been benchmarking the investment performance of the default fund and now have some meaningful data – taken from Financial performance analysis

It’s good that the IGC is doing this. However the analysis throws up the fundamental weakness of reporting pure performance stats; even with a tracker fund, the Virgin Stakeholder’s returns are bouncing up and down the league table like a yo-yo. The comparisons cannot be apples v apples, a better measure of comparison is needed.

It is time that a risk-adjusted measure is created that can allow funds to be compared on a  like for like basis.

That the report cannot look at the transaction costs within the funds is a weakness. As with the performance analysis, there is something lacking. I suspect that this is out of under-resourcing rather than negligence, nevertheless , no matter how effective this IGC is , it is not quite cutting the mustard on VFM and i can only give it an amber for its VFM work.


This is a report that deserves to be read. I know that in previous years, the Virgin Money IGC has actually printed and physically distributed its report, I doubt that even a physical copy was read. This is a shame.

The report is extremely easy to read, it is thoroughly engaging and I have no problem giving it a green.

What it needs is publicity and hopefully it may get some if the FCA get involved. Having said that, there simply aren’t enough Virgin Money policyholders for the IGC’s issues to be front page news.

It’s the likes of the Old Mutual IGC, who should have similarly have referred its provider to the FCA – to engage with what Chapman is doing.


In conclusion

I continue to praise the Virgin IGC for its strong, effective approach to doing its job. Good for Virgin for having employed such a good Chair. By the 2019 report, the investment of money will have passed to Aberdeen Standard and we may see an improvement in the value members get for money. However, the real heavy lifting, on that account, is now with the FCA.

virgin money chapman 2

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The day the world turned orange (II) #GrandNational18


Parade of Champions


When I first went to Aintree six years ago, I wrote a blog called “the day the world turned orange”. I had been caught out by the wonderful world of scouse and I’ve been going back to Aintree every spring since.

I hadn’t had reason to write another blog since then, till yesterday, when I returned from Liverpool at around midnight and promptly watched the whole afternoon again , in the early hours of the morning. To save you that trouble, here’s the Racing Post’s 60 second review of the day.

If you are a fan of racing, and can bear the pain of a horse dying, then here is the Grand National in its 10 minute glorious denouement!

For Stella and me, the weekend will get better – Stella is a netball fan!

I am watching (as I blog) , the Chinese Grand Prix . Last night our train returned with Bournemouth fans going home after a 3-0 defeat to Liverpool. Our train passed Wembley, the scene of Man City’s 3-1 triumph over Tottenham.

Britain is a wonderful place to be a sports fan, but I can honestly say that there in nothing- nothing – that can compare with Aintree in the Sunshine and the smile of Davy Russell as he returns to the winning enclosure!

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Nothing wrong with being contrarian – the Hargreaves Lansdown 2018 IGC report

HL Workplace solutiosn

There’s a compelling logic to the HL IGC Chair’s introduction

Since they all relate to value for money for scheme members, our findings and progress are set out in the following analysis of value for money.

Value for Money is not only the measure, improving it is the objective and that objective leads to increased contributions. This is the conclusion of the HL IGC and it is one that HL would undoubtedly sign up to. Higher contributions equals higher shareholder value from the HL Workplace SIPP. Wins all round.

I buy into this vision, where the customers are engaged in saving and investment and HL has a very special type of customer, it has customers that not only can – but want to “do it themselves”.

Evidence of the utilisation of non-default funds can be seen in the number of members making alternative investment choices. 29%of members (28% last year) invest outside of the default funds and 53% of HL’s workplace pension scheme assets (51% last year) are outside of the default funds. This reflects a high level of member engagement.

This is the contrarian world of Hargreaves Lansdown, a firm that demonstrates what can be done by knowing your customers. But highly engaged customers can be vulnerable too, there is a fiduciary responsibility on HL and its IGC and the challenge for HL is to make sure that when focussing on greater engagement (and contributions) HL do no take advantage of the position it has built up – and rip-off its customer base.

My worry is that the HL IGC are a little in awe of the reputation of Hargreaves Lansdown and forget that their primary responsibility is to the member.

The good news for HL customers is that the default workplace options available to employers and members are currently delivering the goods

hl perf

The not so good news is that when it comes to the “money” side of things, the HL IGC is rather short on detail.

The real issue is whether the entire proposition represents value for money and the IGC continues to keep all dimensions of the offering under close review; at present the IGC is happy to confirm the services provided within the platform fee do represent good value for members

This would be fine if there was evidence of how HL’s charges compare with other similar providers. “At present”, suggests that the IGC has it in mind to demand improvements in member charges as HL’s proposition grows in shareholder value.

The (otherwise pretty boring) findings of the member survey , includes this conclusion about HL satisfaction scores

Most were rated as either good or excellent. However, one area the IGC were concerned with was the relatively high number of ‘I don’t know’ responses to the cost of the plan

You would have thought that the IGC would have used the opportunity of the Chair report to explain how HL is making its money and give members the transparency they claim they lack.

But the report fails to do this. Though we have tables on communication metrics (how long does it take HL to respond to an email) we do not have tables on how much members are really paying for their funds and how much less they would be paying, if HL was passing on the full value of the investment management agreements it is negotiating with fund managers.

This is particularly the case with regards the passive default fund, the “BlackRock Consensus 85 fund”. If I was an experienced investor reading the IGC report, I would be particularly interested to see a transparent assessment of the money that HL are making from promoting this fund (as well s the other defaults).

There is not enough in the IGC report for me to be frustrated,  but the absence of close analysis of HL’s charging structure is now a priority. I’m giving the IGC an amber for its analysis of value for money and an amber for the effectiveness of its work. But I will give the report a green as a read, it is a very engaging document.

In conclusion

The report reads well , but there is too much missing. I am not happy to see no mention of HL’s attitude (or lack of one) to ESG management , I am not convinced that life styling ordinary people to cash, is a good at retirement strategy and (as talked of in this article) I’m worried that the HL IGC is not asking awkward questions about the commercials of the HL Workplace SIPP.



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Con Keating on the Rules of Evidence and The Defined Benefit White Paper.

Con 8

This post is from Con Keating and first appeared in Portfolio Institutional

Alongside its new DB white paper (Protecting Defined Benefit Pension Schemes) the Department of Work and Pensions published a summary of the responses to the earlier DB Green Paper (Security and Sustainability in Defined Benefit Pension Schemes). This consultation drew 835 responses, of which 439 were submissions from members of the Hewlett Packard and BA schemes, for whom there was special interest. The number of responses to the individual questions posed varied wildly; as few as 26 for one question. The Long Finance response to that consultation, which I co-authored, has been downloaded over 1200 times, which is quite remarkable given its length – at 126 pages it is longer than the Green Paper itself. Much of that is concerned with a deconstruction of the Pensions Regulator’s misconceived and misleading narrative surrounding DB pensions. We were sufficiently concerned by this to call for the establishment of a Royal Commission to investigate it fully.

The White Paper is pre-occupied by much more than the issues raised in the Green Paper. Several high-profile employer insolvencies, such as Carillion, have influenced the political agenda. The Parliamentary Work and Pensions Committee, whose aggressive interrogations and stentorian, minatory pronouncements are legend, has provided all the encouragement needed. Any pretence of a sense of proportion has been abandoned. The Pension Protection Fund has been called upon to cover just 2% of the membership of DB schemes after twelve years in existence. Its actuarial liabilities are just £22 billion when bulk annuity purchases are projected to be £30 billion in the current year alone. The insolvency rate of employers has proved to be far below the insolvency rate of the general population of companies. Even transfers out of DB, at £34 billion last year, dwarf insolvencies.

The most eye-catching proposal in the White Paper is to “…legislate to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme…”, which is augmented by the idea that legislation should be introduced to: “… give the Regulator powers to punish those who deliberately put their pension scheme at risk by introducing punitive fines”. Perversely, we view this as a positive development. It makes redundant our call for a Royal Commission to investigate the duties of trustees and responsibilities and powers of the Regulator since it moves the venue for those deliberations to the courts.


Among the obvious early casualties there, are likely to be the valuation standards enshrined in the Pensions Act 2004. The counterfactual nature of these renders them of little or no probative value when trying to establish recklessness, or much else for that matter. In turn, that opens many of the regulator’s other nostrums, particularly those on trustee duties and responsibilities, to challenge by considered argument and explicit judgement.


Communications from the Pensions Regulator have taken an increasing belligerent tone in recent years, and the recent annual DB funding statement is no exception. Yet again the Regulator has added to Trustee burdens. On transfers: “We would ask trustees to keep records of transfer activity, including details of the advisers and the schemes to which transfers are made.” This process of adding to the so-called duties and tasks of trustees by the Regulator has become casual and is insidious as “ask” becomes “expect” and ends as “require”. This example may be trivial, but the codes and guidance and other inventions of the Regulator are not.


We are now seeing direct intrusions into corporate finances. The demonization of dividend payments is a prime example. It appears that our politicians and the Regulator will not be content until all DB pension liabilities are funded to the level of their future cash values, and that even then we would probably hear calls for additional funding to cater for some risk of their imagination.


There is little doubt that we can expect to see these changes – to quote the Pensions Minister: “…we will give the regulator the powers…” Not much point then in following the consultation processes or responding to any of them.


We can expect the courts to see straight through the spin of “protecting members’ pensions” – if that really were the objective, the solution is simple: have the pension protection fund pay the full benefits of members. We can expect the courts to challenge the overfunding of DB pensions that results from the use of counterfactual discount rates and consideration of events that may or may not happen after the demise of a sponsor. It seems certain that they would see that as being no more appropriate than setting aside corporate funds today for payment to shareholders or other creditors after insolvency.


Not many of the nostrums of the legislation and Regulator are likely to survive such scrutiny; not integrated risk management, not the section 75 claim amount and not even the prudential buffer of technical provisions valuations. The sad thing is that none of this will resurrect our private sector DB system. Finance directors have rightly concluded that once is accident and twice, bad luck, but three times and more, enemy action. It may just save what little still exists.

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Reassure’s IGC produce another good report

reassure 18.PNG

Reassure growth

Reassure, the life insurance consolidator owned by Swiss Re, continues to swallow up large numbers of what the market calls “legacy” pensions.

If you took out a pension in the past and stopped paying, you still have rights to that money, even if people call your money “Zombie money”. And every pound you have within Reassure is just as valuable as the money you are saving today.

Well that final sentence deserves some adjustment, it “should” be just as valuable. Unfortunately it may not be as it may be invested in “initial” units, which have to grow by anything up to 6% pa , before your money grows at all. So it’s pretty important you get a grip on any money you have in these legacy policies, and do the best you can with it.

Which brings us to the IGC, ably run by Chair, Zahir Fazal. I say “Chair” as it applies that the IGC could as easily be run by a woman. Last year I hoped that we might see a woman on the committee but it remains an all male preserve – for which I am sure it is the poorer,

This year’s report is 33 pages long – more than twice as long as last year’s. Though some of this is down to the inclusion of stock photos, most of it is down to some performance tables in the appendices. Giles Payne, the IGC’s investment man, needs to look at these tables as they don’t make much sense to me.

Reassure IGC2

These seem pretty random to me and don’t add much to my understanding of what is really going on with the majority of money under Reassure’s control. There is some talk of the small amount in with-profits providing top quartile returns but there is really nothing in the report that suggests to me there’s much going on on the investment front.

As reported by other IGCs, “external” fund managers – aren’t coughing up slippage numbers, which is worrying for Reassure as they don’t have any internal managers. I suspect that IGCs are hiding behind “external” – pretending it’s not their fault. The truth is the opposite, the decision to take people’s money into pension contracts, was based on a fiduciary responsible for that money. The decision to outsource the management of that money was taken by the insurer, the insurer has as much responsibility for “external money” as internal money. So the value for money section of this report is marked down – there is no real idea of how much of member’s money is being spent by these external managers, and how much is invested.

I’m worried too that the Chair tells us early on that he is widening the scope of value for money work to consider things other than performance and costs. Presumably he means the capacity of the insurers to work with members to get the best possible deal. But , as the Chair points out, most people aren’t interested in responding to calls and are simply disengaged. It seems wrong to judge an organisation on its capacity to talk to its customers about a product that has a lifetime value, but there seems little else that Reassure can be judged by.

By the end of the report’s deliberations on value for money, I was coming to the conclusion that it was running out of things to say. It’s a pity that more was not done last year to look at the engagement of external managers with ESG, though this does appear to be on the 2018 agenda (along with getting some facts on slippage). I can’t go so far as to say Reassure’s IGC is failing to get to grips with value for money, but neither can I say they are getting very far. The IGC lives in a penumbra of half ingested information and I’m giving it an amber.

Is it effective?

The report shows that in their limited scope, the IGC is very focussed on mitigating the impact of the charges of the various contracts its members are in.

How effective you can be , when you are battling with a shareholder who has purchased the company in order to wring the maximum value possible out of the book. Each concession made on charges is another line gone in the P&L and a little less embedded value retained by Swiss Re.

In practice, the IGC should be telling everyone who reaches 55 – to get out now – unless they really value their contract. The 1% exit charge will almost certainly benefit members more than hanging around for a death by a thousand cuts.

I find that the Chair’s approach avoids the usual prevarications, he is bold and fearless and I’m giving him a green for clearly putting up with no nonsense. All the same, there is a lot more that the IGC can do to get members to realise they could be a lot better elsewhere!


The introduction of case studies, simply laid out and showing where value has been created for them – since the start of the IGC – is very good.

The IGC has clearly gone away and re-thought how the report itself can be used to engage people and is the better for it. I am giving Reassure a green for engagement.


In Conclusion

There’s not a lot to dislike about this engaging report. It is not going to set the world alight but nor is it bringing IGC’s into disrepute. It is – to be fair – just what we should expect from a functioning IGC – but it could do with some diversity from its board!

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Pension paralysis over the net-pay rip off.


I won’t bore you with a list, but there are 31 blogs on this site dealing with various aspects of the net-pay rip-off which is denying hundreds of thousands of low-paid people the incentive promised them by HMRC for contributing into workplace pensions.

It is a scandal, the pensions industry are complicit in allowing it to become one and this blog explains why the situation has got to the state it has. It also gives some hints to employers who don’t want to be a party to yet another pension scam.

I’m writing this article because net-pay has finally become topical. It’s become topical because a pension consultancy (Hymans Robertson) has launched a report on the matter which has sufficient PR behind it to get it media prominence. Good for Hymans Robertson, they are part of the solution, but why has it taken them and others  3 years to wake up?

How did we get here?

Around October 2015, payroll experts, notably Kate Upcraft, noticed that the lower threshold for auto-enrolment contribution and the minimum threshold for income tax were diverging so that some people could be paying no tax , getting no tax relief and yet being auto-enrolled.

As Kate and I and a few others looked further, we realised that a lot of auto-enrolment was starting at £1 of earnings (this is what happens at the House of Fraser). This means that all low-earners in net pay auto-enrolment schemes, could be missing out on incentives to contribution. Then remember that many people on habitual low-earnings “spike” into auto-enrolment – as a result of a well-paid pay period and you realise that auto-enrolment’s 11m new participants , include a few hundred thousand who get no incentive to contribute – just because their employer is operating net-pay rather than RAS.

From my emails that Kate Upcraft first had a meeting with the DWP about this in November 2015, and NOW Pensions and my blog were flagging all this from mid September 2015. Kate first discussed this with me in July 2015.

It is very hard to know how many people are contributing to DC schemes under net pay and missing the incentive. Many are doing so under salary sacrifice and are completely off the radar. Lloyds Banking Group reckon that they may have as many as 3000 such employees on their own. Since the vast majority of own occupation occupational schemes are set up under net-pay and as many of them (for instance Whitbread) have high numbers of low-earning, part-timers, I think our initial estimate of 300,000 people in the “rip-off”, should be revised upwards.

Over the past 3 years, despite my blogs, Ros Altmann’s blogs and the pleading of parts of the payroll industry (Kate Upcraft in particular), nothing has happened. OK Now has cobbled together a fly-by-wire compensation structure, but other than that NOTHING HAS HAPPENED!


Nothing has happened because virtually all the players in this sorry fiasco , have blood on their hands.

Chief culprits are the consultants, who both recommended employers set up net-pay arrangements (which suit the high-earning purchasers very well) and administer them on systems which are “net-pay only”.

These consultants – especially the big three – Mercer, WTW and Aon, have now gone further and set up their master-trusts under net pay. That means that they are so steeped in net-pay themselves that they can say nothing on the subject. No advice- no action, the large employers sail on ignoring their low-earning members and no-one, not the PMI or PLSA or AMNT or any other trade body does a thing about it.

Now let’s look at the employers. Quite apart from feeling they are absolved by their consultants, they have no wish to deal with this issue on any commercial grounds. The staff who are missing out are their least valued, they are probably more mobile than senior staff but even if they aren’t they have no voice. They have no voice because their normal representatives – the unions – are making no noise.

I do not know why the unions are not bothered about this issue. Perhaps it is because this is DC, perhaps because of phasing, the scale of the problem is currently too small, perhaps because one of the unions has a 50% share in a net-pay mastertrust. Anyway, the unions have generally been quiet on this issue and that has let the employers and their advisers off the hook.

All of which is leading up to the great big villain of the piece – the Government – more especially HMRC – who see Net Pay as a handy way of avoiding the impact of auto-enrolment on tax inflows. Having a high number of low-earners outside of the RAS system is just fine by HMRC, and as the low-earners are not even being told they are being ripped off, this situation can go on bubbling away – just like PPI.

Just like PPI!

Of course we all know what happens when the PPI bubble bursts. You get hundreds of thousands of claimants downloading forms from Money Saving Expert and demanding expensive to administer compensation for being ripped off.

Which is exactly where HMRC is heading.

And even if employers and unions aren’t directly in the line of fire, they will find themselves with the same collateral damage as all those who condoned PPI find themselves with.

This is another version of the “too big to fail” problem. The PLSA, PMI, Consultants, Employers, Unions and most of all HMRC really do believe that they can keep a lid on the Net Pay scandal, because it is so big that no-one will have enough energy to lift the lid on it.

Well done Hymans Robertson (and a few others)

It may have escaped notice, but there are consultants who don’t run their own master trusts and who are prepared to stand up and be counted – even if it means pissing off some of their clients. Hymans Robertson are the biggest, Lane Clark Peacock are another and First Actuarial are a (smaller) third. Apart from us and a gaggle of smaller consultancies  too numerous to mention – (oh and JLT), all the other pension consultancies run their own net pay master trusts and they all do their own administration. JLT of course administer NOW Pensions master trust – and they can’t offer NOW a relief at source solution.

Of course we do have our own vested interests and by writing about net-pay I will undoubtedly piss off some of our clients and introducers. But we really do need to solve this problem and as an industry – put pressure on HMRC to find a proper solution. So long as most of the stakeholders in this debate remain conflicted and stay silent – that will not happen.

Possible solutions

Because NEST is a relief at source scheme, many large employers have put in place a NEST scheme for low-earners and the problem (for them) is mainly solved. I know of at least one large employer with their own occupational DC arrangement (net-pay) considering a GPP for low-earners.

I have seen (from Kate Upcraft) various solutions that could be administered by HMRC , which would compensate those on net pay without incentives, through “year end sweeps”.

And I know that some workplace pensions operating under Net Pay (Smart for instance) are promising to offer Relief at Source within a few months.

People’s Pension of course has the best solution which is to offer both forms of relief(though not within one employer arrangement).

All of these solutions are pro-tem till HMRC gets its act together. HMRC were the bright lads who introduced Relief At Source and HMRC should have it in them to provide us with the long-term solution. I don’t know what the long-term solution looks like but we cannot go on like this!

In conclusion

So rather than right another 32 blogs about net-pay, I hope that others apart from Hymans Robertson , will do it for me. I hope that the PLSA and PMI and other bodies will start lobbying HMRC for fairness for those on low-earning and I really hope that we will have – in quick time- a solution that ensures that a large part of the newly phased contribution increases of those on minimum auto-enrolment contributions, are given what the Government has promised them – an incentive equivalent to basic rate tax-relief – WHETHER THEY PAY TAX OR NOT!

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Laugh, cry, applaud! Zurich’s IGC report is flawed – but a “must read”

zurich ass

I don’t know whether to laugh, applaud or cry when reading Zurich IGC reports and Laurie Edmans’ third report is no exception.

Laugh – because of Laurie’s brutal honesty

But from the members’ perspective, it does not matter whether the issues are industry wide or not. The fact is that the considerable majority of scheme members have little idea whether what and how they are saving is going to give them the lifestyle in retirement they expect.

Cry at the massive amount of customer research that has led the IGC to this conclusion.

Or applaud Laurie for pursuing the course most difficult, questioning whether we can ever sufficiently empower customers for the task ahead of them – to manage an income for life from a pot of money built up within a DC plan.

This may explain my erratic ratings of previous reports. I veer between violently agreeing , ranting with frustration and then smiling appreciatively at Laurie’s great project.

Sadly, that project will not be continuing as intended. Zurich’s modern pensions, the book of DC business established since the turn of the century, has been sold to Scottish Widows, what will be left will be the old Eagle Star and Allied Dunbar books, which hardly bear examination under the ambitious project that Laurie and his colleagues embarked on in 2017.

Value for Money

The IGC comes to one important conclusion that every other IGC should contemplate. Relative to its peer group, the Zurich Corporate Pension is succeeding, but relative to what members want – it is not.

This tough assessment results from the consumer research conducted between 2015 and 2016. It is not based on Laurie’s private prejudices. It is ironic that the largest scheme that Zurich has underwritten, the Royal Mail’s DC plan, looks likely to be abandoned by its 40,000 members, in favour of a CDC plan which – to the Postal Workers – delivers what they want (value) for their money.

When I was working at Zurich (then Eagle Star), the Royal Mail Trustees came on a site visit, arriving in a couple of limos at the gates of our Cheltenham offices.

“Who you here for?”

asks the gateman of the chauffeur.

“We are the Royal Mail trustees”,

replies a voice from deep inside the car.

“Alright, the post room’s round the back”,

said the gateman dismissively –  the site visit never quite recovered.

I am sure the IGC will smile at the story, which illustrates that how we see our customers and how they see us, are seldom aligned! Here is how the IGC sees Zurich relative to its peers.

Zurich vfm 2

Here is the “harsher” truth of how Zurich customers see their pension

Zurich Vfm

When Zurich looked at service standards, they concluded

… our consumer research clearly shows that the comparators that count most for members were not with other financial services companies but with other sectors which are perceived as having higher standards – retailers and digital companies being cited most as examples. Consumers saw financial services companies generally as falling short of their expectations for service. Zurich, in common with its peers, appears to have work to do

What worries the IGC is that Zurich’s service standards and dashboards pass muster not just within Zurich, but with the employee benefit consultants who recommend Zurich. Like Eagle Star, who alienated the trustees of the Royal Mail all those years ago, Zurich don’t know their customers.

The same can and is said by the IGC about the empowerment of customers to take the decisions they need to take to keep their policies up to date. Zurich are proud of the tools and communications they put in place, but the customers don’t seem to use them or read them. Having seen the efforts Zurich went to , to create a self-service culture among clients, and the pitiful use of self-service, I know the frustration that must be felt by Zurich, the painful truth is that much of what is being asked of customers, is beyond them. Again, the simple conclusion is that this is more than a Zurich issue – but it is an issue for Zurich all the same.

The only areas where Zurich’s view of itself (as a good provider) and the view of its customers align, is in terms of investment and compliance. My cynical view is that these are areas that are the “inner sanctum” of a provider’s competence. It is extremely hard for the general public to question whether value for money is being achieved in areas of competence they know nothing about and against which they have no proper benchmark (you don’t find funds or pension compliance on the high street).

These insights are important and for more than Zurich. For the IGC’s brutal honesty, for their focus on Zurich’s customers and for their refusal to give “the right answer” to their masters, I give Zurich IGC a green.



For most of 2017, I was a Zurich customer and I struggled to transfer my legacy pension away from Zurich. I even got as far as tabling a complaint, but gave up against the waves of bureaucracy that came at me. Mine was not a happy experience, I suspect that Allied Dunbar and Eagle Star customers of the eighties and nineties, will have similar stories to tell. To have any chance of getting value out of legacy pensions, you need to be 55 and in my case, it wasn’t till close to my 56th birthday, that I finally got out with only a 1% penalty.

There is a lot of data relating to legacy products , much supporting the assertion that the underlying funds are doing well both in terms of value (outperformance) and efficiency (low transaction costs). There is also much truth in Zurich’s assertion that the process of “moving away” can cause more detriment than staying put (or at least moving to a better fund).

However, I don’t find that Zurich have been particularly effective at managing legacy issues and I don’t find the IGC have been particularly good at helping me! I give Laurie and his team an amber for “effectiveness”.


Having criticised some other IGC reports for being over-lavish with stock photos and info graphics (sometimes used as padding), it may seem churlish of me to criticise the Zurich IGC as over-Spartan.

It does however look like one of my reports, before I put it into beautification for clients. Heavy blocks of text appear as they would on a first draft word document , tables are poorly aligned and there is little  relief to the eye over 24 pages.

Did the budget not stretch to some proper type-setting and some “modern” presentation?

While I enjoyed the content, I couldn’t help feeling that the IGC had run out of money and support from Zurich. This may be the case, as workplace pensions is clearly not the focus going forward.

It is a cruel irony, that having so much time and money since 2015 , getting engagement with its public, this report fails to engage them back. As a matter of style, there are too many difficult words. Here for instance is the opener to the Chair’s statement

The IGC’s main task is to ascertain whether the members of the pension schemes within their remit receive ‘value for money’from their product provider

The word “ascertain” appears at the start of the main body of the report. Why? “find out is the phrase ordinary members use and understand.

This report contains some of the best work of any, sadly it doesn’t quite engage and I can give it only an amber.

In conclusion

Once again, I am left laughing, crying and applauding all at the same time. Laurie is Hamlet “he was likely , had he been put on, to have proved most royally”.  However, the grand design of the IGC is dead and what follows for the Zurich IGC will

necessarily be less.

Hamlet Laurie

Alas poor Zurich, I knew it well.

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Reforming the law to let IGC’s act on ESG


The FCA made the following statement in its 2018 business plan. published this week

We are currently undertaking wider policy work on Independent Governance Committees (IGCs) for workplace pension schemes to look at the possibility of extending their remit. This wider work includes possible changes to the rules for IGCs to improve governance and value for money for consumers, following recommendations on social investing from the Law Commission. FCA 2018 business plan.

This is what the Law Commission said

The assets in DC schemes are expected to increase sixfold by 2030 to £1.68 trillion, a sum equivalent to 15% of the current net wealth of the UK. These changes raise questions about how the new pension assets are to be invested and, in particular, whether at least a proportion could be invested for the wider social good or “social impact”.

and this is what they see stopping social impact investment

The barriers to social investment by pension funds that we identified were, in most cases, structural and behavioural rather than legal or regulatory.

Ian Pittaway, IGC chair at Aegon expands to Professional Pensions on the barriers for IGCs, explaining that unlike trustees, they don’t have the right to hire and fire

“We’re more reviewers and influencers and persuaders; were not actually decision-makers,” he said. “This wouldn’t be a big bang solution, it would be every year, we would question – interrogate – the provider about what their social impact policies were and there would be a dialogue about that and we’d seek to influence it.” Professional Pensions

Ian is right, but that shouldn’t stop IGCs influencing the behaviours of their providers to ensure that they enforce good practice when it comes to the environment, social purpose and governance. In practice, few trustees have the capacity to directly influence on ESG, they leave it to asset managers who may themselves outsource voting to organisations like PIRC and Manifest. The cry that “it ain’t our job guv” is weak if everybody says it at the same time; better that the cry was “it’s all of our job”.

In the first round of IGC Chair statements, only Aviva mentioned ESG, by last year, Aviva had been joined by L&G, this year, almost every IGC statement has a statement on ESG(bizarrely, one of the few exceptions was Aegon’s).  The quality of these ESG statements varies from an informed critique, to what appears to be little more than a “cut and paste” from the provider’s promotional material.

Clearly this is a start, but clearly the FCA wants more. Since the vast majority of workplace saving is invested through defaults, IGC’s should be asking what aspects of the default are being managed on ESG grounds; the FCA may not be satisfied that the provider offers an ESG fund. This may be regarded as tokenism. One occupational scheme operates an ESG tilted fund as its default. This is the HSBC staff scheme which uses the LGIM Future World fund as its defaults. Some employers, such as the RSPB, have also adopted Future World as the default for their contract based scheme.

Legal and General are reported to be building an ESG tilted version of their multi-asset fund, meaning that employers not wishing to adopt a pure equity approach, can also benefit from the value of ESG.

In time, we may expect to see ESG as integral to the construction of DC funds as seat belts are to cars, vans and lorries.  The Law Commission may want that time to be sooner than many IGCs are planning for. This is its recommendation

For contract-based pensions, the Financial Conduct Authority should require schemes’ Independent Governance Committees to report on a firm’s policies in relation to:

  • evaluating the long-term risks of an investment, including relating to corporate governance or environmental or social impact;
  • considering members’ ethical and other concerns; and
  • stewardship.
  • We also recommend that the Financial Conduct Authority should issue guidance for contract-based pension providers on financial and non-financial factors, to follow the guidance for trust-based schemes given by The Pensions Regulator.


We suggest ‘options for reform’ in the following three areas:

  • investment in social enterprises (such as charities and community interest companies);

  • investment in property and infrastructure; and

  • encouraging savers to engage more actively with their pensions.


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