Weathering the Storm

Iain Clacher & Con Keating

As part of our Funding Code research, we searched for academic or practitioner papers covering long-term expected returns forecasts. We were particularly interested in the ex post accuracy of these forecasts. We found none which used historic market performance[i] other than for short-term concerns such as corrections to market bubbles and periods of boom and bust. There were a few, macro-economic in nature, where long-term returns are functions of growth and demographics. To use an analogy, this is climatology rather than weather forecasting. We shall revert to this later.

What we do know

There are a few things we do know about gilt yields – they are strongly predictive of future long-term gilt returns, but that relation is tautological. They are not predictive of equity, property, or other asset class returns at any holding period horizon. This renders their use in gilts + presentation of expected returns highly questionable. To misquote Ralph Nader, they are unsafe at any horizon.[ii]

We have spent much of the past week trying to reconcile various claims and figures cited in the latest USS valuation consultation with UUK as these two things seem inextricably linked. We have had little success.

As best we can tell, the single equivalent discount rate for USS would be less than 2% nominal and the required rate of return on scheme assets would be around 3.2% nominal. These seem to us to be low and readily achievable. With that in mind, we looked to the long-term expected returns forecasts of other long-term financial institutions. The expected returns of other UK pension funds are not a valid comparator as they are subject to the same regulatory panopticon.

Looking further afield, The Norwegian Fund for Future Generations publishes its expected returns – they expect 3% real above their CPI which has averaged around 1.75% in recent decades, so a nominal of around 4.75%. The risk (volatility) of their portfolio is 12%. The most interesting aspect of all of this is that in 2017, in response to declining government bonds yields globally, they moved their target asset allocation from 60/40 equity/bonds to 70/30 equity/bonds and increased the expected return to 3% real from 2.75%. In the context of this shift in investment strategy and return expectations, it is worth bearing in mind this is the largest of the sovereign wealth funds (with circa $1.2 trillion of investments as of July 2020)[iii]. This is a fund that has access to the best advice in the world. Moreover, it has  achieved these types of returns over the long-term[iv].

By our calculation, if USS were to use this rate, it would not be reporting any deficit but rather a surplus of similar order to the headline-grabbing £18 billion deficit.

Intergenerational fairness

This issue of what do future returns look like (and what returns do we need) is also linked to the recent blogs on cash equivalent transfer values.

If we fund a scheme to the levels of liabilities arising from low rates of interest, we are effectively pre-funding those liabilities relative to their contractual values. This also has the effect of lowering the required rate of return on the asset portfolio, and with that, the potential future cost to the sponsor employer. If a scheme is fully funded at this rate, the required rate of return on assets is that rate.

In these circumstances, if a member takes a transfer based on these values, albeit that the transfer may be limited to the degree of funding of the scheme, then it is crystalizing the employer’s cost to that date. Crucially, this transfer enables the employee to extract all of the pre-funding, and denys the employer the possibility of recouping the costs of this prepayment,  as any future outperformance of the asset portfolio relative to this low return, is no longer possible on the assets that have been removed from the scheme.

While it may be the case that transfer transactions throw up gains in accounting terms when those accounting liability values are inflated by the use of low gilt rates, but that is a short-term accounting gain, which comes at the expense of longer-term real gains from higher returns than those we currently observe in the market.

Moving to a gilts-based de-risking strategy has the same effect of crystalising the elevated sponsor costs while removing any possibility of recouping them.

Another comparator

It is worth comparing these transfers with the size of the PPF; at £80 billion they are four time the liabilities of the PPF, and  in reality, the PPF is rather small relative to the overall DB pensions marketplace. In its 15 years of existence, it has assisted just 2% of scheme members and less than 1.5% if measured by liabilities, and it has done so at eye-watering cost. It is apparent that the fear of sponsor insolvency greatly exaggerates the actuality.

The Funding Code consultation makes much of protecting members. This raises the question of just how much of members’ pensions is at risk. The answer is rather little. If we consider the scheme we used in illustrations in earlier blogs, we have 63% as pensioners in payment and 37% deferred. The pensioners in payment are fully covered by the PPF so the risk exposure is limited to the 10% haircut applied by the PPF – so just 3.7% of future pension payments. These have a total future value of just £756k – a small fraction of even the minimal present-day funding cost of the proposed code. It is not difficult to conclude that this funding code strategy is more about protecting the PPF than members.

A final thought

The ‘lower for longer’ view of interest rates is now conventional wisdom. As such, it and its associated returns expectations are suspect. The shifting global demographics imply that we are moving over the coming three decades from the deflationary environment of the past three decades to one in which inflation and higher interest rates will prevail and with that low growth. This unconventional view is explored fully and coherently in Charles Goodhart’s latest book, ‘The Great Demographic Reversal’; we recommend reading it. This is a change in the financial climate that is perhaps as important as the change in the natural climate.

One consequence of that would be that this is surely the wrong time to de-risk in the manner proposed in the DB Funding Code.


In the brief time since we wrote this blog, we have had some very productive discussions with some of our peers. Our attention was drawn to the Canada Pension Plan which publishes 75 year return expectations for each of its two funds. These are 5.95 % (CPI + 3.95%) for the ‘Base’ fund and 5.38% (CPI + 3.38%) for the more conservatively allocated ‘Additional’ fund. Obviously, it is too soon to evaluate the accuracy of these forecasts but the indications to date are supportive. It is notable that both CPP and the Norwegian employ peer review of their assumptions. We feel that the Pensions Regulator’s prescriptions should be subject to similar peer review.

It has also been pointed out to us that the large Canadian funds have proved able to harvest ‘illiquity premiums’ very successfully, with which we agree. However, we will make just one point here, though we will return to the subject in our commentary on the proposed second Code consultation. That point is that it is liquidity in the sense of tradability which has a cost rather liquidity which receives some extra compensation. The means that if you buy liquid securities you pay this cost regardless of whether you exercise the option to use it by selling in a market. Gilts, of course, are the most liquid and most expensive of securities from this perspective. One of the effects of quantitative easing is to lower the cost of liquidity, though relative value differences should persist between on and off the run securities should persist, This lowering of the cost of liquidity should also result in a greater reluctance by dealers to hold large inventories of bonds in pursuit of their liquidity provision role – the returns to capital are less attractive.

Finally, we have had much commentary on the prudence of buying gilts at times when their expected returns are negative in real terms[v]. However, as we have been promised a definition of prudence by the Regulator in the second consultation, we shall leave further discussion until that point in time.

[i] The long-term memory literature results for UK markets are mixed.

[ii] The original comes from Unsafe at Any Speed, Ralph Nader, 1965.


[iv] Those interested in more detail should read their White Paper (in Norwegian) available at:

[v] For more on this aspect see:



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Payroll + Pensions = Value for money! Register here for the event of next week



This is going to be by far and away the best webinar you could watch next week


Hosted with our thanks by the CIPP


For a sneak peak of payroll’s best kept secret – click here

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I love payroll and payroll loves me, don’t mind liaising with HMRC


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Savers are denied the right to check their pension statements

Although it feels like winning, this has been a tough few weeks for me and my team as we struggle to get nearly 600 Data Requests sent to pension providers. These have been entrusted to us  via Letters of Authority signed digitally.

What we’re asking for is the history of pension contributions made for and on behalf of the 300 testers in the FCA sandbox using We are also asking for the current pot value (AKA the net asset value).

Why we want this information is to show each of our 300 users their individual (or internal) rate of return on their savings- their IRR. We also give them a score and an idea of how they’ve fared against the average saver (paying in the same amount).

You would not think that in this age of the GDPR, getting data on what you’ve paid in would be hard , but it’s been a nightmare and these are the top ten reasons pension plan administrators have given us for not complying with our user’s legitimate request.

  1. “AgeWage is not registered with the FCA” (we have direct authorization)

  2. “We don’t recognise digital signatures” (this is against the Law Commission’s judgement)

  3. “We only go back two years” (even if the contribution goes back two decades)

  4. “We don’t have all the data in one place” (split records)

  5. “We haven’t completed due diligence on”

  6. “AgeWage hasn’t verified our client”

  7. Some data supplied but contributions found to be missing

  8. “We will only send you the NAV” Supplied with a wake up pack,

  9. “We don’t provide this information to our clients”

  10. “We are not participating in your test”.

What this means is that despite hanging on to phone lines for upwards of 30 minutes, we are simply unable to analyse an individual user’s data because of ignorance or incompetence or willful obstruction.

The result is that many of our users have faced lengthy delays getting their scores and a substantial minority (around 15%) face the prospect of not getting their data analysed.

Put more simply – savers are being denied the right to check their pension statements and stopped from getting to know their pension,

What this says about governance

Go back to the message from Jerry Schlicter at the top of this blog and then think about why investors on both sides of the Atlantic have a legal right under Erisa and GDPR to their data.

If we do not have access to our contribution histories we cannot tell if the money we have sent to the provider has been recorded and invested.

AgeWage has analysed over one million pension pots in the UK and we estimate around 2.5% of the records we’ve been sent are wrong. So for every 1000 pots – 25 look wrong.

We can tell they look wrong because the rates of return on pots looks highly unlikely.

We provide reports to trustees, IGCs , GAAs  and the administrators of SIPPs , heritage pensions and occupational schemes. We show them records that look wrong and highlight our diagnosis.

We are also highlighting what look erroneous records to those in the FCA test. And we will be explaining to our testers, the FCA, the trustees, IGCs and GAAs where we are being denied the data needed to analyse whether our testers have accurate records.

We are told that we are being disruptive. We push back. We are offering people a service that tells them whether they have a regular or abnormal IRR.

But we says that this shows the governance on record keeping within non-compliant organisations is weak to very weak. Customers are being denied their data to which they have a right under GDPR, they are not being treated fairly for their legitimate data requests and they are certainly not getting any quality of service.

Fiduciaries faced with these failings from their customer service teams are under an obligation to respond. As our testers agent, AgeWage will pursue these data requests by escalating to fiduciaries – where we cannot get the data in a timely and accurate way.

So what of Jerry Schlichter?

You can read of Jerry Schlichter here.  Robin Powell’s fine article explains how this man has forced plan administrators to buck their ideas up in the United States.

In the UK we do not rely on class actions to change things. Instead we rely on principle based legislation such as the FCA’s “Treat Customers Fairly”. Where customers aren’t treated fairly we have IGCs and GAAs and Trustees to escalate matters to. And there are ways to escalate beyond through the consultations put out by Government.

This message was sent to me by Jerry Schlichter yesterday

Denying people the right to see how their pension has done, denying them the right to check whether their records have been kept accurately, is a fundamental breach of any customer code. It is a breach of GDPR and it shows those organisations who fail to provide data, their readiness to participate in the pensions dashboard.

I am not naming or shaming, but I am putting those organisations who are refusing to co-operate and meet the client’s legitimate requests that we will escalate so far as we can. That is a long way.

Here is an email I received from one of the people who has been working with us (unpaid) to get the backlog of data requests sorted. I have redacted the provider but will be forwarding the mail to the life company in question.

Today was an “insurance company” day: 16 open items; eight phone calls (max wait 32mins) to 7 different departments; 7 LOAs resent. Result: 3 sets of data received (one still incomplete) and one policy not found.

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The best friend investors have never heard of (Robin Powell)


Jerry Schlichter

He’s arguably done more to advance the cause of ordinary investors than anyone except the late Jack Bogle. And the chances are you’ve probably never heard of him.

His name is Jerry Schlichter, and he’s the founding and managing partner of the St Louis-based law firm Schlichter Bogard & Denton. In recent years, Schlichter and his colleagues have won compensation valued at more than $1.5 billion on behalf of individuals harmed by financial wrongdoing.

His specific focus is on the excessive fees charged by Wall Street firms for managing large company pension schemes. He’s sued both the fund trustees and, in some case, the fund managers themselves, and his success rate is extraordinary.


My colleagues and I at the Transparency Task Force had the privilege of listening to a talk by Jerry on Tuesday evening. It was truly inspirational.   

The key moment in his career, Jerry explained, came in 2006, when he filed a lawsuit against the Swiss-Swedish multinational corporation ABB and Fidelity Investments on behalf of ABB pension plan members.

“We needed a huge line of credit,” he recalled. “My partners and I put our houses and net worth — everything — on the line.

“The firms said to us, ‘We don’t care how much we pay. We will put your firm out of business.’ We later learned that they had spent $42 million to pay their lawyers alone. Even senior judges encouraged us to give up.

“Losing that first case would have been disastrous. It would have meant bankruptcy for me and my two partners.

“But we won, and that began to turn the ship around.”

“Significant, national contribution”

ABB refused to settle and launched multiple appeals but finally backed down last year, after a twelve-and-a-half years battle.

The U.S. District Court in the case acknowledged “the significant, national contribution” made by Schlichter and his team. It said they had “educated plan administrators, the Department of Labor, the courts and retirement plan participants” about the fiduciary obligations of 401(k) plan administrators.

Schlichter has also won cases against some of the biggest firms in America, including Boeing, Lockheed Martin, Caterpillar and Kraft Foods.

The New York Times has referred to him as “Lone Ranger of 401(k)s”. Investment News called him “public enemy number 1 for 401(k) profiteers”, Chief Investment Officer described him as “the industry’s most feared attorney”.

“Asleep at the switch”

So, why does Schlichter think trustees have failed to spot bad advice? And why didn’t they question the fees being charged?

In most of the cases he has been involved in, he says, they were simply “asleep at the switch”.

“The trustees are typically human resources people,” he said. “We saw cases where they would set a meeting for 4.30 on a Friday afternoon. Everybody was checking their watch to get out of there.

“There wasn’t any scrutiny because there was no financial incentive. The people on the committee aren’t paid for what they do, and a company’s bottom line is not affect by the performance of the plan. All that risk is on the employee and the retiree.

“So it was opaque. People were asleep at the switch, not caring particularly.

“The US financial services industry figured out that there was an explosion of assets — $5 trillion now in defined contribution plans — and jumped into that space.

“The problem is (the fund managers) are not fiduciaries. So they come in and market their own products, and say, ‘Hey, we’ve got great mutual funds, put those in your plan, and by the way we’ll take you out to dinner or give you some baseball or football tickets if you do this.’

“Nobody’s minding the store. The fund managers want to make as much money as they can. The fiduciaries need to control them, and they don’t.”

Blatant self-dealing

In a minority of cases, Schlichter said, his firm has presented evidence of self-dealing — in other words, trustees taking advantage of their position and acting in their own personal interests rather than the interests of employees and retirees.

“I’ll give you an example. In the ABB case, Fidelity came in and said, ‘How would you like to have a free plan?’ So what they did was, they used Fidelity for their own executives’ pension plan, their payroll processing, and health and welfare plan — all of which were furnished at a loss to Fidelity.

“Meanwhile, on the 401k plan, Fidelity were getting more than a 50% profit. So what we had was the employees subsidising their employers’ expenses through their own retirement expenses — a blatant example of self-dealing.”

Enormous financial abuse

Asked whether we will now see similar cases in the UK and other countries, Schlichter predicted we will.

“There is enormous financial abuse going on in all forms and in all countries,” he said.

“This is the most profitable industry in the world. The more opaque and under-the-radar the financial transactions are, the more people will operate to serve their own financial interest.

“You’ve got these massive institutions with massive marketing and prospectuses that are 50 pages long that nobody reads.

“Investors end up feeling they don’t have a voice, they don’t have control, they don’t understand things, and they don’t know where to go with it.

“That’s why people came to us. And it seems to me the same thing is going on in the UK.”

Group actions

One potential obstacle to litigation in the UK is that US-style class actions are are not permitted here.

In a class action, a lawsuit can be filed by an individual acting on behalf of a group of plaintiffs. In the UK we have group actions, which involves having to obtain the consent of affected individuals.

This can be a protracted process, and partly explains why the group actions against parties involved in the Neil Woodford scandal have not yet come to court.

Watch this space

That said, I have little doubt that we will see legal action against UK fund trustees and asset managers over excessive fees in company pension schemes within the next few years.

It really shouldn’t be necessary to resort to litigation to protect the interests of pension fund members. But, in the US, that’s what it took to open people’s eyes to the abuses taking place.

The Wall Street Journal once referred to the 401(k) industry as having been “Schlichterized”.

UK pensions could do with some Schlichterizing too.

This article is taken from the Evidenced Based Investor’s website  #TEBI website. You can read the original here.  I was at that TTF session and thought to write this article. I am glad I didn’t try- you can’t beat a professional and thanks to Robin and Jerry, we have the essence of the evening.

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Wine, lizards and the hazards of the mute button – Covid-19 actuaries Friday report

The Friday Report – Issue 21

By Nicola Oliver, Matthew Fletcher and John Roberts

COVID-19 Actuaries Response Group – Learn. Share. Educate. Influence.

COVID-19 is still one of the hottest topics for scientific papers and articles. The COVID‑19 Actuaries Response Group will provide you with a regular Friday update with a curated list of the key papers and articles that we’ve looked at recently.


Reproduction number (R) and growth rate (r) of the COVID-19 epidemic in the UK: methods of estimation, data sources, causes of heterogeneity, and use as a guide in policy formation (link)

This paper from the Royal Society is a deep dive into approaches used to estimate the key epidemiological parameters R (the reproduction number) and r (the epidemic growth rate). It investigates the main UK models used to inform the UK Government, including data sources used and assumptions made – for example in relation to the time between onset of symptoms and hospital admission and death. The report also looks at parameters that could be employed to assess the impact of implementing and relaxing social distancing and other non-clinical measures used to combat the pandemic.

It concludes that, whilst wide bounds of uncertainty surround estimates of both R and r, they are still valuable to help formulate policy as guidance on a central estimate of these key figures is preferable to guessing them. The authors consider that the key improvements that can be made when estimating epidemiological parameters are clarity on the assumptions made and improving data quality.

Clinical and Medical News

T-Cell[1] Response

Evidence supporting a role for T cells in COVID-19 protection and pathogenesis is currently incomplete and sometimes conflicting. This study examined overall and immunodominant SARS-CoV-2-specific memory T cell responses in patients who had recovered from COVID-19. A total of 42 individuals were recruited following recovery from COVID-19, including 28 mild cases and 14 severe cases.

SARS-CoV-2-specific CD4+ and CD8+ T cell responses were seen in the majority of convalescent patients, with significantly larger overall T cell responses in those who had severe compared with mild disease. In addition this study reports that the proportion of the T cell response that is attributable to CD8+ (rather than CD4+) T cells is increased in mild infections; this may indicate a protective role for SARS-CoV-2-specific CD8+ T cells.

Another useful output of this study is the identification of several parts of the virus that are targeted in a cross-reactive way (i.e. immune response from a different prior corona virus) in up to half of the patients tested; this could prove useful for future immunology studies and for consideration in vaccine design.

What is the evidence for physical distancing in COVID-19?

Trisha Greenhalgh and colleagues provide a review of the evidence for physical distancing in COVID-19. The so-called ‘2 metre’ rule to prevent transmission by droplets originated from research dating back as far as 1897; this has remained the accepted distancing rule despite updated evidence suggesting that droplets can spread beyond 2 metres.

Key considerations are droplet size, force of emission, ventilation, exposure time, and crowding levels.

The figure below displays the risk of SARS-CoV-2 transmission from asymptomatic people in different settings and for different occupation times, venting, and crowding levels.

The researchers suggest that rules on distancing should reflect the multiple factors that affect risk, including ventilation, occupancy, and exposure time.

Clinical risk scores & vital signs

Clinical risk scores are used in a variety of clinical settings in order to aid decision making by medical personnel. For example, APACHE II was designed to provide a morbidity score for patients in ICU. It is useful to decide what kind of treatment or medicine is given.

Two risk scores have been developed to help with management of patients with COVID-19. The first, the 4C mortality score, was developed in order to predict mortality given that the symptoms and clinical course of COVID-19 are significantly different to other severe respiratory infections.

The researchers focused on eight metrics that play a key role in determining mortality risk – age, sex, number of underlying conditions, respiratory rate, blood oxygen concentration, level of consciousness, urea, and C-reactive protein – giving a final score out of 21. Patients with a score of at least 15 had a 62% mortality compared with 1% mortality for those with a score of 3 or less.

In addition, researchers based in Italy have identified the most appropriate risk score that can be used to predict intensive care unit admission and death for COVID-19 patients in the emergency department. Their comparative  analysis showed that in COVID-19 patients NEWS[2] and REMS[3] used on arrival at the emergency department were the most accurate scores for predicting the risk of ICU admission and death, respectively, both at 48 h and at 7 days.

Adding insights to the clinical course of COVID-19 is this analysis, which identified those vital signs which are associated with deterioration in COVID-19 patients. Patients with COVID-19 were found to deteriorate more rapidly than those with other viral pneumonias, with progressively lower oxygen saturations, greater oxygen requirements and only minor abnormalities in other vital signs.

Pause in the Oxford vaccine trial

It has been widely reported by the media that the AstraZeneca Oxford coronavirus vaccine, AZD1222, has been temporarily paused due to an unexplained illness in one of the participants. This press release from AstraZeneca states that this is a routine action which has to happen whenever there is a potentially unexplained illness in one of the trials, while it is investigated. This is not unusual during any clinical trial.

It has also been reported, though not confirmed, that the individual concerned has developed transverse myelitis, a condition in which the messages that the spinal cord nerves send throughout the body are interrupted due to inflammation of both sides of one section of the spinal cord.


ONS Infection Survey

After several weeks when the weekly survey link has reported low and stable levels of infectivity, with relatively few positive tests meaning it was difficult to draw any meaningful statistical conclusion from the results, today’s report strikes a noticeably different tone.

It reports a marked increase in the rate of positivity to 1 in 1,400 members of the community (previously it was around previously it was 1 in 2,000, with the growth in new infections now clear. ONS estimates around 3,200 new infections per day in England. Looking at variations by age and region it is perhaps no surprise to see that infections are growing rapidly in the 17 to 34 age bands, and that the North West is highest in terms of growth.

“R” updates

Also published as usual on a Friday is SAGE’s estimate of R, which is now put at 1.0 to 1.2 across the UK. Simultaneously, the government also published the latest REACT study by Imperial College link which assesses that infectivity has been doubling every 7 to 8 days since Aug 22nd, and puts R at 1.7 (range 1.4 to 2.0). The sample size over this latest period was 150,000.

The difference can be explained by the caveat in the SAGE release that it represents transmission over the last few weeks, whereas the Imperial College survey appears more up to date, and so is picking up the sharp increase we have seen in other metrics recently. However, it is to be hoped that the confusion caused by two markedly differing results being published by the government on the same day does not undermine public confidence in the quality of statistics that are reported.

World Health Organization: Coronavirus disease (COVID-19) Weekly Epidemiological Update and Weekly Operational Update

Since August, the World Health Organization (WHO) have published weekly epidemiological and operational updates setting out the state of the pandemic across the world. The repository is here; the latest reports are here (epidemiological) and here (operational).

The epidemiological report sets out that globally, over 1.8 million new cases and 37,000 new deaths were reported for the week ending 6 September – an increase in cases and a decrease in deaths compared to the previous week. The Americas accounted for almost half of all new cases reported in the week, with the USA and Brazil representing almost three quarters of all cases in the region. New cases in Europe have increased substantially since a low point at the end of May, but deaths remain at a low level. India have reported around 85,000 cases a day for the past week and both cases and deaths in the South-East Asia region continue to increase rapidly.

The operational report looks at field reports of efforts to counter in various different countries, summarises the numbers of WHO-procured items (testing and PPE) in different parts of the world, and reports on the state of preparedness across the globe.

And finally …

Wine, lizards and the hazards of the mute button

Parents and carers who have been home schooling during lockdown could no doubt share many stories, both positive and negative. Some of these reflections are compiled here; take a moment to appreciate the challenges of home schooling, and the positive impact on the wine industry!



[1] T cells are one of the major components of the adaptive immune system. Their roles include directly killing infected host cells, activating other immune cells, producing cytokines and regulating the immune response.

[2] National Early Warning Score (NEWS) is a tool developed by the Royal College of Physicians which improves the detection and response to clinical deterioration in adult patients and is a key element of patient safety

[3] Rapid Emergency Medicine Score (REMS) is an attenuated version of the Acute Physiology and Chronic Health Evaluation (APACHE) II score and has utility in predicting mortality in non-surgical patients



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Balance sheet relief leads to later life grief?

It’s a shame for my loyal readers (Con Keating especially) that some of the most interesting comments on my blog are made on twitter and linked in. In yesterday’s blog I suggested that our former pensions minister, Steve Webb, was using the skills that won him “Spectator Minister of the year” in 2014;- specifically he was justifying pension atrocities in the name of freedom – specifically pension freedoms!

I am not alone in calling this

This may all seem a little arcane but there is substance in this discourse that informs on a wider debate about whether defined  benefit pension schemes are a help or a hindrance.

Those arguing for de-risking see DB schemes as a corporate hindrance, shackling executives to low bonuses, shareholders to low dividends and the enterprise to low investment in its future.

Those taking the opposite position consider pensions promises that should be honored and not shipped out (along with all manner of risks) to be floated on choppy markets.

Having worked in a DB consultancy for 10 years I know of many consultants who have openly sold DB de-risking (aka the facilitation of transfers) as a means to give the corporate balance sheet immediate relief as individual transfers invariably cost less than the imputed balance sheet item of a “deferred pension”.

This argument is then stretched by suggesting that de-risking is strengthening the employer covenant, reducing the risk of the scheme going into the PPF and that transferring members are in fact doing remaining members a point. Believers in the old adage “if it looks too good to be true , it probably is” should be gulping for air at this point.

Providing a DB cash equivalent transfer value at the discount rates that result from the dash to buy-out/self sufficiency means paying a much higher price to de-risk than would be the case for  open schemes. Proposals from tPR to force schemes into low-risk funds are likely to increase pension transfers still further.

There is a much clearer link to increased transfer activity and increasing transfer values than member desire to exercise pension freedoms.

Witness the British Steel Pension Scheme which reported virtually no transfers in the years following the announcement of the freedoms  leading up to the announcement of the RAA in 2017.

On the basis of this information , the trustees believed that steelworkers were (even with the temptation of pension freedoms) were supine and fans of scheme pensions. I was told that this was the prime driver for the complacency that was identified in the Rookes report.

But early in 2017, the scheme – determined it would lock down its investment strategy , the Trustees shifted the investment of the scheme from growth to defensive assets. They abandoned an age-banded  discount rate to a  much lower flat rate  The result was that some transfers nearly doubled, something that would have been foreseen by the employer’s actuaries and something that led to one of the largest mass-exoduses in British pension history.

I am not saying that the consultants to Tata purposefully encouraged the transfers or that the Trustees were complicit, but I am saying that they created the conditions for £3.2bn to leave the scheme to sit in a wide range of SIPPs, some – none too savoury.

Balance sheet relief or later life grief?

A point that is made too rarely is that we really don’t know what will happen to the £80 bn that flowed out of DB schemes between 2015 and 2018. Will it be used to replicate the defined benefit with former members buying escalating annuities and spouses pensions? Or will the money find other investment pathways – from Lamborghini to wealth preservation scheme?

I think it almost inevitable that a high proportion of the proceeds of these CETVs will find its way into the pockets of intermediaries and I see absolutely no argument to suggest that taking their transfers was the “no-brainer” that several welsh steel-makers believed them to be.

In all probability, a high number of people who took transfers will draw down too hard, from pots denuded  by high charges and the money will run out before they do. We will not know this till the money starts running out, but expect in future decades to find a different debate about transfers.

In one corner will be steelworkers being paid a pension (probably by an insurance company as New BSPS looks headed for buy-out).

In the other corner will be those who have taken transfers. Some will feel winners but many won’t. This is what the FCA are thinking about when they question the basis of so many of these transfers.

This is what I mean when I say that employers and trustees must be aware that “balance sheet relief risks later life grief”.


This and my previous blog result from a webinar laid on by LCP and Royal London. These webinars are free – but we know that in this naughty world, very little is for free. The price of attending a webinar in these times is to listen and tacitly consent to the approach being taken.

There is here a worry that those with the capacity to host these events are now so powerful that they can dictate the way things are. So I ask…

Are consultants using webinars to create an oligarchal agenda?

I do not point Zola’s “J’accuse” at pension consultancy. It is true that they are paid by employers (directly or indirectly) and are keen to play to the employer’s agenda.

It is also true that the PPF, as much as any other superfund, poses an existential threat to consultancy earnings , once a scheme slips into it.

But that does not mean all consultants are compromised. First Actuarial’s response to the Pension Regulator’s proposals to the DB funding code shows that consultants can deliver non-hysterical messaging about the PPF and encourage diversity of strategy beyond the one size fits all dash to self-sufficiency.

Lane Clark and Peacock (LCP) where Steve Webb is a partner is a firm, like First Actuarial , with the interests of members at heart and I know that Steve Webb has ordinary people’s interests at heart!

Or can delegates re-create debate?

One trouble with these webinars that we get in is that the dissenting voice finds itself difficult to be heard. The debate recorded earlier this week was such a case with two good speakers arguing not in a dialectic , but to reinforce each other’s views. We are left with a largely muted audience to give tacit assent to the views being expressed.

There can be few more frightening examples of group-think than a webinar without dissent!

Credit LCP for letting me in and credit them for allowing the debate. I have been told on many occasions my questions are unwelcome to the host!

As with consultations, so with webinars – it is essential that we do not allow the conditions under which we live and work – to prevent a reasoned debate.



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

Seven ways to improve Defined Benefit funding

In March 2020, The Pensions Regulator (TPR) opened a consultation on its proposed revisions to the DB funding code. In framing its response, First Actuarial proposes seven ways to change DB funding for the better.

Author – Hilary Salt

What do we want the new funding code to achieve? That’s the question we asked when we sat down to respond to TPR’s recent consultation, which closed on 2 September 2020.

The answer was clear. We want to help employers flourish, with a DB funding code that does nothing to hold back business growth. We want members to benefit from any funding changes. And we’re keen to minimise any regulatory change, as there’s not a great deal wrong with the status quo.

We came up with seven objectives which, if achieved, would bring about meaningful improvements to DB funding, benefiting schemes, sponsors and the members they serve.

1. Society should provide pensions efficiently

Providing pensions collectively is far more cost-efficient than an individual pot. Having both active members and pensioners in a scheme means contributions for current workers can provide for pensioners without the need to pay investment managers to sell and buy assets. And in collective schemes, members pool mortality risk, so there is no need to buy costly insurance, and no risk of running out of money.

Providing pensions efficiently is good for members, employers and society as a whole. So regulatory change should not result in more schemes closing or winding up.

For some employers that sponsor schemes open to pension accrual, the Regulator’s proposed funding code will result in higher contributions and cautious investments that will combine to make scheme closure the only realistic option. This doesn’t just mean a switch to less efficient individual pots; it also has a negative impact on employee relations, with a potential knock-on effect on business growth.

2. Schemes should invest productively

Investments in productive assets (i.e. assets that can generate profits and cash flows in line with inflation) play a crucial role in making the value of pension benefits higher than the original contributions made. By contrast, at the time of writing, every £1 invested in (non-productive) gilts for a 45 year old scheme member will be worth only 46p by the time that individual is an 80 year old pensioner.

The Regulator’s proposals push schemes towards more risk-averse investments, which guarantee that schemes will make a loss in real terms. That goes against the whole principle of pre-funding pension provision, by which we deliver on the pension promise to members with returns that make it affordable to employers.

3. A change in regulation should benefit members

The proposal introduces a real possibility of increasing scheme funding without delivering any additional benefit for scheme members. Yes, schemes may be funded at a higher level, but many would still end up in the Pension Protection Fund (PPF) in the event of insolvency, with no additional benefits for members. In the meantime, the employer would have less money available to fund pay rises, contributions to replacement DC schemes or investment in new jobs and production.

If employers are mandated to increase scheme funding, they should at least be able to invest those extra funds in productive assets, with some of the additional returns trickling down to members.

4. Build on PPF provision for all schemes

The introduction of the PPF marked a significant step forward in protecting DB pensions, and means schemes should be able to fund at a level where they expect to be able to pay all their benefits long term and to invest productively. If all schemes are required to overfund their benefits and invest scheme assets over-cautiously in bonds and to pay PPF levies at the same time, we are effectively requiring double insurance.

When DB members end up in the PPF, it is often seen as a disaster. In reality, however, members are often better off with the slightly reduced benefits of the PPF than they would have been with full provision from a typical DC arrangement. And if PPF compensation is considered insufficient, then the answer is to increase it.

5. Preserve the ongoing covenant between employer and employees in open schemes

We see a DB scheme that is open to new members as an ongoing covenant, or two-way commitment, between an employer and its past, current and future employees.

Employers provide their employees with pensions in an efficient way that allows them to attract, retain and retire staff in line with business needs. In return, members receive good quality pension benefits, while accepting the risk of PPF-level benefits if their employer becomes insolvent.

Deferred members who don’t want this deal can transfer benefits into a Defined Contribution arrangement, with all the risks and rewards that go with that. While pensioner members are unable to transfer, they face a much smaller reduction of benefits within the PPF.

6. Put an end to generational inequity in open schemes

All generations need pensions. Yet the proposal prioritises older generations (deferred and pensioner members) over current and future generations of workers.

Many schemes that close to new members are at the same time forced to make huge investments in loss-making assets to pay for the past pensions of active, deferred and pensioner members.

How can it be right to ask employers to divert significant resources into over funding pensions for older generations at the expense of younger people?

7. Maintain the efficiency of open collective schemes

Every scheme closure makes it a bit harder for society to provide everyone with a pension.

A successful pension regulation system is one in which employers are willing and able to sponsor continuing accrual of benefits, i.e. keep schemes open to new entrants.

In the building industry, there is a role for demolition companies, but the principal task is construction. That the pensions industry and its Regulator have, in the main, been shutting down pension schemes for the past 20 years is a sign that things are wrong. We need to build both pension schemes and regulations that are fit for the future.



Posted in accountants, dc pensions, de-risking | Tagged , , , | 2 Comments

Why I don’t support LCP and Royal London’s calls to boost DB transfer advice


LCP and Royal London jointly presented to an audience of 300 industry professionals yesterday on the vexed topic of “helping members get transfer advice”.

The webinar can be watched here  and as you’d expect from these organisations, this was a thought provoking and responsible event that looked at the issues facing members, trustees, employers , advisers and personal pension providers in depth and through meaningful research. I found it gripping and it got me thinking

While I fully understand the positions LCP and Royal London are taking, I think they are the wrong positions and this blog explains why I take issue with their arguments

Why are people taking transfers?

The right to take a cash equivalent transfer from a defined benefit pension scheme into a personal pension has been in place since July 1988,  that’s 32 years now

However the analysis of changing regulatory attitudes, conducted by Steve Webb started in 2015

It is easy , but wrong, to consider pension transfers a product of pension freedoms. There is no evidence that the pension freedoms were what drove 170,000 people to transfer £80 bn out of defined benefit schemes between April 2015 and September 2018.

All the evidence suggests that people did so chiefly because of the increase in transfer values as schemes de-risked , discount rates fell and average transfer values rose from around £200,000 in 2012 to over £500,000 today. These increases were not down to pensions increasing in the period, most DB schemes were closed to future accrual.

As people realized  they had accidentally become wealthy because of their pension schemes, wealth managers found ways to facilitate the taking of CETVs in a painless way. Rather than pay up front for advice, those who had wealth in their pensions but little in their bank account could unlock their DB pension where the adviser charged out of the proceeds of the transfer.

What happened in these three years was an explosion of activity among financial advisers who took advantage of contingent charging, high transfer values and the appetite of the public to get to their accidental wealth. Having spent time with many of those transferring, the mechanics of pension freedoms were of minimal importance.

Linking DB transfers to pension freedoms is a way of creating a populist argument for pension transfers, but it is a flawed argument and has insidious intent.

Why is transfer activity now reducing?

The FCA were growing nervous about the quality of advice because the new wealthy, particularly the 7000 steelworkers who transferred out during BSPS’ time to choose, did not generally show much understanding of what was going on with their pension rights or have much idea where their money was going.

The FCA’s findings finally led to the banning of contingent charging. Steve Webb was right to point out that for the majority of  IFAs , there is no question of consumer detriment in their offering advice.

Many IFAs remain in the DB transfer market and those who have given up would like to return if they could afford the PI premiums and if the FCA made life a bit easier

This is not surprising, the £80bn that left DB schemes between 2015 and 2018 continues to provide IFAs with considerable revenues and IFAs do not want the tap to be turned off because the recurring revenues from those transfers are what give their businesses value,

The importance of recurring revenues to IFAs cannot be underestimated. That huge amount of money is not sitting in workplace pensions but in much more expensive wealth management accounts , much of which is managed by the IFA with layered advisory and discretionary fund management fees

The FCA are now asking IFAs to justify the increased costs of their products against workplace pensions as a benchmark

Royal London’s research into the future of DB transfers was carried out prior to the FCA confirming it was banning contingent charging. The challenges facing the advice on transfers have increased since this research was carried out (as has the rate of withdrawals by advisory firms from the transfer market).

The concern for  Royal London is that financial advisers ,having adapted their business models to meet the demand to convert pensions to wealth, are now finding their transfer permissions withdrawn or unaffordable. Royal London and other insurers are of course major recipients of CETVs into their  SIPP products so there is little for them to like about the challenges IFAs face. But this does not support the argument for the FCA to step in and

LCP is also concerned that the tap is being turned off. Here the concern is for the trustees and employers of occupational pension schemes who are concerned that their schemes are no longer to be de-risked of liabilities because of transfers.

While I have no issue with the analysis of why DB transfer advice is harder to find, I do not agree with Royal London that the FCA should be supporting the market in DB transfer advice, it has – through the tax-advantaged contingent charging loophole, done that for too long already.

The pension freedoms are not dependent on DB transfers and more than the other way round, the public interest and consumer interest is best served by the majority of people taking their pensions from occupational pension schemes.

Should pension schemes encourage transfers?

Steve Webb took as his starting point for arguing for greater intervention by employers and trustees, the Rookes report into the debacle of the BSPS time to choose.

Rookes argued that trustees should argue what “good looks like”, but with regulatory pressure from tPR being so strongly in the direction of de-risking, good increasingly looks like getting rid of liabilities – primarily through transferring them to insurers and back to members

LCP point to a growing trend of schemes not to incentivise transfer values (they are quite high enough as it is ) but to facilitate advice from the diminishing pool of advisers.

LCP and Royal London have issued a joint report on how this might best be done and it can be accessed here.

Having contributed to the Rookes report and had several meeting with Caroline Rookes, I do not think she intended for her findings to be interpreted as an endorsement of trustees encouraging transfers. The Trustees of BSPS were shocked by the number of transfers taken and the Chairman told me he hoped trustees would in future be given more powers to support their scheme as a payer of pensions.

As with his analysis of the link between pension freedoms and transfers, I suspect that Steve Webb is over stretching a point  and playing to his audience.

I am queasy about this

When Steve Webb stood up in front of the NAPF in 2015 and waived bundles of notes at trustees and employers who were incentivising  transfers with what he called “sexy-cash”, I applauded him. Pension schemes are for paying pensions and shouldn’t be using gimmicks like cash incentives any more than advisers should be factory gating offering sausage suppers.

The idea that people are taking transfers to exercise their rights to pension freedoms is – in my opinion – plain wrong. People are taking high transfer values because they think their advisers can do better for them with their wealth management than the trustees can do. While I accept there are risks, especially for those with big pension entitlements from a failing sponsor, I see the PPF as a pretty strong safety boat and the risks of a wealth manager failing are not covered by the PPF but by a less robust lifeboat in the FSCS.

The idea that trustees – because of the Rookes review – have some kind of obligation to provide or even subsidize transfer advice is also – plain wrong.

As schemes move towards self-sufficiency, the prudence with funding strategies will increase , discount rates fall further and transfer values increase. We risk a dystopian world where members are tempted into transferring by a system that has no regards to the long-term cashflow implications of paying these ruinously high values.

It is much better that trustees step away from facilitating DB transfers than risk involving themselves in an increasingly litigious area.

For once , I don’t agree with LCP’s calling for employers to promote DB transfer advice. Nor do I support Royal London when they call for the FCA to create a new market for ongoing transfer advice.

The days of friction-less transfers are going , we are in the final days of contingent charging and PI premiums reflect the regulatory climate which is now adamantly against the mass promotion of DB transfer advice.

There is good reason for the change in the Regulator’s sentiments.



Posted in advice gap, age wage | Tagged , , , , | 5 Comments

Can Government put social freedom back in the bottle?

Social gatherings of more than six people will be illegal in England from Monday – with some exemptions – amid a steep rise in coronavirus cases.

A new legal limit will ban larger groups meeting anywhere socially indoors or outdoors, No 10 said.

But it will not apply to schools, workplaces or Covid-secure weddings, funerals and organised team sports.

It will be enforced through a £100 fine if people fail to comply with police, doubling up to a maximum of £3,200.

In the last four or five days there has been a significant rise in the number of coronavirus cases. It’s not a gradual gentle drift upwards, but a sharp and obvious spike. The rate of positive tests is going up particularly among the 17-21s, but noticeable too among people in their 40s.

And rather than appearing to be only a problem in particular areas, the increase is relatively consistent across the country – 79 local authorities in England, for example, reported weekly case rates above 20 per 100,000.

Those factors mean there is deep concern in Number 10 that the statistics could be flagging the beginning of a generalised second wave of the pandemic.

It’s important to say, the death rate is still very low. This could be the beginnings of a surge that has very different outcomes to the last terrible toll.

But this is the Government’s difficult second album. The sounds remain the same but will people be listening as intently. With a taste for freedom in a time of Covid – will compliance be accepted?

What will this mean for us?

Firstly, let’s remember that “us” means all of us. The greatest strain of the first wave was on the NHS and carers. While this wave appears to be about the young and socially mobile middle-aged, there is every possibility that the more vulnerable elderly people will be infected with more serious consequences to long term health. Putting such stress on the NHS and care homes is not something that we as society should tolerate and that means giving up a good deal of our new found freedom.

For me it means cancelling events on Lady Lucy for the rest of the summer and the prospect of returning to more solitary forms of exercise than I have recently enjoyed/

Most of us will need to make such adjustments to our lifestyles. Those who won’t are likely to be those who are shielding – we should bear that in mind.

What I hope is that this does not trigger either a maudlin return to individual lockdown with the dangers of torpor, lethargy and obesity of a sedentary lifestyle. Worse, the danger of the early autumn spike returning us to April levels as mass disobedience takes hold.

For all the impact on our workplaces, pubs, restaurants and leisure facilities, we must think first of our hospitals and care homes. We must find ways to take care of ourselves and not allow our health to furlough.

The right action?

I am shocked by this news. I really didn’t see the spike coming and I had – I must admit- settled into a new routine of mask-wearing where I was returning to a new normal.

My complacency has been challenged and not for the first time this year, I am frightened.

Our church reopened last Sunday and I don’t suspect we will go back this Sunday. But I will be praying for our congregation , for t Hackney, Bermondsey and especially the most vulnerable of our neighbors, the elderly , the BAME community and those who already suffer health conditions.

There will be many, especially those who have antibodies and know it, who will consider this doesn’t apply to them. It does.

This is about our  behavior but it is about other’s lives. It’s critical that for a second time, we put the workers in the NHS and Care Homes first. It is going to take a colossal effort to get the genie of personal freedom back in the bottle.


Posted in coronavirus | Tagged , , , , , | 3 Comments