The Netherlands have a new pension bed to rely on.

Posted on May 31, 2023 by henry tapper

According to the Mercer Index of the world’s top rated pension systems, the Netherlands is ranked #2, with only mini-Iceland above it

Mercer describe the Netherlands as having

“a first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity

 

So why is its pension system being changed?

 

The key word is “transparency”.

This is how Jo Cumbo reports the very recent changes

Dutch senators have approved a major overhaul of the country’s pension system, which is expected to lead to big changes in asset allocation for the €1.45tn sector.

The new law was passed late on Tuesday after lengthy debate in the senate, the Netherlands’ upper house of parliament.

It means that the country’s occupational pension system will move from a “defined benefit” to a “defined contribution” model in which pension funds no longer make retirement income promises to members.

Instead, members will pay into individual accounts, with income levels more dependent on investment returns and contributions.

Funds can also offer collective DC arrangements, which aim to smooth out investment volatility for individual pension holders.

The deadline for the system to be fully in place is 2028.

The problem the Dutch have with their pension system, one that Mercer do not recognise is that the current system is capable of cutting out younger savers from the benefits older generations currently enjoy.

Posting under the moniker “I will not share my pension with boomers” one commentor on the FT’s article writes

as a dutch person I can tell you that the basic goal of this behind the scene is to stop older generations from purposefully or otherwise misunderstanding what they are owed compared to what they can get, which would stop a movement wishing to keep benefits for old people at the same level regardless of the pains inflicted on young people. Basically It is to protected the young from ever larger forced transfers.

In other words, the young (and old) are prepared to abandon a highly rated pension system because of inter-generational mistrust.

This should come as a lesson to everyone, including Mercer. Black-box solutions, as young Dutch people regard the “DB lite” system in the Netherlands, is simply not trusted.

The pot’s the thing.

At the heart of the change is the establishment of greater property rights on retirement savings. Instead of a benefits promise, savers will have a pot which may or may not offer smoothing and longevity protection through a CDC style mechanism.

You own the pot, you have some control of how the pot is invested and you have options as to how the pot is paid. Nobody has a right to your pot than you, unless you choose to enter a mutual insurance.

What is being given up is a DB system without the rigid certainty of the UK’s DB plans , but without the property rights of our DC system. People seem to prefer a pot , than a defined benefit that’s a bit fuzzy round the edges.

Less certainty – more transparency

DNB, the Dutch Regulator told the FT about the shift to a defined contribution pot system

“In that way, everyone has an overview of the share of the assets reserved for their pension,” it said, adding the new system will give “much less cause for discussion about uncertain promises and about the distribution of these collective assets”.

This will come as a sadness to those in the UK who aspire to be in a society where intergenerational “solidarity” rather than “distrust” drives thinking.

But there are other reasons for the change, not least the way that the current Dutch system is funded. The amount set aside for pensions increases as people get older making older people more expensive to employ. This is also the case in the UK  where  future accrual is going on (think LGPS). This begs the question – “are we more trusting or less aware than the Dutch”

Though in a perfect world of trust, the assumption would be that each generation would accept inequalities of cost – as each would benefit in their turn – the Dutch seem to have lost confidence that this will happen.

Con Keating is scathing about the lazy thinking behind Dutch thinking

The transfer from old to young argument is specious. The old do receive proportionately more for a euro of contribution due to the shorter investment time span of those closer to retirement. But the older also tend to have higher salaries meaning their fixed proportion of wages contributions are in cash terms larger.

But the main point is a simple one – the young will grow older and benefit in the same manner as today’s older members.

Historically I’ve seen the trust issue fermented by DC pension providers keen to get a bigger slice of the pie, but I am concluding that trust has been lost for a reason, even if not a particularly good one. Trust has been lost because DB funds have failed to get their arguments heard and understood. It’s a failure of transparency but a failure nonetheless.

The “own pot” model means that the bulk of the value of saving is loaded towards the younger years of your career , whereas contributions made in the final year are merely “topping up”. This is fine so long as there is a high level of participation and the level contribution rate is high enough throughout. It is fine so long as younger savers don’t make poor investment decisions.

It’s fine so long as everyone is prepared to accept that the greater transparency comes at some operational cost and with the risk that there will be losers as well as winners.

The Dutch have spoken

While there has not been rioting in the Streets of Amsterdam, the social awareness of the pension issue has been high. This “overhaul” is much more nuanced than what has been happening in France, where the work longer argument has been blunt and brutal.

If the Dutch have got this right, the new system, with its uncertainties, may become more loved . Move loved- because of its transparency, the greater sense of ownership it offers and  (by exchanging level  accruals for level contributions) , a  reward strategy incentives that addresses the pension problem of employing the old.

Whether Mercer or the OECD will see this as positive is debatable. It seems to me that this new approach will – to an extent – beggar the neighbour (at least in terms of operational efficiency).

The key thing, as the FT focusses on, will be the impact on asset allocation. Will the change drive better outcomes because the pot approach attracts better investment strategies, or will it lead to people choosing badly or having default strategies fostered upon them , that just don’t work?

We will have to wait to find out.  For now- the Dutch have spoken. They have remade the bed and now they need to lie on it – we’ll only know how sound the bed was after a few thousand sleeps.

 

 

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Lang Cat Mike spills the cream; Pension PlayPen – Today -10.30

Posted on May 30, 2023 by henry tapper

 

Get the prequel

Lang Cat launched The Advice Gap 2023 last week. It’s one of their  biggest papers and is certainly worth douze of anyone’s pwan. 

Download it here

That’s enough ads-ed

Ok that’s the ad 0ver. But in the spirit of the Lang Cat, I thought some irreverent  and irrelevant detail on how the Lang Cat got it’s name would go down well, so I pinched this off the Lang Cat website

Whatever the talented Mr Barrett comes up with is likely to be every bit as entertaining.

HOW THE LANG CAT GOT ITS NAME

They say you should never meet your heroes, but when you get the chance to wander up to a slightly ginger Fifer in a red cap who wrote the song after which your company is named, you should probably do that.

And that’s what I did on Wednesday night of this week when I went to see James Yorkston playing at the Pleasance in Edinburgh with The Pictish Trail and Seamus Fogarty. It was a very low-key but very funny and musically ace night, drink was taken and it was all good.

At the interval I huckled James Yorkston and told him that I’d named my company after his song ‘A Lang Cat’ which is off a record called Lang Cat, Crooked Cat, Spider Cat. I think it’s out of print now but you can find out more about it here.

Anyway, when I was setting up the name kept popping into my head and wouldn’t go away, so I gave into it and that’s why the lang cat is called what it is. Also, it stops us sounding like a team name from the Apprentice or whatever.

James was a gentleman and managed to look not too crestfallen when I told him what business we were in. Sorry it’s not Fairtrade humanitarian stuff, James. He also told me the story behind the title of the record.

When he was in Spain one time, he saw three cats attacking a snake – one at the head, one at the tail and one at the middle. One was crooked – sort of bent out of shape I guess, one was (I dunno) spidery, and one was ‘lang’ which doesn’t just mean long but can mean skinny, like ‘a big long drink of water’.

There is no video of this Lang Cat song but cats do appear in the accompanying video of the Border Song – and they are Lang

 

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Do pension superfunds have super powers?

Posted on May 30, 2023 by henry tapper

Do pension superfunds have super-powers?

The phrase “pension superfund” has been hijacked by the Tony Blair Institute to mean a not for profit investment fund that swallows up pension money from DB , DC from the PPF and maybe the tax-payer (if it wants to relieve us of unfunded public sector pension liabilities). It’s also used of Nicholas Lyons proposed £50bn UK Future Growth fund, which is more likely to get off the ground.

But waiting in the wings are two actual Superfunds, which could and should be doing the work that Tony Blair and Nicholas Lyons want doing. Both could be investing in real assets to provide people with pension payments today and well into the future.

The Pension Superfund is the more ambitious of the two , Clara has less ambition and is the first to have got approval from the Pensions Regulator. Clara is not quite the long term investor that the Pension Superfund intends to be, which is why it may have got its approval. However it has yet to announce any clients and as the HSBC master trust has shown, no clients – no future.

The Pension Superfund hasn’t got any clients because it hasn’t got approval but it is applying again and at a time when pension schemes are being encouraged to take on more risk, it offers many of the features that Blair, Lyons and Jeremy Clarke look for. I am sure its founder Edi Truell wouldn’t mind his superfund being characterised as having “super powers”.

What are these super powers?

The Pension Superfund is just an occupational pension fund able to take on other schemes assets and liabilities because it has a contingent asset  that can be sold if the fund gets into trouble. That asset is valued as the way of keeping PSF out of the PPF if anything major goes wrong.

Its superpower is its capacity to invest in growth assets and harvest returns that other long -term consolidators can’t. Insurance companies cannot invest DB assets in the way that Jeremy, Nicholas and Tony would like because of the solvency regulations that prevent them. The first superpower that the Pension Superfund has, is the power to invest into wider and more lucrative markets than insurance companies.

The second superpower it has , is that it can offer more for less. If that sounds too good to be true, let me explain. The cost of offloading your liabilities and assets into Pension Superfund (or Clara) is likely to be less than offloading them to an insurer. That’s because investing in real assets – is likely to give higher returns than investing the way insurance companies have to. So buying out through a superfund is cheaper and that means more upside. There is of course some downside with taking investment rich but that is compensated for by the contingent asset which can be sold if needs be.

The third superpower the Pension Superfund has, is to invest in amazing things which might otherwise not get funded. Things like a pipeline being built to bring thermal energy from Iceland to Scotland. Insurers can invest to a limited extent into infrastructure, but not to the degree of Superfunds. Superfunds have the capacity to be a source for good

What to do with surplus money?

Not so long ago , people laughed at the phrase “scheme surplus” – saying that such a concept was a “last-century thing”. But there are now schemes that have serious surpluses worried about what to do with them. The worry is that surpluses are trapped if kept within the scheme or lost if the scheme is transferred to an insurer.

The Superfund can operate using a formula to share the surplus with the superfund getting some of the upside (while providing a floor to the downside). This means that members can feel assured of getting 100% preservation of promised benefits with the option of more – if assets continue to exceed liabilities. (there’s an interesting discussion on surpluses in the LCP webinar – advertised at the end of this blog).

Will these Superpowers be deployed?

We have to wait and see. The DWP consulted on setting up pension superfunds in 2018 and has yet to formally respond to its consultation. Superfunds can be set up on some interim approval basis but the Pensions Regulator is nervous.

It is nervous because the Prudential Regulatory Authority are nervous (and perhaps because TPR is naturally nervous). The PRA are worried that pension superfunds will undercut insurance companies offering better prices because of less onerous regulation (a process called regulatory arbitrage).

That has meant that Pension Superfund keeps on knocking without the door opening. But that may change.

All this noise about superfunds from Nicholas Lyons, Tony Blair and voices inside Government may means that what has been a “no” and “come back later” could now be a “yes” and “what are you waiting for?”.

I hope that we will see the Pension Superfund approved before much longer and to see both it and Clara taking on and investing the assets of pension schemes contracting with them- this year!

Why not?

A lot of people, Tony Blair is one of them, would like to see pension superfunds set up as “not for profits”, meaning that while the management can get paid what they like, there is no shareholder to take dividends and increase price and risk.

I’ve never bought mutuality as a good model. I can see arguments for a not for profit PPF acting as a long-stop, but not for a competitive superfund competing against insurers.

We need the same entrepreneurial zeal from pension superfunds as we do from the companies they could be investing in. That’s not going to come from a “not for profit” mentality – though it could use not-for-profits investments to get returns.

Oc course, Pension Superfund’s rivals would be happy for it never to be approved, they fear the impact its presence would have on its volumes and margins and they could and should lobby against any change that restricts their unfettered freedom to choose which schemes to buy-out.

But just because the ABI is a powerful lobbyist , doesn’t mean that Clara and Pension Superfund can’t eat some of its lunch, and with the capacity of insurers to meet the demands of those buying out , limited – the arrival of new kids on the block should be welcomed by potential customers and regulators alike,

What’s changed?

I sense a spring in the step of the people I talk to in superfunds and it’s there because they see the attitude of Government changing. And more importantly, schemes now feel they are in charge of their own decisions – not in the grip of a deficit and the Regulator.

It’s not just Government pushing for change, it’s the progressive parts of the industry.

You can hear what LCP think has changed (and why) and you can listen and watch their webinar from the link below.

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The pension investment debate – where we have got to?

Posted on May 30, 2023 by henry tapper

Pensions are now center-stage in Britain’s economic debate. The assets within our DC and DB pension systems are openly discussed by politicians , the think-tanks and in the press.

The immediate future of UK pensions has been opened to debate

There has been a polarisation over the past few weeks which exposes a fundamental divide in thinking about funded pensions in the UK.

On the one side of the divide are those who consider that a pension is a promise that should be backed by risk free assets and divorced from wider social and climactic issues. This view – which put the trustees fiduciary duty as being the payment of the promise in full, would have pensions take fewer risks by financing existing payments rather than investing for future generations.

On the other side of the divide are people who still think of inter-generational solidarity where investment into the future growth of Britain is made by those with wealth – either backing their pension or directly invested in their pension pot. Here the emphasis is on generating the economic conditions for future payments to become affordable.

I  could characterise the first view as “lockdown” and the second as “build back”.

VFM Framework and DB Funding Code – the regulatory focus

There are two key areas of pensions policy which provide a focus for the debate.

For DC pensions, there is a nexus of issues around consolidation, a relaxation of cost and charges and the investment of funds – to get better returns for members by investing in higher return strategies; that at least is what the VFM framework is supposed to be about.

Those in the “lock-down” camp want to improve member outcomes by sticking with tried and tested investment strategies, by driving down costs and focussing on getting more money into pensions from employers, savers and from tax-relief.  This position is well expressed by Nico Aspinall in his latest podcast (minute 50 onwards).

For DB pensions, the focus is on the future of the DB funding code and whether the goals of self-sufficiency and buy-out – the instruments of lockdown – prevail. Those who consider we have made enough pension promises support the strictures  of the proposed DB funding code, arguing that it ensures that existing promises get paid without recourse to the Pension Protection Fund. The DB funding code assumes that DB pensions, at least in the private sector are in terminal decline.

Revitalising Corporate DB pensions with the help of the PPF

Until very recently, Government policy was that corporate DB pensions were a thing of the past. This was the view argued by Government when the Pension Schemes Act was debated in 2020. DC pensions were assumed to be the fertile ground for growth investment and Australia was used as an example of Government nudging consolidation which created the scale for a more productive investment of assets to take place.

But over the past two months , the Government has moved from the DB lockdown camp to a view that not just DC workplace pensions but DB schemes can be converted to the “build back” agenda.  A number of Treasury leaks suggest that Ministers and senior officials are considering converting the Pension Protection Fund into a pension consolidator with an investment brief to invest in productive capital. First the Mayor of the City of London and then the Tony Blair Institute have proposed the creation of superfunds capable of receiving money from DC pots and DB pension schemes.

This is understandably receiving short shrift from organisations which put the fiduciary duty and the sanctity of the pension promise as the main priority. For organisations such as the PLSA, this is the politicisation of pensions and a threat to a well established pension industry dependent on diversity , rather than consolidation.

Further options for DB trustees on the horizon

DB pension schemes appear to be in rude health despite being shorn of some £500bn of their asset base in 2022. The depletion of assets is more than compensated for by a reduction in the cost of funding for liabilities. This reduction is primarily down to the adoption of higher discount rates which reduce the present values of liabilities.

And this rude health gives their trustees and employers options. One option is to sell-out to insurers who are eyeing up the market and cherry-picking the best managed and funded pension schemes to enhance their bulk annuity operations. For trustees, this involves preparing a scheme for buy-out by investing as an insurer will invest – in low risk bonds and gilts

Another option is to wait and keep the pension scheme in a holding position awaiting buy-out at a later stage, and  the orderly run off of liabilities through the payment of pensions in the meantime. This involves maintaining a very cautious investment strategy – not dissimilar to those preparing for buy-out.  This is a strategy targeting sel-suffeciency – hoping to make no further cash calls on the sponsor

But a third option is now being talked about, where with the support of Government, schemes might take a much more aggressive attitude to investment. The pension consultancy LCP are suggesting that the Pension Protection Fund encourages this to happen by offering itself as a fallback, if such an investment strategy goes wrong.

The Government may be considering changing the rules to allow the PPF to provide this fallback or it may encourage trustees to consolidate their scheme directly into the PPF, where the scheme cannot negotiate terms with an insurer. This was an option for the PPF when it was originally being designed, an option that was rejected because it was seen to open the floodgates to demand from under-funded schemes.

These new options which are appearing on the horizon, are only rumoured and they are likely to be fiercely opposed by those who want pensions to lockdown and use existing options.

DC schemes and  DB schemes may converge

The proposals to create substantial asset pools to build back Britain, was originally proposed by Rishi Sunak and Boris Johnson as Britain was coming out of the pandemic. Progress has been slower than hoped, partly because the Pensions Regulator’s guidance to DB schemes did not encourage such investment and partly because a combination of competition and charges regulation forced DC schemes to remain in listed markets (even when growing through consolidation).

But the warm reception given to Nicholas Lyons’ proposals by both the Chancellor and Shadow Chancellor, and the publication of the even more ambitious proposals of the Tony Blair Institute, include talk of both DB and DC schemes using the same pools. It is very unlikely that the Government will go so far as to mandate schemes to invest in these proposed superfunds, more likely that they will be incentivised to do so by support from a reformed PPF and the interventions on value for money, the consumer duty and the creation of better post retirement options for workplace pensions.

Taken together, a more aggressively invested DB pension sector and a DC sector managed for value rather than for lowest cost, could lead to a convergence of the two. This could be around a third type of scheme – CDC – or it could be through more aggressive DB and DC consolidators – superfunds and the PPF.

Where the debate moves next

Over the next few days, this debate is likely to gather momentum as LCP lay out their proposals to a wider audience (you can watch this webinar now – simply by registering retrospectively).

The following week is the PLSA investment conference where this debate is likely to be the central discussion.

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Blair’s proposals for pensions may not be taken seriously, but they will have an impact.

Posted on May 29, 2023 by henry tapper

 

The UK’s pension-savings system is broken and long overdue for sweeping change.

Over the past 20 years, this country has seen the abandonment of investment in the domestic economy by United Kingdom pension funds, with the almost total liquidation of their holdings in listed UK equities built up over generations. This has depressed UK companies’ valuations, constrained business investment and limited the supply of growth capital to improve productivity and fund innovation.

So begins the Tony Blair Institute’s report Investing in the future, boosting savings and prosperity for the UK

It is extraordinary how this report , published May 26th is repeating the remarks of Jeremy Clarke and Andrew Griffiths of the Treasury, the shadow chancellor, Rachel Reeves, the Mayor of the City of London and the CEOs of L&G, Phoenix and Schroders and the CEO of the Pensions Regulator.

All are calling for fewer pension schemes investing for growth, in the UK  and in a radically different way to what is happening today.

The only dissenting voice comes from those incumbent in the current  pension-savings system. The PLSA did not recognise the TBI’s characterisation of the pension system  telling the FT the paper had “some extremely radical but also extremely impractical” ways to encourage pension funds and life insurers to invest in the UK.

“There are much simpler and quicker solutions,”

said Nigel Peaple, director of policy and advocacy with the PLSA.

“The government and pensions industry are already working intensively together on these issues and, provided they always put the interests of savers first, they should result in better outcomes for everyone.”

The proposals

Like Nicholas Lyons, TBI’s proposal involve the creation of multi-billion pound superfunds that would pool the investments of DB  and DC plans, using at first  the PPF and then a number of replica superfunds so that the entire pension system (including currently unfunded pensions) would be funded in the same way

The initial fund would grow to £400bn and would sit within the PPF which would grow as a consolidator, along the lines currently under consideration by the Treasury. DB funds could volunteer to participate in the PPF and the PPF would offer members equivalent benefits

Those DB funds that remained open would be encouraged to invest for growth (rather than buy-out with an insurer) . The PPF model would then be replicated and rolled out throughout the UK in a series of regional, return-generating, not-for-profit entities that would progressively absorb the UK’s 27,000 defined-contribution funds, the Local Government Pension Schemes, the remaining DB funds and, potentially, public-sector pension schemes, which in most cases are not funded.

Extremely radical and extremely impractical?

The current pension system supports a huge number of people whose livelihood depends on schemes remaining unconsolidated and independent of each other. Not only would these proposals collapse the purpose of the PLSA but they’d render redundant most pension consultants, lawyers, actuaries, administrators, covenant advisers et al. Rather than a thousand flowers blooming , there would be up to ten sovereign wealth funds managing liabilities and savings on a scale that would only be rivalled by the largest US funds (Calpers et al).

You can think of a thousand reasons not to adopt such proposals, but if they set the boundaries of the possible, then the more modest proposals of the DWP, TPR and the Treasury seem more realistic.

Tony Blair employed Frank Field to think the unthinkable in his first administration. I wonder what Frank feels about these proposals, if he is still well enough to read them.

I suspect that had Frank put these forward before the calamity outlined in TBI’s excellent report, we might have very different capital markets in the UK , to the much diminished markets we have today.

But equally, we should remember that the seeds for the demise of DB plans, what Field described as Britain’s great economic miracle, were sewn in the years when Blair’s power was at its height. The report sees the problem as originating in the accounting reforms that came in 2004 and that the capitulation of DB schemes to “de-risking “followed.

The report does not mince its words – on the management of LDI it has this to say

That consultants could design and trustees could approve an investment strategy that was intended to generate a fall in the value of a pension fund’s assets is beyond comprehension.

Only in the context of a marked to market approach to liability valuations and the tyranny of the discount rate, can LDI become comprehensible.

The motivation for maintaining the status quo is clearly laid out

The current system has therefore in effect served no one’s interest except the pension consultants, who assisted funds and their sponsors to adapt to the changed rules, and the life-insurance companies, who are now benefiting from relieving UK companies of the accounting-driven burden, though they did not design the system.

The impact of this report will be to strengthen the resolve of the Treasury to drive through change, through DWP and TPR. It will weaken the lobbying platform of the PLSA and the consultants and it will cause trustees and employers to think carefully before expediting their plans for buy-out.

The solution proposed is beyond the power of any Government to push through, it would require the equivalent of a financial revolution where the oligarchs were deposed through a coup. This is more likely to happen under a Labour than Conservative Government, but considering the alignment of all sides of Government behind some version of these proposals, the PLSA and the funds industry , should be taking this report more seriously.

 

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People will pay for things they understand and value.

Posted on May 29, 2023 by henry tapper

Tower Crane with PENSION Word on Chalkboard Background – 3D Rendering

Thanks to over 1000 people who took time out of their bank holiday Sunday to read my blogs firstly ripping into Nico and Darren’s latest podcast and subsequently apologising for the two footed tackle.

You’ll excuse me for going back to what Nico and Darren were saying – because I think most people would agree with them- and not with me. I see the VFM Framework as exciting and innovative, Nico and Darren see it as a distraction from more important things. Having spent 19 hour long episodes discussing the Framework, this is not the conclusion listeners might have expected!

I expect that more people have read the blogs that have listened to the Podcast which is a shame as the Podcast contains a view that properly articulates why most people are heartily sick of the VFM debate. At around minute 50, Nico rounds on the VFM consultation which he sees as a distraction from  a broader debate on “adequacy”.

“We’ve been pushed off the ball to talk about VFM to focus on micro-detail”.

This is actually a very bold statement. Nico’s suggesting that the pensions industry has lost control of the game and he wants his ball back. It suggests that we are playing against the DWP. TPR and FCA in a struggle for better pensions.

Nico wants an alternative measure of success as “projected replacement ratio” , where a scheme can be deemed good or bad depending on its capacity to deliver a benefit – ideally a hefty percentage of final salary.

This approach rates all major DC schemes as “good enough” and shifts the focus away from maximising the returns on money and proper support for savers to the level of contributions whether defined or additional – resulting from engagement.

This is the debate the pensions industry wants to be having because it plays to the fundamentals of scheme design, that a company pension replaces income lost when someone retires from work and is funded to meet that goal. To all intents and purposes this is a DB or whole of life CDC approach. So Nico would have a DC approach that looks suspiciously like a target benefit scheme.

“If you join here , you’ll get something like an 80th, because that’s the number that matters”

Promising something like an 80th – is a variant on the “trust me I’m an actuary” theme, it is baffling to think that this could improve public confidence in pensions and save for employees of Royal Mail, not something that any employer would currently say to their staff of their DC workplace pension.

Prioritising contributions and income in retirement over investment is one thing. What follows is even more baffling.

Nico points out that investing to beat public market indices is hard and implies it is too hard for DC pensions. He advocates that instead of investing for growth, DC schemes stick with passive strategies and minimise investment fees. He is actually endorsing the “race to the bottom”

He doesn’t see how the VFM Framework can improve outcomes through consolidation and says that it may do the opposite.

This final view is based on a view that “more information does not lead to better choices” – a libertarian approach doesn’t work and we need strong Government which listens to experts to get things done. Which is somewhat at odds with Darren’s demands for better member engagement.

I think that a very large part of the pensions industry would agree with Nico (and Darren) and want pensions to focus on things that it feels it can control, such as contributions, engagement, sustainable investments and cost and charges.

But while Nico and most of the rest of us, consider investing in real unlisted assets for the birds, that is  what is happening around the world.

Australia, Canada, the great schemes of the USA are looking to increase their allocations to unlisted growth assets, not to please the politicians, but because the better returns are “off market” and because their scale means they can harvest value.

Why I find Nico’s comments so baffling is that only recently, he was a founder of a boutique investment house that set out to invest DC schemes in social housing, venture capital and peer to peer lending. Before that he was CIO of People’s Partnership, arguing for innovation of its massive fund.

The long rant which concludes the “guestless” podcast concludes in an attack on the distraction of social media. But the podcast is of course social media and Nico and Darren’s frustration that other views are available is equally baffling.

The next few days will see the PLSA investment conference discuss these ideas and many will anchor their views with Nico and Darren – setting themselves against testing of VFM through quality benchmarks.

In my view, this will lead to more of the same. The weight of money is with maintaining the status quo and against innovation.

Putting the alternative view is difficult as it was difficult to argue for auto-enrolment or – going back further – the creation of funded pension schemes in the first place.second half of the last century.

There is sufficient evidence from abroad to suggest that the approach behind the VFM Framework will succeed in improving outcomes and that we can get better pensions without having to increase the amount we pay into them.

To me, the best way to increase the amount we pay into pensions, is by showing that they are becoming better value!

 

 

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Will the PLSA recognise the pension investment agenda has changed?

Posted on May 29, 2023 by henry tapper

For a second time in a row, a PLSA  Conference will take place at a time of national debate about the impact of pension investment on the economy. The last Conference in October coincided with the BOE’s purchase period of long dated and index-linked gilts. This Conference will occur as our funding of pension promises appears to be being repurposed.

The noises coming out of the Treasury over the past week and reflected in Nausicaa Delfas’ speech last Monday represent a change of position on the management of pensions.

There will be profound ramifications for trustees, sponsors and  investment consultants.

Con Keating foresees a very different world going forward. It will be interesting to see how far this is recognised at the forthcoming investment conference in Edinburgh.

The new Funding Regulations and DB Code must now be dead. With all of this chatter about enhanced roles for the PPF, the motivation for that legislation has gone in the stroke of a pen. It was that there is harm to scheme members arising from the reduced benefits payable by the PPF.

Amazingly the PPF have never analysed just how large that loss was for the members of schemes which entered the PPF. This was always the central fault with those proposed Regulations and Code.

Consultants’ estimates of the degree of replacement vary from 80% to 95% of the sponsor promise. The more mature the scheme, the smaller the loss suffered by members. Our survey put the difference between PPF benefits at end 2021 and the technical provisions at 12.3%. The current loss to the existing members of the PPF will be smaller than this as its book of ‘business’ is more mature than the market broadly. Schemes within it have been in runoff for as long as 17 years. It is well within the existing surplus of the PPF.

It means that the low dependency, low risk portfolios required under that approach, which would of course be entirely inimical to any growth or productivity agenda, are history.

It also means that schemes will not have to meet the administrative costs of that regime, no small sum in itself, and that sponsors will not be called upon to meet the increased funding costs of that regime. These have been estimated to lie in the range £100 – £200 billion – funds which will now be available for investment in the sponsor business. Of course, whether they will be used for that purpose rather than the payment of dividends and share repurchases is another matter.

Another comment on a recent blog, this time from Jnamdoc is even more graphic

We cannot ever underestimate the damage that TPR deathstar has inflicted to our economy, systematically stripping our pension schemes of an investment mindset and responsibility, and the costs will be borne for some generations.

And the key word here is ‘responsibility’ – each demographics sector (and as a proxy lets assume DB schemes represent the economic interest of the non-working aged) has a responsibility to support and nurture the others. With improved longevity, the pensioner sector is just too large to freeload expecting a risk-free age-wage. All wages – whether working or age-related – need an invested functioning growing economy, in which all can share in the risks and the rewards.

Because of an utter and complete lack of oversight and/or understanding across successive governments, none of them really noticed or challenged the continual and corrosive powergrab of the TPR, and relied upon the actuarial experts. Actuarial experts can bring skills in complex maths and in hindsight analysis. Not about investing.

TPR only produced data that supported their narrow minded funding approaches, and despite the very very considerable power it wielded over Trustees and the professions, and hence over the investment direction and outcomes of c£1.5 – £2trn of Scheme assets, it operated without any remit or consideration to the broader economic impact. They will say, they were only doing their job.

We all know the dangers of the State seeking to choose winners in innovation and technology, but hitherto we have suffered under the worst possible regime – an unelected deathstar of a quango actively sucking all energy out of the economy. Of course until it is extinguished the deathstar will continue to look to blame others for not understanding including targeting trustees for not being “professional” enough to understand the maths modelling, or not having enough buffers to cover the known unknowns induced by TPR’s unique approach to investing.

TPR must step out of trying to offer Trustees investment guidance. Single solution mandated approaches (statism) doesn’t work. Let the market find and invest in the innovation and to deliver the growth we all need. Trustee board need to be filled with business people, not maths modellers doing the bidding of TPR.

I doubt these two voices will be much heard at the PLSA conference, but I will try to represent this point of view where I can.

Just as LDI took over the October Conference, so I expect the Growth Agenda to take over this.

This blog is restricted to a discussion of DB funding, there is an equally important discussion to be had about the repurposing of DC investment. While the funding of DB schemes is likely to be considered “legacy”, DC “is the future”. These characterisations are of course wrong, most of the pensions arising from our DB system are yet to be paid, there is no system yet to pay pensions from DC pots.

In future, we need to think of DC and DB pensions as one –  certainly in terms of  funding, They will differ in the duration of liabilities but  will eventually have  a common purpose. That purpose is the payment of an income for life which gives people dignity in retirement.

 

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So good for Luton Town!

Posted on May 28, 2023 by henry tapper

Luton’s not much of a place, but neither is Yeovil. I’ve been to Kenilworth Rd twice – to watch the two play. I never expected to be watching the greatest club sides in the world play there, but that’s what will happen next season.

I didn’t see much of the game yesterday but listened as I travelled. Tom Lockyer’s collapse was terrible to listen to on the radio but worse still to watch on catch-up. I like this shot much better!

Luton lights up hope for teams like mine. We can dream their dream but getting promoted from National Conference to Premier League is a lot harder than blogging about it.

I caught the penalties and the celebrations after. I watched the fight at the Vitality and thought of how Bournemouth were resorting to bucket collections to keep going a few years back.

Then there’s Tom Lockyer , captain now of a Premier League side though who knows what all those pads attached to him will tell him.

I wish him well , I hope he gets to see this fabulous May day and gets home soon!

Well done Luton, you’ve done yourselves proud.  Coventry, your time will come!

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I have offended friends – that shouldn’t happen.

Posted on May 28, 2023 by henry tapper

I have offended my friend Darren Philp using this blog to characterise he and Nico Aspinall as pension’s Chuckle brothers. I’ve ripped into Nico for being a pensions patrician and criticised a bunch of well meaning pension companies for creating a club which I called woke.

Boy, I must have been in a bad mood yesterday!

These are my views, I don’t withdraw them , though I wish I hadn’t hurt my friend’s feelings. I have been on the end of some pretty ugly stuff on social media myself. Of course Darren will get the support of the bulk of people on social media and that’s right too, these are nice guys. Darren’s called out my attack on linked in and you can read what he has to say here.

Putting it out there

There is barely any debate on pensions that is not sponsored by a commercial desire to be right. I don’t claim to write without a commercial intent, my businesses are about delivering things that pay my companies and ultimately me.

Similarly Nico and Darren have commercial agenda which they pursue in alignment with their beliefs. Nico’s work on sustainability and the capacity of funded pensions to make a difference to the planet are evident in every one of the 18 pots. I have worked with Darren on projects such as “net-pay” and know that he is a genuine believer in causes such as equality of pay and pensions for women and men,

That these guys are genuine is not in doubt, at least in my mind.

And they have every right to put there views out there – as they did in their latest pod. Putting it out there is what it’s all about, getting a broadside from me is a risk that Darren and Nico expect and that’s no bad thing either.

“Ad hominem”

I hope that many people will listen to  Nico and Darren’s latest pod, long as it is, and read my blog.

The 17 podcasts that have preceded this one , have included a lot of criticism not just of Nico and Darren but of the way  things have been said, the attitudes and the proposals of those on the podcasts – especially the guests.

Darren is worried that my comments will lead to people not wanting to come on the pod. I can see that too. But I’d point out that without my blogs, his podcasts would not get the publicity they deserve. Every time I write, I encourage people to listen and I encourage you to listen to the latest pod as part of this.

Directing criticism against  a person rather than the opinion they express is “ad hominem” – a bad thing. And social media makes ad hominem comments all too easy.

However, unless we have personal conviction, then social media would be no more than a series of corporate positions. I could not disagree more with Nico especially for the views he expresses but I like him and Darren no less for revealing what to me is their other side.

Knowing when an attack on people’s views becomes an attack on their person is a fine judgement call and I can see from Darren’s reaction on social media that he thinks I am on the wrong side of that line.

That we can have this discussion without resorting to law is a good thing. That the very important issues raised by Nico and Darren and criticised by me, can get traction on a bank holiday , is another good thing.

If people will not enter into discussion for fear that their views will be challenged openly then there is the Chatham House rule. But podcasts are not under that rule, people who put it out there, ultimately must expect a reaction.

So though I command the bully pulpit , I am conscious of responsibilities to people’s well-being and will respond where people explain that they have been offended. I expect  a lot of personal criticism for my outspokenness and get it. But offending a freind is  a mistake – Darren, please accept my apology!

 

 

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Treasury discusses planning to take on Britain’s enfeebled DB plans

Posted on May 28, 2023 by henry tapper

The following article is extraordinary. Until a few weeks ago, the Government’s Pensions Regulator was urging small and underperforming pension schemes to demand employers pump money into them so they can buy risk-free assets in a process known as “de-risking”.

For a decade these schemes were locked into LDI strategies  where employers were steadily tapped for deficit recovery contributions and schemes inched back to solvency by taking a huge bet that interest rates wouldn’t rise. In 2022 interest rates rose and the good work was undone as they found themselves trapped in funds they clearly didn’t understand. This saw them were shorn of assets and often the expensive insurance they’d purchased against inflation rises.

Many of the small schemes have only recently found that their funding strategies have been sunk below the waterline. At a PMI session on the liquidity crisis  last week, it emerged that some pooled funds were only informing DB scheme clients they had lost their hedge at the beginning of March.

Now these schemes are contemplating complying with the Pensions Regulator’s DB funding code which demands more of the same. The Pensions Regulator marched them up to the top of the hill and marched them down again. Compared to more of such pain, many employers and their trustees may be ready to hand the keys to their scheme to the Government’s lifeboat.

 

Pension funds have been urged by the City minister to embrace a “culture of risk-taking” as the Treasury draws up plans to bolster returns for savers using an industry lifeboat.

Andrew Griffith said pension schemes must be willing to take a greater degree of risk in their investments, amid fears that a reluctance to put money in the stock market is holding the economy back.

Speaking to the Telegraph, he said:

“We are working on removing points of friction, streamlining our regulations and encouraging a greater culture of risk-taking.”

Jeremy Hunt, the Chancellor, is understood to be considering plans to hand control of underperforming schemes to the Pension Protection Fund (PPF), which currently protects people in retirement schemes when their employer goes bust.

Officials are considering how they can encourage small, poorly-performing defined benefit (DB) funds – old-style pension plans sponsored by an employer, which pay out a guaranteed proportion of a worker’s income when they retire – to fold into the PPF, creating a superfund that can invest in a broader range of UK high growth assets.

Treasury sources said the idea was one of several options under consideration, but it is understood that altering the PPF’s powers would require complex changes in the law and could not be rolled out before the next election.

The government-backed body already manages almost £40bn and was forced to step in and run the schemes of Carillion and BHS when the companies collapsed.

It is understood that Mr Hunt and his advisers are against forcing pension funds to invest in UK assets – in contrast to the shadow chancellor, Rachel Reeves, who has suggested they could be ordered to pay into a £50bn “growth fund”.

A Whitehall source said: “Under no circumstances should we be mandating.” A Treasury spokesman declined to comment.

The Tony Blair Institute will recommend in a report next week that sponsors of the smallest 4,500 DB schemes should be allowed the option of transferring to the PPF.

It will point out that although the UK has the third largest pension market in the world, no individual fund is in the global top 40.

The institute believes consolidation could transform the PPF into a superfund of around £400bn, making it one of the biggest in the world.

Mr Griffith said that pension fund managers are not currently being incentivised to deliver higher returns. He said:

“[We have to] move the emphasis away from funds running themselves for the minimum cost to funds looking properly at performance and that is what matters here because it is about making sure long-term savers get the most prosperous retirement that they can.”

His comments came after City heavyweights warned earlier this week that London was falling behind rival financial centres owing to its risk-averse pensions industry.

Sir Nigel Wilson, chief executive of Legal & General, said Britain’s pension schemes were failing to support growth industries such as bioscience and risked holding back the economy.

In a sign of a change of direction, the boss of The Pensions Regulator also pledged to go after the trustees of struggling funds that are letting down their members.

Mr Hunt will on Friday announce plans to earmark £250m of taxpayer cash for the Treasury’s Long-Term Investment for Technology and Science (Lifts) initiative, intended to spur the creation of new investment vehicles for pension schemes to back British science and technology.

Mr Griffith said:

“The £250m will be used to seed a new vehicle aimed at defined contribution pension schemes, allowing them to invest in scaling up some of the UK’s most innovative companies.”

The Treasury will launch a call for proposals alongside the announcement.

Baroness Altmann, a former pension minister, welcomed the move, adding:

This Lifts fund is just a small story, but there are billions of pounds of pension money that could and should be directed to benefit Britain.

“By offering new investment ideas and long term growth projects for new companies, or desperately needed social housing and infrastructure, pension funds could enhance returns.”

Earlier this week, The Telegraph reported that thousands of poorly-performing pension funds were causing savers to miss out on nearly £70,000 in lost investment returns.

There is growing concern that pension funds are increasingly pulling back from stocks and investing instead in safer but less lucrative assets such as bonds, in a growing problem known as de-equitisation.

Mr Griffith said:

“De-equitisation is a long-standing feature of the market and it’s been a concern for some time, it’s not new. People have alighted on it more recently but in policy circles and in the Treasury, this has been a concern.

“It’s fully one of the things we are focused on when we think about the reforms to the financial services sector generally and pools of trapped capital whether they be in peoples’ private savings, in institutional capital such as the work we’ve done on Solvency 2 and to pension funds themselves.

“It’s a combination of changing the culture of risk, removing some of the frictions at pace… and bringing forward new vehicles for investment in equities or high growth sectors such as Lifts.”

OK – not all of this is right. Rachel Reeves didn’t rule out mandating investment in venture capital but that’s along way from adopting the idea. 

Tony Blair’s estimate that the PPF could increase tenfold in size to £400bn is a number plucked fr0m thin air. By creating a benchmark for DB schemes , the PPF can do what Nest is doing and raise standards. Most importantly, it can recreate an investment culture within DB schemes – rather than the cruel parody of corporate finance – that the funding of DB schemes has become.

The PPF would have to compete for business as Nest competes and there’s the rub, like Nest, it would likely get low value business , but as with Nest – this doesn’t really matter.  It is unlikely that the PPF would create a false market and for every scheme taken on, another employer would be released to get on with doing the day job,

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