I don’t want “active” or “passive” – I want value for my money Stuart!

Posted on June 4, 2023 by henry tapper

Stuart Kirk , the journalist who fell out with ESG and the industry it has spawned is now being controversial for a living (rather than a sacking).

This week’s FT column finds him falling out with himself for being active in decision making on where his pension pot should be invested.

He’s not as hard on himself in the article as he is in the headline. In the article he just rails at the funds industry for not providing him with a ready made solution to his problem – managing a pension pot with funds available on a SIPP platform.

In all honesty, I don’t think he stands much of a chance of satisfying himself. He concludes, like many before him that he isn’t Warren Buffet and that he might as well plonk his money in the S&P 500 and walk away. Except he can’t do that as he’d be out of the column faster than Auguste Rodin at Epsom yesterday.

There are fund managers who are making returns for themselves but they tend to do this  for themselves rather than spreading the love. There are markets which are accessible to the likes of you , me and Stuart which don’t conform to the sorry trends he discusses (and they don’t include the 1.30 at Epsom Downs)

But these markets are for patient capital and can be accessed through the stock market as investment trusts and occasionally as attractively priced hedged funds like Ruffer.

They are most certainly uncorrelated to the market returns that Stuart Kirk tracks

Having spent a highly enjoyable but financially disastrous afternoon at Epsom, I am a little jaded, but I have come to the conclusion that the people who make money from racing are far removed from the punters queuing up at the Tote who are under-informed and under-rewarded for the risk they take (me included).

So I bet £1 at a time for the enjoyment of watching the horses career to the line , insouciant to their bearing my dreams on their backs.

I saw expertise at Epsom but in the shape of bloodstock agents , trainers and breeders. Getting them to share so much as a tip with me, was out of the question.

That is the problem Stuart has , I have and most like us have. We need to be on the inside of the ring – not staring at our investments from afar,

Getting inside the markets means having fund management that is managed by those people with a long-term view of what will deliver value.

These people need to be incentivised to manage money not on the basis of how a portfolio is working over the short term, but the value it delivers over time.

The assessment of that value is beyond me , Stuart and probably beyond you too. But it is not beyond the wit or man or woman.

I suspect that the answer to our problems is in the hands of the CIOs of the big workplace pensions – who are incentivised by the value they offer, as that is all they do. Boring as it might sound, we have more chance of achieving what we want from our savings from the Nest default fund than the portfolio offered by Stuart Kirk.

I don’t want activity, I don’t want passivity – I want good outcomes over time – value for my money.

 

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A pension’s for life…Simon Kew on VFM

Posted on June 4, 2023 by henry tapper

The Jackal

Simon Kew appeared on this week’s VFM Podcast which coincided with him starting a new job as head of market engagement at Broadstone and with me bumping into him at an industry event. Simon has been the stalwart of the Pension PlayPen Golf Society , he was also lead singer of the Racket of the Lambs – Pension PlayPen’s contribution to rock and roll. In a previous life he was the Pension Jackal.

Meeting him had prompted me to ask myself what the role of a covenant adviser would be when the employer covenant is no longer necessary and Simon seems to have voted on that one with his feet, returning to public policy, a role he has previously enjoyed at the Pensions Regulator.

Which begged the question. What has Simon got to say about pension’s VFM when the pension in question isn’t a question but a pot – aka – the accumulating pot we save into while we work.

VFM for Simon is a donation of £200 to a rescue dog centre in return for Rudi- his rescued Greyhound. This seems intuitively a good example, dogs give much more joy than they consume in dogfood and pet bills.

However, while we are taught that dogs are for life, sadly they don’t last as long as we do, a dog’s life being rather short. And while they give immediate satisfaction, their departure leaves owners with heartache, as testified by Simon. So a dog is more like the drawdown of a pot, great while it lasts but likely to expire before we do. These points were made on the podcast by Darren, who raised them with great tact.

Tact is infact a word I’d use about the whole pod. The word “controversial” pops up several times without the pod ever sounding controversial at all. Actually, most of the conversation about VFM is taken up talking about TCFD and ESG exclusions, the “values for money” debate. The conclusion of the discussion on VFM is that a framework is rather less important than the outcomes of people’s savings which reminded us again that the people with the most valuable pension pots will be those who pay most into them.

This returns us to the importance of engaging people with pensions , which takes us to a further conclusion that if we loved our pensions like our dogs, we’d have better pension outcomes. None of this is controversial, the Equitable Life advertised their pensions through Clement Freud and a dog called Henry. People loved the Equitable as much for the Clement and his dog as for the VFM Equitable gave – until they didn’t.

Which brings us to the question of whether an employer covenant is part of VFM – which is an interesting question. Some banks provide accelerated outcomes by paying for admin and subsidising fund management costs – whether this is providing VFM is one of the questions in the VFM consultation – which concludes that it isn’t. You might consider that such subsidies – which include the subsidisation of governance , the payment of the schemes legal and advisory bills and so on are also accelerating VFM.

If you work for a big bank that picks up all your bills and pays a big whack into your pot, then you are in a valuable scheme but whether it is offering VFM is a different matter, the DWP conclude that the tests for VFM are about the efficiency of the investment process in turning contributions to final pot, the quality of the service provided and the apportionment of cost and charges.

So a scheme with a strong employer covenant can provide poor VFM – if it isn’t well run. Nico asked the question of master trust TCFD statements and concluded that multi-employer schemes have no employer covenant, the scheme’s TCFD disclosure is exclusive of the employer putting the money into the scheme.

So , bizarrely. we can conclude that in terms of VFM and  TCFD reporting, the employer covenant is minimal.

But here’s a thing. The employer is one of the key stakeholders in the VFM Framework because it is the employer who should be looking at the VFM tests and determining what to do about the workplace pension. So the employer’s covenant to staff could be to ensure that the scheme in which staff participate- whether as members or policyholders, is providing VFM.

This might well be of interest to Simon, who is clearly struggling to get to grips with the VFM framework (it being his first week doing a new job).  We know that one of the key questions facing the DWP in drafting its consultation response is whether the employer is going to be required to engage with their scheme’s VFM. If this obligation falls on them, the covenant of the employer to staff is extended from choosing a qualifying AE scheme to choosing a scheme that is both qualifying and offering Value for Money.

So perhaps the VFM Framework may help to determine whether the employer discharges its pension duties to its staff or not.

The next question is whether that duty extends to the AE savings function or beyond.  I know very few employers who consider they have a covenant to staff who have left service, certainly in DC. A pension’s for life, not just the workplace, whose responsibility is it to ensure people’s pensions last as long as they do?

The Powerful coil of the Pension Jackal – Simon Kew

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How pooling can deliver VFM – Chris Sier looks at Border to Coast.

Posted on June 3, 2023 by henry tapper

Chris Sier

.This article first appeared in IPE and is written by AgeWage co-founder Dr Chris Sier. Chris sent it to me to remind a friend of mine, instrumental in setting up LGPS pools of what best practice looks like. Last week at the PP awards, Border to Coast picked up several awards, they are a bright star that shines a light on how our future investment strategies, both DB and DC, can be improved.

 

Asset pooling (‘Pooling’) by Local Government Pension Scheme Funds, seen as a means of reducing the costs of asset management, was first formally suggested in 2015 by the then UK Chancellor of the Exchequer, George Osborne. Plans for each pool were finalised by early 2018 and eight pools were created. In the subsequent five years each of the Pools have absorbed at least some of the assets of most of their LGPS Fund clients but, despite this and in recent weeks, UK Ministers have criticised pooling for not moving fast enough. And each year Pools publish data that tries to prove claims of great success through huge fee reductions, but these are met with scepticism.

Which is a shame because my experience of the Pools with which ClearGlass has worked has been extremely positive. So, I wanted to set the record straight in this article, which relates to what I think is the first independent and quantitative study of the asset management costs of Pooling and, specifically, the Border to Coast Pension Partnership.

In 2022 Border to Coast invited ClearGlass to benchmark the asset management costs of the products it produces for its LGPS fund clients. This process involved Border to Coast giving CTI (‘Cost Transparency Initiative’) cost and performance templates to ClearGlass for each of its products. This is generally a simple process, but there were complexities involving the attribution of central Border to Coast costs to the underlying costs of external managers (that also had to submit CTI templates) to build aggregate templates. We got past this and built a bank of Border to Coast data with which we could make like-for-like comparisons to the large database ClearGlass holds on institutional fund cost and performance data.

A note on this cost and performance database: since ClearGlass launched in 2019 it has collected data on behalf of almost 1,000 UK DB pension schemes ranging in size from less than £10mn AUM to several over £50bn AUM. The total asset value of the schemes is (or was, prior to last year’s LDI crisis) well over £1 trillion AUM. Data came from over 530 different asset managers, in portfolios of all sizes, and data has been segmented into 44 pooled portfolio strategies and 12 segregated portfolio strategies. Each strategy has sufficient data to generate accurate scale curves across the full range of portfolio sizes, a total of over 30,000 portfolios. Data is granular (CTI templates have over 200 cost sub-categories) and each data point is always deal-specific. This is an important point as the CTI templates require client-specific deal data and are rejected if managers insert only share-class level data. In other words, rebates, indirect fees, implicit costs, fees paid through NAV as well as on invoice…all are captured and checked. Suffice it to say the database is huge, accurate and carefully curated to ensure like-for-like strategy matching. ClearGlass also works with non-UK clients, DC clients, and non-pension clients but these volumes are still quite low. So B2C’s data was compared to a UK dataset.

With this data we can do some interesting things. The first is to compare the data we received from Border to Coast, strategy by strategy, to our database. And the results were interesting. Every single strategy run by Border to Coast had costs that were better than the market median and therefore could be classified as Good Value-for-Money (VfM), with most also being better than the best-quartile and therefore classified as Excellent VfM. We’ve worked with over 1,000 schemes, including some LGPS funds, and haven’t encountered ubiquitous success like this before. But this is to be expected, yes? Scale counts for a lot in asset management and Border to Coast is huge, more than £40bn AUM, and the basic use-case of Pooling is to derive benefits from scale. But our benchmarks are scale adjusted, so by every measure Border to Coast is doing well.

It doesn’t stop there though. For every asset owner with which ClearGlass works, we can create a ‘unique fee benchmark’. To do this we do not look at scheme total size. Rarely are any two schemes of the same total size comparable as they have different asset allocations. In other words, any two schemes will use different strategies with different portfolio sizes, and as fees are dependent on the strategies used, the size of the portfolios, and whether the portfolio comes from a pooled fund or is a unique segregated structure, total costs will vary. To give a simple example, a scheme with £1bn AUM and 30% allocated to private markets will have much higher costs than a £1bn AUM scheme with a lower asset allocation to private markets. Instead, we look at the factors I mention above (strategies, portfolio sizes and seg vs pooled structures) and apply our benchmark fees to each portfolio and then weight each fee according to the asset allocation.

For Border to Coast the results were, frankly, incredible. Our data told us that, given the asset allocation, portfolio sizes…etc of Border to Coast, it should carry a total ongoing charge (equivalent to TER) of 42bps. We calculated instead that Border to Coast was only paying 16bps, a ‘saving’ of at least 26bps, or £121mn, per annum. That is £121 million that Border to Coast is saving its client LGPS funds each year, every year and in perpetuity. Compound that value up over 50 years or so and imagine what it does to the asset values of underlying clients. Deficit wiped out, to put it bluntly.

But what do I mean by ‘at least’? Well, the 42bps ‘unique fee benchmark’ we calculated was based upon portfolios of the size that Border to Coast can build, which are huge. How much would be saved if we created a benchmark fee level, with the same asset allocation, but based on the portfolio sizes that a typical LGPS fund would deploy? For this we scaled back portfolio sizes to roughly one twentieth, which is where a £2bn LGPS fund would operate. Under these circumstances, the benchmark fee level would have been 47bps. So in this version of events, Border to Coast has reduced fees by an even-more-incredible 31bps.

As it happens, we have data on one of Border to Coast’s clients, and we calculate that Border to Coast has actually reduced fees on the assets that have migrated from that fund to Border to Coast by a real figure of 25bps. Point made.

It doesn’t stop there though as ClearGlass has also built a Fee Savings Index, think of it as an index of scheme negotiating efficiency for the 1,000 client schemes with which it has worked, and Border to Coast is ranked at number 1. Border to Coast is the scheme in the UK that has achieved the largest reduction in fees, in relative terms, when compared to any other scheme with which ClearGlass has worked. The index also includes some schemes larger still than Border to Coast, so this is a truly remarkable achievement.

But this begs the question, how? How is Border to Coast achieving what I would describe as supra-normal levels of fee reduction? Basically, it is operating well beyond the limits of its scale and has not only forced external managers to deliver startlingly low fee levels, it has also built an internal management model that adds little to the costs of the fund-of-fund or direct fund management model it operates. To put it in the words of one external fund manager to whom I spoke recently “they really got a fantastic deal, almost unbelievable”.

I think the answer to the negotiating power exercised by Border to Coast comes in several parts.

Firstly, they started with a clean slate. They did not onboard managers and spend time rationalising lots of small portfolios. No, they started from scratch and went to market with notional AUM totals and, having won the deals with their external managers, they onboarded the AUM from client LGPS funds rather than onboarding the managers that were already being used.

Secondly, they built FOMO…Fear of Missing Out. From what I remember, managers were captivated by the potential of winning multi-billion pound portfolios to manage, and a negotiating war ensued that was related not just to the scale of the portfolios, but the idea that in winning they would exclude competitors.

Thirdly, and probably most importantly, governance and independence played a huge role. My experience of most Pools is one of consummate professionalism. Decisions are made based upon rational analysis and an independent decision-making framework, which means that managers are picked because they are good and able to demonstrate that ability.

Finally, and this applies to all institutional asset owners, you can negotiate with liquid asset classes anytime if you have good benchmarking data. But you can only negotiate with private markets managers up front. The threat of losing a mandate as a manager if you misbehave or are too expensive (again based on benchmark data) is not real in the world of illiquids.

In my opinion, therefore, asset pooling does work, but it works best if you have a clean slate, have excellent governance and are independent and rigorous. This is great news for LGPS Pooling, albeit there are questions around how to pool illiquids in any other way than starting from scratch (and there are far wider questions in my mind than just this point for illiquids, but that’s for another discussion). But it should also be great news for wider pooling initiatives in the private sector, such as the Pension Superfund and other aggregator mechanisms.

It might also mean a world where large schemes that either are, or claim to be, good at asset pooling, fee negotiating, and independent manager selection, having a role to play in the wider market. In other words, when will Border to Coast be open to clients other than LGPS because, based upon my analysis, they would do an excellent job

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PLSA Edinburgh – do we merit managing other people’s money?

Posted on June 3, 2023 by henry tapper

I’m going up to Edinburgh on Tuesday to the PLSA conference, my train ticket up cost £32, down £35 and I’m staying in student accommodation. Thanks to the PLSA for letting me cover the event from the press room, I am looking forward to listening to some interesting stuff.

As I prepare, I’m sorting in my head what are the real issues impacting the people we serve and what are the things that matter to us, but have little impact on people’s savings and pensions

Personal solvency

When it comes to money, what matters is money in and out. Most people have not had wage rises that have kept up with outgoings, especially money spent on food , energy and housing (rent and mortgages). They are feeling poorer and some are struggling and , as Stacy Standen told a recent conference “I don’t think we have seen the worst of it yet”.

That we have not seen more opt-outs of pensions than we have is probably down to people’s huge insecurity about their later life finances. It is not down to rational trade offs between debt and saving. You cannot get the rate of return on your savings as you pay to banks on you credit account balances.

People are deeply insecure about later life and prioritise their pensions even when – rationally – they shouldn’t. We should be continuing to point out to people that they have options around pension contributions rather than add to insecurity

Ownership

The money we have in savings, is ours, though sometimes you wouldn’t think it.

I spent an hour on the phone last week making an ISA withdrawal. Having gone through the process of identification and listened to the various warnings about valuations, I was told that I would be sent in the post a form to sign to confirm where I wanted the money sent. Three working days later, the form has not turned up and I am not expecting the process of taking a small amount of money out of an investment account to take over two weeks.

I have yet to access my pension pot but – even as an expert – I dread the thought of asking for my money back! Investment administration is critical.  Quality of service matters and is an investment issue, if not for us – for our customers

We have to make it easier for people to access their money. We must also make it clear to people that pensions are for spending.

Making it easy for people to spend their pensions is crucial to whatever we mean by “engagement”, people are bombarded by offers to bring pensions together and to have wealth management, when most people want to own the process of spending money.

Investment

The PLSA bill the two days of discussions as an “investment conference” and most of the discussions on investment will be way beyond the ken of the people outside the conference building.

This is not a bad thing; we have given up on making everyone their own CIO, we act as fiduciaries to people’s investments and we need not foister the strategies we use on people who have no interest in the mechanics of investment

But we should be able to tell people, when they ask, how their savings are doing. It matters a lot to people how their money is growing. Especially when they take the risk of it not growing or even falling in value, they deserve accurate personal information on how their savings have done.

The Government’s Value for Money agenda is ultimately aimed at private individuals, though for the moment it is employers and trustees who will be impacted by it. Ordinary people are interested in getting value for money from financial services. If you don’t believe me look at Martin Lewis’ viewing figures.

Why this matters

 

Private pensions do matter to people , but they only form a part of the way they look at later life. What comes from the state pension, what comes from work , what comes from other strategies such as buy-to-let, ebay trading , car boot sales or buy to let, maters too.

Private pensions  of whatever hue can matter to us more than they matter to the people who own them (see above). but the money that comes from pensions has the same purchasing power as the money from ISAs or from trading CDs at the boot.

People have been promised simplicity by way of a single view of their pensions on a dashboard ; they have been promised the freedom to spend their pension savings how they like and they have been given an expectation that by saving for a working lifetime they will be alright.

We know that it is more difficult than simply making assurances. But we must remember that the assurance of an income for life that gives dignity in retirement is our common purpose and our product.

It matters to me that this is what we do and it should matter to the PLSA conference too

It can be easy to get distracted by other matters, political, fiscal, macro and micro economic and lose sight of the very simple prize we aspire to – to be trusted with other people’s money

 

 

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Why pension AVCs are back as a top employee benefit.

Posted on June 3, 2023 by henry tapper

 

There are a number of reasons why AVCs are increasingly popular to members of occupational schemes, most of them come down to a dirty three-letter word – TAX.

A sensational tax product

  1. TAX- Budget changes mean that saving more for retirement is no longer penalised by the Lifetime Allowance and is now much less likely to breach the annual allowance.
  2. TAX- Frozen marginal rate bands means that more people are paying higher taxes on their top band of income.
  3. TAX- A newer kind of ‘Shared Cost AVC’ is available which is proving attractive to employers and members as it substantially reduces national insurance costs for both.
  4. TAX – members of some occupational schemes (LGPS is the biggest) can use AVCs to fund tax-free cash, reducing the need to swap pension for cash at disadvantageous rates.
  5. TAX – investment growth on money purchase AVC pots is largely free of UK taxes meaning it grows faster and leads to bigger pots.

The fundamental reason for paying more into a pension is to get more pension, but when ALL the tax incentives align as they do with AVCs – it is hardly surprising that they are one of the most popular ways for those with excess income to save.

 

Admin problems and how they’re getting solved.

Until recently, the vast majority of saving has been into pots managed by one insurance company – the Prudential. Unfortunately, Prudential were rather spoiled by this virtual monopoly and fell short of the standards expected of workplace pensions on administration, member service, fund choice and the charges on funds..

Poor performance puts savers off while poor administration can have serious consequences for schemes and members. The failure to properly administer AVC pots can lead to delays in the payment of pensions, and tax-free cash sums. This has meant that AVCs have not always been promoted by employers to their staff. Employers and trustees have been nervous that AVCs could create another moving part in an already complex mechanism.

Many providers who had previously been in the market were also nervous about the complexity of the payroll interface needed to manage AVCs for multi-employer schemes such as LGPS, NHS, Teachers and the Civil Service.

However, a recent development means that the payroll interface can now be outsourced to a payroll aggregator. This development is attractive to AVC providers who tend to not have relationships with individual employers. Relieving the pressure of collecting contributions means that traditional insurers are now more interested in competing against the Prudential, some master trusts are looking to provide a part of their service as well.

Recently Legal and General launched a product using its latest technology and funds to offer AVC savers a comparable product to that available to members of its DC master trusts.

With increased competition, AVC savers can expect to see better service and better returns than they’ve been used to. Trustees can expect to see an end to AVCs holding up the payment of pensions and tax-free cash while employers can trumpet this savings facility as an employee benefit.

 

Shared Cost – a revolutionary improvement fired by payroll.

For decades, AVCs have been paid out of salary and have therefore attracted national insurance. But with advances in payroll technology, it is now easy to set up contributions as payments by employers with members sacrificing salary in return for a contribution to an AVC pot than can be enhanced by the national insurance they no longer have to pay. For employers their saving of NI goes straight to the bottom line, more than compensating for any extra administration. Indeed, employers find they are incentivised to promote greater pension saving from members, by the incentive of “Shared Cost” – salary sacrifice arrangements.

 

What’s the call for action?

As an independent expert, keen to improve pension saving and value for money, I’ve been focussing on what has been a Cinderella savings product. If you are a trustee or on a fund board of a scheme that must offer AVCs, you should; –

  1. Ask your consultant to investigate providers willing to compete for your business.
  2. Speak to AVC Wise, the leading provider of a fully managed service for Shared Cost AVC schemes (including payroll aggregation)
  3. Promote to your employers the advantages of AVCs and especially Shared Cost AVCs.

If you are a participating employer in or sponsor of an occupational scheme (whether in the private of public sector, you should be considering reviving interest in AVCs, where staff have access to an open DB occupational scheme.

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Rob Reid – Rob Reid – Rob Reid – Rob Reid

Posted on June 2, 2023 by henry tapper

I only know two Partick Thistle fans, one is Andy Young and the other is Rob Reid. If you have been round long in pensions – you’ll know Rob Reid too. Thanks to Andy for the link to the Partick website. We wish this fine man a quick recovery!

Message to fans who helped fellow Jag at Newton-on-Ayr station

Thursday 1st June, 2023 at 12:24pm

 

The club have been in contact this week with family and friends of the Thistle supporter whose life was saved at Newton-on-Ayr train station after Friday night’s second leg at Somerset Park.

Thistle supporter, Robert Reid (not to be confused with the club’s esteemed historian and honorary president) received CPR at the station for some 25 minutes, with the quick-thinking support of many fans proving the difference between life and death.

After receiving emergency assistance for that extended period from numerous supporters, Robert was then treated by paramedics as soon as they arrived, before being taken to hospital locally. He was transferred on to Clydebank Jubilee hospital in the early hours of Saturday morning as his recovery continued. The paramedics assessed that 67-year-old Robert had probably only had a 5% chance of surviving given all the circumstances, had fellow Thistle supporters not jumped into action.

The club have been in contact with Robert’s daughter Jo, and friend Graeme Peden, this week with a visit planned, however that was scuppered by another transfer to a third hospital inside just six days. Club representatives hope to visit Robert late this week or early next week.

It has become clear during these exchanges that many Thistle supporters acted heroically and selflessly to help in several ways when the incident happened on Friday night. Such was the team effort, there are too many to thank individually however Robert and his family and friends would like to single out Dr Tim Parke – an emergency medicine specialist who led the lifesaving efforts, alongside many others nearby who fortunately were also qualified to do so.

In their words: “The doctor Tim, and several others, assisted Robert so professionally – without them he simply wouldn’t still be with us. A heartfelt thanks is extended to everyone involved; in fact, the whole Thistle support were a credit to the club in assisting in every way possible.”

Robert has added that: “Having supported the Jags since 1964, I thought I had seen the best of the club in every respect – these last few days have shown me how the support doesn’t end with the whistle.”

Everyone at Partick Thistle FC would like to echo that sincerest thank you to each and every supporter who assisted in any way on Friday night – you are a credit to the club you support. We wish Robert an ongoing, safe, and full recovery.

Arms aloft on the terrace

 

Let’s hope that Rob’s recovery is speeded up by the ongoing success of the Jags.

And it looks like the big man – hasn’t lost the use of his fingers!

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Can we repurpose the employer covenant adviser?

Posted on June 2, 2023 by henry tapper

The way things were

Not so long ago, any pensions award ceremony had a category to “recognise” the employer covenant adviser whose job it was to tell the trustees the likelihood of an employer going bust.

The Pensions Regulator went through a phase when  it was obsessed by integrated risk management where the employer covenant was deemed as important as the investment and funding level of the scheme. If the Covenant reduced, funding would have to be higher and investment risk lower. It was so easy to explain in a diagram

But times have changed. Many of the schemes TPR looks after don’t carry the risk of going bust anymore, despite investments collapsing in 2022, the extraordinary increase in inflation and interest rates means that most schemes can claim to be self-sufficient of their employers and the employer’s role is now about overseeing the removal of the pension liability from its balance scheme by the most dramatic of “de-risking” – buy out.

A world where the insurers, superfunds and the PPF own DB pensions is a world with employer covenant advisers. This may explain why they aren’t so prominent at award ceremonies, they must fear for their future.

What future integrated risk management?

“IRM” is still embedded in the DB funding code and the importance of the employer covenant is such that without a strong one, you are on the fast-track. The fast-track is perversely a lockdown of investments and a reliance on the weak employer to make good any deficit from the opportunity-cost of not investing for growth.

Perversely, the weaker the employer, the more the pension scheme has to cost to keep funding where TPR wants it to be.

This of course means that most of the schemes that continue to pay their own pensions and haven’t “de-risked” are still governed by trustees who require the Covenant of the employer to be scrutinised with the help of employer covenant advisers.

All of this has to stop, sooner rather than later, if we are to get away from the unvirtuous triangle of mutual suspicion that IRM and the DB funding code encourages.

What future “clearance”?

When Nausicaa Delfas talks of a new way of using pensions to improve the productivity of UK PLC , she may be asking herself why employers who want to get on with investing for future growth, need to seek clearance from TPR to do so. The below is from TPR’s guidance on clearance which – if not obtained leads to a cash-call from the Regulator to the employer as a “contribution notice”.

Contribution notices require a cash payment to be made into a scheme, whereas financial support directions require financial support (in a form approved by TPR) to be put in place for a scheme. They were introduced .. in order to protect the benefits of scheme members and to ensure that pension liabilities are not avoided or unsupported

Whether by cash payments or by other means, employers still live under the threat that their pension scheme could block precisely the investment the Government is calling on them to make.

Does the PPF still need protecting?

Despite some isolated attempts by private equity firms to dump pension liabilities via pre-packs and the like, the PPF has taken on remarkably few schemes since inception. It is the fund it is – due to the success of its investment rather than a flood of schemes that have lost their “covenant”.

The expected collapse of small DB plans didn’t happen  and this is explained as one of the great successes of LDI,

“LDI worked until it didn’t have to”.

This is to reckon without the support for DB schemes demanded by TPR via IRM from small and medium sized employers. WTW estimated this week that £9bn would be paid into a flush DB sector by employers this year.

The tap that has been turned on can’t seem to be turned off, so instead of pension schemes investing into British business, British business is still piling money into its pension schemes to follow the dictates of the Regulator and its powers.

There is no need for such money to be paid , the PPF does not need protecting, members benefits are not at risk, the paraphernalia of the IRM with its covenant assessments and contribution notices should be packed away to the Pensions Archive, and the Covenant Advisers could be put to good work , doing the packing.

Covenant Advisers are endangered and will I expect become extinct. But I am sure these bright people can be repurposed to be more productive in a braver pension world!

Here’s a slogan for the future, where covenant advisers assess the likelihood of a good idea to succeed, rather than to fail!

The way things could be

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All or nothing – teacher’s pay and pensions.

Posted on June 2, 2023 by henry tapper

Yesterday’s pension story in the FT was about how the Government is putting up the cost of funding teaching staff to be in the teacher’s pension and the impact it will have on universities who use this scheme for staff not in USS.

English universities face £125mn hit from pension change

Higher education leaders warn of ‘great strain’ as publicly funded organisations brace for increase in employer contributions

At 23.7% of salary, the Teacher’s pension doesn’t come cheap, unless of course you are bailed out as most state schools are – by a compensating increase in Government funding.

It looks like it will increase in cost to somewhere between 24.2% and 24.7% meaning many universities and private schools will have to pass on the increases through fees or , where this isn’t possible, cut jobs.

There’s nothing machiavellian about this, the Government have been open on it since  it announced the change in the SCAPE discount rate

“The Government is aware that the updated SCAPE discount rate will generally lead to higher employer contribution rates for most unfunded public service pension schemes resulting from the 2020 valuations.”

If you are teaching in the private sector , you may well find your employer withdrawing from the teacher’s pension altogether. This is not a good thing for you as you will almost certainly get a worse scheme in its place and you may well be asking why.

The reason contributions are going up and not down is because assumptions on economic growth are getting worse. This  means that the public purse is not going to stretch to the largesses of the past.

This is not about people living longer (at present they aren’t) nor is it about market volatility (the Teacher’s pension scheme is not invested but paid directly from the Treasury). This is simply a Government cut.

A cut in pay – a cut in pension?

It would be good were teachers to be given a choice on how their pension was paid and not be reliant on an all or nothing offer of the Teacher’s pension. It is not beyond the capacity of the Government Actuaries to offer and account for differing accrual rates and mark them gold , silver and bronze, depending on their generosity.

It’s not beyond the capacity of reward directors to offer a total reward package that allows teachers to flex up or down the rate at which they build up a pension.

It shouldn’t be a binary “close or continue” participation choice for employers.

Because whatever scheme is put in place of the Teacher’s pension will not have the efficiency of what came before and will be required to pay a bunch of intermediaries for the fund behind the scheme and the administration of that fund.

Of course this doesn’t matter much to the pensions industry

Other than a few actuarial firms prepared to advise small employers such as private schools on this matter, the fate of teachers and their pensions passes us by. We don’t have a fund to take a clip on , we don’t get an admin mandate and we don’t offer advice. These are matters for civil servants.

At last night’s Professional Pensions Awards, I saw no sign of public sector pensions other than the excellent Border to Coast investment partnership who represented the funded LGPS.

If we aren’t getting paid, we aren’t much interested, it would seem.

But organisations such as the  PLSA should care about pensions and pensioners – regardless of whether they are funded or not and if they don’t – they become the trade body for “funds” and not “pensions”.

Which is why, once again, we have to thank the FT for keeping these matters to the fore.

All or nothing?

There is of course a third way for employers to deal with the impending increase in the cost of pensions which is to pass on the increase in funding to employees through the contribution rate.

It seems crazy to me that employers want contributions to be paid out of salary and not exchanged for a lower salary, meaning a “non-contributory scheme” with lower salaries, part compensated by the national insurance savings.

There should be scope for innovation and for advice to employers on how to do these things.

But I am out of my depth here, like most in my line of business, this is not “core business”. But if you are a teacher, it is the very stuff of your future. I hope we will see more on this but suspect we will see nothing.

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Capita hack – USS acts sensibly – class action lawyer acts irresponsibly

Posted on June 1, 2023 by henry tapper

It’s now being reported that 90 organisations have reported data breaches to the watchdog, following data hacked from Capita’s systems.

Capita is facing two data issues. The first was the cyber attack earlier this year, followed in May when news broke that Capita had left a repository of files unsecured online.

USS and Capita

The threat to its shareholders is from “no-win, no-fee” lawyers who have already set up cyber-camp outside the universities where 470,000 members of USS are thought to have had their data compromised. data-breach.com  is the first such ambulance chaser to specifically target these members, there will likely be others. These may look good bandwagons to jump on, they seldom are.

Meanwhile there are signs on social media that the nascent problems are beginning to crystallise

USS has put in place some support for staff who can check their situation but one USS member has published an open letter online.

Opens profile photo
Prof Tanja Bueltmann

 

 

There are, I am sure , straightforward answers to most of these questions and USS look like they are wanting to publish answers in a transparent way.

I suspect that neither USS or Capita are relaxed at this point. The unknown unknowns outweigh the knowns , it is very hard for anyone to scale the problem and so long as this remains the case, there will be fear amongst those who know their data is circulating on the dark web.

But there are some clear actions that can be taken by those impacted and USS have posted what they are on their website in a downloadable PDF

An earlier version of this post has been deleted due to “blogger error”.

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Will the new inequalities of Dutch pension prove easier to stomach than the old ones?

Posted on June 1, 2023 by henry tapper

Governments generally do not tamper with existing pension promises

Yesterday I wrote about the recently announced change in the Dutch pension system that will require millions with a DB promise to exchange it for a DC pot or a CDC pension promise.

It is hard to imagine that this could happen in the UK. Bulk transfers of DB promises to DC pots tend to happen with member consent and when they do , they tend to end in tears – witness BSPS.

Assuming the flows of money into the Dutch private pension system remain constant before and after this becomes law (July with a corridor for change ending in 2028), then the overall impact of the change will be neutral. But individuals aren’t interested in the overall situation, they want to know what is happening to them.

One leading actuary put the challenge very simply

And the next few months will see experts finding case studies where people, through the quirk of numbers, find themselves down on the deal. These will become “causes celebres” and hands will be thrown up in horror.

But it can be done

The idea of “equivalence” is very much in the news at the moment. LCP are proposing that the PPF becomes a longstop providing equivalent benefits to those promised to members of schemes entering it, this appears to be being explored by those in Government who would have DB pensions consolidating into megafunds – capable of helping to refinance the British economy.

The Dutch experiment is now in law and this will surely embolden Governments elsewhere.

And has been done in Britain

The introduction of the single state pension happened in April 2016 after years of planning but relatively little argument. There are many winners and losers from the closure of SERPS and the adoption of a new simpler formula going forward.

While the Government attempted to preserve what had been granted, it too could not control the quirkiness of numbers and winners and losers have emerged. Steve Webb, one of the architect of the plan is busy mopping up the mess that such a huge change inevitably created.

With consent

The consent of the Netherlands’ parliament has been all that has been needed for this to go ahead. But such consent in a democracy must be dependent on some awareness of what is going on. If you don’t tell the people, the people get angry – witness Waspi.

So far – there appears to be a consensus behind the reform , quite the opposite of what has happened in France. The Dutch are not stupid , they are – in my experience – generally aware and when they need to be – demonstrative.

We will see what happens in the weeks and months to come.

What about us?

Personally, I think this is something that talks to Britain in a peculiar way. There is a simmering discontent here over the granting of DB pension promises, which creates a pensions apartheid between those with and without them. This is inter-generational and it’s a function of whether you work in the private or public sector. For most people it’s accidental – we don’t choose where we work for the quality of the pension promise thought we are aware that some pensions are better than others.

We do not have, as the Dutch have, a system of conditional benefits where the defined benefit can be defined by market movements. In this country we would call such a pension CDC – but in the Netherlands , the risk sharing is more complex with the formula for who gets what being shared by employer and member in a rather murky way.

This murkiness is being replaced by a more transparent system. This transparent system is in place in the UK, you know what you are getting from a DB pension and it’s not dependent on the markets. You know what you’re getting from DC and it’s an amount paid into your pot.

We now have the apparatus for pension schemes where the amount of pension is determined by the market and we refer to this as CDC.

If the Dutch get consensus behind the new system – which can be DC or CDC (but not DB) then there will be those in the UK who ask “what about us”.

Equivalence – depends on the markets

The idea of equivalence is that we all start out with an equivalent opportunity to what we had before. But where people will end up under this new system will depend on how they are invested and there is no certainty who will win and who will lose. The dial has been shifted so that members take more of the risk, employers less.

If everyone invests in the same way, there should be equivalence of outcomes but that is a fantasy. We know people make choices for themselves and that those who chose for others, do not act in concert. That is why some pensions provide better VFM than others.

Not everyone will find themselves at the top of the league of Dutch pension performers – there will be those at the bottom of the table too. And as the start of the season is now, we will be seeing a lot of comparisons based on “since inception” metrics

How the Dutch react to these “inequalities” will be interesting. It seems to me they have exchanged one set of challenges for another and we will watch on with interest, wondering if we could or should do the same.

 

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