The grand old Duke of York should have “avoided foreseeable harm”….

Posted on May 25, 2023 by henry tapper

Anyone who is familiar with the Consumer Duty knows the phrase “avoiding foreseeable harm” but trustees and funders of occupational schemes may not. That’s because the Consumer Duty doesn’t extend as far as occupational schemes. Perhaps it should.

If you are in your final years of work and in a workplace pension, you are probably comforted to know that your trustees or insurer are “de-risking” your pot, protecting it from nasty surprises like this

or put another way – this.

Why should the 10 year gilt yield worry you? Well because the price of gilts is the inverse of the yield they give meaning that the values of the gilts that you “de-risked” into , may just have plummeted,

With the 10 year gilt at 4.26% and the 30 year gilt rate at 4.55%, the values of gilts are almost as low as during the mini-budget crisis.

The good news is that the price of annuities will be almost as low too – but if you are not off to purchase an annuity in the next couple of hours, then that doesn’t help much.

What is more – general estimates for the 30 year gilt suggest that it will trade with a yield of nearly 5% in a year’s time. If that means further falls in the value of gilts, why are DC managers keeping them as part of a de-risking strategy. Why aren’t they avoiding foreseeable harm?

The Grand old Duke of York

The Grand old Duke of York was known for marching men up and down hills for no purpose. All that the troops knew was there position on the hill, not whether they were doing much good and that seems a just analogy for the practice of investing in gilts.

That your position relative to the hill might mean that you are hedged against someone else’s position is irrelevant unless you want to meet only when you are half the way up the hill – at which time neither of you are taking much risk of slipping up or down.

Last night I went to a PMI London meeting where an assembly of generals were to be seen at the top table , explaining to the troops in the audience why it remained sensible to retain and top-up hedges on the LDI protection for  their defined benefit schemes , even though the cost of doing so has increased as margin buffers have increased from 1% to 4% of the amount borrowed.

I had two questions, one of which to ask why the troops continued to follow orders – even when they could be doing something more productive. The second question was why it turns out that many of the troops (trustees) thought they’d kept their hedging in place only to be told – five months after the event – that it had been blown away at the time of the mini-budget.

The definition of insanity

The Grand Old Duke of York’s men must have gone nuts repeating the same old march time after time and so must trustees and so must the DC savers invested in gilt funds as part of lifestyle de-risking!

We’re nearly back to where we were in the mini-budget crisis. DC savers are taking yet more pain and DB trustees are hoping that while liabilities are down – so is the fund that backs them. No-one knows if he actually said it , but Einstein comes to mind.

Do pension schemes really need to borrow money to stay on the right side of the Regulator? I’m not so sure they do and not sure the current Regulator wants them to.

Hedging isn’t so expensive when interest rates are up towards 5% and maybe a few schemes will start following a slightly more positive approach as the prospect of “long inflation” takes hold.

One way or another – it would good to see schemes considering a slightly longer life than under the strictures of the DB funding code.

The presence at the PMI meeting of at least one hedge fund manager, suggests to me that there are plenty of investors keen to take advantage of forced buyers and sellers.

So maybe those trustees who have followed the mantra of the “fast-track” will reconsider.

Independent thinking and challenging received wisdom seemed to be a virtue to TPR’s new CEO in her speech earlier this week.

 

So what of the DC saver?

The cost of de-risking going wrong in DB is born by the sponsoring employer. The cost of de-risking going wrong in DC is born by the saver. Savers who have been force fed a diet of corporate bonds and Government debt to protect their pots from the volatility of equities are now considerable worse off, and whatever recovery happened in gilt prices after October has now been given back.

The consequences of people in DC schemes remaining in gilts look set to continue with inflation likely not just to exceed the 2% target of the BOE but the 5% year end target , set by the Prime Minister. Many gilt experts expect gilts to remain yielding 4.5-5% for a time to come. The prospect of more people de-risking into gilts is not likely but inevitable.

But this is  “foreseeable harm” and the Consumer Duty is clear. When it is evident, it must be avoided. Whether you listen to the FCA or TPR, it is time that DC trustees and funders worked out what the purpose of their pre-retirement strategies are, and reassessed them in the light of what their savers are actually doing.

As with so much else, the answers are in the saver’s data.

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IFS says Government tinkering with pension investment doesn’t amount to a tax

Posted on May 24, 2023 by henry tapper

 

Speaking to a meeting of the Pension PlayPen , Carl Emmerson, Deputy Director of the IFS said that were a future Government to mandate DC schemes make a 5% allocation of their default funds to a £50bn Government Growth Fund, he would not consider this a tax.

Emmerson went on to say he did, however, think such a strategy would likely have a big impact on how DC savers funds were invested and while the IFS pension review was not going to focus on investment strategies, it would not ignore the possible outcomes of invested funds in its current Pensions Review.

The conversation came after the FT reported Rachel Reeves supporting proposals from City of London mayor Nicholas Lyons for such a fund and for mandatory contributions if the funders and trustees of DC pensions are reluctant to invest voluntarily.

Many people think such an intervention would simply replace direct taxation with an indirect tax on pensions. I welcome the IFS taking such a straightforward position which should help reduce unnecessary noise.

You can view and download the slides from the event here.

You can watch the event here

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Steelworkers face second time to choose

Posted on May 24, 2023 by henry tapper

The sorry tale of redress for the miss-sold steelworkers continues.

Case study one – more de-risking that went wrong

David Stock & Co, an IFA was apprehended  offering restitution of £50 six years after mis-advising a steel man to opt-out of BSPS.

The regulator said on 19 May that the “unsolicited settlement offers” were not calculated in line with guidance” and were “a deliberate attempt to exclude former BSPS members from the redress scheme”.

The scheme, which launched in February, pays out former members of the collapsed scheme compensation of £45,000 on average.

The FCA stated: “We have imposed requirements on David Stock & Co, which mean consumers who accepted these unsolicited offers must be treated in the same way as those who did not. This will ensure all eligible David Stock & Co customers receive the redress they are entitled to.”

Case study two – the case of the vanishing PI insurer

Ray Adam, whose Niche IFA business was known to millions of motorists as they drove past Newport on the M4, has had to liquidate his business , faced with mounting claims for redress.

My understand is that the business retained its Professional Indemnity Insurance to the end. Why did the numerous triggers sent to the insurers not trigger claims that would have paid out to steelworkers on the old terms (before discount rates rose and redress fell)? Why are claims now going to be against FSCS , the tax payers and other advisers when they Ray’s business was insured. Just what has to happen to bet a claim paid by the insurers?

My thoughts are with Ray, who I met in 2017 when he was closing his doors for over-demand from steelworkers. Ray was and is an innovator, the inventor of CashCalc, a cashflow modeler used by many advisers. He and his clients seem to have been ill-served.

Case study three ; – Time to Choose is back

We are an industry of short memories, this time 6 years ago, we were preparing to give steelworkers impossible choices between BSPS II and the PPF.  Thousands chose an easier option, a cash equivalent transfer value, nearly half of them chose for the wrong reason, following advice that is now requiring redress.

Today, those steelworkers are being asked to choose again.

The calculation on what is due will – according to this adviser take 7 months to make, giving the adviser plenty of discretion as to what discount rate to choose. This gives a new twist to the “Time to Choose” saga. All the cards appear to be in the adviser’s hands.

For many steelworkers who have already had a redress calculation from FOS, the option to have a re-calculation is now another choice it’s time to make. Thanks to Rich Caddy for this explanation

Some members received an Ombudsman decision suggesting that the member would have opted to join the PPF and to calculate compensation on this basis, but then to recalculate and pay the difference once the terms of the buyout were known.
The factors of the buyout (PIC) are now included with the FCA BSPS calculator so if you are one of the members this concerns then it’s worth contacting either your FOS investigator or solicitor to request that the redress is now recalculated using the BSPS specific calculator.

Al Rush has had to write to the Financial Ombudsman Service to explain that these choices are not as easy for steelworkers as for FCA/FOS/MaPS and the advisers.

Thankfully, and unlike the first time to choose, there appears to be some sympathy for the plight of those who have had choice thrust upon them. This is a timely reply.

The sad truth is that even the Government’s own staff don’t know how to use the redress calculator. As I’ve reported previously, they are undergoing training – even they can’t use the redress calculator (yet).

The situation is awful. Steelworkers are subject to more long delays, are being asked to make impossibly difficult choices and being told they can do all this without legal or advisory support.

Case study four – an offer of restoration

While all this is going on, I understand that an offer has been made to return those impacted  who want a pension from an occupational scheme, an offer. I don’t know the terms of the offer or if they’ll be attractive but I hope that TPR will hurry up and decide whether such an offer can be made.

The previous transfer mis-selling scandal, that took place last century, did offer redress to pension schemes at the expense of those who had profited from the advice to take DB transfers. This is clearly a well-trodden route and while I doubt that like for like restitution can be made (not least because six years of investment gains/losses and pot withdrawals have taken place), but it is encouraging that the private sector is looking to help.

“Don’t look a gift-horse in the mouth” is my advice to TPR and others involved in this protracted process. TPR  yesterday  vowed to innovate let’s see the color of its innovation!

Saints or sinners?

Steelworkers are a patient lot, but the problems that are assailing them today – when redress should be at hand – are enough to tax the patience of a saint. Steelworkers may or may not be saints – but they don’t deserve to be treated as sinners.

 

 

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“Go for Growth” – TPR tells DC trustees.

Posted on May 24, 2023 by henry tapper


The Pensions Regulator’s link is to the press release which offers edited highlights of the speech, the transcript of the speech itself has been published here. It is probably the most coherent statement of this Government’s intent on pension policy and is notable for its peculiar style. My guess is that it was written by Nausicaa Delfas herself.

My vision for TPR is clear: to enhance the pensions system, to support innovation in the interests of savers as well as to protect savers’ money.

This is a different vision from what has come so far. “Innovation” is a new word in TPR’s lexicon. The Pensions challenge is to “make workplace pensions work” and to respect the shift in risk from employer to saver. It recognizes the particular challenge savers have at retirement

We have created a new market. And the millions of people saving for retirement deserve that market to work for them.

The speech is about DC and about delivering better value for saver’s money through

consolidation, governance and trusteeship, and the imperative to develop good value ‘at retirement’ solutions

This is a quite new agenda.

 

In her own words.

My contention that this is a self-penned speech is based on the peculiar syntax which takes over when it starts dealing with value for money. I was not in the room when it was delivered but reports suggest that TPR’s CEO struggled to deliver certain sections. The speech is not simple prose but the product of rigorous thought. Take this rumination on how employers are taking pension decisions on behalf of staff.

Employers should consider whether the provider is any good and move on if not — it seems to be very much like ‘set and forget’

There is a new thought here, there is no regulatory imperative for employers to review their original decision on workplace pensions and the tools for doing so are clearly not fit for purpose

Many trustees rely heavily on their advisors, who are almost totally focussed on driving down cost — that has to change if we are to deliver real value, with advisors competing on that instead.

Although this has been said many times on this blog, it has not been said by TPR, this is new. The employer and adviser’s role in improving value rather than driving down cost is a radical shift in policy.

We need to make genuine changes to the system, not merely adjust some minor points. We need fundamental shifts in thinking and delivery.

The fundamental shift is away from defining value by way of scheme characteristics and towards evidence of good outcomes

its central objective and is looking to define the data that DC schemes will have to disclose in the future to demonstrate these are being achieved

“Going for growth”

This is the call to action to trustees,

Trustees need to consider if they are really acting in the interests of their members if they are driving down costs at the expense of returns.

Delivering holistic value for members is your fiduciary duty and all savers deserve value for their money.

Many of the trustees of DC pensions double up as DB trustees. For a quarter of a century they have been told it is their duty to take risk off the table. Now they are told it is to do quite the opposite.

“As regulators” TPR is not about requiring trustees to make specific investment decisions , but the speech moves on to encourage the use of Productive Capital in DC schemes. Regulators can’t but (by implication) others can.

Over time, we hope that the value for money framework will shine a light on performance and decision-making giving the tools for trustees to go for growth.

I cannot remember the phrase “go for growth” ever being employed by the Pensions Regulator before this speech.

Nor can I remember such a brutal threat to DC trustees as this

Where we find poor performance, the message is clear: wind up and put your members into a better run scheme. Or we will consider all powers at our disposal.

Again the peculiarity of the syntax suggests this is from the pen of the speaker not a ghostwriter.

Trustees must raise their game

It’s clear TPR expect the skills and culture of trustees to improve and for professional trustees to be on every board.  They should be asking ‘Is our offering the right one’?

It is clear from the rest of the speech that TPR are expecting many trustees to be handing over the keys within months and years.

Fewer but more professional trustees, possibly registered- though Delfas reaches a hand out to the lay trustee, it’s clear they have to raise their game.

At retirement

The sharp focus of previous sections of the speech is lost when Delfas moves on to the “at retirement” decision savers have to make about what to do with their pots.

It is noticeable that the words “dashboard” , “advice” and “engagement” are absent.

Instead there is more of the same – we have heard since 2014 and the announcement of the pension freedoms

Our aim is that schemes either offer, facilitate or signpost high quality decumulation products and services so that right across the journey from saving to spending — and sometimes a little of both at the same time — savers get good value.

Schemes are encourage to innovate to deliver this, but there is no mention of what might be a default approach, so we must conclude for now that an extension of investment pathways is still being considered.

Frankly, this is first base stuff. There is potential innovation in this space but for it to happen, providers need a clear steer about how flows will be directed. The Pensions Regulator needs to have a better story to sell than this.

The lessons from Australia’s Retirement Income Covenant is that we need a clear purpose for what the pension system is supposed to do and schemes need direction on how they achieve that purpose.

Finally, something on DB

While the DB funding code is still skulking in the background, it’s clear it won’t be around this year and may end up being abandoned. Instead we can almost hear the “go for growth” mantra being issued to DB plans

Buy-out may be the answer for many DB schemes, as they will have seen their funding positions improve in recent times. But that market is likely to be constrained and some will prefer a different path. We think the market for innovation and new models in DB has been developing and brewing for some time, including the introduction of Superfunds, and we expect trustees will have more options available to them in the coming years.

The options for trustees other than to lock into self-sufficiency and buy-out are currently very limited indeed. The proof of the pudding is in the eating. The only superfund approved is little more than a waiting room for buy-out while the one superfund which aims to provide pensions itself – the pension superfund, has retired bruised from five years of trying to get approval. The word “brewing” is perhaps a typo for “stewing“.

Actions speak louder than words

We wait to see if Nausicaa Delfas’ words translate into actions. Superfunds, CDC and the readiness of schemes to connect to the pensions dashboard are all challenges to a regulator.

The innovation from the private sector has so far been stifled. We have seen nothing from Clara , RM CPP is yet to launch and and the dashboard is languishing in a regulatory backwater.

TPR challenges in this powerful speech – trustees and funders should challenge back. Now is the time for action from the regulated and the Regulator.

 

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Pension funds and market tumult. Open University – lunchtime Thursday

Posted on May 23, 2023 by henry tapper

 

Join us for the next OU Economics seminar series, on Pension funds and market tumult.

Thursday, May 25, 2023 – 12:00 to 13:30, Online via Microsoft Teams, registration: here.

Jennifer Churchill, Bruno Bonizzi, and Con Keating will unpack how the Covid crisis and financial turbulence of September 2022 exposed the linkages between pension funds and short-term liquidity, casting doubts about their ability to act as patient investors, especially as stabilising forces during crises.

  • Jennifer Churchill is senior lecturer at UWE, Bristol Business School. She previously worked in policy and public affairs and first became interested in pensions whilst lobbying on what became the Pensions Act 2007. She has subsequently done academic research on pensions across Europe, Latin America and East Asia.
  • Bruno Bonizzi is Senior Lecturer at the University of Hertfordshire, Business School. His research interests include financial integration and financialisation, with specific focus on the role of pension funds in the UK and in emerging economies.
  • Con Keating is a retired financial analyst. He is currently the chair of the Bond Commission of the European Federation of Financial Analysts Societies (EFFAS) having previously chaired for seven years the EFFAS committee on Methods and Measures. His research has been heavily focussed on pensions design and has included projects undertaken for the World Bank and OECD.
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What is the IFS up to on pensions? Pension PlayPen – Today 10.30

Posted on May 23, 2023 by henry tapper

The IFS’ Pension Review may not be the second pensions commission but it is likely to span two Governments and is the nearest thing we will have in the next five years to a comprehensive reappraisal on how we organize the nation’s retirement finances.

The Institute of Fiscal Studies is starting out and Carl Emmerson, one of the drivers of this project, will be explaining to members of Pension PlayPen the work it intends to do and the impact the IFS expects the report to have.

This is yet another humdinger of a session which you should not miss. Do not block 10.30am out of your diary today for any other reason than to listen to Carl!

Register here

 

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Are pensions ready to invest in £50bn “future growth fund”?

Posted on May 23, 2023 by henry tapper

 

The story is the FT’s digital headline and is garnering hundreds of comments, almost all of which are opposed to Government intervention. Here’s one of the milder ones.

“So there is now a cross party consensus on this and there will consequently be some form of policy arms race to push UK long term savings into UK companies by a combination of nudgery , cajolery and legislation”.

There is a consensus and this blog has been talking about it for months. Consolidation will happen – that is one of the desired outcomes of the VFM consultation which will give TPR powers to close down under-powered pension schemes with no prospect of investing for “future growth”.

Rachel Reeves wants it as much as Jeremy Hunt, the DWP are implementing but the Treasury is driving.

And the person who has emerged as the poster-boy for this intervention is the Lord Mayor of the City of London, Nicholas Lyons.

I met with Nicholas Lyons last week and was s a “devils advocate” at a talk he gave at a DC strategic Summit, a stones throw from the Mayor’s parlor.

Like Reeves, Hunt and the Pensions Minister, Lyons is not advocating a 5% demi-tithe on pension schemes as a tax or even a requirement. Right now it is a suggestion with the option of legislation available.

This is not going to happen unless DC investment strategies change and change radically.

  1. We are going to have to abandon the broker mentality that persists in scheme selection. This mentality emanates  employer procurement teams and is facilitated by poor consultants who encourage a race to the bottom.
  2. We are going to have to put in place new metrics to replace cost based on value and these will be delivered through the VFM Framework
  3. Pension schemes are going to have to stop complaining about fiduciary duty and knuckle down. The PLSA needs to take a lead in this.
  4. The £3 trillion pensions market is only 30% about DC – the rest is in DB and much of that money is investable in productive capital, if we abandon an end-game that hands the money to insurers to invest in less productive projects
  5. The real power-brokers – the insurers at Phoenix, L&G , Aviva, Scottish Widows, PIC, Rothesay and Just work with Lyons, Truell and the power brokers of private equity and credit – on proper products that the public can trust.

Every one of these 5 items is achievable within the next five years -within the term of the next Government – of whatever hue.

But the first test of Government’s capacity to make this happen is only a couple of months off. By the end of July we should have the response to the VFM framework consultation. If that does not deliver a radical plan to force consolidation and demand a re -focussing on value rather than money (price) then we will not get legislation for the framework in this parliament.

That is why projects like the pensions dashboard , CDC and pension decumulation are getting so little attention. The focus of Laura Trott and her boss Mel Stride are on delivering part one of the plan by the next election at the end of 2024 or the beginning of 2025.

Relative to the political imperative of refinancing Britain through pensions, all the special pleading of the pensions industry counts for very little.

There’s one comment on the FT thread which properly addresses the issue with our current investment strategy for UK pensions.

The massive misallocation of capital that trackers, taxation systems and intolerance of investment risk is now after 30yrs+ being felt in the outlook of the UK as capital is sucked increasingly to the very largest market and whole countries such as the UK become starved of capital.

When 30% of the ‘average ‘man’ in the street’ pension is invested in 10 US stocks no wonder the UK is running out of ideas. The end game is an inevitable concentration of western capital in the US unless rules/laws/taxes are changed.

Level the playing field or the UK will continue to sink towards a Sri Lankan style crisis.

We have some very tough decisions to take about pensions in the next few months. My question to Nick Lyons at last week’s summit was simple

Government seems ready – are pensions ready?

Reeves

 

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Taking VFM seriously – “waiting for others to join”

Posted on May 23, 2023 by henry tapper

 

The photo has me in the inset taking the photo in meeting room 9 on the 12th floor of BlackRock’s Copthall Avenue City HQ. Ten minutes later the room was full and people were on the call from Enfield to Mumbai.

Getting members of DC schemes value for money is as much a part of BlackRock’s consumer duty as AgeWage’s and though we are at different poles of development, the meeting showed we are on the same page when it comes to innovating the antiquated method we use to tell people how their savings have done.

We measure BlackRock performance a lot and it’s great to have a serious discussion about how the AgeWage methodology works. Watching the scales fall from the eyes from senior executives as they realised that all the information people need, lies in their own contribution histories and pot values, was quite something!

Performance measurement is something that has been given to the quant teams of asset managers to do, since I started out advising people on Retirement Annuity Contracts in the early 1980s. At a recent meeting with TPR, a TPR strategist explained that the original decision to measure performance the DB way, without reference to the actual experience of savers , was taken to ensure that “alpha” generated by managers could be identified independently of the “noise” from insurance policies!

I repeated this remark yesterday. There were incredulous looks. DC performance is no longer about “alpha” , it is about minimizing tracking error from the beta and ensuring that the last bp of value is squeezed out of passive funds. DC saving has been stripped down to its bare essentials and is now being offered to savers at a price that would have been thought inconceivable only 25 years ago- when Stakeholder Pensions were being introduced. Back then, nobody thought you could deliver a pension within a 1% charge.

So much has changed, and yet we still cling on to using the quant teams of asset managers to tell us what the net performance delivered to the funders and fiduciaries of workplace pensions looks like. What started out as a serious examination of “value” is now no more than an exercise in “money”. Any emotional connection between a saver and their saving experience is ignored.

I’ve recently described the commoditization of the investment of our DC savings as “scorched earth”. Of course there is money to be made, and it is being made by BlackRock, but it’s being made by flooding public markets with more and more liquidity. Meanwhile – private markets are starved of funds , innovative firms -including my own – struggle to pitch for money and tap into the investment expertise that was so evident in the room yesterday.

There is a fundamental dislocation between the saver and his or her money, for so long as it is held by the pension fund and this is down to their being no narrative being given to savers about what the money is doing and how it is delivering the returns needed to give a saver greater dignity in retirement.

And at the same time, the people who manage the money, have become removed from the saver’s experience. What they see are charts of comparative performance based on the returns they submit to platforms who pass these on to journalists who publish league tables which get viewed by consultants and incorporated into reports which are ultimately ignored in favor of a race to the bottom on basis point charges.

There is no sense of ownership of performance. Savers cannot find out how they have done or compare their experience with that of others. There is little  real benchmarking being done by member, employers , trustees or even Government, this is because everyone knows that the numbers under discussion aren’t what members are really getting, only a proxy based on the assumptions that what the quant teams are churning out , meets the expectations of the consumers at the other end of this convoluted chain.

No one in the room I was in yesterday really knows what is going on in the heads of savers when they take the key decisions as they get towards retirement. No one knows why the average unadvised drawdown is 8%, why people strip out tax-free cash, why so many pots are left untouched. We assume that people are taking informed decisions based on the reams of information we give them. But the key information about how their pots have done, about the risks of their money evaporating (as so much did last year) and about how they are dong against others and their own expectations – all this is not given to them.

This is why people the chief economist of the Bank of England declared he knew nothing about his pension and had given up finding out.

I will go on talking about the AgeWage methodology and so will my colleagues. I’m pleased to see good people at BlackRock wanting to know more. I am pleased to be having regular conversations with Government departments and their regulators. It is good to see more consultants recognising that the old way of net performance is no more than a legacy of the sponsored DB pension.

But will the pace of change be enough. Will the VFM framework be just another iteration of TPR’s “value for members”, the FCA’s value for money IGC assessments? We will know in the next few weeks. I am not sure of the certainty of outcomes, but I am sure that I am right in pursuing innovation and if you agree with me that we need a better way of measuring how our pensions have done, I’d be happy to run the meeting with BlackRock- with you!

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Savers can profit from the green transition

Posted on May 23, 2023 by henry tapper

 

Nick Lyons
Amanda Latham

My Australian friend Amanda Latham, has joined IFM, the Australian infrastructure manager set up by Australian pension schemes to improve returns for DC savers. She’s known to many of us as one of the architects of TCFD while at the Pensions Regulator and an advocate for sustainable investment while at Barnett Waddingham.

Her role will be to ensure Australian savers make their money matter, by investing in the environmentally sustainable projects that can save the planet and improve retirements.

Coincidentally, this  subjects under discussion  by the Lord Mayor of the City of London in Citywire yesterday. Here’s what he’s got to say, I hope that it’s more than Australians listening.

 

Addressing the impacts of climate change, and making ourselves resilient to them, requires even more than what governments are able to offer, writes Nicholas Lyons.

Anyone opening a newspaper over the last few months will have seen the headlines – forest fires, droughts, floods. Addressing the climate crisis can seem like an uphill battle. But in the City there is cause for optimism. Business is putting its money where its mouth is: since 2021 GFANZ members, who hold $85tn of private capital, have made commitments to hitting net zero emissions targets by 2050. They include more than 550 financial institutions, insurers, and asset managers across 45 countries.

With our national purse under strain, private finance will need to bridge the gap. But that requires the government to create the right business environment to catalyse growth.

This is what I’ll be discussing at the City of London Corporation’s annual Net Zero Delivery Summit (NZDS) at Mansion House this week. The Summit will convene government representatives, financial and corporate leaders, and trailblazing climate solution providers from around the world.

It’s impossible for governments alone to provide the scale of financial support required to address the challenge. Even the $370bn worth of investment, grants and subsidies in the US Inflation Reduction Act is a fraction of what is needed.

But what the US has got right is the role that financial incentives play in unlocking investment in key industries for decarbonisation. There has been recent news that the development of the UK’s electric car battery industry is under threat, and we saw the collapse of battery manufacturer Britishvolt earlier this year. A more concerted effort is needed to direct capital into these crucial new industries.

But it’s still a long road between here and unlocking the significant investment required. I agree with Chris Skidmore’s recommendation to review how policy can incentivise investment in decarbonisation via the tax system and capital allowances.

While investment in emerging sectors is important, we mustn’t forget the pivotal role of transition finance in delivering net zero. From aviation to transport, we will only achieve net zero if the owners of high-emitting assets are supported in their efforts to decarbonise. Assigning a scarlet letter of shame to these industries will not help us reach our climate goals.

We need to ensure companies at different stages of their journey towards decarbonisation are still able to access private finance. Not just to support their day-to-day activities, but also to facilitate their effort to reduce emissions in a manner that is financially and environmentally sound.

Net zero is the growth opportunity of the 21st century, worth up to £1tn to UK businesses by 2030. Positioning the UK as the go-to partner for countries and companies looking for capital and expertise and ensuring we have the right policies in place can empower us to reap these rewards.

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“Quality service” if it comes at all -does not come free .

Posted on May 22, 2023 by henry tapper

I’ve been thinking while I navigated the Thames on Lady Lucy about consolidation. Yesterday I wrote a blog about why I think scheme consolidation mainly helps those who have little understanding of how their pensions are managed and aren’t ready to take action themselves – this represents a majority of us – most of us need to have value for money managed for us because we aren’t good enough at pensions to do it for ourselves.

But what about those of us who are proactive and set about setting up our own pension , using a pensions aggregator like Pension Bee , Hargreaves Lansdown, Interactive Investor or AJ Bell? What if they pay extra for advice inside – with an IFA or a bundled advisory proposition such as SJP?

While most “experts” agree that scheme consolidation is a good idea, there is not such a consensus about moving money out of workplace pensions and into “retail”. Combining pensions through a retail consolidator is frankly – frowned upon – by these same experts.

This is mainly because retail platforms require you to pay more for the same thing as is available through a workplace pension. I am referring here to an investment proposition. For instance the default savings proposition at Pension Bee costs 0.75% and is available within some large Aegon workplace pensions at around half the price.

The lower price is exclusive to the workplace pension but is seen by experts as offering irrefutably better VFM.

But this is not the way the “buyer” sees things. He or she sees the service from the aggregator (say Pension Bee) as worth paying more for. Pension Bee might be seen as more friendly, proactive and quicker. It might be offering guidance on matters that otherwise would need financial advice and Pension Bee’s and buyer’s interests may be aligned – the value of the customer increases as pensions are combined and the cost of the  investment decreases as certain tiers of saving are reached.

The same arguments can and are put forward, even by noticeably more expensive providers such as SJP, where the high AMC buys time with an SJP adviser , time that if used productively, can pay for the fees several times over.

It is only where the ceding pension is offering a comparable quality of service and funds offering, that a pure cost comparison can be made.

And even then , there are emotive issues that may drive consolidation where the reward is less rational but none the less real. If you leave a past employer on bad terms, you may not want to keep your money in their trust, no matter the financial advantages.

The drivers that influence the urge of the individual saver are rarely entirely rational. They usually involve some kind of before and after analysis that is based on the value set of an individual. This of course can lead to danger and we know that many attempts to consolidate end up in poor decision making – some of them catastrophic. Which is why we have regulators.

But the fundamental driver for ordinary people to consolidate is much simpler than the reasons not to. For most people, the prospect of managing their retirement over decades, drawing money from multiple sources (11 is accepted as a typical number of pots and pensions we accumulate over a savings lifetime) is “not on”.

There is of course a consumer duty on consolidators (at least those who are regulated by the FCA) to offer value for money and from July, providers will have to share how they see themselves doing this.

The Consumer Duty does not quite fall in the same way on occupational pension schemes, which are regulated by a different organization, but it is likely that the VFM framework that they will need to be a part of, will include metrics on service quality that will include how trustees and their administrators manage demands from retail consolidators for the transfer of funds.

The VFM framework is based on a holistic view of value that includes net performance and service quality. It also sets out to put in context the cost of investment and service so that purchases are made on a balanced decision.

The experts who argue that workplace pensions should not be judged on price cannot argue that the decision to transfer out of them should be governed by cost alone.

Quality service does not come free and until workplace pensions invest in their customer’s experience in the way that retail propositions do, they will continue to see outflows. The ball is very much in the court of the providers of workplace and legacy providers, if they cannot shape up, they risk losing assets or worse – regulatory closure. The DWP’s VFM consolation makes it clear that they have three existential tests, one of those  is “quality of service”. Schemes that do not cater for the needs of consumers to consolidate their pensions, should remember that.

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