From tactical to the trivial , Ukraine’s on our mind.

Posted on May 11, 2023 by henry tapper

Europe keeps the faith in the rule of law

The top-read story in the FT had nothing to do with the financial times but to do with a counter-offensive by the Ukrainians in a flattened City on the country’s south eastern province.

We have a huge appetite to hear a good news story, even if that story is about more soldiers dying in a place none of us has been to and which is all but deserted by civilians.

The key statement is not from Kiev but from the warlord  Prigozhin, the commander of Wagner – as preposterous as Donald Trump.

 “Our army is fleeing. The 72nd brigade pissed away 3 sq km this morning, where I had lost around 500 men,”

Tactically but not strategically significant, the counter-offensive in Bakhmut is seen as a precursor to a full scale counter offensive in the next few days.

This is , I suspect, why FT readers are interested, they are fiercely partisan and support Ukraine in its resistance to Russia.

This is being played out against the events in Liverpool where Europe is trying to party and to mourn for Ukraine, often in the same set.

Meanwhile in America

Any sense of morality – attaching to former president Trump, is now lost. The president seems to have celebrated a $5m dollar fine for sexual assault on CNN last night. His popularity ratings appear to have gone up as he denied the legitimacy of the civil judicial system,  claimed he would exonerate those who caused an insurrection at the White House and repeated the lie that the 2020 elections were rigged. Trump’s comment on Ukraine was as amoral as insincere.

“I want everyone to stop dying”

The subtext reads could read “damned Europeans, getting in the way of me getting the headlines”.

Trump’s attempts to dismiss the rule of law through the courts, the ballot box and the rules of international justice are working within the bubble of his support. The question is whether that bubble can be sufficient to launch him to become a presidential candidate and on to the White House for a second term. If he can achieve this, he will have control over a democratic country , the like of which we have not seen since pre-war Germany. I am genuinely frightened that there is not a strong enough opposition to Trump, to stop this happening.

The upholding of the rule of law.

Faced with the amorality of Putin and of Trump, decent people in Russia, Europe and the US focus on little things, what is happening in Bakhmut and in Liverpool, to avoid the terrible alternative of lawlessness and the rule of amoral despots.

While Trump trivializes the war in Ukraine , dismissing it as meaningless carnage, Putin dramatizes it as a war with the West. Both Trump and Putin us Ukraine to cement their power bases and ferment discord against those who oppose them.

It is easy to ignore this and read about financial stories, but that’s not what the readers of the FT are choosing to do. They are interested in the preservation of liberty in Ukraine and thankfully so are the vast majority of UK citizens.

The public’s expression of its support for decent human justice will reach its climax on Saturday night. The contest may seem trivial but in the context of the insincerity and amorality that we see to our east and west, Eurovision is an important statement.

Our unequivocal support for Ukraine is needed now , as much as ever, and whether we support Ukraine as FT readers or Eurovision watchers, our attention and support of their ongoing struggle is a credit to us.

It is of course the least we can do and many are doing much more.

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Even the best can be beaten by pensions

Posted on May 10, 2023 by henry tapper

Chelsea goalkeeper Peter Bonetti

I remember my Shoot annual having a feature on great goalies – “even the best can be beaten” was a line I adopted for myself as I stood between the sticks for my school. This picture – from a 1965 FA cup semi- final was my favorite (and yes I know – Bonetti actually saved it).

The thought came to me as I received an unexpected call from someone who was “the best” in her time. Caroline Instance was first CEO of OPRA (the forerunner to TPR) and then CEO of the Institute and Faculty of Actuaries. She kept goal – in a manner of speaking – for the pension and actuarial industry and she was seldom beaten.

She found me on linked in – which she recently joined as a concession to progress.

She was great and good and I listened with fear as she introduced herself again to me.

And her story is salutary. Here it is – she is happy to hold herself up as a victim of the complexity she presided over.

How pensions defeated the pension regulator

In her various careers, Caroline built up a large accrual in DB pensions and – on reaching her 66th birthday recently, a right to the state pension. She is not quite sure of her right to the state pension as she was caught by the delays occasioned by equalizing the pension age and again by changes in the state pension age and changes to the single state pension in 2016. She isn’t complaining, but she does not get the state pension she thought she’d get.

But worse, she has spent a great deal of her and other people’s time getting what relief she can from issues surrounding the lifetime allowance. She is aware of various efforts that have been made on her behalf to mitigate the impact of the LTA but has no idea what they are or how to find out whether she has or is paying excess tax unnecessarily.

Rich people’s problems? Certainly. She is not asking for sympathy, simply to bring to our attention how someone who at one time oversaw the rules, is now completely befuddled by them.

We had a good chat which I had to cut short as I had a meeting to go to , to discuss improving member facing governance of DB schemes with Knowa. As we discussed using AI to inform trustees of their duties and ensure they remained compliant and on top of their fiduciary duties, memories of this conversation knocked around the back of my head.

How do we help a generation which is dependent on but beaten by pensions. Like Andy Haldane who has admitted to being totally baffled, Caroline is an intelligent woman who is simply not wired for the complexity she is being expected to master. Her memory of her days when she set those expectations clearly haunts and amuses in equal measure.

As we press ahead with artificial intelligence driving our propositions, we should spare a thought for the emotional intelligence of people like Caroline and Andy, who recognize that we may have created a pension system which only Artificial Intelligence can master.

That is a frightening thought. My nostalgia for muddy days in goal reminds me that football is only a game. Pensions most definitely isn’t.

 

The high-powered world of pension governance today – dependent on artificial as well as emotional intelligence.

 

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Why Pension Bee are right to push for a 10 day switch guarantee

Posted on May 10, 2023 by henry tapper

It’s worth looking in more detail at Pension Bee’s work on DC transfer times. Paragraphs in italics are from yesterday’s much reported press release, my comments are not italicized

PensionBee analysis of Origo’s Pension Transfer Index has uncovered a 31% increase in transfer times, rising from an average of 10.7 days in 2020 to 14 days in 2022. In fact, the vast majority of pension providers included in Origo’s most recent index have increased the time it takes to process transfer requests over the last two years. 

Origo’s data is important. Origo process the majority of transfers and have, through their close links with the insurance world, become the dominant clearer of transfers for both workplace and non-workplace pensions. Its technical architecture is traditional and does not embrace more nimble clearing as being pioneered by ViaNova and others.

Despite slow transfer times being identified as a problem by the Financial Conduct Authority back in 2015, the issue remains prevalent amongst a number of key players.  This includes The People’s Pension, whose average transfer times doubled from 2020 to 2022, reaching 39.5 days; closely followed by LV= which recorded an average transfer time of 36 days and NEST at 21.8 days in 2022.

Peoples Pensions and Nest are large workplace pensions are members of the small pots working group and committed to improving the member experience. Although Nest is not directly impacted by the FCA’s Consumer Duty, it will be subject to the quality of service test of the DWP’s VFM framework which is aligned to both “treating customer’s fairly” and the “consumer duty”.  LV= is directly authorised by the FCA and therefore subject to the Consumer Duty, People’s Pension is owned by insurer B&CE which is regulated by the FCA and similarly subject to the FCA’s Consumer Duty.

Let’s hope that the DWP and the regulator’s are taking notice. As I have mentioned many times, it is not enough to be a workplace pension and consider yourself institutional, People’s and Nest should be striving to be best not worst in class – size should matter in a positive way.

However, by participating in the Origo Index, these providers do display a commitment to transparency and the eventual improvement of their transfer times. A large number of providers and third-party administrators continue to not participate in electronic pension transfers or publicly disclose their transfer times on Origo or elsewhere, showing limited engagement in the industry’s efforts to improve transfer efficiency for consumers.

This is an important point. The Pension Regulator has no powers over third party administrators. However, the quality of service they provide to DC pension schemes will increasingly come under scrutiny as occupational DC  schemes are required to submit themselves to a “quality of service” test.

PensionBee’s own pension transfer data reveals providers that have chosen not to join Origo and/or do not process transfers electronically, such as large pension administrators, operate with extremely lengthy transfer times. XPS Administration recorded an alarming average transfer time to PensionBee of 57 days in 2022. Meanwhile, Mercer took on average 33 days, Capita 32 days, Willis Towers Watson 26 days and Aon Hewitt 24 days in the same year. 

These services are an extension of consultancy services offered by XPS, Aon, Mercer and Willis Towers Watson. As well as being administrative guns for hire, these third party administrators are also embedded into their consultancies vertically integrated master trusts. There are particular reasons for XPS’ lengthy delays, it has taken an extreme position on the throwing of red flags , regarding investment into overseas assets – even when part of an FCA regulated fund, as a potential scam. This position brings anti-scamming into conflict with consumer duty and value for money. The DWP have pronounced against this practice but it persists.

In contrast, PensionBee has consistently taken an average of 10 days to complete a pension transfer request over the same period, as is in line with its proposed ‘Pension Switch Guarantee’ which would ensure switching providers is a quick, efficient and secure process which happens electronically within 10 days. 

I support a 10 day switch guarantee. It is perfectly feasible and deserves attention from the FCA and TPR. Compliance with it could become part of the VFM Framework’s quality of service test.

Becky O’Connor, Director of Public Affairs at PensionBee, commented: “It’s very concerning to see a sharp rise in pension transfer times. This latest data proves just how crucial it is to move away from self-regulation within the pensions industry and instead implement a ‘10-day Pension Switch Guarantee’, a time frame the Financial Ombudsman Service is already independently enforcing. This is essential to help restore confidence and trust in the pension system, allowing consumers to take control of their financial future and plan ahead for a happy retirement. 

Customers deserve to have an effective pension transfer process and the ability to voice complaints to the Ombudsman, giving them the same switching rights as is seen in other markets.”

I have written often about the need to improve standards in this area, it is not good enough for the occupational pension administrators and their trustees to chunter about retail pensions being bad value and potential scams. They perform an important function in helping ordinary people bring their pensions together and organise their retirement in a sensible way.

By contrast, the experience that many consumers get from their workplace pension providers falls short. I hope that Pension Bee continue to knock at the door of organizations such as the DWP , TPR and FCA and set standards these workplace pensions and their administrators should follow.

We should all have our plan for retirement, we should not let dog in the manger administrators frustrate it.

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Has it really come up roses for UK’s private sector DB schemes?

Posted on May 10, 2023 by henry tapper

Over the last 7 yers, First Actuarial published its FABIndex which explained that using “best estimate” actuarial valuations , rather than “marked to market” accounting valuations, the defined benefit pension schemes sponsored by corporate employers were not running deficits but were in rude good health.

Rather than the volatility shown by the accounting method’s estimates of surplus and deficits, the actuarial method shows that the PPF 7800 schemes under scrutiny have consistently been in surplus and that surplus has hardly out of a range of £20-30bn.

While FABI is less noisy and less newsworthy, it makes sense of pensions to the ordinary person in a way that the FRS17 accounting standard doesn’t.

There are few fundamental changes to the amount pension schemes are on the hook to pay their pensioners. We heard at yesterday’s Pension PlayPen coffee morning, that the anticipated improvement to life expectancy over the period hasn’t materialized and that there is likely to have been a slight reduction in how long the current generation of pensioners are likely to get their pensions. But this Covid-dividend is of relatively small import.

What has happened over the period, which has turned accounting deficits on their head has been the end of QE , the reappearance of inflation, the increase in gilt yields and the increase in the discount rate that governs marked to market liability valuations.

While these factors have also been recognized in FABI, they are much less pronounced in terms of impact and could have meant that – had assets maintained their value, pension schemes would now be so much in surplus that they would be once again a national treasure.

Sadly, the yield dividend was wiped out by over £500bn of real asset losses resulting in part from poor investment conditions in 2022 and in part by the impact of the LDI blow up in Sept/Oct.

So has it all come up roses?

The story that defined benefit schemes were in desperate trouble and were likely to drag our larger companies down with them was one that gave birth to the de-risking fever that gripped consultants and trustees in the years following the financial crisis. It was a story that the Pensions Regulator was only to happen to go along with, de-risking made for a chance to show off TPR’s powers to extract deficit payments from employers.

Employers were able to justify coercion to get members out of pension schemes as prudent. ETV and PIE “exercises” meant that members lost their pension rights for a cash equivalent and many members did. Low discount rates meant for high transfer values and over the period between 2016 and 2020, over £100bn of pension promises were swapped for cash paid to retail pensions by Trustees.

Meanwhile, deficit contributions to DB pensions meant that DC pension contributions were kept to a minimum, investment in R and D, plant and machinery and in the innovation British companies needed to compete was swapped for massive pension contributions to meet the cost of all this de-risking.

It now turns out that they need not have bothered. The most solvent funded DB pensions are those that had no need to de-risk, the schemes such as the Local Government Pension Scheme that did not over-purchase gilts using the derivatives market but invested for the future without thought of any end-game.

They are now seeing everything coming up roses. They are the schemes that can afford to invest in productive capital for the benefit of Britain’s economic future and they are now in the fortunate position of being less of a burden on their sponsors (both employers and members).

The opportunity cost

Employers will look back on the past decade with regret. They will ask whether they should have adopted pension strategies which led to such massive exposure to collateral calls when their borrowing strategies went wrong, they will asked why they paid so much to de-risk liabilities relative to the transfer values of today and they will rue the opportunity to focus on growing the assets of their pension schemes , rather than worrying about fake deficits on their balance sheets.

First Actuarial pointed this all out throughout the period when schemes were being herded into “de-risking”. They pointed out that the PPF, in whose name , TPR and Trustees were demanding deficit repayments, was in rude health and they were right. The PPF is now embarrassingly over-funded. Corporate pensions have not folded and – as this article shows, project fear is now exposed as project fake.

All this de-risking has been at a massive opportunity cost to schemes, to members and ultimately to the UK. We will  look back at the past twenty years of DB pension strategy as lost years in which pensions played a substantial part in the UK’s poor economic performance.

To read how one consultancy stood out against the trend – here is the link to FABI and First Actuarial’s monthly briefings/

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What’s going on with longevity? – join our discussion today

Posted on May 9, 2023 by henry tapper

 

You can book to join the discussion by pressing this link.

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How our savings can compete for Europe’s best investment deals

Posted on May 9, 2023 by henry tapper

I title my blog “AgeWage- making your money work as hard as you do”.  Its two big themes are  that pensions need to become a replacement wage in later life and that, when funded – they invest with maximum impact.

Vodafone carved out Vantage Towers from its business when it floated the Düsseldorf-based mobile masts provider two years ago. The business is has now unlisted and the list of those who took it private includes the Australian DC Superfund that looks after university staff – UniSuper.

It’s not hard to understand the impact of Vodafone masts, just look at your phone and check the signal. I’m not upset that an Australian DC pension fund owns 5% of the business but I am concerned that not one UK pension fund is listed alongside  Vodafone, KKR, Saudi Arabia’s Public Investment Fund and activist Elliott Management as an investor.

The FT tells us that

Another major superannuation fund, Aware Super, opened an office in Europe last year and said it would invest A$16bn there and in the US over the next three years. AustralianSuper, Australia’s largest pension fund, with stakes in the King’s Cross and Canada Water property developments in London, plans to spend £23bn in Europe and the US in the next five years.

The UK DC fund perception of “investment”, is prescribed by the use of fund managers to do the work for the investment officers, I cannot think of one CIO of a UK DC pension fund who would say, as Alison Lee of UniSuper says

“This is a high-quality defensive infrastructure investment with strong fundamentals and growth prospects. It adds to UniSuper’s approximately $15bn private markets portfolio and is positioned to deliver excellent results for our members over the long term,”

I know that the likes of Julius Pursaill would like to but even when Cushon team up with Nest, they do not have the combined clout to take a $660mn position in an infrastructure project of this kind.

Nor does he or Nest’s new CIO Elizabeth Fernando have the audience to boast to. The British public has yet to become aware of the awesome investment power of their savings. But that could change and change soon.

Seven and a half years ago, I sit in a room in the House of Commons and heard, L&G’s CEO Nigel Wilson deliver an impassioned plea to allow workplace pensions to invest in projects such as this “mast business” and tell savers that that was where their money was making a difference. Over 43,000 people have read this presentation since I started sharing it, I hope you will read it too!

For Elizabeth and Julius and other like-minded Chief Investment Officers to do deals such as this , we need the vision of Nigel Wilson and the conviction from Government that our money can work as hard as we do.

How are we doing?

The argument for direct investment of this kind cannot be justified within the confines of how DC is managed in the UK – for all but a few DC funds. Nest, Lifesight, L&G’s Master Trust and People’s Pension all have asset bases in or around £20bn but individually, such a deal is indigestible. I am pleased to see that Schroders are now launching LTAFs which might house such assets on life and custodial fund platforms but the LTAF is itself a layer of intermediation that the Australian Supers are by-passing.

But I see a time, and in the not too distant future, when our large DC funds can compete to be investors in deals such as this, if only the ambition of those regulating and legislating for our large DC funds, encourage them. When Nigel Wilson spoke in 2015, the L&G master trust was yet to become a billion pound fund. The cashflows from auto-enrolment and the consolidation of schemes such as Tesco, has meant his flagship DC scheme could soon fulfil his vision.

This will require more than the current tactical plays to encourage consolidation, the VFM framework, the LTAF fund wrapper and easements in charging legislation. It will mean a wholesale change in attitude amongst those who govern and invest DC money. Necessarily that will mean taking direct positions in opportunities such as this.

It will also mean a much more robust attitude to risk-taking where short-term considerations about liquidity, concentration risk and management fees are exchanged for conviction in the value of the assets purchased.

Finally, it will require a common purpose amongst all the major stakeholders that drive the direction of money invested in our workplace pensions.

Pension’s common purpose

Jim Chambers, the Australian Treasurer has proposed to define in law the purpose of superannuation for the first time, as being to “preserve savings and deliver income for a dignified retirement”.

“A massive pool of pension savings is one of the big things we’ve got going for us,”, he told the FT , adding that it was vital to apply that advantage to benefit Australia’s economy.

We have chosen to ditch an unfunded second state pension (SERPS) for a funded equivalent. That has been at enormous expense in terms of human endeavor. But we are getting there. Britain needs a payback for the hard work it has put in.

We too, need to adopt a common purpose for the workplace pension system. It must preserve savings and deliver income for a dignified retirement and it must apply itself to the advantage of our economy. These two  aims need not be incompatible. We can deliver to the needs of savers, not just to the enrichment of fund management.

What is more, we can create an excitement around the investment of our savings, that can allow Julius and Elizabeth to get as excited as their Australian counterparts!

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Who’s ever heard of a gold-plated pension pot?

Posted on May 9, 2023 by henry tapper

Are you sitting comfortably?

Many of us think of our retirement wealth in terms of the size of our pot. But as my friend Stephen Huppert reminds us, it’s the pension not the pot that allows you to sit in comfort.

Well said that Australian Defined Benefit Actuary!

Chrome will do!

The

Franke Campus HDTX597B Stainless Steel Floor Standing WC Pan + Black Toilet Seat

costs just under £1000 and you get a 10% discount from victorianplumbing.co.uk if you apply the code “throne10”.

It is an elegant pot to piss in and much more in keeping with the needs of the average UK pensioner.

As with pots , so with pensions, most of us do not expect the gold-plated guarantee of a DB pension any more than we expected our pre-retirement salary to go up by CPI  (let alone a triple lock). Gold plating comes at a cost that most of us would rather be spent on other things. We’ll live with chrome.

That may mean ditching the guarantees and sticking with a functioning pension that delivers the essentials – an income that lasts as long as we do – with the aim of keeping its real value.

Oh and a pension where we don’t have to do our own plumbing – thanks!

The wrong plated pot and the wrong type of pension.

In “Pay’s the issue, but don’t forget public sector pensions” the Times’ David Smith makes this point (though not in potty-mouthed fashion).

Many public sector staff are finding themselves with gold plated pensions but not enough to live on. For many private sector workers there is only a pot, but plenty to piss in it – by way of salary.

Evening things out a bit might be a good long-term policy objective – but with 10 attempts in recent years to make gold-plated pensions a little more affordable, it seems that losing the gold-plate is harder than you’d think!

The Golden Boy was an improvident urchin who’s reckless tending of the stove – caused much of London to burn down.

Most of us – especially the self-employed, seem to think that retirement will take care of itself and like the Golden Boy of Pye Corner, don’t pay much attention to the future  (pension or pot).

Which means many of us won’t be in a position to afford  the Franke Campus HDTX597B Stainless Steel Floor Standing WC Pan + Black Toilet Seat version of a pension at retirement.

You could find yourself with your private income frozen.

But we shouldn’t forget that people have been using outdoor toilets from time immemorial and – with the advent of a proper state pension , you might even make it through old age -without freezing your bits.

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The state of pension transfers

Posted on May 8, 2023 by henry tapper

 

How Nest would like to see the transfer process

Every pension provider dreams of a system where pension pots flow to them as in the diagram above. This blog suggests that the flow of money is dependent on service not fees and that the winners are not those waiting on Government initiatives, but organisations embracing technology solutions that make pensions open.

We are currently going through a lull as we sit in the eye of pension dashboard’s storm. One day in the next few weeks, the Government will announce what next for a project that has lurched from one setback to another. A new dashboard Tsar – perhaps a full-time CEO – for the Pension Dashboard Program, a reinvigoration of the relationship with technology partners, perhaps something to get a weary pension tech sector excited.

Writing in Financial Adviser, Equisoft’s (aka Altus’) Nick Meredith tells us

The dashboard when launched will for the first time allow individuals and their advisers to instantly see all their pension in one place. Although not a stated objective, it is generally accepted that this will trigger much demand for pension consolidation, creating a bow wave of pension transfers.

But here’s the rub. While the time to see your data on a dashboard is measured in seconds, the time to combine your pension pots is measured in days, weeks and months.

And while technology strives to create open standards that speeds things up (Texx, Via Nova et al), the pension industry has taken to throwing red and amber flags that frustrate and slow down. I appreciate that this flag-throwing is conducted with the best of intentions, but it means that pension consolidation, on an industrial scale is not happening.

And of course, it has to happen if we are to see a solution to what is called the “small pot problem” where our fractured pension saving languishes awaiting the adoption of one of the ideas of the small pots working group.

The problem is someone else’s problem

When I talk to people about fractured pots, they look wistfully to “industry solutions”. The dashboard will sort it – Origo will sort it – we’ve got our day jobs and this is someone else’s problem.

Of course, the problem sits with those least able to sort it, the consumer.  So when a consumer focused organization like Pension Bee or some of the insurers who are now making a move to help people consolidate their pots, comes along, they are considered predatory. They are predating on consumers who are vulnerable because their is no industry driven solution, no “open pensions”.

And part of this problem is that there is neither human or financial resource committed to making consolidation easier. If Pension Bee did not have to battle on behalf of their customers to get money from A to Bee, their costs would be lower and these could be passed on to customers. Criticizing Pension Bee for higher costs than workplace pensions ignores the fact that workplace pensions are typically derelict in their support for savers combining their pots.

For many people, the extra cost of using a consolidator is VFM and for good reason. The more you save with a consolidator, the lower your charges (most have tiered charging scales) and the comfort of having all retirement savings under one umbrella is worth the extra cost in fees.

Since no one has the least clue about the actual performance of their pension pots, service not fees is currently the driver for choice and most transfers move in the direction of a trusted service, transfers are moving to the consolidators. VFM= quality of service , for the consumer with fractured pension pots.

Pension Bee and a few others have made our problem , their problem – and are getting rewarded for it.

A long term solution

No one expects the first iteration of the VFM framework to help consumers combine pension pots. The Framework is being pointed for the moment at employers and trustees, not towards savers and their advisers.

Talking with Equisoft , Via Nova and others in the tech space, it is clear that there is a shift away from centralized services such as Origo, to a transfer system based on open standards. This should both improve speed and cost. The organizations that are embracing these open standards are likely to see further improvements in service and incur lower costs, bringing their charges down.

Meanwhile, organizations that continue to wait for a “deus ex machina” by way of a pension dashboard or a Government imposed small pot solution, will find flows working against them.

In the absence of a top-down solution, it looks to me that bottom up technology that empowers individuals to do things for themselves will win. That is , of course, so long as the consumer is given that chance.

 

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Thinking the unthinkable for our PPF

Posted on May 8, 2023 by henry tapper

The Lord Mayor and other grandees want pensions to play a renewed part in financing Britain

What if the PPF was given an upgrade and used its massive financial strength to pay benefits at the levels members were promised from their original defined benefit pension scheme?

This isn’t the thought of a random blogger but a proposal put to Government and – last Tuesday – the Pension PlayPen, by LCP, one of Britain’s most respected pension consultancies.

The idea seems at first to be too outrageous for further consideration. It has long been thought the primary duty of a trustee and the Pension Regulator, to keep schemes away from the PPF. The PPF has been branded from Scunthorpe to Port Talbot as a pension pariah, reducing pensions in payment by 10-25% and a stigma on a sponsoring employer, even if it survives the offload of its pension.

But we are being asked for bold and innovative thinking and LCP’s proposals have merit. Rather than simply topping up current pensioners using the trapped surplus of a well run fund, LCP is proposing that the PPF is continued to be funded by levies so that equivalent benefits could be a sustainable ambition of the fund. I’m not a party to the details , but at a high level , I can see advantages for the pension system as a whole.

  1. It has never made sense that members had to take the pain of a sponsor failure. The PPF haircut is fundamentally unfair
  2. If you take that view, then the PPF’s strategic aim is not so much a lifeboat but a continuity plan, taking over where a sponsoring employer cannot.
  3. And this would mean a PPF that was more ambitious in its long-term aims, investing rather than insuring its fund.
  4. The PPF could seed the sovereign wealth fund accessible to DC savers proposed by Nicholas Lyons, Nigel Wilson (with apparently  the support of L&G Brit insurers -Aviva Phoenix and M&G).

Adopting this mindset, there could be further advantages to the tax-payer.

  1. TPR would no longer see protecting the PPF as a primary objective (and could focus on better things)
  2. The DB funding code could be abandoned
  3. Schemes of all sizes would be given the option to invest rather than insure
  4. DB pensions would become a source of productive finance for the UK again.
  5. This would maintain a better balance between risks assumed by DB and DC investors

How could the PPF help DC savers?

Here is the Lord Mayor in the FT

“We have to create a scheme that enables 30 to 35-year-olds to put money aside to give them a proper retirement pot. Everybody’s [defined contribution] pension should have 5 per cent invested in this fund. Then everybody’s got a stake in the future of these British businesses, everybody’s going to benefit when they succeed.”

If the Government were to see such a fund with £50bn, Lyons thinks the private sector could find £50bn more. If we are serious about DC savers investing in private markets, using the PPF as a source of seed money sounds more serious than “facilitating ” through an LTAF wrapper.

Market impact

Of course there would be consequences for risk-transfer

  1. A primary driver for buy-out (at scheme level) and transfer-out (at member level) would disappear
  2. Pressure on insurers for buy-out would reduce, with positive pricing implications for sponsors and members
  3. The seeming imperative for mark to market accounting of scheme assets would reduce
  4. More schemes would stay open for future accrual and some might even reopen.

Stephanie Hawthorne has been writing recently about “DB lite” and this could become a reality if we moved from thinking of PPF as less disaster recovery and more a succession and continuity plan.

In the interests of balance

There will be widespread disgust at this proposal by a large part of the pension aristocracy who have already worked out their entitlements in the carve up of the DB corpse.

They will argue against what they see as “moral hazard”, with employers encouraging trustees to take excess risks as a shot to nothing. This argument can be balanced against the consequences to employers when pension schemes fail.

There will also be arguments that such proposals would unleash a tsunami of schemes heading for the PPF as employers find new ways of dumping schemes and “phoenixing”.  This is a consideration for Government but one that can be legislated against/

There will be arguments that the strain on PPF will be too great and that levies for the remaining schemes (schemes that have bought out pay no levies – nor do insurers), will become a “forever” burden.

These arguments are good to have. They mean that for the first time in a quarter of a century, the direction of travel switches from “de-risking” to a growth agenda.

Nicholas Lyons will be appearing at a DG conference later in the month and I look forward to asking him what his attitude to these proposals might be. He is – as well as being Lord Mayor of the City of London, – Chair of Phoenix Insurance.  That makes for an interesting set of perspectives.

 

 

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Has TPR become the insurer’s new trade body?

Posted on May 8, 2023 by henry tapper

 

Conventional wisdom has “buy-out” as a gold standard for all stakeholders

Over the bank holiday weekend, I’ve been blogging about the new orthodoxy, that buy-out of benefits is in the member’s best interests. Quietroom have published an article in Professional Pensions explaining how best to get this message across and there appears on my blog this morning , this response to my criticism of TPR’s lack of self-awareness in publishing some very flattering comment from stakeholders.

the lawyer gateway within TPR will not allow anything to be published that points to responsibility or culpability for the monumental loss of value wrought by the Sept/Oct22 LDI meltdown, or the terminal malaise that TPR funding policy has / is inflicting on our economic prospects. All self-interested bodies work against the greater good.

If/once you understand that TPR considers that the solution to its (myopic) remit is the Insurers (and indeed I’ve heard a number “professional” trustees (still) advocating recently that the buy-in is of course still the “gold-standard” for funding objectives), then you can appreciate why TPR is effectively seen as the trade-body for the Insurers. Think – who does it benefit?

Certainly, under its direction, one major growth area in pensions has been the Insurers and consolidators scrambling to take over Trustees’ assets on a very fully funded basis, while of course the provision of DB pensions (the actual gold standard for the working people) have declined, as has DB support for the wider economy.

Uncomfortable though it may be, time for the TPR to think about how to increase workers’ pensions and its role in the broader economy.

So why does TPR promote buy-out as it does? A cynical and over-simple answer is because it wants shot of DB as much as it thinks sponsoring employers.

But this is not proving as easy as might be thought. Firstly, many DB schemes are over reliant on valuations of illiquid assets , to court the attention of insurers.

Philosophically, LDI was precisely the right answer for TPR as it allowed itself to believe that borrowing bonds gave DB a chance to invest in growth assets , satisfying its role in the wider economy. But when LDI went wrong, the liquid growth assets were the first to be sold, leaving many DB schemes with a lot of gilts and illiquids.

Those illiquids are proving an impediment to buy-out and are either having to be sold at the insurer’s behest, or are keeping schemes from their “everlasting resting place” – with the insurer.

The gilt-trip

Secondly, the cost of buy-out is looking a price that is having to be paid by the tax-payer through higher borrowing costs for the Treasury. The FT reported last week

Economists at credit rating agency Fitch forecast that the combination of debt sales from the UK government and the BoE will be equivalent to 9 per cent of GDP this year. In the eurozone, the equivalent figure is just under 5 per cent.

Who is buying all these gilts?

“Undoubtedly, the surge in gilt supply along with quantitative tightening is weighing on prices,” said Matthew Amis, investment director at Abrdn. “It’s relentless and it will be for the next fiscal year.”

So the window for buy-out is being kept ajar by low liability valuations created by high bond yields. These high yields are because the price of the bonds are depressed meaning that the tax-payer is having to pay more to service Government debt. Behind all this is the latent demand for gilts, being hoovered up (thank you very much) by insurers and trustees readying themselves for bulk annuitisation.

While DB schemes sell off illiquids and gobble up gilts, DC schemes are being urged to do the exact opposite.

The destructive power of buy-out

Taking a step back, shouldn’t we be asking why, a few months after its disastrous advocacy of LDI ended in tears and wet pants, we should accept the Pension Regulator’s claim that “self-sufficiency and buy-out” are the new gold standard?

These strategies lock-out the possibility of investment in productive capital and condemn members to the meanest benefit formulation the insurers can get away with. Any free assets not needed to pay the insurance premium look destined for advisory fees. Members are being sold the “gold standard” line by communication agencies paid by employers, trustees and insurers.

The tax-payer is keeping the buy-out window open by sponsoring  debt repayments twice the cost of our European neighbors and defined benefit pension schemes are offloading their long-term illiquid investments to meet the Pension Regulator’s requirements of them.

This doom loop is now to be supported by loading yet more of the risk of the pension system onto workplace pensions and its 30m savers.

Who does this promotion of insurance over investment benefit?

Sadly, the answer is that it benefits no-one. We are selling our “great economic miracle” – our system of funded DB pension schemes , to insurers on the cheap and the discount is being picked up by the tax-payer in short-term borrowing costs.

When the liabilities have moved to insurers, so have the assets backing them, or at least what’s left of them after LDI and any further sales to meet insurer’s requirements.

We have become inured to the possibility that an insurer can fail, but as Paul Brine of Dalriada has shown  there are risks even under insurance solvency regulations.

We are told that it is too late to stop the destruction of funded pension schemes. But I don’t believe this is the case. There are senior executives such as William McGrath arguing that a DB investment fund, maintained by an employer to pay pensions could be aligned to corporate goals on sustainability and social responsibility. There are unions whose responsibility is to negotiate the best deal for union members and there are pension scheme members who can and should have a voice in what is happening.

Finally, there are the members of DC pension schemes, who have been treated as second class by almost all stakeholders so far. They too should be asking questions as to why they should be required to take on all the extra risk of an illiquid driven investment strategy. They shouldn’t and while I support DC schemes investing for growth in private markets, I do not support this as a political necessity.

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