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Pension Funds

Changing for the best, preparing for the worst

The advent of a new year is often the catalyst for people to start tackling those jobs they have put off for too long.

Be it the financial hangover from Christmas and the need to get better value for money, or wanting to make a change that will make 2017 better than 2016, we always see a flurry of new business at the start of a new year.

Changing administrators is often perceived to be a complicated and risky venture, and it seems that most people are only prepared to begin exploring these options at the start of a new year.

Whatever the motivation, I offer a cautionary note to anyone diving into the search for a new administration service provider. Before you do anything, make sure you have agreed a discontinuance fee and enshrined the agreement in your contract.

Discontinuance fees are charges your current administrator makes for handing over services to a new administrator.

These costs are often missed in the planning and budgeting process, with the focus being on installation charges made by your new administrator to set the scheme up on their systems.

Discontinuance fees vary significantly, with some providers charging as much as 50 per cent of the annual fee to deliver the project.

Unless you have contractually fixed these fees and the deliverables, you will be in a weak negotiating position and run the risk of being stung with a massive exit charge.

To protect yourself against excessive exit charges, consider implementing an agreed schedule of charges for exit services, even if you're happy with the service you're currently getting.

Most good quality administration transitions follow the same path, with many having identical handover requirements. Why not therefore agree to a list of exit services with your current administrator, at a fixed cost, just in case you ever decide to move away at a later date.

Think of it like a prenuptial agreement for your administration service.

Most new administration agreements now include a service schedule for discontinuance services and the associated fixed costs, establishing exit charges at the start of a relationship.

It's unlikely that any administration agreement older than five years will have this feature, so ask for your terms to be updated whilst you are in a strong negotiating position, even if there is currently no appetite to change.

If things go badly wrong and it's time to move, you don't want to find yourself without the security of fixed exit fees. This could see you stung with charges reaching into the hundreds of thousands, simply for moving away from an underperforming provider.

Since most administration transitions have the same list of deliverables, you can broadly establish the requirements now, covering 90 per cent of the process and get your administrator to commit to a fixed fee (which is what they would do for new clients, so you should have an equal right to demand this now).

Whilst the overall cost of these exercises depends on the size of the pension scheme being transitioned, much of the work, such as producing data extracts, is the same for all schemes and should take no more effort if your scheme has 50,000 records than if it has 15.

Struggling to find out where to start? We have put together a typical schedule of discontinuance services which you can download by following the link below.

Ask your administrator to price and commit to providing it.www.trafalgarhouse.com/exit-services

The key is to act now whilst you are in a strong negotiating position, rather than waiting until you've decided to change providers. If you leave it too late and don't lock in a commitment from your administrator, you leave yourself open to getting hit with excessive, unnecessary exit fees.

Written by Toby Clark, Client Relationship Manager, Trafalgar House.

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Pension Funds

Holistic approach to pensions needed, says PTL

PTL says the government and industry must not overlook the fact there are other costs for pensions, despite discussion focusing on transaction costs.

The comments follow the Transparency Paper published by the Financial Conduct Authority in the latter part of last year.

Richard Butcher, PTL managing director, said: "Like many in the industry, PTL welcomed the FCA's Transaction costs consultation and Asset Management Market Study interim report, because of what they said about costs transparency."

"Anything that puts member outcomes central to its objectives, is a good thing."

But, he added, with much of the industry focus and discussion dedicated to transaction costs, there is a real danger that other costs will be overlooked.

"Transaction costs are hugely important, but just one piece of the jigsaw – there are other cost areas to consider including, explicit costs such as annual management charges, platform charges, members' charges, exit charges and holding costs - such as those charged by custodians, audit fees, and those for insurance with property investments."

Not only that, Butcher said, these costs vary, depending on factors like investment selection and whether any of these costs are bundled up into a single fee – so it's difficult to get a true picture of what a scheme is really costing its individual members.

"What the industry needs is a single measure to evaluate all of these complex costs in a holistic way," he said.

"Complete transparency may never be realistically achievable, but that doesn't mean schemes should be kept in the dark on the fundamental aspects of the costs they bear."

"Let's hope the FCA's focus on transaction costs is merely the first step in the right direction and not the last."

First published 12.01.2017


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Pension Funds

Climate change framework launched

The Transition Pathway Initiative (TPI) is being led by the Church of England's National Investing Bodies, including its pension board, and the Environment Agency Pension Fund (EAPF).

TPI is designed to develop a comprehensive framework for engagement on climate change.

It will assess how individual companies are positioning themselves for the transition to a low-carbon economy through a public transparent online tool.

Preliminary assessments include the oil, gas, and electricity utilities sectors.

Carbon performance assessments of additional sectors and individual companies will follow in the coming months.

Thirteen asset owners with £370bn assets under management (AuM) co-founded the TPI, including the UK's Local Authority Pension Fund Forum, RPMI Railpen, Universities Superannuation Scheme and West Midlands Pension Fund.

Other founding members include Church Commissioners for England, the Central Finance Board of the Methodist Church, three Swedish national pension funds, and Wespath Benefits and Investments.

Adam Matthews, co-chair of the initiative and head of engagement for the Church commissioners and Church of England Pensions Board, said the Transition Pathway Initiative is a tipping point for the market.

"The Initiative will identify companies that are aligned with the transition to the low-carbon economy and those most exposed to climate transition risk.

"There can be no doubt about the seriousness with which asset owners are taking account of this risks and it will be a key feature in the discussions we will be having with companies over the coming years."

The TPI's preliminary results indicate that although most companies acknowledge climate change as a business issue, few are doing strategic assessment.

Electricity utilities are marginally more advanced than oil and gas producers.

First published 12.01.2017


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Pension Funds

Brexit leading to pension schemes transferring overseas

Enquiries about overseas transfers have increased by 21 per cent at deVere Group, which pinpoints Brexit as the main catalyst for the change.

Nigel Green, deVere CEO, said: "Since the Brexit vote last June, there has been a groundswell of interest in overseas pension transfers.

"This has intensified in recent weeks as we begin the final countdown to the triggering of Article 50 by the end of March, when Britain will start negotiating with the EU over its exit."

Green added that he expects the momentum to develop further, as 'trigger day' gets closer.

"It's understandable that so many are considering transferring their UK pensions into an HMRC-recognised overseas pension scheme at the moment - they recognise the golden opportunity," he said.

DeVere says there are three factors contributing to the increase in transfers; gilt yields, final salary pension deficits, and the unkown.

Gilt yields have reduced considerably since the Brexit vote, driving up transfer values to record highs.

"It is perhaps unlikely that transfer values will remain at this level post-Brexit, and people seeking to transfer are looking to take advantage of these possibly once in a lifetime values," Green said.

Final salary pension deficits continue to come under pressure and are being exacerbated by the Brexit-induced falling gilt yields.

DeVere says Britain's pension funding gap almost doubled during 2016 and could soon reach a trillion.

"The size of the gap brings into question the survival of many company pension schemes," Green said, "Many will need to make significant changes to the terms of employees' pension schemes.'

Uncertainty about what a post-Brexit Britain will look like and how the economy will be affected, is the final contributing factor.

If there is an economic downturn, it will become increasingly difficult to fund pension schemes, and the value of the assets that schemes invest in are likely to depreciate.

"All in all, so-called 'gold-plated' final salary schemes are, in many cases, looking considerably less golden than they once did," said Green.

"An overseas pension transfer is not suitable for everyone, but, for those who do qualify, now might just be the ideal time to do so."

First published 12.01.2017


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Pension Funds

'No increase to state pension age' says PLSA

The PLSA says raising the state pension age further would cause "unacceptable detriment" to two specific groups of people, including those with lower than average life expectancies who might only receive very little state pension; and those with lower the average health life expectancies who might struggle to stay in the labour market before state pension age.

In its response, the PLSA recommended that the so-called 'triple lock' is replaced by indexation in line with earnings, so that the state pension maintains its current value of around 30 per cent of average (median) earnings.

Graham Vidler, PLSA director of external affairs, said: "We believe the fairest approach for current and future generations of pensioners is to drop the triple lock and halt further increases in State Pension age."

"A State Pension maintained at 30 per cent of average earnings can provide a strong basis for future retirement incomes, and removing the triple lock can keep it affordable - without the need to increase State Pension age still further to the detriment of people with poorer health.

Vidler added that PLSA also believes proposals for a variable pension age, while attractive in tackling socio-economic differences, would sacrifice the simplicity and clarity of the current system.

"On balance, we support the current system of a single State Pension age for all," he said.

The response from the PLSA also highlights the impact changes to the State Pension age will have on some pension schemes, especially those with defined benefit (DB) schemes.

Many of those schemes still retain links to the state pension, which would be affected in different ways by any changes to the mechanism for calculating the state pension age.

First published 06.01.2017


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Pension Funds

Pensions experts predict the year ahead

From the fall-out from BHS, to the launch of the new Lifetime ISA (LISA) and consolidation of master trusts, the year ahead looks to be action packed.

Lifetime ISA

Due to launch in April this year, the Lifetime ISA (LISA) gives savers the opportunity to receive a government bonus of up to £1,000 per year.

The idea is that savers will put the funds to put towards a first home or use them as a retirement fund.

Paul Waters, head of workplace savings at Hymans Roberson, said: "Lifetime ISA participation will be much higher than original estimates when it's introduced.

"Our own research estimates that 61 per cent of workers under 40 would open a LISA, and 23 per cent straight away."

Ian Bell, head of pensions at RSM, predicts although the take up will be high, the cost of the scheme is still to be clarified.

"We can expect confusion among savers with many opting to deposit spare cash in their LISA, rather than their pension," he said.

Impact of BHS

When high street retailer BHS went into administration earlier this year, it left behind a £571million pension deficit.

The impact of the high profile collapse, is likely to be felt across the pensions sector in both the short and long term.

RSM's Ian Bell said: "While we are likely to see some payment being made into the BHS pension scheme, we can also expect more action from the regulator to drive up standards of governance and trusteeship."

"We could also feasibly see moves towards a takeover code to introduce some form of clearance, focused on pension funding prior to a merger being allowed to proceed."

Jon Hatchett, head of corporate consulting at Hymans Robertson said in the wake of BHS, the Department of Work and Pensions green paper into the future of Defined Benefit (DB) schemes is likely to lead to tougher powers for the regulator.

Master Trusts

Multi-employer occupations schemes, or master trusts, are set to have a make or break year in 2017, according to Hyman's Robertson's CIO Andy Green.

Green said master trusts will either collapse or merge, as auto enrolment and intensified DC governance requirements have led to a proliferation of providers.

"We support a phased introduction to the new requirements set out in the Pensions Bill and tighter controls by the Regulator," he said.

RSM's Ian Bell added that trusts will be re-thinking their futures: "Master trusts will now be revisiting their business plans on the back of the business they have won compared to their future running costs."

"We could feasibly see the number of master trusts falling to 10 or less in the foreseeable future."

First published 06.01.2017


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Pension Funds

One in five vulnerable to online pension scams

The Real Retirement Report by Aviva revealed that more than one million over-45s have been the victim of an email scam.

The report also highlights that the experience of being targeted by email is 22 per cent common among this age group, than by phone.

With the Government currently consulting on a cold calling ban to cut off a key source of pension scams, the findings highlight the importance of also tackling digital security, as the pensions industry moves towards greater online management of savings.

Aviva's findings suggest almost three in four (73 per cent) over-45s with internet access have been targeted by an email scam, equivalent to 20.61m people, and of these, six per cent - or 1.24m people - reported falling victim to an online approach.

In comparison, 60 per cent of over-45s – equivalent to almost 17m in total – have been targeted by fraudsters by phone, with seven per cent of those (1.19m) saying they were a victim of phone scammers.

Rodney Prezeau, managing director, consumer Platform, Aviva UK Life, said the research highlights the security risks that come with increasingly technological lives.

He said: "The Government is rightly taking action to combat the threat of pension cold-callers in later life, but it is important we don't forget the additional threats that exist in the digital age.

"The fact that digital advances have had a welcome impact in so many areas of life has left many baby boomers feeling their retirement plans and savings habits would have benefitted from today's technology.

"As we move pensions out of the Stone Age and make increasing use of online tools, it is vital we ensure that consumers are fully safeguarded and supported so more people are encouraged to engage with their savings."

First published 06.01.2017


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Pension Funds

2016 - What a year!

We live in interesting and fascinating times, the world is changing, and changing very quickly.

A Shifting Political Landscape: The Arab Spring of the West?

The political events of 2016 will have an influence on policy that will impact future generations to come. Are we living through a more peaceful 'Arab Spring of the West' - that is, a monumental shift in attitudes, expectations and norms?

Boris and the Brexiteers convinced the UK that we were better off outside of the EU and we waved goodbye to David Cameron.

Theresa May says "we will make a success out of Brexit", and the Government is keeping its cards close to its chest. It remains to be seen how detailed a plan the public will see in advance (or during) negotiations.

One possibility is the UK will ultimately enshrine all EU legislation into UK law, then unpick the pieces we don't like. This process will take years.

A challenge has been fought all the way to the Supreme Court to clarify who has the ultimate authority to trigger Article 50: The Government or Parliament? We are settling into a time of prolonged uncertainty.

On the other side of the Atlantic, President-Elect Trump (I am still getting used to this) is forming his cabinet, committed to 'shake things up' and 'Make America Great Again' (I am also still unclear, exactly, what this means).

The Fed continues its attempts to normalise interest rates, and it unclear if Trump's promises of tax cuts and infrastructure spending will breathe further life into the American economy.

Key elections loom on the horizon in Europe, with important decisions as to who will lead France and Germany.

What Autumn Statement?

We did get a rare bit of certainty this year. We saw the first, and last, Autumn Statement by the current Chancellor. Three key questions remain for those in the pensions industry, and perhaps they will be addressed in the Budget: what does the future hold for the triple lock, tax relief for higher earners, and a lifetime cap on pensions?

Or, is this government going to be so preoccupied with leaving the EU that pensions won't even get a mention? This could be a silver lining in that stable policy that would allow a stronger foundation to support a retirement system to help all members of society.

A volatile new world

The new political landscape will re-introduce volatility. It will be a bumpy road as soundbites become policy, and policy becomes legislation. Global markets will react first (digesting later) through this process. Perhaps the idea of 'sell now / buy now and ask questions later' will become a recurring theme.

Volatility will bring along a new opportunity set, with many set to benefit from opportunities that are on and off the Bloomberg Screen.

Solving the Pensions and Savings Crisis

So, what now for the UK pensions industry? it is crucial that we continue to innovate and create savings and retirements products that allow the individual member to take advantage of these new opportunities: real solutions that are transparent and most importantly, easy to understand. And of course, they must be affordable. Gone are the days when a significant amount of returns can be eaten by a high level of fees.

A Brave New World

2016 taught me to expect the unexpected. It also taught me that dialogue and collaboration hold the key to unlocking seemingly impossible challenges.

As we enter a brave new volatile world in 2017, we cannot begin to predict what is in store, but it is this dialogue with peers, clients, customers, and collaboration (beyond our traditional industry peers) that will help us to identify the key components that we need to solve the pensions and savings crisis.

Written by Stuart Breyer, CEO, Mallowstreet.

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