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Pension Funds
Insider

The end is nigh, but when?

The financial fallout of Brexit is claimed to be the final nail in the coffin for defined benefit (DB) pension schemes, with deficits rising to never-seen-before highs.

The truth is, it's just the latest 'final' nail in the coffin; see also the end of contracting-out, freedom and choice in pensions, increased longevity, auto-enrolment etc. and so on.

It has, however, led me to think about the end point for DB, as it is undoubtedly coming, and what this means for dyed-in-the-wool admin people like me.

When I first started in the pensions administration industry nearly 20 years ago, it was DB as far as the eye could see. Occupational defined contribution (DC) was fairly rare.

All of the schemes I worked on were open to future accrual and the majority were still open to new members. I even got to join a DB scheme myself!

Over time, DB schemes stopped allowing members to accrue for future service, opening DC sections under the same Trust instead. Then, for cost and / or governance reasons, contract-based DC, rather than Trust-based DC, was the popular way to go.

This activity increased in pace until, all of a sudden, the rare beast is now the DB scheme still accruing future service, with those open to new entrants practically extinct (at least in the private sector).

My observations on the schemes I worked on mirrored my own pension scheme membership. DB is a long-forgotten memory and the future is DC.

I look back and feel lucky that I was able to work on schemes that had both DB and DC sections. It exposed me to the very different world of DC administration which needs a time-and-process driven mind-set compared to the complex, history-rich and calculation-based DB.

With the ever-declining number of DB schemes, is it possible to work out how long specialist DB administration will be needed?

For a scheme closed to new entrants, you can simplistically work this out by looking at the youngest member and calculating how long he is likely to live. This could be many decades from now.

The reality, though, is that now the majority of DB schemes are closed, Trustees and sponsors are on a de-risking flight path which will ultimately lead to buy-out well before the last of their pensioners or dependants will stop receiving their pension.

So, how long is left? Without a crystal ball, it's not possible to give an exact answer.

However, there are still thousands of DB schemes out there with millions of members, many of which will be around for at least 30 years, and some much longer.

The future of retirement provision may be DC, Lifetime ISAs or something completely new.

One thing for certain is that the expertise of skilled DB administrators will be needed by clients and members for many years to come.

Written by Joe Anderson,Business Development Manager at Trafalgar House.

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Pension Funds
Insider

L&G completes £750million ICI buy-in

It is the fund's ninth, and second largest, buy-in to date and brings the total liabilities insured to £7bn out of total scheme liabilities of around £11bn.

The transaction was signed eight working days after the EU referendum on 23 June – a record time for a transaction of this scale.

This allowed the Fund to benefit from market movements that had a favourable impact on pricing, reducing the cost of the transaction by £10million.

The ICI Fund was advised by LCP, business consultants specialising in pensions.

LCP partner Clive Wellsteed said being prepared enabled them to act fast: "We needed to move quickly in case this opportunity closed, which was made possible by having innovative umbrella contracts in place with Legal & General."

"These contracts were specifically designed to facilitate the Fund to take advantage of sudden movements in the markets while maintaining the strong contractual terms and robust collateral structures already in place."

Earlier this year, the Fund completed a £63million buy-in with Scottish Widows and added Scottish Widows to its insurer panel, alongside L&G and Prudential.

It has umbrella contracts in place with all three insurers.

In March 2014, the Fund insured £3.6 billion of pensioner liabilities through simultaneous buy-ins with Legal & General and Prudential.

The £3bn transaction with Legal & General remains the largest buy-in or buy-out policy ever executed in the UK.

At more than £7bn, the Fund has insured over twice the amount of liabilities as any other UK pension scheme.

Heath Mottram, CEO of the ICI Pension Fund, said: "The Fund's strong governance and ability to move quickly was invaluable in taking advantage of this opportunity to further de-risk the Fund."

"This was our ninth transaction since March 2014 and LCP's commitment, energy and enthusiasm for delivering an exceptional service to the Trustee is as strong now as it was the day they were appointed."

First published 21.07.2016

Lindsay.sharman@wilmingtonplc.com

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Pension Funds
Insider

Fidelity sets out pension priorities

The company says although some of the initiatives could be slowed down, ensuring automatic enrolment is executed is essential.

Head of Pensions at Fidelity, Richard Parkin, said: "The government has a lot on its plate at the moment and we do think there is scope to slow down on some things, most notably the Lifetime ISA."

"But we have to ensure automatic enrolment is seen through – getting people into a pension plan is the first hurdle to delivering good retirement outcomes."

Automatic-enrolment is the number one priority, according to Fidelity, which says small employers still need to get on board and the minimum contribution needs to be raised to 8%.

"Many have complained these minimums are not enough, and they're right, but the focus has to be on people getting enrolled," said Parkin.

The second priority identified is helping people make retirement decisions in the light of the recent pension freedoms.

Fidelity says "more needs to be done" to help consumers make the right choices with their retirement savings, including looking at how providers communicate with customers in the run up to age 55.

Thirdly, according to Fidelity, more time could be allocated to the implementation of the Lifetime ISA.

It says more development time for HMRC and product providers is necessary if it is agreed that the government top up is paid monthly rather than annually.

Not rushing into more pension tax changes is the fourth priority, Fidelity said.

"The pensions industry is buzzing with suggestions that post-referendum economic challenges might put pension tax relief reform back on the agenda but we hope the government will do a lot more thinking around the approach and possible consequences before doing anything," said Parkin.

Fifth, Fidelity said, is making progress with the development of a pensions' dashboard, while the sixth priority is managing expectations around pensions.

"The consolidation of state pensions and the move to DC in the UK is a clear shift in responsibility for retirement from state to individual, which is well understood by pensions people but doesn't feel like it's fully sunk into the UK psyche," said Parkin.

First published 21.07.2016

Lindsay.sharman@wilmingtonplc.com

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Pension Funds
Insider

PLSA guidance on investment data

'Understanding the worth of the workforce' has been designed to give pensions schemes and investor guidance on what data and commentary they should request from the companies they invest in.

UK pension schemes invest billions of pounds in listed companies around the world to secure pension incomes for millions of savers.

PLSA says there is a growing recognition that companies committed to investing in training and development for their staff perform better in the long term.

It says clear, consistent and structured reporting about how companies manage their workforce is a vital component in allowing investors to understand how the asset of employees is being managed and developed.

The toolkit recommends pension schemes ask investee companies to report on: gender diversity, employment type, staff turnover, accidents injuries and workplace illnesses, investment training and development, pay ratios, and employeeengagement.

Luke Hildyard, policy lead: stewardship and corporate governance, at PLSA, said: "We are all familiar with the phrases in annual reports affirming how important employees are to corporate success.

"But as our report last year highlighted, too often there is too little information in those same reports about how these employees are managed, developed and valued.

"Our new toolkit has been designed to provide pension schemes and other investors with a clear and structured approach to interrogating the data already available in corporate reports and guidance on what other information to request and how to analyse it."

The toolkit builds on the Association's report 'Where is the workforce in corporate reporting?', published last year.

Following the publication of that report, the Association set up a series of discussions with members, their advisers and asset managers along with other experts and corporations themselves and these informed the recommendations in the toolkit.

The toolkit will be shared with both corporations and pension funds and PLSA also intends to arrange private meetings between its members and investee companies to discuss how its recommendations can be implemented over the long-term.

First published 21.07.2016

Lindsay.sharman@wilmingtonplc.com

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Less pensions guidance, more advice please!

The freedoms have given choice and opportunity like never before but with that comes increased risks and complexity. Current guidance and communications are not delivering the necessary support and engagement resulting in many making poor and inappropriate choices with their pension, with a lack of individual personalisation. The Government has rightly identified the need to improve guidance and advice and have wasted little time making changes in a desperate and determined bid to ensure pension freedoms is a success.

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Recent FCA data has shown that fewer people are now shopping around for the best retirement solution; an undoubted step backwards. The data also showed a third of annuity purchases and fifty percent of drawdown purchases were made after receiving regulated financial advice. It is perhaps not surprising that more advice was sought for the more complex drawdown option but to think that one in two drawdown investors has the knowledge and skill to manage their drawdown fund throughout retirement is absolutely fanciful and I would guess the true figure is less than three percent and probably closer to one!

In the Chancellor's infamous 2014 Budget he promised DC members would receive 'free, impartial, face-to-face advice on how best to get the most from the choices they will now have'. A bold statement that unfortunately wasn't matched in terms of execution, what we got was more guidance in the form of Pension Wise, delivering similar guidance to that already delivered by employers, schemes, providers and a host of web sites. What's more, take up of the Pension Wise service has been poor with only 17% of people accessing the service. Not surprisingly, questions were being asked and the Government has been quick to react.

The Government and the regulator are trying to make guidance and financial advice deliver for consumers – it is the stated objective of the current developments and key consultations.

So why this sudden realisation that advice trumps guidance and is a significant missing piece of the jigsaw to improve DC member outcomes? There are two answers, the first articulated in a recent DWP review which stated their newfound understanding of how difficult it is to make the right pension freedom choices. The second becomes clear when you understand the differences between guidance and advice:

• Guidance can give you information and choices – what you could do. Whereas advice will give a personal recommendation – what you should do.
• With guidance you proceed at your own risk. With advice you have full FCA regulatory protection and recourse if the advice is wrong.
It doesn't take much to realise that regulated advice is the best option for members, trustees, employers and the future success of pension freedoms.

The tricky part is how to get more people to pay for regulated advice? The FCAs Financial Advice Market Review identified affordability and accessibility as two key areas to tackle but it would be remiss to ignore trust and understanding as major obstacles of both financial services and the regulatory compensation scheme.

The Government has streamlined its guidance service into a single body and will deliver a pensions dashboard, but it's hard to see how these initiatives will help increase the use of financial advice or improve member outcomes.

Direct steps have been taken to improve employer facilitated advice, increasing the HMRC allowance to £500 and indicating employers will be given safe harbour when pointing their members to regulated advice. This should see an increase in supply but will it drive up demand when a limited supply of quality services are already available within the previous £150 allowance – price is still a barrier.

The regulator sees automated advice as an advice gap solution, but care needs to be taken as research shows people don't want it and prefer human interaction - 59%. Secondly, as a sole means of advice, without navigation and challenge by an expert, it may lead to poor inputs and outputs! Despite a limited number of specialist advice companies willing to deliver an affordable and interactive solution, this is where the best solutions will come from to deliver better member outcomes.

Pension freedoms is a work in progress and regulated advice has an important role to play. More people will benefit from expert advice and the time is right for everyone to get behind financial services and improve people's knowledge and understanding.

To see what level of regulated advice can be delivered for just £150, contact us today for an online demo of our Pathways service.

Pathways-image.jpg

www.intelligentpensions.com


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Factor investing case studies – the merits of tailor made

Since 2005, the Robeco Quantitative Research team has concentrated on analyzing, evaluating, and designing factor strategies that deliver more stable and consistent returns in the long run. We have long believed in the benefits of the evidence-based approach that true factor investing requires. Based on this philosophy, we have been able to give our clients access to portfolios with systematic exposure to a range of factor premiums for well over a decade. It has created a mini-industry within asset management that has won many converts.

Now it is time to take stock of how factor investing is being used, and sometimes, misused. Although some investors are already actively using factor investing strategies, others are still pondering whether they should use multiple factors across all their portfolios. Their more wary approach is justified as factor investing is not a one-size-fits-all investment phenomenon.

A strategic allocation to factor premiums is not only dependent on our evidence-based investment philosophy, but also on a careful assessment of a client's specific needs. In some cases, fund solutions or tailored mandates may not always be the best structures to meet these needs.

In this publication, we address these challenges by looking at the lessons learned from our experiences with clients who have incorporated factor investing into their portfolio allocation strategies. We present three case studies of professional investors who are successfully implementing bespoke multi-factor solutions – a Dutch pension fund, a large sovereign wealth fund and a retail bank. These clients' bespoke multi-factor solutions offer valuable insights for all.

Request to receive a digital copy of this white paper

Factor investing case studies – the merits of tailor made solutions

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Pension Funds
Insider

The new cabinet is announced

Stephen Crabb stepped down from his position as Work and Pensions Secretary on Thursday whilst Theresa May made many 'high profile sackings'.

Crabb, who replaced Iain Duncan Smith earlier in 2016 said in a formal statement that the move is"in the best interests of my family".

Crabb also withdrew himself from the Conservative leadership race early on; he led his campaign with an ethos of strong family values but this was shattered with claims of explicit exchanges with another woman.

Mrs May quickly announced that Damian Green will be the new Pensions Secretary. Mr Green has been a member of the conservative party since 1997 and previously to his political career spent fifteen years as a business journalist for the BBC, The Times and Channel 4.

Philip Hammond has also been named as the new Chancellor of the Exchequer in place of George Osbourne. He was foreign secretary under David Cameron from 2014 to 2016, and previously Shadow Secretary of State for Work and Pensions.

Osbourne said "It's been a privilege to be Chancellor these last six yrs. Others will judge - I hope I've left the economy in a better state than I found it."

Hammond's initial statements suggest he intends to work on scaling back austerity in the UK by taking things at a slower pace. He also plans to reassure businesses whose confidence has been shaken over the last few weeks with plans to exit the EU.

Mr Hammond told the BBC's Today programme. "It has caused many businesses to pause investment decisions they were making."

His statements seems to have helped ease investor's post-Brexit vote fears, with the FTSE 100 index pushing 51.7 points higher at 6,722.5 in early trading.

First published 14.07.2016

ceripugh@wilmingtonplc.com

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Pension Funds
Insider

Is your pension glass empty?

An optimist sees the glass as half-full; the pessimist sees it as half-empty.

The actuary sees it as somewhere between 40% full and 40% empty, depending on a large number of assumptions.

As a pensions actuary, I have felt more like the harbinger of doom in recent days, delivering valuation results, accounting disclosures and funding updates with 30 June 2016 effective dates.

The PPF barometer of pension scheme funding, the 7800 index, is now showing an aggregate deficit of £384 billion and an aggregate funding level of around 78%.

We have reached a new nadir in pension scheme funding levels not seen since 2012 and before that in 2009.

This is despite years of massive deficit funding contributions and pretty buoyant investment markets for much of this time. Asset values have increased, but the value of liabilities have increased even faster.

As such, many commentators are searching to find anything in the glass, never mind ponder over its half-fullness or half-emptiness.

However, I've decided to look for some positives, so here it goes;

- Previous low points have been overcome, and in some cases very quickly.

- Pension schemes are a long-term project, so we all have a long-time to fix the current difficulties.

- Small changes in interest rates can make a big difference – a 1% a year fall in long-term rates would reduce the value of an average pension scheme's liabilities by about 20%.

- Trustees and schemes have many more tools in their armoury to manage their way out of difficulty than ever before – including access to up to date information and access to wider and more sophisticated asset classes than ever before.

- There is likely to be periods of significant volatility in the coming years – this will give pro-active trustees and advisors the ability to lock-in to positive positions that may well be short lived. This could allow many schemes to slowly climb what looks like a pretty big mountain.

We all know some schemes won't make it to the successful conclusion of paying all members' benefits in full and maybe they need to accept that and act accordingly.

However, for the currently squeezed middle who can hang-in for the long-term, there will hopefully be better periods in the future.

I see interesting times ahead, with challenges and opportunities.

Trustees and scheme-sponsors must assess where they want to get to, how they might get there and make sure they are able to act (or someone can act on their behalf) when opportunities arise.

Alan Collins, Head of Pension Scheme Trustee Advisory at Spence & Partners

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Pension Funds
Insider

Schemes may still need to prepare for the revised IORP II

Changes to the EU's 2003 pensions Directive, IORP II, aims to bring their existing requirements in line with the insurance industries Solvency II Directive which is designed to strengthen the internal market by encouraging the development of cross-border pension schemes.

After the vote was announced pension schemes may have too quickly rejoiced in the fact that the new legislation would not be applied to them.

However, the finalised version of the Institutions for Occupational Retirement Provision, IORP, was published last week and may still be implemented whilst the UK is still a member state.

Before the changes are implemented the directive is to go through the Committee of Permanent Representatives before going on to the EU parliament and transposed into each member states native language and then published to the official journal.

From that point all EU member states will have two years to implement the changes.

The speed of this process and date of implementation will effect whether UK pension schemes will need to comply.

This could mean the UK will be in a position of finalising exit arrangements whilst also still being obliged to implement the legislative changes of the IORP II initiative.

James Walsh, Policy Lead: EU & International at the PLSA sees this 'as much more than a revision' as the new requirements grows the number of articles from 24 to 81 with a significant change to the long-standing rules on funding of cross-border schemes.

Article 15.3 still requires these to be fully funded at all times, but the text now continues;

"If this condition is not met, the competent authority of the home Member State shall promptly intervene and require the IORP to immediately draw up appropriate measures and implement them without delay in a way that members and beneficiaries are adequately protected'.

This allows cross-border schemes to have deficits and put recovery plans in place.

Despite the concern that this is 'more than a revision' some are more confident that the changes will not disrupt the UK too much.

Much of the directives will cover governance issues and as Georgina Beechinor of law firm Sackers said:

"I don't think in practice there are going to be major differences in the UK pensions, because of a lot of the focus here is on governance and of course the government and the regulator have done so much in recent years in this area"

James Walsh confirmed that the PLSA would be providing a briefing on the IORP II for its members, but experts warned schemes it is all very much "wait and see".

First published 14.7.2016

ceripugh@wilmingtonplc.com

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Pension Funds
Insider

UK pension schemes see deficit decrease following Brexit

As the headlines are focused on the increase in DB scheme deficits, there remains some positivity in the industry.

The majority of schemes have felt the downturn due to the historically low bond yields which lead to lower discount rates which in turn increase the value of DB pension liabilities, but this is not universally the case.

Those schemes with liability driven investments (LDI) may have reduced their deficits following the Brexit vote as recent findings have shown.

Pension schemes that have protected themselves against the fall in gilt yields by investing in LDI could have seen their deficit decrease. This is due to the LDI strategy enabling assets to increase in line with liabilities.

Some pension schemes have even seen their funding levels improve as a result of the Brexit vote, providing some welcome news to pension schemes and sponsors.

Xafinity head of investment Ben Gold said the findings show there is no uniform approach for pension investments.

He said: "LDI will have provided pension schemes with some protection against the falls in gilt yields we have seen since the Brexit vote. Indeed, because LDI assets have performed so well, many pension schemes with LDI will imminently be receiving cash payments from their LDI managers.

"Receiving these cash payments provides pension schemes with opportunities to further refine their investment strategies, particularly if their outlook or risk appetite has changed.

"We are seeing pension schemes use this money for a range of different purposes depending on factors such as their employment covenant and net cashflow position - there is no 'one size fits all' answer."

First published 14.07.2016

ceri.pugh@wilmingtonplc.com

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