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Pension Funds

BlackRock says pension schemes are making five key mistakes

The company said pension funds are "chronically underfunded" with a collective deficit of £227billion but there are steps trustees can take to get closer to meeting their funding objectives.

The first mistake, BlackRock said, is that schemes focus too much on the micro and not the macro.

Two thirds of trustees spend five hours or less per quarter on investment matters, according to recent industry surveys, and BlackRock said scheme trustees are not using this small amount of time to best effect.

Instead, many focus on the intricacies of investment decisions, such as which securities are held or which manager to select.

BlackRock said trustees could improve their focus on the macro issues by relying more heavily on the input of their service providers (consultants, actuaries, asset managers) and delegating decisions.

The second mistake is not recalibrating investment strategies, despite changing market conditions and an increase in liabilities.

The solution, BlackRock said, is for trustees to evaluate all the options available to them, whether that be a deliberate decision to do nothing; consider different betas and exposures (e.g. smart beta, LDI) explore a greater allocation to active management; or capture the illiquidity premium, which can be well rewarded for long term investors.

Thirdly, pension schemes underestimate time horizons, even though they are in a unique position because of their long-term investment horizons and ability to tie up capital for long periods of time.

Pension schemes will gain from realising that the challenges of investing in private market assets (e.g. additional governance) can be more than offset by the attractive yields and diversification benefits on offer.

The fourth mistake is not managing the total risk profile, which means that pensions schemes have gone from almost fully funded in 2007, to approximately £227bn in deficit.

BlackRock advised schemes to evaluate interest rate risk and inflation risk in the same way they evaluate other investment risks.

Finally, BlackRock said, trustees are not evaluating advice regularly, and should rectify this by challenging the quality of advice, for example by using an independent trustee.

First published 28.04.2017

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Pension Funds

Joanne Segars to leave the PLSA

Segars, who was CEO for a decade, will remain in the role until the end of June and will continue to act as the PLSA ambassador until a successor is appointed.

PLSA said in a statement that Segars transformed the organisation during her tenure.

The statement said Segars: "..built its reputation as an organisation with credible and persuasive policy proposals, representing the interests of members with vigour, determination and imagination, and ensured that the Association is a strong and trusted voice in the public conversation."

Segars leaves the PLSA with a membership of more than 1,300 pension schemes, 20 million savers, £1 trillion in assets and 400 businesses providing services to the industry.

She said the highlights of her time there include creating the Pension Quality Mark, establishing the Pensions Infrastructure Platform, increasing the Association's income by 40% and making its conferences and events "the best in the industry."

She said: "I've been privileged to lead fantastic colleagues and members who work tirelessly to provide millions of people with better retirement incomes."

"Along with working with the PLSA's members, I have given the Association a new and wider focus, reflecting the realities of retirement saving today, culminating in the rebranding of the NAPF as the PLSA in 2015."

"I have enjoyed my time here enormously, but after 12 years it is time to move on."

Lesley Williams, the PLSA chair, praised Segars' contribution to the organisation: "Joanne has been an outstanding chief executive and made a huge difference, as she campaigned for a secure future for pensions and pensioners in the UK and the EU.
"We wish her well in this new and exciting phase of her career."

First published 28.04.2017

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Pension Funds

What might the government's consultation mean for the future of DB

The Association of Member Nominated Trustees (AMNT) has held consultation sessions at its member conferences.

We have just over 700 members, who represent some 500 schemes, with total assets under management of just under £700 billion.

We say that is around one third of the UK occupational pension sector.

We are, therefore, a big representative body. In addition, I have attended several round table discussions on the Green Paper that the Minister of Pensions himself has conducted from across the industry. These operated under Chatham House rules.

With the deadline for responses set for 14 May, I set down here some of the headline conclusions and debates that I see emerging.

Are defined benefit pensions still affordable?

The weight of opinion seems to be that defined benefits (DB) are not in a state of crisis.

It is possible that some less responsible employers might wish to suggest otherwise as cover for trying to weaken their commitments, but these should not be encouraged. That is not to say that problems do not exist with DB pensions.

Some consultees add that we should not forget that many employees now call on several pensionable jobs, often with different employers, during their working lives.

What should be the role of trustees?

I find widespread support for the idea that the governance of pension schemes may be likened to a triangle.

The three sides can be represented as: (1) the sponsoring employer; (2) the consultants and fund managers who work to increase the assets; then (3), most importantly, the scheme members themselves, supported by their nominated trustees.

These three should be kept in balance. Consultees from a range of backgrounds note that there is increased appreciation of the value that member nominated trustees (MNTs) bring to scheme governance.

Specific points mentioned include: risk management, employer covenant assessment and costs & charges.

The quid pro quo is that MNTs should have appropriate levels of knowledge and understanding. Some technical knowledge is needed.

Many see as of equal importance the skills of a non-executive director in holding experts to account. MNTs should figure also in the governance of mastertrusts - good practice certainly demands this.

Is new legislation needed about informing members of their schemes' financial position?

Whilst new legislation is not generally seen as an answer, there is however, a dichotomy between the short term and the longer term.

In the short term, many trustees report that their members are not generally assiduous readers of scheme literature. In any case, there is some support that a little knowledge can be a dangerous thing.

In the longer term, we will want scheme members to have faith that their schemes have sound financial management. They will need to read about this if we are to encourage them to invest a higher percentage of pay to secure income in increasing number of years in retirement.

In conclusion

This progress report is inevitably impressionistic.

Although the full results of the consultation are yet to come in, I detect general agreement that the Pensions Minister, Richard Harrington, is conducting a genuine consultation. It is open minded in the best traditions of Green Papers and consultees generally welcome his thorough approach.

Written by David Weeks, Co-chair of the AMNT.

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Pension Funds

AXA to divest from coal companies

The move will see AXA IM divest from mining and electric companies specifically that derive more than 50% of their revenue from coal-related activities.

Effective from 30 June, the coal policy will apply to €714 billion (99.5%) of assets under management at AXA IM, excluding any funds in the 'funds of funds' or 'index funds' categories.

The decision means AXA IM will be divesting approximately €165 million of fixed income portfolios and €12million of equities portfolios.

Andrea Rossi, AXA IM CEO, said: "As a responsible investor and active steward of our clients' assets, we strongly believe that divesting from coal can help to de-risk portfolios over the long term, as the world moves to be in line with the +2?C scenario."

According to the Intergovernmental Panel on Climate Change (IPCC), +2?C is the maximum increase in temperature before significant risks to society are triggered by global warming.

Staying below this threshold requires significantly limiting carbon emissions globally and coal is the most carbon-intensive energy source.

The new coal policy is AXA IM's latest move towards responsible investment - it has already implemented policies on palm oil, soft commodities derivatives, and controversial weapons, as well as working to integrate ESG across all investment strategies.

"This decision is consistent with our ambitions for continued and greater ESG integration across AXA IM and it is in line with our belief that asset managers have an important role to play in helping the global transition to a low carbon economy," said Rossi.

All its portfolio managers will be working closely with AXA IM's Responsible Investment team to make sure all funds are in line with the coal policy and its clients have a smooth transition in their portfolios.
Clients in segregated mandates will have the option to opt out of this policy should they wish to do so.

"We have been committed to responsible investment for nearly 20 years and have seen growing interest from clients," Rossi added.

"We want to engage with our clients, increasing awareness about the potential long-term risks related to the production and consumption of coal at current levels and encouraging investors to fully consider the long-term benefits of low carbon portfolios."

First published 28.042017

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Pension Funds

Original thinking in emerging markets

To read this article please click here

Company profile

Founded in the US in 1931, Capital Group is one of the world's largest independent investment managers. Throughout our history of more than 80 years, our aim has always been to deliver superior, consistent results for long-term investors.

Investment management is our only business, and the stability of our privately owned organisation has enabled us to maintain a long-term perspective throughout the decades; we believe this perspective helps to align our goals with the interests of our clients. The majority of our portfolio managers and analysts have witnessed several market cycles and have been with Capital Group for many years.

We build our investment strategies with durability in mind, backed by our experience in varying market conditions. Our active investment process is designed to enable individual investment professionals to act on their highest convictions, while limiting the risk associated with isolated decision-making. Fundamental proprietary research provided by our global network of experienced investment analysts forms the backbone of our approach.

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Pension Funds

How to live forever

Is it me, or do all children make their parents feel old? My daughter recently gave me a book entitled 'The 100-Year Life'.

I confess, this wasn't a gift that was received gracefully (apparently I pulled 'that face').

The truth is the title made me think of someone very old, and I didn't like the fact that she'd applied this to me (in that 'I thought you'd like this book' kind of way).

I suspect that's how the under-30s (my daughter is a case in point) feel when we talk to them about pensions!

However, once I'd got beyond the cover I had to admit that it made me think.

The book challenges the traditional notion of a three-stage approach to our lives – education, work and retirement.

The point it makes is that, with increasing longevity, we are going to have to re-think the choices and options we will face - the very structure of life that has been assumed for recent generations.

This resonated with me as I'd already started to think a little differently.

The concept of a career break or sabbatical is not a new one, but I decided to 'do something different' at the end of last year.

I think when I put forward a proposal for 'KP Leave' my boss thought I was planning on going on a course (sorry Peter!). Instead I did a bit of travelling – visiting some of the countries I'd always wanted to explore, whilst I had the time and the stamina to do so.

In truth, the retirement we dream of, where we have boundless energy and bottomless pockets can't be guaranteed, can it?

I like the idea of re-fashioning life, to create a 'shifting balance' between work and 'non-work'.

What we do with our time is important - increasingly important. In the social-media-driven world we live in, it's easy to engage others with the idea of 'rebalancing' our lives between work and leisure.

It has the potential to give everyone a new view, to recalibrate the future. Perhaps pensions are about financing life, not just retirement.

Maybe there is a way to engage the under-30s in pensions after all!

Written by Karen Partridge, Head of Client Services - UK and Australia, AHC.

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Pension Funds

Master Trust hires former Now:Pensions head

Whitmore will take on a newly-created position – head of strategic delivery, in a move Salvus said signals a renewed commitment to the delivery of a "streamlined digital workplace offering for employers, advisers, payroll professionals and pension members."

Prior to the new appointment, Whitmore was at Now: Pensions where he was head of technical support.

During his time there, he built a risk-focused department with four operational teams and a complaint function.

He has a comprehensive knowledge of the UK pensions landscape, after holding senior positions at Xafinity, Mercer, and Bridge Trustees.

In his new role, reporting into Salvus's managing director Graham Peacock, Whitmore will design and develop support services for pension professionals as part of the organisation's move to become a fully digital workplace.

Peacock said: "2017 is a pivotal year for auto-enrolment with the remainder of small and medium business set to stage this year, and it is also a crucial time for us, as we complete the transition into a fully digital workplace provider.

"Russell's technical expertise, as well as his experience and status in the industry, will be crucial as we look to consolidate our offering and create a streamlined service for those employers providing a workplace pension the first time."

Whitmore said he was looking forward to joining the organisation and driving it forward.

"Salvus has a well-deserved reputation in the industry for both its high-quality pension solutions and its unrivalled commitment to rigorous standards of governance," he said.

Salvus Master Trust for employers meeting their auto enrolment obligations, and for employers with existing pension arrangements.

It can also be used by members to consolidate any previous pensions they might have, bringing multiple pension pots under one roof.

First published 20.04.2017

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Pension Funds

Bernard Matthews pension scheme owner 'lined own pockets'

The committee has published correspondence that shows Rutland Partners rejected the offer in favour of an insolvency process, to make sure they received a greater return.

As a result, members of the scheme are now facing cuts to their retirement income.

Bernard Matthews was sold in September last year and the use of the insolvency procedure meant the company Defined Benefit (DB) scheme, with a deficit estimated at up to £75m, was put into Pension Protection Fund (PPF) assessment.

The letters show that a previous offer to buy Bernard Matthews outright and assume ongoing responsibility for the full liabilities of the scheme, was rejected by Rutland as it would have meant writing off the majority of its outstanding loans to the company it owned.

Bernard Matthews was instead placed into pre-pack administration, a process which placed Rutland Partners ahead of the pension scheme in the hierarchy of creditors.

The arrangement led to an improved financial outcome for Rutland Partners, but drastically reduced the amount recoverable by the pension scheme – to potentially less than 1p in the pound.

A letter from Deloitte confirms that the purchase agreement was not accompanied with any assurances to the pension scheme or the PPF regarding the safeguarding of pension rights.

The pension scheme trustees did not consent to the loss of their secured claim, meaning that an application to the High Court was necessary to force this through.

The PPF is currently assessing the scheme and pursuing a claim for the full section 75 debt due to the scheme, estimated at up to £75 million.

Rt Hon Frank Field MP, chair of the committee said: "I have confidence that the PPF, working with the scheme trustees, will act in the best interests of the pensioners, but it's clear that the former owners passed up a better deal for pension scheme members in favour of lining their own pockets."

First published 20.04.2017

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Pension Funds

Pensions questions after snap general election announcement

If it goes ahead, the general election will take place on 8 June.

Richard Parkin, head of pensions policy at Fidelity International, said the election could be highly significant for the industry, leading to faster and more impactful change.

"Although the Government will be busy with Brexit, this could be significant for pensions," he said.

"Rather than causing Government to postpone elements of policy making, it may embolden them to do more."

Parkin said the big issue for pension funds to consider in the context of the early election, is tax relief.

"The main reason this was shelved was because of fears around a reaction from within the Conservative party, but with a big majority, they could go for reducing relief," he said.

Triple lock and pensioner benefits could also come under scrutiny, Parkin said, if the Prime Minister wants to be tough without alienating voters.

How each of the major political parties chooses to address the key pensions issues, could also have an impact on voters – some of whom will be directly impacted by the outcome.

Broadstone's technical director David Brooks outlined some of the key issues each party needs to address in the next two months, if the general election goes ahead.

Along with tax relief, Brooks points to auto-enrolment, state pensions, and equality in terms of death benefits for same-sex couples, as the major issues for consideration.

He said: "With lower opt-outs than expected, it would appear that the general public likes the auto-enrolment method, so pledging to extend it could be a vote winner if people feel included."

Parties will also need to answer more general questions about the future, such as whether pensions would be best serviced the creation of a strategic independent retirement commission, and improving financial education is essential.

"Calls for an independent retirement commission have been resisted by political parties for years but with the mounting list of difficult decisions, it would seem like a get out of jail free card to appoint a commission to make recommendations that the Government can enact," said Brooks.

First published 20.04.2017

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Pension Funds

Costs, charges and the highest quality.

The terms "value for money" – monitored by IGCs for workplace pensions – and "good value" – assessed by trustees of occupational pensions – are not defined in legislation.

Assessment of "value for money" means many things to many people. Most agree it is not merely about charges, but cannot agree exactly how it is linked to charges.

Surely, it is related to all features and all services received by policyholders and members, and all costs and charges too?

Quality counts – at the time of writing, Cristiano Ronaldo had scored 279 goals in 236 games for Real Madrid. Top hat!

He seemingly beat Bayern Munich on his own this week! All would agree he is a player of the very highest quality.

He wins matches and competitions for his club. But is he "value for money" at the £80m transfer fee in 2009 plus all his wages since? What about netting off the commercial value of shirt sales?

He probably represents overall value for money, but who is to say? It nicely illustrates the dilemma – expensive and cheap players can both be good value or poor value.

This analogy is stretched somewhat – some football clubs seem to have no budgetary limits and some owners will place success above all concept of relative value.

Where the analogy applies is that different clubs need different players.

Sutton United have to find cheaper players than Real Madrid, but as good as they can get within their budget. Whatever their budget, they still beat Leeds United!

So surely "value for money" has a link to costs too? Yet there is a growing tendency to play down the role of charges in this attempt to bring in all features into an assessment.

Some people go further to say that costs and charges are a very small component of the assessment. How can this be? The phrase "value for money" implies the value received FOR the money paid. The words here are a clue.

If I buy a car, the quality of the car counts. What type of car do I want? There are very different types to say the least. But I judge potential cars against their cost. I am not indifferent to the cost.

Into this debate stepped the syndicated research commissioned by 11 Independent Governance Committees (IGCs) last winter and reported upon in many recent IGC annual reports.

This asked policyholders to rank the importance of many features. Levels of charges ranked low – not even in the top 15 most important features.

Care is needed with this research. Some have leapt onto it to support the notion that costs are not a main feature.

Yet the top ranking issue for policyholders was investment returns achieved on their investment funds. Of course, policyholders receive investment returns net of costs and charges so it could be argued that costs and charges were ranked equal first!

With such research, everything rests on the phrasing of the questions. The research also showed that the policyholders had very little knowledge of what charges and costs they are paying.

So this doesn't resolve the debate, although many parts of the research were very interesting.

Other consumer research in other fields shows that aspects such as customer service rank much higher in importance for customers than price. So in pensions, clearly, the quality of all services and features count – they may count for the largest share of value for money – as personified by Cristiano Ronaldo. But costs count too. Finally, if going for high quality, seek the real thing, rather than a poor imitation!

Considering all features is correct but, beyond that, one should assess what features have the most importance or value to the policyholders and members. Engaging with policyholders and members to understand their views on value should be done as far as reasonably practicable.

This is a difficult area for some governance committees, as it is not easy to obtain representative member views. Also, recent research has highlighted a lack of understanding of pensions by most policyholders and members – do they know what they are evaluating?

We need to be honest here – in the main they do not.

In short, a drive to consider all features on one side of the equation cannot be at the expense of cost on the other.

Written by Colin Richardson, Client Director, PTL.

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Pension Funds

Retirees risk tax bills, says Prudential

Prudential has released new research that shows one in five people (19%) could be impacted if they withdraw more than the allowance that savers can take from their pensions at retirement.

Under the pension freedom reforms, most pension savers over the age of 55 are entitled to take some or all their pension savings in the form of a cash lump sum, and the first 25% is tax free.

However, Prudential's Class of 2017 study, found that 19% of those retiring, are planning to withdraw more than the 25 per cent tax-free limit from their pension, which could leave them with a one-off tax bill, or having to pay tax at a higher rate than they normally do.

Stan Russell, retirement income expert at Prudential, said: "Being able to withdraw lump sums from their pension pots gives savers unparalleled flexibility on how to spend their money, and it is clear that people retiring this year are making full use of this benefit.

"Many of the Class of 2017 are withdrawing money to sort out their finances for retirement, with many paying off mortgages and debts, as well as helping out family and enjoying themselves."

"However, it is also clear that without careful planning, the tax man could benefit from people making the most of the newly acquired access to their pension funds."

Prudential's research into the financial plans and aspirations of people planning to retire in the year ahead – now in its tenth year – found that more than two in five people planning to retire in 2017 (44 per cent) are planning to withdraw some cash from their pension savings.

A quarter of retirees will stay within the 25 per cent tax-free lump sum limit.

At the same time, Financial Conduct Authority data shows that fewer than half (47%) of those who withdrew all the money from their pension savings between July and September 2016 sought professional financial advice before doing so.

However, the proportion seeking advice had increased from just 29 per cent at the start of 2016.

Meanwhile, Treasury data released as part of the Spring Budget shows that the amount of cash being taken from pension funds is higher than expected when the freedoms were first announced.

It was initially estimated that the changes would mean a total of £900million of extra tax being paid in the tax years 2015-16 and 2016-17. In fact, a total of £2.6 billion in extra tax is now expected to be paid in the two years to 6 April 2017.

"For many people approaching retirement and considering how to make the most of their savings, a consultation with a professional financial adviser where appropriate could help to ensure they access their pension in a way that benefits their long and short-term aims," Russell said.

First published 13.04.2017

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Pension Funds

Pensions schemes paying investment managers 70% more

The survey shows that while average headline fee rates have fallen in 60% of asset classes since 2011, this has not been enough to offset the revenue-boosting benefit of investment market growth.

LCP said this highlights how active managers are rewarded by simply retaining assets and not necessarily to achieve outperformance.

Matt Gibson, partner and head of investment research at LCP and author of the report, said the rise has been driven primarily by rises in equity and bond markets.

"Investment managers have done very well out of increases in assets under management in recent years," he said.

"While we welcome the reduction in fee rates in many asset classes, overall, investment managers are charging much more but don't seem to be doing more."

Gibson added that the findings showed how important it is for pensions schemes to regularly monitor their investment managers and put negotiating pressure on them to reduce fees.

The survey looks at total costs for a £50m investment across the most popular asset classes used by the firm's clients.
For DC pension schemes, the survey identified the benefits of using platforms over accessing funds directly, and found a lack of consistent and transparent reporting on transaction costs.

Some asset managers only provided information on explicit trading costs – such as broker's commission and stamp duty, while others attempted to quantify implicit costs such as dealing spreads and the impact of the fund's transactions on the market price of a security.

The difference in minimum and maximum reported transaction costs from UK equity mandates varied widely with costs ranging from £20k to £400k for a £50m mandate.

LCP said that regulatory changes may pave the way for managers to become more open about hidden costs.

"First, the FCA is in the process of setting out guidelines on the information asset managers must provide DC schemes on how transaction costs are calculated," said Gibson.

"Second is a MIFID II rule, tightening the regulations on broker commission costs related to research."

First published 13.04.2017

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Pension Funds

Auto-enrolment tops half million mark

The report shows that by the end of March this year, 503,178 employers had completed their duties, meaning more than 7.6million workers have been put into a workplace pension scheme since 2012.

TPR said the pace of automatic enrolment continues to increase, with 136,000 small and micro employers complying with the Pensions Act in the first three months of 2017.

Pensions Minister Richard Harrington said the new figures show that by setting up a workplace pension, employers are getting their staff on the road to a financially secure retirement, but there is still come way to go.

"There are nearly one million employers out there that still need to enrol their staff and I would encourage them to take up the support on offer," he said.

Around 1.3 million to 1.4 million UK employers have automatic enrolment duties to meet.

On top of the 136,000 small and micro employers who have met their workplace pension responsibilities in 2017 already, around a further 600,000 have responsibilities that begin this year.

Charles Counsell, TPR's executive director of automatic enrolment, said: "We expected the number of employers becoming compliant would increase dramatically this year and I'm delighted that we've reached the 500,000 mark.

"Hundreds of thousands more employers are due to follow suit over the coming months and it is vital that they act early and do not leave themselves open to being fined."

The success of the scheme to date doesn't account for some of lowest paid workers however, something the government is being called upon to address.

Graham Peacock, managing director of Salvus Master Trust said: "Many workers simply are not eligible for auto-enrolment."

"Many will be lower-paid anyway, often working multiple jobs to get by, and they stand to be doubly disadvantaged as they will miss out on the financial safety net enjoyed by those earning higher wages while the possibility of a comfortable retirement slips ever further away."

"The industry, employers and the government should not rest on their laurels – they need to work to widen the criteria to enable as much participation as possible from workers in these groups."

"It is imperative we work to get across the message of how effective saving into a pension scheme is."

First published 13.04.2017

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Pension Funds

Remaining faithful to active investing

It is claimed that nearly 30 per cent of so-called active UK equity funds are not actively managed at all (2) and recent data shows that only one in twenty US domestic equity funds and less than twenty percent of euro denominated European equity funds beat their benchmarks for the five year period ending June 2016 - it was a similar story over ten years as well (3). Such statistics feed a frenzy of financial headlines that highlight the investor disillusionment over the mediocre performance of active investment managers on a regular basis.

With passively managed assets growing 18% to US$6.7 trillion in 2016 to one-quarter the size of actively managed assets that grew only 4% last year (4), this article explains why you should not give up on genuine active managers so long as you apply some sensible manager selection criteria.

Passive and Active Investing

Passive investing is no doubt appealing due to generally much lower fees, good transparency and strong liquidity. Devotees point to the reality that market indices are merely derivations of the aggregated actions of all investors and, since you can only beat the market by exploiting someone else's mistakes, the average investor will underperform once fees and other costs are taken into account. Some also believe it is becoming more challenging for active investors to sustain a competitive advantage and reliably outperform with new information and tools due to technological progress and more industrious investment research (5).

Yet, as the scale of passive investing grows the defence of active investing becomes more apparent. After all, active investors are vital for the market to function efficiently. As they trade stocks perceived to be under- or over-valued, they provide market liquidity and the best valuation of a company's share price given all currently available information. If passive investing grew disproportionately large the market would become less efficient and improve the prospects for active investors to return until equilibrium is restored.

Surely successful investing is as much about avoiding over-priced and/or inferior businesses as it is about finding good quality ones that offer better value. Why would a prudent investor invest in every company, good or bad, simply on the authority of an index committee? Investment management is very much a people business and, despite all the technology, the decision to invest in a company requires human judgement. A passive investor is not incentivised to undertake any analytical endeavours and sidesteps the human factor that is crucial to determine the merits of each investment.

As a result, the passive investor is likely to own relatively more over-priced companies (and less of those that are under-valued) and also be predominantly invested in a relatively small number of the market's largest companies (6). Further concentration issues may prevail in terms of industry and/or country exposures that can also deliver undesired risks.

We believe portfolio holdings should be chosen deliberately for their potential to add value in line with their price, fundamental and other stock specific characteristics. They should be scaled according to the investor's conviction and risk appetite, and continually monitored for their ongoing inclusion. But, above all, a long term perspective and patience is key.

Debunking the Negative-Sum Game

Much of the active/passive debate is focused on the inescapable truth that active investment management is this negative-sum game. However, the real argument is against those 'active' managers who are intent on retaining assets by taking a safer, short-term, index-clasping approach while still charging high fees. If the estimated £58 billion of UK equity funds hugging the index was instead invested in the least expensive UK tracker fund, investors could save themselves upwards of £756 million a year in fees alone (7). It is these closet-indexers who sail too close to the benchmark who inevitably drag down the performance of the average active portfolio after fees, giving active investing a bad name and driving investors into passive alternatives. Much of the blame lies at the door of these mediocre active funds and, as a result, they are coming increasingly under the spotlight from the regulators.

With the current trend in favour of passive investing, the additional scrutiny may perhaps create a window for change. "Smart beta" approaches in the form of exchange traded funds, for example, are raising the bar for active managers. Those who respond positively by providing an honest review of their strategies will better serve their investors who may otherwise seek better value elsewhere. Active investing is certainly not a lost cause, far from it. As Ellis noted (8), unconventional active managers are the most likely to outperform and those already with clearly differentiated capabilities or longer fundamental time horizons will be under less pressure to compete.

To remain faithful to active investing we believe you need a disciplined investment approach with the necessary talent, conviction and patience to win at this negative-sum game. Let us look at these attributes in more detail.

Active Attributes

As in many human endeavours, to be successful on a persistent basis you need a certain degree of talent or skill that is distinguishable from luck. As luck tends to mean revert (or run out) over time, rather than relying on past performance to offer only limited information, a forensic assessment must be made of the decision making process. A clearly articulated and transparent investment approach is really important. A solid qualitative understanding of how it has been implemented, including the good (and bad) decisions, is crucial to acquire any confidence that historical results may (or may not) happen again. A manager trying to sell a performance track record predominantly hinged on luck will be quickly caught out when having to explain how the underpinning investment decisions were arrived at.

An essential feature at the heart of the investment decision making process is fundamental analysis. Selecting an investment on a thorough examination of a company's business has a better chance of success and adding value over and over again compared to other less reliable strategies such as technical analysis, macroeconomic forecasting or market timing.

The active manager must also demonstrate conviction in its ability to make investment decisions. This is the vital ingredient that binds everything together and is particularly important when the manager acts contrary to its peers. While other factors need to be considered, a concentrated number of holdings representing only the best ideas and a high Active Share (9) can indicate a strong level of conviction. On a related point, high conviction managers are more likely to offer a closer alignment of interest through performance-related fee structures rewarding active return rather than just the ability to gather assets.

Finally, a patient active manager should aim to invest over the long-term. Many of our favoured managers expect to hold investments for three to five years, although some will go out even further. As already mentioned, it is becoming more challenging to consistently beat the market over the shorter-term because any competitive advantage is unlikely to be sustained. The longer the time horizon the less likely that short-term factors or luck can overwhelm a good investment decision, and the more likely that the manager's skill will shine through. Cremers (10) suggests that only those highly active portfolios with patient investment strategies (longer than two years) out-perform their benchmarks on average, whereas those that trade frequently generally under-perform regardless of how active they are. Consistent with our views, he found that long-term managers largely focus on stocks that others find less attractive, buying relatively illiquid or deep-value stocks on the cheap and holding them with conviction over relatively long periods until their prices reach or exceed their perceived fair value.

Once an ideal active manager has been found, the investor may of course have to be patient and ride out any waves of under-performance if they are to reap the rewards of their manager's investment capabilities over the long-term. As actively managed strategies are inevitably in or out of favour from time to time, imposing a rebalancing mechanism can mitigate any bad luck and take advantage of any good luck that comes with market 'noise' over the shorter-term. Frictional costs must not be ignored but the redistribution of out-performing assets to under-performing ones can profit from this short term cyclicality.

Post appointment, a manager monitoring discipline is critical to continue to explore investment views and re-affirm confidence in the stewardship of the assets. This is also in the best interests of the manager as the investor's understanding of the investment proposition over time will help keep them patient for the long haul.

No-One Said It Was Easy

Investors should not despair and surrender to the convenience of an indexed fund. Neither should they have to make do with paying additional fees for a mediocre active manager.

However, the market is far more complex than most people realise and talented active managers are a rare bunch and hard to find, not least because of the difficulty in discerning whether their success is down to skill or luck. It takes time and a lot of dedicated hard work to understand the manager, their approach and the environment in which they operate – our behavioural psychologist, for instance, plays an important role in our qualitative assessment by providing insights which go beyond the traditional financial and investment analysis.

It has to be worth it. The plain fact of the matter is that if markets were simpler and active management was easier, the rewards would be commensurately smaller as many more investors would find they have the skills to be successful. It is the very complexity of the market that offers the opportunity to outperform for those in the minority that have the wherewithal to do so. We have been involved in the investment management industry for almost as long as Bogle's first index fund and remain committed to seeking out true active managers that live up to their responsibilities.

Stamford Associates Limited

February 2017

Author: Andrew Downes, CFA, is a Senior Investment Consultant at Stamford Associates Limited.

The information and opinions contained in this article are intended for general discussion and do not constitute a personal recommendation. Past performance is no guide to future performance and you should seek independent advice before entering into any financial transaction. For professional investors only.

19 – 21 Old Bond Street

London, W1S 4PX

+44 (0)207 629 5225

Stamford Associates Limited is authorised and regulated by the Financial Conduct Authority.

© Stamford Associates Limited 2017. All rights reserved.

(1) Regan, M. (2016, November 23). Jack Bogle Q&A: "We're in the Middle of a Revolution". Bloomberg Markets, 25(6)

[2] Evan-Cook, S. (2014). Kill the Filler - the Costs of Closet Tracking. Premier Asset Management. The study looked at funds in the IMA's UK All Companies and the UK Equity Income sectors

(3) S&P Global. (2016). SPIVA® U.S. Scorecard, SPIVA® Europe Scorecard. S&P Dow Jones Indices. Retrieved from,

(4) FTfm. (2017, February 12). Passive funds grew 4.5 times faster than active in 2016. The Financial Times

(5) Ellis, C. D. (2017, January 20). The end of active investing? The Financial Times

(6) For instance, the largest fifty companies in the UK equity market account for 70% of the FTSE-All Share Index

(7) See 2 above

(8) See 5 above

(9) Active Share is a measure of the percentage of stock holdings in a portfolio that differ from its benchmark index

(10) Cremers, M., & Pareek, A. (2016). Patient capital outperformance: The investment skill of high active share managers who trade infrequently. Journal of Financial Economics, 122(2), 288-306

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Pension Funds

Pensions movers and shakers

Tasker joined the company as a senior manager in 2006 before being promoted to director in 2014 and has more than 20 years' experience in the pensions sector.

Currently RSM's lead for defined contribution schemes, Tasker is also chair of the DC PRAG working party.
The RSM pensions team has 150 members and works with more than 500 pensions schemes, 18 of which hold assets of more than £1bn.

Tasker's promotion brings the number of partners in RSM's pensions team to 13.

Ian Bell, RSM's head of pensions said: 'Karen is a well-respected member of our pensions team and highly regarded in the pensions sector.

"Her promotion to partner is thoroughly deserved and I'm delighted that she will now play an even more important role in helping our clients meet their ever-increasing regulatory and compliance obligations."

RSM was recently named Pensions Accountancy Firm of the Year at the 2017 Pensions Age awards.

Meanwhile, Julian Weston has joined pensions specialist Momentum Pensions, as business development manager for the east of England and home counties.

Weston joins the company from Vitality and is the latest appointment in Momentum's expansion programme.

John McCreadie, head of sales (UK) at Momentum Pensions, said: "Julian has built up a depth of specialist knowledge that is arguably among the best in the industry.

Hiring people of this standard is key to our growth as we remain committed to delivering the best possible service standards to our IFA partners as we continue to expand in the UK."

Paul Wright was recently appointed to the firm's board as director and head of operations (UK), while John McCreadie joined as head of sales (UK) and Danielle Walters joined as Business Development Manager for London and the South-East.

First published 07.04.2017

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Pension Funds

On Westminster Bridge

The focus of national attention last week was also the place where, a few months after Britain had declared war against Napoleon, William Wordsworth wrote "Earth has not anything to show more fair".

Although in another famous poem he "wandered lonely as a cloud", Wordsworth had his feet on the ground, complaining elsewhere that "getting and spending we lay waste our powers".

Two hundred years ago, when few could read, much less afford to buy a newspaper or travel far, most peoples' attention was firmly focused on getting by, day-to-day. Of what was happening far away, or might happen in future, they were ignorant. Not so ourselves, living in the information age, and subject to constant distraction.

Today a new tax year brings a slew of new legislation to which pensions professionals must pay close attention (or suffer tax penalties). Some of the new threats are not even law yet. We live in an era of retrospective change: we must anticipate ways in which the future will change the past.

Thus in late July (when the Finance Bill is expected to gain Royal Assent) the money purchase annual allowance will be reduced from £10,000 to £4,000 – with effect from today. Pension scheme administrators also have to learn a lot to comply with new overseas transfer rules; some having been imposed instantly after the Budget last month.

Overseas schemes are scrambling to meet a deadline for survival next Thursday.
As the 16th century poet (and martyr) John Frith wrote, "This Text holdeth their noses so hard to the grindstone, that it clean disfigureth their Faces." We are all under increasing pressure to attend to the quotidian tasks, such that to see further than the end of our nose sometimes requires an effort of will.

And yet we must, for pension provision especially depends on a vision of the long term. So how should we achieve the right balance; indeed how can we find time to step back from the machine and look ahead?

In 1985 the Church of England published a report, "Faith in the City", a title with a fashionable double meaning.

It focused attention on emerging gaps in society that arguably have only widened since, not least with the demise of traditional employment and the insidious growth of the 'gig economy'. To Christians inclined to take literally the Biblical injunction to "not store up for yourselves treasures on earth", the report counterposed the question of our responsibility for each other.

For we are interconnected; for all the talk about individual choice, no man is an island, entire of itself (the quotation from John Donne's Devotions continues with a reference to Europe, but we'll leave that). We pay taxes for what we cannot do for ourselves, and for others who lack the same opportunities.

Events such as the massacre perpetrated last week on Westminster Bridge constantly remind us of the fragility of our existence: that what has taken an age to create can be destroyed in an instant. Building consensus can be a painful process, taking years (as we have seen with automatic enrolment). On a political whim, executed a stone's throw from Westminster Bridge, it can be evaporated.

We need the will and the way to build a societal consensus about pension provision that is immunised against interference for short-term political gain. Many of us, myself included, have been arguing for something like a

Pensions Commission. That might be one way.

However, we must not hand the responsibility for decisions to a few who happen not to be politicians. Nor do we need yet another Report from a few of the Great and the Good. Such actions risk failure because they do not have the will of the people behind them.

We live in an age of disinformation, distraction and disintegration. Every lie has currency. The tawdry and the tedious occupy the airwaves to fill any gaps in our diurnal rhythm. We need the will to disconnect from the immaterial and the unimportant. Maybe it is time to resurrect the slogan "Demand the Impossible!"

Ian Neale,Director, Aries Insight.

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Pension Funds

LISA awareness low at launch

The Pensions and Lifetime Savings Association (PLSA) said unprompted awareness of LISA among 18-19 year olds is low and there is some confusion around the difference between the new product and a workplace pension.

Nigel Peaple, deputy director defined contribution, for PLSA, said: "Worryingly, 40% of 18-39 year olds who are already paying into a workplace pension say that if they start saving in a LISA they will stop saving into their pension."

"If this were to happen, these savers could miss out on up to two decades of employer contributions, making it even harder for them to save adequately for retirement."

Peaple added that while the LISA can be the right choice of retirement saving product for some groups, such as people who are self-employed, overall the organisation did not believe it should replace workplace pensions.

"The LISA does not provide strong governance, common in a workplace pension, nor value for money ensured by the charge cap, and, crucially, unlike workplace pensions, it does not benefit from mandatory employer contributions," he said.

However, pensions consultancy Hymans Robertson said there is appetite to invest in a LISA, and it's not a case of either the LISA or a pension.

Paul Waters, partner at Hymans Robertson, said: "Our research found 61% of under-40s said they'd open one of the new accounts, but people still recognise the benefits of pensions, with more than two thirds saying they would save into both at the same time."

"While people view LISAs as a product that could help long-term savings, they still clearly appreciate the benefits of pensions, particularly the extra boost they get from employer contributions."

The launch already seen a degree of controversy after the media reported that Lifetime ISAs are only available from three providers, with no high street banks offering them yet.

Hargreaves Lansdown, Nutmeg, and the Share Centre launched LISAs on Thursday, and Skipton Building Society will offer a cash LISA from June.

First published 07.04.2017

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Pension Funds

Young savers 'oblivious' to pension changes

The research, which comes as the pensions industry marks the anniversaries of both the new state pension and the new pension freedoms, found that millions on under-35s are "blind" to the changes.

It found, although the new state pension was introduced in April 2016, and was designed to simplify retirement provision from the state, fewer than one in five under 35s are confident they will receive money from the state when they retire.

The research also showed that two thirds of under-35s believe they will receive their state pension before age 68, despite the fact the current legislation means state pension age for those under 35 will be 68.

This equates to nine million young people expecting a state pension before they will receive it.

Half of under-35s in the research also said they knew nothing about the pension freedoms, introduced in April 2015, designed to give private pension savers more options after age 55.

Alistair McQueen, head of savings and retirement at Aviva, said the research showed that the time, effort, and money spent of modernising the pension system in recent years was still yet to reach its full potential with younger people.

He said: "As many as 14 million young savers today understandably see retirement as tomorrow's problem, but the retirement challenges facing today's under-35s are arguably greater than those faced by any recent generation.

"We need to reframe how we see this challenge and position it as a challenge for the young, not just the old."

McQueen added that the pensions industry needed to look at ways of connecting with younger people by embracing technology, such as the Pensions Dashboard.

"The pensions world is often in the stone age in its adoption of technology," he said, "we need to encourage action and make sure all concerned understand what lies ahead."

"With greater understanding, I am confident young people will be better placed to take control of their futures and will seize this responsibility."

First published 07.04.2017

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Pension Funds

Auto-enrolment contributions should rise

Adrian Boulding said an increase in contributions would bridge the gap between early retirement and state pension age – and called for the issue to be addressed in the 2017 review of automatic enrolment.

He said: "The increase in auto-enrolment contributions past 8% is something we've lobbied for for a while and we firmly believe it needs to be addressed."

Boulding's comments follow an independent government review of the state pension age by John Cridland.

The Cridland review proposes that it should increase from 67 to 68 by 2039, seven years earlier than currently planned.

The government is due to make a decision by May and ministers are under pressure to address the expected in rise in the cost of pensions due to longer life expectancy and a greater number of people being of pension age.

Boulding said a rise in pension contributions has an essential role to play in making retirement, particularly early retirement, a viable option.

He said: "If people are going to use their auto-enrolment pension pots to bridge the gap between early retirement and the state pension age, then they are going to have to pay more into them first."

Now Pensions says its research found that although people want to retire early, some think it won't be an option.

The company says almost half of UK adults (48%) who have not yet retired, want to retire by the time they are 61, and of these, 69% want to finish work while they are still able to make the most of their time.

"While obviously life expectancy is increasing and people can look forward to a long retirement, our research shows people would like to be able to retire while they are still healthy," said Boulding.

"People are realising that what they want and what they can afford are two different things."

First published 30.03.2017

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Pension Funds

Raising the Game

In her speech at the ACA conference in February 2017, Lesley Titcomb, Chief Executive of The Pensions Regulator, among other things, was discussing data quality and data security, and commented;

"In both of these areas, data integrity and security, Trustees should be holding their administrators to account, and if their administrator cannot demonstrate adherence with accepted industry best practice, such as the standards set by PASA, we will expect them to change their administrator.

Leaving members at risk of being paid the wrong benefits, or of having their personal information stolen by cyber criminals is not acceptable."

A few weeks later Andrew Warwick Thompson also commented "Our focus and regulatory remit is on ensuring that trustees engage with their scheme administration as a priority issue.

Industry groups like PASA are hugely helpful to us in driving good practice from within the administration industry itself, complementing our efforts to raise standards."

Administration is a key component to effective plan governance and management. Poor record keeping or poor administration performance continue to have a material effect on member outcomes.

Poor administration has the potential to negate the effort applied to optimising investment and funding activity to mitigate liability.

Despite the regular attention to administration matters by the Regulator, the industry generally continues to show little heed, as evidenced from various surveys undertaken by the Regulator in 2016.

I for one would not be surprised to see the Regulator take a more draconian step and start to mandate on administration issues.

We have already seen public statements by the Regulator about the attention they will be bringing to this area, and it's not just about education - it's about taking stronger steps to ensure compliance.

One of the key areas of focus from the Regulator is the quality and security of member data.

But it's more than just ticking boxes and completing statements in annual returns. Good quality data is essential to ensure that members' entitlements are correctly calculated, that gaps in data do not delay the payment of a members benefits when they are due.

It's about ensuring that the data is current, accurate and capable of being used.

And cyber security is equally important. Security of data in transit, security of data in systems and security of member data on scheme web sites and in the use of modern communication channels, all of which offer potential weak points for those committed to criminal activity.

So the agenda for trustees and administrators has to address these points, progress reported regularly to trustees and that corrective actions are agreed and effected to improve data quality and security.

Good quality data is an enabler; enabling accurate and timely administration of member benefits; enabling accurate actuarial valuations and thus efficient investment strategies based on accurate information.

Good quality data security also minimises the possibility of data loss and the subsequent reputational damage that emerges for the publicity surrounding a data breach.

Good governance is not an option – it is an absolute requirement.

Written by Fergus Clarke, Executive Director of PASA.

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Pension Funds

Pension Protection Fund launches levy consultation

Starting from 2018/19, the consultation will involve a detailed set of proposals and will be supported by roadshows and webinars.
The consultation outlines proposals to revise how employers are allocated to scorecards, introduce two new scorecards and rebuild existing scorecards where the predictive power has been weaker.

The PPF says these changes aim to improve the predictive power and ensures scorecards are better tailored to company size resulting in SMEs and 'not-for-profits' paying levies that better reflect their risks.

It also proposes to adopt the use of credit ratings for some of the largest employers and a specific methodology for regulated financial services entities, which it says will ensure the best possible assessment of insolvency risk for some of the largest levy payers.

The proposals have been developed in partnership with Experian and through engagement with stakeholders.

Alongside wider suggested developments, the proposals focus on two ways in which the PPF plans to develop the approach to measuring insolvency risk.

David Taylor, PPF general counsel, said: "We know that stability is important to our levy payers, so we have only proposed changes where we believe there is a compelling case to do so.

"This reflects our view – supported by feedback – that overall the current levy framework is working well."

The consultation document is also looking for views on a number of other areas, including those suggested by the Work and Pensions Select Committee in its 2016 report, such as the possibility of a levy discount for good governance, and reducing the administrative burden for smaller schemes.

Another area where the PPF seeks views is on the benefits of continuing with monthly scores or moving to an assessment at 31 March each year from 2018.

Taylor added: "I am looking forward to hearing our stakeholders' views on the proposals in this document."

First published 31.03.2017

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Pension Funds

PLSA launches best practice guide for Government pension schemes

The guide, A guide for employers participating in the LGPS: Best practice, is the second is a series of guides for the schemes.

It aims to give an overview of the financial commitments, administrative responsibilities, and regulatory requirements that employers face once they have joined.

PLSA says with an 11% increase in membership of the £217bn scheme between 2014 and 2015, helping new employers navigate the LGPS is becoming more important.

Joe Dabrowski, head of governance & investment for the PLSA, said the membership increase of the last few years is down to an increase in the number of scheduled and admission bodies joining the LGPS.

Scheduled bodies include academies, county councils, London boroughs, post-92 Universities and further education colleges, all of which participate in the local government pension.

Scheduled bodies have an automatic right and requirement to be an employer in the LGPS.

The larger numbers joining the LGPS is driven in part by the conversion of many schools into academies, but the PLSA says often they are not given the information they need about the scheme.

"It's often not made clear to them why they're joining the scheme, which can make employer engagement difficult for the LGPS and can result in new employers underestimating their obligations, particularly with regards to data requests," saidDabrowski.

"The new guide aims to explain what is required of employers in simple terms, offering explanations of pension terminology where necessary."

The first guide provided scheduled bodies with an introduction to the LGPS and local government contractors with help navigating entry into the LGPS.

To develop the guidance, the PLSA had the support of a steering group to develop of experts from across a wide range of employers participating in the LGPS, as well as advisors who work extensively with both employers and funds.

First published 31.03.2017

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