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Pension Funds

On pension planning and the capacity to bear losses

The traditional standard for a decent pension, 70% of the last-earned salary, has become too costly to guarantee for everyone. As a result, pension schemes have become increasingly austere over the last two decades. And closely related to this, risks have gradually been moved from the collective to the individual.

Taking responsibility

The consequence is that people will have to take greater responsibility for their own retirement and become more aware of the various options they have.

Can or should they build up more pension in the accrual phase? What degree of certainty do they strive for? How can they manage their longevity risk (the risk of not having enough income for the intended expenses if people live longer than expected)? And what investment risks do they want to run? Do they opt for a fixed pension income at retirement age, or for continued investing and the risks that come with it, or for a combination of the two?


To be able to make sound decisions, consumers must gather the right sort of information. Models that merely work with an expected return do not suffice, because returns can fluctuate considerably. This uncertainty must be incorporated in the pension planning. In the United Kingdom advisors have experience with legislation in which consumers are allowed to withdraw 25% net.

Is it smart for people to withdraw money to purchase a car or put it into a personal savings account? People also struggle with the remaining amount on which taxes have to be paid: is that one-time or periodically? Will they continue to invest or purchase an annuity? A proper model for pension planning takes all these uncertainties into account.

Capacity to bear losses

With the increased transparency stimulated by regulation, people better understand how much is charged for financial advice and many consumers experience it as rather expensive. The art therefore is to give good sound advice with clear added value. To do so, one needs a wealth of knowledge.

It is challenging for the financial market to properly manage the longevity risk and to incorporate the investment risk with it. Are people willing to take the investment risk and also able to do so? To conform to MiFID II, an advisor must judge whether someone has the capacity to bear losses.

The question here is how clients define that risk and how financial institutions and consumers will determine it. A financial institution can only determine that risk at the level of the client. An advisor should look at what type of risks are applicable and inform people thereof. It is important to determine what risk a client CAN take, what the capacity is to bear losses, and what they are WILLING to take. This way clients not only understand what factors has been taken into account, but also know why a specific pension advice is given.

Written by Ronald Janssen, Head of Private Client Solutions at Ortec Finance.

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Pension Funds

Separation of pension wealth important as divorce age hits all-time high

New data released by the Office of National Statistics reports that the average age of divorce is now 45 years and 11 months for men, and 43 years and six months for women.

The UK holds £11.1 trn in household wealth and private pensions represent the biggest single component – about 40% of that total.

Commenting on the report, insurer Aviva said that agreeing a fair separation of pension wealth is important for both parties.

It estimates that a typical couple could have around £120,000 in combined private pension assets if they were to divorce in their 50s and assuming they married when aged 30.

Alistair McQueen, head of savings & retirement at Aviva said: "It is typical for our wealth to grow as we age, so a rising average age of divorce will therefore typically bring with it a larger pool of wealth to separate."

"With the average age of divorce at an all-time high, it is fair to assume levels of wealth at a time of divorce may also be at an all-time high."

McQueen added that one in three marriages from the late 1990s has since ended in divorce.

"Many people in their 50s may have combined private pension assets worth more than £120,000, so agreeing a fair separation of this pension wealth will be a key step in finalising a divorce, and will be critical to the future financial well-being of both parties," he said.

In 2015, the number of divorces of opposite sex couples in England and Wales decreased by 9.1% to 101,055 compared with 111,169 in 2014.

First published 23.06.2017

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Pension Funds

FTSE100 pension deficit up by £10bn

The increase of more than £10bn reverses gains made in 2015, and comes despite significant contributions from scheme sponsors.

The survey also highlighted that the average allocation to growth assets, equity and property, has steadily decreased from 46% in 2009 to 29% in 2016, while bonds and fixed income assets have increased from 41% in 2009 to around 54% in 2016.

Martin Hooper, associate at Barnett Waddingham, said: "On the face of it, the deficits disclosed by the FTSE100 remained remarkably stable, but with the level of contributions made towards the pension deficits over the year, companies would have been hoping for an improvement."

Hooper added that without the rise in interest rates that the market is currently predicting, any improvement in the deficit will be severely limited.

He said: "The market has already priced in higher inflation expectations following the Brexit vote and the US election - but further uncertainty and any knock-on effect on the sterling, could raise inflation expectations and push up valuations of liabilities."

Hooper said the IAS19 disclosures are the only indicator of schemes' financial health.

"The cash requirements, reassessed every three years and the actual cost to the sponsor, will depend on how the assets are invested and what returns can be achieved, as well as how liabilities are discharged," he said.

"For valuations carried out in the coming three-yearly cycle, deficits against the funding basis may be significantly worse and it is likely many schemes will have to rethink their timetable for achieving full funding and whether the gilts-based funding approach, typically used for scheme funding, remains appropriate."

First published 23.06.2017

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Pension Funds

FCA proposes changes to advice on pension transfers

Following introduction of the pension freedoms in April 2015 and the resulting increase in options for consumers to access their pension savings, the proposals aim to reflect the current environment and increased demand for pension transfer advice, the FCA says.

The level of transfer values is at an 'historic high' according to the FCA, because of the increased options and, it says, recent changes to the financial environment.

Christopher Woolard, executive director of strategy and competition at the FCA, said its new approach should better equip advisers to give the right advice to help consumers make informed decisions.

He said: "DB pensions, and other safeguarded benefits such as guarantees, are valuable so most consumers will be best advised to keep them.

"However, we recognise that the environment has changed significantly and we want to ensure that financial advice considers the customer's circumstances in full and recognises the various options now available to them."

The new rules outline the FCA's expectations of advisers and pension transfer specialists to ensure that consumers receive advice which considers all relevant factors.

They build on an FCA alert on advising on pension transfers published in January.

The proposed changes include requiring transfer advice to be provided as a personal recommendation, and replacing the current transfer value analysis with a comparison to show the value of the benefits being given up.

James Walsh, Policy Lead: EU & International, Pensions and Lifetime Savings Association (PLSA), said the proposals go a long way towards ensuring savers understand potential losses they could incur by leaving DB schemes.

"Nearly all defined benefit or hybrid schemes have received a transfer request in the last six months and we know that transferring out of a defined benefit scheme may not be in the members' interests," he said.

"Defined benefit pensions provide scheme members with a guaranteed income for life – irrespective of how long their retirement might be, so it is essential this guarantee is not given up without serious consideration and appropriate financial advice is taken before any decisions are made."

First published 23.06.2017

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Pension Funds

New pensions minister after cabinet reshuffle

Harrington spent just 11 months in role after replacing Ros Altman last summer

Guy Opperman has been appointed as Parliamentary Under-Secretary of State at the Department for Work and Pensions (DWP), and is likely to become the second minister responsible for pension's policy in less than a year.

Twelve different officials have now held the pensions minister role since 2000.

The news will add to concerns about change, despite calls for a period of stability across the pensions sector.

Malcolm McLean, senior consultant at Barnett Waddingham, said: "It is concerning to learn that Richard Harrington, who has been in post for just under a year, is already moving on - ever since the post of Pensions Minister was established, we have seen constant change - up to the appointment of Steve Webb, who remained minister for a full five-year term."

McLean went of the stress the importance of pensions and called for Harrington's previous role to be upgraded to that of full Pensions Minister.

David Brooks, technical director at Broadstone described the continual change as the "revolving door of pensions and politics."

He said the large number of consultations and reviews will determine the priorities of anyone coming into the role.

They include the fate of the state pension triple lock - which the Conservatives have said they will scrap in 2020 - a decision on when the state pension age will rise to 68, the future of tax relief on retirement savings, and the Brexit fallout for elderly expats.

It has also been announced that David Gauke, a relatively unknown MP, will replace Damian Green as the new Work and Pensions Secretary.

First published 15.06.2017

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Pension Funds

PLSA appoints new DB policy lead

Caroline will lead the PLSA's investment-related public policy, research and publication work, reporting to Joe Dabrowski, PLSA head of governance & investment.

She will focus on promoting a sustainable, long-term investment environment for members while supporting the broad aim of improving the value received by pension's investors.

Prior to joining the PLSA, Caroline worked as a senior policy adviser for Personal Investment Management & Financial Advice Association (PIMFA – formerly APFA).

She has also worked at Hume Brophy, the UK Sustainable Investment & Finance Association (UKSIF) and as a parliamentary researcher.

Caroline said: "The Pensions and Lifetime Savings Association is at the forefront of developments in the pensions market and I am delighted to join the team and to lead the its investment-related public policy, research and publication work.

"There is a significant amount which needs to be achieved to push the market further and I look forward to working with the PLSA team and members to achieve this."

Joe Dabrowski said: "We are pleased to welcome Caroline - she brings a wealth of knowledge of not just investments but also the wider financial services arena, which will make her a valuable addition to our team."

"We work hard to represent our members and develop the market and I look forward to working with her on this challenge."
PLSA currently has more than 1,300 pension schemes with over 20 million members and £1 trillion in assets.

Richard Butcher will become PSLA chair later this year when he takes over the role from Lesley Williams whose two-year tenure ends of the PSLA conference in Manchester.

First published 15.06.2017

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Pension Funds

Reaping the Benefits of Listed Infrastructure Through a Passive Investment

A prominent pledge during US President Donald Trump's campaign was to fix the country's infrastructure, where years of underinvestment have left many roads, airports and utilities in degradation and unfit for current needs.

Trump in February vowed to ask Congress to pass a 1 trillion-dollar "national rebuilding" program, to be financed through public and private capital. The American Society of Civil Engineers (ASCE) has estimated that 4.59 trillion dollars will be needed through 2025 to improve and maintain US infrastructure, of which 2.06 trillion remain unfunded.(1) Consultancy firm McKinsey has forecast that 57 trillion dollars will be needed globally between 2013 and 2030 to finance infrastructure projects just to keep pace with the current economic expansion.(2)

Europe also faces demanding infrastructure investment needs despite its relative advantage to poorer regions. Many of the continent's local economies and new European Union member states need better physical integration, while in the richest areas, many ageing first-hour assets are up for replacement.

Estimates from the European Commission help shed some light on the current funding needs for an infrastructure network fit for the functioning of the economic bloc. The agency in 2011 put the cost of an ambitious new pan-European transport network at 1.5 trillion euros(3) through 2030. In 2014, it estimated that the rollout of projects to comply with new energy and climate targets calls for 209 billion euros per year of investments between 2021 and 2030.(4)

While national governments in Europe may be reining in spending, the EC is in investment mode. Last September, EC President Jean-Claude Juncker doubled the capacity of the 'Investment Plan for Europe' program to provide a total of at least 500 billion euros for broad strategic investments, from funding businesses to building real assets.

There's vested interest from governments in repairing infrastructure. According to UBS, every 40 billion dollars in government spending adds 0.2-0.3 percentage points to US GDP.(5)

The role of private actors
Given the magnitude of the infrastructure bill, it is likely to be partly filled by industry actors such as utilities operators, and increasingly by institutional investors. The latter are attracted to assets that have proved to be stable cash-flow generators with strong commercial models, and that carry lower business and macroeconomic volatility than other assets such as equities.

According to a January article(6) by Invest Europe, infrastructure funds targeting Europe have a war chest of over 167 billion euros ready to be deployed, and may grow in coming years.

Infrastructure has grown as part of pension funds' and insurers' portfolios from a nearly zero presence 15 years ago. BlackRock estimates that as of 2015, global asset owners' endowments were on average targeting a 6.1% allocation in infrastructure, but had only a 4.1% exposure.(7)

A different asset class
Now, direct investing in dams, highways and sewage systems is not an option for many asset owners such as insurers and pension funds. Either because of the high capital commitment required or because of the lack of liquidity in those assets.

It is here where listed infrastructure has played a key role in linking financing needs with investors' search for returns. In March, STOXX published a report entitled "Realizing the Promise of Listed Infrastructure Investments" that highlights the advantages of the asset class.

Listed vs. unlisted
The benefits of listed infrastructure assets include:
• They can be easily accessed through exchange-traded securities, with the related benefits of tradability and liquidity.
• Listed index products can provide greater diversification: the purchase of just one exchange-traded fund can give exposure to over 150 distinct projects, covering different geographies and economic segments.
• Easier due diligence: more transparency in portfolio composition than when investing in specialized funds, and better stock-level financial disclosure.
• Lower capital requirements than a direct investment and lower management costs than specialized funds.

Stable businesses with protected markets
In turning now to the characteristics of infrastructure assets, a key feature is that they tend to be stable cash-flow generators with strong commercial models often protected by quasi-monopolistic barriers to entry and inelastic consumer demand. This is not to say there are not specific risks – mainly regulatory and political.

The result is an asset class with typically low business and macroeconomic or systematic risk. Figure 1 compares the variability of annual changes in operating income for the STOXX® Global Broad Infrastructure Index, a benchmark of 151 listed companies, relative to the STOXX® Global 3000 Index. This average variability in recent years was about 22 percentage points lower for infrastructure companies.


Lower volatility, higher dividends
The lower business risk has translated into more stable share prices for infrastucture securities in equity markets. Over the last nine years, the STOXX infrastructure index has posted an annualized volatility of 15%, compared to the market's 17.6%.

But infrastructure companies also have high operating leverage, which can result in significant free cash flow when unit volumes increase. Operating leverage combined with low business risk allows infrastructure companies to support comparatively high dividends, as seen in Figure 2.


Infrastructure companies devote more of their earnings to return money to shareholders than does the average business. In the period analyzed above, the average payout ratio (dividends per share divided by earnings per share) for infrastructure companies was 18.6 percentage points higher than for the rest of companies.

A hybrid asset to offset long-term liabilities, inflation
Reliable and often regulated earnings and high payouts sit well with the mandate of investors with long-term liabilities; and many treat infrastructure assets as long-duration securities similar to bonds. The dominant market position of infrastructure assets has also allowed them to more easily link revenues to inflation, becoming in essence an inflation hedge.

In this sense, listed infrastructure can be considered a hybrid that provides equity-like returns coupled with the income and duration characteristics of fixed-income securities.

Diversification in portfolios
A further point of interest is that infrastructure can provide diversification within portfolios. The average beta to the broad market has been 0.78 over the past nine years. This indicates that infrastructure companies reacted less sensitively to changes in the market (beta of 1), although the investment performance was equivalent.

The STOXX Global Broad Infrastructure Index takes a broad definition that covers all sectors that are vital to the development of the economy. It includes companies from developed and emerging nations, and consists of five infrastructure supersectors and 17 subsectors. The index caps the maximum weight of represented supersectors and countries to avoid concentration.

The benchmark has served as the underlying for the FlexShares STOXX Global Broad Infrastructure Fund, which trades in New York, since 2013.

A global opportunity
The infrastructure industry is itself undergoing transformational trends. They include the emergence of new services (such as industrial waste, new renewable energy sources), and the growth of private investors' interest in greenfield (built from scratch) investments.

Lastly, as interest rates remain low, projects are increasingly luring new institutional capital comfortable with financing deals through lending. With many insurers and pension funds reportedly still holding limited investments in infrastructure,8 the asset class looks set for growth.

By Rod Jones, Head of North America, and Dr. Jan-Carl Plagge, Head of Applied Research, STOXX Ltd.

1 "2017 Infrastructure Report Card," ASCE, March 9, 2017.
2 "Infrastructure productivity: How to save $1 trillion a year," McKinsey Global Institute, January 2013.
3,4 Occasional Paper 203, Dec. 2014, EC.
5 "A new set of rules," CIO Wealth Management Research, UBS, Jan. 12, 2017.
6 "European infrastructure needs more than public funding," Invest Europe, Jan. 2, 2017.
7 "The New Prominence Of Private Assets," BlackRock, June 2016.
8 "Pension funds and insurers share appetite for infrastructure," Pensions Expert, Feb. 3, 2016.

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Pension Funds

PSP announces strong financial results

The Public Sector Pension Investment Board (PSP Investments) now has $135.6 billion in net assets under management, compared $116.8 billion in 2016 – an increase of 16.1%.

PSP said its one-year total portfolio net return of 12.8% created $15.2 billion of net income, net of all costs.

This outperforms the policy portfolio benchmark, which generated 11.9% return.

PSP Investments manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt.

It manages contributions to the pension funds of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force.

Andre Bourbonnais, PSP president and chief executive officer, said: "We couldn't be prouder of our team's accomplishments in bringing back double-digit returns and contributing to delivering the pension promises to the contributors and beneficiaries."

"While substantial volatility and international uncertainty remain, we continue to pursue our objective of navigating market fluctuations with a long-term investment horizon and well-diversified global footprint."

PSP's net assets increased by $18.8 billion in fiscal year 2017, attributable to net income, net of all PSP Investments costs of $15.2 billion and net contributions of $3.6 billion.

PSP said other corporate highlights for 2017, include the creation of a dedicated Responsible Investment group and expansion of its in-house capacity to identify and monitor environmental, social and governance (ESG) factors in investment decision-making.

It also opened a European Hub in London (PFI, 12 May).

"Our vision is to be a leading global institutional investor that puts the interests of the contributors and beneficiaries at the heart of everything we do - I am proud of the progress that our employees and partners have made to bring this vision to life," said Bourbonnais.

First published 15.06.2017

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Pension Funds

Transaction cost debate: where to next?

In her January 2017 article titled "Understanding the transaction cost debate" my colleague Alison Bostock asked how DC trustees and Investment Governance Committees (IGCs) can meet their duty to assess whether transaction costs are value for money.

The debate has moved on and now is the opportunity for the asset managers to step up to the plate.

And this matters. The FT recently reported that USA companies and asset managers have paid out $400m in litigation settlements due to oversized fees and charges.

The conclusion there was that very little attention was being paid to making sure fees were reasonable.

Why do transaction costs matter? While the asset management charge and total expense ratio are generally easy for investors to identify and understand, transaction costs are largely hidden.

However, research and experience show that these costs can often be over 50% of total portfolio costs and upwards of 50bp. And each 0.50% cost on a 4% annual return reduces a DC member's portfolio value by 20% over 20 years.

Regulatory developments.

There is not a common standard for measuring transaction costs. The FCA has proposed the 'slippage cost' method which seeks to capture the whole cost of the trade, including the market movement aspect.

This simplistic approach has been criticised by asset managers and others as that market movement can outweigh all the other costs.

This can be confusing as the cost could be negative, e.g. if buying securities in a falling market. The Investment Association is taking a different tack and favours using the 'spread' method which combines portfolio turnover with an estimate of the transaction costs incurred.

This effectively calculates a swing price or dilution levy that ensures existing investors are no worse off as a result of inflows and outflows from the fund. Managers already use this approach in their unit pricing systems for pooled vehicles so the information is more readily available. We await the recommendations of both bodies over the summer.

At the same time the DWP is considering whether transaction costs should be included within the charge cap of 0.75%.

The problem.

So much is happening, so much change; a case for inertia if ever I saw one. Some regulatory standards include transactions costs, others don't; there are different calculation methods and even the nature and type of costs included can be different, making it all doubly confusing for investors.

The principle underlying these changes is that transparent information leads to better decision making. This makes sense, but more consistency and clarity is needed.

To compound things, the treatment of costs varies between asset managers. For example in stock lending, where managers will take different portions of the revenues to run this activity.

Not all charges are borne by the fund, in some cases the asset manager will pay for part of the cost. Some costs are difficult to detect or measure, e.g. the level of look through when investing in external funds, or the carry cost within private equity investments.

Looking forward.

So, understanding transaction costs is a complex area for investors. Different asset managers will approach costs in different ways making it hard for investors to assess value for money.

Also, it's not just about the number. Higher costs are not necessarily bad, but there also needs to be an assessment of the value added, e.g. we know active costs more than passive.

We don't want the focus on costs to be at the expense of returns and better outcomes for members, and trustees need help in making these judgements.

So as we await the recommendations of the regulatory and industry bodies, we should remember that transparency and assessment of the control environment that surround these costs is as important as the cost itself.

Written by Donny Hay, Client Director at PTL.

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Pension Funds

Lancashire County Pension Fund invests in London 'built-to-rent' development

The development, 'The Gatefold', is a significant investment by the scheme into the UK's 'built-to-rent' sector.

LCPF is part of the Local Pensions Partnership (LPP), a local government owned pension services company, which it formed in conjunction with the London Pension Fund Authority in 2016.

LPP provides a pension service for public sector funds, including LGPS, firefighters and police schemes.

It aims to work to benefit its members, employers, partner funds and customers, rather than achieve profits for shareholders.

LPP investment director Richard Tomlinson said the organisation is pleased with the completion of its first built-to-rent (BTR) investment.

"The investment was attractive because it is expected to deliver long-term cash returns that are likely to increase with inflation, at the same time as helping to deliver much-needed housing in the UK," he said.

The Gatefold is part of a regeneration project and Invesco Real Estate, the company managing the investment on behalf of LPP, said there is an increased appetite for real estate from institutional investors.

John German, senior director for residential investments at Invesco Real Estate, said: "We are delighted to have provided this opportunity for Lancashire Country Pension Fund, giving them access to this important sector."

"We believe the Greater London residential market remains one of the most important real estate markets in the world for occupiers and investors, creating long-term demand and liquidity for high quality products, and we expect investments in this market to out-perform the mainstream UK residential market."

This latest investment follows the launch of LPP's Private Equity structure in April this year, to coincide with its first full year of operation.

First published 09.06.2017

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Pension Funds

Pension schemes take 'risk off the table'

The quarterly LDI Survey found that both interest rate and inflation hedging activity rose – interest rate hedging increased by 7% over the quarter, to £29.7bn, and inflation hedging rose by 4%, to £24.8bn.

BMO said that buoyant equity markets and rising yields, driven by the expectation of a normalisation of monetary policy, improved the funding ratios of many schemes in 2016.

This, in turn, prompted schemes to de-risk and expand their hedging programmes.

The hedging activity, BMO said, comprised mainly new hedging activity from pension schemes, due to the increased appetite for de-risking.

Trends for the quarter also included relative value switching trades between equivalent hedging instructions to lock-in yield gains, and a rise in new low coupon bond issuances that allowed schemes to switch between individual bonds.

Switching between bonds enabled schemes to release cash and reduce their need for repo funding, BMO said.

Rosa Fenwick, LDI portfolio manager at BMO, said that positive equity market moves towards the end of last year led to a theme of protecting gains.

"Equities are still the most popular return asset and, despite their elevated levels, they remain an attractive long-term asset class," she said, "Pension schemes that are keen to retain long-term exposure but have short-term concerns, have shown interest in downside protection."

"The appetite for hedging using bonds over swaps, and indeed switching into bonds out of swaps, remained keen, despite the demand for bonds, which caused bonds to become more expensive relative to swaps over the quarter."

BMO added that this is a continuation of the theme from the end of 2016, where market participants have greater confidence in their ability to get funding.

First published 09.06.2017

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Pension Funds

Pensions Europe launches two reports at annual conference

The reports both focus on the development of how workplace pensions are considered across Europe.

The first report, 'Towards a New Design for Workplace Pensions', aims to provide a framework that will enable schemes to achieve good outcomes for participants and beneficiaries, by linking the best of Defined Benefit (DB) and Defined Contribution (DC) schemes.

Using experiences from a range of European countries with DB systems, it identifies the features of a good pension system – adequacy, sustainability, reliability, and efficiency.

Pensions Europe said it intends to launch a follow-up report that will look at how these principles might be applied, and looking at the impact on the employer and the employee, as well as the political impact and impact on the regulator.

The second report, 'Principles for Securing Good Outcomes for members of Defined Contribution Pension Plans throughout Europe' discusses the evolution of DC pension plans.

It considers what a good outcome for the pension system might be and sets out the principles that will support this, including: plan design, communications, administration, investments, costs and charges, and decumulation.

Janwillem Bouma, chair of Pensions Europe, said the launch of the reports prompted debate among industry thought leaders at the conference.

He said: "Attracting representation from over 20 countries, our annual conference brings together leading thinkers and speakers, covering the wide range of issues impacting on pension funds.

"We designed these two reports to stimulate discussion and debate around defined benefit and defined contribution pensions."

"Good outcomes need to be at the heart the pensions industry and we are confident that the thinking outlined in these publications will help the industry to develop going forward."

First published 09.06.2017

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Pension Funds

Shifting global trade patterns bring new opportunities

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

Two Regulators Rampant

Whenever someone does something truly horrible, the public reaction typically focuses on whoever in authority is deemed responsible for failing to prevent it. Last week in Manchester for example, it was MI5 and the police.

Especially where staffing has recently been reduced, calls swiftly follow for more recruitment and more money to be given to the authorities. Sometimes we hear suggestions that they should have additional new powers.

Less often, commentators assert that their existing powers are more than adequate, and that more efficient allocation of resources should obviate the need for a massive funding increase. It is very rare for such criticism to be voiced by insiders, and even rarer for whistleblowers to act (despite the nominal protection which might grace the law in places).

In pensions we have two regulators at work. The Pensions Regulator (TPR) has extensive information powers which it uses to target schemes judged to be high risk or inadequately managed. In the case of final salary schemes, this is intended to reduce potential claims for compensation from the PPF.

The other regulator is the Financial Conduct Authority (FCA), which is increasingly involved in the pensions industry. Of course its statutory objectives are broader than TPR's, being to ensure that the financial markets work well, with particular reference to proper competition, integrity, and consumer protection.

Protection of pension scheme members' benefits is a key objective for TPR (although protection of the PPF seems to be a higher priority); not least because in company with the FCA, it has identified a notable asymmetry of information between pension providers and savers.

Last week for example the FCA, having decided that the retirement income market was not working well, set out in PS17/12 new rules which require firms to inform consumers how much they could gain from shopping around and switching provider, before they buy an annuity.

So the idea is to make rules and then police them: rooting out bad practice and unethical practitioners along the way. Inevitably there are degrees of non-compliance: the problem for a regulator is in discerning the significance of a failure.

Too often during the past twenty or thirty years we have seen illustrations of the old adage 'hard cases make bad law': treating an exceptional case as if it represented a common threat results in a burdensome panoply of law. Think 'Maxwell' and the 1995 Pensions Act, et seq.

It is difficult, risky and often prohibitively expensive to challenge either TPR or the FCA; even in cases where there is no evidence of attention by the regulator to the key principle of proportionality (ie relating enforcement action to the seriousness of the breach and the risks of harm caused by the breach).

TPR has always been keen on the idea of using trigger points as a kind of filter in its risk-based strategy. All well and good if treated as alerts, but a more literal meaning of 'trigger', ie to set off an automatic chain reaction of events, is becoming worryingly more common.

In any complex, system as the number of factors increases arithmetically the number of potential interactions between them follows a more geometric progression. That is to say the degree of complexity accelerates. The standard solution is to automate, which increases the incidence of unfair and even irrational outcomes ('computer says no').

All too often the effect of new laws and regulatory requirements is to gift the regulators with a new set of sledgehammers to deploy in a one-size-fits-all manner against any scheme or person triggering a compliance failure.

In a target-driven culture it risks smaller and easier cases being prioritised above more complex ones where the money at stake may be massively more.

If we cannot prevail upon a regulator to prioritise the application of sufficient due discernment and proportionality, then it follows we either succumb to pressure for more staff (there will never be 'enough') – or accept that mistakes happen, unethical or criminal conduct cannot be simply proscribed, and in banning this or that many babies will be thrown out with the bathwater.

Written by Ian Neale, Director, Aries Insight.

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Pension Funds

Trustees and employers should help members more with retirement choices

The poll was of 120 people who listened to a webinar organised by Hymans Robertson.

During the webinar, a panel of pensions industry experts discussed whether more support was needed to help members make the necessary complex decisions post freedom and choice.

Janine Wood, an independent trustee and ITS Limited, said trustees have a duty and a responsibility to make sure their members don't "sleepwalk" into poor retirement decisions.

She said: "It is time for trustees to stop feeling like it is un-trustee-like to make members aware of the options they have when they retire."

"Members need to be sure they really understand the right move for them and that is not always taking a DB pension."

Hymans Robertson said the need for greater assistance is a result of schemes changing the rules so members can access their benefits flexibly.

The number of people choosing to "cash-in" their final salary pension has increased, Hymans Robertson says – with a three-fold increase in transfers out across its clients over the last six months.

Ryan Markham, senior consulting actuary at Hymans Robertson, said: "Too many schemes are taking a passive approach to both communicating with and supporting their members with the freedoms.

Not only does this put members at risk of poor retirement decisions and scams, it also puts trustees and employers at risk of being accused of not providing sufficient information to make an informed choice."

Markham added that schemes have a responsibility to make sure the new flexibilities are communicated properly, and that they can be accessed in a safe and supportive environment.

120 people listened to the webinar on 3 May.

First published 01.06.2017

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Pension Funds

New Chair announced for Pension and Lifetime Savings Association

Butcher will succeed Lesley Williams, whose two-year tenure will end at the PLSA annual conference in Manchester in October.

With a career that spans more than 30 years in the pensions industry, Butcher is the current managing director of PTL.

PTL provides independent governance services to clients across the UK, with a focus on pension schemes.

Butcher said he is "proud and humbled" to take over the position from Lesley Williams.

"Lesley is a great Chair and champion of the pensions industry," he said, "Looking to the future, I intend to build on the hard work of the association members, the councils and committees, and the executives of the PLSA to make sure we continue to inform the debate, and represent the views and interests of our members."

Williams became PLSA Chair in October 2015, after becoming a council member in 2009.

She said it has been a "pleasure and privilege" to hold the position: "I am pleased to hand over this unique role to someone of Richard's experience and calibre."

"Richard and I have worked closely together on the board of PLSA for some years, I know his knowledge and insight will be a considerable asset to the organisation."

"He will be invaluable as the PLSA continues to push for market innovation and represents members' views in Whitehall and Westminster," she said.

The announcement comes just weeks before PLSA chief executive Joanne Segars leaves her post after more than 10 years (PFi 27 April).

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.

First published 01.06.2017

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Pension Funds

Schemes urged to prepare for new data legislation

The regulations come into force in May 2018 and will transform how businesses store and manage personal data.

Pension schemes will need to make sure data processes protect the rights of individuals, by establishing an organised data protection programme.

This obligation extends to any third-party administrators or advisors working with the scheme.
Failure to comply could see schemes facing penalties of up to €20m, or four per cent of annual turnover, whichever is higher.

Audit, tax, and consulting firm RSM is urging schemes to complete their preparation as soon as possible to avoid damaging their reputation or taking a financial hit – both of which could be the result of non-compliance.

Steve Snaith, technology risk assurance partner at RSM, said the new legal framework is the biggest change to data privacy legislation in over two decades.

"It will pose particular challenges to pension schemes as they hold vast amounts of sensitive member data that could be valuable to cybercriminals," he said.

"It's vital that clear processes and safeguards are put in place to protect schemes and their members."

Snaith added that although GDPR will be a welcome attempt to curb fears around how companies use and manage personal information, the new framework will have a drastic impact on the future of stored data and increased company accountability.

"Pension schemes must make sure they are ready for what lies ahead and not get caught out as the financial and reputational risk could be significant," he said.

RSM is the UK's seventh largest firm of audit, tax, and consulting services and operates from 35 locations across the country.

First published 01.06.2017

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