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Pension Funds

Daylight savings and retirement savings

There is always a bit of a moan when daylight savings starts. Firstly there's the confusion, "So are the clocks going forward or back?"

Then the adjustment, it's like a jetlag without going anywhere. And finally there are the perennial arguments about the fade damage to curtains from the extra daylight.

In life there are always reasons why not, the reality is we adjust. It may take a week or two, yet we all conform.

The norm is the norm, the time is the time and we get on with our lives.

We start enjoying the longer evenings in anticipation of those wonderful summer days ahead of us. I can already taste the Pimms.

How does this apply to retirement saving?
It's about a small change in behaviour for an individual that delivers significant benefits at a societal level, just like auto-enrolment. Yet again, there are always people with reasons why not.

Auto-enrolment, like the "extra" hour creates an opportunity to embrace change and to develop the habit of retirement savings. Just like daylight savings we're all in it together.

Of course, there is no opt-out of daylight savings, the daylight savings time change is compulsory. (I can't help but show my Australian bias here and argue that pension saving should also be compulsory.)

Anyway, within the compulsory daylight savings system we have choices – choices on how we use the day.

We could spend longer in the office waiting for darkness to descend or sit on the couch watching TV with the curtains closed to keep the daylight off the screen.

Alternatively we could embrace the change and pursue the possibility of evening adventuring, gardening, golf or even an Aussie style BBQ.

The opportunity is there to do something rather than doing nothing.

Of course there will always be reasons why not!

As communicators our job, in part, is to deal with the reasons why not. To help people act in their own best interest, particularly when it's easier for them to do nothing.

To help employees leverage the retirement savings potential presented by auto-enrolment and get them to do something that will make a difference when they are no longer working.

Good communication has three clear objectives – to impact what people think, feel and do.

I read the following words from Dr Mike Evans this week and it ticked all three boxes for me, "Try to limit your sitting and sleeping time to just 23 and a half hours a day"

Will you look back on your summer with relish or regret?

Written by Peter Nicholas,Managing Director & CEO, AHC.

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Pension Funds

Qrops tax hits wrong target, says Pension Life

The campaign group says the tax on transfers to qualifying recognised overseas pension schemes (Qrops) lets pension savers down and fails to address the issue of pension scammers overseas.

The tax, announced in the Spring Budget earlier this month by the Chancellor Philip Hammond, is a 25% charge on transfers to Qrops (PFI, 9 March).

The charge applies to transfers made on or after 9 March, but does not apply if, from the point of transfer, both the individual and the offshore pension scheme are in the same country, both are within the European Economic Area (EEA), or the Qrops is provided by the individual's employer.

Angela Brooks, chair of Pension Life, said the charge is a misguided attempt to bolster the government's coffers.

She said: "It disadvantages many genuine pension savers who are using bona fide, regulated advisers and who want to benefit from the advantages that transferring their UK pensions out of Britain can offer and it doesn't drop any of the current scammers using Qrops as the vehicle for their scams."

Some of the problems associated with the offshore pension industry include firms operating without regulation and trustees accepting business without due diligence.

"While there are many regulated, well-run and responsible firms operating in the international space, unfortunately there are others that use questionable practices and products - as well as outright scams," said Brooks.

"British citizens living overseas need protection from regulators against those offshore firms which purport to provide advice covered by the FCA, but which actually operate under offshore regulation unbeknown to the client - who only finds out once things go wrong."

Brooks added that the government should be preparing to work with regulators, ombudsmen and financial crime units in all the popular Qrops destinations, to clean up the offshore industry in the interests of British expats.

First published 23.03.2017

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Pension Funds

Changes to public sector pension scheme asset allocation

According to new research from State Street Corporation, which looked at the asset allocation of 105 UK public sector pension funds over a three-year period to the end of 2016, exposure to alternatives has increased by 61%.

The organisation said the figures highlight the importance of multi-asset tools and capabilities, as the 89 participating funds in the UK's Local Government Pension Scheme (LGPS) prepare to transition into eight asset pools by April next year.

Traditional assets classes, such as equities and fixed income, remain core holdings for these funds, with equities accounting for 48% and fixed income accounting for 14% of their overall allocation.

The asset allocation of the 89 member funds participating in the LGPS pooling initiative are likely to see considerable changes to their current portfolio construction over the coming years, State Street said.

Other key findings include overall scheme assets increasing by 13% to £251.8bn, overall exposure to equities increasing by 9% to £120.7bn, allocation to domestic equities allocation decreasing by 5%, accounting for £37.9bn, and a significant increase in exposure to emerging market equities, up 33% to £446.5m.

Andy Todd, head of UK pensions and banks, asset owner solutions, State Street said: "Mounting cost pressures and persisting lower-for-longer yields have led pension fund investment committees to seek 'higher yielding' assets to assist them in meeting their strategic investment targets.

"This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities.

"These changes to the investment landscape are systematic, which means we are likely to see a continued trend toward such investments."

JR Lowry, head of State Street Global Exchange EMEA, added: "LGPSs are in a period of extreme change and technology will be the next stage of their evolution.

"As they reshape to adapt to their new size and structure, they have a significant opportunity to overhaul outdated legacy systems and benefit from new economies of scale."

First published 23.03.2017

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Pension Funds

Bulk annuities topped £10bn in 2016

The total includes the £1.2bn buy-in by Phoenix Life with its own UK pension plan, which was announced this week and is the largest single transaction for 2016.

Legal & General and Pension Insurance Corporation wrote the largest volumes of business with UK pension schemes at £3.3bn and £2.5bn respectively, a 33% and 25% market share.

Rothesay Life wrote no material pension business with UK pension plans during the year, focusing instead on its £6.4bn annuity transfer with Aegon.

The majority of bulk annuities were completed in the second half of the year, with a surge of activity occurring after the EU referendum.

This is the third consecutive year that volumes have exceeded £10bn and LCP predicted it will continue in 2017, potentially exceeding £15bn for the first time.

Charlie Finch, partner at LCP said: "We have continued to see an acceleration of de-risking activity by pension plans since the EU referendum."

"This has been driven by an increased desire to lock down pension risks, which have been highlighted by economic volatility and high-profile pension cases such as BHS."

Finch said a further driver is pensioner buy-in pricing being at its most favourable level for years.

"Following the introduction of Solvency II last year, insurers have innovated and, in a post EU referendum world, have been able to source attractively priced assets and pass back savings to pension plans through lower pricing," he said.

LCP was lead adviser on 12 out of the 24 buy-ins and buy-outs over £100m last year.

Since the EU referendum it completed 10 transactions over £100m helping clients to reduce risk.

"The £1.2bn buy-in by Phoenix Life is the largest of the many transactions in 2016 and the fourth largest pensioner buy-in ever after ICI Pension Fund, Total and the Civil Aviation Authority," said Finch.

The company predicts buy-in buy-out volumes in the first half of 2017 will exceed the first half of 2016,

First published 23.03.2017

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Pension Funds

In two related articles Gowling discuss the security and sustainability of DB funds following the release of the DWP green paper

In two related articles, we look at those aspects of the Green Paper which will be of most concern to trustees (please click here to read this article) and also to employers (please click here to read this article).

Author profiles

Elizabeth Gane

Based in Gowling WLGs Birmingham office, Liz Gane has been advising clients based in the UK, Europe, USA and Asia on all aspects of UK pensions law for over 15 years.
Liz's clients value her clear analysis of the law, straight forward advice and approachable style. Liz understands that building long-term relationships with her clients and her clients' other advisers is key to providing effective, clear advice that reflects the wider commercial objectives of the trustees and the sponsoring employer.
Liz helps clients not only on the day-to-day running of their pension schemes but also on more strategic projects including:

• advising a German client on the impact of a European-wide strategic reorganisation on its UK-based pension arrangements
• advising trustees on proposals put forward by its Japanese parent to restructure its UK operations
• putting in place charges over properties and parent company guarantees as part of wider funding strategies for schemes
• re-writing a set of outdated scheme documents into plain English and incorporating seven new benefit structures into the Rules
• advising trustees on scheme change proposals, including the closure of schemes to future accrual
• advising corporate groups on winding-up or restructuring of very old, insured pension arrangements in order to facilitate the winding-up and striking off of old and dormant, non-trading companies.

Liz advises schemes ranging in size from a few million pounds to over a billion pounds and her client base includes defined benefit schemes, defined contribution schemes, hybrid schemes and CARE (Career Averaged Revalued Earnings) schemes.

Christopher Stiles

Christopher Stiles is a director based primarily in Birmingham who helps clients to deal with any contentious or non-contentious legal issues that may arise in relation to their pension plans with the greatest possible ease and efficiency.Pensions can be a challenging area for employers, with pension plans that ranging from legacy arrangements that are now closed to accrual, but are still a major liability on the balance sheet, to ongoing plans that are used to reward current employees.
Christopher takes a particular interest in innovative and complex projects including asset-backed funding arrangements, liability management exercises and buy-outs. On the trustee side, Christopher has close ongoing relationships with his trustee clients and helps them through the legal issues they face in running their pension schemes, both the day-to-day problems and larger projects including scheme mergers and wind-ups. He has experience in:

• advising various clients on asset-backed funding structures using a range of assets and innovative structures to improve the employer's cash flow while simultaneously improving the security of scheme benefits;
• helping the trustees of a £1 billion scheme implement a comprehensive funding package with their sponsoring employer;
• negotiating major buy-in contracts with insurance providers;
• helping trustees to resolve disputes with scheme members including Pensions Ombudsman cases;
• advising the trustees of schemes in wind-up to secure benefits with an insurer, terminate the schemes and achieve peace of mind from knowing that all liabilities were correctly secured;
• helping a company to obtain a significant financial saving from the merger of its legacy pension schemes;
• advising the trustees of a £1 billion scheme in relation to implementation of a liability-driven investment strategy.

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Pension Funds

Honesty needed for consultant-trustee relationships

Paul Richards, director of strategy at pensions consultancy Redington, said research conducted on trustees and consultants found that 95% agreed that honest dialogue was essential for rectifying areas of weakness in scheme governance.

However, the research also found critical feedback remains uncommon, due largely to concerns from both trustees and consultants about damaging the existing relationship.

Richards told delegates at the Pension and Lifetime Savings Association conference in Edinburgh, one in five had seen no instances of consultants delivering developmental feedback.

He said 68% of respondents worried that doing so would negatively impact the ability to work effectively, and 67% were unwilling to take actions that might risk the client relationship.

However, the research also showed that 86% of those surveyed said that putting assurances in place that offering critical feedback would not affect the trustee and consultant's future ability to work together would increase chances of doing this effectively.

Richards said: "Feedback is an integral part of any healthy relationship, and with the potential to impact so many scheme members, it is crucial that trustees and consultants feel able to have frank and honest discussions with each other."

"In fact, studies have shown that effective governance can equate to an additional return of between 1-2% annually, so the ability to communicate effectively and honestly has a direct impact on members' bottom lines."

Richards suggests encouraging consultants to adopt a "radical candour" approach, keeping trustees informed of what they can expect throughout the process, enabling all parties to air concerns openly.

"With the financial security of so many at stake, we need to find practical and workable frameworks in place to ensure both parties can raise areas of concern without fear of negative repercussions further down the line," he said.

"Very often, raising concerns early on can prevent more serious issues later and it is essential that we find a way to express worries about governance as soon as possible in the process."

First published 17.03.2017

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Pension Funds

Royal Mail pension scheme consultation ends

The UK postal service provider, which announced at the beginning of this year that its Defined Benefit (DB) pension scheme would be unaffordable after 2018, says it is now considering all feedback.

A Royal Mail spokesperson said: "No decisions will be made until we have considered members' views and have had an opportunity to discuss these with our unions."

Royal Mail wants to replace its DB scheme with a Defined Contribution (DC) scheme, but the Communication Workers Union (CWU) has proposed an alternative that has greater risk sharing between the organisation and its employees.

The CWU, which represents Royal Mail's postmen and women, has previously threatened strike action about this issue, so the pressure is on for the organisation to negotiate.

Jon Hatchett, head of corporate consultation for Hymans Robertson said the CWU's proposals would go 'back to the future.'

"Back in the 1970s, DB pensions schemes had these types of pressure release valves, which successive layers of legislation has stripped away," he said.

"While member certainty over the pension promise has increased, the appetite of sponsors to offer these benefits has plummeted, due to the rising cost of provision."

Hatchett said although risk-sharing solutions like the one proposed by the CWU, are better for employees, they are likely to face resistance from employers.

"The other barrier to more risk sharing is that any arrangements that are not fully DC fall into the DB regulatory regime, which means a lot of extra compliance costs," he said.

"That means risk sharing is only a viable option for large, or very benevolent, employers."

The CWU's plan would encompass the 90,000 members of the Royal Mail's DB scheme, as well as some 40,000 people who pay into its DC scheme.

First published 17.03.2017

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Pension Funds

Paying for Mum and Dad's pension

As we all know, some of the National Insurance contributions paid by those of us in work are used to pay the State Pension to those currently receiving it.

We hope that by the time we reach State Pension Age, whatever age that may be, there are enough National Insurance contributions being paid by our children to pay for our State Pension, but that's a subject for another day.

But surely, we do not pay for our parents' private pensions too? I think we do and let me explain why.

For those of us in our twenties, thirties and forties, many of our parents are from the golden generation where they are very likely to have been, for a significant period of their working life, a member of their employer's defined benefit (DB) scheme.

These schemes are now predominately closed to new entrants and us 'youngsters' must now join a defined contribution (DC) arrangement.

It is fair to say that in most, if not all cases, the contributions paid by employers into DC schemes, and hence the ultimate benefits provided from these arrangements, are substandard compared to those of their DB counterparts.

Equally, it could be argued that the reason why employer contributions to DC arrangements are so low is because of the substantial cash injections required to plug DB scheme deficits.

In an ideal world, such deficits would be non-existent, enabling employers to pay higher levels of contributions into their DC arrangements.

Hmmm?.so does this mean that we're subsidising our parents' private pensions too?

Over the years, DB schemes have had a rough time, primarily because of legislative tinkering by successive governments, leaving them riddled with extra guarantees that weren't originally in place when they were established. Whilst this is great for our parents, it does come at a cost to the younger generation (I consider myself an X by the way) who ultimately foot the bill.

The government could look to reduce, or even remove some or all of these guarantees. This might help to reduce and potentially eliminate DB scheme deficits, and at the same time up the level of employer contributions into DC schemes.

It might not make mum and dad happy but it would help address the intergenerational pension disparity we are currently experiencing. Just saying??

Written by Stuart Price FIA,Partner and Actuary at Quantum Advisory.

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Pension Funds

Prudential and Rothesay Life in £960 million reinsurance agreement

Prudential will assume the longevity risk for £960 million ($1.2 billion) in pension liabilities from Rothesay.

The deal is the sixth longevity reinsurance transaction since 2011 between the two organisations which, Prudential says, reaffirms the strength of the growing partnership.

The two companies struck their previous longevity reinsurance agreements between 2011 and 2014.

Amy Kessler, head of Prudential Retirement's Longevity Risk Transfer business, said: "Through six years and six transactions, our teams have worked consistently and collaboratively to meet Rothesay's longevity reinsurance needs and help secure theretirement benefits for thousands of UK pensions."

Prudential Retirement offers retirement plan solutions for public, private, and non-profit organisations, with $386.2 billion in retirement account values as of 31 December 2016.

Rothesay Life was established in 2007 and it has grown to become the UK's fourth-largest annuity provider, with more than £20 billion in assets under management.

The transaction is indicative of the thriving market for UK pension de-risking, and the continuing focus of UK group annuity writers on optimising capital and managing risk with longevity reinsurance solutions.

Tom Pearce, managing director at Rothesay Life, said: "We are delighted to have completed this transaction with Prudential, building upon the longstanding relationship between the two firms.

"This agreement further underscores our proactive approach to risk management, as we provide for the secure retirement of thousands of annuitants."

David Lang, vice president of product development, who led the transaction for Prudential Retirement, added: "The growing UK market for pension de-risking has created a significant need for reinsurance solutions."

"As part of our long-term partnership, Rothesay consistently taps into Prudential's longevity reinsurance capacity and expertise to support its pension risk transfer business in the UK."

First published 17.03.2017

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Pension Funds

Fertile terrain for pension scheme de-risking

To read this article please click here

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Pension Funds

2016 in reflection: solvency, sovereignty and solutions.

A quiet year in the pensions bulk annuity market is a rare thing and 2016 was in no mood to dial down the volume. The year started with the much anticipated introduction of Solvency II, a piece of legislation almost 15 years in the making. We saw the de-risking landscape evolve: one insurer withdrawing, two settling in and a further two merging. The seven active providers drove innovation to meet the needs of an ever more sophisticated market place. And of course, all of this was set against the backdrop of an unsettled political environment, not least the UK voting to leave the EU.

So despite all the noise and bureaucracy, this part of the process isn't that complicated after all."

Read more here

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Pension Funds

Kingfisher head joins Legal & General

Courtier is head of group pensions at Kingfisher PLC, as well secretary to Kingfisher Pension Trustee Limited (KPTL), which oversees the governance and running of the Kingfisher Pension Scheme.

He will remain in these roles in addition to the new positions.

Launched in 2011, the Legal & General Master Trust has £2.9 billion in assets under management with almost 600,000 members.

It is a multi-employer scheme managed by an independent board of trustees that will be chaired by Courtier

The Legal & General IGC oversees the workplace pension schemes operated by Legal & General and acts in the interest of members.

The company manages £16.8bn in such schemes.

Emma Douglas, head of DC at Legal & General Investment Management (LGIM), said the move comes at an exciting time for the Master Trust.

"The Master Trust has expanded significantly since launch in 2011, as schemes have been attracted by our range of strategies that deliver investment solutions," she said.

"We are seeing a strong trend for DC schemes to opt for bundled solutions, where they can outsource administration and member communications and as well as governance to a greater or lesser extent."

Douglas said Courtier will play a pivotal role as the Master Trust expands and the workplace member scheme base grows.

"He is a highly-respected practitioner and brings many years of experience working with a range of employers in different sectors," she said.

"His innovative flair in the way he thinks about investments and communications will help ensure both our offering and the way we engage continue to meet members' and employers' needs."

Since 2007, in an executive capacity Courtier has overseen KPS' de-risking programme and the enhancement of DC benefit structures and investment funds.

He has also held senior pension roles at Hachette Livre Group, Towers Perrin HR Services (now Willis Towers Watson) and Royal Mail Group.

"My work overseeing the impact of pensions freedom and choice regulations means I can bring a valuable perspective of what employers require from their DC solutions, and I look forward to helping to bring the Master Trust business to the next stage of its maturity," he said.

First published 03.03.2017

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Pension Funds

To transition or to transform?

The process of changing pensions administrator is not always smooth. The challenges can include a lack of cooperation from the outgoing provider in sharing knowledge and providing data, and the time and cost of moving.

However, the perception is often worse than the reality.

In the pensions industry, we refer to the process of moving to a new provider as a "transition project". Transition is defined as "a change from one thing to the next; has a predictable and regular form".

Referring to a change of providers as a "transition" paints it as a regular, repeatable project (which it is – for administration providers at least!).

In contrast, transformation involves a more dramatic change, and its steps and outcomes are less predictable – a good example being having children.

A scheme transition is often motivated by the belief that the new provider will deliver some level of transformation and address any service issues that may exist. T

here is little point in going through the effort of a transition, if, once completed, the promised transformation does not materialise. But, can schemes guarantee that changing provider will meet their objectives?

In moving, three key phases will support these change objectives. Firstly, a successful transition will provide the base, then two transformation phases (standard and customised transformation) will take the client-specific operational environment to the agreed levels:

1. Transition phase: manage the risks

The transition phase covers the standard activities involved in taking over service delivery responsibility. Because the outcomes are not completely within the new provider's control, the key focus of this phase is the management of risk.

Trustees and clients should look to assess the provider's approach to, and experience of, risk management. This should include their project management methodologies, focussing on the key risks of knowledge transfer and data migration.

As no two transition projects are ever the same, the variety and flexibility of techniques that can be demonstrated is essential.

2. Standard transformation phase: assess needs and solutions

Most transition projects will have an agreed level of standard transformation to be realised when the service goes live. The focus of this phase is the assessment of the scheme-specific needs and the extent to which the new existing operational environment will meet them.

This may identify areas of change; for example, changes to standard communications, processes or guidance notes that may be required to meet a specific scheme design or requirement. This is the value-added element of any transition project, and whilst the amount of change needed may vary from scheme to scheme, the assessment should always happen, as scheme requirements always differ.

Trustees and clients should ensure that the transition project plan delivers this analysis and allows for those activities that are needed to meet the agreed solution for a go-live steady state.

3. Customised transformation phase: establish continuous improvement

A customised transformation will involve scheme-specific technical projects, such as data-cleansing programmes, typically after the service goes live and is in a steady state.

For example, any deficiencies in the data would have been identified in the transition phase and the standard transformation analysis would have identified the impact of those deficiencies on the service in terms of risk and quality. Projects can then be prioritised and scoped to correct the data or improve the solutions to manage those deficiencies.

Trustees and sponsors should assess a providers' experience and ability to deliver transformational projects. The top three items on most agendas are:

• Data quality improvements
• GMP reconciliations
• Delivery of de-risking projects

Schemes looking for a new provider want to deliver transformation, but they initially focus on the transition phase, which is not intended to deliver that.

To ensure the right outcomes for the scheme and its members, trustees should assess the skills and ability of the new provider to deliver transformation both as part of the transition and as part of live operations.

This assessment of a provider's ability to deliver transformation is especially important in the current landscape where the increased demand for these skills has led to a capacity crunch, resulting in falling standards and extended project timelines.

In the pensions administration industry, a transformation is rarely as dramatic and instant as, say, dying your hair pink or getting a tattoo.

In our world, transformation is a set of controlled incremental projects, each aiming to deliver a new and improved steady state for members.

It is the ability of the new provider to establish, react and sustain change over the long term that enables a scheme to achieve its overall change objectives when making the move to a new provider.

Written by Jenny Monger, Business Design Manager, Trafalgar House.

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Pension Funds

Savers let down by auto-enrolment

The pensions and insurance company says contribution levels for automatic enrolment are too low, and will lead to disappointment for millions of savers when they retire.

It is calling for minimum contribution levels to be increased to 12.5% and it wants the government to consider an increase when it reviews auto-enrolment later this year.

Minimum levels of savings are scheduled to rise from 2% today to 8% in 2019.

Alistair McQueen, head of savings and retirement at Aviva, said people in the UK have understood that they need to start saving for retirement and have started doing it through workplace pensions.

"Workers are doing their bit by saying yes to workplace pensions, but by being automatically enrolled at minimum levels of pension contributions, new savers are on track for disappointment in retirement," he said.

McQueen's comments come in response to latest figures from the Office of National Statistics (ONS) that show a record proportion of workers are now participating in workplace pensions.

The ONS figures show that the number of people now participating in workplace pensions hit a new high of 68% in 2016, up from 64% in 2015 and up from its low of 47% in 2012.

Young people are the biggest growth area, with the number of people aged between 22 and 29 participating in a workplace pension scheme more than doubling from 31% in 2012, to 66% today.

Aviva says the rise has largely been driven by auto-enrolment, but says it is the same system that will let young savers down.

McQueen said: "The underlying data suggests that millions of new savers are being enrolled into pensions at minimum levels of contributions – currently standing at 1% of their salary from the employee and 1% of their salary from the employer.

"The levels of contribution need honest and urgent review because workers are playing their part and the rule-makers should respond by building a system that is fit for purpose."

First published 10.03.2017

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Pension Funds

Pension freedoms raises £2.6bn in tax receipts

It is nearly three times more than it expected to raise, as retirees rush to cash in their savings.

A combination of factors led to the tax funds collected being larger than anticipated.

First, average withdrawals have been larger than the government expected – they expected individuals to spread withdrawals over four years, and they haven't.

Second, many people with Defined Benefit (DB) pensions will have converted some or all of it to a Defined Contribution (DC) fund, which means they typically draw this money faster than the DB benefit would have been paid.

Chris Noon, partner at Hymans Robertson, said the larger tax receipts is an indication of a general lack of understanding.

"Individuals have been making sub-optimal choices, due to a lack of understanding of the tax consequences of their decisions and they've been stung with hefty tax bills as a result," he said.

Noon says some of the increased tax revenue will come at the expense of individuals' pension pots, indicating a need for better support around the decisions people make.

Specifically, he said, trustees have a moral duty to support scheme members with complex choices at retirement.

"The message could not be clearer: we need to be better at helping consumers exercise their freedoms in an informed way," he said.

"There is a real danger that the many people who have withdrawn funds without help from an adviser, will discover that they have been taking out too much and get hit by huge tax bills, which will then deplete their remaining pension pot."

The numbers cashing out of DB pensions have soared since freedom and choice, with twice as many people transferred in the first year and momentum increasing.

"Ensuring people make the right choices when making one of the biggest financial decisions of their life is a natural extension of trustee duties and there is much that they can do," said Noon.

"Members staying or transferring out of DB must do so on an informed basis and with access to quality advice - for example, putting in place a preferred advisor for a scheme can bring dramatic cost savings.

"If scheme members are unsupported and make the wrong choices this could come back to bite trustees and employers."

"If they don't get this right, they run the risk of members ultimately holding them responsible for not providing the support they need and expect."

First published 10.03.2017

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Pension Funds

Qrops crackdown in spring Budget

Chancellor Philip Hammond's first and last spring Budget set out the government's strategy as Brexit approaches.

Those looking to move a UK pension offshore to qualifying recognised overseas pension schemes (Qrops), on or after 9 March 2017, will now face a 25% tax charge.

The charge will not apply if, from the point of transfer, both the individual and the offshore pension scheme are in the same country, both are within the European Economic Area (EEA), or the Qrops is provided by the individual's employer.

Les Cameron, head of technical at Prudential, said: "The government has been gradually reducing the attractiveness of Qrops for several years, but the new charge has come out of the blue."

Although some planned transfers will still be able to go ahead, others will be stopped or paused until the impact of the charge has been considered.

Cameron added: "The last thing anyone wants is to incur an unplanned 25% tax charge – this is high-value business and time needs to be taken to consider the full impact of today's announcement."

Payments out of funds transferred to a Qrops on or after April 6, 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident, the government said.

This means that UK tax charges would also apply to a tax-free offshore pension transfer if, within five tax years, an individual becomes resident in another country.

Meanwhile, calls to reverse looming cuts to the money purchase annual allowance were ignored and will be reduced from £10,000 to £4,000 next month.

Kate Smith, head of pensions at Aegon, said the company was disappointed the chancellor plans to continue with the proposals.

She said: "We expect few people will be aware of the risks they're running by continuing to make pension contributions once they've begun accessing their savings."

Self-employed people were also hit by the latest Budget announcement, with an increase in national insurance.

Critics of the move said the government should consider including self-employed people in auto-enrolment.

Adrian Boulding, director of policy at Now: Pensions, said: "We believe now is the time to in include self-employed people – auto-enrolment has been a great success, but the five million self-employed people in the UK are excluded."

Boulding said with the review of auto-enrolment taking place later this year, the government has an opportunity to look at including them.

First published 10.03.2017

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Pension Funds

How the overlooked middle ground could help solve the cash flow challenge

Unfortunately, we find ourselves in an ultra-low yield environment – the flow of income that gilts and corporate bonds traditionally provided has slowed to a trickle. A gap has emerged between the cash flow required and that being generated. The new challenge for DB pension investment is thus not: what are the liabilities of the scheme; but how will those liabilities be paid, now and in the future?

Moving from a balance sheet to a cash flow approach

When considering the income that assets need to generate, there are broadly three main issues to address:

1. Cash flow today – Today's ultra-low yields, compressed by central bank intervention in markets and increased demand from pension funds, are forcing investors to look further afield. This is especially the case once schemes turn cash flow negative and need to start selling assets. Some investors have focused their attention on alternative fixed-income assets such as infrastructure debt. However these are often illiquid, capacity - constrained and expensive to access.

2. Cash flow tomorrow – So why not simply begin selling assets? Unfortunately this leaves you at the mercy of markets; if you need to raise cash to pay an income, you risk becoming a 'forced seller' – having to accept whatever the market price is for your assets on that day. This is known as 'sequencing risk' – if you have to sell assets the day after the market has taken a downturn, you risk permanently impairing your capital pot, giving you fewer assets to generate an income from in the future.

3. Cash flow for the long term – Improving longevity poses an ever greater risk to pension funds – can the assets last long enough to provide an income to your healthiest pensioners? If you have had to sell assets rather than just taking an income from them, there is a stark danger that the pension pot may simply run dry.


Look at your assets in a new light – do they generate income?

It's clear that we need a new framework for thinking about the purpose assets serve within a portfolio. In a 'lower-for-longer' interest rate environment, these risks are persistent, and capacity - constrained alternative assets such as infrastructure or private debt can only partially close 'the income gap'.

In our view, the answer is to reconsider the role that all of your assets play in income generation – and particularly 'the overlooked middle ground'. These are the higher-yielding areas of fixed income as well as equities – a 'risky' asset class that has been out of favour with pension schemes for a considerable period. In an environment where certain good-quality equities offer greater yield than investment-grade bonds, as well as future growth potential to counter mortality risk, it may be time to reconsider what is a 'risky asset' based on what it can do to counter the cash flow challenge. By diversifying your sources of income in the same way you diversified your liability matching and growth assets, you could find a sensible solution to closing the income gap.


Equities – really? But what about the volatility?

'De-risking' has been the fashionable goal in pensions for a long time, so to consider equities as part of the solution may feel like an uneasy answer. But let's consider the question of volatility – in equities the movement tends to come from the capital return rather than income return; the income stream can be robust and consistent as long as short-term capital movements can be tolerated. It also depends on the type of equity – dividend-paying equities tend to be less volatile overall. By repurposing growth assets to dividend-paying equities, the overall volatility of the funding ratio could potentially be reduced.

Furthermore, dividend-paying stocks have demonstrated greater resilience than their non-dividend- paying counterparts in bear markets and lower volatility overall, making a significant positive impact on cumulative investment returns over the long run (see chart below). Evidence also shows that companies that have been able to grow their dividends over a number of years have generated superior total returns compared with those that pay flat dividends, declining dividends or no dividends at all. Growing dividends over time tends to be a sign of good allocation of capital; the need to pay dividends may mean that company managers select only the highest returning projects.


The role for equities in tackling longevity and inflation risk

As lifespans expand, asset classes like equities that can be owned over the long term and do not carry reinvestment risk have clear advantages. In addition to current dividends, equities offer the potential for dividend distributions to grow in the future and for capital values to increase. Although inflation may currently seem a distant prospect, the potential for a degree of inflation protection through owning the rights to earnings from productive assets has a long-term attraction.

In summary, with many UK DB pension schemes becoming increasingly mature and moving to cash flow negative territory, there is a need to reconsider investment strategy and to prioritise income and cash generation rather than simple capital appreciation, or return over a benchmark. We would suggest that the 'overlooked middle ground' could offer income – indeed, in many cases yields that are higher than bonds– without compromising on liquidity, transparency and capacity.

Although equities are generally more risky than bonds, this could be mitigated to some extent by adopting a strategy that invests in dividend-growing equities rather than simple 'high yielders'. This approach has historically exhibited less volatility than equity markets in general and has held up well in down markets, making it particularly attractive for pension schemes that need to liquidate assets on a regular basis.

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

The road to wind up

Choose your route

It is in the interests of both trustees and scheme sponsors to agree on their preferred route and travel together. To reach wind up with benefits paid in full, there are two routes to choose from:

Motorway – buy-out. The aim of this route is to fund and proactively invest, perhaps utilising liability-driven investment (LDI) options and/or buying-in groups of pensioners, with a view to fully securing the scheme's benefits at the optimum time. Managing scheme costs during this time would be important, particularly for smaller schemes. Monitoring the scheme's progress against the buy-out target would also be required to take advantage of pricing opportunities and to avoid creating surplus which is taxable and highly regulated. Ideally, the trustees would wish to buy-in the last liabilities on the basis of a cash injection from the employer once the final premium has been determined. The scheme could then be terminated and wound up, and the buy-in policy converted to individual member policies. A buy-in contract is an insurance contract requiring trustees to give complete and accurate information and make full disclosure. Trustees can prepare for buy-in by data cleansing and undertaking a legal audit of benefits to identify any discrepancies before going to market.


Country lanes - until death us do part. This is the longest route to exit (wind up after the last beneficiary has been paid) with management time and costs becoming increasingly disproportionate to scheme liabilities. Most trustees and employers will be hoping for a swifter journey than this.

Journey time and / or costs may however be reduced along the way by...

Pit-stop - trim the DC. Employers may have more than one scheme, some with defined contribution ('DC') benefits. There may be merit in exploring opportunities to buy out the DC benefits with an insurer, or transfer them to a master-trust, to remove the trustees' DC governance obligations and give members access to the full DC flexibility options. Unless the trustees have the power to wind up the DC benefits separately, they will need a power to buy out or make a bulk transfer of the DC benefits whilst the scheme is ongoing and the preservation requirements will apply. In deciding whether to buy-out or transfer, trustees must understand the implications for the members: will member costs increase or investment penalties apply (and will the employer underwrite them), will member options be lost (such as to use DC benefits to provide DB tax free cash, or to receive higher pre-A Day rates of tax free cash)? AVCs linked to DB accrual may be trickier to buy out for these reasons. An alternative is to upgrade and streamline DC governance by using a compliance solution, such as the Burges Salmon Governance Manager (click here for further information).

Car share - merge the DB. Employers with more than one DB scheme may wish to merge them into one to help manage competing funding demands, save on future administration and trustee and adviser time and costs and commute small benefits. The trustees of the transferring schemes would need to make bulk transfers of the DB assets and liabilities (plus associated AVCs) into the receiving scheme, and the receiving scheme trustees would need to agree to receive them. Each transfer would require a merger deed and actuarial certificate to meet preservation requirements, designed to maintain the security of the benefits, protect the members from adverse changes and protect the transferring trustees from claims arising from the transfer. The relative funding positions of the schemes and future funding and/or security on offer would dictate whether the schemes could be fully merged or only on a segregated basis. Care would be needed in relation to the receiving scheme, to ensure that it could receive any contracted-out benefits (where extra restrictions apply) and that its employers would be appropriate statutory employers. Once its assets and liabilities have been transferred out, the transferring scheme could be terminated and wound up without triggering an employer debt (provided the employer meets the wind-up costs). Small benefits left behind in the transferring scheme could be commuted as winding-up lump sums, reducing the transferring liabilities.

Convoy - merger-lite. A full scheme merger is a complex and time-consuming project. Adopting a common trustee across several group schemes may deliver a few savings in terms of time and management without the work required of a merger. This approach would work best with a single professional corporate trustee, given that a group corporate trustee would need to satisfy the member-nominated director requirements in respect of each scheme. Conflicts of interest would need to be managed, particularly if schemes have sponsors in common.

Take a cab - transfer to DB Master-trust. Would a bulk transfer to a segregated DB master-trust help ease management time and be a cost-effective solution? The options on the market differ in approach so due diligence would be needed. Would there be a role for the existing trustees, how would costs compare to using existing advisers, would there be clear investment benefits, how much control would the employers retain over scheme management and amendments, is the receiving scheme truly and robustly segregated to avoid cross-subsidy risk? The points made in "Merge the DB" (above) are also relevant here.

Throughout the journey, the trustees will need to be alive to obstacles and hazards in their path, to avoid a crash scenario. This is where the scheme is in deficit and the employer (and/or former employer(s)) responsible for the scheme deficit become insolvent. In this scenario, if the scheme is funded below Pension Protection Fund (PPF) level, the scheme's route may lead to the PPF. If the scheme is not eligible for PPF protection, the trustees would need to use the available fund to secure benefits in the order set out in the Pensions Act 1995 and the scheme's winding up rule, leading to reductions in member benefits.

Overcoming obstacles

There are a number of steps trustees can take to prepare for changing conditions and help them make the right decisions when hazards arise. Change is a constant and trustees with keen road awareness are more likely to overcome the challenges they face. Avoiding hazards may not be possible in every case, but if trustees are prepared, the record of their actions should hopefully silence those 'blessed' with hindsight.

Understand your scheme powers. Every pension scheme was established with the powers and duties as determined by its first sponsoring employer. A trustee should assume that the scheme's powers are unique and get to know how they operate. Who has the power to set the employer's contributions, to alter the benefits or to terminate the scheme? One or more of these may be trustee powers, and give the trustees useful leverage in testing times. A trustee power to determine contributions may mean that the employer need only be consulted on the schedule of contributions and recovery plan, or that the trustees can seek a special contribution if the circumstances demand it, for example in the event of an imminent insolvency or abandonment risk.

Know your statutory employers. The group may be financially strong but is the scheme sponsor? It is vital to know who is legally responsible for funding the pension scheme in normal times and for meeting the employer debt upon insolvency or wind-up (under section 75 of the Pensions Act 1995). Unfortunately this is far from straight-forward. Past employers may remain liable for an employer debt and present employers may have no such liability if they have only ever employed defined contribution members. Also, are the statutory employers eligible for entry to the Pension Protection Fund (PPF), particularly if they are overseas entities? Trustees must seek legal advice on this.

Understand your employer covenant. Once the scheme sponsors are clearly identified, trustees should understand their financial strength and prospects. The scheme is a creditor of the sponsor and the trustees need to assess the appropriate period of credit to extend to it (in the form of the recovery plan). The longer the period of credit the greater the trustees' (and members') risk.

Get good information. A formal written information sharing agreement between trustees and sponsors will help sponsors understand what information the trustees need (and are entitled to see) and help trustees keep track of corporate developments. A well-structured covenant assessment will give trustees further support; this can cut through the web of intra-group accounts and debt and hone in on the scheme's position as a creditor both in the present and in the event of insolvency. Armed with this advice, trustees are better placed to negotiate mitigation for key risks such as a parent company guarantee, or security over assets to give protection where the scheme would otherwise be an unsecured creditor.

Understand how covenant and investment risks combine. Integrated risk management is a hot topic amongst pension consultants. How much investment risk should trustees take if the sponsor's covenant is weak? Generally, if the sponsor is not in a position to underwrite investment risk, trustees are advised to reduce it. This approach may have the effect of locking in deficit and higher contributions, but investment and covenant advice may suggest other options. For example, a comprehensive parent company guarantee may allow continued investment in growth assets and lower cash contributions.

Negotiate, even against the odds. Trustees should negotiate for the contributions and/or other security the scheme needs. The sponsor may not always be receptive, but the old adage of "if you don't ask, you don't get" is very apt. Sponsors will have other calls on their free cash and paying down the pension scheme debt may not be a priority, but trustees should understand their negotiating hand and play it commercially in the same way as any other creditor.

Keep records. Trustees are legally obliged to keep records of their meetings and decisions. Keeping records of negotiations, including correspondence, emails and notes of telephone calls and meetings between trustee meetings is becoming increasingly important. These are the trustees' evidence of good governance when the Pensions Regulator or disgruntled scheme members (or members of Parliament) come knocking.

In summary, trustees cannot avoid facing challenges, but they can choose how they manage or deal with their sponsors and how they plan for future events. Not every sponsor is helpful and co-operative and well-meaning sponsors may face an uphill struggle against large pension deficits and volatile or changing markets. Great trustees are able to identify the most effective route through the challenges ahead to the most appropriate destination and are able to demonstrate this after the event.

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Pension Funds

Pension trustees have had their say

The Association of Member Nominated Trustees* (AMNT) held its quarterly member conference, entitled "Pension trustees: Have your say" last week, and followed two key political initiatives; The Government publishing its Green Paper: "Security and sustainability in defined benefit pension schemes", and The House of Commons debating the committee stage of the Pension Schemes Bill.

Pensions Minister Richard Harrington MP addressed around 90 members at the conference, referring to both political events.

So what did AMNT members have to say about each of them?

The Green Paper raises six questions for consultation, and AMNT members honed in on three of these:

- Question 1 asks "Are the current valuation methods the right ones for the purposes for which they are now intended?" AMNT members want to see debate take place on how an appropriate balance is struck between flexibility and firmer guidance. They think that valuation methods may need to vary in order to take into account the strength of the employer covenant, together with the investment strategy and the risk management arrangements that have been put in place.

- Question 4 asks if there should be different regimes for employers who can afford to pay more compared with sponsors and schemes that are stressed. The Minister said that the Government has not yet taken a view about RPI or CPI as suitable factors for indexation. AMNT members plan actively to take part in the ensuing discussion.

- Question 6 raises the idea of "consolidation of smaller schemes into vehicles with greater scale and better governance". It asks if the Government should "encourage, incentivise, or in some cases mandate"? AMNT members think that it is probably inevitable that some scheme consolidation will have to happen. Cost reduction will be an important aim. The experience of local government pension schemes may prove to be useful. Protection of the rights of individual pension scheme members will be paramount.

And what about the Pension Schemes Bill?

Members also noted the debate on the Pension Schemes Bill at House of Commons committee stage. They are particularly concerned about the governance of defined contribution Master Trust schemes, and are hopeful for some cross-party accord.

Richard Harrington said: "We are all in favour of more people getting involved in their pension scheme". Shadow Pensions Minister Alex Cunningham MP said: "The mantra for the Bill should be: 'members at the centre of everything that we do'". He added: "I remind the Committee that all the investment risk lies with the members, and not with the provider. They should therefore have representation at the decision making level".

AMNT members hope that codes of guidance will spell out that good practice for defined contribution Master Trusts requires adequate member representation on trust boards.

*The AMNT now has over 700 members who represent more than 500 pension schemes, which together have combined assets under management of just under £700 billion. That is around one third of the UK occupational pensions sector. Members split between DB and DC interests on a 60:40 basis.

Written by David Weeks, Co-chair AMNT.

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Pension Funds

PLSA launches diversity initiative

Breaking the Mirror Image, aims to broaden the range of perspectives on UK governance boards.

It will first look at gender diversity, broadening to include other forms of diversity in the future.

The PLSA says the pensions industry still has some way to go before it achieves more diverse representation at board level.

For example, the make-up of governance boards is currently 83% male, but the PLSA says a wide variety of studies have shown that a range of experience and perspectives is crucial to good decision making for its members.

Lesley Williams, Pensions and Lifetime Savings Association chair, said the new initiative was important her on a personal level, as well as to the industry.

"We've been interested in diversity on corporate boards for some time through our corporate governance work; but with an increasing political and social focus on diversity this is the right time for the Association to stimulate and support diversity in our own industry," she said.

"Our campaign begins by looking at gender, but there are many elements to consider if we want truly representative and diverse trustee boards – gender, race, age, disability, sexual orientation, and social class."

A collection of essays, 'Breaking the mirror image: harnessing talent through diversity for better pensions', launched this week and marks the beginning of the campaign.

The move was welcomed by Pensions Minister Richard Harrington, who said he is determined to see greater gender balance in the financial sector.

"I welcome this initiative and practical support for companies from the PLSA," he said.
"A balanced workforce is good for businesses, their workplace culture and for investors. Firms with a good gender balance in senior positions and across teams perform better, and therefore attract the best talent."

First published 03.03.2017

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Pension Funds

Cancer Research scheme completes £250m buy-in

The deal will insure the scheme's 1,355 pensioners and dependant pensioners, which represent a third of the scheme's total obligations.

It was funded by the scheme's assets, primarily the existing gilt holdings.

As well as providing protection against investment market risk, and the risk of members living longer than expected, the pricing also helped to improve the funding position

Ian Kenyon, CFO of Cancer Research UK, said: "We are pleased to secure a transaction that both improves the funding position of the pension scheme and reduces the risk of contributions needing to increase in the future."

"This is another action which serves to reduce our cost base to concentrate spending on research."

The charity says the transaction continues its on-going programme to reduce pension risk.

In 2014 the scheme significantly de-risked the investments by reducing equity exposure and increasing the holdings in assets that move broadly in line with the measurement of the pension obligations.

In early 2016 the scheme further improved the matching of investments to its obligations and, over the course of the year, reduced equity exposure following strong market returns.

Graham Parrott, chairman of the Trustee, said: "We are delighted to have worked in close partnership with our sponsor, Cancer Research UK, to complete this well-timed and efficiently executed buy-in as part of our de-risking programme - the transaction benefits us both."

The Trustee was advised by Lane Clark and Peacock (LCP) and Sacker & Partners.

Kenneth Hardman, partner in LCP's insurance de-risking team, said: "With this transaction Canada Life has established itself within the market for mid-range buy-ins.

"This adds further competition to this part of the market and provides extra insurer capacity to pension schemes looking to de-risk through buy-ins and buy-outs."

Cancer Research UK was advised by KPMG.

First published 02.03.2017

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