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Pension Funds

No news is good news

Pensions experts are breathing a sigh of relief following the minimal changes announced in the latest Budget.

Despite speculation that pension tax allowances might be cut or adjusted, no such proposals were made. Instead, a 3% state pension rise and an increase in the lifetime allowance from £1m to £1.03m are the main pertinent components.

The Budget appears to have been designed with younger people in mind, with measures including changes to stamp duty for first time buyers - a move that makes political sense following the results of the last election where Labour took 64% of the 18-29-year-old vote, compared with just 21% for the Conservatives.

Barnett Waddingham's Malcolm McLean, welcomed the change in focus and lack of dramatic changes: "This was very much a steady as you go Budget, with no major surprises," he said.

While the focus was distinctly on the younger generation, the change to the Lifetime Allowance (LTA) is still significant for pension funds. The LTA has been adjusted in the opposite direction in recent years, making the increase a largely positive step. The LTA has seen several reductions since 2012, including from £1.5million down to £1milion in 2014.

The move was not a surprise either. Most of us in the industry expected to see the increase, but some feared an unexpected U-turn might be on the cards.

Kate Smith, head of pensions at Aegon, said: "Fortunately, there was no U-turn in the LTA and this is good news, even if on the surface the increase isn't large. A small increase is welcome for those nearing the limit, but this is a complex area where people seek financial advice to avoid paying unnecessary tax."

One other advantage for fund managers is the additional security the greater amount provides; giving advisers an even more solid background when they are working with clients.

The 3% state pension rise was also a relief, while not being much of a surprise thanks to the Triple Lock, which is in place until 2020.

Overall, the quiet Budget and distinct lack of action on pensions point to a Government looking to steady the waters after what has been a turbulent time for both pensions and the wider financial community. The impact of Brexit is widespread and pensions have experienced huge changes in recent years.

A calmer period for the industry will no doubt give people a greater opportunity to adjust the status quo.

"No news is good news for pension investors," said Tom McPhail, head of policy at Hargreaves Lansdown.

"The stability of no change is a welcome relief after years of political interference and the salami-slicing of reliefs and allowances. There may have to be further changes at some point in the future, but in the meantime, investors can make hay while the sun shines."

Elsewhere in the Budget?

1. Individual Savings Account (ISA) allowance for 2018/19 to be frozen at £20,000
2. Annual subscription limit for Junior ISAs and Child Trust Funds for 2018-19 will increase in line with CPI to £4,260
3. Annual pensions allowance for the 2017/18 tax year is £40,000 and will remain the same for 2018/19


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Pension Funds

Spotlight on transaction cost disclosure

In line with the growing regulatory pressure on trustees and governance committees to deliver value for money for their members, the issue of cost transparency has been an area of increased focus for UK pension funds and their providers in 2017.

The FCA's Asset Management Market Study, which was published in June 2017, broadly criticised the investment industry for being uncompetitive and providing low levels of transparency. Since then, the FCA has established a working group tasked with standardising the disclosure of all costs and charges.

In parallel, the Local Government Pension Schemes launched a code of transparency in May 2017, outlining a standard method for all asset managers to report investment costs. In Europe, new regulations – in the form of MiFID II and PRIIPS – are increasing disclosure standards around investment costs from January 2018.

Why is this happening?

The FCA report highlighted uncompetitive pricing practices and opaque cost structures across the asset management industry, and announced its intention to address these shortcomings. Improving reporting standards is one strand of this process.

Auto enrolment has brought a greater fiduciary responsibility to workplace pensions, and the government is clearly keen to avoid any miss-selling scandals. Increased litigation in the USA around costs may also have heightened this fear, and the UK is therefore following Europe in terms of raising standards in this area.

Where is the spotlight falling and what is it going to reveal?

Since April 2015, trustees and independent governance committees of workplace pensions have been required to assess and report, through their Chair's Annual Statements, whether transaction costs and administration charges offer value for money. However, there was no corresponding imperative for asset managers to provide the transaction cost data required, nor a standardised calculation methodology, until the FCA ruled on this in September 2017.

Moving forward, investment firms managing funds on behalf of DC pension schemes must, from 3 January 2018, provide data on their funds' transaction costs, using the 'slippage cost' methodology. This is effectively a measure of the market impact – often referred to as the hidden costs – of buying and selling securities. Historically, this has been absorbed by the fund and not been reported separately.

The problem for asset managers is being able to accurately calculate and report transaction costs, and 'slippage costs' in particular. The challenge for trustees will be to interpret and assess this information, not least because of the variable results that are likely to arise from using the 'slippage cost' method.

These obstacles aside, the new disclosure standards will undoubtedly shine a light on many of the variable practices that exist in the asset management industry, ranging across the costs and revenues incurred in trading, such as broker commission and research, stock lending and box profits, to name a few.

What will be the likely outcome?

These new disclosure standards will help investors better understand the incidence and nature of transaction costs in their funds. It will also highlight the impact of higher portfolio turnover and poor capacity management – including in expensive asset classes – and point to the true cost of investing in popular multi-asset fund-of-fund structures.

Ultimately, it will show who pays for what. Competitive pressures will likely mean that fund costs will fall as managers cap fund expenses or pay more of these costs themselves, such as broker's research, for example. At the end of the day, while comparing a fund's net-of-fees performance to its investment benchmark is an appropriate long-term measure of success, over the short term investors also need to assess whether the costs they are paying represent good value for money.

Donny Hay, Client Director, PTL

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Pension Funds

Contingency plan

For pension trustees, cash will always be king. However, the employer may not have the cash available to pay into the pension scheme at the rate that trustees would like. Or the employer may simply not want to pay that amount of cash into the pension scheme, preferring to invest it in the business. Contingent assets can be a workable compromise. They allow employers to pay cash into the pension scheme at a lower level or for a longer period while providing trustees with protection against risks which are of concern to them.
There are various scenarios in which a contingent asset may be used, including:
• as part of the funding package agreed by trustees and employers in relation to actuarial valuation discussions;

• as mitigation where there has been a deterioration in the employer covenant;

• to underpin investment risk taken by the trustees; and

• to obtain a reduction in the Pension Protection Fund (PPF) levy (in which case the contingent asset must be in the PPF's standard form and meet the other prescribed PPF requirements).

A contingent asset sits outside the pension scheme unless a 'trigger event' occurs, at which point trustees may call upon the contingent asset and seek to realise value from it.
The trigger events are usually keenly negotiated. Employers do not want to 'lose' the assets into the pension scheme too soon, whereas trustees want to ensure that they are adequately protected.
The starting point for trustees considering contingent assets is to identify what risks they are seeking to mitigate. Insolvency of the employer is a standard trigger event but others can be catered for, such as a funding level trigger whereby if the scheme funding level falls below a particular level, amounts tip from the contingent asset into the scheme.
Identifying the risks will assist the trustees in determining what type of contingent asset may be appropriate, although ultimately what type of contingent asset is available will depend on what assets the employer has in its business and the type of support it is willing to provide – this is a negotiation after all.
The most common types of contingent asset are:

• guarantees: the guarantor agrees to pay amounts to the scheme if the employer fails to;
• escrow arrangements: the employer places cash and/or securities into a third-party account held by a custodian. Assets tip from the account into the pension scheme following a trigger event;
• legal mortgages: the employer provides the trustees with a mortgage over real estate. Trustees can sell the property and realise value upon the occurrence of a trigger event;

• letters of credits/surety bonds: a third party bank (letter of credit) or insurer (surety bond) issues this in favour of the trustees. The trustees claim money direct from the bank or insurer when a trigger event occurs.

• asset-backed contribution structures (ABC): the employer places assets in a special purpose vehicle in which the trustees have an interest. An ABC typically has a dual function – to fund a pension scheme deficit by way of regular cash distributions and to provide contingent asset support, by way of access to the assets, in the event of a trigger event occurring.

Each type of contingent asset has its own pros and cons. Which one is best will depend on the specific circumstances and what the trustees and employer are seeking to achieve. However, the range of options available and increased familiarity with them in the pensions industry means a growing number of trustees and employers are finding that contingent assets are a viable solution.

Vicky Carr, Finance Partner, Sackers

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Pension Funds

The Time for ESG is now


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Pension Funds

DC Administration Governance?

For many, exciting fund strategies and investment performances being discussed in swishy city offices will spring to mind - the fun and glamourous side of pensions. But the importance of administration in DC governance is vital, if not quite as exciting.

The PASA Standards were put in place as an outcome based guide to what good administration should look like, and they cover all types of pension scheme. However, there are some challenges and topics which are unique to DC arrangements. PASA feels there is a place, and a need, for additional DC specific administration standards, which could eventually be brought in to the PASA Accreditation process.

Good DC administration is not simply the responsibility of a scheme's administrator. Oversight and governance is at three levels – the administrator/provider, the employer and the trustees. Regular communications and input from the scheme's employer and trustees are required to ensure that processes are holistic and effective, members are engaged, data is good, issues are identified quickly to avoid the dreaded rectification and that reporting is useful and clear - as well as understood by all parties.

We all know DC is on the rise, and there is more choice in terms of the type of arrangements available. Group DC arrangements such as Group Personal Pensions (GPPs) and Master Trusts have led to confusion for some employers in terms of defining responsibilities and rights to access for certain information. What belongs to the employer and what belongs to the trustees – where do the employer's responsibilities end and where do the administrators/trustees' start?

The arrival of automatic enrolment has led to a whole new market of employers appointing a pension provider, often for the first time. Many of these employers will not have a dedicated pensions or reward resource. If employers with established pensions departments are experiencing confusion over where the lines of responsibilities lie, what hope do employers with no experience of pensions and only a desire to do the right thing by their employees have?

Clear, useful and meaningful administration reporting is essential for good DC Governance to all involved. All stakeholders need to understand the content of the reporting and be able to identify what is essential, what is useful, what is a 'nice to have'. More importantly, robust, relevant and meaningful Service Levels (SLAs) need to be agreed. Skilful interpretation of the regular reporting will allow the administrator, employer and trustees to identify any service issues in amongst the detail.

Employers in a group arrangement should be aware providers produce administration reporting at a combined level. Knowledgeable interpretation of this reporting will identify where data is referring to activities across the book of business, rather than data directly relating to the service their employee members are receiving. Trustees are more likely to receive more scheme specific reporting, but is the information they are receiving meaningful and helpful to them in ensuring their members receive good outcomes?

As a first step towards producing DC specific Standards, PASA has invited key individuals from across the industry with wide ranging skill sets and expertise to form the DC Governance Working Group (DCGWG). With Board sponsorship, PASA has brought together people with a rich and diverse perspective who can ensure nothing falls through the gaps. The DCGWG met for the first-time last week (09/11/2017) to discuss the main issues impacting on DC administration, and agree key areas of focus.

The Group agreed six initial areas of focus; Data, Employers, Transitions, Decumulation, Reporting, and Controls and Procedures. The DCGWG is not a talking shop, its task is to produce meaningful standards and guidance for trustees and employers which are applicable across the DC universe. TPR is a welcome observer and is keeping a close eye on the group's findings as they develop. It is anticipated our initial findings will be published in Spring 2018.

Lucy Collett, member of the DC Governance Working Group and Secretary to the PASA Board & Kim Gubler, Deputy Chair of PASA

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Pension Funds

The Pensions Dashboard: where are we?

We need to get a grip on retirement saving. People need to know how much they have saved in various pensions during their working life, and where the money actually is now.

Beginning with a government consultation six years ago, the Coalition Government decided on 17 July 2012 that 'pot follows member' was the solution to address the proliferation of small pension pots. The majority of respondents had favoured the alternative 'aggregator' approach, mentioning reasons like lower administrative costs and better protection for individuals.

Enabling legislation for 'pot follows member', an initiative particularly associated with former Pensions Minister Steve Webb, exists in the Pensions Act 2014; but there has been no indication of when - or if - it will be commenced.

Instead, a groundswell of support has since materialised for the pensions dashboard concept, something very like the 'virtual aggregator' preferred by many back in 2012. In Budget 2016, the Government declared it would "ensure the industry designs, funds and launches a pensions dashboard by 2019. This will mean an individual can view all their retirement savings in one place."

The industry swallowed hard and put together a Prototype Project, managed by the ABI with Treasury sponsorship, which demonstrated in May 2017 that the idea was feasible. To retain momentum after the general election in June, industry contributors agreed on a further Project to research consumer needs, engage with the wider industry, refine technical standards and look at how it could be appropriately regulated.

In their report published on 12 October, "Pensions Dashboard Project: Reconnecting people with their pensions", the project group, managed by the ABI and including 16 contributors and the PLSA, set out its recommendations for what should happen next.

The key objective is that consumers should have a right to access information about all of their pensions in one place of their choice in a standardised digital format, through regulated services.

Now "all" is the ideal objective, but Rome wasn't built in a day: there is a general expectation that it might take longer to get trust-based schemes on board than contract-based pensions. An implementation plan and timetable is required. At first, just having all of an individual's pensions listed would be a plus; provided valuations followed in a timely manner.

However, there is a very strong consensus expressed that the DWP must make data about the State Pension available "from day one". Consumers see the State Pension as an anchor

of pensions information and for years to come, it will form the major part of retirement income for most people.

An equally strong consensus formed around compulsion: all pension providers and schemes must make data available. This will require strong Government backing, with legislation and an explicit completion date. Without this, it is unlikely that public sector and trust-based schemes – particularly defined benefit schemes – will contribute as there is no obvious commercial benefit for them, only a cost.

The concept has developed so that multiple pensions dashboards are now envisaged, regulated to ensure consistency, with a governance body to oversee the network, establish and manage data standards, security, and sharing agreements. A non-commercial service, endorsed by the Government, must also be made available in order to build trust and engagement with consumers.

The ball having been lobbed back into the Government's court, it was perhaps encouraging to hear the Pensions Minister declare only a week later that the DWP will take over responsibility for the pensions dashboard "at pace" and "provide a much fuller update in the Spring of next year. There will be absolutely no doubt that the dashboard will happen."

Let us pray.

Ian Neale,Director, Aries Insight.

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Pension Funds

Dashboard Ready

Since the government announced the pensions dashboard in 2016, work has been undertaken by the pensions industry to make the concept a reality by 2019.

Although for some, the lack of immediate commercial benefit might temper their enthusiasm for the dashboard concept, its universal appeal to consumers is likely to convince doubters of its overall value.

In terms of its value to consumers, the numbers speak for themselves. More people have more jobs throughout their careers than ever before. Add auto-enrolment into the mix and your average millennial is looking at accumulating a collection of 10-15 different pension pots over their lifetime. The need for those consumers to have access that information quickly and easily is obvious, and it's only going to increase in over time.

So far, the dashboard project has been largely well-received by the industry, with most large pension providers already on board, including Standard Life, Legal & General, Aviva, Prudential and Now Pensions, to name a few.

The first phase of the project, which launched in September 2016, was designed to develop and test the technology that would allow data from multiple sources to be collected and presented to consumers. The scale of the delivery and collaboration of data is vast, with each scheme having its own set of nuances and complexities to be considered.

Carolyn Jones, head of pensions product, Fidelity International, was part of the team selected to work on the prototype project. The prototype was delivered in April 2017 and since then the team has been investigating further what both industry and consumers are looking for from the dashboard.

"There's a consumer view and then there's the industry – for example how are they going to respond, are they going to do this voluntarily?" she said.

The research found that from an industry perspective, including insurers, trustees, public and private sector schemes, most could see value of a dashboard to consumers – and this was significant enough to drive participation.

From a consumer point of view, full coverage, i.e. all schemes participating in the dashboard, will be essential to build trust and offer transparency.

So, wherever you stand on the dashboard concept, with compulsory participation looking likely and the dashboard set to be launched on schedule - preparation is essential.

Stay informed:

  • Find out if and when the dashboard will be made compulsory
  • First provider: Make your data is available early - it looks good to your members and helps build trust
  • Get online: Members will be able to click through to your scheme from the dashboard. Build a post-dashboard landing page and think about the immediate message you want to give them
  • Movers and shakers: Get ready for a high number of low value transfers as people will want to consolidate
  • Right data: Consumers will want to know simple data, such as the amount they will have in retirement or how much can they draw out now – make that data available

Lindsay Sharman


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Pension Funds

The economics of populism

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Pension Funds

Pension proud

At the PLSA conference in Manchester last month I was challenged by a comment by Martin Fahy, the CEO of ASFA (Association of Superannuation Funds of Australia) the sister organisation of the PLSA.

He reflected on the prominence of the NHS in the opening ceremony of the London Olympics in 2012 and questioned what the pensions industry needs to do to get equal billing next time?

The opening ceremony was an overload of British achievement. The £30 million spectacular, the brainchild of Oscar-winning British director Danny Boyle, included a segment where dozens of skipping nurses and children in pyjamas leaping acrobatically on massive hospital beds, with a large 'NHS' displayed.

It was a celebration of Britain's national health service, which has provided free, taxpayer-funded health care to everyone in the country since its foundation after the Second World War.

But there was nothing about pensions.

Love it or hate it everyone knows about the NHS. They know what it's for, what services it provides and, how to access it.

However, the same can't be said of pensions. Most people know very little about their pension, how it works or the retirement lifestyle it will fund.

What do we need to do to develop our pensions ambition? Our vision must be to ensure our retirement saving provision is the best in the world? Why would we even consider being second best?

Now this won't happen by accident, and it won't happen overnight. It will require a deliberate intention by policy makers, pensions industry determination, employer collaboration, creative engagement of our people but a societal change in the positioning of pensions is possible.

There are two main drivers of change, burning platform and burning ambition. Clearly if there is a burning platform, there is an immediacy to act. With pensions, there is a smouldering platform. Arguably by the time it's burning it's too late to change.

Burning ambition on the other hand needs a rallying cry. Is the prospect of a Zimmer frame flash mob, celebrating our pension prowess, at the opening ceremony of the London Olympics 2040 enough?

Peter Nicholas,Managing Director & CEO

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Pension Funds

More change, not less

There have been recent calls from the pensions administration market to be wary and cautious of service provider transitions as they have the potential to result in data loss.

Whilst it is right to highlight some of the problems encountered with this type of service transition, there is a much greater risk that we continue to scare trustees into not undertaking these vitally important market transactions.

One major reason standards in the pensions administration market have not dramatically improved over the long-term, is because the market does not act like any other rational market.

A mixture of inertia, fear and an acceptance of generally low standards means that trustees are too reluctant to change provider, which has driven down standards. The free market, when acting rationally, will inevitably and progressively mean standards improve when buyers move their business from under-performing suppliers, to those that innovate and deliver quality at a lower price.

The shopping habits of millions of people has not changed because the top three supermarkets colluded to agree on marginal improvements – they improved because Amazon invented a wholly better and more convenient way to shop.

Buyers moved their money and the top supermarket monopoly was broken, for the good of consumers. Innovation and improvements occur because businesses want to attract and retain customers.

If it's impossible to do this because trustees are continually told of the perils or problems of changing administrators, then how will this market ever really improve?

What the pensions administration market needs more than anything else, is for it to behave like a rational market.

Service transitions inevitably uncover issues with past service provision, or seek to highlight the unscrupulous behaviour of the incumbent provider – neither of which tend to come as much surprise to the transferring scheme trustees, as a mixture of these reasons tends to be the motivator for the initial decision to change.

Alongside highlighting the risks and issues we also need to clearly articulate the benefits, such as improved member service, thorough data integrity and quality assurance, as well as often bringing online new communication and digital services.

A truth often overlooked is that scheme administration transitions are simply not as complex as they once were five or ten years ago. Project management, data assurance, systems, programming and communications have evolved exponentially.

Yes, transitions involve risk, it would be naive and short-sighted not to acknowledge that, but the real risk for schemes is not taking that leap and continuing to accept poor standards and slow incremental change.

The biggest threat trustees face in terms of a transition, is generally the transferring party. Staying with them and hoping for the best is not going to improve things though and it certainly isn't going to see standards across the market improve.

Trustees should take steps now to protect themselves against the incompetence or uncooperativeness of their current administration through an exit project.

This can be achieved by setting and agreeing a schedule of exit services and for guarantees or penalties to be put in place that provide suitable motivation for a full, timely and comprehensive exit.

The only way to really improve this market is to promote, protect and encourage change.

We can do this by highlighting the success stories and improvements that transitions can bring and by encouraging trustees to take a closer look at the tools and processes that we now use that have dramatically improved the quality and robustness of these processes.

Jenny Monger FPMI,Business Design Manager, Trafalgar House

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Pension Funds

Changes are coming

With 8.5million more people now in a workplace pension scheme since its launch in 2012, so far automatic enrolment has been hailed as a resounding success. But April 2018 will see the next phase of its roll out and both employers and employees will be required to increase their minimum contributions – something trustees should prepare members for ahead of time.

The overall minimum contribution will increase from 2% to 5%. Within that, employee contributions are increasing threefold, from 1% to 3%, while employer contributions will go up from 1% to 2%. Further increases are scheduled for April 2019, with an 8% contribution split into 5% from employees and 3% from employers.

While some schemes are already contributing more than the new 5% minimum, many are not, meaning this next phase will impact their members directly. For trustees, the challenge will be not only to communicate the new figures, but also to give members the wider context for the increase, as well as being able to explain the differing contributions for employers and employees, before they appear on payslips in April.

The most straightforward reason for the increase is that at its current level, the minimum contribution is not sufficient to give members adequate savings for retirement. But at the 2017 Pensions and Lifetime Savings Association conference in October, Chris Curry, director of the Pensions Policy Institute, told delegates that pinpointing a single answer to how auto-enrolment and the debate around contributions fits into the wider financial landscape is difficult.

He said: "Nearly every response to our consultation suggested there might need to be an increase in minimum contributions, there was no consensus at all about what the right level should be, how it should be implemented, when it should be implemented, or who should bear the burden of doing that."

In addition to identifying the key messages, considering how to communicate that message to members is equally important. Engagement is the key word and trustees must ensure the information they share is clear and concise, avoiding jargon and focusing on the information members actually want to receive.

Ruston Smith, chair of Tesco Pension Trustees, told delegates at the PLSA conference: "The objective is to see how we can improve engagement to create more personal ownership so people can make more informed choices."

Smith highlighted the fact that members often receive financial information from a variety of sources, meaning pensions information is difficult to decipher, even for the most well-informed. He mooted the idea of a cohesive statement style across the industry in the future to make it easier for scheme members to understand the information they receive.

"There's been some phenomenal work done, but bring it back to the person who has all those statements coming to them; and we're all trying to keep it simple using different words. We have to think more holistically about engagement."

Trustees should also consider the limited time members have to digest and understand new information. People are distracted with multiple priorities, meaning communication about auto-enrolment needs to be short and relevant.

Whatever approach trustees choose, getting the right message across to scheme members in the right way is essential for a smooth transition in April when the increase takes effect.

Jamie Jenkins, head of pensions strategy at Standard Life, told PLSA delegates: "It's an astonishing feat so far, but the job is only half done and we are counting on employers over the next couple of years to get contributions not just in, but up."

Written by Lindsay Sharman

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