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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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Pension Funds

Enhancing decision making through cyclicality and dynamic asset allocation

When I think back to my university education in the 90's, the lectures that really stood out for me were those on time-series analysis and understanding how economies and financial markets move up and down.

As a student, keen to learn the ways and wherefores of investing, it was almost an epiphany moment – the realisation that if, as an investor, I could better understand how markets fluctuate, I would be far more equipped to make better investment decisions.

For the past two decades, I have stood by that learning and spent most of my career on building, applying and improving models of economies and financial markets.

Education is cyclical

Fast forward to 2017 and I've just returned from an INQUIRE Europe Conference in Switzerland. There, one of the interesting papers that was presented concluded that the vast majority of so called 'anomalies' that have been reported in the literature, actually cannot be replicated.

This finding is close to my heart, as it confirms what I have learned over the years: when trying to understand how markets fluctuate, it is essential to apply a sound and strict set of methodologies and techniques to prevent finding unreliable or spurious results.

Such a methodology is also needed to distinguish between the two views that I was presented with as a student. Firstly, that markets and economies move in completely unpredictable ways, that they are fully random without any underlying structure. The second is that there actually is some underlying structure to be found, while recognizing that the world remains a highly uncertain place. So, education and focus on topics at a given time can be cyclical.

Cyclicality as a stylized fact

My personal conclusion, fortunately supported by many others, is that the second view of the world is the most realistic one: if one looks carefully there is indeed some structure to be found.

Such structures are typically referred to as 'stylized facts'. Stylized facts are characterisations of how markets and economies move up and down which most people agree upon to describe reality.

One important type of stylized fact that is found, is cyclicality. Cyclicality comes in different forms, the simplest example of which is the change in seasons from Spring, Summer, Autumn to Winter, 'seasonality'. This is a mechanism which everyone is familiar with that repeats itself and impacts the economy as the seasons change.

Business cycles – a more complex example – are about medium term alternating patterns in overall economic activity, driven by structural and behavioural forces. But when thinking about cyclicality, a word of warning is in place – while cyclicality may indicate an average way of how markets and economies tend to fluctuate, it does not offer a crystal ball and also under the cyclicality assumption the future is still highly uncertain.

Stronger together

How can we use our understanding of cyclicality to enhance investment decision making? Well, if conditions change over time and contain some information about how the future might unfold, than a logical consequence is to start thinking about how this information could be used for dynamically changing an asset allocation over time.

Models that manage to capture cyclicality in a realistic way can provide relevant information to those with an asset allocation expertise.

The (almost) epiphany moment at university has served me well (so far), but if we are able to build better dynamic asset allocation strategies by using cyclicality, investors will make even better decisions and people will be more likely to achieve their goals. And for any investor, that is the ultimate aim.

Hens Steehouwer, Head of Research at Ortec Finance

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Pension Funds

The Pensions Dashboard

The Pensions Dashboard is a government backed initiative which was first announced in the 2016 Budget. The aim is to provide all pension savers with the opportunity to access details of all their pension savings in one place, to aid decision making around retirement planning by improving their understanding of projected finances at retirement, the importance of financial advice and the benefits of actively managing retirement savings. An added bonus is that this should lead to improved efficiencies and lower costs for providers, fairer market competition and an improvement to the levels of consumer understanding in relation to long-term savings.

The journey from the 2016 announcement to the proposed delivery date in 2019 continues to take shape, with the prototype demonstrated to the Government and key stakeholders earlier in 2017 by the dashboard project group, managed by the Assurance of British Insurers ("ABI").

The General election in June 2017 has not surprisingly impacted on the government's engagement with the pension dashboard project, leading to recent calls from the ABI and other key stakeholders for "firm Government direction on its plans for pensions dashboard". The ABI has published a paper "Pensions Dashboard Project – Reconnecting People with their pensions" and within the paper has outlined the following key steps they feel will need to be addressed in order to achieve the target of providing consumers with all of their pensions in one place in a standardised digital format by 2019:

- Legislation to ensure all pension providers and schemes make data available
- An implementation plan/timetable and governance body which will lay the foundation for the required standards for all involved
- Produce a non-commercial platform, which government enables consumers to access their data via regulated third parties

It remains to be seen how the Government will react to the ABI's proposal but it is clear that in order to move forward with the project the Government will need to re-engage and decide whether delivering the ABI's recommendations is a priority and compelling schemes to make data available will become a legislative requirement. Without such commitment and support it remains to be seen if the pensions dashboard will be on target to be available by 2019. However, what is clear is that there has been an overwhelmingly positive support to ensure the pension dashboard is available, as this will improve the levels of engagement with consumers and hopefully result in improving retirement outcomes.

James Melsa, Pension Consultant at Quantum Advisory

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Pension Funds

Cost Transparency

Johan Cras managing director of Kempen, speaking at the annual PLSA conference in Manchester on Thursday addressed some of the issues facing the investment and pensions industry once cost transparency becomes a regulatory act.

With effect from 3 January 2018, transaction cost disclosure in the workplace must be visible.

The regulations set out by the FCA will primarily effect those involved in the DC workplace pensions market.This includes those who provide services in that market, such as pension providers and asset managers, and the governance bodies of pension schemes, such as trustees and Independent Governance Committees (IGC)

But what effect will it have?

Johan suggests that once the "can of worms has been opened" the industry won't know what to do with the information and fears that terms and costs will be misunderstood.

Understanding costs are vital, it is therefore key to communicate costs in a relative way.

If an investment is costly it does not necessarily mean that schemes investments are operating inefficiently.

The cost needs to be placed in to some context, for instance it costs more to transact in an emerging market, but if the market is performing well the returns are value for money and that is key. Value for money is key and not cheapest is always best.

Alison Bostock, PTL, in a discussion earlier in the week also agreed that there might be a negative impact regarding cost transparency, in that there needs to be clear understating of what the costs are and why? but in the same breath see positive sees the potential in "shining a light" on things that might be wrong.

Alison says that taking a closer look into investment fees is important, schemes can check if they are paying the right cost for the services that they receive, are they getting value for money? They will be able to see trading efficiency and get a better sense of what's going on.


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Pension Funds

The importance of engagement

People know they need to save, but they lack guidance on how much to save. There is a higher level of people saving but the amount saved is at an all-time low. This could lead to many people disappointed in their retirement.

Speaking at the annual Pensions and Lifetime Savings Association conference in Manchester Guy Opperman, Work and Pensions Minister, said getting people to save more is crucial and "more is needed to be done" he "doesn't underestimate the problems but the fundamentals are positive"

And whilst auto-enrolment has had positive impact with "8.7 million people auto enrolled" it does not mean that people will be able to sit back and wait for retirement. "Auto enrolment is the first stage of engagement, basic payments will not get people a retirement" says Chris Curry, Director, Pensions Policy Insitute.

Speaking earlier at the conference Linda Gratton states that individuals would have to save 25% of their income from the day they start working to end up with a sustainable income from their pensions.

So how do we bridge the gap between too much and not enough? And perhaps more importantly, how does the industry ensure individuals engage with their own savings?

Ruston Smith, Chair, Tesco Pension Trustees, emphasises the importance of making communications simple.

"Simplify the jargon, we currently work in a regional sense when trying to make things simple" Individuals are reading a different set of words from different employers, and when people move jobs and location this can get very complicated. "The dashboard can be a centralised place to make things simple." Ruston says that the average person in an average 12-hour day consumes the equivalent of 35gb of information.

Richard Butcher, Chair PLSA, suggests that setting targets will help those that are disengaged to better understand what they are required to save.

These targets are laid out in the consultation paper – Hitting the Target.

The papers central proposal is that the UK should develop a set of 'national retirement income targets' The identification of a target annual income to achieve a desired standard of living would help savers by giving them a clear and understandable goal. On the basis of this goal, savers would then be able to calculate the amount of savings necessary to deliver the target income.

The paper states that there are three categories of saving; £10,000 to less than £15,000 is adequate to provide an individual with a 'minimum' standard of living in retirement; £20,000 to less than £25,000 is adequate to provide an individual with a 'modest' standard of living in retirement; and £35,000 or more is adequate to provide an individual with a 'comfortable' standard of living in retirement

Richard states that the minimum target of £10,000 a year needs to be realised by everyone. He invites responses to the detailed questions set out in the report by 12 January 2018 "and we'll be touring the country over the next six months, listening to anyone with an interest in helping people hit the target"


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Pension Funds

The Troubles with DB Transfers

Read all about it

Paul Pettitt, Managing Director


Origo is a not-for-profit, FinTech company dedicated to improving outcomes for consumers by transforming the financial services industry's operating efficiencies. By bringing together different organisations and groups in a non-competitive environment, Origo identifies and addresses cost and efficiency issues through the creation and maintenance of a range of industry solutions.

As a development partner of the HM Treasury's Pensions Dashboard project, Origo's Pension Finder service powers Pensions Dashboards, enabling consumers to safely find and return their pension information to their Dashboard screens.

Thanks to Origo's Options Transfers service, pensions transfer times have dramatically reduced to an average 11 calendar days, providing smooth, fast and safer transfers for consumers.

Find out more: www.origo.com

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Pension Funds

Good governance?

Good governance is fundamental to the effective operation of pension schemes and to achieving good outcomes for members.

TPR is concerned that some schemes are not achieving the standards of governance that it expects, and has launched a new, targeted campaign to drive engagement with good governance practices.

The campaign will assist schemes by issuing publications that revisit the key elements of good governance in a clear and accessible format.

The approach taken in the first publication ("Good Governance" issued on 18 September 2017) is very practical, drawing out specific points to consider and using case studies.

All schemes should review the guidance, even where current standards are high, to confirm they measure up.

Governance is relevant to all aspects of a pension scheme.

It is a vast topic and not always easy to work out how to make a start on reviewing aspects of scheme governance.

It is therefore very welcome that TPR has approached 21st Century Trustee from a perspective of addressing key themes which are the basics of good governance.

Schemes will benefit from the structure of this ongoing campaign.

TPR's approach will give schemes the opportunity to consider each component as it is launched, enabling them to review, assess and decide whether changes would be beneficial over time.

Helen Baker, Partner at Sackers.

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Pension Funds

Royal Mail staff vote to strike over pension scheme

Royal Mail announced earlier this year it would close its current defined benefit (DC) scheme in March 2018

Although the pension fund is currently in surplus, Royal Mail, which was privatised in 2013, said its current annual contribution of £400m a year would increase to £1.26bn.

The Communications Workers Union (CWU), which has 110,000 members, said the vote was "sparked by the company's attack on the pension rights of hard-working postmen and women and the refusal of the employer to engage seriously over pay, working hours, future job security and the need to improve and grow the service to the public."

Royal Mail said the current scheme must be closed because it is unsustainable.

Douglas Hamilton, head of pensions strategy at Royal Mail, said its proposals are fair: "We have never hidden the fact from our DB scheme members that the benefits they build up from April 2018 will be smaller than they are now.

"The company cannot afford the plan in its current form, but with our current DB cash balance proposal we have moved a long way compared to the defined contribution (DC) proposal we originally put forward.

"This is not about cost-cutting - Royal Mail will continue to pay broadly the same in pension contributions after its proposed changes as it does now."

More than 60% of Royal Mail employees in the UK are in a DB pension scheme, while the figure for the UK private sector is under 5%.

In place of an existing defined benefit pension scheme, which provides a guaranteed income in retirement, Royal Mail is offering a different kind of DB scheme that instead gives employees a cash lump sum linked to the value of their contributions.

First published 05.10.2017


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Pension Funds

PASA to mediate on administration service transfers

The service is designed to resolve the issues experienced by schemes during the transfer of administration services from one provider to another.

Margaret Snowdon, chair of PASA, said the service is a natural extension of its work in this area.

She said: "Changing administrators might be a relatively rare occurrence, but when it does happen the process must be smooth, safe and hassle free for all concerned - this is only possible when the ceding and receiving administrators work in co-operation."

"We have been very clear on its position in this area, publishing our Code of Conduct on Administration Provider Transfers in 2013 and requesting that all members adhere to it."

"The introduction of our mediation service was therefore a natural extension of our work here."

Snowdon added that PASA aims for trustees to be able to rely on the organisation as a means of indicating the quality of service provision.

She said: "As well as empowering administrators to be the best they can possibly be, we want trustees to be able to reply on us for quality of service, which starts with the appointment and exit processes."

From 1 January 2018, PASA members will be required to comply with the Code of Conduct and PASA will interceded if a need is identified around unreasonable delays, fees, or expectations."

PASA's mediation service will be voluntary and non-binding, seeking to bring all three parties; the scheme, ceding and receiving administration providers together for practical and fair solutions in line with good industry practice.

The mediators will be independent of administration firms to avoid conflict of interest and PASA intends to publish details of the scheme for formal launch in January 2018.

First published 05.10.2017


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Pension Funds

Annual ONS Pension Schemes Survey records highest ever membership levels

It is an increase of 17.1% on the 33.5milllion members recorded by the survey in 2015.

The survey, which looks at data on the membership of schemes and the contributions made, also found that active membership of occupational pension schemes was 13.5 million in 2016, split between the private (7.7million) and public sector (5.7million).

The OPSS covers both private and public sector occupational pension schemes registered in the UK.

It collects information about scheme membership, benefits and contributions from a sample of occupational (trust based) pension schemes consisting of two or more members – including those that are winding up.

The rise in Defined Contribution (DC) membership in recent years is likely to be due to the workplace pension reforms which meant DC arrangements (including group personal pensions), were the most likely route for employers to meet their new obligations under automatic enrolment.

Vince Smith Hughes, retirement expert at Prudential said: "The increase in the number of people joining company pensions schemes shows the success of auto enrolment and how people increasingly recognise the need to provide for their own retirement."

The number of people retiring without a pension has fallen significantly over the last 10 years and people retiring now tell us that they expect to live on about £18,000 a year.

"Our research shows auto enrolment is encouraging people to make better plans for retirement with nearly three out of ten saying they could save an additional £100 a month," added Smith Hughes.

"That's good news because over the past 10 years, responsibility for providing a retirement income has shifted from away from government to individuals and the best approach is to save as much as you can as early as you can."

First published 05.10.2017


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Pension Funds

GDPR juggernaut

I seem to remember that one of Steven King's early films was about a chap driving across America in the dead of night when, for whatever reason, a truck starts harassing him. Presumably it starts at a low level before stepping up to intimidation and then, finally, arriving at terror – it being a Steven King film, after all. Can anyone remember what that was called?

Mentally I have the image of impenetrable dark stretching in all directions shattered only by a steaming hulk of blindingly lit metal, bearing down in a cloud of snorting exhaust fumes and deafening noise. That's sort of how I feel about GDPR at the moment.

The General Data Protection Regulations, to give them their full name, come into force late in May next year. According to many they are a simple extension of the data protection rules we have lived, and possibly breathed, for many a year, updated to reflect the fact it is the 21st century now and we all communicate, store and exchange data electronically. There is, many will tell you, nothing to fear.

That might be a fair analysis (although it wouldn't make a very good horror film) but I am still in terror, for three reasons.

Firstly, a breach of the current data protection rules could, in the worst cases, result in a fine of up to £500,000. The worst kind of breach of GDPR could result in a fine equivalent to €20 million (or 4% of annual worldwide turnover, whichever is greater). That is a staggering, eye watering step up that scares me witless, even though I think I'm doing okay. The sword of Damocles just grew in length from, say, 1 meter to 40!

So, I think I'm okay, but this is what makes me sweat: I don't know that I'm okay. We use good service providers – large reputable firms that are already all over this, but it is not that core operation that scares me. It's all the little peripheral things where this could go wrong.

Does one of my co-trustees have a box of old pension scheme papers sitting almost forgotten in his study, his attic, or maybe even his garage? We archive old papers for schemes long wound up – someone has to keep this stuff in case there's a question later.

What happens if in box 12, somewhere toward the back of file 48, there is a bit of sensitive personal data that we don't need to keep anymore and that we haven't catalogued? How good are we and our service providers, really, at deleting data that is no longer needed?

Then there's all the unanswered semi-legal (or actually legal, I suppose) questions. Should we be in touch with ex-service-providers to find out what they are doing? Should our minutes record member names, or indeed any other identifier, any more and if not, how do we link our decisions to scheme governance? The list gets longer every time I talk with people about this.

Data protection is important – it should be cultural, not just procedural – but we have always held, and will continue to hold, a lot of personal data. GDPR rightly ups the ante, if for no other reason than we have the World Wide Web and email now. But the known unknowns and unknown unknowns scare me witless and, right now, I think I'd rather stare down a truck in the dead of night.

Written by Richard Butcher, Managing Director, PTL.

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Pension Funds

Women leading the way in pension saving increase

Prudential's 'Class of?' research, has tracked retirement finances, plans, and aspirations of people retiring each year since 2008.

Data from the research showed one in four (23%) of those retiring in 2008 had no pension savings at all, but this has dropped to one in seven (14%) of those planning to retire in 2017.

Prudential said the data reflects the success of government and employer initiatives, such as auto-enrolment, to encourage savings.

Women have led the way in reversing the pension saving trend – in 2008 32% of women stopped work with no private pension savings, compared with 19% in 2017.

Just over one in six men retired without a pension in 2008 (17%) while just nine per cent will do so this year.

Prudential said the growth in pension saving rates has taken place against a backdrop of 'massive upheaval' in UK pension saving rules and worldwide financial volatility and political upheaval.

In the face of these challenges retirement incomes for new retirees have struggled to recover from the sharp fall they took immediately after the financial crisis of 2007 to 2008.

The Class of 2008 expected to live on £18,700 a year – a figure that fell to £17,800 in 2009 and continued to fall until it bottomed out in 2013 at £15,300.

Since then a slow recovery has taken place, but even now, retirees in 2017 expect to live on £18,100 a year – still £600 a year short of those who gave up work 10 years ago.

Vince Smith-Hughes, retirement income expert at Prudential, said: "The past 10 years have been a decade of constant change with pension freedoms, the new State Pension, the roll out of automatic enrolment and the abolition of the default retirement age, to name just a few."

"The financial crisis, the subsequent recession and ongoing political change have all added to the uncertainty, however, despite all of this, the message about the importance of retirement saving seems to be getting through, demonstrated by a significant increase in the numbers reaching retirement having saved for their future."

First published 28.09.2017


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Pension Funds

Inquiry into pensions freedoms 'critical'

The inquiry will assess whether the reforms are achieving their objectives and whether policy changes are required, following up on the first inquiry in 2015 shortly after the reforms were introduced.

The government said the inquiry has a 'wide scope' and will look at what people are doing with their retirement savings and how they make those decisions, the information and guidance available, and the way the pension market is working.

One of the major concerns about the new freedoms is the potential for scams – fraudster target people thinking about moving their pension pots.

Police data shows that more than £43million of people's retirement savings has been lost to fraud since the policy was announced, with some scammers even fraudulently using the Pension Regulator's anti-scammer kitemark.

The Committee has asked for written evidence and recommendations on a number of topics, by Monday 23 October, including: what are people doing with their pension pots?; Is there adequate monitoring of decisions?; Are people taking advice?; Will the pensions dashboard help consumers make informed decisions?; Is Pensionwise working?; Is there sufficient product competition in the market?; Are the government and Financial Conduct Authority taking adequate steps to prevent scamming?; and are the reforms part of a coherent retirement strategy?

The Pensions and Lifetime Savings Association (PLSA) said the inquiry was essential as the choice for consumers has increased.

"The freedom for people to spend their pension pots is a good thing, but the choices are now harder," said Graham Vidler, PLSA director of external affairs.

"Alongside the FCA's retirement outcomes review, we see this announcement of a Work and Pensions Committee inquiry as critical to making the market work in the interests of consumers."

Jon Hatchett, partner at Hymans Robertson, warned that pension freedoms have encouraged consumers to access savings early and expressed concern that it would lead to more 'pensioners in poverty' in the future.

He said: "Unless action is taken now, there's worse to come over the next decade or two – it is vital savers get the right advice if they are to avoid poor financial outcomes when they retire."

First published 28.09.2017


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Pension Funds

PLSA launches final DB Taskforce report

The report looks at a range of options for pensions schemes facing the challenges of underfunding, weak employer covenants, and lack of scale.

It makes three main recommendations: a new chair's statement for DB scheme trustees; making it easier to standardise and simplify benefits; and exchanging covenants for funding.

The chair's statement would be produced annually to demonstrate they are operating in line with best practice in areas including governance, investment performance, and cost transparency.

This would also provide the cultural impetus for trustees to consider consolidating services, investment or governance where it offers the prospect of improved outcomes for their members.

Standardising and simplifying benefits would enable schemes to retain member benefits while simplifying the structure of schemes.

The UK's 6,000 DB schemes manager tens of thousands of different benefit structures, PLSA said.

The report also proposes new measures to help schemes backed by weaker covenants, which would mean that schemes could benefit from turning the uncertain promise of future support into tangible funding.

To implement the changes, the industry and the Department for Work and Pensions would need to collaborate.

As part of the Taskforce work, PLSA also undertook employer research to ascertain the level of interest in consolidation.

Among surveyed employers, almost two-thirds (65%) said they would support the principle of consolidation with support for shared administration (72%), shared external advisers (66%), shared governance (64%) and pooling assets under one asset manager (54%).

Ashok Gupta, chair of the PLSA DB Taskforce, said: "More than 11 million people rely on DB pension schemes for some or all of their retirement income, but there is a real possibility that without change we will see more high profile company failures such as BHS or Tata Steel.

"It is vital that action is taken to address covenant risk, underfunding and the current lack of scale in the majority of schemes and our proposals have the potential to transform the industry – helping to ensure more members get their full benefits, reducing sector inefficiency, addressing the issue of stressed schemes and enabling sponsors to concentrate on growing their businesses.

Gupta added that the industry and government need to 'grasp this opportunity' and tackle serious flaws that threaten the security of people's retirement.

First published 28.09.2017


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