As we head towards the end of the year, it’s a good opportunity to review how far we’ve come and to look forward to the challenges ahead.


In the area of master trusts, we’ve come a long way. This time last year, schemes were busy preparing and submitting their applications for master trust authorisation and TPR had begun to receive applications.

Now, 12 months on, we have almost finished the authorisation of existing schemes and have a market of master trusts that millions of savers can be assured meet high standards.

We don’t have a view on what the size of the market should be – our focus is to drive up standards but, as expected, there has been some scheme consolidation.

But our work to ensure master trusts are well governed doesn’t stop with authorisation. Through supervision we’ll continue to work with authorised schemes to ensure high standards are maintained and schemes continue to focus on delivering positive outcomes for members.

We’ve learned a great deal about master trusts and the market through authorisation, and we’ve started to build good one-to-one working relationships with those running schemes. We’ve learned about the different financial models that schemes operate and how the different relationships in each master trust work. This is valuable information to us as we now enter the supervision phase.

In the first year after authorisation, the intensity of supervision will be driven by the potential impact of each master trust’s failure on the market, including the number of members in the scheme and our view on the risk of failure.

We’ll be undertaking a range of activities which will involve engaging with trustees, strategists, funders and other relevant people including the scheme administrator.

These will include:
• periodic scheme evaluations
• proactive monitoring of particular concerns across the market
• requesting a supervisory return to be completed annually
• reviewing regular and ad-hoc information such as chair’s statements, scheme funder accounts, annual report and accounts, and trustees’ business plans to check that schemes continue to meet the authorisation criteria
• reviewing significant and triggering events and identifying the impact on the scheme.

We expect those responsible for master trusts to be open, honest and transparent with us – and they should contact us if they’re concerned about any emerging risks which could affect the scheme’s ability to continue to meet the authorisation criteria.

Master trusts are trail blazers and through our Future of Trusteeship work to drive up standards, we expect all DC schemes to look at master trusts as exemplars – and think about how they too can improve their governance standards and safeguards, to better protect savers.

Through master trust supervision – we are not here to catch schemes out – we want to work with them to help ensure they stay on track.

Supervision

This approach aligns with our supervision of other schemes we regulate.

Through relationship supervision, we are now engaged with significantly more schemes, targeting them through new initiatives across a broad range of areas.

To date we have been working on a one-toone basis with more than 30 public service, defined benefit (DB), hybrid, and defined contribution (DC) schemes, and we will be extending this supervision to beyond 100 schemes this financial year.

Relationship supervision is not only focused on schemes of strategic importance. It also involves more direct contact with large numbers of schemes, using data we hold to target them in relation to particular elements of governance and administration. We will give clear direction about the standards that schemes are expected to meet, and what the consequences of failing to meet those standards could be.

Record keeping

An example of this approach is that we’re now asking the trustee boards of 400 schemes to examine the data they hold to ensure it is accurate and up to date. We’ve set a six-month deadline by which trustees will be required to report back to us.

Schemes targeted in this crackdown are all types and sizes which we believe have neglected to review their data in the last three years. We’ll also be writing to 1,200 schemes prompting them to carry out data reviews every three years.

Good data is key to good scheme governance – and it is also essential to the Government’s dashboard plans; the dashboard will only be as good as the data it holds.

Whether it is poor record-keeping or other practices which put the scheme at risk, where necessary, we will use our powers to prosecute people when they put savers at risk.

But we’re not an enforcement-led regulator – we would much rather those we regulate work within the law, within our guidelines and with us.


Kim Brown
Head of Master Trusts – The Pensions Regulator

Background

The legal process under Part VII of the Financial Services and Markets Act 2000, which allows the transfer of insurance policies from one insurer to another, is a longstanding requirement necessitating court approval. There have been many applications over the years which have been blessed by the court. However, Prudential’s recent proposed transfer which related to an £11.2bn sale of annuities from Prudential to Rothesay, covering 366,000 policyholders, was not so lucky. The judge declined to approve the transfer despite the independent expert appointed by the court being satisfied that the transfer would have no material adverse effect on the security of policyholders’ benefits, and the FCA and PRA being happy for it to proceed.

Reasoning

Around 1,000 policyholder responses to the plans (15% of total responses and 0.4% of the 258,000 policyholders communicated with), could be characterised as objections. The judge accepted that the opposing policyholders had chosen Prudential because of its age and established reputation, that Rothesay lacked those attributes, and that the court should give some weight to their exercise of contractual choice.

Although Prudential had made no contractual promise to policyholders that it would not transfer their policies to another provider, the judge said that there was considerable force in the policyholders’ submissions that they reasonably assumed this would not happen. The judge also thought that it was reasonable for policyholders reading statements that they were buying “a lifetime annuity with Prudential” to make the assumption that – unless they agreed otherwise – it would be Prudential that would provide them with the resulting annuity for life.

Finally, the court found that it was not a fanciful possibility that either provider might require external financial support over the annuitants’ lifetime.

In such an event, there was a material difference in the potential availability of assistance for the two companies in question.

What are the implications?

Perhaps the key message to take from the decision is that the court will jealously guard its discretionary role in the Part VII procedure. Although the judge accepted that the court’s focus in many Part VII cases was on the security of policyholders’ benefits, he laid emphasis on the court being obliged to consider “all the circumstances of the case”. There is no presumption in favour of transfer and if the agreement of the independent expert and relevant regulators were enough, then there would have been no need for the legislation to give the court a role at all.

The judge did not make any broader assertions about the selection of insurers in other scenarios; however, this judgment will clearly cause concern more widely that policyholder activism might become a new feature of Part VII transfer proposals.

Perhaps unsurprisingly, Rothesay has filed an appeal against the decision, although it’s unlikely to be heard for several months.

It will be interesting to see how the Court of Appeal deals with the case and whether it treats the judgment as laying down principles of wider application.

In the meantime, insurers are likely to proceed with caution, and in some cases perhaps not proceed at all, until more clarity is available.

Pete Coyne – Partner, and
Amanda Chamming’s – Senior Associate, CMS
Cameron McKenna Nabarro Olswang LLP


Most UK workers have become significantly more uncertain about the whole notion of retirement over the past two decades or so. The shift from Defined Benefit to Defined Contribution pension schemes means that they’re now having to contend with uncertainty about how they can best plan for retirement, how their pensions investment funds will perform, and the age at which they can retire.


The result of this uncertainty is lots of anxiety about pensions and retirement. Many people feel helpless and not in control of their own future, and a lack of understanding about the current pension system compounds these negative emotions. People simply don’t have the knowledge and confidence to make informed decisions about their finances, including their pensions.

Encouragingly, our Future Face of Retirement research shows that employers are serious about supporting and empowering their people to approach pensions and retirement planning positively. Many recognise that it’s in nobody’s interests to have large sections of the workforce feeling anxious and out of control about their prospects for later life, and they’re offering workers the information and support they need to feel more in control and aware of their options.

It’s critical that both employers and the pensions industry itself reflect on how they can engage and educate people to help them to enjoy better retirement outcomes. Even now, so much communication around pensions is full of jargon and inaccessible, technical language that turns people off and reinforces their belief that pensions are simply too complex and too boring for them. A lot of people have argued that we need to ‘re-brand’ pensions to overcome this negative belief and it certainly has its merits. Getting people to think about lifetime or long-term savings could be an easier task than trying, yet again, to engage them around pensions.

Whatever label we give it, employers need to take a far more realistic, pragmatic approach to communicating about pensions, recognising that many people find themselves with inadequate savings and little room for manoeuvre.

Communications need to be simplified to give people the information they need in a way that is easy to understand and act on.

Technology has a crucial role to play in driving meaningful engagement and education, and organisations are increasingly embracing innovations in Augmented Reality and Artificial Intelligence to deliver more personalised communications, and to allow members to explore and visualise the impact of the choices they make today on their future.

Communications also need to become more relevant and more timely – we’re seeing far more sophisticated use of nudge communications, encouraging people to consider pensions at significant events such as getting a pay rise or bonus, getting married or having a child.

A more uniform or standardised way of communicating about pensions would also be beneficial – currently, approaches vary hugely between schemes and this increases confusion and complexity for people with multiple pensions. The government’s Pensions Dashboard initiative is to be welcomed and, as an industry, we need to ensure that it meets its objective of providing people with a far clearer view of their overall pension position. Our research shows that there is a real appetite for more peer-to-peer engagement and education, and the pensions industry must start listening to employees and delivering the programmes that they’re demanding.


Fraser Stewart
Business Development Manager – Capita Employee Solutions

Background

HMRC has been working with pension scheme administrators across the UK to reconcile scheme and HMRC records regarding contracted-out pension liabilities (GMPs). HMRC has returned all the outstanding queries issued to them and closed the reconciliation window to further queries but it is HMRC’s intention to issue one final Scheme Reconciliation Service (SRS) data report to every pension scheme before the end of this year.

The SRS data report will present the final membership and GMP position for every Scheme Contracted-Out Number (SCON) and concludes 5 years of reconciliation work between HMRC and the pensions industry. However, this is not the end of the process for pension schemes.

New Final Data Cut from HMRC

In order to ensure that HMRC has correctly acted upon all the instructions submitted by administrators and to identify whether any additional liabilities have been added to pension schemes by other schemes and providers as part of their reconciliation projects, the SRS report will require a detailed analysis. This means checking it against the final results held by each pension scheme administrator for each GMP Reconciliation exercise carried out. This analysis is a new piece of work above and beyond that already planned and carried out, and may not have been factored into GP projects to date; it was never HMRC’s intention to provide a final data report to pensions’ administrators.

Provision of the SRS report was only agreed with HMRC a few months ago following pressure from the pensions industry via the HMRC Forum. The pensions industry lobbied for this final report for a number of important reasons, including:

• scheme administrators need to have visibility of any additional liabilities that may have been transferred to their schemes by other firms during the course of their GMP reconciliation exercises; and

• HMRC records may not have been updated with information supplied by the pensions industry or it may not be correct even if confirmation has been received from HMRC. Therefore, a review of the final data report from HMRC is the only way to confirm reliably that the information held by HMRC agrees with the records for each pension scheme.

SRS data analysis

We recommend that for all the pension schemes for which a GMP reconciliation project has been undertaken, the Trustee should:
> complete an analysis of the reconciled GMP data against the final SRS data report
> check that the membership and GMP liability values agree with those on the HMRC database, and
> prepare a final GMP reconciliation summary of all findings and proposed solutions for any new membership, and GMP value discrepancies identified.

It will be necessary to complete this work in tandem with the Phase 4 GMP reconciliation work so that all necessary data are available for GMP equalisation. In addition, if the scheme at some future date moved to buy-out or winds-up, this summary will provide a robust audit trail and evidence what has been done.

Lorraine Harper
PMI Vice President and Director of JLT Employee Benefits


So, you’re thinking of doing a longevity swap. Your advisers are probably excited to get underway, and as a trustee board you might be a little nervous about becoming involved in such a large transaction. You may be thinking about how this fits into a longer-term strategy in your scheme’s journey plan – and if not, you should be.


One of the issues you ought to be considering (and indeed may discuss with the scheme’s sponsor prior to going to market) is whether your scheme needs a right to convert your longevity hedge into a bulk annuity in the future. Once upon a time, this might not have been on your radar, or in the contemplation of your counterparty, and some in the market had suggested in the past that novation of a swap just couldn’t work. But recently we’ve seen a couple of developments in this space, particularly transactions in which BA and Rolls-Royce have converted their longevity swaps into bulk annuities.

So, are longevity transactions just another stepping stone on the way to full buy-out?

Stepping stone, or the bridge to self-sufficiency?

Your longevity swap may just be another milestone on the journey towards full buy-out. It is perfectly reasonable for some schemes to look to the market to hedge longevity risk now whilst accumulating further investment growth in order to buy out the scheme at a later date. If this is the case, then you should think about whether your future bulk annuity opportunities would cover the entirety of the population under the longevity hedge, or whether you will need to tranche that population to seek smaller bulk annuity transactions (and split up the longevity swap in the process). This will impact your approach to setting the framework for this to happen with your counterparty. It may instead be that you and your sponsor think that the scheme has an opportunity to walk like an insurer, talk like an insurer, but remain a pension scheme meeting members’ benefit payments well into the future. If this is the case, a longevity hedge is likely a long-term solution for your scheme (albeit that buy-in transactions may be regarded as a good investment opportunity down the line). A more flexible approach to setting the future conditions for conversion to a buy-in could be taken here with your counterparty.

Why conversion might become the norm

It seems reasonable to assume that we will see more conversions to annuity going forward, and we should therefore see more insurers and reinsurers in the market looking to accommodate such conversions. The longevity swap market had its ten-year anniversary this year, and solutions for smaller schemes are starting to sprout. Solvency II rules, noting that they have now been in force for three years, also have an impact on the way insurers and reinsurers deal with their longevity risk and this potentially opens up more opportunities for schemes to convert their longevity transactions to bulk annuities.

All of this means that, going forward, schemes should think clearly about their goals; in turn this will have an impact on how they approach the market and the contractual terms to get there.

A note on structure

It’s worth noting that there are several possibilities for transacting a longevity swap: schemes can use the existing infrastructure available through a commercial insurer, or they can use a captive insurance structure, choosing either a commercial provider or putting together a completely bespoke structure (perhaps leveraging off their sponsor’s existing business). Generally speaking, using a bespoke route yields more flexibility on the contractual terms as the trustees can negotiate directly with the reinsurer.

Hard-boiled or soft poached?

There are two main contractual areas to consider once you’ve decided whether conversion to a bulk annuity is the scheme’s ultimate goal: restructuring and early termination provisions. Which is more important will depend on whether or not your scheme is consciously looking for a buy-out opportunity later on.

If buy-out is your goal, then consider how you will convert tranches of your longevity swap. Partial restructuring should be discussed with the reinsurer and you may wish to nail down some process around how the reinsurer will react to the scheme’s proposal to convert part of the swap to a buy-out. It would be worth planning your exit strategy now. What kind of early termination provisions do you have in place to give some certainty that you can buy out parts of the longevity swap population without disturbing the remainder? Linking these partial termination provisions with the restructuring clause can provide the trustees with greater flexibility: if your reinsurer says no to your proposal to partially novate the swap to a bulk annuity provider, having that link would allow you to use the nuclear option and terminate that portion of the swap.

If, alternatively, you’re looking to hold your longevity swap for the long-term, a more flexible approach may be more appropriate for you. An agreement to cooperate and engage with a proposal to restructure in good faith will go some way to pinning down an organisation for the future should the people involved in today’s negotiation move on. Setting out a number of conditions for converting the swap could also add certainty and help you understand your counterparty’s process for dealing with future proposals to convert the transaction.

Some reinsurers will be more flexible than others in terms of what contractual commitments they will make for future generations of the business. Trustees should remember that negotiating their rights around restructuring and early termination is both about getting clarity in the contract on how your counterparty will deal with particular circumstances, and putting your intentions and aspirations on the table with that organisation to ensure they’re aware of and willing to support them.

There’s lots to think about here, and strategising beforehand and looking for some engagement on the issue in your request for a quotation can be useful.

Trustees and scheme sponsors should discuss with their advisers what it is they’re after: how the swap fits into the journey plan for the scheme, and what the key concerns and requirements are for stakeholders in completing that journey.

Mike Fallow
Associate
Sackers



Environmental, Social and Governance (ESG) investment is on the increase but many are often confused by what ESG investment means in practice.


World problems creating risk for investment

The world is facing an increasing number of environmental and social challenges. As a consequence, the nature of what makes a good investment has changed. These evolving challenges create a myriad of risks for investors but they also open up the possibility for thinking differently about capital allocation.

There are three major environmental and social forces challenging the investment landscape; climate change, the growth in inequalities and unsustainable consumption patterns.

Climates are changing: we are constantly exposed to rapid changes in weather patterns.

San Francisco, British Columbia and Delhi all reported all-time high record temperatures this year. Other unusual weather occurrences including storms, flooding and giant hailstones across Europe and Asia, and typhoons and hurricanes across the Far East and Americas have been prevalent in the media this year. As the cause is associated with the rise in carbon dioxide in our atmosphere from industrial activities, this poses a risk for any company exposed to heavy carbon industries.

The inequality gap is widening: the gap between the ‘haves’ and the ‘have nots’ is growing and is driving social pressures and trends. The pressure on companies to ensure they are not exacerbating this gap, as well as the pressure to demonstrate a ‘purpose’ and deliver more than just a financial return, needs to be factored into investment considerations.

Consumption is unsustainable: we also continue to consume at unprecedented rates. This year, earth overshoot day (the day we have used more from nature than we can replenish in a year) occurred on 29th July, two days earlier than in 2018. All companies consume natural resources and they need to manage how they do so, as natural resources become scarcer and harder to access.

Companies cannot operate in isolation. What they do, what they make, the services they provide, and how they treat their stakeholders and communities all affect their ability to continue to operate freely, and influence their ability to return cash to shareholders.

ESG Integration is a process

This is where ESG integration plays an important role in investment. ESG integration is not making a moral judgement about an investment but rather thinking about ESG issues in relation to how they would affect a company’s ability to generate sustainable returns. ESG matters should form a holistic part of understanding the risk processes, governance mechanisms and operational standards of any company. Corporate scandals from the past demonstrate how material poor risk management, operational control, culture and governance structures can be. Examples include BP’s Macondo oil spill, Enron’s business ethics, Nike’s accusations of child slavery in factories, the Volkswagen emissions scandal and Facebook’s data privacy issues.

The rise in legislation relating to single-use plastic, a growing move away from fossil fuel use and providing access to basic services are all examples of ESG trends. Investors need to understand how these themes affect different sectors as well as individual companies. Assurance needs to be sought that investments have well established governance frameworks, strong board composition, risks assessments, policies, audit mechanisms and target setting relating to key ESG factors.

Beyond integration

While ESG integration is about making better informed decisions, there is another aspect about ESG investment worth exploring. Beyond risk management, there is a growing desire to think about capital allocation strategies that support sustainability objectives. While the world faces significant challenges, it is worth remembering that problems often drive innovation, opportunity and encourage the belief that you can make money and make a difference.

More recently, the UN Sustainable Development Goals (SDGs) have been established which identify key problems that the UN wants to address before 2030. These goals can be used to establish investment strategies, and Socially Responsible Investment (SRI) funds, focused on driving investments into those companies that are helping to provide tangible solutions and develop business activities in a way that support the goals.

Over the past 30 years, we have seen a spectrum of capital developing that incorporates environmental and social aspects into investment strategies driven from a set of values and sustainability beliefs. This ranges from the integration of these factors into mainstream investment analysis, through to using ESG factors to develop sustainable investment strategies that focus more on how investments benefit society and contribute to the solutions the world needs, to solve the issues and problems we face today. The Impact Management Project developed a spectrum of capital that considers how investments can fall into three areas: avoid harm (reduce risk), benefit stakeholders and contribute to solutions. The chart below provides examples of how this spectrum can be applied if you were to invest in a specific sector.


Two methods to gain from developments in ESG

The awareness of environmental, social and governance issues has risen yet investors can be confused with the terminology and its application. ESG factors can be used in one of two ways – the first is within the investment process; to ensure a better understanding of the ESG issues that impact investments and so to drive change for a better financial return. The second is to create a ‘socially responsible’ outcome or product where the investment strategy embeds greater considerations of sustainability factors. In conclusion, we see sustainable investment influencing ways that capital is allocated, as well as how sustainable returns can be created.

Amanda Young
Global Head of Responsible Investment –
Aberdeen Standard Investments


Aberdeen-StandardImportant information

For Professional Investors Only – Not for public distribution. Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results. United Kingdom United Kingdom: Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL. Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated in the UK by the Financial Conduct Authority. GB-301019-102419-1


At a recent Pension Trustee conference, delegates asked a colleague discussing pension transfers questions about responsibility for the consequences of pension scheme member choices.


Specifically, who is responsible if a member transfers benefits and is subsequently found to have been scammed? Also, who is responsible when an adviser has been appointed to provide regulated financial advice to scheme members on retirement matters, but the member is unhappy with the advice?

Both are good questions and are highly relevant given the continued focus on pension scams and pension transfers.

The answers to both questions are similar but not necessarily cut and dried. Ultimately, pension scheme members bear the bulk of the responsibility for their decision making, but there is no doubt that they need an ever increasing level of support from Trustees; some of which are set out in regulation and others are covered in one of a number of excellent guides and voluntary codes within the pension industry.

The Pension Scams Industry Group (PSIG) code of good practice – ‘Combating Pension Scams’, is based on 3 key principles;

1/ To raise awareness of pension scams for members and beneficiaries
2/ To have robust processes for assessing whether a scheme may  be operating as part of a scam
3/ To be aware of the known current scam strategies.

The Pension Transfer Gold Standard (PTGS), created by the Pension Advice Taskforce, is for consumers, Trustees and advisers in the DB transfer market. It takes the Financial Conduct Authority’s (FCA) position as a starting point that a pension transfer is not suitable and sets out practical steps and examples of good practice to deliver better member outcomes. It’s expected to become best practice and something Trustees should look for that advisers who offer pension transfer advice, sign up to the PTGS and agree to evidence how they are meeting the standards.

Like PSIG, a key principle relates to educating members before they make any missteps atretirement. Something that as workplace financial education provider, we wholeheartedly agree with.

Specifically for Trustees, there are regulatory and disclosure responsibilities to discharge when dealing with member requests – whether that is for information about benefits or for a pension transfer request. However, these don’t always ensure that a member is protected against the myriad of risks faced when accessing their benefits.

But in general, if we assume Trustees have carried out the required checks about the validity of the receiving scheme, have sent the necessary scam warnings, and where a transfer relates to benefits in excess of £30k have checked the member has taken regulated financial advice from a suitably qualified adviser, then that should be job done. The Trustee should then be able to defend any subsequent complaint regarding a scam.

However, it is important to get the process right, otherwise the above does not stand.

An example of this is the Pension Ombudsman finding for Mr N against the Northumbria Police Authority in 2018. The Ombudsman found the Authority failed to carry out the appropriate checks on the receiving scheme and provide warnings to the member on the risks of a pension transfer scam, despite the member having taken advice from a regulated financial adviser.

In 2018, in the case of Mrs R, the Pension Ombudsman found against the Trustees of a defined benefit (DB) scheme for not providing the relevant information to ensure the maximum amount of widow’s benefits from the scheme. This was not a process issue as such, rather an informational one, but the end result was the same; a member made a poor decision that would have had lifelong and detrimental financial consequences because they were not given the right information to make an informed decision.

However, research carried out by WEALTH at work and the PMI earlier in 2019 highlights that Trustees are concerned about members not making the right decisions. In particular, Trustee concerns include worries over members being ill-equipped to deal with a range of issues faced when accessing benefits and that costly mistakes could be made including excess tax being paid, falling prey to scammers, or falling foul of the dangers inherent in DB transfers.

Whilst the regulations don’t and can’t guarantee a member will always avoid suffering financial loss, there is a duty of care and a regulatory requirement to have processes in place to help members and employees understand how to protect themselves and make informed choices. The voluntary codes I mentioned earlier are a good start but ultimately we need Trustees to facilitate access to financial education and guidance at-retirement, as members are more likely to make informed choices if they do, including being able to decide if they need further support such as regulated financial advice.

If this is done after a thorough due diligence process which includes sourcing a reputable firm and checking their regulatory record, speaking to other schemes or employers using their services, looking at member feedback and carrying out a site visit, Trustees should then feel confident that the responsibility for the guidance and regulated financial advice given to members, and the consequences of that, rest with the chosen provider and not the Trustee.

Jonathan Watts-Lay
Director
WEALTH at work



The governance of trust-based defined contribution (DC) and defined benefit (DB) arrangements has much in common. All trustees must oversee administration, investment and communications and ensure good governance through a motivated and engaged board, annual effective assessments and robust risk management. But there are of course key differences, not only due to the nature of the different types of pension arrangements, but also due to the differing development of governance regulations and guidance. Such differences (and the learnings that each can take from the other) did not play a significant role in the Regulator’s recent consultation discussion paper on the future of governance. I take up that theme here…


DC Governance has exploded into life over the last five years, with the DC Code being a central focus around which trustees can assess the extent to which they are compliant with requirements. Additionally, many medium and larger size schemes have an ongoing DC Governance consultant supporting the trustees with this task, and in particular the legally required ‘value for members’ assessment and DC Chair Statement.

DB Governance is in a slightly different position. As yet, there is no ‘DB Governance Code’ (although the Pensions Regulator is currently reviewing and consolidating all its guidance), and as such DB Governance has a different profile. Even key new governance requirements like the DB Chair Statement have so far been trailblazed under a ‘funding’ umbrella rather than a governance one. Yet a central part of managing DB schemes is the important governance concept of Integrated Risk Management.

What DB can learn from DC

Given that the final details of the DB Chair Statement are yet to emerge, there is still time to hope that lessons can be learned from DC world. It is already clear the DB Chair Statement will not be subject to mandatory fining requirements by the underlying regulations, something that has turned the DC Chair Statement into more of a compliance piece than the original vision of a requirement that inspires good governance and communicates this to scheme members. Taking lessons from this, the DB Chair Statement should be a genuine governance document and not just a supplement to the triennial valuation paperwork. Like its DC counterpart it may benefit from:

• A requirement to consider the value for money provided by the scheme i.e. how member outcomes are ultimately being improved by the good governance and oversight provided by the trustees, and high-quality strategic advice; the current DC requirement which, in law, only requires assessment of services which members pay for ignores many factors which contribute to a high-value scheme for members such as the level of contributions, their ultimate expected outcome and benefits which the sponsor pays for, like great governance

• Meaningful narrative around governance quality such as training policies, approach to risk management and annual effectiveness assessment.

These are in addition to the clear focus on long-term objectives and approach to Integrated Risk Management (IRM) that all anticipate for inclusion. A central DB Governance Code, similar to that for DC, would also help to emphasise the importance of good governance for DB schemes, and draw together key themes such as trustee effectiveness (including diversity) and IRM.

What DC can learn from DB

Whilst DC Governance has in general advanced beyond specific requirements for DB, there is still much that DC can take from standard DB Governance. Two of these are the issues of covenant and triennial valuations. My colleague Rona Train raised the issue of covenant in DC in one of her recent blogs. What is meant by this? Surely, given no promised benefit, the strength of the sponsor in DC isn’t so important? But there is a neglected issue here: what happens on sponsor insolvency for a company with a DC scheme that has no provision for wind-up expenses to be paid? The unpalatable truth is that expenses may need to be taken from individual member accounts. To avoid the risk of such an action, DC trustees should have regard for the sponsor strength and any signs that it may not be a going concern. They may also want to consider the matter further, in terms of gaining assurances that money has been put aside to deal with any such eventuality.

So that’s covenant; how about valuations? Every DB scheme must undertake a valuation every three years to assess the funding level of the scheme and agree a recovery plan if necessary to repair any deficit. What could a ‘valuation’ concept mean in DC? When it comes down to it, what really matters in DC is member outcomes, which are extremely variable and critically dependent on members understanding a need to act over contributions, investment and retirement choices. Valuations in DC would therefore be valuations on the extent to which members are likely to obtain good outcomes based on their current scheme (and an appropriate allowance for service and benefits elsewhere). The results of such a valuation would support wider understanding amongst both sponsors and DC members of exactly what they can expect to get if they continue their current pattern of contributions and investment strategy.

The Future of trust-based Governance

The Pension Regulator’s consultation on the future of Trusteeship and Governance has focused minds on issues such as trustee board composition (for example whether they are sufficiently diverse, or all require at least one professional), and trustee effectiveness and training. It has not however considered in detail the differences and learnings that the two major models of UK pension provision can take from each other.

Overall, we must be serious about the governance of our pension schemes. This requires a culture where both trusteeship and good governance are strongly valued.

In such a culture, enough trustees will be found and ‘hours counting’ CPD will be unnecessary, as will constant regulatory intervention. Sponsors of pension schemes should see reputational risk around pension governance as a high priority and support their trustee boards appropriately. Good governance is about great trustees, strong secretarial and adviser support, and a willingness to adapt and learn from our collective experience to date.

Laura Andrikopoulos
Head of DC Governance
Hymans Robertson



What did you do with your last pension statement? If I’m honest, I don’t quite remember, but it’s very likely I looked at it, promised myself I would increase my contributions next year, filed it in a drawer of papers and then moved on.

So how would that change if I could see the information on the pensions dashboard? The intention of the dashboard, according to the Department of Work and Pensions, is that it becomes “a digital interface that will enable people to see all their lifetime pension savings in one place”.1 This is a laudable aim, and particularly useful for those with a mixture of defined benefit (DB) and defined contribution (DC) pensions, but with DB deferred members declining and the possibility of pot follows member, I would argue that the pensions dashboard’s true value is not so much the provision of information as the potential to significantly increase people’s engagement with their retirement savings. By designing a dashboard that encourages interaction and positive behavioural changes, it could bring pensions to life for this and future generations. Let’s look at three industries which have increased engagement with their products by making them interactive: banking, utilities and fitness.

Like the pensions dashboard, online banking apps contain individuals’ financial details, and so must demonstrate that they operate in a secure environment, and provide accurate information.

Banks not only achieve this individually, but – since January 2018 – larger banks have also been part of the Open Banking initiative, allowing consumers to view all their accounts in one place. Engagement with this functionality is growing: it was used three million times in July 2018 alone, with an increasing number of firms lining up to join it.2 Regulated interfaces work behind the scenes to allow consumers to have a holistic view of their finances and switch providers more easily. An ongoing and ambitious project, its successful delivery requires harnessing the expertise of fintech companies to help with the logistics of data sharing, and trusted branding to appeal to consumers.3 Indeed, the new body responsible for the dashboard, the Money and Pensions Service (MAPS), is already considering what can be learnt from Open Banking.4

The success of online only bank Monzo also illustrates how engagement with consumers can translate into increased activity (and business growth).5 Monzo’s app allows consumers to place money in ‘pots’ – perhaps one for bills, one for holidays, one for nights out.

They can set targets for each pot, receive notifications when they reach their goals or make payments, and easily move money around.

A particular favourite with millennials, Monzo’s customers prioritise engagement with their budgeting aims over interest bearing accounts (Monzo do not pay interest on their current accounts). Goals and notifications reinforce positive behaviour and make banking more interesting.

Some DC pension providers already offer some of these features – Pension Bee for example allows users to set retirement goals and transfer money from their bank account to their pension pot as either a one off or a regular contribution. They can see how their pension has performed and use the information to make decisions about their future saving. (Indeed, MAPS will have to consider how the dashboard deals with the provision of advice and guidance.) Although these are features well suited to DC pensions, there’s little reason why a DB pension cannot also be treated as a pot, albeit one that cannot be contributed to in the same manner. If an individual could see their projected retirement income (both DB and DC), set goals around that and make payments into their DC plan to improve their income all in one place, it would be incredibly powerful and do much to improve people’s enthusiasm towards their retirement saving.

The utilities industry is another sector interested in both the sharing of data and the need to engage consumers.

The midata project – originally intended to be more wide reaching – has been adopted most extensively by the utilities industry. The project aims to standardise the sharing of data (with a focus on data protection) for the benefit of consumers who will be able to make comparisons between providers’ various tariffs and analyse their data to “gain insights into their own behaviour”.6

The logistics of achieving this aim have not been straightforward. Issues such as consumer consent to data sharing and how this consent is verified have slowed the project, and it has taken several years for government to consult on the project and begin to lay down the necessary regulatory framework.7 The ability to combine data from several sources has proved tricky. MAPS, then, should not underestimate the task ahead as it builds its “digital architecture” for the dashboard, particularly given the relatively poor data prevalent in the pensions industry. *

The midata project may provide it with some valuable lessons as it seeks to gather and combine data into a single dashboard.

Yet the layperson likely knows little about this project and what happens behind the scenes. If they have an online account with a utilities provider they will not only be able to perform basic tasks such as paying a bill, but also log on and see their usage, compare it to previous periods and perhaps even see how it compares to the average consumption of a household of similar size. This kind of benchmarking is engaging and encourages positive behaviour. Consumers can see if they’re using less energy, reducing waste – and therefore saving money – over time.

This constant and personal narrative make an otherwise mundane – and necessary – product come to life, and encourages a level of interaction that benefits both the provider (self-serving customers mean reduced costs for companies) and the consumer.

Arguably the most successful industry at engaging consumers via dashboards and taking them on a personal journey is the fitness industry. This is driven entirely by commercial need: if it doesn’t enthuse people then there is no business.

Unlike banking and utilities, the use of online fitness apps is much more of a choice. This challenge has not deterred the sector and its success has been exponential, with Fitbit claiming 27.6 million active users in 2018.8

A Fitbit dashboard offers users an holistic view of their fitness journey, providing them with a wide range of metrics and allowing them to drag and drop their preferred metrics into their own personal dashboard. This allows the user to avoid the risk of information overload and gives them the opportunity to intuitively create an aesthetically pleasing and useful dashboard. It also allows them to set goals from the outset and have a clear vision of their pre-determined target. The dashboard takes users on a journey and – crucially – helps them reach their required destination. It generates notifications at various intervals to congratulate them on progress and encourage them towards their next mini goal. Again, it is this sense of journey that keeps users actively involved with the product.

So what of this particular example can be transferred to the pensions dashboard? The ability of users to curate their own dashboard and include only information they want to look at is useful. Modelling tools can take users on a journey by helping them identify their destination – ie how much money they might require in retirement – and what they need to contribute further in order to get there. For those contributing to DC pots, an Annual Allowance gauge could also prove a useful nudge to those wishing to make use of the tax relief available to them. [Other DB examples?] There is no denying that these tools require a level of digital sophistication that would need to be phased in over time, but neither should this kind of functionality be dismissed as the pensions dashboard develops.

Indeed, I would argue that it is only by being ambitious that the pensions dashboard will reach its full potential – not just as an information hub, but as a means of reinvigorating and reconnecting people with their retirement savings. The examples discussed above are all industries that recognise the power of engaging consumers with their products, using well designed dashboards which convert user data into user action. The delivery of a truly interactive dashboard will undoubtedly be tough. There is much to get right in terms of the digital architecture and the regulation surrounding it, but there are examples, like midata and Open Banking, to follow and learn from.

Good retirement outcomes require people to be engaged with and take ownership of their retirement savings, even more so since Freedom and Choice.

The pensions dashboard is a fantastic opportunity to do just that, but it will require more than simply the provision of information – even if it is online rather than a series of paper statements. Much like banking, paying your gas bill and getting regular exercise, making retirement saving an interactive product could be the step change the next generation of savers needs.


1 Money & Pensions Service (2019) moneyandpensionsservice.org.uk, [Online]. Available at www.moneyandpensionsservice.org.uk/pensions-dashboard/. (Accessed 6 September 2019).
2 Marria, Vishal, ‘How Open Banking has changed financial services so far’, December 2018. Forbes (2019) [Online]. Available at https://www.forbes.com/sites/ vishalmarria/2018/12/10/how-open-banking-has-changed-financial-services-so- far/#639b5a163e07 (Accessed 6 September 2019).
3Pinsent Masons, ‘The Future of Open Banking, beyond January 2018’, 2017.
4Department for Work & Pensions, ‘Pensions Dashboards: Government response to the consultation’, April 2019, p38-39.
555,000 people open a Monzo bank account every week. Monzo (2019) [Online]. Available at www.monzo.com (Accessed 6 September 2019).
6Department for Business, Innovation & Skills, ‘The midata vision of consumer empowerment’, November 2011. Gov.uk (2019) [Online]. Available at www.gov.uk/government/ news/the-midata-vision-of-consumer-empowerment (Accessed 6 September 2019).
7Department for Business, Energy & Industrial Strategy, ‘Implementing midata in the domestic energy sector – Government response to the Call for Evidence’, July 2018.
8Fitbit, ‘Fitbit reports $571 million Q4 2018 revenue and $1.51 billion FY 2018 revenue’, February 2019. Fitbit.com (2019) [Online]. Available at https://s2.q4cdn.com/857130097/ files/doc_news/Fitbit-Reports-571-Million-Q418-Revenue-and-151- Billion-FY18-Revenue.pdf (Accessed 6 September 2019).



Ella Purkiss

Associate Consultant – LCP


Pension risk transfer, also known as bulk annuities, is the best way of protecting the hard-earned pension benefits of members of defined benefit pension schemes. Here, we examine the market and highlight how insurers such as Pension Insurance Corporation plc (PIC) approach these transactions in an increasingly buoyant market.


The pension risk transfer market has grown rapidly over the last five years, with the market projected to reach £40 billion of new transactions in 2019. This growth has been driven by a number of factors on the liability side.

As defined benefit pension schemes have been closed to new members and / or future accrual, trustees have realised the need for, and benefits of, fully de-risking their liabilities. Many have been on a de-risking journey for up to a decade and are now better prepared than ever to take advantage of attractive opportunities. Those trustees who successfully complete a bulk annuity transaction typically have a clear goal in mind when approaching insurers. They may have been working to a clear long-term de-risking plan and have transacted a series of buy-ins before moving to buyout.

External factors have had a role too, such as the government’s introduction of pension freedoms in April 2015. For the first time, members could choose to opt out of their pension, which resulted in many schemes seeing their liabilities decline, and hence an improvement in their overall funding position. Changes in longevity have had a huge role to play with a decline in forecast average life expectancy increases for British men and women, leading to better funding positions. At the same time, there has been increased demand from the global reinsurance market to take on the risks associated with policyholders living longer than expected. The longevity reinsurance market, which has seen interest and activity from global reinsurers, has helped bulk annuity insurers manage their capital requirements, provide better pricing for trustees and has improved capacity for transactions within the market.

On the asset side, insurers themselves have innovated and adapted as the market has evolved. In particular, insurers have developed their ability to privately source suitable and, more importantly, secure long-term assets to back long-term liabilities. This includes investments in areas like social housing, renewable energy, and the university sector.

These factors have led to a significant increase in transactions coming to market with PIC already quoting on over 80 transactions so far this year in comparison with around 60 in 2016.

The size of deals coming to market has also been increasing, with a significant rise in transactions coming at the larger end of the spectrum. Despite this, there hasn’t been a significant drop-off in quotations on smaller deals, leading to a need to prioritise.

With the increased supply of large transactions in 2019, there have been situations where two transactions come to market at the same time. This leads to a need for insurers to prioritise and consider factors such as staffing, the availability of advisers, assets held by the scheme, capital requirements, ability to secure reinsurance on longevity risks, deal specifics such as the price, target and whether a joint working group has been set up. Similar exercises are carried out when considering two deals of a small size. The case study (see page opposite) illustrates the decision-making process that is typically undertaken by insurers.

CASE STUDY: Two large transactions

In this scenario we compare Scheme A and Scheme B. Scheme A has a transaction size of £1.1 billion and is coming to market to secure a buyout. Scheme A’s assets are split 60% corporate bonds, 35% government bonds and 5% cash. The trustees are looking to transact using the assets of the scheme, which they expect to be funded at 105% of the scheme’s liabilities. Pricing, on a rolling basis, will be locked in to the scheme assets. In addition, the trustees have indicated that there will be three pricing rounds and have set up a joint working group consisting of the advisers, the trustees and the sponsoring company, which will ultimately select the final insurer. The scheme consists of 70% pensioner members and 30% deferred members, which has reinsurance implications.

Scheme B, which wants to transact on a buy-in basis, has assets of £1.3 billion. The assets are 100% government bonds and the pricing target is gilts +40bps, with a gilt-based roll forward mechanism for future pricing. The trustees have planned for two pricing rounds and whilst the US parent company is involved, it is unclear when the final sign off will take place. Scheme B comprises 100% pensioner members.

Comparing the two potential transactions:
• Scheme B benefits from a two round process, whilst Scheme A requires work on assessing the assets and on the surplus
• However, Scheme A provides greater deal certainty given it is fully funded to buyout, and better governance that comes with having a joint working group in place
• Scheme B has a target above gilts which may be stretching; Scheme A has assets that largely move in-line with how PIC’s premium moves and corporate bonds that PIC would be buying, whilst the gilt lock required by Scheme B would lead to exposure against corporate bond movements for a potentially long period of time as the timing of the deal is unclear
• Scheme A has the additional benefit of better mortality experience data on its members and has provided PIC with pricing feedback. This information enables PIC and other insurers to provide reinsurers with improved execution certainty, allowing for more precise quotes on the reinsurance cover for the longevity risk associated with deferred members.

In conclusion, Scheme A represents a more convincing case. The question for insurers like PIC, is whether to put resources such as staffing and capital towards the best price possible, or to hedge against the two. Other considerations such as the level of competition and potential for future transactions would also come into play at this stage.

The importance of open communication between trustees and insurers is pertinent for deals of all sizes. Against the backdrop of record deal volumes insurers are likely to get more selective. Trustees that work closely with advisers and present the best prepared schemes with clear decision-making criteria will stand out to attract the most suitable bids.

Mitul Magudia
Head of Business Development – Pension Insurance Corporation