PASA’s July 2018 Administration Governance Checklist aims to help trustees evidence and action appropriate levels of governance over their pension administration provider. Covering eight key areas (administration agreement, reporting, operational procedures, business continuity, change control, controls assurance, data management, and staffing), the checklist is derived from PASA’s existing governance principles.

PASA accredited member firms are explicitly exempted from the checklist on the basis that they are already regularly (and robustly) assessed against PASA’s standards. However, given the almost glacial industry pace towards accreditation, the vast majority of UK occupational pension schemes could potentially integrate PASA’s checklist into their existing governance structure.

A question of scale

From the TPA point of view, the checklist is a welcome new player on an already crowded stage. Third party administration is an industry that routinely operates under a huge amount of oversight. Internally, there is peer review of almost all work, integrated checklists, structured authorisation processes, and regular performance reporting. Externally, a high degree of independent assurance comes with the annual scheme and AAF audits, risk registers, ISO accreditations, and also from PASA itself. This is an industry that already has governance front and centre. Looking at the checklist from the point of view of an accredited member firm, PASA’s checklist naturally covers what we would expect to already be in place for high quality administration.

Taking another view though, there are questions to be asked around if and how smaller in-house teams can be supported to deal with ever increasing complexity and specialisation in delivering administration services. Don’t think 30,000 member scheme with a professional in-house team working, in well defined roles with a robust budget and business plan. Think 500 or 1000 member schemes, probably closed to accrual, with one or two in-house administrators filling all the pension functions, maybe with some payroll and HR responsibilities thrown in. For these schemes, the governance challenge is likely to be uphill all the way.

Calling on the experts

Bringing in specialists to review the governance framework against the PASA checklist could be an area where external expertise can add value in a measurable and standardised way. This type of reporting can provide comfort over the design, implementation and operating effectiveness of the in-house administration model.

Keeping the scheme fit for purpose

A key part of governance is being aware of all the options, limitations and incentives open to the scheme. As the pension environment continues to change very rapidly, the way that schemes are administered must adapt. This is especially true with the increasing maturity of defined benefit schemes and the move towards de-risking projects which require highly specialist knowledge, rarely available to in-house teams.

Straddling the operational procedures and change control areas of PASA’s checklist, the provider’s ability to deliver and manage change actually opens up a wider conversation around the ability to envisage the changes that can or should be made. This is where in-house administrators are most likely to struggle without specialist input.

Stronger together

That’s not to say that third party administration is made up entirely of gold stars. Few providers are currently PASA accredited and even in the TPA environment standards vary, and, administration can only be as good as the combination of corporate and commercial priorities allow it to be. But, in the main, the entire point of the TPA industry is to be exceptionally good at pension administration and, eventually, PASA accreditation will naturally follow suit.

Michelle McInnes

Pensions Administrator – Barnett Waddingham


The pensions industry is starting to realise the value of diversity and inclusion in pension scheme trustee boards and beyond. This is about more than reflecting the diversity of pension scheme beneficiaries amongst trustee directors: the evidence is clear that diverse groups, which work well together, are better at making good decisions. At a time when trustee decision making, for both defined benefit and defined contribution schemes, is under more public and regulatory scrutiny than ever before, ensuring boards and committees are diverse and inclusive could give trustees an extra layer of reassurance that they are fit to meet the challenges their schemes face.

“Diversity and inclusion” may just sound like buzzwords, albeit ones that are on the lips of government, regulators, industry bodies and FTSE 100 boards alike. But when we are inclusive in how we select people, when more viewpoints are shared, we see the clear advantages that a broader range of individuals bring to the board table. In short, diversity produces better decision making. Where’s my evidence for this bold claim? Well, there’s a wealth of it.

A long line of researchers, from psychologists and business analysts to mathematicians, have compared the decision making performance of homogeneous (similar) and heterogeneous (diverse) groups. Whatever characteristics group members either share or do not share with each other, the findings tend to be that diversity is significantly advantageous. For instance, heterogeneous groups are more likely to:

1. Pay attention to the facts and assess evidence correctly
2. Have sound reasoning
3. Reach the ‘best’ conclusion
4. Be able to explain their decision well

There is also growing evidence that more diverse businesses tend to perform better. We know this is true for teams with more women in senior management roles or that are racially diverse, and there is growing evidence that this advantage will apply across the diversity spectrum, including sexual orientation, gender identity and disability.

Diverse teams that work well together seem to be more innovative too, and they even perform better on collective IQ tests.

It’s not enough for a group to just be diverse though, it must also be inclusive. Everybody around the table needs to be heard, and all views need to be considered and debated. In my experience, this is sometimes helped along by a cultural shift, which can be supported by training, for instance into the unconscious biases we all have.

There are various theories about why and how diversity and inclusion can improve decision making, but the key point is that it does. You can look up some of the research for yourself (or you can get in touch and I can tell you more about it), but you might also want to reflect on your own experiences. I’ve certainly seen evidence of the advantages of diversity; as a lawyer advising trustees, a senior leader in my firm, and as a charity trustee director. I have seen the effectiveness of trustee boards improved radically by the appointment of a new, and very different, professional trustee chair, although, on occasion, with some initial pain relating to the changes. And there have been plenty of times when I’ve gone into a meeting with the ‘right answer’, only to have my thinking changed and a better solution identified through people listening to each other and properly entertaining other ideas. Very often, the best ideas are introduced with “this may be a stupid point, but…”

Perhaps, unsurprisingly, creating a diverse and inclusive culture is a key business priority at my firm, because of a strongly held belief that only the highest performing teams, which maximise the power of different opinions, perspectives and cultural references, will best succeed in the marketplace.

Diversity isn’t just a buzzword, it can make a real difference to how we all perform, and ultimately benefit scheme beneficiaries

Of course, in the complex and subtle world inhabited by pension scheme trustees, many aspects of performance are hard to measure and there is often no single ‘best’ solution. However, going back to the basics of how trustees should properly make decisions, it seems likely that a more diverse trustee board or committee has a better chance of getting this right. As us lawyers would say: they are more likely to take account of relevant factors and disregard irrelevant factors, and they are less likely to reach a perverse or irrational conclusion. If this is true, then the decisions of diverse groups of trustees are likely to be better protected from challenge, whether by members, employers, regulators or Select Committees.

The pensions industry is waking up to the many, real benefits of diversity and inclusion

On top of this, it seems that the more complex the subject matter, and the more difficult the decision, the more diversity and inclusion are likely to help. So an area as multi faceted and challenging as pensions governance is, in fact, a perfect setting for diversity to work its magic.


The pensions industry is, in many respects, in the early stages of its journey towards diversity and inclusion, although a side-effect of the member nominated director requirements has long been to introduce a greater diversity of backgrounds and experience. However, pensions is typically a fairly agile sector and, given other developments shaking up trusteeship, progress in diversity and inclusion could be rapid. Those who stand to gain from more diversity and inclusion in trustee boards, and in the industry as a whole, are not only those who are more likely to be included in boards, panels or recruitment processes. We all stand to gain: from better performance and more innovative solutions. And, importantly, the beneficiaries of the schemes we all work for, in one way or another, will ultimately benefit too.

If you would like to get involved with promoting a culture of diversity and inclusion in the pensions industry but aren’t sure how to do so, there are plenty of opportunities. Travers Smith is committed to creating a diverse and inclusive workplace and we are keen to help promote these aims more widely. Please do get in touch to find out more.

Daniel Gerring
Partner and Head of Pensions – Travers Smith

The DWP acknowledges in its consultation response that pension legislation is currently “confusing and misleading” in relation to ESG. It says, however, that “given the evidence that ESG factors can lead to better returns in the long run, pension trustees may consider ESG factors”.

Consultation response

In September, the DWP responded to its consultation on clarifying and strengthening investment duties. Some material changes have been made to the original proposals.

By 1st October 2019, trustees will be required to update their Statement of Investment Principles (SIP) to include:

(1) information about how financially material considerations including, but not limited to, environmental, social and governance considerations (ESG), are taken into account;

(2) the extent (if any) to which non-financial matters are taken into account; and

(3) policies in relation to the stewardship of investments, including the exercise of voting rights.

Schemes with DC benefits (except where those are derived only from AVCs), will also need to update the SIP for their default arrangement ,and publish the SIP on a publicly available website by 1 October 2019. Looking further ahead, from 1st October 2020 trustees of these schemes will also have to publish an implementation statement describing how they acted on the principles in the SIP.

Note that schemes with fewer than 100 members, and public service schemes, do not need to prepare a SIP.

The DWP has also updated its guidance on reporting costs, charges and other information to reflect these changes. In addition, the Pensions Regulator is expected to produce high level guidance by the end of November 2018.


One of the perceived barriers to ESG investment has been the legal duty on pension trustees to invest in members’ best financial interests. Some have viewed this as a duty to maximise members’ short term financial returns, which could be an issue for ESG.

The Law Commission’s 2014 report on Fiduciary Duties of Investment Intermediaries (quoted in the DWP’s consultation response), concluded that trustees should take into account factors which are financially material to the performance of an investment, such as ESG, whatever their source. In addition, they may also take account of nonfinancial factors but only where a two-step test is met:

(1) trustees should have a good reason to think that scheme members would share the concern; and

(2) the decision should not involve a risk of significant financial detriment to the fund.


To the relief of some, the suggested requirement in the previous consultation to canvass member views has been dropped. Instead, trustees will be required instead simply to state the extent, if any at all, to which non-financial factors have been taken into account. The consultation response emphasises that trustees have primacy over investment decisions, and whilst they should not rule out the ability to take account of members’ views (as set out in the above test), they are not obliged to do so.

Enforcement, enforcement, enforcement…

“Whilst ‘educate, enable, enforce’ has served us well, our approach to how we regulate is changing and so this no longer accurately reflects how we work”.

So says the Pensions Regulator in its new report, “Making workplace pensions work (TPR Future: our new approach)”. Supervision and enforcement are the overriding themes, and it seems that less emphasis will now be placed on education and employers’ sustainability.

A new supervision team will focus on 25 of the biggest schemes (DC, DB and public service), with one to one attention starting from October. This approach will be rolled out to more than 60 schemes over the next year. Schemes selected for close supervision could be issued with improvement plans if the Regulator establishes particular concerns, and it will engage in regular meetings to review progress.

The Regulator will develop a range of approaches, and supervisory activity will include a variety of interventions that reflect the level of risk identified; everything from letters, phone calls and meetings, to being part of a ‘thematic review’. It will also continue to respond to intelligence-led or eventdriven issues with direct interventions. Overall, about 20-40% of schemes can expect to be subject to some sort of supervisory interaction.


Having been stung by criticism following BHS and Carillion in particular, it seems that the Regulator has reacted by getting tough. Expect schemes to be ‘named and shamed’ and the Regulator to have far greater involvement in the way (in particular, large) schemes work on a day to day basis.

Vive la Ombudsman?

An efficient, consistent Pensions Ombudsman

In the annual report and accounts 2017/18, the Ombudsman notes a 26% increase in the number of cases accepted for investigation last year. The average timescale for closing cases has halved to five months, and common topics for complaints are transfers (20.5%), failure to provide information or act on instructions (11.8%), and incorrect calculation of benefits (10%).

Consistent awards for distress and inconvenience

The Ombudsman is now introducing fixed amounts for non-financial injustice awards (commonly referred to as ‘distress and inconvenience’ awards), to enhance “transparency, create consistency and manage expectations for all parties to the complaint”.

An award will now usually fall into one of the following five categories:

• nominal (£0)

• significant (£500)

• serious (£1,000) • severe (£2,000)

• exceptional (over £2,000).

Guidance is given as to when a case would fall into each category and what the Ombudsman would look at. The awards are intended as an acknowledgement to the applicant of the inconvenience and/or distress they have suffered. In other words, to remedy the injustice genuinely suffered, not to penalise or punish the respondent for bad behaviour.

However, if a respondent persists in behaviours that make it difficult for members to achieve redress, and causing more anxiety, this is likely to result in a higher award. Additionally, the Ombudsman will not look to ‘rob Peter to pay Paul’. For example, where the award comes out of limited scheme resources and the scheme is underfunded, is in wind up, or is in the process of being transferred to the Pension Protection Fund”.


The Pensions Ombudsman has made great strides forward, bringing swifter, cheaper justice to many and introducing what will hopefully prove to be a more logical, consistent approach to the way in which nonfinancial injustice awards are given.

Jeremy Goodwin
Partner (Pensions) – Eversheds Sutherland

With so much focus in the DC market on member communications and experience, would you overlook an opportunity to further engage DC savers and engender pride in their pension scheme?

This is exactly what Aon believe the incorporation of Responsible Investment, or, if you prefer, Environmental, Social and Governance (ESG), policies and strategies has the potential to achieve. This view is supported by DC savers we have spoken to as part of our ongoing research, including Aon’s 2018 DC pension and financial wellbeing member survey, which will be released this autumn, to better understand their attitudes towards saving, including pensions and investment strategies.

One consistent message that has emerged from our 2018 DC pension and financial wellbeing research is that members are surprised to find out that, unless they had specified otherwise, their pension money could be invested in companies and sectors that they oppose. These findings are consistent with those published by the DC Investment Forum (Navigating ESG: A Practical Guide), and NEST (building new norms), whereby DC savers wanted, and expected, their pension savings to be invested responsibly. Both pieces of research found that when this was the case and tangible ‘good news’ stories about their investments were shared, most members’ impression of, and confidence and pride in, their DC scheme was improved.

Schemes may want to ask themselves a couple of very simple questions before they progress further:

1. Is it desirable to increase member engagement and savings?

2. Will our DC members be more engaged and potentially save more if their money is doing some good?

If you have answered “yes” to both, then the next step is to better understand the current regulatory landscape, and to devise a practical framework to move responsible investing forward for your DC members. If you answered “no” to either question, then it is still worthwhile understanding more about the regulations and practicalities.

Regulatory Landscape

In recent years there has been growing interest in responsible investment for pension funds and in ESG considerations. A number of consultations and reports have been released, including a June 2017 report by the Law Commission, which concluded that there are no legal or regulatory barriers to pension schemes making social investments. Final regulations have now been released by the DWP, which aim to dispel trustee confusion and to give institutional investors renewed confidence, if they so choose, to begin allocating, or increase the allocation of capital to investment opportunities such as unlisted firms, green finance, and social impact investment.

Whilst all pension schemes will need to provide information within their Statement of Investment Principles (SIP), setting out how they take account of financially material considerations, including climate change, there are a number of additional requirements for DC schemes. From 1st October 2020, DC trustees will, in addition, be required to produce an implementation report for the year setting out how they acted on the principles set out in the SIP, as well as explaining any changes made to the SIP. In addition, the DC scheme’s SIP and implementation report must be published on a publicly accessible website so they can be found by scheme members and interested members of the public.

Whilst perhaps some people breathed a sigh of relief as the proposal for a ‘statement on members’ views’ was removed from the final regulations, engaging with members to better understand their views on such topics may in fact be a valuable exercise.

Indeed, in the Ministerial foreword to the Government’s Response Guy Opperman states that “…in line with the conclusions reached by the Law Commission, I do believe it is possible and appropriate for trustees to take account of members’ views in certain circumstances.” Pension or wider benefits focus groups can be a great way to do this.


Aon believes that the spirit of the DWP regulation is to encourage trustees to develop their own views as to what Responsible Investment means for that scheme. In Aon’s experience, the conclusions and resulting policies can differ greatly based on a combination of various inputs including:

• the views of their member base;

• time horizon of the scheme;

• investment beliefs;

• preferences to align with the global initiatives such as the Sustainable Development Goals or the Task Force on Climate Related Financial Disclosures, and so on.

Whilst a process of discussion is potentially uncomfortable, there is a worthwhile benefit in reaching a position where one can be clear on exactly what the scheme’s policy is on ESG factors such as climate change, and why it takes that stance. So how can pension schemes do this? To facilitate this, we have constructed the below six step framework that we have successfully used with a number of our pension schemes to walk them through an initial education session all the way to the implementation of responsible investment policies and investment strategies.

What is it?

Raise awareness
>Education amongst stakeholders and members to understand issues and relevance

Define beliefs
>Survey stakeholders’ views and beliefs, including members
>Discuss and reach consensus on core objectives

Agree policies
>Consider regulation, best practice, stakeholder policies, views and beliefs
>Define policies and procedures

Assess risks
>Review asset allocation against systemic risks (e.g. climate change), and portfolio level ESG risks

Engage with managers
>Review policies and actions of managers
>Engage and seek to improve, or take action

Reporting and reviewing
>Report and further engage with members, stakeholders and relevant industry bodies


The capacity for responsible investment strategies to engage DC savers and engender pride in their pension scheme is an opportunity that should not be missed. Through a considered process of discovering stakeholder beliefs (i.e. those of trustees, companies and members), and developing appropriate policies, a successful and engaging responsible investment strategy can be delivered! To discuss any of the issues raised in this article or to request a copy of Aon’s DC pension and financial wellbeing member survey 2018, please email or call 0800 279 5588.

Aon Consulting Limited is authorised and regulated by the Financial Conduct Authority.

Chris Inman
Aon Consulting Limited

Whatever the Government’s view, pensions dashboard services have the opportunity to be really great for UK citizens. In the second of two articles, Richard Smith reviews some of the high level technical complexities of making it happen.

Part 2 – Technical requirements

Three months ago, in the June edition of Pensions Aspects, I used two case studies to illustrate some of the challenges that a pensions dashboard service will face in terms of content, i.e. “what” needs to be shown. This month, I turn to the technical challenges of actually achieving it, i.e. “how” it might be done.

It’s likely that this article could be superceded by DWP’s dashboard feasibility report – at the time of writing this is expected “in due course”. Much of the content remains valid, however, whatever Government says.

Picture worth a thousand words

The only feasible way to talk about this is through pictures, so this article centres around the simplified ecosystem diagram on the next page.

“Ecosystem” used to refer to a biological system of interacting organisms, but nowadays it’s come to mean any complex network or interconnected system.

And behind the dashboard’s front-end simplicity for users, there will most definitely need to be a complex, interconnected, and highly sophisticated ecosystem.

The concept’s really simple: there are currently about 40 million UK Citizens of working age (“Layer 1” at the top of the diagram) who between them, today, have something like 100 million pension entitlements (or, very roughly, an average of two and a half pensions each) (“Layer 8v” at the bottom of the diagram).

Dashboard merely makes online connections between Layer 1 UK Citizens and their Layer 8v Entitlements. What could be simpler? The following brief descriptions of each layer in the ecosystem, show how it will be far from simple. But it can, and must, be done, as citizens really need greater confidence about their pensions.

Highly simplified diagram of the potential ecosystem for UK pensions dashboard services

Note: The brief descriptions on the next page can only give the merest flavour of the different dashboard components. Bringing all the components to fruition at once, in all their necessary detail, will present a truly exciting industry-wide programme, unlike anything the UK pensions world has ever seen before.

Layer 1 UK Population: Clearly, UK citizens should expect to be able to use UK pensions dashboard services. But who exactly is in and out of scope? For example, should a retired person expect to be able to use the dashboard? What about if one or more of their pensions aren’t yet in payment?

Layer 2 Identity Verification Service (IVS): The two hearts of the dashboard ecosystem are the IVS and the PFS, i.e. confirming respectively “who you are” and “what pensions you’ve got”. Citizens may come to dashboard first (interaction A1), or alternatively, have their identity verified before they come to the dashboard (for example by another service such as online banking – interaction A2). The level of identity authentication required, and the associated costs, need to be discussed and agreed across the industry.

Layer 3 Dashboard Services: The dashboard service itself is the citizen’s window on to the ecosystem. Different segments of the UK population will find different things useful, which is part of the argument for multiple dashboards. A plan for publicising dashboard services to the UK population needs to be devised, as part of a coherent industry-wide approach to launching and operating the ongoing dashboard service.

Layer 4 Governance / Funding Entity: As soon as we talk about showing consolidated pensions data to citizens, we need to think about who (or which entity) will govern and control that activity. This entity will have a wide role on data controls in terms of security, matching, transmission, presentation, and so on. Because of its oversight of the end-to-end ecosystem, this entity will also be well placed to manage the necessary funding of the ecosystem, both on start-up and ongoing. It also seems highly logical for this entity to also be responsible for managing the initial delivery of, and ongoing updates to, the service.

Layer 5 Pension Finder Service (PFS): The critical component the Governance entity needs to procure and oversee is the function which finds the pensions belonging to each citizen who uses the dashboard service. Some of the critical complexities surrounding this service are whether, where, and for how long, records of positive and negative finds should persist, as well as the extent of the data that should be recorded.

Layer 6 State Pension Service: The DWP’s State Pension Service isn’t just another pension provider, partly because it’s an existing national online service, but also because the UK’s National Insurance Number database could well prove helpful in providing additional support for the verification of users’ identities.

Layer 7 Integration Service Providers: ISPs are the layer between the Pension Finder Service and our familiar pensions world. In order to access data from this world (and transmit it back via the PFS to dashboards), ISPs will need to enter into agreements as appropriate with Trustees / Providers / Admin Functions / Admin System Providers. (In fact, it’s likely that several Admin System Providers may bring new ISP services to market to leverage their existing relationships with pension schemes and providers.)

Layer 8 Pension Entitlements: This lowest layer represents the circa 100 million pension entitlements currently in existence in the UK. The entitlements “belong” to Citizens but the data relating to them is “owned” by Trustees and Providers. So it is these entities, together with their administration partners, who need to expose their members’ / customers’ pension data to ISPs (or, potentially, directly to the PFS – interaction G2, although that seems less likely). Being compelled to expose this data, over a staggered introduction period, will greatly simplify schemes’ and providers’ business cases for the necessary work. All pension types are in scope: public and private sector defined benefit (DB), trust and contract based defined contribution (group and individual), and, of course, Pension Protection Fund compensation.


To a UK citizen, the experience of using a pensions dashboard should be simple, elegant, beautiful even. Like the proverbial graceful white swan gliding across the lake: it appears elegant and effortless, but under the water a huge amount of sophisticated work is going on. So it will be with dashboard: when all the components in the ecosystem described here are set up and tested thoroughly, they will work together seamlessly, making all the hard work behind the scenes look ridiculously easy; and, crucially, providing a really clear, simple and great service for our fellow UK citizens.

What next?

The whole UK pensions world now needs to get behind the dashboard initiative, working with technology and other partners as appropriate. We must urgently get on with adapting our industry so that it functions properly for citizens in a world where folk don’t just have one 40-year job.

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Stephanie Hawthorne, award-winning journalist, interviews Sorca Kelly-Scholte on the need for cash flow investing.

The Pensions Regulator estimates more than 80,000 DB transfers were completed in the past year.

For pension schemes with negative cash flow it can be like ‘trying to fill up the bath with the plug out, and that is a problem a huge number of trustees and sponsors are facing right now,” says Sorca Kelly-Scholte.

An actuary and head of EMEA Pensions Solutions, and advisory at JP Morgan Asset Management with over 20 years’ experience, she stresses in particular the 2015 pension freedoms. These have created an immediate cash flow challenge for many firms. Across the industry, activity has been elevated with The Pensions Regulator estimating more than 80,000 DB transfers were completed in the past year. Some schemes have been scrambling to generate the cash to make these payments.

Kelly-Scholte comments: “They have been doing that in a relative benign period. We haven’t had much volatility. When there was a spike in February, the market reminds us that it is not always as orderly as it have been in the past two years.”

Transfer pressures

Clearly, the transfer activity is a challenge. Anecdotal evidence suggests this will carry on for a level higher than in the past, but at not quite as high level as in the immediate past. Kelly- Scholte forecasts that “this initial rush to the gates will settle down but at a higher level than we have seen historically. That will further increase the liquidity challenge of pension funds. It may mean that they run off their liabilities more quickly but the other side of the coin is that they will have a shorter time to manage the deficit problems.”

Kely-Scholte’s solution to this Kafkaesque nightmare is cash driven investing. “Three quarters of pension funds are in negative cash flow. Put simply, that means the amount of contributions being paid in is less that the amounts paid out.” This figure is based on JP Morgan’s research on firms in the FTSE 350, MSCI Europe and S&P 500. She adds “For some of these firms, they will only be slightly in negative cash flow and that can be dealt with by investment income in a straightforward manner, but half of these schemes are in negative cash flow to the tune of 2% of assets. Once you are past that level, you will have to think more deeply about how you are going to service those cash flows as it won’t simply be a case of using the investment income.”

Obviously, people focus on sterling assets because pension schemes have sterling liabilities that match inflation.

She refers to a survey Mercer did two years ago in which only a tiny minority of pension funds (around 4%), had begun to develop strategies specially designed to deal with negative cash flow. The vast majority of these were relying on investment income, or relying on the ability to sell assets in an orderly way, but that exposes the scheme to the risk of volatile markets or being a forced seller in stressed or volatile periods. That has the effect of locking losses and creating more volatility on the balance sheet.

“People say ‘what’s the big deal when pension funds are designed to pay out benefits? Why is this a surprise? Why is this a problem?’ But until now pension funds have had more coming in than they were paying out. They haven’t had to deal with cash flow servicing and also they expected they wouldn’t have to until such times as they were full and entered run off.” In the past people were preoccupied with deficit repair problems.

To Kelly-Scholte, setting a cash flow driven strategy is of the utmost importance. “I see more and more people equating cash flow investing to just buying a cash flow matched income portfolio. That may be part of how you address the problem but to us that is only appropriate once you are fully funded and very mature. Many schemes are not yet at the final run off. She warns against thinking of cash flow servicing as just an administrative thing that you deal with at the end of the process. You really need to think about it up front. “Once you are underfunded it creates an extra drag on your funding level.”

Kelly-Scholte says “I don’t think we have seen the emergence of any one solution. Some people are beefing up their allocations of income assets, particularly the mature schemes, building up bespoke fixed income portfolios, but others are grappling with how they are trying to find the right trade offer between the need to deliver return in order to repair the deficit alongside the need to service cash flow and the need to create some duration hedge i.e. the traditional LDI strategy.”

“The first thing pension scheme trustees should think about is incorporating cash flow into their overall strategy and thinking explicitly about what cash flows are coming off their assets and the degree of certainty or security there is. It is about thinking where do you want to end up?”

“For most schemes, it means a much larger allocation to credit than they have at the moment and that will be built in a customised manner and run, not against standard benchmarks, but run against a specification of their liability and cash flow. For most schemes it will probably mean an allocation to the cash flow generative but illiquid assets such as private credit, infrastructure debt and real estate.”

Go global

What about capacity? Won’t everyone want the same assets? “They are in short supply; this is why you need to start with this in mind because that kind of portfolio can take many years to build but you need to be a little but opportunistic.” says Kelly Scholte.

Obviously, people focus on sterling assets because pension schemes have sterling liabilities that match inflation. Indeed Kelly-Scholte says the larger schemes are already doing this and are finding it harder and harder to find the right assets. So, she emphasises, “you really need to think globally when you are building these kinds of strategies which takes you into currency management challenges but this is a manageable problem. Diversification is clearly important. The UK market has a low capacity and is also quite small and relatively concentrated. The US, by contrast, is ten times as large and has ten times as many individual issuers to choose from.” She says a lot of pension portfolios are dominated by LDI and equity high growth assets but there is a missing middle: credit and real assets which can really help deliver cash flow.

Turn on the tap!

2015 was the year of Freedom and Choice in Pensions.

Since then, defined contribution (DC) members have embraced the freedoms and started to access pensions earlier, often cashing in pots in one go and paying HMRC far more income tax than it anticipated. Income drawdown has become a more popular choice than annuities, with individuals increasingly accessing it without taking financial advice. But PLSA research has found the majority of individuals who were about to access income drawdown thought it was risk free, sometimes tax free, and that it offered guarantees similar to those of annuities. In fact, FCA’s Financial Lives Matter research found that huge numbers of members accessing their pensions didn’t understand their access options at all, or even that options exist. When

The Department for Work and Pensions introduced the idea of a single guidance body, it said; ‘Levels of financial capability in the United Kingdom are low and many people face significant challenges when it comes to managing their money.’

It is not surprising that research from the International Longevity Centre highlighted that when making financial decisions, individuals find it hard to think long-term, preferring small rewards today over larger rewards tomorrow, and switching off in the face of complexity.

But there is another consequence of pension freedoms which is having perhaps an even bigger impact. In 2017 defined benefit (DB) pensions hit the headlines and failures involving BHS, British Steel and Carillion brought member support under the spotlight.

The news of Carillion’s collapse was accompanied by rumblings that some advisers were like ‘vultures’ circling members.

This followed much scrutiny of the closure of the British Steel Pension Scheme and transfer of pensions to alternative schemes, with much of the advice given to members being deemed unsuitable by the FCA. The FCA has since revoked or accepted the voluntary suspension of transfer advisory permissions from several firms and announced a data collecting exercise from firms holding pension transfer permissions.

Elsewhere ‘high’ transfer values are seeing other DB scheme members transferring to DC pensions, and inheriting the risks involved in managing pension savings and retirement income. But what can be done to protect members and employees?

The British Steel situation in particular has flagged a big gap for me; although information was available, including a helpline and website content, in the main members were left alone to find help despite the pensions regulator ‘urging’ the Trustees to talk to members about the importance of obtaining financial advice. But this doesn’t have to be the way. Employers and Trustees have access to professional advice from consultants and buying power, and so are perfectly placed to facilitate access to a breadth of services including financial education, guidance and advice, to help employees and members fully understand their pension scheme options, and the risks. This approach also comes with the benefit of having agreed pricing for services rather than leaving members to guess whether they are paying appropriate fees.

This service would ensure that any financial advice provided is by a firm who has been subject to thorough due diligence including ensuring robust compliance process checks, not only in complex DB cases, but as an everyday option. There is plenty of evidence that these services help members get better outcomes.

And whilst there are some employers and schemes doing this now, they are in the minority, and it is time it was the norm.

After all, being picked at by vultures is hardly a good member outcome.

Do you work in DB, DC, MasterTrust, or a contract-based scheme? If so, good news. The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) are working together on a pensions regulatory strategy, which will set out how they could work together to tackle the key risks facing the pensions industry over the next 5-10 years.

In the absence of an independent pension commission, (an advisory, non-legislative body), this has real potential to bring about positive change in our industry.

The last five years has seen significant change in the industry, not the least of which was the introduction of pension freedoms. This not only changed the way that people can access their retirement savings, but alongside the introduction of automatic enrolment, we have seen more than 9 million people newly saving into workplace pension schemes. During this time, Regulators’ powers have expanded in both scope and complexity with the regulatory bodies taking on a much more active, and interventionist role.

In 2013, TPR took on responsibility for the governance of public service pensions, both local and central government. In 2015, the FCA introduced new rules for Independence Governance Committees for workplace personal pension schemes, and TPR is looking at governance of trust-based schemes as part of their 21st century trusteeship programme. Concerns over the quality of governance have contributed to FCA’s recommendation of pooling of pension fund assets, while the Pension Schemes Act 2017 seeks to transform the quality of master trust governance.

For the FCA, this has meant making sure that their regulation provides the appropriate level of consumer protection and competition within this new arena, whether this is through the establishment of IGCs or ongoing work such as the Retirement Outcomes Review.

For TPR, the focus has been on protecting workplace pension savers through improving standards of governance in schemes, ensuring schemes are being treated fairly by sponsoring employers, and that workers are enrolled into the pensions they are entitled to by employers as part of automatic enrolment.

TPR is also moving from its earlier educate, enable and enforce policy to one where it wants to be “clearer, quicker and tougher”.

As part of ongoing efforts to ensure the sector works well for consumers and workplace pension savers alike, both the FCA and TPR want to work together on a pensions strategy which will look at how they could work together, and with stakeholders, better in the coming years. Good governance is about having motivated, knowledgeable and skilled trustees in place. There is a clear link between good governance and good scheme performance. Whilst it is the responsibility of trustees to make sure that their scheme is well run, both Regulators have a role in helping understanding, transparency and consistency on the pensions system.

Some of the existing overlapping of responsibilities, and duplication of interests, e.g. value for member test definitions, can be confusing and unhelpful for Trustees and members alike. This early stage engagement between the two bodies, might one day be seen as the start of the process for a transition to one overall Regulator but in the meantime, we can contribute to and hope for, an improvement in their existing relationship to ensure that those involved in workplace pension schemes are protected and that our Regulators advice and directives are consistent.

Could you help your clients get more from their pension pots, more quickly? In my experience, and in the vast majority of cases, the answer is yes, and it’s all about the fees that are being charged. Regardless of age or how much is being invested, high industry fees can delay the retirement date and decrease the pot of money available. I believe it is our job, as advisers, to help our clients understand the impact of the fees they are paying.

Let’s have a look at an example:

INVESTOR A is aged 45, has pension and ISA savings valued at £300,000, and wishes to retire with a fund in the region of £750,000, preferably at the age of 65. The total Financial Services Industry cost on their money is 2.5% per annum. Assuming an average growth rate of 6% per annum, the fund value would not achieve the target value until the investor is aged 73.

Remember, £300,000 of this fund value was Investor A’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. The total Financial Services Industry charges have totalled £345,512 over this time.

It has therefore cost Investor A £345,512 to make £467,000 and they have lost eight years of their desired retirement lifestyle.

INVESTOR B, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs.

Investor B realised that they could get the same returns and same consumer protection for 1.1% per annum. They also achieved an average 6% return per annum on their money. They achieved a target fund value of £773,000 by age 65, eight years before Investor A.

In other words, they have achieved their target retirement fund value at their projected retirement date with one simple decision; shopping around to get the best fees.

As £300,000 was Investor B’s money anyway, they have made a profit of £473,000 in 20 years, not 28, and it has cost investor B only £102,000, not £345,512, to make £473,000 and achieve their lifestyle objective. If at the time they decided to delay retirement to age 73 like Investor A, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.

Fees can make a big difference and it’s important that the industry is both transparent about these fees and their impact.

Let’s look at another example:

INVESTOR C is aged 30, has a smaller pension fund valued at £40,000, and is to retire at age 65. The average annual return is 7% per annum over the investment period. The total Financial Services fees are 2.13% per annum and no further contributions will be made.

The fund value is projected to be £203,968 and as £40,000 was investor C’s money already, she has made a profit of £163,968. The Industry would report how well she has done and Investor C may be content with her advisor’s recommendations. However, it has cost Investor C £74,588 in Financial Service Industry fees to make £163,968.

INVESTOR D, like Investor C, has exactly the same scenario but shops around and reduces her fees to 1.1%. Lower fees do not mean lower returns and investor D also averages a 7% return per annum. Because the fees do not cause such a drag on the returns, the fund value compounds and at retirement age of 65 has grown in value to £291,105. As investor D already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.

Fees can make a big difference and it’s important that the industry is both transparent about these fees and their impact.

About the author

Hannah Goldsmith is founder of Goldsmiths Financial Solutions and author of ‘Retire Faster,’ Hannah specialises in Low Fee Investing and is challenging the way financial services are delivered to consumers in the UK by enabling each client to understand the nature of investment costs and the impact these costs have on their future lifestyle. Goldsmith’s complimentary ‘Second Opinion Service’ reviews investors’ existing portfolios and makes recommendations on risk, diversification, performance, cost and tax efficiency, making investors’ money grow in a more transparent and financially efficient way.

Many businesses have used mastertrusts to fulfil their automatic enrolment duties. There will shortly be some changes to both the automatic enrolment regime and also the mastertrust regime. What are these changes and what effect will they have?


The Pensions Regulator has said that, from February 2018, every employer will have pension duties and must enrol all qualifying staff into a pension scheme. It has also said that mastertrusts are one of the most effective ways for members to save into a secure and well-run scheme. There will shortly be some changes to the automatic enrolment regime, and the Regulator will soon have power to supervise mastertrusts so that, in future, they will have to be authorised.

Automatic Enrolment

The Regulator’s publication ‘Automatic Enrolment: commentary and analysis,’ explains that automatic enrolment commenced in October 2012. Businesses must enrol eligible job holders into a qualifying pension scheme and make contributions to it. This presently applies to workers who are aged at least 22, but under State pension age, usually working in the UK, and earning more than £10,000 per year, unless they are already a member of a pension scheme which meets certain criteria.

A worker who is automatically enrolled into a pension scheme may opt out of it within one month. Minimum contributions are being phased in. The initial rates were a minimum of 2% of qualifying earnings overall (with at least 1% from the business). In April 2018 that will increase to a minimum of 5% overall (with a minimum of 2% from the business). And, from 6 April 2019, it will increase to a minimum of 8% overall (with a minimum of 3% from the business). There is more information about these increases in the Regulator’s publications.

Every 3 years, staff who were automatically enrolled, but opted out of (or ceased active membership of) a pension scheme, more than 12 months before a business’s re-enrolment date, must be automatically re-enrolled into the scheme. As before, they may opt out.

The Regulator’s online tools include an automatic enrolment Duties Checker.

…mastertrusts are one of the most effective ways for members to save into a secure and well-run scheme.

What is a mastertrust?

A mastertrust is a form of multi-employer occupational pension scheme, which businesses can use for their staff, instead of setting up their own scheme.

The DWP has said that mastertrusts can offer good value for members and employers, and that they offer a number of advantages, such as scale, good governance and value. The Pensions Regulator believes that authorised mastertrusts will be the lynchpin in the development of a sustainable and safe occupational-defined contribution pension schemes market.

Many businesses have used mastertrusts to fulfil their automatic enrolment duties.

The concerns about mastertrusts

The concern is that savings could be at risk from those mastertrusts which do not meet minimum governance standards. So, the Pension Schemes Act 2017 will require mastertrusts to meet higher operating criteria: they will have to be authorised by the Pensions Regulator before they can operate.

The Regulator will also have power to intervene where schemes are at risk of failing. The Regulator says that the new measures will provide consumers and employers with confidence, and that those mastertrusts which do achieve authorisation will be suitable for any business which wishes to use them for its staff.

There are many mastertrusts operating in the UK pensions market, and these new, higher, standards are expected to result in some consolidation. The Regulator has welcomed the continued reduction in numbers of defined contribution pension schemes. It has been concerned about a tail of substandard schemes, and has been encouraging trustees who cannot, or will not, achieve the standards which it expects, to consider consolidation.

What new criteria will mastertrusts have to satisfy, and by when?

There will be 5 key criteria:

+ Persons involved in the scheme must be fit and proper

+ The scheme must be financially sustainable

+ The scheme funder must meet certain requirements, aimed at providing assurance about their financial situation (by presenting a business strategy and fully audited accounts)

+ Systems and processes requirements, relating to the governance and administration of the mastertrust, must be sufficient

+ The scheme must have an adequate continuity strategy.

The new mastertrust regulations are expected to come into effect in October 2018, and mastertrusts will have to be authorised by the Pensions Regulator by then if they wish to continue to operate. Otherwise, they may need to be wound up.

Mastertrusts will also have to continue to satisfy the authorisation criteria on an ongoing basis, including being able to show that member funds would be protected if a scheme had to be wound up.

The Regulator has said that it will assist those mastertrusts which do not apply for authorisation, or which fail to meet the required standards, to leave the market, with a view to minimising the impact on savers.

What effect will the new criteria have on the mastertrust market?

As well as the new criteria, there will be compliance costs. Because of this, there is expected to be some consolidation of mastertrusts. Some of the smaller mastertrusts, which have fewer funds under management, and for whom the regulatory costs may be too high, may decide to exit the market.

There will be a one-off authorisation fee, which is yet to be finalised. It is suggested that new trusts can expect to pay ‘no more than £24,000,’ and existing trusts ‘no more than £67,000.’

The DWP anticipates that 28 schemes will take the decision to wind up before the new regulations take effect, and it estimates that it could cost individual mastertrusts between £89,000 and £196,000 to exit the market.

In addition, schemes, or funders which stand behind the schemes, will need to pay the winding-up costs, so as not to pass these on to their members.

Mastertrusts and The Pension Schemes Act 2017

Many more people are saving into defined contribution pension schemes. Mastertrusts account for a major proportion of the increase, and now account for 10 million defined contribution savers.

The Regulator has welcomed its new powers to authorise and supervise mastertrusts. The number of mastertrust providers has grown over recent years as more staff are put into pension schemes, so their savings need to be secure.

Regulations under the Pension Schemes Act 2017 are being developed, and the Regulator says that they will give it the power to ensure that mastertrusts are being run by fit and proper individuals, and that they are financially stable and secure.

What will this mean for businesses?

Most businesses have used mastertrusts to fulfil their automatic enrolment duties, and the DWP has said that mastertrusts can offer good value for both members and employers.

There are estimated to be around 87 mastertrusts currently operating, and the DWP anticipates that 28 of those will decide to wind-up before the new regulations take effect, expected to be in October 2018.

The Cheviot Pension is one of the mastertrusts which is currently used by employers to fulfil their automatic enrolment duties. Cheviot has been operating since 1930, and it will be applying to the Regulator for authorisation to continue operating under the new regime.

Businesses may wish to contact the mastertrust with which they currently deal, to find out what its future plans are in relation to the new regime, and how far those plans have progressed.

They may also wish to check that their systems are equipped to deal with the increases in the minimum automatic enrolment contribution rates which will come into effect in April 2018 and April 2019.