The liabilities of most UK defined benefit pension schemes are linked to inflation. Recent proposals to change the most widely used measure of inflation, the Retail Price Index (RPI), could have a significant impact on many pensioners. If the changes are implemented, the retirement income for many may be cut, and pension schemes may also find their funding level reduced. Given these potential consequences, we believe now is a good time to assess the proposals and consider how to respond.

UK pension schemes typically offer inflation-linked pensions, and most are linked to RPI. A minority link their pensions to an alternative inflation measure, the Consumer Price Index (CPI).

Flaws in the calculation methodology of RPI have long been recognised. One example is the ‘formula effect’, whereby using the ‘Carli’ mathematical formula is estimated to increase the annual growth of RPI by around 0.7 percentage points, relative to comparable inflation measures.

This effect was exacerbated in 2010, when the range of clothing prices collected to calculate inflation was widened. This led to an expected increase in the margin between RPI and CPI, driven by a divergence in the contribution from clothing prices (see graphic). In total this led to an expected addition of c.0.3 percentage points per year1.

The government now favours CPI, which excludes these flaws and is perceived to reflect inflation more accurately.

RPI back in the spotlight

In July 2018, the House of Lords Economic Affairs Committee launched a public consultation on how inflation should be measured, and published the resulting review in January 2019.2

The review said the UK Statistics Authority has a statutory duty to fix the flaws within RPI. It also recommended that the government use only one measure of UK inflation – an improved version of RPI would be a potential candidate.

Implications for pension schemes

These changes could reduce many pensioners’ future income. Removing the impact of the 2010 changes to clothing calculations would likely lower RPI by 0.3 percentage points each year, or six percentage points over 20 years. This effect would be much larger if RPI was brought fully into line with CPI.

Another likely impact would be a fall in the price of RPI-linked assets, of which the majority is index-linked gilts. All else being equal, this would lead to a fall in the funding level of a scheme using RPI-linked assets to hedge CPI-linked liabilities; this mismatch between hedging assets and CPI-linked liabilities is relatively common due to the lack of CPI-linked assets. The value of RPI-linked assets would decline without a corresponding fall in the value of liabilities, and for the average scheme in this bracket, we estimate a potential negative impact of as much as 10% on its funding level.

Time to take action

Given these implications, we believe both trustees and sponsors would benefit from understanding the full proposals and their impact. Stakeholders may wish to ask their advisers to quantify the effects, and to raise awareness amongst policymakers.

If the negative effects of the proposed changes are fully understood, we would expect the government to consider how to mitigate them if they were implemented. This will likely prove challenging. Also, it may be a good time to discuss with the scheme’s investment manager how the inflation hedge might evolve. For example, it may become appropriate to switch from RPI-linked to CPI-linked hedging assets to achieve a more accurate inflation hedge, if the CPI-linked market develops.

It may be years yet before the government presents a clear answer on how it will resolve the questions around the use of RPI. But taking action now could prevent surprises in the future.

1 shortcomingsoftheretailpricesindexasameasureofinflation/2018-03-08

2 economic-affairs-committee/inquiries/parliament-2017/the-use-of-rpi/

Unless otherwise attributed the views and opinions expressed are those of Insight Investment at the time of publication and are subject to change. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Insight does not provide tax or legal advice to its clients and all investors are strongly urged to seek professional advice regarding any potential strategy or investment. Issued by Insight Investment Management (Global) Limited. Registered office 160 Queen Victoria Street, London EC4V 4LA. Registered in England and Wales. Registered number 00827982. Authorised and regulated by the Financial Conduct Authority. FCA Firm reference number 119308. © 2019 Insight Investment. All rights reserved. IC1541

Jos Vermeulen
Head of Solution Design, Insight Investment

‘Member engagement’ is one of those phrases we’re hearing more and more when it comes to communicating about pensions, because increasingly it’s not just about telling members important information we think they should hear, it’s about increasing the interaction and gaining feedback from members so they feel involved – it’s a two-way process, not a one-way street!

I’m sure we all agree member engagement has never been more important, or more necessary, against the current uncertain social and financial backdrop. Overall, financial wellbeing has become a priority for employers as they look to help their employees navigate the varied and sometimes complex financial landscape they face as they journey through life. Ensuring effective communication, and engaging members in saving for later life, is something we must continue to strive for.

When it comes to pension communications, experience tells us informed members make informed decisions and effective engagement should lead to members taking positive action in relation to their plans for retirement. However, effective engagement doesn’t just happen! At the heart of it should be a well-defined strategy – one that has to be engaging, consistent and results driven.

How do we know member engagement is needed now more than ever? Our 2018 Generation WHY? Survey gave us some clear insight into the current situation:
• 42% of respondents said building a pension for retirement was their top financial priority.
• Only 1 in 5 respondents understood their retirement choices (regarding cash, guaranteed income and drawdown etc.).
• 43% aspire to retire before the age of 55, even though the most common age band is 65-74.
• Only 12% of respondents know what funds their pensions are invested in.

The responses focus primarily on the ‘one day’, which may be some time in the future. We need to implement a cohesive plan to help members prepare for that one day, but start by managing the ‘today’ and ‘tomorrow’ first, to help people cope with immediate issues – issues such as uncertain and potentially volatile times. The plan then needs to evolve over time to complete the journey to ‘one day’.

So, how can we help to effectively engage members to ensure they’re getting the right information at the right time and in the right way, to empower them in their planning for later life?

I would advocate a member engagement philosophy based on Benjamin Franklin’s ‘tell, teach, involve’ philosophy. If we involve, educate and interact with members about their planning for later life, they’re less likely to take short-term, knee jerk reactions to events and more likely to make better informed decisions and take positive action towards their retirement goals. When it comes to member engagement, plan sponsors and trustees have these options:

  • Tell: Reflects a passive, ‘one size fits all’ approach, with a focus on fulfilling regulatory requirements
  • Teach: Is about starting to educate members around their choices and the implications of their actions
  • Involve: Is about helping members to think about their options and providing tools to empower them to take positive action from an informed position. This leads to active participation and full engagement.

“Tell me and I forget, teach me and I may remember, involve me and I learn.” Benjamin Franklin

Regulation dictates that more ‘useful’ information is provided to members; the current cost and charges initiative are a good example, but members are ill-prepared to deal with the information given. It’s clear that ‘involve me’ is the ideal strategy for engaging members, with clear communications to support it – but how can we do this?

Understand members

Key to any engagement strategy is analysis; knowing where your scheme is now and the choices members have already made, helping to shape objectives and form the strategy for the future. Gaining a detailed picture of the characteristics of members is vital to any engagement strategy.

What do members want?

Increasingly seen as an imperative piece of the member engagement puzzle, trustees and plan sponsors are encouraged by Regulators to consider obtaining information on the views, attitudes and likely behaviours of their scheme’s members. This could give valuable insight into:
• what members value about the scheme.
• their ability to make investment decisions.
• how they intend to take their retirement benefits.
• their preferred type and style of communications.

Ensuring the engagement strategy fits with the needs of a scheme’s members is key to its success, with the communication materials and messaging being bespoke to members.

Delivery matters

The more involved an individual feels, the more likely they are to engage and take action. A variety of methods should be considered including written materials (generic and personalised), webinars, videos, face-to-face communications and digital solutions, such as email alerts and an online member portal. What works best for one doesn’t work for all though – knowing what members want is crucial to the success of any engagement strategy.

Even though face-to-face communication is favoured, the majority actually now engage with information digitally, with the use of technology extending to all ages.

This trend will continue as access to information is demanded at any time and from anywhere.

Make it personal!

Engagement increases when the message is relevant to the member. We need to target the agreed key messages, to the right members, at the right time.

Messages should be personalised, targeted to individual member’s needs, objectives and priorities. Having an online solution will help – communications can be automatic and delivered to the individual at key times to give the message the best chance of being engaged with and acted on.

Engagement isn’t a one-off exercise

To help ensure the success of the engagement strategy and the best outcome for members, it’s vital that analysis is done, the strategy agreed and planned, delivery carried out, feedback gathered and the strategy checked and measured, and then lessons are learned – effective engagement is an ongoing process not just because of a one-off event.

We want to make sure members are inspired so they can make active choices and decisions around their own savings and later life plans.

The ultimate aim should be to empower members, giving them all the information they need – whether that’s a ‘tell, teach or an involve’ – to enable them to make informed decisions today and tomorrow which will help them be ready for their own ‘one day’.

Andy Parker
Partner – Barnett Waddingham

An insolvency event (or the spectre of one) is clearly distressing for a company and its employees. It can also have implications for many former employees. Here, I look at the practical steps in preparing for this eventuality in trust-based defined contribution and defined benefit schemes.

Defined contribution schemes

A single entity, let’s call them Spare Parts Limited, is facing financial distress and possible insolvency.

It is important to ensure that all contributions are received (or recovered in the event of an insolvency). Actively monitoring and managing the contribution payments to a scheme to ensure that, as a minimum, they comply with these timescales, will reduce the risk of unpaid contributions on insolvency and allow the trustees to identify any possible risk of nonpayment at an early stage. If contributions are not recovered from the employer, they may be met by the Government – the appointed Insolvency Practitioner would usually look after this in conjunction with the scheme trustees/administrator.

It is also important to ensure that data and record keeping is kept up to date and that all members/beneficiaries are identified. This is a much easier task to complete while the employer is still trading.

If employees (and former employees) are members of a master trust arrangement, it is likely that the master trust itself will be unaffected by the insolvency of Spare Parts Limited.

Each member will have their own policy and their own defined contribution pot – this will continue after an insolvency event.

No further employer contributions will be payable by the employer but it may be possible for the member to make further contributions – this will depend on the rules of the master trust. The same would be true of a contract-based group personal pension plan. The position is less straightforward if the scheme’s only sponsoring employer is Spare Parts Limited (the scheme will be called an ‘own-trust’ scheme in these circumstances). In this case, an insolvency event is likely to lead to the wind-up of the scheme. If no monies can be recovered from the insolvency process to meet the expenses of the wind-up process it is likely that member funds will be used to subsidise the wind-up costs. These costs can be sizeable and if the scheme is small this may be a substantial proportion of the scheme funds. Additional ‘one-off’ costs of the wind-up process will include the preparation of final accounts, issuance of member statements, implementation of member options and member communications. For ‘own-trust’ schemes, it is therefore even more important that the scheme’s data and records are up to date while the sponsor is still around.

These additional costs and risks are one reason why ‘own-trust’ defined contribution schemes are diminishing in number and are considered to be less suitable as a pension option than master trusts or the contractbased equivalents such as Group Personal Pensions – particularly for smaller employers. Indeed, in its latest survey of trust-based DC schemes, The Pensions Regulator comments that larger pension schemes such as master trusts “are more likely to be run well and provide good value for members”.

The implications of employer distress or insolvency should, I would suggest, have trustees of a reasonable number of the remaining own-trust schemes looking for the ‘safe harbour’ of a master trust or other form of orderly wind-up at a point where the costs of doing so would not adversely impact member funds.

Alan Collins
Director – Spence & Partners

Last year, the Government updated the Regulations for pension schemes, requiring both defined contribution (DC) and defined benefit (DB) trustees to reconsider their approach to responsible investment by 1 October this year. This article focuses on the issue from a DC trustee perspective.

What the regulations require

The 2018 Regulations require that, with effect from 1 October 2019, trustees must set out, in their Statement of Investment Principles, their policy on:
• How they take account of ‘financially material considerations’ which include, but are not limited to, Environmental, Social and Governance (ESG) factors, including climate change.
• Their approach to stewardship activities for the assets held.
• The extent to which any non-financial matters are taken into account.

In addressing these requirements, trustees need to consider and set out how their approach is appropriate for determining both the strategy, which includes the structure of the default arrangement, and its implementation.

Reference is made to an “appropriate time horizon”, the intention being that trustees consider longer-term risks within their investment arrangements. Clearly, the time horizon for a DC member will depend on how far they are from their selected retirement age, assuming they are invested in a default arrangement that is structured either as a lifestyle strategy or a target date fund. Stewardship policies should cover voting, engagement and monitoring. This should include how trustees engage with companies and investment managers on matters such as “performance, strategy, risks, social and environmental impact, and corporate governance”. It should also include the exercise of any rights that come with particular investments.

Disclosure requirements for DC trustees

Trustees of DC schemes have additional requirements to disclose their approach, being:
• From 1 October 2019, trustees must publish their Statement of Investment Principles on a publicly accessible website. This ties in with the requirement to publish Chair’s Statements online.
• From 1 October 2020, trustees must also publish an annual report demonstrating how they have complied with their policies.

Trustees need to understand Responsible Investment across the investment process

The Regulations encourage trustees to take greater ownership and be aware of the consequences of their responsible investment policies, rather than adopting a ‘box ticking’ approach. Where trustees’ approaches have historically been somewhat manager centric, greater emphasis is now being placed on the consideration of financially material factors beyond implementation and there is a broader requirement for trustees to consider Responsible Investment issues at each stage of the investment process.

Trustees should pose themselves a number of questions about their current approach in developing their policy, including:

Objective setting
• To what extent are Responsible Investment (RI) factors relevant given the members’ timeframes?
• Has consideration been given to setting investment beliefs or specific RI objectives?
• Are there any views expressed by members that need to be considered?

Strategy development
• Do we need to update our default arrangement to take account of ESG factors?
• Can we demonstrate that any change to our default arrangement will leave members no worse off than at present?
• Does the self-select fund range still meet the needs of members?

• How relevant is RI for the mandates in the strategy?
• Are manager RI policies explicitly considered in manager selection?
• How good are managers at integrating the consideration of ESG risks into their approach?
• Should RI be a differentiator in picking managers?
• Can we implement an RI strategy within the charge cap?

• Do the trustees receive any information (e.g. metrics, case studies) relating to the ESG characteristics of their mandates in reporting?
• Do the trustees review manager reporting on ESG issues and challenge manager activity?
• Do the trustees actively question managers on their stewardship activity?
• How frequently is this done?

Consider what sort of Responsible Investor you want to be

Trustees should take time to consider what sort of responsible investor they want to be. By recognising that there is a spectrum of positions that they could take, trustees can determine an approach to RI that is right for them and their scheme members, recognising this should be both proportionate and scheme specific. The factors that inform trustees’ approach to RI should include their investment beliefs, the complexity of the investment arrangements and their governance budget. Trustees should not, however, feel constrained in their approach and, where they believe it appropriate, they should strive to demonstrate higher standards of behaviour.

Addressing the default strategy

Many trustees have historically consigned more ESG friendly strategies into selfselect fund ranges, both in the belief that ‘responsible’ and ‘ethical’ were the same and that investing responsibly would impact on future returns. The revised Regulations mean that trustees need to review how RI considerations are reflected in the default arrangement. DC default arrangements generally make use of pooled funds which may be accessed through a platform structure. Changing the default arrangement may not, therefore, be straightforward, but trustees still need to consider their RI beliefs and policy, and how these are implemented in practice within the default strategy.

What do trustees need to do next?

Trustees need to ensure that their Statement of Investment Principles is updated and published by 1 October 2019. This is just the start. Policies define the behaviours and practices that trustees intend to demonstrate going forward and we suggest that, as a minimum, trustees focus on the following activities:
• Ensure investment beliefs are defined and documented.
• Schedule responsible investment training into the ongoing trustee education programme.
• Review your default arrangement and ensure that it remains fit for purpose.
• Ensure that the self-select fund range offers sufficient alternatives to meet members’ needs.
• Confirm that your managers properly integrate the consideration of material ESG factors into their investment processes and if not, understand why not. Your investment consultant could help with this, for example, by providing RI ratings.
• Ask investment managers to include suitable RI information in their updates and ensure that managers are challenged to explain their actions. You may wish to discuss with your investment consultant what information would be useful.
• Plan how you will report on compliance with your policies. Setting out a longerterm journey plan to address RI may help you achieve this.

Raj Shah
Head of DC Investment, Hymans Robertson

In the wake of several high profile pensions cases, a number of initiatives from The Pensions Regulator (TPR) in recent months show a more robust stance being taken. Key emerging themes, supported in TPR’s 3 year corporate plan and the Department of Work and Pensions’ (DWP) Tailored Review of The Pensions Regulator, highlight its mission to become a more proactive and clearer, quicker and tougher regulator – but will this result in a ‘smarter’ regulator?

TPR Future

Launched in September 2018, ‘TPR Future’ introduced a new approach to regulatory supervision encouraging schemes to engage, to meet required standards, and emphasising the Regulator’s drive to provide clearer, quicker and tougher action. TPR Future also recognised TPR’s role as part of a wider framework of financial sector supervision.

TPR Future focuses on proactive engagement with a wide range of schemes and aims to provide clearer guidance about the Regulator’s expectations. While continuing to educate and support schemes, a tougher stance is expected for those who are wilfully ignoring or avoiding responsibilities, with member protection remaining paramount. TPR Future encourages focus on those areas where members face the greatest risks.

Four key areas form the basis of TPR’s new approach, being the setting of clear and measurable expectations, early identification of risk, driving compliance through supervision / enforcement, and working with others.

A select population of larger schemes have been identified through horizon scanning and are subject to one-to-one regulatory supervision with a nominated TPR contact. Additional and escalating regulatory effort will be focussed on schemes failing TPR’s standards. Different approaches to scrutiny will be tested and TPR have not ruled out issuing improvement plans.

A second strata of schemes will experience interactions based on a specific regulatory risk or issue, again making use of a range of possible interventions and regulatory action where required. These may vary from the appointment of a nominated TPR contact to letters, phone calls and participation in thematic reviews. In addition, schemes must complete a scheme return.

Publication of compliance failures reinforces TPR’s zero tolerance towards poor governance.

As the new approach takes hold, TPR will publish key achievements, review the effectiveness of their work, measure and track successes, and provide opportunities for feedback. Overall, scheme members will benefit from increased assurance that workplace pensions are secure. As the recent Tailored Review put it, ‘TPRF is a robust programme of change to meet the future needs of the occupational pensions industry’.

Protecting Defined Benefit Pension Schemes

Building on TPR’s new approach, in May, David Fairs (TPR’s executive director for regulatory policy, analysis and advice), outlined The Regulator’s vision for a revised Code of Practice on Scheme Funding, setting out the need for a long-term view of funding and investment strategy and making a distinction between open and closed schemes due to their maturity profiles. Emphasising that affordability is key, TPR will seek views on length of acceptable recovery plans in the context of strength of employer covenant, and considering the role of contingent support and investment strategy.

The aim is for the new code to provide a straightforward, fast track to demonstrating compliance whilst retaining flexibility.

Two consultations are expected; the first focusing on options for a DB funding framework and the second on the supporting legislative package. This follows the February 2019 Government response to the 2018 White Paper ‘Protecting Defined Benefit Pension Schemes’ which sets out improvements to TPR’s powers enabling it to be more proactive, to obtain timely information, to gain redress and to deter reckless behaviour. Whilst recognising that the majority of employers comply with their obligations, the Government intend to enhance TPR’s power to enable more effective intervention. Key proposals include:

  • Enhancements to the notifiable events regime to include notification of the sale of a material proportion of the business or assets of an employer and the granting of security on a debt with priority over the scheme. Further consultation will follow on the details and TPR will revise its Code of Practice and guidance
  • A Declaration of Intent in relation to corporate transactions requiring corporate planners to share certain proposals with trustees and TPR. The Government will work with TPR on implementation of these proposals, including timing requirements, which may prove contentious if the proposed transaction is commercially sensitive
  • Tougher penalties with maximum fines of up to £1m and the introduction of new criminal offences (for reckless actions such as allowing unsustainable deficits or excessive investment risks) and additional powers for TPR in relation to interviews and inspections. Proposals include unlimited fines and civil proceedings for failure to comply with a Contribution Notice. Indeed, the Tailored Review goes further suggesting that TPR should be given more freedom and the power to create rules surrounding their information requirements.

In addition, the Contribution Notice regime will be strengthened and the Financial Support Notices (FSN), previously Financial Support Direction, regime will be streamlined and broadened. The Regulated Apportionment Arrangement (RAA) regime was noted for further consideration. A suggestion for a mandatory clearance procedure around corporate restructuring raised concerns of disproportionate effects on normal economic activity. TPR guidance on the clearance process will be clarified.

Annual Funding Statement

TPR published their Annual Funding Statement 2019 in March. The 2019 statement outlines TPR’s expectation for a long-term funding target (LTFT) and journey plan to its achievement.

The statement sets out expectations for an investment strategy which is consistent with the LTFT, together with TPR’s views on the employer covenant and funding.

TPR’s new approach will include contacting schemes where there are concerns around aspects of the funding and investment approach, particularly focused on equitable treatment of stakeholders and the length of recovery plans. The statement makes clear that, whilst not condoning late valuations, TPR’s preference is for the best outcome, rather than a time compliant but sub-optimal result. A revised funding code is expected next year.

Trustees’ approach to valuations is discussed, highlighting the need for trustees and employers to agree a clear strategy for achieving a long–term goal balancing investment risk, contributions and covenant support, with aligned shorter term strategies.

TPR’s expectations are set out in a series of tables stratified by funding, covenant strength and maturity of the scheme, and containing considerations of appropriate alternative actions. The Statement goes on to clarify that it will consider a recovery period too long ‘if a relatively mature scheme with a strong employer has a recovery plan in excess of the average length for the universe of schemes’.

These messages are reinforced in TPR’s 3 year corporate plan.

In summary, the underlying messages from TPR indicate cohesive and joined-up thinking leading to transparency in the Regulator’s approach. Ultimately, clearer, quicker and tougher regulation should promote confidence in pensions saving… however, ‘smarter’ regulation will be dependent on successful delivery and implementation, backed by appropriate resources.

Anne Rodriguez
Senior Manager – KPMG LLP

Akash Rooprai Head of Client Management, ITM
David Fairs The Pensions Regulator, Executive Director for Regulatory Policy, Analysis and Advice
Emma Watkins Bulk Annuities Director, Scottish Widows
Jane Kola Partner, ARC Pensions Law
Stephanie HawthorneFreelance Journalist and Chair

Is poor data the elephant in the room when it comes to buyout? Freelance journalist Stephanie Hawthorne chaired a PMI round table on data and derisking. Here are the key takeaways:

Stephanie Hawthorne: What is the state of pension scheme data? Is it more ‘dog’s dinner’ than digital perfection?

Akash Rooprai: The reality is somewhere in the middle but particular focus is needed when it comes to buyout.

Jane Kola: Getting to the bottom of the legal side of the coin is as important as the data. I have worked with schemes going back before the first world war. Those people are probably not with us but you never know, there may be one or two. It is all about the art of the possible. You may have gaps. The gaps will have to be dealt with by taking some risk and making some assumptions.

Emma Watkins: If you provide data which gives marital status, spouses’ date of birth and those are better than the assumptions I might otherwise have used, you will get a better price.

David Fairs: I see data as part of a broader issue around administration. 14 administrators cover 70 per cent of the market. Any one of us could set up an admin firm in our bedroom and do that in a completely unregulated way. Trustees don’t focus on data enough. There is a GMP working group. To get through that, you need working data, regardless of whether you are imminently about to do a transaction or not.

Jane Kola: Not enough time is spent on liabilities.

Akash Rooprai: There is not enough discussion on data issues, not just data in isolation but data linked to the documentation. If the data is incorrect, then the target you are aiming for is incorrect.

Emma Watkins: The market is really busy. Insurers are probably declining 30% to 50% of cases. We assess how confident we are that this case will transact, and one measure is how seriously the pension scheme has approached the data. If we are not satisfied they are invested in this, we will decline the business.

David Fairs: Data is going to have to be accurate and complete, and provided to the dashboard in a timely fashion. There is no easy route out of this. You are going to have to address the quality of data. It is just a question of when. We are launching an initiative and are approaching several hundred schemes and we will target the schemes where we think we are most likely to find issues. We will give them a period of time to sort out the data. If schemes are unwilling to do so, we will take stronger action in the form of an improvement notice. It could be a failure of internal controls. If it is sufficiently bad, we will appoint a different trustee.

Stephanie Hawthorne: How much does data cleansing cost?

Akash Rooprai: In general terms, to do a data cleanse is going to costs a few thousand pounds. That could save you two or three percent on your buyout premium so for every £100m buyout premium, that could save you two or three million. The cost benefit is a no brainer.

Stephanie Hawthorne: What should be your priorities?

Jane Kola: Get the benefits right. Some schemes are overpaying people. That is very difficult but the situation is worse where people are being underpaid. There are always a few and they are entitled to more and should get more.

Stephanie Hawthorne: In case of a total mess up, is indemnity insurance worth the paper it is written on?

Emma Watkins: Most trustees have standard indemnity insurance in place. Use it correctly. Nothing is ideal but runoff insurance is pretty good.

Stephanie Hawthorne: What has been the worst data failing?

David Fairs: Last year lots of boxes were discovered in a warehouse which showed there were lots more members that the scheme didn’t know about. There are all sorts of those.

Stephanie Hawthorne: One lawyers’ survey estimated 61% of schemes didn’t have the data to sort GMP equalisation.

Jane Kola: That is an understatement. You need good data to sort it out. People are entitled to equal benefits. For many it will be a small sum but for some it will be a significant amount of money – it could be as much as 20% of their pension.

Akash Rooprai: The C2 method is the default. Actuaries will do a back of an envelope calculation and say it costs 2% of liabilities but it will cost 2% again in administration costs.

Emma Watkins: If you have equalised using C2, I am not enthusiastic. The alternative is conversion which I prefer.

Last words

David Fairs: Make sure your data is accurate and complete and well protected. We are seeing more and more phishing attacks or ransom ware being deployed to seize data. The dashboard is coming along and you are going to have to supply the data to the dashboard. Deal with data accuracy sooner rather than later. We are going to take action against those who don’t comply.

Emma Watkins: Don’t come to the market too soon before you are ready because data gets old and expires; do have a conversation with your insurer and your consultant over which additional data to hold which might get you a better price.

Akash Rooprai: Have a journey plan for your data. Think about all the things you are going to do: scheme member options, buyout, buy-in, and figure out how data will impact that. Then you can figure out what you are going to do and when. Make sure you keep track of manual records as well as digital details such as pension sharing on divorce or scheme pays.

Jane Kola: Preparation is everything and as the lawyer in the room, can someone please find the deeds, all of them? It is well worth getting the benefits sorted out. Once it is done they are not going to change very much. It gives you more credibility if you say you have been working on the specifications for five years and don’t leave it to the last minute. Discretion – trustees don’t like codifying discretion and trying to decide whether to give a discretionary benefit or not in the heat of negotiation is very difficult.

It has become the norm not to invite the administrators to trustee meetings unless there is a complaint. It is also the norm to see lawyers only once every three years. If you are better funded, now is the time for those voices to be heard.

Stephanie Hawthorne
Freelance Journalist and Chair

It has been true for a long time that, in general, the larger the employer you work for, the more likely you are to be saving in a workplace pension for your retirement, and large employers tend to make a larger contribution to the pension too.

Back in 2012, only 17% of the employees of the employers with 1-50 employees were enrolled in a workplace pension, compared to 40% for employers with more than 500 employees.

How has this been affected by the introduction of automatic enrolment, which started in 2012 affecting the biggest employers and has affected all employers, even the smallest and newest employers since 2018? Research by economists at the Institute for Fiscal Studies in London has found that – looking at eligible employees of small employer with less than 30 employees – automatic enrolment has increased their participation in a workplace pension scheme by around 45 percentage points. In other words, without automatic enrolment only 23% were saving for retirement in this way, and now 70% are, which is a transformation in the saving rate of people working for small employers.

While the jump up is high, the level of pension participation, even with automatic enrolment, is not as high as it is for medium and large employers, where it averages almost 90%.

So whereas only 1 in 10 workers leave their pension scheme working for big companies, it is around 3 in 10 for the smallest ones.

Why is this the case? Having investigated this in some detail, we have some – but not all – the answers.

One thing it could be is that people working for smaller employers are less well paid, and have often been working for their employers for less time than people who work for large employers. A higher salary and longer time in the job are both good predictors of being in a pension, but the differences are nowhere near large enough to explain this different participation rate. Similarly, although larger employers tend to offer more generous pension contributions, again the differences are not big enough to drive the difference.

This basically leaves two remaining explanations that must alone, or in combination, explaining the different trend. One is that the administration of pension schemes by small employers might reduce participation, either because they actively seek to get employees to opt out to reduce costs, or because their human resources departments are less effective at explaining the benefits of pensions to their employees. The other is that ‘peer effects’ are important. In large employers, when people are automatically enrolled, they are surrounded by colleagues who are already saving in a pension, and can help explain what it is and why it is important. This is often not the case in small employers, where no one is saving in a scheme.

Either way, this should not take away from the huge increase in pension saving for the employees of small employers, which make up almost 30% of all employees in the UK. But there is more to do to fully understand why the participation rate is lower in small employers, and see if it can be boosted further.

By Jonathan Cribb
Senior Research Economist – Institute for Fiscal Studies

The UK Corporate Governance Code July 2018 (UKCGC)1 states that executive pension contribution rates should be aligned with those available to the workforce. In a climate where chief executives in the FTSE 100 have been enjoying pension contribution rates of around 25-30% while their employees receive around 9-10% 2, this highlights the need for change.

The exact UKCGC wording is: “Only basic salary should be pensionable. The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce. The pension consequences and associated costs of basic salary increases and any other changes in pensionable remuneration, or contribution rates, particularly for directors close to retirement, should be carefully considered when compared with workforce arrangements”.

Accompanying guidance on board effectiveness says that while it may not be practical to alter existing contractual commitments in this regard, remuneration committees will need to ensure future contractual arrangements comply. The Investment Association (IA) took a stronger stance in its February 20193 warning saying that:

• Any new executive director appointee whose pension contribution is above the level of the majority of the workforce will result in a ‘red top’ alert on the remuneration report.
• Any existing executive director receiving a pension contribution of 25% of salary or more will be ‘amber topped’ on the remuneration report.

A ’red top’ is the highest level of warning issued by the IA’s Institutional Voting Information Service (which aids shareholders in voting decisions). It is reserved for “companies where shareholders should have the most significant and serious concerns”.

The IA Principles of Remuneration make it clear that for new appointees this needs to be addressed now. Whilst, for others, it needs to be addressed over time such that the pension contributions are be reduced over time to equal the rate received by the majority of the workforce. Allowing time to resolve these issues is a sensible approach given the fact that amending an executive’s pension contribution would usually involve a contractual change exercise and requires consideration of the executive’s remuneration package and incentives as a whole.

The risk of not following the UKCGC and the IA Principles of Remuneration is the risk of a vote against the remuneration policy.

The House of Commons Business, Energy and Industrial Strategy (BEIS) Committee issued a report in March 2019 echoing these sentiments and also stating that it believes that the primary responsibility for changing the environment on executive pay “rests with the asset owners – the pension funds that invest our money for the long term”.

There is a certain irony in the fact that it may be pension schemes themselves, in their capacity as institutional investors, that are best placed to put pressure on remuneration committees around pension policy for executives.

1. Applies to companies with a premium listing and to accounting periods beginning from 1 January 2019.
2. Source: Business, Energy and Industrial Strategy Committee report “Executive Rewards: Paying for Success”.
3. https://www. media-centre/press-releases/2019/ investors-to-target-pension-perksand-poor-diversity-in-2019-agmseason.html

Anthea Whitton

Partner – Eversheds

Sitting on the panel at the Scottish Association of Pensions Lawyers’ debate on the Professional Pensions Trustee Standards (the ‘Standards’), I was asked if the expectations of trustee chairs were too high.

My response was to refer to The Pensions Regulator’s (TPR) comments that trustee chairs “should be prepared to assume similar governance responsibilities to those expected of a chair of any corporate board”.

This reminded me of a presentation at a recent conference that referred to the Corporate Code and how this could/ should apply to pension scheme governance. Reflecting on this response, I thought I’d look a little closer at how the Standards for Professional Pensions Trustee Chairs and the Corporate Code compare.

Now, the easy place to start is with the corporate need for a chair to be independent on appointment; this really shouldn’t need to be mentioned in the Standards as a professional trustee chair should almost, by definition, be independent. However, the Standards are quite clear on professional trustee conflict management.

The Standards require a professional chair to lead the board ensuring appropriate decisions are made and taking all key factors into account.

This is not very different from the corporate chair’s responsibility for its board’s overall effectiveness in directing the company whilst demonstrating objective judgement throughout their tenure. Similarly, the corporate requirement for promoting a culture of openness and debate is quite analogous to the expectation of the trustee chair to encourage full participation and open board discussions, using skills available on the trustee board to good effect.

Implied responsibility

One slightly controversial area is the implied responsibility of the trustee chair for the performance of other trustees. There is an expectation in the Standards for a professional trustee chair to manage the performance and effectiveness of the board to good effect, and operate effective succession planning.

Furthermore, they are expected to ensure that the knowledge and understanding of the trustee board is assessed and take steps if it does not meet the needs of the scheme. Of course, all trustees have this obligation under statute and the Standards give the nonchair professional trustee an obligation to support and assist the chair in their duties. The obligation being placed on trustee chairs is slightly weaker than the corporate chair who has a responsibility to ensure that the effectiveness of the board is evaluated annually, that the evaluation is acted on, that strengths are recognised, and weaknesses addressed. The Corporate Code requires that all directors engage and act on weaknesses.

This can be the biggest struggle on pensions boards with often long-standing lay trustees who are too busy with the day job and don’t/won’t recognise their trustee weaknesses.

The expectation of the trustee chair to manage succession effectively and the requirement to “take reasonable steps with the appointing party to review the length of their own appointment” is also straight out of the Corporate Code. Although nine years was chosen in that case for the maximum tenure rather than a maximum aggregate term of ten years in most cases for trustees. This, of course, relates to individuals; a professional trustee company with a true team-based approach can provide an automatic solution to chair succession planning without a loss of scheme knowledge.

Similarly, the Standards oblige the professional trustee to have clear terms of business that set out the basis of the relationship and expect the chair to organise appropriate committee structures to ensure efficient operation. Quite in keeping with the corporate need to have responsibilities clear and set out in writing. 

Sponsor engagement

Last but not least is the corporate requirement to have regular engagement with shareholders on significant matters, ensuring a clear understanding of the views of shareholders by the board as a whole. The pension scheme does not have shareholders and arguably the nearest equivalent is the beneficiaries i.e. those with a beneficial interest in the funds under trust.

However, especially in the case of a defined benefit scheme, the interests of the beneficiaries are clearly defined and whilst the trustees have a fiduciary obligation to protect those interests, the views of the beneficiaries are not key to the overall governance and management of the scheme at large. In this case the corporate sponsor takes the place of the shareholder.

It is the sponsor who holds the purse strings, who benefits directly from good performance and who has to fund any shortfalls caused by poor performance. Understanding the sponsor, its views, its business, its corporate governance, its performance, its attitude and ability to underwrite risk is essential to protecting the interests of the beneficiaries and the security of their benefits. This is, therefore, the analogous expectation under the Standards, a key responsibility of the board and possibly the most onerous duty of the professional chair. It is the professional chair who is expected to be the key interface with the sponsor, managing that relationship on behalf of the trustee board or ensuring that it is otherwise done to best effect. It is, furthermore, up to the chair to ensure that appropriate steps are taken to assess the covenant of the sponsor, now and in the future, and that this is taken into account on all funding and investment decisions.

In law all trustees are created equally, all have the same fiduciary obligations, and all have personal responsibility to ensure they comply with rules and regulations.

The Regulator quite understandably holds those of us charging fees and setting ourselves out as experts to a higher level, and the Standard separates professional chairs out for additional special treatment. However, this doesn’t differ much from the corporate world and, since pension schemes are generally a considerable cost centre of their supporting corporate, with proportionately a relatively large asset holding, this has to be right. 

Greg McGuiness

Trustee Representative – Dalriada Trustees


May made for interesting times in the pension world, with The Pensions Regulator (TPR) taking a hard line on compliance and HMRC bending a little to help the industry get things done. Bhavna Baines of Barnett Waddingham takes a brief look at some of the key pension topics for the month.

HMRC: Countdown Bulletin 45 – the clock briefly turns back

In an incredibly welcome turnaround, mid-May’s Countdown Bulletin 45 confirmed an extension to the previously expired deadline for payment of contracted-out equivalent premiums (CEPs). These tiny jewels in the GMP reconciliation crown allow GMP liability to be extinguished and State Pension reinstated for members with service under 2 years (or under 5 years in more historic cases).

Most of these members will have received a refund of contributions decades ago but, somehow, something fell out of the paper trail, maybe at the scheme side, maybe at HMRC’s, and the GMP wasn’t properly extinguished at the time. Much to their own surprise, when the GMP reconciliation data from HMRC first turned up, most schemes found themselves carrying tiny amounts of GMP liability for people they had literally no record of.

With Bulletin 45 extending the deadline to 4 June, we saw 2 weeks of fairly feverish activity across the industry as schemes rushed to submit their final requests. Inevitably there will still be cases where boats have been missed and schemes are still left saddled with rogue GMP benefits, however, with GMP equalisation adding even more urgency to the need to get these records absolutely right, even this short extension to the deadline was hugely helpful.

HMRC pension schemes newsletter 110

As life isn’t complicated or busy enough for pension schemes, HMRC also published pension schemes newsletter 110 which covers a range of topics including:

A consultation on the steps – the Government proposes to meet the UK’s expected obligation to transpose the fifth money laundering directive into national law. This includes a proposal that all UK resident express trusts, which will potentially cover most registered pension schemes, will be required to register with the Trust Registration Service. With the consultation due to close on 10 June, further updates will be announced on the ever increasing spiderweb that is pension scheme compliance.

TPR news – compliance and enforcement bulletin – no more Mr Nice Guy

In other news, May also saw TPR publish the latest edition of its quarterly compliance and enforcement bulletin, in which the Regulator provides an overview of how it used its powers between January and March 2019. This unassuming collection of pension crimes and misdemeanours across 4 cases studies should be required reading for anyone involved in pensions.

Several major outcomes during this quarter include:

• the first fraud conviction
• the first conviction for making prohibited employer related investments
• the first custodial sentence resulting from TPR prosecution
• the first time TPR have appointed a trustee to a scheme primarily because of a lack of competence amongst existing board members.

Bhavna Baines
Senior Technical Analyst – Barnett Waddingham