Mounting hostility towards single-use plastics will create clear winners and losers.


Plastic is the environmental issue of the moment. Campaigners have long argued against the use of single-use plastics and sought to highlight the scourge they create for the natural world.

But it was a BBC documentary, Blue Planet II, that produced a literal sea change in how the US, Europe and the UK view plastics. The documentary graphically highlighted the extent to which plastics have infected food chains, and the immense suffering they inflict on sea creatures.

The response from consumers has been stark, with many people moving swiftly to reduce their usage of plastic. Companies have been equally quick to put in place policies that cut down reliance on plastic. Governments too are reacting, with the UK and Europe both announcing strategies to regulate plastics.

By contrast, the investment community has been slow to react. Many investment managers have talked up the need for action. However, that rhetoric has not necessarily been reflected in portfolios. This is surprising. There are likely to be some clear winners and losers among plastics manufacturers. Simply put, companies with the capital to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper. Conversely, less well-capitalised companies dependent on single-use plastic will struggle to adapt.

Companies able to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper.

The US high-yield debt universe includes many companies producing singleuse plastics. For instance, almost all of the production of Sealed Air Corporation is single-use plastic, and a number of their products are market-leading. The company’s bonds are supported by strong free cashflow, a solid balance sheet and healthy debt levels.

Most crucially, Sealed Air Corporation is investing to adapt to a world intent on using plastic more sustainably. The company has combined product innovation with its work on sustainability. It is also undertaking various initiatives aimed at increasing usage of recyclable materials. Additionally, it is developing bio-materials that are recyclable or that degrade much faster than petroleumbased products.

Not all companies are quite so forward thinking. Some firms in the US high-yield market are heavily indebted, with as much as two-thirds of production dedicated to single-use plastics. Their lack of financial resource leaves them in a precarious position. Such firms will face stark choices about the direction that they want – and are able – to take in the future.

What applies to the US highyield market does not apply to all jurisdictions. Asian consumers have been almost silent on the issue of single-use plastics. Consequently, there is little impetus for change in companies in the region.

The very raw outrage of many western consumers about plastic might fade over time. But companies and governments are moving in a direction that means that some of the changes being sought are likely to prove durable.

As our love affair with plastic sours, the investment community must hasten to catch up with the shift of mood.

A version of this article was first published by Barrons on 5th March 2019.


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Samantha Lamb
Head of Fixed Income ESG – Aberdeen
Standard Investment


Aberdeen-Standard


Paperless pensions is an appealingly simple idea covering a multitude
of organisational, environmental, technological and security challenges.
Drilling right down, we are essentially talking about a sustainability issue
for the whole industry; how do we receive, integrate, manage, transmit,
secure and future-proof information? Do we tinker at the edges or do
we have an ambitious joined-up vision? Where do we want to be in 5 or
10 years? How are we going to get there? These are big, transformative
questions that go far beyond just cutting down on ‘snail mail’.


The member angle; inbox or letterbox?

Discussions around paperless pensions tend to focus on the user end, looking at member online engagement strategies and technologies designed to maximise and monitor uptake and usage. This makes sense; the inbox has already replaced the letterbox in almost every aspect of our day to-day interactions with the wider world. We work, bank, shop and socialise online, so it naturally follows that our pension schemes should be online with us.

None of this is news, but it’s all fast-moving; as recently as 3 years ago, it was mainly DC schemes leading the charge on this, fuelled by the attractive immediacy of online valuations, switches and fund/ benefit modelling.

Today, we are also seeing a significant uplift in DB interest.

This is partly fuelled by environmental sustainability concerns, but probably more influenced by the dawning realisation that DB pension schemes need to keep up with a changing world. Like town criers and telegraph poles (both innovative communications tools in their day), paper correspondence, the polite exchange of enquiries, 5 day waits for answers, and warehouses full of fading member files will inevitably disappear under the weight of their own built in obsolescence.

Resistance: the ‘little old lady factor’

There is a significant and unsurprising member appetite for online delivery. Demand across the industry is also from trustees and scheme sponsors eager for online solutions and information sharing. It may be surprising then that specific resistance to member online services in pension administration has often come from trustees themselves. Partly paternalistic, and partly protective instincts towards members, fears around cyber risk and a worry that the allimportant ‘personal touch’ will somehow be eroded, have all traditionally played a role in the relatively slow adoption of online services.

This is completely understandable: pension terminology is loaded with assumptions and even the term ‘pensioner’ suggests a certain vulnerability, a quaint bafflement in the face of ‘modern technology’. In reality though, this is a hugely oversimplified and condescending version of a pension scheme member. Outside the state sector, the pensions industry is almost unique in that we don’t have a ‘target demographic’. The world is our customer. The lifetime nature of pensions, and the associated intergenerational dependencies, mean that scheme members can be any age, from anywhere, of any background and at any stage in their worklife cycle.

Member online access/ servicing pros and cons: an overview

Information disclosure requirements mean that, even where online is the preference, members must always be offered an individual opt-out that maintains paper-based communications at member request. This is crucial as one size will never fit all.

Advantages

> Improve data security and exposure, e.g. secure access to online platforms avoids unsolicited mail
> Reduces paper, postage and printing costs and associated the environmental impact
> Speed up communications – email instant and accessible from anywhere and online account facilitates member self-service
> Retain link to members, which can be lost if member fails to notify of address changes.
> Maintaining link via online accounts can mitigate future member address chasing costs and data quality scores
> Online library of scheme and member documents acts as a ‘pensions bookshelf’ – a benefit statement landing on the doormat today may be filed under ‘B for Bin’ but when circumstances change members will see the advantage of a permanent store of online documents
> Member education – informed members make informed decisions, and online platforms can offer 24/7 access to online tools and learning materials

Disadvantages

> Potentially vulnerable to ID theft if online account is hacked – needs strict built-in security protocols
> Electronic delivery can be less reliable, e.g. emails blocked by spam filters or lost in email inbox clutter
> Online accounts require careful password management, which can offset some of the time saving features of a paperless set-up
> Requirement to provide opt-out to paperless communications, so additional work in managing paper and paperless communication processes

The key things that jumps out at even a high-level analysis are, firstly, the advantages of an online approach to meeting pension scheme member needs far outstrip the disadvantages. Secondly, the advantages affect all aspects of the scheme and member experience, ticking a lot more boxes than just member engagement. The disadvantages are much more narrowly focused and tend to cluster around technology challenges, all of which are solvable.

When trustees are weighing up whether to move their membership online, they need to design a strategy that’s equally fit for purpose for the members in their 30’s as it is for those in their 80’s, and can capture all individual preferences. Whether members are on a beach with a smartphone or receiving a birthday telegram from the Queen, ultimately, the one key thing that unites them, is the desire for instant access and immediate information.

Promoting online services

Online services aren’t a magic pill for member engagement; many members will never activate their online scheme accounts in the same way that many members will never open a paper benefit statement. However, our experience has shown that when trustees get behind online services, actively promoting usage to their members, the rate of uptake accelerates, reaching upwards of 50% of potential users in timescales that correlate very closely with delivery of employee workshops, newsletters etc. With member engagement as the ultimate challenge for many pension schemes, having concrete usage stats and feedback is massively more proactive than dropping a letter in a box and hoping for the best.


Julie Walker
Associate – Barnett Waddingham


There is a legal and financial imperative to align with the Paris Agreement. Trustees who ignore it risk legal action.


Climate change is happening now

The Intergovernmental Panel on Climate Change (IPCC) has reported that man-made warming has already exceeded 1⁰C since pre-industrial times, and is increasing by 0.2⁰C per decade. The impacts of this warming are being felt in devastating hurricanes, droughts, wildfires, sea level rise, and in catastrophic ecosystem and biodiversity losses.

The majority of the British public (63%) think the planet is in a ‘climate emergency’, with 76% saying they would vote differently to protect the planet and climate. And, importantly, the world’s politicians have made commitments: the 2015 Paris Agreement binds the world’s leaders to limit global warming to well below 2⁰C.

While this may all seem many miles from pension scheme portfolios, it is crucially important for one simple reason:

Climate change is a material financial risk, and trustees and other fiduciaries could face legal action if they fail to consider, and effectively manage, the risk it poses.

Climate change is financially material

We are not talking about ethical considerations here. Bank of England governor Mark Carney has been spearheading regulatory action on climate change since 2010. Investment consultant Mercer has modelled its impacts since 2005. The Institute and Faculty of Actuaries has issued a Risk Alert. Ever more asset owners and managers – including NEST, HSBC Bank’s UK Pension Scheme, LGIM and BNP Paribas Investment Management – are setting out their own approaches to dealing with the risks and opportunities associated with climate change.

Unsurprisingly, discussion around climate can focus on risks. But there are also enormous investment opportunities in the transition to a low carbon economy. There is no inverse relationship between sustainability and return. Evidence over the last five years for MSCI indexes, which exclude all companies with coal or fossil fuel reserves, outperformed the benchmark, while significantly reducing associated carbon emissions. Many investors now see such investments as a ‘free hedge’ against climate change transition risk.

Attention from regulators and members is increasing

Trustees cannot afford to ignore climate risk. Their legal duties have been strengthened even in the past few months: schemes must update their Statement of Investment Principles (SIPs) by October 2019 to include their policies in relation to financially material considerations (defined to explicitly include climate change) and undertaking engagement activities. DC schemes must publish SIPs on a public website and, from October 2020, publish a report detailing their implementation of the policies in their SIP.

Governance must improve and schemes must be transparent. This may make those schemes that are yet to seriously consider the impacts of climate risk feel uneasy.

And for good reason; their action (or lack of it) will be published for all to see. This will be of interest to climate conscious members and regulators alike. The Pension Regulator’s (TPR) investment guidance already signposts that climate change is a material financial risk and, along with the FCA, it has committed to reporting on the adaptation of their respective sectors to climate change under the third round of the Adaptation Reporting Power. This work is likely to result in increased scrutiny of climate risk management from regulators.

The financial imperative to align portfolios with the Paris Agreement

Trustees are investing for their beneficiaries’ retirement. Unmitigated climate change will result in losses throughout the economy, so beneficiaries’ interests will clearly best be met (and therefore fiduciaries’ duties best discharged), through efforts to ensure that warming is kept to a minimum. For well informed fiduciaries, this should be understood as effective risk management.

Indeed, a key conclusion from Mercer’s Investing In A Time Of Climate Change: The Sequel report (released in April 2019) is that investing for a well below 2⁰C scenario is an imperative as well as an opportunity: for nearly all asset classes, regions and timeframes, a 2⁰C scenario leads to enhanced returns versus 3⁰C or 4⁰C, and is therefore better for investors.

The legal imperative is also clear: if it is in beneficiaries’ best interests that catastrophic global warming is avoided, those beneficiaries will expect fiduciaries to exercise their investment duties to further that objective where there is a clear route to doing so. While market practice is developing remarkably quickly, there is a strong argument that forceful stewardship demanding action is already in that category.

A blueprint for trustee action on climate risk: you can’t leave it to your asset managers

Managing climate risk need not be difficult, though it will need appropriate resources. Think of it as a project, and resource it accordingly. Here are six steps to help get trustees on the road to becoming climate competent:

1/ Understand the risks associated with climate risk
Don’t take my word for it, do your homework. Mercer’s report (see above) is a good starting point. The Financial Stability Board’s (FSB’s) Taskforce on Climate-related Financial Disclosures (TCFD) offers a reading list. The Environment Agency Pension Fund (EAPF), whose trustees understand climate change more than most, provides an example of good practice. Once you have done some initial reading, consider whether you need additional advice.

2/ Establish investment beliefs
Consider articulating the core investment beliefs held by the trustee board which will shape the integration of climate risk into investment strategy, including practical decision making on asset allocation, performance objectives and selection and retention of asset managers.

Your investment beliefs around climate change could refer to trustees’ investment duties, as the EAPF’s do.

3/ Review your advisers’ and investment managers’ capabilities
Ensure new and existing mandates with professional advisers, including consultants, auditors, actuaries and accountants, require that appropriately qualified advice will be given on climate risk exposure.

4/ Assess your scheme’s exposure and update strategies accordingly Analyse the fund’s exposure to physical and transitional risks in relation to the fund’s assets and the sponsor’s employer covenant. Enlist experts’ help to conduct forward looking climate change scenario analysis consistent with the TCFD recommendations and consider political and regulatory developments. Findings should inform your investment strategy.

5/ Reallocate assets in line with investment beliefs
Instruct investment managers to reallocate capital and stop investing new capital into risky fossil fuel assets. Move the scheme’s passive investments into products tracking low carbon indices and seek out investment opportunities in low carbon sectors, including in real assets, infrastructure and private equity. Monitor emerging climate benchmarks and plan to invest for a well below 2⁰C scenario.

6/ Pursue active stewardship and engagement
Effective engagement with governments and regulators, as well as companies, is required to mitigate the systematic risks associated with climate change. Alongside company level engagement requesting well below 2⁰C business plans and reporting in line with the TCFD recommendations, make a commitment to investor networks on climate change and support investor action on climate change.

7/ Report
Report in line with the TCFD recommendations.


Megan Clay
Climate Finance Lawyer – ClientEarth

FOR PROFESSIONAL CLIENTS ONLY


A broader de-risking assessment

Today, many private defined benefit (DB) pension schemes are targeting a buy-out as their endgame. However, most schemes cannot afford the cost of undertaking a full buy-out in the near term and consequently require an interim solution. Therefore, they may ask themselves whether they should conduct a partial buy-in for a portion of their liabilities or simply evolve their current de-risking strategies, taking a ‘self-managed buy-in’ (SMBI) approach.

To help schemes make an objective comparison of different de-risking options, we examine:
1. Value for money
2. Impact on the overall portfolio
3. Flexibility to deal with the unpredictable


Value for money

A major driver of the increasing demand for buy-ins is the seemingly competitive pricing from insurers. Typically, buy-in contracts are priced on a ‘gilts plus’ basis, making them look attractive when compared to the cost of matching pension liabilities with government bonds. However, investors should not focus on price alone, but focus on what they receive for this price.

An SMBI approach is able to replicate many of the characteristics of an insurance buy-in, including longevity hedging, but at a lower cost due to the allowance in insurers’ pricing for capital and profit margin considerations, and more stringent investment restrictions.

Historically, we estimate that the difference has been up to 15% when considering the whole scheme membership. In the case of a typical pensioner-only transaction, the difference has been 5-10%, equating to a saving of £25-50m, assuming a buy-in of £500m1.

Because a buy-in is unlikely to cover non-pensioners, whilst the value of retained liabilities may fall, the risks (for example, the sensitivity to interest rates and inflation) will fall by less. Schemes may transfer disproportionally more assets than risks to the insurer.

Impact on total portfolio

An insurance buy-in offers security and cashflow matching in respect of a portion of the liabilities, but schemes should consider the broader impact on the overall portfolio. In particular, how does a buy-in impact the expected return needed on the remaining assets and/or the scheme’s ability to hedge its liabilities, and the expected time to reach the targeted buy-out?

1. Impact on the target return required from remaining assets

If a scheme is underfunded, the nominal level of deficit will vary following the buy-in depending on the valuation basis relative to the buy-in basis. The disclosed deficit may even fall. Crucially, however, a buy-in leaves fewer ‘free’ assets to make up any funding level deficit. This increases the target return needed from the remaining assets, everything else being equal.

Conventional insurance buy-in: A scheme transfers some of its assets to an insurance company, which in return covers the cost of the pension payments for some of the scheme membership, usually the pensioners.

Self-managed buy-in: A scheme aims to replicate the key characteristics of an insurance approach – such as hedging longevity risks and generating cashflows to match outgoing payments – directly and more broadly across the whole portfolio.

2. Impact on the scheme’s ability to hedge its liabilities

In order to maintain a given hedge ratio, a proportion of the remaining assets must be allocated to collateral, further pushing up the required target return on the ‘free’ assets. This would incur additional costs and could result in potentially selling assets at an inopportune time. Alternatively, schemes could decide to accept a lower hedge ratio.

3. Impact on the time to achieve a full buy-out

The pursuit of higher target returns following a buy-in increases the chance of defaults, negative returns and forced selling risk, especially during times of market stress. Ultimately, it potentially reduces the chance of the scheme being able to afford a buy-out at the target date. The alternative, maintaining a lower hedge ratio, could lead to an increase in liability mismatch risk.

Flexibility to deal with the unpredictable

Up to the point of a full buy-out, regardless of the adopted de-risking method, there will always be risks affecting the assets or the liabilities that cannot be predicted or hedged. Examples could be poor short-term returns, transfer values forcing payments earlier than expected, or changes in legislation causing changes to benefits.

Conclusion

We suggest that schemes look beyond buy-in prices alone and assess the impact at the total scheme level, considering a wider range of factors, such as value for money, impact on the total portfolio and flexibility to deal with unpredictable events. We believe that this will help them reach their endgame with more certainty. When considering these wider criteria, we believe a self-managed buy-in offers a more efficient route to a buy-out for many schemes than an insurance buy-in.

Figure 1: An insurance pensioner buy-in can increase the target return needed from your assets

For illustrative purposes only

Risk disclosures

Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations.

Insight calculations, 2019. Given current Solvency II regulation, we estimate that a pension scheme could achieve a net asset yield of circa 100 basis points more than an equivalent insurer. Around two-thirds of this difference is due to the pension scheme’s greater investment freedom, with the remainder reflecting the insurer’s cost of capital. We assume that, on average, pensioner liabilities have a duration of 10-15 years.

This document is a financial promotion and is not investment advice. 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.



Jos Vermeulen

Head of Solutions Design – Insight Investment



Greta Thunberg


Had you been holidaying in Narnia, then you might have had an excuse for not being aware of, and possibly inconvenienced by, the Extinction Rebellion movement, which besieged the capital in recent weeks. Greta Thunberg has been speaking as a voice of a generation with politicians of all persuasions about the devastating impact of climate change, if we don’t meet the 1.5 degrees global warming target. And, hardly a day goes by without another worrying report being issued. We’ve been warned about the cost of soil degradation and the loss of its carbon storing properties through deforestation, poor agricultural practice and erosion. The Government’s own independent Committee on Climate Change has recommended that the UK sets a legally-binding target to have net zero emissions of greenhouse gases by 2050. A landmark UN report – IPBES’ 2019 Global Assessment Report on Biodiversity and Ecosystem Services – alerts us to the possibility that one million species are facing extinction and the potentially devastating consequences for life on earth.


It’s easy to feel overwhelmed by the enormity of the problem. I, on the other hand, am excited about the prospect of meaningful change that can start with us. Having been categorised over decades as dinosaurs (oh the irony), pension funds now have the chance to lead – to show those who rely on us for their future wellbeing and prosperity – that we can be trusted to drive forward the changes that will sustain our planet.

In my view, 2019 is a pivotal year for sustainability. Greta’s quote at the top of this article couldn’t be more direct. So, what are the priorities for trustees and governance committees when it comes to sustainability?

Firstly, all trustees boards will have to amend their Statement of Investment Principles to set out publicly how they have considered financially material environmental, social and governance (ESG) factors, including climate change – in investment decision making and their policy towards stewardship.

The effective date is 1st October 2019. But that’s only a start. Trustees will also be required to own and disclose their policy on voting rights and engagement – not the investment manager’s policy. DC schemes must make these disclosures in relation to the default investment strategy. In October 2020, these schemes will be required to set out in their annual reports just how they have implemented their policy.

It seems to me that many trustees and advisers haven’t yet realised quite how a big a deal this is, particularly since the Stewardship Code is also being revamped. The UK was the first country to have a stewardship code in the wake of the last financial crisis. It applied only to listed equities and was deliberately light touch; virtually all asset managers signed up to it.

The new draft Stewardship Code is a step change from where we have been. If introduced as envisaged, the Code will focus on how effective stewardship delivers sustainable value for beneficiaries, the economy and society.

So to be clear, we are talking about outcomes and not policy statements. Trustees and others will have to clearly demonstrate and report on the alignment of purpose, strategy, values and culture with their investment managers. At its heart, the new Code identifies the care of the beneficiaries’ assets as the primary purpose of stewardship.

That doesn’t mean the investment consultants get off scot free. The new Code will oblige them to comply with specified Principles and Provisions. Which reminds me, over a year ago, 16 investment consultants signed up to an UKSIF/AMNT initiative to ensure that ESG issues were properly raised with trustees. They stated “We believe that ESG is a fundamental part of success in long-term investing, therefore we are drawing the guidance to the attention of UK pension fund clients through a variety of routes such as putting consideration of ESG on trustee meeting agendas, issuing briefings and/or holding training sessions. We also recognise the significant role that clientfacing consultants can play in ensuring that our clients are well informed on the issues”. What progress has been made? This may be a good time to review the performance of your investment consultant.

For the last four years I’ve had the privilege and pleasure of chairing the UK Sustainable Investment and Finance Association (UKSIF. org.uk). When I joined the Board in July 2014 I wrote that “The increasing recognition of global ‘mega-risks’ such as climate change and resource depletion mean that sustainable investment must move up the agenda of everyone involved in pensions; trustees, administrators and sponsors, offering both DB and DC schemes. I would encourage everyone involved to collaborate in developing environmental, social and governance (ESG) policies that influence investment strategy, fund manager behaviour and ultimately performance”.

We’ve undoubtedly made progress, and while ESG factors are fully integrated into investment processes for some fund managers, it’s taken legislation and codes to drag others to recognise the financial and non financial risks of not incorporating ESG into their thinking.

Trustees must ask their fund managers about their own policies on ESG and climate change, and whether those policies extend to the funds they manage.

A recent survey by the Climate Change Collaboration would suggest there’s still plenty to be done. David Cumming of Aviva Investors said recently on the Today programme, “Climate change is an issue. Companies have to be responsive to it. Companies that aren’t seen as responsive to their environmental responsibilities are increasingly deselected by fund managers from their portfolios. Customers and consumers want to invest in companies with a positive climate change culture”.

Outside trust-based schemes, the FCA has an open consultation on how climate change and ESG factors feature in the responsibilities of Independent Governance Committees (IGCs). The FCA proposes a new duty for IGCs to report on their firm’s policies on ESG issues, consumer concerns and stewardship, to help protect consumers from investments that may be unsuitable.

We have a huge responsibility ahead of us. I’m not expecting you to glue yourselves to the Stock Exchange, or any other building for that matter, but I am expecting everyone to step up to the plate. For many, this represents an entirely new area of knowledge and understanding and a need to get up to speed very quickly indeed.

Are you ready to adapt? The alternative is too terrible to contemplate.



Lesley Alexander
PMI Vice president

 




We have many kinds of pension schemes in the UK, covering Defined Benefit (DB), Defined Contributions (DC), CARE (Care Average Revalued Earnings) and various hybrid schemes too, and that is just in the private sector. We then have public sector schemes, often unfunded, and the State Pension system itself. It doesn’t seem to be an adequate range though as we have talked about adding on Defined Ambition schemes and are currently introducing a Collective DC (CDC) option. It’s clear that pension schemes face a number of challenges but surely one of these models will be robust enough to be sustainable over the long term that people need to save for retirement. Won’t it?


DB schemes have been the cornerstone of private pension provision in the UK for decades. In 2006, there were 3,500 open DB schemes in the private sector, covering 3.6 million employees earning benefits. By 2016, this had fallen to under 700 schemes covering 1.3 million employees. Analysis from the Institute and Faculty of Actuaries suggests that a private sector worker born in the 1960s is four times more likely to have a DB pension than a similar worker born in the 1980s. That trend is continuing and shows no sign of stopping, though perhaps DB schemes might still be sustainable for a handful of employers in the future.

The obvious problem in DB schemes is the open ended financial commitment for the sponsoring employer. When times were good, companies were able to take contribution holidays but were also forced to accept higher benefit levels, with requirements to revalue and increase pensions that made schemes far more expensive than was ever intended at the outset. Those extra costs were exacerbated by people living longer, stubbornly low interest rates, legal rulings like the Barber judgement (and the more recent Lloyds case), and understandable pressure from The Pensions Regulator to improve funding levels. What employer in their right mind would leave their company’s financial prospects such a hostage to Government meddling and market conditions by ever setting up a scheme like that again?

The public sector still has DB schemes so perhaps state backing makes these schemes more sustainable. Sadly, that doesn’t seem to be the case. The Universities Superannuation Scheme (USS) employers have been paying contributions of 18% of salary to their scheme (alongside 8% from members), and are being asked to increase that substantially to a combined rate of 33.7%. I’m not an expert on university funding but I don’t get the impression from the news I see that there is lots of money floating around to cover such an increase!

The NHS Pension Scheme moved its Normal Retirement Age to 65 in 2008 and introduced CARE benefits in 2015 but members can still get a guaranteed pension of around 2% of Pensionable Salary for each year of service, and that is a very expensive benefit to provide, as is the 1/57ths of salary pension available from the Teachers Pension Scheme.

Ultimately these public sector benefits have to be paid from tax revenue and there may well come a time when private sector workers chafe at providing gold plated benefits to the public sector that they can never hope to get themselves.

I mentioned the NHS move to CARE benefits, which seems particularly appropriate given the nature of their work. Sadly the punning opportunities are outweighed by the fact that this change is akin to Nero fiddling while Rome burned (or rearranging the deckchairs on the Titanic, whichever analogy you prefer). CARE schemes do partially mitigate the risks of a full blown DB scheme but it’s only a marginal improvement by limiting the exposure to salary escalation, including particularly the accrued costs from promotional increases. Despite remembering the infamous Cedric Brown saga from the mid-90s, I simply can’t see that removing one risk from DB schemes transforms CARE benefits to be sustainable in the long term.

Turning to the State Pension, we have a benefit that is not only Government backed but it’s also practically universal so there is no real danger of squabbling between recipients. Does that give us a sustainable model? The statistics suggest not.

There were 9.1 million people in the UK over age 65 in 1991. That had risen to 11.8 million by 2016. The Office of National Statistics (ONS) say that 15.9% of the population was over 65 in 2007, rising to 18.2% in the decade to 2017 and projected to rise further to 20.7% in 2027. Longevity has also improved over that period so the burden on the decreasing number of working taxpayers is suffering a classic double whammy.

The good news is that successive Governments (of various kinds) have broadly recognised this demographic time bomb and have taken steps to reduce the strain, for example by increasing the State Pension Age. The bad news is that the Office of Budget Responsibility (OBR) has projected that the cost of State pensions will rise from 5.0% to 7.1% of GDP over the next 45 years, an increase of over 40%. That hardly seems sustainable, particularly when coupled with the additional budgets needed for more health and care costs for this ageing population. The House of Lords Intergenerational Fairness and Provision Committee has recently recommended the removal of the triple lock for pensioners (joining GAD and the DWP who have said the same previously), but this remains a toxic political issue, albeit that the Committee dampened down the negative public reaction by monopolising all the headlines with the even more controversial proposal to remove free TV licences for those over the age of 75.

Finally, the shining light of current pension provision in the UK is autoenrolment with 10 million savers benefitting from this. However, there are 5 million selfemployed people (15% of our total workforce) who aren’t covered by autoenrolment and only an estimated 10% of those pay into a pension.

ONS figures suggest that 45% of self-employed workers aged between 35 and 54 have no private pension provision at all. The minimum combined contribution to a DC scheme to satisfy the auto-enrolment rules is 8% of ‘qualifying earnings’ (some way below full salary), and the median employer contribution to DC schemes fell from 10% in 2012 to 4% in 2016.

How sustainable will these DC schemes be when people retire after years of contributing only to discover that they still can’t afford a decent retirement?



Hugh Nolan
Senior Trustee Representative – Dalriada Trustees Limited



The window for authorisation of master trusts closed at the end of March. Ask any master trust that has gone through the process and they will tell you it’s no small achievement to get everything in order to meet the Regulator’s tough new tests. It is a worthwhile exercise that will undoubtedly raise standards throughout this increasingly important sector of pension provision.


As the authorisation window slammed shut, the DWP consultation on wider consolidation in pension schemes also came to a close on 1st April.

This consultation aims to drive scale and up standards in smaller schemes, so all pension savers have access to good quality pensions.

Now, it sometimes frustrates me that the debate about quality often gets boiled down into scale = good, sub-scale = bad. For me, the prerequisite for achieving good outcomes is that the trustees of a scheme are well resourced to run the scheme properly (good governance is expensive), invest in good solutions (benefiting from best in class investment thinking), and good communications, and ensure that systems and processes are up to scratch so members’ money is being well administered. Scale can help with all these points. Harnessing economies of scale and spreading the costs among a wide number of members certainly brings the unit cost down. However, that does not mean that smaller schemes can’t achieve the same, it’s just that they have to do it via a different route, namely by having a strong sponsoring employer that is committed to providing the necessary resource to the pension scheme. In a nutshell, if you are going to do pensions, then do it properly.

The recent DWP consultation takes a first, baby step to forcing smaller schemes to do pensions properly. It introduces reporting requirements on schemes via the chair’s statement. If adopted, this means schemes below a certain size will have to consider whether they could achieve better value for their members by consolidating. This is a positive step and should help focus the minds of trustees of smaller schemes. But should the Government go further?

I would argue it should. Now, some readers will say that I would say that, wouldn’t I? Being a representative of a master trust … and yes, I accept that master trusts could benefit from future consolidation in this sector.

However, all members of all schemes deserve to benefit from good governance, good communications, good administration and service, and above all good value for money.

For too long our pension system has failed the people that we are here to serve; the member. It is good to see the Government and Regulator now grasp the mettle of consolidation and raising standards, and doing it in a considered way. However, this is people’s long-term savings we are talking about and only the highest standards should apply when it comes to looking after people’s money. There is still some way to go to raise standards across the piece.

In summary, if the trustee of a scheme doesn’t have access to resources from the employer, or the benefits of scale, then it is unrealistic to expect them to achieve the best outcomes for their members; the system is, in effect, failing those members. That is not to say that small schemes can’t provide good pensions, they can, it’s just that without the commitment and resources to do so this is unlikely to be the case.


Darren Philp
Director of Policy and Communication – Smart Pension


This is not a headline you would want to wake up to … Figures published last April set out the average prices cyber criminals are thought to be paying for personal data, with email addresses worth between 75p and £3, proof of identity £46, and bank account details around £167.


With that in mind, a pension scheme is the dream target for cyber criminals. Many schemes have tens, if not hundreds, of thousands of member records, encompassing email details, bank account details, dates of birth, addresses, and proofs of identity.

I will not attempt to calculate the dark web value of an average size scheme’s data. But clearly, a cyber breach could have severe consequences for a pension scheme and its members. Beyond the potential losses to members and risks of claims and fines, knock-on service disruption and reputational damage to the scheme and employer are highly likely.

It is not surprising then that pension scheme trustees (and managers) have a variety of obligations, from a variety of sources, when it comes to cyber security.

The Pensions Regulator (TPR) has been paying increasing attention to the matter of cyber security in recent years. In April 2018 it published its ‘Cyber security principles for pension schemes’ Guidance, making it clear that TPR considers cyber security a vital aspect of the internal controls that trustees are required to operate.

Obligations also flow from the General Data Protection Regulation (GDPR), with severe penalties imposed for certain breaches. The GDPR’s core principles oblige trustees to ensure ‘appropriate security’ of the data for which they are responsible.

Cyber resilience: steps schemes should be taking

Trustees should be looking to take the following precautions as a minimum, to build their ‘cyber resilience’:

1. Ensure you understand the cyber risks facing your scheme, record the issues on your risk register and keep them under regular review

2. Put in place, and test, effective and proportionate controls to mitigate the risks identified. Ensure that your service providers also have appropriate controls in place. This is not just about security software, but also about working systems and processes to protect scheme data

3. Ensure relevant people fully understand their roles and responsibilities: undertake training, train others, and keep abreast of industry standards in the area

4. Put in place an incident response plan which sets out how, when and by whom you will be notified of a cyber breach, what you and relevant third parties will do to investigate and mitigate a cyber breach once it has been detected, and when and how you will notify third parties of any incident, including the Information Commissioner’s Office, TPR, and scheme members.

Cyber security is a rapidly evolving challenge, and one that all organisations and individuals need to manage on an informed and ongoing basis. Pension schemes should make sure that it is, and remains, high up on their agendas.


Aaron Dunning-Foreman
Associate – Sackers



BOOM. That’s the sound of a data management time bomb sitting under the pension industry going off at some point in the near future. Data management, whilst it sounds dry, is an area of governance that is one of the most relevant issues for today’s pension industry. The risk of doing a bad job of data management, currently ticking below the surface, not only carries the risk of serious financial penalties, but also holds the industry back in terms of innovations like the long-awaited Pensions Dashboard. Fortunately, there are answers.


Before I get into that, what do we mean by data management? For the purpose of this article, data management is the ability to identify, secure and audit all the data held on a company’s customers. There is an overlap with the field of data security but, as we will see the idea of managing data is broader. With this in mind, why is data management so important to today’s pension industry, and what can companies do to defuse their data management time bomb?

Let’s start with the General Data Protection Regulation (GDPR), which passed into UK law in May 2018, and is the most significant upgrade to data protection law in twenty years. GDPR not only grants sweeping rights to consumers over their own data, but also significantly raises the penalties for failing to protect these rights.

Poor data management can lead to a data breach, which is defined very broadly under GDPR. A breach is not just about loss or theft of data; any unauthorised processing, and even losing access to data, are also considered data breaches. Depending on the severity of the incident and the controls that were in place to prevent it, the fines can reach up to €20 million, or 4% of a company’s global turnover. If a company is not on top of its data management it may not even know there has been a data breach, which GDPR also frowns upon, potentially doubling fines if you don’t detect and report a breach in a timely manner.

Pension companies hold data on consumers that is highly sensitive; not only detailed personal information, such as national insurance number, age and gender, but also financial information about retirement benefits, annual earnings and savings behaviour. Running a pension scheme also generates all sorts of extra data about customers, such as information about tax relief claims and management fees.

Like banks, pension companies have a responsibility to guard their customers’ data safely.

And like banks, the pension industry has had to transition large numbers of customer accounts from paper records into the digital age.

I work at PensionBee, a pension company founded in 2014, that helps consumers get on top of their money by moving it into a single, online pot. We spend a large amount of our time tracking down people’s pension policies, which means we get the opportunity to communicate with almost all of the UK’s pension providers and learn about how they manage their customers’ data. One of the clearest signals of a problem lurking under the surface is the sheer amount of paper that our industry generates. People can and do move their pensions between providers and so often this transfer of data is on paper; quite possibly the only transaction that person will carry out using paper all year. Let’s be clear; paper is a problem. It can get lost, it can get wet, it can be left on a bus, and it’s easy to make mistakes when you’re manually transferring the contents of paper onto a computer system. Transitioning entirely to digital storage, processing and transfer is key to managing the large amount of data generated by the industry.

This is not a controversial point of view, however it is not obvious how to react to it if you are already immersed in a forest of paper processes. The pension industry has been around for a long time; in the UK pensions have been around since at least 1908, and several of its biggest players trace their origins back hundreds of years. Modern digital systems co-exist alongside old fashioned paper-based processes, and it is here that we need to take aim. How do you digitise a dead tree industry? There are three principles that you need to follow to get your data into digital form.

Leave only (digital) footprints: The first principle is to generate no more paper, and thereby stop contributing to the problem. This might sound easy, but there is a lot of fear in the industry that not sending out paper copies of policy documents or customer communication will leave people exposed to abuse. This is the opposite of the truth: you can’t track whether someone has read a letter, whereas you can know if an email or a digital document has been opened; documents get lost in the post (shockingly frequently), whereas emails and digital downloads get delivered in an auditable way. So just stop.

Digitise at source: Next, look at all the entry points to the business and start the process of digitisation there. The post room is likely to be the main bottleneck. It used to be a mammoth task to digitise incoming mail in real time, but technology has now advanced to the point where a machine can take care of opening, scanning, reading and routing digital copies of letters to the correct department with minimal human assistance. Just ask lawyers, who routinely install post room automation, in order to reduce the chance of missing documents and the risk of lawsuits, not to mention the tedium of processing large volumes of documents by hand.

Maintain a ‘golden record’: A key principle is to avoid duplicating data – there should be one master record for each collection of data, and your team should know where that lives. When that data is needed in different business scenarios and departments, live links between systems (or regular batch sync jobs) should be used. Copying and pasting data between systems creates a data maintenance headache and should be avoided.

These principles are hard to implement without a strong culture of respect for customer data. It is important to train your company’s employees, from their first day, to see data as the crown jewels of the business. Create a culture where people are mindful about data management. This goes hand-inhand with good information security training, but encourages people to ascribe a physical quality and value to data and to think hard about what they are doing with it, where they are putting it and who they are giving it to.

It’s helpful to look for tangible pressures pushing the industry in the direction of digitisation and good data management, other than the shadow of a data breach, which everyone assumes will happen to someone else. Fortunately, pensions are in the papers regularly as updates come out about the Government-led Pensions Dashboard. This is a good example of something that requires a solid base of digitally encoded data in order to provide universal coverage and a usefully comprehensive picture of your pension benefits, both policy objectives of this work. Simply put, without solid data management there is no way that the industry can deliver a platform that will bring positive consumer outcomes. It’s time for the industry to rally around this initiative, move away from paper, and roll out strong data management practices that can benefit consumers everywhere.


Jonathan Lister Parsons
CTO – PensionBee


Pension schemes transfer millions of pounds every month and hold sensitive and private information. This makes them a potential target for criminals who can manipulate money transactions or steal data and sell it on the dark market. Trustees and Sponsoring Employers potentially face severe reputational damage for getting it wrong. Trustee Boards and Company Directors can be sued if not enough is done to protect the scheme.


In April 2018, the Pensions Regulator released the guidance ‘Cyber security principles for pension schemes’ which defines cyber risk as follows:

‘The risk of loss, disruption or damage to a scheme or its members as a result of the failure of its information technology systems and processes. It includes risks to information (data security) as well as assets, and both internal risks (e.g. from staff) and external risks (e.g. hacking).’

The Pensions Regulator sets an expectation that Trustees are actively managing their cyber risk and notes the following:

‘The cyber risk is complex and evolving and requires a dynamic response. Your controls, processes and response plan should be regularly tested and reviewed. You should be regularly updated on cyber risks, incidents and controls, and seek appropriate information and guidance on threats.’

Unfortunately due to the everchanging nature of cyber crime no one consistent approach will ultimately prevent attacks. Therefore the focus is on finding a balance between the degrees of cyber security protection and cost.

To help understand whether you have the right balance, check you can answer the following 7 key questions:

1. Are you aware of your responsibilities and liabilities?

The Pensions Regulator has released guidance setting out their expectation for trustees but there are also other regulatory and governmental bodies such as the Information Commissioners Office, Data Protection Act, General Protection Data Regulation and many more, that will provide further guidance and requirements. In the event of a breach it is vital for Trustees to ensure that they have complied with all the various requirements.

2. Do you have an agreed definition of risk appetite and tolerance?

Trustees need to have determined the amount of risk they are willing to accept in relation to cyber security. This understanding will allow you to begin planning what your protection looks like. You must be confident that the minimum amount of controls and processes are in place to reflect your agreed risk appetite, and to be able to defend these actions and report back to members in the event of a breach.

3. What are your most valuable information assets?

Cyber criminals are not necessarily targeting the financial assets held by the fund but a wide variety of information. The EY Global Information Security Survey (GISS) 2018-19, a survey of over 1,400 CIO, CISOs and other executives across the globe on the most important cybersecurity issues facing organizations today, shows customer information was the most valuable information to cyber criminals followed by financial information and strategic plans. Your scheme may hold confidential information on both your members and your sponsor.

Top 10 most valuable information to cyber criminals

1. Customer information
2. Financial information
3. Strategic plans
4. Board member information
5. Customer passwords
6. R&D information
7. M&A information
8. Intellectual property
9. Non-patented IP
10. Supplier information

4. Where are your most obvious cybersecurity weaknesses?

Pension schemes hold and regularly transfer significant volumes of member information and interact with a large number of stakeholders. Due to high dependency on 3rd parties for transferring money, hosting data, and any other services, third party risk needs to be managed with the right contracts, technical controls and insurance. You will need to be confident of security across all areas where members’ information is held including the security of those third party vendors.

5. What are the threats you are facing?

The GISS highlights that most successful cyber breaches contain ‘phishing’ and/or ‘malware’ as starting points. Attacks focused on disruption rank in third place on the list, followed by attacks with a focus on stealing money. Although there has been quite a lot of discussion about insider threats and statesponsored attacks, these are considered a lower threat.

Top 10 biggest cyber threats to organisations

1. Phishing
2. Malware
3. Cyberattacks (to disrupt)
4. Cyberattacks (to steal money)
5. Fraud
6. Cyberattacks (to steal IP)
7. Spam
8. Internal attacks
9. Natural disasters
10. Espionage

6. Have you already been breached or compromised?

Many organisations are unclear about whether they are successfully identifying breaches and incidents. Our survey showed, among organisations that have been hit by an incident over the past year, less than a third say the compromise was discovered by their security centre. Pension schemes should be regularly reviewing their detection protocols to ensure they remain secure and in the event of a breach have a well defined incident response plan, that is exercised and kept up to date.

7. How does your protection compare with other pensions schemes and industry expectations?

Pension schemes across the UK will all be facing the same difficulties on deciding what level of protection is appropriate to protect members interests. You should seek to understand how your scheme compares to the wider market on cyber spend and protection.


In summary, Trustees should have an understanding of where their cyber risk exposure is and establish a plan on what needs to be addressed to ensure members’ information is adequately protected. Although no amount of protection will completely prevent a breach from occurring, Trustees need to ensure that a reasonable minimum level of protection is in place and processes are operating as expected.


James Berkley
Associate Partner, Pensions &
Tal Mozes
Partner, Cyber Security
EY