September’s come and gone; the nights are drawing in and many trustees are gathered around their meeting tables for the first time since the noisy days of a Brexit – dominated summer that left most other stories struggling to be heard.


The Pensions Administration Standards Association’s (PASA) defined benefit (DB) transfer guidance, a serious, aspirational and fairly far-reaching piece of work with some key players on board, is one of those stories that trustees are really only now starting to notice as they come together over their autumn agendas and pumpkin spice lattes to ask ’what does this mean for us?’ What indeed?

The story so far…

Pension transfers is one of those areas where the plot constantly thickens:

2013 – The year many felt as if predators were stalking their pension schemes. Pension liberation was everywhere; it was organised, it was global and it was down to trustees and their administrators to pick up the crushing due diligence burden of protecting members from scammers, even if that meant protecting them from themselves.

2014 – That budget – ‘the biggest pensions shake-up in a century’ – all leading to pension freedoms and the requirement to obtain financial advice on DB to defined contribution (DC) transfers, but accompanied by a super-clear steer from The Pensions Regulator (TPR) that trustees must not second-guess a member’s transfer decision. Very significantly, the nature of the advice did not have to be disclosed to the pension scheme, only the fact of its existence. Also significant, members could proceed with transfers against financial advice. Trustees and administrators should continue to police the scammers, but also butt out.

2015 – The almost impossible task of safeguarding members against pension scammers in the overseas transfer market is made approximately 100 times harder by HMRC’s sudden withdrawal of Qualifying Recognised Overseas Pension Scheme (QROPS) status, for bona fide qualifying overseas schemes. Since UK schemes look to their advisors, the problem – the great big technical, procedural, legal, operational and commercial problem – dropped straight into the pension administration’s lap. Few of us wake up with either a crystal ball or a qualification in the finer points of global pension law. However, collectively, trustees and administrators found themselves on the front line, picking up the costs, the operational burden and the vast majority of the risk. Who wanted to be the administrator deciding how well the re-drafted rules of an obscure Australian pension scheme integrated with UK tax regulations? Who wanted to be the trustee making that call?

2017 – Another spring Budget and the sound of another transfer shoe dropping as the overseas transfer charge, fully effective from day one, left the industry with some major catching up to do. Pension administrators were effectively positioned overnight as defacto tax collectors for an estimated £65m per year. So far, this is not-so-simple, as the 43 densely detailed pages of guidance issued alongside the policy paper proved.

The Government estimated an operational impact on HMRC of around £0.9m in updating their IT systems to cope with the charge. As administration specialists, strategists, IT experts and educators gathered in their respective businesses to decide how to transform those 43 pages into solid working practices, we could only speculate on the operational impact on the industry.

2018 – Where had all the scammers gone? The boiler rooms had gone quiet. Suddenly we weren’t seeing so many of those all too familiar escalating threats and attempts at intimidation, usually delivered in all caps, energetically punctuated, interestingly spelled and arriving at around 90 minute intervals (“DeMANd to speak to YOUr MANAgER!!! OmbUDSMan!!!! ThE PREsS!!!!”). Weeks could go by without anyone threatening our jobs, reputations or businesses. Had the overseas transfer charge driven the overseas scammers into permanent retreat or were they just rapidly googling how to re-register their schemes somewhere within the European Economic Area (EEA) to circumvent the charge? Time will tell but, in the interim, those at the very sharp end of transfer administration enjoy a brief period of relief.

2019 – A Freedom of Information (FOI) request from Royal London to TPR, reveals £60bn of DB transfer activity since the introduction of pension freedoms, with £34bn in 2018/19 alone (close to 250% of the previous year’s figure), and more than twice as many individual transfer cases (210,000 compared to 100,000 in 2017/18). As transfer activity ramps up, administrators have seen very steep increases in the administrative burden, and every transfer request seems to come with multiple requests for additional quotes, follow-up queries and clarifications.

Separately, the Financial Conduct Authority (FCA) announces that despite the standing assumption that it will rarely be in a member’s best interest to transfer from a DB scheme, 69% of members were advised to do so. The FCA’s targeted work in 2018 had previously shown that the transfer advice was suitable in less than 50% of cases. There’s widespread unease that transfer advice may be being driven more by the higher fees advice, to transfer will generate for the advisor rather than by the best interests of the member – pensions is a numbers game, but something isn’t adding up.

PASA DB transfer guidance

These two separate areas of concern on the TPR and FCA sides of the fence set the scene for where we are now and the background to PASA’s DB working group, headed by these two regulatory heavy hitters.

July’s ‘Guide to Good Practice’ focused on less complex transfer cases (so not partial transfers or overseas schemes), aiming to address the balance between member protection and the statutory right to transfer, through three key aims:

• Improve the overall member experience through faster, safer transfers
• Improve efficiency for members
• Improve communications and transparency in the processing of transfers.

Essentially, the guidance set out detailed administrative timescales for DB transfer quotes and settlements and, separately, established a ‘transfer template’ – a comprehensive schedule of scheme and member information/ enclosures to be issued in all transfer cases.

Which brings us back to the trustee table (and the collectively raised eyebrow) as trustees struggle with what feels like the inherent contradiction in the effort to streamline and speed up administrative processes on the way to what the FCA says are poorly made transfer decisions. Trustees are concerned that they are being asked to fast-track cliffedge choices. At the same time, from the actuarial and legal teams, the same trustees are hearing how very complex the transfer process is in the light of GMP equalisation, and every person in the room has their own view on how finely tuned the transfer discharges need to be, to take account of the nuances of their particular scheme. On the face of it, these are not uncomplicated questions or unwarranted concerns.

In reality, and looking at the bigger picture, for providers delivering quality administration the actual process changes arising from PASA’s guidance are unlikely to be significant. Most of the content of the transfer template should already be part of the existing transfer documentation, so bringing it all together in a relatively standardised format is going to strip out a huge amount of the usual follow-up questions that come from IFAs, while also removing any room for misinterpretation.

This last point feels like a huge aspect of what is informing the overall DB transfers project – although PASA is focused on administration, which is basically TPR’s side of the fence. The whole drive for consistency seems designed to both reinforce the FCA’s campaign to improve the quality of financial advice given to members, while also reducing costs. From here it’s just a short walk to the current FCA consultation on banning contingent charging, where advisors receive higher fees if the member is advised to transfer (surely one of the key barriers to truly impartial advice). The FCA’s supervisory work has shown that fees on DB transfers typically vary between £4,800 and £7,250. If the data inputs are standardised, advisor fees, regardless of the advice given, should become more predictable and manageable, with the FCA aiming for a cap of around £3,500.

Heading into winter 2019, we’re at a ‘watch this space’ point in the evolution of pension transfers. From the administrative and trustee point of view, events on the advisor side are likely to be where we see things changing in the transfer market. Potentially, we’ll see both a shake-up and a clamp down as the FCA, in this instance working with the administration industry, systematically working through the biggest risks associated with the DB transfer process and outcomes.


Julie Walker
Principal, Pension Administration – Barnett Waddingham


Trustees of defined contribution (DC) schemes face particular pressures, not least because of The Pension Regulator’s (TPR) close focus on chairs’ statements. But if you’re a DC trustee aiming at good governance, what pointers can you draw about future best practice? How should DC trustees be looking to improve into the 2020s?


Lessons can be learned from the authorisation process for DC master trusts. In some ways that process is unique to master trusts given their multi-employer nature. But master trusts will effectively form the bar against which single employer DC schemes should measure their governance, particularly for large or well-established schemes which are aiming for high standards.

So it’s useful to look for a read across. See below for some examples – not comprehensive, but a strong starting point.

Single employer DC schemes: lessons from master trust authorisation

1/ TPR isn’t afraid to enforce rules and stick to them. In DC trusteeship there is more scope for TPR to create rigid expectations than in defined benefit (DB), where areas such as funding level and covenant vary between schemes. We have seen this happen with DC chairs’ statements and aspects of master trust authorisation. It could follow in other areas, such as TPR’s review of default funds. Action: make sure you stay up-to-date on TPR’s latest thinking, including any messages that TPR gives out behind the scenes.

2/ Trustee independence is important. This is a central theme of master trust authorisation: TPR wants trustees to be empowered to make their own decisions. This prompts questions for single employer schemes too, e.g. the sometimes difficult question of how much power trustees have to determine their scheme’s communications policy. Action: consider whether you are content with your independence and the level of decision-making power you hold.

3/ DC knowledge and understanding needs special attention. The master trust authorisation process has a strong emphasis on trustees demonstrating the right mix of skills and experience. For single employer DC schemes or sections this can’t be taken for granted – many schemes have found this one of the hardest areas of the chair’s statement to complete. Action: consider compiling a skills matrix in a similar format to those used by master trusts.

4/ Schemes should think about insolvency risk. A key focus of master trust authorisation is the risk of the provider becoming insolvent. Master trusts now have ring-fenced reserves to cover winding-up costs. Arguably this leaves a mismatch against single employer schemes which lack the same requirement. Time will tell whether The Department for Work and Pensions (DWP) explores a similar rule for all schemes. Action: discuss whether to ask your employer to create a reserve voluntarily – some schemes might look at this even if they are in a minority.

5/ Test your administrators. A vital area for all DC schemes, adopting a central role in master trust authorisation. Large single employer schemes might look at borrowing some of the headings from the first part of the master trust systems and processes questionnaire. Action: look at the questions you ask your DC administrators as part of their regular reviews, and assess these carefully.


Mark Baker
Partner – Pinsent Masons


Buy-ins and buy-outs are typically undertaken by trustees of defined benefit schemes to help manage or reduce risk. While both buy-ins and buy-outs seek to reduce risk and secure member benefits, they differ fundamentally in three ways: their purpose, practicalities and potential investment impact. Consequently, the analysis you should conduct when you consider them needs to be different.


Purpose

An insurance buy-out is the destination point at which trustees and sponsors can be confident of securing all the members’ benefits, i.e. an endgame solution.

An insurance buy-in is a potential investment option to help trustees move towards their endgame, which is usually a buy-out if choosing this option.

Practicalities

Under an insurance buy-out, trustees typically transfer all their assets and liabilities to an insurance company. The insurer takes on legal responsibility for fulfilling pension obligations to scheme members. The corporate sponsor divests all responsibility for the scheme, and scheme members become policyholders with the insurer. This allows the trustees to wind up the scheme, extinguishing all governance responsibilities.

Under an insurance buy-in, trustees typically transfer some of their assets to an insurance company in return for a cashflow stream that reflects the actual pension payments for a portion of the scheme membership (the members insured). The insurance company makes payments to the scheme, which in turn makes payments to the pensioners. The trustees retain the governance responsibility for managing the whole scheme, effectively making the buy-in an asset of the scheme.

Potential investment impact

Once a buy-out is complete, the pension scheme has wound up, and scheme members are individual policyholders with the insurer.

Following a buy-in, when looking at the notional portion of the members that have been insured, it can appear that there are no investment implications as their pension payments are matched exactly by the insurance contract (ignoring any governance costs incurred by the scheme for managing these member benefits). However, when looking at the scheme as a whole, there can be significant investment implications.

Buy-in transactions typically do not cover non-pensioners, and therefore the longer-dated and most risky liabilities typically remain uninsured. So, schemes may transfer disproportionately more assets than risks to the insurer. In addition, an insurance buy-in ties up a significant proportion of the scheme assets and cannot be reversed – this can reduce the ability to deal with unpredictable events.

The investment implications may be three-fold:

1. Impact on the return required from remaining assets

A buy-in typically leaves fewer assets under trustee control. Depending on the longer-term funding aspirations of the trustees, this could increase the return needed from the remaining assets, everything else being equal – meaning there may be a need to take on more investment risk. Additionally, in order to maintain a given liability hedge ratio, a portion of the remaining assets might have to be allocated to collateral. This could also push up the required return on the ‘free’ assets.

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

The pursuit of higher returns following a buy-in increases the chance of negative returns, especially during times of market stress. The alternative – maintaining a lower return target – could lead to an increase in the time necessary to achieve a full buy-out.

3. Flexibility to deal with the unpredictable

Up to the point of a full buy-out 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. The illiquid buy-in asset gives trustees less flexibility to deal with any setbacks.

The analysis when considering buy-outs and buy-ins needs to be different

An insurance buy-out is widely deemed the least-risk way to secure payments for all members’ benefits, provided the insurer remains solvent. However, insurers need to comply with stringent regulatory restrictions on investments and will also be seeking to generate a profit. This means buy-outs are typically relatively expensive compared to other options.

The usual reason trustees would not pursue a buy-out is a scheme’s inability to afford it. Another reason would be if the trustees believe an equivalent outcome could be achieved more cost effectively by adopting an investment strategy that incorporates techniques used by insurers, but without the regulatory and capital constraints insurance companies face.

When comparing an insurance buy-in to other options, trustees need to consider the impact on their certainty of achieving their target endgame. This involves considering the impact on a wider set of measures, such as the return required from remaining assets, the scheme’s ability to hedge its liabilities, time to achieve the endgame target, and flexibility to deal with the unpredictable.

  Buy-out  Buy-in
Purpose • Endgame solution  • One option on the path to the endgame
Practicalities • Transfer all assets and liabilities
• No further governance obligations
• Transfer some assets in return for a cashflow stream
that reflects some liabilities
• Retain all liability and governance obligations
Potential investment impact • No further investment mis-match risk   • Asset that reduces the mis-match risk for a notional portion of the liabilities, but could increase the time to, and cost of, reaching the target endgame overall
Analysis required when comparing to other options • Cost versus residual risk of managing
liabilities
• Return required from remaining assets
• Ability to hedge the remaining, or uninsured, liabilities
• Time to achieve the target endgame
• Flexibility to deal with unpredictable event

IMPORTANT INFORMATION Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations. 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 Solution Design – Insight Investment



The second edition of PMI Pulse included the hot topic of professional trustees and whether every trustee board should be required to have one. This issue has come into sharp focus again in light of the Regulator’s increasingly critical assessment of governance standards, particularly in respect of smaller schemes.


Responses were mixed. A small majority favoured the principle of compulsory professional trustees. However, there were concerns around how this could be achieved, recognising the currently insufficient number of professional trustees to meet such a demand.

Inevitably many respondents made the connection between this potential shortfall and the Regulator’s focus on consolidation to reduce the overall number of schemes, which could provide a solution. Consolidation could also address the other main concern – cost. A number highlighted the cost of a professional on the board as an unwelcome additional burden.

Some queried the premise that a professional trustee would necessarily produce high governance standards, with concerns around diluting the benefits that lay trustees bring. We also asked for views on trustees’ level of understanding of ESG issues. The responses are concerning, particularly the view that the new requirements for SIPs, aimed at increasing trustee understanding, will have limited effect.

Read on for more and see all results here.


Question 1: How satisfied have you been with the direction of pensions policy over the last 6 months?

Overall, respondents seemed satisfied, with 52% very or slightly satisfied. Nevertheless, several respondents felt that progress had been stifled by Brexit.


Question 2: How optimistic are you about the direction of pensions policy over the next 6 months?

Again, the responses mainly appear to indicate satisfaction with the direction of travel, with 35% very or slightly optimistic. From the 59% less satisfied, comments included:
“Lack of delivery of a pensions bill is holding up lots of innovation and decisions, so not necessarily the direction, but lack of progress”
“Unimportant issues will continue to dominate the short to medium term with countless hours wasted on GMP reconciliations when more vital areas such as member awareness and dashboards crawl slowly into the headlines”.


Question 3: Do you think the Pensions Regulator is currently focusing on the right areas?

27% said ‘no’ versus 19% in January. The overall level of support for the direction of travel will no doubt be seen as encouraging.


Question 4: What proportion of current Trust Based DC schemes do you think will transition into Master Trusts in: 5 years’ time, 10 years’ time, 15 years’ time?

The responses present a mixed picture. Whilst a small number of respondents expect a large transition over time, the majority of responses suggest only limited movement, even over a 15 year time period.


Question 5: Should the Pensions Regulator introduce a requirement for all schemes to have a professional trustee?

Respondents were split, with 50% in favour versus 47% against. Judging by the number of comments on both sides, this issue generates considerable interest. Many questioned whether a professional trustee necessarily improves governance:

“They should focus on the competence and skills of the board as a whole – a professional trustee may be a good solution in many cases, provided they’re the right one for the scheme… The importance and value of diligent, skilled, lay trusteeship… should not be downplayed”

“Some of the lay trustees I work with take their role very seriously, including ensuring that they have sufficient training. I would never want to discourage these trustees, who carry so much of the scheme’s history with them”.


Question 6: If the Pensions Regulator was to introduce the requirement that all schemes have an independent/professional trustee on the Board, does the professional trustee sector currently have the capacity to meet the expected demand?

A very clear response here. There seems to be little doubt that, without changes such as reducing the overall number of schemes or significantly increasing the number of professional trustees, any policy to impose professional trustees on all schemes would face significant practical challenges. Comments included:

“Demand will always expand to cope with moves in this direction however there is not sufficient expertise around currently to cover the shortfall…” 

 


Question 7: When should the Pensions Regulator make it a requirement to have a professional trustee?

Those who wish to see the requirement introduced seem in principle to be in favour of implementation sooner rather than later, with 50% indicating the requirement should be implemented within 5 years. However, as previously observed, these timescales could be severely hampered by supply considerations.

“The longer the timescale the more likely this will not happen. The appetite for more control can quickly dissipate particularly with a change in government”.


Question 8: To what extent do you think the introduction of professional trustee standards will: Improve standards; Lead to consolidation; Increase costs; Lead to a decrease in the number of professional trustees?

Respondents agreed that the introduction of trustee standards will improve standards, increase costs and lead to a reduction in the number of professional trustees. Whether it would be expected also to lead to consolidation in the market is less clear.


Question 9: Are trustee boards sufficiently well informed about ESG issues?

Although not all bad news, the 43% ‘no’ response is of concern. This is an area of growing focus, for good reason. Expectations on trustees to be on top of the issue are already high and growing.

“We are only just starting to look at this seriously”

“Advisers are providing information to trustees; the issue is whether all trustees have or use their advisers appropriately”.


Question 10: Will the new ESG/SIP requirements lead to a significant change in investment policy?

50% of respondents feel that the new requirements will not lead to significant change. Taken with the response to the previous question, this suggests that requiring trustees to increase their focus on such issues through more detailed documentation will not, by itself, be sufficient to force trustees to raise their game on ESG.

“It may over time, but my feeling is that in the short term the SIP will be revised to justify the status quo.”


Kevin LeGrand
Member of PMI Policy and Public Affairs Committee

 


Defined Contribution (DC) provision in the UK is evolving, with sophisticated investment strategies, communication tools to help drive engagement, and stronger processes to improve member experiences. The current narrative serves to develop strategies to ‘get returns’ and ensure members’ pots ‘grow over time’, and it aims to do this at a low cost. It’s time for a change: the focus should be on understanding the level of income members need at retirement and setting strategies that aim to help members achieve that level.


Rise of DC provision

The first company pension schemes were established in the 17th century for (then) quasi-government agencies, such as the Bank of England or the East India Company. One of the earliest private schemes was the Chartered Gas Light and Coke Company, which paid between 3/12 and 8/12 of annual salary on retirement. The motivations for pension schemes at that time are similar to the motivations today; to provide a retention tool for employees, and help people make ends meet at retirement1. As an industry, we have since worked out that trying to provide defined benefits (DB) at retirement is challenging due to the ongoing longevity costs and reliance on the sponsoring employer. Key to the shift in DC provision is reducing reliance on the sponsoring employer – instead of a system that looks to provide a guaranteed income, members can build up a pot of money which they can then use to buy an income, in some form, in retirement.

Pension freedoms

In simpler times, the default options targeted a final position of 75% annuity matching assets and 25% cash. Following the introduction of pension freedoms, we now need to consider all of the choices members might take at and during retirement; cash, drawdown, an annuity, or a combination thereof.

This choice has typically resulted in a shift in the ‘default’ final position across the DC landscape. Schemes have adopted a more flexible asset allocation at retirement – a onesize fits all (none) approach. The industry is focusing on driving better member outcomes by ensuring members have both choice of how to receive their benefits, as well as having the tools to help them understand their options.

Following the narrative

Whilst the current narrative has prevailed in terms of the flexibility and choice it provides, does this really drive better member outcomes? Many schemes have followed this investment narrative – create a default that allows members to take more risk earlier on and de-risk as they get closer to retirement, into an allocation at retirement that aims to allow them to pursue the wider retirement choices available.

The aim of this investment strategy is, therefore, to try and ensure members ’get returns’ at the lowest cost. We still see many schemes invested heavily in passive global equity – if markets were to fall 20% and fund values fell 20%, this would be considered a success for the investment strategy.

While excessive risk management is not the answer either, it is important to be cognisant of what members need. For example, let’s assume members are invested in a passive equity lifestyle that de-risked from 10 years away from retirement. Suppose a 55-year-old was planning to retire at the end of 2018 and was therefore invested 100% in passive equity.

In that case, because of investment returns in the 4th quarter of 2018, that member’s pot would have fallen by around 10%2. If that person was planning to buy an annuity, then the income they would have received for the rest of their life would have also fallen by around 10%. The Dutch have a saying; “Friday is the day you work for your pension” (contribution rates are 20% in the Netherlands). In this case, every Friday morning our member has ever worked in their life has been wiped off by a poorly thought out investment strategy.

While there are a number of assumptions made for this 55-year-old, not all of which will apply to everyone, the fact that this situation has the potential to occur leads us to question whether members are getting good outcomes.

Helping trustees/employers identify members’ needs. How is this done in practice?

Firstly, by understanding how the key levers that determine retirement savings interact, which means analysing contributions, time horizons and investment strategy. It is then important to define the key input – what income members need at retirement.

Australia adopts a ‘basket of goods’ approach, helpfully categorising expected retirement spending habits across a low, medium and high scale which in turn provides an income requirement at retirement. In the UK the Pensions and Lifetime Savings Association (PLSA) are working on something similar, putting outcomes in terms members can easily interpret, such as the quality of wine or frequency of holidays they would like in retirement.

The level of income needed at retirement to provide these outcomes should then be the first step when setting the investment strategy.

Schemes can build an investment strategy based on their own contribution rate. For example, a scheme contributing 20% of salary can probably afford to take less risk than one where contribution rates are 10%. Success of the pension scheme is then easier to measure. It can be based on the investment strategies’ ability to keep pace with the return members need in order to achieve the level of income they are targeting at retirement.

It is important not to overlook the impact of consolidation, another key topic in the DC industry on all this. In reality, schemes with multiple employers, with a number of different contribution rates, all under the same investment approach, need to give careful consideration to meeting the needs of their members.

As a simple example, at current autoenrolment rates, investment returns of between 5.5% and 8%3 above inflation every year for the members’ whole working lives would be needed to maintain the same standard of living at retirement. This level of return is unrealistic and highlights the importance of educating members of the need to make appropriate and sufficient contributions.

It’s time to go back to basics, starting with the level of income needed by members at retirement. Setting clear, objective-based investment strategies around something as definable as that can help members achieve both that level of income and better outcomes.

1. Source: Pensions Archive Trust.
2. Source: MSCI (data for Q4 2018, run in July 2019), R&M Solutions, a division of River and Mercantile Investments Limited (calculations in July 2019).
These figures refer to the past and past performance is not a reliable indicator to future performance
3. Source: R&M Solutions, a division of River and Mercantile Investments Limited (calculations in July 2019).
These figures refer to the past and past performance is not a reliable indicator of future results


Niall Alexander
Head of DC – River and Mercantile Solutions

 


 


The ultimate purpose for pension schemes is to pay out pensions to its members. Sounds simple enough but those familiar with pensions know it is anything but, particularly in the current economic and regulatory environment. While every single basis point counts, much focus has been on funding, compliance and benefits, but less on investments. This has been the poor neglected cousin which has resulted in trustees settling for mediocre investment arrangements.


The recent Competition and Markets Authority (CMA) Review shone the light on poor practices among fiduciary managers and investment consultants, particularly focusing on conflicts of interest, lack of comparable data on performance and cost transparency, and also highlighted the issue of pension schemes not challenging their providers; mainly because of the lack of information or tools to do so. The review was certainly necessary and well received by the pension industry, including IC Select, but was not far reaching or sufficient enough.

The review covered competition but did not touch on the equally important issue of improved governance. Yet research shows that good governance can add as much as 1% per annum to a scheme’s investment returns which for many pension schemes is the difference between success and failure.

Investment is a complex area and our research indicates that trustees do not always understand what they should focus on and what they can delegate. Trustees that lack the skill or time to question the investment advice given should consider other methods of investment governance and should instead focus on an investment governance model that focuses upon high-level strategic decisions.

The 10 December 2019 deadline for setting objectives is fast approaching and there is a real concern that the provision of advice to pension schemes could come to a halt as many trustee boards seem to be asleep at the wheel.

This must be done before the deadline date or the investment advisor will no longer be able to provide the services it was appointed for, rendering the schemes ungovernable.

The Pensions Regulator’s Guidance offers some help to trustee boards with pragmatic advice, which is welcome, but the challenge of getting the monitoring framework right remains. Developing the proposed scorecards to capture all aspects of the advice to be measured will take time to develop and that time is fast running out for the trustee boards.

However, fiduciary managers will have to significantly up their game in order to compete in a market that grows some 30% per year with margins of 20-30% and with an expected 500+ tenders in the coming years. Upping the game among fiduciary managers will have a positive knock-on effect on investment advisory consultants, which is still the predominant investment governance model for DB pension schemes in the UK.

Getting the investment governance framework right will be a win-win for all concerned.

Members will have confidence in their pension entitlements until they die, sponsors are more likely to save money both from the cost of accrual and deficit recovery contributions, and trustees will have done their job to the best of their ability in securing pension payments for the members.

Getting it wrong on the other hand will cost everyone involved dearly. In a worst case scenario, the pension scheme ends up in the Pension Protection Fund (PPF) and members do not get what they were promised or what they expected. Not to mention the reputational risks for both trustees and sponsors.

The maximum PPF pension is currently capped at £40,000 at the age of 65, which would be a significant hit for many but in particular senior executives.

Those who have yet to reach retirement age only receive 90% of what they were originally entitled to, and on top of that the annual inflationary increase will be restricted to CPI, which may be significantly lower than promised in the pension scheme rules. In this scenario trustees and sponsors alike risk ending up in front of a Select Committee and hauled over the coals by the press. If found negligent trustees can be jailed, fined, sued and debarred; a sure way to ruin a career and reputation if ever there was one.

If this sounds overly dramatic, the likes of BHS and Carillion in recent years should not be forgotten. Not forgetting the more run of the mill cases of below-bar investment governance which have left schemes poorly funded despite years of deficit recovery contribution by the sponsoring companies.

Trustees now need to act fast in order to achieve a positive outcome for the industry and ultimately for the members. It cannot be said often enough that ‘what gets measured gets done!’

Good investment governance demands appropriate advice, expert monitoring, competitive tendering and transparency of costs. Furthermore, in accordance with the CMA Review, good governance demands that both fiduciary management and investment consultancy providers require oversight, otherwise how can you assess success and value for money?

This should always have been a necessity not a nicety but until recently this has proven difficult to achieve and implement. Now that the tools exist and independent third-party evaluators (TPE), such as IC Select, can shine the light on poor practices and help raise the bar on investment governance, there is no excuse not to use all means available to get it right and raise their game.

DB trustee boards are not lazy or stupid. For far too long they have simply been starved of the necessary information and insights into how to make the most effective investment decisions for their schemespecific circumstances. This is changing for the better, but trustees and investment advisers all need to be on the ball.

Trustees of today should bear in mind that they will be judged by the standards of tomorrow and that they had better know the road they have chosen because unlike Alice in Wonderland, any road will NOT do!

Donny Hay
Director – IC Select


When man first went to the moon the Apollo Lunar Module had a state-of-the art computer. The phone in your pocket is now more powerful. Smartphone usage has grown exponentially, and the way people consume services is fast changing. With increased online activity comes a rise in how consumers expect things to work. Ease of use and immediacy of response are prerequisites for a good service.


Quick and easy processing

A friend’s car broke down recently and he was telling me he’d used an app on his phone to report it. The geo location function found the car and he had immediate confirmation that the report was logged. He could have phoned, but the app was quicker. The lesson is that if you make services easy people will use them.

I also now buy my rail tickets using an app and a couple of months back I switched bank account to a startup called Starling.

The sign-up process was a revelation in terms of how fast technology is advancing. I downloaded the app, took a photo of my driving licence using the phone camera and recorded a selfie. Seconds later I got confirmation that my account was approved.

You may be thinking, “well he’s a techie and that’s not how most people do things.” Wrong on both counts. I’m in my mid-fifties and by no means an early adopter.

Smart thinking

The Ofcom 2019 UK Communications Market Report shows that the smartphone has now overtaken the laptop as the preferred way of accessing the Internet – 78% to 63%. Smartphone ownership among the 45-65 age group is fast catching up with the youngsters.

As well as being the device of choice for most people there are other benefits in deploying services by means of a smartphone.

Recognise this? It’s a QR code. If you want the detail on how they work point your camera phone at it and see what happens. Apple has had a scanner embedded in the camera for years and the rival Android operating system added this in 2019. QR codes are a great way to get people to content or sites. For example, you could use a QR code to take someone to a video or an app store for a download.

There are big benefits to getting customers onto apps. For one thing it opens an immediate line of communication. You can send notifications and prompt members into action. That’s not to say that apps and online are a panacea; they aren’t. Equally, we shouldn’t ignore the fact that they are gaining currency.

The pension data problem

And so to defined benefit (DB) pensions. As a broad statement it’s fair to say that DB administration systems and member selfserve has yet to hit this peak. Online portals, where they exist, lack the sort of capability members would expect from current financial services.

There are a number of reasons for this.

DB schemes started to take off in the fifties and sixties. Records were paper-based with some moving to mainframes and then onto PCs. The end point for many schemes was technology that was ok then, but not now.

Even more recent systems lack the ability to deliver data in real time to a member portal.

The best current systems may hold data and content on different platforms. That makes it very hard to wire up to a member-facing front end.

The real killer for many schemes is the underlying data quality. Often it’s only at the point of crystallisation that a thorough approach is taken to benefits calculation.

Data may be sitting across a number of systems and some calculations may not be automated.

Self-serve solution

The holy grail for many schemes is a platform with all functions and calculations automated and a member-facing portal enabling self-serve. Administration costs would reduce and member engagement and satisfaction increase.

Clearly there is a degree of difficulty in getting there, but I also think there’s a lack of awareness of what’s possible. So, let’s suspend disbelief for a moment and design a solution for today.

First we need an underlying platform that can serve benefit and Cash Equivalent Transfer Value (CETV) data in real time. They do exist. And with a unified approach to different tasks and calculations they can deliver timely and accurate benefits information.

The next element allows members to selfserve on a range of tasks from change of address to vesting and payment of benefits.

Obviously, the degree of difficulty and risk involved in these tasks is different. For the latter the real risk lies in ID verification: you don’t want to pay a cash lump sum to the wrong person!

New online validation services are, however, gaining ground. A firm called Hooyu recently embedded their ID verification service for NatWest. It’s probably more rigorous than traditional methods of ID verification and works in real time.

If you can get these elements working then the member interface is pretty straightforward, be it a web or app-based solution. Hybrid design means you can build one solution that works across all platforms.

Pocket pension portal

So, how about a pensions portal you can carry in your pocket?

Give members a QR code to find the app in an app store. They download the app onto their phone and complete the online ID verification. The great thing about phones is biometric recognition. Once logged in they can do it next time with fingerprint or facial recognition.

The possibilities?
• View benefits and TV in real time
• Update contact details
• Prompt members for their marital status and spouse’s details
• Push the boat out and go for live chat
• Educate members on their scheme benefits and, where appropriate, their options were they to transfer
• Push notifications to members to prompt them into action and make it easy for them to draw their benefits

It’s all feasible now and actually much closer to reality than you might think!

David Davison
Owner – Mantle Hosting Limited


August was a very quiet month in pensions, with perhaps only three things of note happening.


1. MPs accuse the Government of complacency over cost transparency in the pensions industry

On 5 August Frank Field’s Work and Pensions Committee published a hard-hitting report on its inquiry into pensions costs and transparency. The report acknowledges progress in various areas but concludes overall that it is ‘unconvinced’ that the industry will rise to the challenge of providing clear, transparent information to pension schemes about the costs and charges of investments without legislation requiring mandatory disclosure to a set format for both DC and DB schemes.

The report set out recommendations that went way beyond the pension costs and transparency agenda. They include matters such as the pensions dashboard, accessing DC pensions savings, tax relief on member contributions and FCA resourcing to combat pension scams.

It will be interesting to see what impact the report has on pension policy.

2. The Government moves closer to a complete rethink on the tapered annual allowance

This is wrapped up in the 7 August announcement that the Government will launch a consultation on replacing the 50:50 aspect of reforms to the NHS Pension Scheme that was part of the pension package proposed for senior clinicians in July.

HM Treasury is to review how the tapered annual allowance supports the delivery of public services such as the NHS. It has been reported that the findings of this review will emerge in the Budget and that any eventual reforms would be likely to apply across the whole public and private sectors.

This review is significant. Until now the hope in Government circles had been that the pensions tax crisis in the NHS could be resolved within the current pensions tax framework. It cannot. As this is morphing into a wider review of the tapered annual allowance, it seems that policy in this area is shifting, with the possibility of the taper either being scrapped or substantially modified in this year’s Budget.

3. Changes to the Pensions Ombudsman to go ahead

On 8 August the Department for Work and Pensions (DWP) announced that a number of proposed changes to the operation of the Pensions Ombudsman’s office are to go ahead.

The main change is the formalisation of an early resolution process, which the Ombudsman’s office has been successfully running since the transfer of the Pensions Advisory Service’s facility in March 2018. As this differs from the Ombudsman’s traditional investigation and determination role, an appropriate regulatory framework needs to be built. Amongst other things, the Government intends that this early resolution process should be available at any stage, including before a pension scheme’s formal internal dispute resolution process has been invoked, with the expectation that, in the majority of cases, this will be when it is used.

The other principal change is that an employer will be able to bring a complaint on behalf of itself to the Ombudsman in relation to the provider or administrator of its employees’ group personal pension scheme.

This is good news on both counts and hopefully DWP can bring forward the necessary primary legislation in time for the Pensions Bill. Further changes will need to be set out in regulations.


David Everett
Partner – Lane Clark & Peacock


By the time this goes to print (figuratively speaking, for the environmentally-conscious amongst us), trustees will have recently updated their statements of investment principles (SIPs). And with a further wave of changes over the coming 12 months, in response to regulations published only in June, trustees are having to get to grips quickly with new terminology and new thinking in the way they deal with asset managers.


SIPs: more change on the horizon

By 1 October, trustees should already have drafted amendments to their SIPs covering their policies on “financially material considerations” (including environmental, social and corporate governance (ESG) factors, which covers climate change), non-financial matters, and stewardship (engagement with investment issues), as required under legislation introduced in 2018.

Under a second set of regulations made in June this year, before 1 October 2020 trustees will also need to provide additional information in their stewardship policy, and set out policies on their arrangements with asset managers. Trustees will in addition need to make an “implementation report” available to members, detailing how they have acted on the principles set out in the SIP and on their engagement activities (the requirements for which differ between DB and DC schemes).

The new content requirements are coupled with somewhat complicated timings for publication and compliance, which also depend on the dates of the scheme year and the type of arrangement. Trustees should therefore be speaking with their legal advisers as to the timetable they need to follow for their scheme.

An area of high pressure for trustees

Whilst many trustees say they consider ESG to be important to their scheme, the detailed analysis required to comply fully with the legislation has not made it easy for some to meet this October’s deadline. Reviewing investment strategy requires trustees to have a good understanding of investment-related matters, to be able to engage with their advisers; reviewing strategy in the context of ESG, and the questions it requires to be asked of asset managers, necessitates specialist trustee knowledge and confidence in an area which has no simple answers.

In our recent survey1, trustees and scheme managers cited lack of evidence of financial performance of investments and lack of time and resource to be able to consider ESG fully as the main barriers to achieving compliance. And whilst there does appear to be some trustee appetite for ESG, the speed with which trustees are being asked to act risks undermining the underlying purposes of the changes to the regulatory landscape – that is, encouraging longer-term investment focus, transparency and engagement. Survey respondents expressed concerns that ESG risks becoming perceived to be “a tick-box compliance matter”. Indeed, only 13% of respondents said that they had actually made, or intended to make, material changes to their investment policies following their reviews.

In the coming months trustees will need to balance deadline-compliance with making meaningful changes to investment strategy and interactions with managers. For now, trustees should look to create careful business plans, allocating sufficient agenda time to SIP and ESG matters, to ensure they meet the challenges of the next 12 months.


Emily Whitelock

Associate – Sackers



If someone asked what you would like to see in a pensions dashboard, how confident would you be that in one sitting you could describe exactly what it was you wanted?


If you are anything like me then that is pretty difficult – and I do this sort of analysis for a living! Sure, you can set out the key, high level things you think should be there, but the real detail and features to make a dashboard easy to use I would argue arise largely from ‘muscle memory’ – that is navigating screens and resources in a way that feels comfortable, familiar and compares well to the systems and apps you are already using.

And yet some IT systems still overlook the user in the forefront of the design process. If you design in isolation you do so at your own peril, potentially creating a system that consumers can’t relate to. Take the lead from the big social network providers who provide platforms and spend millions of dollars annually finding out and making the customer journey and content absolutely right. Now, we are not suggesting that the pensions dashboard is in the same league as tech giants like Google, Facebook or Amazon, but the same principles – or what we call ‘golden rules’ (more on those below) – should apply for launching a successful product, enroling consumers and ensuring the pensions dashboard remains relevant and useful. In other words, the pensions dashboard needs to be a sustainable social information system just like the others we all use.

Pensions dashboard design must originate with the consumer

Success of any social information system involves providing a platform that is free at point of use and offers a really useful service which can be scaled and evolved. As it attracts increasing membership as a result of its prime offering, members can be surveyed on what else they would like to see and receive, to keep the platform fresh and relevant. Pension dashboard design therefore needs to originate with the consumer and work backwards. IT software engineers and even pensions professionals are not always the best people to get the design absolutely right for consumers. Validation of design can only come from the consumers.

AiM is a software solution developer and we have built and deployed a number of solutions into the pension marketplace – so we are a Pensions Technology (PenTech) organisation. Part of our business is to build and deploy consumer web portals, so we have a great deal of experience in what constitutes a successful platform servicing different and sometimes disparate consumer communities.

Pensions dashboard development though will involve a greater degree of design handling and can be likened to a balancing act – as it must appeal to all UK demographics, different ages, those at different stages in their careers, those with and without pensions/finance knowledge; and yet must also be simple without underplaying pension rules’ complexity.

The Money and Pensions Service (MaPS) – sponsored by the Department of Work and Pensions (DWP) – has been assigned the responsibility of managing this balancing act, defining the requirements of both commercial and non-commercial pension dashboards to meet the objectives of increases in pension awareness, encourage retirement savings and perhaps, in due course, provide online access to retirement options. MaPS will also set the standards and regulatory controls required for dashboards in the light of design variables, common data standards and security protection – making sure each dashboard developed appeals to consumers and industry stakeholders.

10 golden rules of pensions dashboard design

AiM has already built a fully working pensions dashboard which has received positive feedback from a range of different stakeholder groups consulted. And when I say fully working, I hasten to add that the user interface is just one part of the technical solution required. When we talk of a ‘pensions dashboard’ we actually mean the following components:
• User interface, which displays a consumer’s pension information
• IAM which authenticates/secures a consumer’s ID at login
• A high performing API allowing a dashboard to connect to the tens of thousands of scheme systems simultaneously.

The API can also allow feeds from other pension-related services or organisations that in due course may prove to be of use or interest to consumers.

I mentioned earlier that our experience in consumer web portal design has helped us to create 10 golden rules, and these should also be applied for a successful dashboard development:
1. Consumer-first design
2. Persona-driven, with content and language to appeal to all consumer demographics
3. Different pension views allowing the consumer to choose the display and information relevant to them
4. Support consumers with disabilities
5. Information returned with minimal delay once the consumer enters a request
6. Use of soft incentives to encourage use and loyalty of the pensions dashboard
7. Desktop, laptop, mobile enabled
8. Secure and scalable
9. Compliant with industry and regulatory standards
10. Data presented to the consumer is clean, accurate, up-to-date, consistent and complete.

Clean pension data is a prerequisite to a successful pensions dashboard

The need for clean pension data is in fact the critical prerequisite for a successful pensions dashboard. Pensions information that is inaccurate or incomplete will at best be a quick way to lose the trust and interest of its consumers, and at worst may mislead consumers into following retirement options that are wholly disadvantageous to them. Agencies and thought leaders in the pensions industry such as the PMI, DWP and The Pensions Regulator are promoting the need for pension records to be clean and compliant in readiness for the dashboard.

And in that sense the dashboard has an important dual purpose. If it cannot only improve awareness and savings of pensions for consumers, but also ensure that data hygiene becomes a key housekeeping process across the whole industry rather than a series of one-off projects, then a true social information system and service will have been delivered. 


Steve Ackland
CEO – AiM Ltd