The Government’s decision to change the indexation of pensions in payment from the Retail Price Index (RPI) to the Consumer Price Index (CPI) has been controversial and has proved difficult to implement. It has caused legal difficulties for many pension schemes, and sponsors and trustees have also struggled to ensure that asset portfolios are structured in a way that permits appropriate funding. A further complication has arisen from the more recent adoption of the Consumer Price Index including owner occupiers’ housing costs (CPIH) as the appropriate index to be used. We asked three experts to identify the various issues that trustees need to address and suggest ways in which they might be suitably resolved.


THE BEGINNING OF THE END

RPI has long been discredited as a measure of inflation. It was replaced by CPI in 2011 as the basis for statutory pension increases and revaluation. This led to something of a rules lottery for pension schemes. For some schemes, CPI flowed through automatically, while others ‘hardwire’ RPI. Many more have rules that are open to interpretation, which led to a long line of cases in which trustees and employers have asked for the Court’s help in working out whether their rules allow them to make the switch.

Further change is now in the air. The Chair of the UK Statistics Authority (UKSA) wrote to the Chancellor in March 2019 making two recommendations:

(i) That the publication of RPI should cease; and

(ii) In the meantime, the shortcomings of RPI be addressed by adopting the methods of the CPIH measure. In other words, RPI would become CPIH by another name.

The Statistics and Registration Service Act 2007 provides that before any change can be made to RPI, the UKSA must consult the Bank Of England as to whether the change is a fundamental change which would be ‘materially detrimental’ to the interests of holders of index-linked gilts. If the Bank of England says yes, then the change requires the consent of the Chancellor. The Bank of England did say yes, so the Chancellor’s consent is required to any change before 2030.

The Chancellor has replied to say he will not, at this stage, agree to option one. But he proposes to consult in January 2020 on aligning the calculation of RPI with that of CPIH at some point between 2025 and 2030. However, following the General Election, it remains to be seen whether this has affected the proposed consultation.

It was a missed opportunity for the Government not to legislate to allow all schemes to move to CPI if they wished. Perhaps in the future we will get a more level playing field for schemes mandating RPI in their rules, but it’s not going to happen quickly.

Tamara Calvert
Partner – DLA Piper


SCHEME FUNDING – GOOD, BAD OR INDIFFERENT?

The funding implications of any changes to RPI from 2030 could vary significantly from scheme to scheme and will undoubtedly add an extra twist to actuarial valuation discussions.

The ‘technical provisions’ measure used to determine a scheme’s deficit under the current funding legislation depends on both the level of pension payments that the scheme is expected to make and the expected return on its assets. Changes to RPI could affect each of those components, depending on the scheme’s benefit structure, the investment strategy and how the valuation assumptions are set.

Schemes will have seen a dip in the value of any RPI-linked assets (such as index-linked gilts or inflation swaps) around the time of the Chancellor’s 4 September statement, with a further decline over the following couple of months. Any assessment of how much of this fall is due to revised expectations of future price inflation rather than other factors is inevitably subjective, but the view from analysts generally seems to be that a complete alignment of RPI with CPIH from 2030 onwards (or earlier) is not yet priced into markets. That might reflect either the uncertainty over whether a change will happen or the possibility of compensation for investors, in which case there could be further changes in asset values to come as investor views develop.

If a scheme’s pension increases are based entirely on CPI, the projected future payments are unlikely to be affected by any changes to RPI. However, if the scheme has any inflation hedging using RPI-linked assets, the value of these assets will already have fallen; if you believe that RPI will be aligned with CPIH from 2030 onwards, that could act as a further drag on the return on the scheme’s RPI-linked assets, placing further pressure on the funding position.

At the other extreme, if the scheme increases are linked to RPI, the expectation might now be that future pension payments will be lower, reducing the liability value; if the scheme is partially inflation-hedged the effect on the funding position might then be slightly positive. If there is any compensation for investors, the funding position could improve further.

Trustees and sponsors will need to think very carefully about how changes could affect their scheme under different scenarios, ensuring that they take a consistent view of how the scheme’s liabilities and assets (and possibly the sponsor’s financial position) would be affected in each scenario.

Graham McLean
Head of scheme funding – Willis Towers Watson


RPI REFORM – INVESTMENT CONSIDERATIONS

From a portfolio perspective, pension schemes have tended to hedge the majority of inflation-linked liabilities with RPI Swaps and Index-Linked Gilts. For example, a 20-year RPI-linked assets faces a material re-pricing downwards of up to 5% if the Chancellor’s proposals are implemented (November 2019 market conditions).

Aligning RPI with CPI-H would have two key implications on pension schemes funding levels:

1. A loss from any CPI-linked liabilities that have been proxy hedged with RPI-linked assets (as hedging assets would fall whilst liabilities remain unchanged)

In practice, most pension schemes’ CPI linkage tends to be highest during the next 10 years (deferred revaluation). As a result, proxy hedging these increases with RPI linked assets is less exposed to RPI reform given that reform is only expected to impact RPI after 2030. Whilst the impact will be very scheme-specific, a typical scheme with high inflation hedging levels could face a circa 0.5-1% funding drop. Indexation Complication / Bringing Pensions together / Another record year in bulk annuities and more to come in 2020 By Paras Shah, Head of LDI, Cardano

2. A gain from any RPI-linked liabilities that have not been fully hedged (as liabilities would fall)

So, what can be done to protect from changes?

Pension schemes could switch to using CPI-linked assets to hedge CPI linked liabilities. However, in practice the CPI linked asset market is fairly illiquid and has limited supply at longer dated tenors.

Alternatively, schemes could reduce hedging of longer dated CPI-linked liabilities which are being proxy hedged with RPI-linked assets. However, in practice this means schemes would be exposed to outright movements in inflation levels.

Trustees should also note that considerable uncertainty remains on the outcome of any reform:
• Proposals could be further amended under a new government
• RPI may be reclassified as CPIH + X p.a. where the spread is representative of the difference between the two measures; in this case funding levels would not be materially impacted
• RPI asset holders (e.g. Index Linked Gilt holders) could be compensated by the issuer of the asset. In such a scenario, schemes could expect a windfall funding level gain.

In summary, pension schemes should ensure they conduct appropriate scenario analysis to understand the implications of reform, noting that considerable uncertainty remains on any changes.

Paras Shah
Head of LDI – Cardano


It is clear that changing the index for pensions increases has proved complicated. Whilst the pensions industry continues to struggle with its implementation, it is clear that reaching final resolution is still several years away.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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



Ella Purkiss

Associate Consultant – LCP


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


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


93% of all UK households have internet access, according to the ONS. 87% of all adults access the internet daily. And 54% of over 65s have shopped online this year.


The era of smartphones combined with the power of superfast fibre and emerging 5G is transforming the country. We have never been more interconnected. It all started out with the Internet of Documents – the ability to access a variety of information via link directories like Yahoo and AOL. However, our virtual and physical worlds are now perpetually connected, including with people, across applications and via an array of smart devices. You can see who is ringing your front doorbell halfway across the world, warm your car seats while brushing your teeth and even look inside your fridge while in the office as you do some last minute food shopping.

The Internet of Things (IoT) is here and many of us use it every single day. It will make us more efficient, reduce our costs, improve our experience as customers and boost our productivity. However, will it ever pull the world of pensions into its vortex, or will we be the ones who got away?

A quick look at how IoT has transformed the world of banking and finance will help us appreciate why it is being touted as the next big thing and is in fact being called the ‘Internet of Everything’.

We are already connecting our finances through an ever growing number of smart and dumb devices: credit cards, ATMs, mobile apps, tap-to-pay mobile phones, card readers and smart watches. We can tap our smartwatch on a reader to pay for a tube ticket, buy a bottle of water out of an unmanned gym kiosk, hire a bicycle on the streets of London and even use biometric ID verification to access our bank via telephone and mobile apps. A number of banks have integrated with Alexa and Amazon Echo to offer voice banking features. You can check your balance, be notified of pending bills or check mortgage rates.

Financial services companies in turn are monitoring us via this network of information and devices. Insurance companies can insure us based on our driving patterns. Wearable sensors track employees in high risk areas in real-time to warn of potential threats and decrease fraud related to workplace accidents. Insurance companies are even exploring security, CO2 and moisture sensors for homes to limit their risk exposure.

On the positive side, IoT offers us an experience that is instant, contextual and provides insight. On the downside, we increasingly worry about security, privacy and control. The recent concerns around Amazon employees having access to recordings that could include violent, sexual or criminal behaviour is a good example of the repercussions of this interconnected world.

What can we learn from how IoT is being leveraged already to make some informed decisions on investment directions within the world of pensions?

The Pensions Dashboard is an excellent example of how IoT can be leveraged to add value within the industry.

The ability to pull together information across multiple pension arrangements, slice it in several ways and convert it into actionable intelligence is precisely the purpose behind IoT. However, this needs to be within a secure open standard environment, where data needs to be able to be channelled across multiple devices and manipulated into usable formats by a variety of organisations based on individual choice, and within legal parameters. Artificial Intelligence, immersive environments, gamification and analytics takes this experience to the next level.

The Pensions IoT needs access to clean core data: contribution rates, investment choices and personal assets under management. Only then can one leverage tools to make informed decisions, consolidate pots (virtually or physically), sweep funds to an arrangement with a better annual management charge (AMC), and access decision support frameworks.

A smartphone app is always interesting. However, in the world of IoT we need to be able to access our pensions via our watches, Alexa or a kiosk in the office. Why be paid a pension when we can make micro payments via a pensions virtual card on your smartphone? We all have our salaries credited to our personal bank accounts. Why not have our pension contributions credited to a personal pensions account? Addresses should be updated across multiple providers in real-time, as should data from death registers. Biometric ID verification will clamp down on fraud and remove the necessity for putting birth certificates, passports and driving licences in the post.

However, should we be thinking wider than merely pensions? Given the trusted relationship we have across our membership, could we connect to the extended IoT to create supernormal value for our members?
Other savings and retirement tools: better value ISAs, savings bonds and child trust funds?
Insurance products: Private medical, critical illness and income protection?
Discounted services: mobile phones, broadband, gas and electricity?
Retirement support: meals on wheels, online home visits and access to carers?

The Internet of Things can already transform the world of pensions. However, we cannot escape from the fact that until we clean our data and open this up within a secure open architecture network of applications and devices, our options are limited. This could create a clear bifurcation into the haves and have nots.

On the one hand we have the brand new Master Trusts sitting on new technology platforms and current data. Many of them are pushing ahead exploring the world of IoT. The current government looks keen to push these players into opening up their networks within a secure environment to enable value added services to members.

However, many DB arrangements and legacy DC schemes are focused on a near term buy-out, too crippled with large deficits to consider investing in data and technologyenhancing projects or are just out-of-touch with this emerging reality. It may well be the pragmatic approach to provide these schemes either with a carve-out or a minimum set of conditions they need to fulfil. On the other hand, there may be challengers who will find ways to achieve the required ends in a cost effective manner – with a little legislative help from the Pensions Regulator and the Pensions Minister.

In the Internet of Things, transparency, speed, flexibility and innovation will flourish. We will have to embrace it or get out of the way. It is not a hoax. In fact, it is already here.


Girish Menezes
Head of Administration – Premier Pensions and Member of the PMI Advisory Council


 


As part of our new approach to pension regulation, we are now proactively supervising significantly more schemes as we strive to be clearer, quicker and tougher. Why have we made this change? Our aim is to better manage risks which we identify in the pensions market, ranging from inadequately funded schemes to insufficient record-keeping.


We are doing this by targeting hundreds more schemes through new initiatives across a broad range of areas. We are also building far closer relationships with schemes of strategic importance, and our latest Compliance and Enforcement (C&E) Bulletin highlighted how what we call ‘relationship supervision’ is going.

To date we have been working with 35 public service (PS), defined benefit (DB) hybrid and defined contribution (DC) schemes, and we will be extending this supervision to beyond 100 schemes this financial year.

Relationship supervision enables us to have one-to-one contact with the trustees, managers and sponsoring employers of pension schemes.

It helps us to assess the risks that schemes are subject to, clearly outline what we expect and act quickly where we have concerns.

Some schemes are chosen for supervision because of the risks they present or previous interactions we have had with them; others because they are of strategic importance to us.

One scheme featured in our C&E Bulletin highlights an attitude that we have heard from schemes: that they are wary of being selected for supervision. The word conjures up an idea of scrutiny and control. But in reality it is about advice, guidance and direction.

The chair of trustees and pensions director in this case expressed concerns about the value of engaging with us and the extra burden that supervision might place on the scheme. But they have since told us that it has been a positive learning experience.

The DC scheme historically had minimal dealings with TPR. Through our supervision, it was clear that while it was well run, we were able to offer a fresh set of eyes on a wide range of pensions issues, including suggesting putting in place succession planning for the chair of trustees and supporting the trustees in asking their external administrator for more detailed reporting.

Our new approach has also been noted by the industry. A survey by PwC found that eight out of 10 pension lawyers think TPR’s new approach and use of powers is having an impact on their clients. This is up from three in 10 in 2017 and is in part due to active intervention from TPR.

So far, our supervision teams have mostly seen high standards and well-run schemes. It is important to stress that including a scheme in relationship supervision does not mean we believe it is failing to meet our expectations.

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

We have already begun to operate in this way. In relation to DB, we are initially looking at schemes where our data shows that deficit reduction contributions may not be proportionate against dividends paid to shareholders.

Our approach will be tailored to suit. We begin with dialogue, which leads to support and guidance and might move toward direction. If after this approach positive changes are not being made, we will move towards enforcement.

As well as relationship supervision, our new approach also includes event supervision, where our rapid response teams act quickly on reports of events which pose increased risks to schemes. This will generally involve events that affect the employer covenant supporting DB schemes, particularly corporate transactions or corporate distress.

We assess the impact of an event on a particular scheme and on our statutory objectives. Where we get involved, it is initially through the trustees as they are the first line of defence for savers and, if appropriate, we will engage directly with trustees, employers and other stakeholders to protect the interests of members.

This more front-footed approach was applied with the GKN / Melrose takeover, where we took the initiative and got involved much earlier than we would have previously.

It meant that much greater rigour could be applied and an outcome was reached with far less corporate anxiety and a better result for the pension scheme. Since the takeover took effect, we’ve continued to discuss the implementation of the agreed plans for the schemes with the trustees and with Melrose.

This is an approach we found beneficial for all parties concerned. Savers were protected, corporate entities learned, and we forged deeper and stronger relationships.

Where necessary, we will use our powers to prosecute people when they abuse their position and put savers at risk. We have used more of our powers, more often and been creative in using the law to protect savers.

We are testing our powers in the courts. We’ve prosecuted people for a range of offences such as fraud, making employerrelated investments, computer misuse, and wilful noncompliance with automatic enrolment.

But we are not an enforcement-led regulator. We’d much rather organisations worked within the law, within our guidelines and with us. We will not be complacent. As an organisation we will continue to adapt and change to meet the risks in the pensions landscape around us.

Our new long-term strategy, published for consultation later this year, will build on TPR Future and ensure we continue to be the clear, quick and tough regulator that we have pledged to be as we put the protection of savers at the heart of regulation.



Charles Counsell
Chief Executive – The Pensions Regulator


Poor levels of governance in pension schemes needs to be addressed.
We see problems across all schemes, but particularly in small DC arrangements.


That’s why we have recently launched The Future of Trusteeship and Governance consultation, a key theme of which considers solutions for reducing the number of poorly run pension schemes.

The evidence is stark. The 2019 annual defined contribution (DC) survey report, shows that just 4% of micro schemes with between two and 11 members, and 1% of small schemes with between 12 and 99 members, are meeting all of the Key Governance Requirements.

The requirements which DC schemes are subject to include trustee boards having the knowledge and understanding which is necessary to run a scheme, process core financial transactions promptly and accurately and provide value for members. Such low numbers of schemes meeting these standards is clearly unacceptable.

We’re not against smaller schemes per se. Where we come across well governed schemes that are providing good value to members and providing good investment options then we don’t have an issue. It’s where we see governance that doesn’t meet our standards – and unfortunately that tends to be more the case with smaller schemes – where we have the challenge.

We previously worked to address this challenge with our 21st Century Trusteeship campaign. It set out to those running pension schemes, and their advisers, what good governance looks like. Over 10 months we covered 10 areas which trustees should focus on to run a scheme well, including managing advisers, proving value for members and ensuring a board has the right skills and experience.

The campaign received good engagement from people who were already trying hard to run schemes well and to provide good governance, but less so among trustees running smaller schemes. They tended to remain disengaged. With smaller schemes in particular we have found, when we have challenged them, trustees believe that what we say doesn’t apply to them because they’re a small scheme, that The Pensions Regulator doesn’t have jurisdiction over them or they don’t have to comply with the legal requirements. The challenge for us is how to tackle that. How do we get those running schemes to engage with us to understand what the requirements are on them?

The Future of Trusteeship and Governance consultation, which is running until September 2019, sets out our proposals.

One is putting an accredited professional trustee on every board. We would expect a professional trustee to understand the requirements which are applicable to the scheme as well as highlight what resources we have provided to help trustees to run a scheme better. They are also more likely to have knowledge or experience of situations which may arise and know when the board needs support from advisers.

It’s clearly not an idea we can implement immediately – there are many schemes and relatively few professional trustees. But as consolidation continues and we look at ways we can both build diversity in pension schemes and encourage more people to become professional trustees, we hope to reach a point in the future where a professional trustee on every board will be achievable. Another suggestion is to implement a minimum standard for trustee knowledge and understanding as well as a requirement for ongoing learning, to ensure they have, and maintain, the knowledge and skills they need to run a scheme.

We have questions about whether sole trustees are able to effectively run a scheme, both in terms of challenging sponsoring employers as well as not having diversity on a board. The consultation invites industry views and we’ve already had representations from professional trustees about how they manage the risks that we’ve identified. It is really useful feedback because we’re trying to build evidence, both good and bad. We’re open to ideas and the paper very much tries to stimulate responses. If other people can think of ways of getting disengaged trustees to engage with us, to improve their levels of governance and ultimately protect savers, then we would like to receive those.

Find our more and respond to the consultation at www.tpr.gov.uk/ trusteeship



David Fairs

Executive Director of Regulatory Policy, Analysis and Advice – TPR


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


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

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

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

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

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

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

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

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

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

Understand members

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

What do members want?

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

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

Delivery matters

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

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

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

Make it personal!

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

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

Engagement isn’t a one-off exercise

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

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

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


Andy Parker
Partner – Barnett Waddingham



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


What the regulations require

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

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

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

Disclosure requirements for DC trustees

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

Trustees need to understand Responsible Investment across the investment process

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

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

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

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

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

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

Consider what sort of Responsible Investor you want to be

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

Addressing the default strategy

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

What do trustees need to do next?

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



Raj Shah
Head of DC Investment, Hymans Robertson




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


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

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

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

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

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

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

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

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


By Jonathan Cribb
Senior Research Economist – Institute for Fiscal Studies