Posts by Hugh

Hugh Nolan

(Almost) every stakeholder in the pensions industry wants the same thing – better member outcomes. Sponsors. Trustees. Regulators. Government. And, of course, members.

Why the odd and perhaps grammatically shady parenthesis at the start of the sentence? Well, unfortunately, operating on the fringes, or even lurking in the shadows, are parties less interested in the member outcome and more interested in personal gain. Sponsors do occasionally misappropriate members’ pension funds. Not all financial advice is given exclusively in the interests of the member. Scammers will leave retirement plans in tatters and jet off to sunnier climes without a second thought.

Governance is used widely across the industry to reaffirm how seriously we take our duties in support of better member outcomes. Quite rightly, we need to be rigorous in how we govern schemes in relation to matters of investment, risk, administration and member communications.

However, when it comes to protecting members’ interests when they transfer out of schemes, the industry is sometimes caught between a rock and a hard place. The rock being the individual’s statutory right to take their pension in a different shape or form, through a more flexible arrangement; the hard place being the industry’s desire to protect the member from making decisions that could have a detrimental effect on their financial future.

Perfect storm

To paraphrase a well-worn cliché, every cloud has the potential for rain. The significant fall in gilt yields over the last year has proved good news for defined benefit transfers with the average amount having risen substantially. However, the allure of pension freedoms, coupled with increased transfer values, may have brought on something of a perfect storm.

Members need to be aware that the decision to sail away from the safe harbour of defined benefit to the unchartered waters of pension freedoms will not always lead to an island paradise. They will need to first avoid the pirates and sharks.

The FCA has previously stated that defined benefit transfers are not generally in the interests of individuals and that advisers must provide compelling factors that mitigate the transfer. Nevertheless, between April 2015 and September 2018, seven out of ten transfers from defined benefit schemes were apparently approved by independent financial advisers.

The government has ruled that every individual with a transfer value of more than £30,000 must take independent financial advice before transferring from a defined benefit scheme. Without sufficient education and support to make the right decision for their own specific circumstances, members may not make the most appropriate decision for their future. The Work and Pensions Committee has said that the rise in defined benefit transfers is a ‘major mis-selling scandal’ and sees contingent charging – where advisers only receive payment when transfers go ahead – as a ‘key driver’ of poor advice.

Industry collaboration

Step forward the Pensions Administration Standards Association (PASA). It has launched new transfer guidance to help support members of defined benefit schemes to make better choices. PASA’s transfer guidance aims to improve the administrative efficiency of transfers, assist the overall member experience (both in terms of speed, and crucially, safety) and provide better communications and transparency. PASA’s DB Transfer Guidance is intended to make it easier for providers, advisers and members to see all the information they need to make better informed choices.

While many within and without the industry firmly believe that members are likely to be better off staying in their defined benefit scheme, the appeal of pension freedoms will often be too strong to resist.

Those members that choose to transfer need all the support the industry can provide. This new guidance is a good example of the industry working collaboratively, along with government and The Pensions Regulator, to help provide more support to members and deliver the better outcome (most) stakeholders are looking for.

Hugh Nolan

Young Savers

We all have a vague idea about how little young people engage with pensions but figures from the Office of National Statistics (ONS) suggest the problem is worse than most of us thought and is by no means limited to pension saving. Astonishingly, most people aged between 18 and 29 don’t have a single savings account and 6% of them are in debt to the tune of more than £10,000 (even before allowing for student loans).

Slightly over half of 22-29 year olds have no savings whatsoever, with this proportion up to 53% from 41% before the credit crunch. Of those who do have savings, 1 in 10 have less than £100 and 40% have less than £1,000. On the positive side, 1 in 4 have savings in excess of £6,000 and 10% have savings over £10,000. They may well be saving for a deposit on a house, as only 1 in 4 own a house (with 1 in 3 still living with their parents and the rest renting). The number of these young people owning their own home has fallen by a quarter in the last 10 years.

Debt levels look troubling for 22-29 year olds too. The good news is that only 37% of them are in debt at all, compared to 49% a decade ago. More than a quarter of those who are in debt owe more than £6,000 and 1 in 10 owes more than £14,000. Those amounts will seem huge to the 47% of them that earn less than £20,000 per annum.

The problem is naturally worse for 18 to 21 year olds. The median earnings for this group is less than £10,000 per annum and only a quarter of them earn over £15,000 a year. It’s not surprising that 75% of them still live at home with their parents and they have average debts of £2,400.

These figures really bring to life the challenge of getting young people to agree to put aside some of their earnings to save for a pension that they won’t get until 2060 or whenever. The inertia of auto-enrolment is working pretty well but we might need to bring back compulsory membership of pension schemes once the contribution rates become more realistic to provide a decent pension.

My dad once told me how much he had resented the “2 and 6” he was forced to contribute to his pension scheme. Obviously I am too young to understand what “2 and 6” means but I gather it was a reference to some money that wasn’t a huge amount but would have come in handy for a newly qualified teacher with a young family. As he got closer to retirement he realised that it was actually the best thing that had ever happened to him financially as he knew that he wouldn’t starve in retirement and, more importantly, he’d still be able to provide for his wife and children. Perhaps the time is coming when pensions should again be compulsory so that young people will get the same protection in future.

Until then, I remain keen on the idea of getting people auto-enrolled as early as possible on a very low contribution rate, with gradual increases to an adequate rate over a number of years. I also like the idea of keeping the minimum contribution rate lower than the 15% that many commentators recommend. I’d be happier with a required combined rate of 10% (split evenly between employers and their workers) where members can choose to pay AVCs if and when they can afford them, with employers matching those too. That would allow people to concentrate on buying a house or raising young children when they need to while also encouraging them to top up their pension when they have a bit more disposable income later in life.

Hugh Nolan

Fair Pensions for Women

Following International Women’s Day recently, I wondered how fair pensions are to women these days. A survey by the Society of Pension Professionals (SPP) in 2017 found that 49% of us thought that pensions were fair for women, compared to 61% who thought the same for men. Only 7% strongly disagreed that pensions were fair for women. I’m one of the 7%.

Women now have equal Normal Retirement Ages to men and can expect to live longer than men, drawing their State and any other Defined Benefit (DB) pensions for longer. The recent investigations into GMP equalisation has highlighted that it’s very hard to predict whether men or women are better off because of the remaining inequality, with the average difference being less than 1%. I can understand why people might imagine that pensions are fair between men and women. They’re still wrong though!

The main reason why pensions aren’t fair is that pay before retirement isn’t fair to start with. In 2012, the median earnings for women working full-time was £23,100 pa, some way below the equivalent figure of £28,700 pa for men. When gender pay gap reporting was introduced in 2017, 90% of women covered by the survey were working for employers who paid them less than men and in most sectors, the gap was over 10%. This might be improving slightly as early indications from the 2018 reporting suggested that 50% of companies narrowed the gap over that year, although 40% widened it.

The Office of National Statistics (ONS) says that women are paid 17.9% less per hour than men on average. It’s even worse in Germany (21%) and the US (22%). In Finland, women retiring in 2017 got pensions 27% lower than men, even though twice as many women as men got a top up national pension for those with low/no private pension savings. A DWP survey in 2016/17 found that female retirees in the UK got 40% less than men, leaving them about £7,000 pa worse off.

So it’s clearly not just the gender pay gap that is feeding through to unfair pensions for women. Women are predominantly relied on for child care with fewer than 30% of men taking more than 2 weeks parental leave, three times as many women working part time as men (5.9m compared to 2.1m in 2013) and women also typically retiring two years earlier, often because they can’t continue in their jobs rather than out of choice. On top of that, 1 in 5 women aged 45 to 59 is a carer for someone else. There are 2,700,000 working women who earn less than the £10,000 pa needed to qualify for auto-enrolment. You probably won’t be surprised to hear that more women choose caring occupations rather than those that are most lucrative.

Research from Aegon suggest that these factors combine to leave women with average pension savings of £56,000 by age 50, exactly half of the corresponding figure for men. 15% of women don’t pay into any pension scheme at all (11% for men) and only 4% of women have £300,000 or more in pension savings, compared to 15% of men. According to an Aon survey in 2018, more women than men contribute less than 5% of their pay to pensions (30% vs 40%) and more women than men worry about running out of money after retiring (64% vs 50%). 1 in 3 women admit they are unsure of their exact pension savings and only 1 in 5 men say the same, though personally I suspect that might be largely due to bravado.

As if all that wasn’t bad enough, the advantage that women have been able to draw their State Pension earlier than men has also been taken away from them. The Pensions Act 1995 set a timetable to equalise State Pension Age but the austerity agenda led to an acceleration in 2011 with 2.6 million women having their retirement plans thrown into confusion. 873 of these women are known to have self-harmed due to the stress and hardship of these reforms and 70 say they have been so badly affected that they attempted suicide.

Does that sound fair to you?

Hugh Nolan

Good News in Pensions

Christmas is allegedly the season to be jolly so it seems to be an appropriate time of year to remember the good things about the UK pension scene. There are a lot of them!

Firstly, there are currently well over 10 million members of Defined Benefit (DB) schemes in the UK private sector. This includes 1.3 million people who are still accruing benefits, not to mention all those in the public sector. The private sector is currently paying over 4 million pensions regularly and in full. Despite the impact of the credit crunch, low interest rates and increased longevity, these DB schemes are now estimated to be funded at 73% of the full cost of buying guaranteed benefits from an insurance company, up from 60% in 2006.

There are still inevitably some corporate failures where members have to rely on the Pension Protection Fund (PPF) for their benefits. There are less than 250,000 who have had to do so since the PPF started in 2005 though and their payments from the PPF are well-protected, with £6.7 billion reserves and an estimated probability of 91% of meeting their funding target. The PPF is funded by a levy on the other schemes and the total levy fell last year to £541 million, some way below the £725 million that the PPF was able to pay out. That’s a wonderful improvement from the bad old days when members could lose their pensions entirely if their employer went bust.

On the Defined Contribution (DC) side, auto-enrolment has been a huge success too. The statistics at the end of November 2018 showed that 9,958,000 people have been auto-enrolled into pension schemes, which is a massive number of new savers who won’t be solely reliant on the State pension when they retire. That’s particularly important when the State pension itself is under huge pressure due to an ageing population and austerity and it again shows the advantages of personal pension saving.

Finally, the pension industry keeps trying to improve the regulatory landscape to get the best results. Successive Governments have decimated DB schemes with excessive regulation and, more significantly, by imposing additional financial obligations on schemes retrospectively. We have been lobbying for years for more flexibility and it’s great to see that the Royal Mail and Communications Workers Union have got support from the DWP and politicians to try a new Collective DC arrangement. This isn’t a magical solution to the pensions issue but it has a lot of merit and it’s great to see the industry trying to make the best of a very muddled legislative background.

We’re very proud at Spence to be part of the industry that has delivered these opportunities for millions of people to have a better quality of retirement. The real stars of the industry though are still the sponsoring employers who have paid most of the money needed over the years for their staff to get decent pensions. We also need to recognise the diligent efforts and hard work from trustees, who give up their time and wrestle with the complexities of pension regulations to get the best outcomes for their schemes and members.

Well done everyone and a Merry Christmas to you all.

Hugh Nolan

The Pension Regulator’s Powers

Something must be done! So says the work and Pensions Select Committee chaired by Frank Field MP in the wake of high profile cases like Carillion and BHS. Knee jerk reactions in Parliament rarely lead to the best laws and I suspect that this habitual problem will only be exacerbated with laws made while everyone is distracted by Brexit. What are the chances of the Government actually improving the pension’s landscape?

Well, firstly, there are some changes that can be made which are at least harmless in principle and may even do some good. It’s hard to find a compelling reason to argue against strengthening penalties for wilful or grossly reckless behaviour by trustees and employers, for example. On the other hand it’s only ever been a tiny minority of schemes that have suffered from such behaviour so it’s unlikely that making it a criminal offence will improve things much. There’s also the likely unintended consequence that some diligent trustees will be prompted to err too much on the side of caution rather than run any risk at all of being accused of recklessness.

The problem is that the Select Committee is extrapolating to the wrong conclusion. The Pensions Regulator had been involved with Carillion before it collapsed, but had still not managed to avoid the current problems arising for its pension schemes. The dilemma was though that Carillion was already struggling and the Trustees and the Regulator were in an invidious position. They could have encouraged (or even tried to force) the employer to pay higher contributions at the expense of dividends. If so, that could well have driven investors away and led to a collapse sooner. With the benefit of hindsight the Committee is convinced that the decisions made were wrong, but who really knows what would have happened otherwise. In any event, the problems at Carillion were with the company itself and the pension scheme was just collateral damage. Companies will always be at the risk of going bust and it’s unrealistic to insist on full solvency funding for every scheme at all times just in case it happens to be one of the unlucky ones. Perhaps we just need to be honest about the fact that sometimes bad things happen and it’s not always possible to completely protect people.

Secondly, I happen to have liked the practical way that the Regulator worked in the good old days. They encouraged trustees to do the right thing and explained when they were getting it wrong, only using their formal powers as a last resort. Sometimes they got it wrong but mostly the Regulator found a good balance in a difficult area. Now that something “must be done”, the Regulator has used its enforcement powers in 22% more cases in the second quarter of 2018 than in the first quarter. Have there really been 8,000 more cases where the Regulator needed to step in or are we just seeing a reaction to the unfair criticism for past performance?

Finally, there is definitely a bright side. The Regulator has historically been slightly nervous about using some of its existing powers even when they are clearly justified, possibly due to a fear of being over-ruled later. In the latest quarterly report, the Regulator has used its information gathering powers 31 times, taken action against 25 schemes for failing to submit an annual return and appointed 162 trustees to protect member benefits. The Regulator also exercised powers for the first time ever under the Proceeds of Crime Act 2002, Section 10 of the Pensions Act 1995 and the Computer Misuse Act 1990 (which by my reckoning has been in force for 28 years so far). That certainly seems to support the claim that the Regulator already had more powers if it wanted to use them!

In particular, the Section 10 fine of £25,000 for the Trustees who had failed to produce two actuarial valuations is a welcome wake-up call to the handful of trustees and employers who behave badly. However, I still hope (and expect) that the Regulator will limit the toughest stance to those that deserve it and continue to support hard-working and dedicated trustees to do their best – without leaving them terrified of being sent to jail or the poor house if they ever make an honest mistake or things go wrong for their scheme.

Hugh Nolan

At the end of 2017, a survey by the Society of Pension Professionals (SPP) found that 79% of its members felt that the UK pensions system was unfair to young people. Frankly, I wonder what the 15% of SPP members who disagreed were thinking, especially the 3% who strongly disagreed with this fairly obvious statement of fact. Perhaps they just pressed the wrong voting button accidentally…

Let’s look at the State pension first. The Office of Budget Responsibility (OBR) has forecast an increase in the cost of the State pension from 5.0% of GDP to 7.1% of GDP over the next 45 years. This forecast assumes no change to current pension policy, so includes allowance for planned rises in State Pension Age (SPA). The extra cost of £700 each year for every household in the UK seems unlikely to be affordable so my guess is that further reductions will be necessary to balance the budget. The triple lock on pension increases alone is expected to add over 1% of GDP to the cost of the State pension within 50 years. I imagine the new voters hoping for Jeremy Corbyn to be Prime Minister may be voting for more generous pensions for the current generation of retirees than they can realistically expect to get themselves.

Moving on to private sector pensions, there were 3,500 Defined Benefit (DB) schemes open to new members in 2006 but only 700 left in 2016. Over the same period, the number of employees earning DB benefits fell from 3.6 million to 1.3 million. The Institute and Faculty of Actuaries (IFOA) says that a private sector worker born in the 1960s is almost four times as likely to have a DB pension as one born in the early 80s.

The typical rule of thumb used to be that a DB scheme might cost 15% of salary, with the employer bearing two-thirds of the cost. Recent analysis shows that the surviving DB schemes are costing 22.7% on average, with only a quarter of this cost met by employees. That means that employers with DB schemes are on average paying five times as much as those with Defined Contribution (DC) schemes, where the average employer contribution rate is only 3.2% (with employees paying an average 1.0% too).

In fairness, these DC contribution rates are distorted by new Auto-Enrolment (AE) schemes and the average DC contribution from employers in 2012 was 6.6%, still only just over a third of the corresponding rate for DB schemes. Employers in AE schemes are also going to be forced to make higher contributions, with the minimum rate having increased to 2% in April and due to rise again to 3% in 2019. Meanwhile, employees will have to pay 5% contributions, meaning that they are paying more than half the cost overall, while DB members still only pay a quarter of the cost of a much higher benefit.

The Government is perfectly aware of this issue (which is much wider than pensions) and has made some efforts to address it. The policy to increase SPA as people live longer is unpopular but has been defended to date, albeit slightly weakly, and Theresa May’s manifesto admission that the triple lock would go was a massive vote loser. Several kites have been flown about intergenerational taxes but none have met with anything other than resistance. The public aren’t thinking about affordability or fairness over the coming decades and a Parliament only lasts for five years, so can we really blame the politicians for letting the unfairness drift on?

Hugh Nolan

Politics and Pensions

The world is a very uncertain place at the moment and strangely that might mean a period of relative stability for UK pension regulations. The main reason for optimism about such stability is simply that Parliament will have to focus so heavily on Brexit issues that there will be no time for another Pensions Act any time soon. The second reason is that there doesn’t seem to be any real appetite for any major change, despite the loud shouting from various parties on many, many sides. Read more »

Hugh Nolan

The Government recently announced that the State Pension Age will increase to 68 in 2037 – seven years earlier then planned. This may seem odd given current news about longevity improvements slowing down but it actually makes perfect sense.

The first State Pension in the UK was introduced in 1908 and paid the 25% of people who reached age 70 for an average of 9 years. The Basic State Pension came in from 1948 and allowed people to retire at 65, with a life expectancy of 12 years. But, by 2014 this had risen to 21 years (for men) so it’s no wonder that something had to give. Read more »

Hugh Nolan

Spence & Partners, the UK actuaries and consultants, has moved their Manchester office due to expansion.  The company opened their Manchester office in 2015, with Chris Roberts relocating to develop the presence.  This year, the team is growing to three front-line consultants and has moved to larger premises, remaining in the same street just across the road, at 82 King Street.

Hugh Nolan, Director at Spence commented: “We have seen an increased interest in our services across the North of England since setting up our Manchester office in 2015 and we have had to expand in response to this extra demand.  I look forward to welcoming our new team members as we continue to grow our business in the area.”

Hugh Nolan

With ever more people falling into the “Just About Managing” category as inflation increases faster than many pay packets, pension saving is likely to feel the pinch. Employees and employers both need clear and simple guidance on the choices to get the best outcomes.

In the infamous Jam Experiment (the psychological study rather than the jazz quintet of the same name), ten times as many customers bought some jam when offered a choice of six flavours rather than 24. Similarly, sales of Head & Shoulders went up 10% when the brand range reduced from 26 to 15 varieties. What on earth was Mr Heinz thinking when he decided to advertise a whopping 57 varieties? He could have taken over the whole world if he’d stuck to plain old baked beans in tomato sauce!

One of the authors of the Jam Experiment (lyengar) turned her hand to pensions later, finding that US plans offering just two investment options had a 75% take up rate – falling to 61% where they had 59 choices, which is even more than Mr Heinz. Back in 1999, Baber and Odean found that the least active traders got an 18.5% return compared to 11.4% for the most active traders. The average investor who switched stocks lost out by 3% over the following 12 months. Nowadays few people would object to a return of 11.4% but we’d all definitely want to get a little bit extra if it’s available given the current low expectations of future returns. Read more »

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