Archive for January 2020

John Wilson

Pension Schemes Bill

Here is your ‘bill’, sir

A few days after its publication, but before its second reading in the House of Lords on 28 January, the impact assessments for the Pension Schemes Bill 2019-2020 have been published.

Whilst quite lengthy, the assessments are worth a read because, in addition to providing assumptions and estimates around the costs to business and others of the Bill’s main measures, they provide some additional information and useful context not available elsewhere in the documents issued alongside the Bill.

Some of the headlines have already been reported in the pensions press, but here is a reminder and, hopefully, a bit more detail:

  • The cost to pension scheme members is largely expected to be nil, as there is little or nothing for them to do.
  • The main costs to businesses (employers and the pensions industry) relate to the ‘familiarisation stage’ of The Pension Regulator’s (TPR’s) new information gathering powers (£8.9 million) and changes to the Contribution Notice regime (£1.7 million).
  • In addition, declarations of intent have an estimated familiarisation cost to businesses of around £0.71 million, with an ongoing cost of around £1 million.
  • The requirement for a trustee and board statement (DB ‘Chair’s Statement’) also has an assumed cost of £1 million in terms of familiarisation. For ongoing costs, for the schemes that don’t already have a Chair, there will be an ongoing additional cost because of the higher pay associated with being a Chair rather than a trustee. The Impact Assessment estimates a scope of around 850 schemes that did not already have a Chair of the trustee board, this represents just over 15% of DB schemes. It is estimated that the ongoing costs incurred to businesses to be £19.5 million per year. The cost incurred to each scheme is, of course, assumed to vary depending on the size of scheme.

There is also a useful comparison of the current DC Chair Statement requirements and the proposed DB Chair Statement (reproduced below).

  • For the new long-term funding and investment strategy, it is anticipated that there will be minor familiarisation and implementation gross cost to business, partially offset by savings associated with improved clarity of the requirements (illustrative cost estimate for familiarisation when regulations are published is £1.5 million).
  • The proposed Pensions Dashboard is, not surprisingly given the infrastructure needed, the most expensive measure. There will be costs for the pensions industry to familiarise with new requirements and these costs are £2m in year 1 only. It is expected that there will be material costs for pension schemes and providers to invest in new software/IT architecture to be able to provide data to the dashboard(s). To provide data, ongoing governance, and regulatory compliance on an annual basis, one-off implementation costs and ongoing costs are estimated under three scenarios with different data requirements and coverage to highlight the potential range of impacts. Estimated one-off implementation costs range from £200m to £580m over 10 years and ongoing costs range from £245m to £1.48bn over 10 years.
  • Most of the new measures, where assessed, are expected to be broadly neutral in terms of impact on TPR and it is anticipated that there will be limited impact to the Pension Protection Fund (PPF). Some measures, such as the introduction of the Declaration of Intent is intended to help protect DB pension scheme members’ benefits and, in turn, will (according to the assessments) reduce the likelihood that a scheme will enter the PPF, also reducing costs to the PPF (and potentially benefitting businesses indirectly through a reduction in the pension protection levy).
  • The impact assessment does though note that there may be costs incurred to HM Prison service because of the new criminal sanction and custodial sentence for ‘Wilful or reckless behaviour in relation to a pension scheme’. It is estimated that the cost incurred to HM Prison Service is £26,274 in the first year and then £52,548 per annum thereafter.
Comparing the Statements for DC schemes with DB schemes.
Source: The impact assessments for the Pension Schemes Bill
Hugh Nolan

As we head into the brave new world of 2020 with a strong majority Government that has every chance of seeing all its policies implemented during its five-year fixed term, it seems a good time to review the WASPI (Women Against State Pension Inequality) situation to see whether Jeremy Corbyn’s Labour Party had a point about compensating the 1950s women who saw the age at which they can take their State Pension (“State Pension Age” or “SPA”) increased.

Background to SPA equalisation

The Pensions Act 1995 laid down gradual increases in SPA for women between 2010 and 2020, with the objective of eventually equalising their historic retirement age of 60 with the (then) SPA of 65 for men. That was a slower process than the 15 years recommended by the Turner Commission and the ten years recommended by Saga and seemed long enough to give those affected a chance to plan ahead (provided, of course, they knew about the change…).

Occupational schemes faced with the equalisation issue following the Barber judgment were only able to make changes to normal pension ages for pensionable service from 17 May 1990 onwards but the SPA was amended retrospectively. This is undoubtedly a bit harsh but it is understandable that Parliament took that approach. It is arguably justified by the drive for equality, intergenerational fairness, the need for a sustainable State Pension and the pressure on public finances – especially with an ageing population and an increasing dependency ratio with fewer workers relative to pensioners. At least the women affected had 15 years or more to adjust to the change.

Accelerated programme

However, the Pensions Act 2011 accelerated the change from 63 to 65, so this happened from 2016-2018 rather than 2016-2020 as originally planned. There were concessionary transitional arrangements to limit the impact of this later change so that no woman saw an extra increase of more than 18 months in her SPA compared to the Pensions Act 1995 timetable. That does, however, mean that many women saw an additional delay of 18 months in receiving their State Pension, with only 7 years’ notice (if they were even aware of the change at that point). SPA for both men and women is now increasing to 66 from October 2020 and then on to 67 by 2028, with a further rise to 68 currently on the statute books for 2044-2046.

WASPI women want to be compensated for the change in their SPA to 65, citing long-standing inequality with men in other areas and a lack of notice as justification for retaining the more generous retirement age. I have a lot of sympathy for the inequality that women have suffered over the years (and continue to suffer) but I can’t see that as a compelling reason to give them a better pension than men. I’d rather see society address the underlying inequality. In any event, it’s true that women live longer than men on average so the same State Pension is typically worth more for a woman than a man.

The danger of assumptions

I have less sympathy for the argument that women weren’t given enough notice for the original change from 60 to 65. The Department for Work and Pensions (DWP) ran an advertising campaign and wrote literally millions of letters advising women of the SPA changes, though naturally some weren’t safely received for various reasons (or weren’t understood and remembered). I realise that I may be rather complacent about how widespread the news was disseminated as an industry insider. But the key point for me is that none of the affected women would have had any quote whatsoever or any other official information based on an SPA of 60 from 1995 onwards. WASPI women may have been under the impression that they’d be allowed to retire at age 60 like their mothers and grandmothers had, but that was simply wrong.

Although it’s an understandable misunderstanding, I think this apparent belief in an SPA of 60 was an unjustified assumption, particularly for those who had received letters notifying them of the changes. I wouldn’t want to see people being compensated for an unreasonable expectation and I haven’t seen any convincing case put forward as to why women could reasonably expect to retire at age 60 or make plans and decisions on that basis without checking at any point in the previous decade or two. Even if I were convinced that women had good cause to think their SPA was still 60, I would question how they could plan properly for retirement without knowing what pension they’d be entitled to and I’d challenge how they could know that without asking. In fairness though, the WASPI women aren’t the only people who blithely expect their State Pension to be adequate for retirement without knowing what it actually is.

Sympathy in equal measure

So, I am left with the view that the increase in the SPA from 60 to 65 for women was reasonable and that an extended period of notice was given for the change. My remaining sympathy is for those women who relied on their mistaken belief of an earlier SPA and took irrevocable decisions based on that belief, where I could easily be persuaded that they deserve special treatment even if their financial hardship arose from their own misunderstanding. On balance, I believe that the Labour Party election commitment to compensate all the affected women was misguided.

There are undoubtedly many moving stories of personal circumstances that tug the heartstrings, setting out the difficulties caused in individual cases by the SPA of 65 for women. There are WASPI women who have been unable to carry on working past age 60 due to illness or who have been unable to find (decent) jobs after being made redundant. There are others who have died shortly after retirement having paid into the system for up to 50 years, who could have had the benefit of a few years of retirement and pension if they’d been allowed to retire at age 60. Some have had to apply for Job Seekers Allowance, having to justify their ongoing search for employment after a lifetime of contributing. The harsh reality though is that there are similar stories for men too. If we want equality (and I do), then any sympathy for people prevented from retiring before age 65 should be for men as well for women and for those born in the 1960s (or whenever) as well as those in the 1950s.

Sting in the tale

That said, I take a completely different view about the accelerated timetable set out in the Pensions Act 2011. Those changes were introduced at relatively short notice and were a pure cost-saving measure rather than a way of achieving equality, which was already in hand. Women affected by this change had to wait up to 18 months extra to retire, or use any private pension savings to bridge the gap to their new retirement age. The transitional arrangements recognised that the notice given was too short and mitigated the effect of the change but I can’t understand why it’s any more acceptable in principle to make women wait an extra 18 months at short notice than two years? Frankly, the women affected here were being completely ripped off in the name of austerity. Parliament may have been entitled to make the change as a matter of law (in the same way that State pension increases were changed from RPI to CPI in 2011) but it doesn’t seem ethically correct to disproportionately penalise this specific group of people, who had been disadvantaged over a lifetime of unequal treatment and were already in the process of having one of their few positive inequalities gradually removed.

If I were King for a day, I’d compensate the WASPI women for the change made in 2011, simply by paying them the pension they missed out on for the months of delayed retirement. I doubt if the Courts will insist on that in any WASPI appeal to last year’s unsuccessful action against the changes,  but I still think it would be morally right and the cost would be modest relative to the Labour pledge. In practice, Boris Johnson could do this if he wanted but will surely be tempted to let sleeping dogs lie in the expectation that it won’t hurt him in the next election any more than it did this time. I’d encourage Labour and the WASPI women to lobby for a reversal of the 2011 provisions rather than keep fighting the losing battle about the original 1995 changes. While the Tories might just be prepared to give something (and will have to if the Parliamentary and Health Service Ombudsman finds in its delayed investigation that there has been maladministration), they’re unlikely to open the can of worms if all it gets them is a continued kicking in the press for not going fully “Back to 60”.

[1] Mr S, PO-21607

John Wilson
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Keeping you informed

Latest TPR research

The Pensions Regulator (TPR) has published the latest edition of the ‘Defined Benefit Landscape’[1], its annual report on all DB occupational pension schemes registered with TPR (including those also providing DC benefits, as well as schemes not eligible for the Pension Protection Fund – PPF). This research is separate from the Purple Book, now published by the PPF and covering only PPF-eligible schemes, which is due out on 17 January 2020. A summary of key findings from the DB Landscape, based on information from the pension schemes register on 31 March 2019, is provided below.


  • 13% of DB/hybrid schemes remained open to new members
  • 52% of memberships were in schemes which are closed to new members
  • The private sector had 10% active memberships compared with 37% of those in public service schemes

Schemes by status

In 2019:

  • 43% of schemes were closed to new members
  • 40% were closed to future accrual
  • 13% were open
  • 3% were in wind-up

The comparable percentages for 2010, the earliest year covered by the DB Landscape research, were: 48%; 22%; 17%; and 13%, respectively.

The figures vary quite materially depending on scheme size. For 2019, in schemes with 10,000 or more members:

  • 56% were closed to new members
  • 25% were closed to future accrual
  • 19% were open
  • 1% were in wind-up

The comparable percentages for schemes with 100 to 999 members were: 43%; 49%; 7%; and 2%, respectively.

Membership by status

In 2019:

  • 52% of memberships were in schemes closed to new members
  • 29% were in schemes closed to future accrual
  • 19% were in open schemes
  • 1% were in schemes in wind-up

The respective percentages for 2010 were 57%, 6%, 35% and 2%.

Across all schemes, there were 1,058,864 active members, 5,136,528 deferreds and 4,529,185 pensioners.

Principal employer type

Schemes sponsored by a college or education institution had more open schemes (31%) than schemes with any other type of principal employer (including government/public body where the equivalent percentage was 25%). The corresponding figures for private and public limited companies were 9% and 6%, respectively. Registered charity was also 6%. In terms of the proportion of memberships by status and principal employer:

  • For schemes sponsored by a college or education institution, 71% of memberships were in open schemes.
  • For schemes sponsored by government/public body, private limited company, public limited company or registered charity, the respective percentages were 10%, 17%, 11% and 27%.

Scheme funding

The following funding figures represent the schemes’ Part 3 funding valuations on a common date of end March 2019. For all schemes covered by the DB Landscape research, total assets were £1,700.95 billion and total liabilities were £1,860.20 billion. The split between type of scheme was:

  • For open schemes, £289.62bn assets / 317.2bn liabilities.
  • For schemes closed to new members, £987.18bn / £1,075.10bn.
  • For schemes closed to future accrual, £424.15bn / £467.82bn.

Most schemes, regardless of status, had a funding level of between 75% and 100%.

Indexation information

Schemes can adopt a variety of approaches to increases to pensions in payment. According to the DB Landscape research,

  • For pre-April 1997, 528 schemes used CPI as their measure of price inflation and 2,042 used RPI.
  • The respective figures for post-April 1997 (when indexation became a statutory requirement for benefits in excess of Guaranteed Minimum Pensions) were 1,309 and 4,083.

Public service pension schemes

There are 21 public service pension schemes. Until 2015, pension provision in the public sector was provided on a defined benefit basis. Since then, however, workers in all open public service schemes have accrued benefits on a Career Average (CARE) basis. In terms of the balance of membership types in public service schemes, there were:

  • 36.7% active memberships
  • 33.7% deferrreds
  • 29.6% pensioners


The DB Landscape research confirms the continuing trend amongst DB schemes towards full closure (closure to future accrual), but it also illustrates important differences amongst schemes depending on their size and industry sector of their sponsoring employer.

The indexation information is also noteworthy in the sense that, if the Government moves ahead with the proposal to change RPI, by aligning RPI with CPI, a significant proportion of schemes will be affected.

Brendan McLean

2019 reflections

The year began negatively with many commentators predicting poor returns. This was mainly because 2018 was a particularly poor year for assets. Deutsche Bank said 93% of assets were down in 2018 – worse than during the Great Depression – and December 2018 was the lowest performing month since the 2008 financial crisis for global equities. In Q4 2018, Brent crude oil fell by 35% due to rising crude inventories and increased production, in addition to fears that global growth may be slowing.

The main causes of the large declines in 2018 were: US central bank increasing interest rates, a slowdown in Eurozone business confidence, tightening global liquidity due to the withdrawal of quantitative easing, and weaker Chinese growth.  There were also rising geopolitical concerns including Brexit, Italian politics, US political gridlock, and the ongoing trade conflict between the US and China.

Key features from 2019 were the liquidity issues affecting Neil Woodford’s flagship fund, the Woodford Equity Income Fund, H2O Asset Management and the M&G property fund. As investors continue to hunt in riskier, illiquid parts of the investment universe (due to the decreasing yields available), I would not be surprised if similar events occurred this year.

Environmental, social and governance issues (ESG) became more important in 2019 as trustees faced new requirements to document the way in which they take account of ESG issues in their Statement of Investment Principles (SIPs). This resulted in a frantic push from asset managers to make their funds meet the relevant standards. Suddenly every fund became an ESG focused fund, which going forward is likely to result in a degree of ‘greenwashing’. There will be additional ESG requirements in place from October 2020 so trustees should prepare to spend more time on this area.

2020 predictions

2020 has certainly begun differently to 2019, mainly because 2019 was a fantastic year for assets. It would have been hard to lose money with equities and bonds both going up. Global equities increased by 22% – even a 60:40 equity bond fund would have increased by 20%. Commentators have been claiming that 2020 will be a good year, but I wonder how influenced they are by the joy of 2019.

Nevertheless, there are reasons to be optimistic about 2020. Due to the large Conservative majority in the House of Commons, progress on Brexit will hopefully be made and years of uncertainly should come to an end. There has also been progress on the US/China trade war. In the USA strong real wage growth, low debt levels and rising house prices means the US consumer, the key driver of the economy, is more likely to keep spending, which could prolong the economic cycle and be supportive for assets.

However, bonds and some equity markets do appear expensive by historical standards. There is a high level of global debt and the increased tension between the USA and Iran could very quickly escalate. This means that asset values are susceptible to any type of global shock.

To reduce the effects of such a shock, investors should aim to be highly diversified, allocating not only to the traditional asset classes of bonds and equities, but also alternative asset classes such as infrastructure, commodities, emerging market debt, structured finance, and currency.

Matt Masters

As we say goodbye to the 2010s and welcome the 2020s, we look back at some of the big themes that emerged in Defined Benefit (DB) pensions over the past decade.

Low interest rate environment

Much has been written about low interest rates, might they be here to stay and whether or not the UK is in the grip of a Japan-like environment? Regardless of the answers to these questions, it has certainly made the cost of securing pension income much more expensive, resulting in, amongst other things, significantly increased liabilities for final salary pension schemes.

This has led to an increasingly polarised position for DB schemes, with those who hedged interest rate risk early on now sitting relatively pretty, and those who did not now finding themselves continuing to stare at deficits, despite record contributions and one of the longest equity market bull runs in history.

While the low interest rate environment has led to a corresponding re-rating of asset prices, driving some of the unprecedented returns seen over the decade, perhaps more importantly it means lower expected returns looking forward. Consequently, pension schemes are having to keep their investment strategies under review, with many choosing to look at more esoteric investment classes and the merits of a fiduciary approach. 

A decade of returns

It was the decade of the equity bull market, with the US S&P 500 index up 28.9% in 2019, its best for some years, contributing to a 190% gain over the decade. This was led by stocks such as Netflix (up over 4,000%) and Apple (up over 850%).

Closer to home it was a decade of mixed performance. While the Total Return on the FTSE 100 was 104% (equating to an annualised return of around 7.4%), JD Sports, who weren’t even in the FTSE 100 index at the start of the decade, ended the period as the top performer, with £1,000 invested in January 2010 worth £33,700 at the end of December 2019.

By contrast, Tesco, with its accounting scandal, numerous profit warnings, and with the challenge from the German discounters, was the worst-performing FTSE 100 share over the decade, giving a negative total return of 21.6%. More generally, the banks and energy stocks largely seemed to have a tough time in the 2010s.

The rise of member options and de-risking

The number of DB schemes moving inexorably closer to the “end game” has increased substantially, with many putting in place strategies designed to move them into a position to fully secure all benefits as soon as reasonably possible.

While this may remain many years away for some, a focus on member options has come to the fore. Along with the now regulated incentive exercises, this can perhaps most clearly be seen by the change in options available at retirement. Beside the traditional retirement options of “pension; or tax-free cash sum and lower pension” are further choices, commonly a transfer value or partial transfer value, or an option to exchange pension increases for additional pension.

In addition, the buy-out market has continued to grow rapidly, with the second five years of the decade seeing some five times the level of activity from the first five years, with transactions peaking in 2019 at around £35bn. And, while the headlines suggest a focus on multi-billion pound deals, there remains competitive pricing for those smaller schemes who are genuinely ready to transact.

Pension freedoms

A look back over the past ten years wouldn’t be complete without mention of pension freedoms. The popularity of the member options mentioned above was turbocharged by George Osborne’s shock Budget announcement of 2014. Gone was the requirement to take an annuity with your Defined Contribution (DC) pot, replaced with the “freedom and choice” to do what you want with it, whether to buy the much talked about Lamborghini or not. 

With this change came a substantial increase in transfer value quotation requests, particularly from DB members over the age of 55 curious to explore their options. Indeed, this activity has led to a substantial increases in the amount transferred from DB schemes, to an annual amount in excess of £20bn. While seen as a win-win-win (a win for members, who are able to take greater control over their retirement planning; a win for pension schemes trustees, who see a consequent improvement in the funding position for their remaining members; and a win for pension scheme sponsors, who see a reduction in their buy-out liability), DB pension transfers could represent another “mis-selling scandal”, if not conducted properly.


While pensions are reassuringly long-term in nature, the rate of change in legislation and market developments can often seem to stand in stark contrast. The coming decade promises continued evolution and change, not least with a new Pensions Bill expected imminently, a “stronger, tougher regulator”, GMP equalisation to grapple with, the potential alignment of RPI with CPI, the possible rise of commercial consolidators and the implications of Brexit to come!

Brendan McLean

The liquidity mismatch

Once again, the liquidity of daily dealt funds has made headline news.

Back in June 2019, Neil Woodford’s flagship fund, the Woodford Equity Income Fund, stopped taking redemption requests and will now be wound up, which has prevented 300,000 investors from accessing their investments.

More recently, in December 2019, M&G suspended dealing on its £2.5bn property fund due to £1bn of redemptions in a 12 month period, and the difficulty the firm has had in selling assets to meet all of its redemption requests.

These high profile cases highlight the problem of liquidity mismatch. Both funds offered daily dealing, which enables investors to buy and sell units in the fund each day. However, as the underlying assets cannot be sold at such quick pace, the funds were forced to suspend redemptions while assets were liquidated to meet the withdrawals.

One issue with the M&G property fund is that it had a high retail investor base. This class of investors has historically been quick to move money around at the slightest hint of ‘trouble’. Normally, defined benefit pension schemes will invest into ‘institutional only’ property funds, which makes redemption requests more stable and the funds less likely to be suspended.

Systemic risk

The Bank of England (BoE) has said that the issue of liquidity mismatch has the potential to become a systemic risk – this highlights the seriousness of the issue.  This risk being realised would potentially see similar funds suspended; this contagion effect was reflected following the M&G announcement, as investors started selling other property funds.

To combat the issue of liquidity mismatch and to protect investors, the BoE and the Financial Conduct Authority (FCA) are considering making daily redemptions of property funds incur a financial penalty. This is aimed at preventing large withdrawals and aligning redemption periods with the length of time it takes to sell underlying assets at a fair price.

In September 2019, the FCA announced new rules requiring property funds to suspend dealing if there is uncertainty over the value of 20% of their assets. This may see more property funds being suspended, which could damage investor confidence in the asset class and discourage investors from allocating to open-end property funds. Fund managers will likely respond to the new rules by holding a high cash balance, which will result in lower returns.

It is encouraging that both the BoE and the FCA recognise the importance of liquidity. In my view, the measures may create additional risks and potentially sacrifice returns, however, liquidity mismatch is a serious issue for investors and I am glad more efforts are being made to stop it.

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