Making Sense of Pensions

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?

David Davison

I have highlighted the issue of legacy debt in LGPS in numerous previous bulletins, in numerous publications and at events. The whole issue is often met with some degree of disbelief. Rightly organisations question why should they be made responsible for pension liabilities which belong to someone else and why are public bodies taking the opportunity to avoid costs which are rightfully theirs.

Pension Funds and Councils are just choosing to avoid the issue and Government are just choosing to put it in the too difficult pile and ignore.

At the start of the year I issued an open letter to the Work & Pensions Committee to see if they would be prepared to raise the problem as the number of organisations I’m witnessing who are experiencing difficulties as a result of this issue has increased very significantly over the past number of months, I suspect as membership numbers in LGPS within charities continue to fall having closed schemes to new entrants.

I strongly believe that there is a potential tidal wave facing the charitable sector linked to this issue and the wider cessation debt regulation. Statistics compiled by Scottish Government back in 2014 for their schemes identified that of 422 admission bodies 223 had no guarantor. Of these 102 had fewer than 5 members and so were close to the point where they would have to manage a cessation.

Two LGPS Funds looked at the financial position in their schemes which showed that for organisations with 5 or less members the funding position moved from around £1.93m in surplus on an on-going basis to around £9.4m deficit on a cessation basis. This very much resonates with my experience and I suspect the gap has widened since 2014.

Based on these numbers I would expect that the position in England and Wales would be 8-10 times greater, so these issues could affect in the region of 2000 other charities and account for deficits approaching £80-£100m a material proportion of which relates to liabilities transitioned surreptitiously from local authority to unsuspecting charities.

A small number of LGPS have recognised the issue and made changes to deal with it but they are very much in the minority as the majority continue to stubbornly cling to the inequitable status quo.

Recent changes to the Scottish LGPS Regulations wholly ignored the issue and it was also studiously ignored by the Tier 3 review in England & Wales carried out towards the end of 2018.

The response from the Work & Pensions Committee has been positive and they have referred the matter to the Pensions Minister. I thank them for that. I will publish the letter and any response when it is received.

In the interim I would ask LGPS Funds to review this issue and to decide to ‘do the right thing’.

Gino Rocco

The recent decision in the Lloyd’s case answered a question which has remained unanswered for decades, namely do trustees need to equalise GMPs? The High Court, made it clear that trustees are obliged to equalise GMPs. However, it is not quite “problem solved”. This is because some legal points remain to be clarified by the court. Also, the DWP is expected to provide guidance on the matter in due course but this may be delayed by Brexit, in that the government has other more pressing priorities than GMP to deal with.

Although the case provided some clear guidelines, employers and trustees will need to decide the preferred approach to GMP equalisation. There is likely to be a second hearing to decide whether trustees have full discharge on transfers-out, so trustees will have to decide how they wish to approach transfers out. Do they make a payment now or do they wait for further guidance? It would be a brave set of trustees that equalises GMPs before DWP guidance is published. There are also potential tax implications to any transfer payments which may need to be topped up at later date. The effect of all of this is continued uncertainty to a point and trustees should take legal and actuarial advice before committing to equalise GMPs.

One key thing that trustees can do is to ensure that they communicate clearly with their members about what they are doing about GMP equalisation even if they are deferring until the DWP guidance is published.

Brendan McLean

Markets performed very well in January with the MSCI World up over 7% in USD. This was driven by the US Federal Reserve signalling that it may not raise rates as fast as previously indicated. Also, US/China trade relations are improving, which resulted in the MSCI China Index being up over 11% in January in USD. However, even with the strong returns most asset classes have not recovered from last quarter’s negative performance.

Despite the improving US /China trade tensions assisting in boosting equity markets in January, the US economy is beginning to see effects of this trade war as leading indicators such as the ISM manufacturing survey reported its largest monthly decline since 2008. The tensions have had a greater effect on China, which has resulted in the monetary authorities having to provide stimulus to the economy. Europe has also been affected by the trade dispute, mainly caused by slowing Chinese demand for manufacturing equipment.

In the UK, Brexit continues to dominate the news in the run up to the exit from the EU on 29 March 2019. Throughout January, a number of votes held in Parliament indicated that the majority of MPs are against a no-deal scenario and would support May’s deal if she can re-negotiate the Irish border backstop, however, the EU have so far said this is not an option. If she can receive concessions from the EU regarding the backstop then it is possible that a version of her deal could pass in parliament. Sterling increased on the possibility of a deal being reached. There could be increased volatility in markets if there is no deal agreed by the March deadline, as markets seem to be pricing in some kind of deal at the moment.

In January, Italy officially went into recession, which is defined as two successive quarters of economic contraction. This result did not surprise markets, as over the last six months the new Italian government has been in a dispute with the European Commission over the size of its government’s spending budget.

Despite the bounce in markets in January, we expect them be volatile going forward and Trustees should continue to monitor their investments and speak with their advisors to ensure their investment strategy remains suitable.

Andrew Kerrin

Over the past weeks, living in the UK, you’d have been forgiven for thinking that there was nothing else going on in the world apart from Bre… well, you know what I was going to say – I’ll spare you from hearing the word for once.

Before ‘that-which-shall-not-be-named’ took over our lives, there were other news stories, other events, other happenings in the world that equally shocked us and exercised our opinions.  One of those other sources managed to do his best in the past weeks to grab back the news agenda – the 45th President of the United States.

January has been a tough month across the pond – particularly for the 800,000 federal employees who went without pay checks.  However the story that caught my eye was the initial refusal by the Speaker of the House, Nancy Pelosi, to formally invite the President to give the annual State of the Union address to Congress.  Like the size of a recent loss by the UK Government in a House of Commons vote on ‘that-which-shall-not-be-named’, this action by the Speaker was unprecedented.

“What has this got to do with this Quarterly Update?”, I hear you ask. Well, what this reminded me of was the wording of the clause in the US Constitution that the State of the Union Address stems from, namely that the President:

“shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such measures as he shall judge necessary and expedient.”

In that spirit (assuming that unlike Nancy Pelosi you have invited Spence to address you!) let us give to you this quarter’s Information on the State of the Pensions Union, along with our recommendations, for your consideration, of all the necessary and expedient measures you may wish to take.

We hope you find this useful and look forward to addressing you again in three month’s time… if ‘that-which-shall-not-be-named’ allows us!

Topics included in this quarter’s address include:

• The PPF’s 2019/20 Levy Rules determination
• Investment Market Update
• HMRC and The Pensions Regulator Warning over Member Tax Relief
• Master Trust triggering events
• The Supreme Court judgment in the Barnardo’s case
• GMP Equalisation
• PPF Purple Book
• And of course… an update on ‘that-which-shall-not-be-named’

Download the Quarterly Pensions Update Q4 2018

Dennis Mincher

Data quality

The Pensions Regulator (‘TPR’) has been highlighting the issue of data quality for years and continues to do so. Maintaining data quality requires scrutinising (testing for accuracy, completeness, reliability and consistency) the data set periodically and rectifying where needed. Various rectification tasks may include updating, standardising or de-duplication. Since TPR started pushing their data quality agenda there has been a reasonably positive response from pension scheme trustees, however, over the same period of time, the legislative environment across the UK pensions sector has experienced a rapid succession of changes. Whilst many pension scheme trustees have reviewed their schemes’ data quality and perhaps even taken steps to rectify the issues that exist, legislative developments are potentially creating a host of additional problems for pension scheme data and pension scheme administration operations. The only way to effectively manage this is through the use of dedicated systems.

A good example is the processes involved with pension flexibilities available to members with Defined Contribution (‘DC’) benefits introduced back in 2015. Various actions such as partial Defined Benefit (‘DB’) to DC transfers and flexible drawdowns may not be properly recorded on systems. The issue here is that the fields and calculations required for any potential new inputs may not currently exist and the necessary system development could be difficult or out-of-scope, the implications of this could be disastrous. If all this data is not properly recorded at the time of processing, it could be lost completely or issued with unchecked errors that could create problems for trustees and members alike. Inaccurate records will impact on the information provided to the member and consequently their understanding and application of the guidance and information available. In turn this may lead to the member choosing a retirement option that is not right for their circumstances and which could affect them and their dependents for the rest of their life.

The alternative to updating existing systems is to develop new systems; however the development cycle for a new pension scheme administration system is typically measured in years, with complex projects and high associated costs. Many insurers have been slow to offer new products and services to their customer following the advent of the pension’s freedom flexibilities. One of the reasons cited by insurers to justify the lack of greater flexibilities is that they have not received adequate support in order to develop systems that can deliver the proper information and protection that consumers should expect in making choices about their retirement options.

Beyond the software development world, users of third party systems are often faced with large scale implementation and data migration projects should they wish to upgrade or change their systems. As a result of this, there is a desire among system providers and system users alike to ensure that their pension scheme administration systems remain relevant and fit for purpose for as long as possible. The choice between switching to a newly developed system, or sticking with an existing system and pushing for functionality updates is fraught with risks on both sides. Making the wrong choice in the short term could have costly repercussions for both the long term operations of the scheme and the delivery of a quality service to scheme members, especially if more legislative changes occur in the future.

As always, the key is vigilance to ensure that the correct systems and processes are in place to guarantee good record-keeping now and in the future.

Brendan McLean

Market Volatility

Recent market volatility has created a lot of news headlines, as well as causing multiple asset classes to record some of the worst annual performance since 2008. The last quarter of 2018 was particularly painful with global equities returning -10.6%, UK equities -10.2%, oil -40% and 10 year treasury yields -19%. This was mainly driven by fears of slowing global growth and investor de-risking and moving into safer assets.  It is worthwhile noting that strictly speaking the definition of market volatility is markets moving a lot both down and up however, in periods in higher volatility markets tend to decline as investors panic and sell.

The cause of the volatility has not yet dissipated, and 2019 could be an even more volatile year due to a range of factors including tightening global liquidity because of the withdrawal of quantitative easing, rising interest rates, rising geopolitical concerns including Brexit, Italian politics, US political gridlock, and the ongoing trade conflict between the US and China.

But what does all this mean for pension schemes and their investments? 

I think pension schemes should not be panicking.  They are long term investors so should not be too duly influenced by short-term volatility.  That said such volatility does provide challenges (as well as opportunities) and it does alter market dynamics.  I mention below a few areas that I think pension schemes should be thinking about as follows:

  • Asset switching – with such volatility schemes need to be careful when switching.  The impact of market volatility can be reduced by trading over a number of days or trading on days when news announcements are not expected.
  • Active management – In recent years there has been a lot of capital flowing into passive funds, due to the low cost and better performance net of fees, versus active managers. However, active management may be able to reduce volatility and provide better returns by using their skill to protect against such volatility. Also they can hold more cash in falling markets than passive managers so protecting values. This could mean active managers could outperform the aforementioned passive index funds.
  • Diversified Growth Funds – If you look over the last 5 to 10 years these funds have often provided returns significantly less than equities during the bull equity market run, despite being sold as equity replacements.  Perhaps they can now in a more volatile environment prove their worth and provide equity like returns with lower volatility.
  • I believe that pension schemes should have trigger structures in place to benefit from any potential upside if it does occur. Given the current volatility with market movements occurring rapidly, having a robust process for implementation will benefit pension schemes and help them take advantage of these opportunities.

I am sure that there a lot more areas that pension schemes need to be thinking about and it is worthwhile that Trustees speak to their consultant about what is going on at the moment to seek their views as well as their managers’ views.

Adrian Campbell

Combating Pension Scams

I thought this was worthy of a mention in respect of how Spence and Partners as administrator to a pension scheme prevented a member from transferring her pension to a perceived pension scam.

The facts:

•    A member contacted our administration team to ask for a transfer quote.

 •    Appropriate due diligence was carried out and as a result we had concerns that the member was looking to transfer their pension to a suspect overseas entity.

 •    Upon contacting the member they advised  they had received a  cold call and that the Plan they were being  recommended  offered “significant growth potential”

 •    The member was advised that this could possibly be a Pensions Scam and that they should speak with the Pensions Advisory Service to obtain independent guidance/advice. 

 •    A letter enclosing the Financial Conduct Authority(FCA)/The Pensions Regulator (tPR) , Pensions consumer leaflet  on how to spot and avoid Pension Scams was also sent to the member: http://thepensionsregulator.gov.uk/brand- assets/16423_Pensions_consumer_leaflet_SCREEN.pdf

 •    Several weeks later the member contacted us to say that the company operating the plan had been suspended and therefore they would not be proceeding and expressed their gratitude for  our  due diligence.

Naturally, we were pleased to have saved the member from transferring her pension. This example demonstrates our commitment to ensuring that we apply the principles of the Pensions Industry Code of Good Practice Version 2 which was published in June 2018.

The steps that trustees, administrators and providers should take to protect scheme members from pension scams can be distilled into three core principles:

  1. Trustees, providers and administrators should raise awareness of pension scams for members and beneficiaries of their scheme.
  2. Trustees, providers and administrators should have robust, but proportionate, processes for assessing whether a receiving scheme may be operating as part of a pension scam, and for responding to that risk.
  3. Trustees, providers and administrators should generally be aware of the known current strategies of the perpetrators of pension scams in order to inform the due diligence they need to undertake and should refer to the warning flags as indicated in The Pensions Regulator’s Guidance, FCA alerts and by Action Fraud.

We also welcome the recent Scamscart Campaign advertising and information campaign, that was run by the FCA and tPR which was to help members of pension schemes to become more aware of scamming techniques and encourages them to report any they are aware of:
https://www.fca.org.uk/scamsmart

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.

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