Meeting the Pensions Minister

I wish Henry well with the meeting with the the Pensions Minister.
In our experience which runs from 2012, far too many employers have a Work place Pension based on what works for their adviser, not what works for them as the customer. In particular accountants and payroll bureau’s tend to put their clients into providers that work for the systems the adviser has in place as a ‘one size fits all’ solution to auto enrolment. Having worked with a multitude of SME’s in particular, the one thing I can say is that they are all different, in terms of workforce, salaries and levels of engagement. At CBC we emphasise that employers are responsible for the choice of provider.

The Vision of the Pension Playpen

Tomorrow (18th April) I get to meet the Pensions Minister, which I’m excited about.

I’d written to Richard Harrington a few weeks ago, after an amendment to the Pension Schemes Bill had been thrown out. I’d helped the Labour Party prepare the amendment which wanted it explicit in legislation that an “employer had a duty of care to its staff to choose a suitable workplace pension”.

Employers have a number of such duties, mainly in the area of health and safety. ACAS produce a simple explanation of them which you can read here

But extending the duty of care to a staff’s financial well-being is another matter. The Government, in arguing against the amendment, explained that the Pensions Regulator gave employers some help in choosing a pension and providing that a choice was made following the Regulator’s guidelines, there was really no need for further employee protection.

A duty…

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Six areas for a Trustee’s business plan review

Image        Recognising that some trustees may have already started their business plan review what are some of the issues that should be included in the list of actions for 2014?


Employers covenant  

As the economy starts to gingerly come out of the worst recession in living memory, trustees will need to keep a close eye on the strength of the employer covenant. Returning to growth is a critical time for many businesses; as the economy begins to pick up and the orders grow they may not have the capacity to meet the demand or quickly be able to increase that capacity. This may mean a loss of market share to the more flexible and agile companies that can meet the demand. Whilst some companies will have invested, and continue to invest in additional capacity and products, this requires confidence in the market and as well as the ability to deliver. Not all companies will survive the upturn.

Investment strategy

Much as though the phrase ‘take risk off the table’ has become a cliché of the investment consulting community Trustees in conjunction with their Principal Employer need to consider whether the current investment strategy is actually going to get them to their destination, be it self-sufficiency or buy–out.

This means, among other things, reviewing the Trustees own investment beliefs. This is a critical discussion which allows the investment strategy to be developed, for example:

  • Do they believe that growth assets such as listed equities are likely to deliver a higher return, over the long term, than government bonds or cash but with a higher level of risk, especially in the short term and when compared to the Scheme’s liabilities
  • Do they believe that active investment managers can add value when financial markets are inefficient? If so do the Trustees also believe that active managers will, on average, underperform their representative benchmarks net of fees? From this are the Trustees are only willing to pay high fees if they have strong grounds to trust a manager’s ability to achieve a higher net return than a lower cost solution, such an index tracker?


Member data

The decisions which trustees reach are based in a large part on the member data held by the administrators.  Improving the quality of pension schemes’ record-keeping is a key priority of the Pensions Regulator, which earlier in January 2014 urged schemes to continue the drive to make improvements following the launch of its consultation on DB regulation. This is despite the Pensions Regulator shelving plans to set targets for scheme conditional data as it did for common data. The point is that scheme member data is important (see the CBC blog for more information).


Scheme governance

The Trustees should review the governance of the Scheme to ensure that they have the policies and procedures in place to monitor and check that the Scheme is being managed effectively and efficiently. Good practice is by definition always developing. The Trustees should consider how they can ensure that they have high quality governance systems, how this is applied when working with their advisers and how the scheme governance transmits confidence to scheme members that they will be paid their correct benefits at the correct time.


The impact of more legislation

From 2016, the single tier State Pension is introduced. For the Schemes who provide bridging pensions the trustees need to consider how the rules need to review the Scheme policy and possibly the rules. The potential of equalisation of Guaranteed Minimum Pensions remains a work in progress for the Department Work and Pensions. The draft methodology produced in 2012 was kicked into the long grass and we await another attempt. In our view unwelcome though this is, trustees need to keep the matter on their radar. The Disclosure Regulations are also due to be updated from April 2014. Whilst most of the changes are optional, time needs to be set aside to review what actions, if any the trustees wish to take.


Trustee training

Whilst the Pensions Regulator’s Trustee Toolkit is a useful (and free) trustee education tool, the benefits of a full Got, Gap, Get analysis of Trustee knowledge and understanding should be on most Boards business plans. This is a valuable tool to measure and identify not only at an individual but at a full board level areas which the training budget needs to address. The importance of Just in Time training at trustee/committee meetings, for example just before a scheme valuation, should also not be missed.


Time spent on planning is seldom wasted. Trustees should be encouraged to make the necessary time investment to think strategically. Let’s go to it!


February 2014

Pensions schemes and poor data – why is it and how to sort it

ImageIn July 2013, the Pensions Regulator released a report which made for disappointing reading. Despite all the efforts to date, many schemes are still falling short of the standards The Pensions Regulator has set for measuring data quality and maintaining accurate records, despite steady improvements in some areas.

In 2009, The Pensions Regulator issued good practice guidance about scheme data and subsequently set targets for schemes to meet its ‘common data’ standards by the end of 2012. These standards relate to the members name, date of birth and National Insurance number, which is a key tool in the identification of individual scheme members.

Clearly, the Pensions Regulator is underwhelmed with the findings and has threatened that if schemes have failed to meet targets for keeping accurate records then it will begin to issue improvement notices and if that does not work, financial penalties on pension schemes.  

For those smaller pension schemes, without access to sufficient resources are the ones causing the Pensions Regulator the biggest headache. They are more likely to be part of the two million or so members where common data has not been measured or significant improvements are required to meet the standard set of 95% having data stored. There is also the issue that the scheme conditional data, that is data specific to the individual scheme, is still not what it needs to be. This is particularly important if the there is a scheme valuation, or even more importantly, a buy-in or scheme wind up in the offing.  


Not surprisingly then, the Pensions Regulator has timetabled the end of 2013 to publish the results of its detailed record keeping review and the accompanying guidance.


What do Trustees need to do?

First and foremost trustees need to accept that administration needs more air time both in meetings and outside of them.


The data used by the administrators is a living thing, it changes (members die, re-marry, leave, move address etc) and corrections to earlier administration errors are made almost daily. As many decisions relating to the scheme are based on the member data, valuation assumptions, investment strategy for example, having the best data available is much more than a ‘nice to have’ it is essential.


From this, trustees need to engage with their administrators to develop a plan for both monitoring and improving scheme member data. In turn, administrators need to be open and   

honest with their clients so that they are seen as part of the solution, not the problem. In the past, it has been too often the case of trustees and their advisers, shooting the messenger when the administrator reports data problems.


There are tools in the box to use. For example monitoring pensioner deaths is going to bring benefits not only in having more accurate pensioner data but also as a weapon against scheme fraud. Contacting deferred members may also flush out deaths where there is an immediate benefit payable but then no further scheme liability. Asking active members to ensure that details of spouses are accurately recorded could influence the potential scheme dependents pension liability. A simple review of whether a data item is stored in a database is not sufficient – there needs to a check made to ensure that the item makes sense. The use of dummy data  was prevalent in the not so far off past, such as NI numbers based on a universal date of birth NI01010000F denoted a female and ending in M a male. Such data needs to be identified and cleaned.


All of this requires a budget and in these times, there are competing needs both for the scheme sponsor and the trustees. But not having a budget, both financial and in time, is a false economy and could well end up costing more money with data having to be put right when the clock is ticking.

Trustees – de-risk now?


After months of poorly performing gilts numbers, there are eventually signs that government bond yields might finally be increasing. For trustees, this means it is time to prepare for scheme de-risking and be prepared to act quickly to take advantage of this window of opportunity.


UK 10 year government bond yields have now broken through 3 per cent for the first time since 2011, Paul Carney’s much trumpeted Bank of England’s introduction of forward guidance on interest rates and a “sharp increase” in the manufacturing and construction Purchasing Managers’ Indices and other indexes such as the service sector business survey all support the growing expectation that longer-dated gilt yields will continue to rise.  


Trustees should consider de-risking and buying bonds but only if they believe that the gilt yields increase in the last few months (which has meant that bonds became cheaper and schemes’ funding gaps became narrower) and that interest rates are going to be lower for longer, make it sensible to move into more gilt-type investments. One of the issues will be that as Trustees start to increase demand and in so doing will constrain yields from climbing particularly high.


The decision whether Trustees should increase their investment in gilts depends upon their   risk journey plan and how they want to balance investment risk against sponsor contributions. Or in other words, what is the balance for the Trustees in the degree of risk they are prepared to live with and what the plan is for managing the scheme assets and the contributions.


Trustees do have some sophisticated tools at their disposal to monitor the scheme assets and liabilities, which allows them to prepare for de-risking. Trustees who have been proactive, gone through some scenario planning and therefore understand the decisions they would like to make and can wait for the right market conditions to execute those decisions are in the best position to act quickly because they are effectively further down the road.


Trustees have to consider whether they believe that interest rates will recover more quickly or slowly than the market expects. Although the Bank of England bank is committed to a base rate of 0.5% until unemployment falls to 7% – at the current rate of progress not expected before 2016, all it would take is a couple of political shocks in the Eurozone or Chinese debt spooking markets to seriously derail the global economic recovery. And this will inevitably mean that scheme funding levels will suffer.


On 22 September, Germany will hold a general election which could shake up the Eurozone’s most stable economy, while here at home the coalition looks set to see out their five year term to May 2015. The problem is that political decisions are much more likely to have a bigger impact than economic factors – neither seem exactly stable at the moment.   


Now, as ever, trustees should be thinking about their strategies, how much risk they need to carry and if they can afford to hedge risk even if market conditions are not as helpful as they currently are. There are a number of actions which need to be in place before the ‘buy bonds now’ decision can be made, not least whether the scheme data underpinning the decision is both reliable and accurate.


As always, it’s all about the planning.


September 2013


Pension scheme governance – still a work in progress

Pension scheme governance is a topic which has created it’s own industry within an  industry. The one certainty is that there is no “one size fits all” solution to how a pension scheme works effectively and efficiently.

There is some current noise around the theory that a closed DB or DC pension scheme should be able to operate with a smaller trustee board than an open scheme. The theory is that the scheme is on the road to wind up and therefore should be more easily managed than an open scheme looking at issues including employee benefit levels. All this is true. But in CBC’s experience closed schemes share many of the same issues as open schemes, not least the question as to whether the Principal Employer is going to able to contribute to the Scheme until such time as they are in cheque writing distance of a transfer of liabilities to an insurer. 

From this, the question is whether a trustee board has the necessary skills, the time, the experience, the tools and the desire to keep on running down the road of managing a scheme of which they may not be members and takes them away from the day job which may be under review anyway. For many, it’s not a positive career move. 

It’s no surprise then that independent trustees are sometimes seen as a potential solution to this problem. However, more schemes don’t have an independent trustee and rely on their advisers instead. This can work well, but there are occasions where the advice does not fit the question being asked by the trustees. This is certainly true of smaller schemes, but larger ones (say £500m +) are by no means exempt of this disease. 

We are still surprised by the number of schemes without a proper business plan, not just a diary of the next three years events, a risk register which is a tick box exercise not a proper review of the risks which the trustees can control, rather the ones they can’t, lacking proper terms of committee reference clarifying powers (advising the trustee board or making decisions on behalf of it). Most of all, trustee boards without any scenario planning, for example what happens if the Principal Employer is the subject of a hostile takeover, what triggers should be used when valuing assets against liabilities. The same levels of governance of companies needs to be applied to pension schemes. 

I’m simply saying, that rather like English rugby after the tour of Argentina, there are some promising signs, but there is still much to be done and that requires us an an industry to engage both with trustees and scheme sponsors to improve the game.

NEST – free from restrictions but not just yet

ImageSince its creation, the National Employment Savings Trust has faced restrictions as the government-backed provider to make it focus on its target market: the low to moderate earners, small employers and employers with a high turnover of staff who previously did not have access to good value pensions.

Firstly, the annual contribution limit of £4,400 (in 2012/2013 tax year). Secondly, the ban on transfers into and out of NEST. Thirdly, NEST is restricted by its public service obligation to accept everyone automatically-enrolled, a low-cost objective to offer good value and a ban on offering other products such as life insurance to help improve its margins.

The problem is now the restrictions on contributions and transfers have increasingly come under attack for limiting NEST’s ability to compete in an expanded market against other low-cost providers including NOW Pensions and B&CE together with insurance companies who are willing and able to offer large businesses chunky discounts.

In March 2012, the Work and Pensions select committee called for the restrictions on the NEST to be lifted as a “matter of urgency” or risk the scheme failing to protect against the market gap it was designed to address. The committee argued the contribution cap would stop employers with any high-paid workers from using the scheme, while the ban on transfers added needless complexity for businesses hoping to use a single scheme for auto-enrolment and members wishing to consolidate pension pots.

At the time the DWP said it might be “unlawful” to boost business into NEST and maintained it would wait to look again at the restrictions until the established review date in 2017. This is now the matter of legal and increasingly political argument.

The consultation

But, in November 2012 the government signalled a rethink. The Department for Work and Pensions launched a call for evidence on removing the cap and the ban on transfers. The DWP laid out eight different options and asked for feedback from employers, industry, consumers and their representatives. The link is:

The government is seeking views as to whether the two restrictions are influencing employers’ choice of automatic enrolment scheme in a way that was not intended. From this, the government will also examine the extent to which commercial providers are able to supply low-cost provision to a very diverse range of employers as automatic enrolment gathers speed and how the balance between employer choice and consumer interests shifts as the Auto Enrolment staging dates begin to capture smaller employers.

The Pensions minister Steve Webb has raised concerns that the restrictions on NEST could leave mid-sized employers, with staging dates at the end of 2013 and into 2014, with little choice for an auto-enrolment provider. Webb has said: “We don’t think we have a problem on day one, we think the big firms that are auto-enrolling now are enrolling into generally good low-cost schemes. The question will be further down the market: if you are a medium size firm will you have choice?”

CBC’s reaction

CBC largely echoes Webb’s concern over a 2014 bottleneck, where the restrictions on NEST prevent employers from choosing the scheme for all their staff. CBC believes that the restrictions should be removed since they act as a barrier to employers making auto-enrolment choices decisions.

NEST has undoubtedly lost out on major corporate business because of the restrictions.  A number of employers have chosen not to look in detail at NEST because of the restrictions which are in place.  For some larger employers, the restriction on NEST that causes the most problems is the ban on transfers out of NEST. This prevents them from using NEST as a nursery scheme and then transferring members’ pots across when they become eligible to join a company scheme with higher contributions at a later date.

NEST has announced a number of contracts with high-profile employers, such as McDonalds, BT and the BBC. However, the public service obligation which NEST has means it takes on business the rest of the market would cross the road to avoid. To enable NEST to have the necessary economies of scale it needs to be able to attract better quality business to balance out the more difficult stuff.

Nest steps

The DWP consultation runs until 28 January 2013, with responses to be published in the Spring of 2013 – let’s hope they keep to time.

Update July 2013

Steve Webb has now announced in Parliamentary written statement that the government has responded to the DWP consultation about the restrictions on the National Employment Savings Trust (NEST) to remove these in order to allow it to “focus on its target group without any distraction”.

Webb went on to say that ‘’With over 250,000 members already, it is clear that NEST is a success. Targeting low to moderate earners that the market has traditionally forgotten.With its special focus on those workers with lower earnings, NEST will be a key part of the solution as it has thought hard about its design; it has aimed its research, communications, use of language, investment and decumulation strategies at its target market. o make sure we achieve our aim of getting people saving, we have decided that NEST must continue to focus on its target group without any distractions. That is why I am not making any changes until 2017, when automatic enrolment is fully rolled-out. At this point I will lift the contribution limit so that NEST remains a force for good in the marketplace, driving up standards and best practice.’’

“As huge numbers of employers gear-up to start to enrol their workers, we need NEST to focus on getting these people in to pension saving.”

Earlier in 2013 the Work and Pensions Select Committee called for the restrictions to be lifted “as a matter of urgency” However, the government said it decided to stick with the 2017 date.

NEST and CBC welcomed the decision and said it now provided certainty for employers and members. Managing director of product and operations Helen Dean said: “Members and employers will be able to use NEST as they would any other pension, with no specific restrictions on the amount they can contribute or the ability to transfer in and out.

“We welcome the certainty this announcement brings for employers and members. This means the restrictions will be lifted before minimum contributions rise to 5 per cent in 2017. NEST continues to focus on our target market as we always have done.”

The current restrictions on NEST include an annual contribution cap of approximately £4,500 and a ban on transfers in and out of the scheme. These will be lifted from April 2017. It’s just a shame it’s not sooner

In Gus we trust – for now

Well here we are on Thursday 20 June 2013, the 2013/2014 fixtures are out and we still don’t know what is going on in downtown Amex Stadium.

The club’s statement this week that  “The club has reserved its right to consider further action regarding the League Manager Association statement once the disciplinary process is complete.” hardly sounds like a basis for a positive future working relationship.

The old cliché that ‘no-one is bigger than the club’ is true but I for one hope that the club and Gus do sort out this emotional mess and get on with planning to gain automatic promotion from the Championship next season.