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Musings

Chris Fagan shares his thoughts on the CMA's provisional decision

20 July 2018

The CMA produced its long awaited ‘Provisional Decision report’ this week (330 pages plus a 168‑page appendix).

In short, its key finding was that, whilst the market is not overly concentrated and hence uncompetitive, there are a few things that could be changed to make it more competitive. Some of these relate to the behaviour of investment consultants and fiduciary managers; most of them relate to improving investment governance generally. The CMA notes that more engaged trustees get better results. Or to put it another way – better governance gets better results – not a surprise to Muse of course!

So, what does the CMA say should be done? Improve governance by:

  • compulsory tendering when appointing a fiduciary manager and compulsory retendering of some existing mandates
  • forcing combined investment consulting and fiduciary firms to make it clear when they are pushing their own products
  • introducing standards for performance reporting and more detailed fee breakdowns
  • ensuring that trustees set clear objectives for their investment consultants

To help trustees, the CMA suggests that The Regulator should provide guidance on tendering and the FCA’s remit should be extended to cover more services provided by consultants and fiduciary managers.

The CMA has stopped short of forcing a structural change on the industry (for example outlawing combined investment consultants and fiduciary managers).

We think that the proposals are proportionate to the issues identified and, if implemented well, the governance enhancements should help to improve outcomes. Implementation will be key of course. In particular: any new tendering process must be robust. It must be a proper review and not simply become a ‘box-ticking’ exercise. Where existing mandates are being re-tendered, anything other than a proper review is likely to result in an FM provider’s unwillingness to participate. New performance and fee information also needs to be understood and used in the right way in decision making. The investment consultants themselves have a role in ensuring that their trustee clients have clear objectives.

A lot of trustees have, understandably, put off reviewing their investment arrangements in anticipation of the CMA review. The remedies being proposed do not appear to be too demanding for the industry overall and we expect them to be adopted. Trustees who were waiting for the outcome should therefore wait no longer; good governance dictates that action should take place now.

Are administration SLAs redundant?

12 April 2018

By SLAs, I mean time-based measures of a service providers performance. Of course, there will always be service level agreements in place, but it is telling that SLAs has become shorthand for the all-pervasive 5-day turnaround.

In administration, we have seen this changing. Qualitative measures are now included in more and more contracts and quantitative measures are now broader than just the time it takes to get a letter out the door. It now has to be right first time as well (although why that needs to be explicitly stated is still beyond us – does anyone ever want anything else?). We have also started seeing much more traction for end-to-end SLAs, which, admittedly is still a timescale, but is more representative of the member’s experience of the service. And there are some signs of more proactive management of member expectations at each stage of the process as cases are passed to actuaries and third parties for input.

However, I have been wondering lately, whether time-based SLAs are becoming entirely redundant. In a world where I can logon to my banking app with my fingerprint and send a payment anywhere in seconds, is it really right to be measuring a retirement quote in days? In an increasingly automated and self-serve world, does it still make any sense to measure performance in this way?

Of course, it is not always easy to throw away the comfort blanket. The Trustee still needs a quick way of measuring the performance, which tells them whether the administration is up to scratch or not. The more complex the measures become, the more complex the assessment of performance becomes. However, I thought I would throw a few different ideas out there for you to muse over:

  • Targeted % of transactions/ calculation to be automated without need for manual intervention. Whilst this may exist at the outset of a contract, this should be maintained across the life of the contract and as the scheme and legislation changes/ evolves.
  • A set % of transactions to be completed via self-service. It may take time to get there, but a concerted effort to drive interactions this way should bear fruit. This will ensure improvements in data quality, automation and engagement with the membership.
  • Progress of project work, e.g. bulk exercises, benefit statement issue. Self-reported RAG analysis of these projects, which you, as the client, can comment on where you feel it does not meet the reality.
  • Reporting on trends, e.g. in member queries (particularly those that fall into the bucket of the never really explained ‘general cases’), complaints, etc. This would be used to develop a programme of continuous improvement.
  • Regular review on value for money – is your administrator providing good value to your members?
  • Data management – some more creative thinking about maintaining quality data, i.e. quality of data received through interfaces, queries raised/ outstanding etc.

Clearly, these are not fully formulated measures that you can cut and paste into your contracts, but hopefully illustrate the point that there is more to administration than being able to confirm that a response was provided within five days! And we haven’t even mentioned risk…

Maintaining effective oversight of your Investment Committee

04 April 2018

Trustee Boards commonly delegate investment related activity to an Investment Committee. This often happens, for example, when the Board determines that it needs to have its time freed up to focus on investment strategy, including key investment decisions and risks, whilst ensuring that detailed analysis and monitoring takes place in a smaller and often more appropriate forum. A Committee can also improve the agility of the Board in making strategic decisions in relation to market and time sensitive investment opportunities, which more of our clients find particularly important as the frequency and pace of de-risking starts to speed up.

In this musing, we consider how the Board can maintain effective oversight of the Investment Committee, assuming one has been established.

Be clear on your investment strategy and objectives

In order to delegate effectively, the Trustee Board must be clear on its investment strategy and objectives, and also on the responsibilities it wishes to delegate to a Committee. This will enable appropriate terms of reference to be drawn up, and ensure that delegations and the extent of any decision‑making authority can be clearly defined. As a scheme’s investment strategy is closely intertwined with its funding and covenant position, we would expect the investment strategy to undergo a fundamental review at least every three years, and more often where circumstances require it.

Make sure the right people are on board

Once the Board has decided what activities to delegate, the next step is to consider the membership of the Committee. In order for the Committee to be effective, it is important that it is formed of a group of trustees with relevant technical and other skill sets, and that the remainder of the Trustee Board has confidence in the group’s ability to progress the investment agenda on its behalf. Consider having a membership that is made up of an appropriate balance of independent, employer-nominated and member-nominated trustees. You may also decide to bolster the technical expertise of the group with an independent investment adviser; such an adviser whilst not being a trustee themselves (although, often they are) can assist the trustees in challenging their investment consultant appropriately.

Many schemes also find the attendance of a representative from the sponsor on a regular or occasional basis helpful. This can be particularly valuable if the sponsor representative is empowered to convey the sponsor’s views and to make all but the most significant decisions (where applicable) on the sponsor’s behalf. It should also be a given that any change in investment strategy discussed in the sponsor representative’s presence should be deemed to be consultation with the sponsor in real time thus saving the trustees a lot of time in implementing any change.

It can also be useful to extend an open invitation to other trustees who may sometimes find it beneficial to sit in on an Investment Committee meeting for training purposes or ahead of a material investment related Board decision.

Don’t just replicate – eliminate

A common pitfall is that the poor practices that may have contributed to the Investment Committee being set up, are simply replicated in the new forum. For example, lengthy meetings with investment managers that add little value, philosophical debates about economic metrics and so on, now simply take place in a different room. It’s important to be honest about these practices where they arise, and to eliminate lower value-added activities and discussions wherever possible. The intention after all is to improve overall trustee effectiveness.

Remember, you have delegated not abdicated

The Board continues to be responsible for investment strategy, and so material decisions as well as risk management should continue to revert to the Trustee Board, albeit supported by recommendations from the Committee.

The Chair of the Committee should provide an update on the activities of the Committee at each Trustee Board meeting. Minutes should be produced and available for other board members to review. These minutes are at their most useful if they contain just enough information to enable those trustees not on the Committee to understand what is going on without having to read all the investment papers.

Review regularly

As highlighted above, the Board remains responsible at all times for the scheme’s investment strategy, and should take stock periodically to make sure that the Committee continues to be effective. For example, the Board should review and sign off the Committee’s business plan in advance of the Scheme Year, and there should be an annual review of the Committee’s effectiveness in delivering to its plan. Many of our clients have found externally facilitated interviews and/or questionnaires to be of value in this annual process. The membership of the Committee should also be reviewed on a regular basis to ensure a suitable mix of skills and competences, and as the scheme matures, the continued existence of the Committee itself.

Professional Trustees, Standards and Accreditation

20 March 2018

How to design a ‘one size fits all’ set of professional trustee standards that can be accredited? This was the starter for 10 that the industry was set by TPR, after the revised description and monetary penalties policy. The resulting consultation from the PTSWG has closed, so we’re now into the pictures round. Fingers on buzzers.

First – a photo that looks like a well-known name from a FTSE 100 company. We’ve heard that they are now chairing more than one trustee board, and were independent, at least when appointed. They are good, so they are in demand. But they don’t view themselves as a ‘professional’. They don’t want to be ‘accredited’ either. Should they take their board skills, commercial nous and wide experience elsewhere?

Next – a photo of a chap who we think used to be an adviser (accountant?) a while back. He’s finding it hard to stay current and the schemes he’s on all have issues. The sponsors won’t pay him much. Other trustees aren’t stepping up; he lacks supporting resource; advice is so-so. He’s worried about penalties, and insurance/ protections. He ploughs on - there’s no-one else, he wants to carry on working.

Last – more an impression than a picture – this scheme needs an experienced professional trustee. But so far no luck. Due diligence by one or two good candidates who’ve looked at the role have confirmed the trustee risks are high. But the employer’s playing hardball on funding, and on Trustee costs. They’ve both turned the role down. It’s not on TPR’s radar. So members are unaware their pensions may be at risk.

These are examples of knotty issues being thrown up. Yet, better governance is TPR’s underlying aim.

We’d like to see more debate on where trusteeship is headed for the longer term, to inform the future approach on trustee board composition, standards, accreditation and selection. It might mean waiting a little longer for the White Paper and revisiting options for consolidating governance, if not schemes.

In the meantime, TPR may be able to make further headway with its ‘fit and proper’ message via the scheme annual return process for example. If trustees have to certify their status with TPR, they will be more likely to actively think about it and if needs be seek further advice. Plus, the more the impact of poor and good professional practice is talked about online, and with employers, with advisers, the better.

The resulting accreditation process for professionals has got to be robust, to withstand scrutiny in a crisis situation. So it needs to be proportionate and well-funded, drawing on experience in similar professions.

You can read our full consultation response on our Guides & Tools page.

Trustee Training and Knowledge

01 February 2018

TPR’s latest guidance in the main reflects what many well run boards already do, building their capacity and capability with the aid of evaluation, skills and gap analysis, training plans and development. We’ve been doing this type of work with clients for a long time, as many of our readers will know.

TPR hasn’t been this clear about skills, assessment and board evaluation until now – so that gets a tick. Will less well supported trustee boards take the plunge in ways that help them run their schemes better? Let’s hope it won’t end up in a lot of process, box ticking and poor value for money – and time.

TPR's guidance on this issue is quite short – and it links to some behavioural signs of good and less good approaches. There are many hard and soft reasons why a trustee may not be able to meet what is expected of them. In some cases, should they still serve as trustees? TPR is silent on this – yet it’s a corollary of the guidance.

An important resource for trustees is indeed the Toolkit. It’s a tall order for an inexperienced trustee to get the current content under their belt in six months with few trustee meetings to apply the learning. We’d like TPR to make navigation of it easier to chunk into stages for induction, and to flag what is new.  

Both technical/content and trustee board skills are important. Board skills often need more focus to help trustees use them, such as the important chairing, non-executive and decision skills. These are so far less apparent in TPR’s guidance but perhaps next month’s issue on trustee competencies will address them.

A cognitive and style point is the challenge of ‘knowledge’ that is outside a trustee’s usual frame of reference. Training is just a start – it’s important to know what helps each trustee learn, retain and use it. The more that training can be tailored, consolidated quickly through related trustee work and supported to help trustees use it, the better. Such an approach doesn’t need to be expensive, but it needs thought. This could also start a while before a trustee is appointed, as TPR’s guidance points out. But the idea of shadowing and mentoring works best once a trustee is appointed, being realistic about the effort it takes.

DC Chair statements are required to include TKU arrangements. If, as we expect, DB Chair statements are introduced to bolster transparency and accountability, more work on trustee skills and TKU may result.

Fiduciary Management: Where are we now? Where are we going?

23 January 2018

During 2018, more defined benefit pension schemes and their trustees may look to fiduciary management as one of several solutions to budgeted time and cost constraints.

Fiduciary management has been growing and gaining attention as a potential investment solution for pension schemes for over a decade now. Of course, it won’t be the right solution for everyone, but its growth is now attracting larger funds and new providers. We are also seeing an increase in fiduciary management services coming to the market from organisations with fund management rather than advisory heritages.

Trustee attitudes are changing as well. Some trustees lack confidence in their investment skill and knowledge, and the increasing incidence of trustee governance and effectiveness reviews with accompanying pressures from the Pensions Regulator, are helping to bring this to the fore. This lack of confidence, or capability, makes it difficult to have the right conversations at the right level with the sponsor, especially if that uncertainty is felt on both sides. A consequence of this is that resources dedicated to investment governance may have been insufficient with no one either realising it or appreciating the value of addressing it.

Of course, the increase we have seen in schemes’ deficits hasn’t happened in itself because of poor governance but many of their trustees will, nevertheless, have been let off the hook for their own performance and decisions. In contrast, fiduciary managers have been more committed to hedging interest and inflation rate risks due to being accountable and as a result more assertive in taking risk off the table. Whilst this is a positive aspect of fiduciary management, in a different environment it may no longer be a source of ‘looking good’ and so any scheme entering into a fiduciary management arrangement should do so with considerable forethought.

Whilst professional trustees and finance directors have played a part in driving fiduciary management, it has often been the consultancy firms pushing their own fiduciary management solutions that has driven the uptake. The conflict inherent in this is one of the biggest challenges facing the industry. However, if these are properly disclosed, that is, they are articulated in a manner that ensures that both trustees and advisers have a good and similar understanding of the conflict, then these conflicts can usually be appropriately managed. For example, trustees can take independent advice as to the merits/ demerits of fiduciary management in their situation and where appropriate, work with an independent consultant to select the best fiduciary management provider for their own scheme’s circumstances.

Following their recent report, the FCA may consider banning the provision of investment advice by fiduciary managers. This will be interesting as there can be merit in these coming from a single source once a mandate is in place. However, trustees should consider employing independent oversight assistance to help them monitor their provider.

Fiduciary management will continue to be considered seriously by more and more trustees. Not as a panacea, but as one of the range of solutions in the market when current governance arrangements are not meeting objectives. Trustees must ask themselves: What do we need? What’s wrong with what we’re doing now? How can we fix it?

Fiduciary management is largely a governance decision and is one that will increasingly be on the table when looking at solving investment and risk decision‑making and implementation issues. The FCA’s market study in asset management and investment advisers coupled with the Pensions Regulator’s guidance on good governance and issues will, I’m sure, have many trustees reconsidering their own arrangements and requirements. 2018 may be the right time for an investment governance review for many schemes.

Strong foundations are not enough

22 January 2018

There is a lot of time spent in making sure transitions are effectively and successfully delivered, and rightly so. A good transition is a strong foundation from which to build a quality administration service. It is fundamental in fact. A bad transition is difficult to recover from and sets the service on the wrong path from the start. However, transition is only one part of the story; it is only the beginning.

Sustaining a quality service requires regular maintenance. A strong foundation is not enough to keep the administration in order over the long-term. Administration should be a partnership, in which both sides communicate openly about issues, requirements, changes and any other matter that may arise. There need to be regular meetings for this to happen and an open forum for discussion with the right people in the room. Reporting is required at a variety of levels recognising the difference between the day to day management that, say a Trustee Executive might undertake, and the information needed by the Trustee to fulfil their stewardship of the scheme.

There ought to be an annual plan of activities, for example to check up on the level of automation. As schemes change, automation can easily degrade. The annual plan is not just a checklist, but an opportunity to think constructively about the 12 months ahead. What changes are needed, what is possible and what is appropriate?

How will the administrator be held accountable by the Trustee? Are the right people around the table and do they have the necessary knowledge to challenge? How are issues being addressed and what changes have been put in place to prevent a repeat?

If we were talking about investments, all of this would be a given. It all sounds a lot like good governance. We often find that this is not routinely applied to administration in a meaningful way and, consequently, the once solid foundations start to crumble as services change, schemes mature, automation lessens, and attention falls elsewhere (for the administrator, on new clients. For the Trustee, on seemingly bigger ticket issues).

Administration warrants oversight to ensure that the energy spent in setting it up is not ultimately wasted. Effective oversight of your administration will provide an early warning system for issues, it will enable you to identify and mitigate risks, deal appropriately with significant events and help you achieve your objectives.

World-class Administration

23 October 2017

We were recently tasked with thinking about what world-class pension scheme administration looks like. It’s an interesting topic to ponder (to us at least). An opportunity to ignore the repeating conversations about data accuracy, automation and self-service. We didn’t stray into the realms of artificial intelligence or machine-learning. They are too busy winning games of Go to focus on pensions anyway.

Here goes then…If we were starting from scratch, what would administration look like?

  1. A member logs on to the online self-service portal and generates a retirement quotation. They can tweak the variables (the retirement date, the proportion of tax-free cash etc.) before being guided through a retirement process.
  2. The member makes their election. They confirm their identity online. No certificates are required.
  3. They are guided through the necessary lifetime allowance information and caveats, before being asked to provide an electronic signature.
  4. The member does not understand a part of the process. They open a Live Chat and speak to an administrator through the web. Query resolved, the member continues.
  5. They submit their retirement request, which triggers the necessary activity in the system. The member is retired, a payroll record is created, a cash payment generated and accounting records updated.
  6. A workflow case could be presented to an administrator to review before authorising the completion of the retirement process.
  7. The member receives an automatically generated email confirming the retirement details.
  8. On the specified date, a cash sum is paid, the member receives an automatically generated text message or push notification.
  9. The member receives their first payment and the payslip arrives online.

Simple, right? So where can I find it…?

Administration Oversight

13 July 2017

The assumption seems to be that everyone understands governance in the same way: that everyone translates the concept into a similar practice. TPR are working hard to make this assumption a reality, so we are getting closer to a common definition of good trustee governance, but only in terms of DC, investment and overall scheme governance. What about governance of administration?

Why does investment need governing, but administration does not? Whilst there is an acknowledgement that some form of governance applies to administration, the ongoing oversight, undoubtedly what governance is intended for, is not always as robust. We often see poor reporting, poor contract management and a lack of balance in the performance management. Other industries have well understood frameworks for managing outsourced relationships, but this is an area that we have seen lacking in pension administration for many areas.

If adequate time was spent on administration governance might we land on a common understanding and less administration challenges? How about some principles along the lines of:

  • Balanced (hence a balanced scorecard) – cover the important areas that drive good administration and make sure they are receiving appropriate attention; timeliness may be secondary to accuracy, but it still requires monitoring.
  • Work together – collaboration, another intangible concept, means keeping each other informed, working in partnership to deliver a service to members. It is important to appoint contract managers on both sides of the relationship and ensure that objectives of the two contract managers are aligned and success is measured.
  • Keep an eye on the future – what is coming over the horizon? How will you address it? Is the technology outdated and risky? What are others doing?

Enough questions for now. Defining the principles of administration oversight in a brief Musing was always a hard task! The conversation is happening, but we think it needs to be louder than it is now. Administration is, after all, the ultimate delivery of the Trustee promise to pay the right benefits: it is worthy of attention.

Musings on the British Airways judgement

25 May 2017

After a long haul the BA judgement has finally landed; and with it a keen industry interest in the granular detail. Not only do we know what happened when but, always a joy for the inveterately curious, there is an intriguing and thorough description of individuals’ states of mind during the process too; including one unfortunate trustee director who died prior to the hearing. A timely reminder, as if trustees needed it, of the scrutiny the role can attract.

There’s a lot of baggage to unpack over the coming weeks but if, like us, you eat and sleep and breathe governance, there are a few immediate take-aways:

Clarifying common objectives.

Managing the relationship between sponsor and trustee is key. The court was unimpressed at the length, complexity and expense of the case. It’s hard to know whether all this could have been avoided, but agreeing some common objectives at the outset can go a long way to creating a shared understanding and therefore usually avoiding entrenched positions.

Robust decision making.

The quality of a trustee decision depends on everyone involved knowing who decides, and what information or advice they rely on, with the decision process well chaired. The BA judgement, which expresses no merit or otherwise of the decisions made, reminds us that having clarity on powers backed up by a robust decision-making process is essential.

Top-quality minutes.

Being at either end of the spectrum of minute-taking is poor. A verbatim record of the meeting is long, boring and hides the key information but a short bulleted list of actions with no reasoning behind is arguably worse. Everyone wants to be confident that minutes accurately record enough to demonstrate that the Trustees thought about everything necessary to make a valid decision. Taking good minutes is an art!

The good news for trustees is that when they get these things right and have an audit trail to demonstrate it, decisions will stand; even in the extreme and public circumstances of a 7-week trial.

The good news for employers is that there are very few plans which give the trustee power to unilaterally change the rules to increase benefits. We do wonder though how many FDs will be asking their lawyers to re-check their balance of powers documents…

Master Trust Consolidation

27 February 2017

TPR recently published their annual statistics on occupational, trust-based DC scheme membership. It makes for some interesting reading. It also covers master trusts and, frighteningly but not unexpectedly, it suggests that the 13 master trusts on the published assurance list have the clear majority of memberships, but only just over 50% of the assets. This means that there is a large number of master trusts (around 70) that have, collectively, the other 50%. This is not sustainable.

Master trusts need scale to operate and it is no wonder that the market is crying out for consolidation. The Pension Schemes Bill is expected to help this along and we imagine that conversations are already taking place behind closed doors.

But how does consolidation happen and what are the risks to members? Here are some thoughts to stimulate a debate – you may or may not agree, but we’d love to hear either way!

The Master Trust market is likely to split into three segments:

  1. There will be the very large AE solutions: highly automated and targeted at the mass of employers putting in place a pension solution. There will be lots of schemes and members, but average pot sizes will generally be low.
  2. There will then be a small number of more specialist Master Trusts that seek to consolidate the larger schemes. There will be far fewer employers and members within these schemes, but as these schemes will transfer in existing funds, the average pot size will be higher and there will be more tailoring of solutions to meet specific sponsor needs. These schemes will also provide an in-retirement solution for those remaining own-trust DC schemes.
  3. The final segment will be a small number of specialist Master Trusts, predominately not for profit, that will focus on certain industry sectors.

Consolidation will happen through schemes proactively seeking a partner. Either a buyer will be looking for targets or a seller will realise they cannot reach the scale required to deliver the level of service and innovation needed to be competitive.

The protections within the Pension Schemes Bill should ensure that members are not left to pick up the tab for these changes, so that puts the onus on the buying scheme to make an investment to deal with the integration of the acquired scheme. That will limit the field of buying Master Trusts quite considerably as a number do not have the capital to make such investments. The hunt or be hunted adage really could come to play here.

Any transition is fraught with risk. System migrations, asset transitions and communication exercises will all need to be undertaken. Getting those right so that there are no legacy issues left behind is a challenge that many schemes find a struggle.

Interesting times certainly lie ahead.

Master Trust Value

27 February 2017

Master trusts are growing quickly and this is only going to accelerate. With TPR’s recent data showing that there are around 32,000 micro schemes, the natural fit would seem to be master trusts. And the drive to improve the regulation of the master trust market and push for consolidation between some of the 100-odd solutions out there can only serve to increase their viability and attractiveness as an option. Their pitch is based on economies of scale. The greater the scale, the greater the economy, the greater the value delivered to members; up to a point at least. Or is it?

For me, it all comes back to the member. Trustees have a fiduciary duty to members and TPR frames this in terms of good member outcomes and value for members. Something I am on board with.

The FCA’s recent findings state that small schemes lack the scale to access value and TPR’s data shows the DC market is highly fragmented, consisting of lots of tiny schemes unlikely to ever achieve the scale that will bring lower charges and increased bargaining power.

The question that I ask myself is how can trustees demonstrate value and good member outcomes if broadly, the same (or an even better) solution is available in a master trust at a lower cost?

The answer I have come up with is at once simple and complex: the trustees must demonstrate that the difference between the master trust charges and the costs of the DC scheme they are running, is adding value that otherwise would not be there.

What does this mean then? It means considering the differences between the two solutions. That means not just peer group DC schemes, but master trusts too. It means that trustees have to recognise the unavoidable conflicts and whether the status quo is truly in the best interest of the members.

It is sometimes justifiable to retain an own-trust scheme. For example, you may have a highly tailored investment solution or communications programme that cannot be matched by the master trust market (yet?).

However, the Chair’s statement needs to consider all options on the table for provision of DC to the members and explain why the continuation of a DC scheme adds enough value to justify the higher charges. Time will tell if the smaller DC schemes can tell a compelling story, or if the disappearance of DC into master trusts is an inevitable as everyone thinks.

Of course, there is the additional complexity where the cost of these extra services is picked up by the sponsor and, therefore, are not part of the value equation. Whether members truly value those expensive extras, over higher contribution rates (if the sponsors’ budget can be spent on contributions or adviser fees) is a question for another day!

The PIP of decision-making

13 February 2017

12 Angry Men is a classic. Henry Fonda spends 90 minutes obstinately convincing 11 other equally obstinate jurors of reasonable doubt in a murder case. Clarifying the evidence, testing the assumptions, exposing and challenging the prejudices and applying a liberal smattering of common sense, Henry reels them in one by one. Yes, afraid that was a spoiler alert for those who haven’t seen it

The film must be a psychologist’s dream for exemplifying myriad biases in the way we think, what we pay attention to, how we react to others, and how we tend towards groupthink in reaching consensual decisions. It is that latter point that particularly interests me for trustee boards. How do trustees make decisions consensually in a powerful way, and more likelihood of that lead to the right outcomes?

The industry has a fondness for three-letter acronyms; PIP is one we use about the “art” of good decisions.

People – who needs to be involved, what are their roles in relation to the decision and any prior work to be done, what contributions and behaviours are needed, how are conflicts of interest to be managed? Do the trustees each understand their role and how they can meet their joint and several responsibility for the decision being made?

Insight - what training, reports and papers, advice, input from a committee is needed, and at what level of detail given the board’s role? What assurance do we need and how can we shape the information we are using in ways to encourage the right behaviours and pace of work, so that we can stay out of the detail and not procrastinate?

Process - what is the timeline, how will we phase the work, what will help us reach a clear consensus, does everyone understand what needs to be done?

The chair’s role and trustee support is crucial to a good decision process. Many a good decision though can be undone through lack of clarity when it is taken (that wasn’t what was agreed!) and poor minutes (when did we decide that?).

But it can be a good idea to revisit a decision when circumstances have changed significantly, or when trustees take stock of how decision-making can be improved. Something well worth doing.

Now, that’s something for another Musing!

Will the dashboard be a success?

17 October 2016

The pension dashboard is coming. There is lots of discussion and speculation about what it ultimately might be. We welcome it, but it needs to be done well to fulfil its promise as a great tool for savers to understand their full retirement value, and be more in control of how they use their savings. Hopefully it will allow individuals to make the choice that is right for them armed with the information they need.

With the right marketing and PR, the dashboard presents a great opportunity to rehabilitate pensions in the minds of the public. It could increase engagement and begin a sustained interest in pensions.

As ever, the main challenge will be to get people to use it in the first place. This is why a clear, targeted campaign demonstrating the value of the dashboard is key. Once people are on-board, they could well become more engaged with retirement savings. This could be the first time that some are really seeing their retirement savings properly, so it is crucial to get it right and get them involved.

The dashboard must provide people with the tools that they will need to make informed decisions at retirement and throughout their savings journey. It needs to create a holistic picture that offers modelling, information, financial education and planning tools, and incorporates tax treatment into decision-making.

It is great that the industry is involved in the development of the dashboard. Many providers will have useful insights into how members interact with online tools, how to encourage engagement and what functionality members most want to see (and which of those they then actually use!). However, let’s not forget about the members themselves. One problem that occurs again and again is that the pensions industry forgets that the average person has little to no knowledge of savings, pensions, benefits and tax. In developing the dashboard, it is these people that most need to be reached and it needs to cater for them.

Of course, there is a hurdle to overcome. People have to want to be educated and everyone responds to that in a different way. You can have all the modellers in the world, but still won’t reach some of those that just aren’t interested. There are innovative ideas out there that could be harnessed, such as gamification, to ensure that as broad a range of people are included as possible.

The dashboard needs to keep pace with technology and how it enables people to interact with it through different media and devices. This will always be a challenge as technology can move so quickly, but once it is developed the dashboard needs to evolve. It needs to grow and stay relevant to the people it is seeking to reach.

The pensions dashboard is a welcome innovation and should prove a benefit to people, the industry and to savings. There are hurdles to overcome, not to mention the basics such as the design, but the early signs are encouraging. Many are hoping to make this a rare success for the pensions industry! Are you one of them?

21st Century Trustees: What do we think?

12 September 2016

We welcome the Pension Regulator’s initiative on 21st Century Trusteeship and Governance and have submitted our thoughts to TPR. As recognised experts in pension scheme governance and working with a large number of pension trustee boards on their governance and effectiveness, it will be no surprise that there was a lot of internal debate and discussion about this and some interesting ideas. This Musing provides a snapshot of some our key thinking on the 21st Century Trustee initiative.

  • It is important to be clear about how the different trustee roles are defined, distinguishing between professional, independent and lay trustees.
  • The role of the trustee is widely discussed, but often the focus is largely on technical knowledge. In our experience, some of the best trustees are not from a pensions background, and do not have a detailed technical knowledge. However, what they do have is the right skillset and the intellectual capability to grasp complex ideas, challenge advisers appropriately, identify/ manage/ prioritise risks and participate actively in decision making. Both technical and softer skills are important and should be considered during the trustee appointment process.
  • The role of the chair requires chairmanship, leadership, negotiation, listening, facilitation and other softer skills which are equally, if not more, important than technical skills but are sometimes overlooked.
  • There should be a requirement for a base level of technical knowledge that is refreshed regularly, perhaps built around the trustee toolkit. More importantly, there needs to be greater access to coaching and training sessions, seminars and other forums that address the skillset required of being a trustee, and not just the latest changes in pensions legislation.
  • Pensions is the only significant industry in the UK that does not currently have some form of mandatory board effectiveness assessment. There is a lot to learn from the corporate sphere. As a minimum, trustee boards should be required to annually self-assess and comment on key outcomes in an annual statement. There should be triennial external assessments to challenge the self-assessment and provide an independent perspective.
  • We would welcome the introduction of the reporting requirements of DC schemes into the DB arena. We think this will challenge many trustee boards to think objectively about how they operate.

The idea of the 21st Century Trustee is an important development and one that we are watching closely. It is an opportunity to put some robust guidance around some of the areas of trusteeship that have typically not been at the forefront. We look forward to seeing how this progresses.

Our full response can be read here.

TPR's discussion paper can be found here.

Reconciling your GMP: Time is running out

05 April 2016

The deadline for registering with HMRC’s GMP reconciliation service is today. Time Is definitely running out, and statistics suggest that only 48% of schemes have completed stage one of a GMP reconciliation.

Those that have gone through the whole process are finding some of the issues that have lain undiscovered for years. Overpayments or underpayments compounded over years unnoticed, and tough decisions impacting the lives of members await the trustee.

Those that haven’t even begun the journey, need to spring into action and confront the scale of the challenge.

It has always been a challenge and whilst some schemes have been through the process of reconciling GMPs, many have just assumed that everything is okay. The end of Contracting Out, today’s deadline and HMRC’s intention to wind down their GMP team and write to members in December 2018 have left little choice but to take action.

Let’s have a quick think about what happens if you don’t complete a GMP reconciliation:

  • Material over or underpayments won’t come to light, meaning that members are not receiving their correct benefits.
  • You will likely be required to accept HMRC’s GMP records regardless of whether they agree with yours, so there is a potential change in liabilities with a possibility of an unwelcome increase to look forward to as well.
  • Queries from members when they receive their statement from HMRC in December 2018.
  • De-risking may prove more expensive when it finally comes time to buy out considering that GMPs won’t have been reconciled and there is considerable uncertainty on the reliability of the data.

The problem can be particularly complex for schemes where the employer has gone through a lot of corporate change. Bulk transfers in and out can really complicate matters, especially if past administrative practices were not up to scratch.

Dealing with GMPs as members leave schemes should have been part of the day to day administration work. In some cases, that work has not been dealt with as efficiently as it could have been and therefore there will be discussions about whether the reconciliation work should lead to additional fees.

The technology is there to efficiently digitise old files and identify key information with a degree of certainty. Whilst this might make it a slightly less onerous task, there are still a lot of pages to be thumbed, figures to be found and numbers to be reconciled.

Time is running out to face up to these challenges. Trustees need to tackle GMP head on.

An update on the VAT position

07 December 2015

In June 2015, we published a Musing on the VAT recovery position for pension fund management services. This followed the publication of a policy paper by HMRC which had created a lot of uncertainty about the recovery of VAT going forward.

In particular, it looked to have significant implications for agreements governing the provision of outsourced administration services.

More recently HMRC have issued a briefing with an update on the issue. However, it remains a frustratingly, and, it seems to us, unnecessarily complicated issue. We suggest that anyone needing support right now should best speak to their tax advisers.

That said, our understanding is that the original issues remain unresolved. Furthermore, the update seemingly brings into doubt the deductibility of any (scheme) asset management costs paid directly by the employer in the calculation of the employer’s corporation tax liability.

At least, HMRC have confirmed that the current 70:30 split can be applied until 31 December 2016.

The original HMRC briefing can be found here: http://tinyurl.com/o8wau3e

Master Trusts: Are you sure what you are buying?

20 November 2015

The emergence of master trusts as a popular solution serving the UK pensions market is both a good and bad thing. Good because there is a need for scale solutions to help deliver better governance and better outcomes for members. Bad because the barriers to entry are low and lots of schemes have been established with clients invested before the Pensions Regulator could catch-up.

The Master Trust Assurance Framework that was introduced last year is now becoming more commonplace with many master trusts either signed up, or going through the process. But this is just one part of the jigsaw. The new CEO at the Regulator has already commented on the lack of a ‘fit and proper person’ test and there are no capital adequacy requirements in place for firms running master trusts.

This final point is a particular concern of mine. Whilst some master trusts do have good financial backing, others have very thin margins and the Regulator has already had to step in on a couple of cases. The issue for employers, who ultimately selected the master trust, is that if things go wrong, who pays to put things right? If there is no reserve, then when the Regulator appoints a new Trustee, or when the scheme is wound up, the only option is to use member’s funds or contributions. When members are made aware of these additional charges, they may decide to come back to the employer and ask what due diligence was followed when the appointment was made.

It is not always a case of big being beautiful and small being scary. Make sure that you have assessed the position and that you understand the impact on your members if your master trust ends up being one that doesn’t survive the Regulator’s increased levels of scrutiny.

Independent Governance Committees – It’s not just about the investments

12 October 2015

The introduction of Independent Governance Committees is welcome, and the responsibilities set out by the FCA go a long way to ensure proper oversight of workplace pension arrangements.

However, the FCA’s guidelines are heavily focussed on investment governance. The core focus is on the ongoing value for money for policyholders. Ensuring value for money is a laudable goal, but the assessment focuses only on the investments – the strategy, the default, the charges.

Of course, these areas need attention. And, of course, the case for prioritising these is easy to make: no money, no pension. But, what about the rest of the governance?

If IGCs are mandated to become hung up on investments, what happens to the data, the interfaces, the accuracy of illustrations, the suitability of communications, the education and engagement of members? You can have a huge pension pot, but if the communications don’t inform and seek to educate the member, then it is easy to make the wrong choice - Lamborghini, anyone?

Investments absolutely play a vital role in delivering value. But there is more to the value equation. The member needs to be able to make the right decision, at the right time. That can achieved through great communication, and good administration. So if IGCs focus on investments, there is a danger that these areas will get overlooked. The FCA really only requires assessment of value in relation to investments. So, members are relying on IGCs to go the extra mile, or several miles, to incorporate a broader assessment.

The focus is rightly shifting on to DC. TPR and the FCA have done some good work in developing frameworks to support good governance and better member outcomes in DC. So, DC may no longer be the poorer cousin of DB, but there is a real risk that administration is still considered as the poorer cousin of investment!

HMRC are ‘promoting’ tri-partite agreements for pension administration

01 June 2015

Following a recent EU ruling on the deduction of VAT for pension fund management services, HMRC has been working with the industry to set out how VAT recoverability applies to the administration of a UK DB pension scheme. They issued a policy paper in March 2015, on the ‘deduction of VAT on pension fund management costs'.

This has a significant impact on the nature of outsourced administration agreements. The way we understand it is that as of 1 January 2016, HMRC will permit the recoverability of VAT only if the Sponsor is signatory to the agreement. As with everything that HMRC does, it's not quite as straightforward as that.

The core of HMRC's position on VAT recoverability is that an employer should be the recipient of the services, although they accept the Trustees have ultimate responsibility. HMRC suggests that for pension administration services, recoverability of VAT, could be achieved through a tripartite agreement, providing certain conditions are met within that agreement. Clients will need to clear their respective positions with their legal and tax advisers. And of course the VAT implications of the contracting approach will need to be balanced against other considerations that might influence the decision between bi-partite vs tri-partite approach.

Many clients have been reviewing or setting up new agreements and, for the majority of clients, the trend was to put in place tri-partite agreements including both Sponsor and Trustees as signatories. In many cases, there are advantages that make tripartite agreements worthy of consideration, regardless of the VAT position. For instance, a tripartite agreement allows all parties' rights and obligations relating to services to be covered in a single contract. This makes clear the roles and interactions between parties (TPA, Trustees, Sponsor), whilst reflecting the Trustees' legal responsibilities for administration.

Earlier in the year, we co-authored, on behalf of the PMI, the principles for good pension administration agreements. We have had a lot of positive feedback on this guide, which can be found on our Viewpoint section.

A lot of administration agreements are outdated, and we are regularly suggesting to clients that they review their existing contracts to put in place something more robust, and in line with current market thinking and best practice. Between now and the end of 2015 may well be the time to do so.

DC Advice (without the Conflicts!)

15 March 2015

Five years is a long time in the world of DC consulting, during which there has been a fundamental shift in the market. In the years before automatic enrolment, larger DC schemes (whether trust or contract based) might have employed a DC consultant to support them with getting the most out of their pension scheme. Smaller schemes were happy to take the support available from their provider, or the IFA involved in the scheme, as there was no explicit cost to be met.

The rapid increase in the number of members and assets within DC schemes has led to two main changes in the market. More schemes are now looking for specialist DC consulting advice to help ensure that they maximise the benefit from the increased cost of running their DC schemes. But at the same time, many DC consultancies have been lured by the increase in assets and are developing their own ‘products' in competition with the providers who used to run the schemes that they would consult on. So, we have a growing market for specialist DC consulting, and more conflicts in the market than ever before!

As one client said to us recently, "How can my consultant provide advice on the best provider or master trust arrangement, if they are offering their own master trust and competing?" It's a very fair question and one that few consultants have a strong response to. Individual consultants can certainly give advice, but will it be based on full knowledge of the market? For example, will Provider A share details of their master trust arrangement with Consultant B, knowing that they will be competing against them? The answer is ........ not to the same extent that they would if there was no fear of losing competitive advantage!

To extend conflicts further, some consultants that don't have a product to sell are now being employed as consultants to those providers that do. All in all, it's a very tangled web that leaves schemes in a difficult position. But conflicts are a fact of life, it's how schemes manage conflicts that is important. So what can they do? Asking some pertinent questions would be a good start; let's pretend we are seeking advice around master trusts.

Q. We would like you to advise us about master trusts, but how can you do that given your firm itself is a master trust provider?
Q. We would like you to advise us about master trusts. Before we ask you to do that, can you reassure us that your firm is free of conflicts of interest, such as advising particular master trust providers?
Q. We would like you to advise us about master trusts but before we do so, will you share with us your firm's sources of income in relation to master trusts?

Seeking out a completely independent DC consultant might prove more challenging than you first expect! But if conflicts have been identified then at least you can decide whether they can be managed satisfactorily.

Data and De-risking

01 December 2014

It’s hard to avoid news of de-risking these days. The level of activity seems to be increasing and more trustees and sponsors are looking at ways to de-risk. Not a week passes without news of the latest “largest buy-out” or of some new, innovative de-risking solution that has been put in place.

Of course, this all makes sense when we think about the so-called “DB tail”, and the steady winding-down of DB schemes, as DC continues its march to dominance. However, I fear that pensions is a bit like a Springer Spaniel, and the tail, only belatedly docked, will wag vigorously for many years to come.

This continuing focus on de-risking brings me back to data. To put it simply: if you choose to de-risk without establishing the integrity of your data, you will pay a lot more for the privilege. That’s assuming you can find someone prepared to take on the risk.

Data is absolutely key to de-risking exercises, and presents a significant risk where the data isn’t known to be accurate. There may be a temptation to think “we haven’t had any issues with our data, so it must be fine”, but you need to look at the data and make sure. Just because that’s the way something has always been done, doesn’t mean it is correct as a number of trustees and sponsors are increasingly finding to their cost,

When any risk reduction journey is planned, one of the earliest tasks will be to look at the data. Enough time should be allowed to audit and review the data thoroughly, rather than rushing at the last minute as a planned de-risking approaches across the horizon.

Many typed characters have been expended on the importance of data for de-risking purposes, so I won’t re-tread that path here. But what I will say (there’s always a ‘but’), is that good data is essential to calculate correct member benefits, and good data helps ensure you minimise any de-risking premium.

The process for resolving issues can take many months or even years to complete, and there are schemes that have had to delay de-risking work as a result. If there is one thing a CEO doesn’t like, it’s hearing that the decision the Board took to de-risk the pension scheme hasn’t happened yet, ‘because we are sorting out the data’.

Getting your data in order early, and establishing a process for maintaining the data accuracy through BAU work, will be a huge help, and a significant burden eased, when considering de-risking.

Key Principles of Administration Agreements

13 November 2014

Everyone knows that administration is the runt of the pensions litter. It is a thankless task that has, historically, only appeared under the microscope when something goes wrong: dodgy data, unhappy members, or late payments.

This has been partly due to the nature of the contracts. These have been paid little attention in the past, and were of limited use in governing the administration of a scheme, or managing the relationship.

But with more attention on administration now (record-keeping, good outcomes), and a significant focus on good governance, administration contracts have become an increasingly important part of the governance puzzle.

A strong contract helps to define services, specify performance measurement, control fees, rewards and penalties and prescribe aspects of the service that have typically been left out (transition management, data rectification, exit plans and termination provisions).

A more comprehensive and robust contract can benefit both the administrator and the client. It helps to set expectations for both parties, provide guidelines within which the service will be managed and operate, and sets out the relationship and governance between Trustee and provider.

And the principles of good contracts do not only apply to outsourced administration. In-house departments can also benefit for the same reasons. A formal, or informal, agreement setting out the services being provided to the Trustee, by the Company, and how the quality will be measured can help strengthen the relationship and governance practices. It can also set out ways of working that both the Trustee and Company are comfortable with, and that allows the Trustee to have some input into the operations of the in-house team.

We have recently completed the Key Principles of Administration Agreement for the Pensions Management Institute (PMI). We worked with CMS to draft the key principles to have in mind when considering your administration contract.

Administration contracts are increasingly important, and we recommend that you take a look at yours. The new Key Principles is a good place to start!

Will Guidance Really do the Job?

12 November 2014

With around 20 weeks to go until the new freedoms are unleashed on an eager public, and with the details still to be finalised, is the ‘Guidance Guarantee' really going to protect scheme members from themselves?

From April 2015, all members reaching retirement are guaranteed to receive free, impartial, face to face advice on the options that are available to them. George Osborne promised this as part of the Freedom and Choice announcements revealed in the March 2014 Budget. Of course, what he said and what he meant weren't quite the same. He meant:

  • free - to the user, although the industry will have to pay;
  • impartial - the solution announced will be delivered through TPAS and CAB, so yes;
  • face to face - if you want it, but could be via webchat or phone;
  • advice - oh no, he didn't mean that at all, he meant guidance. It's nearly the same though, isn't it...!?

Let's start out with a positive frame of mind. There will be a number of people, reaching retirement next April, who already have a financial adviser in place. For them, the guidance offered will be of interest, but it is unlikely to have any impact on their decisions. They are the lucky ones who, not only will they be paying for full advice, but are also likely to have sufficient funds to provide themselves with an income that delivers the ‘better outcome' that all trustees are striving to deliver.

At the other end of the scale will be people who have small pots as a result of being auto-enrolled for the first time in the lead up to their retirement. They will be offered the guidance, but if the pot is small and they have little or no other benefits, it is likely that taking their entire fund as cash will be the straight forward choice.

It's everyone in the middle, yes - that's most people in DC schemes, where it becomes more difficult. Well, thanks to George, at least these people will now get some guidance. Firstly, these members need to think about what their needs might be during retirement. That is a challenge for most people, as they just don't know what their future looks like! Then, before they can receive the guidance, the members need to pull together information on all the different parts of their pensions history. What deferred pension pots do they have? What is their State entitlement? And what about the benefits from the scheme where they are still an active member? Pulling all this information together will take time for the member. Having a ‘guidance' meeting or call will give the members a target date to aim for, and it will be down to the industry to provide the information to members in a timely manner.

This meeting will aim to consider all of this information, along with all other relevant financial information, before the member is then talked through the options that are available to them. And that is all due to happen in 30 minutes. For some members with straightforward arrangements, that might suffice. But in reality, the people who most need help will be those with no idea at all what the future looks like, or those with more complex arrangements who need to think about the best way to manage their pension affairs.

For these people, it is likely that guidance will point them towards advice. They will need the support of a qualified expert to really get to grips with their situation and find the best way to deal with their future needs. But will they be prepared to pay for this advice? After all, George did say that everyone will get free advice. And if you'd like to explain to them why advice and guidance are different, that'll probably take another 30 minutes!

Governing Relationships

30 July 2014

In the beginning there was an employer. The employer looked carefully at its employees and saw that they were good people who were valuable to the business and whose services should be retained. So the employer created the pension scheme.

When the pension scheme was created the employer was required to appoint trustees to govern it. This mattered little as its intentions were clear and those executives who took the decision were well represented amongst the trustees. There was little need for any interaction because: a) the scheme was small relative to the employer's business; b) the membership was relatively young, so cash flow was positive, and c) key executives sat at the trustee table.

Sponsor relations might be described as "cosy".

Time marches on, and:

  • The creators of the pension scheme move on; replaced by executives with different challenges and priorities.
  • The membership matures and cash flows turn negative, legislators strengthen funding standards.
  • The conflicts between the fiduciary responsibility of a company director and a trustee are thrown into sharp relief by demands to improve scheme funding. Senior executives become an endangered species amongst trustees.
  • The scheme becomes severed from the original sponsor due to corporate actions. An overseas entity takes the reign. It has little appreciation of the UK's regulatory framework.
  • Sponsor relations take a turn towards "dysfunctional".

More than ever before, trustees are continuously and wholly involved in governing pension schemes. To govern confidently and effectively, trustees need regular engagement with and input and support from today's sponsor, whether that relates to DB funding, DC investment policy or whatever.

Employers, however, have much broader priorities and their motivation to engage in pension issues is only periodically heightened as and when their business objectives are impacted. And when sponsors seek to engage with the trustees, it is this that invariably drives their agenda.

At worst, dysfunctional relationships between trustees and sponsors can be disastrous; sometimes for members; sometimes for employers; but rarely for trustees! But most cases are not so extreme. Poor relationships generally manifest themselves more in ineffective processes, additional costs and regular procrastination. Summed up, the outcome is often frustration for both parties.

We now operate in a world where the Pensions Regulator is guiding trustees and sponsors to work collaboratively, to meet the legitimate concerns of trustees but resist the temptation to impose ruinous financial demands on sponsors (just as we are told our economy is booming!). So are there examples of good practice in sponsor relations that others can reflect on and benefit from? Well yes, of course there are. Many readers will identify their own examples of good practice and they will likely share some or all of the following characteristics:

  • Clear leadership around engagement.
  • A forum for regular trustee-sponsor dialogue between people of appropriate seniority.
  • Use of the forum to flag issues early and appreciate each other's perspectives.
  • Meetings, maybe two or three per year, are not ‘bumped' by more urgent but ultimately less important demands on participants' time.
  • An understanding that inefficient processes result in lost time, additional costs and, potentially, compliance failures.

This simple formula continues to challenge many trustee boards and sometimes there are obstacles to overcome. But the prize of effective sponsor relations is worth the commitment to the task.

Assessing the Governors

20 June 2014

I had the pleasure of being part of a panel discussing DC Governance at the FT/ Pensions Expert's DC Leadership event recently. I thought I would capture some of the key points that came out of the discussion.

  • Governance is not a tick box process. Yes, there is a DC code in place now for Trust-based schemes, but most of it is based on existing Legislation. Good governance is not just about following a code. It is about the people responsible for the scheme doing the right things, at the right time, with a clear focus on the outcomes. And where possible, those outcomes need to be measurable. That is the only way for the Governors to prove that they are doing their job well.
  • Good governance for Master Trusts is going to be critical if they want to secure additional clients. Whether the ICAEW assurance framework is perfect or could be improved is a moot point - employers need to be assured that their provider is fit for purpose and has the right controls in place to look after their members.
  • Independent Governance Committees (IGCs) for DC providers could have a tough job implementing some of the changes that they identify as being required. This is not because the Provider won't listen to them, but because they are limited by Contract Law from making such changes - a prime example here is making changes to investment funds for existing assets.

The theme across all of these points is that the expectations on the Governors of DC schemes are rising and they need to make sure that they have the rights skills and experience available to them to perform that role.

Now that MasterTrusts and IGCs are going to be much more closely monitored, this puts more focus on Trustees of DC schemes to demonstrate how they are fulfilling their role as Governor of the Scheme. If they don't undertake an assessment, how can they be sure that they are doing the right things? Boards of quoted companies have to be externally assessed at least every three years - shouldn't the same be expected of Trustee Boards and Company's own Governance Committees?

CDC: The Solution?

03 June 2014

Following a great deal of lobbying, it would appear that this week's Queen's speech will announce the intention to ease legislation so that Collective Defined Contribution (CDC) schemes can be established in the UK.

These 'miracle' schemes apparently offer 30% or even as much as 50% more pension for the same level of contributions, when compared to traditional UK DC schemes. It sounds too good to be true to me, but maybe I am just getting old and grumpy?

What is CDC?

In simple terms, it's a DC scheme where members (and their employer) pay contributions in return for a targeted level of income in retirement that will be paid direct from the scheme. The actual pension can be altered up or down depending on actual returns. The continued pooling of funds after retirement means that those who die early get back less and subsidise those who live longer. The payments are actuarially calculated, so if too much or too little is paid out to one tranche of members, other members could lose out or benefit.

So what problem is CDC meant to solve?

These CDC schemes, that have been popular in The Netherlands for years, aim to offer a target pension for a set level of contributions. According to Steve Webb, that 'certainty', when combined with higher pension for the same contribution, is what appeals. But, the target is just that - a target. When markets fall, you might get back less than you were expecting. This has happened in The Netherlands and as members have been disappointed, they are now looking to our existing DC schemes as a possible solution. So despite the promises, they are no more certain than a normal DC scheme.

What other benefits are there?

Well, scale is a big benefit as really large schemes have been established and that has driven down costs per member for administration, governance, etc. That is great, but isn't that what MasterTrusts are meant to do? Well, it was until everyone decided to set up their own version as all the providers wanted to take their cut of the fees. Who is going to stop the same happening again here?

Isn't there some pooling of risk as well?

Apparently so, but the cheerleaders might have you believe that there does not need to be any intergenerational transfer of wealth. How can that be the case? Even if all the other actuarial assumptions are perfect, if markets don't do what you expect, you may have underpaid or overpaid pensions to one group of people to the benefit or detriment of another. Pooling of risk might be perfectly acceptable to you as a member, if that is what you expect and you understand the potential consequences. You might end up being better off, but you might end up worse off.

So, will any employer want to set up a CDC scheme?

For employers who have moved from DB to DC, do they really want to move back? Especially as another change to be announced in the Queen's Speech will introduce full flexibility for members of DC schemes when they reach age 55. CDC doesn't work anywhere like as efficiently as some would have us believe if members who have built up a pot then take it away at retirement and do something that works for them. Maybe there will be actuarial reductions, or an MVA to protect members who stay in the scheme? Unless they have no option, will a member in ill health just accept the lower level of income from their CDC scheme if they can secure something better for them and their family elsewhere?

Why not just get DC right?

This is just one point of view. I don't know what the Government is planning for pensions, but I do know that lots of people were hurt by the with profits debacle. ‘Promises' from financial institutions that policyholders could not lose, vanished when things turned bad. I'm not suggesting that the position of CDC in the Netherlands is anything like as problematic as with profits was in the UK, but there are enough people who were let down to make them look to our existing DC schemes as a potentially better solution, despite their flaws.

Shouldn't we therefore try to:

  • create real scale in DC provision;
  • ensure high quality and decisive governance is the norm;
  • communicate with members so that they understand what they are paying in, the risks associated with the investment choices they are making and the likely level of benefit, and;
  • have contributions set at a level that increase the likelihood of meeting members' retirement income needs.

When combined, these should reduce costs, increase returns (on a risk adjusted basis), and ensure that employers and members pay contributions that are more likely to deliver the level of outcome that they require. If we can achieve that, then why do we need to introduce CDC? CDC might work well in good times and can deliver better benefits to some members. But, it is a potentially opaque structure that doesn't solve the fundamental problem with DC schemes, which is that in bad times, members get back less than they had hoped for as they are the ones who are carrying the risk.

Final thought...

I wonder whether CDC is actually the unspoken solution to the public sector pensions crisis. Rather than a move to existing DC, it would mean that a target level of income could be introduced, without all the gold-plating that now accompanies DB schemes. This introduces a pressure release valve that allows benefits to be scaled back in really bad times. Also, with the introduction of a ban on transfers out of public sector schemes, the risk of people selecting against the scheme might be removed.

Don't Forget the Young Ones!

30 May 2014

Pension scheme membership is diverse. Members come from all backgrounds, genders and age groups. It is as important now as ever it was, if not more so, that trustee boards are representative of the increasingly diverse membership whose interests they are tasked with protecting.

This is particularly true with auto-enrolment sweeping up all those for whom a pension was not historically top of the agenda. As someone under 30, it is striking to me how under-represented the younger generation is amongst trustees.

Now, I am not about to dust off the soapbox, but I think it is worth thinking about why this is, and what could be done to encourage participation amongst a broader range of age groups and backgrounds.

To start with, pensions have an image issue. They are seen as something for retired folk, and little attention is paid to what a pension is, or does, before it is actually turned into a retirement income. So, there is an uphill struggle to raise interest and awareness with younger members.

Part of this burden should fall on the employers who could make new joiners aware of the roles of Member Nominated Trustees and the benefits such a position can have for the day job known from day one. Employers should be more flexible in allowing younger, more junior staff, the time away from their desks to discuss default strategies!

The skills of a trustee are highly transferrable. Pensions are not a hobby for old men in musty suits. It is a lot of hard work, and requires an ability to understand a broad range of issues, from a plethora of different points of view; an ability to balance competing interests; manage your time; make effective decisions and be capable of reflection on your own performance.

Trustees can also help encourage younger members into the fold through communications and actively engaging with them. Use of the latest technology will be important here.

Younger members will bring fresh perspectives to discussions on the trustee board, will provide insight into the views and opinions of a previously under-represented section of the membership, and challenge the establish way of doing things. So, there are obvious benefits to trustees as well.

I am not advocating lowering the average age of the trustee board just for the sake of it! I think both parties will benefit significantly.

TPR's 2014 Pension Scheme Governance Survey - More work to do

01 May 2014

Effective governance is pivotal in enabling trustees to manage pension schemes successfully. Despite TPR pushing for better scheme governance, sadly this survey indicates that things aren't improving yet.

With the recent focus on DC, some of the results are alarming; 75% of DC schemes do not have a trustee training plan and 56% of small DC schemes fail to document internal controls. These are just two examples, but they are consistent with the overall picture that small/ DC schemes generally perform less well than large/ DB schemes.

Three in five trustees consider their trustee board to be governing their scheme ‘very effectively'. But TPR reminds us that the survey is based on perception, so how robust is their assessment? In the absence of any clear success criteria, how is any group of trustees to understand what "good" looks like?

There is always room for improvement but never room for complacency. Good governance benefits all. TPR provides trustees with a framework for assessing and reporting the quality of DC scheme governance. But where is the equivalent for DB schemes? Seek and, unfortunately, ye shall not find!

Clearly there is scope for improvement, but how can trustees improve governance if they don't know what's missing? In the absence of accepted standards, a good starting point would be the following three steps:

  1. Establish a clear statement of strategic intent
  2. Assess the governance challenges implicit in the strategy
  3. Ensure the resources are in place to manage the challenges

Overpayments in an Outsourced World

08 April 2014

Pension overpayments and underpayments have been a significant challenge for some Trustee boards. In my view the issue will increase in prevalence as more Trustee boards undertake conditional data audits, benefit audits and GMP reconciliations.

Overpayments are complex, and the potential financial and reputational damage is significant. Good to see a number of Trustees and sponsoring employers avoiding the temptation to bury their heads in the sand.

For any systemic overpayment issue (as opposed to a few one off cases), resolving it requires agreement from a number of stakeholders and, at times, there are differing views on how to proceed.

The best examples of managing these is where Trustees work collaboratively with the sponsor to provide leadership and support to the administrators and where protocols covering all types of errors and a plan of action are jointly agreed.

The number of work streams involved is often underestimated (for example: data audit/cleansing, establishing protocols, obtaining Trustee and sponsor decisions, rectification of pension payments in accordance with agreed protocols, communications, managing costs and service providers, legal and compensation, PR advice, etc). Just like any other large sensitive project, a skilled programme manager, with the appropriate skills and experience, can ease the burden on the Trustees.

And there is the question of conflicts: for example between the TPA (who may want to recoup as much of the overpayment as possible) and the Trustees, who may not. There could also be a conflict if the actuary and the administrator are from the same firm.

Six realities of overpayments and underpayments:

  1. We are only just scraping the surface. As more and more data work is undertaken, driven by derisking, overpayments and underpayments will increase in prevalence.
  2. Once an overpayment is identified, there are likely to be more to uncover.
  3. There needs to be a clear understanding of the issues, e.g. the scale (member numbers and pension values), to ensure that key risks and priorities are identified and to develop a realistic plan of action.
  4. Protocols should be developed.
  5. Project management is essential to pull together all the work streams.
  6. Recovering overpayments is a complicated business and to do so may not be cost effective in some instances; legal advice will be critical.

And talking of legal advice, clauses are increasingly included in new administration contracts that govern the handling of future overpayments. But we'll save administration agreements for another day.

Muse Advisory's Six DC Skeletons

04 April 2014

In the autumn of 2013, TPR issued a new DC Code of Practice. There were a total of 31 quality features covered, broken into six core areas (I’ll come back to them).

Whilst many have welcomed the Code, others feel it is unnecessary. Beyond the Code itself, it has also triggered a reflection of whether governance is anything more than a box-ticking exercise to comfort Trustees and keep consultants occupied. Of course there are many examples of excellently managed DC schemes, both trust and contract based, that go far beyond TPR’s requirements. My fear is that only a relatively small percentage of the many thousands of DC schemes are well run. It is the rest that worry TPR. And it should concern us all as well; it is those skeletons in the closet that give DC pensions a bad name.

Below, I have set out the six core areas that TPR set out, with six corresponding skeletons (or maybe anti-qualities).

TPR Quality Muse Skeleton

Know your scheme No process in place to ensure the scheme is being well managed

Risk Management Contributions regularly paid late & members miss out on growth

Investment Investments continue to be made into poorly performing funds

Governance Charges at a level that should never be considered as reasonable

Administration At retirement practices that are unhelpful at best

Member Communications Lots of information, but little support to help members make decisions

So what should we do about these practices?

For trust-based schemes, it is clear that trustees need to look at how they are managing their scheme. The Code sets out a good starting point for those who haven’t taken their responsibilities quite as diligently as they should have done. For the rest, it is a checklist to confirm that your current practices are in line with expectations.

TPR has now issued an assessment template and draft governance statements to be shared with members on an annual basis. For contract-based schemes, providers have plenty of FCA regulations to comply with, including the requirement to treat customers fairly.

TPR is calling time on bad practice. Letting schemes continue to operate without addressing these issues is not an option. Trustees have no excuses for not knowing what they should be doing. A line must be drawn and any skeletons identified and rectified. If they can’t be rectified, then maybe those schemes should be closed.

It is the job of Regulators to pay attention and intervene where self-regulation fails. TPR have given Trustees a warning and now is the time to rid ourselves of those skeletons.

Governance performance; tigers and rabbits

01 April 2014

When applied to a golfer, the term ‘rabbit' infers either a novice or a seasoned player who, despite years of regular golf, remains a hacker. A term less frequently heard these days is ‘tiger', perhaps killed off as a real live American Tiger now stalks the fairways. Tigers are golfers at the other end of the spectrum; they are the star players. They exist in every club and command respect. Sadly there is no term for the vast majority of addicts who play the game more or less competently so I'm going to call them ‘badgers' (sometimes seen as good and sometimes not so good).

Of our menagerie, rabbits clearly have greatest scope to improve their performance. A rabbit's score can tumble if they can recognise their worst shots and adopt a strategy to avoid them.

Tigers are in a very different position. There is little likelihood they can make dramatic improvements because they are already pretty much in full command of their game. Performance improvements will generally be marginal and require the aid of a coach.

Badgers know how to swing the club and hit the ball but their performance is generally held back by other weaknesses. Often their game plan (if they have one) fails to recognise their strengths and weaknesses. They may have occasional moments of glory but consistent good performance eludes them.

We rarely come across pensions governance rabbits, but sadly they do exist. We get excited about working with tigers because they understand their governance ‘game' and are looking to up their game even further. But it is with badgers where some independent challenge can be most effective. Just as with golfers, trustees can be blind to their own weaknesses; coaching can be the most effective way to improve performance.

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