Category: DB Pensions

What I’m reading summer 2017

What I’m reading this summer
Productivity
Why Deep Work Matters in a Distracted World
Even though mobile devices have increased our access to information and ability to communicate with others, they’ve also introduced barriers that could negatively impact our work. By…
Struggling to be productive at work? Take a neuroscientist`s...
Do you ever struggle to get things done? Do you sometimes feel your brain is not as sharp any more? Did you used to read books and now find it challenging to even finish a short article in…
The Surprising Cognitive Benefits Of Small Talk At Work
The weather, Mondays, Game of Thrones, that local sports team… These are all generally considered as safe small talk topics at work. But for many people, bonding with colleagues is not…
Simplify podcast, 6 episodes with powerful and simple ways to...
Simplify is for anybody who’s taken a close look at their habits, their happiness, their relationships, or their health and thought “There’s got to be a better way to do this.”
Evernote Podcast Interview: Tiago Forte`s Approach to...
Tiago forte is a recognised productivity guru and has a lot of thought provoking good-sense ideas on how to increase one’s productivity especially regarding knowledge work. He’s an advocate of Dave Allen’s “Getting Things Done” (GTD) methodology and talks about the idea of “intermediate packet delivery” that is to say making sure there is a clear output from each block of knowledge work (could be as small as an agenda for a meeting, or a single tweet) but the key is not breaking a train of thought and forcing yourself to try and pick up again mid-train later.
Pensions & Investment
ror20case20study20-20chan-408719-1.jpg
Punter Southall Risk of Ruin
In an indication of how thinking in the industry has developed, Punter Southall have also used long-term ALM modelling incorporating allowance for sponsor default to model what they term (slightly less optimistically than LGIM)  “Risk of Ruin” (RoR).Takeway – in this case study they provide an example of how RoR analysis helps the trustees to focus on the most important issue in the case of an action that decreases the scheme’s covenant, in this case pursuing security rather than negotiating for a cash infusion or de-risking.
LGIM Investment Strategies for Covenant Risk
LGIM Investment Strategies for Covenant Risk
Using long term ALM analysis focused on the Expected Proportion of Benefits Met (“EPBM”) under scenarios where the corporate sponsor defaults, LGIM draw some interesting and actionable conclusions for investment strategy choices in response to changes in sponsor covenant. It particularly highlights a tipping point as a sponsor falls below BBB rated. Takeaway – depending on covenant strength scheme may want more return-seeking assets to maximise proportion of pensions expected to be paid.Caveat – this analysis doesn’t appear to take into account the PPF, this is a key debate with regulatory guidance continuing to stipulate that trustees shouldn’t take this into account.
RAFI Asset Allocation Interactive
RAFI Asset Allocation Interactive
Been loving playing with RAFI’s new tool, one for all you investment geeks out there. Broadly it looks to illustrate the properties of various asset-side portfolios, assessing the long-term expected returns, and risk-adjusted returns.Takeaway – we’re in a world of lower returns and most portfolio are unlikely to deliver the sort of real returns we’ve seen in the past. We need to be realistic about outcomes, however diversification and risk management still matter
Books …
" Inside the Nudge Unit | The Behavioural Insights Team
For anyone who has ever pondered how to phrase an email to encourage people to do something, these insights from inside the UK Government’s Behavioural Insights Team (also known as the “nudge unit”) are fascinating. Halpern describes the EAST (Easy, Attractive, Social, Timely) principles for designing nudges and explains how the wording of a letter increased tax revenues by billions of pounds.
Work Rules!: a new book of insights from Google`s Laszlo Bock...
Laszlo Bock (ex-SVP of people management at Google) lifts the lid on the real stories behind some of the people management innovations that have made google such a success. It’s a must for anyone who has ever thought hard about how to motivate high performing teams. My highlights:Tap into the power of intrinsic (vs extrinsic) motivation by empowering employees and giving them purpose. This helps motivate employees, and increases both well-being and productivityIt was great to see the honesty that he puts out there – refreshing to read that everyone at google hates performance reviews but no-one can agree on a better system!Frequent surveying of views, data gathering and clear KPIs are key to making “self managed teams” work bestThe design of many of our institutions, including most companies are “command-and-control” hierarchies inherited from the 20th (or even 19th) century manual work era where the prevailing view was that individuals needed strict rules imposed upon them. They aren’t appropriate for knowledge work and they restrict productivity by reducing intrinsic motivation
TV series …..
Black Mirror (TV Series 2011- )
How did I not see this years ago? Darkly dystopian but utterly compelling. Created by Charlie Brooker. With Daniel Westwood, Hannah John-Kamen, Beatrice Robertson-Jones, Daniel Kaluuya. A television anthology series that shows the dark side of life and technology.
Other Books
Behind Closed Doors
Utterly terrfiying, gripping
created in Publicate

Five years as part of a small team doing important work

It’s good to reflect, like many of you I spend a lot of time looking forwards, setting goals, moving forward, thinking about what we’re going to achieve. That’s what gets you far, but I’ve learnt it’s also important to look back, see how far you’ve come. That gives motivation, helps push on through the inevitable dips. Today was a good day to reflect – being 5 years since I started work at Redington.

 

5 years isn’t that long, in the context of a whole career, but its long enough to make a decent dent in things (if not in the universe then at least in one’s own small part of it) and really achieve stuff. Of course it’s also a period of time which will include some dips and speed bumps along the way (important to recognise that too). I do feel genuinely proud of what we’ve achieved and where we’ve come over last 5 years, more of that later.

 

As most of you’ll know I didn’t join Redington as a startup. I don’t have any stories of working in Rob’s bedroom or Dawid’s attic (as fun as I’m sure that was). I joined a 45 ish person firm in 2012 that was already working with many of the largest pension schemes in the U.K. It’s easy to remember my first days/weeks as it was just before & during the London olympics in summer of 2012. As many of you will know I spent the previous 5 years living and working in Sydney(note – in case there is still any doubt I’m not Australian: David spent the first year I worked with him thinking I was Australian, and introducing me as such – thought initially was a joke then got a bit awkward). During my years in Sydney I had a desk looking out over the harbour – straight to the ocean, getting the ferry to work. Immediately prior to starting at Redington I’d been travelling 4 months south east Asia. In fact I landed in London on a sat morning from a kick boxing camp in Thailand, started work on the Monday having bought a pair of shoes and a shirt over the weekend. So I turned up to old street on the first morning, mega relaxed, great tan and probably more of a hint of an Australian accent than I’d care to admit. Clearly neither lasted for long!

 

Of those 45 people around 25 are still here – e.g. Rob, Dawid, David, Pete, Alex, Jonny, Karen, Steven + others. And about 100 have joined since. It’s given me a great amount of pride and pleasure to build what we have here over those last 5 years & I really hope those people who’ve been around for some or all of that journey share that feeling, I really enjoy doing great things as a team and it’s great to look back and see what we’ve achieved together, inevitably there are dips and road bumps, and false starts – but seeing things in the round it’s overwhelmingly positive, couple of examples

 

Clients are of course a big part of the story of the last 5 years, and doing great things for clients, doing the right things, is at the heart of it. Too many examples to even scratch the surface but two in particular to mention:

 

  1. Doing the work to put the second LDI manager in place for the PPF. (2013) A highlight because, many bright and capable people in that organisation and they select from a panel of top consultants, so always a privilege to be chosen to work for them. But also because of the reach and impact of the PPF – supporting pension payments to a quarter of a million and counting pensioners & their families from schemes of failed companies.

 

 

  1. SJP, winning in competition a mandate to advise SJP on their fund range (2014), here I really started to see the power of the combination of skills we had in the firm, and it was really rewarding to win that mandate as part of a team alongside Pete, Pat and Rob.

 

Second theme is building assets internally, again so many things there I could mention, but one stands out:

 

Seeing blender and later toaster get built up from nothing to what we have today (2013-present) – observed that from a distance rather than being closely involved – hope that those of you partly or fully involved in that look on that with a great deal of pride, developing something like that from scratch isn’t the sort of thing you get to do many times in a career, great team effort to have produced the asset we have today over that period of time. That’s just one example and I know there’s a lot more to come there in the future too.

 

Third theme learning – learnt a lot, surprised me in a way, was a bit unexpected. Not that I thought I was the “finished article” back when I joined the firm but having spent much of my 20’s doing exams (university, masters, actuarial) and starting work, I suppose at the time I thought it was natural that I would be using those skills more rather than learning new ones, I was completely wrong on that! I might even go as far as to say I’ve learnt more so far during my 30’s than I did in my 20’s – certainly more relevant and deeper stuff. Particularly grateful of learnings from Rob, David, Mitesh.  things like: knowing your inner chimp, tackling tough conversations, setting the context, working in the feel space. If you’re interested I’ve blogged in more detail about this here and here.

 

So, to sum up, Seth Godin put this really well in one of his blogs – a manifesto for small teams doing important work – and that really sums up how I feel about working here (and I know that’s how many of you feel as well) – done a lot of important work over last 5 years , with the team we have today am confident we do even more over next 5. Genuinely mean it when I say that the energy and enthusiasm you all have inspires me, pushes me and gives me that spring in my step each morning.  I’m proud of what we’ve achieved,  but above all really working at Redington has kept life interesting, really means a lot to me to work somewhere you have a spring in your step walking into the office, a sense of purpose, some thing that gets you out of bed each morning, that’s what it’s about isn’t it, at the end of the day.

 

Why a Focus on Personality Matters for a Better Pensions Team

I really enjoyed this fantastic article which featured in the March issue of Harvard Business Review, and explores the Deloitte Business Chemistry model in relation to trying to understand differing work styles and team dynamics. I’d definitely recommend reading the article in full if you haven’t already.

Pensions

It got me wondering – how might these insights apply to pensions? After all, taking decisions, making progress and enacting change within a DB pension fund involves a huge team effort between trustees, corporate sponsor, in house pensions teams and advisors. In many cases there can be big differences in style and approach between these groups and even individuals within the same group. These differences could derail effective decision making, or they could enhance it.

What is the Deloitte Business Chemistry model?

The Model is based around identifying four different personality styles relevant to teamwork. The purpose of this isn’t to “pigeonhole” individuals but rather to identify a common language that helps everyone understand the differences between them, and appreciate the potential sources of tension (both positive and negative). It also gives some actionable takeaways that you can start thinking about straight away.

I’d encourage you to read the whole article but here is a summary of the four styles:

Pioneers value possibilities, and they spark energy and imagination on their teams. They believe risks are worth taking and that it’s fine to go with your gut. Their focus is big-picture. They’re drawn to bold new ideas and creative approaches.
Guardians value stability, and they bring order and rigor. They’re pragmatic, and they hesitate to embrace risk. Data and facts are baseline requirements for them, and details matter. Guardians think it makes sense to learn from the past.
Drivers value challenge and generate momentum. Getting results and winning count most. Drivers tend to view issues as black-and-white and tackle problems head on, armed with logic and data.
Integrators value connection and draw teams together. Relationships and responsibility to the group are paramount. Integrators tend to believe that most things are relative. They’re diplomatic and focused on gaining consensus.

Source: Harvard Business Review

 

The challenge in allowing these diverse styles to work together most effectively are the big differences in what energises and alienates each group. For example integrators dislike conflict, but drivers love a solid debate. Also the style in which each group prefers to think and contribute varies greatly: a guardian is likely to want to step through a plan line by line, for a pioneer this might feel quite painful. This has real consequences for situations where differing styles interact.

You’ve probably already recognised elements of your colleagues’ styles in the descriptions above, but what might this mean for running a pension fund?

It’s easy to see how these differing styles might be present around the meeting room of a typical DB pension fund trustee board. Starting with trustees themselves – the connotation of the word “trustee” in English is similar to “guardian” – even though the role of the modern day trustee is much wider than that – and many trustees approach their role with the mindset and style of a guardian (for all the right reasons). They want to see data and facts before taking any decisions that might expose their members to risk, they want to see rigour and convincing arguments in the choices being made in the management of the assets.

All makes total sense – we’re dealing with members’ future financial security here in many cases after all – however contrast this with (say) a “driver” in the chairman’s seat: someone brought in to get things moving, passionate about making progress, changing things for the better, making members better off. It becomes easy to see how these differing styles might cause tension.

Let’s add in the corporate sponsor angle – perhaps a pioneer in the CFO or CEO seat. A natural risk taker who doesn’t like to hear the word “no”, drawn to bold and innovative approaches and focused on the big picture. Sound familiar?

Where are the advisors in all of this? 

The key advisors to the scheme (actuary, investment consultant, covenant advisor, lawyer) will also contribute to the team dynamic, perhaps significantly so, and might have a variety of styles – and this is one area actually where the model opens up some choice. The trustees can choose their advisors after all and if they are aware of the mix they naturally have around the table, then they might want to select their advisor to complement that. Perhaps an integrator to try and bring people together, or a driver to generate momentum alongside the chair. Perhaps it might even help to have different personalities in the advisors – a guardian to represent and appeal to the guardian types around the table alongside a driver.

Without wanting to generalise excessively, it’s my experience that actuarial-types are likely to often display guardian characteristics to some degree (having said that I do know plenty of pioneer and driver actuaries). In some ways this isn’t surprising: careful study, discipline and logic are what gets you through the exams (and probably attracts many people to the profession). Having guardians among your advisers may be good, but might not be the best choice if the trustee board is already guardian-heavy.

The picture is further complicated in those pension funds that might have significant internal teams involved in the management. Perhaps a bold portfolio manager with pioneering anti-consensus views. There might be an integrator in there, or more guardians.

So what?

So the model’s great, but what can we do with it? What actions can we take away in order to help our pensions teams work better together, harnessing the benefits of cognitive diversity rather than experiencing the tensions.

Well, firstly simply having a common language to understand the differing styles within teams I personally find hugely helpful. Being able to depersonalise by saying things like “look, the guardian in me is saying X”, or “the driver in the room would be saying Y” allows teams to lightheartedly explore the differences without things becoming personal or existential, and hopefully without battle lines being drawn.

But there is more than that.

Adjust your style

Once you are aware that you’re a guardian type, craving rigour and logic, working alongside a driver who is committed to progress and getting things done it becomes easier to recognise and adjust your style – perhaps that means going outside your comfort zone to try and get to a decision on a key issue with incomplete data,  being happy working with a bit of ambiguity in an area that can’t be pinned down, or being open to new types of solution that don’t necessarily fit into existing modes of thinking. On the flip side the driver might need to be patient in systematically exploring the data behind the decision to appease the guardians, stepping through details like by line when their instinct is to get it done and move on.

Recognise minority styles 

Making sure that minority groups are represented and have a voice is really important to be productive and is something that can be influenced – for example it’s possible to verbally acknowledge that a group is guardian-heavy and that they need to try and listen to – and be receptive to the perspective of –  the drivers. Rather than playing “devil’s advocate” in challenging ideas, it may be more helpful to “play driver” or guardian. Especially if that isn’t your natural style.

Add to the team carefully 

When there’s the opportunity or need to add to the team, the model gives a clear roadmap for exploring the fit between the needs of the team in terms of personality and potential candidates. In particular it highlights the need to bring integrators to the table, and potentially the need to bring more balance to the driver/guardian split.

Get close to your opposites 

It’ll often be in one-on-one relationships where the real differences emerge and pain-points become apparent. Knowing how those styles opposite to you will react, what energises them, and how they prefer to work will be really helpful. It might involve getting out of your own comfort zone and adapting your style (as mentioned above), but it must just increase the chance of progress being made.
Beware of cascades

Teams with lopsided composition can be vulnerable to decision making biases such as cascades – where the views of those first to speak become echoed by others and grow into a crescendo until they go unchallenged. The key to addressing this is to consciously “elevate” the minority styles on the team – perhaps making sure they are first to speak when it comes to decision making.

These are just some quick thoughts on how this powerful model could apply to pensions. Do tweet me with your thoughts.

2016’s Most Popular 

My most-read blog posts of 2016 were: 

1. Why Anthony Hilton is wrong about DB pensions 

This post, responding to the misguided (in my view) viewpoints of London Evening Standard journalist Anthony Hilton in September garnered by far the most views of any of my blogs this year (around 1400 views). 

An extended version of this article was also featured in Professional Pensions, and also became their most viewed opinion piece of the year

The article must have stuck a chord with readers in the pensions world. We do of course live in pretty challenging times for DB pension funds, with several strong macro-economic headwinds making it harder to deliver the benefits that have been promised. This year saw a vigorous debate around what should, or should not be done to the DB pensions system. This debate was further catalysed by the high-profile cases of BHS and British steel, and the debate looks set to run on into 2017. 

Given the importance of the DB system to the retirement prospects of millions of members I believe a solid debate on some of these important issues is to be welcomed, and look forward to continuing the debate productively in 2017.

2. No Ordinary Collision – the Future of Asset Management

Powerful forces of change are at play in many industries, and asset management is certainly one of them. Technological and demographic shifts will shape the future of the asset management industry, in this piece (April 2016) I discussed some of  the intersecting forces, drawing on a wide body of existing research on the future of work and finance. 

Here are my six key takeaways: 



3. Consulting firms reply to the Work & Pensions Select committee 

In the wake of the BHS pensions story, the W&PSC issued a green paper calling for views on the future of the DB pensions system in the U.K. Given the prominence of this debate and the considerable air-time it’s received this year the responses from the main actuarial & investment consulting firms were considered and insightful. What was also interesting was the diversity of views. Will most schemes pay the benefits promised? Should the role of TPR change? Should there by wholesale change to the system? Will small changes be effective? Is consolidation feasible? These were all questions on which the consulting firms gave insightful, but often differing answers. 
I hope you’ve enjoyed my blog posts this year. I look forward to sharing more in 2017. Sign up to receive updates on new posts.

Consulting firms reply to the WPSC Inquiry

The Work & Pensions Select Committee (WPSC) Pension Protection Fund and Pensions Regulator inquiry consultation certainly attracted a good number of responses. I count almost a hundred in that list and presumably not all are yet published!

Most of the major investment & actuarial advisory firms are represented there, as well as  PPF and The Pensions Regulator.

Reading through the submissions of all the investment advisory firms (yes, I really did!) I must admit was struck by the quality of the submissions, the level of thought that had clearly gone into them and the ordered and lucid way in which arguments were presented. I didn’t agree with everything that was said by our competitors (you’d expect that) but I was impressed with the quality.

I’ve tried to summarise each of them below, naturally these are through the lens of my own reading and interpretation. If you think I’ve got any of them wrong, please let me know!

At the end I’ve tried to draw out the questions on which that group of respondents are clearly divided.

I’ve ordered the summaries below on an approximate scale of suggested change level, from those that argued for least >> most

Hymans

Big picture Hymans believe that the current regime is fine, there is not an issue with affordability subject to giving schemes and sponsors “time to heal”.

“Most schemes are well managed and should be able to pay benefits in full

Hymans would not propose any changes lest these have unintended consequences and damage the functioning of the majority of schemes. Floated the idea of conditional indexation in stressed situations but highlighted the need for “watertight safeguards”. On the regulator’s powers:

“The regulator has adequate power. It’s wrong to assume that committing more resource to the regulation of DB schemes will improve outcomes for pensioners. It might actually exacerbate the problem – because more onerous regulation could make DB provision more difficult for employers.

Hyman’s noted that the PPF has been managed in a sustainable way and indeed provides a good risk management model for all pension funds.

The PPF

Provided a timely reminder that the PPF itself is both necessary and stable – with a growth in assets to £23bn but a funding level of 116%, and total benefits paid out to members of £2.4bn.

Much of the response concerned considerations regarding the future level of the levy, describing enhancements to the models used and refinements based on data gained, particularly in taking a different approach to small companies compared to large ones. Improving predictiveness of models, using different variables.

The PPF indicated a belief that sponsoring employers have sufficient cash and financial strength to shorten recovery periods, and discussed their aggregate modelling of the number of schemes predicted to enter the PPF:

“. Indeed our modelling projections would indicate that given the strength of employers in the median case the vast majority of schemes should be sufficiently funded to pose little risk of making a claim on the PPF by 2030 (with less than 700 schemes falling into the PPF in in the median case by that time as against around 850 to date).

The PPF would support a more interventionist role from TPR, for certain categories of scheme, with the goal of tackling risks to member benefits. In particular PPF believe that for stronger sponsors shorter recovery periods should be targeted (interesting, this is the one area where the PPF appear at odds with TPR, with TPR indicating their willingness for more flexible terms for strong sponsors). PPF believe restrictions on recovery periods and “back-end loading” of contributions would be appropriate.

For stressed schemes – the PPF  suggests intensive scrutiny and consideration of the options for restructuring the scheme. They made a case for TPR to have the broad power to trigger the wind-up of schemes with request of PPF or the trustee. In transactions PPF believes avoidance powers could be enhanced by better targeting and faster implementation. Duties placed upon employers and trustees to engage with TPR would be appropriate.

PPF noted that options for scheme consolidation should be considered. Highlighted their concern at the suggestion of new business models that might allow a scheme to continue without a sponsor.

 

The Pensions Regulator (TPR)

TPR believe the current regime is operating as intended and most pension schemes are affordable for the majority of employers (backed up by data on ratio of contributions to dividends). Made some suggestions on how TPR could be changed with the benefit of experience: more powers to compel individuals and organisations to give TPR information and submit to scrutiny (including civil powers). More timely actuarial valuation information (narrowing the 15 month window in acknowledgement of technological enhancements). Powers to be more prescriptive on the overall funding and investment outcome, rather than focusing on individual parameters such as length. Shifting the burden of proof to schemes to justify long recovery periods etc. Mandatory clearance of corporate transactions could be considered (the current system being voluntary), which could extend to all actions that potentially weaken the standing of a pension scheme (eg dividends, share buybacks). Suggested enhanced whistle-blowing procedures could also be considered.

Redington

We stressed the importance of considering all this from the member perspective, and emphasised the benefits to schemes of enhanced governance (which many UK schemes are of insufficient scale to deliver). We also highlighted the existence of a number of success stories around the industry that we believe through better knowledge-sharing of best practice. We acknowledged the tricky balance that regulation must strike between security for members and sustainability of firms, noting that it is usually in the best interests of pensioners to continue to have an ongoing firm backing the scheme. We argued for small-scale changes to existing regulation to strengthen the hand of trustees in funding negotiations, provide more guidance on parameters and shift the responsibility to sponsors to offer additional security in the case of lengthened recovery plans.

LCP

LCP’s response took things back to the highest context level, highlighting the key tensions and spelling out the fact that there aren’t any easy political choices. LCP believe a “significant minority” of schemes will be unable to pay full benefits. Resolution will require political change now which may be painful in the short term, but carry long term benefits for security of pensioners. Setting out the three different political options facing the government LCP described the broad choices as (1) leaving the balance between DB members and employers broadly the same (2) shifting the balance in favor of member security at the possible risk of “significant negative impact” on corporate sponsors and (3) shifting the balance to soften the pension promise, creating “welcome easement” to firms at the expense of reducing the value of pensions paid to members. Beyond that point LCP said they broadly agreed with the response of the ACA (summarised below). LCP believe that small changes (to regulation) are unlikely to have a positive impact:

“We think it unlikely that small changes to the current pension regulatory environment will have a major positive impact, and they may have negative unintended consequences. We strongly recommend that you do not propose changes to Government in order to be “seen to do something” in response to BHS.

LCP also commented that the exit from the European Union might present opportunities to change legislation.

Mercer

On the issue of regulating the effect on pensions of corporate action, Mercer believed the onus could be moved to the other relevant regulators (such as the FRC, PRA or takeoever panel), to take into account pensions issues in the context of corporate activity, rather than the “single issue” pensions regulator becoming involved in corporate activity. Mercer suggested that advisers themselves could be an enhanced source of regulation by increased use of “whistleblowing” type activity and an enhanced focus on the need for members of professionally regulated bodies to do this.

On the question of TPR’s powers, Mercer made the point that before considering new powers the way TPR exercises it’s current powers should be evaluated, as it is possible the current powers are sufficient, but not being fully utilized. New powers would not necessarily reduce the risks faced by pension schemes. Making TPR more interventionist would not guarantee better outcomes, and might impose additional costs on trustees for no gain.

On the question of whether the current market conditions warranted an exceptional approach:

“Unfortunately, it is not possible to tell if the current environment is exceptional, and so difficult to say it warrants an exceptional approach.

“Our view is that the purpose of a valuation is to impose some controls over the future expected cost of providing the scheme and the pace at which that cost is met. The statutory funding regime achieves that. If a non-market related approach were introduced, the results might be different, but they would also have no context, be virtually meaningless (for example, they might not give appropriate signals to inform investment strategy), and inevitably short lived.

Association of Consulting Actuaries

Made some very similar points to Mercer in the role that other regulators could play with regard to pensions, and much of the wording in other areas also bears a lot of similarity, suggesting there was a lot of common input.

In particular the ACA highlighted a possible role for other regulators:

“Consider the role of all regulators that could possibly have authority over actions that might affect pension scheme outcomes, and how they could use their powers to influence good governance in relation to decisions and advice affecting workplace pension provision.

Gave examples of the Takeover Panel, PRA and FRC, noting that the TPR itself does not regulate the way companies are run, and how they balance the demands of DB pension provision against other things.

“…corporate responsibility for balancing the security of company pension schemes with their other priorities seems a matter for other regulators, such as the FRC or PRA, with responsibility for good corporate management and governance.

Believe making TPR more interventionist, from it’s current supervisory and guidance stance is not a guarantee of better outcomes, not helped by the TPR’s internally inconsistent and conflicting objectives.

On the TPR’s powers the ACA response (again similarly to Mercer) emphasis the belief that existing powers have perhaps been underused or in practice are “illusory”

TPR has seldom used those of its powers that would directly impact company decisions, which has perhaps led many to view that its powers are illusory (for example, because the hurdles to cross before they can be used are too onerous). It is possible that the threat of using them has always proved sufficient, but that is not obvious to many in the industry. TPR has to produce reports about when it does use its powers; some clarification around situations where it chooses not to might also be helpful.

The ACA noted that TPR’s objective to minimize claims against the PPF skews it’s focus (towards larger schemes, even if they are at lower risk of default) in a way that is not necessarily optimal for the functioning of the system as a whole.

The ACA suggest a statutory override to RPI benefits (moving them to CPI) in the context of generating inter-generationally fair outcomes in relation to money purchase pension recipients. ACA note that the intention of trust law probably wasn’t to hardwire benefit increases to a particular index and also that mandatory indexation was enshrined by the Pensions Act 1995, suggesting that it is appropriate for the government to legislate to overcome problems created by previous legislation.

Mentions consolidation relatively briefly, makes the point that benefit complexity is one barrier to this happening, suggests that introduction of a facility whereby historic benefits can be converted to a single standard would facilitate this.

Aon

Aon believe that the inquiry into DB should be considered in the context of DC – money spent on DB  can’t be spent on DC. Aon believe that an intermediate solution should be available to some schemes between full benefits and PPF levels. Focusing more on bigger regulatory changes rather than tweaks AON made some quite developed suggestions in regard to intermediate solutions, for workable changes to the existing regime. Broadly these suggetions were in favor of an intermediate benefit solution based on conditional indexation and moving to more of a “with-profits” style system with  regard to pension increases (pay increases conditional on the performance of growth assets). Aon suggested that a change to a with-profits system (including within the PPF) might make it easier to push for consolidation of schemes without subsidy.

Of the consulting firms Aon came closest to advocating changes to the funding approach- articulating the benefits of a cashflow and probability of success measurement regime as opposed to a present value and funding level, however overall Aon reflected a balanced view here, arguing for a “wider range” of approaches, including both present value and cashflow approaches, rather than a replacement of the present value approach.

“A present value approach is not wrong. It encapsulates the valuation in a single figure, which probably does reflect where the scheme is trying to get to in the long-term. It also tends to encourage more immediate action in response to changing circumstances, although this means reducing deficit contributions when deficits reduce, as well as increasing deficit contributions when deficits increase. However, the present value approach does have a number of disadvantages which are becoming more apparent in the current low yielding and volatile environment

Aon suggest giving company directors a responsibility to consider the funding level of the pension scheme when deciding upon dividends.

AON “called out” the practical challenges associated with consolidation – namely that it’s tricky to do it in a way that both avoids cross-subsidies between schemes AND achieves the enhanced governance objectives of consolidation. This is important as the concept of consolidation seems an easy one to agree upon, but much harder to find workable ways to achieve it in reality.

Cardano

Cardano believe that the regime should be changed to engender (1) greater prevention – by focusing on the economic value of the liabilites (rather than the technical provisions basis which allows for asset returns) and (2) more flexibility – with the ability for trustees to negotiate with employer to get to an intermediate solution between full benefits and PPF benefits, in advance of a full corporate insolvency process. Cardano believe that there is a systemic affordability issue that government needs to address.  Cardano believe that the current system of Technical Provisions gives a false sense of security, they also referred to the increased cashflow negativity of schemes and path dependency issues this creates as schemes pay out full benefits while being substantially underfunded on a full economic basis.

Cardano are critical of the Technical Provisions as a measure of scheme health and believe this has not fostered the best decision making:

“The recovery plans, approved by The Pensions Regulator (TPR), have also been sliding. As schemes have become more severely underfunded, longer recovery periods and higher future return expectations have been accepted. So a fuzzy measure of the health of the pension fund (Technical Provisions) contributed to poor risk management on behalf of trustees, which led to deteriorating funding positions, and that has been met, broadly, by TPR simply relaxing the parameters, and tacitly accepting the new status quo.

Summary

What are the key questions that divide the respondents?

I think you can boil it down to the following subjective questions with the above respondents divided on pretty much all of these points

  1. Is large-scale reform of the DB system needed (to generate better and more optimal outcomes for members and sponsors)
  2. Are small-scale tweaks to existing regulations worth considering
  3. Should an intermediate solution between full benefits and PPF levels be investigated
  4. Should there be consolidation among schemes
  5. Would additional interventionist powers in TPR be overall helpful to pension security

What common themes were there among the responses?

I think there was broad agreement on what the key challenges are – namely balancing security for members with sustainability for employers. This question seems to frame the debate at the right level for government consideration, rather than getting too absorbed in the particular details.

I think there was general agreement that changes to the funding regime, particularly moving the basis on which the liabilities away from one which references bond yields are not warranted.

Scheme consolidation and conditional benefit indexation were two frequently occurring suggestions that while not universally agreed upon, would appear in my view to have enough advocates for further investigation.

A considerable number of suggestions were made regarding smaller incremental improvements to current legislation, although there was disagreement on the question of whether incremental improvements is in itself worthwhile or beneficial or wholesale reform needed. Again that question seems framed at the right level for government consideration.

There seemed to be agreement that the current system is not set up to deliver inter-generationally fair outcomes, given that younger employees (particularly in the private sector) have no access to DB provision and are likely to receive lower pensions in relative terms than previous generations. There were several suggestions that the DB reforms should be considered in the context of/alongside the DC system in the knowledge that imposing increased costs on the DB side will impact DC.

So there you have my take on the consulting community responses to the WPSC BHS pensions inquiry. Do let me know your thoughts.

Why Anthony Hilton is Wrong on Pensions 

“Expected returns don’t pay benefits, cash does”

Anthony Hilton recently wrote a stinging attack on pension consultants -like myself- who advise defined benefit pension schemes to measure, and hedge, their liabilities with reference to gilt yields.

Here’s one (of several) reasons why he’s wrong.

His argument – that you could fund based on the much higher expected returns on risky investments – might perhaps be justifiable in a world where all corporate sponsors were rock solid and would last forever (clearly we do not live in this world – and even then it would expose companies to some needless nasty surprises along the way, but anyway).

However this completely misses the point that a major reason we fund pensions at all is precisely to provide security in a situation where the corporate sponsor ceases to be able to make payments itself. The reason we need to measure deficits is to get a picture of how secure the benefits might be in the absence of the employer, and to take corrective action (eg topping up contributions) if the situation is off-track, before it is too late.

And in those situations of sponsor company failure, we would hit a major snag under Mr Hilton’s approach: it’s hard cash that must be used to secure the benefits – Mr Hilton’s expected returns won’t cut it I’m afraid. Just ask the pensioners of BHS scheme, or indeed the allied steel and wire groups, still campaigning for their pensions over a decade later. This second example pre-dates the Pension Protection fund, so thankfully pensions today are better protected, but the conclusion for scheme funding – that you can’t rely on high future expected returns to discount liabilities – remains valid.

Pensions need to be paid to members in real cash, and it flies in the face of both accepted theory, and common sense, that the amount of money needed to provide these benefits can be reduced depending on the assets held to deliver them.

Today’s unfortunate reality is that the defined benefit system in the UK is on average chronically under funded compared to the benefits it has promised. Time and effort would be far better spent on considering the tough choices that might need to be taken, rather than on attempts to deny the existence of a problem in the first place.

Unfortunately Mr Hilton’s ill-judged remarks from an otherwise respected journalist damage the hard work that many of us in the industry have been doing for many years to try and secure the benefits and financial futures of those members dependent on defined benefit pensions for their retirement.

Grim Summer for DB Pensions

It’s not been a good summer for the financial health of UK DB pension funds.

Data released by the PPF in September underlined a summer of bad news for schemes and scheme sponsors.

A continued trend of falling gilt yields have seen liability values increase dramatically – adding more than £200bn to the aggregate deficit compared to the start of the year. The aggregate funding level (on the PPF basis) fell to 76% at the end of August, the lowest value in the 10-year history of the series. For context the funding level on this basis was close to 100% at the end of 2013.

Long-dated gilt yields have fallen from around 2.5% at the start of the year to around 1.2% by the end of August.

The result of the referendum vote certainly added impetus to the move lower in gilt yields, as “lower for longer” became a more likely scenario, and this was re-enforced by the BoE’s announcement of renewed bond purchases (quantitative easing) and a cut in interest rates to 0.25%.

While asset markets have generally performed positively – especially overseas equities in £ terms, these good results have been insufficient to keep pace with unhedged liabilities.

It seems likely that actuarial valuations as at 30 June or 30 September are likely to contain bad news for corporate sponsors, prompting tough conversations such as those happening at plastics manufacturer Carclo, and negative headlines such as those at Associated British Foods. These are likely to become more and more common as we move forward, as highlighted by LCP in their Accounting for Pensions report.

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