Pensions Manager Blog

New podcast on caring for someone with dementia - by specialist carer Juliah Ratladi

2023-11-23T13:46:00.005+00:00

https://open.spotify.com/episode/30si4eqmyebYuPEV1HyHkh?si=mm0Q3bUuSfS6M3mSxnY6Pg

The link above will take you to Spotify where you can hear one of two episodes just released.

Autumn Statement 2023 - 10 Pension Aspects to note

2023-11-23T12:55:00.004+00:00

The Chancellor made several announcements about UK pensions in the Autumn Statement. Some of these build on his Mansion House speech that focused on delivering the best outcomes for savers through consolidation of pension scheme assets and productive investment in the UK including more investment in private and illiquid assets.

Key announcements

1. A pot is for life - the Chancellor announced that employees will be given the "legal right to require a new employer to pay pension contributions into their existing pension". An initiative designed to drive value to individual savers and to end the problem of individuals building up multiple small pension pots over their working life.

Tiley comment: Neil Woodford and patient capital spring to mind! A star manager able to secure several billions in investment from individuals as well as as occupational schemes. How did that end? But if we have a few excellent Master Trusts at low cost that really add value and don't go off on a weird investment tangent, then it could work as it seems to have done in Australia. Improving on the rag bag of old style high cost personal pensions and neglected paid-up company schemes is a low bar to set.

There will be a call for evidence so no action anytime soon!

2. Foundations laid for a defined benefit (DB) ‘run-on’ model - this winter the DWP will launch a consultation on a regime that will allow DB pension schemes to ‘run-on’ and potentially repay surplus to the sponsor. The consultation will also cover an option for these schemes to pay a higher Pension Protection Fund (PPF) levy in return for 100% coverage.

Tiley Comment: This could mean a DB pension scheme could continue with a 100% guarantee provided by the PPF instead of buying-out with an insurer and distribute surplus above a threshold to the sponsor taxed at 25% instead of the current 35%. This could be cheaper for larger schemes (or smaller schemes choosing to amalgamate with Superfunds such as Clara Pensions) due to the regulatory abritrage of not having a buffer of regulatory capital as required by insurers as well as their need to cover their administration costs years into the future and their tendancy to have a low risk bond dominated investment strategy.

3. Consolidation of small DB schemes - the DWP will launch a consultation on an option for DB schemes that are not well served by the current insurance market to use a vehicle run by the PPF as a consolidator. This option may be attractive to smaller schemes that find it difficult to obtain competitive buy-out quotations or where insurance is not affordable. Subject to the details being confirmed, this may also be a new option to reduce running costs for scheme sponsors and trustees as well as enhancing member outcomes and services. A potential game changer for the circa 2,000 DB schemes with assets of less than £10m each.

Tiley Comment: this would be useful for trustees and sponsors running small schemes where the governance budget is insufficient to manage them effectively at reasonable cost. The devil will be in the detail and managing change can be expensive for very small schemes.

What else on pensions?

4. A Growth Fund will be established by the British Business Bank to help facilitate investment by UK pension funds into high-growth UK start-ups. Eight pension providers and fund managers (Aviva, L&G, M&G, Smart Pension, Aegon, Phoenix, AON and USS) have voiced their support for the fund as a potentially valuable addition to the market.

The Chancellor also reconfirmed £250m in Government support to establish two further investment vehicles that can be used by pension funds to invest into UK science and technology companies. The Government expects this will ultimately lead to over £1bn of total private capital, including substantial amounts from defined contribution pension schemes, going to support innovative UK consolidation.

5. Abolition of the Lifetime Allowance (“LTA”) - the government will legislate in the Autumn Finance Bill 2023 to remove the LTA, which will take effect from 6 April 2024. The measures will clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements and reporting requirements.

6. A trustee register - the Government confirmed its support for the Pensions Regulator’s plans to implement a register of trustees to aid engagement with trustees and to update the trustee toolkit to include further information on productive finance.

7. Local Government Pension Scheme - guidance to these schemes will be revised to require them to implement a 10% allocation ambition to private equity investments and a March 2025 deadline to consolidate into asset pools exceeding £50 billion.

8. Small pots - the Government will also introduce the multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000.

9. Putting performance first - the Government will engage with the pensions industry on proposals to ensure that all aspects of the pensions market are playing their part to support best outcomes for savers including how to shift employers away from prioritising low fees ahead of long-term pension investment performance when they are selecting a pension scheme for their employees.

10. State pensions - the commitment under the ‘triple lock’ will be honoured meaning the largest ever cash increase to the State Pension of 8.5% to £221.20 a week from April 2024.

St James Place top dog! Unfortunately it's the Best Invest Dog Funds table!

2023-10-08T12:21:00.006+01:00

Very disappointing as the charges are high for many of these!

	Fund	IA Sector	Size (£bn)	Value of £100 invested after 3 years	3-year under performance (%)
1	St. James’s Place Global Quality	Global	11.47	114	-24
2	St. James’s Place Global Growth	Global	7.49	109	-28
3	St. James’s Place International Equity	Global	7.09	101	-36
4	St. James’s Place Growth European Progress	Europe Excluding UK	1.85	113	-17
5	Scottish Widows UK Growth	UK All Companies	1.82	120	-14
6	Artemis US Select	North America	1.53	125	-17
7	Columbia Threadneedle Responsible Global Equity	Global	1.41	120	-17
8	abrdn UK Smaller Companies	UK Smaller Companies	1.11	90	-18
9	Troy Asset Management Trojan Income	UK All Companies	1.00	105	-29
10	St. James’s Global Emerging Market	Global Emerging Markets	0.87	85	-20

Source: Spot the Dog, August 2023

Which fund groups earned the most dog tags?

St. James’s Place not only topped the Great Danes list, but it was also the worst performing fund manager, with its paw prints on six measly mutts. It currently has £29.3bn across these six funds, that is 63% of the total dog fund assets in this survey. To put this in perspective, the next highest fund group Artemis holds £2.66bn dog funds, which accounts for 5.8% of the overall assets on the list.

While three of six St. James’s Place funds are in the Global sector – Global Quality, Global Growth and International Equity – its poor performing Growth European Progress and Continental European funds appear in the European sector while it also features in the Emerging Markets sector with its Global Emerging Markets funds.

Two things of note here is that St. James’s Place outsources management of its funds by appointing external fund managers as investment advisers, with the ongoing costs on its two largest global funds coming in at 1.88%. However, the group shifted the positioning on its three global funds in July last year as it looks to improve performance, though the switch has not had an effect yet.

Overall bad dogs underperformance %

	Fund	IA Sector	Size (£bn)	Value of £100 invested after 3-years
1	Baillie Gifford Global Discovery	Global	0.78	61	-70
2	SVS Aubrey Global Conviction	Global	0.04	74	-64
3	Premier Miton US Smaller Companies	North American Smaller Companies	0.06	95	-47
4	AXA ACT People & Planet Equity	Global	0.01	92	-45
5	JP Morgan US Small Cap Growth	North American Smaller Companies	0.20	100	-42
6	Unicorn Outstanding British Companies	UK All Companies	0.06	97	-36
7	St. James’s Place International Equity	Global	7.09	101	-36
8	EF Rosevine Capital Global Equity	Global	0.01	103	-35
9	AXA Framlington UK Sustainable Equity	UK All Companies	0.07	103	-30
10	Troy Asset Management Trojan Income	UK All Companies	1.00	105	-29

Source: Spot the Dog, August 2023

Dementia Caregivers Corner - new podcast here and on Spotify and Apple from Juliah Ratladi

2023-10-08T12:14:00.003+01:00

*** https://open.spotify.com/show/6JeVOQteK08zsc7PTkRNTT?si=eec9cb3fe9b64c8a *** The above link will take you to a new podcast which gives tips and advice on caring for someone with dementia. Having first hand knowledge of this from a personal perspective and witnessing the compassion and inspirational care given by Juliah to my Mother, Ruth, before she died, has proved the expertise Juliah has. Listen to her insights and do share the link above.

Life Expectancy

Alzheimer's disease – around eight to 10 years.

Life expectancy is less if the person is diagnosed in their 80s or 90s. A few people with Alzheimer's live for longer, sometimes for 15 or even 20 years. Vascular dementia – around five years.

The 7 stages of Dementia are categorised thus:

Normal Behaviour ... Forgetfulness ... Mild Decline ... Moderate Decline ... Moderately Severe Decline ... Severe Decline ... Very Severe Decline...

Beatles songs with the best backstory

2020-02-14T16:09:00.002+00:00

As a bit of a music fan I find this site very interesting! Read Ben Jackson's answer to What Beatles song has the most interesting backstory? on Quora

Churning for Value?

2017-07-18T17:21:00.000+01:00

July 16th was National Ice Cream day! Thanks to Michelle Cracknell from the Pensions Advisory Service for reminding me.

I have paraphrased her article here:

Apparently the difference between Gelato and Ice Cream is determined by 'churn'. American ice cream is whipped to create air, increasing the quantity by 25%. Cheap ice cream is whipped so hard that its volume can increase by 50% or even 90%. Whereas, Gelato goes for the slow churn making it very smooth but not increased in volume. This means that Gelato needs to be taken out of the freezer for at least 30 minutes before serving.

With the exit charges cap that was introduced in April, we have a situation where it could be better for some pension savers to 'churn' their old policy into a new style contract.

'Churning' by salesmen to 'earn' extra commission is frowned upon, but 'churning' to derive better value is to be welcomed of course.

Even if you do not need money from your pension pot now, it's worth checking with your provider on the amount of the exit charge plus also the ongoing charges on the contract in order to better understand if you are getting value for money.

It may be worth transferring to a new pension contract with lower charges and/or better investment options. This works if your exit charge has been reduced because of the 1% cap.

Read more about it here.

TPAS Link

It is like Gelato, the churn means that it tastes creamier than ice cream even though it uses more milk than cream, so it does not have nearly as much fat.

Exit Penalties to be capped - at last!

2016-05-28T12:15:00.003+01:00

Pension early exit fees are to be capped for anyone over age 55, and about time!

Even David Brent is apathetic over pensions but when he is 55 he could benefit!!!

The Government announced in the last few days this great news for pension investors stuck in old style rip-off pensions typically sold in the bad old days - the 80s and 90s, but right up until 2004 in many cases.

Government figures show more than 300,000 people could benefit from this hard fought victory by campaigners including Which?, Henry Tapper, Martin & Paul Lewis (not related) and others. Possibly even this blog might of helped!

Steve Bee, the self-styled Pensions Guru did not help quite so much, and has campaigned more on the side of the IFAs and insurers who benefitted from high charges and overriding commissions, residuals, etc.

It has been proposed the cap will be 1% of fund values on existing pensions and this should take effect from end of March 2017.

Policies set up after then will not be allowed to charge any early exit fees.

This cap will cover personal pensions and it is proposed a similar cap will apply to occupational pensions too, although most occupational pensions are set up more carefully with advisers, but smaller pension schemes (or most likely Group Personal Pension) set up by financial advisers may have exit penalties.

The final rules are expected later this year.

Latest Real Return (above inflation) for shares since 1950

2014-06-07T11:48:00.000+01:00

The annual Barclays Equity and Gilt study into historical rates of return once again underlines the value of the dividend in a long term investment strategy.

One of the more familiar strategies designed to bolster long term growth of equity portfolios is to invest in companies that offer a higher, but sustainable, dividend yield, preferably allied to a growing dividend pay-out ratio.

These attributes, successfully combined with consistent corporate earnings growth, should allow investors to achieve total returns above the rate of inflation, even if market prices for their holdings have flat-lined.

Research from Barclays shows that the average real rate of return on equities since 1950 has been 6.18% annually – of which 4.48% (72.5% of returns) is linked to the reinvestment of dividend.

Long term inflation and interest:

So why do pension funds gravitate towards bonds?

The answer is regulation, accounting standards and short termism. Most commercial enterprises cannot afford the short term market price volatility associated with equities, except in a restricted sub portfolio, often referred to the 'growth portfolio'. Often you will see other asset classes in the growth portfolio to utilise diversification benefits. The 'matching' or income portfolio will consist of bonds providing certainty of income to meet cash flows expected.

With bond yields so low in recent years it has become increasingly obvious that a diversified portfolio of high yielding blue chip companies is now a more attractive option to many private investors with a desire to obtain an increasing income from their portfolios.

Warren Buffet often quotes the yield on his original Coca Cola stocks as 55%! This being the current dividend as a percentage of the original purchase price. Of course a bond purchased at the same time would have seen the yield remain the same at around 5% and the original capital would have been massively eroded by inflation.

Scottish Life - well, well....

2013-12-04T20:37:00.001+00:00

Scottish Life review after ‘Christmas money’ email backfires

By Josephine Cumbo, FT

Scottish Life is reviewing its compliance procedures after one of its sales staff suggested financial advisers could make extra Christmas money by transferring pension clients.

A sales consultant for the life office sent the email, headed “Christmas Money Making Opportunity” to more than two dozen financial advisers last week.

The email read: “If you would like to make some extra money for Christmas then read on.

“Do you have any existing clients that need a review of their current pension arrangement? If the answer is yes, then all I ask is that you send me the projections to retirement and the client’s attitude to risk.”

The email added that Scottish Life, part of the Royal London Group, enabled transfers to take place within a fortnight, “which gives you plenty of time to buy those special presents”.

“The tone of this is inappropriate and disappointing,” said Phillip Bray, of Investment Sense, the IFA, when shown a copy of the email by the Financial Times.

“Pension transfers can be complex and clients should only be advised to do this because it is in their best interests, not for any other reason.”

Scottish Life said the email had not gone through a marketing compliance check as it had been sent directly from the consultant to IFAs they dealt with regularly.

“We do not condone that sort of language at all and clearly the tone is wrong,” said Gareth Evans, of Scottish Life.

A disciplinary process has commenced with the individual and we have instigated a review of our compliance rules around these messages to mitigate the risk of this happening again.

“The adviser had meant the email to be light-hearted but it wasn’t appropriate and they have now apologised to the firms. We are treating this very seriously.

“We are treating this very seriously and reviewing our compliance procedures to ensure that this sort of communication does not happen again.”

The Financial Conduct Authority was concerned by the email.

“We take a very dim view of churning and unsuitable switching, be it by an IFA or by a provider encouraging an IFA. Investment transactions should only be recommended when they are in the best interests of the clients, and that means properly assessing their suitability.”

High pension fees lose their magnetism

2013-12-04T19:50:00.001+00:00

From Interactive Investor site www.iii.co.uk

By Ceri Jones (Money Observer) | Wed, 4th December 2013

Traditional pension schemes get bad press, and for good reason, as the charges on older-style schemes can be extortionate.

Some of the worst legacy pension schemes charge 4% in annual management fees alone, while the majority make charges of around 2% or more.

The impact of compounding over the years on even a small charge is massive. For example, if you can reduce your charges by just 1.4% a year, your pension pot will be more than 42% better off after 25 years.

Investors with modern pension schemes have little to worry about, however, as charges have been steadily reducing for two decades. The Association of British Insurers (ABI) says the average modern scheme has charges of just 0.52%, which is significantly cheaper than an individual savings account.

Crackdown on poor value

Pension companies aim for consistency

A group of ABI members are working together to provide consistent disclosure of pension charges in workplace schemes.

The agreement will be implemented by next summer for schemes newly established for auto-enrolment, and by 31 December 2015 for all older workplace pension schemes.

A common definition of all charges in sterling terms (including any entry or exit charges) will be disclosed at the outset to members, and also the total charges taken in the previous year, including transaction costs.

Providers that have signed up to this agreement are: Aegon, Aviva, Axa, B&CE (The People's Pension), Co-operative Insurance, Friends Life, Legal & General, Lloyds Banking Group, LV=, MetLife, Prudential, Royal London/Scottish Life, Standard Life and Zurich Assurance.

The Office of Fair Trading (OFT), which has recently finished a six-month study into pensions, is cracking down on poor-value arrangements through a series of reforms. The watchdog has identified two areas where the risk of rip-off is greatest - both relate only to defined contribution pension schemes, not final salary schemes.

The first involves "legacy" schemes. This term is commonly used for any contract-based scheme set up before 2001 (which might, for example, be a group personal pension); and the second covers smaller, trust-based plans with fewer than 1,000 members.

The OFT has ordered pension providers to undertake an audit of all such schemes, and also all post-2001 schemes with a charge of 1% or more.

By the end of 2014, savers in many of these schemes should start to enjoy a better deal, as their providers will be forced to reduce their charges.

However, the OFT stopped short of recommending a specific cap on charges in defined contribution pensions, saying that the position is simply too complicated, as schemes set up years ago impose a baffling array of regular and one-off charges, including opaque structures such as reduced allocation rates.

These charges are levied in different ways over various timescales for each individual saver, and are even set out in different documents - making it almost impossible for investors to calculate the total amount.

But these complexities have not dissuaded minister for pensions Steve Webb, who says the government will press ahead with a consultation on a possible charges cap.

The charges in legacy schemes are hard to quantify at scheme level, because they are not single-charge schemes, unlike most modern schemes, says John Lawson, head of policy at Aviva.

"They are multi-charge schemes with bid/offer spreads, initial unit charges, monthly policy fees, low allocation periods and the like. You can really only reliably examine charges in these schemes at individual member level, using reductions in yield (RIY), which is the equivalent of an annual management charge (AMC) in the modern world.

"For example, the National Employment Savings Trust (NEST) pension is a multi-charge scheme, and its RIY charges vary from more than 1% for someone within five years of retirement to 0.5% or less for someone with 18 or more years to retirement. The RIY at individual member level for some old schemes could well be more than 2%," he added.

Some insurance companies, such as Aviva, are already taking steps to improve their plans by capping legacy charges in group personal pensions set up before 2001.

Although the multi-charges are likely to remain in place, the insurer can calculate the charge on a monthly basis; if the RIY exceeds a certain level (1% in Aviva's case), it may add extra units to bring the charge down to that level.

The magic number quoted by politicians as a suitable benchmark charge has historically been 0.5%, but in recent months Webb has shifted to talking about a potential 0.75% cap on management fees.

The Department for Work & Pensions (DWP) is consulting on a range of options to make fees more transparent and easy to compare, including the disclosure of a single AMC plus transaction costs, and capping the investment management charges for default funds in schemes used for auto-enrolment.

Employers in a quandary

The OFT investigation also found that employers, who after all are responsible for deciding which pension scheme to choose for their employees, not only lack the capability to assess value for money but also lack an incentive, since most employees are apathetic about the concept of pensions and can't penetrate the jargon.

This will be exacerbated over the next few years, as smaller employers with limited resources put auto-enrolment schemes in place.

The OFT's stance is supported by the findings of a recent survey by consultancy Secondsight, which found that two thirds of employers had little or no knowledge of auto-enrolment legislation, a third plan to comply without external help, and more than a quarter think they will be able to spend less than one day in complying with the regulations.

Most legacy schemes also impose exit fees, which range from 3 to 20% of the fund, preventing savers from moving to better-value plans. This particularly impacts on people with a fragmented career history, typically women.

Many schemes also operate "active member discounts", where an active member is charged a smaller AMC than former employees who have subsequently left the organisation. The difference may be around 0.3-0.5% on the AMC. The practice will be outlawed in future, starting with schemes used for auto-enrolment.

The government is currently working on a pot-follows-member scheme to improve the portability of pension funds from one employer to another, and early-leaver penalties will be a central consideration.

While legacy schemes are contract-based schemes, so-called because the member has a direct contract with the life insurer, trust-based schemes are very different and fall under the auspices of The Pensions Regulator (TPR), rather than the Financial Conduct Authority.

Many modern, large trust-based schemes, especially those that cover a whole industry, have attractions such as economies of scale and improved governance.

However, some off-the-shelf trust-based schemes carry traditional insurance company-style charges, and historically were chosen by employers largely because until quite recently they allowed the sponsor to recoup the first two years of any premiums paid when a staff member left during that period.

The worst are generally "bundled" schemes where the administration is also run by the plan provider. TPR is taking steps to assess which smaller trust-based schemes are not delivering value for money, and the DWP is considering whether the regulator needs new enforcement powers to tackle the problem.

The OFT also highlighted other features of these trust-based plans that are not what they are cracked up to be, in particular where master trust boards are not sufficiently independent from their parent company; so although they appoint independent trustees, it is just a veneer of impartiality over an underlying commercial bias.

Independent governance committees should be able to switch the default fund or administrator to another service provider if that is in the members' best interests, says Aviva's Lawson. He also argues that TPR needs to beef up its powers.

"A regulator that needs to plead with those under its jurisdiction to "comply or explain" is not a regulator; it is a standards body," he says.

Governance issues

The OFT has ordered schemes to appoint independent governance committees by the end of 2014, with the power to recommend changes and escalate issues to regulators where necessary.

In the future these will be the people to approach if you have a bone to pick about your scheme's investment offerings or structure. The committees will oversee value for money on an ongoing basis, as well as ensuring any action recommended following the legacy reviews is carried out.

"Some providers of personal pensions and packaged master trusts will find this review challenging," says Lawson.

"The audit will also take into account other aspects of VFM [value for money] such as investment performance and service standards."

The DWP is also preventing schemes being used for auto-enrolment if they contain in-built adviser commissions, and is considering whether to extend the ban on pension scheme consultancy charges to historical arrangements that pre-date its implementation in May 2013.

One conundrum is that NEST, although relatively expensive, is the de facto government scheme.

Former Treasury adviser Ros Altmann says: "This government-sponsored scheme charges 1.8% of every worker's contribution and an ongoing annual charge of 0.3%. The Treasury insisted on a high up-front charge to try to recoup the taxpayer loan to NEST - which had to be ratified by the European Union - as quickly as possible."

How ironic that this level of fees is deemed acceptable for a government-borne scheme, but not for any other.

Overseas Property bargains - BEWARE!!!!

2013-11-25T20:35:00.000+00:00

A sorry state of affairs.... see this UK investor's story...... (source: Citywire)

"Hi everyone,

This is my first post on here so here goes:

Last year I was naive enough to purchase a 3 bed property in Detroit, US.which was touted by the selling agents here in UK as refurbished and with existing tenants and having a management firm collecting rent and seeing to any maintenance, etc.so effectively a hands off investment.

I knew this was a bit of a risky first time venture due to the location primarily, but somehow got blinded by the overall returns promised. I managed to receive rent for about 6 months. The tenants at that time wrecked and destroyed the whole house causing damage estimated to be nearly as much as what I paid for the property. Obviously the property management firm in Detroit deny any liability or responsibility. Consequently the property has been vacant since the start of this year and now boarded up.

I did not have any insurance on the property for the good that would have been as it would have been very restrictive and not covered that type of risk. I realize that it would be almost futile to try
and get whoever is responsible to pay damages in another country.

So now, because I cannot afford to have the property repaired, I just want to cut my losses and be rid of it as I still have to pay their property tax and other maintenance fees as well as the
US tax returns. Unfortunately it would be very hard to sell the property in its present condition.

The only solution I have been offered so far is to transfer my name to a limited liability company, the benefits of which are not quite clear to me. I do not have any liabilities on the property (no mortgage or bills, etc) I am now at a loss on what to do next .

Can anyone shed any light on this? Any form of advice which might lead to a satisfactory solution, is greatly appreciated.

Sorry it is so long winded.

Thank you
BM"

Consultation on a cap on charges for auto enrolment pension schemes

2013-10-30T12:29:00.000+00:00

Exterminate! Exterminate! High charges to be exterminated!

Management fees charged by pension providers could be capped between 0.75% and 1%, according to proposals being set out by the government.

The Treasury is consulting on its plans to cap fees, which could save consumers tens of thousands of pounds.

Some legacy schemes set up more than a decade ago have been found to charge up to 2.3% a year in management fees - and that's often on top of front loaded charges meaning the first couple of years of contributions have virtually been wiped out to pay commission and set up fees, etc.

On Tuesday, Pensions Minister Steve Webb said the government would launch a "full frontal assault" on pension fees.

Auto-enrolment

The consultation will seek industry input on three possible options: a 1% cap, a 0.75% cap, or a two-tier "comply or explain" cap, where pension providers will be capped at 0.75%, rising to 1% if they can explain to regulators why their scheme must charge more.

A Treasury spokesperson said any final cap could lie somewhere between the two levels suggested, depending on the evidence received.

The proposed cap would also only apply to auto-enrolment funds.

“Start Quote

It is important that any cap doesn't have the effect of levelling charges up”

Otto ThoresenDirector general, Association of British Insurers

Steve Webb, Pensions Minister, said: "We do have powers to cap a much wider range of charges. The document today looks at banning something called active member discounts. That means when you leave a firm they jack your charges up - we don't think this is right so we will probably ban those."

When asked if charges should be capped lower than 0.75%, the minister said the cap should not be so low that it discouraged providers. He said the cap needed to be "at a level where there's competition in the market".

Labour's shadow minister for pensions, Gregg McClymont, said the opposition would have to look at the detail of the proposal "to see if it goes far enough".

But he added: "It is clear this government is not ready to take the decisive action needed to stand up for ordinary savers, given that they have just voted against our amendment to the pensions bill that would have made all pension costs and charges transparent."

Since last October, workers have been gradually signed up to workplace pensions, such as the government funded National Employment Savings Trust (Nest) scheme, unless they deliberately opt out.

Over the next five years, nine million extra people are expected to join so-called "defined contribution" schemes.

The average charge on a pension set up in 2012 was 0.51%, but the Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65bn worth of assets subject to annual charges of more than 1%.

Older pension schemes, set up more than a decade ago, were found to be charging as much as 2.3% in annual fees.

The government said that someone who initially saved £1,200 in the first year and worked for 46 years could lose almost £170,000 from their pension pot with a 1% charge and more than £230,000 with a 1.5% charge.

And a saver with a 0.75% annual charge on their pension pot could end up £100,000 better off than if they had been charged a rate of 1.5%, it added.

OFT crackdown on pension schemes that offer poor value to millions of savers

2013-09-19T16:18:00.001+01:00

The Office of Fair Trading at last report on the high charge legacy pension problem long highlighted on this blog.

Here is the BBC reporting today:

"The Office of Fair Trading (OFT) has ordered a crackdown on pension schemes that offer poor value to millions of savers.

It is recommending a series of reforms, including new powers for the Pensions Regulator.

But it has stopped short of recommending a cap on management charges, for the moment at least.

However the government said it would go ahead with a consultation on a possible cap, regardless of the OFT's report.

The OFT said pension schemes containing £40bn worth of savings are, or may be, delivering "poor value for money".

The complexity of some defined contribution schemes makes it difficult for individuals and employers to make the right choices, the OFT concluded.

Employers "lack the capability or the incentive to assess value for money", it said.

As a result it is advising the government to consider improving the transparency and comparability of different schemes.

Charge cap

Some older schemes set up before 2001 have annual management charges as high as 2.3%.

Such charges can erode the final value of a pension quite dramatically.

Clive Maxwell, the OFT's chief executive, said he might still consider a cap on management charges in the future.

"We're holding off on that for now," he told the BBC.

"But it may be that a cap is the right thing to do," he added.

However, the government has decided to go ahead with a consultation on a cap for auto-enrolment schemes, after the Pensions Minister, Steve Webb, expressed his support for the idea earlier this week.

He suggested that the Department for Work and Pensions (DWP) might consider a 1% cap on management fees.

"We will be consulting on a range of options, including a cap on charges (including management charges) in default funds in qualifying schemes used for automatic enrolment," a DWP spokesperson told the BBC.

Consumer group Which? called for such a limit to be brought in as quickly as possible.

"The government must go further and set high-quality minimum standards for all workplace pensions as soon as possible, including a cap on all charges," said Richard Lloyd, the executive director of Which?.

Improving value

In the meantime the Pensions Regulator has agreed to assess which smaller pension schemes are not delivering good value.

If the government agrees, the regulator could also be given new enforcement powers.

The Association of British Insurers (ABI), whose members offer pension schemes, has agreed to carry out an audit of the larger schemes, some of which are charging up to 2.3% in annual management fees.

Pension providers will also have to set up governance committees to help protect savers.

The OFT has also asked the government to consider banning certain schemes being used for its auto-enrolment programme which make high charges when savers stop paying into the schemes.

The government is worried that such excessive costs could discourage people from taking out pensions, when it is trying to persuade people to participate.

Since last October, workers have been gradually signed up to workplace pensions, unless they deliberately opt out.

Over the next five years, nine million extra people are expected to join so-called "defined contribution" schemes.

Five million people are already saving into such pension schemes, which invest the monthly contributions in stock and bond markets.

Savers' retirement income is dependent on the investment returns made by such schemes, and the charges they levy.

The pension pot that savers end up with is then used to purchase a retirement annuity, which provides an income for the rest of their lives.

The government has said it will now go ahead with some of the consultations recommended by the OFT."

BBC Website 19/09/13

BEWARE!!! Pension Transfers, Property abroad, exotic locations...

2013-05-29T09:17:00.000+01:00

Having recently visited IFAonline.co.uk I came across a story about Harlequin - an investment scheme to invest in property/villas/development in the Caribbean. Unfortunately some investors have remortgaged their homes to invest and others have used SIPP assets. It does not look good!

Apparently Harlequin have paid very high commissions to agents, and some IFAs have acted as agents for Harlequin whilst arranging SIPP investments.

Harlequin have apparently lost their second auditors in 3 years and are allegedly behind in payments to investors (some who need to cover interest payments on their re-mortgages).

One comment (with spelling corrections by me) said:

"My boss Richard Bateman did so much more than 15% [commission] on Caribbean villas. As I did too but not quite as much as he.

He sold MGM personal pensions which paid 135% up front commission on the first year's premiums then a further 25% for high sales volume. This was deducted from the pension policy over a 3 year period which meant that there was nil investment for the first 3 years. And it was an easy sell no agents no costs apart from a few calls and a trip in his Porsche Boxster or Green Rolls Royce. Nowadays he gets his clients to visit him in Liskeard of all places . Ever heard of Liskeard for a £40,000 pound a month IFA on commissions?

No I thought not.

One has to ask why doesn't the SFO give him a visit?

The HMRC, FSA, FCA, CAMERON, OSBORNE, most national news, and Million Dollar Round Table all know, but no answer comes.

SILENCE." (Careful Investor's view on IFAonline)

http://www.ifaonline.co.uk/ifaonline/news/2268032/harlequin-advisers-netted-up-to-15-in-commission

So is that where all the personal pension salemen end up - Liskeard? Or St Vincent perhaps?

How do regulators let it happen? Time and time again. If it's not property, it's wine or land banking, or carbon credits, or betting systems, or overseas property. If it's too good to be true.....it's a con.

Pension unlocking and exotic transfers to overseas destinations are very high risk - BEWARE!!!!

Don't let flash and glamour seduce you! (Harlequin Air - remember Stanford's helicopter?)

Ripped-off Britons - excellent blog!!!

2013-03-30T04:52:00.000+00:00

Pensions - how fund management charges swipe 50% of your pension

The government and the pension industry are continually preaching to us that we are saving too little. They deploy vast advertising and advisory budgets to get this particular gospel across to us. You’ll be doomed if you don’t save, they tell us, but there is a nagging suspicion that we will be doomed if we do save too.

It would be unfair to say government and pension fund managers are entirely in cahoots. Each have their own separate reasoning for their common cause:

a) The government, so it can transfer the blame for pensioner poverty to the pensioners, for not saving enough. A low cost and curt “I did warn you!” is much cheaper than actually doing something about it. It’s a tactic from the same handbook as putting “Smoking Kills” on packets of cigarettes – nothing to do with warning the smoker, everything to do with providing an “I told you so” defence in compensation court.

b) The pension industry so it can rip us off. The impact of pension fund charges, which typically range between 0.5% and 5%, can slash your savings by over 50%. For a prudent young person planning for the future thus;

· 25 years old, planning to contribute for 40 years until they are 65

· £100 per month, increasing by 3% each year

· Fund growing at 6% per year

A report by the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce) found that a reasonable charge would be 0.5%, and that excessive charges in the UK meant:

"If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50% higher income in retirement."

Let’s put the government to one side and focus on the pensions industry, for now. The government will wait for another time. You need a bit of mathematics to explain what is possibly the widest reaching, most chronic, and most ruthless rip-off of them all. To be more precise, widest reaching, most chronic, and most ruthless sequence of rip-offs. “Sequence”, because you are ripped off during every stage of your life.

STEP 1. As a worker: to get the tax benefits you are required to save for your pension with ‘regulated’ providers. If you take all the money you save, plus the returns on the investment, over a working life of 40 years, you will find the provider takes up to half of it in charges.

STEP 2. On retirement: or by the time you are 77, you are required to buy an annuity. You take all the money you saved during your life, and you give it to a pension company. In return they will give you an annual amount which will be as paltry as they can get away with. The pension company will, by default, give you a terrible return. They will try to bamboozle you with ‘future proofed’ pensions that grow with time. Omitting to tell you that 'future proofing' means you start with about a third less monthly income, and it will probably take a couple of decades to catch up with amount you would have got with a non-future-proofed pension. The maths, which I will explain in a future post, shows that if you take your future-proofed pension at 65 you could be over 90 before you see any extra cash.

STEP 3. On passing away: Having retired and bought an annuity, when you die your pension stops and your pension fund is taken by the provider. If you invested £500,000 with them, and you lived for 1 day or for 10 years drawing at a rate of £25,000 a year – then when you die, the remaining money becomes the property of the pension provider.

STEP 0 (this rip-off is cyclical). As a child: the wealth your parents built up for their retirement, their savings built up by skimping on your holidays, sweeties, birthday presents, and private education, is grabbed when they pass away. Not a farthing of the money they used to buy the annuity for their old age will you find in the inheritance carve-up.

For this week, I will concentrate on STEP 1, the charges, leaving STEP 2, 3 and 0 for future weeks. Fund management is perhaps one of the greatest financial rip-offs in current times. If the government is actually serious about reining in bankers’ bumper bonuses, they don’t need to put caps on remuneration. They simply need to control the contribution rip-offs make to bank profits – deflating that particular balloon would go a long way to bringing the bonuses down to earth.

Investment funds in the UK typically charge anything between 0.5% and 5% per annum to provide their service. At first it doesn’t sound so much. After all, at a restaurant you would typically leave a 10% service charge for the waiter. But the investment fund takes their service charge every year. It’s as if the waiter is sitting at the table with you eating your lunch. In the world of pension funds, you pay for your meal during the meal, but only get to eat your share once the waiter has finished – that is to say when you retire and get your pension payments.

For those who do invest in pension and other funds, taking a closer look at the mathematics of a mid-level 2% per annum investment fund charge reveals the catastrophic impact of the charge on a 40 year investment. The maths also reveals a further well hidden cost of the charges, on top of the charges themselves:

· You earn interest on the amount you have invested.

· When you pay a charge, the amount you have invested is reduced.

· Therefore the cost to you is not only the accumulated charges, but also the lost investment income that would have accrued had those charges not been made.

· Effectively, the money you are charged has moved to someone else’s account and is earning them interest instead of you.

To keep things simple, here is an illustration if you made a single £1,000 investment and made no further contributions.

After 40 years, earning 6% and paying a charge of 2% per annum, the £1,000 is worth £4,584 and the accumulated charges over this period have been £1,848. However, the removal of the £1,848 over the 40 years has also resulted in a loss of a further £3,854 in investment income if you had kept that £1,848. So the total cost to you is £1,848 + £3,854 = £5,702 – more than halving what your investment would have been worth without any charges.

Could it be that the fund manager is worth the cost of his hire? There is an ongoing debate around whether passive Index Tracking funds can be beaten by actively managed funds in which ‘clever’, i.e. highly paid, fund managers duck and dive between stocks and cash striving to win extra profits. However the overall statistics show that over a period of 5 years, Index Tracking beats the great majority of actively managed funds. Standard & Poor’s (S&P), a financial research company, produces a quarterly report the S&P Indices versus Active Funds Scorecard (SPIVA). The SPIVA report for North American funds in the year 2008 stated

· Over the five year market cycle from 2004 to 2008, the S&P 500 index outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003.

· The belief that bear markets favour active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.

· Benchmark indices outperformed a majority of actively managed fixed income funds in all categories over a five-year horizon. Five year benchmark shortfall ranges from 2-3% per annum for municipal bond funds to 1-5% per annum for investment grade bond funds.

· The script was similar for non-U.S. equity funds, with indices outperforming a majority of actively managed non-U.S. equity funds over the past five years

· The Financial Services Authority provides comparison tables, including tables for pension providers. The charges that our prudent 25 year old saving £100 per month and planning to retire at 65 range from £40,000 to £124,000 depending on the rapaciousness of the fund manager's fee. The Financial Times market data service lets you see the performance of one of the most expensive providers on the list compared to the FTSE All Share Index.

All the talk by government and the pensions industry about Ripped-off Britons working longer and living leaner is missing one big point. By stopping the fund managers ripping out 50% of the value of pension funds, you can at a stroke make a giant stride towards dealing with the pension crisis. And also make a giant stride towards dealing with excessive pay in the financial services industry.

Posted by Jake at 22:00

The power of dividends and dividend growth

2013-01-12T08:16:00.002+00:00

I was reading and listening with interest to the RPI/CPI/RPIJ debate/publicity that followed the announcement of the decision to maintain the formula effect in the RPI computation. It reminded me that CPI had gradually overtaken RPI as the main inflation measure watched and monitored by the media. This is despite the fact that to many RPI was the index that impacted their pension increase, and various other investments,e.g. Index Linked National Savings, price increases on utilities, train fares, excise duty increases, etc.

So what's that got to do with dividends and dividend growth?

Well how often do we hear from the media, and investment professionals, about the FTSE100 Index level? It peaked in September 1999 at 6,900+ and when will we see that level again?

Well my point is why do we use that index as a reference when it excludes the reinvestment of dividends?

How many trustees and individuals (and indeed investment consultants) realised that with dividends reinvested and through dividend growth the total return index peaked very recently and previously in 2007? (see graph)

Should we not relegate the FTSE100 index to the 2nd division and instead watch the dividend reinvested index (or whatever it is called)? And will the potential bond bubble burst mean a reassessment of equity income as a match for investing for pension funds?

Dividends over the long term do tend to increase ahead of inflation so aren't they a good match for rising income needs? The answer is YES, but no one can guarantee a match with defined promises made years ago, and because of the visibility associated with mark to market accounting, bonds are still in demand, especially index linked (to RPI) bonds. This despite yields of less than 2% on 10 year fixed interest government bonds with an almost certain real terms capital loss when the bond matures. ILGs have yielded negative in some instances based on the market price!

It's a bit like a buy to let investor totally ignoring the rent received and just watching the sale price expectation or Halifax Index of property prices.

Why is this so important? It's a fact that trustees are often not as savvy on investment issues as they should be and even financial journalists and investment consultants don't seem to take enough notice of the power of dividends for long term investors. Just ask Warren Buffet, family offices and wealth managers what they think of dividends!

Stephen Tiley
12 January 2013
(This article can be copied if the source is acknowledged)

‘I have a dream!’ - Let no man suffer high charges again!

2012-07-20T17:00:00.000+01:00

Philip Coggan

Philip Coggan was a Financial Times journalist for more than twenty years and is now the capital markets editor of the Economist. He writes a monthly column for Pensions Insight.

‘Much pension commentary revolves around asset allocation, fund manager selection and the right rate to use to discount liabilities. It is easy to forget the impact that charges can make.'

'So the report from the Royal Society of Arts (Seeing Through British Pensions: How to increase cost transparency in UK pension schemes) is a very welcome reminder of the costs issue.

The publicity that attaches to such reports may put workers off pension saving altogether.
If the average pension holding is 25 years, then a 1.5% annual charge reduces the final pension pot by 37.5%.

The report gives another example of a man who saves £1,000 a year for 40 years and earns a nominal return of 6% (3% after inflation); before fees, that translates into an inflation-protected pension of £16,080 a year while after a 1.5% annual fee, the income falls to £9,900.

(PM - Wow! No wonder the likes of the Pensions Guru did so well at Prudential, Royal London and don't forget that the Paradigm IFA supplier business boasts of getting its advisers 1% a year in residual commission – well I hope they give stunningly successful advice to justify it!)

The problem is that responsibility for pension provision is shifting from the company to the individual. But the individual is even less aware of the impact of costs than the average finance director (or pension fund trustee). And even when workers try to find out about costs, they may not be able to do so.

The authors of the report (including David Pitt-Watson of Hermes, an industry veteran) asked 23 providers for a full list of charges, including trading costs (which is not included in the total expense ratio); only two admitted that such costs might exist and even those could not provide the details.

The RSA report calls for a much fuller explanation of costs and charges in an annual statement, along the lines of the Danish model. This seems a good idea, although regulators have been experimenting with benefit projections for the past 20 years without having any noticeable effect on consumer attitudes.

Indeed, the publicity that attaches to such reports may put workers off pension saving altogether, hardly the desired result.

This may be another case where paternalism is needed. The Government’s planned auto-enrolment scheme, NEST, has paid a lot of attention to keeping costs down, and quite right too. But employers can help when offering a defined contribution scheme.

Yes, it is important to have the right asset allocation in the default fund and a reasonable selection of single-asset class funds for those who want to do-it-themselves. But none of us know how markets will perform.

However, companies do know that controlling costs will boost retirement incomes and that should be their priority, as the only element that can be reliably controlled.

The US savings market has been revolutionised over the past 40 years by the rise of tracker funds and exchange traded funds, which have lowered the costs for individual savers wanting to invest in equities.

In Britain, many defined benefit schemes have also had success in driving down management fees.

But there is still plenty of work to be done; the average Briton spends more time trying to find a bargain in the January sales than on the more important task of controlling his pension costs.‘

New Fair Deal proposal for Public sector TUPE'd staff

2012-07-20T12:05:00.000+01:00

Public Sector out-sourcing to be made easier? This article seems to be saying that the 'Fair Deal' on pensions for transferring public sector staff under TUPE will be reviewed to enable private sector employers to keep transferring staff in their public sector schemes.

This is excellent news for those companies biding for public sector work and great news for the employees. We will have to wait for the detail...that's where the devil is...

HMT to allow transferred public sector workers access to old schemes

Professional Pensions | 19 Jul 2012 | 15:11

By Rachel Dalton

The government may offer public servants who are transferred to private sector contractors the ability to remain in their public sector schemes.

Chief secretary to the Treasury Danny Alexander said in a written statement that the government will "retain the overall approach" of the Fair Deal policy, which says employees transferred from public to private sector must be offered comparable benefits.

However, Alexander added the government will deliver this goal by "offering access to public service pension schemes for transferring staff".

"When implemented, this means that all staff whose employment is compulsorily transferred from the public service under TUPE, including subsequent TUPE transfers, to independent providers of public services will retain membership of their current employer's pension arrangements," he said.

"These arrangements will replace the current broad comparability and bulk transfer approach under Fair Deal, which will then no longer apply."

Nabarro partner Anne-Marie Winton explained: "Private sector companies will be allowed to join the public sector schemes as employer; currently this is only possible with the LGPS, and very occasionally the NHS pension scheme.

"So the company will have to contribute to the public sector scheme it joins, with the taxpayer funding the rest of the ‘employer' costs.

"The private sector company will only want to be responsible for meeting the costs for its employees, so there will need to be a deed of participation setting out what the company pays, what the employees pay and how its share of the running expenses of the scheme are met."

Winton added that the decision to change Fair Deal may wipe out certain sections of the pensions industry.

"There is quite an industry for providers of stand-alone broadly comparable pension schemes," she said.

"This may well be the beginning of the end for them, as given the choice, assuming there will be one, it may be easier for companies to opt into a public sector scheme, and easier for ex-public sector employees to understand this route."

Alexander said the government will publish proposals for the new system in the autumn.

The review of the Fair Deal policy was launched last year. The government said it was a bid to make it easier for small to medium sized companies to bid for public services contracts, arguing only the largest firms could afford to offer pension schemes comparable to those offered by the public sector.

Last year, consultants warned that a lack of clarity over the future of Fair Deal was forcing private sector companies to negotiate poor pension deals for their workers

Scale of hidden pension charges 'extraordinary'

2012-07-18T14:00:00.001+01:00

This article highlights the scale of murkiness re:charges on existing pension products - unfortunately for many with older style personal pensions, the position is much worse. Old style insurers and IFAs still skim off far too much in charges and residual commissions.

Professional Pensions | 18 Jul 2012 |

By Jenna Towler

The majority of pension providers and managers are failing to inform savers about 'hidden charges' which typically wipe £100,000 off pension savings, a think tank has said.

A year long study from the Royal Society for the encouragement of Arts, Manufactures and Commerce has found workers in the UK are routinely denied simple and low-cost pensions available to people across Europe.

The RSA report found that 21 of the 23 pension providers surveyed failed to inform people about the charges, other than the annual management charge.

It said audit and custodial costs, and other hidden costs including taxes, stock lending fees and broking commissions were not communicated to members.

Author and fund manager David Pitt Watson said the scale of hidden levies was "extraordinary" and charges accounted for up to 40% of typical retirement savings.

“For markets to work effectively, consumers need to know what they are buying,” he said. “It is extraordinary that, after so many years, such a system is not in place in this country. It is vital that people have access to straightforward, accurate, high-quality information.”

The report comes ahead of the government's introduction of auto-enrolment where millions of qualifying workers will be enrolled into work place schemes for the first time.

The report found that in Denmark, a full clear statement is provided to pension holders. It concludes that the same could, and indeed must be made available in Britain if the pension market is to work effectively.

The report also warned that small businesses have little idea about which providers represent good value for money and that there is a huge danger that they will be sold expensive and inappropriate products when auto-enrolment laws come into force.

The RSA noted that the Department for Work and Pensions has inadvertently allowed the removal of consumer protections that presently cover workplace pensions, without which it said there is a real danger of these otherwise admirable reforms resulting in a mis-selling scandal.

Pensions minister Steve Webb said government is willing to step in unless fees are lowered and become more transparent.

Professional Pensions - News and analysis from the pensions market.

Latest on charges as auto enrolment looms for UK employers

2012-03-12T14:24:00.000+00:00

From: Professional Pensions Magazine

The Pensions Management Institute has thrown its weight behind efforts to make charges more transparent before the introduction of auto-enrolment.

The National Association of Pension Funds has been pushing for "clear and transparent" charges and is set to launch an industry-wide code of conduct this spring.

PMI chief executive Vince Linnane gave his backing to the NAPF code of conduct and warned that hidden charges could do "irreparable damage" to the reputation of pensions.

He said: "Security and transparency are going to be key to a successful and engaged introduction of auto-enrolment and it is imperative that members are positive about the policy from the start.

"Hidden charges and barriers could do irreparable damage to the image of auto-enrolment before it has even taken off."

Linnane said public confidence in the pensions system was vital for auto-enrolment to be a success.

He added: "The responsibility of the industry to encourage member participation also extends to boosting the level of retirement savings for these members.

"Taking money through hidden set-up and running costs, that are not explained fully to the member when they set up the policy, ultimately defeats the purpose of auto-enrolment as a tool to encourage sufficient funding for members' futures."

Ros Altmann on QE - she has a point!

2012-02-10T12:15:00.002+00:00

StockMarketWire.com

Saga has accused the Government of 'robbing people of their pension' through the Bank of England's programme of quantitative easing.

Director general Ros Altmann says that if the Government had announced that, in order to bail out the banks and help those who had borrowed too much, it had decided to raid people's pensions, there would be uproar.

But she says that by calling it 'quantitative easing', it has got away with stealing older people's futures.

She says: "QE is causing dreadful damage to pensions, pensioners and annuities, and the impact is long-lasting.

"Of course, there are some lucky ones, with final salary pensions who are better off, but that is by far the minority.

"I believe it is important for everyone to understand the almost impossible position facing older people around retirement today.

"They are suffering in silence so far, but for how much longer?

"There is simply nowhere for them to turn - they were led to believe that low rates and QE would be 'temporary' policies, but there is no end in sight to this massive inter-generational transfer."

Altmann continues: "Why is the Bank ignoring these terrible effects on pensioners?

"Is it because officials don't realise how many people are being hit and these older people do not have a powerful voice?

"Is it because most of those making monetary policy decisions have final salary pensions and, therefore, are protected from the impact of their own policies?

"Most of those who have saved in a pension scheme, other than a final salary-type arrangement, will need to buy a pension income from their pension savings on retirement.

"They are suddenly finding that the Bank of England has stacked all the cards against them and there is often nothing they can do to protect themselves."

Story provided by StockMarketWire.com

PensionsManager comment:

Ros does not mention the impact of low interest rates on pensioners with modest savings on deposit.

You could argue that the golden age of retirement - those that gained from property wealth increases in the 70s, 80s and 90s, and enjoyed final salary schemes with often generous RPI index linking, and tax free cash sums, are now paying the price for that with low interest rates on their nest eggs.

The point made well by Ros is that ordinary private sector employees are now reaching retirement (sometimes earlier than expected due to redundancy) and finding their defined contribution retirement pots are totally inadequate.

They would normally be expected to shy away from the equity market as they approach retirement (lifestyle investing approach) and so any equity boost caused by QE is lost to them. They may well have bonds in their porfolios that have risen in value to compensate, but many are in managed funds or diversified growth funds trying to make up from stockmarket losses in 2008-9.

Purchasing an annuity at such low rates caused by continued Gilt purchase is a real kick in the teeth. No wonder so many keep on working if they can and what does that do for youngsters that need work? A ridiculous state of affairs.

If interest rates begin to rise and pension deficits fall this will be a boost for many companies. This will help the economy and cause more money to be available for investing in growth. But beware - many schemes will swap this benefit with investment banks in return for a smoother funding path now. Is that wise?

Fiduciary Management - Jury still out?

2012-01-22T20:58:00.002+00:00

What is Fiduciary Management? Some also use the term 'implemented consulting', but whatever you call it there are various definitions and opinions that abound. The more cynical trustee might be forgiven for being suspicious about big brash American owned consultants or investment banks selling 'products' that are akin to offering umbrellas after it's stopped raining, but the concept deserves a closer look in my view.

We have seen that increasingly trustees and employers have become frustrated with, perhaps, the odd missed opportunity, the dreaded procrastination, and these regrets may have fueled demand for delegated services where professionals can act quickly and with defined objectives within carefully constructed parameters.

The toolkit available to a pension scheme these days is such that not many trustee bodies necessarily feel confident enough to act quickly, potentially entering into multi-million pound derivative contracts to 'lock-in' to what may seem attractive market opportunities, interest rates or inflation levels. Therefore some form of delegation to either a joint committee or professional firm that has the technology and specialist knowledge to monitor assets and liabilities as well as the financial markets sounds like an attractive proposition.

In an ideal world we could all take a very long term view and wait for our diversified portfolios of quality assets to eventually come good, and as long as the day to day cash flows of the scheme were covered then time would hopefully prove to be a healer. However, as Abraham Lincoln said, 'Things may come to those who wait, but only the things left by those who hustle'.

In reality the majority of schemes and sponsors are now looking to manage the 'end game' and the eventual self sufficiency goal or buy-out. Given the number of potential booby traps along the way, and despite attractive phrases such as 'glide paths' or 'flight paths' what we really know is that it feels more like chasing a pigeon out of a supermarket!

Trustees and sponsors that have a desire to rid themselves of defined benefit liabilities may want to keep control of all the levers, but how many will invest enough resources to enable effective control and management of portfolios worth hundreds of millions of pounds or more?

Those that are perhaps still in denial will continue to hope that they will get it right eventually, and some will bite the bullet and accept that they need help and may need to delegate more.

There is no predefined service that trustees have to buy despite what one might think. Trustees can devise their own model which could be a form of delegated manager selection, or fund of funds perhaps, and for some a joint committee type approach with consultants taking a more pro active part in driving for quicker decisions and tactical moves.

For smaller schemes the more integrated trustee investment service solution, where more or less everything is delegated, could be attractive and the right answer where governance constraints and cost preclude a bespoke approach.

A word of caution, however, we are all aware that most things are a 'zero sum game' and we can't all be winners. Just as the majority of active managers under perform it could be that as more consultants/banks get involved in taking decisions then some will inevitably get it wrong and that could see Trustees' patience being tried.

There are undoubted risks in delegating to professionals. We should not forget how triple A asset backed funds were widely misunderstood in 2007 and 'you don't stop dancing 'till the music stops' and 'when the ducks quack you feed them' quotes about selling suspect packaged securities to investors. These market professionals don't always get it right! There is also the question of how many clients they could potentially have competing for trades or their undivided attention. Is their desire, loyalty and affinity with the scheme or employer the same as a trustee body has with a true fiduciary duty and responsibility?

Let us finally not forget about cost and the extra layer of fees that may or may not be material. Professional indemnity fees have to be paid for and some large schemes have even hired additional firms to watch what the delegated manager is doing! But, although the jury may still be out, these delegated solutions are here to stay. It is surely better to have an honest appraisal of your own abilities in terms of governance and investment knowledge, and decide if you are realistically able to take the responsibility yourself as a trustee board or committee, or whether by delegating to consultants or banks you will have an edge that puts you in the minority of winners.

High charges and sneaky charges are undermining saving

2011-12-18T10:28:00.000+00:00

Daniel Boffey of the Guardian reports as follows:

Highly paid City traders are depriving pensioners and savers of thousands of pounds through high management fees that are often hidden, according to leaked advice provided by consultants to the Treasury. The charges are spreading and are so steep that savers may find they get less back in retirement than they invested in savings accounts and pensions over their lifetimes.

If the size of the charges were to become widely known, the UK's "fragile savings culture may be permanently damaged", according to the warning presented to the Treasury last month.

The damning findings come at a time of growing anxiety that millions of Britons will not have enough money for their old age. They will also raise new questions about the prime minister's decision to veto a new EU treaty over his demands for greater protection for the City.

David Cameron has insisted that the financial sector is a vital national interest, yet the consultants brought into the Treasury claimed that the often unnecessary charges built up by traders are damaging potential economic growth.

A source who has seen the presentation told the Observer that the conclusion was fund managers had "lost sight" of their customers and that the government needed to act. The presentation suggested that the country's pensions black hole – unfunded public and private pension commitments – could be wiped out over time if costs could be reduced, a source said.

"They are so high that the industry is actually destroying value for the UK investor at least as fast as the stock market can create it," the source said. "The government's message is that you have to save for your retirement, but with the amount you will make it hardly makes it worthwhile if these costs are being taken out. And the highest cost of all are personnel costs, wages and bonuses."

Even publicly disclosed costs reveal that UK funds are in most cases more expensive to invest in than funds in France, Germany and the US, it is claimed.

Michelle Mitchell, charity director at Age UK, said the revelation was evidence that the government must urgently enhance protection for people who followed ministers' appeals to save for their retirement. She said: "Some parts of the pensions industry very clearly have a case to answer. In these challenging economic times it's essential that charges are as low and as transparent as possible."

The presentation revealed how savings and pension pots were being chipped away as they were moved around by traders. A simple stocks and shares Isa can be top-sliced up to 16 times as it is traded around, it was claimed.

And while this practice and the costs were not noticeable when the market was on the up, the economic downturn was highlighting how much was being taken.

The average equity fund manager makes explicit that they are charging about 1.5% a year of the sum invested for their services, but additional hidden expenses average 0.3% a year and trading costs cut a further 1.4% off an investment. And the situation is getting worse, according to the analysis, which found that charges had increased by 9% in the last decade. The presentation added: "If the trend of diminishing returns and increasing costs continues we could soon expect negative returns on average."

During the presentation, which was later shared with the Department for Work and Pensions, the point was illustrated by the example of a saver who made £70,000 in contributions between 1994 and 2009, only to see the £46,000 in profit from the rise in the value of the FTSE 100 being consumed in its entirety by the financial services industry.

The experts behind the advice, Dr Christopher Sier, a former consultant to investment managers, and David Norman, formerly chief executive of Credit Suisse Asset Management (UK), revealed that the £2.1 trillion assets under management in the UK attract a cost of £67.2bn a year – or the equivalent of 3.2% – with the greatest cost being wages and bonuses for traders and fund managers.

The 14-slide power-point presentation concluded that the industry needs to be more transparent so that savers could effectively shop around and the government should act to make it safe and wise to save.

Sier declined to comment on his conversations with the government when he was approached last week. "What the Treasury said to me and what I said to the Treasury I will leave to the presentation, because you have got hold of that," he said.

Gareth Thomas, the Labour MP for Harrow West, said he feared that the government was reluctant to clamp down on the City's extravagant charges and practices. He said: "Dithering, out-of-touch ministers don't seem to understand how high the stakes are, or have the will to act. If pension charges were brought down by even a small percentage millions even billions more would end up in people's pension pots helping the next generation of pensioners and the communities they live in to have a safer, more secure future."

Tomorrow George Osborne, the chancellor of the exchequer, will give his formal response to the Vickers report on future regulation of the banks. He is expected to welcome its findings, including the recommendation of ring-fencing high street banking from investment banking services, but with the latest consultation and the preparation of a white paper expected to take several months, bankers are likely to launch fresh attempts to get the government to change some of the recommendations.

Blast from the past - August 2007 Professional Pensions

2011-12-17T08:52:00.000+00:00

Other side to ‘pro-contract propaganda’

In response to your front page article "Trustee ‘paternalism myth’ needs debunking", can I put the other side of the argument to redress this pro-contract propaganda?

Many employers with trust-based defined contribution schemes are attracted by the considerable advantages that trust gives them, for example:

•Ability to hire and fire suppliers/advisers and employ “best of breed” for each process.

•The ability to offer investment choices pitched right for their members, and this will often be a narrow choice of low-cost options by design.

•Greater transparency.

•Bespoke design and integration with other benefits.

•Ownership of communication process and greater affinity with employer.

•Fiduciary duty of trusteeship and impartial approach with no profit motive.

•Protection of members against high charges, especially after they leave employment where employers with contract schemes will cease to have influence.

•Short-term member contribution refunds available (up to three months automatically, but up to two years if no transfer value taken).
This stops numerous small benefits from accumulating (which are generally disproportionately costly to administer) and enables the employer to allocate his contributions to pay for other pension benefits, or to defray administration costs, etc.)

Clearly there is a place for contract, but there appears to be a heavy push going on to sell contract-based arrangements to larger employers, which appears to be based on taking advantage of the alleged “hassle factor” of trust schemes and the neat solution contract appears to deliver.

Some of the advantages of trust are, I fear, being quietly forgotten about, which suits those advisers doing very nicely out of selling contract arrangements, and potentially earning residual commissions for many years to come!

Nice work if you can get it!

Stephen Tiley
Chippenham
Wiltshire

Footnote: December 2011 - Steve Webb announces consultation on banning short term refunds for DC schemes.

Note: IFAs often prefer contract due to their own self-interest.

Henry Tapper's web site and support for the campaign!

2011-12-12T23:15:00.001+00:00

http://preview.tinyurl.com/6olsbe8

Read Henry's take on my campaign and plenty of other interesting articles.

Snipit:

"Why your personal pension/FSAVC may be worthless.

Stephen Tiley’s starting a campaign to get restitution for those who invested in valueless FSAVC and Personal Pensions. You can read about it here. [link above]

The comment box isn’t working [should be now - ST] so I’ll blog a response here as Stephen’s opening a can of worms I’m quite sure a lot of people would prefer was kept shut.

In the old days before stakeholder pensions, insurance companies were able to employ back end loaded charging. What this meant was that units you purchased in the first 24 months of a regular premium policy like a personal pensions, Retirement Annuity Plan, FSAVC , EPP and some AVCs would carry a supplementary charge of up to 6% pa. Supplementary to the 1% charge you paid on units later in the life of the policy.

This 7% pa charge on initial or “capital” units is to cancel out part or all of the growth on the units. Indeed, in times of low unit unit growth (as we’ve experienced on equity based funds in the past ten years, these units can reduce in value to a point where they are pretty well worthless. etc.."