Newsletter – July 2014


Pensions News Bulletin July 2014

7 reasons why retirement practices are not fit for purpose plus older workers are the key to improving business and the recruitment of younger workers too!

In June the government published “Fuller Working Lives-A Framework for Action”. In a forward by both Steve Webb, Minister of State for Pensions and Esther McVey, Minister of State for Employment they cite the negative impact on individuals, productivity and the economy, of the usual sudden transition from employment to retirement and point out the compelling case the paper makes for change.

In one of the key paragraphs the report says there is evidence from a number of countries that increasing the employment of older people does not necessarily limit the opportunities for younger people. And it certainly need not do so if employers evolve their company policies to benefit.

The paper is a great read and sets out what the government is doing in this sphere and what some companies are also doing. It also collects together some astounding statistics such as:

  • Out of 10.2 million people aged between 50 and State Pension age, 2.9 million (28 per cent) are out of work.
  • Over half of men and women have already stopped working by the year before they reach State Pension age.
  • One in 3 children today will live to be 100 yeas old.
  • Almost half of people aged between 50 and State Pension age have a long-term health condition, a quarter have more than one long-term condition and a quarter are disabled.



Future looking companies and those that want to thrive and prosper will need to plan and action changes to their employment and retirement processes to align them better with how the population will work.

That change will mainly come from employers who want to grow their businesses and who can see that by thinking a bit differently they can extend their reach and profitability in a way never before possible. While also, it should be said, benefiting society at the same time.

Just consider these 7 reasons why most companies’ employment and retirement policies are no longer fit for purpose.

  1. It is illegal for employers to require people to retire at a mandatory retirement age.
  2. Most employees will not have enough pension and other savings to give up work and have the life style they need, planned or expect.
  3. Many workers will still be coping with debts and subsidising their children and grandchildren in their later years.
  4. Sufficient pension from auto enrolment will likely take a generation to build up to a meaningful level.
  5. Most people will be living much longer so will need more money for longer.
  6. Many of us will be much fitter for longer and will expect and desire to work but many will be less fit and less healthy for longer.
  7. There will be more ill health absence from work but medical interventions will enable them to keep returning as will the drive to keep earning.

With current practices how will we retire people in future without great cost and complexity?

Continuing with current policies will create upset and poor morale in the workplace.

The employer will bear the costs and complexities of dealing with the new way but a sensible employer will not just see the threats of the new paradigm but choose to benefit from this employment and cultural shift by changing policies.

At CORPIAS, because new rules mean pension savings can be utilised more flexibly than ever before, we advocate an employment system where retirement is phased in over a lengthy period. During the phasing younger workers would be recruited and could similarly, although not necessarily, be phased in. Perhaps in role sharing or trainee/mentor contracts. Differences in relative costs and productivity between younger and older workers mean that the phasing in and out of each constituency doesn’t have to be identical.

The result of such a policy would be increased productivity, improved workforce flexibility, better planning and higher staff morale, which itself creates greater productivity.

Corporate recruitment and retirement policies often take years to fine tune and bed down so a forward looking company should start to plan for the new way now.


Do your scheme’s investment funds use irrelevant benchmarks?

All investment funds have a benchmark so you can identify how well the fund has performed against it. The wrong benchmark can flatter the performance.

A paper from CLERUS, an investment governance specialist, contends that Local Government Pension schemes have been using irrelevant benchmarks. This means that they will have been making decisions based on the performance of the pension funds relative to an irrelevant benchmark. If true this may have caused large and unnecessary losses to the funds and ultimately the tax payer. You can read the paper here A Review of Performance Assumptions used to Determine Deficits and Investment Strategy in Local Government Pension Schemes.



A pension fund’s benchmark is of critical importance. If your scheme or fund is investing in, for instance, the shares of larger UK companies and your benchmark is a cash fund benchmark then it bears no resemblance to the type of performance you should expect. If for instance the cash benchmark increased by say 2% over 2013 and your UK equity pension fund provided a performance of say 5% over the same period your fund will have outperformed its benchmark and slaps on the back all round will follow.

However if your benchmark had been the more appropriate UK FTSE100 index which gave 14% positive return over 2013 then you will see that your pension fund has been managed extraordinarily badly and different decisions would likely follow.

Now this example of a mismatch may seem straight forward to identify but pension fund trustees or others responsible for their pension scheme governance often don’t question the benchmark. In addition as pension funds become more complex more complex benchmarks are created. The consultant or provider may decide on the benchmark without any explanation to the trustees or other fiduciaries. However there is a factor which identifies how relevant the benchmark is and this is called the “R-squared”.

Someone responsible for the pension scheme should ensure they are satisfied that all the benchmarks are relevant and that there is a suitable degree of correlation between the fund and its benchmark. The R-squared is the tool for this job.

Treated as a percentage the R-squared indicates what proportion of a fund’s movements can be attributed to those of the benchmark. Values for R-Squared range between 0 and 1, with 0 indicating no correlation at all, and 1 being a perfect match. Values upwards of 0.7 suggest that the fund’s behaviour is increasingly closely linked to its benchmark, whereas the relevance diminishes as R-Squared descends towards 0.5, and starts to disappear altogether below that.

R-Squared is a key ratio in that other measures of a fund’s performance will have been calculated by reference to its benchmark so the weaker the R-Squared correlation, the more unsuitable the benchmark, and the more unreliable these measures will be in assessing the fund.

So trustees, fiduciaries and others who care, should be as interested in the benchmark of the fund as they are in the fund itself.


Workplace pension professionals and HR must reclaim “Advice” from the financial advisers

When the chancellor gave his budget speech on 19 March 2014 he made radical reforms to defined contribution pensions (as reported in an earlier newsletter) and one of those announcements was the guarantee of free, face to face, impartial advice to prospective retirees about the pension choices they will have. He mentioned “advice” in this context about three times.

In the days that followed, the financial media was buzzing with financial advisers complaining that the word ‘advice’ was misused and that the chancellor should have said ‘guidance’ or anything similar but not used the word ‘advice’. This view is a reflection of how important regulated financial advice is to the wealth management and financial advice industries but they were not right to transfer that view to the chancellor’s use of the word.

Unfortunately since the concept of regulated financial advice has become so important many of us working in the field of company pensions, be they HR or pension professionals, have fallen into the same trap.

Over the last three decades this has led to a failure to communicate properly with employees and pension scheme members who want advice about their pension scheme and how they should use it. Many people have been turned away and disappointed when in answer to common and reasonable questions about the pension scheme they have been told by pensions people or HR “sorry, I can’t give advice”. Naturally this destroys credibility and is a widespread source of disengagement with company pensions.

  • Regulated financial advice is a specific service which involves offering, selling or directing an individual towards a particular savings fund or product chosen, or agreed to, by the adviser because of the individual’s full and particular relevant characteristics.
  • Advice, is a common word in the English language that means help, guidance or recommendation to take some sort of prudent action. As most financial advisers know there is little need for regulated advice in the context of company pension schemes and financial advisers working in that field are not often providing the regulated service.

It is important if employers, trustees and pension providers want to improve engagement with pension scheme members (as they do) that the teams responsible for making this happen understand and take responsibility for giving the advice that members and prospective members really need and appreciate.

An article in Professional Pensions – face-to-face-guidance-what-it-should-look-like – demonstrates how even experienced pension industry leaders can’t define the difference between advice and guidance so we shouldn’t be expecting employees to understand it. There is none. Advice is what they want and what we must give.


Thank you for reading.