Pensions News Bulletin March 2017
1. ISA season. How much of a gambler are you? Try £ cost averaging
As the usually busiest ISA investment days approach will money flows be down at the product providers because the stock markets are at record piercing highs? Obviously no one can say where any stock market is going with any certainty but the old adage ‘markets can go down as well as up’ is true every day. I leave it to the reader to reason if it’s more likely that markets drop significantly at some time over the ISA planning horizon, rather than increase. The ISA planning horizon for most of us seems to be a 5 year view even through people leave their money invested for longer, but generally it seems that if people strongly feel that in a year’s time markets will be lower they are less likely to invest now.
Market trading companies such as banks and investment managers, as well as investment consultants or financial advisers, are almost always bullish (positive on market direction) because getting our money in their products is their purpose. And although they say, ‘money can also be made when markets go down’ that is not true for the ISA investor!
A particular habit of the ISA investor is that the whole of the year’s investment tends to be invested in one go, in the last few days of the tax year. This means that forever after, the outcome from that investment is wholly based on how it did from that single day to the day in the future when the money is withdrawn.
Therefore why not consider the company pension ‘way of the investor’ also called pound (£) cost averaging where the investor’s contributions are invested on a monthly basis. That way you have twelve different investment periods in a year and some contributions will always be more in the money (profitable), or suffer less loss, than others.
2. Investment Consultants seek to avoid CMA review
In my December 2016 LinkedIn post ‘Pension Fund Management Market Study and 5 Actions to take’ I wrote about the Financial Conduct Authority’s (FCA) Asset Management Market Study. One of the key takeaways was the regulators threat to invoke an investigation by the Competition and Markets Authority (CMA) into the pension investment consultancy sector due to lack of transparency, conflicts of interest and poor competition.
Since then the UK’s ‘big three’ investment consultants Aon Hewitt, Mercer, and Willis Towers Watson have jointly submitted to the FCA a list of potential changes to avoid a CMA review.
The content of the big three’s submission is as yet unknown but it will need to propose significant changes to the business model including some transparency over costs and advice outcomes to avoid more regulatory oversight.
3. Combining Defined Benefit Schemes to avoid more failures
Consider BHS pension scheme, British Steel pension scheme and the bad news from many others before. The problem is that due to regulatory and benefit burdens carelessly thrust upon the Defined Benefit (DB) Pension Scheme structure when it was at an immature stage of development in the 1980’s and 90’s, employers struggle to maintain their schemes and the members continue to carry the risk of not receiving their expected pension benefits in the future.
To mitigate the risk of more DB pension schemes failing and to reduce the debilitating cost and complexity faced by the sponsoring employers, the Pensions and Lifetime Savings Association (PLSA) have proposed consolidating all DB schemes into much larger units thereby reducing costs and enabling best practices to be adopted across the board.
The PLSA suggest pooling pension scheme’s administration or investment or governance. However their preferred option is the recommendation to create a number of superfunds by fully merging and replacing existing employer schemes. Employers and trustees would be discharged from their obligations for future benefit payments which would be paid from the superfund. Best governance practice and benefits of scale would reduce the risk of failure and improve the chances that all members would receive their expected pensions.
The PLSA hope the DWP and the Government will seriously consider their proposals. Their paper can be found here. However the complexity of actually implementing such a proposal would be enormous. I think it highly unlikely that the regulators and politicians, let alone employers, members and trustees would all agree.
4. What information do DC pension scheme trustees communicate annually?
The interesting point is how this demonstrates the care and interest in their workforce that the larger employer sponsored, in-house, schemes have over the Mastertrusts whose members are not their own employees. The lower cost transparency figure for larger schemes (74% to 95%) probably indicates the historic position where the employer, not the employee, picked up the administration costs which led to a perception that there was less need to disclosure costs to members.
Thank you for reading.