Newsletter – June 2014


Pensions News Bulletin June 2014

A round up of the pension changes in motion right now

No-one can say nothing changes in pensions but you could say change is the only constant. Below is a list of the changes, definite or awaiting assent, which make the present time a veritable pensions revolution.

Auto Enrolment is continuing to have a major impact on employers. But in your spare time you can plan for these!

From 27 March 2014

  • The amount of guaranteed income people need to prove in retirement in order to access their (other) pension savings by income drawdown reduced from £20,000 pa to £12,000 pa.
  • The amount of total pension savings that can be taken as a lump sum increased from £18,000 to £30,000 (25% is tax free, 75% taxed at your marginal rate).
  • The capped drawdown withdrawal limit increased from 120% to 150% of an equivalent annuity.
  • The maximum size of a small pension pot which can be taken as a lump sum (regardless of total pension wealth) increased from £2,000 to £10,000.
  • The number of personal pension pots that can be taken as a lump sum under the rules in the above bullet increased from two to three.

From April 2015

  • A 0.75% maximum charge to apply to assets under management for members of an auto enrolment default fund.
  • Defined contribution (DC) retirees to have a choice of either.

  • all their pension savings as a lump sum;
  • draw them down over time;
  • or buy an annuity.

  • Pension providers will have to offer DC retirees free, impartial, face to face guidance on these choices.
  • All pension schemes must be governed by a body with a duty to act in members’ interests.

  • So Independent Governance Committees (IGCs) will need to be set up and be required to protect members’ interests in contract-based schemes and;
  • rules for trust based schemes will be stronger.
  • trustees and IGCs will have new duties to consider and report on costs and charges.
  • the government will then introduce new requirements to make standardised disclosure of all pension costs and charges mandatory.

  • Consultancy charges banned from auto enrolment qualifying schemes.

From April 2016

  • Adviser commissions and active member discounts will be banned in auto enrolment qualifying schemes.
  • Defined contributions schemes to be allowed to pool the contributions and risks of its members and pay pensions from the scheme. Known as collective DC.
  • Basic state pension to become a flat rate amount for new state pensions set at just above the pension credit level. (£155 per week is the assumed indicative figure). However, additions will be made for additional earnings related contributions and deductions made for contracting-out where the entitlement is paid from an employer’s scheme.

From April 2017

A review of the 0.75% charge cap to consider reducing it and including transaction charges.


New Evidence that Active Fund Management is not value for money

The Pension Institute at The Cass Business School released a paper showing that active fund management does not repay its higher fees and the small percent of managers generating returns above their costs don’t pass it on to investors.

The Pension Institute studied monthly returns of 516 UK equity funds between 1998 and 2008 and declared in their research report that almost all active fund managers fail to outperform the market once fees are extracted from returns.

The research found an annual alpha* return after fees of minus 1.44%, meaning a typical investor would be better off switching to a low-cost equity tracker.

Only 1% of fund managers were able to generate returns above operating and trading costs, but these managers “extract all of this for themselves via fees, leaving nothing for investors.” The remaining 99% of fund managers were unable to deliver outperformance from stock selection or market timing.

(*alpha return is the investment performance attributable to the managers skill rather than merely general market rises –which is called beta).

The highly technical research paper can be found here:

New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods



Most of us have heard the debate about whether active investment management or passive investment management is better. Or more to the point whether the extra fees you pay for the skill of active fund managers gives the investor value.

There is the old saying that a monkey sticking a pin in a list of potential investments is as likely to pick a winner as a fund manager. Also the saying that no-one beats the market forever seems to make sense because conditions change and investment managers are neither prescient nor able to move their funds around with total flexibility. Significant moves are also expensive which reduces performance.
These pro passive management ideas certainly seem to have some truth and the massive growth of passive funds suggests many investors believe or partly believe it. However most of us who use active investment management (alongside passive management) will point out that we are not picking managers or funds from the totality of the possible. We will focus on the small number of managers and funds that have a record of performance in their speciality and we know that any above market success will be for a limited time. However it’s important to understand the net performance after fees and not be impressed by the gross performance shown on the charts.

Just expressing it this way shows me that for the majority of defined contribution investors passive fund investing is more sensible because most members are not going to be making the decisions and taking the actions necessary to control their active management risks. However in an occupational scheme with interested and dynamic trustees they could choose to use active funds better than individual investors could.


Auto Enrolment. How do you measure up?

The first report on Auto enrolment compliance was recently published by the Pensions Regulator. It named Dunelm as failing to comply with legislation and required them to pay £108,000 missed pensions contributions but the reasons that led to the problems are pretty common ones as you will see from the list.

  • Staff tasked with auto-enrolment duties left the company.
  • A bespoke payroll system did not perform all the auto-enrolment requirements and;
  • Inaccurate employee data was given to the pension provider.

The pension regulator stated that Dunelm were now compliant and that they were open and helpful with regard to getting the matter put right.



Any of these reasons could derail auto-enrolment on its own let alone together. Many other companies will also experience these issues but maybe haven’t noticed its caused them problems. How are you auditing the post auto enrolment process? Is it rigorous enough?

The key points for employers committed to getting this right at first, and continuing to get it right every payroll period are:

  • Appoint a project manager and business lead of an adequate experience and seniority. They can then arrange the following essential requirements.
  • Ensure you allow sufficient time to prepare for auto-enrolment. Most companies underestimate the complexity and time needed.
  • Establish a governance structure to support and monitor the project and to ensure accountability at a high level within your organisation.
  • Ensure a smooth handover if key people move on.
  • Verify employee and payroll data to ensure they are up to date and accurate.
  • Select, install and test payroll systems well in advance of auto-enrolment staging dates to ensure they are able to meet the requirements.
  • Take advice from the specialist(s) throughout the process and don’t leave it until things have gone wrong.


Pension Scheme Accounts to change

As a result of the issue of the new UK accounting standard FRS 102 Pension scheme accounts are set to change. The current statement of recommended practice (SORP) dates back to 2007. There is a new draft SORP out for comment at the moment.

The Pensions Research Accountants Group (‘PRAG’) published an exposure draft which sets out a revised SORP: Financial Reports of Pension Schemes intended to replace the current 2007 version.

Interested parties are urged to take the opportunity to consider and comment on this draft by the deadline of 16 July 2014.

New pension account practices are necessary due to the Financial Reporting Council’s 2012 and 2013 revisions to UK financial reporting standards. These fundamentally reformed financial reporting and specifically addressed financial reporting by pension schemes. In addition, since the 2007 SORP was published pension investment arrangements have become increasingly complex, auto enrolment has been introduced and increasing numbers of pension schemes have been entering the Pension Protection Fund. The final paper may not be available on the internet but the exposure draft can be found here:

Statement of Recommended Practice: Financial Reports of Pension Schemes

Thank you for reading.