Newsletter – March 2015


Pensions News Bulletin March 2015

Stop employee’s pensions being stolen

Last month I wrote about the pension freedoms and the likelihood of a rush to cash that the over 55s could make, especially those actually retiring. Now in the March 2015 budget, there is a proposal that people who are already receiving an annuity will be able to cash them in. Many will do so.

The freedoms are not wrong, but they create a greater urgency for those who can, to protect the rest from crooks. Recently I was reading a case, where three apparently regular middle ranking white collar executives were jailed for a scam which ‘robbed ordinary people of all their pensions’. The scam was promising a much better return than is available in the UK if you transferred your pension fund to the firm, who would invest it in a Cambodian rainforest fund providing guaranteed higher returns – I kid you not! The prison sentences were long, but for most pension scams it seems tracking down the culprits is rare.

Pension scams are numerous and most of us wonder how people fall for them – but we do. The ‘sales people’ are convincing, persistent and skilled in deception techniques. We know these things occur and are likely to get worse the greater the opportunity to part someone from their money. The pension freedoms are that great opportunity. Unfortunately regulators don’t appear to protect before the crimes are committed, and nor do Internet Service Providers or telephone companies appear to stop access to their services for criminal purposes.

This is where employers can play such a big part. Despite what we say about our employers in ‘off the cuff’ semi-humorous remarks, or grumpy clichés, most people really DO trust their employers when it comes to communicating financial information and providing financial education. Workforce financial education around the important issues and key learnings is easy and cheap. It sometimes doesn’t seem that way because corporates make it complicated, and devolve it to people who don’t necessarily understand the specifics themselves (and/or they have a full time job doing something else). The rewards to employers for providing financial health and safety to their workforce is a more engaged and productive one.


Budget actions effective NOW

The budget happened on 18th March 2015 and there is so much written about it elsewhere that I am simply going to highlight the pension announcements from last year’s Budget, which have become law and are effective from 6 April this year.

That means all over 55s with private sector workplace pension savings not yet in payment have the opportunity to take cash all at once, in instalments, buy an annuity, leave it invested (or plan a combination of these). However, it is important to be aware of the following issues:

  • Pension schemes do not have to allow these options, and schemes that want to are largely unprepared.
  • It is not clear who will deal with angry employees who believe they have the right.
  • People who want these choices may need to transfer out to another arrangement. This could create a problem for an underfunded scheme and be costly for the employee who may face a heavy charge for the new arrangement. In addition, they may face unexpectedly heavy tax charges as any cash above the usual tax free cash sum will be treated as taxable income in the year taken.

How will your company or pension scheme deal with these issues? It may be that not putting good governance around this will result in employees, who have suffered detriment, blaming their employer or trustees and looking for compensation. In this respect employers must be aware of the FCA’s ‘Dear CEO’ letter and the Pension Wise service.

The other critical pension details effective from this 6 April are:

  • Maximum ongoing charge for members of an auto enrolment default fund is 0.75% of funds under management.
  • Pension providers will have to offer DC retirees free, impartial, face to face guidance on their multiple ‘freedom’ choices.
  • All contract based pension schemes (GPPs, SIPPS) must be governed by an Independent Governance Committee, with a duty to act in members’ interests.

For the 2015 Budget all the budget documents can be found here:

Budget 2015 Documents


Dispelling 4 Myths

This month it’s on to myth number two:

“Stock markets are efficient”

This has been a traditional maxim since the efficient markets theory was articulated in the 1970s. The idea is that the market reflects all the information made available to market participants at any given time, of which all market participants are aware, so company shares are perfectly priced according to their inherent investment properties.

But how long does it take for everyone to know the latest available information and then for the market to adjust based on it? What about investors who have a different opinion of the same information, or a different purpose for its use? At every particular time, different investors decide to sell, hold and buy the same stocks, presumably on the same facts.

Some investment managers talk about markets being semi-efficient. Is this because they don’t believe efficient markets theory but aren’t bold enough to disown it? What does semi-efficient mean, like semi-pregnant or semi-honest?

Having been an interested observer of stock markets for years, it seems that the majority of movement happens because competing trading companies (any transacting firm from high street banks to treasury departments to hedge funds etc.) want to make more money for their firm or themselves, than their competitor. (Yes, human nature and normally incentivised behaviour.)

All traders know something about their main rivals, their rival’s books of business, their clients and how they react to events etc. How this works is that on any particular piece of news, trading firm A will think “what will competitors B, C & D do?” and whatever answer is derived, trader A will try to do it first (and of course, all of the other competitors will also be doing the very same thing). Specific stocks and the market will therefore be moved accordingly. There is also the fact that many large trading companies have strategies that have their own path uncorrelated to immediate market impulses.

Later, the reason for market movements will be retro fitted with an acceptable economic explanation – sometimes that’s correct, often probably not.


How do you know if your fund manager has done a good job

Last month was the scene setter for why pension scheme decision makers, trustees and investment governance committees ought to understand and be able to challenge their investment managers.

Last month I explained the very key R-squared, this month it’s the turn of:

Standard deviation

This is a statistical measurement which, when applied to an investment fund, expresses its volatility (usually referred to as risk). It shows how widely a range of returns varied from the fund’s average return over a particular period.

Low volatility reduces the risk of buying into an investment in the upper range of its deviation cycle, then seeing its value head towards the lower extreme. For example, if a fund had an average return of 5%, and its volatility was 15, this would mean that the range of its returns over the period had swung between plus 20% and minus 10%. Another fund with the same average return and a volatility of 5 would return between plus 10% and zero, but there would at least be no loss.

While volatility is specific to a fund’s particular mix of investments, and comparison to other portfolios is difficult, clearly, for those that offer similar returns, the lower-volatility funds are preferable. There is no point in taking on higher risk than necessary in order to achieve the same reward.

Thank you for reading. Come back next time for more news and the next in the series of myths and investment ratios.

Alan Salamon.