Pensions News Bulletin May 2015
1.The New Pensions Minister – the first expert?
Welcome to Baroness and Doctor Ros Altman who replaces Steve Webb as the new pensions minister. She may be the first person to come to the position who is an expert in the field before getting the position! Her bio can be found here.
On the one hand I hope very little action is seen on pensions because auto enrolment and the freedom and choice changes are massive, costly and still in their early stages. There are also previously announced changes on legacy pension costs still to be introduced which could adversely affect insurance companies significantly. These things need time to bed down.
On the other hand there are so many things she could have her eyes on. This article in City Wire found here has a few pension specific examples.
However not so many people are aware that the minister, who used to be head of SAGA the over 50s service company, has recently stated that the issue of long term care is a crisis worse than the pensions crisis. She has voiced concern that action must be taken to prepare for the huge rise in the numbers of over 85s. She also believes that older workers want and need to work longer, and that older workers working longer produce a higher GDP which in turn produces more jobs for younger people. She has also said that immigration is not the answer to replacing older workers leaving the job market but that the answer is to retain older workers, retrain older workers and re – recruit older workers.
2. Auto enrolment update. 1,529 compliance notices issued and accountants have the worst knowledge.
Employers are failing to understand key aspects of their automatic enrolment duties, according to the pension regulators recent compliance and enforcement quarterly bulletin which can be found here.
The regulator found that many employers assume their only duties are to automatically enrol staff meeting the age and earning criteria, and don’t know their duties towards staff with a right to join or to opt into a scheme. Employers have also mistakenly assumed that automatic enrolment means that once their workers are enrolled, the pension scheme is responsible for calculating contributions and making the correct deductions. This impression has resulted in contributions not being paid. The employer is responsible for this.
The report puts it ‘While automatic enrolment may be automatic for an employer’s staff, it is not automatic for the employer. We recommend that employers start preparing for their automatic enrolment duties 12 months ahead of their staging date’. Many if not most employers turn to their accountant for help but the report says ‘gaps in knowledge remain, in particular among accountants and bookkeepers who continue to have the lowest level of understanding of all intermediaries about automatic enrolment.’
CORPIAS will advise the employer of their optimal auto enrolment strategy and oversee the process that gets them through to staging date and their post staging compliance declaration.
3. Dispelling 4 Myths
The last of the 4 – Its often said that increasing longevity and mark to market accounting rules killed the final salary scheme.
For final salary pension schemes – now called defined benefit – increasing longevity does increase costs. Accounting rules forcing mark to market pension valuations does increase volatility. In addition low interest rates increase liabilities, bear markets reduce asset values and abolishing advance corporation tax and its relief also raised costs.
However all these things may have been manageable had employers who had volunteered to sponsor defined benefit pension schemes not been forced to provide indexed benefits to ex-employees (yes ex-employees), for their entire working lives (working for someone else that is) and then an indexed pension for their retired lives. Indexation was based on general price rises and there was no correlation to the performance of the company or the performance of the funds. Then laws were introduced to force companies to keep a high level of solvency for pension schemes they clearly would not be able to afford in the long term. This is what broke the final salary scheme.
They were designed for the long term but as they did so well in their early days when they covered genuine employees, had few retirees and the markets were in a bull phase they were plundered for their riches. However it was this part of the cycle that was needed to sustain the other part of the cycle. Clever people ignored that assets go down as well as up and that liabilities go up and up with more and more members, and the greater value promises enforced by regulation. Pension schemes were voluntary. Exponential increases in non-employee members (deferred members) with high value benefit promises couldn’t be sustainable.
4. How do you know if your fund manager has done a good job?
Pension scheme decision makers ought to understand and be able to challenge their investment managers. To do this it’s useful to know some of the measurement criteria they use. Particularly, so you can ask them to tell you more about the measures they’ve used for the fund you’re interested in. We’ve looked very briefly at the’ R –squared’, ‘standard deviation’ and ‘information ratio’. This time we look at ‘Tracking Error’
Tracking Error measures the standard deviation of a fund’s excess returns over the returns of an index or benchmark portfolio. It can therefore be an indication of ‘riskiness’ in the manager’s investment style. A Tracking Error below 2 suggests a passive approach, with a close fit between the fund and its benchmark. At 3 and above the correlation is progressively looser and the manager will be deploying a more active investment style, and taking bigger positions relative to the benchmark’s composition.
Too low a number and you will want to be paying low tracker type fees. Too high a number and you may question the appropriateness of the benchmark and you may require less risk to be taken. You may want to ask how long the shares are held and be interested in reducing the amount of trading. At least being able to discuss these issues is important even if you are then satisfied it’s what you want or find acceptable for a period.
Please make contact if you wish to discuss any issue raised in this newsletter or would like support for your pension scheme challenges.
Thank you for reading.