Newsletter – November 2016


Pensions News Bulletin November 2016

1. Internet of Things and Cyber Security. A Modern Oxymoron

The internet of things, or IoT, as we will start seeing, is the inter connectivity of our physical devices, from computers and phones to networked everything else. Homes and offices, and their contents such as fridges, heating, entry doors, windows, dog flaps, cookers, lights and other items, even vehicles.

All these things, and many more, can be embedded with electronics, software and sensors that enable control from a computer across the network. We are already way down the track with this, with consumers proudly buying such items as connected fridges, central heating controllers, door entry systems and cameras that they can operate from their phones. Even drive-free cars are undergoing testing. Fantastic.

On the flipside of this innovation is the exponential rise in personal risk. Every week we hear examples of hacking and other computer risks. Remember the October distributed denial of service (DDoS) attack which hacked a domain name server provider and took down massive numbers of systems mostly in the US, including Twitter, Netflix and CNN, but also some in Europe including the Guardian. The news with that attack reported that humble home consumer goods, surveillance cameras and street lamps were among other things affected and indeed used to spread the hack.

There are not many topics that experts in any subject are unanimous about but an exception is hacking risk. Every cyber security expert agrees that the cyber-criminal is always one step ahead and that it’s almost impossible to catch any of them. Recently an NHS (UK Heath Service) computer manager confirmed this in response to an interview about the difficulty of securing hospitals from cyber-crime. Hospitals have been victims and have paid ransoms to get back access to their patient’s records.

This type of crime will grow. Businesses and individuals are already suffering.

So is the internet of things something we should aspire to be part of or is this an example of technology going down a wrong road?

Computer crime is a growing threat. Its still in its infancy and yet causes so much damage. It is perpetrated with impunity by bedroom hobbyists doing it for fun, national security services doing it for political leverage and industrial espionage, and international crime syndicates doing it for big money. Whoever is doing it, it’s dangerous for the individual citizen. We can already lose our money, access to our banks, our confidential records and our computers but with the IoT we will be able to lose our food, have our place flooded and front doors opened to the world while we sleep. Once we get the cars we can presumably also be moved into the oncoming traffic.

Until ………

  • cyber security can keep one step ahead of the criminal,
  • internet service providers (ISPs) commit to protecting society and
  • international enforcement results in computer criminals routinely being caught everywhere,

…..who will want to be IoT networked?

I feel happy my fridge is isolated from the world.

2. FCA Asset Management Market Study

The FCA published their interim findings after a year of review and have asked for replies to this consultation report by 20 February 2017. The final report is scheduled for delivery by June 2017 but don’t be surprised if it doesn’t meet that timescale. The report can be found here.

In short the FCA found much was wrong with all parties to pension’s investment and intend to refer the investment consultancy sector to the Competition and Markets Authority.

At 208 pages the full report is a lengthy read and the findings validate the very long held concerns of many industry experts who haven’t been able to make headway individually when the status quo has been so very valuable for the influential corporate participants in the value chain.

Important findings and implications from the report include…

  • Recommendation that institutional investment advice (eg advice to pension schemes) is regulated by the FCA. (you may not realise it wasn’t)
  • Price competition is weak in a number of areas of the industry.
  • The market in investment consultancy is heavily concentrated. 60% of market share belongs to Aon Hewitt, Mercer and Willis Towers Watson.
  • Fund performance is not always reported against an appropriate benchmark.(making it easier to show outperformance).
  • Consultants are unable to identify active asset managers that will outperform the benchmark.
  • It’s difficult to assess and monitor the investment consultant.
  • Too many pension schemes stick with the same investment consultant for too long.
  • Active fund management overcharges for the fund performance it provides.
  • Investment consultants have significant conflicts of interest where they also provide fiduciary management, also called delegated consulting.
  • Passive funds have reduced prices over the years while active funds have become relatively more expensive and have not performed better than passive funds.
  • Fees are complicated and not transparent.

The FCA propose a significant package of remedies to make competition work better in the market. They intend to protect individual pension scheme members and similar investors unable to actively engage with their investment manager. They want to strengthen the duty on asset managers to act in the best interests of investors with changes to enable managers to be held to greater account. They propose introducing an inclusive single charge to make it easy for investors to see what is being taken from the fund, and measures to help individual investors better identify the most appropriate fund.

This is a wakeup call for the industry. Participants who can adapt and modernise relatively quickly will thrive and it will not be technically difficult to improve if the corporate will is there. The business models must change and the organisation and ethics must fit better. Trustees and plan sponsors also come in for criticism for not being better stewards. If they step up after this report, change should come quicker.

3. Regulator caps ‘freedom’ exit charges at 1%

Following a paper from the Treasury, in early 2016, on barriers to accessing the pension freedoms, the FCA has published a policy statement available here, demonstrating it intends to cap early exit charges at 1% of the value of transfer or exit benefits, from workplace pensions and other contract based personal pensions.

The cap will come into force from 31 March 2017 but note that early exit charges already below 1% cannot be increased and new schemes from April 2017 cannot impose exit charges.

The FCA estimates suggest the charge cap could cost providers between £46m and £89m over just four years although providers will be subject to similar accumulating potential losses for the long term until all relevant investors have exited their schemes one way or another.

On the introduction of the cap, FCA executive director of strategy stated “People eligible for the Government’s pension reforms should feel able to access them as they wish. “The 1 per cent cap on early exit charges for existing pensions, and the 0 per cent cap for new contracts, will mean that current and future savers will not be deterred by these charges from accessing their pension pots.”

Thank you for reading.