Autumn for me represents two things: colder, darker days, and a new budget. I wait excitedly for the budget in the hope of fewer taxes, but it seldom happens – however this year, something else exciting happened. Philip Hammond, Chancellor of the Exchequer, declared the Government wants to see pension funds invest in patient capital as a way of financing growth in innovative firms as part of his mission to unlock over £20bn of new investment over the next 10 years, ensuring the UK economy is fit for the future.
This move follows a government consultation that closed in September 2017 which discussed lowering barriers to patient capital investment, such as long-term illiquid investments in start-up companies, for defined benefit (DB) and defined contribution (DC) schemes.
This change won’t take place overnight – The Pensions Regulator will still need to provide guidance on how trustees can increase patient capital investment, which both the regulator and HM Treasury has not yet provided a timescale on. However the Treasury has said they will establish a working group consisting of institutional investors and fund managers with the goal of increasing access to patient capital for innovative firms, and removing barriers to investment for DC members.
In this current low yielding environment with various asset classes valued at record highs the thought of allocating to alternative long-term investments such infrastructure and venture capital which are less correlated to traditional asset classes offers a hope of a higher level of future returns for DB schemes. This could help decrease funding deficits. I believe over time illiquid long-term assets which are currently more accessible for larger schemes will become available for smaller schemes, as previously occurred for LDI.
Investment in long-term patient capital represents an opportunity to encourage younger DC members to get involved with investing in their pension. As they are unlikely to retire for decades the benefits of long-term patient capital will be more visible to them. However most DC pensions’ assets are currently daily priced and normally offer daily liquidity. These two factors make it extremely difficult to make illiquid assets available to DC investors. On a technical point, DC funds are offered in life assurance wrappers and the rules around those wrappers typically prohibit investment in illiquid asset classes.
Removing barriers to entry can only be a positive thing as it will help investors allocate capital more appropriately. These new changes will benefit DC members as they currently have a greater challenge accessing long-term illiquid investments. DB schemes will also benefit as they will have a greater opportunity to allocate to diversified less correlated assets.
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Yes, it’s that time of year again. The start of a new quarter and, once again, the pace of change in the pensions world continues unabated. Your team at Spence has pored over the various legislative changes, reviewed in detail the consultations and kept their fingers on the pulse of current issues in order to bring you a condensed summary of the highlights from the first three months of 2017.
As such, you can see at a glance the key issues you need to be aware of from the last quarter, and we’ve even put together a handy summary of what topics and dates to keep a look out for in the next quarter.
Topics covered in this quarter’s update include:
- News from the PPF;
- Consultation on the future of defined benefit pensions;
- Highlights from the investment markets;
- The ever-increasing value of scheme liabilities;
- with many other highlights besides.
So what are you waiting for?… Click here to download your copy of the Spence Quarterly Update!
With ever more people falling into the “Just About Managing” category as inflation increases faster than many pay packets, pension saving is likely to feel the pinch. Employees and employers both need clear and simple guidance on the choices to get the best outcomes.
In the infamous Jam Experiment (the psychological study rather than the jazz quintet of the same name), ten times as many customers bought some jam when offered a choice of six flavours rather than 24. Similarly, sales of Head & Shoulders went up 10% when the brand range reduced from 26 to 15 varieties. What on earth was Mr Heinz thinking when he decided to advertise a whopping 57 varieties? He could have taken over the whole world if he’d stuck to plain old baked beans in tomato sauce!
One of the authors of the Jam Experiment (lyengar) turned her hand to pensions later, finding that US plans offering just two investment options had a 75% take up rate – falling to 61% where they had 59 choices, which is even more than Mr Heinz. Back in 1999, Baber and Odean found that the least active traders got an 18.5% return compared to 11.4% for the most active traders. The average investor who switched stocks lost out by 3% over the following 12 months. Nowadays few people would object to a return of 11.4% but we’d all definitely want to get a little bit extra if it’s available given the current low expectations of future returns. Read more »
If nothing else, 2016 has shown us that predicting the outcome of future events is a mug’s game. If we can learn one thing from the likes of Brexit, Donald Trump, and Leicester City, it is to expect the unexpected. As such, it was with some trepidation I accepted the challenge to pen a short blog on what I expect to see from the Chancellor’s Autumn Statement next week.
Due to the proximity of the “Autumn” Statement to the festive season, I’m going to take some artistic licence and predict a visit from Aladdin’s Genie of the Lamp, who will offer me three wishes for what I would like to see in Mr Hammond’s first Statement. Bear with me, it doesn’t sound as unlikely as certain other events that have happened! What would I wish for….??
1. No tinkering with the pensions tax system. As attractive as it might be as a target for raising some much-needed revenue for the Exchequer, now is not the time for tinkering. Pensions are already far too complicated, and any changes will just add unwelcome complexity to a tax system that is already creaking and few people understand. As a nation, we need to be encouraging saving and shifting the goalposts just doesn’t help.
2. Do something to help (those members of pension schemes run by) distressed employers. There is a growing clamour in the industry about the impending problem of distressed employers – those 1000 companies who are sitting on schemes they have no realistic chance of funding. Do we just sit and wait for these companies to fail and their pension schemes to fall into the PPF, with benefit cuts for members and job losses for employees, or can something be done to help both the members and the sponsors? This is a very difficult problem to resolve, and not one for which there is a magic bullet, but a number of ideas have been floated over recent months. The Government is there to make difficult decisions – there is a danger that if something isn’t done soon they may run out of time on this one.
3. Improve the investment opportunities on offer. Providing more investment in income-generating infrastructure projects, as well as providing a government guarantee for the early years of such investments (which are traditionally the riskiest period). Allow mayors to issue “city bonds” so that pension schemes can invest in local projects. Issue more long dated index linked bonds – there is huge demand and at current yields what’s not to like for the Government?
So there you have it. I’m sure that come Wednesday Mr Hammond will have some very different policies to the above. It might be too late to put the genie back in the bottle for defined benefit pension schemes, but there’s plenty that can be done to improve the UK’s long term savings arena.
Spence & Partners, the UK actuaries and consultants, today announced their appointment by The LS Starrett Company Limited Retirement Benefits Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’. Services to the 475 member, £25 million Scheme will include actuarial, investment and pension scheme administration.
Alan Collins, Head of Trustee Advisory Services at Spence commented: “In a post-Brexit environment trustees are looking for greater scheme transparency and a more joined-up approach to funding, investment and governance. Our Mantle® system allows schemes to make informed decisions around their funding at any point in time, based upon the live administration and investment data – what we see they see. Trustees are no longer looking in the rearview mirror; instead they can be fully responsive to funding opportunities that will benefit the scheme. Ultimately, we are giving trustees and sponsors of all schemes levels of analysis and advice that is usually reserved for schemes with much larger budgets. We are very pleased to be working with LS Starrett and the Trustees.” Read more »
The UK has made its choice, and has voted to leave the EU. What does that mean today for occupational pension schemes? In the wake of the result on 23 June 2016, significant market volatility ensued. With the yields on UK Government bonds falling, the majority of schemes will have experienced an increase in liabilities. However, the impact on funding will depend on a scheme’s investment strategy.
We therefore posed some of the questions which you may want answered to our own Chief Investment Officer, Simon Cohen. Read more »
Spence & Partners latest blog for Pension Funds Online
I believe that clients should be using and taking more advantage of their investment consultant. I see clients paying for actuarial valuations, reviewing actuarial factors and other matters but generally not making full use of their investment consultant. Clients legally have to do a valuation or other compliance work, but often see investment work as something that is secondary to this. For example, there is not a legal requirement to carry out an investment strategy review like there is for a triennial valuation, it is just considered best practice, so sometimes one isn’t carried out.
I sometimes see cases of trustees who haven’t reviewed their investment strategy in over 10 years and their Statement of Investment Principles in a similar period of time. Read more »
Spence & Partners, the UK actuaries and consultants, today urged schemes to review any strategy that contains allocation to Diversified Growth Funds (DGFs).
Simon Cohen, Head of Investment at Spence & Partners, commented: “DGFs are a pretty common part of an allocation strategy for smaller schemes, as they allow them exposure to lots of different asset classes they wouldn’t ordinarily get access to due to issues of scale. However, schemes should be careful when investing in them – yes, they are less volatile and have somewhat protected schemes against the fall in equity markets at various points in time, but schemes need equity. DGFs aren’t a direct equity replacement and shouldn’t be treated as such – and, of late, their performance has been particularly disappointing too. Read more »
Spence & Partners, the UK actuaries and consultants, today urged trustees to take more
proactive steps in order to avoid the kind of market volatility that caused BHS and TATA to struggle*.
Simon Cohen, Head of Investment Consulting at Spence, commented: “Volatile markets present both opportunities and threats for pension schemes. In order for them to present an opportunity, schemes must monitor their funding level more actively in order to be able to take prompt action to lock-in investment gains and reduce future volatility. Schemes should assess their risks and take control of a strategy to achieve the ultimate goal of paying all benefits to members in full without bankrupting the employer in the process.” Read more »
For many Trustees and employers, reaching the point where you can secure your pension liabilities with an insurer seems like an impossible task.
The Pensions Regulator publishes ‘Scheme Funding Statistics’ each year based on various ‘tranches’ of pension schemes. As at May 2015, the average buy-out funding level was 58% for schemes with a valuation date between September 2012 and September 2013.
For the majority of schemes , the path to buyout is not an easy one but it is important to understand that there are measures you can take to move towards this goal.
I have set out below our ‘five steps to buy-out’ Read more »