3 1 / 0 1 / 2 0 1 9I N D E P E N D E N T P U B L I C A T I O N B Y # 0 5 6 7R A C O N T E U R . N E T

WORKPLACE PENSIONS

HELP IS AT HAND FOR YOUNG SAVERS

THINGS TO WATCH OUT FOR IN 2019 0603 GENDER PENSIONS GAP

A MAJOR CONCERN11

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0302

IntelliPen - a global pensions administration technology platform

• A complete package for today’s pensions challenges• Highly performant processing engine for scale operations• Supports millions of pensions and payees• Live with clients in the UK, EU and US• Secure self-service since the initial launch in 2006• Now offers complete self-service of the retirement process• Intelligent rules and calculation engine drives automation

At the heart of our success is continued innovation to support pensions reinvention, relentless driving down of technology costs and increased cyber security.

For more information please email Paul Ayres at paulayres@procentia.co.uk or call +44 (0) 117 332 7794 or

take the tour procentia.co.uk/tour

© Procentia Ltd 2019

T A K E T H E T O U R

he terror-stricken diary of a millennial is now a per-manent feature of newspa-

pers, along with the football scores and obituaries. A recent Guardian column by the eloquent journal-ist Juliana Piskorz was a classic of the genre.

“I am 25 and a half, single, una-ble to pay my rent and the closest thing I own to a car is a broken skateboard,” wrote Ms Piskorz. “It seems too old to still be living at home, for your card to be declined buying loo roll.” Just thinking about her situation triggered waves of adrenaline. “My head began to spin, a familiar tightness seized my chest and the sweat glands in my palms went into overdrive, signalling the begin-ning of a panic attack that would last the best part of the day.”

It's no way to live. Ms Piskorz found a crumb of solace by talking to a psychiatrist, who helped her make sense of societal changes and how she saw her place in it. The themes are perennial: the replacement of a job for life with job hopping; the decline of entire industries includ-ing journalism; and the malevolent impact of social media, comparison being the thief of joy.

But another source of advice might help too. A corporate finan-cial wellness service. This isn't facetious. Company advisers are now on the front line of helping employees make sense of a chaotic financial world. Even low-wage workers may find their employer takes an active role in helping them handle their finances.

“Companies know that there is a clear link between employee con-tentment and productivity,” says Damian Stancombe, head of work-place health and wealth practice at Barnett Waddingham, a corpo-rate pensions and investment con-sultancy. “So the trend is for com-panies to think about the wider financial wellness of staff. They are bound by law to auto-enrol staff into a pension, but the best are expanding beyond that. For example, by providing a debt con-solidation service.

“About a quarter of employees are struggling with what they see as problem debt, so a company-sup-plied consolidation service can be of real value. Payments can be made from payroll at advantageous rates, so it's a real benefi t for staff .”

A company can encourage staff to think about how they save. Employees often wonder whether to save in a pension or an ISA. A com-pany is in a great place to provide information to employees, who oth-erwise have little appetite to organ-ise their fi nances.

The fact that employees need more information about their finances is clear. A survey by YouGov shows around half of peo-ple in the UK are totally or partially unsure whether they are putting enough into their pension. Only 6 per cent are “definitely” sure they are saving enough. Meanwhile,

half of millennials with a work-place pension struggle to under-stand their scheme, according to Prudential. Corporate financial wellness is a concept designed to improve both awareness and the action taken by employees to improve these numbers.

Online services are a growing part of the wellness equation. A human consultation can be pro-hibitively expensive, but online “robo-advisers” are a game-changer, making it possible for everyone, no matter what hours they work, to access decent advice. Employees answer questions via a

web browser to see whether their contribution levels are on track and how a change would affect income when they retire. The method is ideal for anyone too time-poor or nervous to visit a human pension adviser or simply who enjoys a quick pension review every so often.

The service is usually free to employees; the bill is paid by com-panies who want their staff to feel confi dent about their money.

Companies are thinking creatively about how to help employees save money. Barnett Waddingham, for example, off ers staff access to an online discount shopping service supplied by Sodexo. Around 5 per cent can be saved on supermarkets, restaurants and high street chains. Around 70 per cent of Fortune 1000 companies off er staff an online dis-count portal.

Also, companies can even help staff reflect on the concept of retirement. The old rules said you retire at 65. But in the past five years there's been radical rethink. Former pensions minister Ros Altmann is leading the campaign to decouple the pension age from the retirement age. In a nutshell, you can, if you desire, keep work-ing after the date when your pen-sion kicks in. Either enjoy the extra income or defer the cash and swell your pension pot.

The incentive for companies to offer advice to employees on their retirement age is clear. The National Institute of Economic and Social Research suggests that if people worked an extra three years, it would add up to 3.25 per cent in real GDP every year. Not only is the workforce larger, but younger employees benefit from the mentoring and productivity of their older colleagues. That “per year” claim needs highlighting. It's enough to catapult the UK into tiger economy status, radically improving job opportunities and salaries for younger workers.

Above all, corporate fi nancial wellness services are blossoming because companies understand that happy employees will be more hard working. Both parties gain. Worried employees get advice, plus helpful services to improve their fi nancial life. And companies get calmer, appreciative workers.

It's early days for the concept of corporate financial wellness – even the name is a bit clumsy – but the demand and logic for it are undeniable.

Help is at hand for young savers

WORKPLACE PENSIONS

@raconteur /raconteur.net @raconteur_london

As traditional working patterns evolve and attitudes to saving change, corporate fi nancial wellness has never been more important

Charles Orton JonesAward-winning journalist, he was editor-at-large of LondonlovesBusiness.com and editor of EuroBusiness magazine.

Fiona BondFreelance journalist, writing across business, fi nance and personal fi nance, she is the former commodities editor at Interactive Investor.

John GreenwoodEditor and publisher of pensions and benefi ts magazine Corporate Adviser, he is a former personal fi nance editor at The Sunday Telegraph.

Pádraig FloydFinancial writer, he is a former editor of the UK pensions and investment group at the Financial Times and former editor of Pensions Management.

Tim CooperAward-winning fi nancial journalist, he writes regularly for publications including The Spectator, London Evening Standard, Guardian Weekly and Weekly Telegraph.

Distributed in

Charles Orton-Jones

Published in association with

Contributors

Publishing managerJames Studdert-Kennedy

Digital content executiveFran Cassidy

Head of productionJustyna O'Connell

DesignJoanna BirdGrant ChapmanSara GelfgrenKellie JerrardHarry Lewis-IrlamCelina LuceySamuele Motta

Head of designTim Whitlock

Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 3877 3800 or email info@raconteur.netRaconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, fi nance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at raconteur.netThe information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © Raconteur Media

Robe

rt B

ye/U

nspl

ash

S A V I N G

T

39% 21%

Scottish Widows 2018

are saving nothing for later life

of people aged 22 to 30 say they are saving adequately for their retirement

Associate editorPeter Archer

Managing editorBenjamin Chiou

/workplace-pensions-2019raconteur.net

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0302

IntelliPen - a global pensions administration technology platform

• A complete package for today’s pensions challenges• Highly performant processing engine for scale operations• Supports millions of pensions and payees• Live with clients in the UK, EU and US• Secure self-service since the initial launch in 2006• Now offers complete self-service of the retirement process• Intelligent rules and calculation engine drives automation

At the heart of our success is continued innovation to support pensions reinvention, relentless driving down of technology costs and increased cyber security.

For more information please email Paul Ayres at paulayres@procentia.co.uk or call +44 (0) 117 332 7794 or

take the tour procentia.co.uk/tour

© Procentia Ltd 2019

T A K E T H E T O U R

he terror-stricken diary of a millennial is now a per-manent feature of newspa-

pers, along with the football scores and obituaries. A recent Guardian column by the eloquent journal-ist Juliana Piskorz was a classic of the genre.

“I am 25 and a half, single, una-ble to pay my rent and the closest thing I own to a car is a broken skateboard,” wrote Ms Piskorz. “It seems too old to still be living at home, for your card to be declined buying loo roll.” Just thinking about her situation triggered waves of adrenaline. “My head began to spin, a familiar tightness seized my chest and the sweat glands in my palms went into overdrive, signalling the begin-ning of a panic attack that would last the best part of the day.”

It's no way to live. Ms Piskorz found a crumb of solace by talking to a psychiatrist, who helped her make sense of societal changes and how she saw her place in it. The themes are perennial: the replacement of a job for life with job hopping; the decline of entire industries includ-ing journalism; and the malevolent impact of social media, comparison being the thief of joy.

But another source of advice might help too. A corporate finan-cial wellness service. This isn't facetious. Company advisers are now on the front line of helping employees make sense of a chaotic financial world. Even low-wage workers may find their employer takes an active role in helping them handle their finances.

“Companies know that there is a clear link between employee con-tentment and productivity,” says Damian Stancombe, head of work-place health and wealth practice at Barnett Waddingham, a corpo-rate pensions and investment con-sultancy. “So the trend is for com-panies to think about the wider financial wellness of staff. They are bound by law to auto-enrol staff into a pension, but the best are expanding beyond that. For example, by providing a debt con-solidation service.

“About a quarter of employees are struggling with what they see as problem debt, so a company-sup-plied consolidation service can be of real value. Payments can be made from payroll at advantageous rates, so it's a real benefi t for staff .”

A company can encourage staff to think about how they save. Employees often wonder whether to save in a pension or an ISA. A com-pany is in a great place to provide information to employees, who oth-erwise have little appetite to organ-ise their fi nances.

The fact that employees need more information about their finances is clear. A survey by YouGov shows around half of peo-ple in the UK are totally or partially unsure whether they are putting enough into their pension. Only 6 per cent are “definitely” sure they are saving enough. Meanwhile,

half of millennials with a work-place pension struggle to under-stand their scheme, according to Prudential. Corporate financial wellness is a concept designed to improve both awareness and the action taken by employees to improve these numbers.

Online services are a growing part of the wellness equation. A human consultation can be pro-hibitively expensive, but online “robo-advisers” are a game-changer, making it possible for everyone, no matter what hours they work, to access decent advice. Employees answer questions via a

web browser to see whether their contribution levels are on track and how a change would affect income when they retire. The method is ideal for anyone too time-poor or nervous to visit a human pension adviser or simply who enjoys a quick pension review every so often.

The service is usually free to employees; the bill is paid by com-panies who want their staff to feel confi dent about their money.

Companies are thinking creatively about how to help employees save money. Barnett Waddingham, for example, off ers staff access to an online discount shopping service supplied by Sodexo. Around 5 per cent can be saved on supermarkets, restaurants and high street chains. Around 70 per cent of Fortune 1000 companies off er staff an online dis-count portal.

Also, companies can even help staff reflect on the concept of retirement. The old rules said you retire at 65. But in the past five years there's been radical rethink. Former pensions minister Ros Altmann is leading the campaign to decouple the pension age from the retirement age. In a nutshell, you can, if you desire, keep work-ing after the date when your pen-sion kicks in. Either enjoy the extra income or defer the cash and swell your pension pot.

The incentive for companies to offer advice to employees on their retirement age is clear. The National Institute of Economic and Social Research suggests that if people worked an extra three years, it would add up to 3.25 per cent in real GDP every year. Not only is the workforce larger, but younger employees benefit from the mentoring and productivity of their older colleagues. That “per year” claim needs highlighting. It's enough to catapult the UK into tiger economy status, radically improving job opportunities and salaries for younger workers.

Above all, corporate fi nancial wellness services are blossoming because companies understand that happy employees will be more hard working. Both parties gain. Worried employees get advice, plus helpful services to improve their fi nancial life. And companies get calmer, appreciative workers.

It's early days for the concept of corporate financial wellness – even the name is a bit clumsy – but the demand and logic for it are undeniable.

Help is at hand for young savers

WORKPLACE PENSIONS

@raconteur /raconteur.net @raconteur_london

As traditional working patterns evolve and attitudes to saving change, corporate fi nancial wellness has never been more important

Charles Orton JonesAward-winning journalist, he was editor-at-large of LondonlovesBusiness.com and editor of EuroBusiness magazine.

Fiona BondFreelance journalist, writing across business, fi nance and personal fi nance, she is the former commodities editor at Interactive Investor.

John GreenwoodEditor and publisher of pensions and benefi ts magazine Corporate Adviser, he is a former personal fi nance editor at The Sunday Telegraph.

Pádraig FloydFinancial writer, he is a former editor of the UK pensions and investment group at the Financial Times and former editor of Pensions Management.

Tim CooperAward-winning fi nancial journalist, he writes regularly for publications including The Spectator, London Evening Standard, Guardian Weekly and Weekly Telegraph.

Distributed in

Charles Orton-Jones

Published in association with

Contributors

Publishing managerJames Studdert-Kennedy

Digital content executiveFran Cassidy

Head of productionJustyna O'Connell

DesignJoanna BirdGrant ChapmanSara GelfgrenKellie JerrardHarry Lewis-IrlamCelina LuceySamuele Motta

Head of designTim Whitlock

Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 3877 3800 or email info@raconteur.netRaconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, fi nance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at raconteur.netThe information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © Raconteur Media

Robe

rt B

ye/U

nspl

ash

S A V I N G

T

39% 21%

Scottish Widows 2018

are saving nothing for later life

of people aged 22 to 30 say they are saving adequately for their retirement

Associate editorPeter Archer

Managing editorBenjamin Chiou

/workplace-pensions-2019raconteur.net

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0504

Commercial feature Commercial feature

Rise of master trusts

WHAT MAKES A GOOD MASTER TRUST?MAIN CONSIDERATIONS

WHAT DO SCHEME MEMBERS WANT?PENSION MEMBERS WANT THEIR EMPLOYER TO FOCUS ON RETURNS

EMPLOYERS ARE TRUSTED TO BUILD AND MAINTAIN THE PLANThe pensions landscape has changed dramatically since the rollout of auto-enrolment. Master trusts have an increasingly important role to play in future retirement saving

DC Pulse Survey, BlackRock 2018BlackRock 2019

ore than ten million people, 42 per cent of the workplace pension market, have been

auto-enrolled since 20121 and master trusts play a role across the whole spectrum - from simple, cost-effec-tive solutions to premium, customis-able arrangements.

At the same time, pension schemes have had to implement new stand-ards to protect members, while trus-tees are under increasing pressure to professionalise and report on the factors they take into consideration. For master trusts, tougher regula-tions focused on reducing risks are leading to consolidation.

All of this evolution gives pause to assess the UK retirement market and where it is headed. There are more than 200,000 defined contribution (DC) schemes in the UK.2 These are split between contract based, which gives a direct link between employee and provider, and trust based, where the employer plays a more prominent role via its appointed set of trustees.

As defined benefit schemes fade and DC becomes the sole recepta-cle for retirement saving, the appeal of master trusts is simple. They give employers access to a trust arrange-ment with one trustee board to over-see governance, lower operating costs through economies of scale and, in some cases, access to spe-cialist investment teams. This appeal applies to smaller companies that

simply do not want the administrative and governance burden, and to larger schemes seeking a sophisticated and large-scale solution.

Master trusts are now required to be authorised by The Pensions Regulator, so there is more transpar-ency and a greater level of structure in the master industry. Master trusts will now be expected to have higher levels of capital backing, removing reservations around the robustness of their long-term business models. This means that the main trade-off for most employers is whether they want access to that simplicity and scale, and to what extent they’re will-ing to relinquish control over their own scheme.

“What a master trust does is take risk and potentially cost away from the employer, and delivers the scheme in a robust and scalable way,” says Alex Cave, who helps head up asset manager BlackRock’s DC business. "It’s arguably more sophis-ticated in structure than a single scheme, so there are benefits from both a member’s perspective, but also very specifically from a corpo-rate per spective."

DESIGNING THE RIGHT MASTER TRUSTEmployers looking at these develop-ments can see the quality on offer has improved as barriers to entry increase. So what does an ideal master trust scheme design look like in practice?

Designing a robust master trust involves a number of steps but, at its heart, must be an appropriate default investment solution which will help members achieve their retire-ment goals.

Good schemes will have a holis-tic approach to portfolio design,

an efficient governance structure, engaging member communications and a cost-effective offering.

INVESTMENT“We surveyed 1,000 scheme mem-bers in 2018 and the message from them was clear: they expect their employer or scheme to get good returns” says Mr Cave.

“With over 90 per cent of mem-bers typically in the default invest-ment,1 this puts a particular onus on investment design to ensure their expectations and circumstances are taken into consideration.”

Ideally, a scheme will deliver investment profiles reflecting their members’ statuses at various stages of their life, typically known as a ‘glidepath’. As the Financial Conduct

Authority’s Retirement Outcomes Review has just prescribed, schemes should have different ‘landing points’ depending on whether the member believes they will want to cash out of the pension, buy an annuity or stay invested to draw slowly from their pot.

To ensure an employer builds a robust and future-proofed invest-ment solution, many master trusts are making use of the glidepath concept. This process usually sees a younger inves-tor’s portfolio contain mainly equities and then gradually moves to a conservative port-folio, comprising predominantly fixed-income investments, as they get closer to their intended retire-ment date.

“It’s important to consider a holis-tic approach to portfolio construc-tion, particularly around the crea-tion of member-centric investments which takes into account the mem-ber’s age and circumstances,” says Mr Cave.

“When looking at the default scheme structure, it’s important not just to focus on cost and broad-based market exposure; there should be sophistica-tion on the investment content,” he says. “From an independent master trust perspective, there isn’t neces-sarily the internal skillset of invest-ment management, and they may need to source that from an invest-ment manager, but with an insur-ance or consultant master trust you would expect a significant level of that expertise.”

COSTCompanies with schemes ranging from a micro to medium size usually see a master trust as a particularly attractive proposition, due to the abil-ity for the master trust to drive nego-tiations on fees and add to the sophis-tication of the investment product in the default construct.

“I don’t think master trusts are unat-tractive for large and mega schemes, as we have moved a number of schemes of this size to master trusts in the last 18 months,” says Mr Cave.

GOVERNANCEThe subject of governance is less tan-gible than the more binary questions of investment, cost and even com-munication. Those are often easier to reflect on whether the employer’s

M

Master trusts have a real opportunity to be trailblazers on environmental, social and governance issues

Does the master trust take the right risks at the right time to give

members the best outcome?

Is the master trust an appropriate long-term vehicle for the pension

savings of employees?

trust their employers to make good decisions about how their pension is invested

as many respondents would prioritise returns over lower cost, with almost twice as many over increased contributions

Good returns

Increased contributions

Tools to stay up to date

Involves little participant involvement

Very cost effective

feel their employers should assume responsibility for selecting pension investments

Does the master trust communicate with members in an engaging way that encourages

them to increase contributions?

Does the master trust leverage its scale to provide the best value for

money to its members?

Portfolio efficiency with investment oversight and

innovation

In-house expertise, member-appropriate investment and performance measurement

Member-specific engagement and actionable illustrations

Scaled market access

INVESTMENT

GOVERNANCE

COMMUNICATIONS

PRICE

existing scheme has the resources to conduct these activities at the desired level.

But governance is the driver of all scheme aspects and companies moving from a trust-based arrangement need to balance the benefits of scale offered by a master trust against the control they will potentially relinquish.

It involves deciding how best to measure whether the scheme’s invest-ments are delivering against their objectives; whether they are providing value for money and that all investment considerations, including environmen-tal, social and governance (ESG), have been taken into consideration.

“The concern from those firms would be, ‘If we put this into a master trust, do we end up with something off the shelf and do we lose the abil-ity to tailor it specifically to our mem-bers?’ What we’ve seen is that master trusts absolutely have the capabil-ity to tailor those products for large schemes, removing this concern,” says Mr Cave.

COMMUNICATIONSWhile easing the governance duty of running a DC scheme is a key ben-efit for employers, members, too, can gain from this switch. Master trusts can invest at scale in com-munications platforms and drive engagement to increase contribu-tions, and create better outcomes for members.

“It’s a major challenge for the retirement industry to help people meet their retirement goal, as people are not yet used to holding sole responsibility for their retirement future,” says Mr Cave. “Many people are clinging on to the notion of ‘my employer will take care of me’ and are not used to thinking about their retirement savings.

“As more people become solely dependent on their DC pots, it’s vital that they are made more aware of the choices and responsibilities in front of them.”

BlackRock’s 2018 DC Pulse Survey found that only 12 per cent of respond-ents know exactly how much is in their DC pot from their current employer, indicating members need to be given the right tools to be better informed of their progress.

The potential scale of master trusts means they may be able to fund a dedicated communications team. Master trusts have the ability to seg-ment their member communications, too. For example, having different

issues, and master trusts have a chance to become advocates for good. This is what the best master trusts have done; they’ve in-built ESG into their default,” says Mr Cave.

The question of how best to incorpo-rate ESG into a master trust is increas-ingly relevant as proposed regulations across the UK and European Union are set to more clearly define inves-tor duties. Trustees will soon need to have some form of articulated strategy around ESG, with evidence of specific actions that have been made to meet ESG requirements.

“In the master trust structure, there is significant scope for BlackRock to offer guidance and support on select-ing investment products to improve the quality of investment defaults,” says Mr Cave.

“We are uniquely experienced to help our clients, including master trusts, take a holistic view of their portfolios and what they’re trying to achieve. Often the solution is a blend of different invest-ment strategies, which we optimise to be as cost efficient as possible.

“Ultimately, what we are looking to do is improve the member journey and find new ways to provide them with better security on their retire-ment dreams.”

For more information please visit www.blackrock.com/institutions/en-gb/solutions/defined-contribution

communication programmes for retail workers, engineers and dentists to reflect their different retirement targets.

“Although the underlying mechanism is the same, it’s not just one huge pool where every member gets the same user experience. There are a number of opportunities to tailor engagement with members on a granular level,” says Mr Cave.

“Good schemes engage with their members and speak to them on digital platforms, aimed at driving an increase in contributions.”

GROWING ROLE OF ESGThere is a growing demand for master trusts to consider the ESG aspect of scheme investments. Members are growing more interested in where their money is being invested and if it’s being invested in a sustainable way. According to DC Pulse, seven in ten members would invest in an ESG fund, even if it had lower returns or higher fees.

“Master trusts have a real opportu-nity to be trailblazers on ESG issues. We have a significant responsibil-ity as an industry to manage envi-ronmental, social and governance

81%

3x

72%DC Pulse Survey, BlackRock 2018

Broadridge DC Monitor 2017

The Pensions Regulator 2018

defined contribution (DC) schemes in the UK

of the workplace pension market, more than 10 million people, have been auto-enrolled

of respondents know exactly how much is in their DC pot from their current employer

200k+

42%

12%

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No 2020394. Tel. 020 7743 3000. For your protec-tion, telephone calls are usually recorded.BlackRock is a trading name of BlackRock Investment Management (UK) Limited. © 2019 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylised i logo are registered and unregistered trademarks of BlackRock,Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.BlackRock DC Pulse Survey conducted in associ-ation with research agency Illuminas in May-June 2018 among a nationally representative sample of 1,000 UK representatives aged 25-69 years old, earning £10,000 or more and who are contribut-ing to a defined contribution workplace scheme. The results of this survey are provided for informa-tion purposes only.

1 The Pensions Regulator, 2018² Broadridge DC Monitor 2017

What a master trust does is take risk and potentially cost away from the employer, and delivers the scheme in a robust and scalable way

37%

21%

17%

13%

11%

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0504

Commercial feature Commercial feature

Rise of master trusts

WHAT MAKES A GOOD MASTER TRUST?MAIN CONSIDERATIONS

WHAT DO SCHEME MEMBERS WANT?PENSION MEMBERS WANT THEIR EMPLOYER TO FOCUS ON RETURNS

EMPLOYERS ARE TRUSTED TO BUILD AND MAINTAIN THE PLANThe pensions landscape has changed dramatically since the rollout of auto-enrolment. Master trusts have an increasingly important role to play in future retirement saving

DC Pulse Survey, BlackRock 2018BlackRock 2019

ore than ten million people, 42 per cent of the workplace pension market, have been

auto-enrolled since 20121 and master trusts play a role across the whole spectrum - from simple, cost-effec-tive solutions to premium, customis-able arrangements.

At the same time, pension schemes have had to implement new stand-ards to protect members, while trus-tees are under increasing pressure to professionalise and report on the factors they take into consideration. For master trusts, tougher regula-tions focused on reducing risks are leading to consolidation.

All of this evolution gives pause to assess the UK retirement market and where it is headed. There are more than 200,000 defined contribution (DC) schemes in the UK.2 These are split between contract based, which gives a direct link between employee and provider, and trust based, where the employer plays a more prominent role via its appointed set of trustees.

As defined benefit schemes fade and DC becomes the sole recepta-cle for retirement saving, the appeal of master trusts is simple. They give employers access to a trust arrange-ment with one trustee board to over-see governance, lower operating costs through economies of scale and, in some cases, access to spe-cialist investment teams. This appeal applies to smaller companies that

simply do not want the administrative and governance burden, and to larger schemes seeking a sophisticated and large-scale solution.

Master trusts are now required to be authorised by The Pensions Regulator, so there is more transpar-ency and a greater level of structure in the master industry. Master trusts will now be expected to have higher levels of capital backing, removing reservations around the robustness of their long-term business models. This means that the main trade-off for most employers is whether they want access to that simplicity and scale, and to what extent they’re will-ing to relinquish control over their own scheme.

“What a master trust does is take risk and potentially cost away from the employer, and delivers the scheme in a robust and scalable way,” says Alex Cave, who helps head up asset manager BlackRock’s DC business. "It’s arguably more sophis-ticated in structure than a single scheme, so there are benefits from both a member’s perspective, but also very specifically from a corpo-rate per spective."

DESIGNING THE RIGHT MASTER TRUSTEmployers looking at these develop-ments can see the quality on offer has improved as barriers to entry increase. So what does an ideal master trust scheme design look like in practice?

Designing a robust master trust involves a number of steps but, at its heart, must be an appropriate default investment solution which will help members achieve their retire-ment goals.

Good schemes will have a holis-tic approach to portfolio design,

an efficient governance structure, engaging member communications and a cost-effective offering.

INVESTMENT“We surveyed 1,000 scheme mem-bers in 2018 and the message from them was clear: they expect their employer or scheme to get good returns” says Mr Cave.

“With over 90 per cent of mem-bers typically in the default invest-ment,1 this puts a particular onus on investment design to ensure their expectations and circumstances are taken into consideration.”

Ideally, a scheme will deliver investment profiles reflecting their members’ statuses at various stages of their life, typically known as a ‘glidepath’. As the Financial Conduct

Authority’s Retirement Outcomes Review has just prescribed, schemes should have different ‘landing points’ depending on whether the member believes they will want to cash out of the pension, buy an annuity or stay invested to draw slowly from their pot.

To ensure an employer builds a robust and future-proofed invest-ment solution, many master trusts are making use of the glidepath concept. This process usually sees a younger inves-tor’s portfolio contain mainly equities and then gradually moves to a conservative port-folio, comprising predominantly fixed-income investments, as they get closer to their intended retire-ment date.

“It’s important to consider a holis-tic approach to portfolio construc-tion, particularly around the crea-tion of member-centric investments which takes into account the mem-ber’s age and circumstances,” says Mr Cave.

“When looking at the default scheme structure, it’s important not just to focus on cost and broad-based market exposure; there should be sophistica-tion on the investment content,” he says. “From an independent master trust perspective, there isn’t neces-sarily the internal skillset of invest-ment management, and they may need to source that from an invest-ment manager, but with an insur-ance or consultant master trust you would expect a significant level of that expertise.”

COSTCompanies with schemes ranging from a micro to medium size usually see a master trust as a particularly attractive proposition, due to the abil-ity for the master trust to drive nego-tiations on fees and add to the sophis-tication of the investment product in the default construct.

“I don’t think master trusts are unat-tractive for large and mega schemes, as we have moved a number of schemes of this size to master trusts in the last 18 months,” says Mr Cave.

GOVERNANCEThe subject of governance is less tan-gible than the more binary questions of investment, cost and even com-munication. Those are often easier to reflect on whether the employer’s

M

Master trusts have a real opportunity to be trailblazers on environmental, social and governance issues

Does the master trust take the right risks at the right time to give

members the best outcome?

Is the master trust an appropriate long-term vehicle for the pension

savings of employees?

trust their employers to make good decisions about how their pension is invested

as many respondents would prioritise returns over lower cost, with almost twice as many over increased contributions

Good returns

Increased contributions

Tools to stay up to date

Involves little participant involvement

Very cost effective

feel their employers should assume responsibility for selecting pension investments

Does the master trust communicate with members in an engaging way that encourages

them to increase contributions?

Does the master trust leverage its scale to provide the best value for

money to its members?

Portfolio efficiency with investment oversight and

innovation

In-house expertise, member-appropriate investment and performance measurement

Member-specific engagement and actionable illustrations

Scaled market access

INVESTMENT

GOVERNANCE

COMMUNICATIONS

PRICE

existing scheme has the resources to conduct these activities at the desired level.

But governance is the driver of all scheme aspects and companies moving from a trust-based arrangement need to balance the benefits of scale offered by a master trust against the control they will potentially relinquish.

It involves deciding how best to measure whether the scheme’s invest-ments are delivering against their objectives; whether they are providing value for money and that all investment considerations, including environmen-tal, social and governance (ESG), have been taken into consideration.

“The concern from those firms would be, ‘If we put this into a master trust, do we end up with something off the shelf and do we lose the abil-ity to tailor it specifically to our mem-bers?’ What we’ve seen is that master trusts absolutely have the capabil-ity to tailor those products for large schemes, removing this concern,” says Mr Cave.

COMMUNICATIONSWhile easing the governance duty of running a DC scheme is a key ben-efit for employers, members, too, can gain from this switch. Master trusts can invest at scale in com-munications platforms and drive engagement to increase contribu-tions, and create better outcomes for members.

“It’s a major challenge for the retirement industry to help people meet their retirement goal, as people are not yet used to holding sole responsibility for their retirement future,” says Mr Cave. “Many people are clinging on to the notion of ‘my employer will take care of me’ and are not used to thinking about their retirement savings.

“As more people become solely dependent on their DC pots, it’s vital that they are made more aware of the choices and responsibilities in front of them.”

BlackRock’s 2018 DC Pulse Survey found that only 12 per cent of respond-ents know exactly how much is in their DC pot from their current employer, indicating members need to be given the right tools to be better informed of their progress.

The potential scale of master trusts means they may be able to fund a dedicated communications team. Master trusts have the ability to seg-ment their member communications, too. For example, having different

issues, and master trusts have a chance to become advocates for good. This is what the best master trusts have done; they’ve in-built ESG into their default,” says Mr Cave.

The question of how best to incorpo-rate ESG into a master trust is increas-ingly relevant as proposed regulations across the UK and European Union are set to more clearly define inves-tor duties. Trustees will soon need to have some form of articulated strategy around ESG, with evidence of specific actions that have been made to meet ESG requirements.

“In the master trust structure, there is significant scope for BlackRock to offer guidance and support on select-ing investment products to improve the quality of investment defaults,” says Mr Cave.

“We are uniquely experienced to help our clients, including master trusts, take a holistic view of their portfolios and what they’re trying to achieve. Often the solution is a blend of different invest-ment strategies, which we optimise to be as cost efficient as possible.

“Ultimately, what we are looking to do is improve the member journey and find new ways to provide them with better security on their retire-ment dreams.”

For more information please visit www.blackrock.com/institutions/en-gb/solutions/defined-contribution

communication programmes for retail workers, engineers and dentists to reflect their different retirement targets.

“Although the underlying mechanism is the same, it’s not just one huge pool where every member gets the same user experience. There are a number of opportunities to tailor engagement with members on a granular level,” says Mr Cave.

“Good schemes engage with their members and speak to them on digital platforms, aimed at driving an increase in contributions.”

GROWING ROLE OF ESGThere is a growing demand for master trusts to consider the ESG aspect of scheme investments. Members are growing more interested in where their money is being invested and if it’s being invested in a sustainable way. According to DC Pulse, seven in ten members would invest in an ESG fund, even if it had lower returns or higher fees.

“Master trusts have a real opportu-nity to be trailblazers on ESG issues. We have a significant responsibil-ity as an industry to manage envi-ronmental, social and governance

81%

3x

72%DC Pulse Survey, BlackRock 2018

Broadridge DC Monitor 2017

The Pensions Regulator 2018

defined contribution (DC) schemes in the UK

of the workplace pension market, more than 10 million people, have been auto-enrolled

of respondents know exactly how much is in their DC pot from their current employer

200k+

42%

12%

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No 2020394. Tel. 020 7743 3000. For your protec-tion, telephone calls are usually recorded.BlackRock is a trading name of BlackRock Investment Management (UK) Limited. © 2019 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylised i logo are registered and unregistered trademarks of BlackRock,Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.BlackRock DC Pulse Survey conducted in associ-ation with research agency Illuminas in May-June 2018 among a nationally representative sample of 1,000 UK representatives aged 25-69 years old, earning £10,000 or more and who are contribut-ing to a defined contribution workplace scheme. The results of this survey are provided for informa-tion purposes only.

1 The Pensions Regulator, 2018² Broadridge DC Monitor 2017

What a master trust does is take risk and potentially cost away from the employer, and delivers the scheme in a robust and scalable way

37%

21%

17%

13%

11%

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0706

Companies with fi nal salary or defi ned benefi t (DB) pensions are “unlikely to have a quiet year in 2019”, according to Sir Steve Webb, former pensions minister and direc-tor of policy and external communi-cations at Royal London.

DB schemes received a nasty shock in October when a legal case put the cat among the pigeons. The case con-cerns the equalisation of guaranteed minimum pensions (GMPs), a com-plex program of calculations that stems from a time when workplace pension funds could opt out of the government's state earnings-related pension scheme (SERPS).

Spiralling costs and volatility

The ruling instructed Lloyds Bank Pension Scheme to equalise benefi ts between men and women further than had already been completed. The ruling requires all DB schemes to check their fi gures and ensure they have acted in the same way.

“Almost all DB pension plans are affected,” says Matthew Arends, head of UK retirement policy at consulting firm Aon. “There is an accounting impact as almost exclusively the cost gets taken through P&L [profit and loss] and therefore grabs the attention of the finance team.”

The cost to Lloyds will be around £100 million, but across all DB schemes could be as much as £15 billion.

The new year brings fresh challenges for UK employers, and changes to the pensions landscape on the horizon should be closely watched by business leaders

What to watch out for in 2019

1 42

Uncertainty is a global theme. The implications of a slowdown in the United States and/or China would be far reaching, but markets have responded well to policy support from these governments.

If investment returns fall, this will place pressure on any DB scheme’s funding, with employers having to foot the bill.

Defi cits remain a headache for those funding these schemes, and the Brexit process will have an infl u-ence on volatility and interest rates.

“A bumpy transition could lead policymakers to cut interest rates to keep the economy on track, and this in turn could lead to higher deficits and more pressure on employers to increase contribu-tions,” says Sir Steve.

Though prime minister Theresa May’s defeat of a no-confi dence vote brought some calm to the mar-kets, each step of the Brexit journey brings more uncertainty.

“For investors, it means further uncertainty in the near term, and it could mean a bumpy ride for both markets and sterling in the coming weeks as the saga con-tinues to unfold,” says Terence Moll, chief strategist at Seven Investment Management.

Market madness

One of the biggest changes among defi ned contribution (DC) pensions will come in April when automatic enrolment (AE) mandatory contri-butions are increased.

Employees enrolled in these schemes must now have a minimum contribution of 8 per cent, with a minimum 3 per cent coming from the employer. Some already contrib-ute above these levels and will not notice any increase, but those oper-ating at minimum levels will see this liability increase by 50 per cent.

“That will be signifi cant for some employers,” says Mr Arends. “The worst hit are likely to be those with large numbers of lower-paid staff ,

Governance is the foundation of all good investment strategies, but growing concerns about the impact of climate change on future returns and the desire for investors to do no harm with their pension funds have seen environmental, social and gov-ernance (ESG) rise swiftly up the corporate agenda.

New investment regulations on ESG come into force from October 1, 2019, requiring pension schemes to make fuller disclosure of their policies.

“Pension schemes should be think-ing hard about about which fac-tors pose risks to their portfolios

Automatic for the people

The rise of ESG

such as retailers, who are already having a tough time."

And further rises should be antic-ipated. The average contribution rates to pensions have fallen signif-icantly in recent years as the num-bers of employees participating in schemes has shot up. Though an additional ten million people are now saving for retirement, they’re saving at lower levels which are not suffi cient to generate meaningful income in retirement.

“Those contribution rates will have to rise, so employers should plan not just for the cost increases coming this April, but also for fur-ther increases in the future,” says Tom McPhail, head of policy at Hargreaves Lansdown in Bristol.

of investments, and how an ESG approach fi ts with their investment philosophy and beliefs,” says Caroline Escott, policy lead of investment and stewardship at the Pensions and Lifetime Savings Association.

It has never been easier to adopt ESG-friendly investment strategies and products, but schemes must be sure they have made the right choice.

“It’s vital schemes work with their advisers to do the proper due diligence and differentiate between those asset managers who are walking the walk on ESG and stewardship issues, and those who are just greenwashing,” says Ms Escott.

P E N S I O N S O U T L O O K

Pádraig Floyd3

5

6

As AE was introduced, many new mas-ter trusts – multi-employer schemes designed to consolidate small DC schemes into one large organisation – were formed.

These providers came under scru-tiny and have had to adopt a new reg-ulatory framework. This is far more stringent and requires considerable capital reserves to protect the mem-bers of the schemes they operate from potential insolvency.

It will not only raise standards, but also result in many of these provid-ers exiting the market, in turn lead-ing to consolidation of providers, according to Darren Philp, head of policy at Smart Pension.

“The Pensions Regulator will continue to seek to raise stand-ards among employers that provide pensions themselves, and we are

Consolidation of the consolidators?

expecting more and more of these schemes to move to a master-trust arrangement,” says Mr Philp.

Tighter regulation means better safeguards for employees, but there could be repercussions for some employers if their chosen provider should withdraw from the market.

“Employers using a master trust should stay in touch with their pro-vider and check they’re getting their authorisation completed in a timely manner,” says Mr McPhail. “They may also want to speak to their adviser about whether an alterna-tive scheme is going to be needed.”

An anomaly exists whereby many of these master trusts do not deliver pension tax relief on contributions made by lower-paid employees. This may become a bone of con-tention in 2019, warns Sir Steve. “Employers may be asked to jus-tify why they have opted for such a scheme,” he says.

A new form of pension fund may be given the green light in 2019. Collective defi ned contribution (CDC) presents an interesting third way between DB and DC. It off ers less than a guarantee, but more than the uncer-tainty of a conventional DC scheme.

There is a debate over whether CDC can work, but with interest from Royal Mail and postal unions to trial one, we may see legislation passed to allow the fi rst scheme to be created.

Some commentators believe employers will be attracted by the

We’re all in it together extra fl exibility and partnership with employees. However, Mark Smith, partner at law fi rm Taylor Wessing, believes that most employ-ers who have already abandoned DB schemes are unlikely to want to con-sider CDC.

“Employers will be concerned the government may move the goal posts, as we have seen many times in the past. But DC arrangements off er more predictable costs and lev-els of risk, and this is now market practice. We simply don't see a need to just spend time and money look-ing into another alternative.”

Commercial feature

Pensions must get smarter to serve millennials Better education and new innovation will be vital to leverage the initial success of auto-enrolment and create a sustainable pensions environment that works for everyone

of the workforce will be millennials by next year, rising to three quarters by 2030

amount of private pension savings needed for a comfortable retirement for the average worker

1 2/

£260k

ollout of auto-enrolment over the last seven years has transformed the pensions

landscape in the UK and resulted in around ten million extra people saving for their retirement by contributing through a workplace savings scheme.

While these numbers are impressive, workers are still not saving enough. According to insurer Royal London, the average person in the UK would need a pension pot of at least £260,000 to have a sufficient retirement income. This would provide an annual pension income of just over £9,000 in addition to the state pension of £8,546.20.

This amount is unlikely to be achieved by sticking, as most people do, with the minimum employee contribution required of auto-enrolment, which is currently 3 per cent and rises to 5 per cent in April. According to analysis from Fidelity International, an average male earner aged between 25 and 34 in this scenario would achieve a pot of only £142,836, while an average female earner of the same age would reach just £126,784.

The most pressing challenge was highlighted last year by a Pensions and Lifetime Savings Association study which found that more than half of workers believe the minimum contri-bution level of auto-enrolment is the amount government recommends to achieve enough retirement income. It’s clear that more education is crucial.

“Auto-enrolment has done a fan-tastic job of engaging workers in pen-sions again, but those minimum levels just aren’t adequate for providing a sustainable retirement,” says Duncan Watson, chief executive EQ Paymaster at Equiniti. “We need to find better ways

to educate folk on the impact of taking or not taking actions. It’s about holistic wealth and benefits planning, education and training so savers have information that is easy to understand and platforms that are easy to transact on.”

The demographic that requires the most attention is the younger gen-eration. Already the largest segment in the workforce, millennials are expected to make up half of workers by next year and around 75 per cent by 2030. A recent study by Prudential found that more than two thirds of under-35s have joined workplace pension schemes which, while lower than older demographics, defies common perceptions that millennials are unwilling to engage with longer-term saving.

In the same Prudential study, more than half of millennials said they want more education and support around pensions from their employers. This will be particularly vital in 2019 with Royal London research indicating that April’s rise in minimum contributions for auto-enrolment could cause up to a third of millennials to opt out.

“The expectations and desires of millennials and generation Z work-ers are very different,” says Andrew Woolnough, director of HR Solutions at Equiniti. “Savvy employers are cot-toning on to the needs and desires of this growing slice of the working pop-ulation and recognising that more pen-sion guidance can have a demonstrable impact on their employees’ job satis-faction as well as their own bottom line by improving productivity, attraction and retention.”

However, the role of educating people on pensions shouldn’t only fall to employers. The government has a responsibility at multiple levels, not least because better education should alleviate stress on the welfare state and the NHS. Parents and schools have an obligation to increase financial awareness among children, while the pensions industry must catch up with other financial services in providing strong and engaging content.

This will become increasingly impor-tant as pensions become even more complicated. Millennials have replaced the “job for life” concept favoured by older generations with a preference for switching jobs every couple of years, resulting in numerous pots of funds in different places. With no “pot follows member” legislation in the UK, it is likely to fall to the pensions industry to provide the innovation required to keep track.

“The pensions dashboard champi-oned by government is a great con-cept, but without compulsion it’s going to be very difficult to execute,” says Mr Watson. “The industry must evolve to allow individuals to keep track of all their pensions savings and make financial decisions from a position of strength, not make individual point decisions on just the current arrange-ment they are contributing to.”

For more information please visitwww.equiniti.com

R

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0706

Companies with fi nal salary or defi ned benefi t (DB) pensions are “unlikely to have a quiet year in 2019”, according to Sir Steve Webb, former pensions minister and direc-tor of policy and external communi-cations at Royal London.

DB schemes received a nasty shock in October when a legal case put the cat among the pigeons. The case con-cerns the equalisation of guaranteed minimum pensions (GMPs), a com-plex program of calculations that stems from a time when workplace pension funds could opt out of the government's state earnings-related pension scheme (SERPS).

Spiralling costs and volatility

The ruling instructed Lloyds Bank Pension Scheme to equalise benefi ts between men and women further than had already been completed. The ruling requires all DB schemes to check their fi gures and ensure they have acted in the same way.

“Almost all DB pension plans are affected,” says Matthew Arends, head of UK retirement policy at consulting firm Aon. “There is an accounting impact as almost exclusively the cost gets taken through P&L [profit and loss] and therefore grabs the attention of the finance team.”

The cost to Lloyds will be around £100 million, but across all DB schemes could be as much as £15 billion.

The new year brings fresh challenges for UK employers, and changes to the pensions landscape on the horizon should be closely watched by business leaders

What to watch out for in 2019

1 42

Uncertainty is a global theme. The implications of a slowdown in the United States and/or China would be far reaching, but markets have responded well to policy support from these governments.

If investment returns fall, this will place pressure on any DB scheme’s funding, with employers having to foot the bill.

Defi cits remain a headache for those funding these schemes, and the Brexit process will have an infl u-ence on volatility and interest rates.

“A bumpy transition could lead policymakers to cut interest rates to keep the economy on track, and this in turn could lead to higher deficits and more pressure on employers to increase contribu-tions,” says Sir Steve.

Though prime minister Theresa May’s defeat of a no-confi dence vote brought some calm to the mar-kets, each step of the Brexit journey brings more uncertainty.

“For investors, it means further uncertainty in the near term, and it could mean a bumpy ride for both markets and sterling in the coming weeks as the saga con-tinues to unfold,” says Terence Moll, chief strategist at Seven Investment Management.

Market madness

One of the biggest changes among defi ned contribution (DC) pensions will come in April when automatic enrolment (AE) mandatory contri-butions are increased.

Employees enrolled in these schemes must now have a minimum contribution of 8 per cent, with a minimum 3 per cent coming from the employer. Some already contrib-ute above these levels and will not notice any increase, but those oper-ating at minimum levels will see this liability increase by 50 per cent.

“That will be signifi cant for some employers,” says Mr Arends. “The worst hit are likely to be those with large numbers of lower-paid staff ,

Governance is the foundation of all good investment strategies, but growing concerns about the impact of climate change on future returns and the desire for investors to do no harm with their pension funds have seen environmental, social and gov-ernance (ESG) rise swiftly up the corporate agenda.

New investment regulations on ESG come into force from October 1, 2019, requiring pension schemes to make fuller disclosure of their policies.

“Pension schemes should be think-ing hard about about which fac-tors pose risks to their portfolios

Automatic for the people

The rise of ESG

such as retailers, who are already having a tough time."

And further rises should be antic-ipated. The average contribution rates to pensions have fallen signif-icantly in recent years as the num-bers of employees participating in schemes has shot up. Though an additional ten million people are now saving for retirement, they’re saving at lower levels which are not suffi cient to generate meaningful income in retirement.

“Those contribution rates will have to rise, so employers should plan not just for the cost increases coming this April, but also for fur-ther increases in the future,” says Tom McPhail, head of policy at Hargreaves Lansdown in Bristol.

of investments, and how an ESG approach fi ts with their investment philosophy and beliefs,” says Caroline Escott, policy lead of investment and stewardship at the Pensions and Lifetime Savings Association.

It has never been easier to adopt ESG-friendly investment strategies and products, but schemes must be sure they have made the right choice.

“It’s vital schemes work with their advisers to do the proper due diligence and differentiate between those asset managers who are walking the walk on ESG and stewardship issues, and those who are just greenwashing,” says Ms Escott.

P E N S I O N S O U T L O O K

Pádraig Floyd3

5

6

As AE was introduced, many new mas-ter trusts – multi-employer schemes designed to consolidate small DC schemes into one large organisation – were formed.

These providers came under scru-tiny and have had to adopt a new reg-ulatory framework. This is far more stringent and requires considerable capital reserves to protect the mem-bers of the schemes they operate from potential insolvency.

It will not only raise standards, but also result in many of these provid-ers exiting the market, in turn lead-ing to consolidation of providers, according to Darren Philp, head of policy at Smart Pension.

“The Pensions Regulator will continue to seek to raise stand-ards among employers that provide pensions themselves, and we are

Consolidation of the consolidators?

expecting more and more of these schemes to move to a master-trust arrangement,” says Mr Philp.

Tighter regulation means better safeguards for employees, but there could be repercussions for some employers if their chosen provider should withdraw from the market.

“Employers using a master trust should stay in touch with their pro-vider and check they’re getting their authorisation completed in a timely manner,” says Mr McPhail. “They may also want to speak to their adviser about whether an alterna-tive scheme is going to be needed.”

An anomaly exists whereby many of these master trusts do not deliver pension tax relief on contributions made by lower-paid employees. This may become a bone of con-tention in 2019, warns Sir Steve. “Employers may be asked to jus-tify why they have opted for such a scheme,” he says.

A new form of pension fund may be given the green light in 2019. Collective defi ned contribution (CDC) presents an interesting third way between DB and DC. It off ers less than a guarantee, but more than the uncer-tainty of a conventional DC scheme.

There is a debate over whether CDC can work, but with interest from Royal Mail and postal unions to trial one, we may see legislation passed to allow the fi rst scheme to be created.

Some commentators believe employers will be attracted by the

We’re all in it together extra fl exibility and partnership with employees. However, Mark Smith, partner at law fi rm Taylor Wessing, believes that most employ-ers who have already abandoned DB schemes are unlikely to want to con-sider CDC.

“Employers will be concerned the government may move the goal posts, as we have seen many times in the past. But DC arrangements off er more predictable costs and lev-els of risk, and this is now market practice. We simply don't see a need to just spend time and money look-ing into another alternative.”

Commercial feature

Pensions must get smarter to serve millennials Better education and new innovation will be vital to leverage the initial success of auto-enrolment and create a sustainable pensions environment that works for everyone

of the workforce will be millennials by next year, rising to three quarters by 2030

amount of private pension savings needed for a comfortable retirement for the average worker

1 2/

£260k

ollout of auto-enrolment over the last seven years has transformed the pensions

landscape in the UK and resulted in around ten million extra people saving for their retirement by contributing through a workplace savings scheme.

While these numbers are impressive, workers are still not saving enough. According to insurer Royal London, the average person in the UK would need a pension pot of at least £260,000 to have a sufficient retirement income. This would provide an annual pension income of just over £9,000 in addition to the state pension of £8,546.20.

This amount is unlikely to be achieved by sticking, as most people do, with the minimum employee contribution required of auto-enrolment, which is currently 3 per cent and rises to 5 per cent in April. According to analysis from Fidelity International, an average male earner aged between 25 and 34 in this scenario would achieve a pot of only £142,836, while an average female earner of the same age would reach just £126,784.

The most pressing challenge was highlighted last year by a Pensions and Lifetime Savings Association study which found that more than half of workers believe the minimum contri-bution level of auto-enrolment is the amount government recommends to achieve enough retirement income. It’s clear that more education is crucial.

“Auto-enrolment has done a fan-tastic job of engaging workers in pen-sions again, but those minimum levels just aren’t adequate for providing a sustainable retirement,” says Duncan Watson, chief executive EQ Paymaster at Equiniti. “We need to find better ways

to educate folk on the impact of taking or not taking actions. It’s about holistic wealth and benefits planning, education and training so savers have information that is easy to understand and platforms that are easy to transact on.”

The demographic that requires the most attention is the younger gen-eration. Already the largest segment in the workforce, millennials are expected to make up half of workers by next year and around 75 per cent by 2030. A recent study by Prudential found that more than two thirds of under-35s have joined workplace pension schemes which, while lower than older demographics, defies common perceptions that millennials are unwilling to engage with longer-term saving.

In the same Prudential study, more than half of millennials said they want more education and support around pensions from their employers. This will be particularly vital in 2019 with Royal London research indicating that April’s rise in minimum contributions for auto-enrolment could cause up to a third of millennials to opt out.

“The expectations and desires of millennials and generation Z work-ers are very different,” says Andrew Woolnough, director of HR Solutions at Equiniti. “Savvy employers are cot-toning on to the needs and desires of this growing slice of the working pop-ulation and recognising that more pen-sion guidance can have a demonstrable impact on their employees’ job satis-faction as well as their own bottom line by improving productivity, attraction and retention.”

However, the role of educating people on pensions shouldn’t only fall to employers. The government has a responsibility at multiple levels, not least because better education should alleviate stress on the welfare state and the NHS. Parents and schools have an obligation to increase financial awareness among children, while the pensions industry must catch up with other financial services in providing strong and engaging content.

This will become increasingly impor-tant as pensions become even more complicated. Millennials have replaced the “job for life” concept favoured by older generations with a preference for switching jobs every couple of years, resulting in numerous pots of funds in different places. With no “pot follows member” legislation in the UK, it is likely to fall to the pensions industry to provide the innovation required to keep track.

“The pensions dashboard champi-oned by government is a great con-cept, but without compulsion it’s going to be very difficult to execute,” says Mr Watson. “The industry must evolve to allow individuals to keep track of all their pensions savings and make financial decisions from a position of strength, not make individual point decisions on just the current arrange-ment they are contributing to.”

For more information please visitwww.equiniti.com

R

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0908

PERCENTAGE SAVING ADEQUATELY FOR RETIREMENT

Proportion of people over 30 who are saving at least 12 per cent of their income or expecting their main retirement income to come from a defi ned benefi t pension

SAVINGS SHORTFALLEven with the introduction of auto-enrolment and scheduled increases in contributions, Britons are not saving enough for their retirement. With one in eight retirees relying solely on the state pension, there is a real risk that fi nancial pressures and a decline in standards of living could push more and more people into poverty as they retire, particularly if they do not own their own home

Prudential 2018

of people who retired in 2018 have made no provision for their retirement

12%

Scottish Widows 2018

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

55%

46%

49%

51%

56%

48%

51%

46%

45%

53%

56% 56% 56%

55%

October: Auto-enrolment (AE) begins for the UK’s largest employers; minimum contribution set at 2 per cent April: AE staging

begins for mid-sized employers (50 to 249 employees)

August: AE staging begins for small companies (30 to 49 employees)

January: AE staging begins for smallest companies (under 30 employees)

April: AE minimum contributions increase to 5 per cent

April: AE minimum contributions set to increase to 8 per cent

Although savings levels have increased over the last fi ve years, auto-enrolment has not solved the dilemma that a big proportion of the country is still not prepared for retirement

WEEKLY MONEY NEEDED FOR AN ACCEPTABLE STANDARD OF LIVING

Amount needed

£192.27

Shortfall for those without retirement

provisions

£27.92

State pension contribution

£164.35

Joseph Rowntree Foundation/Department for Work and Pensions 2018

HOW FUTURE GENERATIONS OF RETIREES WILL FARE

UK workers and retirees were asked about future generations compared with those currently in retirement

proportion of the average retiree’s total retirement income that will come from the state pension

33%46%of retirees feel they are either not fi nancially well prepared for retirement or are unsure about their preparations

Don’t know

11%

Worse off

59%

About the same

22%

Better off

9%

PERCENTAGE OF RETIREES WITH NO PENSION SAVINGS

Percentage of those entering retirement in 2018 only

SAVING PREPAREDNESS

UK workers were asked if they were saving enough for their anticipated retirement needs

I don’t know if I am on course to achieve my retirement income

33%

No, I am on course to achieve around one quarter of my retirement income

12%

No, I am on course to achieve around half of my retirement income

17%

No, I am on course to achieve around three quarters of my retirement income

13%

Yes, I am on course to achieve my retirement income

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

23% 22% 20% 20% 16% 16% 14% 15% 14% 14% 12%

Prudential 2018 Aegon 2018

Percentages may not add up to 100 due to rounding

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 0908

PERCENTAGE SAVING ADEQUATELY FOR RETIREMENT

Proportion of people over 30 who are saving at least 12 per cent of their income or expecting their main retirement income to come from a defi ned benefi t pension

SAVINGS SHORTFALLEven with the introduction of auto-enrolment and scheduled increases in contributions, Britons are not saving enough for their retirement. With one in eight retirees relying solely on the state pension, there is a real risk that fi nancial pressures and a decline in standards of living could push more and more people into poverty as they retire, particularly if they do not own their own home

Prudential 2018

of people who retired in 2018 have made no provision for their retirement

12%

Scottish Widows 2018

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

55%

46%

49%

51%

56%

48%

51%

46%

45%

53%

56% 56% 56%

55%

October: Auto-enrolment (AE) begins for the UK’s largest employers; minimum contribution set at 2 per cent April: AE staging

begins for mid-sized employers (50 to 249 employees)

August: AE staging begins for small companies (30 to 49 employees)

January: AE staging begins for smallest companies (under 30 employees)

April: AE minimum contributions increase to 5 per cent

April: AE minimum contributions set to increase to 8 per cent

Although savings levels have increased over the last fi ve years, auto-enrolment has not solved the dilemma that a big proportion of the country is still not prepared for retirement

WEEKLY MONEY NEEDED FOR AN ACCEPTABLE STANDARD OF LIVING

Amount needed

£192.27

Shortfall for those without retirement

provisions

£27.92

State pension contribution

£164.35

Joseph Rowntree Foundation/Department for Work and Pensions 2018

HOW FUTURE GENERATIONS OF RETIREES WILL FARE

UK workers and retirees were asked about future generations compared with those currently in retirement

proportion of the average retiree’s total retirement income that will come from the state pension

33%46%of retirees feel they are either not fi nancially well prepared for retirement or are unsure about their preparations

Don’t know

11%

Worse off

59%

About the same

22%

Better off

9%

PERCENTAGE OF RETIREES WITH NO PENSION SAVINGS

Percentage of those entering retirement in 2018 only

SAVING PREPAREDNESS

UK workers were asked if they were saving enough for their anticipated retirement needs

I don’t know if I am on course to achieve my retirement income

33%

No, I am on course to achieve around one quarter of my retirement income

12%

No, I am on course to achieve around half of my retirement income

17%

No, I am on course to achieve around three quarters of my retirement income

13%

Yes, I am on course to achieve my retirement income

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

23% 22% 20% 20% 16% 16% 14% 15% 14% 14% 12%

Prudential 2018 Aegon 2018

Percentages may not add up to 100 due to rounding

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 1110

Stuart BreyerChief executiveMallow Street

’d argue the biggest chal-lenge we have ever faced in the history of humanity

is climate change. I’d also argue it’s the biggest opportunity for business and investors in the 21st century.

It is clear climate change is a very real, very present danger. Mark Carney, governor of the Bank of England, has fl agged climate change as a “signifi -cant risk for global fi nancial stability”. And in 2015, the Paris agreement set out meaningful goals: the world col-lectively agreed to limit global warm-ing to a “two-degree scenario”.

However, as writer and broad-caster Dr Gabrielle Walker rightly points out, the world isn’t tracking to a two-degree scenario. We are, in fact, doing an excellent job of track-ing to a six-degree scenario. And a six-degree scenario is catastrophic: droughts, fl oods, rising sea levels, food shortages, water shortages. And all this would be on a global scale. It is scary stuff , but it isn’t all doom and gloom.

Many pension funds acknowledge climate change presents diffi culties outside mere material risks; they are faced with a number of chal-lenges. First, the language we use is jumbled: climate risk, sustaina-bility, environmental, social and governance (ESG) factors, responsi-ble investment, to name just a few. “Sustainable” might mean “envi-ronmentally friendly” for one per-son and “well governed” for another.

Second, there has been a prolifera-tion of confl icting research and data, and a fl ood of information, resulting in decision-making paralysis even where the intention is positive.

Third, the asset management indus-try is not innovating fast enough. Yes, there are investment funds available and some have built ESG teams, but do they really give input on invest-ment decisions? How well integrated is ESG across the asset manager’s holdings? There is a danger that as investors look for climate-aware investments, managers paint things to look greener than they are.

And for investors the big question remains how do you quantify the risks across a pension fund’s entire portfolio?

Most importantly, investors have the power to infl uence the outcome of this global crisis. One single investment, say £100 million, from a pension fund is a positive step, but it isn’t going to solve the problem.

However, imagine a world where pension funds in the UK collectively allocate assets to support invest-ments that combat climate change. Suddenly, you are talking about allo-cating trillions of pounds in assets. At this point, the world would have to pay attention. And on a global scale, it is tens of trillions of pounds in assets, representing signifi cant infl uence.

Some of the larger UK pension funds are doing groundbreaking, cutting-edge work on sustainability. Their thought process, governance, insights and internal resources are impressive, and they are starting to drive change. But what about the thousands of smaller pension funds that do not have access to resources like this? What are they to do?

This is a challenge that no one individual, pension fund or organ-isation can solve on their own. The responsibility sits with the pensions industry, which collectively repre-sents the long-term and retirement savings of everyone in society.

It is up to the industry to come together and create a playbook, availa-ble to everyone, that is easily accessible and easily implemented. This would help create an agreed set of processes, metrics, benchmarks or ideals for trus-tees to rely on to infl uence the discus-sions, decisions and changes needed.

I’d argue this is the key challenge of our generation. Get it right, now, and we help to create a sustainable and vibrant world. Get it wrong and we face horrible consequences.

It is time for the pensions indus-try to stand together to change the narrative and invest with the end in mind, directly addressing climate change. And ultimately, shaping the legacy we want to leave behind.

‘It is time for the pensions industry

to stand together to change the narrative and invest to directly

address climate change’

I

Gender inequality continues into retirement

oor access to company pen-sion schemes is the biggest cause of gender inequality

in retirement income, according to a European Union report. Workplace schemes are often not female-friendly or available to large num-bers of female workers, particularly the lower paid.

This means pensions gender ine-quality, which is twice as bad as pay inequality, could widen as more people rely on workplace schemes.

The fi ndings, from the EU’s Pension Adequacy Report 2018, came amid a spate of headlines highlighting dis-parities between men and women in workplace pensions.

In the UK, the High Court ruled that guaranteed minimum pension (GMP) payouts should be equalised at Lloyds Bank, a move that could cost other companies up to £15 bil-lion, according to consultants Lane Clark Peacock.

Meanwhile, pensions expert Ros Altmann sparked a widespread debate by calling for urgent measures to address the “wide gap between men and women in pensions”. She said companies discriminate against women because their pensions suf-fer from lower earnings, interrupted careers and caring duties.

The UK has closed its pensions gender gap from 44 per cent to 34 per cent between 2009 and 2016. However, the gap is below 10 per cent in Estonia, Denmark and Slovakia.

In poorer countries, this could be due to women needing to work longer and take fewer career breaks. However, Denmark could be an example to other developed countries. It has targeted the gen-der pensions gap since 2005 with initiatives including education to address gender segregation, for example through women’s career choices, laws and initiatives to address the gender pay gap, and interventions on parental leave and care services to support female careers.

Lars Green, executive vice pres-ident at Danish pharmaceuti-cal company Novo Nordisk, says Denmark sets labour market condi-tions via co-operation between gov-ernment, employers and employ-ees, which has helped close the gender pay and pension gaps.

“Our company takes a similar collective approach,” he says. “It provides regular pensions advice to individuals, which helps reduce the gap. We have equal pay and pension contributions for equal roles. But we are working to equal-ise the career gap. Like many com-panies, we face a diversity chal-lenge and genders may not have equal careers.

“So we aim to have more women in all organisational levels, especially senior roles, through programmes to encourage female talent and to address managers’ potential uncon-scious biases.”

Maj Britt Andersen, senior vice president of Danish brewer Carlsberg, says closing the pensions gender gap is about organisational culture. “We may have set a stand-ard [in pensions equality],” she says. “We say that Carlsberg was proba-bly the fi rst company in the world with a corporate social responsi-bility policy. But it was more likely [due to] the founders’ mentality of treating people equally.”

More needs to be done to ensure women are as fi nancially prepared for retirement as men, yet experts remain at odds over potential solutions

Ms Altmann suggested helping women retain pension membership during maternity leave or child-care and encouraging employers or partners to contribute for them during breaks.

She proposed removing the UK’s £10,000 earnings limit for auto-enrolled pensions, which excludes millions of lower-paid workers.

Ms Altmann also called for a ban on companies placing workers into arrangements with so-called net pay rules. These often force low earners to pay 25 per cent more than other workers for workplace pen-sions, she said.

But Rosie Lacey, pensions man-ager and member of the Pensions Management Institute advisory coun-cil, says the term “discrimination” is controversial in all these issues.

“Newspapers said the GMP rules were discriminating, but I don’t think they were,” she says. “Under the previous GMP rules, men suf-fered more initially than women; the advantage, in most cases, swapped from women to men over time. Equalising could just as likely be in men's favour depending on their life stage. But I nonetheless welcome the ruling as it clarifi es a complex issue.”

Ms Lacey also says all the issues about lower-paid workers raised by Ms Altmann apply equally to men

G E N D E R G A P

We are working to equalise the career gap. Like many companies, we face a diversity challenge and genders may not have equal careers

Tim Cooper

P

PENSION GENDER GAP FOR EU PENSIONERS

Difference in pension income for pensioners aged 65 to 79

Social Protection Committee/European Commission 2018

and women in the same situation, so they are not discriminating against gender. She says the comment refer-ring to maternity breaks applies to fi nal salary schemes, which do retain pension membership for women who take a break.

However, Ms Lacey still agrees with most of Ms Altmann’s propos-als. They would help both men and women and, since more women are lower paid, they would help close the pensions gender gap, she says.

The pensions gender gap is a per-sistent problem in the UK and in many other countries. The EU report shows that the average dif-ference between men’s and women’s retirement income in member states is 36 per cent, more than twice the 16.3 per cent pay gap.

This mostly refl ects pay inequali-ties, which lead to shortfalls in life-time earnings, a lack of mitigating design features in pensions, and women having more part-time jobs and career breaks, the report says.

Research by insurer Aviva suggests the pension gap amplifi es the pay gap, partly because of behaviour. For example, women tend to choose less risky investments, which grow less over time. Better advice to employees could address this.

But access to company schemes is the biggest issue, according to the EU report. It says: “Where occupa-tional systems are common, access to [them] eclipses all other con-siderations in entrenching gender inequality. As these types of pen-sions spread, more inequality may be created.”

According to a separate report from the European Parliament, in addition to improving access, schemes could become more female friendly by offering care credits, better widow’s pensions and measures to improve financial literacy. The growing role of occu-pational pensions also calls for more stringent regulation to pre-vent inequality, it says.

Pukk

a TV

/Shu

tter

stoc

k

PERCENTAGE OF RETIREES WITH NO PENSION SAVINGS

2009 2010 2011 2012 2013 2014 2015 2016

41.1

%

40.8

%

39.2

%

40.2

%

40.1

%

40%

38.3

%

37.2

%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Social Protection Committee/European Commission 2018

5%

10%

15%

20%

25%

30%

35%Women Men

Commercial feature

rom excessive boardroom pay and sexual harassment to exploitation in the Third

World, businesses that prize short-term profit over long-term reputation have found to their cost, in an era of social media, there is nowhere to hide.

Terry Saeedi, partner and pen-sions specialist with law firm Clyde & Co, says while the spotlight on more responsible executive behaviour is a challenge for some, a root-and-branch rethink of what constitutes a good investment is to be welcomed.

“Pressure from European and global institutions, together with social and environmental activism, is not only changing how we view the role of business, but also demonstrates that a focus on environmental, social and governance (ESG) factors should be part and parcel of an investment strategy, not an optional extra,” she says.

With all available research showing that companies that choose to do the right thing by workers, suppliers and society both prosper financially and outperform their peers, the busi-ness case for responsible investing is unanswerable.

“For corporates and trustees look-ing to make long-term, sustainable investment decisions for their work-place pension schemes, such firms are clearly a better bet,” says Ms Saeedi.

Although environmental concerns loom large in ESG, she believes that a fairer gender balance in organisations, particularly in the upper echelons, is a less contentious yardstick.

“While the entire debate over how to address climate change continues to rage, there can no longer be any doubt that firms with a higher level of gender and ethnic diversity in the workforce and on the board are more profitable,” says Ms Saeedi.

Pivotal year for ethical pension investmentsPension investments are driving further environmental, social and governance changes

“I would argue gender balance has become a useful prism for look-ing at issues of corporate govern-ance more widely and clearly demon-strates that far from being soft and fluffy, there is a pressing financial imperative behind ESG.”

With the UK stewardship code, which dictates how fund managers hold to account the companies they invest in, soon to be overhauled and the role of pension fund trustees to include any ESG factors deemed to be “financially material”, 2019 looks set to become a pivotal year.

“Trustees are responsible for £3 tril-lion-worth of investments in the UK, and have a huge opportunity to influ-ence boards and help build a better society for all of us,” says Ms Saeedi. “But in terms of executive behaviour, there are specific areas worth keeping an eye on.

“I believe executive pay will prove an even more incendiary issue this year, as will non-disclosure agreements used to silence victims of sexual har-assment. The debate over the living wage will inevitably become louder and businesses will also need to demonstrate they are making adjust-ments for a low-carbon world if they are to avoid attracting greater risk.”

Ironically, many of the underly-ing principles of ESG are already enshrined in the UK Corporate Governance Code, yet as Ms Saeedi points out, it has proved all too easy to overlook them in the past.

“There is mounting pressure on directors to explain why they make particular decisions and although this duty has existed for a long time in law, it’s very heartening to see it move to the top of the agenda,” she says.

With as much as £1.7 trillion of the total value of UK-listed companies thought to be banked in their reputations, any business which ignores the pressing societal and environmental issues of the day is vulnerable to a fall from grace.

“While trustees’ duties on ESG are tightening up, there is also an increas-ing focus on what steps employ-ers should be taking with the con-tract-based schemes they select for their employees, in particular default fund strategies, and we are very keen to help them,” says Ms Saeedi.

“This is a difficult area in which the law is still developing and at Clyde & Co we can draw upon a wealth of experi-ence from 50 offices in six continents to help guide our clients through.”

For more information please visitclydeco.com

more likely for companies in the top quartile for gender diversity on exec teams to experience above-average profitability than companies in the fourth quartile

basis point increase on return on assets by replacing just one man with one woman in senior management, according to IMF Analysis

21%

8-13

F

O P I N I O N

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 1110

Stuart BreyerChief executiveMallow Street

’d argue the biggest chal-lenge we have ever faced in the history of humanity

is climate change. I’d also argue it’s the biggest opportunity for business and investors in the 21st century.

It is clear climate change is a very real, very present danger. Mark Carney, governor of the Bank of England, has fl agged climate change as a “signifi -cant risk for global fi nancial stability”. And in 2015, the Paris agreement set out meaningful goals: the world col-lectively agreed to limit global warm-ing to a “two-degree scenario”.

However, as writer and broad-caster Dr Gabrielle Walker rightly points out, the world isn’t tracking to a two-degree scenario. We are, in fact, doing an excellent job of track-ing to a six-degree scenario. And a six-degree scenario is catastrophic: droughts, fl oods, rising sea levels, food shortages, water shortages. And all this would be on a global scale. It is scary stuff , but it isn’t all doom and gloom.

Many pension funds acknowledge climate change presents diffi culties outside mere material risks; they are faced with a number of chal-lenges. First, the language we use is jumbled: climate risk, sustaina-bility, environmental, social and governance (ESG) factors, responsi-ble investment, to name just a few. “Sustainable” might mean “envi-ronmentally friendly” for one per-son and “well governed” for another.

Second, there has been a prolifera-tion of confl icting research and data, and a fl ood of information, resulting in decision-making paralysis even where the intention is positive.

Third, the asset management indus-try is not innovating fast enough. Yes, there are investment funds available and some have built ESG teams, but do they really give input on invest-ment decisions? How well integrated is ESG across the asset manager’s holdings? There is a danger that as investors look for climate-aware investments, managers paint things to look greener than they are.

And for investors the big question remains how do you quantify the risks across a pension fund’s entire portfolio?

Most importantly, investors have the power to infl uence the outcome of this global crisis. One single investment, say £100 million, from a pension fund is a positive step, but it isn’t going to solve the problem.

However, imagine a world where pension funds in the UK collectively allocate assets to support invest-ments that combat climate change. Suddenly, you are talking about allo-cating trillions of pounds in assets. At this point, the world would have to pay attention. And on a global scale, it is tens of trillions of pounds in assets, representing signifi cant infl uence.

Some of the larger UK pension funds are doing groundbreaking, cutting-edge work on sustainability. Their thought process, governance, insights and internal resources are impressive, and they are starting to drive change. But what about the thousands of smaller pension funds that do not have access to resources like this? What are they to do?

This is a challenge that no one individual, pension fund or organ-isation can solve on their own. The responsibility sits with the pensions industry, which collectively repre-sents the long-term and retirement savings of everyone in society.

It is up to the industry to come together and create a playbook, availa-ble to everyone, that is easily accessible and easily implemented. This would help create an agreed set of processes, metrics, benchmarks or ideals for trus-tees to rely on to infl uence the discus-sions, decisions and changes needed.

I’d argue this is the key challenge of our generation. Get it right, now, and we help to create a sustainable and vibrant world. Get it wrong and we face horrible consequences.

It is time for the pensions indus-try to stand together to change the narrative and invest with the end in mind, directly addressing climate change. And ultimately, shaping the legacy we want to leave behind.

‘It is time for the pensions industry

to stand together to change the narrative and invest to directly

address climate change’

I

Gender inequality continues into retirement

oor access to company pen-sion schemes is the biggest cause of gender inequality

in retirement income, according to a European Union report. Workplace schemes are often not female-friendly or available to large num-bers of female workers, particularly the lower paid.

This means pensions gender ine-quality, which is twice as bad as pay inequality, could widen as more people rely on workplace schemes.

The fi ndings, from the EU’s Pension Adequacy Report 2018, came amid a spate of headlines highlighting dis-parities between men and women in workplace pensions.

In the UK, the High Court ruled that guaranteed minimum pension (GMP) payouts should be equalised at Lloyds Bank, a move that could cost other companies up to £15 bil-lion, according to consultants Lane Clark Peacock.

Meanwhile, pensions expert Ros Altmann sparked a widespread debate by calling for urgent measures to address the “wide gap between men and women in pensions”. She said companies discriminate against women because their pensions suf-fer from lower earnings, interrupted careers and caring duties.

The UK has closed its pensions gender gap from 44 per cent to 34 per cent between 2009 and 2016. However, the gap is below 10 per cent in Estonia, Denmark and Slovakia.

In poorer countries, this could be due to women needing to work longer and take fewer career breaks. However, Denmark could be an example to other developed countries. It has targeted the gen-der pensions gap since 2005 with initiatives including education to address gender segregation, for example through women’s career choices, laws and initiatives to address the gender pay gap, and interventions on parental leave and care services to support female careers.

Lars Green, executive vice pres-ident at Danish pharmaceuti-cal company Novo Nordisk, says Denmark sets labour market condi-tions via co-operation between gov-ernment, employers and employ-ees, which has helped close the gender pay and pension gaps.

“Our company takes a similar collective approach,” he says. “It provides regular pensions advice to individuals, which helps reduce the gap. We have equal pay and pension contributions for equal roles. But we are working to equal-ise the career gap. Like many com-panies, we face a diversity chal-lenge and genders may not have equal careers.

“So we aim to have more women in all organisational levels, especially senior roles, through programmes to encourage female talent and to address managers’ potential uncon-scious biases.”

Maj Britt Andersen, senior vice president of Danish brewer Carlsberg, says closing the pensions gender gap is about organisational culture. “We may have set a stand-ard [in pensions equality],” she says. “We say that Carlsberg was proba-bly the fi rst company in the world with a corporate social responsi-bility policy. But it was more likely [due to] the founders’ mentality of treating people equally.”

More needs to be done to ensure women are as fi nancially prepared for retirement as men, yet experts remain at odds over potential solutions

Ms Altmann suggested helping women retain pension membership during maternity leave or child-care and encouraging employers or partners to contribute for them during breaks.

She proposed removing the UK’s £10,000 earnings limit for auto-enrolled pensions, which excludes millions of lower-paid workers.

Ms Altmann also called for a ban on companies placing workers into arrangements with so-called net pay rules. These often force low earners to pay 25 per cent more than other workers for workplace pen-sions, she said.

But Rosie Lacey, pensions man-ager and member of the Pensions Management Institute advisory coun-cil, says the term “discrimination” is controversial in all these issues.

“Newspapers said the GMP rules were discriminating, but I don’t think they were,” she says. “Under the previous GMP rules, men suf-fered more initially than women; the advantage, in most cases, swapped from women to men over time. Equalising could just as likely be in men's favour depending on their life stage. But I nonetheless welcome the ruling as it clarifi es a complex issue.”

Ms Lacey also says all the issues about lower-paid workers raised by Ms Altmann apply equally to men

G E N D E R G A P

We are working to equalise the career gap. Like many companies, we face a diversity challenge and genders may not have equal careers

Tim Cooper

P

PENSION GENDER GAP FOR EU PENSIONERS

Difference in pension income for pensioners aged 65 to 79

Social Protection Committee/European Commission 2018

and women in the same situation, so they are not discriminating against gender. She says the comment refer-ring to maternity breaks applies to fi nal salary schemes, which do retain pension membership for women who take a break.

However, Ms Lacey still agrees with most of Ms Altmann’s propos-als. They would help both men and women and, since more women are lower paid, they would help close the pensions gender gap, she says.

The pensions gender gap is a per-sistent problem in the UK and in many other countries. The EU report shows that the average dif-ference between men’s and women’s retirement income in member states is 36 per cent, more than twice the 16.3 per cent pay gap.

This mostly refl ects pay inequali-ties, which lead to shortfalls in life-time earnings, a lack of mitigating design features in pensions, and women having more part-time jobs and career breaks, the report says.

Research by insurer Aviva suggests the pension gap amplifi es the pay gap, partly because of behaviour. For example, women tend to choose less risky investments, which grow less over time. Better advice to employees could address this.

But access to company schemes is the biggest issue, according to the EU report. It says: “Where occupa-tional systems are common, access to [them] eclipses all other con-siderations in entrenching gender inequality. As these types of pen-sions spread, more inequality may be created.”

According to a separate report from the European Parliament, in addition to improving access, schemes could become more female friendly by offering care credits, better widow’s pensions and measures to improve financial literacy. The growing role of occu-pational pensions also calls for more stringent regulation to pre-vent inequality, it says.

Pukk

a TV

/Shu

tter

stoc

k

PERCENTAGE OF RETIREES WITH NO PENSION SAVINGS

2009 2010 2011 2012 2013 2014 2015 2016

41.1

%

40.8

%

39.2

%

40.2

%

40.1

%

40%

38.3

%

37.2

%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Social Protection Committee/European Commission 2018

5%

10%

15%

20%

25%

30%

35%Women Men

Commercial feature

rom excessive boardroom pay and sexual harassment to exploitation in the Third

World, businesses that prize short-term profit over long-term reputation have found to their cost, in an era of social media, there is nowhere to hide.

Terry Saeedi, partner and pen-sions specialist with law firm Clyde & Co, says while the spotlight on more responsible executive behaviour is a challenge for some, a root-and-branch rethink of what constitutes a good investment is to be welcomed.

“Pressure from European and global institutions, together with social and environmental activism, is not only changing how we view the role of business, but also demonstrates that a focus on environmental, social and governance (ESG) factors should be part and parcel of an investment strategy, not an optional extra,” she says.

With all available research showing that companies that choose to do the right thing by workers, suppliers and society both prosper financially and outperform their peers, the busi-ness case for responsible investing is unanswerable.

“For corporates and trustees look-ing to make long-term, sustainable investment decisions for their work-place pension schemes, such firms are clearly a better bet,” says Ms Saeedi.

Although environmental concerns loom large in ESG, she believes that a fairer gender balance in organisations, particularly in the upper echelons, is a less contentious yardstick.

“While the entire debate over how to address climate change continues to rage, there can no longer be any doubt that firms with a higher level of gender and ethnic diversity in the workforce and on the board are more profitable,” says Ms Saeedi.

Pivotal year for ethical pension investmentsPension investments are driving further environmental, social and governance changes

“I would argue gender balance has become a useful prism for look-ing at issues of corporate govern-ance more widely and clearly demon-strates that far from being soft and fluffy, there is a pressing financial imperative behind ESG.”

With the UK stewardship code, which dictates how fund managers hold to account the companies they invest in, soon to be overhauled and the role of pension fund trustees to include any ESG factors deemed to be “financially material”, 2019 looks set to become a pivotal year.

“Trustees are responsible for £3 tril-lion-worth of investments in the UK, and have a huge opportunity to influ-ence boards and help build a better society for all of us,” says Ms Saeedi. “But in terms of executive behaviour, there are specific areas worth keeping an eye on.

“I believe executive pay will prove an even more incendiary issue this year, as will non-disclosure agreements used to silence victims of sexual har-assment. The debate over the living wage will inevitably become louder and businesses will also need to demonstrate they are making adjust-ments for a low-carbon world if they are to avoid attracting greater risk.”

Ironically, many of the underly-ing principles of ESG are already enshrined in the UK Corporate Governance Code, yet as Ms Saeedi points out, it has proved all too easy to overlook them in the past.

“There is mounting pressure on directors to explain why they make particular decisions and although this duty has existed for a long time in law, it’s very heartening to see it move to the top of the agenda,” she says.

With as much as £1.7 trillion of the total value of UK-listed companies thought to be banked in their reputations, any business which ignores the pressing societal and environmental issues of the day is vulnerable to a fall from grace.

“While trustees’ duties on ESG are tightening up, there is also an increas-ing focus on what steps employ-ers should be taking with the con-tract-based schemes they select for their employees, in particular default fund strategies, and we are very keen to help them,” says Ms Saeedi.

“This is a difficult area in which the law is still developing and at Clyde & Co we can draw upon a wealth of experi-ence from 50 offices in six continents to help guide our clients through.”

For more information please visitclydeco.com

more likely for companies in the top quartile for gender diversity on exec teams to experience above-average profitability than companies in the fourth quartile

basis point increase on return on assets by replacing just one man with one woman in senior management, according to IMF Analysis

21%

8-13

F

O P I N I O N

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 1312

Are you serious about business performance?

Then our new exclusive content hub, Business of Marketing, is for you.

This is not for the many, but for senior executives and marketers who are devoted to being in the

top 5 per cent in their field.

solutions.raconteur.net/bom

he defi cit of defi ned ben-efi t (DB) pension schemes has become a major talk-

ing point among regulators, corpo-rations and the pensions industry. With the defi cit of FTSE 350 pension schemes increasing by 28 per cent in 2018 alone, a possible solution has emerged in the form of a superfund.

Designed to consolidate several pension schemes into a single “super” pension scheme, superfunds are built on the premise they can off er attrac-tive investment opportunities at a lower cost than typically charged by traditional insurers. However, their creation poses an interesting, if some-what controversial, development.

While the sector remains in its embryonic stages, with just two main providers – the Pensions Superfund and Clara Pensions – active in the market, it is evident from the gov-ernment’s latest DB consultation paper that ministers are in support of greater consolidation in the market, highlighting the “benefi ts of scale” and “the wider and potentially more innovative mix of investment oppor-tunities” they off er.

Matthew Arends, head of UK retirement policy at Aon, echoes the sentiment. “The fear of insur-ers is that their model will dry up as employers increasingly look to con-solidate,” he says.

“The question is how large is the target market for superfunds? They will likely target the middle band of companies, for whom a conven-tional buyout is not feasible so this isn't a signfi cant threat to insurers. Innovation in pensions is undoubt-edly welcome, however it requires the right balance and to ensure scheme members are protected.”

There is also concern whether superfunds, which will operate under the watch of the Pensions Regulator rather than the Financial

Conduct Authority, should be pro-vided with a diff erent regulatory regime from insurers.

For Mr Arends, the full require-ments of the insurance regime would not marry with superfunds. “It’s quite clear the government and DWP are looking for a cost-eff ective alterna-tive to the insurance industry with a diff erent business model, but exactly how the regulatory framework will ensure member protection needs to be at the core of the DWP’s consulta-tion outcome,” he says.

For Mr Shah, however, superfunds possess all the hallmarks of a fi nan-cial institution. “It doesn’t make sense to create a completely diff erent framework for what has ultimately got the same goals as an insurer,” he says. “The insurance framework has been built over decades with very strong regulatory supervision and, in my view, the regulatory framework for superfunds should be created to be the same as insurers, with a view to then considering which parts of it can be removed if a weaker regime is being targeted by DWP.”

As the pension industry eagerly awaits the outcome of the DWP’s con-sultation, one thing is clear, super-funds are set to become a key part of the DB landscape under the scrutiny of concerned insurers.

question mark over the impact they will have upon insurers.

The Department for Work and Pensions (DWP) has made clear that schemes in a position to buy out their liabilities or likely to aff ord a buyout within the next fi ve years are not eli-gible for superfunds. It acknowledges that without an eff ective gateway, “superfunds would enjoy a consid-erable competitive advantage in the price of acquiring DB schemes” com-pared with insurers.

However, as Jay Shah, chief origi-nation offi cer at Pension Insurance Corporation, explains, there remains a level of uncertainty around how this will be assessed.

He says: “The original idea was to create a solution that would ena-ble smaller, less effi cient schemes to benefi t from economies of scale. Out of that notion has grown the concept of a superfund, which has proved to be markedly diff erent. By their very nature, superfunds will look to target bigger, better run and better funded schemes.

“When making an assessment about which companies are suita-ble for consolidation, both the assets of the pension scheme and the value of the company should be taken into consideration, to fully understand a scheme’s access to future funds.”

For many sponsoring employers keen to remove the heavy burden of pension liabilities from their bal-ance sheets, this alternative to a con-ventional insurance buyout holds an undeniable attraction.

Alistair Russell-Smith, head of corporate DB at Hymans Robertson, says: “Superfunds will become a solution for the tranche of compa-nies that are not in a position for an insurance buyout. We will likely see a wide band of schemes becom-ing much better funded as sponsors increasingly see the value in mak-ing a cash injection into the scheme in return for a clean break from their future liabilities.

“There is a gap in the market and superfunds will pose a compelling solution for many companies. We are expecting the fi rst transactions by the summer and once these have gone through, traction will build and I think it very likely others pro-viders will follow.”

Yet the creation of a new sector does not come without its chal-lenges. Critics have warned super-funds remain untested and exactly which companies they will target remains ambiguous at best, woe-fully unexplored at worst, leaving a

The introduction of superfunds could disrupt pension market dynamics and pose fresh challenges for traditional insurers

Superfunds set to shake up the pensions market

S U P E R F U N D S

T

Fiona Bond

As the nature of work continues to evolve, pension professionals argue whether rules and regulations are still fi t for purpose

Is regulation up to date?

he traditional concept of working until age 65 and retiring on a generous

pension is fast becoming a thing of the past. A combination of longer life expectancy, rising living costs and the demise of the final salary pension scheme has led to a seis-mic change.

As many as one in ten men continue to work beyond the age of 70, with 8 per cent of women also working past their seventh decade. For millenni-als, for whom casual employment, high job turnover, soaring property prices and student debt has become a rite of passage, the prospect of a comfortable retirement in their 60s seems even more elusive.

But part of the challenge is ensur-ing that the right regulatory frame-work is in place.

Claire Walsh, personal finance director at asset management company Schroders, says one of the big issues surrounding pen-sions is “public fatigue”. Today’s landscape looks vastly different to pre-1997, when there was no Pensions Regulator in place and very little in the way of pensions law. In comparison, the past two decades have seen successive gov-ernments continuously move the goal posts, leaving savers feeling precariously uncertain.

Experts agree regulation should serve to nudge people towards the right behaviour, rather than act as a tax grab. Auto-enrolment is a case in point, with its steady, staged increases in contribution levels successfully galvanising millions of workers.

Ms Walsh says: “We are moving in the right direction with the intro-duction of auto-enrolment. It has placed everyone on a level play-ing fi eld and encouraged people to become more involved with pen-sion saving. Going forward, it’s key the government maintains dialogue with consumers about the impor-tance of making provisions.”

However, with 4.8 million people now working for themselves, many would like to see policy refl ect the rapid growth of self-employment.

Jon Greer, head of retirement policy at fi nancial services com-pany Quilter, explains: “The self-employed currently slip through the cracks of auto-enrolment and there is still no clear strategy to make sure this group of people put enough away to fund their retirement.”

Mr Greer suggests the introduction of a pension “sidecar”, where a pool of money is made accessible at any age in times of need, would be par-ticularly benefi cial for those lacking security and certainty around their monthly income.

“Whatever solutions the govern-ment put forward, they need to avoid a one-size-fi ts-all approach for the self-employed as they are a unique group of workers with vastly diff ering needs,” he adds.

For Ms Walsh, it will be technol-ogy that will be at the core of helping workers engage with retirement sav-ings. “Today’s employee can change jobs several times and keeping track of diff erent pots can be diffi cult, while transferring can be a cumbersome process,” she says. “Technology will play an important role, and the intro-duction of a pensions dashboard will revolutionise the way people manage their pensions and create greater pos-itivity around retirement savings.”

R E G U L A T I O N

T

Fiona Bond

There is a gap in the market and superfunds will pose a compelling solution for many companies

4/5of the two million workers who have more than one job are missing out as at least one of their jobs pays under £10,000 a year, says Scottish Widows

43%of self-employed people do not have a pension, according to Prudential; 31 per cent expect to rely entirely on the state pension

22minimum age eligible for auto-enrolment, meaning those who have been in full-time employment since 16 have missed out on valuable contributions

Pros and cons of superfunds

Pros

Cons

Pension sponsors can discharge their obligations at a lower cost than an insurance buy-out

Member security can be increased in certain cases due to an improved funding position

Effi ciencies and economies of scale

High funding levels and contributions for entry

Uncertainty over superfund regulation and future obligations on departing sponsors

Complex due diligence process for sponsors and trustees compared with an insurance buy-out

KPMG 2018

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 1312

Are you serious about business performance?

Then our new exclusive content hub, Business of Marketing, is for you.

This is not for the many, but for senior executives and marketers who are devoted to being in the

top 5 per cent in their field.

solutions.raconteur.net/bom

he defi cit of defi ned ben-efi t (DB) pension schemes has become a major talk-

ing point among regulators, corpo-rations and the pensions industry. With the defi cit of FTSE 350 pension schemes increasing by 28 per cent in 2018 alone, a possible solution has emerged in the form of a superfund.

Designed to consolidate several pension schemes into a single “super” pension scheme, superfunds are built on the premise they can off er attrac-tive investment opportunities at a lower cost than typically charged by traditional insurers. However, their creation poses an interesting, if some-what controversial, development.

While the sector remains in its embryonic stages, with just two main providers – the Pensions Superfund and Clara Pensions – active in the market, it is evident from the gov-ernment’s latest DB consultation paper that ministers are in support of greater consolidation in the market, highlighting the “benefi ts of scale” and “the wider and potentially more innovative mix of investment oppor-tunities” they off er.

Matthew Arends, head of UK retirement policy at Aon, echoes the sentiment. “The fear of insur-ers is that their model will dry up as employers increasingly look to con-solidate,” he says.

“The question is how large is the target market for superfunds? They will likely target the middle band of companies, for whom a conven-tional buyout is not feasible so this isn't a signfi cant threat to insurers. Innovation in pensions is undoubt-edly welcome, however it requires the right balance and to ensure scheme members are protected.”

There is also concern whether superfunds, which will operate under the watch of the Pensions Regulator rather than the Financial

Conduct Authority, should be pro-vided with a diff erent regulatory regime from insurers.

For Mr Arends, the full require-ments of the insurance regime would not marry with superfunds. “It’s quite clear the government and DWP are looking for a cost-eff ective alterna-tive to the insurance industry with a diff erent business model, but exactly how the regulatory framework will ensure member protection needs to be at the core of the DWP’s consulta-tion outcome,” he says.

For Mr Shah, however, superfunds possess all the hallmarks of a fi nan-cial institution. “It doesn’t make sense to create a completely diff erent framework for what has ultimately got the same goals as an insurer,” he says. “The insurance framework has been built over decades with very strong regulatory supervision and, in my view, the regulatory framework for superfunds should be created to be the same as insurers, with a view to then considering which parts of it can be removed if a weaker regime is being targeted by DWP.”

As the pension industry eagerly awaits the outcome of the DWP’s con-sultation, one thing is clear, super-funds are set to become a key part of the DB landscape under the scrutiny of concerned insurers.

question mark over the impact they will have upon insurers.

The Department for Work and Pensions (DWP) has made clear that schemes in a position to buy out their liabilities or likely to aff ord a buyout within the next fi ve years are not eli-gible for superfunds. It acknowledges that without an eff ective gateway, “superfunds would enjoy a consid-erable competitive advantage in the price of acquiring DB schemes” com-pared with insurers.

However, as Jay Shah, chief origi-nation offi cer at Pension Insurance Corporation, explains, there remains a level of uncertainty around how this will be assessed.

He says: “The original idea was to create a solution that would ena-ble smaller, less effi cient schemes to benefi t from economies of scale. Out of that notion has grown the concept of a superfund, which has proved to be markedly diff erent. By their very nature, superfunds will look to target bigger, better run and better funded schemes.

“When making an assessment about which companies are suita-ble for consolidation, both the assets of the pension scheme and the value of the company should be taken into consideration, to fully understand a scheme’s access to future funds.”

For many sponsoring employers keen to remove the heavy burden of pension liabilities from their bal-ance sheets, this alternative to a con-ventional insurance buyout holds an undeniable attraction.

Alistair Russell-Smith, head of corporate DB at Hymans Robertson, says: “Superfunds will become a solution for the tranche of compa-nies that are not in a position for an insurance buyout. We will likely see a wide band of schemes becom-ing much better funded as sponsors increasingly see the value in mak-ing a cash injection into the scheme in return for a clean break from their future liabilities.

“There is a gap in the market and superfunds will pose a compelling solution for many companies. We are expecting the fi rst transactions by the summer and once these have gone through, traction will build and I think it very likely others pro-viders will follow.”

Yet the creation of a new sector does not come without its chal-lenges. Critics have warned super-funds remain untested and exactly which companies they will target remains ambiguous at best, woe-fully unexplored at worst, leaving a

The introduction of superfunds could disrupt pension market dynamics and pose fresh challenges for traditional insurers

Superfunds set to shake up the pensions market

S U P E R F U N D S

T

Fiona Bond

As the nature of work continues to evolve, pension professionals argue whether rules and regulations are still fi t for purpose

Is regulation up to date?

he traditional concept of working until age 65 and retiring on a generous

pension is fast becoming a thing of the past. A combination of longer life expectancy, rising living costs and the demise of the final salary pension scheme has led to a seis-mic change.

As many as one in ten men continue to work beyond the age of 70, with 8 per cent of women also working past their seventh decade. For millenni-als, for whom casual employment, high job turnover, soaring property prices and student debt has become a rite of passage, the prospect of a comfortable retirement in their 60s seems even more elusive.

But part of the challenge is ensur-ing that the right regulatory frame-work is in place.

Claire Walsh, personal finance director at asset management company Schroders, says one of the big issues surrounding pen-sions is “public fatigue”. Today’s landscape looks vastly different to pre-1997, when there was no Pensions Regulator in place and very little in the way of pensions law. In comparison, the past two decades have seen successive gov-ernments continuously move the goal posts, leaving savers feeling precariously uncertain.

Experts agree regulation should serve to nudge people towards the right behaviour, rather than act as a tax grab. Auto-enrolment is a case in point, with its steady, staged increases in contribution levels successfully galvanising millions of workers.

Ms Walsh says: “We are moving in the right direction with the intro-duction of auto-enrolment. It has placed everyone on a level play-ing fi eld and encouraged people to become more involved with pen-sion saving. Going forward, it’s key the government maintains dialogue with consumers about the impor-tance of making provisions.”

However, with 4.8 million people now working for themselves, many would like to see policy refl ect the rapid growth of self-employment.

Jon Greer, head of retirement policy at fi nancial services com-pany Quilter, explains: “The self-employed currently slip through the cracks of auto-enrolment and there is still no clear strategy to make sure this group of people put enough away to fund their retirement.”

Mr Greer suggests the introduction of a pension “sidecar”, where a pool of money is made accessible at any age in times of need, would be par-ticularly benefi cial for those lacking security and certainty around their monthly income.

“Whatever solutions the govern-ment put forward, they need to avoid a one-size-fi ts-all approach for the self-employed as they are a unique group of workers with vastly diff ering needs,” he adds.

For Ms Walsh, it will be technol-ogy that will be at the core of helping workers engage with retirement sav-ings. “Today’s employee can change jobs several times and keeping track of diff erent pots can be diffi cult, while transferring can be a cumbersome process,” she says. “Technology will play an important role, and the intro-duction of a pensions dashboard will revolutionise the way people manage their pensions and create greater pos-itivity around retirement savings.”

R E G U L A T I O N

T

Fiona Bond

There is a gap in the market and superfunds will pose a compelling solution for many companies

4/5of the two million workers who have more than one job are missing out as at least one of their jobs pays under £10,000 a year, says Scottish Widows

43%of self-employed people do not have a pension, according to Prudential; 31 per cent expect to rely entirely on the state pension

22minimum age eligible for auto-enrolment, meaning those who have been in full-time employment since 16 have missed out on valuable contributions

Pros and cons of superfunds

Pros

Cons

Pension sponsors can discharge their obligations at a lower cost than an insurance buy-out

Member security can be increased in certain cases due to an improved funding position

Effi ciencies and economies of scale

High funding levels and contributions for entry

Uncertainty over superfund regulation and future obligations on departing sponsors

Complex due diligence process for sponsors and trustees compared with an insurance buy-out

KPMG 2018

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 1514

lmost a quarter of a mil-lion cash-strapped NHS workers have quit their gold-plated defi ned ben-

efi t (DB) pension scheme to boost their take-home pay by a fraction of the value of the benefi ts they are surrendering.

A Freedom of Information request by the Health Service Journal found 245,561 staff had opted out of the NHS pension scheme in the last three years, forgoing benefi ts worth up to nine times the value of their pension contribution. The fi g-ure represents around 16 per cent of active members of the scheme, according to calculations from pen-sion provider Royal London.

Experts say a combination of fi nan-cial pressures is driving staff to take

the drastic step of opting out of their DB scheme, with a decade of zero or below-infl ation pay rises, increased employee contribution levels and a climate of negativity around pen-sions all blamed for the exodus.

A typical nurse on £25,000 a year can save £1,420 in employee contri-butions by opting out, but will lose pension rights worth around £13,000 because they will also miss out on the signifi cantly bigger employer contri-bution into the scheme.

Opt-out levels are considerably higher in the NHS scheme than in other public service schemes, risk-ing an epidemic of poverty in retire-ment for nurses, doctors, consult-ants and other health service staff . Just 3.4 per cent of members have opted out of the teachers’ scheme, while 1.45 per cent have left the civil service scheme and 0.04 per

generous compared with the pen-sions off ered to most other workers in the UK,” he says. “It is a shame to see so many NHS staff putting their retirement plans at risk by leaving the scheme.”

Mr Porter says a big step forward in helping NHS staff in England and Wales better appreciate the value of their pensions would be the introduction of an online pen-sion modeller, which would enable them to visualise the value of the benefits they accrue and the con-tribution made by the employer. The NHS scheme in Scotland and the Local Government Pension Scheme already offer such a tool on their website.

Staff perceptions of the NHS scheme could start to improve from April when members’ ben-efits may be increased follow-ing a statutory review of its funding level. A mechanism known as the cost cap, which was implemented in 2015 to con-trol unexpected changes in pen-sions, requires the Government Actuary’s Department to assess whether the scheme is under or overfunded.

into the future rather than reduce employee pension contributions it will receive today.

The group of staff with the high-est level of opt-outs is those aged between 26 to 35, which includes many staff in lower-pay brackets. But some typically older high-earn-ing medical staff , including GPs and surgeons, have also been leav-ing the NHS scheme because they have hit HM Treasury’s £52,750 a year DB pension lifetime allow-ance, so they are no longer enti-tled to tax relief on contributions. The lifetime allowance is £1.055 million for defi ned contribution pension savers.

Earlier this month, health secre-tary Matt Hancock petitioned the Treasury to lift the lifetime allow-ance for GPs, according to an inter-view in Pulse, a trade publication for doctors. Mr Hancock blamed the limit for contributing to staff retention problems in the sec-tor, with some GPs retiring early. However, the Treasury has not given any indication that it will carve out an exemption to its pen-sion taxation rules for public sec-tor medical professionals.

Union offi cials say the scheme is expected to be assessed as being funded beyond the cost cap because mortality improvements have not been as great as had been predicted. Such a fi nding would mean predicted payouts to pensioners will be lower than have been accounted for to date. The government has two options for bringing the scheme back within the cost cap: reducing employee contri-butions or increasing the benefi ts accrued by members each year.

Mr Porter says he expects the Treasury to opt to increase bene-fi ts that will be received decades

Concerns rise as a perfect storm of fi nancial pressures force hundreds of thousands of NHS employees to opt out of their attractive pension schemes

Healthcare workers in opt-out epidemic

N H S

A

John Greenwood

A broader disillusionmentwith public sector pensions has contributed to an atmosphere of negativity towards what remains a very attractive benefi t

Colm Porter, national offi cer at Unison, the union that represents healthcare workers, says another problem causing staff to opt out is the “all-or-nothing" nature of the NHS scheme. Local government workers are able to opt to buy half contributions into their scheme, to enable those who cannot aff ord the full contribution to be able to participate to a lesser extent. But this option is currently not avail-able to NHS staff , who must opt out altogether if they are not pre-pared to make the full contribution, although Unison is pushing for it to be introduced.

Mr Porter believes that a broader disillusionment with public sec-tor pensions, following increases in employee contributions and retire-ment ages, has contributed to an atmosphere of negativity towards what remains a very attractive ben-efi t. He believes the NHS could do considerably more to educate staff about retirement saving and com-municate the value of the benefi ts the scheme off ers to members.

“It is true that the NHS scheme is not as generous as it was when it was changed in 2015, but it is still very

cent have opted out of the Armed Forces scheme.

Sir Steve Webb, of Royal London, who served as pensions minister in the 2010-15 coalition government, says NHS staff have been hit by a “per-fect storm” of factors driving them to dropping their pension. He says: “NHS workers have suff ered a dec-ade-long pay freeze, an increase in contributions following the abolition in contracting out and a contribution policy that sees higher earners pay a higher percentage than lower earn-ers. This creates cliff edges where peo-ple can fi nd their contributions soar-ing just because they got a pay rise.”

The NHS Pension Scheme in England and Wales operates a grad-uated contribution policy where those earning up to £15,431.99 con-tribute 5 per cent of gross earnings, rising in seven tiers to 14.5 per cent for those earning £111,377 and over. The NHS scheme contribution pol-icy means that individuals receiving a pay rise can actually see their take-home pay reduce where the increase in salary tips them into a higher con-tribution bracket. The NHS is con-sulting on amending this contribu-tion structure from April 2019. Health Service Journal 2019

NUMBER OF NHS PENSION SCHEME OPT-OUTS, BY AGE GROUP

16-25

26-35

36-45

46-55

56-65

66-75

stur

ti on

Get

ty Im

ages

The fl ood of public sector staff leaving gold-plated defi ned benefi t pension schemes has highlighted the dilemma all workers face when asked to meet the cost of providing for their retirement.

Increased longevity and historically low interest rates have pushed the cost of securing a retirement income to astronomic levels. An annuity of £3,000 that increases in line with the retail price index would cost a healthy 65-year-old non-smoker £100,000 to buy.

Since 2012, automatic enrolment has brought almost ten million new workers into pensions. So far, opt-out levels have been lower than pundits had expected. Latest figures from the Department for Work and Pensions show 4.2 per cent of 22 to 29 year olds and 7.6 per cent of 50 to 59 year olds had opted out by June 2018.

Some experts predict opt-out rates will increase when minimum employee contributions increase from 3 to 5 per cent of earnings between £6,032 and £46,350 from April, when employers will be required to pay a further 3 per cent.

The Pensions and Lifetimes Savings Association says a total of 8 per cent of band earnings is inadequate and is calling for a minimum combined contribution of 12 per cent of all earnings. Such a contribution level would still leave private sector workers short of final salary benefit levels, but would be likely to lead to a greater number of opt-outs.

What will happen to opt-out rates?

35k30k25k20k15k10k5k0

2015

2016

2017

4.7%of UK people auto-enrolled from April to June 2018 actively decided to opt out, down from 5.6 per cent the previous four years, despite an increase in the minimum contribution level to 5 per cent

8%minimum contribution level for auto-enrolment pensions from April 2019, up from 5 per cent previously

75%of employers do not expect a reduction in pension scheme participation because of the upcoming increase in contribution levels

65%of small companies (with less than ten staff) expect modest to substantial falls in participation

Association of Consulting Actuaries 2019

Department for Work and Pensions 2018

R A C O N T E U R . N E TW O R K P L A C E P E N S I O N S 1514

lmost a quarter of a mil-lion cash-strapped NHS workers have quit their gold-plated defi ned ben-

efi t (DB) pension scheme to boost their take-home pay by a fraction of the value of the benefi ts they are surrendering.

A Freedom of Information request by the Health Service Journal found 245,561 staff had opted out of the NHS pension scheme in the last three years, forgoing benefi ts worth up to nine times the value of their pension contribution. The fi g-ure represents around 16 per cent of active members of the scheme, according to calculations from pen-sion provider Royal London.

Experts say a combination of fi nan-cial pressures is driving staff to take

the drastic step of opting out of their DB scheme, with a decade of zero or below-infl ation pay rises, increased employee contribution levels and a climate of negativity around pen-sions all blamed for the exodus.

A typical nurse on £25,000 a year can save £1,420 in employee contri-butions by opting out, but will lose pension rights worth around £13,000 because they will also miss out on the signifi cantly bigger employer contri-bution into the scheme.

Opt-out levels are considerably higher in the NHS scheme than in other public service schemes, risk-ing an epidemic of poverty in retire-ment for nurses, doctors, consult-ants and other health service staff . Just 3.4 per cent of members have opted out of the teachers’ scheme, while 1.45 per cent have left the civil service scheme and 0.04 per

generous compared with the pen-sions off ered to most other workers in the UK,” he says. “It is a shame to see so many NHS staff putting their retirement plans at risk by leaving the scheme.”

Mr Porter says a big step forward in helping NHS staff in England and Wales better appreciate the value of their pensions would be the introduction of an online pen-sion modeller, which would enable them to visualise the value of the benefits they accrue and the con-tribution made by the employer. The NHS scheme in Scotland and the Local Government Pension Scheme already offer such a tool on their website.

Staff perceptions of the NHS scheme could start to improve from April when members’ ben-efits may be increased follow-ing a statutory review of its funding level. A mechanism known as the cost cap, which was implemented in 2015 to con-trol unexpected changes in pen-sions, requires the Government Actuary’s Department to assess whether the scheme is under or overfunded.

into the future rather than reduce employee pension contributions it will receive today.

The group of staff with the high-est level of opt-outs is those aged between 26 to 35, which includes many staff in lower-pay brackets. But some typically older high-earn-ing medical staff , including GPs and surgeons, have also been leav-ing the NHS scheme because they have hit HM Treasury’s £52,750 a year DB pension lifetime allow-ance, so they are no longer enti-tled to tax relief on contributions. The lifetime allowance is £1.055 million for defi ned contribution pension savers.

Earlier this month, health secre-tary Matt Hancock petitioned the Treasury to lift the lifetime allow-ance for GPs, according to an inter-view in Pulse, a trade publication for doctors. Mr Hancock blamed the limit for contributing to staff retention problems in the sec-tor, with some GPs retiring early. However, the Treasury has not given any indication that it will carve out an exemption to its pen-sion taxation rules for public sec-tor medical professionals.

Union offi cials say the scheme is expected to be assessed as being funded beyond the cost cap because mortality improvements have not been as great as had been predicted. Such a fi nding would mean predicted payouts to pensioners will be lower than have been accounted for to date. The government has two options for bringing the scheme back within the cost cap: reducing employee contri-butions or increasing the benefi ts accrued by members each year.

Mr Porter says he expects the Treasury to opt to increase bene-fi ts that will be received decades

Concerns rise as a perfect storm of fi nancial pressures force hundreds of thousands of NHS employees to opt out of their attractive pension schemes

Healthcare workers in opt-out epidemic

N H S

A

John Greenwood

A broader disillusionmentwith public sector pensions has contributed to an atmosphere of negativity towards what remains a very attractive benefi t

Colm Porter, national offi cer at Unison, the union that represents healthcare workers, says another problem causing staff to opt out is the “all-or-nothing" nature of the NHS scheme. Local government workers are able to opt to buy half contributions into their scheme, to enable those who cannot aff ord the full contribution to be able to participate to a lesser extent. But this option is currently not avail-able to NHS staff , who must opt out altogether if they are not pre-pared to make the full contribution, although Unison is pushing for it to be introduced.

Mr Porter believes that a broader disillusionment with public sec-tor pensions, following increases in employee contributions and retire-ment ages, has contributed to an atmosphere of negativity towards what remains a very attractive ben-efi t. He believes the NHS could do considerably more to educate staff about retirement saving and com-municate the value of the benefi ts the scheme off ers to members.

“It is true that the NHS scheme is not as generous as it was when it was changed in 2015, but it is still very

cent have opted out of the Armed Forces scheme.

Sir Steve Webb, of Royal London, who served as pensions minister in the 2010-15 coalition government, says NHS staff have been hit by a “per-fect storm” of factors driving them to dropping their pension. He says: “NHS workers have suff ered a dec-ade-long pay freeze, an increase in contributions following the abolition in contracting out and a contribution policy that sees higher earners pay a higher percentage than lower earn-ers. This creates cliff edges where peo-ple can fi nd their contributions soar-ing just because they got a pay rise.”

The NHS Pension Scheme in England and Wales operates a grad-uated contribution policy where those earning up to £15,431.99 con-tribute 5 per cent of gross earnings, rising in seven tiers to 14.5 per cent for those earning £111,377 and over. The NHS scheme contribution pol-icy means that individuals receiving a pay rise can actually see their take-home pay reduce where the increase in salary tips them into a higher con-tribution bracket. The NHS is con-sulting on amending this contribu-tion structure from April 2019. Health Service Journal 2019

NUMBER OF NHS PENSION SCHEME OPT-OUTS, BY AGE GROUP

16-25

26-35

36-45

46-55

56-65

66-75

stur

ti on

Get

ty Im

ages

The fl ood of public sector staff leaving gold-plated defi ned benefi t pension schemes has highlighted the dilemma all workers face when asked to meet the cost of providing for their retirement.

Increased longevity and historically low interest rates have pushed the cost of securing a retirement income to astronomic levels. An annuity of £3,000 that increases in line with the retail price index would cost a healthy 65-year-old non-smoker £100,000 to buy.

Since 2012, automatic enrolment has brought almost ten million new workers into pensions. So far, opt-out levels have been lower than pundits had expected. Latest figures from the Department for Work and Pensions show 4.2 per cent of 22 to 29 year olds and 7.6 per cent of 50 to 59 year olds had opted out by June 2018.

Some experts predict opt-out rates will increase when minimum employee contributions increase from 3 to 5 per cent of earnings between £6,032 and £46,350 from April, when employers will be required to pay a further 3 per cent.

The Pensions and Lifetimes Savings Association says a total of 8 per cent of band earnings is inadequate and is calling for a minimum combined contribution of 12 per cent of all earnings. Such a contribution level would still leave private sector workers short of final salary benefit levels, but would be likely to lead to a greater number of opt-outs.

What will happen to opt-out rates?

35k30k25k20k15k10k5k0

2015

2016

2017

4.7%of UK people auto-enrolled from April to June 2018 actively decided to opt out, down from 5.6 per cent the previous four years, despite an increase in the minimum contribution level to 5 per cent

8%minimum contribution level for auto-enrolment pensions from April 2019, up from 5 per cent previously

75%of employers do not expect a reduction in pension scheme participation because of the upcoming increase in contribution levels

65%of small companies (with less than ten staff) expect modest to substantial falls in participation

Association of Consulting Actuaries 2019

Department for Work and Pensions 2018

W O R K P L A C E P E N S I O N S16

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Freedom and choice in pensions has increased the risks and complexity that employees and pension scheme members face in the lead up to and at-retirement

including; falling for a scam, buying inappropriate retirement products, paying more tax than necessary, running out of money, or not understanding the risks

around defined benefit pension transfers. This has created a growing need to provide support for employees and pension scheme members at this stage.

including; falling for a scam, buying inappropriate retirement products, paying more tax than necessary, running out of money, or not understanding the risks

around defined benefit pension transfers. This has created a growing need to provide support for employees and pension scheme members at this stage.

Support with the implementation of retirement

income options

this allows a holistic solution to be implemented and managed

throughout retirement.

Financial education

to aid understanding around the various retirement income

options available and key issues such as tax efficiency.

Regulated advice

to help individuals understand their personal

financial situation.

Financial guidance

to offer one-to-one support to employees and pension scheme

members facing life changing decisions about their pensions

and retirement savings.

To find out more about how you can help your employees become financially empowered, please contact us on: 0800 234 6880, email us at info@wealthatwork.co.uk or visit www.wealthatwork.co.uk

Our Retirement Income Options service

is available to pension schemes, Trustees

and employers and consists of: