"Pension schemes need urgent rule change"

Catching up after annual leave last week. Just read Janice's important letter on pensions published in the Guardian on 25 July.

"Phillip Inman's welcome report on the dire state of private sector pensions (No wonder ministers are panicking over pensions, 23 July) nevertheless omits one major reason for the horrendous deficits of defined benefit (ie final salary and career average) pension schemes: a couple of clauses buried in the 2005 Pension Regulations. The clauses force defined benefit schemes to conduct valuations using methods derived from free market theory: basing scheme projections, decades into the future, on the state of the markets on one day. If the markets are fine, the pension fund is fine. If not, schemes are in trouble. These rules have caused wild volatility: no one has a clue about how big their deficit will become. Last year the Pension Protection Fund reported DB schemes' combined deficits as £8.3bn. A few weeks ago they passed £300bn.

The Association of Member Nominated Trustees, whose members are trustees of pension schemes with collective assets of about £200bn, says DB schemes must be enabled to ride out short-term market volatility by smoothing the valuation – taking an average of asset values and gilt yields over several years. The PPF has adopted this method for itself. What's good enough for the PPF is good enough for the schemes that fund it. The AMNT has submitted rule changes to the Department for Work and Pensions, and our views are shared by organisations such as the CBI and the National Association of Pension Funds.

This may sound like a dusty technical issue. But what's at stake are the pensions of more than 2 million working people, and the chance for the millions coming after them of having a decent pension.
Janice Turner
Co-chair, AMNT

AMNT newsletter – July 2012: meeting review; trustee guide discount

Association of Member Nominated Trustees

 Dear member,

Two weeks ago the AMNT hosted its summer members’ meeting with a number of topical discussions and presentations.

The event, which took place at AXA Investment Managers’ London offices in Newgate Street, began with a presentation by co-chairs Barry Parr and Janice Turner on the association’s latest developments.

Copies were distributed of AMNT’s recent submissions to the Dept for Work and Pensions inquiry into occupational pension schemes and to the Red Tape Challenge. We reflected the consensus of  all our meetings and called for DB trustees to be given the option of using smoothing when carrying out our triennial reviews.

DC trustees were updated on the discussions going on within the pensions industry, in which AMNT is participating, on development of a better type of DC scheme.

These included the finalisation of the constitution, an update on the AMNT’s lobbying activities and an insight into the potential sponsorship opportunities the association is in the process of finalising.

Then committee member Owen Walker gave a presentation on the development of the website.

This was followed by AMNT member and chief executive of FairPensions Catherine Howarth giving a presentation on the shareholder spring and how this affects trustees.

FairPensions has produced a briefing on executive pay, which has been designed with busy trustees in mind.

The idea is to make something available which gives trustees some handy questions they can ask fund managers if they want to be sure that a tough line is being taken on executive pay packages.

You can read it here: http://www.fairpensions.org.uk/sites/default/files/uploaded_files/investorresources/ExecutivePay2012.pdf

Members were then given a presentation by an AXA IM spokesperson on how investment companies can also help trustees to improve their shareholder engagement.

The meeting then split into breakout groups, focused on DB and DC issues.

The working group on defined benefit pensions concentrated on discussing a draft produced by DB working group chair John Gray on what to do if your scheme sponsor announces they want to close the scheme.

This draft is at an early stage and John Gray (john.gray@amnt.org) is very keen to hear from you if you have been through this process, regardless of whether the scheme closed or stayed open.

We are now revising the draft guide, carrying out further research and checking and we hope to circulate it to everyone in the near future. If you are interested in contributing to it please contact John.

After the break, members received a presentation by friend of the association and executive director of OPDU Jonathan Bull on the benefits trustees can receive of indemnity insurance.

Jonathan’s presentation can be downloaded by clicking here.

30% discount on trustee guide

The publishers of The Guide for Pension Trustees are offering AMNT members 30% off this publication which is on the reading list for the PMI trustees’ qualifications. The Guide is a practical and comprehensive manual for all pension trustees.

It contains the essential practical, legal and commercial information that trustees need in order to perform their roles efficiently, accurately and lawfully. You will receive free quarterly updates of the guide, reflecting the latest developments in the sector, and you will have free access to the guide online, which includes additional modules and data tables.

It normally costs £265 but the AMNT discount brings this down to £185.50, and all those taking up this offer will also receive a free copy of the Pensions Pocket Book 2012, which normally retails for £47.50. To obtain the discount you have to quote offer code GPTCW110 when you order. Telephone 01235 465 574, fax 01235 46556 or email subscriptions@marston.co.uk.

Ask your fellow MNTs to join us

The meeting was delighted to hear that AMNT has now grown to about 240 members, and we are responsible for pension funds with collective assets of an estimated £200-billion.

The more members we have the stronger our voice will be in putting forward your concerns to the industry, the regulators and the government, so if you could suggest to your fellow MNTs to join us that would really help.

Kind regards, AMNT Committee

(I posted this late so had to take out an invite to a conference that was out of date)

AMNT open meeting to members next Tuesday June 20

Association of Member Nominated Trustees. There is an open meeting of the AMNT next Tuesday 20 June at AXA Investment Managers’ London offices, 7 Newgate Street. London. Starting 1.30pm (sandwich lunch beforehand) and finishes 5.30pm (followed by drink and nibbles).

AMNT member and chief executive of Fair Pensions Catherine Howarth will give a presentation into the ‘Shareholder Spring’ and what it means for trustees.

Jonathan Bull of OPDU will also give a talk on the types of insurance available to trustees and what MNTs can to do to limit their own personal risk.

Followed by a report from the AMNT committee and breakout sessions on member concerns.

I have drafted a paper for the AMNT on "what to do if your employer wants to close your Defined Benefit Scheme". Which may be discussed either this meeting or the next. I'm at the UNISON conference next Tuesday so can't make it.

Find out more about the AMNT and join here. Email mail@amnt.org to apply if you want to attend.

"Active Responsible and Engagement Investment Approaches: Do they deliver positive returns?"

Last Tuesday evening I went to a seminar organised by the Pension Investment Academy and the University of Westminster Business School(Marylebone Campus) via the AMNT. The seminar was about whether responsible investment and engagement approaches actually work. Which is a pretty fundamental topic I posted on recently here.

Why I believe as a pension investor and trustee that investments should be made in a social responsible manner. I have to ask what empirical proof or evidence is there that such a policy actually achieves a positive return especially when compared to investments on behalf of those who don't worry what happens to their investments as long as they make money. 

I can remember being told many years ago that it is the duty of pension trustees to maximise the performance of their fund and nothing else. Which is clearly nonsense (then and now).

There was a pretty high powered panel of speakers from the Pension Protection Fund, Mercer, BT Pension fund and Henderson Global Investors.

The good news is that it seems that there is now research that engagement can add to returns and could reduce risk and volatility. However, the evidence is so far patchy. Certainly there is the argument that such active stewardship in Banks could make a "rerun" of the recent global banking disaster "materially less likely" (Walker Review 2009).

In the Q&A I did respond to the points made by some members of the panel that voluntary regulation is better than the state being involved, by saying that the lessons from the Banking crisis is that laissez faire capitalism failed and that you need more state regulation not less.

Also that until our investment advisers start advising trustees that it does make financial sense for the fund to be active then most trustees will not have the confidence to do so. Many fund managers (not all) in my experience see SRI as a unnecessary interference  in their right to manage money as they see fit. They simply pretend otherwise to win and keep business.  Regardless of the Stewardship Code you will need the support of your advisers to take them on.

Update: evidence on positive returns by Helene Winch from BTPF  here ; here; here and here 

Hat tip cartoon Kevin Wong

(I spent 3 years on a day release at the Westminster University site in the late 1990's to do a CIH post-graduate diploma. It was nice to be back but due to expansion and building works the campus is now unrecognisable).

Molins to Workforce: give up your pension...or else!

It was another bad week for employees last week. At around the same time that the Conservative hedge fund multi-millionaire and sponsor, Beecroft, published his report recommending that companies should be able to sack their employees if they don’t like them, Molins, a FTSE listed UK engineering company was found to have threatened its workforce with the sack if they don’t leave their pension fund!

They decided to close their scheme but their trust deeds did not allow it. So they have issued a section 188 notice to the government saying they are intending to dismiss everyone and then offer to re-engage them on condition that they do not join the pension scheme.

Molins claims that that they cannot afford to run its existing defined benefit scheme. Which is rubbish. It is making good profits and is financially secure.

Pension’s Week suggest that there may be a problem with attracting investment but that is not what they are telling their workers. I think it is just cost cutting and they want to cut the wages of their employees with a substandard pension contribution which will not be enough to give their workers enough money to have security and dignity in their old age.

I gave a statement to “Pensions Week” (part of the FT group) as Chair of the AMNT Working Group to defend and promote Defined Benefit Pension schemes. Part of which they quoted

“This is a test to the 2006 pensions regulations, which quite clearly state an employer’s consultation with the workforce has to be meaningful,” said John Gray, Association of Member Nominated Trustees (AMNT) committee member.

“Molins appears to in breach of its own ethics policy. Threatening to sack their staff in order to get out of providing them with a decent pension does not appear to us to be anything like the highest standards of ethical behaviour.”

The AMNT has launched a campaign to support trustees of DB schemes under threat of closure.

What Molins has got to realise is that closing their pension scheme will not make their liabilities disappear. It could make things much, much worse.

Current Pension deficits are worked out using a completely artificial and discredited accounting standard called “mark to market”. Due to a double whammy of recent exceptionally low fund management returns and a 200 year low in the yield of gilts make things appear far more negative  than they actually are.

Not only that but if you panic and close your scheme in response to these meaningless figures then the company faces having to pay even more into the scheme since the fund rapidly becomes cash deficit and has to invest into low yielding bonds and gilts with no equity premium.

Ironically last week I goggled “Molins” and “Pensions” and came across this story from "The Independent" business pages in 1992. The Molins pension scheme was then in surplus by £90 million.

The company was trying to take out £18 million out of the pension scheme to cut company debt and fund acquisitions (and increase benefits). I don’t know if were able to take this money out of their scheme but if they did what would have been the scheme funding now if they did not take out £18 million in 1992?

(NB to be clear this post is my own and not necessarily the views of the AMNT)

UPDATE: Professional Pensions has a good article on this case here

"Housing staff face massive pension hikes"

I was contacted by "Inside Housing" (trade magazine for Social Housing) this week about possible significant increases in pension contributions for members of the Social Housing Pension Scheme (SHPS).  What I told them is hardly rocket science, but after years of below inflation wages increases (and savage cuts in care and support) if the cost of pensions go up then members will leave the scheme.

I have also posted on line this comment:-

Can I recommend that if anyone learns that their employer is considering increasing contributions or closing their scheme to contact their trade union. UNISON is in the process of organising a meeting with the Social Housing Pension Fund and also will want to meet with employers.

Please remember that this “deficit” is an accounting figure which is almost entirely bogus and due a double whammy of recent exceptionally low fund management returns and a 200 year low in the price of gilts. Some things might have to change but defined benefit schemes are as affordable now as they have ever been. Housing associations should not panic. They will only run the risk of making the deficit seem even worse if they do. Instead they should meet up with their unions and negotiate a way forward.

and in reply to a blog by its Editor here

Sorry Stuart but it would not be a pragmatic step to consider closing the scheme nor raising contributions significantly. It could make things very much worse. This “deficit” is completely artificial and discredited accounting figure due to a double whammy of recent exceptionally low fund management returns and a 200 year low in the yield of gilts.

The Pensions Minister accepts that this "mark to market" accounting should be reviewed. Even the Bank of England says that you should not take a "mechanical" viewpoint of such "deficits"....

In housing management we see first hand the awful consequences of poverty in old age. Defined benefits schemes gives dignity in retirement for millions and should remain as the cornerstone of decent occupational pension provision.

I am also writing a guide/resource for the AMNT on what should trade unions and trustees do if their employer decides to try and close their defined benefit scheme (or increase costs so much it will close)

How to pitch to the Local Government Pension scheme

Last week I was in "Citywire" magazine (see website here) on how pension fund managers and other financial service providers should "pitch" for business to Local Government Pension Scheme (LGPS) committee members. The interview had been arranged by the Association of Member Nominated Trustees (AMNT).  I'm a member of their Executive Committee.

I have endured a number of pension "pitches" and so called "beauty parades" over the years. Some are very good but often they are pretty awful. There are some fund managers who may be good at their jobs but should not be allowed to appear in front of well rounded human beings. They forget that their role is not to dazzle us with their brilliance but to persuade us to buy their services.

I have a general rule in life. If I don't understand something I won't buy it. You can also guess what I will do if I don't like the person trying to sell it. I also want to buy a decent house view on investment principles and not a "star performer" not matter how brightly he or she is burning at the time.

The lack of preparation and research is also striking. If they don't even bother to read and understand our scheme Statement of Investment Principles (SIP) before the pitch then I really wonder why they have turned up and wasted their time and mine? 

When you explain that Pension funds should be long term investors who believe that investments in well managed companies who have good governance practises will tend to produce superior returns you can can see the horror, the horror of the ill prepared and the complacent. Sometimes even the wannabee Masters of the Universe truly have no clothes.  

In defence of DB

This is an article I wrote on behalf of the AMNT in defence of Defined Benefit Pension schemes for all.  It was published in Engaged Investor in its December edition.

"While the Association of Member Nominated Trustees (AMNT) has no formal view on the dispute between the Government and the public service unions, many of our
trustees are strong supporters of defined benefit (DB) schemes. 

In fact, one of the most active AMNT working groups is dedicated to defending and promoting DB schemes and almost exclusively comprises private sector DB trustees. This group is convinced that DB should remain the cornerstone of occupational pension provision.

DB trustees are also concerned that the often inaccurate media attacks on public sector DB schemes are having an adverse impact on the standing of their schemes with their sponsors.

It is often forgotten that alongside the six million workers in the public schemes there are still 2.4 million continuing to build up DB benefits in private schemes. It is important that
the pension myths about all DB schemes are exposed and countered.

The first myth is that DB is “gold plated”. The average local government pension is only £4,000 per year while the average retired female NHS worker’s pension is less than £2,800 per year. The maximum that many retiring today will get in typical DB schemes is half pay and a lump sum typically 1.5 times their final salary. Are people really saying half pay after a lifetime of saving is too much?

Another myth is that DB is too expensive. Future employer contributions for many schemes are less than 14% and with some, such as the NHS’s scheme, it has already been agreed that employer contributions are capped at 14% and any future increase in cost will have to be wholly met by the employees.

In the absence of compulsion, unless we have pension schemes which are attractive to employees then people will simply not join or opt out. This will leave the taxpayer with an even greater bill to support these people on the poverty line when they are old.

Nobody is arguing that DB schemes are perfect, or that hugely damaging mistakes were not made in the past. Deficits for past accrual are often confused with future costs of DB, however. Most DB trustees remain convinced that people want a degree of certainty in their retirement. They want to share the investment risk with the employer and the state, not to personally bear the brunt of it.

There are many changes that could be made to improve DB. These could include merging DB funds and schemes; bringing together the 100 or so different local government pension schemes.  We need changes in the accounting standards that currently treat century-long pension benefit liabilities as if they were a credit card bill. We need to get a grip on spiralling fees. We need to improve governance and make sure that savers are not ripped off in future financial scandals.

The real scandal in pensions is not DB schemes but the two thirds of private sector employers who do not pay a penny towards their employees’ pension and the 50% of private sector workers who have no pension provision whatsoever".

AMNT Presentation to Irish Banking Trade Association

Yesterday, during a visit to their headquarters in Dublin, Janice Turner, the Joint Chair of the Association of Member Nominated Trustees (AMNT) and I gave a 45 minute presentation to the Irish Bank Officials Association (IBOA) National Executive Committee.

The IBOA represents 22,000 finance workers in the Republic and Northern Ireland. It has has been very supportive of the AMNT and its lay pension trustees NEC have played a key role in our growth. Their members are in Defined Benefit (DB) and Defined Contribution (DC) pensions schemes.

Being finance workers they are acutely aware of the value of pensions and the threats that all their schemes currently face. The employer pension "promise" and "covenant" is under attack. For example the UK regulated Banks suffer from unnecessary and damaging accounting standards while in the Republic there is also no equivalent of the Pension Protection Fund (PPF).  This needs to be challenged.

I think that the IBOA committee members and officers appreciate that the AMNT is the only organisation that is run solely by member nominated pension trustees who want to not only defend and promote DB but also want to improve all DC schemes as well.

At some point in the future it would make sense to try and organise local pension training and briefings by the AMNT outside London. 

Many thanks to the IBOA for the warm welcome and hospitality they showed to us during our visit.

AMNT Pension Week article on Governance & the LGPS

I wrote this article on behalf of the Association of Member Nominated Trustees (AMNT) last month which was published in Pensions Week.

I tried to answer the following question. "I have just been elected as a trade union employee representative on my local government pension scheme. What should I do next?".

Quick plug for the next open meeting of the AMNT on 23 February 2012. One of our speakers is Con Keating. Who is one of the leading proponents of Defined Benefit (DB) Pensions Schemes.  To attend this event join the AMNT here.

(NB I am Chair of the AMNT DB working group not the AMNT as stated in the Pension Week article)

Happy 1st Birthday Association Member Nominated Trustees (AMNT)

On Thursday I went to the first anniversary meeting of the Association of Member Nominated Trustees (AMNT) at JP Morgan in Moorgate.  The AMNT is a national forum and network for member nominated pension trustees and representatives. I missed the AGM in the morning but was able to attend the afternoon session.  The new AMNT web site (see right) was also launched.  Join here for free if you are a member nominated trustee or rep of any pension scheme.

In the afternoon we had report backs on our AMNT working groups. 

I chair the Defined Benefit Working Group and gave a brief presentation on our work to defend and promote DB schemes.  I was probably the first person ever to offer trade union fraternal greetings and invite people to join a pension picket line to such an audience at such a location.

We then had a presentation on "Is shorter-term equity investing an issue for our Pension Schemes?" by Professor Paul Sweeting who works for JP Morgan and the University of Kent.  I asked him about the problem that short term investors (by definition) cannot act as owners and make sure that the managers of companies act in their owners' interests and not their own.  Paul recognised that this could be a problem but thought that the advantages that such investors bring to the market in terms of liquidity out weigh this (hmmnn - I'm not convinced).

                                                                                                        Next we had the MD of Pitmans, Richard Butcher brief us on "Should Master Trusts incorporate MNTs? I think that there was a consensus that Master Trusts should be legally obliged to have MNTs on their boards. We then spilt into work groups, debated various burning trustee issues and reported back to the main meeting.  Afterwards we retreated to the "Red Herring" pub to properly reflect on and celebrate the first anniversary of the AMNT and our plans for the year ahead.

The Good Liberal Democrat

This is part of the speech on pensions that Janice Turner gave at a Liberal Democrat fringe event last week called "Pension reform – public, private and state – What’s fair?".  Also at this event was Steve Webb MP, Pensions Minister, Dave Prentis, UNISON and Danny Finkelstein, The Times.  Janice is also the Co-Chair of the Association of Member Nominated Trustees.  In her speech she firstly attacked the pension industry for for doing their best to try and destroy decent company schemes in the private sector. 

"I’ve devoted my spot to talking about private sector occupational schemes, because we’ve got an expert sitting next to me who will be talking about public sector schemes. But as a Liberal Democrat I can’t just say nothing at all about public sector schemes when millions of public sector workers are about to ballot for the biggest day of action since the General Strike.

A hundred years ago, Asquith and Lloyd George brought this country the old age pension and they did it by having the vision, and by having the courage and determination not to back down when the Conservatives insisted that the government couldn’t afford it. A century on and occupational pensions are just as necessary today. We all hope to retire with a pension we can live on, rather than just existing. But most of us aren’t going to get there.

In the public sector the average pension is a mere £7,800 a year, beneath the poverty threshold. The average for women is only half that. There is nothing gold plated about public service pensions. Now more than five million people are being told that the Conservative-led government can’t afford them and are proposing that they move to career average schemes, raise the age that they can retire on it, and link it to the state pension age so that it keeps going up; and cutting their take-home pay by increasing their pension contributions.

All this is on top of the government’s announcement that they were going to switch public sector pension increases to CPI instead of RPI. That move on its own will wipe over £100-billion off their pensions when they retire. £100-billion. The government really hasn’t thought this through. Have they considered the impact it will have on the economic recovery if nearly a quarter of UK households have a pay cut? If 5 million people reduce their spending and increase their retirement saving to compensate that may be enough to slow down the recovery.

It is not true that we can’t afford these pensions. Just like a century ago, the government can afford it, the Tories just don’t want to. They have other priorities like wanting to save rich people from paying the 50p rate of tax. These proposals go too far, they are unfair, this government isn’t listening, and for many people struggling with a pay freeze and spiralling inflation it will force them out of their pension schemes as they cannot afford the pay cut.

And it is wrong to suggest that public sector pensions are unfair to private sector workers. Private sector workers had their pensions savaged by the Labour government but that’s not the fault of ordinary public sector workers. I for one expect the British government to lead by example, to set the highest standards for the way it treats its workforce, and that means safeguarding their pensions.

So yes I believe there is a major crisis in occupational pensions and the government needs to stop trying to make it worse with its proposals for the public sector, and act now to start repairing the damage to private sector pensions".