PMI. Cybercrime. n e w s N O V E M B E R the UK's leading pensions jobs board. is it on your scheme s agenda? Moving the goal posts

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1 PMI n e w s N O V E M B E R Cybercrime is it on your scheme s agenda? Overseas transfers where do we go from here? Moving the goal posts The record holders always win the UK's leading pensions jobs board

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3 [ PMI n e w s [ contacts+contents HEAD OFFICE The Pensions Management Institute PMI House, 4-10 Artillery Lane, London E1 7LS T: +44 (0) MEMBERSHIP T: +44 (0) E: membership@pensions-pmi.org.uk QUALIFICATIONS/TRUSTEES T: +44 (0) E: qualifications@pensions-pmi.org.uk COMMERCIAL DEVELOPMENT T: +44 (0) E: events@pensions-pmi.org.uk FINANCE T: +44 (0) E: accounts@pensions-pmi.org.uk FEATURE ARTICLES 10 Cybercrime is it on your scheme's agenda? 14 Overseas transfers where do we go from here? 18 Moving the goal posts 28 The record holders always win 31 Administration errors what happens when it all goes wrong? REGULAR ARTICLES 04 Editorial [ 14 PMI news team EDITORIAL Daisy Goodstien T: +44 (0) E: dgoodstien@pensions-pmi.org.uk CORPORATE/DISPLAY ADVERTISING T: +44 (0) E: nick@insidecareers.co.uk RECRUITMENT ADVERTISING T: +44 (0) E: nick@insidecareers.co.uk DESIGN S2 design and advertising T: +44 (0) E: enquiries@s2design.co.uk PRINT Crossprint Ltd T: +44 (0) E: sales@crossprint.co.uk Published in the UK by The Pensions Management Institute Available free to PMI members ISSN Notes from PMI House 06 Qualifications 09 Events 13 Expert Insight Financial Education 17 Investment Insight Managing Volatility 22 Investment Insight Member Engagement 24 A month in pensions 27 News from the Regions 33 PMI AAP 35 NEST update 37 Regulator update 39 Services directory 45 Appointments PMI NEWS NOV

4 editorial Revolutionising the public s engagement with retirement planning Gareth Tancred PMI Chief Executive The Dashboard will do much to help the public engage more effectively with pensions, and this is something for our industry to cherish On 12 September this year, the Government committed itself to an ambitious project which could revolutionise the public s engagement with retirement planning. At a launch event staged at Aviva s Digital Garage in trendy Hoxton, the Treasury Minister committed the Government to developing a prototype Pensions Dashboard by the spring of The Dashboard will aggregate information about an individual s accrued pension savings into a single portal. Via a single source, it will become possible to review all pension savings, including contract-based and occupational defined contribution (DC), defined benefit (DB) and State benefits. Current working patterns mean that individuals will have several employers over the course of their working lives, and this will commonly result in a collection of separate pensions. Statistically, an individual is likely to have eleven separate employers over the course of a working career. The Dashboard will therefore be an invaluable aid in helping people review their current savings and allow them to assess the extent to which current contribution rates are appropriate. Older members can plan a decumulation strategy in a well-ordered manner. The basic concept of the Dashboard is not new. Twenty years ago, the Government began developing combined benefit statements, which would show benefits accrued in an occupational scheme in addition to State entitlements. More recently, the public has become familiar with the concept of aggregation in the form of websites such as Go Compare, Money Supermarket and Expedia. Translating the format into the specific context of pension savings is a logical development which will give pension saving a degree of visibility comparable with other financial services. This can only be beneficial. Responsibility for the development of the Dashboard has been entrusted to an ABI-led consortium consisting of Aviva, Aon, B&CE, HSBC, LV, Nest, Now:Pensions, Royal London, Standard Life, Willis Towers Watson, and Zurich. They are to be congratulated for accepting the challenge which awaits them. It would, after all, be naïve to suppose that developing the Dashboard will be easy. The greatest challenges facing the development of the Dashboard are likely to be commercial rather than technological. The success of existing aggregation services demonstrates that from a purely architectural perspective the Dashboard is eminently possible to design. However, the major threat to the project lies in the extent to which pension providers are prepared to share commercially-sensitive information in a format which invites close comparison with a competitor s offering. Charging structures, fund ranges and decumulation services could be compared easily. Some firms will see this as an opportunity; others will perceive this as a threat. The Government will have to present some powerfully persuasive arguments to win over all elements of the pensions industry. Another area which will require careful management is security. Cybercrime has emerged as one of the major problems of our era. With so much personal information and much of it involving savings available via a single source, the Dashboard will be a particularly lucrative target for the resourceful criminal. The public will need to be confident that using the Dashboard does not put them at risk. However, in spite of the potential problems, the Dashboard is an exciting prospect. Keeping track of a range of separate types of pension saving will no longer be a complicated and time-consuming process. The Dashboard will do much to help the public engage more effectively with pensions, and this is something for our industry to cherish. [ n] 4 PMI NEWS NOV

5 pmihouse notes from PMI Fellowship Network The PMI Fellowship Network consists of a group of Fellows around the UK who discuss key retirement savings issues. All Fellows are eligible to be enrolled in the PMI Fellowship Network. If you are interested in finding out more contact the Membership Department at membership@pensions-pmi.org.uk We run quarterly meetings which provide us with invaluable insight into the thinking of our leading members, which in turn helps raise the profile of the PMI by providing input to White Papers and events. The next sessions will focus on the question: How can Fellows help create a post-brexit Britain with a workplace pensions system that actually delivers real value for retiring employees, and becomes an inspiration for the rest of the world? The dates for the next sessions include: n Tuesday 29 November - Birmingham n Wednesday 30 November - London n Wednesday 7 November - Edinburgh For full details visit our website or to register your interest contact the Membership Department Subscriptions last chance to renew Your membership renewal was due on 1 September 2016, and subscription renewal notices, along with reminders, have been sent out to all members. We will begin lapsing members on Thursday 10 November, so if you would like to renew without being charged a 150 re-joining fee contact the Membership Department as soon as possible. Affiliate Subscriptions Affiliate Members are reminded that their subscription for was due on 1 November The current subscription renewal fee is 75. If you have not received your renewal form contact the Membership Department or alternatively you can log on to our website to complete your renewal. CPD Fellows and Associates are reminded that meeting the PMI s continuing professional development (CPD) requirement is compulsory (except where retired/nonworking). Under our CPD Scheme, PMI members are required to record at least 25 hours during the year. Members have two months left to collect their CPD, and all activity must be recorded by 31 January 2017, so please make sure you log on to the website and update your CPD record. Members have been notified that the withdrawal of the designatory initials FPMI and APMI is inevitable for those who do not comply with PMI CPD requirements and have not submitted any evidence of CPD for the years 2014 through to Certificate Membership Certificate Membership is open to those who have completed one of our qualifications at the Certificate Level. We are pleased to announce that the following people have been elected to Certificate Membership and are now entitled to use the designatory initials CertPMI: Perminder Bilkhu Kevin Brocklesby Paul Carmichael Andrew Davey Ian Dickinson Brenda Douglas Ruth Everitt Robert Gregory Stephen Grimshaw Timothy Harris Barry Heather Victoria Hinson Ruth Johnson Nicola Millar Charlotte Oliver Louise Parker Douglas Peters Emma Rippin Gary Robinson Charlotte Sanders Peter Silcock Jeffrey Stokes James Smith Ruth Sturges Anna Symes Richard Whitfield Diploma Membership Diploma Membership is open to those who have completed one of our qualifications at the Diploma Level. We are pleased to announce that the following people have been elected to Diploma Membership and are now entitled to use the designatory initials DipPMI: John Butler Matthew Court Julie Jones Liam Scarfe Associate Membership Associate Membership is open to those who have completed the Advanced Diploma in Retirement Provision. We are pleased to announce that the following people have been elected to Associate Membership and are now entitled to use the designatory initials APMI: Joanne Barnard Matthew Coleman Lea-Ching Wan Fellowship Fellowship is open to Associates with five years membership and five years logged CPD. We are pleased to announce that the following people have been elected to Fellowship and are now entitled to use the designatory initials FPMI: Ellen Ratcliffe Emelda Nicholroy Martin Lacey People We are saddened to hear that Mr William Hitchings recently passed away Follow Discuss this month s articles using #PMINews PMI NEWS NOV

6 qualifications ARE YOU LOOKING TO EXPAND YOUR KNOWLEDGE IN TRUSTEESHIP AND GAIN FORMAL RECOGNITION? The Award in Pension Trusteeship (APT) is for trustees, or those interested in trusteeship, based on the Pensions Regulator s indicative syllabus. It provides formal recognition of a trustee s knowledge and understanding (TKU) in line with the requirements of the Pensions Act The syllabus covers trusteeship essentials such as: Investment and Funding Issues, Scheme Management Issues, and Law and Pensions. There are a number of providers that run trustee training courses combined with sittings of the APT examinations, and a full list can be found on our website. We strongly encourage candidates to attend training sessions, as results indicate that those who attend tend to do better than those who do not. Capita, our Member Engagement Expert Partner, also run trustee training sessions for the APT exam, and currently have four dates scheduled: n London - Wednesday 30 November and Thursday 1 December n Sheffield - Wednesday 14 November and Thursday 15 December Contact Jennifer Batty at Jennifer.Batty@ capita.co.uk for further details on any of the dates listed above. Places are limited so do get in touch as soon as possible to reserve your place. IS THERE ANYONE IN YOUR ORGANISATION THAT COULD BENEFIT FROM EXPANDING THEIR PENSIONS KNOWLEDGE? The Retirement Provision Certificate (RPC) is a qualification that is ideal for employees new to pensions, support staff and those professionals working in related fields. It provides a broad introduction to pensions and other related benefits in the UK. It has been designed to meet the needs of a wide range of people, not just pension professionals. The qualification is assessed by a 2-hour multiple choice exam made up of 120 questions, designed to test knowledge across the whole syllabus. The next sitting of the qualification is Wednesday 15 March, and the deadline for entries is Friday 13 January. For further details visit our website or contact the Qualifications Team ADVANCED DIPLOMA IN RETIREMENT PROVISION There are many reasons to study for the Advanced Diploma in Retirement Provision (ADRP) including: n to gain a nationally recognised professional qualification uniquely appropriate to careers in retirement savings, pensions and employee benefits n to study all aspects of pensions management enabling you to undertake specialised and varied work in any area of the pensions and retirement savings industry n to become eligible for Associate Membership, and as a result use the designatory initials APMI which indicate that you are professionally qualified and agree to follow the PMI s Code of Professional Conduct n certain units of the Advanced Diploma qualify students to undertake certain FCA Regulated activities n to achieve promotion more easily as an independent assessment has been made of your ability. Many employers advertise for people who are studying for, or have completed PMI examinations n to meet other professionals on equal terms at regional and national levels at seminars and conferences Those considering a career in the pensions and retirement savings industry should give serious consideration to undertaking the ADRP. For further details visit our website. Results Results for the October examinations will be posted mid-december, and a copy of the pass list will be available on the website the following day. Next sitting The next available sittings will be April Entry forms are now available on our website. Please note that the closing date for entry is Friday 27 January and late entries will not be accepted. MULTI-CHOICE EXAMINATIONS Multiple choice examinations include: n Award in Pension Trusteeship (APT) n Certificate in Pensions Automatic Enrolment (CPAE) n Certificate in DC Governance (DC Gov) n Retirement Provision Certificate (RPC) The next exam sitting will be held on Wednesday 15 March. Entry forms are now available on our website. Please note that the closing date for entry is Friday 13 January. Late entries will not be accepted. VQ EXAMINATIONS Vocational Qualification (VQ) examinations include: n Certificate in Pension Calculations (CPC) n Certificate in Pensions Administration (CPA) n Diploma in Pensions Administration (DPA) Results for the September examinations will be posted to centres and independent candidates on Monday 7 November. The next available sittings will be from Monday 6 to Thursday 9 March, in the same running order. Entry forms will be available on our website shortly, but for further details contact the Qualifications Team. 6 PMI NEWS NOV

7 FINAL CERTIFICATES OF ACHIEVEMENTS Congratulations to the following VQ candidates who have recently achieved their final certificates. Thank you to the assessors, internal verifiers and centre contacts who have supported these candidates. Certificate in Pension Calculations John Adair Claire Fuller Matthew Jenkins Diploma in Pensions Administration Richard Osborn Careth Pellegrini EXAM INVIGILATORS NEEDED The Qualifications Team are always looking for people to help invigilate our examinations across the country. If you would be interested, please contact the team. An honorarium and expenses are offered. CONTACT US Full details on all our qualifications can be found on our website along with all our forms, dates and fees. If you would like to speak to one of our qualification advisors or alternatively call Award in Pensions Essentials Emma Carter Daniella Federico Stuart Vernor PMI Study Support Partners Our Study Support Partner (SSP) Programme is an arrangement in which we have joined forces with leading organisations, involved in managing or advising UK pension schemes, to offer enhanced learning and study support services for those undertaking our qualifications or accessing our materials. The purpose of the programme is to help prepare Students for the qualifications, or other individuals for particular roles, by producing the highest quality materials at the appropriate depth. We are pleased to be working with the following organisations, and the enhanced study support service is greatly appreciated by all those studying for the qualifications: Aon Hewitt, Advanced Diploma Core Unit Understanding Retirement Provision and the Transfers Programme of the vocational qualifications online learning system Barnett Waddingham LLP, Retirement Provision Certificate Capita Employee Benefits, Advanced Diploma Specialist Unit Defined Contribution Arrangements Ferrier Pearce, Advanced Diploma Communications Manual First Actuarial, Advanced Diploma Core Unit Running a Workplace Pension Scheme JLT Benefit Solutions, Advanced Diploma Specialist Unit Reward and Retirement Provision, the Leavers Programme of the vocational qualifications online learning system and the Certificate in Pension Scheme Member Guidance Lane Clark & Peacock, the Retirements Programme of the vocational qualifications online learning system Mayer Brown LLP, TrustSec and the Certificate in DC Governance Mercer, Advanced Diploma Specialist Unit Defined Benefit Arrangements Nabarro LLP, Advanced Diploma Core Unit Regulation of Retirement Provision Punter Southall, the Deaths Programme of the vocational qualifications online learning system Pinsent Masons/Trustee Solutions Limited, Advanced Diploma Compulsory Unit Professionalism and Governance Willis Towers Watson, Certificate in DC Governance PMI NEWS NOV

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9 events SECRETARY TO THE TRUSTEE SEMINAR Our next SECRETARY TO THE TRUSTEE seminar will take place on Thursday 8 December at Taylor Wessing, 5 New Street Square, London EC4A 3TW. This event will provide the opportunity to share experiences and gain insight into how others carry out the role of the Secretary to the Trustee effectively. Topics include: n The role of Secretary to the Trustees effective meeting preparation/best practice at and post meeting n Preparing and monitoring an effective risk register n Working effectively with the Chair of trustees n Effective minute writing n Regular annual activities n Trustee effectiveness n Effective complaint handling n Managing conflicts of interest n Development of meeting management See enclosed booking form for further details. Hosted by: WORKPLACE PENSIONS TRAILBLAZER APPRENTICESHIP FORUM On Wednesday 30 November we will be holding a forum for all those interested in delivering the new Workplace Pensions Trailblazer at Willis Towers Watson, London. We have invited a number of training providers to attend to explain how they can assist with the delivery and the funding requirements. It will also provide an update on the Apprenticeship Levy and the PMI s role in this area. Further details can be found on our website. ANNUAL DINNER Our 2017 Annual Dinner will take place on Wednesday 1 March at the Dorchester Hotel, Park Lane in London. The PMI Annual Dinner has been running for over 30 years, and still proves to be one of the most entertaining pensions social events of the year. Attracting over 300 key professionals within the industry, it is the ideal occasion to relax and unwind with colleagues and peers in the most prestigious of surroundings. With pre and post dinner drinks included in the ticket price, together with Tony Robinson as the after dinner speaker, we promise our guests will enjoy a superb evening of great entertainment. For details of individual and full table ticket prices see enclosed booking form. ADMINISTRATION SUMMIT We are pleased to announce that our Administration Summit will take place on Monday 20 March at America Square Conference Centre, London. Topics include: n What does the future look like for the pensions administrator? n Introducing the pensions dashboard a step into the future n Meeting the expectations of the 21st Century Pension Scheme Member n Meeting the needs of pensions staff who regularly liaise with members n Data protection and cybercrime what do scheme administrators need to know? n The ongoing challenges of assessing value for money n Administration transfers a seamless move? n 21st Century administration how will administration services need to change to service new types of members and new long-term saving arrangements? For further details and to book visit our website. DIARY DATES n 2 NOVEMBER 2016 PMI Technical Seminar Financial Empowerment n 2 NOVEMBER 2016 PMI Eastern Group Autumn Seminar n 17 NOVEMBER 2016 PMI London Group Pub Quiz n 17 NOVEMBER 2016 PMI Eastern Group Seminar n 17 NOVEMBER 2016 PMI Annual Lecture n 29 NOVEMBER 2016 PMI London Group Business Meeting n 29 NOVEMBER 2016 PMI Southern Group Seminar n 8 DECEMBER 2016 PMI Secretary to Trustees Seminar n 29 JANUARY 2017 PMI Southern Group Seminar n 1 MARCH 2017 PMI Annual Dinner n 20 MARCH 2017 PMI Administration Summit n 11 MAY 2017 PMI Annual Conference Regional Groups activities shown in italics CONTACT US Full details on all our events can be found on our website, along with all our booking forms. If you would like to speak to one of our events team events@pensions-pmi.org.uk or alternatively call PMI NEWS NOV

10 Cybercrime IS IT ON YOUR SCHEME S AGENDA? x A recent warning from the chief executive of the Pensions Regulator that trustee boards need to do more to assess their risk of cyber-attack, and protect member data, has once again thrust the issue of cybercrime into the spotlight. Data within the pensions sector is a valuable commodity, and trustees have a responsibility for significant amounts of it but do they understand their responsibilities, and are they asking the right questions of their service providers? In this article we examine cybercrime, why trustees should be concerned, and suggest some questions that trustees should be asking of both themselves and their service providers. What is cybercrime? The National Crime Agency (NCA) defines cybercrime as crimes committed through the use of information communication technology, which is clearly a very broad definition, but the increased integration of technology platforms in modern society, and easy access to tools which allow manipulation of these platforms, means we are all susceptible to being targeted. There are risks inherent in the fact that we are becoming more connected, and the sophistication of the attacks on these methods of connection is increasing in parallel. Try an internet search learn to hack, and you ll soon see a multitude of step-by-step beginner guides and learn to hack magazines freely on sale across retail outlets. 10 PMI NEWS NOV

11 Such easy-access how-to guides have seen a rise in casual and curious hackers, who just want to see if they can. However, there are also social engineers, insider attackers, hacktivists and cyber terrorists who are posing a considerable threat to business continuity and operations, not to mention cybercrime syndicates and state-sponsored activities. There are some shocking statistics available. According to the Office for National Statistics (October 2015), the crime rate for England and Wales doubled in the previous 12 months to more than 11.6m offences. This was primarily due to the inclusion for the first time of an estimated 5.1m online fraud incidents and 2.5m cybercrime offences. Anecdotal evidence suggests that there are two types of organisation those that have suffered cybercrime and are aware that they have, and those that have and just don t know it yet. Why should it be on the trustee agenda? There have been a number of reported incidents of cybercrime in the media recently, and it is clear from these cases that it has a debilitating impact not only on business operations, but also on reputation. Trustees are classified as data controllers under the Data Protection Act, but typically they are not directly responsible for or involved in the control systems that should be in place to protect that data. The increasingly sophisticated cybercriminal is targeting data, as they have recognised quite rightly that data is a very valuable currency. What price on the Dark Net for a list of pensioners obtained from the scheme administrator with their bank account details, addresses, dates of birth, national insurance numbers and monthly pay? What price for a list of employees obtained via an attack on the employer? What price for a list of defined contribution members from the investment manager? Such data has a high value, and it needs to be protected. Trustees need to understand the sorts of attack that cybercriminals are carrying out, in order to respond accordingly. Crucially, they also need to appreciate their responsibility to ensure that their third party administrator support also adheres to strict cyber security best practice. What types of attack occur regularly? Social engineers may seek to exploit lax systems around physical access to systems and data, perhaps by tailgating someone into an otherwise secure building, by masquerading as company officials, by calling a company help desk, or by searching through the bins. What is the company or third party administrator policy on paper shredding to dispose of secure information appropriately? Then there are insider attacks what controls are in place to prevent an employee downloading data to a memory stick and then selling it on both within the employer and within the service organisations that are engaged by the trustee board? Hacktivists and cyber terrorists typically have an agenda to cause as much disruption as possible. How much damage would be caused to your pension scheme through a sustained attack on your sponsoring employer that threatens or succeeds in putting them out of business? Is this beyond your remit as a trustee? Arguably not, as trustees must assess the strength of the covenant. If the employer can be brought down by a cyberattack, how strong is that covenant? Phishing activity (which is the targeting of many individuals under one attack, mainly with blanket s in the hope that some will follow links, open attachments, reply with information or transfer funds) has been increasing rapidly. Similarly Whaling attacks are also on the rise. These attacks work on a similar basis to phishing, but involve targeting a small group of individuals who have significant data access, often posing as a senior company official, requesting personal information, bank detail changes or a large funds transfer. We are aware of at least one pension scheme that has been the victim of such an attack, however fortunately their protocols identified the attack and the systems prevented the spread of the attack. There is also an increasing rise in ransomware attacks, which are successful when a hacker gains access to the system and takes it over, holding the system to ransom until payment is made. Lancashire County Council is perhaps the highest profile victim of this, having taken itself offline for four days in January 2016 in response to an attack in which a ransom demand was made. Whilst there was no evidence that any data had been extracted, the success of the attack shows that systems are vulnerable. So what questions should trustees be asking? The message that must be taken from this is that the weakest link in practically all cases is human error or lack of awareness. According to IBM s 2014 Cyber Security Intelligence Index Report, human error is involved in more than 95% of security incidents. The Verizon Data Breach Investigation Report 2015 reported that 23% of recipients opened phishing messages, and 11% opened the attachments. The message has to be that there must be policies and protocols in place, and the mitigation of risks must be considered at all stages of the employment cycle. Sponsoring employers and service organisations should: t Elisabeth Storey Senior Manager RSM Anecdotal evidence suggests that there are two types of organisation those that have suffered cybercrime and are aware that they have, and those that have and just don t know it yet PMI NEWS NOV

12 Cybercrime and IT risks are not currently high enough on the trustee radar. 47% of respondents confirmed that they had not improved their IT controls to prevent member identity theft and 40% of trustee boards had not tested their internal controls within the past 12 months n perform staff vetting n adopt screening processes at interviews n adopt a robust insider policy n be open about likely threats so staff can identify them n establish a non-blame security culture n employ a rigorous policy for third parties and sub-contractors n review what staff do on your systems and on social networks Trustees should not be afraid to question these and other areas, as they have a responsibility to ensure the safety of their own cyber-footprint. Examples of questions that trustees should be asking themselves, the sponsoring employer and their service organisations are as follows: n Is cybercrime on our risk register and in what guise? Does it consider all the elements of a possible attack? Do we know what controls should be and are in place? n Has this risk been appropriately assessed and has it been rigorously tested? And what is the extent of that testing? Examples of testing include a professional cyber security expert parking up outside an office building and attempting to hack into the system, or phishing n Do the trustees use portable devices for board papers? How secure is access to the device and to the information it contains? n Do the trustees use home computers? How secure are they? Are there up-to-date firewalls and virus checkers in place for example? Are s encrypted? n Have the trustees had sufficient levels of training in this area in order to understand and assess the cybercrime risks? n Does the service organisation have an internal controls report? Are IT risks addressed and are there any exceptions? What has been the response to those exceptions is it sufficiently robust? n What about changing service organisations? What happens to data during migration, and what happens to the data at the previous organisation? n Have there been any successful attacks that have not been made public due to the threat to the reputation of the organisation, and would the service organisation inform the trustees if there was such an attack? Does the service level agreement include a requirement for trustees to be informed about cyberattacks? The latest RSM fraud risk survey, published in December 2015, suggests that cybercrime and IT risks are not currently high enough on the trustee radar. 47% of respondents confirmed that they had not improved their IT controls to prevent member identity theft, and 40% of trustee boards had not tested their internal controls within the past 12 months. Only 8% of respondents identified IT systems as the area of their scheme most susceptible to fraud. We expect this number to be significantly higher in our next survey, particularly as the chief executive of the regulator has now highlighted the risk. The British Standards Institution is currently developing a new Standard: BS Cyber risk and resilience expected to be published in It will be interesting to see how many organisations in the pensions industry achieve this Standard, and whether it becomes the minimum Standard that trustees require their service organisations to achieve. Conclusion The pensions industry is behind the curve and is only now beginning to respond to the serious threat that cybercrime poses. Cybercrime needs to be on the risk register and trustees should be ensuring they are receiving appropriate training to become sufficiently aware of the many guises of cybercrime. This will allow them to challenge their service organisations and question the responses they are given. Trustees have a responsibility to their members and need to be calling the sponsoring employers and their service providers to account. [ n] KEY MESSAGES n Cybercrime is defined as crimes committed through the use of information communication technology n The threat is wide-reaching n The key factor in over 95% of cybercrime has been a human element n There needs to be better training n Cybercrime must be on the risk register and controls must be tested n Do trustees have sufficient training to enable them to understand the threats of cybercrime, and the cyber security protocols and processes that are appropriate responses to those threats? And do they know what is being done on their behalf? n Trustees must be challenging their service organisations ultimate responsibility for the systems that prevent and detect fraud rests with the trustees 12 PMI NEWS NOV

13 insight expert Taking a wider view with pension transfers Recently I had an interesting discussion with pension lawyers and professional financial advisers about the requirements to provide advice on pension transfers, particularly around defined benefit (DB) schemes; a target area for scammers, and one that carries risk due to the valuable benefits in these schemes. The first question discussed was: What does a person contemplating transferring out get when they receive appropriate advice? Legislation refers to advice specific to the type of transfer but what does this mean? Firstly, the Financial Conduct Authority (FCA) are clear that DB transfers should be deemed as unsuitable, unless there is a very good reason for doing so. Additionally, the FCA specifies that the advice should include a comparison and suitability report. But is this presented in a standard format across the industry? To answer this, there is no standard format across the industry but best practice in larger firms is to have a consistent templated approach to their client communications, including the comparison and suitability report. This helps ensure advice outcomes are consistent. It is also useful for the employer and adviser as it means the process is likely to be more cost effective, and simpler to run a second set of eyes compliance check, as all the information assessed will be in a standard format. As well as this, there are other things that need to be taken into account by advisers including: the client s aims and objectives, if they have dependents or partners, other lifetime savings they have, where the transferring monies are going and what the assessment of the receiving scheme is, what kind of charging structure the receiving scheme has (as this will impact on any transfer value analysis report produced), and if the transfer is in the best interests of the client. As a final point it should be noted that any advice should be independent from the scheme, to ensure there are no conflicting objectives. The next question discussed was: If an employer is obliged to pay for its scheme members to receive appropriate advice (for example, where an employer is encouraging a pension transfer), what would be the minimum level of advice required to satisfy the legislative requirements? FINANCIAL EDUCATION In this case there has to be a personal recommendation made and a certificate or letter signed by an authorised and qualified (pension transfer specialist) adviser to meet the requirements. This should be sent to the scheme for confirmation that advice has been given. A generic discussion about the implications of a pension transfer, without any receiving scheme in mind, is not sufficient. Also, remember that trustees do not have to see what advice is given. As long as they know that they have received advice, the appropriateness of the advice is the responsibility of the adviser, who should be acting solely for the scheme member. When it comes to paying for the advice, is there scope for employers to pay for the advice in relation to their employees pension only, and to then allow individual members to pay for full advice to include all their assets? As after all, it s not just about pensions. The simple answer here is yes, and the easiest way for this to be facilitated is that the employer may contribute towards the fee payable by the employee. It s evident that amongst the many challenges and opportunities that freedom and choice has created, DB transfers could end up being the one topic that creates the most debate in years to come. Advising on a DB transfer without taking other lifetime savings into account may lead to advice being, at best, compromised. Also the out of sync tax treatment of death benefits in DB and defined contribution schemes should be an important consideration for trustees and employers when thinking about DB transfers. These are issues that we certainly believe merit concern. Given recent market conditions and exceptional circumstances like the collapse of BHS, it is understandable that DB schemes and their benefits will come under more focus by those that stand to benefit from them. It is more important than ever that when transfers are being contemplated, a wide view is required, not just a narrow focus. n [ ] Jonathan Watts-Lay Director WEALTH at work DB transfers could end up being the one topic that creates the most debate in years to come PMI NEWS NOV

14 Overseas transfers WHERE DO WE GO FROM HERE? 14 PMI NEWS NOV

15 Last month, Andrea Turner discussed the impact of HM Revenue & Customs (HMRC) stating that the qualified registered overseas pension schemes (QROPS) list can no longer be relied upon for the due diligence checks carried out by the transferring scheme. She stated that HMRC had pulled the rug out from under our feet and that administrators had become part-time sleuths in an effort to protect our clients and members from expensive penalties. So what exactly does this sleuthing involve and how much does this work cost? What changed? In October 2013, HMRC moved UK based scheme registration from a process now, check later approach to a more robust process, because they acknowledged that it would deter pension liberation and safeguard pension savings. However, in 2015 they placed greater responsibility for checking the qualifying status of an overseas scheme on the individual, their advisers and the transferring scheme. HMRC have not provided any channels through which we can directly report schemes which we suspect are non-qualifying in order to get them struck off the registered overseas pension scheme (ROPS) list. The list itself is not of ROPS, but of schemes which have notified themselves to HMRC as ROPS. There has been no explanation of why overseas schemes are not being treated with the same level of concern in relation to pension scams, when scammers so frequently exploit the most vulnerable areas. Requesting clarification We took the step of writing a letter to HMRC outlining our understanding of their duties and asking for clarification of what can be expected of trustees. The response stated: HMRC does not accept that it has a duty to establish that every scheme that makes a notification does in fact meet the conditions to be a registered overseas pension scheme (ROPS). HMRC does not approve QROPS. The only power HMRC has to remove QROPS status is exclusion under section 169(5) Finance Act We agree that exclusion cannot be retrospective. However, HMRC points out that if a scheme has never been a ROPS, then it follows that it could not have ever been a QROPS, which is not exclusion and can therefore be retrospective. The discharge of the scheme sanction charge remains where a scheme has carried out sufficient due diligence, but HMRC will not tell us what this is. There is a code of practice created by the Pensions Administration Standards Association (PASA). It doesn t necessarily cover all appropriate due diligence for each case, and it doesn t currently cover overseas transfers in specific detail. These checks should be carried out for every single transfer request. Our approach to due diligence HMRC have not confirmed exactly what they expect in terms of due diligence, and declined to clarify this when we asked. It seems reasonable to request as a minimum copies of: n the scheme rules n HMRC s initial QROPS acceptance letter n retirement age restriction certification/declaration n HMRC s acknowledgement of certification n the initial APSS251 n evidence of home state registration/approval n product booklets etc. n confirmation never excluded from QROPS status If any queries arise from receipt of these items, we will request any extra evidence required to resolve those queries. Of course receiving and checking these documents still gives us no guarantee that the receiving scheme is or will continue to be either a QROPS or a ROPS. How much does it cost? One recently completed QROPS transfer took almost 20 hours to complete, with around 5% of that time being covered by the usual transfer settlement fixed fee. The majority of the time spent was discussing the case with the trustees and their legal advisers. Another particularly complex ongoing case has a total time cost of over 6,000 so far, excluding any external costs in relation to legal advice and trustee time. It seems unfair for the scheme to have to fully fund these investigations, since they already have so many other fees and scheme liabilities to manage. However, if the trustees are not willing to pay the administrator to carry out a reasonable level of due diligence checks, they are unlikely to avoid any scheme sanction charges which will prove much more costly. Unauthorised payment charges Although schemes ought to still remain protected from the scheme sanction charge, provided an acceptable level of due diligence checks has been carried out, members will still be liable to an unauthorised payments charge in the event that a scheme is not a QROPS. t Jo Wright Senior Technical Analyst Barnett Waddingham LLP In October 2013, HMRC moved UK based scheme registration from a process now, check later approach to a more robust process because they acknowledged that it would deter pension liberation and safeguard pension savings PMI NEWS NOV

16 The Pensions Tax manual places the onus on the member to carry out due diligence checks as well as the scheme administrator. How can the member be expected to know what checks to carry out if experienced pension administrators aren t certain of what HMRC are looking for? It seems contradictory for the industry to provide a service such as Pension Wise to assist with making decisions on how to take your defined contribution (DC) benefits, but to essentially provide no support on one area that is so complex and a high risk area for pension scams. The Pensions Tax manual places the onus on the member to carry out due diligence checks as well as the scheme administrator. How can the member be expected to know what checks to carry out if experienced pension administrators aren t certain of what HMRC are looking for? High Court HMRC previously lost a High Court battle against investors in ROSIIP, a scheme in Singapore that transpired not to be a QROPS, in At the time the judge, Justice Charles, ordered HMRC to set out its exact position on QROPS, and criticised HMRC for misleading members of the public. Might another High Court battle occur should another scheme lose QROPS status, or be deemed to have never been a ROPS? A High Court judge is unlikely to find the current guidance to be misleading, as it is made very clear that the list isn t to be relied upon. However, it might be considered unfair that so much responsibility is being placed on the member to check the status of a scheme, since there is very little guidance on how to do it, and even the most experienced pension administrator is not entirely certain what is required. Potential solutions The recent government response to the consultation on pension transfers and early exit charges mentions streamlining the due diligence process, including establishing a whitelist of trusted pension providers which could further increase the gulf between the robust checking of a UK based transfer against that to an overseas arrangement. HMRC does not appear to have the capacity to appropriately govern ROPS and QROPS schemes in a way that trustees and scheme administrators would desire. If they were tasked with doing so, they would require more resource. While this would protect members benefits, this extra expense would also reduce the amount of unauthorised payment charges collected. Therefore a valid argument exists for this duty to fall elsewhere. Perhaps to a body whose primary concern is making sure members are protected, such as The Pensions Regulator. The Government spends a lot of money assisting members with help in other areas, such as making their retirement choices for DC benefits. This particular area is not only high risk for unexpected tax charges, but also remains high risk for pension scam activity. Therefore an independent group putting together a HMRC approved whitelist of QROPS which protects members and schemes from unauthorised payment charges would seem like an ideal solution to the current issue surrounding overseas schemes, and could potentially bring back some consistency between UK and overseas transfers. This group would take responsibility for verifying the credentials of overseas and UK based schemes, and time spent carrying out due diligence checks would be minimised. In our recent poll, 96% of respondents already said that schemes weren t equipped to reliably carry out the necessary due diligence. Our latest poll, accessible via the PMI s website, takes the discussion to the next step, asking: Uncertainty around transfer due diligence has been in the news throughout This poll asks who you believe should carry out due diligence on pension scheme transfers: n Trustees/administrators of transferring scheme n HMRC n Independent third party It will be interesting to see the outcome of this poll, and whether it will have any impact on HMRC s current stance.[ n] 16 PMI NEWS NOV

17 insight investment MANAGING VOLATILITY How index investing keeps members on track Index investing is available across equities, fixed income and an ever-wider range of alternative asset classes, providing powerful, cost-effective ingredients to build diversified investment solutions for defined contribution (DC) members. Index building blocks give members broad access to the growth opportunities or defensive attributes that each asset class offers individually, as well as providing the market-risk mitigation that more complete asset diversification can bring. And, with costs contained more sophisticated portfolio management techniques can be added, such as tools to help control overall portfolio volatility. The art and science of index precision Indexing is rightly seen as a straightforward and transparent solution for investors, but getting the underlying indexing right tight tracking of the benchmark demands a deft touch and significant manager expertise. An index manager s job is to deliver benchmark returns year in and year out a task rather more nuanced and sophisticated than one might expect. The range of tools, techniques and manager insight needed to deliver precision and value demands the deep experience and institutional capacity of global index managers. A benchmark assumes that the world is frictionless and that index changes (when a company is added/deleted from the index) and corporate actions (when a company makes a change to its stock) are instantly reflected free of charge. In reality, investment managers need to take into account intricacies such as trading costs, taxation and market liquidity, and they might encounter some benchmark rules that can t readily be replicated in a cost-efficient manner. Accounting for these requires a vast range of individual decisions to be made and executed correctly in order to deliver consistently low tracking error and a better risk profile. Stronger index managers can also deliver additional value through techniques such as effective index-change trading strategies, corporate action selection strategies, crossing of securities trading (the mix of buys/sells of a stock can be offset against each other for little or no cost), stock lending arrangements and precision trading. These strategies can augment performance and tracking in a risk-controlled way, providing a valuable uplift that ultimately can assist the scheme in meeting its return targets. New Opportunities Accessing the transparency and value benefits of indexing is no longer contained to market cap weighted benchmarks. Smart Beta strategies have evolved to provide even greater choice for DC schemes looking to move the dial on cost-efficient, risk-adjusted returns in their portfolio. Indexes target market factors like value, size, low volatility, quality and momentum. They offer the opportunity to achieve the specific returns of these factors, which were previously the domain of expensive active investment strategies, whilst at the same time retaining most of the benefits of traditional indexing. For clients focused on improving their overall portfolio the returns over time, lowering risk or a combination of the two these indices can be viable choices. Elsewhere, increased awareness of environmental, social and governance (ESG) concerns introduces new opportunities for investors to rethink traditional investments. ESG indexing is increasingly becoming a vital component for many investors; as well as generating returns over the long term,it s generally thought to have risk mitigation benefits in a portfolio. n [ ] MARKETING COMMUNICATION FOR INVESTMENT PROFESSIONAL USE ONLY. Issued by: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England, No VAT No Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. Web: ssga.com Investing involves risk including the risk of loss of principal. The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2004/39/EC) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information State Street Global Advisors. All Rights Reserved. DCUK-0367 Exp. date: 30/10/2016 Maiyuresh Rajah Senior DC Investment Strategist State Street Global Advisors An index manager s job is to deliver benchmark returns year in and year out a task rather more nuanced and sophisticated than one might expect PMI NEWS NOV

18 Moving the goal posts Pension scheme funding appears to be in crisis. Valuation discount rates have followed gilt yields downwards, increasing reported deficits. Pension schemes are investing more and more in gilts, which raises costs. The solutions are simple. First, don t invest in gilts if their future return is too low to pay the benefits; this is not de-risking the benefit payments. Second, don t set the discount rate by reference to gilt yields: there is an alternative method in the funding regulations which works much better for planning the long term future of a pension scheme. 18 PMI NEWS NOV

19 Billions of pounds have been poured in to defined benefit (DB) schemes by sponsors in recent years, to very little effect. Why is this, and what can be done about it? First, let s examine whether this is true. The Pensions Regulator publishes relevant data. The data in Table 1 overleaf shows that, since the scheme funding regime began, technical provisions funding levels have varied but are stuck around 85%, and deficit recovery periods have not shortened. Over the same period, schemes have invested less in equities and more in bonds. Table 2 shows that the average equity and property allocation has declined by 12% since the funding regime began, and the allocation to bonds and cash has risen by 19%. The yield data in Table 3 shows the familiar story of gilt yields going down by around 2% while dividend yields on equities have risen by about 0.7%. This means that the gilt market has gone up a lot, while the equity markets have become lower rated. Finally, in Table 4, the average real discount rate for valuing technical provisions has fallen by more than 1.1%. It is notable that the difference between the real discount rate and the real yield on gilts has been virtually constant over the nine years, at about 1.0%. Schemes are investing more in bonds which are guaranteed to produce a low return if held to maturity. Index linked gilts are guaranteed to lose money in real terms. If the future return on the investments is reduced then the contributions must go up to pay the benefits. The discount rate in funding plans has gone down in line with gilt yields. If the discount rate goes down, the projected cost of benefits goes up. The goal posts have been moved further away. The situation which DB schemes are in is the natural outcome of decisions to invest in assets of lower return and/or to set higher funding targets. The rise in the gilt market has increased funding targets to disconcertingly high levels. Do we need to base discount rates on gilt yields and to invest more in gilts, if it is causing such problems? Is there an alternative? Scheme funding regulations The Occupational Pension Schemes (Scheme Funding) Regulations 2005 Paragraph 5(4)(b) say: The rates of interest used to discount future payments of benefits must be chosen prudently, taking into account either or both: i) the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns, and ii) the market redemption yields on government or other high-quality bonds In law, the discount rate does not have to be based on gilt yields. There is another option, to base the discount rate on the yield or expected return on the assets. Let s explore it. Simple model scheme Imagine a scheme in which all the assets are in UK equities. To estimate the return on the equities, we need to think about the current rate of dividend income, and the prospects for dividend growth. Long run average dividend growth in the UK has been over 1% more than the retail prices index (RPI). But we need a prudent assumption for statutory funding purposes, so let s assume long run dividend growth of 0.8% less than RPI, a drop in dividends in real terms. Assuming a real terms decline in dividends seems very prudent. Chart 1 shows the valuation of liabilities from time to time using two different constructions of the discount rate. One is gilt yield+1%, the average assumption in use since the current funding regime began, which uses option (ii) in the funding regulations. The other is dividend yield + RPI 0.8%, using option (i) in the funding regulations. Over the period covered by Chart 1, the average discount rate produced by each method is the same, therefore I am making a fair comparison. There are no deficit contributions in my model and no benefit accrual, I have simply looked at how the value placed on the liabilities compares with the market value of the assets. Looking first at the results using the equity return discount rate, the funding level cycles up and down over time, with a gentle trend for gradual improvement, as there should be if the actual experience is better than the prudent assumption. The method is not wildly unstable; it appears to give a good foundation for the long run planning of the scheme. The results on the gilts+1% method show a grave worsening of the funding level. It has halved, from 140%+ in the early years to 70% or so in the later years. In the late 90s, the UK equity market was very high. The gilts+1% discount rate set an imprudent t Derek Benstead FIA Senior Consultant First Actuarial LLP The discount rate in funding plans has gone down in line with gilt yields. If the discount rate goes down, the projected cost of benefits goes up. The goal posts have been moved further away PMI NEWS NOV

20 There is no need to despair. If valuation results are poor on a gilt yield basis, it does not mean that the scheme has an unaffordable future funding target because the method did not factor in any data about the height of the equity market. In later years, gilt yields have fallen to record lows, and these lows are not indicative of the returns to be expected on the equity market. Gilts+1% is arguably excessively prudent at this time, for this ongoing model of a scheme invested in UK equities. The funding level on the equity return discount rate varies as the equity income varies. If the scheme has a long run future, the variation of asset income relative to benefit outgo is important, and this valuation method examines it. The gilts+1% method does not examine the prospects for equity income, the important interrelationship between asset income and benefit outgo goes unexamined. The method is deficient for long run planning. The results on the gilts+1% discount rate change as the equity and gilt markets move relative to each other. If a scheme is to wind up in the short term this is important, but it is not if the scheme has a long run future. Definitions of risk Common definitions of de-risking are to increase the certainty of the investment return, and to increase the stability in the scheme s balance sheet. However, these definitions do not get to the heart of the matter, which is to increase the certainty of being able to pay the benefits in full. Does investment in gilts raise the probability of paying the benefits in full? Only if the employer can afford the high balance of the cost of the benefits, and more besides to cover the heightened longevity risk created by the low investment return. If the employer cannot afford the gilt based deficit, then investment in gilts makes it certain that the benefits cannot be paid in full, which is not derisking the benefit payments. Investment in assets of higher expected return could raise the probability of paying the benefits in full. The investment return would be less certain, but the benefit payments could be more certain. Is stabilising the balance sheet by investing more in gilts de-risking? If the target is buy out, and the employer can afford this target, yes it is. The actuarial basis of the buy out is determined by the insurance company. The employer can afford to insure the benefits in full, and the task is to stabilise the interaction between the scheme s assets and the buy out cost. What if the discount rate is determined by the trustees as part of their long term planning? If the trustees choose to base the discount rate on, say, the rental yield on office space in Hong Kong, then investment in offices in Hong Kong would stabilise the balance sheet, but this would not make investment in Hong Kong offices a good idea. Similarly, if the trustees choose a discount rate of gilts+1%, this does not give a good reason to invest in gilts. Where the discount rate is a choice of the trustees, the choice of discount rate should not drive the investment strategy. Rather, the investment strategy should drive the calculation of the discount rate, and this is expressly provided for in the funding regulations. The investment strategy should be chosen to maximise the certainty of being able to pay the benefits, and this objective is not necessarily met by investment in gilts. Summary There is no need to despair. If valuation results are poor on a gilt yield basis, it does not mean that the scheme has an unaffordable future. It only means that gilt investments are unaffordable for the time being. The solutions are simple: don t invest in gilts if their future return is too low to provide for the benefits, and don t set the discount rate by reference to gilt yields. The solution for the discount rate is in the funding regulations: we can switch from basing it on gilt yields and instead base it on the yield on the assets held by the scheme. [ n] KEY MESSAGES n In a scheme which is not about to wind up, don t invest in gilts if their future return is too low to pay the benefits n Investing in gilts does not de-risk the benefit payments if the employer cannot afford the resulting deficit n Basing the discount rate on gilt yields is deficient for the long run planning of a pension scheme not invested in gilts n There is no obligation in law to base the valuation discount rate on gilt yields n There is an option in law to base the valuation discount rate on the yield on the assets n This option is suitable for the long run planning of a pension scheme n This option examines the important interrelationship between asset income and benefit outgo n This option gives a more stable balance sheet, making forward planning easier 20 PMI NEWS NOV

21 Chart 1 Funding levels using alternative discount rates Scheme funding and investment data since PMI NEWS NOV

22 insight expert MEMBER ENGAGEMENT Why employers need to Mind The Gap when planning pensions and benefits campaigns Robin Hames Head of Marketing and Research Capita Employee Benefits Our research shows that employees under the age of 35 have the most optimistic financial outlook. However, while they are more likely than any other cohort to believe that tomorrow will be a better day, the costs of today are manifestly a financial challenge for many younger employees We have now released our fourth annual Employee Insight Report. The extract below is from the Executive Summary. The report is available as a free download. By the mid-1960s it had become increasingly apparent to London Underground bosses that the practice of having drivers and station attendants warn passengers to take care when boarding trains was, to say the least, somewhat outmoded and largely ineffectual. The number of passengers and the amount of sheer noise on cavernous curved platforms meant an alternative means of communication was needed. The solution chosen was to deliver an automated announcement through a digital recording using solid state equipment. This led to the next obvious conundrum: what should the announcement actually be? In certain respects the answer was driven by the technology of the day and another practical consideration. As data storage capacity at the time was expensive, the phrase had to be short. Furthermore a concise warning was also far easier to paint onto the platform. Necessity remains the mother of invention. And so, in 1969, a simple three-word caution entered the lexicon and, indeed, has since become synonymous with London for millions of tourists; spawning a mini-industry of mugs, t-shirts and fridge magnets. The phrase is, of course, Mind the Gap. Not only is this a story of how communications do not need to be lengthy or technical to convey a key message, it is in many respects a very good summary of the strongest overall message arising from this year s Employee Insight Report. The gaps to be minded manifest in three key areas: a generation gap, an education gap and a communication gap. Inter-generational unfairness The deep recession from which we are slowly recovering has sparked many debates. The fate of the millennials and, by implication, the legacy of the baby boomers has possibly been one of the most divisive. Those speaking from, or on behalf of the younger generations have argued that those who benefitted from free further education, generous pensions and an accessible housing market have, in effect, pulled the ladder up behind them. Or to use a phrase familiar to baby boomers, I m alright, Jack. Baby boomers would cite the greater freedoms and choices available to the younger generations and their delivery of a liberalised and more egalitarian society than the one in which they grew up. Whatever the rights and wrongs of the debate, what is clear is that those who have entered the workplace over the last decade have faced significant challenges: suppressed wages, more limited job opportunities and a high cost of living, especially in the form of rent. Our research shows that employees under the age of 35 have the most optimistic financial outlook. However, while they are more likely than any other cohort to believe that tomorrow will be a better day, the costs of today are manifestly a financial challenge for many younger employees. 30.8% of year olds struggle each month compared to just 11.1% of over 55 year olds. Some 37.4% of under 35s worry that they will not be able to get through the month without going into debt. Indeed 48.0% of employees earning less than 25,000 say they simply could not meet an unexpected bill of 1,000 and 28.9% of employees aged say that financial worries impact on their productivity at work. Any benefits strategy in place needs to be sympathetic to this predicament that a significant section of its audience is facing. Financial literacy the known unknown It is very apparent again this year that many employees are confident about one thing in terms of their financial acumen: that it is sadly inadequate. Employees are acutely aware that they do not understand many aspects of the financial world from the cost of borrowing to the art of saving, many are ill-prepared for the markets they have to navigate through and the choices that they now have to make. Self-education is reliant on what might be considered questionable sources. Google was back at the top this year as the primary source of financial information with 35.7% of respondents confirming 22 PMI NEWS NOV

23 it as their resource of choice or perhaps more accurately their port in the storm. While the internet has been a transformative tool for us all, it is worrying that so many are relying on information that may be out of date, inaccurate or misleading, in some cases deliberately so. It is therefore perhaps unsurprising given this conscious lack of knowledge that so many employees are looking for their employers to fill the education gap. 60.3% of employees felt that their employers should provide them with access to financial education to help with their retirement planning. But this should not be taken as being driven by older employees. The call for education was high across the spectrum of age, gender and salary level with the highest demand (62.1%) coming from female employees and those under the age of 35. And yet only 5.2% of respondents said their employer makes financial education available to them. This is, in many ways, the most striking disparity between what employees say they want and what they are actually getting. This education gap is now surely a call to action. What we've got here is failure to communicate Around the same time as the great and good of the London Underground were contemplating their communications challenge, one of the seminal films of the 1960s was hitting the cinemas: Cool Hand Luke. A very cool Paul Newman stars in the title role as Luke, a prisoner in a Florida prison camp who refuses to submit to the system. In one of the film s most famous scenes, the Captain of the prison in fury and exasperation decries What we've got here is failure to communicate. Some men you just can't reach. Indeed, it is a line repeated back to the Captain by Luke at the film s climax. Suffice to say that the two parties never do find an effective communication channel. While the employer/employee relationship is a little less dramatic than this, the communication challenge is certainly common to both. In preceding Employee Insight Reports we have shown the disparity between employees preferred method of communications and the engagement strategies used by their employers. This year we have delved deeper to not only look at the headlines but to really examine the extent to which employees feel engaged by the media used to convey key benefits messages. In particular for every individual respondent we examined the channels of communications they were seeking and those their employer were using to assess whether there was a perfect match, a close fit or indeed a total absence of overlap. For the under 25s, only 17.6% saw their employer s choice of communication channels as closely fitting their preferences. For 44.1% it would have to be described as a total failure. While the results narrowed with age, for those aged 45-54, only 25.5% would describe the communications as a close fit with 36.8% still in the total failure camp. There s no doubt that the wide variety of channels now available make it very difficult to please everybody but this does go to show that while focusing on content and message is very important, the media being used needs to be constantly evaluated to ensure engagement programmes remain current and effective. Failure to do so could undermine the exercise entirely. Building the perfect beast The modern workforce is diverse, complex and at times, if not contradictory, then certainly paradoxical. So the challenge of attracting, retaining and maximising the contribution of talented individuals is no mean task. It is clear that a number of younger employees need support through testing financial times, that many employees are keen to see their employers support their educational needs and that communications programmes need to be flexible and dynamic and should use multiple channels to convey their important messages. We do hope that this year s report will provide fresh evidence and insights for HR and benefits professionals, will help them to Mind the Gap and will support the ongoing development of truly 21st century benefits strategies. [ ] n The modern workforce is diverse, complex and at times, if not contradictory, then certainly paradoxical. So the challenge of attracting, retaining and maximising the contribution of talented individuals is no mean task Download the full report for free benefits.co.uk/currentnews/employee-insightreport PMI NEWS NOV

24 pensions a month in Sarah Stimson Associate Sacker and Partners LLP LEGAL Finance Act receives Royal Assent After much waiting, the Finance Act 2016 ( the Act ) received Royal Assent on 15 September It contains some noteworthy points in respect of pensions, including: Reduction in the lifetime allowance The reduction of the standard lifetime allowance (LTA) to 1million from 6 April 2016 was given temporary legal effect by Budget Resolutions passed on 22 March The Act formalises [both] this and the annual increase in the LTA in-line with the consumer price index (CPI) from the tax year Introduction of Fixed Protection 2016 (FP16) and Individual Protection 2016 (IP16) The Act introduces two new transitional protections for individuals. n FP16 is relevant to anyone whose pension savings exceeded 1 million at 5 April 2016, or are likely to exceed that amount by the time they come into payment. FP16 allows an individual to maintain a LTA of the greater of 1.25 million and the standard LTA, but will be lost in a number of circumstances (for example, in a DC arrangement, if contributions are paid to the scheme by the member or someone on their behalf) n for individuals with pension rights over 1 million on 5 April 2016, IP16 gives a personal LTA equal to the value of their pension savings on 5 April 2016, subject to a cap of 1.25 million. In contrast to FP16, individuals with IP16 can continue to accrue pension n individuals wishing to rely on the new protections must apply to HM Revenue and Customs (HMRC) online for a reference number before taking benefits. Members will no longer receive paper certification, but can view details online. Temporary reference numbers (obtained before the online system was established) will continue to be recognised, but HMRC strongly recommends that individuals follow-up online to obtain a permanent protection notification number. There are no application deadlines for these protections. Simplification of test for dependants scheme pension The Act includes provisions to simplify the test that takes place when a dependant s scheme pension is payable in respect of a member who dies aged over 75, with a view to reducing the current administrative burden. Inheritance tax and undrawn pension funds No charge to inheritance tax will arise when a member designates funds for drawdown, but does not draw all the funds before death. These provisions are treated as having come into force on 6 April 2011 in relation to general drawdown funds (being the date from which the requirement to purchase an annuity at age 75 was removed, and the option to enter drawdown instead was introduced) and on 6 April 2015 in relation to flexiaccess drawdown funds. Other changes A handful of changes to the pension flexibility rules were also included in the Act, such as: n serious ill-health lump sums (SILS) could previously be paid out of funds only where no benefits had been taken. The Act now permits them to be paid from unused drawdown funds. SILS are now also taxable at an individual s marginal tax rate, rather than at 45%, when paid in respect of individuals aged 75 or over n dependants drawdown or flexi-access drawdown funds can now continue to be used after the dependant s 23rd birthday without them being treated as unauthorised payments n money purchase pensions in payment can now be paid as a trivial commutation lump sum, where total pension savings are under 30,000 What should you be doing? Employers and trustees should familiarise themselves with the changes. HMRC has recently published updates to its Pensions Tax Manual (PTM) to reflect changes introduced by the Act. Schemes should already be working with the reduced LTA, and taking action in relation to members wishing to take advantage of the latest transitional protections. HMRC is currently working on a look up service for administrators to check their members protection statuses, as well as a function for members who have IP16 (or the earlier IP14) to amend their protection details online. HMRC had hoped to launch these in October, but confirmed at the end of September that delivery will now be later this year. 24 PMI NEWS NOV

25 ACTUARIAL AND INVESTMENT What is the impact of ultra-low gilt yields? Following the Brexit vote, and the subsequent Bank of England decision to lower interest rates, long-term gilt yields have fallen to new historic lows. The impact of this on individual schemes will vary. For well-funded schemes that have fully hedged their liabilities, the effect may be limited. However, where there is a deficit, even if the funding level is little changed, deficit contributions may need to increase (because the monetary gap is likely to be higher). In other cases, the funding level will have fallen, if measured by reference to gilt yields. Taking a broader perspective, Government policy following Brexit is to avoid actions that in themselves reduce confidence and investment in the economy, as this could trigger an economic downturn. Trustees are in a different and possibly difficult position - should they use the flexibilities in the system to manage deficits, or should they have more concern about the long-term sustainability of their sponsor? Richard Akroyd Senior Consultant Willis Towers Watson COMMENTS A starting point would be to ask what has changed. Payments from a pension scheme are mainly affected by inflation and longevity, and to a large extent unaffected by market movements. So the initial focus should be on future investment returns. Fundamental to this is agreeing what returns might now be expected from a scheme s investments, and how risks have changed. Many market commentators believe we are now in a period where investment returns will be lower for longer, but individual trustee boards need to consider their own views and what it means applied to their investment strategy. For example, is there any change to future plans for reducing investment risk? Is the margin for prudence in the discount rate still reasonable? Should some of the buffer this provides be unwound recognising that one of its purposes in the first place was to provide a margin for a reduction in expected returns. Or is this margin still needed given the sponsor s covenant? A more fundamental question being asked by some trustees and scheme sponsors is whether measuring a pension scheme s liabilities by reference to a return which varies with gilt yields remains appropriate. While in many schemes the margin assumed over gilt yields from valuation to valuation is maintained (unless there are covenant or planned investment changes), legislation is more flexible than this. Trustees may take into account the yield on assets held by the scheme to fund future benefits and the anticipated future investment returns on these assets. So a different approach may be possible, but it would need to be appropriate and reflect an individual scheme s investment strategy. In contrast to funding, where an appropriate response to ultra-low gilt yields might be to pause and take stock, the opposite may be the case for member options, in particular commutation and transfer values. Usually these are reviewed following a valuation, but it may be sensible to bring forward a review to see if the terms remain reasonable. For example, transfer values are usually linked to gilt yields as a proxy for changes in the expected cost of providing the benefits by reference to a scheme s investment strategy. They will therefore have increased significantly over the last few months. This is to be expected if future returns will be lower, but may have been exaggerated if a scheme is operating a diversified investment strategy not fully correlated to gilt yields. In some schemes, there may be a more fundamental question of whether they can continue to afford full transfer payments, and they may need actuarial advice on whether these should be cut back. Whatever the position of a scheme, a constructive discussion on all of these issues should help both trustees and sponsors to understand the effect of even lower gilt yields on their scheme, to provide a context for forthcoming valuations, and to ensure members receive appropriate benefits if they exercise the options available to them under their scheme. PMI NEWS NOV

26 CONSULTANCY AND ADMINISTRATION Paul Niblett Associate Mercer A change to bulk trivial commutation The Finance Act 2016 introduced a change to the standard trivial commutation rules. From 16 September 2016 what the legislation refers to as an in-payment money-purchase in-house scheme pension (referred to here as a DC scheme pension) can be trivially commuted under the usual trivial commutation rules. How may the change help? Many schemes look to undertake liability management exercises such as bulk trivial commutation. The widening of the trivial commutation rules may help with the processing and communication aspects. For example, if a scheme has members with small defined contribution (DC) scheme pensions, these can now be trivially commuted. A further example is for members who have both a defined benefit (DB) (crystallised or uncrystallised) and a DC scheme pension (e.g. secured by DC additional voluntary contributions) in the same scheme. Prior to 16 September only the DB benefits could be paid as a trivial commutation lump sum with the DC scheme pension having to be paid as a separate authorised small lump sum commutation payment. This broadly involved the following: n scheme undertakes the usual trivial commutation tests to ensure that the value of all of the member s benefits from all schemes is no greater than 30,000 n if the above test is passed the scheme firstly pays a trivial commutation lump sum in respect of the DB benefits n secondly, subject to meeting the separate conditions for payment, the scheme pays a small lump sum commutation in respect of the DC scheme pension. This has to be paid last to meet the requirement that payment extinguishes all of the member s entitlement under the scheme However, from 16 September both the DB benefit and the DC scheme pension can, subject to meeting the necessary conditions, be trivially commuted under the new rules. This means that just one test is required, and only one payment is made to the member An important point Under the new rules, where a member has a DC scheme pension in the same scheme as a DB benefit and a trivial commutation lump sum is to be paid, both benefits must be trivially commuted at the same time in order for the payment to be authorised (so just one payment must be made). Considerations for trustees If trustees are considering a bulk trivial commutation exercise (or even currently undertaking one) and have members with DC scheme pensions, they should discuss the impact with their legal advisers and administrators. 26 PMI NEWS NOV

27 regions news from the EASTERN REGION By the time you read this our Autumn afternoon seminar on 2 November 2016 at Aviva in Norwich will have taken place. A report will be provided next month. We are grateful to David Rich of Accurate Data Services for once again stepping into the breach to be the fourth speaker we were seeking. This time his subject is investment costs and charges transparency. We are still finalising the date of our March afternoon seminar, which will be our next event. If you wish to be added to our distribution list contact Susan Eldridge at susan.eldridge@ aviva.com SOUTHERN REGION Last month we announced our final business meeting for 2016 which will be held on Tuesday 29 November at the offices of Fidelity in Tadworth, starting at 6pm. Back by popular demand will be our speaker from last year, Richard Parkin. This time however he will be giving us his views on DC investment options post April Anyone interested in attending should contact Clair Hood at clair.hood@howdens.com New members are always welcome and to find out more on what a 5 annual membership fee buys contact our Membership Secretary Mark Matthews at mark.matthews@willistowerswatson.com Our first meeting of 2017 will take place on Thursday 26 January, when our speaker will be Guy Jackson of RSM on the subject of integrated risk management. Full details will be announced towards the end of the year. LONDON REGION FORTHCOMING EVENTS PMI LONDON PUB QUIZ Date: Thursday 17 November Time: 6.00pm for 6.30pm Venue: Lewis Carroll Dining Room, Walrus and Carpenter Pub, 45 Monument St, London The popular PMI London Pub Quiz returns this month, once again kindly sponsored by the GO Group. The quiz will be starting at 6.30pm, and there will be some food at half-time. There is no entry charge for members, or non-members teams, and individuals are welcome as we can create teams for the night. Once again, the winners of this epic battle of general knowledge will take home (or to the office) the prestigious and much coveted PMI London Group Pub Quiz Shield (but you only get it for a year!). To secure a place for yourself or your team contact Damon Lacey at damon@museadvisory.com. Please provide the names of your teammates as well, and any dietary requirements. Note that this is a very popular event so is now fully subscribed; however, there is a waiting list so let Damon know if you are interested. BUSINESS MEETING Date: Tuesday 29 November Time: 6.00pm Venue: Crowe Clark Whitehill, 10 Salisbury Square, London Master trusts are continuing to make the headlines for a variety of reasons, and we will hear from two speakers who will be looking at the impact of recent legislation, how these trusts can meet the needs of growing numbers of members and employers, and exploring why they are attracting so much regulatory attention. Invitations will have been issued, but check out the PMI London Group's LinkedIn site for more information. NORTH EAST REGION The North East committee members for are confirmed as follows: Chair Chris Tagg (Barnett Waddingham) Vice Chair Louisa Calvert (First Actuarial) Treasurer Vikki Massarano (DLA Piper) Secretary Jane Briggs (Squire Patton Boggs) Publicity Secretary Mark Norris (Willis Towers Watson) Education Secretary James Webster (The Pensions Trust) Events Representatives Ruth Bamforth (Walker Morris), Gemma Hanley (Eversheds), Richard Leach (Baker Tilly), Andrea Mulrooney (RPMI), Andrew Wilson (Pinsent Masons) and Paul Wilson (Xafinity) Our first event of the season was the seminar GMP Rectification, which took place on 20 October at the offices of DLA Piper. Thanks go to speaker Alex Beresford of Barnett Waddingham. Our next seminar will take place on Thursday 17 November at the offices of Barnett Waddingham, with speakers from First Actuarial. Full details of this event will be advertised via . The rest of our event programme is currently in the planning stage. Details of forthcoming events will be added to the regional section of the PMI s website. Final details of each event will be circulated via four weeks prior to the event. Please contact Jane Briggs at jane.briggs@ squirepb.com if you would like to be included on the distribution list. PMI NEWS NOV

28 The record holders always win Gillian Hickey Project and Support Services Manager Trafalgar House The majority of defined benefit (DB) schemes are closed to future accrual, with many more closed to new members. According to a recent industry research report, only 5% of FTSE 250 companies are still providing DB pensions. This will naturally lead sponsors to consider how they can reduce the DB pension scheme burden on the balance sheet. Whilst all paths ultimately lead to full buyout, there are a number of exercises that can be undertaken along the way which will help to manage liabilities, offer flexibility to members, and prepare the scheme for buy out: small pot and/or trivial commutation, enhanced transfer value, pension increase exchange, retirement transfer option, as well as insurance buy-in. The success of liability management exercises relies on a number of factors; communication, offer design and provider collaboration. However, even a well designed, slickly managed and expertly communicated exercise can fail without good data. Before embarking on any liability management exercise, there are some data fundamentals that should be reviewed and addressed which will help reach a successful conclusion. 28 PMI NEWS NOV

29 t Do you know your members? Ensuring you are able to reach members is crucial when the success of liability management exercises typically relies on high levels of member engagement. Therefore, the first step should be to check member contact details. After all, if you can t contact members, you can t make them an offer. Have you asked members recently how they want to be contacted? In this digital day and age, relying on address accuracy is often unnecessary. Many members will prefer to receive communications via or online, and may well be more inclined to respond to offers in this way. This also has the benefit of increasing member satisfaction and engagement, whilst providing potentially significant cost savings. If you have no alternative means of communicating, you will need to verify address data. It is here where deferred members are more likely to need checking. Up to 11% of the population move home each year, and some deferred members won t have been in contact with the scheme for a number of years. Also consider extending this from simply tracing missing addresses to full existence checks. Existence checks should be carried out on an ongoing basis for pensioners, to reduce the risk of fraud and to prevent overpaid pensions which can be time-consuming and costly to recover. However, the same reasons don t apply to deferred members, so making the effort to nail down your deferred membership at this stage can save time and cost at a later stage. Existence checks can be performed via tracing services (noninvasive) or through contacting members directly to ask them to provide this information. Whilst making contact with your members, you should also take the opportunity to check and update the personal information you hold: n Name n Date of birth n NI number n Marital status n If applicable, spouse name and date of birth Holding complete and accurate personal information will make it easier for you to transact with your members at the point of settling benefits. Additionally, it is well known that poor quality data can adversely affect buyout prices, as insurers will make assumptions where data is incomplete or unavailable. As well as knowing where your members live, it is advantageous to verify both the marital status of your members and the date of birth of any spouses. Is your benefit data complete and accurate? All liability management exercises rely on accurate and complete benefit data. Data inaccuracies may delay progress, increase cost or at worst can lead to over-or under-payments, which are costly and timeconsuming to rectify. So ask yourself: n What is the scheme s conditional data score? In June 2010, The Pensions Regulator issued their good record keeping guidance, covering common and conditional data. The aim of the conditional guidance is to allow you to take a view of the quality of data required for the effective administration of the scheme. It is called conditional data because the presence and value of data items to be tested is conditional on the scheme design, member status, and events that may have happened during the course of their membership either to the individual member (e.g. transfer in or divorce) or to the membership as a whole (e.g. change in accrual rates). Therefore, the results of your conditional data report are not only useful for day-to-day administration, but will also ensure you have all data needed to perform calculations for liability management exercises, such as commutation or transfer values. Please note that although the regulator has provided industry guidance, you should work with your scheme administrator to ensure that data validation is tailored to your scheme. n Are the scheme s GMP records accurate? Following the cessation of contracting-out in April 2016, all contracted-out schemes have a fixed timeframe to reconcile their contracted-out liabilities with HMRC. Therefore, it is expected that the majority of schemes will have at least started work on reconciling contracted-out liabilities via the scheme reconciliation service (or via scheme cessations for schemes which ceased to contract out prior to 2016). Holding complete and accurate personal information will make it easier for you to transact with your members at the point of settling benefits PMI NEWS NOV

30 The more time you put into understanding your scheme s demographic and data quality, the better you can shape and execute your de-risking strategy to offer your members the best of the options available, and maximise the reduction of scheme liabilities If you have not yet started, the first step is to ask your administrator for a comparison of the scheme records against HMRC s records. n Have benefits been calculated in line with the scheme rules? The administration of pension schemes is complex. In addition, scheme changes, provider changes and system changes all add layers of complexity to the day-to-day administration and calculation of benefits. It is therefore worth taking the time to document the benefit structure of each section and asking your administrator to perform a range of sample benefit calculations to give you confidence that your data is correct, and that there are no historic, systemic issues. n Are all pensions split by tranche and pension increase rates recorded accurately? This would be particularly important where you are considering a pension increase exchange (PIE) exercise, but it is also relevant to the calculation of benefits for trivial commutation and/or transfer. Additionally, are all of the contingent spouses pension elements present and accurate? Traditionally, contingent spouse s benefits have not always been recorded electronically, so now is a good time to review and update them. n Are there any outstanding legal issues to implement? The perfect time to ensure that any outstanding equalisation and benefit-related projects are complete is before embarking on a liability management exercise. Completing these up front will reduce the risk of having to revisit and recalculate benefits at a later date. Are there any groups of members who are better aligned to the de-risking strategy? There are a number of liability management exercises which can be undertaken, each of which present their own challenges, and require a focus of different aspects of data. Being familiar with your scheme s make up ensures that you can devise a strategy that will achieve maximum impact, and prevent unexpected delays to implementation. We have already covered some of the issues that may hinder the success of undertaking any liability management exercises; for example the accuracy of GMP data, or missing addresses for deferred members. The opposite is just as important to consider for example, pensioners in payment whose benefits are entirely post-1997 could be an ideal group to target first in your derisking strategy, as there will be no GMP element to complicate the process. Sponsors and trustees who are thinking about undertaking any liability management exercise should speak to their administrator to obtain relevant data to underpin any feasibility study. For example, small pot and trivial commutation can be offered to all pensioners and deferred members over the age of 55. However, members with GMP that revalues in line with section 148 orders are not permitted to commute their benefits until they have reached GMP Age. The more time you put into understanding your scheme s demographic and data quality, the better you can shape and execute your de-risking strategy to offer your members the best of the options available, and maximise the reduction of scheme liabilities. Involve your administrator Liability management exercises can have large cost, resource and time implications. Your administrator can play a key role in ensuring they are scoped and managed correctly and to a high standard so it is important to keep them involved and informed at all stages of the process. Working together and taking the time to understand the crucial role that data plays in liability management exercises is what will ultimately bring success. [ ] n The bottom line is that the more time you invest in data cleanse activity, the quicker you can move forward with liability management exercises, and the less risk there is of error and rework. 30 PMI NEWS NOV

31 Administration errors what happens when it all goes wrong? Where you have humans, you have human error the number one cause of pension administration complaints. Whether we call them incidents, accidents, errors, complaints or omissions, the fact is that sometimes things go wrong, and third party administrators (TPAs) need to have a robust and proportionate system in place to manage the consequences when they do. Designing the framework Defining a complaint as an expression of dissatisfaction is Customer Service 101, but errors and complaints cover a multitude of sins (from squeaky wheels to ruined retirements), so the top priority has to be having a framework in place to properly categorise errors and complaints, and look at the wider implications for members and processes. Examples of error categories could include data security breaches, human error, procedures not followed, misinterpretation of scheme rules etc. Error recording When things do go wrong there s a much lower chance of them being put right if people don t feel comfortable admitting to failures. With the monitoring system in place, the next key consideration is making sure it is used consistently and openly as part of a supportive no blame culture. Once identified, errors should usually be reported internally by a senior member of the team, who will have experience in considering the bigger picture when evaluating risk and impact. Root cause analysis and change management All errors and complaints should be individually assessed and reviewed at root cause level to mitigate any future reoccurrence. Ideally, this analysis should be carried out at arms-length by a dedicated team that has sufficient objectivity to avoid knee-jerk responses. Most issues will be the result of human error and/or failure to follow procedure. The root cause analysis should be able to differentiate between a failure in a procedure and a failure to follow a procedure a very important distinction. What you should never see in effective root cause analysis is an over (or under) engineered solution implemented in isolation. Where procedural change is necessary, it should be instigated and communicated in a controlled way so the entire organisation benefits from the lessons learned. Transparency Depending on severity, the administration provider should also report every incident to the relevant client, either routinely through the administration report for very minor issues, or immediately for anything more material or significant. The administration team should also report on their ability to manage the situation effectively by outlining procedures that they have put in place to mitigate future risk. n [ ] Sharon Khan Associate Barnett Waddingham LLP PMI NEWS NOV

32 HELP REQUIRED Workplace Pensions Trailblazer Apprenticeship We have been busy working on the Workplace Pensions Trailblazer Apprenticeship and the new Workplace Pensions Apprenticeship standard was signed off and published late last year. It is an entry level apprenticeship designed to support two roles: 1. One administrator focussed 2. One consultant focussed As part of the apprenticeship process, the PMI has sucessfully applied to become the end point assessment organisation. In brief this means that the PMI will sign off each apprentice as having completed the standard and met the requirements. As part of the end point assessment, candidates achievements will be reviewed by the PMI and each candidate will have a reflective discussion with an end point assessor. We envisage this end point assessment work will begin in 2017 and we are planning accordingly. Allied to this work, we anticipate that a range of employers and training providers delivering the apprenticeship may require assistance on an ad hoc basis from individuals with relevant pensions experience, assessment and verification type skills. We are also keen to help match opportunities and volunteers so we can support delivery of the apprenticeship. If you would like to find out more contact Neil Scott at the PMI for further details indicating whether you would be interested in working with the PMI as an end point assessor or providing ad hoc support to employers and training providers or both. CONTACT Neil Scott T: E: nscott@pensions-pmi.org.uk

33 pmi accredited adviser programme FCA Update Financial Conduct Authority (FCA) publications which may be of relevance to members include: n 6 October Complaints Data from January to June According to the FCA data consumers made a total of 2.5 million complaints to firms in the first half of This is 2.6% less than the number of complaints made in the previous six months. Payment protection insurance is the most complained-about product. 3% of total complaints concerned decumulation, life and pensions. There was an upward trend in the number of complaints related to personal pensions between 2010 and the peak in 2015, with an overall increase of 78% during that time. Since then the number has been decreasing, by just under 15% between the beginning and end of 2015, and a further 10% up to 2016 when the reported number was 27,386. The FCA noted that the overall increase in complaints since 2010 is consistent with the increasing trend in personal pension sales over the same period n 5 October 2016 FCA fined Aviva Pension Trustees UK Limited and Aviva Wrap UK Limited 8.2m for client money and assets failings n 29 September 2016 FCA published its third MiFID II consultation paper n 28 September 2016 FCA published a document proposing new measures to maintain firms focus on culture. The FCA will mark six months since the implementation of the Senior Managers and Certification Regime by providing feedback on implementation so far, and proposing measures to further strengthen the regime n 16 September 2016 FCA published a speech by their Chief Executive Andrew Bailey looking at pensions and long-term retirement saving: a macroeconomic perspective n 15 September 2016 FCA published a regulation round-up Diploma in Regulated Retirement Advice PMI s fully RDR-compliant qualification the Diploma in Regulated Retirement Advice (DRRA) has been revised for It will now comprise two (instead of three) units covering the entire syllabus. The range of content remains unchanged, and both of the new study manuals have been updated to cover the most recent developments. These study manuals can also be purchased for reference purposes. As well as being fully RDRcompliant it is also an appropriate qualification for the regulated activity acting as a pension transfer specialist. It is possible to obtain copies of the study manuals for this qualification, and a single user licence that covers both study manuals in a PDF version. The cost is 400. For further information contact Neil Scott at nscott@pensions-pmi.org.uk CPD Workshops The next Workshop is planned for Wednesday 7 December. The day will comprise a morning session, which will include a regulatory update and guidance on CPD requirements. The outline agenda is as follows: n update on regulatory requirements/latest developments n FCA feedback n guidance on CPD, and in particular CPD for the PMI AAP n lessons learned from PMI verifications/sps renewals The Workshop will include lunch. It will be relevant for CPD purposes (four hours in total). It is hoped the session will provide an opportunity for active participation from delegates to help us develop our ongoing CPD programme. The booking form can be found on our website. For further information, contact Neil Scott at nscott@pensions-pmi.org.uk PMI AAP Fees The fees for will be as follows: there is a fee of 45 for Affiliate Members to renew an SPS. There is no renewal fee for Student Members, Trustee Group Members, Certificate Members, Diploma Members, Associates or Fellows. Membership subscription fees will depend on membership grade, and will be required when they fall due. For Affiliate Members the subscription will be 75. [ ] n Neil Scott PMI Head of Professional Standards PMI NEWS NOV

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35 update NEST MIND WHAT THE WILL GENDER FREEDOM GAP AND CHOICE MEAN FOR NEST? Last month saw the closing date for the Department for Work and Pension s call for evidence, NEST: Evolving for the future. The focus of the consultation was to consider whether NEST s remit needs to better reflect recent changes to the pension landscape, including the introduction of the pension freedoms. It was noted that this might include providing new ways for members to access their pension savings, and allowing individuals, employers and other schemes to access NEST s services. So why was the consultation necessary, and why now? NEST was set up to help millions achieve a good retirement income, and giving our members access to appropriate retirement pathways has always been part of that goal. That s why we created NEST s annuity panel in 2011, to ensure our members with small pots would not be disadvantaged. However, with the introduction of the pension freedoms, which give pension scheme members much more flexibility on how and when they access their pension pots, NEST s existing options need to change. The NEST Trustee believes we have a duty to help ensure our members achieve good outcomes. We want our members to be able to take advantage of the new flexibilities, and help them get the most from their pension saving, in the same way as any other pension saver can do. We ve found that although the sector is developing innovative products for mass market savers, post freedom and choice mass market very often means the mass affluent. These are people who may not have traditionally accessed complex investment products, but nevertheless have pot sizes of 100,000 or more. Our research tells us that most people, whatever their pot size, want to convert their savings into a lifelong income. Though we already have a wide range of pot sizes amongst our membership, our members are typically on lower than average salaries, which means they re more likely to have modest pots compared to traditional pension savers. This means the costs of on-going advice associated with retail drawdown products, for example in setting income levels each year, just won t add up. To secure a good retirement outcome, our members will need to be able to navigate a complex set of decisions, including what investment products might be appropriate for their needs, what the likely investment returns will be, estimate their longevity, and then ensure they have chosen the right balance of cash, drawdown and longevity insurance to make the best use of their pension pots. Those are complicated decisions for any individual to make, even with advice. Our research also showed that many people lack the confidence to shop around at retirement. This may be due to a lack of understanding of financial products, made more difficult by their complexity and the sector s use of jargon. Simplifying the choices of those who cannot afford to access advice, or lack the confidence to do so, is crucial if we are to make the pension freedoms a reality for our members. As the trustee, we believe NEST needs to be able to consider new options which will do the hard work for our members, whilst providing flexibility and security. We believe good governance can help provide confidence to our members, allowing them to make simple choices. Currently, governed products available on the market focus on the governance of investment decisions within funds. NEST proposes looking at using a similar model at retirement. This would reduce the need for advice by helping cohorts of members set and monitor their access to sustainable levels of income. NEST should also be able to leverage its scale to ensure that the approach we may ultimately take is affordable for those with smaller pots. Securing a good retirement outcome has always been NEST s mission for its members. Our consultation response outlines our position, and the research we ve considered, in more detail. If you d like to read it, visit our website at n [ ] Otto Thoresen Chair NEST NEST was set up to help millions achieve a good retirement income, and giving our members access to appropriate retirement pathways has always been part of that goal PMI NEWS NOV

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37 update regulator MEETING THE CHALLENGES OF DB PENSION SCHEMES It is widely acknowledged that employers and trustees of defined benefit (DB) pension schemes have been operating under challenging conditions in recent years. Following the UK s vote to leave the European Union (EU), market volatility led to uncertainty about scheme funding plans and investments. While the immediate post-referendum volatility has subsided, challenging economic conditions in particular persistent low interest rates continue. So it s understandable that there is a growing debate around the affordability and sustainability of DB schemes. At the Pensions Regulator we welcome this debate and we are keen to engage in it. But we also believe that it s important not to make knee-jerk reactions in response to difficult situations, or to individual cases. The headlines around the growing scheme deficits have led to questions about whether DB schemes are affordable and sustainable. But headlines about large deficits, by themselves do not necessarily mean the system is not working. Pensions are long term vehicles, and most schemes will be paying out for another 50 years or more. All of our research continues to show that the vast majority of employers with DB schemes should be able to repair their deficits and meet their long-term financial obligations to their schemes members. Our 2016 Annual Funding Statement shows that generally, there has been an increase in employer s, profits since their last valuation dates. More than half of FTSE 350 companies paid out 10 times or more to shareholders than to their schemes. As for recovery periods, roughly half of recovery plans of schemes carrying out valuations in 2016 have five years or less remaining to run. The average remains at around nine years. In our view, the flexibility available to DB pension schemes and their sponsoring employer means that over the longer term most employers will be able to pay members their promised benefits. The current regulatory framework is working as Parliament intended. It provides considerable flexibility, and recovery plans can be tailored to meet the specific needs of the scheme and sponsor, including the employer s plans to invest in sustainable growth. However, we recognise that some schemes are operating under strain. There are growing deficits for many schemes, primarily caused by the impact of low interest rates and longevity, which serve to increase scheme liabilities by more than the growth in asset values. At the regulator we are committed to helping trustees and employers navigate the challenges they re facing. 21st Century trusteeship We are continuing our work on 21st century trusteeship to fully understand the challenges trustees are facing in order to help them to carry out the increasingly complex role that s expected of them. We have our own thoughts on this, but we wanted to hear the industry s views too. In July we published our 21st Century Trustee discussion paper asking for the industry s views, and received 75 responses. Unsurprisingly, there were a variety of opinions expressed, but there are also some emerging themes. While most respondents supported the idea that the chair of trustees should have demonstrable leadership skills, few respondents thought that minimum qualifications for the chair or membership of a professional body would be helpful. Where there are schemes that don t reach expected levels of governance, most respondents thought a targeted approach by us towards those particular schemes would be better than placing additional burdens across all schemes. There is little support for mandatory qualifications. Most respondents felt that it is the knowledge and skills of the board as a whole that should be considered, with the support of advisers and other service providers. We ll be taking all these responses into account as we develop our strategy over the coming months. Using our powers We take an educate and enable approach to regulation, but we will use our powers to enforce where necessary. Last month we acted to ensure members of a closed DB scheme receive Pension Protection Fund (PPF) compensation after the scheme s rules were changed. Former trustees of the DCT Civil Engineering Staff Pension Fund mistakenly executed a change to the scheme s rules which resulted in accrued benefits being calculated on a defined contribution (DC) rather than a DB basis. This was a material change to their benefits, and it meant some members would not have been eligible for PPF compensation. This case shows that we will use our powers to protect schemes in appropriate cases, regardless of the number of members. [ ] n All of our research continues to show that the vast majority of employers with DB schemes should be able to repair their deficits and meet their longterm financial obligations to their schemes members t PMI NEWS NOV

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39 services directory To advertise, please contact or call actuarial + pension consultants asset management PMI NEWS NOV

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45 appointments To advertise your jobs in PMI News or on PensionCareers.co.uk, please contact or call Copy deadline: Wednesday 16 November for December s issue. You can find all these jobs and many more at: PMI NEWS NOV

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