Blake Lapthorn's London Pensions conference 19 March 2014

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On Wednesday 19 March 2014, Blake Lapthorn's Pensions team hosted its London Pensions conference - 'The State of Pensions'. The team were joined by Ed Tomlinson of SEI and Kevin Wesbroom of Aon Hewitt. Speakers brought delegates up to date with recent and future developments and demonstrated ways in which some of the current and future challenges can be met.

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Blake Lapthorn's London Pensions conference 19 March 2014

  1. 1. LONDON PENSIONS CONFERENCE 19 March 2014 The State of Pensions Adrian Lamb, Legal Director, Pensions and Head of Trusteeship Services adrian.lamb@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  2. 2. London Pensions Conference 2014  Health & safety and housekeeping!  Feedback forms  Ask questions throughout  Participate  Challenge  Enjoy Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  3. 3.  9.30 am Introduction - The state of pensions Adrian Lamb, Blake Lapthorn  10.00 am The future is DC – but can we do better collectively? Kevin Wesbroom  10.30 am Good governance – making a difference John Hamilton, Blake Lapthorn  11.00 am COFFEE BREAK London Pensions Conference 2014 Agenda and timetable Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  4. 4.  11.20 am Pensions law – latest developments and evolving principles Nicola Walker, Blake Lapthorn  11.50 pm Fiduciary management for both DB and DC worlds Ed Tomlinson, SEI  12.25 pm 2020 (and 2050) vision – Looking ahead – opportunities, challenges and pitfalls Adrian Lamb, Blake Lapthorn  12.45 pm Questions and open forum  1.00 pm LUNCH! Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  5. 5. Pensions-underdog.co.uk Why am I here today? For:  Trustees  Employers  Employees  Actuaries?  Administrators?  Auditors?  Lawyers? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  6. 6. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  7. 7. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  8. 8. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  9. 9.  UK Fund deficits up/down/up/down….?  Emerging economies volatility  Volatile asset values – where to get some value?  Auto enrolment – more work but for whose/what benefit?  What chance have employees got to understand all that is going on – new arrangements; DA, DB and DC; investment choices; AMCs, AMDs, etc.  Continued (and increasing?) pressure on covenants  Life expectancy???  Retirement – what will this look like in the future (or now)?  Outlook for the economy, gilt yields, etc., etc???? Just when you thought things couldn’t get any worse! Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  10. 10. Previous questions  Is there such a thing as a risk free investment?  Can I ever know what our liabilities really are?  Data, what data?  Can I get smarter with my/our investment strategy?  What does it take to make DC adequate?  What is adequate?  Is auto enrolment just a precursor to more tax?  Will it work?  Can it work?  What do we need to do?  Can I do anything about this? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  11. 11. Your Starter for 10  DB?  DC?  DA?  AE?  CARE?  CDC?  CB?  AMC?  AMD?  MEGO? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  12. 12. Current questions  Can DC deliver - for employers and employees?  What are my liabilities exactly? Or what measure is the most realistic?  Am I/are we doing the best that I/we can?  Where can I achieve the most in the time available?  Can I make auto enrolment into a positive rather than just a headache?  How can I improve understanding?  The law is evolving – am I up to date with it all?  What is the “big picture” here? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  13. 13. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  14. 14. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  15. 15. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  16. 16. London Pensions Conference 2014  Increasing market share  Different definitions  Why is it growing?  OK for DB but DC?  Consultancies have dominated so far but …. FM market grows 20% in a year but consultants lose market share Pensions Insight – 19 November 2013 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  17. 17. London Pensions Conference 2014 – Public sector pension reforms Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  18. 18. London Pensions Conference 2014 The make up of your pension  Now – BSP = S2P or c-out ops + GPP/AVC, etc.  The (short term) future – FRSP + AE (OPS/GPP) + ?  More annuities?  Less flexibility?  Less adequacy?  Later retirement? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  19. 19. London Pensions Conference 2014 – the themes  The future shape of pensions, and the impact of the past and present  The emphasis on governance  Learning lessons from the law  Making better use of the assets for better outcomes  Thinking ahead and looking up Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  20. 20. The State of Pensions Adrian Lamb, Legal Director, Pensions and Head of Trusteeship Services adrian.lamb@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  21. 21. Blake Lapthorn Pension Conference 2014 The Future is DC But can we do better Collectively? Kevin Wesbroom Senior Partner, Aon Hewitt kevin.wesbroom@aonhewitt.com 020 7086 9350 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  22. 22. Blake Lapthorn Pension Conference 2014 I have an Ambition …. or Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  23. 23. Blake Lapthorn Pension Conference 2014 Increase the amount people receive for their savings Enable innovation and new products … to give people more certainty … and encourage more risk- sharing Increase transparency and build trust, confidence and engagement Ensure the sustainability and stability of the UK pension system Increase the amount people are saving in pensions Reinvigoration objectives 23 Better pension outcomesBetter pension outcomes Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  24. 24. Blake Lapthorn Pension Conference 2014 Reinvigoration Workstrands  DB Lite – We have: CARE, cash balance, longevity adjustment. – Why no traction? Need new approaches (before 2016!)  DC Plus – We have: With profits, deferred annuities, targeted or managed DC – Why no traction? Need new approaches  CDC and Scale – Think Dutch/Danish “If Carlsberg/Heineken made a pensions systems …” Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  25. 25. Blake Lapthorn Pension Conference 2014 DB Lite – the Runners and Riders ConditionalConditional IndexationIndexation OptionalOptional IndexationIndexation Core DBCore DB FlFluctuating Pensiouctuating Pensionsns Flexi AgeFlexi Age DBDB ConversionConversion DB to DCDB to DC NPA tied toNPA tied to SPASPA Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  26. 26. Blake Lapthorn Pension Conference 2014 DC Plus – the Runners and Riders Money BackMoney Back GuaranteeGuarantee GuaranteedGuaranteed ReturnReturn SmoothingSmoothing FundFund Advanced AgeAdvanced Age GuaranteeGuarantee IncomeIncome GuaranteeGuarantee Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  27. 27. Blake Lapthorn Pension Conference 2014 Reinvigoration Outcomes?  DB Lite – Just scrap indexation going forward?  DC Plus – Not a place for government? – Guarantees are expensive!  Collective DC – Two variations to be introduced – CDC with guarantees • Dutch model – premium split 2/3 to buy deferred annuity 1/3 to growth assets and capital. Slow steady build up of benefits that are guaranteed once awarded. Guarantees are expensive! – CDC without guarantees – And DC defined along the way! Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  28. 28. Blake Lapthorn Pension Conference 2014 Collective DC (CDC) plans (the ones without guarantees)  The employer pays a fixed contribution rate – In our view employers will not tolerate pension risk  No individual accounts – Investment done by independent trustees, with professional advice  The member gets a DB-like Target pension – Pension paid from the plan, not annuity purchase – Revaluation and indexation to preserve real value – Expected benefit level facilitates retirement planning  We “square the circle” because the Target Pension is not guaranteed – Indexation and revaluation is not guaranteed – Even the basic pension is not guaranteed in extremis – Benefits adjusted to ensure cost stays constant – Plan would have strict rules on how to get back into balance – benefit adjustments or bonus additions 28 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  29. 29. Blake Lapthorn Pension Conference 2014 Does it work? Aon Hewitt Modelling - Historic outcomes 0% 10% 20% 30% 40% 50% 60% 70% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Retirement year Percentage of final pay DC Gilt [Median = 14%] DC Lifestyle [Median = 21%] DC Equity [Median = 27%] CDC (average in retirement) [Median = 28%] Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  30. 30. Blake Lapthorn Pension Conference 2014 Does it work? Aon Hewitt Modelling - Projected outcomes Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  31. 31. Blake Lapthorn Pension Conference 2014 More helpful for planning? 0% 10% 20% 30% 40% 50% 60% 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Age Projectedincomereplacementratioatage65 DC Lifestyle CDC Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  32. 32. Blake Lapthorn Pension Conference 2014 CDC Issues  Bigger pensions  More stability  Pensions not accounts  No annuity purchase  No member investment  Lower charges  Better returns?  DB in waiting  “Soft” guarantees  Benefit cuts  Cross –subsidies  Complexity  Lack of choice  The need for scale  Run off schemes THETHE BADBAD  With Profits  Been Here Before?  Risk Sharing? THETHE GOODGOOD THETHE UGLYUGLY Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  33. 33. Blake Lapthorn Pension Conference 2014 Dealing with the Big Ones … Look at likelihood and severity Public tolerance – within limits Cuts in Benefits Public disclosure of all finances CDC Website It’s just with profits - complexity Regular focused communication Raised public awareness Communicating the uncertain future Soft Guarantees – communicating with members Explicit legislative reference Big Red Button in deed Employer Concerns of Regulatory Creep ResolutionIssue Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  34. 34. Blake Lapthorn Pension Conference 2014 Historic modelling - bonuses added -10% -5% 0% 5% 10% 15% 20% 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Year Percentage -10% -5% 0% 5% 10% 15% 20% Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  35. 35. Blake Lapthorn Pension Conference 2014 Making it Happen  Legislation  Political consensus  More public awareness raising  Large, unionised employers?  Employers willing to go first?  Ready made solutions – provider led master trusts Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  36. 36. Blake Lapthorn Pension Conference 2014 Are we alone? www.aonhewitt.co.uk/collectivedc www.targetbenefits.ca Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  37. 37. Blake Lapthorn Pension Conference 2014 The Canadian Vision  Retirement is still a novel concept for humankind and it continues to evolve. We have reached a critical point in planning retirement schemes where, in much of the world, individuals can end up receiving a pension for significantly longer than they contributed towards it. This was not the case when existing DB pension plans were originally designed and adopted.  The traditional DB plan has been a 50-year experiment that we have finally begun to understand, while the traditional DC plan is a 30-year experiment that has yet to fully mature and from which we continue to learn  We define a sustainable pension plansustainable pension plan as one that can consistently deliver, through both favourable and adverse circumstances, an appropriate range of benefits within an acceptable range of costs over the long-term. A sustainable approach to pensions will allow a pension plan to adjust both costs and benefits in response to actual experience, with the key objective that adjustments be infrequent and low in magnitude Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  38. 38. Blake Lapthorn Pension Conference 2014 All we are saying ….. le mieux est l'ennemi du bien (Voltaire) CDCCDC Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  39. 39. Blake Lapthorn Pension Conference 2014 The Future is DC But can we do better Collectively? Kevin Wesbroom Senior Partner, Aon Hewitt kevin.wesbroom@aonhewitt.com 020 7086 9350 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  40. 40. DC Governance – the dawn of a new era or tell me something new?! John Hamilton Partner john.hamilton@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  41. 41. DC Governance under scrutiny  Pension Regulator – Codes of Practice Number 13 (in force July 2013) and Number 15 (in force September 2013)  OFT Defined contribution workplace market study – September 2013  DWP Consultation Better Workplace Saving – a consultation on charging – October 2013 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  42. 42. The current pension landscape 2.7 m840,000960,000118,0001.4 mTotal active memberships Unknown1.6 m5 m851,0007.8 mTotal memberships 1,80028,62053050880Open Schemes 2,02037,6901,0503305,530Schemes DC (workplace contract) DC (trust)Hybrid – dual section Hybrid – mixed benefit DBPrivate sector schemes Source: The Pension Regulator’s presentation of scheme return data 2013-2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  43. 43. Key findings in the Regulator’s 2013- 2014 review of scheme return data  £30 billion in assets in DC trust-based schemes with 12 or more members (excluding hybrid schemes with DC members).  DC memberships now account for 30% of workplace pensions memberships (up from 27% last year).  33% of active DC members in trust-based schemes and 67% in contract-based schemes.  The number of trust-based schemes has reduced by 2%.  The number of DC trust-based memberships has increased by 15% over the last year.  The number of DC master trust schemes with 12 or more members has increased by 11%, and membership of such schemes has increased by 22%. Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  44. 44. Triggers of DC governance focus  Continued DB closure and replacement by DC  Automatic enrolment - an additional 6-9 million people in DC schemes by 2018  Abolition of short service refunds from DC occupational pension schemes and “pot follows member”  Increased focus on investor protection – e.g. pensions liberation  Government desire to ease the burden on the welfare state Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  45. 45. The four key ingredients of DC governance  Effective management and oversight  Good administration and communication with members  Effective design and execution of investment strategy  Value for money Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  46. 46. Advantages of good DC governance from the employer’s perspective  Enhanced reputation as an employer of choice  Effective tool in workforce management  Litigation protection  Cost, efficiency and control Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  47. 47. The barriers to good DC governance  Weakness on the buyer side of the market  Complexity of the product  Lack of knowledge from key counterparties – employers, trustees, members  Conflicts of interest  Lack of transparency and complexity of charging Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  48. 48. tPR’s powers - DC trust based schemes  Regulator’s objectives – Protect the benefits of members – Maximise compliance with Pensions Act 2008  Range of options for dealing with trust based schemes: – Issue notices and orders – Recover unpaid contributions – Impose fines where it finds a breach – Prohibit trustees from acting Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  49. 49. Key risk areas identified by tPR:  Trust based DC governance: – Trustee knowledge and understanding – Internal controls – Fitness and propriety of Trustee board – Conflict management – Poor investment governance and decision making – Poor administration practice Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  50. 50. TPR - steps towards a more robust system of Governance  DC regulatory guidance: Governance and administration of occupational defined contribution trust-based pension schemes (January 2013)  Code of Practice Number 5  Code of Practice Number 13  DC Strategy document  DC compliance and enforcement policy Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  51. 51. Code of Practice Number 5 - in force September 2013  Prepare and maintain a payment schedule  Check receipt of contributions by deadline  Resolve and, if necessary, report late payments to the Regulator  Reasonable periods for reporting  Annual statement to member of total contributions Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  52. 52. Code of Practice Number 5 – in force September 2013  Risk based approach to check contribution amounts  Procedure for requesting payment information from the employer (e.g. pensionable earnings) to enable checking of amounts.  Report non-provision of payment information.  Information to members so that they can check contributions – regularly updated online access is best practice. Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  53. 53. Key areas in Code of Practice 13  Trustee knowledge and understanding – Know your scheme – Regularly review skills to demonstrate TKU  Internal controls appropriate to a DC scheme – Accurate member data, evaluate regularly – Support employer in understanding responsibilities and processes – Accurate and prompt transactions – Monitor and report contributions – Robust administration system  Investment  Governance of conflicts of interest and advisers/service providers Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  54. 54. What DC Trustees need to be doing  Read Codes and Guidance  Arrange training/demonstrations  Review scheme and current processes against quality features  Come up with a governance Action Plan  Prepare a governance statement  Assistance from the Regulator? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  55. 55. Key recommendations of the OFT  Government intervention to introduce minimum governance standards  Independent Governance Committees  Closer regulation of master trusts – demonstrate value for money to TPR  Commonly defined single charge  Tackle consumer detriment from legacy schemes  More active role for tPR for small trust based schemes Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  56. 56. DWP Consultation on charging  A cap on pension charges: – Option 1: A charge of 1% of funds under management – Option 2: A lower charge of 0.75% – Option 3: A two-tier ‘comply or explain cap  Ban on active member discounts (AMDs)  Ban on consultancy charges to all qualifying DC schemes  Ban on adviser commissions set up prior to the Retail Distribution Review  Now likely to be a delay for ‘at least’ a year – April 2015? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  57. 57. Dawn of a new age for DC governance???  Reflects good practice – employers and trustees should already be doing to manage risk  OFT’s recommendations will have significant impact on DC providers  For employers and trust based trustees - the emergence of a value for money principle  Will this lay the seed for future legal claims against trustees and employers? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  58. 58. Employers actions to manage risk  Contract based DC - consider establishing a governance committee  Review current and legacy arrangements – both investment and administration  Trust based DC: – do your trustees have the resources to do the job? – consider the appointment of an independent trustee – is another alternative the best option going forward? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  59. 59. Any questions? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  60. 60. DC Governance – the dawn of a new era or tell me something new?! John Hamilton Partner john.hamilton@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  61. 61. Refreshments 10 minutes Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  62. 62. Pensions law – as interpreted by the Court Nicola Walker Associate nicola.walker@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  63. 63. Exercise of Trustee/Employer duties and discretions  IBM: "Imperial" duties of good faith do not compel employer to agree to unreduced deferred pensions  " Hastings-Bass " or the equitable remedy of mistake Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  64. 64. Construction of Scheme Rules  Construction of pension increase rule Employer  Deed of adherence also be construed as deed of amendment? Members  The role of the "reasonable reader" in the construction of pension scheme amendments Employer  Passage of time and lack of evidence not fatal to the exercise of trustee discretion Employer Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  65. 65. Application of European law and decisions of ECJ  Partner's mandatory retirement at 65 was proportionate means of achieving legitimate aims  Age-related DC pension contributions can be objectively justified  VAT or no VAT Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  66. 66. The Pensions Regulator  Financial Support Directions: Court of Appeal  confirms trustees are "directly affected persons"  Supreme Court confirms no "super-priority" for FSDs  Pension liberation schemes are occupational pension schemes Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  67. 67. Procedural  "unprincipled" to go behind actuary's section 75 certification  Employer’s court application to pre-empt Ombudsman claim is not an abuse of process  Pensions Ombudsman can’t assume jurisdiction to set aside third-party funded compromise   Desmond: Northern Irish High Court refuses permission for judicial review Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  68. 68. Legal Principles  Duties and discretions – Court will not enlarge employer duties and discretionary remedies will not always be granted  Construction – wider practical considerations  Age discrimination tempered by common sense, but VAT is not?  Pensions Regulator – open door but limited value?  Procedure – Fairness and justice prevails of course! Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  69. 69. Future trends?  Court will be more practical and purposive in its construction powers  The Hastings-Bass doctrine will not allow Trustees to easily back track on the exercise of their powers  Pensions Regulator will continue to test the scope of its powers  Ombudsman will continue to stray beyond his powers  Pension litigators will put clients in a position of power! Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  70. 70. Pensions law – as interpreted by the Court Nicola Walker Associate nicola.walker@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  71. 71. 1FooterFor Professional Client Use Only – Not for Distribution to Retail Clients © 2013 SEI Fiduciary Management........ What it is and who it is for? Ed Tomlinson, Regional Director, SEI Institutional Group The state of Pensions conference 2014
  72. 72. 2FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Agenda • Developments in pension governance regarding investments • Fiduciary Management for DB schemes • Master Trust: Can DB experiences improve outcomes for DC trusts
  73. 73. 3FooterFor Professional Client Use Only – Not for Distribution to Retail Clients SEI – Key numbers 1968 300 50 Investing in over 100 managers 465 £135bn Founded Investment Experts European Institutional clients Institutional clients worldwide Assets Under Management As at 30 September 2013
  74. 74. 4FooterFor Professional Client Use Only – Not for Distribution to Retail Clients The past decade – a perfect storm for pension schemes 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0 200 400 600 800 1,000 1,200 1,400 Giltyield MSCIWorldIndex(GBP) MSCI 10 YEAR GILTS Source: Bloomberg For most pension arrangements equities are used to generate returns Long gilt yields mainly determine the ‘price’ of the liability for both DB and DC
  75. 75. 5FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Governance evolutions • Emergence of Independent Trustees • Formation of Investment Committees • Outsourced Investment governance models including: • DB  Fiduciary Management • DC  Master Trust
  76. 76. 6FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Acceptance of Fiduciary Management in the UK The market has continued to grow at a remarkable pace, at over 20% every year since 2007.
  77. 77. 7FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Defining Fiduciary Management This diagram represents services incorporated within SEI’s Fiduciary Management offering. All services shown may not be offered by other Fiduciary Managers Trustee Board Actuary Fiduciary Manager Investment Advice + Implementation + Monitoring Liability information Asset Allocation and Risk Management Investment Implementation Client Service & Reporting ‘The mandate objective is typically to meet a funding level/liability target within a prescribed timeframe.’ – KPMG, November 2013
  78. 78. 8FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Trustees decide where their time is best allocated Strategic Decisions Implement Flight plan Manager Search and Selection Manager oversight Performance Evaluation / Rebalancing
  79. 79. 9FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Allocation Change: UK fixed income diversification Allocation Change: De-risked allocation Approximate funding level differential: 16% Allocation Change: Add Global fixed income Allocation Change: Reduce Index Linked, Increase High Yield Corporate and Emerging Market Debt Client case study Actual & Simulated Performance Currency: GBP Gross of fees and charges. The Legacy Strategy represent simulated performance designed to replicate the Client’s strategy prior to SEI. Does not reflect actual performance of predecessor investments nor any allocation changes that might have been advised. Past performance is not a Guarantee of Future Performance. As of 30/06/2012.. Implemented: Diversified strategic allocation Fiduciary Management Legacy strategy
  80. 80. 10FooterFor Professional Client Use Only – Not for Distribution to Retail Clients The benefits of Fiduciary Management for trustees FundingLevel Proactive Cost Lower investment manager fees may enable a budget for Fiduciary Management. The solution might be cheaper overall. Governance Control Accountability
  81. 81. 11FooterFor Professional Client Use Only – Not for Distribution to Retail Clients SEI Trustees responsible for the bespoke DC solution SEI DC Solution leverages governance commonly used for DB schemes to improve member outcomes. Employer Employer (& current Trustees) decide solution for the section Administration Communication & Education Investment Manager selection Investment menu & Default Strategy Sub-section(s) within SEI Master Trust Regular Reporting
  82. 82. 12FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Reasons why sponsors select a DC Master Trust • Paternal nature - accepts that members need help • No desire to internalise the pension governance burden • Solution for deferred members - alternative to Buy-out • Reduce ongoing costs without compromising quality
  83. 83. 13FooterFor Professional Client Use Only – Not for Distribution to Retail Clients About SEI’s Institutional Group SEI’s Institutional Group is one of the first and largest global providers of outsourced fiduciary management investment services. The company began offering these services in 1992 and today acts as a fiduciary manager to more than 450 retirements, non-profit and healthcare clients in seven different countries. Through a flexible model designed to help our clients achieve financial goals, we provide asset allocation advice and modelling, investment management, risk monitoring and stress testing, active liability-focused investing and integrated goals-based reporting. About SEI SEI (NASDAQ:SEIC) is a leading global provider of investment processing, fund processing, and investment management business outsourcing solutions that help corporations, financial institutions, financial advisors, and ultra-high-net-worth families create and manage wealth. As of June 30, 2013, through its subsidiaries and partnerships in which the company has a significant interest, SEI manages or administers $507 billion in mutual fund and pooled or separately managed assets, including $204 billion in assets under management and $303 billion in client assets under administration. For more information visit: http://www.seic.com/enUK/institutional-investors.htm.
  84. 84. 14FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Important information This document and its contents are directed only at persons who have been classified by SEI Investments (Europe) Limited as a Professional Client, or an Eligible Counterparty, for the purposes of the FCA New Conduct of Business Sourcebook. This information is issued by SEI Investments (Europe) Limited, 4th Floor, Time & Life Building 1 Bruton Street, London W1J 6TL, which is authorised and regulated by the Financial Services Authority. No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. If the investment is withdrawn in the early years, it may not return the full amount invested. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence. Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. Past performance is not a guarantee of future performance. Investment in the range of SEI's Funds is intended as a long-term investment. SEI sources data directly from the following vendors: Factset, MSCI Barra, Russell, TOPIX, FTSE, Barclays Capital and BofA Merrill Lynch. Where appropriate, returns in base currencies are converted to the relevant currency using WM Reuters 4pm Spot rates.
  85. 85. 15FooterFor Professional Client Use Only – Not for Distribution to Retail Clients Important Information on Case Study Fiduciary Management Case Study Performance of the SEI Strategy represents an actual client track record, representing an asset allocation implemented through our UCITS Funds with the inclusion of investment strategies as a result of our enhanced advice. The performance illustrated is reflective of the time period from the client’s first investment with SEI and assumes investment at the beginning of the period indicated and reflects changes in allocations (as applicable). SEI treats every client individually, therefore these results may not reflect the impact material economic and market factors, within the timescale stated, may have had on SEI's decision making if a different client mandate was being managed. Past performance is not indicative of future performance. The Legacy Strategy is designed to replicate the client’s portfolio prior to transitioning to SEI. It was created using the client’s prior asset class allocation matched to the closest SEI Fund based on asset type. This does not reflect the actual performance that would have resulted had the client stayed in their original investments and does not incorporate any adjustments to allocations or recommendations that may have been made to the client’s portfolio had they remained with their previous provider. The legacy portfolio / strategy was weighted in the following manner: 12.85% SEI UK Equity Strategy (X% SEI Quantitative UK Equity Fund and X% SEI Fundamental UK Equity Fund), 2.93% SEI US Large Companies Fund, 2.64% SEI European (ex-UK) Equity Fund, 1.88% SEI Japan Equity Fund, 2.60% SEI Pacific Basin (ex-Japan) Equity Fund, 0.45% SEI Emerging Markets Equity Fund, 1.19% SEI Global Developed Markets Equity Fund, 45.47% SEI UK Credit Fixed Income Fund, 14.21% SEI UK Index Linked Fixed Interest Fund, 4% SEI Global Government Fixed Income Fund, 9.54% SEI UK Property Fund, 2.24% SEI Offshore Opportunity Fund II. Allowance has been made for deficit repair contribution inflow and benefits payment outflow from the portfolio. Liability projections and inflation assumptions used with each Strategy are identical. Master trust Case Study Projections carried out using SEI’s capital market assumptions and returns (before fees) achieved by funds in the SEI Master Trust over 1 and 3 years to 30 September 2013. Projected membership assumes a salary of £25,000, price and salary inflation of 2.5% pa, a total contribution rate of 5% and a normal retirement age of 65. Annuity change based on the change in the FTSE Over 15 year gilt yield over 1 year to 30 September 2013. This information is for illustrative purposes only.
  86. 86. Looking ahead to 2020 and 2050 Adrian Lamb, Legal Director, Pensions and Head of Trusteeship Services adrian.lamb@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  87. 87. How full (or empty) is my glass? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  88. 88. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  89. 89. London Pensions Conference 2014 Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  90. 90. A =  Abandonment  Assets?  Auto enrolment?  Ageing population – and workforce  Aches and pains!  Ambition – defined or otherwise?  Active engagement  Annual management charges  Actuaries  Attitude Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  91. 91. Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  92. 92.  “One Fiscal cliff delayed – but not avoided  What is normal?  “Zombie companies and individuals”  “Extend and pretend”  More for less (or at least no more)  Eurozone stagnation risk  Debt is not coming down  QE tapering/ emerging economies  BRIC - CIVETS – MINTS – SMARTIES - PIIGS London Pensions Conference 2014 - the economic backdrop Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  93. 93. London Pensions Conference 2014 Many children “slower runners than their parents were” Average household debt doubled in last decade - £54k per household and now stands at a total of £1.43 TRN Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  94. 94. Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  95. 95.  More bad news if valuation 1st half 2013  Auto enrolment to cope with on top of everything else  Total costs on the rise – where can I make savings?  Resource shortage so can I stay on top of it all?  Can I be confident that I know the true position?  Do I have time to look ahead? Do I have time not to? An Employer’s perspective – a look back at the last 12 months Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  96. 96.  More - or at least the same - for less – adviser fees  Focus on value (or cost)?  Continued trend towards fiduciary management (or FM lite)  Still a wall of money waiting for Buy ins/outs  Data and benefit audits  TPR expectations and pressure on governance  Even less time = even more focus Trustee’s perspective – a look back at the last 12 months Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  97. 97. Trustees’ circle of interdependencies Employer covenant Funding Investment Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  98. 98. Predictions for 2020  Private sector DC world – adequacy a real issue  Public sector still DB  Debt and deficit + legacy DB – still with us  AE contributions start to rise  State pension age increases accelerated  England still haven’t won the World Cup Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  99. 99. Predictions for 2050  State pension is safety net, not entitlement for some/all  DC evolves to CDC/other models  Public sector pensions rumble on  Debt and deficit + legacy DB – still with us  AE contributions at minimum 15% combined  State pension age at 75 and rising  England current holders of Football and Rugby World cups and the Ashes and Europe has won the Ryder Cup 15 times in a row Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  100. 100. Reasons to be cheerful? •Recovery is taking hold – BOE •Latest growth figures encouraging •Car production and sales are up - SMMT •Factory orders strongest since 1985 - CBI •House prices are on the up in most areas? •2013 - 7th warmest year since 1850? Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  101. 101. Things to take away from today  Liabilities - follow the rules but check your data  Manage/mitigate all of your risks  Good governance is essential and worthwhile –  Most DB schemes headed for either buy out or PPF – but is there an alternative?  Master trusts/aggregated schemes?  Other efficiencies are also available  K.I.S.S. Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  102. 102. Things to take away from today IMPROVING DC OUTCOMES  Good choice of funds, including default fund  Salary sacrifice  Annual management charges  Save more tomorrow?  Governance matters just as much here and with increasing focus from regulators and government  Master trusts/aggregation It’s in everybody’s interests that it is made to work Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  103. 103. Employer checklist  Employment costs likely to rise  AE is not just compliance – engagement may pay dividends  Scrapping DRA adds others pressures but creates opportunities – can you get more value for the spend?  Contracting out is going – think about it soon  More governance needed for all DC  Good governance pays off in the end Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  104. 104. Trustees’ checklist  Manage the assets effectively  Monitor the covenant effectively and proportionately  Manage your costs – savings in time and money are possible  Monitor your time, your governance and your performance  Make sure you know your liabilities  Be prepared for any opportunities  Good governance pays off in the end Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
  105. 105. Looking ahead to 2020 and 2050 Adrian Lamb, Legal Director, Pensions and Head of Trusteeship Services adrian.lamb@bllaw.co.uk Create PDF files without this message by purchasing novaPDF printer (http://www.novapdf.com)
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