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Private 3rd Party Pensions Sponsorship - A Chance fpor better social stewardship. Explores the definded aspiration of people and impact investing by pension funds. Published by the Pensions ...

Private 3rd Party Pensions Sponsorship - A Chance fpor better social stewardship. Explores the definded aspiration of people and impact investing by pension funds. Published by the Pensions Management Institute September 2012

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Pages from pmi news sept 2012 Pages from pmi news sept 2012 Document Transcript

  • [ PMI [ news S E P T E M B E R 2 0 1 2New species fraud– Are SIPPs vulnerable? Plus: A simple way to help trustees sleep at night… Discretion is the better part of valour, particularly where trustees are concerned Olympic Airlines: is the PPF entry regime too strict? Private third-party pension sponsorship in the UK – a chance for better social stewardship Tighter grip over ETVs
  • Private third-party pension sponsorshipin the UK- a chance for better social stewardship T his article follows up on a case study article that underpin the existing scheme options over the next appeared in the March issue of PMI news. This five years. With the benefits being staggered time as well as highlighting some of the between 20-25 years into the future from this, the background case we looked at, I will focus on what sooner money is invested the greater the impact it can be achieved for other stakeholders in society. has on his targets (see graph 2). The original case study aimed to demonstrate The savings that George would need to set aside in what can be made possible with innovation to create a vehicle of his choice, assuming the same 5.75% net potential outcomes that are more affordable and of charges could be achieved are just £227 per month. potentially two to four times greater for a consumer He will maintain full access to his savings and only use than using traditional pension schemes in isolation. them to repay the sponsorship if the target returns are As a reminder, George aged 42 had identified achieved. It is also more affordable and, from that to have a realistic chance of reaching his defined George’s point of view, less risk as he has two aspiration of having a pension of £37,500 p.a. in investments working rather than just one. 20 years he needed to have a minimum pension George has been made aware that a private 3PPs fund of £625,000, based on a 6% withdrawal rate solution may be suitable as an addition to existing being sustainable post retirement. pension provision, but it should not be seen as a His existing pension fund of £100,000 growing total replacement of responsibility to save. From a at 5.75% p.a. net of charges was projected to reach sponsor’s perspective, repayment of original £305,920 Leaving a saving gap of some £319,080 sponsorship in the future allows them to redistribute (shown in Graph 1). that capital to the next generation. If anything, it The cost to bridge that savings gap would require would be reasonable to assume that the biggest risk future funding of some £720 per month, currently would be to deny them the opportunity of 11% of George’s salary. He is unableunwilling to combining more than one strategy to lower overall commit to this for a number of reasons including risk. Thus Private 3PPS is designed to help people affordability, losing access and perceived views that meet a defined aspiration which they may have been pensions provide bad overall value. Even the latest either unwilling or unable to reach with conventional automatic enrolment efforts would not be enough solutions in isolation. A mixed solution could to reach his targets. increase the willingness to save through a range of Conversely a private third party pension vehicles and it is hard to see the case where a bad sponsorship (3PPS) available to him for the next five outcome for George or a similar client could arise by years could help him achieve his defined aspirations. having more set aside for the future than would The sponsorship solution secures George’s ability otherwise be the case. to make a total of £275,000 in contributions to34 PMI NEWS SEPT 2012 WWW.PENSIONS-PMI.ORG.UK
  • Private 3PPS is designed to help people meet a defined aspiration which they may have been either unwilling or unable to reach with conventional solutions in isolationPensions and tax reliefs – “Weve got a shot at really pulling together toresponsibility to provide good value turn upside down the way we approach theHaving a solution that helps an individual meet their challenges we are facing in the world and look atdefined aspirations is excellent from one prospective. them in a brand new entrepreneurial way. Never hasPhilanthropic sponsorship that allows individuals to there been a more exciting time for all of us touse allowances they may not have utilised without explore this great next frontier where the boundariesthe help of sponsorship needs to be balanced with between work and purpose are merging into one, Pierre Coussey where doing good, really is good for business.” Chartered MCSIsocial responsibility. It is a bit like most of the APFSdip IMCpopulation having an ISA allowance when we know Source - Richard Branson Director of Pensions &the vast majority cannot afford to fully utilise it. This Investment Strategyis even more vital during difficult times of austerity. Support for the SME sector and Wealth Connection Ltd A good social sponsor will typically aim to invest innovation when investingin the host nation over a number of years in order to Scalability of sponsorship solutions depends on longboost economic growth and repay the government term projects that are feasible to a sponsor andthe tax breaks in the shortest possible period. After provide a return on investment over a long duration.this has been achieved they may look further afield Mapping demographic trends helps to identify areasas any other global investor may. Thus a 3PPS of demand. A good source for basic trends can besponsor ideally will be tax aware and make specific found in the document Population Trends atcommitments in its style of investment both in initial www.statistics.gov.ukyears and be aware of tax receipts for the host The right innovation, particularly home made incountry throughout the lifetime of the individual the UK, can create a merger of benefits for the shortbeing sponsored. term economics if combined with things that can Table 1 aims to demonstrate how the effects of also help a sponsor reach longer term objectives.tax relief and reinvestment of newly created pension Like most investors the sponsor will employ afunds in areas that a country needs investment can longer term strategic asset allocation policy. But theybe very socially beneficial from a fiscal point of view. will be matching this to a total investment cycle thatThe example would be typical at a micro level for, say, can be ten to 20 years ahead to match the returns required to meet a clients aspirations. Ma group of 15-25 people like George benefiting froma single year’s sponsorship. The same ratios wouldapply to a scaled up level of sponsorship across manythousand individuals if not tens of thousands. Graph 1 As well as the first year effect, the sameinvestment cycle takes place with each subsequentyear. Thus 3PPS solutions with scale could effectivelyrepay the exchequer in excess of tax reliefs grantedtypically within 12-18 months. The more importantfactor, however, comes from the long term increasein wealth that would not otherwise exist. This alsohelps with long term balancing of the books and anatural redistribution amongst different generations.The great thing about a UK registered pensionscheme is the ability for HM Revenue and Customs(HMRC) to clearly know what is held and that thiswill potentially be available to help tax receipts in thefuture. Innovation such as this that creates pensionfunds that would not otherwise exist means thereshould be less dependency on the state.WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 35
  • A good social sponsor will typically the requirements on thermal efficiencies of buildings, with regulations coming into place next year in the aim to invest in the host nation over residential sectors and further regulation set for a number of years in order to boost 2016, which effectively means all new build property economic growth and repay the will need to be passive/zero carbon. One such innovation that has been selected by a government the tax breaks in the sponsor is investing in a particular technology also shortest possible period known as Insulated Concrete Formwork (ICF) to create low or zero energy buildings for the future. A critical price/supply barrier has effectively been met whereby building with this technology can be done at no extra This longer term investment avoids much of the cost in comparison to traditional brick and block or short term nature that has blighted much of the timber frame. financial sector, and allows for much reduced The key factors that helped them identify this as volatility. In this way investment into the source of a future long term base to investments included: UK PLC investment, such as via private equity, can be I the period of carbon payback for production of made. The long term nature of investing can mean the blocks being just one year’s use companies and assisting them in their growth stages I structural aspects - the system components have rather than short term stock market sentiment- adequate strength to resist the loads associated driven investment or even removal of investment due with installation to external factors outside a company’s control. I thermal insulation - the system contributes to the “The best companies view sustainability not only overall thermal performance of the wall as a chance to contribute to social goals, but also as construction a powerful source of competitive advantage.” I condensation - walls, openings and junctions with Source - Supply Chain Management Review other elements will adequately limit the risk of surface and internal condensation Investing in companies that have the right ethos I behaviour in relation to fire - walls will provide of not just today’s customer, but also those investing adequate fire performance, provided the system is for tomorrow’s consumer, can give added confidence used in conjunction with suitable materials in long term viability. I sound insulation - separating and internal walls Another core area for growth investment is in the with the minimum concrete core density and area of infrastructure and property; however this may detailing provides sufficient sound resistance not be as simple as bricks and mortar. There may be I durability - the system components are durable many reports on the desperate need for investment and backed by large institutions who provide the in the UK, but looking behind the scenes can bring materials and backing to the technology about new opportunities. In the construction industry, as an example, new regulation is changing Graph 2 [I]36 PMI NEWS SEPT 2012 WWW.PENSIONS-PMI.ORG.UK
  • As well as growth sectors during a phase of The right innovation, particularlyaccumulation, this needs to be a technology that can home made in the UK, can create abe applied to longer term income-producing sectors inneed of investment and having a demographic demand. merger of benefits for the short Investment into zero energy nursing homes is another term economics if combined witharea that has good social payback as well as the lowerfinancial cost of utilities. things that can also help a sponsor At the other end of the spectrum this technology reach longer term objectivescan be applied to new school buildings, giving betterlearning environments. Children are our future soadding benefits to the education sector allows some targets can be met. The real breakthrough with this typeform of payback today. On the ground research is of technology is being able to deliver the zero energyimportant building today at an identical cost to a traditional one. “A brand new school building that is not boiling hot The price equilibrium is such that being green does notin summer and cold & noisy in winter would be one of have to be a luxury choice.the greatest things to improve my pupils education, Innovation can create dilemmas such as what willteaching them about how the science works would also happen if you can increase the supply of new zerobe very rewarding ” Marco Dias – trimary teacher energy social homes? Do you then need to find aLeybourne School political acceptable way of equalising the benefits Reinvestment into the education sector in a number systems so that different families have the same netof ways is giving real chances to shape tomorrows’ benefits? Do these demand a higher rental premium?pioneers’ of industry. Helping the construction industry Whatever the answer, probably a blend of the two, thishas some of the highest payback of new jobs and offer effectively creates a spiral of lowering social benefitchances for apprenticeships in new trades and skills. costs allowing further government support for this form This also gets us looking at those not in employment of building. Key decision makers, be this in localand great things can be done in the area of social government or housing associations, need to embracehousing sector. Once again excellent long term investor new technology and support these type of SMEinformation can be gleaned from publications such as businesses on.the www.communities.gov.uk and their Estimating Finally are these some of the next areas for sustainableHousing Need study published in November 2010. income yield for tomorrow’s retiree, and perhaps enough The liquidity issue for banks has increased the gap to support a sustainable income yield? [I]between supply and demand and governments haverecognised the need with softer planning requirementswhere certain environmental or energy conservationTable 1 Summary of tax Summary of Summary of Summary of Summary of NET tax position relief issued by projected projected 20% 20% Income Tax 55% death for HMRC HMRC to Infrastructure tax to be paid collected at duty charges assuming an Individuals for Investment for by UK SME’s maturity via on income investor’s own sponsored Zero Carbon & Suppliers to pensions in drawdown savings grow pension Project Construction payment for assets at a net rate contributions Industry 20 years (zero growth) of 5.75%p.a. 3PPS £476,000 £2,700,000 £540,000 +£64,000 Extra Pension £387,000 +£451,000 Death Duties £1,061,000 +£1,512,000WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 37
  • regulatorupdate NAO REPORT ON DC PENSIONSRenewed scrutiny of DC The principles and features cover areas frequentlyThe introduction of automatic enrolment has placed in highlighted but where current practice is mixed e.g.sharp relief the importance of high-quality defined transparency of costs, charges, investment strategies,contribution (DC) schemes. Unsurprisingly, there is also retirement processes and communication witha heightened interest in the role regulation can play in members as well as areas less frequently discussedpositively influencing outcomes. The National Audit e.g. clarity of accountability, protection of assets, andOffice (NAO) recently published a report on the Bill Galvin effective management of conflicts of interest. Whilst Chief Executiveregulation of DC schemes and, later in the year many schemes are already well-placed to exhibit the The PensionsParliament’s Work & Pensions Select Committee will principles and features, their presence across the Regulatorcarry out an enquiry into governance and best practice different segments of the DC landscape is not universal.in workplace pensions. We welcome these reviews asthey help us to look at our work and our approach Regulatory architecturefrom an outside perspective. There has also been a The NAO report also made three recommendations toconsiderable amount of media interest in costs and Government relating to setting objectives, assessingcharges in DC pensions, and value for money in risks, and measuring performance. It does not proposeannuity provision. a single regulator for workplace pensions – though These are clearly important areas of consumer there was significant comment and speculationinterest. The most important test is how the industry following the report’s publication. There is already aresponds to this increasing interest in DC outcomes. considerable degree of coordination between theWe are monitoring developments closely. regulator, Financial Services Authority (FSA), Department for Work and Pensions and Her Majesty’s Trends inRecommendations Treasury, and our principles and features are a provision inThe recent NAO report was a measured and carefully significant step towards a more integrated approach. large employerswritten review of the regulator’s work on DC Regulatory authorities working closely together in a – who areregulation and the wider regulatory architecture. It joined-up way is key.recognised the achievements of the regulator in knowledgeableaccurately assessing risks to DC members, our overall Costs and charges and engaged onrisk-based approach to regulation, and our work on We’ve seen some prominent headlines recently critical behalf of theirencouraging good administration. of the industry’s approach to costs and charges. The NAO report had three recommendations for Although evidence points to these becoming more employees –the regulator – including that we should look to competitive as automatic enrolment approaches, may not be thestrengthen performance measurement in relation to trends in provision in large employers – who are best indicatorseconomic outcomes for members. The long-term knowledgeable and engaged on behalf of theirnature of pension saving, identifying objective employees – may not be the best indicators of the of the shapebenchmarks, and the wide range of factors beyond shape of provision among smaller, less-engaged of provisionthe control of regulation mean this is not employers. We emphasise the importance of among smaller,straightforward. Nevertheless we accept the NAO’s transparency and value for money in our principleschallenge to accelerate development of performance and features; and our communications to employers less-engagedmeasures linked more directly to actual economic will encourage them to choose value for money employersoutcomes for members. schemes. The FSAs work with financial advisers and the National Association of Pension Funds’ proposedPrinciples and features for good DC code of practice are important interventions, and wepensions will monitor how the industry responds.Shorter-term performance measures will be based uponthe presence of our principles and features for the Next stepsgovernance of good DC schemes, which are helping to The industry has shown broad support for our workset the agenda for automatic enrolment. Our goal is so far. We intend to consult on our approach tothat all schemes are designed and run in the best regulating workplace DC pensions next year,interests of members. We’ve discussed these including how the presence of our principles andcharacteristics with providers and industry stakeholders features can be demonstrated across the differentand there is a broad consensus around them. segments of the DC landscape. [I]WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 41
  • NESTupdate TRUST, CONFIDENCE AND KAYA long term approach to investment across all aspects of the pensionsindustry can ony be in a member’s best interestsI f you were asked to find a pension saver who welcome Kay’s proposal to reduce the pressure for spends their time and energy fixating on changes short-term decision-making by asset managers that to their pot every three months, you’d expect to be arise from excessively frequent reporting of financialchoosing from a pretty shallow pool. So one might and investment performance, including quarterly Paul Todd iswonder how the investment industry arrived at an reporting by companies. Head of Investment At NEST we’re seeking to maximise pots over Policyinvestment chain that has embedded just this sort of the long term, but not at all costs. Delivering NESTshort-termism and one which is too often misaligned consistently good outcomes generation afterfrom long-term interests of end users whose generation cannot be about chancing short-terminvestment horizons are likely to be decades, rather performance. This would inevitably create ‘unlucky’than years, and almost certainly not months. cohorts and widely dispersed outcomes between As a predominantly long-term investor – the generations and would do nothing to support theaverage age of NEST’s target membership is mid 30s re-building of the public’s fragile trust in financial– we fully endorse Professor John Kay’s independent institutions over the decades to come.review examining investment in UK equity markets We’re deeply supportive of a culture in whichand its impact on the long-term performance and business and finance can work together to creategovernance of UK quoted companies. high-performing companies and earn returns for We’re firmly of the belief that now has to be a savers on a sustainable basis. While some reportinggolden opportunity for many in the investment world around NEST’s investment strategy has focused onto re-focus on long-term performance and on the proportion of equities being lower thancontributing to building profitable and sustainable traditional 100% offering for those who start savingcompanies and equity markets. with NEST in their twenties, the reality is we are The ultimate With public trust in financial institutions at a a strong advocate of providing broad access to theparticularly low ebb, automatic enrolment and the benefits of global capital and share ownership. Our owners andway in which pension schemes invest money on investment objective is all about significantly beneficiaries ofbehalf of their members represents a huge and outperforming inflation and equity is a crucialpotentially once in a life-time opportunity to re-build UK equity element to our successful delivery of this goal -that trust. As Kay and others make clear, trust is a it’s just not the only thing we focus on. markets willcrucial factor in many ways throughout the chain of We agree with Professor Kay that promotinginvestment participants. increasingly be good governance and stewardship is central to the Our members put their trust in NEST to invest functioning of UK equity markets and were pleased hard-workingtheir money in a proper manner and, as asset holders to see proposals aimed at diminishing the current members of theon their behalf, we expect our underlying asset trading and transactional cultures that encouragemanagers to manage members’ money in way that is asset buyers to act like short-term tenants rather public saving foraligned to their best interests. Our fund managers than long-term owners. their retirementsknow they have a responsibility to NEST and accept The ultimate owners and beneficiaries of UKthat they are also accountable to our members. A equity markets will increasingly be hard-workingsignificant part of our role is ensuring the alignment members of the public saving for their retirements.of interests along all parts of the investment chain - They should be recognised as the true motivation forfrom the individual contributing to a pension for the good and effective stewardship. Making real a greaterfirst time in Newcastle, to the equity trader operating alignment between the time horizons of all in theout of New York. investment chain and final owners has to be a priority Asset holders and pension providers play an if we’re serious about re-building trust and confidence.essential role in the investment chain as the legal The challenge now is working together to implementowners of shares with a direct relationship with genuine long-termism and in doing so deliver betterpension savers. We would like to see additional outcomes for pension savers into the future. [I]investigation into their role. Small to medium-sizedpension funds may warrant particular attention as ingeneral they will outsource much of the decision-making to asset managers and investment consultants. As a long-term investor looking to build long-term sustainable relationships with its partners, weWWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 43