Reports

For further information please contact:  pensions@city.ac.uk.

 

Pensions Institute Practitioner Reports

 

  • Generating Retirement Outcomes to be enjoyed and not endured : Why we must harness the opportunities and overcome the risks at and in retirement in a world of freedom and choice.

Chris Wagstaff,  Head of Pensions and Investment Education, Columbia Threadneedle Investments, and Senior Visiting Fellow, Finance Faculty, Cass Business School, London.

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  • Defined Contribution: It’s time for investment to do more of the heavy lifting.  Chris Wagstaff, Head of Pensions and Investment Education, Comumbia Threadneedle Investments, and Senior Visiting Fellow, Faculty of Finance, Cass Business School, City, University of London.In summary, the paper considers the following:“Adding one per cent per annum to long-run risk-adjusted returns really is the difference between retirement bliss and retirement penury.” Unlike defined benefit (DB), with its increasingly negative cash flow and de-risking focus, defined contribution (DC) has positive cash flow and a growth focus. Most DC schemes also have a very long investment horizon. However, most DC schemes, DC default funds in particular, still predominantly invest, via insurance platforms, in highly liquid asset classes. As a result, most are missing out on the many longer-term illiquid asset opportunities and the associated illiquidity and complexity risk premia that populate the asset portfolios and returns of most DB schemes. These can potentially add as much as one per cent per annum to long-run risk-adjusted returns.By advancing DC investment governance to leading-edge DB standards, DC schemes would be well placed to embrace those asset classes and investment techniques increasingly utilised by DB schemes, such as investing in real estate and social and renewable energy infrastructure and better integrating ESG factors into investment decision making. Doing so really could be the difference between retirement bliss and retirement penury.

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  • Bringing Black Box Thinking to the Pensions Industry by David Blake and Matthew Roy was published on 21 February 2018. The report proposes a new way of managing the issues faced by the trustees and regulators of the UK’s 6,000 remaining defined benefit (DB) schemes.  The new approach seeks to emulate the constant evaluation of mistakes make by certain sectors – most notably the aviation industry – where data from “black box” flight recorders in aircraft are used to identify and understand the cause of both major accidents and near misses, and, in turn, to drive constant improvement in the safety of the sector as a whole. In 2017, through the consistent application of this “open loop” approach, there was not a single passenger jet crash for the major airlines anywhere in the world.  The Black Box Thinking framework was developed by Matthew Syed, author and broadcaster. Applying this approach to pension schemes, the report has sought to address three key questions: 1. What mistakes are being made by DB trustee boards today? What are the errors that emerge in strategy setting that Black Box Thinking can be applied to? 2. How do boards evaluate errors? Do boards have a culture of recognising and measuring errors and are they able to learn from their mistakes to improve future decision making? 3. Ways to improve. Based on the analysis, what can schemes do.
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    Press Release

  • The Dependancy Trap – are we fit enough to face the future? was realised on 29th January 2018. The dependancy trap, usually refers to societies in which the popoulation becomes over-reliant on government handouts. In this report, we use it to describe a society that is sleepwalking into a conflict between the competing needs of an ageing population for a decent pension and a working age population that is struggling to save for retirement, with the issues compounded by inequalities in health and income. The research finds that far too many people cease to be economically active after age 55, and more than 50% are disabled-inactive from age 70. This impacts on the timetable for raising the UK state pension age which is due to increase to 68 by 2037-9, and the report finds that it should be raised much sooner to keep the PAYG scheme solvent. However, with modest increases in activity rates at older ages, based on improvements in preventable chronic health conditions, the transition to 68 becomes fiscally more manageable. The report also finds that women are hugely disadvantaged under DC workplace pension schemes and recommendations are made to improve their position including new tax breaks.
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    Press Release

  • The Meaning of Life 2: The UK life company business model in the context of dramatic changes to the political landscape and the investment and private-sector pensions market was published on 20 November 2017. The report argues that recent government reforms and rapid market changes have led to reduced consumer choice over pensions products, leaving the UK facing a potential crisis in the retirement income market. ‘Pensions Freedoms’ introduced in 2015 allowed those over 55 to withdraw funds but there has been a dearth of new products that offer flexibility and guaranteed income launched since, with the industry also struggling to adapt to regulatory and technological change. The report updates the findings of our November 2015 independent investigation into the UK’s life company business model.
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  • Greatest Good 2, was published on 21 June 2017. The report calls on the Government to shift UK pensions policy towards delivering fair pensions for the greatest number of people who are members of private-sector defined benefit pensions schemes. The Government needs to recognise the reality that many workers will not get their full pension because the sponsor will become insolvent well before their scheme is restored to full funding. This report follows on from our previous Greatest Good Report published in 2015, in which the Pensions Institute highlighted the acute pressure faced by many companies sponsoring DB pension schemes and their trustees as they both strive to meet their long-term promises. As highlighted by the BHS and Tata Steel cases, many DB pension scheme sponsors could collapse under the current policy which obliges scheme sponsors to adhere to the binary outcomes of either ensuring schemes can pay benefits in full or risk leaving the scheme underfunded if the sponsoring company goes bust. The Pensions Institute recommends a policy of ‘second best’ outcomes, allowing schemes with weak sponsors at a risk of insolvency to negotiate settlements for their members between full benefits and the level of compensation provided through the Pension Protection fund safety-net.
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    Press Release

  • Pensions and chocolate: The state of pensions regulation 2017 was published in January 2017 by PendragonPinsent Masons, and the Pensions Institute. It is a survey of the state of pensions regulation as it develops over the years. Pensions regulation has become generally recognised as excessive and counter-productive in the United Kingdom – yet there are presently pressures to increase it yet further in quantity and complexity. This survey is intended as a review of the present position, considering the state of legislation, regulation and court decisions, and maybe act as a guide to the future. It is designed to be read by clients, customers and colleagues in the field – and by MPs, regulators and policymakers.
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  • Milking and Dumping: The Devices Businesses Use to Exploit Surpluses and Shed Deficits in Their Pension Schemes was published on 3 August 2016. The report, written by Keith Wallace, president of the Association of Corporate Trustees and chair of the Legal Advice Panel of the Pensions Advisory Service, warns that no-one should underestimate the ingenuity of businesses and advisers to milk and dump their pension schemes. The study is particularly topical, given what has been happening at companies like BHS, Halcrow and Tata Steel – with allegations of excessive dividends paid to proprietors, bludgeoning pensioners into accepting lower benefits, proprietors distancing themselves from legal liability and incoming proprietors seeking to avoid liability altogether.
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  • The Good, the Bad and the Healthy: The medical underwriting revolution in the defined benefit de-risking marketwas published on 13 January 2016. The report highlights the significant growth in medically underwritten bulk annuities (MUBAs). From a standing start in 2013, 60 transactions worth over £1billion have been transacted. A particularly important development is the ‘top-slicing’ of the largest pensioner liabilities which offers particularly cost-effective risk reduction. The report suggests that as the sector develops those who currently operate in the MUBA space will begin to compete for more standard bulk annuities deals, while ‘traditional’ insurers will develop the ability to use some health and medical conditions to augment existing underwriting processes. This convergence of approaches will be led by the appetite from employee benefit consultants and trustees who have reported MUBAs generating material savings of 5% – 10% of transaction price in some circumstances.
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    Press Release


  • The Greatest Good for the Greatest Number: An examination of early intervention strategies for trustees and sponsoring employers of stressed defined benefit schemes was published on 14 December 2015. The report highlights the acute pressure faced by many private-sector defined benefit schemes and their trustees as they strive to meet their long-term liabilities. It predicts that the businesses of hundreds of employers will become insolvent well before the end of their recovery plans, under which the trustees and sponsor agree contributions to make good the deficit over an agreed number of years. On insolvency, these schemes may have insufficient funds to pay members’ pensions in full. The report argues that this worst-case scenario can be averted if the approach to managing pensions changes to one that is prepared for many more schemes to pay less than full benefits on a planned and co-ordinated basis, with all parties in agreement on how best this is achieved. Freeing an employer from the burden of its pension fund, whilst avoiding insolvency, can create extra value which can be shared with the members to achieve a better outcome.
    Copy of the Report
    Copy of the Supporting Material
    Press Release


  • The Meaning of Life: An uncertain future for the traditional life company business model in the UK’s private sector pensions market was published on 30 November 2015. The report predicts that by 2020, fewer than 10 organisations, including life insurers, will be in the ‘premier league’ of auto-enrolment scheme providers. They will control 90% of total assets under management (AUM), which are expected to almost double from £280bn at present, to £550bn in 2020.
    Copy of the Report


  • The Future of Retirement Income was published in July 2014.
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  • “How do savers think about and respond to risk?” was published on 19 February 2014. In late 2013, YouGov conducted a population survey of 4,154 individuals designed to elicit savers’ attitudes to taking risk in order to achieve their savings goals. Risk is a complex multi-dimensional concept, but we simplified matters by breaking the savings process into two stages, a savings stage and an investment stage. We invited respondents first to consider the ‘savings risk’ of falling short of the target established by the savings goals they set themselves. We then asked respondents to consider the ‘investment risk’ that is associated with the investment funds that savers use to help them achieve their savings goals. We found that: 52% of consumers prefer to miss savings goals than take action; half the population saves regularly, but only 1 in 3 prioritise long-term saving; ‘reckless conservatism’ and boxed-in thinking can lead to savings shortfalls; short-term savings edge out long-term wealth plans; only 6% of investors said they would tolerate investment losses of more than 20%; fund managers need to take more steps to respond to investor risk concerns; and advisers need to help investors understand risk and savings pots holistically.
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  • “VfM: Assessing value for money in defined contribution default funds” was published on 16 January 2014. The report examines the long-term impact of auto-enrolment on the DC market and sets out recommendations to providers, government and regulators to ensure member VfM does not suffer as a result of market forces. It also analyses DC scheme default funds, the multi-asset investment strategies designed for the majority of scheme members who do not make investment decisions. For a given level of contributions, differences in explicit and undisclosed member charges, asset allocations, and de-risking glide paths (the changing asset allocation over the period of membership), largely determine the differences in pension income that is secured during retirement, usually by the purchase of a lifetime annuity. The report finds that while cheapest is not necessarily best, there is no link between the cost of membership and member outcomes: higher charges are not linked to potential outperformance.
    Press Release
    Copy of the report
    Presentation

  • “Returning to the core: Rediscovering a role for real estate in defined contribution pension schemes” was published on 22 October 2013. The report concludes that a new trend of increased real estate investment by DC workplace pension schemes can be ascertained which could lead to significant growth in the real estate investment sector. Several new DC schemes designed for auto-enrolment have selected real estate as the first illiquid of ‘alternative’ asset class to be incorporated as a core component of default funds, with an average weighting of 10%. Default funds are likely to be used by the majority (more than 90%) of scheme members and with the projected growth of the DC market in the UK, thanks to auto-enrolment, it means that if this trend is adopted across the market real estate assets under management (AUM) may be worth £170 billion by 2030.
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  • A healthier way to de-risk: The introduction of medical underwriting to the defined benefit de-risking market was published on 4 February 2013. The report shows that the trustees of defined benefit pension schemes could secure savings of 10% or more when they de-risk their pensioner sections, thanks to the introduction of health and lifestyle underwriting techniques in the bulk purchase annuity market. The publication of the report coincides with news of the first ‘enhanced’ buy-ins to be completed in a market estimated to be worth up to £380bn.
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  • “An Evaluation of Investment Governance in London Local Government Pension Schemes” was published on 12 November 2012. The report identifies fundamental flaws in the investment governance of the majority of London’s 34 local government pension schemes (LGPS). It also paints a grim picture of the way the funds that support these gold-plated defined benefit schemes are managed and argues that the future of the schemes is potentially blighted by weak oversight of investment governance on the part of the Department for Communities and Local Government (DCLG) which regulates LGPS.
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  • “Caveat VenditorThe brave new world of auto-enrolment should be governed by the principle of seller not buyer beware” was published on 11 October 2012. It is a landmark study on auto-enrolment which examines – through a qualitative and quantitative evaluation of market practice – the likely outcomes for private sector employees saving in DC default funds – the funds used by up to 97% of members. The report identifies serious problems with the potential widespread use of older high-charging funds, particularly among smaller employers, which are not considered viable for advice due to the unintended consequences of both the Retail Distribution Review and auto-enrolment rules. We suggest that there is time to address this issue, given that smaller employers have a later staging date for auto-enrolment. However, we also suggest that the government, regulators and industry need to act now to make sure that employees passively auto-enrolled into an employer scheme (and who are therefore not active purchasers of a financial services product) are not disadvantaged.
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  • “Treating DC scheme members fairly in retirement?” was published on Monday 6 February 2012 jointly by the National Association of Pension Funds and the Pensions Institute. The report found that around half a million people retiring each year are being short-changed by up to £1bn from their total future pension income, because overwhelming obstacles stop them getting the best deal. The report also uncovered evidence of sharp practice and murky pricing in the annuity market, putting unsuspecting consumers at a huge disadvantage.
    Press Release
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  • “Ending compulsory annuitisation: Quantifying the consequences” was published on Wednesday 29 September 2010, as a companion to an earlier report “Ending compulsory annuitisation: What are the consequences?” published in July 2010. This second report provides a quantitative assessment of the issues raised in the first report, the aim of which was to stimulate the debate about the proposal to end the mandatory requirement to purchase annuities in pension schemes as formally announced in the Budget Statement on 22 June 2010 and subsequently expanded upon in the HM Treasury consultation document “Removing the requirement to annuitise by age 75” released on 15 July 2010.
    Press Release
    Copy of the report
    Copy of the presentation

  • “Ending compulsory annuitisation: What are the consequences?” was published on Wednesday 28 July 2010. It is designed to stimulate the debate about the proposal to end the mandatory requirement to purchase annuities in pension schemes as formally announced in the Budget Statement on 22 June 2010 and subsequently expanded upon in the HM Treasury consultation document “Removing the requirement to annuitise by age 75” released on 15 July 2010.
    Press Release
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  • “Saving Britain: A White Paper on Rebuilding Britain’s Savings Culture” was published on Thursday 27 May 2010. The report sets out what a savings culture is. It proposes some practical ideas for policy development, which are based on today’s technology, infrastructure and legislation, and could therefore be done quickly. But at the same time it identifies an entirely new approach to the issue, which is much more likely to work because it is based on how real people think and behave.
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  • “Increasing Longevity and the Economic Value of Healthy Ageing and Working Longer” was published on Monday 20 July 2009. One of the UK’s great achievements is that people are increasingly living longer. One consequence is that the number of older people in society is increasing steadily as a proportion of the working age population. In addition to this, the ‘total support ratio’, the ratio of the number of workers to the number of both young and old people, peaked in 2007 and is now in decline. The significance of this is that a high total support ratio is often associated with periods of rapid economic growth as has occurred in the UK over the last decade or so, and which has also occurred, but on a much greater scale, in Asian ecnomies such as China, India and Korea. In Japan, the first Asian country to develop economically after the war and currently the most advanced ageing country in the world, the total support ratio peaked some time ago and its economy has been relatively static since. In the light of these demographic facts, this report investigates the economic challenges of an ageing UK population and considers it to be at a demographic crossroad. It estimates the potential downside of getting outcomes ‘wrong’ i.e. doing nothing based on current trajectories, but it also estimates the potential economic upside of getting outcomes ‘right’.
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  • “Financial Planning Through Retirement” was published on Monday 29 June 2009. This landmark study from the Association of Independent Financial Advisers (AIFA) and Prudential UK, outlines changes required by Government, retirement product providers and independent financial advisers to ensure people in the UK maximise their income and wealth in retirement. The study was overseen by an Editorial Board that included Rt. Hon John Gummer MP, Independent Chairman of AIFA, Lord Lipsey, ex-Chairman of the Financial Services Consumer Panel and Professor David Blake, Director of the Pensions Institute at Cass Business School. The report calls for fresh thinking about the retirement market: the decumulation market needs to be viewed as a market in its own right, there should be an onus on individuals to make adequate provisions for retirement income, independent financial advice in the workplace should be better promoted and funded, and there should be clearer guidance for those advising individuals in and at retirement.
    Press Release
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  • ‘Apocalyptic demography? Putting longevity risk in perspective’ which was published on 29 April 2008 has been funded by, and produced in association with, the Chartered Institute of Management Accountants (CIMA), the only international accountancy body with a sole focus on business. This report and checklist allows finance directors to put longevity risk in perspective by focusing on issues such as current life expectancy, projected life expectancy and the types of longevity risk to which their organisation may be susceptible. It will also help them when discussing, with their actuary, the basis of mortality assumptions used in estimating their scheme liabilities.
    Press Release
    Copy of the report
    Longevity Risk Checklist

  • ‘An Unreal Number. How Company Pension Accounting Fosters an Illusion of Certainty’ was published on 31st January 2008.This research paper, funded by the ICAEW’s charitable trusts, is intended to be a ‘state of the art’ review of the ways in which companies account for their pension obligations. It explains how pension accounting has evolved both to reflect changing views of the nature of the pension promise and to help fulfil the accounting objectives of stewardship and decision-usefulness. The paper contends that the most useful information that accounts can provide about a defined benefit plan’s funded status is the market, or fair, value of its assets and the amounts, timing and uncertainty of its projected pension payments. By reducing this information to a single number, pension accounting standards create an ‘illusion of certainty’ which supplementary cash flow projections and sensitivity analyses do not dispel.
    Press Release
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  • ‘Are Customers in Closed Life Funds Being Treated Fairly?’ was published by the Financial Services Consumer Panel on Wednesday 19 September 2007. The lead authors of the research were Debbie Harrison and Alistair Byrne of the Pensions Institute at Cass. The report identifies a serious problem for about 8m with-profits policyholders, who do not have access to independent advice to review their policies, many of which have changed dramatically in terms of asset allocation since the date of purchase. The report also identifies a significant governance gap, whereby there is little or no policyholder representation in the financial management of many with-profits funds run by proprietary companies. The report calls on the FSA to address these critical issues that go against the grain of the FSA’s ‘treating customers fairly’ regime and can lead to considerable customer detriment.
    Press Release
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  • ‘Dealing With the Reluctant Investor: Innovation and governance in DC pension investment’ was published on Monday 23 April 2007. The report is the first major study of DC investment strategies used in UK defined contribution pension schemes. It is critical of ‘traditional’ arrangements and urges employers, trustees, and pension practitioners to consider innovative strategies for the default fund, in which the majority of members invest. It also calls on the regulators to introduce ‘safe harbour’ rules to enable parties to the scheme with relevant expertise to provide much clearer advice to ‘reluctant investors’, who are unable or unwilling to make active investment choices.
    Press Release
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  • “Annuities and Accessibility: How the industry can empower consumers to make rational choices” was published on Thursday 16 March 2006. The report calls on the Financial Services Authority, specialist annuity advisers, trustees, and employers to respond to key recommendations that could transform the way consumers in the mass market buy their lifetime annuities from insurance companies.
    Press Release
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  • “Pyrrhic Victory? The unintended consequences of the Pensions Act 2004” is the first independent study of its kind on the early impact and unintended consequences of the Pensions Act 2004. The report warns that the government may win its battle with employers to ensure they pay employees the defined benefit pensions they have promised to date but it will be a Pyrrhic victory. Employers will pay up – and then leave the battlefield, turning their backs on trust-based occupational pension provision
    Press Release
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  • “Delivering DC? Barriers to participation in the company-sponsored pensions market”, reveals that finance directors often oppose greater employee participation in company pension schemes. This strong implication of this is that the governments’s policy objective of switching the balance of state to private sector pensions provision from 60:40 to 40:60 by 2050 has virtually no chance of succeeding.
    Press Release
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