Blog: Nobody's laughing now

You can just imagine Christmas at the extended Balls family home. We all know Ed, Labour’s pugnacious shadow Chancellor of the Exchequer. Then there’s his wife and shadow home secretary Yvette (Cooper), who could easily fill her husband’s shoes having cut her teeth as an economics correspondent for the Independent newspaper. Completing a heavyweight trio of economics brains is Ed’s brother Andrew, whose is also head of global bond trader PIMCO’s London office.

Things must get a little strained between the brothers occasionally. There was the time, for example, during the immediate run-up to the 2010 general election, when PIMCO produced its famous quote that the UK was sitting on a “bed of nitro-glycerine” due to the high level of public debt run by the then Labour government.  

And on Wednesday, Balls jr had some kind words for his brother’s opposite number George Osborne, praising the Chancellor’s recent handling of the eurozone crisis- the kind of words unlikely to ever slip out of his brother’s lips. He told the briefing that Osborne had a good point when he had suggested that it could take a Greek exit to properly concentrate Eurozone leaders’ minds.

Balls was outlining his thoughts on the ongoing Eurozone crisis at a press briefing held by the bond giant in London on Wednesday, four days before Sunday’s pivotal election that will determine whether Greece stays in the currency union.  

He argued that it was crazy for the problems of a peripheral economy to have such a major impact on the wider world economy, remembering how bad Greek economic figures had led to a 2% drop in the US Standard and Poors index one day last year.

But he also pointed to one of the euro’s many systemic weaknesses – the diverging interests of national governments. “If the New York Fed was attacking the Washington Fed, it would not be confidence enhancing.”

However, Balls mused, Greece’s exit could mean several things. For example, he suggested, it may not mean the return of the drachma, noting how many countries used hard currencies like the US dollar without having to be part of the same monetary union.

But if the much mooted ‘Grexit’ happens, “the European policy response has to become more coherent,” he said.

And this could point towards the idea, fiercely resisted by Germany, of Eurobonds, which he said could be attractive to the many investors seeking non-US dollar denominated assets.

But whichever way Greece votes, the heavily indebted country is likely to exit the currency union, he suggested.

Recalling that any suggestion of Eurozone break-up used to be greeted by scoffing, he observed how different the picture was now. “When we speak to clients nobody is laughing.”

 

Enough is enough

The mood is spreading. Across southern Europe, from the Occupy UK protestors to those battling in Athens‘ Syntagma Square, people are angry and they’re not afraid to show it.

The last month has seen the mood of insurrection take a new turn, propelling rebellion into the boardrooms of Britain’s top companies. After years of jaw jaw on the evils of top executives’ pay, the pensions industry has joined the ranks of annual general meeting activists as the so called ‘shareholder spring’ has caught fire.

The new mood has led to some unexpected outcomes – Aviva group CEO Andrew Moss has been one of the most prominent victims of the new mood of militancy although ironically, Aviva’s investment arm is one of the biggest voices in the land when it comes to excessive pay in other boardrooms. Figures in the recently published High Pay Commission report showed that pay rises for those at the top of the corporate tree have far out-stripped the share prices and profits of the companies they are managing.

This degree of mismatch suggests that the existing voluntary mechanisms, introduced by Labour ten years ago, are not working as well as they could. Investors have been emboldened by business secretary Vince Cable, who has held a string of meetings with industry representatives over the last few months. He even found time in his diary for a meeting on the morning of last month’s Queen’s Speech, in which the government outlined legislation to make shareholder votes on directors’ pay binding.

The mooted bill falls short on proposals outlined in the consultation paper that would have forced companies to achieve a 75% majority to approve pay packages. No bad thing, the industry said in its responses to the Department of Business, Innovation and Skills consultation on corporate governance – erecting such a high bar threatened to turn senior management teams into hostages for small, unrepresentative groups of shareholders.

Some argue that even making the votes binding is a step too far, pointing to the current wave of shareholder activism as proof that the existing system works. The roll call of CEOs who have been deposed over the last month is indeed spectacular. However, the top managers in question have all long had question marks over their heads due to the mismatch between the performance of their companies and the size of the remuneration packages they were reaping. Binding votes could empower investors to take swifter action, potentially stopping rot from spreading in corporates before it becomes too damaging.

Of course, there is a counter-risk: that remuneration votes become proxies for judgements on short term dips in performances, with consequences that could be damaging for the long-term future of the corporations in question. This point leads into wider questions of stewardship. As Hermes’ Colin Melvin points out (p 25) in our analysis on the shareholder spring, the recent wave of ‘no votes’ are a poor substitute for effective, long-term stewardship.

The BT asset management arm’s ideas on aligning managers’ incentives packages with the long term performance of their companies’ equity performance could be in the interests of everybody and pension schemes in particular given the less than stellar returns from UK equities over the last decade.

A worry however is that top executives will give up on the stock market and shepherd their companies towards the more opaque environment of private equity, where there are less opportunities for prying into issues like socially responsible investment and governance.

The issue will be firmly back in the spotlight over the next month with the London School of Economics’ Professor John Kay due to submit his hotly anticipated review of equity markets to Cable.Pension schemes will not be the only group of investors hoping that he is able to offer a route to a more sustainable stock market.

 

Blog: Lofty ambition

If you want to push a story, pick a slow news day – advice heeded by Steve Webb over the Easter weekend.

The pensions minister used Easter Monday, traditionally one of the most barren days in the news calendar, to publicise his crusade to create a promised land of improved pensions provision.

While Webb’s Daily Telegraph column contained little that was strictly speaking new, he grabbed some useful mainstream media coverage to promote his vision of a kinder, gentler defined contribution regime.

For the industry, there is as yet frustratingly little flesh to put on the bones of Webb’s vision of what he calls defined aspiration or ambition (DA). That will have to wait for the Department for Work and Pensions consultation on the future of DC, pencilled in for publication later this year. But the road to this place, or ‘DA-ville’ as Webb dubbed it when speaking recently to a heavyweight assembly of industry grandees, is a long and as yet uncharted one.

The shift from DB to DC is fuelling increased commercial and intellectual focus on what has until recently been the Cinderella option. An example of this is Prof David Blake’s new research, which points to the need to move away from ‘one size fits all’ approaches to investment (see Special Report, May issue). This shows that DC could deliver greater benefits than it typically does at the moment.

The need to find improved solutions is clear. Over the last year, the rush to switch over to DC-style arrangements has become a stampede, research carried out by Towers Watson reveals. The study, published last month, shows that the proportion of FTSE 100 companies offering DC-only schemes has doubled in the last year alone, now covering one-third of the total index.

But while corporate UK sees its stock market performance buoyed by this trend, the picture is a lot less rosy for staff. Research pushed out by Pensions Corporation shows that a 35-year old joining a DC scheme will have to pay ten times as much into their pension as his or her DB counterpart.

British OAPs are still protesting in front of Parliament rather than travelling there to commit suicide, as one unfortunate pensioner did in Greece, in a protest against his dwindling retirement income.

However, the long term risks of endemic pensioner poverty are clear. Webb claims there is plenty of appetite in the corporate world for doing better than what he dubs the ‘Gradgrind’ option, after the Dickens character in the novel Hard Times.

Some companies will see benefits in offering a better form of provision than that on offer from mainstream DC. The past month has seen Wm Morrison announce an overhaul of its occupational scheme, which will be re-established as a cash balance scheme.

The supermarket chain as a big employer and consumer facing brand may reap significant benefits in terms of PR and staff retention from offering greater certainty, if not necessarily greater rewards, for its workforce. But it is difficult to see why more typical firms will opt for this route, unless the UK labour market sees the kind of tightening that few economic commentators predict in the near or even medium term.

To get to the promised land will require, on top of exhortation, a degree of compulsion, as Webb has acknowledged. The prospect of further red tape will understandably send shivers down the spines of many in the pensions world and even more so in the business community, which is struggling to even get its head around the auto-enrolment challenge.

However, to ensure decent outcomes for tomorrow’s pensioners, some such move is probably necessary. It may even mean that pensions moves from its current default setting of a bad news story.

 

Blog: Cheque’s in the post

The problem with pensions policy is perennial – the temptation to push things into the never never.

It’s certainly true of private companies. Look at Trinity Mirror, which last month announced that it had taken the controversial and unusual step of paying its US creditors ahead of its pension scheme debt.

Premier Foods, the owners of such venerable brands as Hovis and Oxo, has also got in on the act by deferring a £94m contribution to its pension scheme until 2014 as part of a refinancing deal.

For many employers, the pensions cheque is always in the post. Refreshing in this context therefore was BT’s decision to stump up £2bn as part of a programme to repay its scheme’s deficit. The government, as the custodian of the national interest should follow BT’s lead. Unfortunately, the fall-out from last month’s Budget shows that ministers are just as prone to short term pressures as their colleagues in the private sector when it comes to pensions.

In the run up to Budget Day, the talk centred on the scrapping of higher rate tax relief for pensions contributions. A debate over pensions tax relief may be a common staple of the pre-Budget period, but this year the tenor of the discussion was more serious.

Treasury chief secretary Danny Alexander set pulses racing when he claimed in an interview that scrapping higher rate relief could generate up to £7bn per annum for the public finances. The pensions industry mounted a very public defence of existing reliefs, which proved successful. Higher rate tax relief emerged unscathed.

However, while the industry can breathe a sigh of relief, the intensity of the speculation about the relief has doubtless damaged long-term efforts to promote retirement saving.

Instead we got the ‘granny tax’ – the one bit of the Budget that didn’t get leaked. The Treasury targeted pensioners’ tax allowances, which ministers aim long-term to bring into line with those of the working age population.

In itself, this change to the tax regime is unlikely to dissuade today’s workers from saving for their retirement. But linked moves to ensure that some employees are not included in the tax system at all look set to have unintended ramifications for the government’s efforts to promote workplace pensions. This is because ministers have made the trigger point for being auto-enrolled the same as the personal taxation allowance.

Judging by the Department of Work and Pensions’ statement; issued just before Pensions Insight went to press, it has no immediate plans to break the link between the two figures.

The worry is that this laudable move to lift the poorest workers out of the tax system will frustrate efforts to recruit the same low paid individuals into workplace schemes. But while this reflects the law of unintended consequences, the government’s announcement on the Royal Mail scheme carries more clearly the whiff of short term thinking.

The government isn’t playing fast and loose with the Royal Mail’s members. They and their representatives in the Communication Workers Union will be happy that their benefits will be guaranteed by the taxpayer. The change gets the government off the hook created by its desire to privatise the loss making utility. No buyer would have wanted to be saddled with the Royal Mail scheme’s liabilities.

The move also gave an immediate £28bn fillip to the government’s deficit reduction plan. However the way that the government’s accounting rules work mean that while the scheme’s assets count on the government’s books, its liabilities do not.

Professor Stephen Booth of City University’s Cass Business School has estimated that the deal will burden the public with £9.5bn worth of additional future liabilities. That’s not a problem for the scheme or its members, but it is for the rest of us, who will be saddled with having to pay the bill long term.

Meanwhile turning a funded scheme into an unfunded one does not quite fit with the government’s wider rhetoric about bringing down the cost of public sector pensions.

It is also timely to remember that when a similar move was being considered by Labour in 2008, the then shadow business secretary Alan Duncan condemned it as storing up trouble for the future. It still is.

It also reinforces the message that pension liabilities are something that can be shoved into some point in the future. Similar short term thinking could be said to characterise the government’s moves to inject pension fund investment into infrastructure, fleshed out in the Budget in the form of a £2bn infrastructure platform.

Leave aside that while some pension funds have signed up to the platform, many are distinctly unwilling to bankroll high risk infrastructure projects. Given that cost of government debt is so low, reflected by chancellor George Osborne’s decision to look into locking in current low borrowing costs by issuing perpetual bonds, there have to be question marks over creating an elaborate and potentially much more costly mechanism to fund infrastructure projects. Anybody remember the private finance initiative?

But then the trouble is that governments, unlike pension funds, don’t have to think about the long term - the next election is generally the limit.  

 

Blog: A taxing issue

Next week’s Budget may irrevocably change the shape of pensions tax relief

This afternoon, four early middle-aged men will sit down for a conference call, which could have a profound impact on the future of occupational pensions in the UK.

The four in question are prime minister David Cameron, his deputy Nick Clegg, chancellor of the exchequer George Osborne and his chief secretary Danny Alexander. The two Tories and matching number of Liberal Democrats form the so-called ‘Quad’ which will decide the final shape of next Wednesday’s Budget.

All reports indicate that negotiations are going to the wire, but that decisions need to be taken today in order to allow the Office of Budget Responsibility to crunch the government’s numbers.

Pensions tax relief has emerged as one of the hot topics in this year’s Budget. It’s far from the first time that scrapping the relief has been mooted, but there has been unprecedented focus on the issue this year. Political pressure is mounting to reduce the annual allowance for tax-privileged pension saving from £50,000 to £40,000, or even get rid of higher-rate relief altogether.

Scrapping higher rate relief could generate up to £7bn per annum, according to Alexander, who authored the Lib Dem manifesto pledging such a move at the last general election. The Lib Dems need to find a way to fund their flagship pledge to cut tax for low earners and thereby demonstrate to their supporters that being in government is worthwhile.

Alexander’s shadow Rachel Reeves sidestepped the issue when I quizzed her on it at last week’s National Association of Pension Funds conference. But a few days later, her boss Ed Balls unveiled a policy to restrict tax relief for 50% tax rate payers to 26%, ratcheting up the pressure on ministers.

The attractions are clear from the government’s point of view. Recent tax receipts have been healthier than expected, but the deficit still stands at a historically high level.

But it’s not just the deficit, eye-wateringly huge as it is. The discussion about pension tax relief also connects to an increasingly potent debate about fairness, across both society and the generations. Even within the Tories, influential voices like ConservativeHome.com editor Tim Montgomery argue that the party will only secure a Parliamentary majority again when voters see that it is prepared to take steps that are in the wider public interest rather than those of its core, well-heeled supporters.  

Over the weekend trade bodies, including the NAPF and the Association of British Insurers, unleashed a broadside, warning that scrapping higher rate relief would undermine Osborne’s stated pledge to promote a savings culture. With pensions saving at historically low levels, this is a potent point.  

The chancellor will have been particularly sensitive to ABI director-general Otto Thoresen’s likening of such a move to the now infamous abolition of advance corporation tax by his predecessor but one Gordon Brown.

Subsequent reports suggest that the pass has been saved on higher rate relief. However, lump sum payments may not be as safe, PWC head of pensions Raj Mody suggested to me yesterday.

However getting the ‘Quad’ to sing in harmony on this topic will be tough.

 

9th March: The latest from NAPF

Infrastructure’s time may have come says David Blackman, reporting from the NAPF conference

Inside the hall, the mood about the economy was as chilly as the early March weather outside in Edinburgh where the National Association of Pension Funds has been holding its annual investment conference.

David Blanchflower, until a couple of years ago the monetary policy committee’s pet arch-Keynesian, set the tone on the first day by lambasting the UK government’s austerity programme.

Next up was Rachel Reeves, Labour’s up and coming chief secretary to the Treasury, who used her keynote address to launch a strong pre-Budget attack on Chancellor George Osborne’s management of the economy. The widespread response was that the ex-pensions spokesperson’s speech was too ‘political’.

It was a shame that there was nobody from the coalition to put the other side of the argument. But apparently it was not for lack of trying: business secretary Vince Cable had been due to wrap up the event today until he discovered that he had a more pressing engagement in Gateshead at the Liberal Democrat spring conference.

Paul Mason wrapped up yesterday’s proceedings, warning pension funds that the government was after their assets through measures such as quantitative easing.

The schemes present will have known exactly what he was talking about: it was staring out at them from the front pages of the complementary FTs left in the lobby of the conference venue. The NAPF has estimated that QE has cost UK pension funds £90bn since the policy was introduced three years ago yesterday thanks to declining gilts yields.

An opportune moment perhaps then to introduce an infrastructure fund. This morning, NAPF chief executive Joanne Segars was holding a meeting behind closed doors with funds to talk about the association’s infrastructure fund initiative. She gave the press a sneak preview of these plans yesterday and the spoke of the NAPF’s hopes that a dozen big funds will get on board to set up a £2bn facility, which could rise to £4bn over time. Funds would pump in £1bn, with the balance leveraged.

Segars wouldn’t reveal the identity of the funds that had agreed to back the fund. And as expected, given pension funds’ reluctance to risk investments in so called ‘greenfield’ infrastructure, the fund would be designed to pick up projects once they were up and running.

That leaves a continuing question mark over who will fund the highest risk construction phase of such projects. Meanwhile the sums in question are a long way shy of the £20bn contribution that the Treasury would like the industry to make.

However, given the lack of returns elsewhere, infrastructure’s time may have come. Unlike fast fashion, we know we will need it. The NAPF initiative represents a start. The clouds remain thick, but there may be one silver lining to come out of this week’s gathering.

 

Balancing act

For the pensions minister, it’s been another busy month

February 21, 2012: At the end of January, Steve Webb unveiled what he described as a ‘red tape’ challenge for the sector. In line with the government’s wider ‘one in, one out’ drive  to curb the volume of regulation, he called on the pensions industry to come up with ideas for cutting rules.

Then earlier this month, in a speech at the National Association of Pension Funds chairman’s dinner, Webb came up with the phrase  ‘defined aspiration’ (DA) to describe his already-trailed push to come up with a new halfway house between defined benefit and defined contribution.

Once you know that Webb is a member of the Liberal Democrat Party’s Orange Book tendency (he was one of ten contributors to the 2004 volume that championed a more economically liberal approach by the party), his deregulatory ambitions make extra sense.

But if any sector is ripe for deregulation, it is pensions. There are over 1,000 pension regulations – some are arguably legacies of a more past and more generous age, such as indexation for deferred members.

A large chunk are the fruits of the post-Maxwell scandal moves to improve the protection of scheme members’ hard-earned savings. However few would disagree, at least in the DB sphere, that the regulatory wheel has turned too far. 

According to Pension Corporation research, published last month, the cost of complying with just four specific legislative requirements had loaded an extra 44% onto schemes’ costs over the past two decades.  

Many pensions regulations are poorly defined, while others are complex and difficult to implement effectively: Guaranteed Minimum Pension equalisation springs to mind. 

Others have had unintended consequence, such as the move to consumer price index from the retail prices index , where a lack of CPI-linked gilts has introduced more complexity in investments, as schemes now have to use swaps to mirror CPI.

Webb is right to push the ‘red tape challenge’. But to borrow from sportsman speak,  reducing the overall regulatory burden will be a ‘big ask’ for both the government and the sector.

One of the difficulties is that so many pieces of pensions regulation are interlinked. Once  one is removed, could others come tumbling down or cease to function properly?

And everybody likes the idea of deregulation until it affects them. Behind many pieces of seemingly nonsensical piece of red tape sit vested interests, with whole business models constructed to suit the kinks of the regulatory landscape.

Another issue is whether there is enough time to properly implement the legislative changes that will be needed.

The industry is already grappling with a huge amount of change, such as the activity surrounding  the introduction of auto-enrolment and the revamp of the advice structure triggered by the retail distribution review.

How many other regulatory changes are they, and the providers that support them,  realistically able to handle between now and the end of the current Parliament?

Meanwhile, cynics will say that we have been here before: A-day in 2006 was supposed to simplify pensions and make their regulation more manageable.  Most would argue that this didn’t work –sceptics will need to be persuaded that things really are different this time. 

And while a lot of regulation can be tidied up or simply thrown on the bonfire, some of the rules that have done the most damage to pensions – such as the use of IAS19 regulations – are very unlikely to be removed, or  may not even be within Webb’s remit.

In addition, a whole raft of new regulation is soon to descend on the UK pensions scene. The most notable example is the EU’s Solvency II directive, which will result in several barrel-loads of new regulation if the experience of the insurance industry is anything to go by. At the same time, the government has embarked on a radical overhaul of City regulation, with a massive bearing on those parts of the pensions industry currently policed by the Financial Services Authority.

However, Webb is not just acting to the dictates of a small state ideology, but deregulating for a broader social purpose. 

The Bristol MP believes that the burdens on defined benefits schemes should be eased to encourage such arrangements, which is where the ‘DA’ idea comes in. 

Some suspect that Webb’s frenetic pace on pensions reform is driven by the knowledge that he will not be in the job for long.

A big ministerial reshuffle has been pencilled in post the local government and London elections. A quick glance at the Lib Dems’ front  bench team shows that the  junior coalition party is not exactly awash with potential Cabinet minister talent.

The Lib Dem leadership could not be blamed for wanting to redeploy one of their sharper talents to a higher profile portfolio, meaning that Webb may not be around to complete his crusade to reform the UK’s ailing pensions system.

Unpicking the myriad regulations surrounding occupational pensions will be a a difficult balancing act and one freighted with risk. However, it offers Webb the chance to establish a lasting legacy that buttresses the Lib Dems’ credentials as a party that can deliver meaningful social change.

 

February 8, 2012: On Saturday lunchtime, I heard a reassuring sound –the Association of British Insurers in defensive mode.

As deputy editor of our sister title Insurance Times until a couple of weeks ago, I got used to the sound of embattled ABI representatives on the airwaves.  

This time it was the insurer body’s secretary-general Otto Thoresen, who was on the ‘Money Programme’ to rebut the findings of a new National Association of Pension Funds report into the operation of the annuities market.

Its findings are pretty damning. According to the study, which was co-authored with the Pensions Institute, scheme members are being short-changed to the tune of £2,000 each when they buy their annuity.

Most retirees, overwhelmed by the complexity of the annuity system, don’t shop around, opting for low return “default” annuities provided by their pension scheme provider, rather than shop around.  On top, they find themselves paying hefty fees.

According to the report, DC members are at  a “growing risk” of getting  a poor outcome when buying their annuity.”

And these numbers will only grow , it warns, when auto-enrolment kicks off, bringing an additional 5-8m low-to-median earners into the private pensions market.

In her foreword to the report, NAPF chief executive Joanne Segars identifies the risk that “the worrying stories which have surfaced during the production of this report will turn into newspaper headlines and further dent trust and confidence in pension saving.”

It won’t be news to pension schemes that those headlines are already out there.  

Thoresen and NAPF chief executive Joanne Seagar had a pretty bad-tempered exchange, which the ABI and the NAPF will no doubt revisit.

One thing is certain however: with the continuing shift to Defined Contribution schemes, this issue is going to become more urgent by the day.