The Trustee and the Investment Adviser

 

Every Investment adviser, whether it be to individuals, Pensions Funds or other institutions, preaches the mantra that diversification is a good thing - don’t put all your investment eggs in one basket. The cynic might say that by arguing for spreading the risk the adviser is covering himself – especially if there is a counterbalancing component to the asset classes he recommends! As a Trustee I am expected to exercise due diligence in my legal responsibility of overseeing the appropriate investment of the Fund’s assets. This includes ensuring that there is an appropriate spread of risk so that the Fund is as protected, as much as possible, from the vicissitudes of today’s pyretic world.

However unlike most other investments where bigger is always better a Defined Benefit Pension Fund has no underlying imperative to grow - and its legal construct is also very different from that of a PLC or a Limited Company. For me and I suspect many other Trustees with a past or present business career an early lesson that needs to be learned is that we are not actually running a business at all. True there are superficial similarities to, say, the operation of a company offering investment products to consumers. But the core objective of a Pension Fund is different, which brings us back to diversification.

As an individual or a corporate investor I probably want to grow my assets and at the same time protect them. “How much risk do you want to take” is the often asked but always unanswerable question that advisers love to pose. It is unanswerable because risk is an abstract concept - until after the event that is! If the advice leads to my becoming much richer then, with hindsight of course, it was good advice – even if along the way the risks were large. If the advice leads to the diminution of my net worth then it was bad advice, even though the recommended portfolio was seemingly wise, diversified and comparatively risk free.

In normal times (remember them?) we minimise risk by being diversified and for a Pension Fund that usually means achieving a suitable balance between Liability hedging and Return-seeking assets. But what is a suitable balance – conventionally that is determined largely by the Funding ratio.

If a schemes Funding Ratio is strongly positive – say in excess of 125% - today’s imperative for many funds is likely to be to “derisk” – that is to say to switch substantially, possible even completely, from return seeking Assets into those that hedge against future Liabilities. In a way this is a bit counter-intuitive. If your Asset management policy has successfully got you into a healthy position then why not do more of the same?

The answer, of course, comes from the fact that a Pension Fund’s objective is not to make as much money as possible but to make sufficient to meet its liabilities – with some margin for error. It is arguable that mature funds which are closed to new entrants should do this as soon as they can. The fact that the Fund is closed means that no provision for new employees needs to be taken account of in the Liability calculation – this estimate can be predicated completely on the present and future demands placed on it by existing members.

But what if a Fund’s Funding Ratio is negative and the sponsor cannot or will not make up the shortfall sufficiently to allow a switch to Liability hedging investments? Here the conventional wisdom is that far more of the Fund’s assets should be placed in return seeking assets like Equities. For me there is a feel of the Roulette table about this! Presumably the main reason that a fund has got in trouble is because it has been too heavily committed to highly volatile stocks and shares rather than largely risk free Bonds and Gilts.

Is more of the same the correct medicine in these circumstances on the grounds that it must all come right eventually? I’m not so sure that it is.

One option might be to try and come up with an income generating investment portfolio which gives sufficient inward cash flows to cover annual pension payment obligations and not worry over much in the short and medium term about the value growth performance of the asset itself. Better a stable blue chip with good dividends than one that might (or might not) grow ahead of the market. It would be these challenges I would be throwing at my investment advisers at the moment.

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.

Paddy Briggs

“Pensions Age” January 2012

The Trustee and the difficult struggle for “Fairness”

From “Pensions Age” December 2011

It’s not just that the world of Pensions is complex or that, in some cases, the Pension Scheme is a huge burden on the funding Sponsor that being a Trustee is so challenging. Every Trustee also knows that it is an insufficient discharge of their duties just to ask the lawyers what to do when a decision on something important is needed. The challenge is at its most difficult when the law is ambivalent and we are asked to exercise judgment – simply put to decide what is “fair” in any one situation. It would be nice to be able to echo Abraham Lincoln and say that our members ask for one thing “fairness and fairness only” and that “…so far as it is in my power [this is what] they shall have”. The problem, of course, is what is seemingly fair to one person may not be to another - one group of Pension Fund beneficiaries may be advantaged by a decision but another group may be disadvantaged.

As a Trustee I must act in the best interests of the members and of the beneficiaries overall – and that latter category includes the Sponsor. It is arguable, and has indeed often been argued, that if a Company’s future prospects are seriously hampered by a burdensome Pension Fund then the Trustee should be sympathetic to change – even if that change is in some way disadvantageous to members. This in essence is the Government’s public sector proposition – that unfunded Public Sector schemes are too great a charge on taxation and that the package of benefits currently enjoyed by scheme members must be reduced. Whether you believe that to be “fair” or not depends partly on how you balance employee and pensioner rights on the one hand and the rights of the population at large on the other. No easy task!

Fairness is also linked to “norms”. If the majority enjoy a benefit but a minority, through no fault of their own, do not that is on the face of it unfair. Similarly if a privileged minority receive Pension protection when the rest of the members do not the charge of unfairness and discrimination can also be levelled. This brings us into the whole fractious debate about executive compensation and in particular about the “one per-cent” and the “ninety-nine per-cent”. The huge and growing inequalities that exist between the compensation of a small number of very senior executives in a company and the rest of that company’s employees carry on into retirement. The one per-cent will nearly always be protected from negative changes that might be agreed to the Pensions of the ninety-nine per-cent not just by the sheer size of their pension but by a willingness of their successor directors to ring-fence their predecessors’ substantial retirement income. It is, after all, in the interest of the existing Company Board to do this – they’ll be retired one day soon as well!

So when a Trustee is informed of a proposal for a change that he knows is solely designed to protect the interests of the already very well provided for 1% what should he do? Especially if, as is likely to be the case, the implementation of this change is external to the Fund and is neutral on it. There is no obligation on a Trustee to ensure that all members of a DB scheme are treated equally – it there was the increasingly common practice of closure of the Fund to further accrual would not be permissible. Similarly, and for the reasons already alluded to, there is no imperative of “fairness” – other than, perhaps, the highly subjective one of “Natural Justice”. We may, as individuals, regret that we have a society in which a small number of “High Net Worth” individuals just get richer but, as the music hall song has it, "It's the same the whole world over, It's the poor what gets the blame, It's the rich what gets the pleasure, Isn't it a blooming shame?". Having said that whilst it is rarely, if ever, the case that you make the poor richer by making the rich poorer the ratcheting up or protection of benefits for the 1% does, if it happens, somewhat alter the context within which the benefits of the 99% are being discussed. Class war rhetoric is probably best avoided – but the odd subtle hint that some members are more equal than others might help sometimes!

Paddy Briggs

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.

Pensions – the increasing gap between the Public and the Private sectors

One of the least edifying aspects of the febrile debate on public sector pensions is the charge being made, often by people who should know better, that current public sector pensions are in some way “Gold-plated”. It is certainly true that the retirement prospects of employees in the private sector have been dealt a series of blows over the past decade – blows from which employees in the public sector have hitherto been immune. But it is facile and wrong to say that the problem is one of equity and that public sector pensioners should “suffer” in the same way that those in the private sector will.

Defined Benefit schemes

The basic premise of the pensions offer to employees in the past was broadly the same in the public and the private sectors – although whereas all public sector employees benefited far from all private sector employees had workplace schemes. The Defined Benefit (DB) pension schemes that were constructed in the immediate post-war years had two elements at their core. Firstly there was the understanding that the longer you worked for a particular employer the more pensions rights would accrue. Second there was the guarantee that when you retired your pensions would be directly related to your income at the time of your retirement. These DB schemes were predicated on the “Final Salary” principle. Typically a scheme would offer (say) 1/54^th of the final salary for each year of service – so If an employee had a salary of £26,000 on retirement and had 35 years’ service his pension would be around £16,000 – roughly 65% of his final earnings. In addition, but not in all cases, he would be entitled to a State pension at 65 and this combination of “workplace” and State pensions offered the prospect of a comfortable retirement.

Lord Hutton’s Commission recommendations broadly retained the key elements of the DB scheme that public sector employees have traditionally benefited from. Crucially the DB principle itself is retained albeit that pensions will in future be based not on final salary but on a career average. However although the DB principle is retained, and there are other protections built in, public sector employees will have to work longer before they can enjoy a full pension and the annual increases to their pensions that they will enjoy in retirement will be linked to a lower index (the Consumer Price Index - CPI) than the Retail Price Index (RPI) that was used in the past. They will also have to pay more towards their pensions in “contributions” over their years of employment.

Public Sector Pensions are unfunded

The absolutely crucial point about pension schemes in the Public sector is that they are mostly “unfunded” and this fact lies at the heart of the Government (and Lord Hutton’s) proposals. Unlike schemes in the private sector there is no “pot” from which the pensions of a retired nurse or teacher will be paid. The “contributions” are not set aside but just go into the Treasury along with taxes - in effect contributions are just another part of the tax on incomes, like National Insurance. And the pensions payments are and will continue to be made from taxation. If this is understood the true driver of the Government’s actions becomes clear. it is promoted as a significant element of the deficit reduction programme - the Government wishes to reduce its expenditure and pension payments are in the firing line. The size of the public sector pensions deficit is enormous – between £780bn and £1200bn depending on which accounting convention you choose. In truth the changes proposed will have only a minor effect in the short-term and, like so much of the Government’s “Cuts” programmes, they can be seen as being more about maintaining economic confidence and protecting the UK’s AAA rating than anything else!

The strike is an action against spending cuts

The strike which took place on 30^th November by public sector employees needs to be seen primarily as a strike against Government budget cuts. Arguably the most insidious element of what the Government proposes to do to public sector pensions is to change the annual increment indexation (from RPI to CPI) because this affects directly the income of today’s pensioners. In effect this is a retrospectively applied income tax. Pensions are deferred earnings – during years of employment workers accrue rights and make contributions and thus they defer some of their income until later (pension) years. To change this after employment is finished is a highly questionable action - almost a breach of contract (the social contract if not the legal one).

Pensions are deferred income

The comparison that should be made when the public sector debate is underway is not the comparison with the private sector but a comparison with other elements of public expenditure. If we look at a public sector employee from the date of their commencement of employment to the date of their death the Government pays them for their services over this full period. Some of the income is paid during the employment years and some is deferred until retirement – but it is all a payment made for a service rendered. Arguably the Government should no more change a pensioner’s rights than they should ask that same pensioner to return some of the salary they have already received! And certainly the “in service” change to an employee’s contract implicit in the Government proposals is a clear breach of the social contract that existed when that employee was originally recruited and throughout their employment to date. Pensions promises once made will not now be fully honoured because the changes proposed are not just to the deal for new employees but to the entire existing public sector workforce as well.

Private sector employees are increasingly vulnerable

If public sector pensions are a burden on the taxpayer (they are) the same does not apply to private sector pensions. And if some people decided to work in a career in the public sector because they felt that their financial future would be more protected then in the private sector they were certainly right to do so – at least so far as pensions are concerned. As we have seen the basic pensions premise in the past was broadly the same in the public and private sectors – even if the funding arrangements were different. In the private sector DB pension schemes have always been “funded” – that is a “pot” is built up by levying a contribution from employee and employer over the years of employment. For some well-managed schemes the pot is today broadly large enough to cover the likely future call on it. The Assets of the Fund match its Liabilities. However partly as a result of mismanagement and partly as a result of changing demographics (particularly significantly increased longevity expectations) many funds have a shortfall – a situation that is exacerbated by a difficult investment and economic climate. Over the last decade the mismatch between Assets and Liabilities has led many employers to make changes to their Pensions arrangements - changes that impact far more negatively on their employees than anything that the Government proposes in the public sector.

Companies are walking away from their Pension obligations

Publicly traded corporations are not charities and however much they might like to argue otherwise their principal and overriding obligation is to their shareholders. It was ever thus. As we have seen, in the past a company would offer its employees a compensation package which included Final Salary pension arrangements. They did this not because they felt any social obligation to look after their employees in retirement but because it was a pragmatic thing to do. If your competitors are offering a Defined Benefit pension scheme you better do so as well – in order to attract and retain staff. This was, of course, at a cost (the employer’s Pension Fund contributions) but it provided ancillary benefits in terms of loyalty and maybe also the opportunity to do a bit of bragging about being a socially responsible employer. This paradigm was largely unchallenged for over 40 post-war years.

But in the 1990s things began to change. The compensation culture, especially at the top of companies, moved from any element of “jam tomorrow” to a mainly “jam today” mind-set. Post Margaret Thatcher’s “big bang” the earnings potential in the City spiralled upwards and the bonus culture was born. Little of this trickled down to ordinary employees but it certainly trickled sideways moving from the financial sector to most other British businesses. As the head honchoes of British companies (especially the FTSE 100 ones) paid themselves more and more so they sought to find specious justifications for this largesse to themselves. This was to come from performance metrics which showed how “well” they were doing and why it was legitimate to pay themselves as much as they wanted to. Business is simple really. You sell things to generate income and in so doing you incur costs. There are two ways of boosting the resultant cash or profit generation. You sell more and/or better things and generate more income. Or you cut your costs. And if cutting costs means you cut off your long term nose to spite your short term face so be it. Bonuses are paid in the short term. So if you can find some fat in the system and cut it that has to be good doesn’t it – even if that “fat” sits in the pensions obligations you have to your staff.

The downward spiral in the corporate world’s commitment to making proper pensions provisions can be traced back to those companies whose Pension Funds got into trouble – that is to say their Liabilities began far to exceed their Assets. The very fact that many companies did not let their Funds get into difficulties shows how venal it was that some did. In short some companies mismanaged their Pensions schemes for years - and the Trustees of these schemes let them do it. Having got into trouble these companies tried to find a way out - one that would reduce their (the companies not the schemes) liabilities. Briefly they sought to minimise the statutory obligation of having properly to fund a scheme now or at some point in the future if that fund had a shortfall.

The Defined Contribution scam

The biggest change comes from a decision to close a DB scheme to new entrants. It’s comparatively easy to do, has little direct effect on existing employees and can have an immediate benefit on the bottom line. In place of the DB scheme the employers who took this course generally created a Defined Contribution (DC) scheme in its place. For public consumption and in the forums in which Corporate Social Responsibility is discussed this would be presented as both an economically sound decision (lowering costs) and a socially responsible one. But a DC scheme is a pale shadow of its DB cousin. Essentially it is a savings pot owned by the employee into which he and the employer make contributions over the period of the employee’s working life with the company. On the face of it not that different from a DB scheme – except in one crucial particular. The Pension received on retirement is solely determined, not by the retiree’s final salary or by a career average, but by the size of the money pot accumulated on the date that an employee retires. That pot has to buy future income flows through an annuity purchase and the cost of an annuity is unpredictable. The pot size itself is a function of the health (or otherwise) of the retiree’s investments. So whilst a DB scheme offered a very high degree of certainty which would help an employee plan a comfortable retirement a DC scheme does anything but. And the benefits, such as they are, are very expensive as well – as the employee will find to his cost. In the DB example above, based on average UK earnings, an employee would have a pension of £16,000 a year (plus the State pension). To achieve a similar pension from a DC scheme that employee would have to have built up a pot of around £400,000 at current annuity rates. In 2011 money assuming that the employee had worked for 35 years at £26,000 per annum he would have earned a total of £910,000 over his employment years. That means that to have enough money in his pot he would have needed to build up a pot equivalent to around 45% of his aggregate pre-tax income. Put another way every year he and his employer would have had to make contributions of £11,500 per annum to fund a pot sufficiently large to allow him to retire on a pension of 65% of his final salary! Not very likely is it?

I have called DC schemes a scam but this is perhaps a little unfair. A well run DC scheme may be quite a good and a tax efficient savings opportunity. But the only beneficiary when a Company closes a DB scheme and offers a DC scheme to new employees is the company itself. That’s why they do it. But it doesn’t stop there. Companies can and do attempt to reduce their pensions liabilities (real or imagined) in other ways as well. They may decide to change the index used for the calculation of annual increments from RPI to CPI as is proposed for the public sector with the same outcome – lower pensions. This is what British Airways is trying to do and it has caused a furore in their Pension Fund Trustee Board. They may stop existing employees from accruing benefits which means that for an employee in mid-career their pension will be substantially reduced. (In the example above had the scheme been closed to further accrual half way through the employee’s career his pension would have been halved). Or they may decide to close a scheme entirely – as Unilever has announced it will be doing. The Unilever case is an interesting but sadly not atypical one. This is what Unilever’s Chairman says “…the changes have been proposed to help tackle the increasingly unaffordable and unsustainable costs associated with Unilever's UK pension fund”. Unilever made profits of over £6 billion in 2010 and there can be no doubt that if they had wanted to they could have maintained their existing Pension arrangements which were in reality far from “unaffordable”. No the real reason is that Unilever judged that to offer employees pensions scheme as they had in the past was no longer necessary – i.e. necessary to give them an advantage or maintain their position as an employer. In their promotional literature they make all the usual motherhood statements about how important their employees are but they are not the only employer whose pensions actions don’t match their corporate rhetoric.

Whilst the first imperative to abandon – either completely or partly – the old DB scheme Pensions arrangements came from those companies with Pension Funds in difficulties now it is the target for all. Profitable businesses as well as struggling ones are seeking to reduce their pensions burden (or potential burden) by moving away from DB to DC. It becomes almost a virility symbol of the corporate world to have closed a DB scheme to new entrants, to stop further accrual, to change indexation arrangements, to move from final salary to career average or, in extremis, to close a Fund completely. In the first wave of the move away from the presence of a significant element of worker power at the workplace companies sought to de-unionise, often by contracting out many of their operations. We are now in the second wave of this process under which the workforce begins to resemble just another factor of production along with land and capital. In a high unemployment world, and despite minimum wage and other protecting legislation, employers will feel increasingly empowered to reduce costs by offering lower benefits. The major changes to pension arrangements for so many are just part of this seemingly unstoppable trend and it is happening at a time when those in Government, the Media and in political parties and the trades unions are fighting other bigger battles.

The chilling prospects for retirees of the future

We find ourselves in a world of unparalleled uncertainty – a world in which all too many of the old assumptions no longer apply. We cannot guarantee Growth or employment or probably anything like the welfare benefits that we have enjoyed for more than sixty years. Many on the Right are relishing the commercial opportunities of what they see as the “post-welfare” world in Europe. These people expect most European states to be unable or unwilling to have the public sector active or the sole provider in traditional areas like healthcare and education. Whether this happens or not remains to be seen but it is undeniable that our economic systems are struggling to adapt to the new realities and as individuals we struggle as well. One thing is, however, abundantly clear. The old paradigm of cradle to grave care – be it from the State or (partly) from an employer is disappearing. The Welfare State is under threat as never before and the hidden agenda of many politicians, and not just Conservative ones, is to change the mix so that private enterprise does many of the things that the public sector once did. The disparity in retirement benefits between the private and public sector described in this article may mean that the pension cost advantages of privatisation as opposed to public sector provision could tip the case over in the direction of private enterprise. In the past Companies “contracted out” to save money and hassle so that they could concentrate their efforts on the added value rather than the cost side of the P&L. To offload any concern for Pensions provision from a DB into a DC scheme is more of the same.

The most suffering victims of the new economic realties are actually in the private sector. For here the logic is much less defensible than the Government’s Public sector intentions and Lord Hutton’s thoughtful proposals. In truth, it is private sector employees who are the main causalities of the fiercely market-oriented world in which we now live.

Paddy Briggs is a Member Nominated Trustee Director of the Shell Contributory Pension Fund. He writes in a personal capacity.

Learning points from the NAPF Conference

(From November 2011 “Pensions Age” magazine)

So what, from a Pension Fund Trustee perspective, were the learning points from the NAPF Conference in Manchester? I would start, perversely and slightly controversially perhaps, from a visit, as a guest of AON Hewitt, to Manchester United on the Wednesday evening. (In the photo I’m with former United stars Gary Pallister and Gary Neville – and the Premier League trophy). You did not need to be a United fan to appreciate the sheer class and management grip of what we saw at Old Trafford. The class came from the feeling that this was a brand that takes seriously the need to make its stakeholders confident that it knows what it’s doing. And the management grip was seen in the manifestation of this focus. Those at the club who organised the evening knew that our host (and their sponsor) wanted the guests to have a good time. But as we were trustees and actuaries and analysts (in the main) so this didn’t mean anything vulgar or trivial – it meant delivering a truly memorable evening where we saw the wonderful cathedral that is Old Trafford, talked with a couple of United’s recent stars and were, albeit briefly, enrolled in the Manchester United family.

The lesson from Old Trafford was surely that whatever you do you must do it well. Life might be tough, but if your core beliefs are sound and you are true to your values, you too could be a winner. I was, I admit, not instinctively supportive of Steve Webb when he strode to the podium to speak (see various articles of mine in this place!). But I have to admit that he did seem to have a grip which, whilst not of the “Red Devils” standard, was at least of decent proportions. Similarly with the excellent John Hutton, the impressive shadow Minister (new to the task) Gregg McClymont and the Pensions Regulator Chairman Michael O'Higgins. These heavies persuaded me that we do have people at the top of the Pensions world in positions that can influence the future who have the best interests of us all in mind.

There was much talk about finding common ground and working together – and that message (about teamwork) was wonderfully encapsulated in the final session of the conference when Sir Matthew Pinsent told us how Olympic Gold medals were won (and lost). One of Pinsent’s messages was about how for a team to win you need to subsume, to some extent, your individual character and personal priorities for the common good. Well done to the NAPF for finishing on this note – it was subtle and all the more impactful for that.

As a Trustee I am expected to work not as an opinionated individual (which I admit I can be) but as a team player. That’s fine. But if we seek the Pensions Fund equivalent of Olympic Gold I would argue that for a Trustee uncritically to accept the status quo, or blindly to agree with the conventional wisdoms, would be an abrogation of our duty. And at Manchester there was plenty of food for thought in this regard. Let’s take, as an example, the debate about Defined Benefit versus Defined Contribution. Overwhelmingly the view at the Conference was that DB in the Private sector is dead – or dying – and that DC in its various guises is the future. And to help us come to terms with this many speakers from the Platform encouraged us not to give voice to the slogan “DB good DC bad”. This cry, to eschew the quasi-Orwellian, was, in my view, wishful thinking. After all one of the featured selling points of “The Deal” for the Public Sector in Lord Hutton’s report was that Public sector workers would continue to have a Defined Benefit pension. If DB isn’t better, even somewhat watered down à la Hutton, then why did he stress that workers in the public sector will still be in a DB scheme?

It can be helpful to cut through the confusion caused by technical descriptions like DB, DC, Hybrid and the like. Hutton can help us through this quagmire. He says that a good pension in retirement for those below median income should deliver, taken together with the full state pension, “…more than two-thirds of pre-retirement salary…” This is a useful checkpoint for the private sector as well. In the main DB schemes still deliver this and any changes that they make should not alter their ability to continue to do so. But all too many DC schemes build in huge uncertainty about take up, investment performance and then delivery. Private sector DC schemes should have “Manchester United” level quality – which means delivering wide take up (auto-enrolment will help), robust and secure asset performance and certainty that an individual, on retirement, won’t suffer because of the vicissitudes of the investment or the annuity market. Until this happens it will still be “DB good DC bad”.

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.

My question for Mr Webb at the NAPF Manchester Conference

And so to Manchester for this year’s NAPF Annual Conference. It will be my second after last year’s Liverpool event and I see that some of 2010’s star turns will return for a second show. Amongst them is Steve Webb the Pensions Minister who was praised in some quarters last year for actually knowing something about the subject. Compared with many of his predecessors it may well be the case that Mr Webb had a head start when he took the job – a former University Professor no less. But still engrained in my memory was Webb’s misleading statement at Liverpool that CPI is a better measure of inflation for pensioners than RPI. We all know why he said this, of course, and we are familiar with his argument that the exclusion of mortgage interest payments from the CPI does make it more appropriate as most pensioners no longer have a mortgage. But, as he should know, mortgage payments are just one component and other housing costs, notably Council Tax which most pensioners certainly do have to pay, are not in the CPI either. But the real source of irritation for me and others about Webb’s statement was summed up by Param Basi, the Technical Pensions Director at AWD Chase de Vere, who said "The argument that CPI is a more appropriate measure does not stand up when you consider that pensioner inflation is recognised as being higher than RPI anyway. This change will have a double whammy impact on pensioners’ real incomes."

For the Trustee trying to act both honourably and responsibly in these febrile times is extremely difficult. When a Government Minister makes a claim which is self-evidently disingenuous surely we should express our concern? As John White showed in the July “Pensions Age” the switch from RPI to CPI really does mean that for virtually all Fund members currently in employment their retirement pensions will be lower. And for deferred members who leave a scheme early the fact that their pension accrual will now use the CPI between the date of their leaving a scheme and the date of their retirement will lead to a very substantially lower initial pension as well. I have a personal rule of thumb to guide me in this and in other contentious Pensions matters. If the members of the Pension scheme of which I am a Trustee will be disadvantaged by any proposed changes then I’m in principle against them! This may sound a little precious, and my scheme is not doing it anyway, but were I to be a Trustee of a scheme which planned to replace RPI with CPI I’d be up in arms in protest.

David Willetts, Minister of State for Universities and Science and a speaker at last year’s NAPF Investment conference, has as the subtitle of his book “The Pinch” “How the baby boomers took their children’s future – and why they should give it back”. This is jokey (I think) but Willetts, who is currently ten years from drawing his own Pension, perhaps consciously reveals an attitude of mind that is prevalent in Government today. To paraphrase Harold Macmillan this attitude is that the baby boomers have “had it too good” and what wealth we may have accumulated over our forty or so years of employment is a legitimate target to attack for the Government as it tackles the deficit. A major component of that wealth for most of us is of course our accumulated occupational pension entitlement. So when a pensioner’s annual increase in a public sector or private Pension is switched from RPI to CPI it actually has the effect of reducing his wealth - and for many this offends against natural justice. The key point here is that the legislation is retrospective in effect. Throughout a baby boomer’s employment years he and his employer contributed on the assumption that on retirement he would have an inflation proof Pension generally linked to RPI. To change that may be legal – I am sure that the Government lawyers will have seen to that – but surely it isn’t right?

So what will be my question to Steve Webb at Manchester? It will be in two parts. First does he agree that the problem for all public and some private sector pensions is the abject failure of Pension providers to make adequate provision for the future over the comparative years of plenty in the 1990s and 2000s? Secondly given that failure is it fair to penalise present and future pensioners by significantly reducing their wealth? I might wear my “I agree with Nick” T-Shirt when I ask the question – but probably not!

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.

Paddy Briggs

September 2011

Rethinking the Pensions paradigm

The Chinese curse is "May you live in interesting times" - and that curse seems dramatically to be with us at the moment. At the risk of stating the obvious the Pensions world is at the crossroads and we have reached that point not when there is calm in the world around us (allowing measured reflection) but when there is at best uncertainty and at worst chaos. Pensions, a subject that in the past rarely made the media at all, is currently front-page news. And yet for all the ubiquity of the coverage I have yet to see much discussion of what may eventually turn into a need for a radical redefinition of the role of the Trustee. That role could become one which includes not just the need to protect the interests of Fund members but also to monitor the moral obligation that employers have to ensure that all their employees a have properly funded retirement.

About fifteen years ago, when I was in the last quarter of my career with Shell, the company produced a helpful booklet about Pensions. This communication explained that I would enjoy a pension equal to 1/54^th of final pensionable salary for each year of service meaning that, as a long serving employee, I would have a high degree of financial security in my retirement years. The scheme was in line with most public and private sector Defined Benefit schemes in what it offered. To live on a Pension of say 70% of a final salary, revised annually in line with the Retail Price Index would be unlikely to cause too much hardship! And the then completely uncontroversial premise was that the employer has a duty of care to its employees which extended into and throughout retirement.

The situation described in the above paragraph seemed pretty much cast in stone for most European businesses until, over the past decade or so, for many schemes the foundations began to rumble. Businesses - often influenced by the very different paradigm in the United Sates - began to wonder whether they were really getting value for the pensions commitments they made to their staff. And the staff put funding their retirement even lower in their checklist of priorities than it had been in the past. Jam today became the order of the day driven by escalating property prices that meant that salary now to fund bricks and mortar became the imperative - and the future could take care of itself. So when Blue Chip companies began to close their Funds to new entrants it met with little resistance from the newly recruited. When you are 25 where you might be financially in 40 years time is not top of mind - putting yourself in a position to maximise your earnings now is the order of the day. This has led to a sort of collective apathy to the benefits of good quality pensions and it is this apathy which has led to the decline of DB pension schemes. As a consequence, as recent research has revealed, 70% of adults aged between 22 and 64 have no idea how much they are likely to retire on.

The old pensions paradigm was that saving for retirement was essential and that employers had an obligation to make contributions to pension accrual. This model may have broken down – but the reality remains that in retirement everyone needs an income stream and that the State Pension, helpful though it is, will not be sufficient for many. Government policy changes like Auto-Enrolment - along with, of course, the tax advantages attached to Pension schemes, tries still to encourage saving for pensions. But a significant minority of the population does not save at all and can expect no income other than the State Pension and perhaps welfare benefits unless they do something quickly.

In these rapidly changing circumstances could it become a part of the Trustee’s role not just to protect Fund members but also to have an overview of all employees’ interests – including those who cannot be members of a closed DB Pension scheme? This role redefinition would require Trustees to have an input into a Sponsor’s remuneration policy with a view to encouraging and enhancing elements of compensation that help employee retirement welfare – such as sharesave, tax wrappers like corporate ISAs and of course, the provision of a good DC scheme.

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.

Pensions Fund communications in the internet age

Pensions Funds are not famous for their brand management – indeed I suspect that few would even consider that they are brands at all. But they are – and this has important implications for how they communicate - and indeed for how they behave. Obviously a Defined Benefit Pension scheme’s brand is in most cases inextricably linked to that of its sponsor - but the sponsor’s brand is not the same as the Fund’s and it is a communications challenge is to ensure that this is understood by members. Decisions taken by the Pension Fund trustees are NOT decisions taken by its sponsor and although that important distinction may not be understood by all Fund members it really needs to be.

The main challenge is for Trustees to give their Fund a distinctive identity separate from that of their sponsor. This means that they need to emphasise that the management of the Fund, and especially changes made to it, are changes taken by Trustees not changes imposed by the sponsor. In a well-run Fund with good sponsor relations this is unlikely to be a problem. But if a Fund gets into difficulties this does become much more challenging – especially if the sponsor is pushing the Trustees hard to agree to changes to the Trust Deed that will reduce its (the sponsor’s) financial liabilities or risk. Trustees have by law to act in the interest of the Pension Fund’s members but this can lead to tensions in times of difficulty - such as when a Fund is heavily in deficit and a recovery plan is in place. In the past it was much easier for a determined sponsor to push through major changes - such as a closure of a scheme to new entrants or even the stopping of further accruals for actives.

Modern communications, including social networking, gives those opposed to Pension Fund changes the opportunity to campaign effectively. For example in the British Airways pension scheme three trustees recently resigned from their Board in protest against a proposed RPI to CPI indexation change. These three ex-trustees continue their campaign in the Pensioner interest and are active in the independent “Association of British Airways Pensioners” (ABAP) where they use brand and communications techniques skilfully to fight their case. The ABAP has a website as a communications tool and they also have professional looking video clips on YouTube and pages on Facebook. The creation of a professional looking website is straightforward and costs very little. I doubt that the very good looking ABAP website at http://www.abaponline.org/ cost much to create and run but it works well. In the modern world of communications such common interest group alliances can be built and supporters can be kept informed quickly and cheaply. The ubiquity of modern communications is such that Sponsors and Pension Fund Trustees will have extra pressures on their shoulders and fewer places to hide!

Whilst activists have modern communications tools at their disposal so of course do Trustee Boards and they certainly need to respond to these changing communications realities. If it is competently done a Pension Fund can benefit from this rapidly changing communications environment and need not feel threatened by it - but to do this they first need to accept that the old ways of doing things just won’t work anymore. All communications to members need to be well designed, non-formulaic and digestible with the key facts and issues openly presented. And the style must be such that two-way communication is encouraged. The web is ideal for this and any Fund’s website should ideally include (inter alia) a forum to which members can make a contribution if they wish. The content and visual appearance of a Fund’s website, and navigation around the site, needs to be judged in the context of Internet best practice - it should be designed not just to inform but to enhance the Pension Fund’s brand and build members’ confidence in it.

The old days of Trustee Boards being perceived unquestioningly by members as acting in their interest have gone. The new reality is that a Board’s duties include that of managing the perceptions of its members - and they should also anticipate that there could be organised and professional opposition from activists to any changes that can be presented as not being in members’ interest. In these circumstances Boards need a highly professional approach to communications and the use of all of the modern brand management tools.

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.