At last, the Financial Conduct Authority and Treasury have officially confirmed there are serious errors in published investor cost information for UK-listed investment companies and that these misleading practices must end.

Past flawed cost-disclosure rules created sector-wide selling.

Under intense scrutiny to report lower investor charges, fund-of-funds and wealth managers reduced these seemingly-expensive investment trust holdings, driving share prices to massive net asset value (NAV) discounts.

Ordinary investors who spotted the undervaluation kept losing money as ongoing selling widened discounts further.

Customers wanting to buy, sell or hold investment trusts on their platform are being misled about management charges they pay

Such market dysfunction saw good investment companies – many specialising in important areas for boosting sustainable growth – starved of capital, unable to raise new funding. Estimates suggest the UK economy and markets have lost up to £30bn in investment.

The last Parliamentary session had widespread cross-party support for my Private Members’ Bill, which sought to stop these damaging misleading disclosures.

So, it was heartening when the FCA and Treasury issued statements and forbearance notices in September, plus draft legislation, to introduce urgent changes.

Sadly, though, the required adjustments have not materialised for ordinary investors.

Although fund-of-funds and wealth managers are correctly reporting investment trusts have no direct costs for shareholders, most retail platforms refuse to do this for their customers.

Some have threatened to de-platform investment trusts whose boards want to comply with the new FCA and Treasury rules

Consumer Duty requires all investor information to be clear, fair and not misleading, but customers wanting to buy, sell or hold investment trusts on their platform are still being misled about the management charges they pay.

Some platforms (I will not name and shame) are sticking to publishing the information that was wrong for so long.

They insist on misleading investors that the corporate expenses for managing these trusts are directly deducted from their share value. This is not true. The shares are valued at the market price.

Even worse than this, some platforms are apparently barring their customers from dealing and have threatened to de-platform investment trusts whose boards want to comply with the new FCA and Treasury rules.

How can the platforms justify refusing to treat their customers fairly?

Of course, investors need to know all the costs and charges incurred by any businesses they may buy, sell or hold shares in. Nobody is suggesting there are no management costs but, when buying closed-ended investment companies, other information is at least as important, including NAV discounts, type of investments and gearing.

Reports and accounts, factsheets and websites show this information, alongside other relevant data about the companies and their operations. But platforms produce examples showing trust shareholders losing money over time as a result of charges they don’t themselves pay, ignoring the other vital information.

The government’s draft regulations to replace EU-inspired Priips and Mifid regimes make clear investment trusts must be treated differently and separately from open-ended unit trusts or Oeics (which do make direct deductions from investors who trade at NAV after charges).

The explanatory memorandum states: “The single aggregated figure that is being produced under current EU-inherited rules is not an accurate representation of the actual cost of investment in shares in an investment trust”.

Platforms are damaging their customers’ interests by shutting them out and preventing them from taking the opportunity to buy UK investment companies

How can the platforms justify refusing to treat their customers fairly?

The problem largely stems from overzealous regulatory focus on driving down reported costs. Yes, in the past, direct deductions from investor asset value were not clearly disclosed but things have tightened up.

Meanwhile, misleading investors to believe the appropriate comparison yardstick for judging the value of these investments is how much managers are paid or their other costs is wrong. Nobody would suggest investors wanting to buy an oil stock should choose between buying BP or Shell by looking at their directors’ pay or its accountancy costs.

Platforms are damaging their customers’ interests by shutting them out and preventing them from taking the opportunity to buy UK investment companies.

The industry must not snatch defeat from the jaws of this long-awaited victory. It’s time for change.

Ros Altmann was pensions minister 2015-16 and is a member of the House of Lords

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New chancellor Rachel Reeves has rightly expressed a desire to utilise the power of pension assets to boost domestic growth.

It has long been clear the fiscal constraints resulting from Covid and energy support schemes have reduced government finances available for much-needed infrastructure and sustainable growth investing.

Meanwhile, there are hundreds of billions of pounds languishing in unproductive assets in UK pension schemes and tens of billions of pounds a year being contributed to both defined benefit and defined contribution schemes, most of which are benefiting overseas markets more than our own.

Significant amounts of tax and National Insurance reliefs are paid into pensions – £70bn a year – so there is a clear national interest in how this money is invested

The new government has already promised to review pensions and has rightly recognised the tremendous opportunity to use these domestic asset pools more productively. After all, significant amounts of tax and National Insurance reliefs are paid into pensions – £70bn a year – so there is a clear national interest in how this money is invested.

Sadly, pension funds have consistently cut exposure to the UK in recent years, weakening our economy and financial markets.

The pension selling pressure created a vicious circle, with market weakness deterring foreign investors and domestic funds then cutting further as the UK kept underperforming.

The new government can seize the opportunity to rebuild support for our own markets, bringing more long-term capital into growth-boosting and potential return-enhancing opportunities in the UK.

Rebuilding UK pension flows into domestic growth assets could kick-start a virtuous circle, after years of disinvestment, de-rating and inadequate growth

Most major economies have fiscal constraints, so global competition to attract institutional capital and foreign direct investment has risen. Rebuilding UK pension flows into domestic growth assets could kick-start a virtuous circle, after years of disinvestment, de-rating and inadequate growth.

So, what should policymakers be considering?

Firstly, remove barriers deterring domestic, relative to foreign, investment. An obvious one is removing stamp duty. Other countries do not impose such costs on their share transactions.

Secondly, reconsider the UK regulatory over-emphasis on risk minimisation. Protections designed to benefit consumers are actually imposing significant costs, in the form of lower returns, less diversification of asset classes and restrictions to capturing different types of risk premia.

Disproportionate emphasis on lowest cost drives pension funds away from active management in assets such as real estate, infrastructure, alternative energy and venture capital specifically. Diversification across geographies is an inadequate substitute for asset class diversification.

The government has a responsibility and a right to require a minimum amount of new contributions to be invested in UK assets – perhaps 25% or even more

Consumer Duty diktats need careful review, including the impact of tougher financial advice rules (even for non-advised customers!), daily pricing, liquidity requirements and shorter transfer times, as the benefits of investing in less liquid, growth-boosting or sustainable assets is conflicting with daily pricing, speedier transfers and cost controls. Greater use of performance fees could help.

The ludicrous and misleading cost disclosures imposed on investment trusts – which are an ideal mechanism for long-term investment in illiquid assets – have caused losses to both retail and institutional investors, while destabilising a fund sector that could do so much more to boost returns and growth.

While removing barriers would be a good start, introducing new incentives is also important.

Channeling UK retirement savings into domestic growth makes economic and social sense, helping ensure pensioners retire into a better country.

Recent initiatives, such as requiring funds to disclose how much they invested domestically by 2027 and voluntary Mansion House commitments to early-stage capital (none of which must be in the UK) are far too weak. Much bolder measures are overdue.

I’m in favour of merging cash, stocks & shares and innovative finance Isas into one annual allowance of, say, £25,000, of which a minimum percentage should be invested in UK assets

With public money so scarce and generous taxpayer contributions into pensions, the government has a responsibility and a right to require a minimum amount of new contributions to be invested in UK assets – perhaps 25% or even more. Assess the economic value of such enormous spending.

The same applies to Isas. I am in favour of merging cash, stocks and shares and innovative finance Isas into one annual allowance of, say, £25,000, of which a minimum percentage should be invested in UK assets. This would simplify the system, while also boosting domestic markets.

Finally, it is time for the government to work with investment companies to develop long-term investment funds that support UK growth, including infrastructure, early-stage businesses, promising small or medium companies, social housing and sustainable energy projects.

National infrastructure funds, which can be transferred in specie and must be held for a minimum period, such as five or 10 years, could combine a range of projects across several types of assets.

These would be available for pensions and Isas, qualifying for tax-relieved investment vehicles.

Ros Altmann is a former pensions minister

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The scale of undervaluation could offer attractive opportunities for long-term investors. In 2015, the UK forward-looking price/earnings ratio was higher than European markets and around 10% lower than the US. Now, UK equities are over 40% cheaper than the US on this measure and more than 20% cheaper than Europe.

So, what has happened? While post-Brexit political, economic and pandemic dislocations have played a part, the loss of our once-strong domestic investor support has been a major factor too.

This is a loss to our economy and future growth. Restoring domestic investor support must be a government priority

Private equity and overseas investors are snapping up successful British firms cheaply, share buybacks have increased and companies are listing overseas instead of in London, citing unwarranted undervaluation. This is a loss to our economy and future growth. Restoring domestic investor support must be a government priority.

Office for National Statistics (ONS) figures show the proportion of UK quoted shares owned by British pension funds reached a record low of 1.6% in 2022, continuing a multi-decade downward trend.

In 1991, UK pension funds allocated 75% of their assets to equities – around half in the UK – and 13% in bonds. In 2006, equities were still over 60% and bonds near to 40% but, by 2021, equities were just 19% of assets (with very little in the UK) and 72% in bonds.

This ignored the basic tenets of capitalism, which predict equities will outperform bonds over the long term

Regulatory pressures, supposedly designed to reduce risk, cut costs and protect consumers encouraged pension investors to switch from higher expected return equities into supposedly safer bonds.

This ignored the basic tenets of capitalism, which predict equities will outperform bonds over the long term. Rewards for risk are a fundamental element of the capital asset pricing model, so switching from equities to bonds to reduce risk would also reduce expected returns.

After 2009, central bank quantitative easing (QE) policies created new money to artificially support fixed income returns, improving bond market performance. But the 2022 reversal of QE created significant volatility and capital losses in bonds, relative to equities.

Japan, Australia and South Korean pension funds invest 30-50% in their own markets – overweighting by well over 1000% relative to MSCI indices

Reviving traditional domestic investor support for British-based companies – which helps create thriving corporate and financial sectors – is important.

Japan, Australia and South Korean pension funds invest 30-50% in their own markets – overweighting by well over 1000% relative to MSCI indices and even US pension funds are 50% overweight. By failing to back their own market, UK investors undermine confidence internationally.

The government wants to re-engage the power of domestic investors to revive our flagging markets and economic performance. The £5,000 extra UK Isa allowance announced in the Budget is a small start but there is room to be much bolder, especially with pensions.

By failing to back their own market, UK investors undermine confidence internationally

Directing, say, 25% of all new pension contributions into UK-assets, including listed or unlisted companies, infrastructure and housing projects, would help maximise value from the £70bn a year tax and National Insurance reliefs that go into pensions.

Currently, these huge sums do not need to back Britain and even the Mansion House reforms, encouraging 5% of pension assets into unlisted securities, do not have to invest domestically.

Previous underperformance has deterred purchasers but reviving domestic demand could create a virtuous circle, benefitting us all. Long-term investors should consider this historic undervaluation opportunity seriously and the government should encourage or incentivise support. It is in all our interests for the UK markets to thrive.

Ros Altmann is a former pensions minister

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With 2024 set to be an election year, the government needs positive headlines and feel-good economic news. I think this could happen.

An environment with sharply falling inflation, recession being avoided and earnings growth moderating but positive in real terms should enable base-rate cuts.

Of course, this assumes that geopolitical risks recede. If Middle East or Eastern European wars disrupt shipping and energy supplies severely, inflation and growth will be worse.

This could finally be the year when domestic investors support British growth once more

Ministers want lower rates, because the current high levels worsen household debt, including mortgages, and increase debt-servicing costs of the huge post-Covid fiscal deficit.

I believe the Bank of England (BoE) should have reduced rates already because monetary policy is overly tight, so I hope for positive surprises. However, investors need to be careful in positioning long-term asset allocations because cuts may not be fully reflected in long bond markets.

Bonds face significant headwinds as the BoE has been selling the gilts purchased with newly created money since 2009.

Unwinding the extraordinary quantitative-easing (QE) purchases started only recently. This so-called quantitative-tightening selling pressure has been compounded by insurance companies selling gilts they receive from defined benefit (DB) pension scheme bulk annuity deals.

Pension schemes could and should increase exposure to British markets and small quoted companies, not just unlisted investments

Trustees, encouraged by regulators and consultants to offload risk, are advised to hold more gilts, which attract better buyout quotes than portfolios with more ‘higher risk’ assets. But, once the gilts transfer to the insurance company, the insurer sells them to buy higher expected-return investments instead.

This additional gilt selling prevents sharp yield falls, especially once the bulk-annuity peak has passed and pension investors no longer need more gilts.

Indeed, the chance of sharply lower gilt yields is less than may be suggested by falling base rates. In the QE years of artificially low government bond yields, pension investors moved money into supposedly lower-risk fixed-income assets, away from traditional allocations to equities or other higher expected-return, growth-boosting investments.

Since QE ended, that has resulted in significant capital losses, as well as damaged UK markets.

Growing recognition

But there is growing recognition that pension funds should take more investment risk. At last, the government, regulators and investment experts are suggesting increased pension-fund exposure to growth assets, and reducing supposed ‘liability-matching, lower-risk’ bonds, which performed so poorly as QE ended.

Even the Mansion House reforms can be invested overseas. This well-intentioned initiative is simply not ambitious enough

This could be a game changer for UK financial markets and the economy. British markets have lagged global performance, partly due to Brexit impacts, political uncertainty and pandemic disruptions. But some of the market de-rating is likely to be due to dramatically reduced domestic institutional support for our own markets.

Government policies to incentivise Isa and pension funds to invest in the UK — such as in infrastructure, tech stocks, early-stage companies, social housing or alternative and sustainable energy projects — can boost domestic growth, confidence and market performance through 2024.

There is talk of introducing a British Isa in the March Budget and I also hope the chancellor recognises the potential to do more to encourage both DB and defined contribution pension funds to invest in the UK.

Currently, more than £70bn a year of taxpayers’ money (in pension tax and National Insurance reliefs) supports non-UK firms and countries. Using pension assets to fund much-needed investment is surely justified and would permit more tax cuts.

At last, the government, regulators and investment experts are suggesting increased pension-fund exposure to growth assets

Even the Mansion House reforms, aiming to attract £30bn by 2030 into unlisted early-stage companies, can be invested overseas. This well-intentioned initiative is simply not ambitious enough to make a real difference.

Pension schemes could and should increase exposure to British markets and small quoted companies, not just unlisted investments. This can diversify risk and take advantage of attractive valuations here.

This could finally be the year when domestic investors support British growth once more. This can benefit pension-fund returns and increase long-term and sustainable growth, thus improving everyone’s retirement prospects too.

Ros Altmann is a former pensions minister

This article featured in the February 2024 edition of MM. 

If you would like to subscribe to the monthly magazine, please click here.

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But this once thriving sector, with over 350 companies quoted on London stock markets and assets exceeding £250bn, is in crisis.

Continuous selling pressure has created massive share price discounts to net asset value and new funding has dried up.

Several factors are responsible, including recession fears, geopolitical risks and surging interest rates that reduce the attraction of equities. But why have UK investment companies been hit especially hard, despite similar factors at play elsewhere in the world?

It is galling to see new EU-derived cost disclosure rules, not applied in the EU or any other country, undermine a once thriving UK financial sector

Well, a spectacular regulatory own goal has uniquely exaggerated the reported costs of owning UK investment companies, driving those seeking exposure to sustainable investments such as alternative energy, infrastructure and fast-growing tech companies into overseas funds instead.

Ironically, regulatory emphasis on helping investors make properly informed decisions about total charges they pay to own funds have left UK investment companies looking too expensive, with comparable non-UK and other similar listed individual companies looking much more attractive.

The problem stems from European Union (EU) measures to improve consumer protection for investors in alternative investment funds (AIFs) after the global financial crisis. The 2013 AIF Managers Directive (AIFMD) aimed to improve charges disclosure of notoriously high-cost alternative investments such as private equity and hedge funds.

The flawed charges regime worsened last year with increased FCA emphasis on value for money

Unfortunately, UK financial regulators erroneously lumped our investment companies in that same basket, labelling them as AIFs, even though these quoted investment companies were already subject to strict London Stock Exchange reporting rules required by the listing authorities. 

It is really galling to see new EU-derived cost disclosure rules, not applied in the EU or any other country, have undermined a once thriving UK financial sector.

Subsequent EU regulations for AIFs – including Priips and Mifid II – have resulted in UK investment companies having to report all so-called underlying charges, including management fees, administration and legal costs, as ‘ongoing charges’. 

Retail investment platforms have even excluded such companies, mistakenly labelling them as high cost

No other country applies this approach to its listed investment companies, because those costs are just part of the market share price, not ongoing charges deducted from investor assets.

This flawed charges regime worsened last year with increased Financial Conduct Authority emphasis on value for money and Consumer Duty. Wealth managers, unit trusts or Oeics have been told to add charges of UK investment companies to their own fees, as if the investor pays all those costs, which is a nonsense.

Holding listed investment trusts helps improve diversification or capture specialist sector exposures but exaggerates reported charges, whereas holding ordinary shares (and, indeed, non-UK investment companies) adds no more to the reported ongoing charge.

If it galvanises government and FCA into action, it might help restore a critical part of the UK’s financial ecosystem

Institutional and pension investors have thus steered clear of or sold UK investment companies, rather than report misleading higher costs to clients. Retail investment platforms have even excluded such companies, mistakenly labelling them as high cost.

This all makes no sense. It mixes up open-ended and listed closed-ended funds. The latter do not deduct management and other fees from the investor’s assets. Once listed, costs are just reflected in the market share price.

It has become increasingly clear these misleading charges are undermining the UK investment company sector, draining the economy of growth capital, driving investors to use overseas investment companies or UK funds which ignore the new rules and undermining specialist investment opportunities as well as confidence in UK financial markets.

This once thriving sector, with over 350 companies quoted on London stock markets and assets exceeding £250bn, is in crisis

Working with Baroness Sharon Bowles and other industry experts, I am introducing a Private Members Bill in the Lords, to try to restore a level playing field for UK investment companies and stop this misleading charge disclosure.

This is not a quick fix but if it galvanises government and FCA into action, it might help restore a critical part of the UK’s financial ecosystem. 

Ros Altmann is a former pensions minister

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The conventional advice that ‘low risk’ investors, especially those nearing pension age, should hold mostly bonds or gilts to avoid large losses let many with defined contribution pensions down, particularly those in workplace default funds.

Being switched out of equities or other supposedly riskier investments resulted in huge losses.

The year saw gilts fall 20% and index-linked gilts down more than 30%, while the FTSE All Share and FTSE 100 rose 1% (or 4.7% including dividends). Yes, the FTSE 250 lost nearly 20% but, overall, supposedly lowest risk assets proved riskier than ever imagined.

Are there lessons for advisers from this experience?

Nobody knows what investment risk means in a post-QE world of higher inflation

The root cause of the bond market problems stems from the ongoing policy response to the 2008 financial crisis.

Quantitative easing (QE) saw all major central banks create massive amounts of new money to purchase fixed income securities. The aim was to force down long-term interest rates to avoid deflation and bolster growth by increasing asset values.

This massive monetary experiment was meant to be temporary but proved such a boon for governments (who could spend more despite rising deficits), as well as inflating asset markets (benefiting the wealthiest groups and financial firms), that it continued.

Further QE during Covid facilitated furlough affordability, but creating huge amounts of new money while the economy was almost shut down, with people having less chance to spend, resulted in too much money chasing too few goods – the classic definition of inflation.

Coupled with the Ukraine War and Brexit trade disruptions, this resulted in soaring inflation.

Standard risk models may now be unreliable, not just temporarily but for the longer-term

QE theory held that central bank bond purchases would be unwound once the economic emergency had passed. This has not yet happened.

As the deflationary fears following the banking crisis are long gone, central banks should start the process of quantitative tightening (QT) by selling the bonds they hold. This would make bonds riskier than before, as the official underpin is removed, with significant implications for markets.

Financial advisers and pension investors must be careful assessing risk appetite and supposedly ‘safe’ assets. Standard risk models may now be unreliable, not just temporarily but for the longer-term, as QE ends and QT looms on the horizon.

So, unlike recent years, pension investors cannot rely on a natural buyer to underpin bond markets, especially with negative real rates, as inflation remains above nominal yields.

The usual emphasis on holding large amounts of fixed income, axiomatic in auto-enrolment, may continue to let investors down

Bonds have become a relatively unattractive proposition and if the economy remains resilient, real assets such as equities and supposedly ‘higher risk’ investments may offer safer investment opportunities. We cannot be sure as there is no lived experience of unwinding QE.

Effectively, QE undermines traditional risk models. Post-QE markets could see previously lower-risk assets far riskier, while assets that were considered to offer ‘higher expected returns’ with greater risk may now be lower risk relative to traditional low-risk investments.

In truth, nobody knows what investment risk means in a post-QE world of higher inflation.

Capitalism and capital asset pricing models assume government bonds are lowest risk or ‘safe’ assets. But as the artificial depression of interest rates is being unwound, we cannot reliably predict which assets will be more volatile, which have lower expected returns and what their relative risk characteristics are.

Unlike recent years, pension investors cannot rely on a natural buyer to underpin bond markets

A broadly diversified portfolio, comprising assets seeking to capture more than one type of risk premium, may offer a lower risk, better return structure.

Exposure to equity risk, illiquidity risk, property, infrastructure and private markets could be more appropriate for people approaching pension age, especially if they still wish to benefit from market upside and pension death benefit tax advantages, with no intention of buying an annuity.

The usual emphasis on holding large amounts of fixed income, which is axiomatic in auto-enrolment workplace default funds such as lifestyle or target-date funds, may continue to let investors down.

It is time for a fundamental rethink on pension investment.

Ros Altmann is a former pensions minister

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What can the industry do to help women build better pensions?

Something urgently needs to be agreed, given there remains a shocking 40%–50% gap between men’s and women’s pension pots, according to recent research from Aviva.

Indeed, although the gender pay gap has narrowed significantly to around 15%, the gender pension gap is just not budging.

The majority of poorer pensioners are women, so it is vital to address this issue. Financial advisers must not ignore any opportunities to assist.

Advisers and providers must help women build better retirements

Of course, the gender pension gap exists globally and the principal reason behind it is women’s lower lifetime earnings. As private pensions are determined by earnings, women tend to build less in savings, so this will not be an easy fix.

Over a typical working life, caring responsibilities mean women have more interrupted careers, lowering their income prospects. Indeed, 84% of the 1.75 million people who have recently given up work to care for a family member are women, according to official figures. Fathers’ earnings, unlike those of mothers, usually keep rising after having their first child.

Women are also more likely than men to work part time or in jobs with lower average pay.

Later life

Even in later life after their child-caring years, women are more likely to reduce working hours or retire early to look after loved ones, leaving them at further risk of lower retirement income.

Relationship breakdowns pose another serious risk, with divorce frequently causing women to lose out financially in later life. Pension sharing on divorce was introduced in 2000 but women often fail to benefit from their former spouse’s pension. Lack of financial awareness and inadequate legal protections for divorcing women, which do not flag the importance of obtaining independent financial advice, leave many behind.

There’s plenty to do but this is such an important task

Women whose partner fails to disclose correct pension values, and who cannot afford a good lawyer or who simply trust the value given by their husband, can be seriously short-changed.

A wife should always benefit from her own independent advice and this is where financial advisers come in (although they have a role through the early years of marriage too). During women’s career breaks to have children or to care for other relatives, advisers and pension providers could promote the idea of a partner’s pension product, whereby the working partner keeps contributing to build savings for the non-working partner.

Encouraging women and their employers to keep paying in to a pension during maternity leave is also important, as well as suggesting those who have not yet started a family consider increasing voluntary contributions while working full time.

A wife should always benefit from her own independent advice

Even workplace auto-enrolment ingrains a gender gap, with 3 million women earning below £10,000 a year losing auto-enrolment benefits. Workers earning under £12,570 (mostly women) must also pay 25% more for their pension in a net pay scheme than a relief-at-source scheme would charge them, leading to higher opt-outs.

State pension

The cards really are stacked against women in the pension world. Not only do they lose out in private pensions; they get less state pension too.

The state pension since 2016, supposedly paying flat-rate pensions to overcome decades of National Insurance (NI) gender inequalities, still leaves women forecast to receive £500 a year less than men (albeit down from £1,500), with the gap not disappearing before 2040.

Advisers should help women check their state pension and make the most of all available NI credits. Making sure women who — themselves or their partner — earn over the £60,000 means-tested limit apply for child benefit they are not entitled to, to avoid losing credit for their state pension, is vital.

There remains a shocking 40%–50% gap between men’s and women’s pension pots

So, removing the auto-enrolment earning thresholds, improving workplace financial education, encouraging pension contributions before and during caring years, as well as partner or employer contributions for stay-at-home partners, and protecting women’s pensions more robustly after divorce — all of these can help narrow the gender pension gap.

Advisers and providers must help women build better retirements. There’s plenty to do but this is such an important task.

Ros Altmann is a former pensions minister

This article featured in the May 2023 edition of MM. 

If you would like to subscribe to the monthly magazine, please click here.

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One of the biggest issues for the industry to cope with is data accuracy.

Of course, the online security of people’s information will also be crucial to get right but, unless the information people find on the dashboard is reliable, customers could be misled about how much money they can expect to live on in the future.

The last couple of years have seen a massive scramble by schemes to update their data, try to reconcile historic records, find basic information about customers who may have lost touch with their money and ensure they are ready to connect electronically.

A recent survey of major in-house pension schemes found only three-quarters are confident they can comply in time

This has created huge costs for schemes – and, of course, a potentially welcome source of revenue for advisers and administration experts.

However, many schemes are far from finalising this work. Indeed, the defined benefit (DB) system still completing guaranteed minimum pension (GMP) reconciliation and equalisation exercises started over five years ago to correct old scheme records of members who contracted out of the state pension. These changes will also impact people’s state pension records.

On top of this, public sector schemes are now going through the major task of adjusting past entitlements for the McCloud judgment.

This was a legal ruling which said the reform of public service pensions – moving everyone from final salary to career average arrangements after 2015 – had discriminated against members who were more than 10 years from pension age.

This requires trustees to put them back into the old scheme if they would have been better off, but also means they can stay in the new career average scheme if this is better for them. Another mammoth data correction exercise is therefore underway.

So all DB and legacy defined contribution (DC) schemes, whose records were never digitised or reconciled, have much to do to ensure member pension records are reliable.

Regulators have not yet imposed mandatory data checks or error correction reporting

However, the first schemes to connect in August and September this year will be large auto-enrolment master trusts and most personal pensions. Will they be ready?

There are well-known data inaccuracies in more recent pension contribution records for DC auto-enrolment schemes. Regulators have not yet imposed mandatory data checks or error correction reporting.

Medium-sized schemes and all public sector pensions will have to be ready by late 2024 and, although smaller schemes will probably not connect before 2026, they need to start data correction now as these issues take so long to sort out – and there are worrying shortages of experienced administration staff.

Dashboards are supposed to reunite people with their forgotten pensions and help deal with the consolidation of millions of small pots left behind when workers move jobs. Individuals with a professional financial adviser may still need to track down old pensions, but at least they should have had help with planning their investments to suit their needs.

Most people, though, have never been encouraged to engage with their pensions. They just pay contributions, usually into default funds, and then let their fund managers take care of the investment and administration.

Recent frantic lobbying and survey evidence suggests we can expect more delays

The dangers of this approach are increasingly recognised, as the supposedly low risk, pre-retirement funds have lost 30% or more of their value.

Dashboards can help change this approach, encouraging a sense of ownership, but I fear we are a long way from a reliable proposition being rolled out on time. Indeed, recent frantic lobbying and survey evidence suggests we can expect more delays.

Consultancy WTW’s recent survey of major in-house pension schemes found only three-quarters are confident they can comply with their dashboard duties in time for their connection deadline, with just 5% offering data for every member.

Most are not confident of having pension values for at least 90% of their members and, particularly worrying for advisers trying to help clients, more than a third anticipate difficulties coping with the higher volume of enquiries.

Reliable data, efficient helplines and data security are vital for the success of the pension dashboards project.

Regulators need to be tougher with their expectations of data checking, while also ensuring the security protocols are robust enough to protect members’ individual records, so everyone can have confidence in the reliability of the information.

Plenty to do, not a huge amount of time to do it in. Expect further delays.

Ros Altmann is a former pensions minister

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The tax advantages of transferring or purchasing a property to be held in the pension wrapper — such as tax-free capital gains and rental income — can save clients significant sums.

Unfortunately, some years ago there was a huge problem for pension property purchases when advisers were led to believe, by many industry leaders, that property could be transferred ‘in specie’ without losing tax exemption.

My efforts to alert the industry have been strongly resisted

They were relying on information from some HM Revenue & Customs (HMRC) officials who had previously suggested in-specie transfers were acceptable.

Rather than borrowing money within the pension fund for the purchase, which was of course possible, in-specie transfers saved transaction and borrowing costs, so clients were told the former was not necessary and they could just do the transfer in specie.

Subsequently, however, the Revenue changed its mind and some pension funds with transactions already completed lost their tax-exempt status.

HMRC claimed, despite its misleading guidance, that it had not agreed in-specie transfers were acceptable, and it pointed to the legislation that strictly required transactions with monetary consideration. This problem resulted in huge costs for some individuals or firms.

Clients or customers who unnecessarily may have paid stamp duty should be contacted and given the chance to take advice on reclaiming overpayments

Pension industry leaders and organisations, recognising that HMRC guidance cannot be relied on, are fearful of any pension property tax issues.

However, if a specialist expert’s legal interpretation of legislation is sought and followed, such issues should not arise.

I hope the industry and advisers will not shy away, but it seems there is a legacy reluctance to touch this area. That is what I found when I recently discovered a possible tax error relating to pension fund property transactions, but in this case the error is tax being overpaid, which clients may be able to reclaim if they are alerted to the situation.

With only four years to make a claim, there’s an urgency to alert potential beneficiaries

Unfortunately, my efforts to alert the industry have been strongly resisted. Perhaps the experience with in-specie transfers has coloured their thinking and deterred them from seizing the chance to potentially achieve thousands of pounds extra for client pension funds, from stamp duty that never should have been paid when the property transaction occurred.

Lack of familiarity

After asking a number of lawyers, I discovered most conveyancing solicitors did not know about this issue. Indeed, of the tens of stamp duty relief types, most solicitors were familiar with only a few; this had resulted in routine legal advice for pension savers to pay stamp duty on commercial properties transferred into their personal pensions.

If a specialist expert’s legal interpretation of legislation is sought and followed, issues should not arise

This potentially erroneous advice ignored the fact property transactions between multiple owners in Sipps or Ssas might have no stamp duty liability.

Most property or pension lawyers seem insufficiently familiar with stamp duty law intricacies applied to partnerships and related-party transactions. It is a complex area requiring specialist expertise.

When a leading firm of stamp duty specialists asked me to look into the matter, I was sceptical such an error could be so widespread. However, after comprehensively studying the legislation guiding stamp duty payments, anti-avoidance rules and partnership provisions, I believe many people may have paid stamp duty unnecessarily if connected parties and multiple owners are involved, as the correct calculation of stamp duty can be zero. With only four years to reclaim the money from HMRC, there seems an urgency to alert potential beneficiaries.

After asking a number of lawyers, I discovered most conveyancing solicitors did not know about this issue

Just as advisers would automatically suggest someone should claim higher-rate relief on their pension contributions to reclaim their overpaid tax, clients or customers who unnecessarily may have paid stamp duty should be contacted and given the chance to take advice on reclaiming overpayments.

This may not apply to every transaction, but there are many circumstances in which a stamp duty expert can identify warranted reclaims. But the reclaim application must be submitted within the four-year window.

Many clients have received stamp duty refunds. I hope more advisers, providers or trustees will give others the same chance for improved pensions.

Ros Altmann is a former pensions minister

This article featured in the October 2022 edition of MM. If you would like to subscribe to the monthly magazine, please click here.

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We will move towards a new proactive regime for ensuring customer needs are being met, starting in April 2023.

The new Duty’s over-arching consumer principle is that firms ‘must act to deliver good outcomes for retail clients’, taking ‘all reasonable steps to avoid foreseeable harm to customers’, acting in good faith and enabling customers to pursue their financial objectives. 

The specific outcomes which must be delivered are good communications, product design, customer service and well-priced products or services offering good value.

This is a significant step up from current SMCR rules, moving from taking ‘reasonable’ steps to fulfil their responsibilities, to taking ‘all reasonable steps’ to avoid customer detriment.

Evidence of good advice

The Regulator will require documentation demonstrating how products, services and communications offer good value outcomes for clients, including justification for trail commissions, ongoing charges, choice of particular product and provider. 

Reviewing internal governance processes, measuring and tracking customer outcomes and service levels, improving complaints handling processes and transfer efficiency are likely to be required.

The new Consumer Duty rules will apply to advisers and even to providers who do not have a direct relationship with end-consumers, if their offerings can affect customer outcomes, or performance of products and services.

Effects on retirement planning?

The introduction of pension freedoms swept away the inflexible pre-2016 rules, providing tremendous opportunities to improve long-term customer outcomes. 

Now, however, pension withdrawal products could be designed to better fit today’s lifestyles, recognising that people have multiple pension pots, significant health differentials and retire gradually or work longer. 

Unfortunately, there is a dearth of innovative decumulation products and services.

Still the same old choice between annuity or drawdown, with ‘innovations’ such as ‘Flexi-Access’ drawdown to replace capped and flexible drawdown or ‘UFPLS’ – Uncrystallised Fund Pensions Lump Sum’ instead of tax-free cash plus annuities.

Is this really the best we can do?

The new freedoms offer opportunities for modernising pensions. My last column called for new mass-market accumulation products, beyond lifestyling or target date. We also need new decumulation approaches. 

Independent advisers can tailor-make and monitor clients’ retirement income strategies and investment options, ensuring they do not take money out too soon.

Most sixty-somethings who are still working may achieve best outcomes by leaving their pension intact and even contributing more.

Pensions are generally the last money people should spend – using ISAs, other savings or downsizing property first.  But what about the mass-market?

How about multi-asset diversified products offering fixed 3-4% percent withdrawals, with good risk-adjusted long-term return expectations.

Or splitting pension funds into four separate parts, starting when the customer stops working. Taking the tax-free cash for their 60s, while leaving the rest for their 70s, 80s and 90s, invested for higher expected returns over 20 – 30 years – moving away from traditional thinking that retirement funds should just invest in cash or low-return assets.

Alternatively, part of the fund might buy life insurance, perhaps with an early payout if the person needed money for care or annuities can be purchased around age 80, when the mortality cross-subsidy offers better value.

Such reforms could ensure pensions last longer and also address the care crisis.

The new Consumer Duty could help the industry rise to the challenge of devising new, flexible approaches to take advantage of pension freedoms properly.

Financial advisers can help clients directly, but mass-market customers are not being well-served yet and all involved may need to revisit their approaches.

Ros Altmann is a former pensions minister

The post Ros Altmann: Revolution is about to hit financial services appeared first on Money Marketing.

We all understand the enormous advantages of investing in pensions. They are a brilliant product, with generous tax breaks and additional money not available to most Isas or other investment accounts.

The market for customer-focused investment approaches is still wide open

However, the AE programme has relied on automatic payroll deductions of workers’ money, without any understanding of investment details and relying on the employer’s chosen provider for suitable products.

The failure of stakeholder products — partly due to historic pension scandals, complex jargon, regulatory barriers and a lack of financial education — clearly indicated the need for behavioural nudges to improve pension take-up across the population. But, despite unexpectedly low opt-out rates, there has been little advance in customer engagement or product development for these new pension investors.

This is puzzling given the context of radical pension freedom reforms from 2015. Although elements of these changes remain divisive in some corners of the advice sector, the reforms have made pensions far more flexible and potentially better suited to later-life financial planning and changing retirement patterns.

Most workers in their 50s and 60s have no idea their money is switching out of higher expected-return assets for about 15 years

Ending mandatory annuitisation and traditional drawdown restrictions could have paved the way for people to pay into pensions for longer, and mandatory employer provision could have provided lower-cost means of engaging, informing and serving customers in the workplace.

The industry has had a tremendous opportunity to reach out directly to millions of new or existing customers; helping them to understand all the benefits of pensions, encouraging them to contribute more and explaining about the extra ‘free money’ available — from possible employer matching and tax relief — when adding to the legally required minimum contributions.

Unfortunately, this has not been seized upon as many experts hoped.

Potential product improvement

Pension providers do not seem to have grasped this golden opportunity to design better products to cater for a different work-and-pensions landscape. They have not risen to the challenge of engaging their customers and promoting pensions.

Yes, there have been governance improvements and movement towards ethical, environmentally friendly ESG investing. But these changes do not mean much to the uninitiated investor and new types of drawdown, such as flexi-access and uncrystallised funds pension lump sums, are hardly likely to excite popular interest.

Despite unexpectedly low opt-out rates, there has been little advance in customer engagement or product development for these new pension investors

The industry has not succeeded in engaging customers at either accumulation or decumulation stage. More suitable pension products and direct-to-consumer solutions are missing.

Flagship offerings for most AE schemes are still their ‘default’ funds. Marketing advisers would surely suggest consumer-focused companies steer clear of this word. Why would anyone outside pensions think putting people’s money into something that offered ‘default’ was an attractive, customer-friendly proposition?

We may all understand this jargon but does it add positive value? At least ‘standard’ funds or ‘expert’s choice’ may have some positive resonance.

21st century lives

Most of these so-called default funds are still just lifestyling or target date, which will be unsuitable for many customers. Where are the attractive new approaches to fit 21st century lives?

Most workers in their 50s and 60s have no idea their money is switching out of higher expected-return assets for about 15 years, which could be entirely wrong for them. Gearing their funds to a date selected many years previously, which may not be the date at which they actually retire or need to draw their pension, without any requirement to review it regularly, is unwise.

The industry has not succeeded in engaging customers at either accumulation or decumulation stage

Switching mostly into cash by this date is probably unsuitable for those who will work longer, or keep contributing, and for those who will not buy annuities or will keep most of their money invested in drawdown products for several years. They would be better off with just 25% cash and the remainder staying invested, but are not told this.

The big opportunities of AE have been missed. The market for truly customer-focused investment approaches, engaging individuals with their money and helping them to build better pensions over time, remains wide open. Hopefully, exciting new approaches will evolve soon.

Ros Altmann is a former pensions minister

This article featured in the May 2022 edition of MM. 

If you would like to subscribe to the monthly print or digital magazine, please click here.

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