There are some big changes to our pensions next year. The Scottish Local Government Pension Scheme changes next April and the UK government is allowing transfers out as a lump sum. In addition, new governance arrangements should ensure that the £24bn in Scottish funds are invested more effectively for the benefit of members.
I was at UNISON's annual pensions seminar today that brings together pensions champions from local government funds across the UK. While the Scottish scheme is separate from its England and Wales counterpart, there are a number of common concerns.
There are huge variations in the performance of funds across the UK. We simply don't know the true cost of investments and there is not even an agreed set of key metrics so we can compare funds. One speaker gave an insiders explanation of how asset managers try to hide the true costs. He gave us a frighteningly long list! I particularly liked (not) private equity firms who charge the firms they invest in to put one of their staff on the board, which of course reduces the financial performance of the company and therefore the return to pension funds. There are also a range of conflict of interests in the value chain that again add to costs.
Some firms are trying to put Non Disclosure Agreements (NDA) around cost data, which just demonstrates that they have something to hide. We should be saying, we will not appoint asset managers that want to hide costs. They are anyway subject to FoI in the LGPS. Evidence from the transparent Dutch market shows that a 40% reduction in fees is possible. The published data the Dutch have is amazing and has been the key to driving down costs. Trustees should be asking their Custodian Fund Accountant, who have most of the data
There was a useful explanation from the Law Commission in England (the law on this point similar in Scotland) of fiduciary duty and what factors you can take into account in ethical investment decisions. In my experience, trustees are given a very narrow interpretation of this because fund managers are not keen. In fairness, the case law is based on some bad factual cases. The Law Commission report shows how you can ethically invest legally using due process. Many decisions can be given a financial gloss and even non-financial factors can be taken into account if you follow the process outlined in their guidance. They also recommend some changes to local government investment regulations that we will need to look at. In particular, confirming that funds should be invested in the interests of the members - not what the councillors think is in the best interests of the council!
A key issue is again getting quality data. We should be tagging unethical firms on the investment database so that the fund is notified anytime asset managers invest in them. A number of speakers in the final panel highlighted how effective activist share action can be in promoting ethical investment. Also on issues like executive pay that has spiralled out of control in many firms. The TUC has developed trade union voting and engagement guidelines and organisations like Share Action are also running effective campaigns.
From next April, all members in funded schemes will be able to take their pension pots from age 55. What many people don't realise is that they will pay tax at their marginal rate on 75% of their pot. We will need to watch out for pension scams and develop rigorous procedures to ensure members get proper advice. There is also a risk that some funds could suffer negative cash flows. The government says they don't expect many to do this in quality schemes like the LGPS. Although interestingly the government hasn't allowed members in pay as you go schemes like the NHS to take out their pot, because that would be a cost to the government!
The coming year is going to be a busy one for union pension representatives at every level.