The big increase in private pension coverage is very welcome, but we need to improve the adequacy of pensions and the quality of provision as well.

The impact of auto-enrolment on pension coverage has been very significant. As the Resolution Foundation chart below shows, overall workplace pension coverage has jumped from 46.5% in 2012 to 72.9% in 2017. 

This chart also shows that the proportion of employees holding defined benefit pensions has continued its longer-term decline. However, this form of quality provision still covers almost 30% of the workplace. I know from my own experience as Joint Secretary of the SLGPS, the largest pension fund in Scotland, that auto-enrolment has also increased coverage, particularly among lower paid, mostly women workers.

While the growth in pension coverage is very welcome, contribution rates are often low. The initial default minimum contribution rates was only 2% of qualifying earnings. More than half of all private sector employees with a workplace pension contributed less than 2%. The minimum contribution is now 5% (with at least 2% from the employer). This will rise to 8% next April (with at least 3% from the employer). it remains to be seen, at a time when real wages are still falling, if these increases result in higher levels of opting out, particularly amongst low paid workers. 

The growth in coverage is largely in defined contribution schemes. This type of scheme places the investment risk on the workers who are least able to sustain it. If pension coverage and adequacy is to be sustained we need to defend and grow high quality defined benefit schemes and collective defined contribution schemes that share the risks.

A recent report by MPs on the Work and Pensions Committee highlighted market failure in relation to so called pension freedoms. The committee called for the government to rethink its decision not to allow state-backed provider NEST to offer retirement products. As they say, "Concerns that allowing NEST to offer such products would hinder competition in the market would carry greater weight were there evidence of a functioning market currently."

We also need to tackle the lack of transparency over the fees charged by investment managers. This is something UNISON has campaigned on for several years - a cause that has now been taken up by the Financial Conduct Authority. Their study found that fund managers were overcharging clients for hundreds of billions of pounds worth of investments. They enjoy huge profits and salaries, but performance is frequently mediocre. If low paid workers are to be encouraged to hand over their hard earned wages in higher pension contributions, then every possible penny needs to go into their pension pots, not the pockets of fat cats, who are currently ripping them off.

Finally, we also need to ensure that our pension funds are invested wisely and help to grow the real economy and create jobs. For example, investment in fossil fuels is not only risky as the world wakes up to the threat of climate change, but they don't create jobs either as the chart below shows.

So, let's celebrate the increase in pension coverage, but at the same time recognise that we have to put our pensions system in order. We also need to improve real wages and the adequacy of incomes in retirement, if that coverage is to be sustained. 

We are generally living longer at that means the cost of the state pension is rising. Does that mean the State Pension Age (SPA) should go up and up - or is there another way?

That's the question being addressed by John Cridland's state pension age review, visiting Edinburgh today. They published an interim report last October and are planning to publish their recommendations in March.
 
They are looking at the period after 2028, which excludes the planned changes before then and the controversy over transitional arrangements, including the issues raised by the WASPI campaign. Although it does highlight the importance of communication and transitional provisions in future.
 
There are three pillars to the review.
 
The first is Fairness. As most people probably understand, pensions are no longer paid from the National Insurance Fund - today's pensions are paid for by today's taxpayers. Intergenerational fairness is therefore something the review has to consider. 
 
A key issue in Scotland is that life expectancy is 1.3 years shorter than the rest of the U.K and also worse than most European comparators. This might lead to the conclusion that the state pension age should be lower in Scotland. However, differences in life expectancy within Scotland are much greater than the differential with the rest of the U.K. Social class, income and health remain the main reasons for a shorter life. We also need to recognise the quality of life in retirement.  
 
The second pillar is Affordability. Spending on the state pension is projected to rise from 6.1% of GDP today to 7.2% in 2040s (an extra £20bn at today's prices.). This is largely driven by an ageing and larger population. The relative value is also rising due to the 'Triple Lock', which adds around 0.3% of GDP.
 
The number of people above the SPA per 1000 workers is also rising. This is called the Dependency Ratio by economists - a very poor and inaccurate descriptor that always irritates me.
We are of course living longer and the review has an interesting slide that shows how every projection since the fifties has underestimated this trend. 
 
The third pillar is Fuller Working Lives. There has been a noticeable trend for people to work longer, even past the SPA. 1.2m people now take their pension and continue working. The reasons for this are not always positive and many are doing different job or working part-time. What gets less coverage is the increasing number retiring early, again not always for positive reasons. Ill health and caring responsibilities - one in nine people now have a family caring role.
 
Responses to the review consultation have highlighted the role of carers, ill health, burnout, help for older workers and healthy life expectancy. As always plenty of issues for the review to take into account, but fewer solutions.
 
It's a big issue for public service pensions because the normal retirement age in these schemes is now linked to the state retirement age. As I pointed out today, this means workers in demanding jobs are expected to work well past the age when they can realistically perform their duties. 
 
The answer apparently is that we need to consider changing jobs in the run up to retirement. However, this assumes that such jobs exist and that employers are prepared to fairly consider older workers. John Cridland mentioned B&Q, which is at best is the exception that proves the rule. We spend a lot of time and effort developing younger workers, perhaps we should consider a similar approach for older workers?
 
In addition, as a recent TUC report shows, barely half of 60-64 year olds are economically active and half a million people within five years of SPA are too ill or disabled to work.
 
The problem for reviews like this is that their remit encourages silo thinking. Many of the issues identified in the review have little to do with the retirement age. They reflect inequality in the workplace and in society more generally. Raising the retirement age will affect low income workers the most. This is because they have the greatest difficulty in saving for a private pension. High income workers will be able to build up a private pension, which will enable them to take early retirement before the state pension takes effect. The average Scottish local government worker has a pension in payment of just £3,750. This means they might save the taxpayer some social security benefits, but they won't contribute to the higher tax revenues - a common justification for raising the pension age.​

Compared to the rest of Europe, the UK has been the most aggressive in raising the SPA. The solution in this review isn't simply to increase the pension age yet again. We need to address a range of broader workforce reforms rather than rely on this crude and unfair mechanism.
here to edit.

All of a sudden, pensions are rarely out of the news. From changes to the state pension, through to transparency of investment charges and outright fraud. Largely as a result of auto-enrolment, thousands of workers are now in pension schemes and those approaching retirement have complex decisions to take as a consequence of pensions liberation.
 
Today, I was at the annual TUC pensions conference, probably the best of its kind, covering the full range of pension policy issues facing schemes across the UK.
 
Paul Nowak, Deputy General Secretary of the TUC, set the scene. Big issues for unions include improving auto-enrolment, a success, but weaknesses need to be addressed. Pensions adequacy in DB and DC schemes - there are no 'gold plated' schemes for most workers. The state pension needs to be protected and restricting access should be resisted. Intergenerational inequality, particularly for young workers facing insecure jobs and poverty wages, a point covered in a new TUC report today. Finally, stronger unions mean better pensions, so we must continue to organise to secure better pensions for all.
 
Richard Harrington MP, the UK pensions minister, highlighted the gap between the state pension and what most people need for a comfortable retirement. This means occupational pensions have a lot to do, around £10,000 a year (£250k pensions pot). He accepted that the move from DB to DC schemes has shifted responsibility from employers to employees, who need to take much greater interest in their own pensions. Auto-enrolment has been a success, although smaller employers still have much to do. When contributions reach 8%, cost may be an issue, but the benefits have to be promoted. He recognised difficult issues including adequacy and access - these will be addressed in the forthcoming review.
 
He referred to coming Green Paper on DB pensions. Issues for that review include consolidation of schemes to reduce costs and widen investment opportunities. The way pension funds are valued and inflation proofing. The role of the Pensions Regulator, fairly light touch compared to FCA, as Philip Green case illustrates, do they need more powers? Perhaps he should look at equality of treatment between dividends and payments into pension schemes! He noticeably avoided answering a question on that point!
 
Government is also working on better consumer protection. Consolidating guidance bodies and tackling scams. The Pensions Bill in parliament is also addressing the master trust issue. Overall, his contribution was well received, certainly in listening mode, even if he ducked some of the difficult issues on adequacy and the state pension.
 
Ian Baines from Nationwide, presented a case study on how they improved adequacy of their DC scheme with higher employer and employee contributions. An impressive communications campaign persuaded more staff to pay more to get more out of their pension.
 
Steve Webb, former pensions minister, talked about pensions and the self-employed - bogus or not. Latest figures show only one in seven in a pension scheme. Self-employment now covers large numbers of people who would have been employees in the past. He argues that Class 4 NI contributions could be redirected into voluntary pension schemes, similar to auto-enrolment for employees. Of course the problem could also be reduced if we ended bogus self-employment.
 
Labour peer, Patricia Hollis, covered sex discrimination, quoting Scottish Widows research - the problem for women and pensions is that their lives do not mirror those of men. For example, half of women end pension contributions at childbirth. She was particularly critical of pensions liberation, which is being used to clear problem debts. She recognised gains from auto-enrolment, but the low pay threshold and rules on aggregating employment, has hit women harder than men. She called on the government 2017 review to tackle discrimination against women by introducing a blended product between savings and pensions.
 
Daniela Silcock from the Pensions Policy Institute talked about what information people need about pensions. In an interesting approach, she looked at information needs at different times of life, from childhood to adulthood to approaching retirement and finally in retirement. Research shows that better financial education results in a significant improvement in financial capability. Even numeracy levels are low in UK.
 
The afternoon session started with an examination of the impact of pension liberation. Ignition House have undertaken detailed research with more than a one thousand participants, focusing on middle income pension pots. The publicity did generate an initial sense of excitement, but also concern that savers might make wrong decision - 'pensions are a minefield' was the most common response. However, there is also a short-term, optimism bias, with a tendency to ignore risk or develop confirmation bias.
 
People are also struggling to cope with the plethora of information available, although there was good awareness of the Pension Wise advice service - even if few used it, although those that did found it useful. Very few used a professional advisor, beyond an initial consultation. There were issues of trust and past poor experience, coupled with high cost and advisors unwillingness to deal with smaller pension pots. Most people in the study failed to make a decision, those who did took a lump sum, viewing it as cash to spend today, not a lifetime decision. They had limited idea of how the balance is invested and what the charges are. This included some frighteningly risky investments. The research indicates some sensible reforms, but the bottom line is that this is just too complex for most people.
 
The session on DB schemes highlighted the huge numbers that still rely on these schemes. They are not as badly funded as many claim - First Actuarial calculate a £270bn surplus in DB schemes. Gilts plus actuarial valuations need to be challenged, as they significantly overestimate liabilities. Shock headlines need to be challenged as they are often used to soften up employees.
 
The final sessions focused on the review of the state pension age by John Cridland. He is coming to Edinburgh this month, so I will cover that issue in a separate blog. I sadly missed what looked like a fascinating debate between John Kay and the Investment Association on active fund management costs, but my blog on the recent FCA report covers the issue.
 
As you can see there's a lot going on in pensions. The message from this conference is that we all need to take a lot more notice of what's happening. We should all be pension geeks now!

​Dave Watson

If you read anything about pensions this year, you should include the recently published Financial Conduct Authority (FCA) interim report on the asset management market. It may not be the easiest read, but it shines a light on why we get such poor value for money from our pensions in the UK.
 
OK, I don’t expect you to read all 206 pages! There is an executive summary. It should certainly be required reading for pension trustees and in the SLGPS, pension board and committee members. It confirms what UNISON has been shouting about for some time – we need much greater transparency over the real cost of using investment managers.
 
The UK’s asset management industry is massive. It manages £6.9 trillion of assets. Over £1 trillion for individual investors in the UK and £3 trillion on behalf of UK pension funds and other institutional investors. The service offered to investors comprises a search for return, risk management and administration – although it is the investor that bears virtually all the risk.
 
Over three quarters of UK households with occupational or personal pensions use these services, including over 10.2 million saving for their retirement through pension schemes. There are also around 11 million savers with investment products such as stocks and shares ISAs.
 
There will be very few UNISON members who are not touched by this industry, although most will probably have never heard of it. More importantly, they will have little idea how much of their hard earned cash goes to the industry. The report states that asset management firms have consistently earned substantial profits with an average profit margin of 36%! These margins are even higher if the profit sharing element of staff remuneration is included. The saying ‘we are in the wrong job’ has a whole new meaning!
 
On transparency of costs the report states that investors are not given information on transaction costs in advance. These costs can be high and add around 50 basis points on average to the cost of active management for equity investments. The report says:
“In addition, we have concerns about how asset managers communicate their objectives and outcomes to investors. Investors may continue to invest in expensive actively managed funds which mirror the performance of the market because fund managers do not adequately explain the fund’s investment strategy and charges.”
 
This is something the LGPS has been addressing through its transparency code and the Scottish LGPS has issued guidance to funds in Scotland to adopt the code. However, its still only voluntary at present and measurable outcomes are still some way ahead. The drive for transparency is not as present on the retail side with only half of investors even aware if they are paying charges.
 
One of my colleagues likes to illustrate this issue using a fridge analogy. If you buy a fridge you can compare the marked price. But the real comparison should include, energy use, delivery charges, warranties and much more. Very few of these charges are transparent when it comes to asset management.
 
More of us will be familiar with the investment disclaimer, "past performance is no guarantee of future returns". The FCA report highlights the reasons for this. Funds measure performance over different time periods and there is a practice of merging poorly performing funds, “giving investors the false impression that there are few poorly performing funds on the market”. Even those who do outperform don’t continue to outperform the relevant market index or peer group for more than a few years.
 
Pension trustees are often sold active investment strategies on the grounds that they deliver higher returns than passive funds that track an index. In the UK the split is around 20% passive to 80% active, whereas in the USA the split is closer to 50:50. However, the evidence in the FCA report suggests that actively managed investments do not outperform their benchmark after costs. And the costs of active investments are significantly higher than passive investments as this chart from the report shows. 

​Charges have also have remained stable, unlike charges for passive investments, which have been falling. The FCA suggests that this reflects competitive pressures and unwillingness in the active fund market to undercut each other. Weak pressure on prices can lead to weak cost control.
 
The FCA report is particularly scathing about the role of investment consultants, with 60% of the market controlled by three firms. For example, they found that investment consultants accept hospitality from asset managers, suggesting a further conflict of interest and could result in poor outcomes for end investors. They are considering a market investigation reference to the Competition and Markets Authority (CMA).
 
The report concludes with a number of very welcome interim proposals on remedies – not least on transparency and all-in fees. However, this is a hugely powerful and profitable industry and they will be lobbying hard to water down any action. It’s up to us to reclaim our pension funds for the workers who rely on them.

Yesterday’s budget was originally going to be a big day for pensions with announcements on the review of pension taxation. However, this was scrapped or deferred, as the political consequences for Brexit put it in the too difficult file for now. In general, there will be a sigh of relief for most of the sector, as Osborne would probably have made the wrong decisions. Even though there are sensible reforms that UNISON and others suggested to the review.
 
This doesn’t mean there was nothing of interest on pensions. Early in the Chancellor’s speech he mentioned a change in the Discount Rate. I choked on my soup, but most people would be thinking ‘what’s that?’ The Discount Rate is the assumed investment return used in a present value calculation of assets and is probably the most important factor in pension cost calculations.
 
The current net Discount Rate above inflation (CPI) is 3% and he reduced it to 2.8% with effect from 2019-20. This announcement wasn’t expected because there has been no consultation with stakeholders or an explanation as to why it is being reduced.

The accompanying OBR report explains why this is important:
“the Government has also placed an additional £2.0 billion a year squeeze on departments in that year by raising planned public service pension contributions, in line with a lower discount rate, but not compensating them for the additional costs they will face. This reduces borrowing by displacing other departmental spending within existing expenditure limits, while reducing net spending on public service pensions;”
 
This means the employers in pay-as-you-go public service schemes (primarily NHS Scotland health boards for UNISON) will have to find another £2 billion pounds from 2019. Health board finance directors will be busy calculating their share of that cost. It doesn’t do anything for pensions; it’s just another Treasury raid on public services.
 
In a funded scheme such as the Scottish Local Government Pension Scheme the discount rate is an assumption about future investment returns in order to “discount” future benefit payments back to the valuation date at a suitable rate. The Scottish LGPS funds use different discount rates, largely dependent on which actuarial firm is advising them. Some are already using rates that we consider too pessimistic and below the current 3% rate.
 
When we negotiated the SLGPS 2015 scheme, it was based on a discount rate of 3% above CPI. The rate used in future is a matter for the SLGPS Advisory Board to advise Scottish Ministers, so we are not bound by the Treasury view. The Treasury assumptions are used for the cost share calculations. However, they are only used for calculating the employer contribution cap (currently 15.5%).
 
The budget also included the expected announcements on pooling of LGPS investments in England and Wales. These are irritatingly called ‘British Wealth Funds’. They are neither ‘British’ because Scotland is not included, or ‘Wealth Funds’ – they are our members deferred pay and not for George Osborne to play with.
 
Other pension changes in the budget are likely to have a greater impact on our members’ outwith the main public sector schemes.
 
A particularly welcome announcement was that there will be no change to salary sacrifice schemes. These arrangements allow both employees and employers to reduce their National Insurance liability in lieu of pension benefits. It has been an important way for members to be able to afford pension contributions.
 
From 2019 a new digital platform will be launched which will provide details of an individual’s entire pension portfolio. Many in the industry doubt that the dashboard will ever come to light; there are simply too many outdated legacy systems still being operated by insurance companies and pension administrators alike.
 
There is a relatively little used tax and National Insurance free allowance of up to £150 per employee for employer arranged pension advice. This allowance will be increased to £500 per employee from April 2017, which will hopefully enable lower paid employees to access professional advice.
 
From April 2017 anyone under 40 will be able to open a Lifetime ISA, whereby for every £4,000 saved the government will add £1,000 every year until the age of 50. There are a range of conditions attached. He has also increased the annual ISA allowance from just over £15,000 to £20,000. Precious few of our members will be able to save anything near this sum.
 
Many industry commentators reckon this is the Chancellor’s way of implementing a ‘Pensions ISA’ via the back door by creating a voluntary one instead. The risk is that it may encourage younger staff to opt out of auto-enrolment, losing out on employer pension contributions. There is also a risk of scams and excessive charges because these schemes are not covered by pension regulations.
 
The government will also create a ‘new pensions guidance body’, which will replace the Money Advice Service and merge the functions of The Pensions Advisory Service and Pension Wise. They claim this will ensure “consumers can access the help they need to make effective financial decisions”. Highly doubtful.
 
So, while there were few pension headlines in the budget, there may be some hints as to future direction. For the battered public sector, there are just unnecessary additional costs.

 From 6 April the Basic State Pension and Second State Pension (S2P) will end and be combined/ replaced by a new State Pension. Those who are paying reduced rate NI Contributions at the moment because they are in a work place pension scheme that is better than the Second State Pension will start to pay the standard NI contributions and start to earn a higher State Pension.
 
Who will it apply to?
 
This will apply to nearly all our members who are contributing to a workplace pension e.g. LGPS, NHSPS and private sector pension schemes.
 
How are National Insurance Contributions being calculated up to April 2016
 
If someone earns more than the Lower Earnings Limit currently £5824 a year (£112 a week) they will start to qualify for a State Pension. If they earn above what is called the ‘primary’ threshold currently £8060 a year (£155 a week) they start to pay NI contributions on earnings above that figure.
 
If they are in the Second State Pension they pay 12% on earnings up to the Upper Earnings Limit (£827 a week from April 2016) that is NOT in a work place pension that is contracted out of the Second State pension.
 
If on the other hand they are not in the Second State pension because they are paying into a work place pension instead that is contracted out of the Second State pension, they currently pay a reduced rate of 10.6% from the primary threshold up to what is called an ‘Upper Accrual Point’ of £770 a week and then pay 12% up to the Upper earnings Limit. On earnings above the Upper earnings limit the contribution goes down from 12% to 2 %
 
At the moment those who are contracted out also get a further small reduction on earnings between £5824 a year and £8060 a year.
 
How will National Insurance Contributions be calculated from April 2016
 
So after 6 April 2016 everyone will be paying 12% between £8060 a year and £43004 a year into the new State Pension. On earnings above Upper Earnings Limit of £43004 a year from April (£827 a week) they will continue to pay just 2%.
 
Set out below are some examples from the LGPS, NHSPS, Water, Energy and Voluntary Sector. They are purely illustrative of typical jobs and levels of pay in the sector.  There may be small differences due to rounding in the NI calculations. The reduction in take home pay will be offset to certain degree by changes in tax thresholds from £10600 to £11,000 and if they receive a pay rise round April
 
Of course the person has to be a member of the relevant work place pension scheme. If they have opted out or haven’t joined; they already pay the higher rate.

Key Messages
 
For those who reach their State Pension Age after 5 April 2016 will have their State Pension calculated on the new basis. The full State Pension from 6 April 2016 will be £155.65 a week if a person has a minimum of 35 qualifying years and no contracted out service in a work place pension scheme like the LGPS,NHPS etc...
 
If you have a lot of contracted out service and you would have qualified for the pre April Basic State Pension your minimum new State Pension at 6 April 2016 will be the single person’s Basic State Pension of £119.30 a week from April not the £155.65 a week.
 
If you are still working after April and earning above the lower earnings limit you will earn extra pension up to the maximum of £155.65 a week (this will be increased in line with the better of average earnings, inflation (CPI) or 2.5%).
If your State Pension is less than £155.65 per week you can earn extra state pension up to your State Pension Age or until you reach the maximum pension that starts at £155.65, whichever occurs first. For every year you pay at the higher rate you would be earning based on the starting pension,  £4.45 a week extra pension until you reach State Pension Age or you reach the maximum State Pension (that is 1/35 X £155.65 = £4.45 a week).
 
So for most of our members in workplace schemes they will be paying more NI but earning extra State Pension at a very reasonable price.
The new full State Pension is still below the poverty line so members should not leave their workplace pension scheme.
 
In the LGPS where the opt out rates are highest amongst low paid staff the message is if you feel you cannot afford the higher NI and stay in the LGPS consider electing to pay half your normal contributions to the LGPS to get a lower benefit until you can afford to pay at the full rate again.
 
Everyone should apply in writing or on line for an up to date state pension statement
https://www.gov.uk/government/publications/application-for-a-state-pension-statement
 
What are the other issues?
 
There is a big issue on who will pay the pension increase on the part of the workplace pension the member would have got if they had contributed to the Second State Pension instead of their workplace pension.
 
Until April this increase has mainly been paid as an addition to the state pension. From April depending on the rules of the scheme either the pension scheme will now have to pay or it simply won’t increase in line with inflation anymore for anyone who reaches State Pension Age after April 2016.
 
Public Sector schemes like the LGPS and NHSPS would pay the increase unless the government allows them to change the rules. Good news for members, but another burden on the schemes that could feed into further cuts and job losses.
 
There is a danger that a number of women and men who reach state pension age after April will be worse off as spouses pensions attached to the basic state pension are being withdrawn. They will not be able to increase their state pension using their spouse or civil partner’s (or late or former spouse or civil partner’s) NI contributions but if they are widowed they may still be able to inherit some additional State Pension under transitional rules.
 
The increase and equalisation in State Pension Age has meant that particularly  women born in the first half of 1950’s are being faced with a larger than expected increase in their State Pension Age. The government is being pressured into looking again at the transitional period and possible compensation for women whose State Pension Age is set to rise by more than a year by April 2020. There is a petition with currently 148,000 signatories and ongoing debates in parliament.
https://petition.parliament.uk/petitions/110776

MSP’s have highlighted today how local government pension funds could make a useful contribution to infrastructure in Scotland.
 
The Scottish Parliament’s Local Government and Regeneration Committee has published a report on pension fund investment in infrastructure and City Deal spend. This is a good analysis of the current position and they examine the barriers to infrastructure and other socially useful investment.
 
The Committee draws attention to the UNISON Scotland report Funding and building the homes Scotland needs 2013. I wrote this paper with assistance from the Scottish Federation of Housing Associations. It called for local authority pension funds, with Government backing, to invest in Registered Social Landlords providing low risk and socially useful investment. Sadly, nearly three years later, there has been only a limited take up of this proposal, while £billions have been invested in overseas equities – not to mention arms companies, tobacco firms and fossil fuels.
 
The Committee identifies a number of barriers to infrastructure investment. Most of these have been recognised by the Scheme Advisory Board (SAB) for the Scottish LGPS and are included in their current workplan.
 
The investment regulations limit the amount of investment each fund is allowed to invest in infrastructure and other categories. These are overly prescriptive and the SAB at its last meeting recommended abolishing them and replacing the regulations with a more flexible code of practice.
 
Another barrier is lack of expertise. In effect pension funds invest in what they are comfortable with or as the Government Actuary Department (GAD) put it: “GAD considered funds didn’t invest in infrastructure because of a lack of necessary expertise to assess and quantify the risks involved, so they preferred to invest in assets with an established income stream.”
 
The obvious solution is to recruit the expertise. This is linked to an over reliance on expensive external investment managers. Lothian Pension Fund is probably one of the better examples of building in-house capacity in Scotland, but the best UK example is West Yorkshire, as the report notes:

“37. Our attention was also drawn to WYPF and its approach to in-house investment management. In its written submission, it gave a number of advantages over externally managed funds, namely the speed of identifying potential infrastructure opportunities, the speed of authorisation for new infrastructure investments and the ability to manage investments over the longer term as in-house investment managers were free to make investment decisions based on a long-term assessment of the investment and returns.32
38. This in-house approach enabled the Fund to gear its strategy towards low risk investments, over a longer period of time, and to keep fee costs down to achieve a 96% funded scheme.33”

Fiduciary duty is also claimed to be a barrier to infrastructure investment. In my view this has been interpreted too conservatively by some funds in advice to their pension committee/boards. The report urges funds; “which haven’t yet considered these types of investment, to challenge themselves to do likewise and give a degree of priority to investing members’ funds more locally and building in elements of public good”. This is sound advice and I have written a briefing on fiduciary duty for our members on pension boards that sets out how this can be done. The SAB has also commissioned further legal advice and plans to issue guidance to funds on this issue next year. As the committee puts it; “We make the point that without some degree of risk taking, innovation will not happen. We see parallels with the taking of a narrow interpretation of the fiduciary duty”

The report briefing touches on the pooling of funds as one way over reducing costs and building expertise. This follows the UK Government’s decision to push funds in England and Wales into six ‘wealth funds’. Guidance on this was published last week as part of the Chancellor’s Autumn Statement. The Committee was ‘less attracted’ to this formal approach, drawing attention to the informal links that exist between funds in Scotland. The SAB has this issue in its workplan and is starting with new data collection tools that should inform this exercise. Pooling investment is not just an issue for infrastructure investment. It is also a means of improving transparency and reducing the very high costs of external investment.

Finally, the Committee looked at the topical issue of ethical investment and concluded:
“43. While considering rates of return, it would be remiss of us not to consider investments in certain industries, for example, fossil fuels, arms and tobacco. These might provide a high rate of return but we question whether local government pension funds should be investing in such industries given social, environmental and ethical considerations. We note Strathclyde Pension Fund’s view these industries would be less responsible if public pensions did not invest and also that collective action by investors can have a greater influence on the industry. We consider funds should be guided by consultation with their members on this issue.”

The Committee is right to question such investments as UNISON representatives have been doing at pension boards. While pension funds are part of local government they are also bound by public law duties that government has placed on councils, such as climate change.

Overall, this short inquiry is a useful overview of pension funds and infrastructure investment and well worth a read. Most of the issues they have identified are being taken forward by the SAB, but there is also an issue of pension fund culture to be addressed. That may be a more intractable challenge. ere to edit.

Workers pensions across the world are facing similar challenges and we need to learn and act together.

I was at the 2015 Workers Capital Conference today, meeting with union pension negotiators and trustees from across the world. There is great best practice that we need to learn from, but also recognise that funds are invested internationally. We are investing in each other's communities and economies. Pension funds own half of the assets in the world and we should act collectively.

The first session looked at the role of trustees and shareholder activism. 

The Californian teachers pension fund had some good advice for union pension trustees. They distilled these into seven effective ways of working.

• No place for fear. Don't be intimidated by the experts and hand over your fiduciary duty to the 'money people'.
  
• Stay curious. Be inquisitive and don't be afraid to ask questions.
  
• Be unwaveringly ethical. Remain true to those you represent. Without this funds are vulnerable to manipulation.
  
• Think objectively. Not enough to know what to do, be ready and willing to share views.
  
• Work hard. Read the materials, understand best practice. But recognise there is never enough time to do everything.
  
• Keep focused. Money managers are skilled at distracting trustees.
  
• Listen first. Speak less and listen more. Intervene at the right moment, don't just follow the money managers.
  

The Dutch pension fund ABP talked about shareholder activism. Examples included tackling poor labour conditions for textile workers in Bangladesh and Burma. Lack of safety standards and resolving the 'leukaemia dispute' at Samsung. Anti-union practices at Walmart. The latter resulted in four years of work before divesting. Their strategy involves intense dialogue, asking key questions and site visits. Sanctions included voted against directors remuneration and finally divestment, but only when all else fails. All of this is much more robust than the sort of ESG engagement advisors in Scotland pursue.

The U.S. Bakers union have a similar strategy through their capital stewardship programme. Part of their organising department because they see this work as building the union. Companies with good governance perform better, particularly those who treat their workforce fairly. They work with other funds collaboratively to target specific issues and sectors, particularly retail companies. An example of their engagement was the retail firm GAP, promoting a living wage and a good jobs strategy.

While there were different views on priorities, there were some common issues. Infrastructure investment to boost the economy (but not PPP), climate change and workers rights are probably the three main ones and there was support for some broad common goals. Pension funds are long term investors and there was an interesting debate about the pace of change funds should expect from the companies they invest in. Fiduciary duty shouldn't be a barrier to achieving common union goals.

The second session looked at pension fund management and transaction costs. The best approach is the Dutch model who have a level of understanding and transparency that we should aim for. Scottish funds have very little grasp of the true transaction costs of their equity investments. The Dutch now have legislation regulating this approach and this includes an asset management contract that is reducing costs. 

Unsurprisingly, commercial asset managers in the UK resist this approach - even those who can do it in The Netherlands, because they have to! There is no good reason for telling us what something costs - if they can't tell you don't buy their services! 

We probably only know about one third of the real costs. They are much higher than we think, probably three times higher at least. This matters when pension funds are under financial pressure. When resources are tight we should look closely at costs. It is also a fiduciary duty on trustees to know the true costs of their scheme, so they save contributions, not pay for profits.

Cutting costs is best done by bringing services in house. The top performing LGPS schemes in the UK are largely delivered by in house teams, cutting out the rent seekers. Active fund management is an illusion to fool us into trading that makes huge profits for the asset managers and hedge funds. It was interesting to hear that even New York public pension funds are coming to the same conclusion about active fund management.

The lessons for Scotland are that we should introduce systems that make real costs transparent, bring services in house, and largely get out of active fund management. Another lesson is that size matters and we should pool assets.

A lot of these issues appear complex to the average union trustee. But the value of today's conference is the sharing of information and developing common approaches. There are few more important issues than our member's pensions and there is much to do.