This article discusses private third-party pension sponsorship (3PPS) in the UK and how it can benefit both individuals and society. It provides an example of how 3PPS could help a man named George achieve his pension savings goals. It then discusses how 3PPS sponsors could invest in areas that boost the UK economy like infrastructure, property development using new technologies, and social housing. The article argues 3PPS has the potential to create pensions funds that wouldn't otherwise exist, lower dependency on the state, and redistribute wealth across generations.
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2. Private third-party pension sponsorship
in the UK- a chance for better social stewardship
T
his article follows up on a case study article that underpin the existing scheme options over the next
appeared in the March issue of PMI news. This five years. With the benefits being staggered
time as well as highlighting some of the between 20-25 years into the future from this, the
background case we looked at, I will focus on what sooner money is invested the greater the impact it
can be achieved for other stakeholders in society. has on his targets (see graph 2).
The original case study aimed to demonstrate The savings that George would need to set aside in
what can be made possible with innovation to create a vehicle of his choice, assuming the same 5.75% net
potential outcomes that are more affordable and of charges could be achieved are just £227 per month.
potentially two to four times greater for a consumer He will maintain full access to his savings and only use
than using traditional pension schemes in isolation. them to repay the sponsorship if the target returns are
As a reminder, George aged 42 had identified achieved. It is also more affordable and, from
that to have a realistic chance of reaching his defined George’s point of view, less risk as he has two
aspiration of having a pension of £37,500 p.a. in investments working rather than just one.
20 years he needed to have a minimum pension George has been made aware that a private 3PPs
fund of £625,000, based on a 6% withdrawal rate solution may be suitable as an addition to existing
being sustainable post retirement. pension provision, but it should not be seen as a
His existing pension fund of £100,000 growing total replacement of responsibility to save. From a
at 5.75% p.a. net of charges was projected to reach sponsor’s perspective, repayment of original
£305,920 Leaving a saving gap of some £319,080 sponsorship in the future allows them to redistribute
(shown in Graph 1). that capital to the next generation. If anything, it
The cost to bridge that savings gap would require would be reasonable to assume that the biggest risk
future funding of some £720 per month, currently would be to deny them the opportunity of
11% of George’s salary. He is unableunwilling to combining more than one strategy to lower overall
commit to this for a number of reasons including risk. Thus Private 3PPS is designed to help people
affordability, losing access and perceived views that meet a defined aspiration which they may have been
pensions provide bad overall value. Even the latest either unwilling or unable to reach with conventional
automatic enrolment efforts would not be enough solutions in isolation. A mixed solution could
to reach his targets. increase the willingness to save through a range of
Conversely a private third party pension vehicles and it is hard to see the case where a bad
sponsorship (3PPS) available to him for the next five outcome for George or a similar client could arise by
years could help him achieve his defined aspirations. having more set aside for the future than would
The sponsorship solution secures George’s ability otherwise be the case.
to make a total of £275,000 in contributions to
34 PMI NEWS SEPT 2012 WWW.PENSIONS-PMI.ORG.UK
3. Private 3PPS is designed to help people meet a defined
aspiration which they may have been either unwilling or
unable to reach with conventional solutions in isolation
Pensions and tax reliefs – “We've got a shot at really pulling together to
responsibility to provide good value turn upside down the way we approach the
Having a solution that helps an individual meet their challenges we are facing in the world and look at
defined aspirations is excellent from one prospective. them in a brand new entrepreneurial way. Never has
Philanthropic sponsorship that allows individuals to there been a more exciting time for all of us to
use allowances they may not have utilised without explore this great next frontier where the boundaries
the help of sponsorship needs to be balanced with between work and purpose are merging into one, Pierre Coussey
where doing good, really is good for business.” Chartered MCSI
social responsibility. It is a bit like most of the
APFSdip IMC
population having an ISA allowance when we know Source - Richard Branson Director of Pensions &
the vast majority cannot afford to fully utilise it. This Investment Strategy
is even more vital during difficult times of austerity. Support for the SME sector and Wealth Connection Ltd
A good social sponsor will typically aim to invest innovation when investing
in the host nation over a number of years in order to Scalability of sponsorship solutions depends on long
boost economic growth and repay the government term projects that are feasible to a sponsor and
the tax breaks in the shortest possible period. After provide a return on investment over a long duration.
this has been achieved they may look further afield Mapping demographic trends helps to identify areas
as any other global investor may. Thus a 3PPS of demand. A good source for basic trends can be
sponsor ideally will be tax aware and make specific found in the document Population Trends at
commitments in its style of investment both in initial www.statistics.gov.uk
years and be aware of tax receipts for the host The right innovation, particularly home made in
country throughout the lifetime of the individual the UK, can create a merger of benefits for the short
being sponsored. term economics if combined with things that can
Table 1 aims to demonstrate how the effects of also help a sponsor reach longer term objectives.
tax relief and reinvestment of newly created pension Like most investors the sponsor will employ a
funds in areas that a country needs investment can longer term strategic asset allocation policy. But they
be very socially beneficial from a fiscal point of view. will be matching this to a total investment cycle that
The example would be typical at a micro level for, say, can be ten to 20 years ahead to match the returns
required to meet a clients aspirations.
M
a group of 15-25 people like George benefiting from
a single year’s sponsorship. The same ratios would
apply to a scaled up level of sponsorship across many
thousand individuals if not tens of thousands.
Graph 1
As well as the first year effect, the same
investment cycle takes place with each subsequent
year. Thus 3PPS solutions with scale could effectively
repay the exchequer in excess of tax reliefs granted
typically within 12-18 months. The more important
factor, however, comes from the long term increase
in wealth that would not otherwise exist. This also
helps with long term balancing of the books and a
natural redistribution amongst different generations.
The great thing about a UK registered pension
scheme is the ability for HM Revenue and Customs
(HMRC) to clearly know what is held and that this
will potentially be available to help tax receipts in the
future. Innovation such as this that creates pension
funds that would not otherwise exist means there
should be less dependency on the state.
WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 35
4. A good social sponsor will typically the requirements on thermal efficiencies of buildings,
with regulations coming into place next year in the
aim to invest in the host nation over
residential sectors and further regulation set for
a number of years in order to boost 2016, which effectively means all new build property
economic growth and repay the will need to be passive/zero carbon.
One such innovation that has been selected by a
government the tax breaks in the sponsor is investing in a particular technology also
shortest possible period known as Insulated Concrete Formwork (ICF) to create
low or zero energy buildings for the future. A critical
price/supply barrier has effectively been met whereby
building with this technology can be done at no extra
This longer term investment avoids much of the
cost in comparison to traditional brick and block or
short term nature that has blighted much of the
timber frame.
financial sector, and allows for much reduced
The key factors that helped them identify this as
volatility. In this way investment into the source of
a future long term base to investments included:
UK PLC investment, such as via private equity, can be
I the period of carbon payback for production of
made. The long term nature of investing can mean the blocks being just one year’s use
companies and assisting them in their growth stages I structural aspects - the system components have
rather than short term stock market sentiment- adequate strength to resist the loads associated
driven investment or even removal of investment due with installation
to external factors outside a company’s control. I thermal insulation - the system contributes to the
“The best companies view sustainability not only overall thermal performance of the wall
as a chance to contribute to social goals, but also as construction
a powerful source of competitive advantage.” I condensation - walls, openings and junctions with
Source - Supply Chain Management Review other elements will adequately limit the risk of
surface and internal condensation
Investing in companies that have the right ethos
I behaviour in relation to fire - walls will provide
of not just today’s customer, but also those investing
adequate fire performance, provided the system is
for tomorrow’s consumer, can give added confidence
used in conjunction with suitable materials
in long term viability. I sound insulation - separating and internal walls
Another core area for growth investment is in the with the minimum concrete core density and
area of infrastructure and property; however this may detailing provides sufficient sound resistance
not be as simple as bricks and mortar. There may be I durability - the system components are durable
many reports on the desperate need for investment and backed by large institutions who provide the
in the UK, but looking behind the scenes can bring materials and backing to the technology
about new opportunities. In the construction
industry, as an example, new regulation is changing
Graph 2
[I]
36 PMI NEWS SEPT 2012 WWW.PENSIONS-PMI.ORG.UK
5. As well as growth sectors during a phase of The right innovation, particularly
accumulation, this needs to be a technology that can
home made in the UK, can create a
be applied to longer term income-producing sectors in
need of investment and having a demographic demand. merger of benefits for the short
Investment into zero energy nursing homes is another term economics if combined with
area that has good social payback as well as the lower
financial cost of utilities. things that can also help a sponsor
At the other end of the spectrum this technology reach longer term objectives
can be applied to new school buildings, giving better
learning environments. Children are our future so
adding benefits to the education sector allows some
targets can be met. The real breakthrough with this type
form of payback today. On the ground research is
of technology is being able to deliver the zero energy
important
building today at an identical cost to a traditional one.
“A brand new school building that is not boiling hot
The price equilibrium is such that being green does not
in summer and cold & noisy in winter would be one of
have to be a luxury choice.
the greatest things to improve my pupils education,
Innovation can create dilemmas such as what will
teaching them about how the science works would also
happen if you can increase the supply of new zero
be very rewarding ” Marco Dias – trimary teacher
energy social homes? Do you then need to find a
Leybourne School
political acceptable way of equalising the benefits
Reinvestment into the education sector in a number
systems so that different families have the same net
of ways is giving real chances to shape tomorrows’
benefits? Do these demand a higher rental premium?
pioneers’ of industry. Helping the construction industry
Whatever the answer, probably a blend of the two, this
has some of the highest payback of new jobs and offer
effectively creates a spiral of lowering social benefit
chances for apprenticeships in new trades and skills.
costs allowing further government support for this form
This also gets us looking at those not in employment
of building. Key decision makers, be this in local
and great things can be done in the area of social
government or housing associations, need to embrace
housing sector. Once again excellent long term investor
new technology and support these type of SME
information can be gleaned from publications such as
businesses on.
the www.communities.gov.uk and their Estimating
Finally are these some of the next areas for sustainable
Housing Need study published in November 2010.
income yield for tomorrow’s retiree, and perhaps enough
The liquidity issue for banks has increased the gap
to support a sustainable income yield? [I]
between supply and demand and governments have
recognised the need with softer planning requirements
where certain environmental or energy conservation
Table 1
Summary of tax Summary of Summary of Summary of Summary of NET tax position
relief issued by projected projected 20% 20% Income Tax 55% death for HMRC
HMRC to Infrastructure tax to be paid collected at duty charges assuming an
Individuals for Investment for by UK SME’s maturity via on income investor’s own
sponsored Zero Carbon & Suppliers to pensions in drawdown savings grow
pension Project Construction payment for assets at a net rate
contributions Industry 20 years (zero growth) of 5.75%p.a.
3PPS £476,000 £2,700,000 £540,000 +£64,000
Extra Pension £387,000 +£451,000
Death Duties £1,061,000 +£1,512,000
WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 37
6. regulator
update NAO REPORT ON DC PENSIONS
Renewed scrutiny of DC The principles and features cover areas frequently
The introduction of automatic enrolment has placed in highlighted but where current practice is mixed e.g.
sharp relief the importance of high-quality defined transparency of costs, charges, investment strategies,
contribution (DC) schemes. Unsurprisingly, there is also retirement processes and communication with
a heightened interest in the role regulation can play in members as well as areas less frequently discussed
positively influencing outcomes. The National Audit e.g. clarity of accountability, protection of assets, and
Office (NAO) recently published a report on the Bill Galvin
effective management of conflicts of interest. Whilst
Chief Executive
regulation of DC schemes and, later in the year many schemes are already well-placed to exhibit the The Pensions
Parliament’s Work & Pensions Select Committee will principles and features, their presence across the Regulator
carry out an enquiry into governance and best practice different segments of the DC landscape is not universal.
in workplace pensions. We welcome these reviews as
they help us to look at our work and our approach Regulatory architecture
from an outside perspective. There has also been a The NAO report also made three recommendations to
considerable amount of media interest in costs and Government relating to setting objectives, assessing
charges in DC pensions, and value for money in risks, and measuring performance. It does not propose
annuity provision. a single regulator for workplace pensions – though
These are clearly important areas of consumer there was significant comment and speculation
interest. The most important test is how the industry following the report’s publication. There is already a
responds to this increasing interest in DC outcomes. considerable degree of coordination between the
We are monitoring developments closely. regulator, Financial Services Authority (FSA),
Department for Work and Pensions and Her Majesty’s
Trends in
Recommendations Treasury, and our principles and features are a provision in
The recent NAO report was a measured and carefully significant step towards a more integrated approach. large employers
written review of the regulator’s work on DC Regulatory authorities working closely together in a
– who are
regulation and the wider regulatory architecture. It joined-up way is key.
recognised the achievements of the regulator in knowledgeable
accurately assessing risks to DC members, our overall Costs and charges and engaged on
risk-based approach to regulation, and our work on We’ve seen some prominent headlines recently critical
behalf of their
encouraging good administration. of the industry’s approach to costs and charges.
The NAO report had three recommendations for Although evidence points to these becoming more employees –
the regulator – including that we should look to competitive as automatic enrolment approaches, may not be the
strengthen performance measurement in relation to trends in provision in large employers – who are
best indicators
economic outcomes for members. The long-term knowledgeable and engaged on behalf of their
nature of pension saving, identifying objective employees – may not be the best indicators of the of the shape
benchmarks, and the wide range of factors beyond shape of provision among smaller, less-engaged of provision
the control of regulation mean this is not employers. We emphasise the importance of
among smaller,
straightforward. Nevertheless we accept the NAO’s transparency and value for money in our principles
challenge to accelerate development of performance and features; and our communications to employers less-engaged
measures linked more directly to actual economic will encourage them to choose value for money employers
outcomes for members. schemes. The FSA's work with financial advisers and
the National Association of Pension Funds’ proposed
Principles and features for good DC code of practice are important interventions, and we
pensions will monitor how the industry responds.
Shorter-term performance measures will be based upon
the presence of our principles and features for the Next steps
governance of good DC schemes, which are helping to The industry has shown broad support for our work
set the agenda for automatic enrolment. Our goal is so far. We intend to consult on our approach to
that all schemes are designed and run in the best regulating workplace DC pensions next year,
interests of members. We’ve discussed these including how the presence of our principles and
characteristics with providers and industry stakeholders features can be demonstrated across the different
and there is a broad consensus around them. segments of the DC landscape. [I]
WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 41
7. NEST
update TRUST, CONFIDENCE AND KAY
A long term approach to investment across all aspects of the pensions
industry can ony be in a member’s best interests
I
f you were asked to find a pension saver who welcome Kay’s proposal to reduce the pressure for
spends their time and energy fixating on changes short-term decision-making by asset managers that
to their pot every three months, you’d expect to be arise from excessively frequent reporting of financial
choosing from a pretty shallow pool. So one might and investment performance, including quarterly
Paul Todd is
wonder how the investment industry arrived at an reporting by companies. Head of Investment
At NEST we’re seeking to maximise pots over Policy
investment chain that has embedded just this sort of
the long term, but not at all costs. Delivering NEST
short-termism and one which is too often misaligned
consistently good outcomes generation after
from long-term interests of end users whose
generation cannot be about chancing short-term
investment horizons are likely to be decades, rather performance. This would inevitably create ‘unlucky’
than years, and almost certainly not months. cohorts and widely dispersed outcomes between
As a predominantly long-term investor – the generations and would do nothing to support the
average age of NEST’s target membership is mid 30s re-building of the public’s fragile trust in financial
– we fully endorse Professor John Kay’s independent institutions over the decades to come.
review examining investment in UK equity markets We’re deeply supportive of a culture in which
and its impact on the long-term performance and business and finance can work together to create
governance of UK quoted companies. high-performing companies and earn returns for
We’re firmly of the belief that now has to be a savers on a sustainable basis. While some reporting
golden opportunity for many in the investment world around NEST’s investment strategy has focused on
to re-focus on long-term performance and on the proportion of equities being lower than
contributing to building profitable and sustainable traditional 100% offering for those who start saving
companies and equity markets. with NEST in their twenties, the reality is we are The ultimate
With public trust in financial institutions at a a strong advocate of providing broad access to the
particularly low ebb, automatic enrolment and the benefits of global capital and share ownership. Our owners and
way in which pension schemes invest money on investment objective is all about significantly beneficiaries of
behalf of their members represents a huge and outperforming inflation and equity is a crucial
potentially once in a life-time opportunity to re-build UK equity
element to our successful delivery of this goal -
that trust. As Kay and others make clear, trust is a it’s just not the only thing we focus on. markets will
crucial factor in many ways throughout the chain of We agree with Professor Kay that promoting
investment participants.
increasingly be
good governance and stewardship is central to the
Our members put their trust in NEST to invest functioning of UK equity markets and were pleased hard-working
their money in a proper manner and, as asset holders to see proposals aimed at diminishing the current members of the
on their behalf, we expect our underlying asset trading and transactional cultures that encourage
managers to manage members’ money in way that is asset buyers to act like short-term tenants rather
public saving for
aligned to their best interests. Our fund managers than long-term owners. their retirements
know they have a responsibility to NEST and accept The ultimate owners and beneficiaries of UK
that they are also accountable to our members. A equity markets will increasingly be hard-working
significant part of our role is ensuring the alignment members of the public saving for their retirements.
of interests along all parts of the investment chain - They should be recognised as the true motivation for
from the individual contributing to a pension for the good and effective stewardship. Making real a greater
first time in Newcastle, to the equity trader operating alignment between the time horizons of all in the
out of New York. investment chain and final owners has to be a priority
Asset holders and pension providers play an if we’re serious about re-building trust and confidence.
essential role in the investment chain as the legal The challenge now is working together to implement
owners of shares with a direct relationship with genuine long-termism and in doing so deliver better
pension savers. We would like to see additional outcomes for pension savers into the future. [I]
investigation into their role. Small to medium-sized
pension funds may warrant particular attention as in
general they will outsource much of the decision-
making to asset managers and investment consultants.
As a long-term investor looking to build long-
term sustainable relationships with its partners, we
WWW.PENSIONS-PMI.ORG.UK PMI NEWS SEPT 2012 43