The latest Pensions Age Autumn Conference addressed the changing nature of the challenges facing pension schemes

At our Pensions Age Autumn 2012 Conference: Ever-Changing Times, key note speaker Darren Philp kicked off the day with the NAPF’s view on reinvigorating pensions. He repeated the association’s view that the focus needs to be on the member and on how to achieve better retirement outcomes, which he said is not always the case at the moment.

To improve the UK’s pension system, Philp said the first step needs to be to improve the state pension, as people need a clear foundation to build their pension savings on. “With no guarantee on this, it makes the communication challenge around auto-enrolment very difficult,” Philp said, referring to communicating to members how much they need to contribute.

On auto-enrolment, he said that the industry needs to make sure people save enough and in the right schemes that give them the right outcomes. He compared the UK’s average scheme size of 2,600 members to the Netherlands’ 10,500 and Australia’s 27,000 and said there is a need for consolidation. He cited better buying power, better investment strategies, better communication strategies and lower charges as advantages of larger schemes.

He finished off his presentation by discussing the move from DB to DC and the need for DC with some guarantees. He said that current regulation “polarises between DB and DC” and is therefore stifling innovation. Philp welcomed Steve Webb’s idea of defined ambition, but he added that we should not force people to do anything, but rather make it a permissive regime.

Following the update on the NAPF’s view, managing director, client portfolio management in J.P. Morgan Asset Management’s global multi-asset group Olivia Mayell looked at the underlying assets hedge fund managers invest in and how pension funds can easily mimic these investments themselves, thus creating more (sub) asset classes to invest in.

She said that although people have talked about risk parity, they mainly move away from equity or try to diversify by investing in different geographical areas. “But different regions move together in equity markets. The purpose of diversification is to move away from that. So diversifying equity might be a bit futile,” she explained.

She talked the audience through the underlying assets of three popular hedge funds strategies - convertible bonds, equity long-short, merger arbitrage - and how these strategies can easily be implemented by pension funds themselves.

She pointed out that what a lot of people see as alpha is in fact beta and she recommended the audience to look at the underlying assets and strategies that drive return.

Third up was Premier Pensions Management head of administration Daniel Taylor, who explained the latest trends in the administration space. He started off discussing delivery, pointing out there is a continuing trend to outsourcing, especially with the number of closed DB schemes growing.

He added that member engagement is a key element, especially in light of auto-enrolment. “Confidence in the pensions market needs to make auto-enrolment work. But 33 per cent of respondents to an Aon Hewitt survey have said they would opt-out at the first chance they get. I think the administrators also have a roll to play in educating employees.”

Finishing up the first session before coffee break, Sarasin & Partners partner and deputy chief investment officer Henry Boucher shone the spotlight on long-term returns.

There is a new breed of savers out there, he said, adding that this will also start driving the investment market because those countries will have much bigger pension markets.

He emphasised that investors are always looking for upward trends, but that these are hard to find at the moment. Developed markets have a lot of debt to pay off, so there are less upward trends. However, he mentioned data obesity and dietary change as some of the areas were upward trends can still be found.

“Investments continue to be increasingly global, investors need to work harder to find upward trends. But they’re there. Not by buying the market as a whole, but one needs to seek them out,” he said.

After the coffee break, Aon Hewitt’s Sue Clark presented fiduciary management as a pragmatic, creative solution for trustees faced with dozens of challenges such as deficits and pressure to close funding gaps at a time when sponsors are dealing with their own business issues.

Reporting on the findings from Aon Hewitt’s 2012 Delegated Investment Survey, Clark announced that flight plans are being executed or actively planned by 85 per cent of trustees, up from 55 per cent last year. The demand for fiduciary management is up from 17 per cent last year to 27 per cent this year and the initiatives are overwhelmingly from trustees.

JLT Pension Capital Strategies director and head of buyouts Martyn Phillips talked about the myths and barriers that prevent trustees and scheme sponsors de-risking to their advantage in the buyout and longevity swap market.

He presented seven myths about buyouts, such as the perception it takes nine months or longer to complete a buy-in and will miss opportunities in volatile markets. He said this is not true as deals can be completed within three months.

“I think we learned from last year that the market can thrive in difficult times. And we do still think pension buyouts will dominate the market.” he said. Most transactions continue to be conventional bulk annuities.

He added: “No scheme has ever regretted a transaction but plenty regret not acting when the time was right.”

Ignis Asset Management’s director of fixed income Helen Farrow explored the benefits of using forward rates as a more pragmatic LDI solution. She said forward rates provide greater clarity than conventional ‘bucketed’ approaches because individual one year rates underwrite the averages.

The price advantage is also a notable difference with forward rates. “There is a sizeable amount you can save with a more intelligent approach to hedging,” she said. Using gilts rather than swaps uses the government as collateral and that is a better and more transparent way, Farrow said, as trustees can simply look up the performance of gilts in the paper.

Next, B&CE’s director of customer solutions Jamie Fiveash presented the simplicity of The People’s Pension to help engagement with low income and transient employees such as in retail, hospitality and construction and to help employers communicate necessary information.

He said simplicity is key in communication and complexity causes distrust, like with energy bills.

“We’re not saying that what goes on underneath the bonnet can’t be complex. What we’re saying is you don’t need to communicate that to the target market. They don’t need to know about gilts and stocks, and yet sometimes we try in the industry to do that,” he said.

After lunch, Ferrier Pearce executive chairman Nigel Ferrier talked about how consumer-marketing techniques can ensure the right people are receiving the right message through internal communications.

He explained how companies know a lot about their external customers and their needs but they don’t know a lot about their employees, or ‘internal’ customers.

Auto-enrolment can be seen as an opportunity for positive messages such as the concept of ‘free money’ – no where else are contributions matched and tax relief is gained later on. He advises employers to see DC schemes as a consumer product that gives employees the freedom of financial decisions.

Russell Investment managing director and portfolio manager James Ind looked at why investors should consider multi-asset investing and discussed some of the latest developments in this area.

Investing is no longer a balanced product like it was, he said, because contrary to the core assumption of modern portfolio theory where risk and return are positively correlated, the relationship between risk and return has been negative or not linear.

He pointed out the idea of buying and selling an asset at the right time in bull and bear markets is based on the assumption that markets are self-contained units with their inner workings.

“The growth expectations of opportunities often cause those assets to overvalue and the market to go down,” he said.

In equities, companies need to return double digit earnings growth on average to justify total investment and none have done so in the last 10 years with the unique exception of Microsoft.

“You really can’t be allocating large amounts of new money to equities with that kind of assumption and if you do the onus is on you to make a very very bold explanation on why you think we’re in a totally different world,” he said.

Schroders multi-asset fund manager Remi Ajewole then spoke about the benefits of implementing a dynamic approach to investing in order to withstand the volatile investment environment by allocating across a wide range of asset classes, providing diversification.

The final presentation of the day was from ABI director of life, savings and protection Stephen Gay. He provided an overview of the challenges that the pension industry has been facing, and the ABI stance on such matters, confirming the conference’s theme that the industry is currently facing ever-changing times.

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