- UK pensions still facing a £779.9 billion deficit (end March 2016, full buyout basis)
- Investment in UK companies continues to decline, now below 7% of scheme assets,
- Special contributions by employers cost £10.5 billion in the first half of 2016
- Active scheme membership falls below 1.5 million
The Pension Protection Fund has today published its annual Purple Book analysis of the state of health of the UK’s final salary pension schemes. The data covers 5,794 schemes and shows that in spite of substantial additional employer contributions and positive stock market returns, UK employers remain a staggering £779.9 billion in debt to their current and former employees’ pensions. Even on a s179 basis, which is the amount required to meet PPF level benefits, schemes are showing an aggregate deficit of £221.7 billion.
Special contributions are one-off payments in excess of the annual funding commitment, specifically to reduce a scheme deficit.
By contrast to the relatively low levels of defined benefit scheme membership in the private sector (public sector schemes are not covered by the PPF), there are now around 10.5 million members of defined contribution pensions.
Tom McPhail, Head of retirement policy, Hargreaves Lansdown commented:
Funding
“Scheme members have built their retirement plans on promises made by their employers. It is now up to those employers and the pensions industry to deliver on those promises. There should be no compromise over the level of benefits, no sneaky watering down of inflation-proofing terms to get the schemes off the hook.”
“Looking forwards, the future lies with defined contribution pensions. Too often the transition away from final salary pensions has been accompanied by massive cuts to employer contribution rates. The average defined benefit scheme employer contribution is 16.2% of earnings, compared to just 2.5% going into defined contribution plans. This trend in reducing contributions has to be reversed.”
Consolidation
“Consolidating some of these legacy pension schemes would be technically challenging but worth pursuing. It costs two to three times as much per member to run a small scheme as a large one, with consultants, independent trustees, actuaries, accountants and lawyers all taking a cut. Fewer, larger schemes would mean better security for members and lower costs for employers.”
Investment strategy
“The relationship between employers and the UK pension system has changed significantly in the past ten years. Pension schemes used to be owners of UK companies as well as being funded by them. Now, the bulk of scheme assets are invested overseas or in bonds. What’s more, as schemes mature, they will increasingly become net sellers of assets. Pensions being used to help finance the growth in British companies is becoming a thing of the past; instead our savings are either being lent to the government or invested abroad.”
The weighted average asset allocation to Equities has fallen from 61.1% in 2006 to 30.3% today; of this equity allocation, the proportion invested in listed UK shares has fallen from 48% (2008) to 22.4% in 2016.
(Source: Hargreaves Lansdown)
Prepaid Financial Services (PFS), a leading e-money institution that specialises in prepaid cards and alternative banking services, has announced the launch of a programme for international relief organisation, Samaritan’s Purse, to provide financial aid to refugees and migrants across Greece.
Samaritan’s Purse has been operating programmes in Greece for over a year, improving conditions in refugee sites and bringing hope and dignity to refugees and migrants by providing water and sanitation infrastructure, shelter, supporting community initiatives, aiding people in accessing asylum services, and distributing emergency food, hygiene kits, and critical relief items.
This new cash programme will allow Samaritan’s Purse to further provide for basic needs by giving refugees and migrants access to prepaid cash cards. Given the varying needs of a diverse population, cash programming allows refugees and migrants to purchase exactly what they need in the local markets in a dignified way that supports resilience.
PFS are acting as the issuer of cards. Samaritan’s Purse is distributing the prepaid cards to vulnerable refugees and migrants across Greece. Of all the methods available for distributing cash, multi-purpose grants in the form of prepaid cash cards are the most appropriate for the context. The prepaid cards provide a secure method of distributing funds as cards have unique PIN codes with ATM and Point of Sale (POS) capabilities.
Noel Moran, PFS CEO said: “As the migrant crisis in Europe continues, PFS is pleased to provide a solution that will help Samaritan’s Purse manage fund disbursements, while also supporting financial inclusion, and giving financial stability to refugees and asylum seekers.
“Although the scheme has rolled out very recently, we are confident that this new method of distributing funds will alleviate pressure on Samaritan’s Purse, letting them focus on continuing to improve conditions and support people in camps.”
Sally Morson, Cash Program Manager for Samaritan’s Purse said: “Until recently, our main support was provided through in-kind distributions. Now, we are moving towards a cash based response where the refugees and migrants will be given the freedom of choice which promotes dignity and resilience. The prepaid cash card is a good modality because it is a secure way within Greece to access what they need in the local markets given the varying needs of a diverse population.”
PFS has a wealth of experience in delivering prepaid solutions that provide financial support for end users of charities, Local Authorities, and National Governments across Europe, offering card programmes that work seamlessly across borders and allowing refugees and asylum seekers to use prepaid cards for financial inclusion.
(Source: Samaritan’s Purse & Prepaid Financial Services)
In light of the UK’s Chancellor Philip Hammond’s Autumn Statement today, where he vowed to make the UK economy "resilient" in its exit from the EU, and noted an expected economy of higher borrowing and slower growth, Finance Monthly has heard from several sources who have given their opinions and comments on the Chancellor’s announcements. The comments below range regarding the productivity investment fund, tax free personal allowance, and the new NS&I savings bond, to the fintech sector, economic forecast, IR35 tax legislation, and general funding in infrastructure, R&D and more.
You can read about the key points delivered in Hammond’s Autumn Statement here.
CEO and Co-Founder of MoneyFarm, Giovanni Daprà:
Tax free personal allowance
By raising the tax free personal allowance and higher rate threshold, the government is providing Brits a terrific opportunity to save and invest more money. By 2020 when these changes are in full effect, people earning £30,000 will have close to an additional £300 in their purse each year while those earning £50,000 will be as much as £1,700 better off. Investing this money for the future, as it is earned, is an incredibly easy way to grow wealth over time.
News savings bond
The new savings bond announced today is a reminder from the government that interest rates are low so Brits need to consider an alternative to cash savings. Chancellor Hammond has provided a potential solution in terms of capital preservation – however a 3 year term at 2.2% will tie up money. Some expectations suggest inflation may shoot above the target 2% during that time frame, in which case locking money into this bond may hinder wealth growth.
This is one option but each individual needs to look at their personal circumstance and financial goals to see if a savings bond is a good solution for them. There are other alternatives to cash savings in the investment market, the growth of robo-advice has helped make this more affordable.
Kerim Derhalli, CEO and Founder of invstr:
Much has been made of the recent dip in venture funding within fintech, but we’re simply observing the typical cycle of an innovative environment. The fintech boom has seen rise to many impressive products, but also a large quantity of lower level pretenders who will, naturally, fall by the wayside. Venture capitalists have now reached a point where only the best ideas with real longevity will find funding.
The key for foreign investors looking to invest in the booming UK fintech scene is consistency. By essentially maintaining the status quo in today’s statement, Mr Hammond has gone a way to restoring calmer waters following the tidal wave of concern following Brexit and Donald Trump’s election. The reality is that, despite various forecasts, no one really knows what Brexit means so businesses will look to reduce their own volatility until details emerge.
The City is going to remain the hub of finance and fintech, irrespective of Brexit. The likes of Barclays and HSBC have already said as much. If a fintech start-up wants to succeed it needs to be where it’s at – which is the UK. For now, the outlook doesn’t look too bad.
Markus Kuger, Senior Economist at Dun & Bradstreet:
In the UK government’s first major economic statement since the shock Brexit vote, Chancellor of the Exchequer Phillip Hammond has announced a series of new measures designed to alleviate the economic pressures facing businesses in the UK. Firms looking to combat the continued slowdown of business growth and navigate fluctuating global markets should turn to data as the key to unlocking smart growth and mitigating risks.
A bleak forecast was expected from the UK government, and similarities with the US, following the surprise ascension to power of Donald Trump, won’t go unnoticed in the globalised business world. It’s also important to note that the long-term impact of Brexit is yet to be felt, as Article 50 is only likely to be invoked in Q1 of next year.
With levels of uncertainty remaining very high, Dun & Bradstreet is maintaining its ‘deteriorating’ outlook for the UK’s country risk rating. The two downgrades we have made to the UK’s rating since the referendum make the UK the worst performing economy in 2016, in terms of rating changes. In this light, we remind companies that it’s crucial to carefully assess growth opportunities, while preparing for the far-reaching negative implications of Brexit.
Geoff Smith, Managing Director of Experis UK & Ireland:
In response to the £23bn Productivity Investment Fund
It’s pleasing to see the Government pledge billions of pounds worth of investment into the tech and science sectors in a bid to create more highly-skilled and better-paid jobs. Despite high employment levels in the UK, productivity remains low, part of which is down to the rise in low-paid, low-skilled jobs, following the economic crisis, so it’s encouraging to see the Chancellor attempt to turn things around.
However, if we’re to see an improvement in wages and living conditions, it’s vital that we upskill the tech sector as quickly as possible. Organisations are struggling to find the right talent, and as a result, demand and remuneration for IT professionals continue to grow, with cloud, IT security and mobile skills most in demand, according to our recent Tech Cities Job Watch research.
Upskilling will be vital to success for businesses that want to retain their best talent. By offering the right training and development opportunities, organisations can support their employees in learning the latest skills as these evolve. This needn’t be a complicated or expensive process – a lot of the skills that IT professionals already have are easily transferrable.
To take advantage of the Government’s funding boost, businesses need to think about building their optimum teams for the future. We work closely with our customers to ensure they have a long-term workforce solution in place when it comes to anticipating what skills will be needed three to five years from now, and the IT know-how required to deliver business success.
In response to the changes to IR35 tax legislation
While HMRC’s intentions to amend existing IR35 legislation in a bid to crack down on tax avoidance should be lauded, we’re concerned about the impact that the change in regulation will have on the IT sector. In an industry where organisations are already struggling to find the right talent, there is a serious risk of ‘brain drain’, whereby projects could be ground to a halt until they find individuals willing and able to work under the new regulations. In fact, we wouldn’t be surprised to see how such a change might encourage existing IT professionals to set their sights abroad to countries courting their talent in a post-Brexit world.
To mitigate against any likely risk, organisations should prepare for these changes now, and also optimise their use of talent for the long term. This can be done in various ways. Firstly, invest in Employed Consultants (ECs) that are permanently employed by recruitment companies and sit outside the scope of the legislation. ECs will be a steady investment for any project, and will offer organisations cost savings and flexibility. Secondly, if developed correctly, Statement of Work projects that clarify deliverables/results, resources, costs, and timelines will help ensure that all Personal Service Company (PSC) work is compliant with IR35 requirements. Finally, consider implementing a Managed Service which will help reduce the time taken to process a high number of contractors, by transferring all the admin and risk to the master vendor.
Lucy-Rose Walker, CEO of Entrepreneurial Spark:
The Chancellor’s pledge to provide an economic environment that drives productivity and supports growth sounds great for entrepreneurs, but we’re keen to see more support for early stage and scale-up businesses in the form of tax relief, access to finance and support for employing and developing people.
On broadband investment
Technology is a great enabler for business growth and here at Entrepreneurial Spark we’re seeing growing momentum across the UK in the technology sector. Investing in broadband will help more internet based businesses to grow, however many of our Chiclets and alumni are facing issues in accessing basic broadband services, so access for all should be prioritised before investment is made into 5G networks. We are currently looking to the future to help entrepreneurs right across the UK through a virtual business growth enablement programme so access to broadband is essential to help us deliver this.
On R&D funding
Investment into R&D is crucial for British firms to compete in a global economy. The commitment of £2 billion per year in tax breaks between now and 2020 for research and development will certainly help, however we’d like to see more done to help start-ups and scale ups access finance to help them grow.
On regional investment
The increased support for economies outside of London will help to strengthen entrepreneurship and economic growth across the UK through schemes such as City Deals and investment into regional transport infrastructure.
On the British Business Bank VC Fund
Unlocking £1bn in finance for growing firms through the British Business Bank as venture capital funding is a great step forward in helping start-up and scale-up businesses to invest in growth.
On Corporation Tax
Sticking to the previously announced tax roadmap is a good move for the Chancellor, reducing corporation tax to 17% by 2020 as previously planned is crucial at this time of uncertainty for British business. We hope this will see continued investment into UK start-ups.
Jake Trask, currency analyst at UKForex:
Sterling fell this afternoon as Philip Hammond announced a raft of measures in an effort to stave off a potential post-Brexit slowdown as we head into 2017.
The pound jumped earlier, as measures to tackle a lack of productivity were announced. However, this good news was tempered by the feeling that the statement didn’t go far enough with regards to infrastructure projects and other measures to promote growth. After an initial snap higher, the pound fell away as investors were left disappointed by the Chancellor’s stimulus package.
Ben Brettell, Senior economist at Hargreaves Lansdown:
We might have a new chancellor but Philip Hammond’s speech today came straight out of the George Osborne playbook.
Like his predecessor he was keen to stress the economic positives in his opening remarks, highlighting that the IMF predicts the UK will be the fastest growing major economy this year, with employment at a record high.
To be fair to Mr Hammond, the economy has proved surprisingly resilient in the wake of the vote to leave the EU. Nevertheless forecasts were unsurprisingly downgraded, to 1.4% next year and 1.7% the year after.
Also predictable were the abandonment of the commitment to eradicate the deficit by 2019/20 and the announcement of a mild fiscal stimulus, focused on housing and infrastructure, and with an emphasis on regional development and improving productivity.
This focus on productivity was welcome, and long overdue. The UK has fallen behind in productivity for too long, though it should be noted that promising to tackle the problem is much easier than finding a solution.
Danny Cox, Chartered financial planner at Hargreaves Lansdown:
We saw from the popularity of the NS&I ‘pensioner’ bonds introduced back in January 2015, how savers are desperate for a better return on their cash. With no end to low interest rates in sight a new bond aiming to pay 2.2% over 3 years and a limit of £3,000 is a decent gesture, but with inflation rising and heading toward 3%, its unlikely money in this new bond savings will do anything but go backwards.
Ray Withers, CEO of Property Frontiers:
This statement was less show-stopping than usual, though not without its moments. Hammond is apparently keener on setting top-level economic policy than laying out specific spending measures, which will sensibly (if less entertainingly) be left for individual departments. His overarching themes included easing pre-referendum austerity commitments, more (and less glamorous) spending on infrastructure and housebuilding, and help for struggling families.
The best way to help working people is simply to fix the economy, and we are hopeful that Hammond's moves on that front will be successful.
More interestingly for those of us in the industry, however, the Chancellor today cemented the place of housebuilding as the cornerstone of Mrs May's refashioned 'working for everyone' economy.
There is important work to be done on that front. 'Just about managing' families are more than twice as likely to rent privately as to own their own homes and the Treasury is clear about its intention to help would-be buyers get a foot on the ladder.
The main pledge today - a £2.3bn fund for 100,000 new homes in high demand areas - is relatively substantial, but even smarter is the focus on infrastructure spending in ways and places that support new development.
An encouraging takeaway from this supposedly final autumn statement is a clear indication that the government understands the need to make the rental sector more affordable in addition to beefing up its traditional focus on housebuilding.
With landlords still reeling from Osborne's final statement, we had been hoping that Hammond's first would also offer them some conciliatory breathing room in this area. A reversal of the recent changes around stamp duty and tax relief on mortgage payments, as a string of industry bodies have called for, was always a long shot and did not happen.
Indeed, the prospect of a silver lining of any kind faded fast with news overnight heralding a now-confirmed ban on lettings fees. The Chancellor in fact targeted landlords specifically with the rebuff: 'landlords appoint letting agents and landlords should meet their fees'.
A ban of this kind is something that has been the subject of debate for some time, and so not altogether surprising. Scottish renters already benefit from something similar, while English households reportedly face average fees of £337 per year. Some of those fees are indeed overinflated, but the key question is: who will eat the cost?
It is not difficult to imagine a farcical parlour game in which the Treasury passes the cost from tenants to agents, who pass it to landlords, who in turn pass it back to tenants. The only part of the chain at no risk of incurring the cost is the Treasury itself, and indeed a subsidy for agents to charge extortionate fees is ridiculous.
But this is indicative of a wider and more worrying misunderstanding in the government's handling of the private rental market: it is largely treated as a zero sum game in which losses for landlords are automatically wins for tenants. That is not the case.
With any luck, the repercussions of this new ban will focus the debate on the balance of pressures affecting every part of the rental supply chain - including landlords. Recent moves giving the Bank of England powers to limit overstretched buy-to-let mortgages, for example, seem like a better way of discouraging the darker side of the rental market than squeezing profits for all landlords.
We wish the Chancellor great success with his new program, and have faith that the pendulum will swing back if the desired corrections to the housing market do underwhelm. In the meantime it is not such a bad time to be a landlord: mortgage rates are at historic lows, and Savills projects rent increases of around 19% across the country in the next five years.
On a more local and self-centred note, we are delighted at the confirmation of a £27m expressway connecting our hometown of Oxford with Cambridge via Milton Keynes. Congestion is probably the main constraint on the UK's twin knowledge economies, and shortened commutes will be a welcome boost to our own staff morale, when it eventually happens.
Charles Owen, Founder of CoInvestor:
Hammond’s announcement to reduce the Money Purchase Annual Allowance is likely to come as a blow to those who currently benefit from double tax relief on their pensions. However, significant tax relief can still be found through investing in alternative assets, such as those under the Enterprise Investment Scheme and Venture Capital Trusts.
It is becoming increasingly important that investors assess how they can diversify their portfolio to protect themselves against economic volatility. Our research has shown that half (48%) of mass affluent Britons who decided to act on pensions freedoms now feel more in control of their own investments and 38% have already benefitted from alternative tax-efficient investments. Considering the decreasing state support and the growing mistrust in pension schemes, we expect this trend to continue as Britons look to take growing their pensions into their own hands.
In a letter to the new Chancellor, Phillip Hammond, ICAEW has urged Government to take action urgently and reverse the trend by increasing investment in public infrastructure. It also calls for new fiscal rules to support greater private investment.
In its paper ‘Funding UK Infrastructure’, ICAEW argues that for all the new initiatives announced by Government in recent years, public investment in economic infrastructure appears to be static or declining until the end of the decade, while attempts to encourage greater private investment have not been successful. It also reveals:
-Private finance initiative (PFI) contracts have been drying up, with only £0.7bn of projects reaching financial closure during 2014-15.
-Although the Government announced that the total National Infrastructure Pipeline had increased from £411bn in 2015 to £425.6bn in 2016, the near term profile of investment grew by less than the overall growth in the economy, with investment in energy infrastructure declining.
-Investment in social infrastructure – schools, hospitals and housing - is also static or declining, with claimed increases in social housing investment being offset by expected reductions in capital spending by housing associations.
Vernon Soare, ICAEW Chief Operating Officer and Executive Director, said: “In the past we have seen too much talk and not enough action on infrastructure. The combination of a new Chancellor, low interest rates and Brexit means that now is the time for decisions to be taken and investment to be made. Wavering on projects such as a new runway in the south east of England and a lack of public investment have meant that we are not getting the economic benefits that infrastructure can generate. If Government leads the way, private investment will follow.”
The new Chancellor has already made the decision to change fiscal rules to permit borrowing to fund investment. However, priority now needs to be given to infrastructure investments that provide a positive return to the taxpayer and so pay for themselves, while PFI contracts need to be brought back onto the balance sheet so that they no longer bypass fiscal targets and can be properly evaluated based on whether they provide value for money to the taxpayer.
Vernon Soare adds: “With cost cutting and austerity only getting the UK so far, it is now necessary to generate revenue growth. That will require more investment in key infrastructure projects and spades in the ground. There is now the potential to use borrowing to fund an immediate increase in infrastructure investment.”
(Source: ICAEW )
According to the Pulse of FinTech, the quarterly global report on FinTech VC trends published jointly by KPMG International and CB Insights, Asia’s FinTech funding has risen to US$2.6b in the first quarter of 2016. Following a significant pullback in funding in Q4’15, mega-rounds lifted quarterly investment into VC-backed FinTech companies by over 150%.
Global investment in private FinTech companies is said to have totalled US$5.7 billion in Q1’16, with US$4.9 billion specifically invested in VC-backed FinTech companies across 218 deals, a 96% jump in comparison to the same quarter last year. The fact that three mega-rounds accounted for 54% of VC FinTech investment in Q1’16 has resulted in the increase in funding. On a quarter-over-quarter basis, VC-backed FinTech deal activity rose 22% in Q1’16.
Warren Mead, Global Co-Leader of FinTech, KPMG International said: “Global VC investment into the technology sector may be experiencing a bit of a pause, however FinTech, propelled by some very large mega-rounds, has proven to be an exception to the rule. Investors are putting money into FinTech companies all over the world – from the traditional strongholds of China, the US and the UK – to up and coming FinTech hubs like Singapore, Australia and Ireland.”
“While FinTech startups continue to attract large investment both in the US and abroad, and investors gravitate to areas yet untouched by much tech innovation including insurance, recent events and public market performance suggest that growth-stage FinTech fundraising will be harder to come by moving forward in 2016.” commented Anand Sanwal, CEO at CB Insights.
Lyon Poh, Head of Digital + Innovation, KPMG in Singapore, added: “In Singapore, we have seen a flurry of activities in line with the government’s push for financial institutions to adopt innovative technology. For example, many insurers are building innovation centres and programmes to rapidly identify and adopt FinTech solutions to bring innovation back into their core businesses. This has in turn encouraged more FinTech startups to come to Singapore and use it as a base for developing their propositions, and for fund raising.”
Toby Triebel, Co-Founder and CEO of Spotcap
Spotcap secured €5 million in funding from Kreos Capital, it announced in March. Spotcap plans to use the debt capital to finance the online business lending activities in Spain and the Netherlands and expand its operations globally.
Mårten Vading, General Partner at Kreos Capital, said: “Spotcap is at the forefront of the rapidly changing alternative business lending landscape. The investment reflects our confidence in Spotcap’s management team and investors, its big data technology approach, and its significant growth potential. We are excited to support the company’s success.”
Spotcap’s growth reflects the high demand by small businesses for alternative financing solutions. After its recent launch in Spain, Spotcap expanded to the Dutch market. The fintech company plans to expand to at least three additional markets during 2015.
“We are delighted with the endorsement and backing by Kreos Capital. This support affirms that Spotcap has an attractive business model and that we are making very good progress in achieving our ambitious goals. The funding will help us accelerate our expansion as the global leader for short-term online business loans and finance our lending activities,” said Toby Triebel, Co-Founder and CEO of Spotcap.
This is Spotcap’s second round of financing and its first debt facility. The financial technology startup raised €13 million in funding by a group of investors, including Rocket Internet, Access Industries and Holtzbrinck Ventures, in October 2014. With the latest funds, Spotcap has solid financial backing to fast-track its growth and to finance its lending activities with outside capital. Spotcap is successively moving to debt as a source of capital to fund its loan book.
