If I strain my eyes North Westward, I can see the white arch of Wembley across the horizon.
On Sunday, 25,000 Brentford fans will make their way round the north circular and down Wembley Way, with them will be a couple of lads in green and white.
I slept in my Yeovil Town away kit last night and will wear my home kit today as I go about my business in Brentford High Street.
My father grew up here, my grandfather was Methodist Minister for the Hounslow and Brentford practice.
Sheffield United logo (Photo credit: Wikipedia)
When I was a kid I supported Bournemouth, who pipped Brentford and Yeovil for automatic promotion. But a few years ago, Doncaster, the other promoted team from League One stole Bournemouth’s manager and most of its first team from Bournemouth.
A.F.C. Bournemouth (Photo credit: Wikipedia)
Yeovil have never stolen players, we have never had the money. Our best player and the league’s top-scorer, Paddy Madden, arrived at the club mid-season on a free transfer.
Yeovil got to the final by beating Sheffield United over two legs. Sheffield United brought less fans to Huish Park on a sunny bank holiday Monday than Yeovil took to Sheffield for the first leg on a cold Friday night. Yeovil’s average home crowd is around 4,000 , about a quarter of #SUFC’s.
Yeovil Town is the best thing going for Yeovil which has one of the highest levels of youth unemployment in the country. Our fans are impeccably behaved, we regularly win awards for our behaviour and Huish Park must be one of the safest grounds in the world. The relationship between the crowd, manager and players is close and while we do our fair share of moaning about the owners of the club, we are solvent and can afford to lose on Sunday.
Our motto is “Achieve by Unity” and it’s awesome how we have.
When Yeovil Town run out on the Wembley turf to fight for a place in the Championship, we will not be thinking about the £6m odd in extra TV revenues , or keeping Madden and Stech or dreaming of the Premiership. Our fans will be thinking about the lads and King Gary Johnson and glory for the Glovers.
We’ve come close before , this time we’re going all the way!
Football in Yeovil is played for the right reasons, for football reasons. As our club song goes we’ll be Yeovil True whether we’re up or down. But blimey, it would be great to get to the Championship for the first time in our club’s history!
Anyone who believes in community football should support us, Brentford is a great club, most seasons I look out for them, but not this system. If at 4pm on Sunday afternoon they have beaten us , I’ll share a drink with the Bees but let’s hope we’ll be spending Sunday night up town as the happiest of Brentford Glovers!
“Pension Providers have for long relied on IFAs to “onboard” and manage workplace pensions. They won’t for much longer, they will need to automate the on boarding and management processes or close to new business ”. – The Pension Plowman ; May 2013
To understand this statement , let’s go back a few years.
In the nascent days of the GPP, the eighties, there were clear distinctions, IFAs dealt with people and insurers and consultants dealt with companies. The Group Personal Pension, that emerged as an entity shortly after A-day in 1987, was a hybrid product that allowed released employers from the burdensome business of having to run a pension for their staff.
The GPP was originally an outsourced occupational pension , where the management of a trust board was dispensed in favour of an individual advisory approach. The adviser was a surrogate pension manager responsible for implementing the scheme, inducting new members and maintaining a relationship with leavers . I couldn’t build up a portfolio of GPPS so labour consuming was each employer relationship.
Over time, we have seen a commoditization of support for employers with GPPs to the point that some advisers , especially those like my firm who do not take compliance responsibility for the members, can help a company set up a GPP but never see a member.
Nevertheless, the vast majority of GPPs are still the adviser’s babies. Since they have no trustees and rarely any pension professionals on the payroll, most companies with GPPs rely on the IFA to install them, help them manage in new joiners , provide sessions to explain the arrangement to those staff in the scheme and some support to those leaving, especially those retiring.
It is this relationship which the abolition to consultancy charges and the threat to commission radically changes.
The presence of an IFA on site becomes a “given”. “you’ll be getting a visit from Henry our financial man” was part of the induction letter that went out to staff at one of the companies I used to look after. Nobody quite knew who I worked for, but from the way I swaggered around the shop floor in my suit, I suspect most of my customers thought I was part of the management. I don’t ever remember being asked who paid me, I was just something that came with the job – like the induction letter said.
In fact I was being paid for out of their pension pot, and in many cases, I still am. Even though the company I’m thinking of wound up many years ago, the majority of people I saw were no older than myself and will still be working, waiting to draw a pension which may have up to 4.5% pa taken from it to recover commission paid to me in those years. I would be surprised there has been much growth in their posts in the past ten years.
This is the fundamental deceit of old school pensions.What seemed “free” and seemed “easy” was not free to the member or easy to the adviser.
For all my swagger, I did not become rich from my efforts.
I was a financial salesman dressed up as a financial adviser. I was paid to maximise the contribution from each employee. But the employees were in no position to save, lapse ratios were appalling as was staff turnover. Most of my work was counter-productive.
Had I understood market segmentation, I would never have bothered explaining complex financial matters to people with no interest or aptitude for my arguments. Nor would they have countenanced calling me over to discuss the time of day , if they knew the damage my relationship would be doing to their pension pots today.
If I paint a grim picture with no winners, I have only half filled the canvas. For there were winners from all this. “Upstream” were the broker consultants, the sales managers , the product managers , the underwriters, the fund managers and the Directors of the insurance companies who received the money. They would keep me happy with lunches and the odd ticket to a football game and in return I and my client would pay their wages and keep them all in company cars.
It is a grim truth but it was never those at the foot of the pyramid who benefited. Money flows up the pyramid in financial services “contra natura”.
But now the pyramid is being dismantled. The Advisers are leaving the workplace, their pay and rations have been terminated. To their general dismay, the buck that was passed to advisers in the late 80′s has now returned to the insurer and the employer.
The memories of the 12 years I spent in my twenties and early thirties as a commission only adviser are vivid. I was poor and so were my clients and what money I made my clients the poorer still. I cannot think of many of them without a mixture of affection and personal guilt.
I know most of the big-wigs in the providers today, many of them were in the pyramid above me then. They never advised clients directly nor experienced the horror of a negative cheque at the end of a month (when commission clawback exceeded money earned). For them, the gravy train has hit the buffers and they have gravy down their shirts, but they still have their cars and their occupational pensions and job security.
All most of the people I advised have got to look forward to is the shriveled stump of a savings pot devoid of growth.
So if you hear stories from providers of the “advice gap” be aware. The system that has been in place these past 25 years has served few well, it has brought pensions into disrepute among a substantial proportion of the population, it has created a sub-group of bitter ex-advisers who feel guilty and let-down and it has created among employers a suspicion of pension people as pariahs who prey upon their workforce.
This is the legacy of 25 years of commission-based GPPs and it is why I am glad to see the back of commission and consultancy charging. The financial salesman is well out of the workplace but will he be replaced?
To stay in the game, the insurers who relied on commission based IFAs are going to have to spend money creating a replacement infrastructure to “onboard” new schemes and auto-enrol new entrants. They’ll have to provide the day to day support to their policyholders and ensure they get proper help when they want to draw on their pension savings.
This is a major undertaking and I fear there will not be an appetite among some providers to take on this new challenge. I sincerely hope this does not happen. There is not just an advice gap, there is a gap in good quality workplace pension provision for the 1.2m employers yet to stage auto-enrolment.
There are, since the RDR, hundreds, maybe thousands of corporate financial advisers either unemployed or trying to enter new professions. We can no longer afford them, they have been made redundant by regulation which assumes they can be replaced by technology. The old role of adviser as on-site salesman has disappeared
Auto-enrolment killed this kind of adviser as video killed the radio star.
But technology cannot replace lawyers and accountants and nor can it replace the need for financial advice among those most vulnerable, those approaching and at retirement. They have wealth to be managed and the decisions they take will impact the rest of a lifetime.
The providers who have built relationships with these advisers would be well advised to think of redeploying their skills in helping the pots that have been built up in personal pensions decumulate to the advantage of the pensioner.
The very best advisers will be able to make this transition themselves, most already have. It is the insurers that took a bet that the pyramid would remain intact post RDR, who have most to do. The few advisory firms who took a bet that members could continue to be charged for the on-site salesman.
The transition which must happen over the next six months as we prepare for 2014 and onwards will be expensive and traumatic, let’s hope it does not drive the remaining good advisers out of the market, let’s hope we see no more insurers close their doors to new business.
The Pensions Network held an excellent breakfast meeting this morning that included a grumpy Steve Webb (late night in the house?) and a variety of great speakers giving us an elevator pitch on what makes for good.
Apart from the usual sparring between NEST and L&G this was a pretty sedate affair with a lot of nodding heads at statements of the bleeding obvious, mixed up with some insiteful stuff from Tim Jones, Adrian Boulding, Yvonne Braun, Alan Higham Chris Curry (the new PPI supremo) and especially Doug Taylor of Which.
One thing that is becoming clear to me is that whoever is speaking for the companies sponsoring workplace pensions, it is not going to be the NAPF- not unless they significantly raise their game.
The NAPF are putting a lot of store by their Pension Quality Mark which they hope to become the recognised quality for workplace pensions. To date they have 175 companies signed up (and there are sign-up fees). You can read about it here
If the NAPF want to provide a nationwide pension benchmark, they need to start speaking to and for all the employers of Britain , not just the pension intelligentsia.
Pension Quality Mark is not getting traction beyond its core membership
A few weeks ago, I invited the NAPF to work with my site www.pensionplaypen.com to promote better standards of governance and higher levels of contribution to the 1.2 million employers that are not members of the NAPF, don’t have a meaningful workplace pension and have no idea what PQM is.
I don’t speak for workplace pensions any more than the NAPF do, but I’m prepared to stand my own money on a website and on services that set out to restore some faith in public pensions. It greatly saddens me that the trade body that I subscribe to is uncomfortable to enter into a simple agreement that can give PQM a free ride.
The NAPF, unlike the ABI and the IMA who are moving forward, seems to be determined to spend its time in battle with other trade bodies. It calls for tPR and FCA to work as one, yet it cannot work towards the common good within its sisterhood. The NAPF’s failure to promote the ABI’s code of conduct on annuities to trust based occupational DC schemes is incomprehensible and inexcusable.
Tom Mcphail tells me that they are beginning to come to the table so “better late than never”. The fact remains that the NAPF are following not leading on DC issues – whether at employer or consumer level. This goes for the PQM too.
The NAPF needs to make PQM a user-friendly kitemark that isn’t a barrier to entry.
Everything that we have seen about auto-enrolment so far draws us to one conclusion.
Auto-enrolment works because it makes things easy for people.
The only people auto-enrolment hasn’t been easy for so far has been the early staging employers who have had to work with unsimplified regulations and pioneer many of the processes and practices that will be normalised for those staging in future.
The NAPF’s solution for the 1.2m employers many of whom are as green to pensions as the employees they will be enrolling is to put up three road blocks. To get along the road the other side of PQM, you need to contribute substantially more than the minimum auto-enrolment scales. And you need to set up a governance structure within your organisation. Thirdly you need to pay an initial and annual fee to the NAPF to be credited.
This is not called making workplace pensions easy.
I question whether setting a governance committee up at employer level is either feasible or productive. I know it will be a greater burden on smaller companies than larger ones.
I also question whether the NAPF have any business interfering in the reward strategy of employers. Determining minimum standards on a qualifying workplace pension scheme is one thing, but deciding on a minimum contribution for a “trying” employer well in excess of AE tiers is another.
I don’t question the value of accreditation but I think you pay for something that gets peer group appreciation and unless the PQM becomes relevent to the “pensions uninitiated”, it will not get their money.
For PQM to appeal it must have mass appeal. It would be better to focus on the efficiency of the scheme and in particular on DC outcomes than on the financial and human resource that a company should be throwing at the scheme.
So howabout PQM lite- something that smaller employers can aspire to?
Companies can do much to improve the pensions their staff get without a large expense of money. They can negotiate the best charges for staff, investigate and ensure they get a good default investment option , make contributions more efficient through the use of salary sacrifice and provide staff with real help at retirement by making a good annuity broker available to staff. These things improve outcomes without limiting the company’s ability to pay good wages and invest for the future.
The NAPF has no real understanding of SME and micro employers, they have always pitched to the big schemes run by large employers . In three years they have picked up 175 customers for PQM, a lot of them big schemes.
Some of those schemes have been introduced by my company, the PQM works for members of the NAPF.
But PQM is failing to become a household name. PQM is not a national standard and the NAPF does not speak for the 1.2 million employers that are not their members.
If the NAPF wants to become a relevant trade body beyond the narrow coterie of its existing membership, it will need to start listening to people like me and working with organisations that are set up with the small employer in mind.
The NAPF must democratise itself if it is to continue to speak for pensions
Somebody needs to speak for workplace pensions, it should be the National Assoication of Pension Funds and it is frustrating that while the ABI and IMA are prepared to listen and co-operate, the NAPF remains obdurately aloof.
The question arose during a talk by John Raven of Oxera and whacked me right between the eyes. This is a big question in the development of workplace pensions. I was at a conference on annuity but I was thinking workplace pensions.
It had till now seemed obvious that the blunt instrument of a mono-price was a ruse to level up prices and that careful underwriting of propositions made sure the price was “fair”.
But this is not what is happening in workplace pensions. It seems that NEST and NOW and People’s Pensions and now Legal & General (who are moving into that space) are offering an awful lot for not very much.
I wonder whether the position of the mono-price insurers is sustainable, I wonder whether the risk-based approach can work for the mass workplace pension market. There are of course insurers (for now just L&G) who will have a foot in both camps.
The idea behind a single price for everyone is distinctly mutual. It assumes that some more attractive propositions will cross-subsidise the less attractive. I mentioned this to David Pitt-Watson as an example of an insurer nodding towards collective DC - albeit with a GPP, a series of individual contracts. David did not buy the argument but I’m not taking it off the table.
In practice I am not sure that there is the appetite among some insurers to fully underwrite, We see tables in place for many classes insurers that segment propositions and drop them into pricing boxes. Rather than have an infinite number of prices, a half-way house might have four or five pricing bands some of which would be competitive (on price) with the mono-price , some not.
The mono-price in workplace pensions is now 0.50%. You can dance around the pin about the NEST and NOW charging structure but that is what you are paying across the piece.
The challenge for everyone will be to move the debate on from price whether mono or risk-based. A risk-based price above 0.50% needs to be explained (to comply) and that is a bet on employers focussing on value and on there being information/guidance/advice in the system that gives employers the chance to do this.
The only way I can see the information being delivered to the mass of SMEs and micros is via the internet , via self-service and decision making which does not rely on manual interventions.
If the pensions industry can find a way to get employers to make these decisions on pensions (as they do on many other things) then we are in business. The price issue will become secondary to the value issue and over time , the insistence on a highly risk-based approach will give way to a more mutual system.
I may be wrong, the idea put up by John Raven, that a risk-based system delivers more may be right, but intuitively I sense we are moving to a more pooled approach to pricing.
For now, the consumer has the best of both worlds, if he can find a way to do this cheaply, he has the option of underwritten or blanket terms (from the same provider). It will be fascinating to revisit this question in the next year and I have diarised to reblog about this in August when we have more experience and www.pensionplaypen.com ’s “rate a pension” service has some data to show what the customer (the employer) is chosing!
Two years ago I took on a company who wanted me to advise them on their workplace pension. They had an existing adviser who they hadn’t seen in over a year and was not responding to their calls.
It turned out that the adviser was being paid a substantial sum every time someone joined their group personal pension arrangement and the company wanted to get something for these payments.
The company wanted me to take on the advisers role but be paid by the commissions but I could not do this, we will not take commissions on this basis.
I suggested instead that we negotiate a new arrangement with the provider so that members paid lower fees and the company decided what it wanted to pay me going forward.
Unfortunately, though the provider was happy to pay commissions to the adviser (who was still around to receive them) , they were not happy to reduce the amount being taken from member’s pots.
The company was faced with Hobson’s choice;
Cease paying into the old GPP and establish a new one on better commission free terms
Stick with the old GPP in the knowledge they were paying over the odds
Force the old adviser back to do the job it was being paid to do
In the end the company got sick of the issue. The Directors had made their own provision and we are now in the uneasy position where the company is reluctant to pay fees to improve the old plan or pay commissions to the absent adviser. It is now reluctant even to contribute to the plan, knowing the members are not getting value for money.
If the company ceases contributing, the members will suffer, but who is really to blame?
I am afraid it is a case of the financial services industry shooting itself in the foot by being lazy, greedy and inflexible. Worst of all, it’s a case of putting the customer last.
These dilemmas are not unusual. I wrote a blog on May 5th 2012 highlighting this very issue. You can read it here.
The train-crash I predicted would happen, did happen and nobody yet has started the heavy lifting to get the survivors out.
“consultancy charges are the most transparent of a number of charges levied by advisers and therefore the ‘easiest to target’.
In the past some pension providers felt they needed to pay commission to advisers to win business from employers who did not want to pay for advice themselves. Charges paid by members would be lower today if providers did not need to claw this money back.
Commission was banned as a way of financing new advice from the start of the year, but it’s not dead yet.”
I’d only disagree in the statement that commission is not transparent. It is transparent, it is declared on every key features statement issued to members.
I am quite sure that Steve Webb is choking on his corn flakes (if he’s reading this) and spluttering
“you try retrospective legislation to ban a system that you saw operating under your nose. I saw the trains, issued the warnings and still they crashed!”
The fact is that advisers like the one in the example above have been establishing GPPs over the past three years in the full knowledge that commission would be banned from January 2013 but in the certainty that their future income was future-proofed provided that the “commission-rich” GPP’s they set up then, continued to be funded by employers.
All the advisers needed to do was to make promises. They did not have to keep them.
There are thousands of companies out there with commission based GPPs. Some of them are getting a great service from their advisers who are delivering the services they promised. But many of the advisers are now out of the business and some are absent without leave, having decided they can take the income and not do the work.
Steve Webb cannot do anything about this. It happened on the FSA‘s watch, the FSA knew it was happening and have passed the problem on to the FCA. The FCA are working with the Office of Fair Trading and we can only hope that the OFT report due in the autumn highlights abuses such as the one I mention.
There is a catch-all set of prudential regulations known as “treating customers fairly” which were established by the FSA before it disbanded. These rules require , among other things, for advisers to do what they say on the packet.
It is regrettable that the main difference between a 2012 and 2013 GPP is that the 2012 model has a “rip-off loophole” which advisers can crawl through at any time in the future.
Steve Webb has more lawyers on his staff than he can shake a stick at and I’m sure they are pointing out to him that the risk of going after this commission outweighs the political advantage. If he plays his cards right, he gets his Regulator talking to the Treasury’s FCA and with a nifty pincer movement, they find a way of making commission inoperable.
There are ways that this could be don. Most easily they could use the “comply or explain” principles to ensure that advisers being paid out of the member’s fund, have to show that the commissions they receive have been earned and are not a way of financing their business. This could involve time sheets signed by the adviser and verifiable by the employer.
I’m sure this would be most unpopular with advisers, but it would put those who work and paid on commission on a level playing field with advisers such as James and myself who do measure our fees by the time we spend doing the work.
In time, if the cost of the work done by the adviser is less than the commissions taken, commissions could be reduced and of course vice versa. The employer could control the process and advisory fees could be something that formed part of a governance review. This is not fanciful, it is what happens with all our clients.
However it is extremely unlikely to happen voluntarily. What is more likely to happen (unless the FCA bears its teeth) is that employers will savvy up on all this and say enough is enough.
This week I launched a website which allows employers to go straight to a leading GPP provider and get terms of 0.48% pa. They do not have to pay an adviser to get them nor do they have to be of a certain size or have a certain average salary of be a young demographic.
They only have to agree to pay the minimum auto-enrolment contribution on the scale of their choice.
The employer in the case study is still paying 0.75% -more than 50% more than it needs to (for a comparable product). The cost of that 50% fee hike will only be experience at retirement , but it could be massive
The answer to the problem rests with people in workplace schemes, waking up and smelling the coffee.
Let’s hope that we can get people getting and standing up for their pension rights.
Friday May 10th 2013 is momentous for the pensions industry. It is the day the DWP announced the end to consultancy charging for pensions qualifying to be used in the workplace for auto-enrolment.
It is odd that a type of charge that is only four months old, could so soon be banned and since “consultancy charging” replaced a previous system of commissions, the announcement is as step short of banning all methods of getting members to pay for the costs of their workplace scheme.
The sting in the tail is that the DWP are going to consult, following the publication of the Office of Fair Trading‘s report on the subject, into the general charges paid by members for the scheme’s they are in. This is likely to result in a charge cap. Depending on the rigour involved, this could lower the bar to levels that make it unviable for providers to continue to offer trail commission to advisers of Qualifying Workplace Schemes(QWPS). The options will be to strip out the commission to get the boat back above the plimsoll line -or start a new scheme.
In any event, expect to see a new regime which requires employers to comply with strict rules or explain to staff and regulators why the organisation’s case is special.
Nothing has been lost
The opportunity to advise has not been lost, it has changed. Pre-payment is ending (though it persists where there is still commission in the schemes), but a “payment on delivery” model is still viable.
Advisers who are prepared to sell their time at an agreed rate, can charge explicitly for expenses including preparation and documentation. A pre-agreed program that delivers to expectation is likely to be repeatable and get referrals.
This is not an easy business to build, but it is one that my firm First Actuarial, has been building since its inception in 2004. We now have 150 staff, have never taken commission and do not take fees from members (though we may charge per capita fees to the employer).
Though there is only one pot from which fees and contributions are paid for, it’s the fact that the employer is in control of what is being paid, that makes the employer funded advisory model acceptable both to employers and Government.
Advising on and managing “business as usual”
Where there is a need to help employers through staging and onwards to ensure ”business as usual”. The commercial justification for paying an expert to “hand hold” is the cost to the business of getting it wrong which is usually much higher than the cost of getting it right.
This is a business risk and the cost of sorting it should not be born by members. The costs of establishing a project plan and delivering to it, of creating bespoke staff communications, managing the payroll obligations and ensuring that all interfaces between payroll, HR and the provider work is worth paying for. But it is not up to the member of the scheme to foot the bill.
Consistency going forward.
We are in danger of having two types of workplace pensions. Those that were properly set up and those that were set up with consultancy charging and commission pre-paying for advice (which may never be delivered) or for “business as usual services” which should have been paid for by the employer.
That schemes established up to 31/12/12 can be allowed to reward advisers through commission, while schemes set up from 01/01/13 can’t is patently absurd. Unless something is done about commission schemes, especially those sold in the run up to RDR on a “buy now while commission lasts” basis, is absurd.
We must urge the OFT and DWP to be strong on this. We cannot have confidence in a system where member’s pensions can be impacted by as much as 30% through advisory arbitrage.
The Government should have no sympathy with arguments that advisers were only playing by the rules in 2012. Advisers who openly ran seminars encouraging employers to set up a scheme for a couple of staff in 2012 so that commission could be paid to all staff joining in the years to come, were not acting in the best interests of the members who were ultimately their clients, if the scheme was occupational, they were inciting trustees to act against the interests of their members.
If those advisers who sold these schemes want those schemes to qualify as workplace schemes, they should revoke their entitlement to trail commission and move to a fee charging structure with the employer where the employer pays for work carried out. This will allow the charges by members to be adjusted downwards.
It seems to me the DWP are giving these advisers a limited window to get their heads round the new charging paradigm. If they do not react and sort the issue prior to the consultation, these advisers risk being “hung out to dry”.
I and other people who are set about restoring confidence in public pensions , will have no difficulty in assisting in that process.
The time for systematic abuses of the member through practices such as trail commission, active member discounts and salary sacrifice arrangements where employees take the pain and employers the savings is over.
10/05/13 is a momentous day for pensions, it is a momentous day for those of us who have campaigned for good and it’s a momentous day for www.pensionplaypen.com which has been set up to allow employers to choose and implement good schemes and know exactly what they and their staff are going to pay.
I haven’t seen too many smiley faces among Pension people , certainly not in the last five years.
But yesterday, at Workplace Pensions Live 2013, the sun broke through the clouds (metaphorically). Part of this was to do with it being a great even, brilliantly hosted by David Blackman, well supported by Maggie Williams and her team and held at the best of venues – Edgbaston Cricket Ground!
There was a moment in an afternoon session panel debate after much talk of the surprising reluctance of the great British public to opt-out of the new breed of workplace pensions when David Blackman asked the audience for their experience of pensions governance in the workplace.
Like a Quaker I felt moved to speak and blurted out that at our company, staff had got to fed up with the poor service , high charges and lack of development of our workplace pensions that our staff had risen up against us and demanded a new pension scheme – which they have got.
I don’t know how this went round around the hall but as this was hardly news to me, I was surprised that it seemedweird to the panel. One panelist labelled my staff as “unusually sophisticated” and that this was a one-off, another made the point that most employees don’t know that there is any better so will remain supine.
Let’s deal with these comments.
First Actuarial staff ar no more or less savvy than anyone else, they just have better access to pensions information.
The great British Public is pretty money savvy, sit at the checkout of any supermarket and watch how people use vouchers, special offers and seasonal buying to bring down the cost of their shopping, note the use of www.moneysavingexpert.com and note the general awareness that something has not been right about pensions.
The public get it, the pension industry doesn’t.
Given the opportunity to get a better pension, staff at First Actuarial got a better pension, I would argue that we differ only from other workforces in knowing that the door is half open. If we can get people as pensions savvy as Marting Lewis gets them money savvy, they will do the rest.
Now let’s think about that second comment. Most people do what they can to do the best thing. That included buying PPI (clearly marked as a “good thing” – an inertia sell but a sale nonetheless).
Unsurprisingly , the 4.2m who have subsequently downloaded PPI claims forms from Martin Lewis’ site and are awaiting financial redress, have done the right thing. The banks have blown their “trusted adviser” brand, Martin Lewis has it now.
Do you not think that the same can happen in pensions?
We have not given people best value from their workplace pensions, it’s not a scandal but we have brought pensions into disrepute over the past twenty years by failing to do the best for the great British public.
Do you not think that the great British public are looking for some leadership which says
“this is what makes for good”
“if your employer doesn’t offer you this you should ask for it” “
if he doesn’t listen go and get another job/ moan to the union/ organise your colleagues and make a pain of yourselves”.
The cost of pension provision has plummeted, your employer can now provide good quality workplace plans for you and your colleagues for less than 0.5% – that’s half the cost of a stakeholder pension. The quality of admin, investments, communications and at retirement assistance has all improved over the past ten years. Pensions aren’t perfect but they’re getting there!
And it costs employers so little to give staff so much. In our pensions upgrade, First Actuarial halved management fees, improved the default investment option, gave a SIPP option to those who want it and lined up with a provider with a sustainable business plan. It was not hard.
We need to make it easier for employees to know what is good, especially those who have influence over corporate pension purchasing. We need to make it easy for employers to find good and implement good and we need to get staff and employers talking about the funding levels into these pensions. That’s what www.pensionplaypen.com is all about!
Governance on these schemes cannot be imposed by Government, it needs to happen organically – bottom up.
It needs staff who hassle employers who hassle providers.
But if Government can create , as they have created with auto-enrolment, the conditions where people will stand up for their rights for a proper workplace pension, if we can give employers access to good quality schemes and if providers can deliver as they say they will, we will have better pensions in this country and the chink of Brummy sunshine will brighten us all up!
It was also read by Per Andelius http://www.andelius.com a Swedish pensions expert who passed it for comment to Con Keating – well know to readers of this blog being an adviser among other bodies to the Bank of England.
Here is Con’s response to his friend Per, published with his permission, in its entirety,
He is not correct in a number or regards.
The best source for Dutch data is the DNB and that report by Jacob Bikker is unimpeachable. Contrary to what he says LCP have in conjunction with every other consultant every incentive to exaggerate the costs of Dutch schemes.
I for one do not believe they are anywhere near 20% of contributions – that would make them over 50% above the levels I see here in the UK and I believe them to be more efficient.
He seems to feel that Collective DC is not superior to Individual DC - in this he is wrong. The GAD say 20-25% but in simulation 39%. I have looked at this myself and it depends upon the level of diversifiable risks – it was never less than 20% in my own simulations and often in the range 30-40%
The schemes (66 of them of of 482) in Holland which have had to cut benefits at the insistence of the regulator (for being below 105% funded) have all been of the traditional DB form, not CDC - no CDC arrangement has been required to reduce benefits.
The advantage of CDC does come in part from their ability to maintain higher equity holdings for longer periods of time. There is no need to de-risk in an inter-generational structure.
There are no facts about how long people will live – no matter what assumptions are necessary.
It is clear that the individual structure is inferior to the collective, for all but a very few gifted people.
Perhaps he has included in his cost figures the costs of CDC but the majority of dutch CDC schemes have taken out insurance policies which guarantee minimum returns for certain periods (usually the next five or seven years).
The £25 cost figure he cites for individual schemes in the UK is nonsensical as a mere glance at the costs of NEST or NOW would reveal immediately.
The €356 figure comes from the LCP ”study” which I have never seen. I have seen smaller figures but the point needs to be made that the quality of service matters – and in Holland that is high, remarkably so in many cases.
The piece by Andy Cheseldine is another of the LCP articles – it confuses the schemes which do have to cut with those which are CDC. When I look at the Bikker study, I see cost results which are materially better than are achieved ib the UK – but that is mutual DB in Holland being compared with sponsor guaranteed DB in the UK and in theory at least, the latter should be more efficient.
As for the RSA being political – it was formerly formally a qualifications awarding body – albeit many were of a vocational nature. It is headed by Vicky Heywood, who also sits on the Council at Warwick and is involved in another vocational qualification board: City and Guilds.
It sees its role now as being to promote debate – it has obviously succeeded. It has a statement of objectives on its website, I think. (It must have to meet Charity Commission requirements).
If you look o the trustees there are none who are overtly political (or as far as I know, surreptitiously so.) David Pitt-Watson who authored the RSA reports is a staunch Labour man – he almost became the Labour Party Treasurer. He is also a good friend of mine, and would not stoop to deliberate misrepresentation. That would run counter to everything he has done in corporate responsibility and sustainable investment.
He was alone for much of the time with his work for Hermes and the BT pension scheme on that work.
There is a general mood in Britain today of frustration with our funded pension system, especially the DC element. People don’t trust it.
When the collective system put in place by Barbara Castle in the late 70s was reined back and eroded by cuts and appropriate personal pensions, those who talked of collectivism and inter-generational transfers were silenced.
For 25 years it has been the individual personal pension that has been promoted. When the Government had the chance between 1997 and 2001 when they conducted the stakeholder review, they missed the chance to return to a more efficient system. Frank Field was sacked and stakeholder pensions emerged a pale shadow of what they could have been.
There are still people, like John and PJ Zoulias who live the Thatcherite dream that sees every man their own CIO and releases us from obligations to and from others. This vision of self-reliance is based on financial empowerment and a trust in our private financial institutions to do the right thing.
At the very least, this model needs to be challenged.
The real challenge laid down by the Dutch is not to get charges down, it is to establish a system of social governance that ensures that power is in the hands of the fiduciaries who act for the members. This will not only keep charges down but will ensure that there is more risk diversification (Con’s phrase – most people refer to this as risk-sharing).
Necessarily this will mean a transfer of power from insurance companies and pension consultants and into the hands of governance bodies who act for the member rather than the shareholder (or partnership).
This is the great battle waiting to be fought out over workplace pensions. It can only be engaged when we know the terms of the debate and that is what David Pitt-Watson and the RSA have been assisting us to understand.
Dullards like me, follow behind and start getting it because of pioneers like David and his colleague Harry Mann. They are, to me, part of the Force for Good which will be promoted in the months and years to come by http://www.pensionplaypen.com.
All the people who are mentioned in this blog are involved in that debate and without John and PJ and Saq Hussain on one side, there would be no dynamic for David and Con and Per to argue their case,
I sit and watch; – like 1.2m other employers, I just want to see the money I pay into a workplace pension generate the best outcomes it can.
Speaking on the DWP review of consultancy charge which we expected in April but will now be delivered in May, Debbie spoke of the potential “advice gap” left by commission based employers withdrawing from the market and smaller employers not being able to pay the four or five figure fees of the traditional pension consultancies.
But Debbie was sanguine, she saw new services filling the advice gap . This is what she had in mind…
Good quality web-based systems run by actuarial consultants to help employees select the best scheme for the employer./employee profile
Low one-off cost (c £500) with certificate from actuarial firm for audit trail in relation to employer decision.
Almost certain that several major life offices will support the type of service in order to compete in the new “direct to employer” market established by NEST and its competitors.
I sat there, the proudest man in the room and when she mentioned that this service was about to be offered by me, I felt like a 16 year old kid who has just won through on the X-factor.
We can pretend all we like that we aren’t affected by compliments and that we are cold hard-hearted businessmen; but when someone sticks their neck out like Debbie did for me last night, you can get a lump in your throat.
For what it’s worth, I do think there is an advice gap and I do think that there is a direct to employer market for NEST and others. I think that employers will pay to have their decisions certified and presented back to them with a full audit trail and I think the amount they should pay is £500. I think employers are capable of taking difficult decisions on what is right for them and their employee profile and I think that actuaries are well-placed to martial the information and organise it to help those decision to be made.
In short, I believe Debbie is right, I have put my and my friends money where her mouth is and we will be launching www.pensionplaypen.com to the market next week. The full functionality she is talking of is being built and should be ready by July.
It is often hard to accept compliments because you do not trust their source or respect the judgement of the person paying the compliment. But on this occasion it was very easy.
The cuts in pensions – averaging 1.9 per cent – were necessary for the funds to achieve minimum funding ratios enforced by DNB of 105 per cent by April 1. The reduction applies to both pensioners and the rights accumulated by active members, which are also reduced.
Two funds that initially were expected to apply cuts were bailed out by sponsor contributions.
According to DNB, 37 funds expect to be forced to curtail pensions further to achieve their recovery targets, with an average cut of 1.7 per cent (weighted by the pension liabilities held by each pension curtailing fund).
The final figure will depend on funding ratios at the end of 2013.
In all, two million active members face cuts to meet funding ratio requirements, as well as 1.1 million pensioners and 2.5 million “sleepers”(members who have changed jobs without taking their pension rights with them to the new employer’s pension fund and who may be counted twice in the statistics). Further curtailment would affect 1.3 million active members, 0.7 million pensioners and 1.1 million sleepers.
Total pension liabilities of the 66 funds curtailing amount to €410bn.
DNB’s figures follow confirmation earlier this month from civil service scheme ABP that, despite a recent recovery in its funding ratio, it would cut pensions by 0.5 per cent from April. (European Pension News)
Here is a little perspective. The Dutch system works rather like the with profits system. The current levels of pension being paid to Dutch pensioners have been shown by David Pitt-Watson and others to be producing approximately 39% more than our “guaranteed pensions” in the UK which we might regard as “not for profit” but fully guaranteed.
So what Jan Dutchman is getting is a reduction in his advantage from 39 to 36.4% (my maths stands corrected) over his British counterpart. It is true that Jan does not enjoy total security over his advantage (except for the payments he’s already had) but I do not see rioting on the streets of Amsterdam and Leyden over the iniquity of this pension cut.
Which begs the question “crisis what crisis?”.
If we are looking for a pension system that defers pay then would we not (still) chose a system with 36.4% better outcomes? Couldn’t we live with the odd cut in our with-profits bonus?
What price the guarantees of the British system – a pay cut of 36.4%?
I’m feeling jolly underwhelmed by these cuts and if is the worst news Jan Dutchman hears this year- lucky old Jan!
Pension people are obsessed with engaging the British people about the importance of pensions while the great British public was as little to do with pension plans as possible.
That will not change. What can change is that the great British public become properly “pensioned” by joining and staying in good quality pension plans. Plans that deliver good incomes and a healthy dollop of cash when it’s needed (when the money from work dries up).
While we welcome pension enthusiasts to our “geekernity”, we secretly admit that we are glad we are a small and self-selecting community of saddoes. We should not be inflicting the complexity of the UK pension system on the Great British Public, our job is to manage the legacy – spend time in our garden shed and let people get on with their lives in peace.
Which may sound a little rich from the Pension Plowman with 850 pension blogs under his belt.
But the time has come for some action and over the next ten days, you will get it from me and my colleagues at www.pensionplaypen.com.
We’ve had enough of teaching and want to get people doing. At the moment, if you want to set up a pension scheme for your staff which provides good benefits to members rather than advisers, fund managers and insurance companies, you have to be determined.
NEST has one, NOW has one, there are lots of smaller mastertrusts like BlueSky which your employer can sign up to with relatively little ado. But I bet you feel nervous about buying a house without looking at other properties in the neighbourhood. I bet you’d be worried about what your family said it you didn’t have a look at the other houses on sale.
And what about your existing workplace pension? If your company runs a plan , is it any good? What yardstick can you use it to compare it to the market and if you find out it’s sub-standard , and if you do find it lacking – what can you do about it.
We wouldn’t let a car out on the road each year without its MOT, but many pension schemes are into their second or third decade without their tyres getting a kicking; pensions people call it governance but you can call it a “pensions check up”.
At the moment you can learn as much as you like about what makes for good, but there’s not much you can do about it , short of employing someone like me to look into the situation and charge you quite a lot of money (I don’t come cheap).
But you may not have a lot of money and if you do, you’d rather be paying it into people’s pensions pot than lining my pockets.
So whether you are a first time buyer, you’re looking for a pension MOT or you’re deciding your old plan is not up to it and want a new one, it’s my job to find a way to help you.
And here’s the refreshing bit, I want to help, I can help but I don’t want your money.
The great thing about what is happening right now is that technology is setting you free. You don’t need to spend a fortune to end up in a good place. Even the pension minister has said it, the DWP wants you to set up your workplace pension scheme for nothing.
NOTHING that’s precisely how much it will cost you to get an excellent pension plan at less than half the cost of a stakeholder pension.
No fees, no commissions and no hidden costs.
How can this be done?
It can be done for nothing because a low-cost website can do a lot with a little advertising revenue. Because there are some things that employers want to pay for (auditing and certification of due process) and because over time, the information on people’s patterns of purchases builds a value in itself.
Martin Lewis has 86 million reasons to show that you can run a for-profit service with the trust of your public- you just have to be straight with people about what’s going on.
No learning without doing – and if it’s worth doing- it’s worth doing well!
The auto-enrolment experiment marks a first for UK Government. For the first time, a public policy initiative will be judged not by what happens, but by what doesn’t happen. Steve Webb‘s primary metric for judging our appetite for the new pension reforms is the number of people who vote against it and opt-out.
So far the run rate looks like 10% and the Minister has made himself a hostage to fortune, “downhill all the way” is what his critics are whispering, pointing to lower levels of engagement the further you go down the employer food-chain.
Far from sitting on his hands, Steve Webb has been very much on the front foot, launching his pot follows member initiative in a week when the Work and Pension select committee issued their report on workplace savings and the FCA put their foot down on platform rebates. Government intervention in the savings market has never been so marked.
Ominously though, the noise is very much between policy makers , the manufacturers (funds and platforms) and the distributors. The consumer is not yet part of the loop.
All that is going to change as debate on pensions moves out of the Westminster Chambers and the offices of the ABI/ IMA /NAPF and the various think tanks and into the workplaces of the million plus organisations for whom auto-enrolment into work place pensions will be new.
Last week I argued in this blog that we are not really prepared for what will happen - how can we be - nothing like this has ever been tried before. We may try to control the Tsunami as it rushes at us but we could be washed away if we do. Better for us to move to higher ground and watch and listen.
If we think that we can moderate social media conversations to make sure that Mum and Dad approve of people’s language and that nobody’s being rude about Auntie Edith, then we don’t know how social media works – or how useful it can be.
Social media is self-policing. That’s its strength. If someone posts a ridiculous or ill-informed opinion, other members of the community correct them. Mum and Dad can join in the conversation if they need to, adding new thoughts, but it’s not THEIR conversation, it’s not THEIR media.
Just like the water-cooler in the traditional office, conversations that go on in social media belong to the participants. And if you try and clamp down, they’ll just move to the photocopier or the mail room. What’s great about social media, unlike the water-cooler, is that you know what people are saying. . That’s what brochures and letters were for. Remember them?
So there’s your take-away Mr Webb. The challenge for the DWP is not to take charge but to watch and listen. The danger is that policy is made by those not watching and not listening.
Steve Webb is hearing second-hand whispers around the water-cooler; people (it is said) are not happy with loads of pension pots- ok, let’s sort pot follows member; people are saying they can’t stomach falls in the nominal level of their pot – ok, let’s give investment to the banks with their structured products;
Read what Vincent is saying again. Social media is self policing, some things said are daft and sometimes you have to wait till things correct.
If you are a policymaker you need to be asking the meaningful question
Would people be prepared to lose 10% of your pension pot to get one great big pot or another 10% to get a big fat guarantee?
There is no doubt that Steve Webb wants to be at the water cooler and no doubt he is hearing what he can from the people who turn up at conferences and from his advisers.
Now he can be a little more ambitious and ask the meaningful questions to those at the water-cooler.
He could use opinion pollsters or get people into focus groups , he could go on question time and ask for a show of hands. That’s how it used to be done – small samples , expensive with unwanted bias’.
Or he could be a little braver and go and talk with the people who really know how to find out what the public want – Money Saving Expert, MoneyMail ,the Sun , bbc.co.uk. He could get them to ask their publics the meaningful questions.
If Steve Webb really wants to manage the AE Tsunami , he should be asking questions about the key trade offs around every digital water-cooler in the land. These big bets around “pot follow member” and ”defined ambition “ are about how people buy things and the price they are prepared to pay for them.
Never before has a Government had such an opportunity to find out what people want and are prepared to pay for and what they just don’t understand.
The Financial Conduct Authority has published rules to make the way that investors pay for platforms more transparent. In the future, platforms, in both the advised and non-advised market, will not be allowed to be funded by payments (commonly described as ‘rebates’) from product providers. Instead, a platform service must be paid for by a platform charge which is disclosed to and agreed by the investor.
Currently, providers of investment products, such as investment managers, generally pay a rebate to some platforms in order to have their products included on a platform. This rebate comes from the annual management charge (AMC) which is paid by the investor to the fund manager. As a result, some platforms are able to give the impression that they are offering a free service, which means that the investor may not understand the true cost of the service provided by the platform.
This appears to me but half the story. What if you are a bold fund manager looking to build a business around being true and fair in your dealings with your unitholders? Let us say you off a true and fair charge of 1% pa on your fund which is inclusive of all your costs because you carefully manage them. Now let us suppose you go to a platform manager who demands a rebate of 0.75% for the privilege of distributing your fund.
This is the Tesco choice, pay up and risk ruin as you “sell at a loss” or hold out and find yourself a leper, excluded from the platform’s buy-list.
Consumer detriment? Well a top manager may find he has no shop window on a top platform and people will ask questions. What does that manager do? Disclose that he is being held to ransom or keep mum?
If he’s worth his salt he says
to hell with you, I can distribute myself and I’ll wait till some regulator sorts this out
There is a straightforward alternative to this , which has been adopted by Legal and General (the life company rather than its subsidiary Co-funds). quite simply L & G apply a platform charge on all funds which is added to the factory-gate price of the fund and the price the customer pays is the combination of the two.
Why I prefer this is that I know that the platform has been consistent in its pricing across the board and that where a fund manager has dropped his pants, he’s done it to get the customer a better deal, not to add to the platform manager’s bottom line.
You can read the rest of the FCA’s press release here. No need to bother!
Something that surprises me is the lack of interest in all this from the lah de dah institutional platform managers – the insurers and a few up-market workplace platforms (Hargreaves Lansdowne straddling the divide).
Along with the warning-off of rebates are some robustly worded statements about the use of advertising to buy your way onto best advice lists. I hope the FCA will have their binoculars trained on the corporate boxes of the asset managers this summer. We wouldn’t want any of our virtuous investment consultancies being mistaken from their chavvy retail cousins in taking the fund manager’s shilling.
The urban dictionary defines “noodling” as mulling over, thinking about, contemplating, pondering and puzzling. Steve Webb has been pot noodling for some time and if his plans to instigate a system of compulsory transfers for those with less than £10k becomes law, I think we’ll be noodling plenty more.
I’m into aggregation people who can get a single value for their DC pensions become happier more confident savers and pensions takes a step closer to being liked again.
In 2001 I wrote a paper suggesting a national aggregator for stakeholder pensions. It was waived in the House and got a mention in Hansard but it’s 15 minutes are long gone. It is probably harder today (on an execution only basis) to aggregate pots as at any time over the past twenty years (a legacy of pension mis-selling). Even if you do get the go-ahead to aggregate, you are prey to a multitude of vicissitudes.
I have seldom seen a transfer “out of the market” for less than a week. On an equity to equity basis, that means a lot of risk. Then there’s the execution cost which is supposed to be free but exposes you to the lottery of the single swinging price not to mention the paper mountain thrown up. Ask insurers about the costs of an execution only transfer and then double it to get an adviser involved.
The insurance companies are not geared up to the minimal amount of aggregation going on today, their priorities in systems development have been in other areas, transfers is a toxic word that reminds them of the great mis-selling disaster about which they are still sore.
To get insurers and mastertrusts to voluntarily upgrade systems and processes to make for a free flowing pot-follows member merry-go-round will cost a lot in systems time. This time is currently over-stretched dealing with auto-enrolment and the “on boarding” of 1.2m new employer schemes. Insurers are adapting to the post RDR world and struggling with new distribution channels. The news of pot-follows- member arrives on their doormat like an investigation from HMRC.
It does not have to be like this. We do not have to transfer pots to get the benefits of aggregation. Virtual aggregation where the pot is linked to a central register and viewed with other pots linked to a person’s Nino is a much more elegant idea. While it relies on a central register, which government’s are pants at operating, it can be linked to existing registers, which the DWP are at last learning how to use. Issues around security won’t go away but we’ve got to put some trust in a technology dividend to make them easier over time.
Steve Webb has three big ideas
Pot follows member
Minimum standards for Qualifying Workplace Pension Schemes.
I would argue that two out of three ain’t bad and that if he gives up on one it should be (1)!
If Steve Webb chooses to press ahead, he should listen not to me but to the people who have to implement the service standards that a pot follows member system would have to adopt. The business case for the spend to make this happen properly is hard to make, the prize too small, the cost too high.
Think technology Steve, small pots will become a lot smaller through aggregation and operation big fat pot may end up being renamed “Webb’s folly”.
There’s oil and snake oil, cheese and ripe gorgonzola and there are shiny fishing lures.
In a fine article sent me by Alan Miller I read that its author, John West (coincidence) of Research Affiliates tells a story of an encounter with a fishing tackle salesman who was selling lures that bore little resemblance to fish.
“I asked him, ‘My God, they’re purple and green. Do fish really take these lures?’And he said, ‘Mister, I don’t sell to fish.’
It adds to a consensus that long-term returns from a balanced portfolio of bonds and cash are unlikely to beat inflation by more than 4%
Promises of returns of 8% above inflation , based on past returns by US endowments (Yale and Harvard), are snake oil. The methods used are not available to retail investors today.
The means retail investors use to access Hedge Funds (fund of hedge funds) is so expensive, that its introduction damages rather than improves returns.
In summary , Research Affiliates conclude that funds of hedge funds may “hedge” but they don’t “return” and investors would be better off getting diversification from simpler multi-asset funds which diversify but at a fraction of the expense of fund of hedge funds.
To quote again from the article
Commodity futures, emerging market local currency bonds, bank loans, TIPS, high yield bonds, and REITs all have unique return drivers and will respond differently to various market environments. Shouldn’t we employ these in our asset allocation on a scale large enough to matter?
There is good news here for ordinary people. Several of the largest pension providers who we speak to , either have introduced or are planning to introduce funds that work in this way as the defaults for their workplace savings plans. In our new auto-enrolled , these funds will be employed on a scale large enough to matter.
The cost of these diversified funds are little more than their predecessors, the passive global equity funds that form the body of the lifestyle options that have been so popular over the past ten years.
This is evolution not revolution. The returns from the new breed of multi-asset funds will not shoot out the lights (they aren’t targeting 8% real) . Hopefully they will get equity like returns without the volatility of their pure equity predecessors and without the prohibitive pricing structures of fund of hedge funds.
These funds are, in short, neither snake oil, ripe cheese nor shiny lures. They are deeply dull.
If the providers of workplace pensions are prioritising DC outcomes over marketing advantage – good for them. We should start giving credit where credit is due.
The dynamic diversified strategies of NEST and NOW, Bluesky, SHPS , Pensions Trust, L&G, Aviva and Zurich to name but a few, all offer variations on the theme “low-cost diversified defaults that target good DC outcomes not marketing brochures”.
I’ll use John West’s conclusion
As a fishing enthusiast growing up in San Diego, I can tell you I caught more tuna on as plain a lure as you will ever find—the cedar plug. Vaguely resembling an oblong torpedo with a single hook, the cedar plug has a lead head and a tail of unpainted cedar wood. There’s no fisheye, no silver and blue (let alone purple and green!), and no paint anywhere. Just dull lead and the rusty hew of cedar wood. If there was ever a lure that wouldn’t sell in the tackle store, this is it. And yet it produces
…..and that an average hedge fund is effectively typically effectively about 60% long
(that means that it expects to get 60% of its return from said equities)
once you put in 2 lots of high charges as per a traditional fund of fund structure, it should not be such a surprise why you would be much better off investing in a dynamic multi-asset fund instead.
Hedge funds typically charge 2% of the contributions and 20% of the return, a more conventional multi-asset fund is unlikely to charge more than 1% overall – a lot less (in a low return environment this makes a big difference).
One of the requirements of the NAPF’s Pension Quality Mark is that for workplace pension schemes to meet the mark they must show some level of governance. PQM requires that SMEs (and micro employers) manage their workplace scheme..
The PQM is aimed at companies both large and small and the latter may not have the resources available to run a permanent management committee. However, in applying for the PQM, the company will have to show that, as a minimum, an annual scheme review is adequately carried out.
But what happens at “an annual scheme review”? In my experience, these meetings are unfocused as there is little that a small employer can do to influence the behaviour of the master trust or insurer of which they are but a miniscule participating employer.
In practice, after a couple of years, these meetings take place so that the PQM mark is retained , there is little ambition left to exercise pressure on the pension provider and over time the process falls into disrpute.
Looking at it the other way round, if you were at Aviva or Legal & General or Standard Life, would you be managing your strategy around the requests of your SMEs and micros?
Well you might if they acted together and exerted pressure collectively, but we know that organising small employers is as difficult as organising small shareholders. There is no collective voice.
The PQM are striving for good in Workplace Pensions and are now looking at ways to help smaller employers find mastertrusts (they call them supertrusts) which give proper governance. PQM explains the aim of the new service “PQM READYy” as
to enable employers to identify the multi-employer schemes that have good governance, low charges and clear member communications. ‘Pension Quality Mark READY’ will also help multi-employer pension schemes to demonstrate they meet an independent benchmark of good quality, and will help drive up standards in the pensions industry.
Good stuff, but that still leaves most employers (who use contract based arrangements) with little guidance as to what makes for good. And it does not solve a more fundamental question as to how the management committee exerts any control over the behaviour of the provider either of the master trust or contract-based services.
John Lawson of Aviva, worries about the lack of effective controls on a master trust board and he’s right to do so. A master trust can be set up by anyone for anyone with anyone being a trustee. John argues that for a master trust to offer itself as a workplace pension scheme, it should have a supervisory trustee from the Pension Regulator on its Board.
But we have tried “supervision” of pensions in this way before. Direct regulation of pension schemes through Government participation in trustee boards will do little but bureaucratise one of the most innovative and healthy parts of workplace pensions.
The alternative to “super” vision is “sub” vision or “bottom-up governance”. Traditionally occupational schemes (and master trusts are occupational schemes) have been influenced by the views of member nominated trustees and well established mastertrusts like the Social Housing Pension Scheme have real representation on the trustee board from MNTs.
But we are talking here of models that grew up in the 60s and 70s. Are the systems used to offer participating employers a say in the running of mastertrusts or contract based workplace pensions fit for today’s purpose?
I would argue “no”. The world has moved on- not just the pensions world either. Whereas in the past MNTs were supplied by unions, today many employers are non-unionised. Nowadays. Nowadays, if a group of employees need something to be done, they organise a Facebook page and get a campaign going. If a group of employees want something done, they can congregate using a Linkedin Group or a Google Page.
I was speaking with Paul Bucksey of BlackRock about this yesterday and he made a very good point. Where social media is likely to be important in pensions, is where employees and employers start organising themselves to put pressure on the providers of their pensions to come up with the goods.
I’ve spoken about people power in pensions and heartily agree with Paul. It is only a matter of time before the pressure among those now relying on these new DC workplace pensions builds to a point that there is organic organisation among users to collectively exert Governance.
The PQM, if it is smart, could tap into this latent pressure and do its bit to create the structures for these groups to develop. It may be that there is nothing it need do but facilitate the growth of these social media groups.
However, I suspect that leaders will emerge from the pack who will take “sub-vision” through social media forward, independently. The PQM, who do understand social media, may find their role not as instigators of change but facilitators of proper change.
The proof of the pudding will be in the eating, but don’t be surprised if in five years, the most important influence on the management of DC workplace pensions, whether under a master trust or contract, comes from social media groups organised by the people for the people.
Social media is the new voice for the small company and the disconnected employee. In my view it will become the means that their voices are heard by the pension behemoths.
I’d value your feedback on a scoring system we are developing which aims to provide employers with a method of rating one pension proposition against another.
We want it used by employers looking to establish a new workplace scheme, and those who have an existing scheme and are wondering if it needs attention (a second opinion).
Clearly this will need some clarity from Government about what makes for good (the Quality Test) .
Here are three questions to you, trusted readers
1. Is this a fair method to assess workplace pension schemes?
2. Can we expect employers to engage in rating a series of propositions like this?
3. Would providers be comfortable to directly offer pensions to companies chosing in this way?
Answers on a postcard (or better still in “comments”).
Here is how an employer rated the Providers at a recent beauty parade we ran.
Security of proposition
Security of proposition
As they say in boxing, Provider A won on points, the judge marked it 68/66. This seems a simple and elegant basis for taking and documenting the decision.
Charge -overall impact of charge TER (including an assessment of impact of nominal per capita (NOW) and contribution charge (NEST)
Investment -subjective view of default plus organization of other fund options
Payroll/HR support- mainly AE related but also at implementation and ongoing (Note we assume all providers will have excellent record keeping – this is now a hygiene factor)
At Retirement –treating customers fairly – member support provided to all participants
Member engagement –effort put in to provide staff with comms –including FE
Security of proposition- how likely is the provider to be still in the game in 20 years’ time.
This is a slight development on the thinking on the six DC outcomes established in the Pension Regulator’s paper (Nov 2011).
We’ve moved on from “security of assets” to security “of proposition”, “getting higher contributions” maps onto member engagement while “administration” maps onto “Payroll/HR support”.
The essential difference between this and PQM is that this is about the scheme chosen and not about the sponsor and member covenant (the contribution structure).
This system of rating is based on my personal view of the importance of each subject to my decision making; someone else might place Payroll/HR support at the top and charges less important . Others would argue that Member Engagement should be higher
Any fiduciary should be able to change the weighting order to suit their preferences but the default order should be set by the expert with conviction (in my case First Actuarial).
I don’t think that the attributes and the “out of” scores should be variables, they are hard coded into the process. Bespoking attributes and the scoring system would be an operative disaster and smacks of our having no conviction. It’s doing away with the concept of guidance.
During the process of choosing, a small number of employers will become enthused and want to “go further into it”. This might mean them wanting to go to a consultancy “after all” and pay fees for a second opinion or for detailed help on investments, engagement or on a full on wrap proposition .(for instance).
Exceptional companies should be given easy links to further assistance, something we think hard about at www.pensionplaypen.com.
Similarly , a system like this must point companies both to mainstream providers but also to industry specific workplace schemes such as SHPS , the Pension Trust and the Printing Industry scheme . To know what makes for good is one thing but to find and impliment “good” even more important.
In the months to come, we will build a machine that will help companies work out what makes for good and assess either an existing scheme (or workplace schemes available to them).
The chief output is the overall % as this gives the personal assessment of the person managing the staging process. If a company wants to get this rating done by a number of people (a committee) then we should let them run this a number of times and save each result for them.
What if the employer can’t or won’t score?
This is a big conviction question . Should we have default positions on all providers? . The way I’d like it to work is that we ask the employer to make their own decision on “weightings” and “scores” but give each answer a “can’t choose? ” option which leads them to a default position.
(One snag with default positions is with providers (insurers) with variable responses. Our default view may be that xyz are generally the cheapest insurer but what if abc comes in with a superquote when they are normally very expensive ?)
If any “expert” can be sophisticated enough to give a bespoke rating on attributes based on the response received – well and good, but I think this is expensive and risky.
Apart from the dangers of assuming a standard charge from those with variable choices, we should not force companies to adopt a single “provider view”
Employers using this methodology should be encouraged to think for themselves and this means either requiring them to fill in certain fields or giving them the strongest of warnings that adopting the default position is not going to be as accurate a way of assessing as personal engagement.
Of course, employer specific scoring is valuable if it can be collected. It provides a “true view” of propositions (eg what the employer thinks), over a large sample of employers. This is about as good a data as you can get as to what employers really think ( a reasonable proxy for members the closer you get to 2018).
If we can collect this data at a provider level the data becomes even more valuable as it informs not just the general debate about what makes for good, but also the internal development of each provider’s proposition.
Further advantage of a self-service technology led approach.
A lot of this decision making will be imperfect. Even with a beauty parade this happens - (I once spoke with an HR manager who had the casting vote on a provider selection and chose xyz on the colour of the presenter’s tie).
We won’t have those distractions and we want to provide information to decision makers which is clear and easy to compare.
This blog is designed to encourage debate and then action. We can argue all day about this methodology but in the end we need to adopt a way of doing things. Basing our assessment on a tweaked version of tPRs six DC outcomes is a smart move as it ties in with Govt thinking but allows an “expert” to remain a thought leader with a value proposition.
The scoring system that leads to a percentage rating seems about right to me- encouraging a range of engagements from an employer (based on interest and competence) with a relatively small degree of bad outcomes (the beauty parade method produces its own).
Of course the providers will be able to see our hand and we will need to be able to justify our ratings not just to employers but to providers (and the regulator) so we are talking “robust”. That said, “robust” is something we do pretty well!
The DWP are shortly to announce what they consider the minimum standards should be for a scheme to be a “Qualifying” workplace pension.
Yesterday I spent time with Kevin Odell and other members of the Altus team discussing the need for common data standards for auto-enrolment software.
This morning I am locked in a debate with my colleagues over whether the website we’re building should “let people work it out for themselves”. Or whether we need to give default ratings on the quality of pension providers and their workplace schemes.
Steve Webb famously said that we didn’t need to legislate on the price of a can of baked beans because the market finds that price. But he didn’t add that every can has a series of disclosures on “best before” ingredients” “storage instructions” and”nutritional information” that allow you to make your purchasing decision in an informed way.
Many will buy beans on price, some on brand , a few on taste and a very few on the nutritional differences. The can I am looking at has three quality marks telling me the can is recyclable, the contents suitable for vegetarians and there’s a third with swoopy arrows that no doubt says something to bean officanados.
I buy beans with great confidence.
The same cannot be said for “pensions” (or “auto-enrolment software”). No matter how much information we put on the tin (and disclosure documents can run to 20 or more pages) what people look for is a simple statement that tells them whether the product is any good or not.
There are a few pension kitemarks that attempt to do this. The NAPF have introduced the Pension Quality Mark which tells you that the employer is making a reasonable contribution and that the charges aren’t outrageous but this is something that the employer purchases to validate their scheme – it doesn’t help employers chose a provider.
Stakeholder Pensions were required to have minimum standards which made sense in 2001 when they were introduced; those standards have changed the market (in a positive way). But they are now looking a little tired and the new minimum standards being brought in by the DWP (which we hope will be accompanied with some guidance on best practice from the Regulator) will take us a lot further to providing an answer to “what makes for good?”.
Whe it comes to the various solutions to the complexities of auto-enrolment regulations, employers are really in the dark. You can see all the demonstrations you like but until you run your first payroll through the assessment and contribution tools , you will be keeping your fingers crossed with precious little but trust in the brand you are using. Altus is right, the sooner we get common data standards - the better.
Employers need help in taking these decisions, guidance that provides them either with a method that helps them “do it themselves” or a series of default ratings that allow them to take a decision using the experienced judgement of a trusted source.
I have worked for nearly 30 years advising people on pension purchasing decisions and whether I am talking to the CEO of a FTSE 30 or to a financial novice, their capacity to take decisions about what is “good for them” is very limited. They look for guidance, for defaults; they ask what others like them have done and they take consensus positions. The importance of defaults is enormous and the need for guidance immense.
The more complicated the concept the more important the need for clear guidance. The lessons of ISA purchasing is that you can make the purchasing decision easy and people will “self-serve”. The lesson for pension people is that if you make the purchasing decision easy, people will self-serve.
To make it easy, we need to find a new language, new technology and most of all a new attitude to the sharing of the information that people want.
For too long, pensions has been impenetrable because there have been no standards. To buy into pensions, knowledge people have needed to spend money on information that, were they buying baked beans , they could read on the packet.
Pensions aren’t baked beans. In terms of the importance of a purchasing decision, the pension you buy ranks with house purchase and career moves as the most important financial decisions you take.
Nevertheless, pension schemes do not need to be too complicated for employers to buy into schemes online. Indeed it should be possible, the standards of “for good” being in place, to make comparisons between pension schemes on value for money grounds. VFM is a composite measure of the cost for the quality of services bought and could be expressed in any number of simple ways- perhaps most easily as a % mark (the price per 100g!).
The DWP, the Pension Regulator , Altus, First Actuarial , the Pension PlayPen and all the other organisations that wants to restore confidence in pensions , need to work together over the weeks to come to make sure that the standards that are set are embraced by the 1.2 million companies that will be buying into Qualifying Workplace Pensions in the next five years.
We need to set the standards and if we do, we will start to restore confidence in pensions.
I have just read a Report by Demos which ends like this
The shift in private retirement coverage from traditional pensions to individual retirement plans has made the goal of a comfortable retirement a risky, costly gamble. A fortunate few will retire wealthy while the majority watches as their contributions are gutted by high fees and their account balances plummet every time a corporation reports a losing quarter. A new retirement system, built upon guaranteed returns and lifetime payments, as provided by Guaranteed Retirement Accounts, is needed to restore the stable, secure retirement that should be the right of all those who have worked their entire lives. Meanwhile, only one part of retirement is certain: workers nearing retirement are watching their individual account balances and crossing their fingers, hoping that another market downturn doesn’t postpone their retirement for years to come, or wishing there were employers willing to hire workers that many consider too old to work.
Sounds familiar? – it isn’t. This is a report on the American 401K by a group of American commentators whose analysis of DC pensions is much the same as that of UK commentators; eg that as an individual retirement savings system, individual retirement plans don’t cut the mustard.
The report , which you can read here , confirms what we in the UK know, that unless there is an element of collective insurance, the enterprise of workplace savings will throw up some winners among the wealthy and condemn those at the bottom of the contribution ladder to 100% participation in not very much.
Collective insurance is , in its loosest sense, what defined ambition is all about. At the one end of the scale is the insurer which offers blanket terms which accept that the very best risks subsidise the poorest risks. Where the blanket terms are set at below 0.5% for every member of every company in the land, you have NEST or NOW or People’s Pension and let’s hope some enlightened “for profit” insurers,
But this is only the start of the push towards collectivism. The next target is the individual annuity which is the most hopeless way of delivering guaranteed pensions to the nation, one could imagine. Collective annuitisation , using pooled mortality and embracing economies of scale enjoyed by large DB plans and to an even greater extent the state pensions is a logical next step.
Somewhere, deep in the bowels of AonUK (or more likely India) Kevin Wesbroom is leading a research project which we hope will shed light on the options open to risk sharing between employer and employee (and perhaps the tax-payer). I can think of many such models but we need the deep actuarial research Kevin can provide to work out how fast we can move towards what DEMOS refer to as “guaranteed retirement accounts”.
Guarantees are important but they should not be purchased individually, their cost at an individual level prohibits the prospect of a decent pension. Guarantees work collectively and work through pooling of risk, of costs and ultimately they imply a pooling of intent between generations.
The work we do over the next five years will be in an environment dominated by “individual retirement accounts” and we will have to wait till we get a savings system as efficient as the Dutch collective DC approach. On average £ for £ , Euro for Euro, the Dutch system pays out 39% more than ours (Towards Tomorrow’s Investor).
The DEMOS report shows the shift to individual accounts and the damage it has already done to the elderly America
The retirement security of American families has crumbled in the past generation. Workers retiring in the next 20 years can expect to receive only 65 percent during retirement of what they made during their working years, a drop of 16 percent from their parents
Another American study which I was sent yesterday by Thomas Schildhimmer who I met at our pensions lunch is even more stark. It demonstrates that 401K in the states is 50% less effeceint that its DB counterpart. If you doubt the quality of the research read it here. The report is called “A better bang for the buck”. You can guess what lies behind the better bang!
Many people in this country laugh at David Pitt-Watson, at collective DC and at Defined Ambition. But the goal of David and of CDC and DA is to get us back to where we were, to stop the slide towards “lower for all but a few” and have the ambition to work together to make pensions “better for all”.
This is the third of three Easter blogs that address the issue of how corporate pensions are designed and paid for. In the first Give a Straight Red to Active Member Discounts , I argued that the design and cost apportionment needs to be fair to both active and deferred members of workplace schemes.
In the second blog “What’s Expensive for a pension these days?” , I replied to feedback from a provider and argued that insurers need to adopt a collective approach to their pensions book if they are to compete to provide pensions to the 1.2m employers who have yet to certify their Qualifying Workplace Pension Scheme (QWPS).
In this third blog , I’ll try to introduce some harmony (having been quite disruptive enough). I’ll suggest a simple way forward that will allow pension providers an opportunity to prosper in the post RDR auto-enrolment world.
John Lawson of Aviva made a very keen comment yesterday…
What I am saying is that 0.9% is sustainable. It isn’t particularly profitable, but it is sustainable. Is 0.48% sustainable for transient workers? Only if you move to 100% self-service and take a marginal pricing view.
Taking a marginal pricing view doesn’t necessarily mean you will make a profit. In the long run, if you don’t make a profit, you will be out of business.
Unless the 0.48% provider can build its asset pile quicker than it is spending cash on its platform, and encourage its customers to self-serve…
You can sense the conflict in John’s writing. On the one hand he can see that a collective solution at a low price might work – but it depends on customers self-serving. On the other hand he senses his duty of care to his policyholders to keep his insurance company solvent.
His life company, like all the remaining lifecos still active in the mainstream pension market, can stick or twist.
Sticking means keeping the faith with the old distribution model and hoping that it will find a way to “comply or explain” with whatever stricture comes next.
Keeping the faith despite the RDR and the FSA’s “treating customers fairly” campaign.
Keeping the faith despite the threats of “naming and shaming” from the DWP over much that has been standard practice in the advisory market .
Keeping the faith with trail commissions set up on the eve of their abolition, active member discounts, “sexycash ETVs” and the mis-certification of poor legacy schemes as QWPS.
And what does twist look like?
Twisting in the new post RDR world of auto-enrolment looks like NEST. It looks like a low AMC for everyone with a big bet that the ladders will cancel out the snakes.
Those kind of bets are tough to take, because if you are a lifeco in the UK and you just get the snakes, then you lose money and the more schemes you take on , the more money you lose and then you have to go to your shareholders for more money – which is John’s point .
When the DWP were consulting with the lifecos back in 2010, they asked them whether they wanted to play in the auto-enrolment market and they generally said “no”.
But open up the Times on Thursday last week and who has the lead advert? AEGON, who is banging the drum for Mastertrust , BLACKROCK.
Lined up on the other side of the road are the mastertrusts, at the front NEST with NOW and the people’s pension side by side, not far behind other non-insured mastertrusts from Bluesky, SEI , Salvus, Supertrust and the Nations Pension. Not forgetting industry wide schemes from the Pension Trust and SHPS
These mastertrusts have all twisted, they have all adopted NEST’s public service “collective” mantra and will offer blanket terms whether their customers have high staff turnover or low average salaries or multiple payrolls.
And they are offering their wares directly to employers at deep discounts to the historic prices achieved by insurers through IFAs.
Much though the lifecos would like to stick with their traditional distribution model, they cannot do so and offer sustainable pricing that competes with the 0.30- 0.50% guaranteed terms of the mastertrusts.
It is hard for the insurers to twist because they think the dealer’s against them.
It’s galling for insurers that they must compete against the tax-payer subsidised NEST and it’s galling that they must reserve for SolvencyII while mastertrusts don’t.
It is galling for the insurers that they can’t argue they have superior governance, or product structure, or investment options or “at retirement options” because the mastertrusts have been given the high ground (while the insurers have given their ground to the IFAs).
Some insurers can’t even claim they know what their clients want. How can you twist if you can’t even see your own cards?. A pensions manager at Aviva’s second largest UK client told me she had never met anyone from Aviva! All her dealings were through her IFA.
So where is harmony to be found?
Well John knows the answer ; it’s where a…
provider can build its asset pile quicker than it is spending cash on its platform, and encourage its customers to self-serve…
I can hear the grinding of John’s teeth. Over the past five years Aviva has spent £200m on platform developments which they have abandoned. This £200m write off is only 7% of the £3,200,000 they lost last year from American write offs but it’s still substantial.
But the bad news is out of the way, the shareholders have taken the pain and now it’s time to move on. John can console himself that his previous employer did little better with “corporate wrap”.
The Lifecos have had their spending spree- they cannot all go off and spend another £200m on platforms. They’ve now got to find a way to get several billion pounds onto what they’ve got.
To do that you are going to need to start competing for business against NEST and NOW and yes – one of their own who will be offering a GPP to everyone at 0.48%.
You know the answer John, it’s 100% self-service and it’s marginal pricing. It’s about giving up on yesterday’s practices. You cannot stick and twist at the same time.
100% self-service means a direct to market strategy unless we start seeing on-line search engines doing a “go compare” on a B2B basis (surely not).
Marginal pricing means taking a collective view. A collective view that across the 1.2m opportunities out there, there are as many ladders as snakes and that a general price broadly adjacent to 0.5% will be sufficient to keep you in play for a decent slice of the cake. Rather than loading transient workers with a 0.9% AMC, start thinking about “pot follows member”. Build your product so good that people want to spend their savings on retirement. Restore confidence in pensions by being a Force for Good!
Here’s the room called Harmony John. Open the door and you’ll find a number of people ready to shake your hand;- myself and David Pitt-Watson among them.
John Lawson – Head of Policy (Corporate Benefits) at Aviva
A reasonable question to ask and one asked by the very reasonable John Lawson of Aviva in a response to my blog “Give a straight red to active member discounts“. I quote John’s response in full as he articulates a view which most UK pension people could agree with.
“0.9% is expensive for a pension? Really? For transient workers? 0.9% is expensive compared to the retail price of a pension? Really? If you walked into a pension retailer, what would you pay for a pension? Why should leavers be subsidised by the employer? Are leavers hard done by? I don’t think so! Fundamentally disagree with this rant Henry. This is the second piece of nonsense that you have uttered this week, the first being your support for Pit-Watson’s Dutch fiction – you clearly haven’t bothered to look into Dutch schemes. Less PR and more substance please. Serious pension people want serious debate,
High time that First Actuarial started offering pensions for 0.3%, or 0.48% or even 0.9%. What’s stopping you Henry?
Why I’m sympathetic to John’s view is that it used to be mine too!
Adrian Boulding, who does a similar job to John’s at Legal & General tells the story of finding himself in a room in the seat in front of me. The then pensions minister John Denham asked whether the insurance industry could operate a stakeholder pension at 1%pa. Adrian jumped up and blurted out
”oh yes minister, we at Legal & General consider our factory gate price to be 0.5%”.
He sat down and was catapulted forward , so hard did I kick him in the backside.
As it turned out, Adrian was right and I was wrong. I claimed I had Eagle Star‘s profit margin to protect and Adrian took it in good heart – we’ve had a laugh about it since.
That was 2000, this is 2013 and the boot is on John’s rather than my foot!
I suppose I had better respond to John’s public challenge!
Taking the last para first , as he knows, my firm is not a manufacturer, we do not “offer” pensions, First Actuarial point people to where and how they can buy good workplace pension schemes for their staff.
The rates quoted are available and if anyone wants them they should get in touch with me at email@example.com . You will have to be acting for your company and be ready to pay a qualifying contribution ( a minimum of 1+1% of the AE band of earnings).
The 0.3% pa rate is what a deferred member of NEST would pay for their pension. There is an extra loading from the 1.8% charge but spread over 10 or 20 let alone 30 or 40 years this is minimal.
The 0.48% rate is for the default fund of a leading provider’s GPP. This rate is guaranteed for the transient workers of retailers.
You won’t get those rates by walking into a pensions retailer but you can get them online as I hope to show to John and his colleagues in the next couple of weeks.
Is this Apples v Apples? Well we could argue deep into the night about “bells and whistles” but if I was a transient worker, I’d be more interested in a solid pension than “co-branded communications” and on-going workplace presentations. After all, I’m not planning to stay around.
0.30% and 0.48% are no longer “factory gate” prices , in the intervening 13 years they have become workplace prices (or at least prices that are freely available to any of the 1.2m employers staging workplace pensions over the next five years). We are in “collective pension land” now.
Which moves me on nicely to my second “piece of nonsense”, my support of “David Pit (sic)- Watson’s Dutch fiction”.
David Pitt-Watson is a fan of collectivism – and that’s what they do in Holland; they don’t much do company pension plans, it’s “industry-wide” with them – like another thriving pension system in Australia.
One of David’s contentions is that we in the UK pay too much for our pension funds , relative to the Dutch (the Swedish system is even more effective but let that be). He argues as a super-collectivist.
A huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.
If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.
That minor changes to our regulatory framework could boost pension returns by 39 percent.
I’ll have to see a counter-argument from John about why this shouldn’t be the case but would stand by any comments I have made in support of these assertions.
Certainly, for those transient employees, even a relative reduction in the annual charge on their money “boosts pension reserves” by up to 20% . Well it could be more than 20% for the youngsters but let that be.
Term of deferment
If AMC is 0.48% rather than 0.9%, fund is bigger by …
If AMC is 0.3% rather than 0.9%, fund is bigger by …
David Pitt-Watson‘s point is the British system of pension provision is less efficient and more expensive than the Dutch, many of the savings he imputes to the Dutch are achieved by collective decumulation (outside the scope of this argument but important ) but the core savings as people accumulate a pot with which to get an income are directly relevent.
As John should know if has read my many blogs on the Dutch system and on Pitt-Watson’s pioneering work, the big difference between Dutch and British DC comes down to social attitudes. The Dutch take pension outcomes very seriously and providers are scrutinised intensely by the public fiduciaries – advisers, trustees, employers and regulators all play a part.
There is a collective social conscience to keep public confidence in pensions and despite falls in pension outcomes in the past year, there is no rioting on the streets of Amsterdam. People are still getting 50% more from their DC pensions than we are getting from ours.
I am sure that any Dutch fiduciary or adviser who was accused of lacking substance and concentrating on PR for promoting lower fees for transient staff would find this extremely amusing (as I do).
John has kicked my backside. I didn’t quite fall off my chair but like Adrian Boulding, I turn round to him now, with eyebrows raised!
I’ve published the numbers, I’ve confirmed that an 0.48% guarantee on a GPP’s default is available and that NEST will offer 0.30% in deferment using its default. I’ve shown the boost that could be given to transient workers pensions by using these rates.
This is not PR – this is substance.
Is 0.9% expensive for a pension these days?
Most UK pension people may still agree with you and see 0.9% as cheap but not me. It might have been cheap in 2000 and it certainly isn’t today!
English: John Denham at Innovate ’08 (Photo credit: Wikipedia)
To me, active member discounts are the pension equivalent of the two footed tackle (with all studs showing).
Companies that use active member discounts as part of their “Qualifying Workplace Pension Schemes” get my straight red .
I know I am not the ref - I don’t even want to be the fourth official (look what reffing did poor Bill Galvin!)
I’m the bloke in the stand who goes on 606 and says – “watch it on match of the day!”
Enough football, this blog’s a longun.. (get on with it – ed)
What are active member discounts (AMDs) and what’s wrong with them?
AMD’s reduce the charge a member pays on a pension contract while they are actively at work for a company. In the case of one large employer whose scheme has a member charge of 0.9% , the charge is reduced to 0.4%pa while the member is “actively in employment”. So far so good.
But not much good for staff of retailers where staff-turnover averages 35%; and where 75% of new joiners leave within the first two years.
Here the majority of the members of a scheme enjoy a discounted pension fee for a few months and a lifetime at the full rate.
Here are some quick calculations . The results show how much bigger the fund value would be if the member had got an AMC of 0.48% or 0.3% rather than 0.9%.
Term of deferment
If AMC is 0.48% rather than 0.9%, fund is bigger by …
If AMC is 0.3% rather than 0.9%, fund is bigger by …
Why use a comparison of 0.48%? – well these terms are available on all UK schemes from a reputable GPP provider and are the same for those who work for the company and those who have left. Almost all AMD’s are on GPPs
Why use a comparison of 0.30%? - this is the management charge people pay when using NEST’s default fund, an option available to any organisation contributing to a workplace scheme in the UK.
The philosophical bit
Originally, the idea of a pension was to reward someone for good works, they used to be dished out by the monarchy to pay-off favourites.
The idea of “company pensions” was an extension of this reward, company pensions have never been compulsory nor universal – until now!
Active member discounts look backwards not forward, they are of course not marketed to staff as a discount, they are promoted as if the discount, like employment , will last for ever.
In the past you might have had to work two years before qualifying for a pension - fair enough, if the pension is designed to reward the 25% who stick around.
In the past you might just have got your contributions back if you’d joined the scheme and left within two years.
But now you have to join the scheme and it is definitely not the done thing to opt-out. So what is your reward for doing so? Your contributions carry an extra charge and are worth up to 20% less when you get your money back (I won’t scare you with the figures for 40 year deferments).
Philosophically the concept of a pensions reward has been overtaken by universal coverage (auto-enrolment). There can be no place in such a system for a practice that subsidises the rate for one group of employers at the expense of another.
And that is what AMDs have come to be about. They are about hiding some pretty shabby practices.
Even where staff turnover is low, future employment is far from certain. While people have the opportunity to get the discount back by funding the old pension and the new one- few can afford it (and even fewer of the 11.5m still to enroll).
ISAs are promoted by the likes of Michael Johnson as a “clean” alternative to pensions. They are simpler to understand and easy to use, but are they clean?
Here is some research from my reliable friend Dan Norman describing the “journey” of your money.
• You are recommended the ISA investment by a financial adviser, an IFA or a private bank, which takes a commission.
•The financial adviser passes it to a funds distribution platform (such as Cofunds) which may add a variety of charges, including initial charges, switch fees, trading fees, and tax wrapper (ISA) fees.
•The funds distribution platform uses outsourced technology, for which it is charged a fee.
•The funds distribution platform passes the investment to a transfer agent, which charges fees for out-of-pocket expenses, maintaining the account, updating the register of investors and passing the subscription on to the fund manager.
•The fund manager places the investment in safekeeping with a custodian bank which charges an annual ad valorem fee plus fixed fees for settlement of transactions in the underlying assets, plus out-of-pocket expenses.
•The fund manager appoints an independent fund accountant to value the investments held in the portfolio. It charges an ad valorem fee on the value of the assets under management plus transaction charges and sundry charges for audit and tax reporting.
•Interactions between fund managers, transfer agents and fund distributors (such as IFAs) are routed via electronic message services such as EMX, Calastone, FundSettle, Vestima and SWIFT, which levy set-up fees and per message charges.
•The investment process and the participants are monitored and reported on by the depositary bank or trustee – often the same organization as the custodian bank – which charges an annual fee.
•At this point, the promoter of the fund may take an initial charge from the client for the investment. This can be a substantial amount: 5% or more is not uncommon. Promoters also levy exit charges for withdrawals from the fund.
•The fund manager takes the newly injected cash to invest in the market. The manager charges an annual percentage fee on assets under management and, possibly, a performance fee.
•The fund manager places a deal in the market to invest the new cash. This may involve paying a spread if the trade is placed directly in the market, or a commission to a broker-dealer.
•If the trade is subject to tax (like stamp duty on equity trades) then this is taken from the fund via an adjustment to the trade consideration.
•The broker-dealer may make a payment back to the fund manager as an inducement to trade with them. This is called “soft commission.”
•The fund manager confirms the trade data with the broker-dealer through a trade matching service, such as those supplied by Omgeo or SWIFT, which levy further fees.
•Settlement instructions are exchanged between the custodian banks to the buyer and the seller of the asset, and cash is exchanged for securities via electronic book entries at a central securities depository (CSD), which charges a settlement fee.
•Cash is paid and received via accounts maintained at the central banks by the custodian banks, which charge settlement fees.
•And we haven’t yet covered FX fees, securities lending, a Fund of Fund structure….
ISAs may look simple but so does an iphone. Neither are cheap!
There are some simple rules you can follow to keep yourself out of trouble. Trust your instincts. If you do not understand, ask and if you still do not understand, do not invest.
The simpler the product the cheaper. As we are constantly advised, cheaper is not necessarily best but long supply chains are rarely in the consumer’s interests.
If you discovered that you could buy Nestle gold blend in Tesco’s finest coffee (you can’t ) you’d pay the lower price per 100g. Unless you wanted to wave the Nestle jar around in the kitchen. you’d probably go for the Tesco own-brand product as you get the same coffee.
Much the same can be said for the prescription of generic drugs by GPs.
Consumers are savvy, they understand supply chains and will chose the short ones as a route to sustainable value.
This does not rule out spending money on flim-flam. Most people will pay a little extra to go to a hairdresser who is pleasant ; similarly the comfort of a trusted intermediary is a considered.
But before pressing any buttons , we need to separate what we are paying for comfort and whether this is an acceptable price.
Do not be brow-beaten. In this new web enabled world, you have the choice whose service you use.
Compare the attitude of the most famous funds platform, expressed in an e-mail to one of their clients yesterday.
Currently it is not possible to invest into ‘clean’ funds within the Vantage Service as at present there are no requirements for fund supermarkets to offer such funds. Until the outcome of the FSA’s decision making process surrounding how the Retail Distribution Review (RDR) will affect fund supermarkets has been finalised, we have no plans to offer these or change our current charging structure.
Any required changes to platforms (such as Vantage) have not yet been finalised and we are still in a consultation period with the FSA. We expect a decision from the FSA later in the Spring. Any new platform rules confirmed will then be expected to be introduced from 31st December 2013. If we do need to make changes our clients will be the first to know.
With this (from Citywire)
Informed Choice has unveiled the charging structure for its execution-only platform, IC Direct, which will be powered by Fidelity FundsNetwork.
The platform will charge a flat fee of 0.45% on assets per annum.
A £45 annual account fee will apply after the first two years on each new account and there are no initial or switching charges.
IC Direct only offers clean share classes and currently has 425 funds from 18 fund managers … The firm expects to have around 2,900 funds from 80 fund managers by the third quarter of 2013.
Martin Bamford …., managing director of Informed Choice, said: ‘We made the decision to adopt clean fund pricing from day one after our market research told us investors are disillusioned with the smoke and mirrors used by existing platform pricing structures.
‘This is an important step forward for the platform sector in terms of transparency, ahead of the regulator forcing existing discount brokers and direct to consumer platforms to clean up their pricing terms.’
We are seeing a profound change in the way people provide for their retirement.
The Thatcherite experiment of personal pensions has been discarded and we have returned to “works pensions” as our way of supplementing our state benefits. Meanwhile two of the three defined benefit schemes - the occupational and state second pensions are being run down and after 2016 the only defined benefits we will accrue will be in the basic state pension or in Government sponsored public sector schemes.
While the Basic State Pension‘s long-term decline has been arrested in the short-term by the triple-lock (and in the medium term by its upgrading), the best part of the slack will be taken up by workplace savings schemes.
At first glance, workplace pensions set up today look little different from the personal and occupational money purchase pensions of the past thirty years, the new workplace schemes are likely to be very much more effective in replacing pre with post retirement incomes (the replacement ratio).
This is because they will be better funded, better invested , better decumulated, better administered and offer considerably better value for money to those using them – the pension consumer.
At the heart of this positive evolution is the change in distribution brought about by auto-enrolment and by the retail distribution.
To understand this statement you need to understand why “pensions” were the last thing on the mind of “pension advisers” particularly most of those working in the retail sector
The abolition of commissions brought about by the RDR has been long-flagged but the pressure on advisers to restrict charges on member’s pensions to services that benefit the member hasn’t. Without the prospect of consultancy charging, the traditional retail advisory model that enabled employers to get a free ride and loaded charges on members is not just broken - but disappears.
The retail financial adviser has always struggled with the concept of saving to buy a pension. Over the years I have seen complicated pensions that showed how EPPs and SSAS could be used as a tax-effecient financing vehicle for SMEs, I’ve seen SIPPs touted as a means for hiding CGT on second properties, I’ve seen pension mortgages and recently salary sacrifice and even pension liberation schemes. All variants on a theme that denies the central purpose of a pension savings plan – to replace income lost by retiring from work.
Because pension saving was dressed up as a financing or tax-avoidance tool, issues to do with pension outcomes - investment, annuitisation and value for money were downplayed. Indeed a smokescreen was created that allowed advisers to take huge proportions of the early contributions made into these plans as commissions.
In this , the insurance companies were complicit. Eager for distribution, insurers aided and abetted advisers in their endeavours by offering ever more complex products with complex charging structures to pay more and more commission.
Even with the simplification brought about by stakeholder pensions, attention has been diverted from the matter in hand. Flexible benefits and the corporate wrap have continued to dress up pensions as wealth creation . The promise of “Wealth at work” has disguised the paucity of the pension outcomes when work finishes.
Now the retail advisory community has fragmented. Many have left to do other things, some are sitting on a legacy book which they hope will provide a long tail of trail commission to support a life of leisure while others have seen yet another opportunity to advise around the fringe of pensions by selling compliance tools that will keep employers on the right side of the Pensions Regulator. Recent announcements from insurers that they are withdrawing their corporate wrap products suggest that the flex project is grinding to a halt while announcements from payroll providers such as SAGE and EARNIE provide a threat to the middleware on which many corporate IFAs are relying to make money from auto-enrolment.
The harsh but brilliant truth is that for the first time since I started advising in 1984, there is an opportunity for even the smallest company to purchase a company pension at a reasonable cost without the need for expensive advice. I talk of NEST but also of NOW and PEOPLE’s PENSION, BLUESKY, PENSION TRUST, SHPS and SUPERTRUST and if I have anything to do with it L & G and other enlightened insurers.
All these organisations are offering the business community, access to a bundled DC savings plan with good investment options at or around half the price of the stakeholder pension (price cap).
What is more, these organisations will contract directly with the employer without the need for an intermediary. I spoke last week with an employer who had set up a commission based workplace scheme for some thousands of employers. In eight months , they are yet to meet the insurer which provides the scheme. An over-reliance on intermediaries is a recipe for disaster all round.
I am pleased to say that examples such as the one above are becoming the exception rather than the rule.
There is a long way to go, there are still many legacy pension schemes which are not working which we will need to upgrade. But I firmly believe that by the time we reach the end of auto-enrolment staging in 2017, not only the 11.5m new entrants but the vat majority of the 1om people currently in workplace DC plans , will be getting a much better deal than ever they had before.
I say this because we have now a way to get directly to providers with advisers needing to offer only the lightest of touch in terms of guidance around what to do and how to do it. New technology can accelerate the process. Costs of staging will tumble, the quality of corporate decision making will improve but best of all, there will be better outcomes for members retiring using these new plans.
Although operating costs fell between 1994 and 2000, they have risen against since then and are now climbing back to 1994 levels
Put together, these fees now reduce the average fund by 2% per year
With funds growing from €47bn to €1,105 bn over the period, the increase in nominal returns to fund managers has been staggering
In a low inflation/low growth environment where the total gross return can’t be expected to exceed 6%, fees now take in excess of 30% of the total return.
Regular readers of this blog will know that an actively traded equity fund that doesn’t pay much attention to operating costs can easily run up three times the operating costs quoted by Lipper (above).
We have seen funds where the management and distribution costs exceed 1.5% and incur operating costs which together mean 3% pa is lost from the return. Now half the return is now lost to charges.
Dan likes to quote the Economist
“Imagine a business in which other people hand you their money to look after and pay you handsomely for doing so. Even better, your fees go up every year, even if you are hopeless at the job.”
And this is the way the money goes! Thanks again to Dan and TCF investments.
•Manufacturing costs - unnecessarily complicated instruments. e.g. derivative instruments.
•Trading costs – huge variety of banks, investment banks, exchanges and broker-dealers intermediate transactions, adding layers of costs.
•Management costs – wealth managers have devised a variety of intermediary vehicles through which the investors they advise can approach the equity and debt markets. Investment trusts, mutual funds, exchange traded funds and hedge funds – all create additional administrative costs, notably in fund administration, fund accounting and transfer agency.
•Infrastructure costs (again) – complete lack of standardisation. Transfer agency is one facet of complexity cost. Though transfer agents administer purchases, sales and switches between pooled funds on behalf of investors, they are instructed mainly by fund distributors.
•Servicing costs – safekeeping or safe custody, is carried out by custodian banks which levy ad valorem charges on portfolios plus fees for “servicing” assets, in the sense of settling transactions, collecting entitlements such as dividends and rights, and exercising voting rights.
•Infrastructure costs (yet again) – Central Securities Depositories maintain complete digital records of who owns what, and charge fees for maintaining accounts. The CSDs also settle exchanges of cash and securities, usually through accounts maintained by banks at the central bank, for which they charge settlement fees. Increasingly, trades between banks, investment banks and broker-dealers are also intermediated and netted through central counterparty clearing houses (CCPs), which eliminate counter-party risk but impose further costs in terms of collateralisation and transaction fees.
•Simplification costs – Government trying to help. PEPs to ISA, CTF to Junior ISAs. But just adds more complexity – how many pension regimes??
Well that’s the kind of small print I actually wanted to read.
So while the rest of western industry has been using new technology to cut costs and taking wage and bonus cuts, the financial services has seen operating costs maintained at 1994 levels, management and distribution charges shooting through the roof and the regulators standing by wringing their hands.
The fund management industry has to exercise its fiduciary duty to treat its customers fairly
And that goes for platform and advisory fees from the so-called vertically integrated advisers too. From Hargreaves Lansdowne to Mercer, advisers who take their profits implicitly from assets under their control are going to have shape up.
Gregg McClymont has been quite explicit. It is now Labour Party Policy that if the fund and platform managers do not put their houses in order, a new Labour Government will.
Brave people like Dan Norman, David Pitt-Watson, Terry Smith, Alan Miller, Emmy Labovitch Con Keating (and many more) have extricated themselves from the conflicts of working within the funds industry and we are now finding out what we suspected all along.
Those swanky City offices , fancy cars and fancy salaries, those corporate boxes at Wimbledon and Twickenham were not paid for from thin air. The ridiculous excesses of the fund management industry that are still going strong, have to stop. Operational costs must be declared and reduced. Distribution fees and management charges need to be curbed.
For too long , those who have lived off the fat – the journalists and the trade bodies have stood on the sidelines. Now ,at last, organisations like the NAPF are joining in. A few journalists are being brave enough to bite the hands that fed their sales and marketing teams.
Most of all, those charged with fiduciary responsibilities, including the managers themselves must, as Dan puts it “put themselves in their customers shoes” and start treating them fairly,
I argued that agency workers were being tricked out of penssion contributions under the new Pension Reforms.
A previous Government had created a loophole through which tens of thousands of contract workers - typically teachers were falling. In return for a marginally higher take home, contractors who elected to be paid from that employment hub – Sark (population a man and a goat) got a VAT and national insurance break but no pension entitlement under the new pension reforms till 2017.
It was the BBC who brought the issue to the public note.
Mr Alexander said British firms with British staff must pay British taxes.
He announced the move in a speech to the Scottish Lib Dem conference.
It is not just about the tax we get in, it is also the case that many employees will not know they are paid in this way”
Mr Alexander said around 100,000 employees – mostly teachers, nurses and oil and gas workers – were believed to be paid through offshore payroll services set up in tax havens such as Jersey and Guernsey and could be ineligible for statutory sick pay, but completely unaware of that status.
He said he was alerted to the loophole by one such worker who approached him at Inverness Airport. But he insisted he found it was already under investigation by officials.
“It is not just about the tax we get in, it is also the case that many employees will not know they are paid in this way,” he told BBC Radio 4′s Today programme.
Mr Alexander said the move had a direct consequence for workers.
“If their employer is not paying employers’ National Insurance, unbeknownst to them they may not then be entitled to statutory maternity pay if they become pregnant, they may not be entitled to statutory sick pay if they fall ill,” he said.
“This is not just something which has direct consequences to the Exchequer, costing us all hundreds of millions of pounds, it is also something that has a direct consequence for the workers concerned and that why it is so important we are taking this action.”
Patrick Stevens, tax partner at Ernst & Young, told BBC News the loophole needed to be closed.
He said: “This originates from the situation where British companies are sending their employees overseas, so if they’re working full-time overseas, it’s probably perfectly fair that they are not subjected to UK tax.
“But in some cases people are taking advantage of a bit of a loophole where British workers are being got into the same situation but this needs to be closed down.
“It’s the special rule around agency workers that I understand is allowing people to get into this loophole and take advantage of something that was really only meant for people working overseas.”
Again the article does not specifically mention but it looks pretty certain that if the loophole is closed, these teachers and other professionals will get their entitlement pretty much from day one. The onshore umbrella payroll companies are among the first to auto-enroll as they have huge numbers of UK workers on their books.
The news is not just good for the contractors, it’s good for the DWP andTreasury – who get their full share of National Insurace and VAT revenues.That’s good news for the rest of us who have been picking up the tab.
It is also good news for pension providers who are understandably nervous about receiving large amounts of cash from an offshore bank account (think money laundering). Indeed NEST have simply refused to take the money, so these offshore workers would not have been eligible for NEST.
Once again, the Beeb , in a very low-key way, have won an important battle. We are quick to launch attacks against the BBC but slow to acknowledge the quality of the Beeb’s journalism and its positive impact.
A good news story all round (except for the man and the goat on Sark).
Debbie O’ Donovan who blogs as DOD has written a definitive comment on commission and the shameful shenanigans of Q4 2012 which saw advisory firms filling their boots at the expense of the members of workplace pension schemes.
Many years ago a good friend, who at the time worked as a financial adviser, gave me a piece of advice: “Always pay fees for advice, never opt for commission – fees are ultimately a fraction of the cost of commission.”
Last year we saw a tremendous flurry of activity before commission payments on pension plans to corporate advisers was scrapped on 31 December. Many employers were convinced to switch pension providers so their adviser could have a last gasp grab at a hefty commission.
This dreadful practice often found employers, and certainly their staff, unaware of the true costs of their scheme to the extent to which some even believed they were getting their scheme for free. It is especially damaging because commissions are taken out of contributions, greatly eroding employees’ long-term investments.
Any pension schemes put in place under the old commission system now have an added burden to bear (and fear).
Contracts signed before 31 December 2012 have until May this year to implement them. Advisers who put them in could well be loath to recommend any changes that will stop ongoing (trail) commissions being paid out. Many in the industry are, consequently, concerned that these schemes and their investment funds choices will grow old and dated (see also Governancevacuumforcontract-based pension schemes).
A good place to start is by having a good pensions governance committee at your organisation so the full burden does not just land on HR.
Be aware, and be wary – this is a potential misselling scandal, especially if employers auto-enrol staff into a scheme that is not (on an ongoing basis) the best it could be.
But there is something very interesting going on with this story. The commissions that are paid by insurers to advisers for pensions business are effectively an advance against future service. They are a financing arrangement where the insurers take a bet on the persistency on their fees and have no recourse to the adviser if they can’t recover this advance. Advisers who take pension commissions are in a no-lose situation.
By contrast, advisers who make their fees from the sales of funds outside of pension wrappers do not get financed. They get paid “on the drip” and if the tap is turned off, so does their revenue. Which is why the following story is so astonishing.
The Financial Services Authority is planning to ban rebates on legacy business which are paid by fund groups to platforms from 2016, in a move which will shake up the platform industry and force providers to charge groups for additional services.
Investment Week can reveal the FSA intends to stop platforms retaining rebates from fund groups on legacy business, and is giving them a two-year grace period to migrate clients on to new fee arrangements.
The new rules will be revealed officially in the near future, most likely in the upcoming platform paper. They will kick in from April 2014 when the new platform rules come into force, meaning groups will have to stop taking fund manager rebates on legacy business from April 2016.
So while the pension advisers are invulnerable, the rest have to justify their fees year after year. Small wonder that people distrust pensions.
The point that is made by DOD is , in the context of non-pensioned platform fees, doubly valid. The behaviour of advisers in the second half of 2012 was blatant and shameless.
The reality is this. Companies that bought commission loaded workplace pensions in 2012 and are due to put their members into them in 2013 are doing it on the cheap.
The impact of all this commission paid out to advisers won’t be felt till those joining pension schemes retire, by which time any accountability will be gone.
This will not be sorted by advisers holding up their hands, nor employers holding up their hands, it will be sorted by consumers working things out for themselves. But will they?
Presumably the FSA and the Pension Regulator trust that consumers entering into workplace pensions set up by employers on this basis know that they will be paying the advisers out of their funds. Presumably staff are happy about this.
Or are they paying for the commission like they paid for PPI and pension transfers and swaps; because some clever lawyer who wrote the small print convinced the vendors that they were perfectly entitled to big fat margins for very little risk?
DOD is right to point this out now, the OFT should be looking into this and asking not just how it happened but why it happened. They should look into the cost of the churning of pensions not just in terms of charges but in terms of the frustration that it is creating among pension experts and the Great British Public alike.
And it was a more general lament for the paucity of knowledge and vision throughout UK financial regulation - the FSA have offered little leadership either.
I argued that unless someone of substance was found quickly, the Pension Regulator would be letting the DWP and in particular Steve Webb down , as they looked to build on the great start to auto-enrolment.
I’m really pleased that they have chosen as their new Executive Director for DC – Andrew Warwick-Thompson. Andrew is precisely the person who the Regulator should have appointed. He really knows his stuff, is strong and usually right.
Andrew was one of a group of exceptional consultants at Hewitt around the turn of the last century (fin de siecle pension gurus?). He came through the ranks alongside Steve Mingle, Andy Cox, Kevin Wesbroom, Ann Freeman and Raj Mody. He married Gillian, one of the best DC investment consultants Bacon and Woodrow I have known.
Andrew qualified as a lawyer in the late eighties and his forte has always been governance. He was one of the first to see how insurance platforms could be used to reduce fund management fees, reduce risks and deliver open-architecture to occupational pension schemes.
One story which I heard from him and from others concerns the Equitable Life. It demonstrates what kind of a man he is and why he, above all others, is right for the job.
Andrew had discovered well in advance of the eventual House of Lords ruling , that the guarantees offered by Equitable Life were extensive enough that , were interest and annuity rates to fall, they could make the Society insolvent.
His firm had advised many of its clients to invest in Equitable Life and Andrew was determined to bring the threat to policyholders and to his own firm’s reputation to the attention of his colleagues. He wrote of the matter to his colleagues in the company newsletter.
News of this article was passed to the Society’s Chief Actuary, Roy Ransome, principal architect of what proved to be Equitable’s demise. Instead of answering the issues that Andrew raised, Ransome slapped a personal writ on Andrew. Andrew, for a short time suffered a lot of reputational damage at his firm as a result.
Even today, the bravery of Andrew’s stance and indeed right he was, has yet to be fully acknowledged.
Amidst all the waffle of the press release, Bill Galvin hits the button when he links Andrew’s appointment to the introduction of auto-enrolment. There is much to do upgrading existing trust and contract based workplace savings plans and Andrew has the insight and strength of character to cut to the chase (as he did with the Equitable).
If this finds its way onto your desktop Andrew, well done! Here is my agenda for you
Establish what makes for a good workplace pension saving plan
Help companies with finding such a plan
Do all that you can to help companies integrate their plan as “business as usual”.
Regular readers of this blog will know those are the issues that bother me most and those of First Actuarial and the recently incorporated Pension PlayPen.
The group of consultants Andrew was a part of ten or fifteen years ago have continued to influence the way pensions in this company are delivered. It is good to see Andrew being given such a crucial role at such a crucial time and we should do all we can to ensure that his work is effective and returns pensions to the respect in the public eye they once enjoyed.
Yesterday under promised and over-delivered. When Cornelius Lycett claimed that 95% of the course was sound at 8.30am , one wag in our household remarked “yes, the car parks”. It was a triumph of hope over ground that allowed the 10.30 inspection to go ahead, but the decision proved both brave and correct as we watched a succession of titanic battles.
Memorable to me will be the slug-fest as the Mcmanus horses came for Ruby and Champagne fever at the last and the magnificent effort of horse and rider that saw off Tony McCoy to set the pink and grey colours up as Champion Novice hurdler. Aunty Kim and the Onesie got their festival off to a winning start and they earn pride of place at the head of the blog!
For those not able to master the link to the video – here are Tap’s top tips again.
Hope to see you at the Bandstand in the Guinness Village before and between races (but not after as they seal off the village to returning racegoers after the last race – grr!)
1.30 John Oaksey National Hunt Chase (Amateurs) 4m Rose of the Moon
I met yesterday with a Swiss firm whose business is to reduce the investment costs for large investors (typically with €500m +).
The model is simple, no retainer – they receive 50% of the savings from their work.
They are a very succesful business. A sort of “twitcleaner-(RIP)” for the asset management business.
It will come as no surprise to hear that they most enjoy working for clients who employe hedge fund managers , especially when those hedge fund managers are investment banks. But their bread and butter is the day to day active equity or bond fund and they can even extract juice from passive managers by renegotiating stock lending agreements and the terms of box management.
Their arrival on our shores has been unheralded and I am quite sure that they will be as welcome as a fart in a lift in the City. As you might imagine, they are poachers turned game keepers but they’ve been at their work for nearly a decade now so the Kool-aid is clearly out of the system.
It seems more likely that it will be firms like this that will create immediate change than any number of market reviews by the OFT, tPR and FSA. Frankly, the time has come for a little ghostbusting…
John Lewis is conducting an extensive two-year review into its pension provision after revealing its final salary scheme deficit rose by almost 29% in 2012.
Can this great company maintain its final salary arrangement or does something need to give?
This question is not just being asked at John Lewis, it is being asked in Whitehall, particularly by the arch-proponent of the Defined Ambition pension – Steve Webb.
The threat to John Lewis’s scheme is financial. Quite simply, they face the choice of paying off their deficit within a reasonable “recovery period” orbuilding new stores.
Put in union-speak “jobs or pensions?”.
John Lewis do not have a third way, they have no shareholder to whom dividends can be paid, they can only distribute profits to “partners” as bonuses, or through pension payments or through expanding and modernising the business.
If they do not expand and modernise, they risk their long-term capacity to pay bonuses and fund pensions. The choices are neither simple or easy; as I said - something has to give.
I was speaking with Jonathan Camfield a very perceptive actuary on Friday. His view was that the lasting pension legacy of Gordon Brown’s tenure as Chancellor was the announcement in his March 2003 budget of a move to guarantee pension rights which became enshrined in law in the Pension Act of 2004. The introduction of a StatutoryFunding Requirement for pension schemes marked the point at which pensions stopped being an activity of mutual endeavour and became a corporate liability.
How John Lewis must wish that had never happened!
How Steve Webb must wish that he could return to a world where the pension contract between member and employer was one of mutual respect and understanding and not based upon statutory obligations!
The obligations that Gordon Brown visited on pensions are onerous enough to have collapsed defined benefit provision well beyond the declines illustrated in the chart above.
If the next European Pensions Directive is enacted then the numbers of private sector workers accruing defined benefits will approximate to zero as we discover just what “guarantees” mean in a pan-European insured sense.
The management of John Lewis clearly recognise the threat
The partnership admitted that funding the scheme was the largest single annual investment it made and that it had also pumped £125m into it in January.
The accounting charge for the pensions included within the operating profit was £138.1m up 11.4% (£14.1m) on last year and was due to the change in the financial assumptions and growth in scheme membership.
In all the deficit grew by 28.8% (£184.0m) to £822.1m due to the 19.6% (£621m) increase in liabilities to £3.796bn outstripping the growth in assets of 17.2% (£437m) to £2,973.9m. The asset increase included the £125m one-off cash contribution.
John Lewis estimated that under its last valuation the scheme would have ended the year with a surplus of approximately £280m, however the next valuation is due this month and it warned that the funding position was likely to weaken due to lower gilt yields.
“The pension is one of the most important benefits offered to Partners, but also accounts for the greatest single investment made each year by the Partnership.”
Unless we move as a nation to a new pensions contract which does away with statutory funding requirements and returns us to a system of mutual understanding over what can be paid and to who, the system of guaranteeing defined benefits will continue to decline.
When you take the mutuality out of pensions , you take good pensions out of mutuals. John Lewis’ brave stand for ongoing Defined Benefits for their staff looks threatened and there seems precious little that anyone is prepared to do about it.
nor Pier della Francesca; Zuan Bellin’ not by usura
nor was ‘La Calunnia’ painted.
Came not by usura Angelico; came not Ambrogio Praedis,
Came no church of cut stone signed: Adamo me fecit.
Not by usura St. Trophime
Not by usura Saint Hilaire,
Usura rusteth the chisel
It rusteth the craft and the craftsman
It gnaweth the thread in the loom
None learneth to weave gold in her pattern;
Azure hath a canker by usura; cramoisi is unbroidered
Emerald findeth no Memling
Usura slayeth the child in the womb
It stayeth the young man’s courting
It hath brought palsey to bed, lyeth
between the young bride and her bridegroom
They have brought whores for Eleusis
Corpses are set to banquet
at behest of usura.
Pound later defined Usury as a charge on credit regardless of potential or actual production and the creation of wealth out of nothing (ex nhilo) by a bank to the benefit of its shareholders. The poem declares this practice both contrary to the laws of nature and inimical to the production of anything good.
Thegreat insight is that it is not the banks or the bankers that is the root cause of the problem.
The root cause is the idea, the ideathat something can be created out of nothing.
And this is where the tectonic plates of society and business grind against each other like ill-set teeth. For Pound, social virtues were always expressed in “art”. Art became a metaphor for social good.
But, later in life, when facing death in a prison camp in Pisa, he wrote another poem, Canto 81. Between the two poems was only 9 years but for 5 of those years the world had been at war. Pound found himself in the camp for his repugnant support of both Mussolini and Hitler whose propaganda machines he made himself a part of.
This photo was taken at the time
In a cell open to the elements he wrote several poems that put faith not in ideas but in humanity and specifically in man’s capacity to lift himself above the filth.
The noblest expression of Pound’s humanity, his vulnerability and his greatness comes in this passage. Again there is a beautiful reading of the words by Pound you can listen and watch here
What thou lovest well remains, the rest is dross
What thou lov’st well shall not be reft from thee
What thou lov’st well is thy true heritage
Whose world, or mine or theirs or is it of none?
First came the seen, then thus the palpable
Elysium, though it were in the halls of Hell,
What thou lovest well is thy true heritage.
This blog is not meant to be a cheap shot at banks or bankers, but an offering of an alternative way to deal with the issues of modern capitalism (what Pound could call the canker of Usura).
Canto 81 ends with a great heave of hope that can inspire us all to see beyond the shameless profiteering of our financial system to something that we can make of lasting value.
The ant’s a centaur in his dragon world.
Pull down thy vanity, it is not man
Made courage, or made order, or made grace,
Pull down thy vanity, I say pull down.
Learn of the green world what can be thy place
In scaled invention or true artistry.
Pull down thy vanity,
Paquin pull down!
The green casque has outdone your elegance.
“Master thyself, then others shall thee beare”
Pull down thy vanity
Thou art a beaten dog beneath the hail,
A swollen magpie in a fitful sun,
Half black half white
Nor knowst’ou wing from tail
Pull down thy vanity
How mean thy hates
Fostered in falsity,
Pull down thy vanity,
Rathe to destroy, niggard in charity,
Pull down thy vanity,
I say pull down.
But to have done instead of not doing
this is not vanity
To have, with decency, knocked
That a Blunt should open
To have gathered from the air a live tradition
or from a fine old eye the unconquered flame
This is not vanity.
Here error is all in the not done,
all in the diffidence that faltered.
English: Cosimo de’ Medici (Photo credit: Wikipedia)
Do small firms face difficulties making pension decisions in the interest of their employees? Employers do and will face difficulties; most employers don’t know what in their employer’s interests and have no idea where to get reliable advice on the pension decisions they take.
What ongoing scrutiny will employers make on pension providers and fund performance? Employers don’t see this as their duty though some care that their contributions are effective. Most consider this responsibility belongs to the members, trustees and pension providers.
Will employers be prepared to pay for help
at outset? Yes – complying with auto-enrolment will generally be considered a business expense
Are trust based schemes likely to offer greater oversight and protection for savings?Only if they have the resources to “skill-up” to do so ; this means time, knowledge and understanding need to be devoted to fiduciary management.
Capacity & Scale
Are there already too many schemes and too many providers to deliver the best outcome for savers making consolidation desirable? There are too many schemes. Many have no reason to exist as separate entities and would be better merged. The current number of providers is probably about right to optimise competition without being inefficient or burdensome to those making choices
Do larger schemes enjoy economies of scale and offer better value to consumers than small schemes? They do, they buy cheaper bringing down variable costs (such as fund management which is typically offered on a tiered pricing basis). Fixed costs such as administration and governance are diluted over a wider membership base
Is there an advice shortage, and will employer be making decisions without advice? The number of employers (1.2m) set against current schemes (0.1m) suggests we need considerably more advisers, instead, the RDR is estimated to have reduced the numbers of advisers by 30%. Employers will have no choice but to take decisions without face to face advice – advice will in future be delivered in other ways – mainly using the new technologies.
how are pension providers competing? Currently, large employers invite them to compete via manager selections (beauty parades) after they submit responses to tenders issued via Employee Benefit Advisers.
What are the most important features in winning auto-enrolment business? The price of the default fund, the brand and the support of the adviser.
The supply chain is long and complicated. How can we ensure that the interests of all players in the chain are aligned with the pension saver? By identifying the key stakeholder and ensuring that they take responsibility for best practice throughout the supply chain. In practice this means the “provider” of the pension.
Are costs being hidden and are charges disclosed in a way that is comprehensible to savers? Costs are being hidden by fund managers who do not disclose their portfolio turnover and their costs of executing trade. This is allowing them to get away with poor execution. In the long-term the impact is felt in poor fund performance but by then any accountability for past performance has “moved on”.
What influence does the employee have? Thepower to be disruptive to the employer by being a “pain in the neck”
How can an employee challenge a bad decision by the employer? Via a union, but if there is no union, they have very little opportunity other than to complain directly (which is likely to do their career little good). Where employers are consultative, then works councils can garner feedback and of course where there are member nominated trustees, an employee can become a trustee or influence his or her member nominated trustees.
How will the market develop once staging is complete? We see it likely thatwith more money in the system, pressure to maintain high standards will be high. Provided we can improve standards now, I expect those standards to remain high.
What pressure will there be on providers to keep charges low once the auto-enrolment new business glut is over? There is no evidence that providers have put prices up as a result of poor profitability. The greater risk is that a provider withdraws from writing new business and reduces resources for servicing what is now a “legacy book”.
How easy will it be for an employer to switch schemes if the one originally selected becomes inappropriate? It’s difficult to get employees in a personal pitch to switch their individual pots but trustees can switch money from one occupational to another occupational pension. Future contributions can be directed where an insurer chooses.
How will the choices that an employer has made impact on member’s pension pots? We follow the pension regulator’s 6 factor’s that impact good DC outcomes ..encouraging contributions, low charges, good administration, secure assets, good decumulation options and suitable investment choices (especially defaults)
We use a very simple modeller at First Actuarial which shows the corrosion of your pension by fees over time. One axis of the graph shows the fees you pay expressed as a percentage of the fund, the other shows the time you pay them for. Plot one against another , you get a number, that’s the amount the fees you pay have eaten into the pension you get. (we use standards SMPI assumptions).
We’re not that interested who benefits from the fees , we are interested in what web people call the UX – user experience. The user in this case being a member of a workplace savings scheme (formerly known as beneficiary or member).
UX-good …Big pension
UX-bad ….Small pension
And as every fool knoweth, the total cost of the user’s experience of a pension plan includes the operating costs of the platform manager (AMC), the additional fund expenses of the fund manager (AFE) ,the portfolio management costs of running the fund (PMC) and the cost of advice – the consultancy charge (CC). If the cost of advice is picked up by the employer, we can consider this to be in lieu of contributions and convert it to a Consultancy Charge.
So the formula to calculate the annual cost of the UX is
AMC+ AFE + PMC +CC =”what the member pays” or Total Charge.
Now as Professor David Blake of Cass tells us, the impact of this Total Charge is normally larger than the positive impact of skilled asset management (the value add or alpha). To test this, he has built a model which is the pensions equivalent of the Hadron Collider. (I am promised a visit to Cass Towers where no doubt I will be led into a germ free room in a white suit).
If charges present such a great risk to your eventual pension, I am surprised that an industry obsessed by risk management has not come up with a measure to assess this risk. I won’t bitch about conflicts of interest – only to say there’s an element of “turkeys not voting for Christmas” here. The issue is that to measure risk against return on the entire User Experience, you need to be clear about definitions.
Some will argue that the value of a smoothed investment strategy is not just in its absolute return but in the peace of mind it gives to the member during the accumulation phase.
I say that’s bunkum. Our model defines return as the money that is given to the member at the end of accumulation to buy a pension (one day we’ll do it on the amount of pension but we aren’t there yet),
So a proper risk measure for fees might be the total cost of the UX (fees) set against the total value of the UX (money to purchase pension)
The total cost has to be measure against a risk-free cost, which I reckon to be 0%. How can you manage the UX for nothing? Well because of a positive thing you can sometimes do with funds of sufficient size and stability – stock lending. Stock lending might reduce the total cost of the UX to nothing through an offset of revenues generated v costs incurred. I suspect that some members of DC plans whose total charge is around 0.1% AMC (BT and Logica GPP members) might be close to such a “risk free fee”, especially if their passive manager is fully rebating stock-lending revenues.
Any fees incurred above the risk free level represent additional risk and need to be justified. To use the jargon of the age “they need to be wanted risk”. An example of wanted risk might be the cost of buying more stock for the fund. An example of unwanted risk would be higher than normal commission paid to brokers to pay for access to CEOs or Twickenham tickets.
The parable of the talents applies here, burying your money under ground (or under the mattress) is risk-free but valueless. The measure compares the risk taken against the reward earned. The servant who invested actively (rather than burying his talent) was able to please his master through the growth of the money he had been given, the servant who buried the money under ground got a good kicking.
Paradoxically, there are people who claim to make their money from doing very little, the most obvious are the passive managers who just watch the computers whirr and make sure the execution of what they do is as low-cost as it can be. A step up from them are the fundamental managers- most famously Warren Buffet.
Buffet spends his time being sage and only acts when he have a deep conviction hs idea is good.
Another example is Terry Smith of Fundsmith, the sage of Cavendish Square. Terry’s proudest boast is that he has nothing to report, this means his strategy is working and he has not had to tinker. Terry has had great success doing very little (but considering an awful lot) and despite not selling a single stock in 2012, he became the world’s top performing global equity manager.
And the sage of the PensionPlay Pen- David Hargreaves- is of this camp. He advocates a random approach to investment which dispenses with funds and allocates cash to equities without any form of intermediation (I take issue with the efficiency of the approach as it can never capture economies of scale but I get his direction of travel)
So at one end of the spectrum of fee-risk, we have the passive managers who do very little and charge next to nothing, at the other end you have managers who buy and sell like there’s no tomorrow (which for them there usually isn’t). In our view, the high turnover approach is doubly expensive as high turnover managers pay less attention to best execution so in terms of fees they take on huge amounts of unwanted risk and would have a very poor fee to return ratio. In fact their fees could be higher than their returns making them a very risky prospect for investors!
Take the argument a stage on and start looking at the other costs- the AMC which pays for the expenses of the platform manager (the insurer usually though you have to look at other platform providers like NEST and NOW and Hargreaves Lansdowne. Do the additional costs they incur and pass on to members, generate extra return?
It’s harder to measure the value of the platform though there must be value to the UX or people wouldn’t use the platforms – go on Hargreaves Lansdowne or NEST’s or NOW’s websites to work out what the value is to you.
I would say it’s marketing value and not properly part of my return formulation but I’m prepared to be swayed by an argument that the accessibility of the platform makes savings more comfortable and encourages good behaviours that result in higher contributions and higher pensions…though this is tenuous.
There are many risk adjusted returns we can use to better measure the performance of managers, but none that focusses on the measure of risk as “fees incurred”. If, as I suspect and David Blake suspects, it is the managers who are delivering the most for the least who are providing the best pension outcomes, then we should be adopting such a risk measure.
This is simple measure which makes such fundamental sense that any fool can grasp it. It is so obvious that I wonder why we haven’t thought of it before and no doubt many who have read this far, will be questioning whether I am a total buffoon.
I’d hope that I can point to the Warren Buffets and Terry Smiths and the David Hargreaves as my teachers!
Imagine you have to put your furniture in storage, white goods, carpets, chairs – the lot.
You nip off abroad for a couple of years and return to find your furniture still there, you pay your storage charges and take the stuff back.
Nothing wrong with that! But then you get a call from a friend saying how much he enjoyed using your furniture last year. Nonplussed you phone the storage firm who point out that in the small print , it has the right to lend your furniture and make a nice turn on it. They point out that you got it back in as good a nick as you left it so what are you worried about
Fine , you say, but you were lending my property and I want my share of the proceeds. Reluctantly money is returned, offsetting the storage fees but not all of it.
You think to yourself, this is pretty shoddy stuff. There ought to be a bit more said about this. There ought to be a cap on the amount these firms keep for doing this work and I ought to be told when it’s gone on so I don’t get ripped off. You’d be right.
Of course, storage companies do not lend out your property, but fund managers do!
You give them money, they give you a slip telling you how many units in their fund you own, they then buy assets which they can lend to others for profit. As the beneficial owner of the returns of the fund, you would expect to be getting the lion’s share of the profits from this lending and not to see it being trousered by the fund manager.
You would not expect the money to be lent to hoodlums or terrorists, but in a financial sense that is often what happens. In America, where scrutiny of fund managers “fiduciary obligations” is much stronger, pressure has mounted on firms when they lend , to lend wisely and firms are responding. Thanks to Michael Glenister of Investment Circle for this;
There is risk- like your furniture, your assets could get nicked or lost, that risk needs to be insured and there are legal costs and sales costs . We would expect that whoever organises the stock lending would pick up the costs and bear the risks out of the profit of the enterprise. I’d expect a storage company to be acting for me in trying to keep those costs low.
And when I think this through, I’d want an agreement with my fund manager, as I would with my storage company, that I would be entitled to a minimum percentage of the profits after fees had been deducted. Those who remember back to with-profits will remember 90:10 funds will remember the policyholder got 90% of the profit after the deduction of costs- put another way, the lower the costs the better for insurer and policyholder- an alignment of interests not in place today.
I wouldn’t expect them to cancel out my storage charge but I’d like them to make a dent in them. Indeed, if I could see that one storage company could show me their track record in reducing costs, I’d favour them (all else being equal).
As for funds, we don’t have a clue how our fund managers work. Well we sort of do if we read excellent articles like this from Emma Dunkley http://tinyurl.com/ambsyh2
Emma has found much confusion about who is doing what. Organisations like Black Rock and State Street are withholding as much as 40% of the profits of their stock lending to keep their profits up and managers in bonuses. Other firms, Vanguard most notably , rebate all the profit. In the States, Black Rock are being sued by angry investors pointing out that Black Rock’s slice of the cake is exorbitant. There is a growing body of research in the US that demonstrates just how good practice in stock lending leads to better returns
I expect that Black Rock will point to some legal point that demonstrates they can do what they want. But they will lose that argument. When you give money to a fund manager, they agree to act as your agent and are subject to fiduciary obligations – that’s why so many of them have in their titles words such as “Fidelity and Prudential”, their brand is about “care”.
The good news is that the Regulators are catching up
But there are still opportunities for the perseverant opportunist running a fund. The definition of “costs” is far from clear, (the bloke running the storage company could sub his insurance to Acme brokers and be pocketing a 50% commission rebate). Worse still he could have set up his own management company and be charging his customers whatever he thought reasonable.
And this is where I get to do some hand clapping. There are people out there who are sharp enough to know about these things, diligent enough to bring them to our attention and brave enough not to get shouted down by the institutions who do not want any honesty about what is going on.
Step forward Alan Miller who posted most of the information I am using onto the Pension Play Pen, step forward Terry Smith whose fund Fundsmith is pioneering new standards of openness and step forwards too, the journalists who are investigating these difficult subjects and bringing the information to our attention.
The knowledge we are gaining about matters such as stock lending, helps people like me, who’s job it is to chose the funds that carry our retirement dreams, to chose wisely and act as trustees or advisers ensuring their is no slippage. This is proper fund governance there is not enough about and we are miles behind the Americans on much of this.
Meanwhile , academics like David Blake and Dr Debbie Harrison at Cass Business School are also catching up, working out what good looks like and feeding into their models the information that the likes of Emma Dunkley and Michael Glenister are rooting out.
David told the OPDU conference last week that fund charges have a bigger influence on the amount of pensions we get , knocking asset allocation off that perch. At First Actuarial, we model the impact of fractional differences in charges and quite agree. No matter how skilled a fund manager, if he hasn’t got his charges under control, he cannot add value.
And whether it’s a Professor, a journalist, an adviser or a consumer champion, the message is the same. If we are to move forward and make pensions clean and respected, it’s at this level of scrutiny that we translate fine words into action.
As Emma did, I will let Alan Miller have the final word
‘Esma needs to show BlackRock that even though they are a big player this does not prevent them from following the spirit of the rules and if necessary BlackRock’s ETFs and other funds involved in securities lending should be banned by Esma in describing themselves as UCITS funds,’
I started this blog last night when it was winter and finished it 6 hours later now it is spring.
I certainly have a spring in my step this morning as yesterday we gave ourselves the green light to build a new business that will expand the scope of this blog and bring it together with my other social media venture, the pensionplay pen.
The big idea is to provide a place where people interested in workplace savings can get information . make comparisons, get guidance and take decisions. We will call this place www.pensionplaypen.com.
There are 1.2 million employers who need to get ready for auto-enrolment. Some will treat it as a chore, some will become enthusiasts, most companies seem willing to go beyond the bare minimum, which is deal with NEST and demonstrate to their staff they have taken reasonable steps to get their staff the best that they can.
Our plan is to as useful and as popular as www,moneysavingexpert.com, If over 30% of our adult population gets an e-mail from Martin Lewis every week, then 30% of the business people who will have to deal with pensions can get one from me!
This is no idle boast. For the past three months I have been road-testing an idea that we refer to as “staging for a monkey”. I don’t want to be rude about monkeys or the people who will stage – the monkey is slang for £500!
Using new technology we aim to take companies through the various stages of preparation , getting a project team together, working out the contribution rate and sorting payroll and HR issues.
Once the planning’s done, we’ll provide a quick and easy price comparison service which will allow these companies to see what workplace pensions they can use. The service will organise information so companies can make a meaningful choice. Once they’ve landed on the right option the service will put the chosen provider in touch and trigger a series of next steps which will culminate in the payment of the first contributions within three months of staging.
Most importantly, the service will provide a full audit trail signed off by one of Britain’s leading firms of pension actuaries.
We hope to launch the playpen in early April and have completed work on this “staging for a monkey” by July. We want this service to be ready for the first huge hump of employers who will be staging in the first quarter of 2014.
The model is simple, it works on self-service, the £500 fee is charged to the employer and we hope that it will, for those who cannot reclaim VAT, be a true £500.
The pension providers will pay not commission to the playpen nor will there be consultancy charges. The service will include all providers whose products meet the yet to be decided quality test.
Because it is a technology solution, it will stand and fall on the quality of the technology. That is why we will be spending the next four months working with pension providers, flex and payroll people to ensure that everything is as slick and easy as you’d expect if you went to gocompare or comparethemarket.
And here is the pension plowman’s vision. This site will not be for pension people, it will be for people interested in pensions. This will not be a site you have to log on to, it will be open to anyone. Like all the best websites it will be free to use. We are not going to create an online community but there will be forums where people can share experiences and places where products will be rated. The site will mature like a good bottle of wine getting richer and more sophisticated with time!
The original Plowman , Piers, was the creation of a 14th century poet William Langland. Piers had a vision of a field of folk who worked together for a common good, each profiting from the other’s endeavour. Piers made Langland famous to this day.
We are the playpen- the famous playpen
and we’d like you to be the first to know, this mild March day!
Open Government does not need transparency, it needs honesty. Honesty is a two way street. Government must be honest with us and we must be honest with Government.
Bill Galvin read my blog yesterday and he responded, not with offence, not with defence but with the good news that a head of DC was on its way and that , though the Pension Regulator may not have got it right, it (he) is getting there.
That’s open Government. I blame Steve Webb – it’s Steve’s fault. Ever since that man turned up in the DWP in the Pensions Spring of 2010, there has been a door open to those who want to talk to Government. The dialogue between the various interest groups that Webb deals with and the various parts of Government that include the Regulator has been relaxed.
We have got used to laughing with our Minister, eagerly awaiting his talks , his videos and his television appearances. We have followed his laborious progress as he carried the single state pension from a pipe dream to a reality. We have seen him pick up Labour’s policy on auto-enrolment and make it happen and we have seen him rant at the purveyors of “sexy cash” that encourage the transfer of risk from companies to individuals.
This is not transparency, a cold word for Governance and Government that has the jargon of the speech and copy writers. More this is “honesty”, the emotional committment to know what is good , promote what is good and make what is good happen.
Perhaps a better differentiator between honesty and transparency is that honesty comes with soul.
And part and parcel of knowing what is good, is knowing what is bad. If we cannot point at what we think is bad and demand change, we do not have open Government. If Steve Webb or Bill Galvin or Lawrence Churchill are to operate open Government, they must listen to the criticism and deal with it.
Too often, we, who dish out the criticism, forget to acknowledge the bravery of those who take it, deal with it and make things good.
Mankind cannot bear very much reality but those who are leaders of men are marked by their capacity to deal with reality – honestly.
I am pleased to hear that the Regulator is soon to have someone to lead on Defined Contribution Pensions, and because I trust the man who made the appointment, I am confident that the Regulator will raise its game in making DC good..and honest!
English: animation showing a micron particle having a brownian motion inside a polymer like network (Photo credit: Wikipedia)
I’ve taken to tweeting when listening to people talk at conferences.
A tweet a day keeps boredom away but like a micron particle in Brownian motion, when I get worked up, I tend to over - agitate … (overtweeet) - this clearly happened yesterday.
Several of my tweepy followers pushed off, fed up with their timelines bunged up with my thoughts from the #opdu conference.
You can read my running commentary on this great event run by the Occupational Pensions Defence Union (thanks Grant, Jonathan and the team) – on my twitter timeline.
If you would like to follow me on @henryhtapper then please do, I suspect that some of you already do and that some of you used to but got fed up! I am trying!
Enough of this and on to Bill Galvin, who is the Pension Regulator. Like the Government Actuary, he has his own department but his is situated in sunny Brighton (not dismal Chancery Lane). His job is to make sure that pensions run smoothly which they have been doing over the past few years.
This is partly due to the excellently managed Pension Protection Fund, which takes on unloved DB schemes forsaken by careless or bankrupt employers. Sadly many of the employers became bankrupt stumping up contributions to the pension schemes so the Pension Regulator treads a fine line between keeping companies honest and solvent. This Bill Galvin and his team, do very well.
But so much of their time has been spent overseeing defined benefit schemes , that defined contribution plans have had to sit on the subs bench , seldom getting a run out in front of the fans. Judging from Bill Galvin’s speech yesterday, I suspect he hasn’t been watching his reserves too much of late.
He looks and sound distinctly uncomfortable on the subject, This is Bill yesterday on the paper mountain his department produced on DC at the start of the year
“I know some people thought that there was rather too much paper but defined contributions are very complicated and there’s a lot of different parts to look at”
Sorry Bill, that’s the comment of a hapless amateur! DC schemes can be assessed against some pretty simple measures and if you’d stuck with your original concept of what made for good – the November 2011 “Good DC outcomes” paper, you’d be a lot better off than with the “32″ good DC characteristics you came up with in January (the number that you couldn’t remember).
If this is a criticism , it is a criticism of resource not of competence. I don’t want my Regulator getting hung up on how many DC characteristics there are, but I want to know that within his department , there is someone who I can trust to be authoritative on DC. The Pension Regulator does not have such a person, as far as I can see it does not even have a head of DC.
Which is astonishing! They did have a head of DC (who I’d rather forget) but they packed her off into retirement with a gong and a fat pension and have not found a replacement in the last six months.
DC is not reserve team anymore, it is in the premier league and it is expected to exceed DB in terms of assets by as early as 2019. It is what most of us will relay on to supplement our £145 pw basic state pension. It is the principal vehicle for the savings of the 11m odd auto-enrolling over the next five years and it is what got me up this morning to write this!
So having a pensions regulator who bumbles along without a head of DC producing paper mountains of tedious stuff about 32 characteristics of good DC is not good
Bill, tPR need a gong-worthy head of DC asap. (tweet that someone)
Where to look?
- well there are a lot of pension managers with experience of running DC schemes who are currently losing their jobs as companies cut back. Some of these have experience working withinsurers, some worked for insurers and some worked with insurers , in house administration teams and third party administrators.
Yes it is complicated - but so is the PPF and just about everything else in pensions and the very best people can cut through the crap ,make it sound simple , sound and be authoritative on what really matters.
If you want me to put together a short-list for you, I’d be happy to!
My final tweet on the matter read like this
Have to like Bill Galvin at #opdu Very straightforward honest and open! give him some DC resource
This blog’s been prompted by a meeting with the egg-heads at Cass Business School who are investigating what can be done to make the default investment options better.
I’m pleased they are getting stuck in. At the moment, what “action” there is in this space, is being taken by NEST and NOW who are resourced to put theory into practice , by the leading firms of investment consultants who have taken to managing the options themselves (tactical asset allocation overlays) and by the insurers who are tweaking pure equity strategies into what they call multi-strategy funds.
There is a fundamental dynamic at work here, as funds under management increase, so does the time and money devoted to managing these funds. And funds under management will increase because DB plans are now closed for new entrants (in the private sector) and because 11m more people will be saving into DC plans because of auto-enrolment.
I haven’t time or expertise to analyse whether the money that NOW or NEST are pouring into the investment management of their funds will pay off. I ‘ll point out that as an investor in their defaults you are currently getting a “free ride”. In the case of NEST, the costs are picked up in the DWP loan (which is supposedly to be repaid by policy holders). In NOW’s case, you are piggybacking on the success of the parent ATP’s asset grab in Denmark.
In the case of the consultants who are operating defaults of their own, the cost of the management is passed on to the member of the scheme being advised by the consultant, which is fine as long as there is scale. But this doesn’t sit so easily with the vast bulk of employers who cannot afford the underlying service. There are governance issues here , as always with Fiduciary Management and the “vertically integrated model“.
At an operational level, the slow but inevitable move away from lifestyle and into target dated funds is under way, the operational inefficiencies and risks of lifestyle are not tolerable in a world where we take fund governance seriously.
The true cost of portfolio management is about to be revealed. Better disclosure, better understanding and better practice are needed if we are to properly measure the operational efficiency of our fund managers. At the moment we can but guess, for which reasons , most consultants stick with what they know and understand, the passive approach.
But all in the passive garden is not rosy. Recent attempts by some insurers to move from using insured pooled funds to “wrapped OEICs” demonstrates how little they thought we knew about tax.
Thanks to good consulting from LCP and Towers Wason, the insurers trying it on were headed off. That I knew nothing of this till PJ Zoulias and co talked me through the issue, demonstrates how diligent experts can protect us from the unknown (un)knowns.
We need more diligent experts!
Which gets me to the grist of my blog. The current “big idea” in investment consulting is that the “only free lunch to be had from the markets is through diversification”. This is not a new idea, it underpins the idea of the balanced or managed fund that we’ve lived with since the early 1980s. But the “new balanced” approach is deemed superior as it calls on multiple strategies that can include such cuties as private equity, infrastructure, commodities and various other alternative strategies which we can bundle together and call “hedge funds”. These multi-strategy funds that call themselves Diversifed Growth Funds (DGFs) are fine in theory, but they’re so massively expensive to run that they struggle, net of fees , to deliver any value and can -very easily – destroy value. Certainly not a “free” lunch!
A cheaper and more efficient way of getting the free lunch is achieved by what experts call a “derivatives-based approach”. Here , rather than physically investing in funds that get you the diversification, you can flit between asset classes using derivatives to get you “exposure”. This sounds sexy (especially to the exhibitionist in you!) and it certainly has come up with the goods. The Standard Life GARS fund which leads the charge here, has delivered since launch. Nonetheless, the cost of this approach is still high and its it hasn’t historically been easy to see what it really costs or what is really happening. Like the old with-profits approach, it leaves a lot on trust.
In contrast, Legal & General investment management have, for some time now, been running a very cheap and transparent fund which co-mingles many of its passively managed funds (which get invested in more esoteric areas) with its core range of equity and bond funds. There is a little bit of management between the asset classes but not much. That’s because you don’t pay much for this diversified approach than you would for a passive equity fund. This approach is often referred to as “diversified beta”.
Our view is that what extra you pay is worth it, and in as much as it makes a cheap passive approach only slightly more expensive, it is a credible alternative to global equity growth funds. It looks like this approach is being replicated by other insurers on the basis that if all the sheep in the field look the same, you won’t be able to pick anyone out for slaughter.
If the diversified beta strategy (inside a TGF not a lifestyle option) is at the cutting edge (accepting that the GARS approach does not sit within the TKU of most schemes), then what’s happening on the other side of the knife?
My guess is that in two or three years time, we will be talking about alternative passive indices, in particular RAFI and TOBAM but also some more that emerge (Terry Smith is rumoured to be interested in this idea).
What’s this, it’s the idea that you can diversify not by spreading your money across many asset classes and using market timing devices to get added value, but by using better means of passive investment within a given market - typically equities. The idea is based on an analysis of key equity indices such as the FTSE where the index is constructed around market capitalisation. To put it simply, those companies which are worth the most get the most investment , this creates market distortions (bubbles) which are effectively bets. As with most bets it is the booky not the punter who wins. In this case, the booky is the market and the punter is the investor.
To take the bet out of investment, firms such as TOBAM look to recreate the market on a more fundamental basis, not using finger in the air economics but complex mathematical models (much loved by actuaries!). They ague that the purity of their investment gives more opportunity for the “equity premium” to emerge. In layman’s terms - they think they are offering us the free lunch at a fraction of the cost of the GARS approach, more effectively than the diversified beta approach and a whole lot more efficiently than the fully active DGF approach.
This is how the market looks on this day 25/02/13. I don’t have a crystal ball but I would say this is the agenda for the foreseeable. What I’m encouraged by is that we are at last setting out the terms of reference for what makes for better DC defaults and from these terms should emerge better information, better measurement, better governance, better returns and ultimately better pensions. When people see the jigsaw being put together , we may even get better public confidence in workplace pension schemes – something devoutly to be hoped for!
These were the brave new breed of unit-linked insurers who had “moved on ” from with-profits to offer you direct access to managed funds.
If you had spoken to a more established advisory firm, the choice would have been from the “old guard” of Eagle Star, Prudential, Norwich Union, Provident Mutual, UK Provident, NPI, National Mutual, Equity and Law, Sun Life, Commercial Union, General Accident, the Pearl CIS and the Prudential.
What have all these insurers got in common?
Answer, you can’t buy one of their personal pensions today.
The consolidation of the UK Life insurance industry has been spectacular.
Today , if you want to buy a plan for yourself, you will struggle. There are insurers who will still offer you a personal or stakeholder pension, but you are going to have to jump through some hoops to be able to buy one yourself. The insurers (and the FSA) want you to buy through an intermediary and , since they have disbanded their sales forces) that intermediary will in some sense be “independent”.
Alternatively you can join a scheme offered by your employer.
The collapse of choice has been accompanied by a collapse in the numbers of advisers wanting to talk about personal or stakeholder pensions. The old “home service” sales forces and the tied sales forces of the unit-linked providers have been disbanded. The RDR has made mass market independent advice unviable.
The buzzwords among advisers are “platforms” “wraps” and “customer segmentation”. Look behind the jargon and the picture’s clear. Advisers want to deal with wealthy people who can pay fees from a fractional clip on the wealth managed (via wrap platforms).
With the advisory community, turning their attention, quite properly to where the money is, the insurers are building products to meet that demand. You may have difficulty buying a stakeholder pension but you’ll have no problem finding yourself a self invested personal pension sitting on a platform that can wrap your other assets (provided you are properly segmented).
The harsh reality is that the vast majority of insurers operating in the UK ten years ago were not operating viably. Most of them sit within banks such as Lloyds or specialist holding companies dubbed “Zombies”.
Some of the great hopes, most notably the Prudential, have pretty well given up on the UK (and Europe) and are looking to less heavily regulated, less consumer savvy and less intermediated markets in the Far East. A quick look at the strategies of the remaining players suggest there may be following. Last week, HSBC Life closed its doors on its ambitious plans to dominate the UK pension market
Which leaves a very small number of insurance companies active in the UK pensions market. Aviva, Royal London, Friends Life, Aegon, Zurich, Standard Life, Scottish Widows and Legal and General.
There are of course insurers who still insure, guaranteeing individual and bulk annuities, group risk benefits and individual protection products. But even the mighty Met Life, who had promised so much, are rumoured to be withdrawing from the UK.
Should we be worried about this contraction of choice. Certainly you would if your livelihood depended on the insurer’s massive spend on research and distribution. But if you are a consumer, I think the future is considerably brighter. The last men standing now have a massively growing market almost to themselves. The “almost” refers of course to NEST and the new mastertrusts and unsurprisingly the insurers are setting their own mastertrusts up to defend their territory.
The point for consumers is that the proliferation of insurers competing for distribution has proved a dreadful model for the consumer. It has resulted in a lot of rich advisers and insurance people and a lot of angry and frustrated customers.
It could not continue and , if you agree with my analysis, will not continue.
We now have a vacuum.
We’ve decided that the consumer will be provided for through the workplace and the distribution will be sem-automatic (for the people). That’s what auto-enrolment is.
We’ve set up the mechanisms and learned the rules. The remaining providers are pretty well ready.
But there is one piece of the jigsaw that is missing. Putting the 1.2m employers who are staging auto-enrolment in touch with the twelve or so mainstream auto-enrolment providers (and a good many specialists) requires a new route to market.
The good news for businesses and consumers is that without intermediation, the costs of the product has plummeted. But without guidance, the business of identifying pension providers and making a meaningful comparison has all but disappeared.
Some of our insurers are missing and the rest are hard to find
An ”agnostic“ is someone who knows he cannot know and so gives up trying to find out.
You hear the phrase “pension agnostic” bandied around at the moment, mainly from the providers of ancillary services that help companies auto-enrol.
If you key the term into google you get to the sites of the HR flex providers. It is their proud boast that the software that they provide works with any pension. When I just looked , Staffcare were #1 on the search
I can understand a firm such as Staffcare, distancing itself from the long-term outcomes of auto-enrolment- the pensions people buy. Staffcare provides compliance software to businesses that keep them on the straight and narrow.
But when one of Staffcare’s vendors sets out his stall by tweeting
You’re not saving for a pension; you’re saving for yourself. Forget about products (they don’t exist anyway); think about yourself.
…I get confused – I thought I was saving into a pension plan?
But for Steve Bee, the founder of JargonFreePensions.co.uk, what matters most in the post-RDR world is not products but service. The RDR signalled, quite simply, the “end of product” he said.
“What we called products in the past, in the future are likely to be as relevant in people’s everyday lives as floppy discs are to people who use iPads – things have changed.”
This I find very strange indeed.
There’s a touch of the Vicki Pollard about this; to paraphrase…
frustrated IFAs, unable to derive an income from products reinvent themselves as service providers, and snarl “bovvered?”.
Maybe I’m being harsh, but this obsession among Corporate IFAs with platforms , flex and AE middleware seems a nonsensical over-reaction to the end of commission . And it’s taking them down a blind ally.
IFAs are great with people, their unique ability is converting complex financial concepts like ” a pension” into a tangible product – “happiness in old age”. The “product” of retirement savings is “a lifetime income – protection against living too long”.
Corporate IFAs who forget this heritage and turn themselves into software salespeople sell themselves short.
We can know what makes for a good “pension”; it’s not hard – contributions, investment and managed decumulation (to sound actuarial). What is hard is to insist that “good and only good” happens.
Knowing “what good looks like” is the opposite of agnosticism.
To get people saving proper amounts into proper workplace pensions with proper drawdown is what financial advisers are uniquely placed to do.
“Pension agnostic” a phrase suggests not just that we cannot know what good is but don’t care. Faced with NEST and NOW and auto-enrolment and the loss of commission, financial advisers give up on pensions and throw their toys out of the pram? They go and sell HR software?
To be fair to Steve Bee, he has campaigned for thirty years to get IFAs to better understand pensions – and by extension to get pensions advice to the people who need it most.
But like Brian, his followers may follow him up the mount, listen to his sermon and come away convinced that
“blessed are the cheesemakers”.
IFAs cannot all ( as St James Place claim to have done) turn their back on the mainstream to focus exclusively on the “high net worth”.
Nor should they be exclusively focussed on technology solutions
Rather than run away from the product, they should embrace mainstream pensions – they are by far and away most people’s most important source of savings.
IFAs auto enrolment needs you!
Your skills are needed by the million small and micro employers needing help with staging and by the 11m people employed but not saving and by everyday folk saving into rubbish pension plans.
You IFAs need to get your mojo back and rediscover what made you successful. You cannot be pension agnostic, you must become “product” focussed again. But this time the focus must be on the end product of their advice- the pension, rather than the commission it pays.
To this aim, firms like mine, who advise employers, must create the opportunities for you to deliver in the workplace. We must start opening the doors not pretending we’re the “gatekeepers”!
Hilary Salt is founder of First Actuarial plc. She is currently the Actuarial Post’s Actuary of the Year. Late in 2011 she was asked to contribute a piece to the Independent’s Battle of the Ideas. This is what she wrote
Twenty years ago, if a conversation at a party began with someone asking me what I did, I could reply with ‘I work in pensions’ and we could move swiftly on to much more interesting topics like football or music.
Now the ‘p’ word produces such a desire to discuss retirement provision that I hide behind a different word. For a while I used the code ‘I work with statistics’ but now I’ve abandoned that too.
A word which once produced a polite frown now induces a discussion about the statistical basis for evidence of red wine being good/bad for you, or about how meaningful (or not) school league tables are or about measuring the impact of QE on economic growth.
But we have a difficult relationship with statistics. On one level, we seem to have replaced the 10 Commandments with the 10 Statistics – running our lives taking into account the need to limit our alcohol units, eat our 5 a day, read to our children, pay down our debts and reduce our stress levels.
These behaviours are made mandatory by cautionary tales of the statistical proof of what will happen if we don’t force ourselves into the statistically blessed box. At another level, people show a cynicism of statistics which whilst not new (lies, damned lies….) does perhaps show a deeper level of mistrust than has existed previously.
In particular, any statistic produced by a pressure group or even worse a commercial organisation (or anybody funded by a commercial organisation) is immediately suspect.
This cynicism is often well deserved as many organisations (including some who should know much better) use statistics carelessly.
For me, the ‘big four’ examples of careless use are:
1. Confusing correlation and causation – just because two things are associated with each other does not mean one causes the other (the recent SpongeBob SquarePants debate was a useful example)
2. Assuming past trends can be projected to show future experience. For example if the past experience is shown in this graph, what would you assume happens after point A?
The actual future experience could be any of the lines shown below:
3. Scaring people with big numbers. In the UK, we spend £69.5bn on State pension benefits (2009-10 figure). Getting this figure wrong by 1% (that is getting it almost bob on) means over/underestimating by almost £700 million. Asking about the significance of a number is always important.
4. Exploiting the lottery effect. If the stakes are high enough (a big money win or ‘catching’ cancer), we suspend disbelief easily.
While many people have an instinctive feel for the misuse of statistics, they still seem to practise a ‘to be on the safe side’ adherence to the latest claim of what the numbers say they must do.
In part I think it is because people have lost the self confidence to challenge statistics. Although I could descend into a critique of maths education, I think it is important to recognise four wider (and inter-related) effects which act to undermine the general ability to understand and challenge statistics.
The first is the tendency not to challenge or dissect another person’s statistics, but to respond instead with a different statistic.
Modern etiquette seems to frown on any questioning of others’ figures, however implausible they may be. Instead we must be tolerant and non judgemental and instead present alternative evidence.
This just produces a blaze of competing and contradictory figures which most normal people can only deal with by sticking their fingers in their ears and shouting ‘Ner ner I can’t hear you!’
Second, we live in a world which values simple stories and easy connections. It is far more compelling to believe that MMR causes autism than to conduct long term studies of the effect of many different drivers.
Third, we too often treat social science in the same way as natural science – making people into predictable and passive objects of experiments. The idea that on receiving a stimulus, a person-machine will always produce the same response may seem silly but it is one which underpins many statistical claims.
Finally and perhaps causing and exaggerating all these issues, is the falling away of a belief that we can rationally understand the world and take action to shape and change both it and ourselves. We need to challenge all these tendencies to remaster statistics.
The title refers to Augustine’s prayer “lord make me chaste, but not yet”.
It came to mind as I read concern from “industry spokespeople” over the DWP’s announcement to simplify the Auto-Enrolment regulations in time for the staging of the small and medium-sized companies in 2014.
A cottage industry has sprung up among corporate benefits advisers keen to hold employer’s hands through the “regulatory minefield” (and associated clichés) of AE administration.
The Government’s simplification program had better not clear too many of the mines or a lot of these advisers are going to have nothing to do.
The concern of actuarial consultants and lawyers is expressed as regret for large companies who have spent a fortune coding payroll software to sort their complex problems and might find some of this sunk cost unneccessary. Towers Watson and Taylor Wessing have gone so far as to suggest that such firms might have to rework their processes to comply with a simplified regime.
I find these concerns extraordinary. Any business that is built around exploiting weaknesses in legislation is running a risk that that legislation will be fixed. It is not a sustainable business model.
Similarly, advisers moaning about undoing the work that has been done to comply with bad regulation ignore that it is they who have been paid for doing this work (and they who will charge again to redo the work). In practice, if there are a few over-elaborate processes which are maintained post-simplification- so be it. The payroll coding was designed to make these processes automated and it looks extremely unlikely that the likes of Marks & Spencer will have to pay again to “dumb down” their systems.
But there is a much bigger point to make here.
This constant harping on about compliance to regulations (simplified or otherwise) is offensive to those whose primary focus is on getting AE to deliver large amounts of cash and pension to those who need it most, the 11m + who do not save today.
There are greater obstacles to achieving this than the concerns we took to the DWP, problems with assessment, the jiggery-pokery to keep the pensions rich from losing protection and problems with pay period alignment.
The heavy lifting to get the DC schemes we use “fit for purpose”, the work to restore trust and get people saving voluntarily into workplace schemes is of greater moment.
While we continue to press government to make pensions simpler, First Actuarial’s primary concern is to make sure that the 1.2m small and micro employers who will staging over the next five years, do so effectively.
Auto-enrolment is not a business problem, it is a way of getting people who work in businesses to see light at the end of the tunnel, a way to the sunny uplands of retirement. If we adopt that mindset then the short-sighted concerns of the “pension industry” vanish behind us.
Here are the practical steps we suggested to the DWP in September 2012
Payroll Periods and AE Pay Reference Periods are misaligned
AE Pay Reference Periods should be aligned to tax and NI periods
Employers find it hard to meet the deadlines for commencement of AE communication duties
Align the start of communications duties with the pay-date in the final reference period in which an employee become eligible
Pro-ration obligations are out of step with tax, NICs and pension contribution practice
Abolish pro-ration and have employees pay the full contribution at the point of payment
Opt-out and continuous employment obligations are inconsistent with employment law
If employees opt-out or cease active membership, their next assessment date should be three years later
Missed payment and back pay obligations are complex and out of step with tax and NICs
Regulators should consider AE and contribution payment, in alignment with Tax and NICs and allow comms duties to commence from this point
I’ll let you off reading this briefing if you press the People Get Ready link which gets you to the Reverend Al Green and friends (no ads) - it will make you cry!
Still with me ? Enjoy the vid? Oh I see, you want to hear about how to get ready for auto-enrolment. Well then…
AUTO ENROLMENT IS HERE!
So far so good with news of low opt-out rates and no “horror stories” from payroll or HR!
But the early stagers have deep pockets. Lloyds reported to the FT they had spent in excess of £1m staging.
If “wave one” so far looks a success, what about waves 2 and 3 and what can the employers preparing to stage in late 2013 and onwards learn?
This briefing note outlines what First Actuarial sees as being the 5 key stages to complying with the new regulations, making sure that your company is ready on time.
In a recent briefing called NEST claimed that most companies they’d surveyed were under-estimating the work needed to be auto-enrolment ready and over-estimating the amount of help available to them “cometh their staging”.
This blog is here to help you get ready. I’ve broken the tasks down into five stages.
It’s drawn from our and our “early staging” clients’ experience of what really matters!
Assessing your workforce means segmenting them into different types. eligibles, entitled and non-eligibles. That’s the easy bit.
The hard bit’s working out who works for you but isn’t on your payroll – typically your contractors – who under the new terminology are your “workers”. Opinion on who does and not quality for one of the segments is hardening but you will almost certainly need to take advice on this.
Once you’ve done the assessment once, you need a process to do it again and again, in fact every pay reference period.
So assessing who works for you can be difficult and laborious so you’re best off getting a machine to do this work. Ask your payroll if they offer an assessment tool , if they don’t you may be able to get one from your pension provider. If you can’t get one there then you may have to hire the machine from a specialist “middleware” provider.
The assessment requirements can be quite complex, and so it is absolutely vital that you know your workforce, and understand where your responsibilities lie. You will need to determine who will undertake the assessment and how it will be done. Without this first stage, you will find it harder to understand the scale of the task at hand.
Stage two – understand the timing issues
Your staging date is decided by the size of your largest PAYE scheme. For many companies, this will be fairly easy to assess, but for those with complex structures, there can be more than one staging date. Your staging date will be confirmed by The Pensions Regulator in writing. If you are staging in 2013 or early 2014 you should have told the date and be on the way to getting yourself ready.
The staging date can be brought forward, but not deferred. There is some flexibility to align multiple staging dates or to stage at an easy time for the business.
While you can’t push back your staging, you can postpone deducting and paying auto-enrolled contributions. This is known as postponement, Postponement can be used to align the contributions of different staging dates, or where there’s high staff turnover, defer the assessment of short service workers who are likely to leave.
For companies who want to enrol using a “qualifying” defined benefit scheme, there’s another option to delay auto-enrolment until October 2017. This is known as the “hybrid transition period”.
Early staging, postponement and the hybrid transition period are supposed to provide employers with sufficient flexibility to implement auto-enrolment without serious business disruption
So far, we’ve found that auto-enrolment projects take 12 to 18 months to complete, so it’s important to work back from you allocated staging date, and start planning early.
You cannot start preparing for auto-enrolment too early – Get a proper project plan in place with the help of a pensions expert such as a First Actuarial Consultant. Time is not on your side
Stage three – scheme design and suitability
Getting the design of scheme right is crucial. You need to think about the costs of the various contribution models you can use for auto-enrolment, whether any cannot be managed by your provider or your payroll, whether you want to use salary sacrifice and whether you want to phase contributions in (if you are an early stager)
We can help you model the costs of each structure and can include likely opt-out rates. We can also advise you to stay within certain guidelines that will keep you on the right side of the Regulator. 10% mandatory employee contributions may be what is needed to fund a solvent retirement but it’s likely to be considered by the Regulator “an inducement to opt-out!”. And it’s not just your yet to be enrolled staff that you need to consider, you’ve got to make sure that staff already in a pension plan are getting at least a minimum contribution.
Then there’s the decision about what scheme or schemes to use to enrol your staff. You may have existing plans but do they qualify to be certified for auto-enrolment and even if they do, are they likely to meet the Government’s new “Quality Test”? You may decide this is a good time to look at other options you can use, including the new supertrusts like NEST and NOW. The price members pay to be in these plans has fallen in recent years and you may be pleasantly surprised to find you and your staff can get better value for money than in years gone by.
Your pension provider needs to be able to provide the statutory communications that go to your staff, manage the opt-out process and work with your payroll and HR departments to minimise business disruption. Even if you like your existing provider, you may be forced to bring in a new provider, if only to deal with those not already enrolled
While you shouldn’t panic buy, we strongly recommend you do not leave making changes to your pension provider. It may well be that you also need to make changes to your payroll and HR software, retrain your staff or even buy new middleware to ensure that your pension provider can operate with you compliantly.
Stage four – communications, HR and payroll readiness
Whatever you do that touches your staff’s pay and benefits needs to be communicated. Some communications are statutory (and have template letters which give little scope for tailoring), some communications can be tailored to meet your company and staff’s needs.
Many employers want to provide their own communications to their workforce – to set the scene, raise awareness and for financial education provide guidance about contributions, defaults and so on. All this maximizes the “employee value proposition” as HR experts now call it!
Designing a communications strategy and establishing a delivery plan that complies , engages and helps achieve the company’s strategic goals is a difficult business. You may well want to speak with us about what has worked for other companies and the options available to you.
Some payrolls can deliver these messages while some organisations may be better served using an existing HR system. In some cases, communications may come from a specialist source, possibly the middleware provider.
Getting a communications plan in place is critical to the success of staging , especially in the eyes of your staff. Creating a communications plan which deals with everything from data management to who prints and delivers the letters, is a critical part of becoming ready for auto-enrolment.
Stage five – record keeping and other considerations
It’s not enough just to compliantly manage the contributions from those enrolled and chosing to join your plans. Nor is it enough to manage the opt-out process and make sure the communications are properly distributed. Nor is it enough to properly assess each pay reference period and deal with tricky items like re-assessment
All of this needs to be recorded and to be available for inspection should a “regulatory” inspector call.
These records need ordinarily be maintained for six years, with opting out records being kept for four.
Your administration and record keeping processes need to be sufficiently robust to ensure that other aspects of the auto-enrolment duties are able to work correctly.
The final lap in the five stage process takes you round all the processes you have established in the previous four and makes you sure that not only is enrolment done, but it is seen to be done.
How First Actuarial can help
We don’t think that getting you and your company ready for auto-enrolment should be daunting. We’ve been round the loop a few times already and as each new wave of clients manages their way through the five stages, we refine our advice to make it easier.
We are keenly aware that both in terms and fees, contributions and business disruption, auto-enrolment has the capacity to be very expensive. By following our well-established path, you can keep fees to a minimum, avoid risk and maximise the value of your contributions to your staff.
A researcher I was speaking to yesterday asked whether I considered the bad practices associated with the poor execution of trades by fund managers as criminal fraud. His argument was that indirect benefits such as the receiving of rugby tickets from your dealer went beyond “a conflict of interest” and represented “white collar theft”.
Thinking about it, I can’t call this theft, nor the activity criminal, but it is morally atrocious as those who manage funds have a fiduciary obligation to “treat customers fairly” and a legal obligation to apply best execution to their trading. The FSA’s paper on conflicts of interests should make the ranks of managers and consultants at the Home Internationals, keep their heads low as the cameras pan across them.
But we need to go beyond the banner headlines and investigate exactly what goes on when a large fund makes a trade. Where is the leakage and how can the plumbing be improved. If we know the questions to ask and understand the difference between good and bad, we can apply governance. If we don’t bother with the detail, we won’t stop the drip drip that compounds into the 40% loss of income in retirement that charges can create ;- the power of compound drippage eh!
Here are seven things that we should be looking to change to improve things
We need to improve the information flow; share and unit holders in funds get shortened reports that provide inadequate information to fully understand what is going on. The argument is that the long forms are too unwieldy and too expensive to send out by post. Get real, post is not the way to deliver this information. The default delivery option must be e-mail, the document(s) should be sent as PDFs and everyone should have both the short and long forms.
The spectacular own goal of taking Portfolio Turnover Percentages out of compulsory fund reporting needs to be reversed. The churn rate of the portfolio is a key indicator of conviction (low churn, high conviction); as importantly , it is an indicator of the costs being incurred by the fund, the more churning, the higher the costs.
We must rationalise the supply chain of information. Fund managers give instructions to dealers who place orders in the market, the costs are reported by the manager and then lost by the insurer wrapping the fund. By the time the member of a DC fund tries to access information via the platform they use, the source of the information is so distant that even experts don’t know where to go. The way to go on this, is the way the ABI have promised to go. ABI, I continue to watch for signs of progress and will admit no recidivism! We need the insurers to get the information from the IMA (it is published deep in the fund accounts). If the structures of the insured funds are too complex to report on, those structures need to be rationalised
We need to understand the market into which traders place orders. My understanding is that their are primary markets (the recognised exchanges) intermediate markets and what are referred to as “dark pools”. BEST EXECUTION involves the skilful trading across all markets , to ensure best dealing prices, lowest spreads and to minimised the pricing impact of a trade. Pricing impact is particularly important, skilful execution ensures that market makers do not see your money coming, If a market maker gets a whiff that there is a trade on the way, he has the opportunity to reprice the asset on sale to creat value for himself and take value from the fund.
Stock lending is similarly murky. The recent law-suit against Black Rock in the States revolves around that manager retaining 40% of the profits in the States and 60% of the profits from lending on “overseas” equities. The charge is profiteering at the expense of fundholders. We don’t know enough about how managers offering funds in the UK use stock lending and share the revenues (and we should).
We have to have targets for best execution, sure these will vary according to size of fund and the fund’s investment principles. The difference between “good” and “bad” on commissions is huge 3.5bps v 25bps (according to my man on the inside). Spreads are similarly elastic and while we cannot do much about the rate of stamp duty , we can minimise its impact by minimising trading. We need to know who is benefiting from stock lending and by how much.
Last but not least, we need to encourage fund managers to own the performance of their funds. There are two many jobbing managers who flit from fund to fund. The best way to reward fund managers is to get them to focus on long-term investment and this means incentivising them to think long-term. It’s good to see that Lord Turner’s parting shot as he leaves the FSA is to call for managers to be rewarded on their comittment to long-term investment.
There is no excuse for poor execution. Managers who execute well should get the money and those who don’t should be starved of funds, that’s how a good market operates. But without perfect information we will have an imperfect market.
It is up to consultants to fight this fight – there are some good consultants doing this in the UK , but not many – we need better awareness among the experts, we need consultants to be unconflicted (hats off to Towers Watson who are now not taking any incentives - even when under £10), we need consultants who are going to be tough on this.
We need trustees who are going to learn from consultants and make independent researches. On this subject , they should spend time exploring Alan and Gina Miller’s excellent website http://www.trueandfaircampaign.com/.
We need journalists , commentators and bloggers to keep up the pressure.
Finally we need regulators to continue to apply pressure on the ABI and more particularly on the IMA. These trade associations rightly act for their members and not the consumer. But when it is recognised that the interests of manager and consumer can be, should be and will be aligned -WE WILL GET CHANGE.
The result of my nocturnal deliberation is articulated by my opening statement.
I do not speak for anyone but myself and if anyone is following my blog to get some thought leadership, they should worry about themselves.
Being told “you are a thought leader” is like being put in a box and placed at the back of the shelf (pigeonholed – as people used to say).
It is part of the controlling process of large corporations and governments that they employ people to do their thought leadership for them - to think “outside the box”. This thinking is often outsourced to management consultants as their independence from the firm’s management is considered more likely to provide objective and unbiased advice.
But there is a more sinister process that sometimes gets employed. Here the validation of an idea or dogma is imputed to “the crowd”. The idea of anti-Semitism was not given to the German people, it was, if Mein Kampf were to be believed, the articulation of Germanic wisdom. Hitler‘s claim to leadership was based on his being in tune with the German crowd’s wisdom.
Hitler’s false humility, his loathsome claims to be the servant of his people were part of the process that gave him absolute power.
I am weary of those who claim to understand the wisdom of the crowd and set themselves apart as articulating their wishes.
The great leaders , the Ghandis and Luther-Kings were not apart from the crowd, they did not have secret police forces and act through violent intervention. Their words and actions were consistent with their intent for good. They made their way through proper leadership,
I do not want to extend any parallels between the behaviours of dictators and the behaviours of those in Government and Corporate Leadership today. The leaders I come accross are those who translate their thoughts into action through positive influence not coercion; for them the word and deed are one.
Those in leadership are accountable for their actions, they cannot rely on thought leaders or claim validation from the wisdom of the crowd. It is the job of those who lead to lead and be accountable for what they say and do, not to hide behind others.
But they should also listen.
The main reason I write these articles is because the thoughts that swirl round my head at night need to be articulated, otherwise they would grow old and sterile with me. No one (I hope) has to read these things and while it’s gratifying that some people come back for more “you are only as good as your last blog”.
These views are mine and not those of First Actuarial. But I am a Director of First Actuarial and we swim in the same current. My aim this year, and the aim of First Actuarial is to make it easy for companies staging auto-enrolment over the next five years, to do so easily , well and happily.
So there is a second reason that I write these articles, to help myself to understand the issues that I grapple with in my day job. In this, any feedback is helpful, even a flaming bot telling me to “shut up”.
If you thought you were sick of pensions, imagine the nausea of the life company CEO.
If you are such a beast and reading this, you are probably are American or European and your company brought into the UK a few years back as a land of milk and honey. Since then you’ve had to contend with pension mis-selling crisis’, the retail distribution review and now a battery of studies, investigations and the like from a plethora of regulators and other quangos.
“Nobody told me it would be like this”
The predicted closures of DB plans has happened but the predicted asset transfer (as happened in South Africa) hasn’t.
Pricing of contracts written in the early noughties has proved to be hopeless with the duration of most Group and Stakeholder personal pensions, pitiful. Indeed many of the schemes set up then (such as the House of FraserAXA stakeholder), have simply been replaced by similar but cheaper arrangements (in HOF’s case from Aviva).
This race to the bottom on AMCs has resulted in a plethora of small pots to the frustration of the DWP, the life companies and most pertinently the members.
Much of the commission has been (because of stakeholder) unrecoverable. Meanwhile , money sunk into IFA networks has similarly been deemed sunk cost and written off as “last year’s vanity project”.
But nothing – nothing – has hoovered up the CEO’s spare cash like “corporate wrap”. Egged on , first by the management consultant;s vision of work site marketing and latterly by the large actuarial consultants (particularly Mercer), life company chief executives have placed their bet on a single number on the pensions roulette board. That number is the “wrap”, comprising a portal through which employers and employees can see the various benefits offered across the workforce or to an individual (respectively). The second is a platform which can allow the life company to offer a variety of services directly to the market.
PORTALS are for SHOW, PLATFORMS are for DOUGH. The loss leading portal – which included lots of fancy graphics and plenty of modelling tools to keep staff happy - typically costs £30m to build , though latest estimates for the more snazzy variety are rumoured to have cost closer to £100m.
The financial justification for the spend seems to be
Everyone else has one
We can probably charge 0.1% extra on the AMC for the portal
In time people will see sense and buy all our other products
It keeps the advisers happy
It may give us an edge in the auto-enrolment feeding frenzy.
All of these premises seems to be shaky
Reading the Platforum’s excellent report on corporate wrap, it’s hard to find any differentiation between the corporate wraps on offer
Only one platform (Fidelity’s) has broken the £400m AUM barrier, to recover a £30m spend, that needs to increase to £30,000m – maybe one will break through but you’re in a field of twelve and the “handicapper has you in his grasp”
People seem to be deciding to buy their ISAs , life policies and manage their company shares and resulting tax, privately and not through a company facility
The advisers are unhappy, they want their commission back and are spitting out their dummies- corporate wrap has not been the hoped for pacifier.
None of the early staging auto-enrolment plans has been set up as a corporate wrap. Legal & General, who have set up the vast majority of them have a corporate wrap version of their GPP which includes SIPP and ISA extensions, if they are promoting these, they are keeping very quiet! Indeed they don’t seem to have contributed to the Platforum survey.
Meanwhile the great unwashed (which includes me) puzzles at why we should be worrying about saving tax on ISAs and wrapping up our sharesave gains when the personal pensions we invest in are proving themselves unfit for purposesy.
Build your house by all means , Mr CEO, but make sure the foundations are solid.
And even in the posh seats where wrap was predicted to take over from old-fashioned unbundled occupational DC schemes, the story for the CEO is no better
Standard Life‘s SIPP option on the BT GPP is virtually unused, CSC who pioneered the use of Scottish Widows‘ “mymoneyworks” report virtually zero take up on the ISA and we have still to see mass migration of assets from the BT or CSC’s occupational DC schemes to take up the slack.
In summary, the corporate wrap project is proving a fiasco. The brave new world of flexed benefits , employee empowerment and osmosis of life products through the workforce hasn’t and isn’t happening.
The conversations that are going on with employers large and small are not about cross-selling ISAs into the workforce , or holistic reward statements. The conversations are about how to fit payroll and HR systems into the back-ends of the pension provider’s black boxes. The conversations are about what constitutes “good” and the arguments are about what the insurers and fund managers are leaking from their systems by way of charges.
The corporate wrap has been designed as a means of distribution but auto-enrolment has sorted the distribution problem out. Never mind the width, we want quality and the £100′sm + spent on wrap has done nothing to improve the underlying quality of the fund options, basic administration of contributions nor to improve the public’s perception of pensions.
Corporate wrap has become a massive distraction for insurers who needed to be focussed on auto-enrolment. The DWP’s forthcoming announcements on its “quality test” and on “consultancy charging”, the FSA’s review of annuity pricing and the OFT’s wider study of distribution all address the core functionality of the DC pension and have nothing to do with wrap’s breath of services.
The wrap trap has been set and has snapped, and who’s been caught?
This looks like another fine trap that the life companies have walked into.
That’s what I think should be the procurement cost to get a firm through auto-enrolment staging.
Which is not going to please a lot of people who still consider this pension revolution “Business as Usual” and anticipate multiples of current turnover at current margins as customers pass through like cows through the abattoir.
Why £500? Because give or take a few quid, that’s the amount I need to make an acceptable margin based on business projections for an procurement service that gives a company
The critical path to follow to get AE ready
A market search based on the company’s needs , demographics and contributions
An options report with the information on which they can do due diligence
The capacity to instruct the chosen provider so that staging is implemented
I see no reason why most companies should have to pay more. Many companies may wish to offer more than this basic service, procuring investment expertise, ongoing governance and specialist communicators to help staff better understand what they have got.
But companies planning for the future should not be cowered into believing that they will be hit with a massive fee for establishing or re-establishing their pension affairs.
Many reading this will be doing so with no pleasure at all. It is extremely hard based on current practice, for advisers/consultants to take companies through staging for much less the £3,000. The costs of prospecting for business, false starts and bad debts and the logistics of meetings, manual report writing and data gathering, make bespoke and face to face reporting an extremely expensive business.
Many firms will be prepared to meet such expenses.
But the capacity to deliver bespoke solutions in a traditional way is limited. There is insufficient capacity among properly trained advisers to reach a fraction of the 30-40,000 companies staging each month in the early part of next year.
For those companies starting on their AE journeys now with stagings in 2014 and beyond, there is no service that can deliver them an AE solution based on the what the market offers, for anything close to £500.
There should be and there will be.
Over the weeks and months to come , I will be blogging about the work I and my colleagues will be doing to build a proper enrolment service which will allow companies to certify themselves as AE compliant for an all-in fee of £500.
Don’t expect it to have much to do with the past. Don’t expect it to make anyone a fortune. Setting up a pension for your staff is your duty as an employer. While you are free to pay a small fortune to do so, you do not have a duty to pay through the nose for the service you use.
I am looking to speak with employers who have the duty of staging auto-enrolment in 2014 or 2015 (eg have between 250 and 50 staff on their payroll) I am also keen to speak with smaller employers with less than 50 staff.
I want to understand what would make you comfortable in making pension purchasing decisions and whether the service I have in mind would fit your bill.
I want to know whether £500 is an amount you would want to pay or whether, and this choice is available to you, you would by-pass even that charge in favour of going directly to NEST.
I’d be especially interested in speaking to employers who are , have or are going to stage directly with NEST or any other provider without using a consultant.
Any conversations will be treated in total confidence and you have my assurance you will not be added to my or anyone else’s prospect list, by helping me in this way.
Apparently it’s worth £6m to us in TV rights, it will take us to grounds we have never played at and we’ll be rated one of the top 50 clubs in the strongest leagues in the world.
Quite an achievement for a club with an average home gate of barely 4000, a wage bill that wouldn’t pay a premiership star and only ten years in the football league.
What it means to the town is none of my business, I don’t live there and don’t do business there. But what it means to the town’s citizens is quite something. Yeovil is not a rich town and youth unemployment is very high. Yeovil Town Football Club is for many of its fan base, the only game in town.
The atmosphere at the Yeovil (away) end was remarkable. The bond with manager Gary Johnson - aruldite. This is the only game when the only invasion was from pitch to crowd when Luke Ayling (who can do as he pleases with our wives) bounded over the security fence to hug the crowd.
I’ve not gone home to Brentford tonight, gone to stay with the missus after dropping the kids off round South London.
Others are in deep water
Many good things are happening at the moment but none has given me so much pleasure as our winning this afternoon. Of course it meant that Brentford must wait another year (how they will rue that missed penalty), but Brentford are going places with a great manager, a new ground on the way and a fan base which is loyal and certainly not trophy!
We were sitting last Thursday in the Stonemason’s arms. By “we” I mean the Pension Playpen’s content management team.
Most of our number don’t know about pensions - in fact the only person who knows about pensions is our Hannah (Clarke) who knows everything (though she’s no “know all”).
Martin , who is a small businessman, turned to us and with a look of mild surmise intoned
If I go to a pensions website, I want to know what to do about this auto-enrolment thing. Where should I go to find out what I have to do?
Eyebrows were raised, www.pensionplaypen.com is designed to help small businesses like the ones Martin runs, make easy going of auto-enrolment.
Just go to the Pension Regulator’s website
Said Hannah. So we did , and what we found was so good that I have spent the past 24 hours re-reading all the documents that I read when they first came out and have now forgotten.
The Pension Regulator has really got its shit together and has produced an auto-enrolment website that is beautifully constructed with excellent navigation. It contains all you need to know whether you are a beginner,intermediate or expert. The information is delivered to a consistent standard of excellence.
There is nothing sexy about the site but it is packed with useful tools that can help your company with understanding the when,what and how of employer obligations , provides a project planner to help companies be ready for their “staging day” and gives practical tips on how to communicate what is going on to the employees affected.
The site is not going to win awards, because it is not flashy and there’s no commercial reason for those outside of Government to promote it.
Well I take that back, because here am I, a commercial guy – promoting this website; not because I want to , but because I have to - it’s better than anything I’ve seen in the private sector, including the auto-enrolment section of the sites I’m involved with at First Actuarial and Pension PlayPen.
Which calls to mind a question I’ve been meaning to ask the Pension Regulator, if I can’t beat you, can I join you. Can I make this wonderful educational resource part of my offering?
As a tax-payer I’ve paid for a little bit of it and if I can host your information on my site , I make sure my visitors get it straight from (my) horse’s mouth.
People throw sticks at Government for making auto-enrolment too complicated; then they complain when the Government try to simplify the complexity, but no-one takes the trouble to congratulate Government when it gets it right.
The Pension Regulator has been getting its digital policy right for a couple of years, it gets social media, runs a great linked in group, does twitter well and is always relevent. It is an example to other Government functions on how to engage with its audience.
At a studious pensions lunch at the Cargo Business Lounge in Edinburgh, Gregg MClymont and an assortment of pension and policy people sat down to lunch and debated the impact pensions could have on the current debate over Scottish independence.
As the token Sassenach, I consider myself ill equipped to provide an intellectual analysis of the discussion. However these observations may provide an unhelpful but irreverent perspective .
The argument for independence seems to be emotional and not to have connected with hard economics
No proper analysis of the pension implications of a breaking of the union appears to have happened.
The Scots appear a sickly lot with higher levels of morbidity than the rest of the UK, this would suggest they are expensive to care for in older age.
Due to the national obsession with deep-fried Mars Bars (and macaroni cheese if luncheon choices are a yardstick) the Scottish lifestyle can be characterised as “nasty, brutish and short”. This suggests that though their elderly are expensive to care for, the caring is short-lived.
In terms of tax, Scottish independence could be a pensions nightmare and the prospect of differing basic rates of tax for the Scots and the English may not be as far away as Independence. Cross-border arbitrage opportunities look a racing certainty as does administrative melt-down
Judging by the large numbers of lawyers present, the current debate may well be sponsored by the Scottish legal profession who will find themselves with several billion of chargeable hours sorting out the mess referred to as “unravelling”.
I can only conclude, like Samuel Johnson, that the Scots are nuts to be even considering a breakaway from the Union.
I had thought if might be in the interests of the English Welsh and Northern Irish to let the Jocks jock off but the arguments of the clever people in the room have convinced me that a severance of Scotland from the United Kingdom is in nobody’s interests.
A huge thankyou to Susan Mcdonald for making this happen. Good on you Edinburgh- even if you have the climate of Reykjavik.
In the Queen’s Speech last week, the Government confirmed what will be included in the forthcoming Pensions Bill.
• The introduction of the single-tier state pension from April 2016 (replacing the basic state pension and earnings-related state pension);
• Speeding up the increase to state pension age to 67;
• Allowing the government to regularly review the state pension age in light of rising life expectancy;
• The automatic transfer of small dormant pension pots;
• Abolishing contribution refunds for defined contribution trust-based schemes for people who leave within two years; and
• Allowing the Secretary of State to ban enhanced transfer value exercises at any time within the next 7 years.
The Bill also sets out the wording of the Regulator’s new objective to encourage growth (this being announced by George Osborne in the budget). The proposed wording, which is perhaps a little bit weaker than George Osborne had led us to expect, is:
“to minimise any adverse impact on the sustainable growth of an employer”
Cynics might remind the Government that the biggest “adverse impact” on pensions over the past five years has been its policy of quantitative easing that has deepened funding deficits and reduced the value of annuities purchased.
Impact on payroll of “pot-follows member”
For most pension operatives, QE is a side issue – it’s the “automatic transfer of small dormant pots” that should be ringing alarm bells.
It doesn’t take Sherlock Holmes to deduce who will have to trigger the transfer once an employee has left pensionable employment.
“Pot-follows member” requires precise execution, excellent data management and a focus on member outcomes. Skills that have been sadly lacking among pension providers over the years.
Pension operatives have a right to be sceptical about the practicalities.
The DWP have also announced the banning of consultancy charging to pay for auto-enrolment.
Consultancy Charging was only introduced in January as the FSA’s successor to “commission”. It enables advisory costs to be paid not by the company but by the member of the scheme as a deduction from their pension pot
This ban will be imposed across the advisory spectrum and will impact on those large consultancies who provided investment advice on the default funds as well as the small IFA unwilling to directly bill the employer.
Consumer champions have applauded the move while many advisers moan that this will only increase the “advice gap” leaving many of the 1.2m employers with no immediate route to advice.
Consulting on a charges cap
As the DWP announced the ban on consultancy charging, they also announced they would consult on a cap on pension charges later this year. This is thought as a pre-emptive strike prior to the publication of the OFT’s review of pensions in the autumn.
This looks like a further assault on the use of legacy pension schemes, many of which still pay commission to advisers.
The early success of auto-enrolment in terms of the low-opt out rates among large employers and the lack of visible train-crashes has led Webb to openly ask “might the Government have a public policy success on our hands”.
However, he knows that his political legacy will be judged on the capacity of the SME and micro employers to engage with “what makes for a good pension” -do more than simply comply.
This means a wholesale shift in the perception of pensions by a public who have grown wary of them.
For pensions to deliver to people’s expectations, Webb feels he must get snouts out of troughs (by banning consultancy charging), stop the fracturing of pension rights through “operation big fat pot” , and prevent further abuses through a “charges cap”. He also continues to explore pension guarantees as part of his “defined ambition” initiative
A radical agenda
Taken together, this is a radical agenda. No wonder that Gregg McClymont , Labour pension spokesperson is supportive. It could sit easily within a Labour manifesto.
But this will need more than a political consensus; as Britain struggles out of recession, a nation’s appetite to “save not spend” will be sorely tested.
As will the patience of those called upon to implement the ever growing list of changes.
I sit in a Pret at Heathrow Terminal 5 contemplating a day ahead in Edinburgh. Like Conrad’s travellers , I will venture into unknown and seemingly hostile territory inhabited by Caledonian tribes – a far away people about whom we know nothing.
Up there sits a latter-day Mr Kurtz, leader of these primitive people, presiding over his fiefdom with feudal authority. Step forward Gregg McClymont.
For me to venture into the head offices of both Standard and Scottish Life, is foolhardy, to combine it with a meeting of the Clans at the Cargo Business Lounge is downright suicidal.
Al lunchtime, in said lounge, I will listen to the Macdonalds and the Campbells beating seven bells out of each other over whether they can afford to be independent of us Sassenach.
There is a strong contingent within the Pension Play Pen, headed by our Treasurer Mr Bill Whitehead who would like nothing more than to out the Celtic Fringe to Euroland and be done with them. I suspect that Gregg has other ideas.
We will hear this lunchtime whether the tangled web weaved by successive generations of pensions legislators can be unravelled so that we can properly divide Scottish pension liabilities from those of the rest of Britain.
My guess is that this would be the economic equivalent of separating Siamese twins; even if we managed the severance, the weaker party would bleed to death in time.
But there are other, better reasons to keep Scotland in the Union. Gregg for one. Without the cheery Celt in Westminster, Britain would be a glummer place. Bravo to our next pensions minister for turning up at our humble luncheon today.
Let’s hope he gets a great turnout and that we have as lively a debate as ever. This is a pay as you eat event (PAYE). Typically the bill is shared at around £15 (17 Euros to the independence enthusiasts). All are welcome though we expect you to sign up to the linked in group if you turn up at the meal.