I know a lot of people who like managing their money and study the fund pages of the newspapers as I study the form pages of the Racing Post. For them the Self Invested Personal Pension, the services of a good stockbroker or wealth managing IFA and the prospect of a managed drawdown program in retirement.
For the rest of us, the thought of picking funds to invest my pension savings has as much appeal as this month’s weather.
So how was it that personal pensions became the mass market product they appear to be today?
The answer would probably be found by studying the client list of a firm like Hargreaves Lansdowne. I worked with this great British firm some years ago and remember discussing with their then pension supremo how they managed the money of most of the key influencers in Government pensions policy.
The Government‘s agenda for the past 25 years has been to encourage us to take responsibility for our pension decisions , effectively to take us with them.
That was until the arrival of Steve Webb. If you read the blogs I was writing in April and May 2010, you’ll remember how excited I got as the Liberals edged into power sharing and Steve Webb was gently ushered into the DWP as Pensions Minister.
For all I know, Steve Webb has a SIPP and is as I write, pouring over past performance figures to find his next global commodity fund. I doubt it though. Steve is a collectivist. He thinks about the behaviour of the proletariat, not as needing education, but of needing security. Not for Steve the vision of a financially empowered population happily managing their retirement. For Steve a strong basic state pension and a system of workplace saving with the emphasis on “saving” not investment.
Over the past two years, we have seen a subtle but now discernible shift in the way that legislation has been drafted which gives value to collective rather than personal pension provision. Aligned to this we have seen the Government’s promotion of collectivist retirement savings vehicles around the flagship – NEST. Though the flagship has been temporarily been hobbled by the Association of British Insurers, it has spawned a cluster of rivals from overseas , from closed industry schemes and from the insurers who can see which way the wind is blowing.
Webb cannot be credited with the establishment of NEST , indeed he appears a little embarrassed by this taxpayer-funded monolith that looks like taking more in taxpayer’s loans than it will in pension contributions.
His “big idea” is risk-sharing – what he calls “defined ambition”. This is an overt challenge to personal pensions which philosophically promotes the concentration of risk on the “person”.
Risk-sharing seems to be a broad church in which Webb can worship. Anything from a final salary company pension scheme to a guaranteed cash fund seem to get the nod.
A couple of weeks ago, I found myself in a room with Steve Webb and was able to formally ask him a question about his intentions. I’d been surprised to discover a little known get-out clause in the auto-enrolment regulations which allows companies prepared to sponsor risk sharing arrangements such as cash balance defined benefit pension schemes, the chance to defer auto enrolment for up to five years. The trade off is simple, companies who are prepared to take risks in a scheme offered to all eligible staff, don’t have to opt reluctant staff till 2017.
I can’t tell you the details, we were under the accursed Chatham House rules, but I got a direct answer to my question. The import of his answer was that the auto-enrolment agenda was secondary to the defined ambition agenda.
Many large employers should and probably will be thinking hard about the lower cost/risk defined benefit arrangements - especially cash balance. If there is an opportunity to offer a more secure collective arrangement that targets those who can be bothered to opt into it rather than a group of personal pensions from which there is little escape, the collective options may be the one to go for.
Certainly we are expecting to see companies at least asking the question – is it time to look again at defined benefits, even if the benefit stops short of sharing the risks of retirees living too long (the essential weakness/strength of cash balance).
I’d be surprised if the DB loophole (known as hybrid deferral) is the only twist of the knife. Webb’s professed ambition to arrest the proliferation of “small pots” may lead to further opportunities for the collectivists.
The big problem surrounds those who join a workplace savings scheme and then leave (known in the trade as “deferreds”). If you leave a company and have a deferred personal pension you are on your own and may even suffer the horror of seeing your charges double as the “active member discount” unwinds. If however you are a deferred member of a collective scheme you are not on your own. You are still under the trust your employer arranged for you.
What’s more, if your employer is doing the right thing for his staff, he or she’ll be able to offer you the same improvements as a deferred member as you’d have got as an active employee (other than ongoing contributions of course)!
Many companies that established their pensions under occupational trusts (whether their own or under mastertrusts such as Standard Life‘s Stanplan A, are looking pretty damned smug right now.
“Why’s that” I hear you cry!
Pension costs are plummeting, plans established ten years ago can now be re-established often with 50% of the charges stripped out. If you were put in a personal pension in the early years of the last decade you I can promise you nothing. You may have the opportunity to do yourself an upgrade. But if you are a member of an occupational scheme – whether you are an active employee or long gone, you could be in luck!
Firms such as mine can, using an actuarial certificate, bulk transfer the funds to cheaper alternatives.
This is really fantastic news for job movers for a whole load of reasons, not least , because the impending changes resulting from the Government’s retail distribution review are encouraging large number of employers waking up to the advantages of a post-comission world to renegotiate their pension charges.
If you are reading this and are a pension manager, a trustee or a consultant, I’m sure you are already thinking about this renegotiation. If you are renegotiating charges on a group of personal pensions, count your staff unlucky. If you are renegotiating charges of an occupational DC plan, make damned sure your members get the discount not just on future unit purchases but on the units already bought.
If your name was Steve Webb and you wanted small pots to get a fair deal, wouldn’t you be tilting the DC playing field in favour of the collective occupational approach?
- Time for a “4G” Pensions auction? (henrytapper.com)
- Auto-enrolment – winners and losers. (henrytapper.com)
- Steve Webb challenges pension industry to provide ‘money-safe’ pension scheme (libdemvoice.org)
- NEST’s been gelded by the ABI – this is the result! (henrytapper.com)
- The Spurious Certainty of Chicken Licken (henrytapper.com)
- Financial Education – why we do it- why we love it! (henrytapper.com)
- Collective Defined Contribution Schemes – A Shameful Missed Opportunity (henrytapper.com)
- “Pensions that are no more” (henrytapper.com)
- 500,000 pensioners who will get no help from the Government. (henrytapper.com)
- CIT; your ABC of auto-enrolment! (henrytapper.com)
- Pensions Bindweed- pretty and deadly (henrytapper.com)
- Who’ll win this Pension Referendum? (henrytapper.com)
- How to buy a pension (henrytapper.com)
- Heard the one about the actuary, the investment consultant, the IFA and the lawyer? (henrytapper.com)