Hot on the back of PADA’s excellent consultation paper on Personal Account fund governance comes a gritty missive form DWP’s Pension Client Directorate. It should rattle a few cages.
Here are the highlights
The consultation excludes Occupational DC Schemes because of the “different way” in which (they) work. (More on this at the end).
GPP Providers will now be called “operators”, to operate a GPP as a “qualifying scheme”, the operator will need to take the responsibility for the design,implementation,governance and communication of the default option.
In designing the default the operator will have to declare its high-level objective, make sure it’s suitable for its specific membership, have “total charges ..below the stakeholder price cap”, have a lifetime de-risking strategy (lifestyle and DC banking are quoted), and provide diversified asset allocation.
The standard default of passive global equity lifestyling into long-dated gilts and cash ticks all the boxes though the door is left open for a DGF or similar targeting an absolute return at low volatility (albeit at a knock down price).
The contentious bit is of course that the GPP should sit within the stakeholder price cap (which is currently 1.5% but I’m pretty sure means less than 1% to the DWP).
So what does this mean?
Well first GPPs (and by extension SIPPs) will only be able to compete with Personal Accounts if they can tick the boxes of these guidance notes. For the posh schemes implimented on a non-comission basis then there should be no problem. However, a huge number of GPPS do not have defaults falling within stakeholder charges and are likely to fall four of a number of the other “design principles”. The message is clear, if the operator (eg provider) wants to pick up money from the new legislation then it will be its job to clean up the default.
This is a lot easier said than done. Firstly, many “dirty” schemes have higher charges because the advice for their implementation and management comes out of member charges. Take away this advisory comission and you have a lot of unhappy advisers, keep it and you may see your scheme wither on the vine. A big threat for insurers who have big persistency plays in place and probably haven’t seen a penny’s profit out of these schemes yet. Ouch!
Secondly the operators are going to have to look at each GPP individually because advisers have typically designed the scheme’s options on a bespoke basis. This is going to mean a lot of work for operators working through all their workplace GPPs and presumably designating each one a “qualifying scheme” or not. Ouch!
Thirdly, and this is where the DWP looks very joined up with the FSA, many advisers are going to have to accept changes in their relationship with the sponsor and the operator if they are going to have an ongoing role with the GPP as a qualifying scheme. The paper refers to the FSAs Treating Customers Fairly guidelines but there’s also the lurking presence of the Retail Distribution Review in the background. Both Government initiatives are pointing advisers away from AMC funded advice and towards direct fees. This is a big ouch for advisers.
The adviser’s role is marginalised throughout the guidelines on implimentation, ongoing governance and communication. Again and again the document refers to the operator’s repsonsibilities, only in the selection of the default option (from a range of options supplied by the operator) is the intermediary’s role mentioned.
It looks as if the purpose of this consultation is to ensure that GPPs provide a default option that can demonstrably compete with the Personal Account equivalent and that the insurers are required to keep the default option up to scratch. It’s a pretty brutal document which will bring little comfort to many advisers and will no doubt get current GPP providers thinking very hard about their strategy post 2012.
A final thought- where does this leave occupational DC schemes? The consultation paper asks whether their defaults should be subject to similar governance. The paper however has excluded them because they operate in a “different way”. Occupational Schemes have their own trustees (like Personal Accounts). There appears to be an assumption that their defaults will be well governed. There are of course a great number of occupational schemes that are well governed and tick all the paper’s boxes. Many are well governed but offer expensive defaults- especially those switching to DGFs. Some are poorly governed, offer high AMCs and are unsuitable for their members. I would be suprprised if the Pension Regulator does not take up the cudgels but suspect that occupational schemes will not be subject to quite the controls suggested in this paper. Anyone got a MasterTrust?