I’ve written recently about the DC population in terms of Bunnies, Bears and Badgers. The Badgers, those who have the inclination to choose funds or stocks and manage their pensions according to their own rules are taken care of – products such as Hargreaves Lansdown‘s SIPP are as advanced as anything I have seen in the USA and considerably better value.
For many Bears- those with the inclinations of Badgers, but the need for guidance (or Leadership as HL would have it), the SIPP is also appropriate.
This article is for the Bunnies – those who do not want to self-invest but who want the security of an investment option decided upon by a Fiduciary, either a provider (generally an insurer) ,their employer or by Trustees. Since defaults are used by about 85% of us (though carrying a smaller percentage of total funds invested) , they are massively important.
When an individual joins a trust based occupational DC plan or a contract based DC plan, he is entering into a relationship with one or more Fiduciaries who offer him a duty of care. The Duty of Care may be taken on by Trustees or by employers or by Providers but ultimately the responsibility for the security of members is deemed to be the same – however shared – the total responsibility should add up to 100%.
100% in a perfect world equals perfect Governance, however distributed.
In practice, the more the stakeholders in the management of a default fund, the less likely it is that perfect governance will be achieved.
Which is why a strong Trustee Board with direct control of their subcontractors – investment managers, investment administrators, record-keepers , performance measurers and communicators is an ideal model. It is the model that NEST has adopted along with a handful of DC Trust Boards in the private sector (think O2, Accenture, Logica).
At another level, Trust Boards delegate to insurers who e bundle many of these functions into one contract. The platform provides a series of funds reinsured by the provider – investment administration , performance measurement and perhaps member record-keeping – effectively a Fiduciary Management Service that simplifies the process of sub-contracting. What Trustees lose in terms of control they gain in terms of operational efficiency – or so the argument goes.
Contract-based plans established by employers simply transfer the residual fiduciary responsibilities of the Trustees (using such a bundled arrangement) to themselves. This is not properly understood.
By offering a GPP or Group Stakeholder Plan to its staff, an employer is making itself accountable to a greater or lesser degree for the outcomes of that Plan. If the employer – like a swift-handed centre – simply passes the ball to the Provider, he is only accountable for the Provider’s selection but if the employer gets involved in the selection of the default fund (and other investment options) then it becomes to a degree accountable for the outcomes of those selections.
In America, where employers have and can still be sued for malfeasance when a fund does not perform to an employee’s reasonable expectations, the Government has stepped in and created “safe harbour” rules, compliance with which, ensures that the employer has been seen to discharge its Fiduciary obligation to its employee and cannot be sued.
In creating NEST, the UK Government is effectively going a step further by creating a “Safe Harbour” Scheme, participation in which allows the employer to fully delegate all investment duties. NEST and other mastertrusts offer a Trust based solution without the duties of Trusteeship.
Ultimately NEST is paid for by its members and underwritten by the taxpayer (of which participating employers are a sub-group). If NEST fails – the liability reverts to all.
But I come back to the point of this article – no matter how responsibilities are delegated – the sum total of those responsibilities adds up to 100%- 100% being perfect Governance.
Where we are going to have problems with DC Governance and in particular with the management of defaults – the Bunnies trusted choice, is where none of the “Governance Stakeholders” assume leadership and where , when a problem occurs, every stakeholder points to the other accusingly.
We need to be absolutely clear, before we do something about defaults , to whom governance of the default ultimately reverts – who ensures the 100%.
It can be the Trustees
It can be the Employer
It can be the Provider
The first step in sorting out DC defaults is to establish where the buck stops and focussing appropriate resource at that point. In my next article which will be called “What can be done about defaults 2”, I will press on with what I consider the key risks of default management hoping to establish a framework from this Risk Register which may help the Fiduciary organise a governance framework to protect the Bunnies and themselves.
- Northern Trust Study Charts How to Make Defined Contribution Plans Work for U.S. Employees (eon.businesswire.com)
- Fiduciary Duty: What Does It Really Mean? (pr.com)
- The Duty To Investigate Pension Consultant Conflicts (blogs.forbes.com)
- A “Tipping Point” for Public Pensions? (November 2009) (blogs.forbes.com)
- 401(k) Abuses: The Mutual Fund Industry’s Next Nightmare, By Ted Siedle and Steve Lansing, Sentinel Fiduciary Services (July 2, 2004 ) (blogs.forbes.com)
- International Campaign to Eliminate Pension Consultant Abuses (November 2, 2004 ) (blogs.forbes.com)
- Clock ticks down on pension dreams (telegraph.co.uk)
- You: DIY super boom puts investors’ skills to the test (menafn.com)
- Towers Watson: Defined Contribution Enters a New Era (eon.businesswire.com)
- Mark Dampier: An unfashionable area can merit a close look (independent.co.uk)