General Melchett revisited


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An interesting picture is beginning to emerge which suggests that the subjective satisfaction scores given by schemes in relation to their consultant may be inversely related to the value delivered through default solution design (2011 DCisions default design)

I’ve been reading about the work my old colleagues have been doing for one of their clients. The crux of their argument is that..

For DC schemes, it is of course the employee alone who rides the investment rollercoaster. So if this level of risk is unbearable for employers, why should employees bear this level of risk?

My (former) colleagues believe that employees cannot bear to see their pension savings rise and fall on the choppy, nay stormy rollercoaster of the investment markets. Appalled by the impact of a bad year they suggest.

A member who experiences a significant fall in fund value is much more reluctant to put additional savings into a pension scheme. Protection against the downside therefore helps to encourage saving throughout a career.

There is no empirical evidence to suggest that members pack in saving because they’ve seen their savings fall. This is the fantasy of a cod behavioural psychologist whose opinion of the member could most kindly be referred to as “benevolently paternalistic” or at worst “bloody patronising”. This is General Melchett stuff.

What does this patronising drivel translate itself into?

It turns out that the Default Solution on offer caps out the worst and best outcomes so that members experience a smooth journey to retirement. This mantra of smoothing is hard-coded into actuarial thinking from “with-profits” through DC-banking”  and now onto Diversified Growth Funds.

There is a downside to all this – “No free lunch ” as they would have it,  but it’s not the loss of the peaks in exchange for the loss of the troughs. The downside of the super complex Diversified Growth Fund delivered to Trustees on an insured platform wrapped in a white-labelled fund wrapper is FEES!

It costs money to diversify into alternative asset classes which give the smoothing to the equity growth. It costs money to run a blended fund on an insured platform and yes it costs money to have them devising this strategy and poking his nose under the fund wrapper, tweaking the asset allocation and adding and replacing funds on the “journey”.

In my view that money would be better spent leaving the conventional “rollercoaster” well alone and spending the money on fancy investment fees on things that matter a lot more

  1. On improving the employer’s funding rate
  2. On bringing down the cost members are paying for fund management
  3. For employing proper at retirement advisers to make sure members get the best annuity options.

If money is to paid to consultants, it should be paid to go into the factories and offices and depots of these clients and listen to what the members are saying. Don’t go in there and tell them what to do,but ask them what worries them and answer their questions properly – courteously, knowledgeably and without being patronising.

DC is not DB. DC consulting is not DB consulting and DC plans do not exist to earn DB consultants a living in the style to which they have become accustomed. DC is tougher, it is retail and if you are a Trustee of a scheme your accountabilities are to your member, not to the employer, the bondholders,the shareholders and the bank manager. DC is about delivering maximum pension for minimum contributions, not for giving you a Rolls Royce for the journey.

Do not be deluded by fancy talking consultants charging you for investment strategies that protect members from imaginary rollercoasters.

Talk to your members about risk, explain that what goes up goes down and instead of versa, explain capital protection  for cash sums and protection against annuity rate fluctuations close to retirement.

If you can’t talk to your members find those who can, find ways to get pensions champions in your organisations and if you can’t buy consultants to talk with your staff . Don’t throw money down the drain.

We recently did some work on the cost of the kind of investment strategy fancypants DC schemes  have taken on. Typically it adds 0.40% to 0.50% to the annual pension charge. That works out as a 4.5% pension pay cut of a 45  year old and a 9% pension pay cut for a 25 year old. 

That matters.



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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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