What Steve Webb must do now.

Well Mr Webb, you said it; I refer to your excellent talk at the IOD (16/10/12)

First you said that you would legislate for “pot follows member” in 2014/15 .Then when asked what happens if a member transfers to a bad qualifying scheme, you said

“there will be no bad quality schemes Qualifying for contributions under auto-enrolment”.

Mr Webb, if you simply want to legislate and leave it to the market to sort things out, forget it. The market will not voluntarily abandon poor practice. Joanne Seagers and the NAPF will be right, “pot follows member” will reduce income in retirement and further line the coats of the City.

But if you are also prepared to legislate on standards and beef up the definition of a Qualifying Scheme, I’m in.

So what’s a good scheme ?

In January 2011, the Pension Regulator published a document that laid out the 6 qualities of a DC scheme that led to good member outcomes. That’s a pretty good way of determining the qualities of a “good scheme”.

For those who haven’t read the paper here are the sensible six;-

  • appropriate decisions with regards pension contributions;
  • appropriate investment decisions;
  • efficient and effective administration of DC schemes;
  • protection of scheme assets;
  • value for money; and
  • appropriate decisions on converting private pension savings into a retirement income.

The point about contributions is not that there is an interface with payroll, it’s that the scheme makes it easy for members to do more than is needed either under the rules of the scheme or the auto-enrolment contribution scales if that’s all the member gets.

The point about investment decisions is that a scheme has to operate under an investment philosophy that is stated and makes sense. Whether it’s a SIPP or a monofund, the investment options have to be stated and shown to be suitable for the membership.

The point about efficient and effective administration is that it has no leaks. Members get 100% value for the contributions they make, operational risk is eliminated by straight though processing both of contributions and investment transactions.

The point about value for money is that there is a benchmark, it is NEST and it is 0.30% (forget the 1.8% contribution charge). If a company or its trustees cannot deliver all services to the member within  a charge adjacent to 0.3%, they might as well use NOW or NEST or join up with other schemes to get some collective clout.

The point about the protection of scheme assets is that a Qualifying Scheme cannot be run without the strongest governance. At present security of assets means insured or at the very least using UCITS funds or equivalents.

The point about appropriate decision making on conversion to decumulation is simple. It is not generally happening today because no-one is paying it much attention, Get a grip pensions industry and start using target dated funds, collective drawdown and thinking of longer term alternatives to guaranteed annuities which should not be the only option. Options to avoid premature annuitisation do exist and they do not need prescriptions.

If all DC schemes “Qualifying” for auto-enrolment were certified as meeting the highest standards under these six criteria, I would be happy to see “pot follow member”. If we got to the stage where DC pension provision was universally excellent , I would expect us to move on and implement “pot follows member” and start sharing a little more risk as we move towards the efficiencies of Dutch CDC.

But here is the thing. If Steve Webb thinks that this benign state of affairs is going to emerge between now and 2015 he had better be planning some savage conversations with providers. Make no mistake Mr Webb, there is no place for adviser charging from member funds in a 30bps world, no place for feeble defaults that have no principles, no space for slapdash admin or weak governance on assets and asset transfers. There is no place for the current behaviours of most trust and contract based arrangements at retirement.

I will be perfectly straight with you Mr Webb. The DC landscape you envisage is not going to be created by pussyfooting around. The Pension Quality Mark will not get you half way there. Good intentions will not get you a quarter of the way there. If you are serious about “pot follows member” you will have to transform the culture of DC pensions form “what we can get away with” to “best practice”. You aren’t going to do that overnight and you shouldn’t kid us that you can. It would Stakeholder cubed to get anywhere close and even if you and Ed Milliband and Greg McClymont and IDS and all the great and the good of the pension industry got together and said “heave”, you would still not have that perfectly benign pitch on which to play “pot follows member”.

So this is what you must do now, Mr Webb. You must spell out to the audience in Liverpool at the NAPF when you speak to them that you are not prepared to accept shoddy second rate DC schemes any more. You must tell the trustees and the pension managers and the consultants that unless they bring their schemes up to the standards of NEST, immediately, they will not be allowed to use their proprietary arrangements for Qualifying purposes.

This will not go down well Mr Webb, but I know you are up to the challenge. You have told us you want “pot follows member” by 2015, now show us you mean business.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, CDC, dc pensions, defined aspiration, Financial Education, Henry Tapper blog, Management, Payroll, pensions, Retirement, Treasury and tagged , , , , , , , , . Bookmark the permalink.

20 Responses to What Steve Webb must do now.

  1. Mike Atkin says:

    Excellent Henry-Thankyou

  2. Andy Heath says:

    Good stuff, Henry – and good luck! (Had you thought of running for a Police Commissioner post? It’d give you somethin gto do in your spare time.)

  3. Steve Brice says:

    Henry, it is all very well insisting that everyone uses NEST as a benchmark or as a QWPS when you can afford to do so.1.3 million employers in this country will need to do something over the next five years and 1.1 million of them employ less than 50 people!
    This means that they do not always have the funds to pay for governance, advice and education for their employees. This all costs money and if you use NEST as your QWP, NEST has no Auto Enrolment admin software so the employer must take on this task themselves. NEST offers little support and NO advice for members as well as no ability for anyones pot to follow them anywhere apart from NEST. Adviser charging is not ideal but is a fact of life brought in by RDR (another piece of government legislation that may have benefited from a little more thought). From 1st Jan 2013 an employer will have no choice but to pay fees for their new scheme or accept adviser/consultancy charging. Where I do not think it ideal I think it is a reality that a large number of those 1.1 million employers will accept adviser/consultancy charging rather than foot the bill themselves. The Government cannot have it all ways, either low cost schemes at say 0.5% max (not 0.3%) which pay for advice within this cost or higher charges like adviser/consultancy charges with a lower Annual Mangement Charge. RDR leaves very few alternatives for the smaller employer and more importantly for the member, who remember, has no say in any of this right now as they must accept whatever scheme the employer chooses to put in place!

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  19. Ruth Haynes says:

    Very interesting reading. I was intending to transfer a very poor performing and high fees defined contribution pension until I discovered that Friends Life will impose a transfer penalty of 35%.

    Very, very cross! This money (a modest sum, admittedly, but contributed when very young, along with AVCs) was invested 14 years ago! The Terms and Conditions are vague and the few statements I received never gave a transfer value, just a bid value.

    I feel that at a young age I was let down by my employer, their financial advisor and the pension company.

    • henry tapper says:

      You are not alone Ruth and I know that is no consolation. There may be good reasons for holding on to your DC pot – guarantees that are worth keeping.

      On the other hand , you may still be locked in to exit penalties that merely recover commission.

      We know so little about what we bought (or where we contributed under trust- what was bought for us)

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