Neasa MacErlean has written a great article in the Independent which you can read here. I was asked to collaborate on one or two sections and I’m quoted as inciting members of workplace savings plans to up the ante and make sure that their employer gets the best plan available for them.
People have become quite shrewd on some aspects of their personal finances. Thanks to people like Martin Lewis, they now have information at their finger tips to save money on everything from mortgages to getting in free to Kew Gardens (something I’ll be doing on new year’s day).
But pension savings plans are, by and large, not something you buy for yourself. They are offered to you by your employer. Many people who’ve been eligible for a workplace savings plan have chosen not to join, even when there’s been a decent slice of salary paid by your employer.
Reasons given for not joining range from “pensions are a rip-off” to “can’t afford it”. However, the leaked figures from large employers like Sainsburys who have opted in staff to pensions under the “auto-enrolment” process, suggests that most people who didn’t join, just couldn’t be bothered to take a decision. Why else are thousands of people “staying in”, when previously they had stayed out?
But if people stay in and are not rewarded for giving up their salary – what then? If these workplace savings schemes aren’t up to scratch, what then?
People will not know that their plans have failed them they have reached the point they can buy their pension. By then the damage will have been done.
Most people know the difference between a good mortgage deal and a bad one, they find it harder to tell a good pension savings plan from a bad one.
You shall know them by their fruits. Do men gather grapes of thorns, or figs of thistles? (Matthew 7:1)
It sounds a little simplistic, but the only thing that tells a good plan from a bad one is the amount of money produced. To be precise, the tax-free cash sum (that can be drawn as 25% of the total saved) and the lifetime income purchased with the other 75%.
Do not expect many “grapes or figs” from your pension savings plan if it displays thistle or thorn like properties.
Here are some tell tale signs that you may be in the thorn-bush.
- The quoted fund management charge should not be higher than 0.5% pa. If it is, your employer is probably not getting you a “good deal”
- Any further charges on your fund to pay for administration should be clearly displayed and added to the fund management charge as a “total charge”. The total charge should not be more than 0.5%.
- Warning bells should be ringing if the words “adviser” or “consultancy” charging.
- There should be a clear “exit strategy” at retirement which can give you confidence that you will get proper advice on all the options open to you.
- The contributions that your employer is making should at the very least be “auto-enrolment” compliant. As a rule of thumb, that means at least 3% of your basic salary.
These are relatively easy signs of thorniness, but for a workplace savings plan to work, the investment strategy needs to be suitable for the vast majority of participants who don’t want to take decisions on how their money is invested.
There is no consensus about the best design of a default investment option, but we can be sure that the cost of the investment management, must fall within the maximum fund charges quote above. The investment strategy needs to be explainable and there needs to be flexibility within the strategy to meet differing “at retirment”needs (eg different retirement dates and means of pension payment).
This is the time for the Pensions Regulator to get tough and lay down clear guidelines on what is good and what isn’t. We have such guidelines on contributions, and we’re getting guidelines on charges. In the USA and Canada, there are clear guidelines on investment strategies. These are often referred to as “safe harbour” regulation because provided an employer stays within the guidelines, they cannot be sued by disgruntled staff.
UK employers, whether they are starting a workplace pension plan for the first time or reviewing their existing plan, are going to have to consider their “duty of care” to their staff. If their plan falls below the minimum standards laid down , not only could be be in trouble with the Regulator, they could be in trouble with their staff.
In this new tough world there is unlikely to be any place for “excess baggage”. Sales commissions and advisor fees on workplace plans will come under increasing scrutiny. If advisers are to be rewarded from the member’s funds, it looks as if this will need be out of the 0.5% total charge – which doesn’t give much comfort to the traditional adviser.
We are moving from a world where a pension savings plan is an employee perk to one where a “works” pension is a condition of employment. Since these schemes will no longer be sold but bought, employees will be exerting pressure on the purchasers of these schemes – eg their employers.
My fingers are crossed but I’m hoping that 2013 will see many more employees getting pension savvy, just as so many of us are mortgage and ISA savvy. If this happens, then the outlook for pensions is rosy.
But for it to happen, we are going to need to see tough action from the Regulator and a responsible attitude from pension providers. Judging from the comments of Tim Banks (Alliance Bernstein) and Steve Rumbles (Black Rock) in the Independent article, it looks as if we are at last moving towards a more consumer focussed attitude to pension provision.
Not a moment too soon.
- Why we don’t need to fear a pension “advice gap”. (henrytapper.com)
- A chance to keep companies with DB pensions solvent (henrytapper.com)
- Pensions will not exist by 2050, expert warns (telegraph.co.uk)
- RDR and AE – what future for commissions and advisor-charging? (henrytapper.com)
- Government ‘must not fiddle with the pensions tax regime again’ or fewer people will save, warns trade body (thisismoney.co.uk)
- New pensions crisis on way (express.co.uk)