In the heyday of occupational pension provision, offering membership to a company pension scheme sent a clear message to staff that the company was confident in its future and cared for its human resource. When defined benefit schemes were first established they were conceived as the most efficient way for a company to defer pay for its valued employees. It was easy for members to work out what they would get, you just looked at the benefit formula.
Things have changed.
Offering a company pension scheme is now compulsory. Over the next five years, 1,204,000 employers will auto-enrolment staff into one scheme or other.
And staff now have little way of knowing whether the scheme they are joining is any good.
We now live in a world of flex where employees are expected to choose how they organise how they are paid at work and how much they get paid in retirement. HR call this financial empowerment, the cynical see financial empowerment as a smokescreen to rid companies of the unwanted risks of DB plans. Whatever their motivation, most companies now see themselves as “facilitating” rather than “providing” good retirement incomes.
Miserably, the levels of pension being purchased from these DC savings pot are well below the expectations given to staff when they read their “statutory money purchase illustrations”. People do not believe the arguments about market returns and quantitative easing, they feel cheated. “Rip-off” pensions has become a buzz-phrase on financial websites.
The Government is acutely aware that having required companies to enrol staff into new DC pensions, they could be accused of selling the nation down the financial river. It has become a political imperative to restore people’s trust in the pension schemes they use.
The Government is looking at ways to help people judge whether the pension they are put in is good or bad. They are looking at simple measures which can help us work out whether our pension plan offers value for money, suitable investments, proper administration and so on,
Meanwhile the financial services industry which has been salivating at the prospect of a Tsunami of new money, is waking up to some harsh new realities.
Advisers, used to taking fat commissions on workplace pensions, have found this tap has been turned off. From January onwards, advisers will need to demonstrate they are being paid for to advise not to sell. Commissions are banned and replaced by a more direct and open system of “consultancy charging”.
Providers, who had expected to use advisers to set up the new workplace pensions needed for auto-enrolment are finding they are coming under severe scrutiny. Take this comment from a recent DWP paper.
we are monitoring charges, including consultancy charges, very closely and have been clear that we will take prompt action if we see evidence that charging structures are being used inappropriately or if charge levels are excessive.
We have powers to stop a scheme from being used for auto-enrolment if its fees are too high or if members are required to pay for anything which doesn’t deliver them a pension benefit. We could take action within months so the industry has every incentive to do the right thing.
The heat is on and it’s not just advisers and providers who are under scrutiny. The Pension Regulator wants to impose an additional duty known as “comply or explain” on employers. Employers will need to comply with “good” or explain why their schemes can’t pass muster.
All this will be alarming news to employers with existing workplace pension plans. Particularly alarming news if the plan they operate pays commissions or fees to an adviser out of the member’s pension pots.
While we do not yet know all the details of the Quality Test, it is becoming clear that the “benchmark level” for member charges is going to be around 0.50% per year.
Employers who thought they had “nailed” pensions by setting up an “auto-enrolment ready” pension plan may find themselves having to revisit that decision. They may actually find that it is hard for their company to limbo under the new bar set by Government without having to join a multi-employer pension plan (a master trust).
The DWP published a paper early in January which explicitly stated it did not consider the majority of small occupational DC plans suitable for auto-enrolment. While the DWP cannot comment on group personal pensions, the paper makes it clear that they expect the same line to be taken by the FSA (and its successor the FCA).
The Government are explicitly stating that unless small companies can beat NEST , they should join it (or something similar). The implications are obvious, a consolidation of schemes and advice around a few “super trusts” and mega-insurers. The templates are there in Holland and Australia where vast collective DC arrangements dominate the financial landscape.
While the financial services industry may regard such consolidation as a calamity, it may be the only way that pensions can re-establish themselves as fit for purpose by a public that has fallen out of love with them
- Workplace pensions: A guide to auto-enrolment (confused.com)
- “Comply or explain” – will “bottom up” regulation work for pensions? (henrytapper.com)
- The Regulator’s right to be cautious about mastertrusts (henrytapper.com)
- 2 cheers for the Regulator’s new clothes (henrytapper.com)
- A straightforward pension scheme for all (telegraph.co.uk)
- Hats off to Steve Webb for our new pensions system! (henrytapper.com)
- ABI finally comes clean on pension charges (henrytapper.com)
- New pension plans to be unveiled (standard.co.uk)
- All change on pensions – a positive outlook for 2013! (henrytapper.com)
- Right direction – wrong speed! Defining a “good” workplace pension. (henrytapper.com)