Cobblers shoes – how an adviser selects a pension for its staff

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I am about to help select a manager for our staff pension scheme; this is triply important for me as

  1. it sets the standard for manager selections we (First Actuarial) do in years to come
  2. the decision will be of great importance to my colleagues
  3. the decision will determine how well my own retirment affairs progress.

I want to be as awkward as possible to those providers we are meeting. I have attended many such meetings as a provider and know what works and doesn’t. Both sides need to be prepared but it is particularly important that the purchasers know the awkward questions to ask.

Our agenda must be relevent and the only measures  we focus on be those that affect the amount of pension we get.

There are six things we should be concerned about

  1. the ability of the provider to inspire us to contribute the right amounts for our retirement (almost certainly more than we do today)
  2. the capacity of the provider to administer the arrangement properly
  3. the availability of suitable investment options to provide a default and other options for the “self-selecting”
  4. whether value for money is offered from the costs and charges of the contract
  5. the security of the assets into which employees invest
  6. whether proper decumulation options are available at retirement

When I sold group pensions to companies like ours, I was surprised how little attention was paid to anything but administration. “Administration was the comfort zone about which both the company and the provider could talk without embarrassment.

Ten years ago , insurers were still seen as administratively incompetent, poor at data management, slow-adopters of new technologies and resistant to direct dealing with members

The world has moved on since then. Straight through processing of contributions is a given, on-line self-service mechanisms are a hygiene factor. The large insurers have raised their game and are now expert data managers.

The challenges of auto-enrolment are new but not insuperable. They involve integrating the providers with payroll and HR , but for firms like ours with a single payroll and a mid 2014 staging date, “auto-enrolment readiness”  is a secondary consideration.

Instead of being the key area for us to probe , administration is becoming, as I’d hoped it would become , a sideshow.

Other areas are much more problematic .

Value for money is particularly difficult – we know that there are costs about which we know little but without knowing more have no means to ask the questions. There is an elephant in the room

Charges have plummeted since the days in which I sold the Eagle Star platform at 1%. 0.5% is the new 1% and stripped of commissions and consultancy charging, the platform charges we now pay, are – both in relative and absolute terms – minimal.

We have learned how important costs and  charges are. We are now beginning to understand the less obvious charges, those that affect the return on the funds in which we invest. The elephant is appearing though how to curb its destructive impact is still not clear.

Investments were difficult then and difficult now, frankly there is little proper understanding of what “suitable” means and progress towards better defaults has been painfully slow. The risk/return/cost assessment is harrowing. I had hoped to include in this an excellent diagram from David Blake of Cass which shows these complexities. Ironically, the diagram is back on the drawing board because some of the providers found the questions too hard!

As for the security of the assets, a term included in the Pension Regulator’s seminal document on good DC outcomes, it is only recently that I have begun to understand what the issue is.

Most insurers now go beyond “fund open architecture” which offers a range of funds they take responsibility for. Organisations like Standard Life and Legal & General offer Self Investment options where the choice of assets is at the discretion of the member.

The issue is not just whether these assets are admissible to pensions, it is whether they can be properly administered. It is at this margin that we can find investments that can seriously damage investor’s wealth and employers like us to ensure controls are in place to protect us from ourselves.

I worry about decumulation. In the early days of workplace DC pensions, DC was for “new joiners” who tended to be young. Times have moved on, some of these youngsters are now approaching retirement and now it’s not just about new joiners. many schemes that have closed for future accrual , are full of mature refugees from previous DB plans and have urgent need for advice on annuities.

It amazes me that we take so little interest in the expenditure of the pensions we work so hard to build. In the world of DB, the glide path at the end of the pension journey is critical. In the DC world it is simply ignored. The new ABI code is a start, but it is only that. We need new decumulation options and providers need to be tested on what they are doing to give access to innovatory products such as Alliance Bernstein‘s Retirement Bridge.

Clearly , any discussion about “At Retirement” needs to link with the pre-retirement lifestyle glide path. The awkward questions are about why so little thinking is being done about protecting members from the impact of low interest rates . Frankly we are still having the same conversation today as we had ten years ago without much greater urgency.

Finally, and most importantly of all, we have to ask some hard questions of our providers about how we and they can engage with employees who are simply not saving or not saving enough.

The responsibility to ensure a minimum level of financial literary among staff is the employers. It is no use having a workforce that relies on Wonga. There are advantages in terms of retention and personal development in having staff who are using their wages to build for their futures. These simple messages are the bedrock of “workplace financial education” and we should be looking to our pension providers for all the help we can get.

It is in the providers interests for members to save voluntarily into these DC plans , not just because it makes the plans more profitable to them, but because it reduces the long-term risks of pension falling into disrepute. No matter how good we make our plans in terms of value for money, investment, decumulation, administration and security, if they are inadequately funded , they will disappoint.

But getting the engagement means going the extra mile, talking with staff directly as well as giving them the right tools on the right devices.

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All too often , I have attended beauty parades where the questions asked were lazy. Too often discussions centred around ill-informed debates about “brand” or “S&P ratings” as if it were the life company that was being bought rather than the product.

Sadly, many of these selection meetings were hi-jacked by the personal agendas of senior staff. This was permitted by weak consultants and  disinterest from workers representatives focussed on DB matters.

But the hard work, the scary stuff, comes down to understanding those elements of DC that are not perfectly formed, are ill-measured and little understood.

Our challenge is not just to understand our providers, but to understand “good”. If we can find a pension provider that knows what “good” is, I will be pleased! If we can get purchasing to match best practice among providers, we will have won!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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8 Responses to Cobblers shoes – how an adviser selects a pension for its staff

  1. George Kirrin says:

    I’m sorry, Henry, but I read your piece again and again, and I’m afraid it just feels to me as if nothing is really changing in your world. Looking for “good” as opposed to what? Bad? Less good? And since when did savers or their advisers (who advise, so they don’t usually invest much themselves) know the right questions or even think they can recognise the right answers before they start?

    I’d start instead by asking the manager(s) to explain how he/she/they invest(s), their beliefs, their actions. This shouldn’t take long, or be complicated, or be laced with jargon and/or weasel words. I’d also ask how they invest for themselves and try to get a sense of whether they really understand what we need them to do for us. Markets are an opportunity, not an excuse.

    And if you must use relative terms like “good” and “not so”, then I’d ask them to talk about what this means to them.

    I’d also do the same with any investment advisers, get them to explain their beliefs and how they invest (or often don’t invest, as it usually turns out).

    This shouldn’t take long – 15 to 20 minutes for each? If it does take longer, they’re really not clarifying for me what it is they actually think they can do for me. Your six questions are OK, as far as they go, but they remain your questions. Do the customers really know the right questions to ask? I’d rather hear the managers’ statements first, and six of anything is, for me, too many to hear about. They shouldn’t even be in the room in the first place if they can’t do administration, offer security and value for money.

    How you score them afterwards, if you do pick one or more of them, is a tale for another time, but you should always be aware of the truism that what gets measured gets managed. Too many consultants seem to me to make a living out of measuring the things which are really not that helpful to us making decisions, whether to play/bet, stick/hold or fold. At least that’s been my experience. Others may hold different views, but have their chosen measurements worked out any better for them?

    I do wish you the best of luck, but it really shouldn’t be about whether a manager has “good” luck or otherwise. Investment should be a serious business.

    • henry tapper says:

      George, for once I think we are talking at cross-purposes. I am selecting a manager of funds for my DC plan, not the funds themselves- though clearly I want certain funds to be on the platform that I’m offered.

      I quite agree that when it comes down to selecting our scheme specific default, we’ll want to be clear on the value of the fund manager’s proposition. We have a part of our business devoted to manager research and to looking at the merits of the various fund structures – lifestyle v target dated funds etc.

      Whether anything has fundamentally changed in ten years is open to debate. Our day out is on Wednesday- perhaps I’ll update the blog afterwards!

  2. George Kirrin says:

    In the old days of more than ten years ago, I admit, it was trustees who acted in members’ interests as managers of funds. Now in this contract-based world, do you really need a manager of managers, with the second layer of agency costs that brings, to fill your platform shoes? I thought your new friend, Mr Galvin, was advocating some kind of oversight committee without the limitations (but also without some of the advantages) of a trust?

    I look forward to hearing if your awayday prompts anything new, or even old-fashioned, on this.

  3. Joe says:

    It matters little about what an employer or adviser or provider or insurer thinks about a pension. What matter is what pension the plan produces and how that measures up to the expectations of the member or what he was led to expect or was promised by the employer.
    There are only two things a member really wants to know about a pension scheme or plan.
    1 What do I have to pay?
    2 How much will I get when I retire.
    The trouble with all DC is that he cannot know the answer to question 2 until he actually retires.
    The trouble with all DB is that the employer cannot know the answer to question 1.

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