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

henry tapper

13 years ago

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

it sets the standard for manager selections we (First Actuarial) do in years to come
the decision will be of great importance to my colleagues
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

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

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