Tomorrow’s problems today..the OFT on pensions

pensions_2369684bHere are some questions I was asked yesterday.

My answers are in blue.

See how you get on with them!

Governance

  • Do small firms face difficulties making pension decisions in the interest of their employees? Employers do and  will face difficulties; most employers don’t know what in their employer’s interests and have no idea where to get reliable advice on the pension decisions they take.
  • What ongoing scrutiny will employers make on pension providers and fund performance? Employers don’t see this as their duty though some care that their contributions are effective. Most consider this responsibility belongs to the members, trustees and pension providers.
  • Will employers be prepared to pay for help
    • at outset? Yes – complying with auto-enrolment will generally be considered a business expense
    • ongoing? No
  • Are trust based schemes likely to offer greater oversight and protection for savings?Only if they have the resources to “skill-up” to do so ; this means time, knowledge and understanding need to be devoted to fiduciary management.

Capacity & Scale

  • Are there already too many schemes and too many providers to deliver the best outcome for savers making consolidation desirable? There are too many schemes. Many have no reason to exist as separate entities and would be better merged. The current number of providers is probably about right to optimise competition without being inefficient or burdensome to those making choices
  • Do larger schemes enjoy economies of scale and offer better value to consumers than small schemes? They do, they buy cheaper bringing down variable costs (such as fund management which is typically offered on a tiered pricing basis). Fixed costs such as administration and governance are diluted over a wider membership base
  • Is there an advice shortage, and will employer be making decisions without advice? The number of employers (1.2m) set against current schemes (0.1m) suggests we need considerably more advisers, instead, the RDR is estimated to have reduced the numbers of advisers by 30%. Employers will have no choice but to take decisions without face to face advice – advice will in future be delivered in other ways – mainly using the new technologies.

Supply Chain issues

  • how are pension providers competing?  Currently, large employers invite them to compete via manager selections (beauty parades) after they submit responses to tenders issued via Employee Benefit Advisers.
  • What are the most important features in winning auto-enrolment business? The price of the default fund, the brand and the support of the adviser.
  • The supply chain is long and complicated. How can we ensure that the interests of all players in the chain are aligned with the pension saver? By identifying the key stakeholder and ensuring that they take responsibility for best practice throughout the supply chain. In practice this means the “provider” of the pension.
  • Are costs being hidden and are charges disclosed in a way that is comprehensible to savers? Costs are being hidden by fund managers who do not disclose their portfolio turnover and their costs of executing trade. This is allowing them to get away with poor execution. In the long-term the impact is felt in poor fund performance but by then any accountability for past performance has “moved on”.
  • What influence does the employee have? The power to be disruptive to the employer by being a “pain in the neck”
  • How can an employee challenge a bad decision by the employer? Via a union, but if there is no union, they have very little opportunity other than to complain directly (which is likely to do their career little good). Where employers are consultative, then works councils can garner feedback and of course where there are member nominated trustees, an employee can become a trustee or influence his or her member nominated trustees.

Looking forward

  • How will the market develop once staging is complete? We see it likely that with more money in the system, pressure to maintain high standards will be high. Provided we can improve standards now, I expect those standards to remain high.
  • What pressure will there be on providers to keep charges low once the auto-enrolment new business glut is over? There is no evidence that providers have put prices up as a result of poor profitability. The greater risk is that a provider withdraws from writing new business and reduces resources for servicing what is now a “legacy book”.
  • How easy will it be for an employer to switch schemes if the one originally selected becomes inappropriate? It’s difficult to get employees in a personal pitch to switch their individual pots but trustees can switch money from one occupational to another occupational pension. Future contributions can be directed where an insurer chooses.
  • How will the choices that an employer has made impact on member’s pension pots? We follow the pension regulator’s 6 factor’s that impact good DC outcomes ..encouraging contributions, low charges, good administration, secure assets, good decumulation options and suitable investment choices (especially defaults)

Your answers on an e-postcard to

www.oft.gov.uk/OFTwork/markets-work/pensions

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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