Better-buying makes auto-enrolment work

Karen bradyWe are seeing  a profound change in the way people provide for their retirement.

The Thatcherite experiment of personal pensions has been discarded and we have returned to “works pensions” as our way of supplementing our state benefits. Meanwhile two of the three defined benefit schemes – the occupational and state second pensions are being run down and after 2016 the only defined benefits we will accrue will be in the basic state pension or in Government sponsored public sector schemes.

While the Basic State Pension‘s long-term decline has been arrested in the short-term by the triple-lock (and in the medium term by its upgrading), the best part of the slack will be taken up by workplace savings schemes.

At first glance, workplace pensions set up today look little different from the personal and occupational money purchase pensions of the past thirty years, the new workplace schemes are likely to be very much more effective in replacing pre with post retirement incomes (the replacement ratio).

This is because they will be better funded, better invested , better decumulated, better administered and offer considerably better value for money to those using them – the pension consumer.

At the heart of this positive evolution is the change in distribution brought about by auto-enrolment and by the retail distribution.

To understand this statement you need to understand why “pensions” were the last thing on the mind of “pension advisers” particularly most of those working in the retail sector

The abolition of commissions brought about by the RDR has been long-flagged but the pressure on advisers to restrict charges on member’s pensions to services that benefit the member hasn’t. Without the prospect of consultancy charging, the traditional retail advisory model that enabled employers to get a free ride and loaded charges on members is not just broken – but disappears.

The retail financial adviser has always struggled with the concept of saving to buy a pension. Over the years I have seen complicated pensions that showed how EPPs and SSAS could be used as a tax-effecient financing vehicle for SMEs, I’ve seen SIPPs touted as a means for hiding CGT on second properties, I’ve seen pension mortgages and recently salary sacrifice and even pension liberation schemes. All variants on a theme that denies the central purpose of a pension savings plan – to replace income lost by retiring from work.

Because pension saving was dressed up as a financing or tax-avoidance tool, issues to do with pension outcomes – investment, annuitisation and value for money were downplayed. Indeed a smokescreen was created that allowed advisers to take huge proportions of the early contributions made into these plans as commissions.

In this , the insurance companies were complicit. Eager for distribution, insurers aided and abetted advisers in their endeavours by offering ever more complex products with complex charging structures to pay more and more commission.

Even with the simplification brought about by stakeholder pensions, attention has  been diverted from the matter in hand. Flexible benefits and the corporate wrap have continued to dress up pensions as wealth creation . The promise of “Wealth at work” has disguised the paucity of the pension outcomes when work finishes.

Now the retail advisory community has fragmented. Many have left to do other things, some are sitting on a legacy book which they hope will provide a long tail of trail commission to support a life of leisure while others have seen yet another opportunity to advise around the fringe of pensions by selling compliance tools that will keep employers on the right side of the Pensions Regulator. Recent announcements from insurers that they are withdrawing their corporate wrap products suggest that the flex project is grinding to a halt while announcements from payroll providers such as SAGE and EARNIE provide a threat to the middleware on which many corporate IFAs are relying to make money from auto-enrolment.

The harsh but brilliant truth is that for the first time since I started advising in 1984, there is an opportunity for even the smallest company to purchase a company pension at a reasonable cost without the need for expensive advice. I talk of NEST but also of NOW and PEOPLE’s PENSION, BLUESKY, PENSION TRUST, SHPS and  SUPERTRUST and if I have anything to do with it L & G and other enlightened insurers.

All these organisations are offering the business community, access to a bundled DC savings plan with good investment options at or around half the price of the stakeholder pension (price cap).

What is more, these organisations will contract directly with the employer without the need for an intermediary. I spoke last week with an employer who had set up a commission based workplace scheme for some thousands of employers. In eight months , they are yet to meet the insurer which provides the scheme.  An over-reliance on intermediaries is a recipe for disaster all round.

I am pleased to say that examples such as the one above are becoming the exception rather than the rule.

There is a long way to go, there are still many legacy pension schemes which are not working which we will need to upgrade. But I firmly believe that by the time we reach the end of auto-enrolment staging in 2017, not only the 11.5m new entrants but the vat majority of the 1om people currently in workplace DC plans , will be getting a much better deal than ever they had before.

I say this because we have now a way to get directly to providers with advisers needing to offer only the lightest of touch in terms of guidance around what to do and how to do it. New technology can accelerate the process. Costs of staging will tumble, the quality of corporate decision making will improve but best of all, there will be better outcomes for members retiring using  these new plans.


About henry tapper

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