To me, active member discounts are the pension equivalent of the two footed tackle (with all studs showing).
Companies that use active member discounts as part of their “Qualifying Workplace Pension Schemes” get my straight red .
I know I am not the ref – I don’t even want to be the fourth official (look what reffing did poor Bill Galvin!)
I’m the bloke in the stand who goes on 606 and says – “watch it on match of the day!”
Enough football, this blog’s a longun.. (get on with it – ed)
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What are active member discounts (AMDs) and what’s wrong with them?
AMD’s reduce the charge a member pays on a pension contract while they are actively at work for a company. In the case of one large employer whose scheme has a member charge of 0.9% , the charge is reduced to 0.4%pa while the member is “actively in employment”. So far so good.
But not much good for staff of retailers where staff-turnover averages 35%; and where 75% of new joiners leave within the first two years.
Here the majority of the members of a scheme enjoy a discounted pension fee for a few months and a lifetime at the full rate.
Here are some quick calculations . The results show how much bigger the fund value would be if the member had got an AMC of 0.48% or 0.3% rather than 0.9%.
|
Term of deferment |
If AMC is 0.48% rather than 0.9%, fund is bigger by … |
If AMC is 0.3% rather than 0.9%, fund is bigger by … |
|
10 years |
4.3% |
6.2% |
|
20 years |
8.8% |
12.8% |
|
30 years |
13.5% |
19.9% |
Why use a comparison of 0.48%? – well these terms are available on all UK schemes from a reputable GPP provider and are the same for those who work for the company and those who have left. Almost all AMD’s are on GPPs
Why use a comparison of 0.30%? – this is the management charge people pay when using NEST’s default fund, an option available to any organisation contributing to a workplace scheme in the UK.
The philosophical bit
Originally, the idea of a pension was to reward someone for good works, they used to be dished out by the monarchy to pay-off favourites.
The idea of “company pensions” was an extension of this reward, company pensions have never been compulsory nor universal – until now!
Active member discounts look backwards not forward, they are of course not marketed to staff as a discount, they are promoted as if the discount, like employment , will last for ever.
In the past you might have had to work two years before qualifying for a pension – fair enough, if the pension is designed to reward the 25% who stick around.
In the past you might just have got your contributions back if you’d joined the scheme and left within two years.
But now you have to join the scheme and it is definitely not the done thing to opt-out. So what is your reward for doing so? Your contributions carry an extra charge and are worth up to 20% less when you get your money back (I won’t scare you with the figures for 40 year deferments).
Philosophically the concept of a pensions reward has been overtaken by universal coverage (auto-enrolment). There can be no place in such a system for a practice that subsidises the rate for one group of employers at the expense of another.
And that is what AMDs have come to be about. They are about hiding some pretty shabby practices.
Even where staff turnover is low, future employment is far from certain. While people have the opportunity to get the discount back by funding the old pension and the new one- few can afford it (and even fewer of the 11.5m still to enroll).
Related articles
- It’s a wrap trap – but who’s been caught? (henrytapper.com)
- Better-buying makes auto-enrolment work (henrytapper.com)
- Time is running out for auto-enrollers (theraconteur.co.uk)
- UK News: Membership low for pension scheme (walesonline.co.uk)
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Don’t pull your punches Plowman….
This is a really good insight for anyone unaware of the treatment of AMD and what is very often misconceived as a great concept for rewarding staff loyalty.
Given NOW: Pensions and Nesy charge 0.3% of assets under management but both have an additional charge until their scale removes these, it may not be truly representative, however both NOW: and Nest will deliver a significantly better thought out Investment solution for the members than the cheapest tracker solution that is often also hidden behind seemingly low AMC’s
A brave blog, and a really good read.
While I don’t always agree with AMDs they have had their place and with pot follows member, many will be reviewed over the coming months anyway.
AMDs on non-commission schemes, where you can continue to benefit from very low rates by contributing into them once you leave employment are very valuable indeed for those of us who understand that a simple £20 a month contribution retains the low charge.
However, I would say that this is more the fault of the IFA advisor community and the clients that dealt with them. These two groups collaborated to ensure that employees paid for services, where employers did not want to and the advisors could not articulate or communicate what value they bring to ensure fee paying services.
This may be the fault of the Executive at the employer, however, there needs to be an incentive there, commission taking advisors, to enable that habit in the first place. Without commission taking advisors, there would not be employers addicted to “free” services.
Why is this likely to be the case here? Well, we all know that a GPP for all employees of a retailer with a likely 100% staff turnover was the wrong advice. If indeed a GPP was absolutely necessary, we all know that a master trust for the shop workers and distribution, GPP for head office and GSIPP for Executives is probably the solution many would come up with if advisor charging and commissions were not available.
There is a very valid argument to say that a master trust is probably right for the 95% of their employee population who would simply go into a default fund in any event according to available data. A GPP is wrong entirely for such a retailer where individual advice to each employee is never going to be deliverable and is essential to ensure each person understands what it is that they are contributing to, that they undertake a proper risk assessment and go into a fund that is appropriate to their needs. How many of these employees are going to need or take advantage of a range of 200+ funds?
This is without of course even touching on the debate around employee education and communication, something which I wholeheartedly agree with you on; far too much emphasis goes on communicating the “service”, the platform and the provider, rather than the purpose of pension savings and financial education.
In short, while dishing out red cards, I’d suggest that the game has been fixed in this particular instance and that the referee is on a hiding to nothing unless the participants review what they have done and implement a more “fit for purpose” solution.
Indeed, perhaps another debate needs to be had; why is there no true regulation of corporate advice and why would such an arrangement as this GPP for a retailer be considered ok by The Pensions Regulator?
A sorry state of affairs.
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Reblogged this on The Vision of the Pension Plowman.
I am not sure how old this post is but there are not going to be any more AMD schemes soon anyway. In practice AMDs were used not to incentivise loyalty for employees at all, but simply to enable employers to allow advisers to be paid from the commission which AMDs were used to fund by provider firms. So in other words, rather than the employer paying a fee for their employees to receive advice the cost was instead passed on to those employees who left the company. However, a straight red may not always be applicable for several reasons:
1) very often the employer would be making a substantial employer contribution into a scheme in the days before AE made it compulsory to do so.
2) the use of AMD often meant that financial advisers could be paid to offer face to face advice rather than guidance to employees, so that employees were made aware of the benefits of making contributions into the most tax efficient of all wrappers available to the ordinary man or woman in the street
3) the vast majority of AMD schemes allowed penalty free transfer out of such schemes on leaving employment, so that it was possible to avoid suffering the loss of AMD in any case. Not all schemes offered penalty free exit but many did and still do.
4) very often the loss of AMD could still lead to a lower than 0.75 % annual charge even if the funds were not transferred out.
However the commentators are right that if employers paid adviser fees then AMD would almost certainly not have been dreamt up by providers to fund commission for advisers. So it has to be true that if employers are prepared to pay fees to advisers and to make employer contributions into low charging good pension schemes then this is better than using an AMD scheme. However, the one problem I find with a lot of these blogs is the incorrect assumption that employees would join schemes that benefitted them in such large numbers had they not received advice to do so. People do not voluntarily join pension schemes if they have the choice not to and if the default is that they have to fill in forms to do so. And even if they do join they often pay the minimum contribution rather than pay a more substantial contribution where they take advice and can see the benefits of doing this. Advisers are not just salespeople you know.
And by the way using 0.30% as the AMC for NEST is plain disingenuous since until further notice there is a 2% initial charge on every single contribution into NEST pensions, so if people leave the scheme then the AMC for any NEST fund if MUCH higher than 0.30%. In fact NEST exceeds the charge cap of 0.75% for those who leave an employer providing NEST AE schemes where they then move to a new employer with a different scheme. And NEST services for employers compare very very unfavourably with other master trusts such as tPP and NOW! Pensions.
This blog precursed the abolition of AMDs by about a year.I’d like to think that it, and several more, had something to do with their demise. Certainly there are people who blame this blog for it@