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)