John Lawson – Head of Policy (Corporate Benefits) at Aviva
A reasonable question to ask and one asked by the very reasonable John Lawson of Aviva in a response to my blog “Give a straight red to active member discounts“. I quote John’s response in full as he articulates a view which most UK pension people could agree with.
“0.9% is expensive for a pension? Really? For transient workers? 0.9% is expensive compared to the retail price of a pension? Really? If you walked into a pension retailer, what would you pay for a pension? Why should leavers be subsidised by the employer? Are leavers hard done by? I don’t think so! Fundamentally disagree with this rant Henry. This is the second piece of nonsense that you have uttered this week, the first being your support for Pit-Watson’s Dutch fiction – you clearly haven’t bothered to look into Dutch schemes. Less PR and more substance please. Serious pension people want serious debate,
High time that First Actuarial started offering pensions for 0.3%, or 0.48% or even 0.9%. What’s stopping you Henry?
Why I’m sympathetic to John’s view is that it used to be mine too!
Adrian Boulding, who does a similar job to John’s at Legal & General tells the story of finding himself in a room in the seat in front of me. The then pensions minister John Denham asked whether the insurance industry could operate a stakeholder pension at 1%pa. Adrian jumped up and blurted out
“oh yes minister, we at Legal & General consider our factory gate price to be 0.5%”.
He sat down and was catapulted forward , so hard did I kick him in the backside.
As it turned out, Adrian was right and I was wrong. I claimed I had Eagle Star‘s profit margin to protect and Adrian took it in good heart – we’ve had a laugh about it since.
That was 2000, this is 2013 and the boot is on John’s rather than my foot!
I suppose I had better respond to John’s public challenge!
Taking the last para first , as he knows, my firm is not a manufacturer, we do not “offer” pensions, First Actuarial point people to where and how they can buy good workplace pension schemes for their staff.
The rates quoted are available and if anyone wants them they should get in touch with me at henry.h.tapper@firstactuarial.co.uk . You will have to be acting for your company and be ready to pay a qualifying contribution ( a minimum of 1+1% of the AE band of earnings).
The 0.3% pa rate is what a deferred member of NEST would pay for their pension. There is an extra loading from the 1.8% charge but spread over 10 or 20 let alone 30 or 40 years this is minimal.
The 0.48% rate is for the default fund of a leading provider’s GPP. This rate is guaranteed for the transient workers of retailers.
You won’t get those rates by walking into a pensions retailer but you can get them online as I hope to show to John and his colleagues in the next couple of weeks.
Is this Apples v Apples? Well we could argue deep into the night about “bells and whistles” but if I was a transient worker, I’d be more interested in a solid pension than “co-branded communications” and on-going workplace presentations. After all, I’m not planning to stay around.
0.30% and 0.48% are no longer “factory gate” prices , in the intervening 13 years they have become workplace prices (or at least prices that are freely available to any of the 1.2m employers staging workplace pensions over the next five years). We are in “collective pension land” now.
Which moves me on nicely to my second “piece of nonsense”, my support of “David Pit (sic)- Watson’s Dutch fiction”.
David Pitt-Watson is a fan of collectivism – and that’s what they do in Holland; they don’t much do company pension plans, it’s “industry-wide” with them – like another thriving pension system in Australia.
One of David’s contentions is that we in the UK pay too much for our pension funds , relative to the Dutch (the Swedish system is even more effective but let that be). He argues as a super-collectivist.
For those not familiar with Pitt-Watson’s arguments here is a summary, taken from Building the consensus for a People’s Pension in Britain
-
A huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.
-
If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.
-
That minor changes to our regulatory framework could boost pension returns by 39 percent.
I’ll have to see a counter-argument from John about why this shouldn’t be the case but would stand by any comments I have made in support of these assertions.
Certainly, for those transient employees, even a relative reduction in the annual charge on their money “boosts pension reserves” by up to 20% . Well it could be more than 20% for the youngsters but let that be.
|
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% |
David Pitt-Watson‘s point is the British system of pension provision is less efficient and more expensive than the Dutch, many of the savings he imputes to the Dutch are achieved by collective decumulation (outside the scope of this argument but important ) but the core savings as people accumulate a pot with which to get an income are directly relevent.
As John should know if has read my many blogs on the Dutch system and on Pitt-Watson’s pioneering work, the big difference between Dutch and British DC comes down to social attitudes. The Dutch take pension outcomes very seriously and providers are scrutinised intensely by the public fiduciaries – advisers, trustees, employers and regulators all play a part.
There is a collective social conscience to keep public confidence in pensions and despite falls in pension outcomes in the past year, there is no rioting on the streets of Amsterdam. People are still getting 50% more from their DC pensions than we are getting from ours.
I am sure that any Dutch fiduciary or adviser who was accused of lacking substance and concentrating on PR for promoting lower fees for transient staff would find this extremely amusing (as I do).
John has kicked my backside. I didn’t quite fall off my chair but like Adrian Boulding, I turn round to him now, with eyebrows raised!
I’ve published the numbers, I’ve confirmed that an 0.48% guarantee on a GPP’s default is available and that NEST will offer 0.30% in deferment using its default. I’ve shown the boost that could be given to transient workers pensions by using these rates.
This is not PR – this is substance.
Is 0.9% expensive for a pension these days?
Most UK pension people may still agree with you and see 0.9% as cheap but not me. It might have been cheap in 2000 and it certainly isn’t today!
English: John Denham at Innovate ’08 (Photo credit: Wikipedia)
Pensions are not potatoes – there is no market value for them. True, on the margin, one supplier may have a product that offers a bit more for a bit less. On the margin. But essentially there ar only three things which will determine the value of your DC scheme pension when you retire:
(1) How much you and you employer put into the scheme and for how long.
(2) How well managed the scheme is over time.
(3) The Annuity market realities when you cash your scheme in on retirement.
I accept that lower charges are preferable to higher charges and that the cumulative effect of them is significant. But frankly the debate over charges obscures the real debate – that few but the rich can afford to build up a DC pension pot that will be anything like sufficient.
Yes Paddy, that wider debate about adequacy is one that we need to keep to the fore. We need a way back to DB or at least DA and I’m with you and my colleague Hilary Salt that we should be levelling up.
But my day job is about what we can do today, improving at retirment decision making, helping people invest wisely and keeping costs to a minimum may not solve the bigger issue but it makes the makeshift solution we have today – better.
The alternative is a revolution in more senses than one – perhaps a good thing in the long-term but maybe we can get there in a smoother way?
What do you think?
OK Henry, here is a bit more substance:
Many pensions are offered at less than their economic cost today because providers are in an arms race to build assets on the platforms that they have invested millions in. Will it last? I doubt it. If you are recommending providers that price pensions at less than the economic cost, you should question what their future looks like. Is their price really “guaranteed”, as in written into their Ts & Cs. Something will have to give at some point.
Thinking about it logically, a leaver in a retailer’s scheme may leave with a pot typically between £500 and £1,500. At 0.9%, that generates between £4.50 and £13.50 a year. Let’s call £9 a reasonable median. For £9, the provider supplies product design, marketing, asset management, custody, pensions administration, telephone access, C&E, adviser support, in some cases commission, governance and lives by the rules set by FSA, which incidentally trust schemes can and do ignore. I don’t think this is expensive. I know for a fact that it is not expensive.
Nest is offering its pension at 0.3% plus 1.8% contribution charge which adds up to 2.1% for a 1-year active member with a 1.8% discount for leavers (Nest works the other way around from active member discount schemes by penalising active members at the expense of leavers). What people seem to miss about Nest is that it has hoovered up over £200m of taxpayer’s money to date and is still going. You should ask your actuarial colleagues whether you think its J-Curve will ever cut the X-axis. I am not an actuary but have tried to project its numbers and I don’t think it will ever break even. Nest’s price is currently not economic and, in my view, never will be. However, I have given up on worrying about Nest’s price as I accept that it has a bigger job to do to make automatic enrolment work. Where I do take issue, is when its charge is held up as a comparator for the rest of the market. This would only be a fair comparison if every other provider had a £200m credit line from the taxpayer, not to mention a £10m annual gift.
Is it fair for leavers to pay the full market rate for their pension. I think so. And 0.9% is not expensive. If you bought one of those popular online pensions without advice, you would probably be paying 1.2% or 1.3%. So, 0.9% is probably a bit below the retail price. So, I conclude that leavers are not subsidising active members because they are not paying more than the retail price for their pension – at 0.9%, they are actually paying less.
On the fairness of active member discounts generally, large employers offer all sort of benefits to their staff including subsidised health insurance, motor insurance and even shopping. Put it another way, they offer active employee discounts on these benefits. If an employee left to work for another employer, is it right that they should still benefit from the cheap health insurance, motor insurance and shopping? Why on earth would their former employer want to offer them the benefit of their bulk-buying power once they no longer work there? When employees leave, if they want to buy these things they will have to pay the full retail price. I honestly don’t understand why people see pensions as a special case here. When people leave they have to pay the retail price (in this case they are paying slightly less).
Moving to Pitt-Watson and his ‘work’. I find his work a collection of assertions and opinions rather than what I would call facts. You re-quote these assertions as if they were facts e.g. “People are still getting 50% more from their DC pensions than we are getting from ours.” Really?
Where is the proof? Not in the RSA’s report, that’s for sure.
If you want facts, Lane, Clark and Peacock did some work on Dutch DC charges. They typically fall in the range 0.5% to 1%. Probably about 10% to 20% more expensive than the UK. So the 50% uplift doesn’t come from there.
Does it come from the collective fund? Collective funds reward some cohorts of members at the expense of others by smoothing investment performance. We still do that here. It is called with profits but is no longer popular. Some savers in collective funds may get 50% more than they might have otherwise got, but on average, I doubt that the average member in a collective fund does any better than the average member in say a managed fund.
You could invest retirement assets in ‘higher return’ assets such as equities (although some might question their higher return credentials given the last 15 years). We can of course do this here in drawdown, or with mortality cross-subsidy in investment-linked or with-profits annuities. Do people who are drawing their income this way get more income. I haven’t studied this in detail but I don’t think so. There is also a danger here that if your equity portfolio bombs, you will have to take less income otherwise you will run out of money. Now, this might be a coincidence but I keep reading that lots of these Dutch pension schemes keep cutting their benefits…
So, until I see real, properly researched and substantiated proof, rather than urban myth, I regard the 50% better claim as nonsense. To use a Scottish summation, it’s a load of old tripe!
I agree with you that NEST is subsidised but the insurance industry has had its pound of flesh already and frankly the sooner we can get NEST into play for transfers from highly charged pensions the better.
There is one major difference betwen subidised benefit and pensions and it can be summed up as “deffered pay”. Pension contributions from employees are deferring gratfication and from employers are deferring pay (in the case under discussion where there is a salary sacrifice, the entire contribution is deferred pay).
Whereas the other benefits you mention offer immediate gratification (well I might except death in service from that term).
You seem to be approaching the question of charges from an obscure angle; why is it good that 0.9 is better than 1.2% when it could be so much better? Surely we are striving to do the best for people , not just to beat the worst?
I haven’t read LCP’s report on Dutch pension charges so cannot comment. I am seeing a co-author of the Pitt-Watson report next week and will come back to you privately. I would be surprised if the Pitt-Watson research is materially innacurate and that investment returns from the Dutch system are below ours. The proof of the pudding is in the pension and the Dutch £ for £ or Euro for Euro appear to be getting much more out than we do – albeit not gauranteed to the same degree.
The key difference in decumulation is found in that term “collective”, pooling not just funds but also liabilities is a cost-effective way of going about things. Our system of individual drawdown and individual annuites (with-profits or guaranteed) is hopelessly wasteful.
Aviva know this only too well – look at your bulk annuity rates compared with those offered to individuals!
Enjoying the debate John, you should blog your thoughts
Coming at this as an outsider I don’t feel able to say what constitutes an “expensive” pension, other than to hope that in time the market will decide. But that requires total clarity and some simplicity and that is where Active Member Discounts fall down. Even if the technical argument in their favour was won, at best they take a lot of explanation to justify and hence probably defeat the understanding of an average member. If employers want to make a contribution to active members why not simply make a contribution? Why the second tier of differentiation? Thus whatever the outcome of the debate here between Henry and John, to me active member discounts still fail the “smell test”.
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