Improving governance and best practice – Work and Pensions Committee

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The Work and Pension Committee has produced an excellent report “Improving governance and best practice in workplace pensions“.

There is nothing in this report that does not make sense.

There are a couple of areas where focus could be sharper and this looks as a result of insufficient information rather than poor judgement.

  1. Governance of workplace contract based plans

I am uncertain about the emphasis of improved governance on contract based plans which the report recommends happens at the employer level.

The reason that employers went the GPP route was to transfer governance to the provider (who is officially the trustee) and to “empower” the employee by making him his own fiduciary.

While individual policyholders  have virtually no voice in the high level governance of their pension, the report explicitly states that the Government should intervene where a provider is not offering the member a decent deal. People often forget that the collective nature of GPPs is similar to mastertrusts, they are effectively multi-employer schemes without a trust – a master trust in all but name.

So I don’t think that small employers have much to gain by running a governance committee and the expense of time and effort would be better directed on making sure employees were properly engaged with the business of providing for themselves.

Trying to recreate GPPs as occupational trusts (through the implementation of governance committees) will suit only the consultants and the professional trustees. This is not the way to go.

2. Trail commission has no more place in QWPS than consultancy charging

My second concern is about consistency. The report rightly lays into shoddy practices such as the loading of charges on deferred members both through active member discounts and consultancy charging. But it is silent over the use of commission based schemes as QWPS. To my mind, there is no difference between a nominal amount being taken out of a pension pot to pay a consultant and a % of fund being taken out of a pot to pay for a consultant – other than the latter is back end loaded.

The Committee are right to call for the abolition of AMDs for QWPS and ,for all but exceptional cases (comply or explain), the abuse of consultancy charges to pay for the running of the scheme.

I am glad that JLT have decided to suspend the use of consultancy charging in workplace schemes.  Richard Roper’s comments should be read by other EBCs

We do not want to be in a situation whereby we implement a charging structure on a new scheme today that could be deemed ‘unfair’ next month and then have to unravel the scheme structure

The same can and should be said about the use of commission in schemes, especially where schemes were set up with trail commission with full awareness of the changes resulting from the RDR.

Trail commission was openly on offer throughout 2012 and being sold to employers as a means of pre-funding the cost of auto-enrolment.

To wit- the risk transfer of DC from employer to member could be extended to getting the employee to pick up the tab for the “employer duties”.

I have written about this before and will doubtless do so again. Employer’s duties are paid for by employers, not passed on to staff either by consultancy charging or by trail commission.

If we are to restore confidence in public pensions, trail commission and consultancy charging must be explained  and justified or ditched. Active member discounts and other practices that pass risk from one group of employees to another need to be explained , justified or ditched.

So long as we don’t say these things, we are complicit in the destruction in pension value and will have only ourselves to blame it the public stick two finger up to us.

About henry tapper

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