Today, assessing whether your existing pension qualifies for auto-enrolment is easy.
If all you’re interested in is complying with the current regulations you can stop reading now
But if you are interested in what’s round the corner and in the success of your workplace pension scheme in producing good member outcomes – read on!
The Government have long been interested in what makes for a good pension. They landed on six factors back in 2011 on which they have built their ideas for good outcomes. They have announced they will be strengthening the “minimum standards” schemes will need to achieve to qualify. We expect this will be legislated before the next election,
The six areas the Pension Regulator landed on were
Appropriate contribution decisions
Appropriate investment decisions
Efficient effective administration
Protection of Assets
Appropriate decumulation options
In assessing whether your scheme will quality in future, these are the areas you should concentrate on. The trouble is we don’t know what the minimum standards look like yet so it’s “governance in the dark”!
Most of the speculation surrounds an announcement from the DWP on May 10th that (following the OFT report on workplace pensions due to be published in August), the Government would begin a consultation on a cap on the charge levied on the default investment option.
The jury is still out on whether caps do much good. Recently the Pension Minister Steve Webb claimed that you didn’t need price controls on “baked beans” and inferred that workplace pensions should be no different.
This puzzled many experts who considered workplace pensions more complicated than the Cross & Blackwell/Tesco Value dilemma.
So there’s a lot of uncertainty on what “qualifying” will mean though increasing clarity on what best practice looks like.
Choosing an investment default
Only Stakeholder pensions currently have to have a default. Most insurers who run stakeholder plans designated one fund as the default when they opened these plans for business in 2001.
Quickly, consultants decided they would be the judge of what default employers will use.
Most large employers still take advice from consultants and many now employ their consultants not just to choose the fund but to manage aspects of the default strategy.
If you have consultants they’ll be asking you to consider
The fund(s) used to grow the pot in the early years
The shift from growth funds to pre-retirement funds (the lifestyle glide path)
The funds used prior to retirement
How those funds are presented
They’ll focus you on the challenges that trustees and employers have in choosing the investment default
Establishing the investment principles they adopt that inform on the decision
Knowing the true costs to the member of the investment options (and judging whether these provide value for money
Establishing how much volatility members can withstand during the early years
Ensuring that the pre-retirement strategy is appropriate for staff needs.
Small employers are less likely to want to exercise this degree of governance.
The rise of mastertrusts where the default is prescribed (as it originally was with stakeholder pensions), allows smaller employers to buy into the collective investment governance offered by the “master trustees”.
One argument for a charging cap is that it reduces the range of pricing options and demands that purchasing decisions are taken on value and not just on price.
And while the Insurers offering Group Personal Pensions have done little to innovate, the mastertrusts offer real choice which includes Target Dated Funds, the Dimensional Approach as well as the state managed diversified funds offered by NEST and NOW.
Some mastertrusts are even beginning to talk about offering default fund options that could in time replace the need for small pots to buy annuities.
So, what should you be doing about choosing your default investment options?
If you already have a workplace pension, you should ask your provider what options are open to you and use the metrics the Regulator has set out, establishing your principles at outset and applying your knowledge of your staff when considering choices. Your existing advisers should be able to help you here and you should demand they do (whether you are paying them directly or via a commission agreement).
If you do not have a workplace pension and are looking for a new one, you may have difficulty finding whole of market advice
The withdrawal of many advisers following the implementation of the RDR , the banning of commissions and latterly the banning of consultancy charges has left an advice gap. Whereas formerly you could get advice and pass it to your members through the fund charges, you are now going to have dig into your own wallet.
The time cost of good quality investment advice is comparable to what you’d be paying for legal or tax advice (expect to pay between £200 and £600 per hour).
A review of your existing scheme’s default options and a recommendation should cost around £3000 but the bill would rise steeply if you choose to investigate options from other providers. Don’t expect to get much change from £10,000 for a full market review.
It’s small wonder then that many small employers are looking to either go directly to their providers or are hunting the web for self-service opportunities to compare the market and make informed decisions through aggregated websites.
This blog first appeared here!
- Pensions for nothing and advice for free (henrytapper.com)
- Why target date funds have been slow to catch on (henrytapper.com)
- Who speaks for workplace pensions? (henrytapper.com)
- A democratic way to improve DC investment. (henrytapper.com)
- Risk-sharing starts with cost-sharing (henrytapper.com)
- Investments: Save Money on Investing (quicken.intuit.com)