The biggest threat to workplace pensions in this country is political. The next election will be fought on a growth agenda and every Government department (other than the DWP) will be taking a long hard look at the employer duties surrounding the staging and management of auto-enrolment.
As Whitbread recently confirmed, the costs of meeting these duties can be higher than the contributions made into staff pension pots!
So the DWP have to concentrate on reducing employer costs and this they are doing by encouraging multi-employer schemes – mastertrusts and GPPs and insisting that AE can be implemented without advice. Placed in the context of a growth agenda, this country cannot afford to waste money on pensions infrastructure.
Writing in this week’s Pension Week, Ruth Bamforth , a barrister at law firm Gordons makes a compelling argument for improving the governance of workplace pension plans and especially contract based plans
As more individuals are auto-enrolled into contract-based schemes, member expectations are likely to increase, and schemes will come under more scrutiny with the introduction of pot-follows-member.
Ruth holds up the occupational pension trust structure as the exemplar of good governance but those of us who have sat on them, advised them or sold to them know that with regards DC, trustee knowledge and understanding is little better than that of members.
As Cromwell said, so might we..
You have sat too long for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!
Ruth is pragmatic in her article in stating that there is no appetite amongst most employers to get involved in pension scheme governance. This is why the NAPF’s Pension Quality Mark so misjudges “what makes for quality”. Employers do want good pensions but they want the governance to be done at a multi-employer level.
There is no reason why a GPP cannot at a multi-employer level, replicate the quality of governance of a multi-employer trust. No reason why L&G’s GPP cannot look after its member interests as effectively as NEST.
So what is lost by collapsing all the small trust boards into a few large mastertrusts? Well purists will argue that employer specific structures bring with them benefits
Differentiation from competitors that can bring competitive advantage in the recruitment and retention of good staff.
Employer specific default investment options
Tailored HR and Payroll interfaces
But when you look in practice at the behaviour of staff, you have to ask
Do staff choose jobs on the quality of the workplace pension scheme (unless of course it’s DB)?
Has any employer successfully argued that their investment default is aligned to their membership demographics?
Does anyone read member communications?
Is there really any differentiation between DC providers administrative support services?
Frankly the answer to these four questions is NO. The competitive advantage of a pension scheme relates to money in (contributions) and money out (charges).
Employers do of course see value in getting a good investment default, providing excellent at retirement options and financial education to staff but they will only be rewarded for selecting a provider with these capabilities over time.
The employer’s job is to generate profit which generates jobs and the capacity to contribute to pensions. The employer’s job is not to manage the pension scheme or sponsor its own trustee board to do so.
Until recently, providers were afraid to step on the toes of advisers and offer the kind of governance that Ruth Bamford is demanding. Mastertrusts were seen as pariahs that “dumbed down” the work of single employer trusts and did advisers out of a job.
ALL THIS HAS CHANGED.
The withdrawal of the majority of pension advisers from advising on pensions has left the employer scheme (other than for the largest employers) HIGH AND DRY!
The coup de grace for the small pension scheme will be the introduction of the charge cap on the default investment option. Small occupational schemes and employer tailored GPPs will simply be too expensive to fit under the cap- especially if advisory fees are being paid from the member charge.
The combination of increasing pressure on charges, the withdrawal of advisers and member pressure for better schemes will require a consolidation of the 58,000 occupational DC plans in the UK around a handful of mastertrusts and GPPs.
These few GPPs and Mastertrusts will become centres of DC governance excellence.
Ruth Bamforth finishes her article by asking whether the introduction of mandatory governance might be a “sledgehammer to crack a nut”. I agree.
But it may suit the Government to insist on it. I can see no easier way to clear out the non-performing pension trust boards of Britain, than to require them to raise their game!
This post first appeared at https://www.pensionplaypen.com/top-thinking/show/87/you-have-sat-too-long-in-the-name-of-god-go.html