Price isn’t everything

priceI’m rather shocked to have one life company claim that http://www.pensionplaypen.com is driving value out of the market by over-promoting the importance of price.

The assumption is that an online tool that asks employers to provide data, get quotes and compare the quotes is necessarily a price comparison site.

Today http://www.pensionplaypen.com launches a new feature “let’s rate our pension” which allows employers to rate their existing workplace pension for themselves. It uses 6 different metrics and apportion weighting to each.

You can check the tool out here https://www.pensionplaypen.com/rate-your-pension/attribute-weighting . The idea is that you and your colleagues could each input your views of your pension to get a consensus position.

The tool is not just about rating aspects of your scheme, it’s about weighting the various attributes of your scheme against each other.

We only apportion a fifth of the scoring to “charges and costs” and we’re likely to continue this weighting into the more advanced tools we’ll be introducing in the autumn as we help employers to choose a new pension.

Price isn’t everything, in fact it is only 20% of the issue (in our view).

We are where we are in workplace pensions. When people say “pensions are a rip-off” they generalise. Clearly some pensions have been a rip-off and some pensions continue to be. However most workplace pensions, to compete in the new post RDR world, need to focus on delivering value for money rather than value to the shareholder/adviser or just not focussing at all.

There is a lot of price convergence in workplace pensions. If you take the DWP’s guidance and convert NEST and NOW’s default into a 0.50% AMC, compare it to the 0.48% price generally on offer from one GPP Provider, People’s Pension at 0.50% and the Pensions Trust and Social Housing Pension Scheme at 0.45%, you can effectively throw a blanket over many of the leading players- at least on price.

This convergence suggests that the market is settling at a default price around 0.5% , at least for now.

But what is included within the price?

Here there are still substantial variances in the key areas of investment, member engagement, at retirement services, auto-enrolment support and in terms of the provenance of the provider (brand reputation).

Take that final point, for many employers the over-riding determinator in choosing a pension will be the security the brand gives them. Here the established insurers have major advantage in terms of name awareness and in the public’s perception of their being in it for the long-term.

While some pension professionals may feel a little sniffy about this brand issue, where there is little knowledge, a name goes a very long way.

The research we have done so far , suggests that brand and price are the two factors that will most influence the decisions of the 1.2m employers who need to take a decision on who will manage their staff’s retirement funds.

We are where we are and are likely to continue to see decisions taken on brand and price (and little else) unless there is a concerted effort to promote investments et al and especially the debate about “what makes for good”.

I don’t see this as easy but I don’t see it as impossible. We may not be able to raise financial awareness at the employee level, but we can do work at the employer level, especially where employers are prepared to take some fiduciary responsibility for the outcomes of the workplace pensions they set up.

There are good reasons why they should, choosing a proper pension is not just in the staff’s interest, it is part of any sensible reward policy. It is a prudent risk mitigator and can be seen to generate shareholder value. A company that properly discharges its duties as an employer is not only a lower risk but is likely to be able to manage the retirement of its older workers better. I will put to one side further arguments over recruitment and retention as I have never properly convinced myself that they are impacted by the quality of pension. However, I have had sufficient experience of disruption in the workplace when staff become dis-satisfied with pensions (or the lack of them) to assert with some confidence that pensions can make a difference to productivity.

The arguments about the changes in our demographics, dependency ratios and savings habits will rage on and on. Many argue that with proper funding, the problems of future pension poverty would disappear and ,at one level , these arguments are right. However you cannot make employers or their staff sign up to high levels of contributions unless the platform is right. And right now, other than at the top of the pyramid, the platform is not right.

There are still too many over-priced workplace pensions that are not delivering sufficient value to justify their existence and there are many employers who continue to be turned off by pensions because they consider them a rip-off.

Price isn’t everything but it is where many employer’s heads are today. The trick is to move the argument on from price but this can only be done once we have got bad practice out of the system for all time.

About henry tapper

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