Are workplace pensions all the same?



This from the twittershphere and from Mr John Lawson

The outcome from all competent pension schemes will be similar.

As the wind batters my seaside home (this house has been far out at sea all night), I ponder whether.

John’s contention is that the impending charge cap will so commodatise the delivery and investment of workplace pension schemes that choice will be irrelevant.

There are areas of commerce where price is the key differentiator. While motor insurance is bought primarily on the (cheapest) rate, lady’s handbags seem to be racing to the top (the dearer the better).

It would seem that workplace pensions are converging on a single price  (somewhere between 0.5 and 1% of the funds under management). There is the odd workplace scheme (Whitbread) that is purposefully expensive, arguing that it can comply with its obligation to produce good member outcomes and “explain” how the extra expense is worth it.

There are many workplace pension schemes operating way below the minimum proposed charge cap (0.5%). But over 90% of the quotes that have been received in the last month on have been in a range of 0.5-0.6%. It is extremely difficult to see a world where employers will want to explain to staff why they are paying much more than 0.7% for a product that is freely available for less.

So to those who consider the only worthwhile differentiator is price, all workplace pensions look like being the same (going forward). As I have written several times, the choice to providers will be whether to stick (and continue to quote ) or quit (and cease offering new pensions).

But if , as I hope there will be, there remain a hardcore of ten to fifteen insurers and master trust providers keen to grow their businesses from 2014 onwards, then how will we be able to tell one from another?

If I was managing an independent governance committee or the trust board of an occupational scheme. I would apply six metrics to assess how well the product I was offering was performing.

One of these six would be price. Price will become a measure of  efficiency. Let me give you an example that demonstrates the explicit link between price and efficiency.

One provider, BlueSky pensions, set the price members pay at the level of charge needed to ensure the operations of the pension scheme are delivered solvently and sustainably. I’m pleased to see that each year we’ve monitored them their charges have fallen. Currently they charge 0.62%, next year’s rate will hopefully see them offering the same for less. Organisations that are mutual, have only two ways of spending their fees, either on investment for the future or on delivering back to current members (like the Co-op divi).

The second key metic is  “durability”. Whether as a trustee or as a “buyer” I want to be involved with a pension plan that pays out to its members whenever they retire.

The first committment of a pension manager is to stay in business. Maybe failure is not as radical as the collapse of Lehmann. Maybe failure is a simple withdrawal from the market. In November 2010 HSBC opened themselves as a workplace pensions. If you click here, you can read their proud boasts to advisers about their committment to the market.

If you click here , you will read about their complete withdrawal from offering workplace pensions. Any employer who took the advice to go with HSBC Life in the past four years, will now have to up sticks to Standard Life.

Committment to market is not a matter of brand or financial strength (HSBC have those in abundance), it is about a desire to provide good retirement outcomes for staff. Shamefully, HSBC has failed its customers and those advisers foolish enough to fall for its nonsense. I will add that First Actuarial has never recommended HSBC to any of its customers because we had no confidence in the durability of its product and how right we were.

Both price and durability are variables by which pension providers can be judged. Price is a measure of efficiency and Durability is a measure of a provider’s committment to the market.

The third metric, though more humdrum, is no less important. We can call this metric “service” by which we mean the capability of the provider to manage the various interfaces between itself and an organisations payroll and HR functions, and offer member service in the ways members want to be served.

The best (perhaps the only) correspondent reliable enough to measure service is the customer (client). Feedback from clients is critical to our rating of pension providers and poor service is an alarm bell to those who rate the durability of a proposition. Providers may think that their customers may consider their product can only be differentiated by price but the key differentiator from customer feedback we receive is service.

Nowhere is service more important than at the point of implementing auto-enrolment and nowhere are service levels so disparate than in the support we currently see from providers to HR and payroll functions.

If price is a measure of efficiency and durability a measure of committment, then service is a measure of immediate reputation.

A fourth differentiator, one that many commentators believe already commoditized is the investment of member’s money. I will stop short of agreeing with the commentators. The current “best idea” among those managing default investments is to invest in a low-cost diversified passive structure and lifestyle into gilts and cash. For the moment, this may be right, but it is only an iteration along the way towards the long-term solution.

Investment is one of the few areas of pension performance that can be measured. Specifically measured by the past performance of the fund. The investment industry has been happy with regulatory messages to members not to read into past performance a guide to the future. While it is right for members to be wary of high returns (which may have been generated by betting on 20-1 shots), fiduciaries should be very interested in past performance indeed. Past performance is an indicator of how well a manager followed his own precepts and to what extent his vision better anticipated macro and micro trends

Specifically to workplace pensions, default options may be trending towards multi-asset diversified growth funds but within that category there are good and bad funds, funds that execute efficiently dynamic asset allocation and funds that consistently get both the tactics and strategies wrong.

The indices which are tracked are themselves critical to the success of the strategies. These can now include indices that incorporate latest investment thinking on sustainable investing, can manage out market distortions created by superstocks (smart beta).

The delivery mechanisms that manage the glide path towards annuitisation are also varied , ranging from the conventional lifestyle strategies, through the target dated approach to more sophisticated approaches such as DC choice (currently available from Dimensional but only employed by Supertrust).


To suggest that all these funds are the same is like saying all four door hatchbacks are the same. They may look alike but they drive in different ways.


So far we have dealt with four differentiators, price. durability, service and investment. All may look the same if you read the websites of the providers, but in practice we see substantial differences between providers.

There are two remaining areas where workplace pensions can seek to differentiate themselves and deliver lasting advantage to themselves and their customers.

The first is in creating member engagement. How this is achieved will differ from workforce to workforce and their are infinite variables . Some employers will budget to allow employees to take time out to listen to presentations, some will expect employees to manage their affairs in their own time. Providers that can deliver information as it is needed ranging from an app to a staff presentation , can perform a powerful function for an employer.

It is in the interests of all employers that employees are properly informed of their choices. Whether the choice of the employee is to stay in a workplace pension or opt-out , the greatest risk is that employees take no interest in their finances and become a financial liability as they approach retirement.

Since corporate advisers are no longer rewarded for workplace seminars (via commission), the onus for providing information and education has shifted to providers. Some have stepped up to the plate, others haven’t.

Last but not least is the differentiation providers can achieve at retirement. This is perhaps the area that offers providers the greatest opportunities to improve their service. While some providers, notably Legal & General and Aviva, still offer competitive annuity rates, most don’t and many still allow those in their pensions to buy from them on appalling terms (often exploiting the ignorance of their customers). As a first step, all workplace pension providers must adopt the ABI code and seek to go beyond the code to ensure that the pension savings they have helped accumulate, are properly distributed.

But a much bigger win beckons. The capacity of the few remaining super-providers, the large mastertrusts and the major GPP providers to provide collective decumulation options, is one we hope to see exploited over the next three years.

Collective decumulation is an alternative not a replacement to conventional annuities (as with profits became an alternative to the traditional non-profit contracts). The disparity between the GAD scheme pension rates and those available under individual annuities is proof positive of the need (and inevitability) for change in this area.

I don’t quote John Lawson lightly. He is an important commentator, one who articulates the consensus views within the ABI with a passion and brevity that marks him out as a future spokesperson for the insurance industry.

John argues that if we cap the price that providers can charge to employees for the investments then there will be nothing in the pot for any of the other five factors I have listed.

This argument has been and is being employed by the energy companies who stand in relation to their customers in a similar way (semi-state monopoly).

I agree with John that there is a danger that Government can over-prescribe and drive away providers (see earlier comments on durability).

However, John’s argument that providers who remain in the market will not want to compete for better does not ring true. Providers have not ,for some time, had the opportunity they have today to innovate. Free from the self-imposed shackles ot their commission arrangements with distributors, they can now crack-on to create better product and better DC outcomes.

The opportunity to succeed based on innovation,competition and reputation, rather than distribution, is not one that workplace pension providers should miss.



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About henry tapper

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