Recognise the title?
It’s what the DWP chose to call their Command Paper on charges.
This paper is not a justification for a charge cap, it’s a new framework for DC pension governance.
It’s gone un-noticed but only one chapter of the seven in the DWP’s Command pater “Better workplace pensions ;further measures for savers” is about the charge cap.
The title is very specific, this paper aims to provide those “saving” for retirement better workplace pensions. It is complimentary to the Treasury Paper, Freedom and Choice in Pensions.
In this blog, I pick out what I consider to be the key changes brought in by this paper, I rate the abolition of commission and AMDs and the charge cap itself as hardly worthy of a mention. If the guiding principle of the post April 2015 DC governance structure is “putting the member’s interests first” how can these have survived?
The DWP is about how you save it and the Treasury about how you spend it, the Pension Regulator is about accumulating capital and the FCA about decumulating capital. If it is this simple, I am happy with split regulators.
The Cap is ,in any case,an irrelevance to new schemes. I can take you onto http://www.pensionplaypen.com and guarantee your workforce four quotes for an auto-enrolment scheme. I do not anticipate that the four providers quoting on a universal basis will leave the market anytime soon (though only one is pinned to the wall on that).
There are upwards of ten further providers who our rating team consider fit for purpose. They will exclude you on certain grounds
Smarter pensions will exclude you if you are not a charity or a not for profit social housing group.
Legal & General will exclude you if you have less than 50 eligible jobholders in your workforce assessment.
Scottish Life will exclude you if you are less than 6 months from staging.
I could go on.
My point is that there is currently no shortage of capacity, there is however a lack of confidence among providers (concerned about governmental interventions) among advisers (concerned about what they can advise on) and among employers (concerned about purchasing the wrong thing).
Clearly, dumping upwards of 1m employers on NEST is not a good policy decision for the DWP, it needs confidence among all three stakeholders that there is choice in the market , not just now but going forward.
Which is why we need these “further measures”.
As an insurer I would look at my responsibility to set up an IGC with some trepidation. The constitution of the IGC has to ensure it is properly independent from the insurer and it’s Chair will have the responsibility to produce “a clear independently audited annual statement” that the group personal pension has acted in the member’s best interests.
These statements will, if we have anything to do with it, come under intense scrutiny. Advisers will be taking their responsibilities to their clients, the employers who enroll their staff into these pensions, equally seriously.
As the sponsor of a mastertrust I would be equally concerned. The “vertically integrated masster trust” where profit is driven not just from the mastertrust fees but from the asset management (most insurers have one) will need to pay particular attention to conflicts of interest.
As with the IGC’s, advisers like First Actuarial will be scrutinising the mastertrusts , measuring them against their own calibration in a very public way.
The duties on both IGCs and Mastertrusts are onerous;
- a public statement on the reason for the design of the default investment option
- monitoring of the performance of the investments
- scrutiny of the financial transactions administered within the funds (at member and fund levels)
- monitoring of charges within the (default) fund
- monitoring of costs incurred by the (default) fund
At a very minimum they will need to have an independent investment adviser and lawyer.
These duties will require skill and expertise among the fiduciaries (whether corporate or individual). This doesn’t not come cheap. In order to carry out the work and report on it, these costs need to be borne by members within a tight charge.
The paper makes it quite clear that single employer occupational schemes will have the same burdens placed upon them. I am quite certain that the majority of such schemes will read the DWP’s command paper with more than concern. If trustees are not up to the job, they had better consider consolidating their schemes as soon as possible as the timetables for the implementation of these reforms is tight (April 2015).
It is not for nothing that the second chapter of the document (after the introduction of minimum quality standards) is devoted to scale. The DWP make a compelling case for the extinction of the small DC occupational pension scheme- few will mourn its passing.
But for me the most important chapter of this long paper is chapter 6 “transparency in workplace schemes”. I quote from the paper
- Providers of workplace DC schemes would be required to disclose full information on all charges and costs in a standardised and comparable format to trustees and Independent Governance Committees. We would welcome views on how this could operate for unbundled trust-based schemes, including mastertrusts.
- Providers and trustees would be required to provide information about charges and costs to employers before the employer makes a choice of scheme and on an annual basis thereafter. This information will be made available in a standardised comparable format to ensure that employers can assess likely value for money offered by schemes and make appropriate choices.
The implications are clear. In the post 2015 world
- the decision making is at the employer level
- choice is predicated (“comparable”,”each”, “appropriate choices”
- full disclosure is required to fiduciaries, they choose what to disclose to sponsoring employers.
This is a new world of purchasing where the individual is reliant on a hierarchy of governance beginning with the employer – relying on the fiduciaries and ending with the Regulator/Government.
This is a healthier and more robust model than what we have today. It is a clear model for advisers to work with and it suggests that at last we have a regulatory framework for savers that is measured and understandable.
Taken with the work done by the Treasury (the detail of which will be established by the FCA’s “New Annuity Framework”, we can at last set about “restoring public confidence in pensions”
This post first appeared in http://www.pensionplaypen.com/topthinking