Having spent 36 hours in the company of Life Co “strategists” and their counterparts in the IFA and EBC communities, I can now try and make sense of where “heads are at”.
The mood has changed.
Two years ago, the conference was 9 months into the post RDR regime, the concern was getting paid. Twelve months on, the conversations were about auto-enrolment and the cap on workplace pension charges. This conference was about the pension freedoms, at retirement outcomes and the employee value proposition.
Andrew Warwick-Thompson of the Pensions Regulator joked that what the industry might need is a return to having three Pension Ministers a year (changes being confined to ministerial appointments).
Auto-enrolment – a bird that’s flown (for corporate advisers)
For the large advisers represented, I sensed that auto-enrolment was a bird that had flown. For the most part, the advisors at this summit have moved on and seemed disinterested in the remaining 1.2m employers who have still to stage (let alone the 200,000 new employers born every year). This was a problem for accountants, IFAs and providers not for them.
Pension Freedoms – a fresh corporate dilemma
One delegate asked why he should worry about helping smaller companies who could not afford his fees when the opportunities to advise companies on easing employees out of the workforce was so much more remunerative.
The opportunity did not appear to be to provide individual advice. Another adviser asked whether he could make money from those with “only £30- 80,000” in their pots. The larger pots have been managed by these guys for years and the worry was that they would have a bunch of small-pot holders thrust upon them.
Corporate advisers – by definition – advise corporates. The challenges of the guidance guarantee about delivering guidance – and maybe advice to individuals. But the impact of the pension freedoms has been felt by corporates in reminding them that the outcomes of the workplace pensions they have spent years funding, are largely dependent on the decision making of their employees as they exit employment.
The point was made more than once that when employees de-couple from the mother-ship, the success of the pass-on from work is largely dependent on getting the retirement income decisions right. So employers have “skin in the game” again. They may not be guaranteeing retirement outcomes as they did with defined benefits, but they are still implicated in the success of the process.
Solutions to the dilemma of the squeezed middle still some way off
But while advisers and providers realise that the financial fate of employees at retirement is now “their business”, nobody seemed to have found a mass market solution. The debate on collective solutions descended into an unedifying barrage of abuse hurled at CDC. Any further mentions of CDC was met with laughter , it is clearly not an idea for which this community is ready.
That said, this community was not ready for the RDR, the OFT report, the Further Measures for Savers and most of all the Pension Freedoms. The DWP and those who are fiends of CDC should not be dismayed!
Advisers still not focussing on what makes for good DC outcomes
Our group conducted with one life company a game where we had to choose from a variety of attributes of a good workplace pension to establish five things that we could agree “made for a good workplace pension”.
I had to feel a little ahead of the game as I see the decision making of hundreds of employers and know that the top six attributes they decide on are “investment solutions, durability, employee support, at retirement support, HR and payroll assistance and cost”.
Five out of the six attributes were on the table as choices- the one that wasn’t was “durability”, by which we mean, the capacity of a provider to sustain providing the five attributes over time. This is really the fourth dimension of a proposition and to me is measured by the commitment of the provider to manage the scheme in a sustainable way. Duration is ultimately measured by the quality of a scheme’s governance.
What was interesting was that the choices made by our group as to what made for a good pension were not made on the basis of good governance and best member outcomes but on what would prove most attractive for the employer at the point of purchase. These attributes included the bells and whistles of benefit platforms, apps and most crucially a low headline management charge.
The value of a workplace pension is more than what sells it!
In these two areas of discussion, I found a contradiction that I think besets the providers of workplace pensions and their key distributors.
Employers are now having to think more about the outcomes of the pensions they establish for their staff (and about those they didn’t but underpin their retiree’s “pot”).
But employers still want to differentiate their workplace pensions by their capacity to be valued by members at point of sale. Advisers see the value of workplace pensions as what they can add to the employer value proposition at the point of entry and focus on member engagement tools to the exclusion of all else.
I argued very forcibly in our session that the priority in decision making must shift.
A low AMC is not the same as “value for money”.
Nowhere is there so much need for the argument to shift as in the understanding of the simple formulation “value for money”.
Employers are taught to concentrate on the annual management charge as the measure of cost. However, we know that many costs that members meet are not in the AMC, they are met from the net asset value of the fund and cannot currently be measured because they are hidden.
So the AMC is an imperfect measure. However it is an easy measure for employers to explain to their staff and the equation of Low AMC = Good Pension is still being used by many employers and advisers as a proxy for good decision making.
Advisors (and providers) need to spend time reading the FCA consultation paper on IGCs and better understanding the role of on-going governance in ensuring value for money.
The employer and the adviser value proposition
The AMC is valuable to an employer because it is something that an employer can influence. By selling itself to the market as a distributor of pensions, an employer can negotiate a lower AMC and advisers, as brokers, can help in this process. The typical analysis of the value of using a corporate adviser, usually comes down to the capacity of an adviser to help in bringing down charges and the employer value proposition is often measured by the extent to which this has succeeded.
Unfortunately, if the impact of squeezing charges is to reduce the quality of the five metrics that make for good member outcomes and to further reduce the fourth dimension that ensures the scheme remains high quality in these respects, all that driving the cost down achieves is lousy outcomes in every other respect.
The value proposition shifting from point of entry.
For the first time that I can remember, the corporate adviser is going to have to become accountable not just for the value of the proposition at the point of sale, but for the outcomes of the workplace pension at the end of the member’s career.
This is the endpoint of process that started with the RDR and is now moving towards completion.
Advisers cannot be rewarded with a fat commission on day one and then be seen no more -RDR has seen to that.
Providers cannot walk away from the on-going management of a workplace pension, the OFT report, the DWP command paper and the Pension Freedoms of the budget have seen to that.
In short, the interests of employers, advisors and providers are now aligned -they are to ensure good outcomes for those in these workplace schemes over the lifetime of the scheme (perhaps extending into retirement) . This is good and at last brings DC plans into the same space as DB plans, who knows- actuaries may start treating DC seriously !
There is still a lag in understanding the importance of the IGCs
The importance of on-going governance has yet to properly embed itself. In 36 hours in the company of advisors and providers, I did not have one conversation about the role of IGCs, how they would interact with employers and advisers and what role advisers and employers would have on improving governance through them.
When IGCs were mentioned, they were mentioned in passing as a consequence of the OFT report, not as something that was integral to the delivery of sustained quality scheme management (in respect of what we eventually agreed mattered (investment, at retirement, administration, communication and cost efficiency).
I hope that these will be the matters we will be discussing at #CAsummit15.
Next (tiny) steps.
My estimate of this conference is that the mood has changed. Advisors and providers are no longer angry and confused, they are now concerned and confused. Strategically they have not generally grasped the importance of governance and are still too wedded to selling the employee value proposition rather than managing good member outcomes.
But we are definitely getting there. We are now on the move towards better governance and lets hope we are just waiting for the lag between what providers and advisors say in public and what they say behind the closed walls of conferences such as this.