How google pictures St Andrews day today – so easy!
I spent some time last week expressing my dis-satisfaction with the DC Governance and the irrelevance of most DC trustees. It is easy to throw stones….
What is also needed is someone to mend the greenhouse to make it fit to nurture..
We need to find a way of talking about our pension plans which makes sense to the people who use them and depend on them to convert pension saving into pension spending.
I often hear people say that if we could only get rid of the word “pension”, it would be problem solved. It wouldn’t, the problem is not with the word but with “confidence”, if people were confident they were in a good pension , then the’d be proud of the word.
I’ve been looking for an extended metaphor (a conceit) for inspiration. I’ve landed upon the motor vehicle as my metaphor.
There are three essential properties of a car that need to be right; chassis,engine and steering.
Chassis
Without a sound chassis and associated bodywork, a car can take you nowhere. The chassis has to be of sound construction and durable. The pension equivalence of a chassis can best be described as the service superstructure.
Engine
The engine of a car is what drives performance, an engine should have good fuel economy and should meet the needs of those who drive the car. There can be many different types of engine. The pension equivalent is the investment mechanism.
Steering
The consul of the car that comprises the wheel,gears, pedals and dashboard enables the driver and any passengers to control the vehicle and enable its progress to the destination. The pension equivalent is the member interface between provider and member.
Whether the vehicle in question is a single seater or a charabanc with many passengers, this conceit holds true.
Rather than think of a pension as having 31 governable characteristics, we should think of it as a vehicle that gets people from A to B in a variety of different ways.
We think we can measure the suitability of a vehicle in six different ways
- Its cost– is this vehicle vehicle “value for money” in terms of initial costs and ongoing servicing.
- Its performance – does it perform as expected (whether a Lamborghini or a mini)
- Its steering – does it give necessary control to the driver and/or passengers.
- Its chassis – is it of sound construction so that it securely carries driver and passenger
- Its adaptability – once it reaches its destination , can it be used for the return journey
- Its durability – will it stay the course and will it offer lifetime servicing.
Maybe I am over-stretching the metaphor , but I hope you get where I am going. The tangibility of a motor and our familiarity with them make it easy to relate to “what makes for good”.
Why we need fiduciaries – trustees advisers, IGCs
Most of us, cannot be so familiar with pensions; a pension’s value for money depends not just on what you can see – historic performance and quoted costs, but on a detailed understanding of fuel consumption (charges) and the capacity of the pension to continue to deliver.
Because this is hard, we need experts- fiduciaries, to assess and monitor value for money, ensure that administration is being properly carried out, check the calibration of the dashboard, check the brakes and accelerator, the steering and the mirrors that allow us to manage our pensions. Whether these experts are trustees or are members of IGCs or are our financial advisers, they have to do the same job, make sure we get from A to B without fuss.
These people who look after our pensions are our buyers, our service engineers, they do the MOT and make sure the car is safe. If they are not doing their job- it matters.
Which is why I think the job of being a DC fiduciary is too important to be left to people who don’t understand these things.
I do not see the standard of fiduciary care generally available to members of occupational DC schemes as very high at all. If we were to think of trustees as mechanics, I would not let most of them loose on my car, let alone put them in charge of a MOT centre.
There are over 40,000 occupational DC schemes in this country but there are not 40,000 occupational DC trustees up to doing the job.
We have been failed by these trustees in the past. The appallingly low numbers of retirees from DC trusts exercising the Open Market Option, the ridiculous charges levied on some investment funds, the creaking administration, the lack of member engagement and education and the failure to empower members to take decisions for themselves is endemic in occupational DC schemes.
It is no longer good enough for DC trustees to point to insurance company GPPs as “worse”, they’re not. By and large they are better. They had better OMO take up, provide better interfaces with members, are better administered and have investment funds that are much better governed.
I generalise I know, there are well governed occupational DC plans, but not many. And those few that are well run, cannot speak for the many that are not.
It is time that we got DC trustees to do their job- or shape out. We cannot go on tolerating failure in a part of the market that matters so much.
Good for Google, and they even got the Flying Scotsman’s numbers (4472, 4-6-2 and 4 for the tender) about right.
As for cars in pensions, Henry, of course we’ve had Steve Webb’s Lamborghini in recent times.
I’m stretching your point a little, I know, but it strikes me we’ve been trying to drive pensions by looking through the rear view mirror (of past performance) or through the side windows (of volatility from the kerb), rather than looking ahead through the largest window of the windscreen, or having sat nav to plan the road ahead rather than just looking at the latest road sign.
Great analogy. I agree with your comments about the use of the word pension. Changing the name won’t suddenly make everyone more confident. And when it comes to confidence, I believe that us advisers lack it at the moment. To inspire confidence you have to be confident. A little more belief in ourselves wouldn’t go amiss. We know what needs to be done to run these schemes properly but it requires time, effort and it is not without cost. We should be confident enough to say to employers and trustees, ‘if you want a quality pension, and your leavers retiring happy, then this is what we recommend you do.’ And if they don’t want to follow our recommendations then do we actually want them as clients?
Thanks George- why don’t you do Mastermind?!?
Stephen- thanks too – I agree that Advisers are unconfident but if they are – surely they should outsource the research?
Henry – an interesting analogy, so let me continue along this route.
It’s interesting that far from giving up with cars we are looking for safer more efficient cars:
• We are making cars easier to drive and indeed moving much closer to cars that drive themselves;
• We are seeking the most efficient use of fuel – rather than moving to the DC solution that costs up to 50% more [fuel] to produce the same pension [journey];
• We are making cars more comfortable and safer.
So, why are we making pensions far more difficult and more hands-on? Why have we made them significantly less efficient? Why are we making them significantly riskier and uncertain?
Individual DC is significantly less efficient and more risky for the user than group defined pension, or defined benefit, provision. Allowing full encashment at retirement (and likely on a basis that is financially beneficial to the Treasury) is going to make retirement less safe and more likely that individuals will jettison their seat belt and crash into reliance on state provision.
Trains were great – maybe better than cars?! You don’t have to be able to drive a train to go on one. There is no choice of route, you pay the fare but someone else worries about the best route and keeps the train going! The car does have the advantage of going door to door – you think you have total control over it. But you have to be taught how to drive, maintain a license and still car crashes are far more frequent than train crashes. Maybe it’s because train drivers are professionals and general motorists are no more than part-time amateurs!
We still need to travel around and maybe ‘there is mileage’ in looking back at trains and busses – find a better train or bus that is (even) more efficient than it used to be – rather than everyone driving themselves! Were defined pensions so bad as an idea? Did we suffer not having 50,000 choices or needing to be a combined financial planner and investment adviser?
Maybe we too willingly junked the whole idea of predictable collectively and relatively cheaply organised pensions that just ‘happened’ at retirement in favour of the DIY and ‘take personal responsibility’ pensions mantle, started by Margaret Thatcher’s government in the late 80’s when members of good company schemes were given a right to opt out and be mis-sold a personal pension!! Should we be prepared to think a bit more now about whether/ how we can have defined pensions again?
Keep this thread going. It makes a lot more sense than a Key Features document or Statutory Money Purchase Illustration.
A significant issue is that many people’s experience of pensions is now memories of the pot of gold that their parents enjoyed (Rolls Royce DB schemes) compared to the clapped out mis-sold heap of junk that some dodgy car salesman flogged them.
The introduction of the new family car is interesting but economy combined with strong performance is also essential if everybody is to have a comfortable journey to and even during retirement.
Agree entirely with your comments here Henry. The focus on contract scheme quality and the general (though often deserved) antipathy towards pension providers has meant that public and parliamentary debate has often had a ‘contract bad/trust good’ subtext. The manifest failings of the trust based regime – not just the things you mention but low entry barriers, incentivised transfer exercises, pension liberation, absence of charging disclosure requirements etc has been forgiven or brushed over on the basis that trustees are at least untainted by impure motivations. The trust based world has been judged by the standard of its best examples, and the contract based world pilloried by its worst. Unfortunately the debate does have political dimensions as well with the paternalism of occupational schemes appealing to one side (even where lacking competence), and the greater transparency of contract appealing to the other (even where lacking adequate oversight). At the heart of it is the core question ..’What are pensions – a marketable saving and investment plan …or a pillar of social policy?
… they should be a pillar of our social policy!