I am not a lawyer, if you want to read a learned discussion on the impact of the various forms of regulation that could apply to financial services, if you want to explore the theory. I suggest you read this excellent paper by the LSE and Herbert Smith.
One of the paper’s central themes is that no type of legislation can do the job for all the people all the time.
The best we can hope for in regulation is that it focusses its protection on the people who need that protection when they need it most.
If we are to take the term “outcomes” seriously, we must assume the target for outcome based pension regulation is “good pension outcomes”.
In this article, I argue that in pensions, the outcomes are so distant from the input that regulation at the point of sale is ineffective. To achieve good outcomes, there needs to be a culture change throughout the pension supply chain, and most importantly, among those purchasing workplace pensions.
Misalignment of interests
Over Christmas I’ve watching episodes of the Thick of It in which politicians and civil servants spend their time preserving their jobs rather than adding to the common good. The short term objective of staying in Government is commonly referred to as the political imperative.
There is similarly a commercial imperative. This is the responsibility of businesses to stay in business, satisfy shareholders and maintain the management structure.
Inevitably, the short-term objectives of Government and the Financial Services firms are not aligned with the long-term objective of providing good DC outcomes.
Why short-term objectives will fail
The political imperative is for auto-enrolment to work and for there to be no scandals about the pensions people are enrolled into.
We can see these short-term pressures at work in the Regulator’s criteria for a Directory of workplace pension providers. The purpose of the Directory is stated as to offer choice to employers looking to source a workplace pension for their staff.
The political concern is that there may be a capacity crunch with all providers pulling out of the market when the going gets tough, leaving the Government’s anointed – NEST – to carry the hopes of auto-enrolment (for SMEs and Micros).
So the sole criteria for inclusion in the Directory is a statement from the Provider that they will keep their workplace pension open to all employers.
The last time that Government tried to push the market around like this was when it introduced stakeholder pensions. It was assumed by stakeholder pension providers was that there would be a quid per quo and that in return for running unprofitable arrangements for SMEs and Micros, they would be given the lion share of the spoils from the larger companies.
This proved to be a false assumption. As soon as the Government had secured providers for their project, they so failed to encourage inclusion that stakeholder pensions quickly became a white elephant.
Simply messing with the supply side in this way will lead to the market distortions that killed stakeholder pensions. Wise politicians like Steve Webb know this.
Short term measures address the symptom not the cause
Government is not just concerned about auto-enrolment falling over due to a lack of capacity from pension providers. It is also afraid that some of the workplace pensions into which people are being nudged will prove as wretchedly ineffective as the failing legacy pensions on which the ABI have recently reported.
To avert such a scandal, the DWP is in the process of bringing in legislation which will cap charges and iron out various market abuses that have allowed advisers to be remunerated without the need to advise.
But the vacillation of Steve Webb and his department about introducing a charge cap was totally understandable. Not only are these caps circumventable, but they address the symptom not the cause.
The cause of failure will be poor purchasing not mis-selling
There is a third and vitally important ingredient in the compulsory introduction of workplace pensions. It is the problem identified by the Office of Fair Trading
Precisely because “pensions are complicated products, the benefits of which occur a long time in the future”, they are difficult for Government and for the management of private sector companies.
Neither are incentivised to deliver long term benefits as neither politicians nor executive boards expect to be around to see (or benefit from) the pension outcomes.
Improving workplace pensions
The only way that the OFT could see there being a long-term resolution to the problems with workplace pensions was by improving the “buyer side”.
This is not achieved by imposing caps or demanding universal acceptance of employers. it actually involves encouraging employers to pay attention to the pension.
An employer can be fined for not following the rules of the auto-enrolment game, a provider can be excluded from a Directory for not dropping its pants to all comers and an adviser can be banned from being paid by commission or consultancy charging; but none of these measures address the problem of poor purchasing by employers.
To address that problem, we need a long-term program that engages – educates and empowers employers to do the right thing by their staff.
There are simple things that Government can do to help this to happen
1. They can reduce or abolish VAT on advice to employers on the choice of workplace pensions
2. They can encourage and promote online advisory services set up to engage- educate and empower
3. They can bring the regulation of workplace pensions under a single regulatory unit – preferably the FCA so that both trust based and contract based workplace pensions are on a single regulatory platform.
Using new technology to engage-educate and empower
In a few months , this Government will be gone, in a few years, the Directors of the financial services companies we rely on for our workplace pensions will be gone. The bosses of the companies purchasing workplace pensions will be gone to
But for many of us, the prospect of drawing our pensions stretches further than their horizons.
We need to have a culture of good buying in this country, a pension procurement process that ensures that employers know why they are buying ,what they are buying and finally why they chose the pension that they did.
This cannot be achieved by Regulation alone, it needs buy-in from all parts of the financial services supply chain.
The internet has revolutionised the way we are engaging, educating and empowering people to take difficult decisions like the choice of workplace pension. Let’s make sure we use this new technology to embed a pension buying culture into the 1.3m employers who will by 2018 be running workplace pensions for their staff.