It has now been well over a year since the OFT published this comment
Since this warning, not a lot has been done to improve the quality of purchasing by employers.
The DWP is introducing legislation in April which will make it hard for employers to buy a bad pension. The Pension Regulator is talking of introducing a Directory of workplace pensions that concentrates on easing capacity rather than improving quality.
But there is precious little talk of helping small employers buy well.
There are good buyers…
Large employers do buy well, they have professional buyers called pension managers, they bring in high quality advisors and they purchase using a process that is broadly consistent.
The purchasing process works well for both sides. Providers et feedback which helps them develop product while employers can see the whites of their pension providers eyes.
The integrity of the beauty parade selection process relies on decisions being taken on the likely outcomes for members. The employer’s purchasing were used to paying for self or third party administration of the workplace pension and it went without saying that the advisers would submit invoices to the employer (sometimes via the trustee).
So what has gone wrong?
This labour and cost intensive approach to scheme selection could not be replicated for smaller companies. Those costs that had been picked up by employers were transferred to the employee. The pension pot had to pay not just for the administration of the pension , but for advice to employers. With the introduction of auto-enrolment, the AMC was being used to pay for everything from bespoke communications to the implementation of workforce assessment tools and opt-out mechanisms.
In this mid-market, the provider did not see the whites of the client’s eyes. In fact the client and the provider might never meet as the adviser embedded themselves as essential to the process. Middlemen and middleware were deemed essential to the purchase and the outcomes of the workplace pensions were relegated to lower league status.
Somewhere in the mess of flex-benefits, corporate wrap and worksite marketing, the commercial imperative of getting staff into retirement has been forgotten
What about the smaller employers – should NEST be the only fruit?
I am very concerned about NEST. It has an important place in the market but it cannot become the market.
It had to be created because the large insurers could not promise capacity for the long tail of micro and nano employers.
So we should be grateful that there is a back-stop for the small employers that exist today and for those of tomorrow.
But that is only half the story, a market that becomes over-reliant on NEST to do the dirty work is a lazy market. The process of competition that works well at the top of the food chain (e.g. with large employers), is all but lost when NEST becomes the only fruit.
What concerns me about NEST is that it is allowed to grow conceited. It is not a great success story, it is the swallower of some £400m of public funds. At some point it will have assets to match its debt but it is a long long way from self-sufficiency, let alone being debt-free. Recent behaviour such as its refusal to adopt the PAPDIS standard and its quasi-governmental consultation on its post retirement strategy worry me. What further worries me is that NEST thinks it can get its consultancy for free.
It is this confusion between NEST the public servant and NEST the cuckoo driving out all other species, that is causing me problems.
Because it is allowing us all to take our eye off the ball.
The new workplace pension market
If we are to have workplace pensions for all, then we need the employers – who control the workplace – to engage with the pensions they are establishing.
We have moved from a market with integrity and independence (large employers) to a mid-market, compromised by over-intermediation and we are about to launch a new market for over 1m smaller employers.
This new market has a different kind of customer- Steve Bee’s Fish and Chip shop owner. It needs a new kind of regulation that recognises that these new customers need to be protected from bad purchasing, it needs a new kind of adviser, who is able to transfer the integrity and independence at the top end of the market to this mass market. Finally we need a new type of product that can be purchased easily, implemented easily , managed easily and delivers the kind of returns that would be expected of large employer schemes.
A new type of customer
We have a new kind of buyer. We know nothing about him or her since they have never bought before. This buyer may be familiar with a pension plan purchased for him or herself, but not for others.
The process of buying,promoting and managing a workplace pension for others is not a skill that has ever been taught. Not in schools or college or in any vocational course. The skills reside within a small group of expert buyers (pension managers) and a group of pension consultants.
These skills are not being shared. I see no effort to transfer the skills and knowledge from the NAPF membership and the PMI membership to meet the needs of the one million employers yet to stage.
Haves and have nots
Commission is dead, middleware is dying and large and medium employers are managing very well.
The challenges of 2012 and 2013 have been overcome (not without considerable expense- some of which unnecessary). If you work for a large or medium sized employer you have a workplace pension. If you advise such employers, your work is largely done. Large employers have other problems for you to attend to.
But what of the have nots – those weak-buyers the OFT pointed to? What of the employers who are finding their relationship with their advisers unwinding as payroll takes back the management of auto-enrolment and commission is ripped out of the AMC?
What of the employers who have no adviser or an adviser who tells them they are not advising on workplace pensions?
These employers may run great businesses, great charities or third age initiatives but they know nothing about pensions. They have not engaged with pensions, they know nothing about pensions and they have no means to get up to speed.
How can such employers become “haves”?