Inertia selling is all the rage in financial services. We encourage the use of the defaults investment options, we applaud the non-decision not to opt-out of a workplace pension and now it seems we are to applaud the seamless transition from accumulation to decumulation advocated by certain corporate advisers , certain insurers and certain fund managers.
I cannot name names because the plans are under wraps (or as we now call them “non-disclosure agreements”). It is however an open secret that three of the largest actuarial consultancies have or are planning to launch master trusts to house the members of the occupational DC schemes they advise and/or administer.
Exactly how this is going to work is beyond my technical expertise. To move members from one occupational scheme to another ( a master trust is an occupational scheme), WITHOUT MEMBER CONSENT requires an actuarial certificate that confirms there is no member detriment. It also requires the employer sponsoring the accumulating scheme to be a participating employer in the master trust.
The reason for transferring from one scheme to another is to remove the liability on the original employer for the outcomes of the decumulation process. To use the parlance of risk management,
“if there’s going to be a train-crash, let’s make sure it’s not on our watch”
So just how much “separation” is there going to be , if you the employer, establish an arrangement by which “risk” (here defined as the financial future of your retiring staff) is transferred from your trustees to someone else’s?
NOT MUCH! Risk, in financial services, has a nasty habit of rebounding. Banks have not been able to wash their hands of the outcomes of PPI, Swap sales to SMEs, LIBOR rate-rigging, Forex manipulation, Custodial theft or any of the other market abuses for which they have been fined some £3bn over the past year.
What is common to all the abuses is that they happened because consumers were not aware of the implications of the transactions that they entered into. Indeed, many of the abuses happened because the purchasers of services were not even aware that they were being sold something.
If the large banks (who happen to be sitting on more DC money than any other part of UK corporate, decide to ship out the pension pots of retiring members, then they will do so with extreme caution.
I think it very unlikely that Trustees will wish to be a party to any transaction to wash their hands of the outcomes of their labours without being absolutely sure that the transaction has the consent of the people involved. This means more than a default acceptance, it means actively engaging people in the process and clear documentation that the transfer has not happened because of “inertia”.
We are now entering into a new phase of DC consulting, what can frighteningly be referred to as “DC de-risking” (you heard it here first).
If trustees “want out” of managing their member’s pension pots, they are going to have to work hard to achieve “separation”. Ironically, this is likely to mean increasing the barriers to transfer, not creating a seamless service.
I use the word “ironic” advisedly, for conventional wisdom supposes that a straight through process is the only way that action will be achieved and that a non-advised nudge (as happens with AE) is what is needed to get rid of elderly DC members.
No matter how good these new master trusts might look,
no matter the efficiency of low cost transitioning-
high quality fiduciary management-
expert corporate trusteeship-
and world class administration –
I think it unlikely that an employer or a trust board that bulk transfers of DC pension liabilities will have wiped them from its “risk register”.
Any more than insurers can consider they are off the hook for the “seal-clubbing” of annuitants into hopelessly uncompetitive annuity products.
There are of course alternative strategies that could be employed.
Employers could sponsor trustees to administer drawdown from within the scheme,
They could offer financial education – guidance – even advice, to staff considering their retirement options.
Whether employers could go so far as to signpost specific course of actions (such as a master-trust of a GPP is a matter for its lawyers. I suspect that without some kind of “safe-haven” legislation, most employers will be deeply suspicious of directly recommending any financial product unless it can be seen to be totally separate from that decision.
What is obvious, is that a new form of intermediation is needed to offer the kind of separation employers need.
The need is not just to reduce the risk of “yellow-labelled pension liabilities”, it is to maximise the satisfaction of retiring staff with their decision making, give confidence to retiring staff to retire and improve the value of the employer brand and the pension value proposition.
The business case has yet to be formulated by any adviser or employee benefit consultancy I have spoken to. I suspect that it will not become compelling until there is a genuine improvement in the quality of product available to advise on or signpost to.
Perhaps the experts within the large pension consultancies should consider how they can help those products be built. They need to think of separation too!