I am going to New York next month to talk about risk sharing in the UK. I will be sharing my session with Simon Nelson of Eckler, a Canadian actuary and we’re comparing notes at the moment.
I’d like to be talking about the really big issues, the balance between the state and the private individual, the role of employers and most of all what we can and cannot guarantee.
But there is an obstacle to this. Before we can talk about what should be happening, we need to understand what is happening. We need to ensure that we build on a firm base and this means properly understanding the governance model and where the “risk stops”.
What’s clear from our conversations so far is that the risks are being borne by those paying the money and the money is being made by those not taking the risk. Which sounds a good consultancy model, but not a formula for good member outcomes.
I cannot speak for Canada, but I can for the UK and when I try to explain what is happening here, I am surprised by how difficult it is to explain who is doing what!
The supply chain that persisted for three decades in the UK, has been disrupted. Advisers can no longer be paid from the members funds for advising members on what to do with their pensions.
The argument against this practice was that there was no evidence that members were getting value for money and that the advisory costs would be better managed by being paid as fees by the member or fees by the employer.
The principles of better disclosure and value for money have been extended and now are being applied to the other hidden costs that members pay for the management of their retirement pots.
Rather than assign the job of controlling these costs to consultants, the Government has chosen to use trustees and the newly created Independent Governance Committees to do this work. (Today is the first business day for this new governance regime.)
IGCs are the fiduciaries for contract based plans, Trust Boards remain in control of occupational pension schemes (including master trusts such as NEST, NOW and the Peoples Pension. IGCs will be regulated by the FCA, trust boards continue to be regulated by the Pension Regulator.
Advisers and consultants have spotted opportunities here. The weakness of DC governance, especially the governance of occupational DC plans, gives opportunities for advisers to operate as Fiduciary Managers, effectively charging members not to advise but to manage their workplace pensions,
The distinction between advice and management is squashed into a new concept “vertical integration”. In theory this is fine. If the expertise is with the consultants then why should they not implement their consultancy?
The problems with such a model arise at the point of sale. Where the one stop shop concept is being sold to employers and their representatives (typically their accountants) as a fully advised product, there is likely to be confusion.
The adviser is being paid to manage the pension but being chosen as an adviser. It is an advised sale where the adviser is acting both as salesman and fiduciary.
But who is taking the risk? Inevitably it is not the adviser since he or she is being rewarded from the management fees generated by the pension fund. It is not the trustees who have delegated the management of the pension scheme to the advisers. The risk is sitting firmly with the members .
But where is the oversight to ensure that there is good practice in the process? It sits with the trustees who theoretically have power to sack the managers of the scheme. But since these trustees were appointed by the scheme managers, there are deep conflicts here.
The danger of employers being defaulted into a pension arrangement sold through an accountant, governed by compromised fiduciaries and managed by advisers is growing by the day.
The creation of vertically integrated master trusts, ostensibly to manage the supposed capacity crunch, but in practice to provide embedded value to advisers and consultants is a potential abuse of workplace pensions. To my mind it is yet another means of subverting the ban on commission and consultancy charging.
So long as the boundaries between advice and governance are blurred by “vertical integration”, the public will continue to be confused, bemused and ultimately abused by pensions.
As a firm of independent consultants, we – First Actuarial – are against vertical integration. We do not work as independent trustees nor do we enter into distribution agreements with third parties that compromise our independence.
Similarly as http://www.pensionplaypen.com, we pledge to offer ratings on the pensions offered to employers without prejudice. We will not take money from insurers or master trusts to impact our ratings – indeed we ensure that the rating process is carried out independently.
It is only through employing a scrupulous approach to advice that we can properly claim to be advisers. We believe that our value rests with our integrity and should that be compromised, so will be our value.
From the member’s point of view, confusion between who advises and who governs simply adds to the risks they are taking. Where the member and the employer are one and the same, as will increasingly be the case for small and micro employers, the lines becoming further blurred.
Which is why I am talking with Simon Nelson of Eckler in New York about risk-sharing. It is simply not fair for members (and indeed micro employers) to be left carrying all this risk.
Whether we are talking about the growth of DC in the UK or the growth of CDC in Canada, we need to properly understand not just what the pension risks are and who should be taking them.