I’m watching formula one and the race management programs that are as much a feature of a race as the driving. It is possible to win or lose a race in the pits , it’s not often that drivers win races for themselves.
The comparison with works (place) pensions needn’t be laboured, for the most part pensions work not because of the brilliance of an adviser, or a fund manager or the actions of the member – they work because of the efficiency of the “team”.
We are used to looking at the diagnostics which teams use to manage the car over 60 or 70 laps. Over a short distance, these systems are not important but the fractional advantage they give a car can build over a race into what determined the race position. It is not hard to see that Ferrari, Mercedes , Williams, Mclaren and Red Bull have better race management systems.
Each season we see them producing the fastest cars. Exactly the same applies to works pensions. There are certain management teams which consistently produce results and it’s down to simple things- lower costs, better processes and a system of diagnostics that ensures member outcomes are constantly optimised.
The problem is that the performance statistics are obscured by the timeframes involved. A formula one rate is over laps, a pension performs over years. So how do we know our works pensions are working?
All the F1 diagnostics have their equivalence; fuel economy, tyre life , straight line speed , braking and cornering can be compared to costs, digital efficiency, asset allocation and a working dashboard. We do not have the obvious comparators that an F1 race gives us, but over time, we will see some workplace pensions consistently doing better than others.
NOT ALL WORKS PENSIONS ARE THE SAME.
This is why choosing the right pension is so important.
Can we have new entrants or will it always be the usual suspects? NEST, NOW and People’s pensions are showing all the signs of becoming long-term players. There are other new entrants that are set up well but are having problems getting the kind of funds under their control which will enable them to be durable long-term contestants and there are some new schemes we just don’t get.
Some of the traditional players, the insurers such as Aviva and Friends Life, are merging to create super teams, some are struggling, some are surging ahead. This period between now and 2018 will see more than 4m employees from 1m new employers engage with pensions for the first time.
Their decisions will determine who will win and who won’t. If a new pension provider cannot get scale over this period, it is hard to see it sustaining its proposition.
So can providers buy success?
In olden days, a poor workplace pension could succeed if it got its marketing right. The assumption was that a provider with strong distribution could distribute anything. The primary driver was commission payable to the distributor.
But with commission all but played out of the system, it looks a lot higher for a provider to buy success. All that is left is deals – and we are seeing a frantic land-grab from the traditional barons of the business. But the nature of the buyer is changing and we have to ask whether, unless these deals are really delivering value, they will be sustainable.
The deals are badged “defaults” which puts the purchase of a workplace pension on a par with the choice of an investment fund by someone joining one of these schemes.
Are these deals doomed?
My earlier point is that the buyers are different. Employers are being asked to choose a pension which suggests a decision needs to be taken. An argument that this is an impossible decision is plausible. Currently there is not enough advice to go round and the delivery of that advice has more in common with the village shop than the digital superhighway.
Employers choosing a works pension will need to show not just why they made the decision they did, but why they didn’t choose other options.
There needs to be a system by which the comparison can be made and this means that the choice needs to be taken with knowledge – it needs to be an informed choice. In my opinion, the information with which works pension decisions can be taken, is simply not being presented to employers and many works pensions that are being set up today are being set up without any form of due diligence.
Would you choose an F1 team this way?
Would you choose a works pension this way?
How do we know our pensions are working?
Most employers are at the start of the race, they are now having to engage their track management systems and understand how their works pension is performing. Measuring performance is a key task of the newly formed IGCs. We are yet to see how they will display the information they gather. Nor is it obvious how the new master trusts will respond.
I very much hope that we will be able to develop a system of performance measurement that enables employers to see how their works pension is doing and take remedial action on behalf of staff, it the pension is not succeeding.
It seems inconceivable to me that consumer organisations will not want to promote such comparison. If they knew this was coming, would employers not be a little more careful about how they chose in the first place?