Those clever folk in Brussels have come up with the idea of extending MIFID to cover UK pensions, says this article. My old chum Matthew Connell of Zurich is concerned that this might stop the sale of workplace pensions to employers “on a default basis”
All complex products can only be sold to a consumer either through an advised sale or through a sale following an ‘appropriateness test’.
Oh dear, and there’s me thinking that employers should be entering into long-term investment contracts on behalf of their staff without the faintest idea of what they are doing. After all , that’s how people bought personal pensions, endowments, PPI and how employers bought interest rate swaps as part of business loans.
Of course it makes absolute sense for the 1.2m employers and 5 million workers joining these schemes to be defaulted into the pension scheme arranged for them by some super buyer like the National Association of Haberdashers or the local accountants or ZYZ payroll services. After all they know all about how pensions work , what separates good from bad and what might be considered appropriate for their members/clients/customers.
Now I know in these new enlightened times we must consider any meddling from Europe as a “bad thing” but might there not be just a little bit of sense in requiring employers setting up a long-term investment contract for their staff, to take a little time to work out what they are buying and why? And might it not be a good idea for someone to write down for the benefit of the staff whose take home pay will reduce, to know just what they are investing in and why it was considered suitable by their employer?
Might someone not consider being nudged into a financial product without any understanding of what that product is , akin to the process by which people were suckered into that list of financial products (to which I could add default annuity products)?
Might that same person not ask , in years to come , why no-one stopped to ask
what the hell’s going on here – what exactly is this work place pension?
No!
We are now so in love with non-decision making , that we’ve agreed that large numbers of non- heterogeneous employers can be herded into pens and defaulted into workplace pensions they know nothing about – and this is good.
A couple of nights ago I watched a film called Boom Bust Boom in which – like groundhog day – I saw banks blow up over and over again. It wasn’t the same explosion, each explosion was separated by history. South Sea Bubble – Wall Street Crash – Credit Crunch.
But what linked all of these events was that they sprung from the supreme over-confidence of those running the banking system that
“this time it’s different”
This time is no different from the defaulting of people’s funds into inappropriate personal pensions, endowments, annuities, PPI. Defaulting employers into workplace pensions without them having a clue about what they are doing is simply an extension of a failed process that will have precisely the same consequences- ambulance chasing, claims, restitution and ultimately a breakdown of what is currently going well.
If auto-enrolment is to continue to go well, we need to provide the same help on workplace pensions to the SMEs and micros who know nothing about pensions as we do to the larger employers who know nothing about pensions.
All that changes is the delivery mechanism, You either deliver advice and guidance to employers properly , or you run the risk that – like all the other mis-selling scandals that preceded this, the default sale will come back to bite you.
That is why there should be no carve out of workplace pensions, why people buying into workplace pensions should know what they are doing and – ultimately – why Brussels – on this – is right.
Henry
As so often you are bang on the button. But why not go one stage further ands require employers to provide financial advice to their staff to help educate them into making a decision as whether a pension, workplace or otherwise, is really the solution or indeed even part solution to their own needs? One size does not fit all.
Whilst what you say is ideally true, in the real world most of the 1 million plus SME employers do not know the first thing about what makes a pension good and what makes a pension bad. The charge cap on default funds means that no employee who is automatically enrolled will pay more than 0.75% AMC (apart from those using NEST where the costs are significantly more than 0.75% in the early years because of the 98% allocation rate on all contributions) and all default funds will have to be deemed “suitable” for a pension scheme to qualify as an AE compliant scheme in the first place. By commoditising pensions in this way the mass of employers and by association their employees will end up with a one size fits all pension. That is pretty much the intention of the legislation, so why now go against this commoditisation? Anyone who cares enough about their pension (and who maybe works for a SME who has provided a pension scheme with a very limited range of funds) will be free to self research or pay for financial advice to transfer their holdings out to the pension scheme of their own choice. Traditional Pension providers and life offices do not really want AE schemes unless the payroll data for the proposed scheme suggests high salaries and low turnover combined with contributions in excess of minimum qualifying contributions. So given the next two years will see the majority of SMEs signing up to workplace pensions for the first time it is likely to be the case that NEST, Now Pensions! and the People’s Pension are going to provide a lot of the capacity, together with some of the new master trust schemes coming on to the market. These schemes all look very similar because the profit has been taken out of the industry and so index linked tracker funds using lifestyling glidepaths form the majority of default funds for most schemes. There is also a lack of alternative fund choices for most scheme providers as it is just too expensive to provide a wide range of choices for tiny schemes. And the other thing is that employers are rightly bamboozled at the complexity of the requirements to assess each months payroll and with the complexity of minimum contributions. And they must be rightly cheesed off with the failure of payroll providers and pension providers systems to talk to each other properly. So although Pensions Play pen is a great website providing useful information for employers, that is not really going to do the job of educating employers. And I know you champion L & G but in practice they are not ever interested in small schemes with high turnover and small numbers and small contributions.
One size does not fit all but if you want to have made to measure pensions you have to pay the tailors fees for “Savile Row suits you sir” pensions. SME employers won’t pay these fees. Pay pension providers and advisers peanuts and you get monkeys. NEST was supposed to be a solution which could act as a national employee savings trust for any employer. It may well succeed in being that but in fact has the highest charges in the early years (because of the 2% initial charge on every contribution), has an adequate but not exciting choice of funds, and has zero customer service interaction with human beings. If all one does is focus on driving costs down this is the kind of homogenised one size fits all solutions we can expect.
“Savile Row suits you Sir” or “Maybe Sir would like to consider whether he is ready for a suit yet and first check out our range of informal clothing that will equally well keep him tidy and warm. We have a most helpful instruction guide here on how to look good and tidy without necessarily going to the expense of a suit.”