Over the weekend , the Telegraph published a story about Source Pensions . In the article it correctly claims that many pension savers have been automatically enrolled into illegal schemes. Source Pensions admit this is “regrettable”, I agree,

You can read my blog published last month on the subject here. This blog is also now published in Professional Pensions. I argue that the lack of candour of schemes such as  Source about how they actually operate is threatening auto-enrolment’s good name.

In the Telegraph article Katie Morley writes

“It (Source) is the first major legal setback to hit “auto-enrolment”

She is right. While the pension industry worries about the fines meted out to employers for non-compliance with auto-enrolment regulations, the public worry about their savings.

Over the past 12 months , we have had a number of pension providers who have not been offered on http://www.pensionplaypen.com . Source was one of them. The reason is always the same, unless we can be satisfied that the workplace pension stacks up against our six criteria, we do not offer it to the public. For the most part, small providers find it too much hard work to answer our due diligence, some answer it and we are unimpressed and occasionally we follow the Regulator’s process where we suspect there may be a fraud.

Almost all the problems we have had with pensions over the past 30 years could have been avoided if those selling and purchasing the pension plans , had been rigorous in their selection.

Source is an interesting case study. Katie found a corporate purchaser who claimed

“I wanted my staff to have the best pensions possible but when I approached the big providers they said they don’t work with small businesses like mine.

“I chose Source Pensions because they were cheap, but that turned out to be a mistake.”

This sounds  implausible. Not only does NEST have a public service obligation to take small schemes, but there are a host of other providers keen to do business with employers large enough to have already staged. Nor are Source Pensions that “cheap”.

I suspect that this particular purchaser didn’t have a clue what he was up to and was prepared to take the adviser’s advice. Most S0urce sales were “advised”.

The reason that Source Pensions were popular was that they offered financial advisers an opportunity to do what they feel they are best at, manage the accumulating wealth of individuals. Source openly advertised their arrangement as a way for advisers of getting paid by the pension fund (AUM or “asset under management” remuneration).

As each employer had their own Source Pension, each could have their own investment structure and (by extension) there own investment managers.Source was a godsend for advisers wishing to differentiate themselves.

And it was compliant with both auto-enrolment regulations and the Retail Distribution Review.

Ironically, the lure of being able to better govern the investment process took eyes off deficiencies in other parts of the proposition.

As it happens, the problems with Source pensions in Ireland were spotted by one of the advisers recommending Source Pensions, (someone I know to have the interests of members at his heart). He and his firm are now instrumental in rectification.

Who picks up the cost of putting things right?

We are at a stage in the purchasing cycle, where employers are still using advisers and advisers are experienced enough to sort out problems of this kind. I am sure that the advisers who recommended Source Pensions now wish they hadn’t as I expect the  rectification bill will arrive at their doorstep.

But I am more concerned about some of the smaller mastertrusts operating as qualifying workplace pension schemes which have no financial reserves for restitution, As Duncan Buchanan, one of our best pension lawyers, wrote in Pensions Expert last week.

The costs of winding up a mastertrust and distributing its assets should not be underestimated and in most cases are likely to have to be met from the members’ own retirement savings.

Accountancy practices looking at “pre-select” deals where the master trust is capable of generating management fees for themselves, should think twice. As with Source Pensions, the initial attraction of an annuity stream must be balanced against the “complicity risk’ of being associated with any failings of that trust.

As we know from previous pensions failures, it is those with the deep pockets who will be found liable. As Duncan points out, mastertrusts have no pockets, ,members have empty pockets and the risk is likely to revert to the originator of the proposal, those pre-selecting a failed arrangement,

Expensive short-cuts

In my opinion, there can be no shortcuts in the selection of a workplace pension.

Even when choosing NEST, that choice must be made with due regard to the other options available. For most small employers,  finding out who is out there offering them pensions will be a struggle. Any thought of making an informed choice without some expert guidance is deeply problematic.

Far too little has been done by Government to address these core issues. There has been an assumption that there is market capacity to provide these selection services. There isn’t.

I spent last night reading an excellent paper by  Andrew Tarrant, former adviser to Gregg McClymont, on the future of Pension Regulation in this country. He calls for a proper system of licensing workplace pensions that excludes rogue schemes from “Qualification” prior to them setting out their stalls.

I hope to publish this paper on this blog shortly.

In the meantime, you have www.pensionplaypen.com !