Once it was so simple. Good employers offered good pensions and lousy employers didn’t. The good employers congregated at NAPF conferences and congratulated themselves and an industry fed on the easy money growing within these plans.
But then came lower than expected interest rates, lower than expected market returns, longer living and ever greater demands on companies to account for pension promises as corporate debt.
Pensions stopped being fun and started becoming a problem.
The decline from “reward” to “liability management” has continued to the point that the proudest boast of a CFO is that the “pension problem will be over soon”. It’s the length of the flightpath to buy-out that is the metric by which the success of a pension is measured.
There is simply no point bemoaning this. This is what it looks like in Corporate Britain and the only reason the public sector is different is because the tax-payer is not as savvy as the share-holder.
If the point of investing is return, the return on an investment in staff pensions has rendered it pointless. Pensions are now a corporate obligation (under auto-enrolment), effectively a lag on cashflow, a stealth-tax.
The marketing departments of pension consultancies, corporate IFAs and the new breed of auto-enrolment consultancies stress that auto-enrolment has nothing to do with pensions and employers and their representatives (the trade bodies) have picked up on this.
The success of the auto-enrolment project is judged in terms of regulatory compliance and employee apathy. The opt-out rate is low because nudging is working., regulatory failure is low because employers are aware of their “duties”. This is not a project that has – as yet – captured the popular imagination.
Auto-enrolment – tomorrow’s challenge not today’s success story..
However, the pensions industry is starting to wake up to the possibility that it might have a public policy success story on its hands and is keen to grab whatever positive PR it can (for itself). Follow this link to hear Ruston Smith of the NAPF claiming the success of Auto-Enrolment is down to the hard work of his audience (NAPF members presumably).
The difficulty for the NAPF is that they have absolutely no part to play in the extension of auto-enrolment beyond their membership to the 1.8m employers who have no pension. Their quality mark, PQM is fine for BAE Systems, the BBC and Taylor Wimpey who they advertise on their landing page, but look at the news feed – on August 14th, the latest piece of pensions news was from May 20th. At a time when things are moving fast – the NAPF and PQM aren’t moving at all.
When its CEO can start a talk in the spring of 2015, “with auto-enrolment almost over…” , you know there’s a disconnect.
Auto-enrolment has done nothing to revive DB
The truth’s auto-enrolment is no more than a platform which ensures that people can be involved in pensions. It puts people and companies that have been excluded, in the same place as the BAE, BBC and Taylor Wimpey.
But if everyone is on the same platform, what incentive is there for employers to return to pensions with a sense of pride? The appetite of corporate Britain to take on any kind of guarantee (even if its only a promise) has led to a total lack of enthusiasm for CDC as an alternative to current DC workplace pensions.
The only engagement between DB pensions and auto-enrolment in the corporate sector was when WM Morrison enrolled members into a cash balance plan and Tesco countered using their career average plan. Tesco have done a u-turn and reverted to a standard DC structure, while Morrisons continue to enjoy the short-term cashflow benefits that mean many staff are not having to be enrolled till 2017. We wait to see what happens then.
Employers are walking away from pension governance
The idea of an employer establishing a pensions trust for staff is as obsolete as DB. Master trusts fulfil the duty of care by proxy, the IGCs do the same for Group Personal Pensions and Stakeholder Plans.
While consultants continue to promote governance committees at employer level, it is increasingly difficult to see what effective governance they can do – certainly in relation to improving the member outcomes. What influence a governance committee has is based upon current assets and future cashflows. While the grandees- the BAEs , BBcs and Taylor Wimpeys can still do their willy-waving, for the vast majority of SMEs and micros have no-one shouting their corner other than the fiduciaries of the providers (and Government).
How do we re-engage employers?
Here’s a simple blueprint
- Start by making sure that the workplace pension is fit for purpose- an employer can select the best plan it can without a great deal of fuss.
- Focus on the things that employees can do for themselves, chiefly save sensible amounts.
- Engage and educate employers in what “sensible amounts” means – and it will mean different things to different people.
- Empower people to save by making it easy to contribute through payroll and easy to see the impact of their saving online (on whatever device they choose)
- Make sure that people become addicted to this by establishing and maintaining a budget to engage, educate and empower staff.
This isn’t rocket science, the rocket science is going on elsewhere. We shouldn’t be asking employers to become pension rocket scientists, in fact we want pension managers who can focus on the 5 simple tasks above.
Employers will become re-engaged with pensions because they can see their staff re-engaging with pensions. The circularity of this argument is a problem. Most employers see employee apathy towards pensions as a clear signal not to bother.
The consultants (and to some extent the Pension Regulator) have to move on from this insistence on payroll compliance towards an engagement strategy that includes employers and employees.
Most of all, we need Government to act to make pensions more engaging. After years of timidity , this is finally happening. The Pensions Green Paper could turn pension tax around incentivising people to save rather than putting them off. The FCAs approach – put forward in the recent Financial Advice Market Review – is pointing advice back in the right direction while the DWP and FCAs ongoing work in nailing “value for money” is (slowly) getting there.
We have yet to properly deal with the way we organise people to spend their savings, people need a “spending default” and I hope that the Defined Ambition project will eventually deliver them one.
We are not there yet.
But I genuinely believe we can and will restore confidence in pensions. Employers have a huge role to play in this but it’s not the role they have traditionally played. The employer is now a facilitator, engaging, educating and empowering staff. It would be nice to see more employer contributions to DC, but better still to see staff choosing to pay meaningful contributions themselves.