On Wednesday March 9th, the Work and Pensions Committee met to discuss auto-enrolment. This blog looks at this conversation in some detail. It concludes that there is an urgent need for Government to clarify what liability there is on an employer to choose a pension in an informed way .
You can follow the Committee’s discussion by pressing on the link below (sadly I can’t embed the Government code to show you the video on this blog.
This conversation between Ros Altmann, Charlotte Clark and the DWP Select Committee poses important questions about choice.
Choice for those least able to choose
At around 10 minutes 30, the conversation turns to “pathways and journeys” for very small employers, especially those employers who don’t consider themselves as bosses.
These are the most vulnerable employers, those employing carers, typically through money given to them by local authorities.
Ros Altmann makes it clear that the “journey” to choosing a pension has a default destination- NEST. Though these vulnerable employers can choose, the mechanics of the journey promotes NEST. We know that the less engagement there is, the more important the default. NEST claims to be setting up around 500 schemes a day at present, it is clear that this throughput is in part as a result of direct Government intervention. (the NEST numbers are from a session at the Payroll World Client Conference yesterday).
The first question posed by this, is whether, should something go wrong with the default, there is liability reverting to those who used the default, or whether that liability is with the Government that promoted NEST as the default in the first place.
The setting of NEST as the default scheme is a worrying trend, there is nothing in the auto-enrolment regulations about choice other than the employer has a duty to choose a pension. The law says nothing about the Government choosing where local authority money goes, though one member of the committee suggests that perhaps this should be the case. But if local authorities are choosing on behalf of carers, then carers are not employers at all and this drives a coach and horses through the elaborate artifice established to engage, educate and empower carers (or their representatives) to act for themselves.
I take issue with the Government’s journey to NEST, I think it should be challenged and Ros Altmann’s justification that it costs an employer of carers £3000 in IFA fees to help make an informed decision is wrong. I know because we have been helping carers make this choice for £99 and the service has worked very well.
Can advisers choose pensions for employers?
Carers have clearly been singled out by the DWP as in need of greater direction, it is hard to fault that logic though I do challenge the DWP’s market information about the cost of advice.
A much more worrying misconception ob market dynamics occurs immediately after the discussion on carers, from 10.40.40 (the link again takes you to the recording of the Work and Pensions session).
The question is from Heidi Allen, conservative member for South Cambridgeshire who asks whose responsibility is it, if a pension that has been suggested by a third party,”if that pension fund turns out to be no good or goes under”.
At this point something goes seriously wrong. The Minister starts talking about choices being made for employers by financial advisers. She correctly distinguishes between the compliance service offered by payroll companies and help with the choice of pensions but she completely ignores the rule that the choice of pension should be made by the employer.
Our position at http://www.pensionplaypen.com is clear about this. We are responsible for the information given to employers and their advisers, we are responsible for the process which turns that information into an employer specific rating (and by extension recommendation) but we are not responsible for the choice which our service demands be made by the employer. We make the employer, in its own words , state why the choice is made.
There is no ambiguity, the choice is the employer’s , the intermediary simply gets the employer engaged, educated and empowered to make that choice.
This clarity is needed if we are not to have a mis-selling crisis down the line.
Ros Altmann goes on to half-heartedly endorse the signposting going on on the Pensions Regulator’s website, but backs off from endorsing this process.
The Government needs to get this right and I am doing everything I can to get tPR, DWP and the FCA to get their heads together.
Why so many goats?
In the next section of this fascinating debate, Charlotte Clark explains why the risk of master trusts failing had not been addressed . She argues that no-one thought that anyone would want to take NEST on. I have a lot of sympathy with this as I sat in a DWP meeting where no provider would commit to be provider after 2015.
The market dynamics that have made for “master-trust proliferation” were however in place at the time. What the DWP and the established providers in the room, failed to appreciate was the ease with which small master trusts (with low overheads and low capital adequacy requirements) could compete.
Jeremy Quin (conservative Horsham) then asks a key question – whether the Government are looking to guarantee no loss to members of a failed master-trust. John Glen (conservative Salisbury), asks why the Pensions Regulator feels it hasn’t the power to properly protect members.
Ros Altmann points out that the cost of wind up can be substantial for a small scheme. If anyone wants confirmation of this, they should look at the comment on this blog by Jade Murray, a senior pensions lawyer who gives an example of a simple wind up costing £600,000 in fees.
NEST – a safe harbour?
Craig Mackinlay (conservative South Thanet), reverts to the question of whether NEST can be generally used for NEST and asks the question
Is there a statutory exemption for anyone who says NEST is ok?
Ros Altmann’s response is again to suggest that clear signposting is needed to “good schemes”. She rightly points out that the signposting right now is all about the Master Trust Assurance which doesn’t cover investment matters, protection against wind-up (or much more than the capacity of the scheme to make an employer compliant).
Charlotte Clark points out that employers cannot (from the Regulations) be held liable for a poor choice of pensions which leads one member of the committee to observe that just about everyone is protected apart from the poor member!
Sorting the sheep from the goats
Craig Mackinlay then suggests to the Pension Minister that NEST gets a statutory exemption (a safe harbour) so employers choosing NEST (and providers recommending NEST) are immune not just from Regulatory but from civil liability.
Ros Altmann is clear (backed by Jeremy Quin) that more risky schemes (than NEST) should be available for those who want racier returns. Again Ros Altmann reverts to the need to make all choices “safe enough” and clearly the means to do this is to sort the sheep from the goats, effectively taking poor choices out of the market through legislation.
What are we to make of this?
It seems quite clear that while the Regulator wants to restrict choice to approved providers, they do not have a solution for engaging, educating and empowering employers to make informed choices.
This should have been within the remit of the FAMR and I’m sorry that the FCA are not involved in this debate. The FAMR concludes that new technology can be applied to the problem to bring the cost of delivering informed choice at a reasonable price.
As I have mentioned above, the amount we charge to help an employer make an informed choice can be as low as £99 and we will not charge any employer more than £499 (no matter how much hand holding they need).
The difference between these prices and the £3000 mentioned in this session by the Pension Minister is really about how successful we can be in engaging and educating on-line.
My conclusion, having listened again and again to this fascinating conversation is that Government needs to engage and get educated about the way we engage and educate!
Why oh why have we got a system like this? For piddling amounts for piddling employers for au pairs, carers and casuals whereas a NICs surcharge direct into NEST (or similar) would have been preferable. But no, let’s create a bureaucracy even the EU would be proud of to invest pocket money amounts for millions of transient workers who will accumulate piddling amounts all over the place. With some dodgy Master Trusts and ample mis-selling opportunities, are we really just creating another scandal for decades to come? More jobs for the bureaucrats of the future? Who will fund that ultimately? Probably Joe Public eventually via tax or higher prices created by providers to pay for the clear up!