It has taken four years to hear an echo but finally it came and from an unexpected source.
Sue Flood, speaking at a Morningstar breakfast seminar questioned the basis of decision making of employers choosing workplace pensions for their staff. Sue is American and is familiar with the American version of workplace pensions (401k plan).
In the United States, workplace pensions are not universal as they will be in the UK by this time next year. Employers still choose whether to fund a 401k plan and only around 28% of small employers have a plan in place. There is no compulsion about contribution rates but employers are put under an obligation to act in staff’s interest in the choice and maintenance of the plan.
Employers take fiduciary obligations seriously, not least because staff are prone to issue class actions if they don’t. A class action can focus on the choice of plan provider, failure to establish suitable investment options and failure to monitor how funds perform as the plan progresses.
Speaking with Sue, it soon became clear that she thought the information given to employers to choose a workplace pension was insufficient and that there was little supervision of the due diligence process from UK regulators – in sharp contrast to what happens in America.
The meeting also heard about the Australian system of workplace pensions – known as Super. In the Super system, there is compulsion on employers to contribute to Superannuation plans but no fiduciary obligation or manage to choose the plan for staff.
Ironically, though the employer will soon be making deductions of a mighty 12% of payroll to Super, it is the member who selects where money goes. Members get the opportunity of a Super for life through the clearing system that has grown over time. This clearing system means that contributions from employers are dispersed to a wide range of providers with hubs such as “super choice”, directing the money.
The British system sits between these two poles. For 401k, the choice and maintenance of investment options puts the employer as a fiduciary, in Australia, the employer has no liability for choice which is off-loaded to each participating member.
My contention, made consistently on these pages since 2012, is that the employer obligation to choose a workplace pension is a fiduciary obligation and that the UK regulators are negligent in not making this clear.
Whereas in the United States, pension regulation is carried out by Erisa. The Erisa regulations establish “safe harbours” for employers. This means that employers cannot be sued providing they manage their plans within certain guidelines (the safe harbour rules). No such safeguards are in place in the UK.
I have repeatedly pointed out that the Head of Private Pension Strategy at the DWP had no right to assert “no employer can be blamed for choosing NEST”. NEST is not a safe harbour product (as Erisa would understand the term).
UK employers are being asked to choose workplace pensions for their staff with no instructions as to how to do so. It is like giving someone an Air fix model and telling them how to clip it together blindfold.
Tomorrow’s problem – today’s mistakes
Understandably, the choice of auto-enrolment workplace pension is not an issue for staff just yet. There is insufficient money in these plans to create an interest among staff, or an opportunity among lawyers, but this will change.
But pensions have a history of class action litigation in the UK (remember the pension transfer scandal of the 90’s?). The cause of this scandal was individuals taking decisions without proper information. Around 7 million individuals have taken a decision not to opt-out of a workplace pension based on trust that being “in” will be good for them.
I have not seen any survey (yet) which assesses the basis of that decision. Nor have I seen any survey of employers about why they chose the workplace pension that they did. My suspicion is that most employers would have no more idea of the basis of decision than their staff.
The reality is that most small employers are taking no decision at all, something that would shock staff if they understood the importance of getting the workplace pension decision right.
We have recently helped out 10,00oth employer thought the workplace pension decision making process. www.pensionplaypen.com requires the employer, not the accountant , or book-keeper or payroll bureau or IFA to state on an actuarial certificate the basis of the choice made.
The simple audit trail we provide each employer which uses www.pensionplaypen.com is proof that the employer has exercised its duty in choosing a workplace pension for a staff. As with GCSE maths, it is not the answer, but the working – which matters most.
But we are only skimming on the top of the pond, the problems lie beneath the surface
When will the Pensions Regulator regulate the choice of workplace pensions?
I hold the UK Pensions Regulator in deep contempt for its failure to alert employers to the importance of choosing a pension properly. I believe the DWP have compounded tPR’s failure by issuing false assurances (see above).
Most of the decisions taken by employers will turn out fine, some will be challenged, a very few will be calamitous. There will come a time, I suspect some time in the next decade, when the choices made by employers today will be called to account.
With the exception of those employers who have conducted due diligence and recorded their decisions, I see employers as extremely vulnerable to criticism, if not litigation from staff, seeking an explanation about how their money came to be invested as it was.
The integrity of the auto-enrolment is at stake. If we rely on nudge, we have got to be sure that we are nudging people into good quality schemes. The Pension Schemes Bill is designed to bring master trusts to some minimum quality standard but the reality is that not all workplace pensions are right for all employers and some – good plans – are entirely unsuitable for some good employers.
In the United States, they are finding out the consequences of not paying attention to the workplace pension, it is the employer and the adviser which have most to lose. Thank goodness we at last have an organisation – in Morningstar – prepared to point this out.