I was “privileged” to spend a whole day with one of the many employer groups we have in Britain. This meeting brought together Directors (especially FDs and Heads of HR) of Research and Technology organisations. When I say privileged – I mean it!
This was a paternalistic group with a history of making high quality DB provision, and there had clearly been benchmarking of contribution rates so that most employees working for an RTO in the UK can expect a total DC contribution well above the national average. Partly this is the fall-out from DB Schemes – where employers negotiated with staff a Defined Contribution Rate designed to be financially equivalent (to company cash flow) to what had gone before.
Good governance of the DC scheme was seen, by many in the room, as clearly a matter over which the employer should take an interest, contrasting the position with the amount of governance effort expended on the now closed DB Scheme.
Do employers have a fiduciary duty of care to staff?
The session looked at this big question from seven different angles.
- Does an employer have a duty of care to ensure the DC scheme is suitable for its staff?
- How much should an employer be contributing – what is the benchmark?
- What obligations are there on an employer to provide workplace pension governance?
- What feedback is the panel getting from members of their workplace pension
- Is auto-enrolment working? Are there snags?
- Does the panel feel confident their staff are getting value for money?
- What are Independent Governance Committees and are they any help?
One driver for wanting to do the right thing for the DC contributors was awkwardness engendered by there being “haves” and “have nots”.
Another driver was peer pressure, there had clearly been benchmarking of contribution rates so that most employees working for an RTO in the UK can expect a total DC contribution in excess of 10%. (well above the national average). Part of this is the fall-out from DB – where employers negotiated with staff a Defined Contribution Rate designed to be financially equivalent (to company cash flow) to what had gone before.
Good governance of the DC scheme was seen, by many in the room, as one way of both assuaging guilt and managing the manifest inequality between those accruing DB benefits and those getting a DC scheme.
Concern about employer specific investment defaults
But when we turned to what could be done to make outcomes better, the room was split. The conventional view – derived from consultants- was that the employer could improve on the default designed by the pension provider. One employer had gone so far as to poll staff about their intentions when they retired (e.g. annuity v drawdown v cash). But, the results had been inconclusive. As the IGCs are finding out, ask people who don’t know , what they want to do, and you get no further.
Other employers admitted that while they had started out with employer specific defaults, these had not been reviewed since the introduction of pension freedoms and there was concern that these employers were driving staff down a road called annuity when the staff had other destinations in mind.
This is a problem picked up by both Standard Life and Prudential’s IGC reports this year (the two I’ve read so far this round). The cost of maintaining these defaults (principally in advisory fees) is not sustainable and these defaults are looking less and less fit for purpose. These bespoke defaults are becoming an embarrassment.
Employers are proud of their pension engagement programs.
Where employers were getting results was in the day to day feedback systems they were putting in place with staff. One employer said that the cost of running a social media program where the staff were able to talk about the workplace pension had been a good investment. Clearly it could measure outcomes both in member satisfaction and in terms of usage of the workplace pension (enquiries and increased contributions).
But they struggle with their DC governance
But feedback cannot be properly called governance – at least not of the workplace pension. Infact, the feedback from the room was embarrassment
“what can we do?”
asked one finance director.
Value for money?
There was embarrassment when I asked whether employers felt they were getting value for money. These are scientists used to measuring things and I could see that a simple benchmark of the AMC was not considered all that Vfm is about.
The embarrassment was at many levels. Could employers get a good idea from their consultants? One doubted that a consultant – who owned the selection decision – could give an impartial answer. Another mentioned that they could not ask the consultants or the providers because they did not have the right questions.
But the biggest worry was that even if they had the right questions , they had no way of knowing they were getting the right answers.
What are IGCs?
The vast majority of the workplace savings schemes set up by employers were GPPs set up with insurers. Amazingly, only a handful of the employers (and only half the panel) knew what an Independent Governance Committee was.
When I explained the function of an IGC, scales fell from eyes and their were looks of wild excitement (well that might be slightly overstating it) but the relief was palpable.
For these sizeable employers who do not have in-house pension expertise or a meaningful advisory budget for DC, IGCs are a godsend.
The IGC is (for them) a professional source of due diligence which is both cheaper (as in free!) and more effective than the work of the in-house pensions governance committee.
The FD’s immediately got it and since the meetings I have had a number of requests for links to the IGC Chair reports for their schemes (when they come available).
Access to IGC Chair reports
It is a shame that I have to send these links. The publicity that the IGC Chair Statements get from Insurers is simply not good enough.
I was with a member of the Prudential IGC last night and he told me that the statement is going to all their employers. This is not enough, many of the members of the Pru’s workplace pension are deferred and no longer work for the employer, the IGC statements should be going to all members of the workplace pension (regardless of whether they are currently contributing).
And if the IGC reports are going to employers, then the employers are clearly not noticing them!
Who’s kidding who?
Whether it be from the dilution of the advisory budget (which happens when things aren’t working).
Or because the commission to pay for governance has “run out”.
It seems that workplace pension advisors are largely absent from the workplace.
This group of employers said they felt that they didn’t have the right questions to ask providers, the right help to ask the right questions – from advisers , and even if they did ask the right question, they felt they were powerless to change things.
The IGCs really want to help employers like these but they are not getting through to them.
One present asked their consultant whether they should be paying attention to the IGC report and was told that there was no need (as they were already paying for due diligence ).
We shouldn’t be kidding ourselves that DIY due diligence and ongoing governance can be effective. Unless done to a really high standard, it is unlikely to come close to the work that IGCs can do. If done to a really high standard, one has to question whether it can do more!
For large employers (with a minimum of say 10,000 staff) there really is an opportunity to put pressure on a provider.
But kidding smaller employers into thinking they can influence the behaviour of large master trusts or group personal pensions isn’t helping. These pension committees do a great job talking with members and making sure the scheme is working in their best interests
There are plenty of good things advisers can do to help such employers engage with their staff, I suggest that they focus on what is now called financial education.
Advisers – let IGCs do their job – don’t second best them!
We have enough to do helping members, without trying to play God!