To my surprise and mortification, I have been contacted by a group of DC pension consultants complaining that a recent blog denigrates their work with smaller employers helping them get the most out of their workplace pensions.
A big fat sorry – we need pension committees and DC consultants!
It wasn’t my intention to poo-poo “DC governance in the workplace”, but if that was the impression I gave, I apologise! Blogs need to get it right first time!
The blog in question suggested that advisers would be better off using the IGC’s agenda and focussing on what eventually will become a Value for Money score as an estimate of the worth of the workplace pension.
What was contentious was my estimate that only the very largest employers have sufficient clout to make meaningful changes to the way a workplace pension provider operates. I went further and suggested that consultants who try to set up scheme specific defaults for clients without the covenant to maintain and nurture the default, are doing more harm than good.
What I did not mean to imply is that an employer has no business being involved in the management of its own DC plan- as it members of staff, nor that consultants cannot add considerable value working with an employer specific pension governance committee.
What I have noticed is that the terms of reference for many of these committees are overly ambitious and/or wrongly focussed. Instead of measuring service standards, trying to guess the yield drag of the scheme’s default fund and replicating work being done at the IGC/ Master-trustee level, employer’s should be gauging the level of engagement at staff/member level.
There are some obvious things to look at;-
- opt-out levels
- voluntary contribution rates
- awareness of IHT/AA and LTA issues
- use of Pension Wise
- level of cash-out v drawdown v annuitisation
- use of advice at retirement.
There may be some more obscure issues that can be explored where share-save schemes are available, or where salary/bonus sacrifice facilities are in place. Where employers use a financial education program, whether designed internally or run with the help of a consultant, the of that program becomes part of the terms of reference for a pensions committee.
The big dividend of the IGCs and the Master-trusts is the capacity smaller companies get (for free) in terms of scheme governance. Recent conversations at everything from client meetings to conferences and Pension PlayPen lunches suggest that consultants are slow to rely on the IGCs and the trustees of the master-trust.
Instead of feeding back to the IGCs, they all too often ignore them. Such was the case with a group of employers I spoke with recently who were using consultants to help them monitor the performance of their GPPs but had no idea that this work was being done collectively by their provider’s IGCs.
Too many employers and not enough advice = poor governance
The work of benchmarking and performance measurement needed to help 1.5m employers with workplace pensions have a clear idea of value for money, needs collective performance measurement , value-benchmarking and the kind of forensic accountancy of costs and charges that can only be carried out once!
The majority of the employer based pension committees I have worked with, have not changed their terms of reference to take into account the collective governance of the IGCs and Master Trusts. As most of these committees are run by advisers, I guess I am criticising advisers for not letting go these functions (which may be where the DC consultants were getting cross).
But I am sure that when we sit down and discuss this (I hope to meet with them), we will find much common ground. For all the work that is done on the workplace pension product itself, the missing ingredient to making a workplace pension “work” is the voluntary contribution level.
To some extent, the contribution level will increase if the staff/members consider that the workplace pension is worth investing in and the pension committee reserves the right to press the nuclear option and change providers. But in the vast majority of cases, changing providers should only happen as a last resort, it should not be high on the pension committee’s agenda.
To a much greater extent, the contribution level will increase when people see that the syphoning off of net disposable income into long-term savings is a good thing to do. The pros and cons of spending on retirement/housing/debt/enjoyment need to be discussed and where better to discuss them than at work. Work is boring, money is boring – there is a synergy there.
In my view , the work of the Pension Committee should be focussed 80% on the adequacy of savings level and 20% on the Workplace Pension as the means of saving. The proportion may be higher or lower but it is in that order of things.
Currently I see DC consultancy too focussed on the product and not focussed enough on the risks of the product not getting properly used. The modern day pension governance committee should be talking with staff, not just once a year through a report, but regularly through polls, surveys and the kind of interaction you would expect from someone who is taking a big slug of your salary.
So I’m really sorry to have given the impression that DC consultants and employer established pension committees are of no value. That wasn’t the intention at all. Their value is 80% in getting the workforce to use the workplace pension and 20% in making sure the pension is meeting the needs of the staff.
Where I take issue with DC consultants is that they have yet to adapt to the new conditions of group personal pension – with IGCs and of occupational schemes – with master-trusts. The very largest employers may get value from running their own trust, but I think I’m right in saying that bar is probably set at 10,000 employees. Below that – it’s the IGCs and the master-trustees who should be doing the heavy-lifting on governance, and the pension committees and DC consultants, who should be focussing on getting the GPPs and master-trusts – properly used.
How small employers can get pension smart without really trying.
For many very small employers, it is not cost efficient for pension advisers to provide help directly. These employers will depend on accountants or their payroll function. For them the IGC and master trust chair statements are of critical importance.
I am reviewing this year’s crop of reports, if you have come across IGC statements not covered on this blog, please send me the link or the PDF to firstname.lastname@example.org
Making sure these statement are up to the mark is important!