Tomorrow (18th April) I get to meet the Pensions Minister, which I’m excited about.
I’d written to Richard Harrington a few weeks ago, after an amendment to the Pension Schemes Bill had been thrown out. I’d helped the Labour Party prepare the amendment which wanted it explicit in legislation that an “employer had a duty of care to its staff to choose a suitable workplace pension”.
Employers have a number of such duties, mainly in the area of health and safety. ACAS produce a simple explanation of them which you can read here http://tinyurl.com/qe5m9q4.
But extending the duty of care to a staff’s financial well-being is another matter. The Government, in arguing against the amendment, explained that the Pensions Regulator gave employers some help in choosing a pension and providing that a choice was made following the Regulator’s guidelines, there was really no need for further employee protection.
A duty of care or an act of good faith?
Speaking with various lawyers on a conference call arranged by the Transparency Task Force, I was surprised to be told that what I was wanting was for employers to act in good faith (rather than to exercise a duty of care).
I’d be grateful for any lawyer or legal expert to explain the precise difference, but from what I can read, acting in good faith is a rather less onerous obligation than “a duty of care”.
Frankly, the degree of the obligation is secondary to their being an obligation. What I am concerned about is that no thought is being put into the choice of workplace pensions, a choice that should be made by an employer. How we ask employers to engage with the choice of pensions is important. It is about getting the best outcomes for staff, as well as avoiding the worst.
The knowledge gap on workplace pensions
In my view, the capacity of staff to make reasonable decisions for themselves is extremely low. This is also the opinion of the OFT.
The OFT was writing in 2014, when auto-enrolment was impacting larger employers with in-house pension expertise or a budget to access external advice.
Today there is generally no pension expertise among employers staging and only a minimal budget to understand what makes for a suitable workplace pension.
What of tomorrow?
I am confident that the vast majority of workplace pensions in place today are fit for purpose and are suitable for the needs of most employers. There are a few bad apples which surface from time to time (myworkplacepension being the latest). I do not expect any of the large workplace pensions to go belly up, but I do expect there will be grievances from classes of employees who feel they were offered the wrong scheme.
- Employees on low earnings saving into schemes from which they can get on government incentive (tax relief)
- Employees who are denied an investment option that meets their religious or moral make-up.
- Employees who are invested in a workplace pension which (for whatever reason) deteriorates in quality and falls behind others.
When all you can judge a workplace pension on is it’s promise for the future, then there are few immediate differentiators (net pay v RAS and investment options are examples).
But if we develop a comprehensive and consistent value for money scoring system that allows ordinary people to compare the progress of their investment in one workplace pension against another, then people will become much more interested in why an employer chose one pension over another.
Creating a way to compare pensions,
I write a lot about IGCs and Trustee Chairs and the important role they have in assessing their workplace pensions for value for money. So far they have failed to come up with a coherent measure to benchmark each scheme against another.
I am keen to create such a measure and to publicise how each workplace pension is performing against it. This is how I wish to develop the work we have already done on scheme selection ( http://www.pensionplaypen.com) .
But creating a transparent performance comparator will be controversial. For it will need to show performance, explain performance and explain what is holding performance back. One thing we know from the research done by the IGCs over the past 12 months is that people will judge their workplace pensions by outcomes.
The IGCs and other fiduciaries of workplace pensions need to publish and explain outcomes as soon as possible.
Employers should become very interested in these value for money scores and the components that go into them. They will determine whether they backed a title contender of a relegation struggler.
Employees should get interested too (as they are in countries with mature compulsory saving systems). Australia and America both have intense interest by all parties to Super and 401k plans.
The state of today
We know that when we – as employers- choose a workplace pension for our staff, we are doing so on their behalf.
When I asked a group of 170 employers at Sage Summit earlier this month, whether they felt they had a duty to choose a suitable pension, every one put up their hand, not one said it was not their business.
And yet the vast majority of decisions being taken today, are being taken blind. The Pensions Regulator’s choose a pension pages do not even demand that the reason for the choice is documented. The majority of employers who I spoke to after the Sage event admitted to not feeling confident why they made the choice they did. Only two I spoke to had documented why they’d chosen as they had (and they’d had to because they’d used Pension PlayPen!).
The truth is that most employers are buying blind, having no clue as to why they are buying one pension over another and they have anxiety that they are not exercising any duty of care- or good faith – at all!
Meeting the Minister
I have two objectives when meeting Richard Harrington;
The first is to impress upon him the bind that auto-enrolment is putting on employers with regards the selection of the workplace pension.
The second is to inform and engage him in the importance of transparent information that allows employers and members to compare the value for money of one workplace pension against another.
The two matters are inter-related; the first is a matter for the Pensions Regulator, the second for the FCA. In as much as the Pensions Minister’s remit is to make the auto-enrolment project work, it is critical that both regulators work together. My hope is that I can help pull regulation together to improve engagement both from employers and those who work for them.
If you have any comments on this , or matters that you think I should be bringing to the Pension Minister’s attention, drop me a line at henry.tapper@pensionplaypen.com or add a comment below.
Reblogged this on Thoughts of a pension seagull and commented:
I wish Henry well with the meeting with the the Pensions Minister.
In our experience which runs from 2012, far too many employers have a Work place Pension based on what works for their adviser, not what works for them as the customer. In particular accountants and payroll bureau’s tend to put their clients into providers that work for the systems the adviser has in place as a ‘one size fits all’ solution to auto enrolment. Having worked with a multitude of SME’s in particular, the one thing I can say is that they are all different, in terms of workforce, salaries and levels of engagement. At CBC we emphasise that employers are responsible for the choice of provider.
you know what I’m going to say Henry, can he and his team talk to us mere payroll folk. I now we’re not above the salt in terms of the AE review but the one meeting we’ve had is simply not enough to make sure the review considers issues from both ends of the telescope
I agree that employers should take care choosing a pension. I would add that even when care is taken, some mistakes will be made so it should be easy to change.
Disclosure of costs. The investment management industry obviously argue that they add value but the evidence is they seldom do. For consumers, one of the best indicators of relatively higher future returns is low costs. Whilst costs are hidden, it is virtually impossible for a consumer to know what they are paying and act on this.
I do fear the removal of amendment for a lifeboat for mastertrusts will come back to haunt government. Not this one probably as will take a while for one that meets capital adequacy of the new bill to fail but one will. I very much doubt the funds earmarked at time of approval for that situation will still be around when that happens.
A couple of tax issues to sort out:
1. tax “relief” for non tax payers in net pay schemes; It seems unjust that this group miss out on government contribution to their pension. Government should set out their tax relief policy and then it should apply to people regardless of the details of how their scheme is set-up.
2. IHT on death benefits; A similar theme to point 1 i.e. gov should decide whether these are in estate and subject to IHT or outside. The current situation highlighted with NEST approach of it being outside IHT if you know to use a discretionary trust to avoid it but if you overlook that technicality it is inside seems to do nothing for society as a whole other than set-up additional fees for advisers.
good luck
what timing henry! election announced as you visit… Will he still be pensions minister after the election??
Well if he was worried – he didn’t show it!
This issue has some parallels in Australia where some employers have expressed reluctance to “choose” a superannuation fund for their employees. Any policy to impose a new duty on employers is likely to face some resistance, particularly from smaller employers. In a recent draft report by the Productivity Commission (a microeconomic policy adviser to the Government), it argued that “some (mainly larger) employers are well placed to choose a default product and negotiate favourable arrangements for their employees, while many (mainly small and medium size) employers are not well placed to select a default product.” One of the options under consideration if the role of employers were to change would involve a “quality filter” which would reduce the list from which they would choose. I think there might be some things of this interest for UK readers and the draft report can be found here http://www.pc.gov.au/inquiries/current/superannuation/alternative-default-models/draft/superannuation-alternative-default-models-draft.pdf
Thanks for this really helpful post and for the link. Something like this does exist in the UK but I’m too modest to promote the Pension PlayPen other than publishing a link http://www.pensionplaypen.com