On Wednesday , at 5pm , I’ll be explaining these slides at Accountex 2017 – a talk generously sponsored by the Chartered Institute of Payroll Professionals. It’s going to be a fun, provocative and I hope instructive talk and I’m looking forward to plenty of heckling, questions and “observations” from those who want some fun before they go to the pub!
This is the presentation I’ll be giving
What’s the big idea?
When NEST published their financial plan last month, it dawned on many people just what the scale of auto-enrolment investment will be. Just one provider is likely to have half a trillion pounds under management by 2038 – and their are many providers.
The amount of money in auto-enrolled workplace pensions will dwarf that in funded occupational DB plans and – by comparison – the occupational DC plans we know today will be a sideshow.
Many of the decisions on where money flows have already been taken by employers staging by now (May 2017), but every day 1200 employers choose NEST and (we suspect) as many again spread their money between a variety of insurers and master-trusts.
The big idea of auto-enrolment is to make the workplace, a place of saving money.
A small proportion of your pay is syphoned into an investment account with your name on it by your employer – for your benefit. You’ll notice the passive tense, you do nothing, your employer does two things – choose where to invest the money and how much money should be invested. You have limited rights to opt-out. It’s binary- opt-out and you lose all rights, stay in and you get looked after.
That is what people are hearing. No matter how much distance employers are putting between them and the investment of your money, people expect to be looked after because they are in a company pension scheme. It is part of the DNA of our workplaces, has been since the fifties.
But of course not all workplace schemes are the same. Kingfisher used to operate a 60ths final salary scheme and a 1% employer contribution COMP. The COMP barely covered the SERPS you gave up but actually gave you higher take home than if you didn’t join. Everyone joined it except a small minority who chose to pay for the 60ths pension scheme (about 5%) of staff. The COMP was funded at 1%, the DB plan is still costing Kingfisher twenty or thirty times that. Both- ladies and gentlemen were occupational pensions!
Of course the outcomes will be hugely different just as the outcomes of the auto-enrolment workplace pensions set up with high sponsor contributions, good investment strategies and low charges will produce a lot more than shoddy, minimum funded plans.
The expectations of your staff need managing
In time, Kingfisher scrapped the COMP (the Kingfisher Retirement Plan) which one union dubbed the worst occupational pension scheme in Britain. It was an embarrassment and presented a cause for future litigation if it could be proved that employees were not properly explained its (lack of) benefits.
One of the lessons of the past, is that if you use coercion and lace it will unrealistic expectation, you have a lethal combination that can lead to the class actions we have seen against insurers and banks in the past (pension and endowment mis-selling, PPI and swaps).
The past tells us that you cannot just walk-away from these workplace pensions if you are an employer. Like NEST, they will grow as part of your organisation’s DNA and you will be held – to an extent -responsible for outcomes. That’s what Kingfisher were finding and it’s what a million + employers will find as they see employee and employer contributions rocket and investment balances grow.
Just as nothing much was done to help employers choose a workplace pension in a reasoned way, so nothing much is being done to help employers explain what’s going on with their workplace pensions. There are the seeds of a workplace governance structure which allows employers to benchmark their plans against those of other providers, but there is really no benchmarking going on.
The Investment Association is letting it be known that while they are happy for their charges template to be used discretely, they don’t want hidden charges to be publicised. There is practically no performance benchmarking of workplace default investments and when the IGCs commissioned research on the member experience, they were prevented from publishing the comparative results by providers for fear it might show some in a poor light.
In short, there is no way of comparing what you’ve bought , of looking to improve what you’ve bought or of sending it back and starting again. A shocking state of affairs if you ask my opinion.
That is auto-enrolment present, but what of the future?
It is obvious as you see countries with mature DC coverage, that the governance of workplace pensions becomes a major issue. In the United States, the ERISA legislation allows employers – provide they abide by simple governance steps, to be immune from employee litigation. Nonetheless , it still happens and class actions against 401K plans still happens. There is plenty going on in Australia to ensure that Super does not turn sour and in Chile there is civil unrest at the state of the compulsory savings regime initiated under Pinochet which was ungoverned and is turning out badly.
The US system depends on incentives and the Australian and Chilean depend on compulsion, but they’re all mature systems that are now – sometimes too late – looking to implement pension governance.
The third part of my talk looks at what pension governance looks like and how we can use the work of the IGCs to create a workplace pension governance system that nips the problems we see in other countries – in the bud.
If you want to see what I have in mind, check out the slides or better still get down to #Accountex17 on Wednesday when I’m talking – or even Thursday when I’m not!
You can book free tickets via this link http://www.accountex.co.uk/