Gavin Perera-Betts
NEST gets us thinking
Gavin Perera-Betts work for NEST, he’s the chief customer officer – the person charged with helping people get the most out of their savings and he’s the author of NEST’s recent response to the Government’s Select Committee for Work and Pensions (Frank Field’s committee).
Reading about this response, I’m struck by what a difference it would make to BSPS members wishing to take their CETVs, if there were “guided pathways” for them to follow. I don’t think pathway is the right term – it has the wrong medical connotations, but it does at least highlight the need for solutions that serve members till death do them part.
NEST warns that a major mis-selling scandal is likely to hit millions of retirees unless default decumulation options are set up.
NEST says providing advice and guidance alone would not meet the needs of millions of savers approaching and entering retirement.
It wants pre-set retirement options which meet high minimum governance levels to be set up by pension schemes – helping members get the most out of their savings for life.
NEST points out members face multiple risks including overpayment of tax, being scammed, facing higher overall costs and spending too much (or too little) in retirement.
Here’s what Gavin actually has to say
“We don’t need to look too far for the answer. Auto-enrolment has worked extremely well and can be a model for where to go from here. No one is tied in, savers are free to make their own choices, but most of the hard work is done for them. We think that’s what’s needed in retirement too”.
Qualifying workplace pension schemes, which have a fiduciary duty to their members, should be expected to offer a straight-through solution from saving through to taking an income, so anyone who doesn’t want to shop around doesn’t end up worse off.
“We want strong default options in place to complement a thriving and competitive advice market. We believe that’s the way to avoid the next pensions mis-selling scandal and give millions of savers peace of mind in old age.”
NEST says that qualifying workplace schemes should be compelled to offer a guided pathway for those who remain disengaged or just want a trusted source to do it for them.
Right Solution – wrong problem
I agree with all of this, but NEST’s solution is designed to meet its savers needs in a decade’s time. In the meantime, hundreds of thousands of savers will be looking for a home for the transfers they are taking from occupational DB schemes. As this blog points out, they have no guided pathway, only an array of products about which they know very little .
The British Steel Pension Scheme has been succeeded for its current employees by a new DC arrangement which could- in theory – provide the guided pathways Gavin is talking about. I have met a number of current TATA employers – none of whom had considered transferring into their TATA workplace pension. I think this might be a good option.
But it would only good for the relatively small number of current TATA employees eligible for membership. The majority of BSPS deferred members are not eligible for the TATA DC scheme but are eligible for the kind of workplace pension scheme that Gavin is talking about.
But in all the conversations I have had about transfers, both online and face to face, I have not heard mention of these new workplace pensions – once!
Why workplace pensions aren’t being used for transfers.
There are two reasons
- Workplace pensions have their eyes set on receiving auto-enrolled contributions. They are managing small pots for the future, they have not prepared themselves for helping people spend their pension pots today. They are ill-equipped to deal with let alone compete for transfer business.
- The people advising BSPS members (and many others) about how to spend their pots are looking everywhere but workplace pensions. They may have interest in managing the money themselves, they may wish to retain advisory rights over the money or they may simply be unaware of the workplace pension retirement option.
But the average cost of managing a pot in a workplace pension is around 0.5% of funds, typically half the cost of managing money in the self-invested personal pensions. This matters when you have a pot which is on average worth £350,000.
Workplace pensions are set up to help people who may not have advisers and offer those who want self-sufficiency, options to manage their investments independently. Non-advised options may be scary, but they are the alternative to paying ongoing advisory fees.
Both from a cost and value perspective, workplace pensions should be the natural home for much of the money that is flowing out of DB schemes. NEST is now able to receive transfers in as are all the other qualifying workplace pensions. There is still time to construct the guided pathways Gavin is talking about in advance of most transferors starting to spend their pots.
There should be a clear alternative to the advised SIPP and it should be on the menu of choices available to anyone considering transferring out of a DB plan.
Food for thought for the FCA
Just how many of the people advised to take a transfer from BSPS, have discussed their current workplace pension (including the new TATA DC arrangement) – with their adviser?
More widely, what are the IGCs of insurance companies offering workplace pension products doing to promote workplace solutions against individual self-invested plans (often offered by their own insurer)?
What are the trustees of occupational pension plans (including master trusts like NEST), doing to promote themselves as homes for these substantial sums of money arriving from CETVs?
At an advisory level, can advisers – as they had to in the days of RU64 , demonstrating that independently sourced personal pension solutions, beat transfers in to lower-cost occupational and group personal pension arrangements (available to their clients)?
“At an advisory level, can advisers….? Why pass the buck to advisers surely the providers of the occupational scheme should take some responsibility. They are the ones who provided the expectation and the lamentable level of understanding amongst members.
I would have thought that an adviser – being paid to advise – would lay out all the options before delivering a recommendation. I don’t say that the advisers are wrong to conclude that SIPPs and the like are right, but I’d like to see some evidence that workplace pensions have been discussed. The occupational pension schemes aren’t blameless, nor are workplace pensions, this is not an attack on advisers but a blog about choices.
Hi Henry. I don’t know how in depth your individual conversations with the BSPS members were. However, one of the things that often precludes advisers being able to consider workplace pensions as a home for DB transfers is the member deciding to rule them out. Advisers need to be paid for the advice, and if the advice is to transfer then usually the cost of advice would be several thousand pounds. In almost every case that I have ever dealt with the member has wanted the cost of advice to be taken from the pension funds transferred. A lot of workplace pension providers do not allow advisers to take their fee from the transferred funds. As an example, and not to single them out, but Standard Life’s good to go does not permit adviser fees, and nor do i believe does NEST. So given most ordinary folk do not have several thousand pounds to spare they will often tell the adviser they do not want to consider schemes which do not allow for the cost of transfer advice to be paid to the adviser. The other thing to remember is that most advisers agree with you on one of your key beliefs – i.e. that the ordinary member is not qualified or comfortable taking control and making investment decisions. Therefore the advice is rarely a one-off transaction, if the advice is to transfer then usually the adviser provides ongoing financial planning and investment advice. That advice also needs paying for on an ongoing basis, so again if workplace pensions do not provide a facility for advisers to take their ongoing fees then the member would be invoiced each year. I assure you that advisers have no problem with this arrangement at all, but in practice members are happy to accept the ongoing advice fees but are not necessarily able to pay for them out of their own net monthly income. This is why members (NOT advisers) usually rule out workplace pensions. I agree with you Henry about not using SIPPS for the sake of it. If you exclude the adviser fee (which would need paying even if workplace pensions are used) you would be misguided to think that insured contracts always cost more than workplace pensions. For a pension sum of £350,000 and as an example only, Royal London would provide a governed risk managed portfolio for 0.4% per annum.
Very fair explanation, thanks Brian
I disagree with quite a bit of this.
First, AIUI workplace / AE pensions are prohibited from allowing advice fees to be deducted from their policies. All of them, not just NEST and Standard Life.
Secondly; I’ve almost never seen a transfer being made to an employers scheme. Clients want to have “ownership” of the policy, not perceive it going to an employer scheme. Plus, if funds are transferred to that scheme and the adviser doesn’t have agency for it, it’ll be “managed” by an existing adviser.
I’d also make a third point – there is no way I can see an adviser recommending a transfer into NEST given they’ll likely be liable for IHT on the members death. Fund management is not likely to make up for this massive hit.
It’s a very helpful post Brian. The tax and VAT implications for ordinary people make paying for advice from the bank account (not the pension pot) unviable. The onus should be on workplace pensions to make it easy for this to happen. One for the IGCs perhaps. I think there is merit in the SIPP but the guided pathway from a workplace pension seems as close as we can get today to a default. A lot to think about here – as I see some robo-advisers offering integrated products that seem to work for some e-confident people.
Mike, I wasn’t aware that the ban on adviser charge payments extended to transfers in (though I’m prepared to accept that it does!). On the other points, I quite agree.
The point is that people like me – just don’t think of things like this from the adviser’s point of view – or for that matter – the clients. It’s particularly useful feedback – thanks/
I see what you mean Henry – I’d read the comment initially as implying that only some QWPS had a prohibition on adviser charges. I can’t see any reason for an advice charge not to be taken from a transfer INTO such a scheme.
Yes, it would be good for IGCs to consider this. Although one of the problems for Workplace Pensions is that under current legislation the maximum charge cap for the default fund is 0.75%. Given that many workplace pensions charge close to this amount for the default fund there is then an issue with them allowing an additional ongoing charge for advice. Having said I think a lot of providers are overly cautious about this and use this as an excuse. I hope that something can be done about this as otherwise the vast majority of DB transferors will opt for non-workplace pensions as a home for their transferred funds for the reasons stated. I am not fully understanding how CDC pensions work, and would be very interested to know how they would work in practice. I get the theory but not the practicality. Guided pathways might be helpful but clearly robo-advisers are not relevant in the area of DB transfers since current legislation requires all potential DB transfers in excess of £30,000 to have advice from a suitably qualified adviser with G60 or AF3. Robots don’t have those qualifications yet, although that may come!
Thanks Brian, very helpful insights, I think I meant that the robo-advisers can do the initial work online (not yet through bots but this may happen), I – like you – am suspicious of the capacity of digital communications alone – it’s one thing booking a train ticket …..). There is definitely a role for e-advisers to give second opinions. Evestor is a useful website you might like to look at.
thanks Henry, I will take a look at the Evestor site.
Hi Henry
For fear of being controversial, I suspect the reason for the non-use of workplace pensions for DB transfers is the loss of control of the risk (and management) of assets by the advising IFA. The reason for this is not as cursory as implied by your article- the regulatory and legislative requirements on advisers on pension transfers and the unlimited ongoing liability for this advice ad infinitum, makes it perfectly understandable that advisers wish to retain control of the risk. They are in place to ensure clients make good financial decisions which, given the emotive nature of money, can be challenging for many. Managing this ongoing risk has costs which many clients do not have the cash flow to pay, therefore limiting their options. I think it’s a little disingenuous to put the scenario as simply as you have here hanging the hat on RU64.
I think that’s fair comment Matthew, the good adviser has to back him/herself to do better than the guided pathways from workplace pensions (when they eventually arrive). The RU64 comparison is not necessarily a good one – as that was there to stop over-charging by insurers. Ideally workplace pensions would be manageable by IFAs as if they were SIPPs , but this is not going to happen, I see a lot of money moving out of workplace pensions into SIPPs for this very reason. For a large part of the retiring population, IFAs will be responsible for helping people getting paid in later life.