Following the publication of yesterday’s Guidance from the DWP on “DC pension” disclosures, this article asks “have we any framework for answering the question in the title?”.
The conclusion is “not yet”, thought the disclosure guidance takes us another step towards a common measurement system which can allow us to compare our “SIPPs,” “auto-enrolment pensions” and “company schemes”.
That I struggle to find a consistent language to embrace three different parts of the market is part of the problem. Our defined contribution schemes operate in distinct bubbles, with little means to talk of “retirement savings” as a single entity.
Let’s try a little harder and organise our savings options into the same three buckets but this time use the titles that the Regulators are using.
Non workplace pensions (SIPPs)
As a nation we have around £400bn of retirement savings in private “non workplace” pensions. Some of us executed our private pension (Hargreaves Lansdowne) , most of us were advised (SJP or pre-RDR personal pension or SIPP platform), and a few of us are using the remains of a workplace pension which was jettisoned into our ownership when we left a former employer. It’s a messy market which the FCA are currently trying to knock into shape. For most of us, it’s pot luck as to whether our savings are working for us or for the retirement savings provider.
Workplace pensions (Auto-enrolment pensions)
This is a much more ordered market, still small compared with the mature non-workplace pension market, but growing with the advance of auto-enrolment.
Despite the high degree of Government control , this remains a diverse market containing trust and contract based schemes which flourish or fail depending on their commerciality. With the exception of NEST, which really is too big to fail, all the workplace pensions are competing against existential threats. Two of the leading workplace pensions (NOW pensions and Standard Life) will likely be under new ownership by the end of the year.
Ironically , Standard Life have gone wrong by assuming employers will buy something that looks like a SIPP (Good to Go) while NOW pensions have used a product that looks like a paternalistic occupational DC pension.
Many smaller master-trusts are currently deciding whether to continue under the more rigorous conditions created by PA16.
But general awareness among buyers (employers) and savers (employees) of the state of their workplace pensions’ fortunes is as low as ever. If the OFT were to return today, I doubt they would revise their 2014 statement.
Single occupation schemes
The DC schemes set up by employers for their own staff should be the crème de la crème, the benchmark against which non-workplace and workplace pensions set themselves.
But this is very far from the case. While the best schemes are very good indeed, many are beset by problems of their own making. The richest employers are too often beguiled by bogus consultancy-driven strategies involving “white-labelled funds”, “liability driven investments”, over-engineered communications and under-engineered administration. These schemes are beset by the vanity that comes from unconstrained budgets, offered DC trustees by guilty employers aware they are selling mutton dressed as lamb.
And behind the first wave of trophy schemes with their PQM kite-marks, is a dark web of semi-derelict occupational schemes that struggle along because employers feel that as they’ve started – they should finish.
Far from being an example of excellence, the single occupational schemes are an example of a free-market gone wild. A thousand flowers bloom in this meadow. but as many weeds.
How do we compare one with another?
Writing in today’s FT, Jo Cumbo compares the Australian’s engagement with pensions and concludes that they are saving four times as much as us, partly because they know what they are saving into and have confidence in their “super”
Australians are not shy about talking about their super. In fact, they can get positively competitive about how well their pensions pot is doing. This is largely due to the fact they have choice over where their super is invested and do not have to stay with the fund chosen by their employer, a feature of the UK system which sees billions languishing in poorly performing “dog” default funds.
There are many comparison websites that allow investors to rate their super on a range of measures from charges and investments options to insurance and death cover.
Newspapers frequently publish league tables of the best-performing super funds, with the top 10 accounts achieving over 10 per cent, net of investment fees, in 2017. This generates a culture of competitiveness between super funds in a way which is yet to be seen in the UK workplace pension market.
There is currently , no such culture in the UK
Many people who have been saving for their retirement twenty or thirty years, will have examples of all three types of pension. Quite naturally, they’ll be looking to bring all these pots together into one single pot and working out which pot to use going forward.
They may employ an adviser, who typically nowadays is a wealth manager who will advise all pots aggregate to the wealth management solution on offer from the advisory firm. There is no way for the ordinary consumer to test if this is a good idea, this is a worry.
Many people will not have an adviser and will consequently feel disempowered to aggregate. Typically these people will be unaware of where they are getting value and what money they are paying. We don’t even know the rules of engagement. For instance, very few people know that exit penalties on non-workplace pensions dramatically fall away on their 55th birthday.
The non-advised are therefore acting in the dark. There is some “lux in tenebris” from organisations such as Pensions Bee, Evestor, Nutmeg and other progressive aggregators and there are new organisations such as Hulgrave who are looking to put information into the market which can help us understand value, but there is still no “GO COMPARE” for pensions.
GO COMPARE FOR PENSIONS.
There is a simple way for us to assess what we have by way of “good” or “bad”. The test is called “value for money” and requires a commonly agreed measure of “value” and “money”. Till very recently, the best we had to hope for, was the “single charge” which is disclosed to us as the cost of management.
Here is another extract from that 2014 OFT report
Four years on and we are nearing a point where we have a manually completed template that will allow IGCs and Trustees to understand the total cost of the funds that their providers choose to invest our money into.
In a couple of years, we can hope to have automatic feeds from asset mangers which will prevent “cheating” and bring down the cost of gathering this information.
Meanwhile, we are struggling even to get consistent accurate reporting on value within sectors. If I want to compare NEST with Standard Life’s default, I have to wait till NEST send me their unit prices (up to a month after the price was created) and I have to apply through a price vendor (Morningstar of Financial Express) for price history on Standard Life.
There is no table showing performance data, let alone risk adjusted performance, let alone the costs incurred in getting that performance.
And that’s just the funds bit of it! The value we get from a workplace pension is the combination of the net performance of the investments and the experience we have of using the pension (both now and in the future). We are a long way for agreeing a value for money formula that can compare workplace, non-workplace and occupational pension schemes.
Leaving other forms of retirement savings (ISAs) out of this, we need to embark on creating a means for ordinary people and ordinary advisers to have access to tables that can compare the value for money of all retirement savings vehicles where we – the punters- are bearing the performance risk.
The DWP’s disclosure paper, is a step in the right direction. The work of the IDWG in creating a template is another, MIFID II and Priips help and the clearance work from the Transparency Taskforce is important too.
But we need more than all this, we do need the co-operation of all parties in a general endeavour to make saving for retirement easier and fairer for those of us doing it.
That’s one of the ways we restore confidence in pensions.