Workplace pensions – value for money?

workplace pension 5


This is the second of eight blogs answering the questions set out in the Work and Pension Select’s inquiry into transparency in pensions. The idea is that this blog, together with comments from anyone who chooses, will go to Frank Field and his team.

Is the government doing enough to ensure that workplace pension savers get value for money?

In summary, my answer is “yes”, the Government is currently doing a good job.

The exam question is different than the title of the blog – purposefully. The responsibility for making workplace pensions work, is all of ours. We should not be relying on Government to kick our butts, we should adopt best practice as a matter of course.

So far, the opportunities to make money from workplace pensions have been few and far between. There were a few maverick master trusts set up as outright scams at the outset of auto-enrolment, those who scam for a living, take delight in exploring all avenues, but in practice, there has not been enough capital in workplace pensions to make them scam able. This will change over time and the precautions being put in place today by the DWP (enforced by TPR) mean that the days of the  “pop-up” master trusts are numbered.

The timeframes for workplace pensions are long, and rewards for providers are potentially immense. Look at the profitability timeline for NEST.

nest debt.png

source First Actuarial

What is interesting about this diagram is the speed at which the £1.2bn of projected debt decreases from 2028, by 2038 NEST is solvent and beyond that NEST is in profit. These figures are based on NEST’s own projections.

What can be said for NEST , can be said for any Master Trust that has the stomach to survive the turbulent waters of the next ten years.

The question for Government is not just how it ensures an efficient and stable market in 2018, but how it ensures that master trusts like NEST – deliver value for money, when they move into profit.

Value for money – for who?

Over the past few days , we have seen Fidelity launch zero cost funds in the USA. The concept is transferrable. If fund management can be “free”, why should a charge cap be set at 0.75% of the assets in the default fund?

The answer is of course because value must be shared, NEST is Government financed and effectively “from the people, for the people”, the tax-payer has subsidised NEST and the tax- payer should be rewarded by NEST, at least when NEST moves into profitability. I don’t see why the people deprived of services by the £1bn+ loan that NEST is drawing down, should not get value for the money the DWP has lent NEST. Post 2038, I hope that NEST will return money to the DWP so fund welfare to future generations.

As for not for profits, such as People’s Pension and Royal London , there is only one beneficiary of the wealth the master trust will bring – the people who have invested in it. I am convinced from what I have seen in Australia, that for the not-for-profit, trust based model is the best financial structure to take forward a vast project such as a workplace pension and I see no difficulties in this sector.

Where I see problems ahead – is with the “for profit” master trusts and group personal pensions run by insurers. Here there are fundamental conflicts between the interests of shareholders, management and beneficiaries that need tight Governmental supervision. The main players in this space are Aegon, Aviva, Royal London, Scottish Widows, Hargreaves Lansdown, Zurich and Smart Pensions. Ensuring that the competing claims for value for money from the various stakeholders involved, will be no easy task.

Add to these schemes , the numerous consultancy driven master trusts – operating on a vertically integrated basis, and you can see why the “for profit” sector is potentially, Government’s biggest challenge. As assets grow in size, the capacity for this part of the market to behave carnally grows.

IGCs and Trusts – are they fit for purpose?

The Government has chosen, rightly in my view, not to prescribe what workplace pensions should look like. This has happily led to a healthy market of workplace pension providers, many of which have already been mentioned. Of course there are many private occupational pensions which are being used for auto-enrolment pensions – most of which are sponsored by employers – way beyond the AE contribution minima.

It is tempting for Government to put its feet up and say “job done” simply because AE is compliant. It is particularly easy to say that to large single employer funded schemes where the contributions go beyond compliance. But that would be wrong.

We need all schemes to be measured for value for money – whether multi employer of single employer based on the efficiency measure of “value created per unit of money”.

That is why the Government are right to insist on value for money as a measure to be adopted by DC trust based schemes and contract based workplace pensions alike. A single measure of efficiency that rewards those who increase value and reduce member costs is the way for governance to go.

But the capacity of single employer trusts, master -trusts and contract based plans to measure and vigorously enforce value for money within the schemes and plans they oversee – is not yet proven. This blog looks at IGC reports when they are delivered each April and finds that many IGCs are failing in their key functions.

IGCs 2018 with TP16

Red – fail , orange – just getting by, green – ok

The situation is not static and there is not continuous improvement, some IGCs like Aviva and Royal London are getting better, some – like Legal and General, are getting worse.

The Government should be paying more attention to the IGC reports being produced, they are the shop windows for the IGCs, weak IGCs are likely to allow insurers to shift value for money away from policyholders and towards management and shareholders.

The same can be said for master trusts and single occupational pension schemes. I would like to say that trustees run these schemes for the benefit of members but I cannot. All too often I come across Chair of trustee reports that are bland boilerplates – merely ticking the boxes that allow the trustees (mostly paid) a cushy addition to portfolio careers. The standard of professional trusteeship within master trusts is variable and while there are centres of excellence there are plenty of examples of abject failure.

The net pay scandal is such an example

That trustees of occupational schemes can allow people auto-enrolled into their schemes, who pay no tax, to be denied the Government incentive available under relief at source (RAS) is a scandal. Either the scheme should change from net pay to RAS, or it should compensate the low paid from the sponsor’s pockets.

The Government could and should be prioritising this issue , HMRC seem totally disinterested.

That trustees, the DWP and tPR, HMRC, PLSA, PMI and even the FCA (who oversee some of the insured master trusts operating under net pay), can allow the net-pay scandal to continue , shows me that many still think workplace pensions are for the rich and the state pension is for the poor. So long as this thinking persists, the almost criminal denial of incentives to those who save and get no incentive for doing so, is an indictment of governance failures among trust-based plans.

In my opinion, the risk of  failure within trust based plans , is around lack of professionalism , of care and of effort. This is quite the opposite from the risk of failure among the insurers and SIPP providers whose risk arises from conflicts between various stakeholders.


In general I am impressed by the value for money emerging from workplace pensions and I like the way most are governed.

I see problems down the line arising from the potential profitability of these schemes. My concern for the “for profit” sector, is that they cash-cow workplace pensions and make them a nice little earner for shareholders – not investing for members or passing on savings in lower fees.  My concern for the not for profit sector- is the ineptitude and laziness of many trustees who see their roles as sinecures.

There are many things that master trusts and the remaining own- occupational DC schemes can and should be looking at. These include sorting out default investment pathways for those retiring and looking at collective options – arising from the work being done on CDC. I hope that we will hear more from big schemes like NEST and Peoples on their “decumulation strategies” (eg – how we spend our money).

The work done recently by DWP (being enforced by tPR) is good, it will make master trusts fit for the future and see those that aren’t – find suitable partners to take them over.

By adopting consistent value for money measurement, and through the publication of league tables showing who is succeeding and who lagging, I believe we can show members of workplace pensions a way to choose who looks after their money over time.

My conclusion is therefore that “yes, the Government is doing enough to ensure that workplace pension savers get value for money” but they could do more!

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to Workplace pensions – value for money?

  1. A fascinating article and if I understood just half of it I would probably see it as more than just fascinating – I might even think it was good. This is the issue with this question.

    What does Value for Money look like and who needs to recognise it?

    if you’re expecting ordinary people – like me – to know what Value for Money Looks like then you’re on hiding to nothing. Clearly at my time of life it is irrelevant but you’re really wanting a much younger generation to know what it looks like and engage with it so they can make the right choices. The real exam question imho is: “Is the government doing enough to ensure that workplace pension savers understand value for money so they can make the right choices?”

    Or are we to leave it entirely in the hands of “advisers” – and all too many of whom are acting in “self interest” – a kind of “trust me I’m an IFA” but when it turns out the choices weren’t actually the best the “saver” gets the blame for not understanding the advice!

    I for one don’t know what Value looks like. Wouldn’t recognise it if it slapped me in the face.

    • henry tapper says:

      Value for Money – in my book – appears as a single number between 1- 100 – the higher the better. You don’t have to know all the details, but if you wanted to – you should be able to! That way you get the information you need on what you’ve bought and all the workings- if you can be bothered. Thanks for the comment Stephen – I know how let down you’ve been by a system that doesn’t seem to care – be assured – we care.

  2. Adrian Boulding says:

    As the Nest debt triangle picture above has a footnote that says it’s source is Actuarial, I will offer an actuarial comment on its pointy shape. The fact that it has a dunce’s cap point on the top rather than a smoother camel hump shape is testament to the ridiculously low rate of interest that is paid on the loan.


    • henry tapper says:

      I have to be held responsible for the pinnacle (rather than the bell curve) but I quite agree that the subsidised interest rate is at odds with NEST’s supposed position as a market participant! I am still wearing my NOW rucksack in protest!

  3. Bob Ward says:

    Good summary of all the organisations who sit back in full knowledge of the injustice of those not given what the DWP & via tPR promised in black and white compulsory letter templates to new members – until when they realised the Chancellor broke the level playing field by splitting the AE trigger & Lower Earnings, they quietly buried the old versions and re-issued new guudes with ‘ifs’ & ‘buts’.
    Now there is almost a conspiracy of silence as no-one has tackled the current Chancellor to put it right.

    The way forward now is to identify those schemes with members not receiving tax relief and then collectively confront the Chancellor

    The Select Committee would have sufficient clout to rectify this in the shortest time

  4. henry tapper says:

    Here’s hoping Bob!

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