Company DC schemes are an utter shambles
I was as a DC conference yesterday, chairing a session on CDC. I went to one other session – a 70 minute discussion on what company pension schemes are doing to help people spend their savings (to use the conference parlance – “in decumlation”).
My conclusion from listening to the decumulaion debate is that there is no point whatsoever in companies running DC pensions.
One DC trustee who has to remain nameless (Chatham House), told the panel that the company behind his trust wouldn’t countenance him offering a drawdown facility from the pension scheme “they want ex employees off their books”.
When a poll was taken, the two biggest reasons that the audience gave for not offering a drawdown facility from the plan were “cost” and “corporate risk”. Instead of offering a scheme pension , trustees are reduced to offering financial education seminars.
In the 70 minute discussion , there was no mention of the Single Financial Guidance Body and the only mention of Pensions Wise (and I wrote this down verbatim) was from a senior figure who’s job is funded by the tax-payer.
“We signpost Pensions Wise because we have to”
The same tax-payer is paying £85m a year for the Pension Wise service. In this mad world- we cannot the Government can’t even endorse its own guidance!
Why this failure of nerve?
The job of a pension scheme is to provide pensions, the second pillar of pensions is the company sponsored scheme which is granted special tax-treatment to fulfill its social purpose of providing people with an insurance against their living too long- a pension.’d
It was left to a European, who’d flown in from Frankfurt to remind us of this fact. He said that he thought Germany might be 20 years behind the UK, I think Germany sounds like it has retained its pension compass.
I do not think that trustees should be prevented from providing pensions by employers who want “ex-employees off their books”, nor do I think that Pensions Wise is worth spending money on, when it has become no more than a box to tick for trustees and DC pension managers.
Nor do I think that we should be making advice compulsory – as one panellist suggested, though the comment did spark the most interesting part of the session, where the panel and audience got themselves tied up in knots.
The one pension manager who admitted to offering drawdown from the scheme talked of risk-mitigation and the need to employ external consultants rather than run any risk of the trustees or company offering advice.
He talked about the dangers of un-advised drawdown and the importance of making financial advice available to those who wanted it. But he did not say what the take up of this advice was. As it appeared to be advice that employees would have to be paid for , we will have to go with the FCA’s estimate that 94% of his members don’t take up the offer of hiring a financial advisor to manage their retirement income.
What then are the trustees doing?They are offering an extremely dangerous product – drawdown and telling staff to sort things out for themselves. When this was explained to the audience – nobody seemed to blink.
Moans about the lack of innovation
Large amounts of the 70 minutes were spent moaning about the lack of innovation from platform providers, insurers and fund managers. Nobody since the pension freedoms had invented the silver bullet that would allow trustees to signpost a default solution in safety.
One panellist complained that providers told trustees that drawdown was an advisory product and that they couldn’t offer a non-advised drawdown facility – effectively confirming what the FCA has been saying – that 94% of those decumulating are dong it without advice , against the rules of the game.
Another panellist went so far as to say that the pensions industry was too tired to innovate.
Perhaps the most telling comment of all was from the person from the large Government pension scheme mentioned above who said that when asked about “retirement solutions”, his members said they didn’t want “solutions” they wanted pensions. They were investing in a Government Pension Scheme and expected to get a pension when they got to retirement.
Sitting at the front of the audience were two senior managers of Royal Mail. The audience had to be reminded that whatever had been said against CDC in the previous session, Royal Mail had come up with an extremely innovative way of turning a DC savings scheme into a wage in retirement.
\But that kind of innovation is clearly not the innovation that the panel or the audience had in mind.
Why do companies run their own pension plans?
Those who’ve read my tirades about “net pay schemes” will know that I think companies are depriving low-earners – auto-enrolled into their scheme, of incentives otherwise available from master trusts and contract based schemes.
Having listened to the collective failure of nerve emanating from the panel and audience at this conference with regards “decumulaiton” and witnessed the opposition of many to the innovation of CDC, I have no answer to the question.
I could be facetious and say that companies run their own pension plans to keep the people at the conference in a job, but these are good people who could do all kinds of jobs.
I can only conclude that companies run their own DC pension plans because that is what big companies do. Which is no reason at all.
If companies are not prepared to innovate and upgrade to a CDC pension scheme, nor offer drawdown (and pay for the advice that is needed), then what is the point?
Will I come back year after year to hear the same arguments about default decumulation options that nobody wants to endorse for fear of offering advice?
Will I hear more tired people say they are too tired to innovate.
Will I hear another senior pension figure complain that they can’t offer a pension scheme where the pension might go down and then spend 70 minutes avoiding talking about annuities!
Pension leadership.
To my mind, the only employer in the UK who is showing any leadership in pensions is Royal Mail. They have galvanised 140,000 staff into voting against a strike and for a CDC pension scheme, they have lobbied Government to re-enact dormant legislation via the current consultation and they have turned a pension situation that threatened the existence of one of Britain’s largest employers into a major PR coup.
I am quite amazed that employers running their own DC schemes continue to do so. It seems to be an absolute waste of time and money. The new master trusts can do the job for them much more efficiently.
Of course in saying this, I will be annoying not just the trustees and pension managers but the investment consultants, the lawyers and accountants and the army of financial educationalists who attend upon these DC schemes.
But this blog is not here to promote the interests of these well paid people. It is here to show some leadership. I say that the sooner we convert these DC schemes into CDC schemes or hand the management of the money to insurance companies and master-trusts, the better.
These schemes cannot go on as they did yesterday, refusing to renovate or innovate. If companies do not want to be involved in providing staff with pensions, they should not be running pension schemes.
As reported in Professional Pensions today, “After 30 years in the pensions industry I now feel we may need to rename our industry to something else, like the ‘save till 55 and then cash it all in’ industry”
Adrian
It does seem as though many employers are now running their own DC schemes purely because they always have. But very often (not always) these schemes offer far more generous employer contributions than those employers who merely comply with the (soon to be 3%) minimum employer contributions. I understand your frustration about such schemes failing to offer scheme pensions and in effect leaving employees to their own devices but fail to see what alternative they have in the regulatory framework within which they operate. I applaud your passion in trying to support the development of CDC, which if implemented properly could offer an additional alternative to drawdown or individual annuitisation. And i agree with you calling out the government official saying he only recommends pensionswise because he has to. However you are showing an element of naivety when you appear to dismiss pensionswise as a tick box irrelevance. Regardless of how and why the referral is made a pensionswise appointment is very often invaluable to help people understand their options and the possible pros and cons of those options. And please refrain from throwing grossly inaccurate monetary figures out in the public domain. In 2018 tpas delivered pensionswise appointments at just over £31per appointment. So try not to use ridiculous figures to support your argument about a subject on which your knowledge is maybe not yet up to scratch. I support your aim to make cdc an additional decumulation option. In discussing its merits with colleagues their main objection relates to the difficulty in explaining and communicating possible reductions in the pension to scheme members. Maybe focus on developing your positive arguments for cdc rather than criticising pensionswise and employer schemes?
I agree that people I have met who have used Pensionswise have been very pleased with the guidance offered. At the end of the day, though, most DC members do need regulated advice (although I would say that) to help avoid serious mistakes.
Its a funny old world, corporate pensions. When I joined the industry, back in the late 1980s, I worked for a small subsidiary of that sprawling conglomerate, Lonrho, and spent years driving around the country visiting Volkswagen & Audi dealers sorting out the frightful mess that their Scottish Equitable COMPS had gotten into. The members hadn’t a clue what they had. Whatever happened to those funds, I wonder?
I always remember that the Boards of some Lonrho subsidiaries decided to offer employees an unusual ‘solution’ to pension problems. They contractually offered escalating annuities at retirement age set up on an agreed basis (50% of salary at NRA/66% of salary at NRA). I used to visit firms to collect the member data as retirement loomed and the firm just purchased an annuity. Not so expensive back then, and many more firms in the market – Generali, Sun Life of Canada – we arranged hundreds of annuities a year.
As the fuse on the drawdown bomb burns down, will we see a renaissance in the annuity market? I hope so.
Did you have any advisers at the conference?
No IFAs as far as I can see – plenty of consultants
On the latter point, it is often that Advisers are effectively excluded from conferences by virtue they have to pay for entry with free entry being available only to those actively managing schemes or trustees or providers!
The lack of innovation is not restricted to DC schemes Henry. How many DB schemes have sought to bring their offerings to members up to speed – pretty much none have changed their retirement ages despite the Age Discrimination laws and demographic changes and even the Gov has done that.
Most trustees (never mind employers) are currently more concerned with de-risking schemes – that means getting rid of members by either offering transfer incentives or buy-outs. This strategy smacks of “lets reduce the scheme membership, close it to longevity (no new members & no further accrual) run the scheme down to coincide with our retirement!