Everyone acknowledges that defined contribution pensions turns the risk register on its head. Instead of sponsors taking the risk of poor performance, poor information and poor governance, these risks are now taken by savers.
So why doesn’t scheme governance reflect this?
When I look at scheme reporting, whether for multiple employers of a a single sponsor, the format and intent of the reporting doesn’t differ much from the way we have traditionally reported on DB schemes.
In a very abstract sense, DC governance should bypass the sponsor altogether and be focussed entirely on helping savers manage their risks, understand the success or failure of the investment strategies employed and deliver individual metrics meaningful for each saver alone.
This is the reality of individual DC, whether it is delivered through a scheme or a group or personal pension plans, the “pot” is what the member relates to. It is the outcomes that members experience that matters.
A pragmatic approach includes employers
At an abstract level, we might want to do away with scheme of plan level reporting – we can’t. The sponsor – the employer still considers it owns responsibility for what happens within the plan, if only for old fashioned reasons. Employers have infact discharged their duty by choosing a qualifying workplace pensions and are not (in terms of regulatory compliance) on the hook if the chosen provider messes up.
However , in terms of reputation , a workplace pension can create havoc. NOW pensions – in their pre-Cardano days, caused acute embarrassment to employers through poor administration – compounded with a positioning in some league tables that exposed employers to criticism for choosing them. A failure by NOW pensions to address internal problems quickly enough and to come clean with employers lead to many employers moving qualifying schemes.
There are two key areas of risk for employers, performance and data quality. If providers cannot evidence that they are keeping member records properly or that individual pots are showing value for the money invested in them, then employers should consider the basis of their relationship of their supplier.
Providers have to be accountable both to savers and employers
I recently attended an event where the pension manager of a DC scheme with a large employer told a session that DC value for money assessments were an exercise to satisfy trustees and the employer and had no relevance to members. This brutally honest statement demonstrates the failings of current DC governance which simply replicates the DB pecking order.
It does not acknowledge that whatever happens at scheme level, is only an aggregation of what is happening at saver level and it is what the plan participants are getting that matters (not just to the savers but ultimately to the sponsor). If the plan participants are getting shoddy record keeping and poor returns on their money then the impact ultimately fall on the saver.
Employers only have skin in the game so much as poor outcomes can sour labour relations and make HR and Reward decisions on issues like early retirement, a lot harder.
DC Governance turned on its head
At first site , this row of metrics may look to be reinforcing the traditional model
The pink box tells a trustee/IGC/employer that the average value for money score for the participants in the dataset was 52. That’s slightly better than average.
The average return savers got from the pots in the dataset was 7.66% and the average return from the benchmark, was slightly higher at 7.7%, as the benchmark contained no lag for charges , the dataset (net of charges) showed saver experience slightly better than average.
We are finding that these high level metrics encourage those with governance responsibilities to dig deeper and start filtering groups of savers to see who the winners are , who are not doing so well and what kind of things are influencing both value for money and absolute performance (the internal rate of return of the pot).
We have analysed over 300,000 pots and new data sets are coming in every week, each pot is measured against a benchmark fund into which contributions are theoretically invested to discover the value for money AgeWage score.
The employer/IGC/trustee/provider is then able to generate reports that shows pot performance at any level of granularity he or she chooses (including individual pot analytics).
So, for the first time, fiduciaries will be able to look at things from the savers point of view.
This is what we mean by governance turned on its head.
Where is this going?
We hope , once people have got used to this new way of reporting, that we will be able to report to savers individually. We are still discussing with providers, fiduciaries and the regulators how this can be done in a way that doesn’t disturb people in the wrong way.
Engagement is one thing, but getting people all worked up about their pension could lead to them taking rash decisions with a lifetime of regret.
All the same, wouldn’t you rather know what has happened to your pension pot than not? Is it really fair that you have to take all the risk and “they” get all the information?
Ultimately, we need balance. Most people are interested in their retirement money and our initial testing suggests that people get AgeWage scores and want to dig further to find out how they could improve them. Once people get into one pension pot, they want us to get scores for other pots and to see all the pots in one place (a dashboard).
This is taking governance into new areas, creating the opportunity for people to self-govern – using the super-governance of employers, providers and fiduciaries to open the door,
If you are interested in this form of governance and would like a demonstration, please contact me email@example.com or call me on 07785 377768.