A progressive approach to workplace pensions

Yesterday I talked about the importance of reporting, both to and from employers. Employers want to understand how their workplace pension is working and savers want to know how their money is doing.

The purpose of this reporting is to maximise the efficiency with which money saved is converted into money paid in later life. For employers , the question is who provides the saving apparatus, the questions for savers are how much to save and where the money goes.

There needs to be choice for employers and  savers and that means competition for those savings. The primary market has formed and we now know the winners and losers. We now need a secondary market which gives fresh choice, rewarding providers who innovate and taking money from providers who sit on other people’s money.

To make sure we have a properly functioning secondary market in which workplace pension providers can compete. Behind competition is a recognition that it drives innovation , increases efficiency and passes cost savings and value creation on to the end users- Britain’s savers.

There is an alternative school of thought that sees competition as bad for savers, that the cost of switching investments or even providers makes it better to have a stable market built around a handful of providers with the Government’s great intervention – NEST – as the default for employers great and small.

I am firmly for a functioning secondary market and I think that workplace pensions should engage participating employers and savers with progress – in all senses of the word,

The Trust based occupational pension scheme is the standard route for most employers to organise participation in workplace pensions. This is because of multi-employer master trust structures which have been the big growth area of pension provision resulting from the introduction of auto-enrolment.

In practice , we have the  market for small employers  dominated by four master trusts – Smart, People’s , Now and NEST with a number of commercial and not for profit master trusts  biting at their heels. There are still (after the dust settles on authorisation) 38 choices in the market. The 39th choice for employers is to set up a new occupational pension scheme exclusively for their staff. In practice, setting up an occupational DC scheme from scratch is almost as rare as setting up an occupational DB scheme.

The 40th choice is to set up a group personal pension, either with an insurer, or – more rarely – with a SIPP provider like True Potential or Hargreaves Lansdowne. Here there is no formal fiduciary structure for staff who have to access their information either through an employer governance committee (where the employer can be bothered) or from the provider and the provider’s independent governance committee.

How do providers get their messages accross?

Auto-enrolment has brought a great deal of change to the way businesses great and small organise the destination of the moneys they pay on their account and on account of their staff.

But the mechanism for communicating about the progress of workplace pensions in meeting their proper function (helping to provide security in retirement) has not changed.

The DWP are consulting on what paper statements should tell people as if nothing much had happened in the past two decades. Re-reading the DWP’s consultation on simplified statements, I think it could have been published in 1999 and made as much sense as it does today.  And the simplified statement makes a lot of sense.

The statement itself should be timeless.  DC “pensions” , at least for those not spending their savings, are simply pots of money being managed by other people which grow fast because of Government savings incentives. Statements should be simple because there is not a lot to say.

Once we have accepted that the message is simple and should be confined to things people really want to know, we should ask the second question – how do we make this message “clear, vivid and real” and this is where we are currently hitting the buffers.

We simply aren’t asking the question, “what do workers read?”

How do people read things?

One simple answer is that people tend to read stuff that impacts on their pay. They read their payslip and letters that tell them of pay-rises and changes in their benefits. Where the communication is material to their standard of living, people will read it.

People read utility and tax bills and letters from the DVLA because if they don’t, they will be cut-off or at worst, prosecuted. They also read letters which tell them about things they may have won, occasionally they may read marketing literature from trusted sources and they will read pension statements that arrive in the post – but only if they think there’s a point.

But mostly we ignore paper. Mostly we concentrate on those things that make it through the spam-filters in their inboxes and they read direct messages on their chosen social media.

Learning what our staff read is one thing, learning how they read them is another.

The critical success factors

I follow the simple mantra of Quietroom , communications should be clear, vivid and real.

Clear – we know the pension statements can be real and thanks to Ruston Smith and others, we now have a clear template which can communicate the important facts.

Vivid – means producing powerful feelings or strong images in the mind. People need to be presented with the facts, not only clearly, but in a way that touches their emotions

Real – this I think the hardest of the three, these statements have to be statements of fact, not imagined or supposed.

But there is a fourth dimension which is as important as time was to Einstein. We need to get these clear, vivid and real communications in people’s lines of sight when it suits people and how it suits people.

Pensions are a part of pay

And that means making sure we deliver pension messages in the workplace as a part of pay. The people who communicate pay are the payroll people, whether in-house or in outsourced payroll bureau.

The key to payroll communication are the templates provided by our leading payroll software suppliers. These include Sage, Iris, Quickbooks, Xero. A full digital list of payroll software suppliers is supplied here.

Almost all the companies listed are capable of and prefer to supply payslips digitally. Many can provide them through messaging systems other than email, but company emails are now the main way of delivering payroll information.

We might well ask the question why company payrolls are not the main way of delivering payroll information. I suspect there is a simple answer to this. Nobody ever asked payroll whether they would do the job.

A good reason why pension dashboard infrastructure should be open … any payroll provider could then include pension information directly on payslips. I expect that is far more effective than signposting a single government provided dashboard

— alan chaplin (@achaplin71) December 27, 2019

Alan is right, getting payroll to participate in workplace pensions through the dashboard , is a matter for Open Finance and I hope to contribute to the FCA’s call for input by following up on this tweet.

So why doesn’t electronic payroll delivery, mean electronic pension delivery?

The question begs a much more important question for workplace pension providers. Between 2012 and 2018, payroll invested heavily in making themselves payroll compliant. In 2016 the CIPP asked its members how employers and payroll companies were getting on with auto-enrolment. These were the key findings

Typical costs incurred due to automatic enrolment were several thousand pounds, with one respondent stating they had implemented a new HR and payroll system costing £290,000

● More than nine in ten payroll agents (92%) anticipate that their clients will need some level of advice and help with necessary actions for automatic enrolment

● More than half of agents (52%) believe the biggest challenge facing their clients in regard to automatic enrolment is that clients do not realise that it applies to them

● Three quarters of agents believe that their clients are not prepared to pay the necessary fees for services relating to automatic enrolment

And yet payroll complied with auto-enrolment – to a very large part because of payroll software companies upgrading their products, providing support and creating awareness.

Why do workplace pension providers not learn their lesson?

If you want a job done, give it to payroll. Payroll software companies  are commercial and will find ways to charge for the job. One way or other the cost will be absorbed or passed on to employers or providers.

If pension providers can integrate their communications with what payroll send, their chance of getting their stuff read increases dramatically.

If pension providers can convince themselves and payroll that what comes out of payroll as a pension deduction goes to providing a wage in later age, then combined payroll and pension statements may become a reality.

The lesson is being missed, pension contributions are deferred pay

This very important statement is at the heart of the problem and the solution. We have come to think of pensions as part of wealth management and the pension agenda has been hi-jacked by fund and asset managers to the point that the concept of “pensions as pay” has been almost forgotten.

In muddling this message, we have broken a critical mental link between work and pensions, downgrading pensions to a kind of expensive “perk” – an employee benefit.

Our first and primary reason for going to work is to earn a living and a part of this is to earn the right to stop working and rely on an income being paid to us from our savings.

Payroll has transformed its communications  into clear, vivid and real payslips which get read electronically by the vast majority of people on payroll.

The challenge for pensions people is to make friends with the people in payroll , learn their lessons and use their route to market.