The changes announced yesterday by People’s Pension and its parent B&CE are significant.
- It’s furloughing its sales team, battening down the hatches to new business
- It’s changing its charging structure, protecting itself against the ruinous impact of small deferred pots.
While the furloughing is most significant for the 140 staff who are effectively on gardening leave, it is partly subsidised by the tax-payer and is reversible. It should not impact on service levels to current customers and shows an insurer being ahead of the game – I don’t read this as panic.
Patrick Heath-Lay used his words careful when announcing changes to the charging structure (in the longer term much more significant).
“As we evolve our charging approach to meet changing requirements, we think this approach combines fairness, incentives to save, and prudence”.
I remember John Jory telling me of the 0.5% mono-charge that People’s Pension would employ to simplify pension charging. At the time (2011) – it was expected that the pension cap on defaults would be set at 0.5% and Legal and General were actively lobbying for a cap this low (I tried to stop this madness by literally kicking Adrian Boulding’s butt ).
By introducing the £2.50 per annum member charge, B&CE will enhance revenues from People’s Pension by £10m but they will have abandoned John Jory’s dream. People’s Pension will join NEST, NOW and some parts of Smart in adopting a complex charge, albeit a much lower fixed charge than their competitors.
This may be “evolution” to Patrick , but there will be many within B&CE and further, that will see it as a retreat from the proud announcements made nearly ten years ago.
A necessary retreat?
By introducing this small but significant charge, People’s Pension has given itself a safety valve. The master trust said its new approach would reduce the cross subsidy by active members of millions of small, inactive pots, which are increasingly created by auto-enrolment”.
As well as implementing the annual fixed charge, it has halved the starting rate for a rebate to a £3,000 pot, at which point members are eligible for a 0.1% rebate. This grows to 0.3% on savings over £50,000.
It expects around half a million members to benefit when this is implemented later this year, with an illustrative member on an annual salary of £20,000 and a pot of £3,000 paying the equivalent of 0.3% total annual management charges over 20 years.
The charging structure at People’s Pension has evolved from the simplest to the most complex in the space of a few months. Is this necessary?
Is this a challenge to Government to get pots moving?
When I first read the report of this change, I assumed the £2.50 charge monthly (years of selling such charges had inured me). That the charge is annual (21p per month) surprised me and apologies to those who read my erroneous tweet
.@henryhtapper think @PeoplesPension new admin charge is 2.50 per year not per month (will raise >10m annually). This is a new charge introduced due to the current situation. By the looks of it, previous bands where tiered charging kicked in are also less generous for the member.
— Darren Philp (@darren_philp) April 2, 2020
I don’t expect it to stay so low and for this reason.
Two of the four big auto-enrolment master trusts have now put in place protection against small pots (the other is NOW). Smart has some protection.
If the Government cannot get small pots to follow members when members leave employment, then pot proliferation will increase. The DWP estimate that there could be 50m abandoned pots by 2050.
With the average deferred pots size valued in hundreds rather than thousands of pounds, even a £2.50 pa charge is going to significantly reduce the value of several million small deferred pots , languishing with Peoples Pension and NOW.
Moving these pots on will increasingly become a commercial imperative not just for providers , but for Government and most of all the members. But there is no mechanism in place to do this.
Technology is not in place to allow the pots to tag along behind someone moving jobs and the cost of organising the transfer by a regulated financial adviser cannot be recovered by fees (in many cases the fees would wipe the pot).
This change of charging is a direct challenge to Government to get pots moving. If Government doesn’t listen, People’s Pension can further increase the fixed costs, effectively creating an active member discount to counter current cross subsidies.
Unlike insurers, People’s Pension is a trust and has little recourse to capital other than from its parent – B&CE – itself a mutual. People’s can rightly claim that it has been given little choice but to protect itself, its parent and its members from the calamity of pot proliferation.
It should be remembered that Patrick Heath-Lay, as CEO, has a responsibility to all parties to keep People’s Pension solvent and prosperous. These are necessary changes – albeit they make the People’s Pension a complicated beast.
Patrick Heath-Lay was one of the first advocates of a pension dashboard and has been at the forefront of the argument for a technology solution to the problems of pot proliferation.
Patrick Heath-Lay has now thrown down the gauntlet. If they are sensible, policymakers within both DWP and the Treasury will take notice.
The sooner the pensions dashboard allows people to see their pots in one place the better.
The sooner that significant changes to the rules governing the aggregation of small pots are put in place the better.
The sooner that “pentechs” are allowed into this argument with their aggregation solutions the better.
Finally – some more on the charges evolution
The announcement made to Professional Pensions, is fully inclusive of all changes. But some of the recent changes to the People’s Pension charging structure are so new that they need to be clarified.
Clarification to the new tweak in the People’s Pension charging structure was solicited by Darren Philp of Smart Pensions (formerly head of policy at People’s Pension) and disclosed by the current head of policy at People’s pension (small world)
Yup D, rebate at/of £3k 0.1% /£10k 0.2% 25k 0.25%/£50k 0.3%
— Gregg McClymont (@greggmcclymont) April 2, 2020
This compares to the current rebate structure
For the part of their savings:
- up to £6,000, no rebate is given
- over £6,000 and up to £10,000, we give back 0.1%1
- over £10,000 and up to £25,000, we give back 0.2%
- over £25,000 and up to £50,000, we give back 0.25%
- over £50,000, we give back 0.3%.
All that is changing is the substitution of the £6,000 trigger point with the lower £3,000 point.