I sat in on a 90 minute Zoom last night hosted by John Moret’s Pension Network. I am allowed to say that the panel consisted of Paul Johnson, Emma Douglas, Jamie Jenkins and Steve Webb. I can’t attribute comments to individuals but can say with under John’s Chair we talked of the impact of the pandemic on people’s retirement planning and discussed pension policy.
One insight that came out of the conversation was the role of pensions policy in delivering or stymieing innovation. The two innovations that were discussed most were the pensions dashboard and the developments of defined benefit super funds.
In this article, I ask if the creation of safe harbor legislation to allow super funds to operate in a regulated environment might not be copied for the dashboard. Let me explain what I mean; it has long been possible to run multi-employer defined benefit schemes (the Pensions Trust is a good example). But only one defined benefit scheme exists where there are no sponsoring employers and that is the PPF, it gets sponsorship from a very large levy on solvent schemes.
Short of declaring insolvency (in which case your DB scheme goes into the PPF assessment period) , an employer has in the past been able to buy-out all or part of its pension obligations with an insurer , but there has not been an opportunity to sell-out to private markets. The two private market funds Clara and Pension SuperFund have been ready for business for some time but without the rules from the Pensions Regulator in which to operate, they have not opened their doors.
Like socially distanced shoppers, interested schemes have formed an orderly queue.
What the Pensions Regulator did yesterday, was offer super funds and prospective clients a safe harbor in which to negotiate terms and transact. It seems that the pensions regulator has applied the same methodology to authorizing super funds as it did DC master trusts. It is raising the bar but providing security for those operating within the authorized perimeter.
I am allowed to exempt myself from the Chatham House so can say that I asked the meeting last night, whether such safe harbor regulations might not be applied to the development of pension finding services – and indeed to those using those services to offer people dashboards.
The risk of not having
Despite not making it into the Pension Schemes Bill, the arguments for having super funds backed by capital rather than insurance have all been around protectionism. The ABI argued (and still do) that super funds provide buy-out on the cheap while pension schemes want buy-out on the cheap. Perhaps the solvency of many employers forced the DWP’s hand , tPR sees itself protecting the PPF and if a number of schemes can avoid the PPF by buying members into a super fund (where insurance was too expensive) needs must! Super funds are now competing with insurers which hopefully brings down the cost of insurance (guaranteed annuities). The risk of not having super funds became too great.
A similar argument could be made for the pensions dashboard. Progress of late has been painfully slow , there is a “new” website that has been published this week by MAPS, but it is just a better brochure but we are yet to see progress on common data standards for the pension finding service , the promised consultation on next steps or the onset of procurement. This cannot be blamed on any part of Government, it is just in the nature of large IT projects managed by Government that they go at the pace of the slowest.
Guy Opperman , the Pensions Minister, is aware of the pressing need. He is reported to have written to pension schemes telling them to be “dashboard ready”. There is much that DC schemes can do to make sure they have clean data to share and there is much that legacy pension providers can do to make sure their systems are ready with what is called an “API layer”. However the PLSA is right in saying that unless the Government makes it clear what data standards schemes are signing up to , there is not much they can do to give the Minister the thumbs up.
Here the slowness of the Government is creating new risks and not just the risk of confusing pension schemes .
It was mentioned last night that now that DB pension transfers are pretty much out of bounds, the focus shifts to DC transfers which are very much in the sites of the less savory parts of the pension community.
I have seen it argued that the creation of commercial dashboards that show people’s policies in one place will increase the likelihood of scamming. The FCA’s pension policy statement PS20/06 mainly focuses on DB transfers but does look at safeguarded benefits with DC schemes (GMPs and GARs are treated as if DB). There are of course a lot more opportunities to lose money on a DC transfer – they include the loss of terminal bonus from a with-profits contract, exit penalties (especially for the under 55s) and the loss of loyalty bonuses or guaranteed life cover and waiver of premium.
For all these reasons, DC transfers should properly be conducted under the eyes of the FCA , But whether however all DC transfers need to be “advised” is another matter.
The FCA has said that it wants to regulate commercial dashboards and for this reason commercial dashboards have not emerged. Just as pension super funds had to wait for the safe harbor regulations, so with pension dashboards.
But just as the pressure for DB schemes to consolidate has increased, so the pressure from consumers to get to grips with DC pots. I’m pleased to see that we now have nearly 500 volunteers waiting to test our DC aggregation service in the FCA’s sandbox. This is around ten times the size of test group we had originally envisaged.
The risk of not having properly regulated DC aggregation services is primarily because it allows scammers to operate outside of the perimeter in much the way as we saw at the peak of pension transfers in 2017/18. But there is a further risk posed by pot proliferation, some master trusts already have many times more deferred than active members with small pots abounding. The increase in unemployment predicted at the end of furlough will create a further spike in deferred pension pots. The DWP estimate that unless something is done we could see 50m abandoned pots by 2050, the PPI currently estimate that there is £20bn of lost DC pension pots.
So long as there is not a safe-harbor for firms offering people the chance to see their pensions in one place, there will continue to be suspicion among pension providers of letters of authority used to find pensions, Pension aggregators increasingly need to be FCA regulated to properly carry out pension searches and it is only a matter of time before the aggregators find ways of displaying the various pension pots so that pension consumers can make informed decisions for themselves.
Since the cost of advice on transferring a DC pension pot can be more than the value of the pension pot itself, there is clearly a need for ordinary people with pots not subject to safeguarded benefits, to be able to use aggregation services without advice.
The risk of this not being allowed is that frustrated savers find help with those on the fringes of decency.
The right balance
It is great to have MAPS building its dashboard team and I admire the thoroughness with which Chis Curry is building the dashboard proposition. But we still don’t have a timeline for having a timeline and are unlikely to have a clear delivery timetable till the end of this year.
Online pension inquiries are, according to one insurer speaking last night – rocketing. Empowered by their use of new technologies during lock-down, people are using all kinds of financial services online. But there is no pension dashboard for them to use and commercial firms who have the capability to show multiple pensions on one screen are shying away from doing so because they do not want to jump the gun.
So while it is great to have MAPS building a non-commercial dashboard, the speed of progress is creating precisely the problem that we have seen in DB consolidation. It is important that Government looks to DC consolidation services and gives them safe harbor status , as it is doing in the DB consolidation space.