I thought about calling this blog the “cult of complexity” as in modern English, a cult is a social group that is defined by its unusual religious, spiritual, or philosophical beliefs, or by its common interest in a particular personality, object, or goal
The social group I have in mind is the group of consultants who dominate orthodox thinking on how workplace pensions are designed ,measured and “drawn”,
This cult has one goal, which is to perpetuate their omnipotence. The strategy is simple – pension consultants have set about and largely succeeded in controlling everything – right down to the laws that govern their activities. Such is the power that they yield that we do not even notice that they are there. But their influence on our pensions is universal and often very unhelpful. They are responsible for the curse of complexity that makes pensions so hard for ordinary people to get to grips with.
Attempts to define the pension benefit – suppressed
Once upon a time , pensions were very simple. Defined benefit pensions were designed to cost employers a certain percentage of payroll and the people who managed the pension had the simple objective of funding pension promises with their best endeavors. The single discount rate that measured liabilities was used to ensure that the enterprise balanced the needs of members for a wage for life with those of sponsors for a means of rewarding loyal staff and ensuring succession from older to younger workers. The whole shooting match could be defined by what Con Keating calls a Contractual Accrual Rate. The CAR underpinned the underlying agreement between employer and staff of what could be delivered. It was based on a faith that over time, the assets committed would meet the liabilities.
Then came consultants and then came trouble. What has happened over the past thirty five years has been the breakdown of the faith in the CAR as intermediaries have worked their way between employer and staff and redefined the CAR as a contractual guarantee. This has taken away the old agreement for both sides to do their best and replaced it with a contractual obligation on employers. This has suited the consultants very well as they now hold all the cards. They have convinced the Pensions Regulator that it is in the interests of the common weal (and especially the PPF) that these contractual obligations are enforced.
The result is that open pension schemes that were designed for perpetuity have become closed pension schemes on a glide path to oblivion. This chart shows how abandoning the CAR in favour of pensions lockdown has destroyed what Frank Field in 1997 could still call one of Britain’s economic miracles – a funded pension system that delivered. Space doesn’t permit to explain the intricacies of the evisceration of the contractual accrual rate, but this picture explains its impact.
Attempts to revive the definition – suppressed
In recent times there has been an attempt to revive the contractual accrual rate , this time by explicitly stating that the defined benefit of a pension is a promise based on best endeavors and not a guarantee. We call it today “CDC” but – as the picture shows, it is a reversion to the old single discount rate of DB -when pensions were simple enough to be explained and understood.
This simplicity is not to be tolerated by consultants who operate a cult of complexity. The curse of this complexity was clearly in evidence at a recent meeting of the Pensions Network where a variety of advisers cursed CDC, primarily because it gave far too little opportunity for advice. A few days later we were lectured by John Ralfe who used 40 minutes and 40 slides to explain how the harmony at Royal Mail was based on a con, where one set of postal workers were ripping off another because the future could not possibly be as bright as the past.
The “lockdown” of CDC is well underway and (with a few well known exceptions) it is being suppressed by investment consultants for whom it represents precious little opportunity for control.
Attempts to link defined contributions to pensions – suppressed
DC pensions were originally called “money purchase” because they were designed to purchase a pension annuity at a certain point in the member’s career – the point when they had saved enough to stop work. This was never a great idea as it relied not on the old single discount rate and the CAR but on two moving parts – accumulation and decumulation, which needed to be married by some financial mechanism. To begin with the control of this mechanism was put in the hands of insurance companies who operated retirement annuity contracts that retained a link between the contributions and the benefits through guaranteed annuity rates that underpinned saving with an element of insurance.
The Equitable Life overcooked the insurance and were caught out when a period of high interest rates came to an end at the end of the last century. This gave the consultants their chance and their answer was to unbundle the contractual accrual concept even further. Not only did they strip out the previously integrated investment and administration of the pension scheme , but they broke the remaining links between contributions and pensions by dismantling “with-profits” and replacing it with a market value approach where savers were entirely exposed to the volatility of the markets in which they were invested.
This enabled consultants to introduce the practices of “de-risking” into DC, which they had pioneered in closing down DB. The lifestyle matrices that became fashionable 20 years ago and still sit within workplace pensions, were the replacement for the guaranteed annuity. The idea that when annuities were expensive, lifestyling would deliver funds to pay the high price and when they were cheap, the lifestyle program would not deliver much – not much being needed.
There was still a small vestige of the contractual accrual rate in the life styling program but even that was to go. DC was becoming a source of wealth rather than an insurance against living too long and wealth management suited advisors rather more than social insurance. Hence the self-invested personal pension which didn’t target a pension but provided a capital reservoir for the well-heeled
Is the self invested personal pension – the high-water mark of pension complexity>
Suppressing pensions altogether
As you follow my narrative, you can see how consultants had suppressed the old contract based on a best endeavors accrual rate , first by introducing the guarantee within DB schemes, then by strangling its re-birth through CDC and finally how they unbundled DC introducing the concept of wealth management as the end of the pensions journey.
The coin dropped for me at the aforementioned meeting of The Pensions Network when a member of the Zoom crowd asked what opportunities for “advisers” existed in a CDC plan. The answer – pretty clearly stated – was “not many”. DC is now a playground for investment consultants to rake in fees from organizing beauty parades for employers who like to believe pensions are still something they are in control of. The beauty parade also ensures that the consultants control the offerings of those providing workplace pensions, many of whom are now consultants themselves. Even the insurance companies are having to dance to the consultant’s tune, producing products to the consultant specification and reporting on pensions to consultants rather than sponsors.
The employer is given the impression they are in control, but as one of my friends who runs the pension affairs of a global car manufacturer put it “workplace pensions is the only area of procurement and governance where the employer has no control at all”.
The final break between the employer and staff was broken when pension freedom arrived, ensuring that nobody ever had to use their money to purchase a pension. The pension freedoms market the total victory of consultants in their attempt to destroy the contractual accrual rate. The link between contributions and pensions was now completely broken, as was any pretense that employers were providing their staff with a wage in retirement. Pensions were now an employee benefit and not even an insured benefit, they have as little to do with social insurance as an employee share scheme.
The cult of complexity
Pensions are now far too hard to be understood by employers, let alone their staff. Employers need consultants and staff need advisers.
We have regulators who police the system on the look out for unauthorized advisers but seem incapable of returning pensions back to the people for whom the private pension framework was originally designed for. The RDR, FAMR and now the investment pathways, are attempts to help people act for themselves but it’s unlikely that any retail regulation can deal with the curse of complexity. It is by now systematic and can only be reversed when it’s accepted that 90% of us have no intention of paying advisers to tell us what to do.
The cult of complexity – which has prevailed over the past 35-40 years may now be at a high-water mark. I see signs from Government, that simplification has to happen. Auto-enrolment has shown that policy interventions can have beneficial impact , not just on saving rates, but on investment decisions (compare default pension investment to ISA “investment”).
But for Government to really turn back the tide, it is going to have to stop listening to consultants and advisers and start listening to the needs of employers and staff. That will take courage and it will involve tears at bedtime.
One final feature of cults which gives hope, they never last. Cults either become mainstream (very rare) or they burn or fizzle out.
Maybe we are reaching the point where the cult of complexity and the cult of the consultant has so overwhelmed the object of its attention that it becomes the thing it set out to advise on.
Consultants are now running a good part of the pension system. They control DC and DB pensions through fiduciary management, they control large parts of the regulatory system and they are highly influential in the creation of legislation. In my view this is unwholesome and deeply concerning. I am not the only person who has this view, but I may be one of the very few , independent of consultancies, who can articulate it.