When auto-enrolment started I, naively as it turns out, hoped that small employers would be excited enough by the chance to choose a workplace pension, to consider what made for a good scheme and download a report that told them why they’d made the choice they did.
Pension PlayPen did produce such reports and the methodology behind the report was signed off by a firm of actuaries who stood behind the research. In total we produced more than 7,000 of these reports and I hope that employers have kept them in their digital pension file to explain to staff why they are saving into the scheme they are.
But for most of the 1.1m employers that staged auto-enrolment, the default button was “choose Nest”, followed by “People’s” and “Now Pensions”. Many employers , new to workplace pensions, did not take a decision based on member outcomes, their primary concern was support so that they could remain compliant with auto-enrolment regulations.
But things have moved on and workplace pensions are now being asked to show how they will deliver more value for the saver’s money. A quick look at this simple chart shows that the main way that a pot builds in the early years of saving is through the red box (contributions) , but over time investment returns increasingly determine the size of the pot. This chart shows how , even where investments underperform (the grey box) , investment returns overtake contributions in the build up of the pot. If investment returns are in line with the average of all other savers, people get the additional build up of the yellow box and if people can get a higher return of just 1% more than average, their pot builds with the addition of the blue box. The message is simple, improving member outcomes is all about improving long term returns.
Put another way, members and employers control the red box, trustees determine the rest.
Of course there are people who want to determine their own strategies and trustees must ensure they have the tools to do so, or make it clear why this isn’t allowed. At present only NOW pensions doesn’t allow self-selection.
In July we will have been auto-enrolling for 9 years. Many DC savers were saving before their employer staged auto-enrolment. For many people, their pot is now filling up faster from investment returns than from contributions.
The jewel in the auto-enrolment crown is that almost everyone who is auto-saving is auto-investing into default funds that are growing at a tremendous rate (and have been for many decades). The chart above shows how people’s pots have actually grown over the past 30 years , net of average costs and charges but with average performance on an average contribution.
By comparison, an investment in a cash ISA would be filling the pot up at a trickle.
The difficult second album
The Government (in the shape of the DWP but with Treasury support) is embarking on launching what Guy Opperman calls auto-enrolment (2.0). Much of the noise is about increasing contributions for the self-employed, the young and those on low incomes.
But the much more radical agenda is Government’s interventions in the investment of workplace pensions , which are subtle but could be very important. Get it right and people will be getting the blue box, get it right and you’ll be stuck in the grey-zone of the chart above.
There are infact two interventions, the first is what woodsmen call “coppicing”, where Government is planning to cut out deadwood to leave the strong trees in the forest to grow stronger. This will be done by small scheme trustees voluntarily winding up their work and handing their assets to bigger schemes capable of managing money with an eye to the blue box.
This is a fraught process as many of the saplings in the wood have every chance of growing to strong trees, we don’t want to see innovative and courageous schemes being uprooted. We need to work out where the deadwood is and that means testing a few trunks.
But if Government gets it right and the coppicing speeds ahead, then we will find much fewer trees but trees that can grow to full strength delivering timber and lumber for many years ahead.
Excuse the mixed metaphor, but I think Government is going about this the right way and that in getting increased scale into our workplace pensions, it is creating an opportunity for DC schemes to make the kind of difference to people’s pots that means they are in the blue and not the grey. But to get to that point, things will be difficult and there needs to be collective resolve among people in pensions to accept that the long-term good outweighs the short-term advantage of immediate profit.