What is going wrong?
It appears that the PLSA has fallen out with the DWP and the Pensions Minister in particular. Yesterday the PLSA’s Director of Policy publicly criticized the Pension Minister for failing to adopt its proposals on “Guided Retirement Income Choices” . In this blog I’ll explain why DC pension trustees aren’t looking to offer these choices and suggest a better way to keep the P in PLSA.
People looking to get their money out of occupational pensions are currently in an odd position. If the pension offers them a defined benefit they have only to work out whether to take their tax free cash or not and then press the button, the rest is done for them and they receive a monthly credit to their bank balance till they die (and spouses and partners may have an expectation of getting more of the same if they die).
By comparison, those in defined contribution occupational pensions have very little done for them, as became obvious listening to the PLSA’s talk on the retirement options they want adopted by DWP/tPR , I was mystified by the lack of progress that has been made. While savers using contract based plans have their investment pathways, occupational schemes seem years behind and the PLSA proposals seem to add very little.
Why aren’t the PLSA and DWP as one?
Why couldn’t the PLSA and DWP have found a way to introduce investment pathways into occupational pension schemes by now? What is the risk to trustees of establishing retirement options for members which keeps money in the scheme , rather than being transferred into a self invested personal pension?
Master trusts don’t need the PLSA to design their products
I think the answer comes down to hard commercials. For commercial master trusts, the option of keeping money is a financial blessing, not only are pots managed through retirement at their largest, but post retirement strategies are not subject to the same scrutiny and they need not conform to the charge cap regime.
But commercial master trusts don’t need the PLSA to design them post retirement options, it’s the employer sponsored trusts that struggle.
And employer running their own trusts reject these pathways
Where the occupational scheme is non-commercial, and the sole sponsor is an employer, the maintenance of money in the trust post-retirement presents little benefit to the sponsor. The employee is retired but the sponsor retains the risk of things going wrong.
Rene Poisson’s bold move to operate investment pathways out of the JP Morgan staff scheme ran into the buffers because there was nothing in it for JP Morgan. Had JP Morgan been the investment managers of a JP Morgan master trust, run for other employers, I suspect the answer would have been different.
These dynamics are not fully recognized in regulation (even by the master trust authorization framework). The PLSA and DWP/TPR consider DC pension schemes as one, but they are clearly bifurcated between commercial and “employer mutuals”. The PLSA looks like representing no-one and seems to have alienated the DWP in the process.
What has gone wrong between the PLSA and DWP?
At the end of Nigel Peaple’s presentation, given at a Pension Age event, the PLSA’s Policy Director delivered a stinging attack on the Pensions Minister for failing to engage with the PLSA on the implementation of its version of the FCA investment pathways. Peaple went further, calling on the work and pensions select committee to give the DWP a kick up the bum on the matter.
The DWP are already being given a kick up the bum on the issues around the under-payment of the State Pension and I wonder why all this couldn’t have been sorted out in line with the implementation of the investment pathways (themselves delayed from last October but delivered in February).
No doubt there is more going on here than meets the eye but the upshot is that commercial master trusts have not adopted the investment pathways and sole employer trusts are still requiring members to find their own way to the pension freedoms which usually means transferring to a SIPP.
So long as this goes on, the member is the loser. Commercial master trusts can and should build their own versions of the investment pathways and employers who sponsor their own schemes will see a bulk transfer of deferred members and the scheme itself into a master-trust as an increasingly attractive option. If Tesco and Vodafone can do it, any occupational scheme can.
But a much more likely option – in the short term – is that members will make their own way towards what they see as freedom and either cash-out or move their pots into SIPPs. So long as this goes on and occupational pension schemes lose their membership then the PLSA will be jeopardizing their P and presiding only over the Lifetime Savings element in their title.
A better way to keep the P in PLSA
My question at the talk was whether the PLSA see CDC as a means for DC occupational schemes to offer decumulation. It was answered with mild positivity but little enthusiasm. If the PLSA want to reconnect with this debate, I suspect they would be better pushing for a default decumulator such as a pooled collective with built in longevity protection than ape the investment pathways as they appear to be doing at present.
In doing so, they would be sticking to their core purpose, providing members of occupational pensions schemes with pensions. Right now they appear to be all at sea and falling out with a Conservative Government that they should be most friendly with.