Governance improving – but…
The DWP has been asking itself some searching questions about the governance of the workplace pensions that Britain will be increasingly rely on to supplement the state pension and eventually overtake it as our main source of retirement income.
It established that its policy objectives are being achieved in relation to the vast majority of the provisions it put in place. But…
The review has identified,.. that the policy objectives in relation to the Chair’s statement are not being achieved within the current approach. In particular, using a single instrument – the Chair’s statement – to try to achieve multiple policy goals, in respect of scheme governance and member engagement does not work.
Testing and discussions with interested parties including trustees and service providers’ voices revealed that industry understanding of the purpose and intended audience of the Chair’s statement was unclear.
It does not work as a communications tool for members and there is little evidence that members know it exists.
As a means to keep members informed, the chair statement has failed. As a way of focusing trustee’s mind on the job it has succeeded (though – according to the DWP’s “improving member outcomes” consultation last September, the vast majority of small DC schemes are failing in meeting the DWP’s governance standards, even so.
What do members expect?
Unsurprisingly, the member’s voice is not heard very loud in this review. The output – apart from the sign-off from Guy Opperman is that the DC Governance Group produced a free template which is hosted on the PLSA website. This may be of some help to smaller single occupational schemes but doesn’t address the deficit of information getting to members.
Frankly , the members are told very little about their scheme and what they are told about the progress of their retirement pot towards meeting their retirement needs is woefully inadequate.
So what do members get?
Speaking last week to the Chair of one of Britain’s largest single employer DC workplace pensions, it became clear that he had totally lost confidence in the capacity of his principal instrument of communicating with members which he saw, not as the Chair Statement but as the statutory money purchase illustration.
Most of us will have seen one of these, it’s the document that tells you what you are likely to get as an extra income when you retire. Typically it’s full of numbers which are calculated based on annuity rates, assumptions about future inflation and growth of the pot net of charges.
The Chair’s complaint was that no matter how simple he made the SMPI , nor how he explained it with video footage, the method used to calculate the numbers was fundamentally flawed, stymied by prescription over the rates that pots were converted to income set out by the Pensions Regulator. Certainly, reading the method used by trustees, it is as if the pension freedoms never happened.
This is a statement made to the clergy of the Church of England using money purchase AVCs. I don’t mean to criticize their trustees, just to show the fustian in which their illustrations are clothed
There follows the growth assumptions on various funds, many of which are negative. If I was a member of the clergy seeing this, I would be asking what in heaven’s name was going on.
Why would I be wanting to invest in funds with negative growth assumptions?
The answer is of course because the expectation within the SMPI illustrations is that you will behave like any DB pensioner and expect a guaranteed income in retirement. Which rather ignores the point of the pension freedoms, as George Osborne proudly proclaimed “from this day forwards, no one in this country will ever have to buy an annuity again”.
We talk to members the language of a bygone age.
The problem here is not just confined to single occupational DC pensions or the AVC schemes sitting beside DB benefits, it is there in the statutory communications of benefits to those in master trusts including the big ones – Nest, People’s, L&G, Lifesight …I could go on.
We set member expectations for their pensions through statutory instruments like chair statements (that don’t get read) and SMPIs – which do get read and confuse the hell out of us (apologies to the clergy).
Simplification is only part of the story
We can simplify the messaging in Chair Statements and SMPIs but if we do not address the message itself, we only end up confusing in a more simple way.
DB and DC schemes are different, they don’t both end in guaranteed pensions (it could be argued neither does). But that is what the DC SMPI assumptions are really about and that is what the template of a chai’s statement is really about too, it’s all about saying that what you are getting from DC is no difference (in terms of governance) than what you used to get from DB.
It is time that the DWP extended its thinking to what goes on in the member’s head, rather than in the imaginations of actuaries , policy makers and trade bodies. People want illustrations that tell them what is likely to happen and chair statements that tell them what has happened and they want information in clear and easily digestible statements.
The fundamental question over what a DC scheme is designed to do is not being properly addressed. If people continue to strip money out of DC occupational schemes either to transfer to their bank balances or to SIPPs then trustees need to reflect this in their chair statements. If they don’t want this to happen they need to find default mechanisms that channel people into investment pathways or maybe even scheme pensions (using CDC).
Right now, the information being given people who are retiring is couched in the paradigm of a bygone age, an age of DB and of annuities and not of pension freedoms
It may be that trustees are holding out for something better and looking at CDC as something better, it may be they are happy seeing their schemes giving up on members when they reach retirement. But whatever trustees think (and I think most are as confused as the messaging they produce), we need to get the message updated.
When that happens, it may become clear that much of the scheme design of workplace pensions is simply not up to the job members are expecting it to do.
But that is the subject of tomorrow’s blog!
The existing rules do not stop to make other forecasts, on top of SMPI. The rules just request schemes to make a statutory pension forecast, as the expectation is that many people will need a pension.
And what is the problem with having negative return expectations?
I am reviewing now a Swiss pension which has -1% expected return and this is the only option to invest. However the employer offers 35% of earnings pension contributions.
There is no promise of a % of the salary as pension, however the scheme has conversion rates (annuity rates) or around 5% with 50% spouse benefit, and possible inflation increases which were paid for the last 20 years. Overall, it is a decent pension scheme. The employer wanted to take market risk away and offered high pension contributions!