This blog asks “can workplace pensions be exclusive?” and concludes that on matters such as gender, ESG and ethnicity, they should embrace diversity and be “inclusive”.  We find it harder to achieve this in some areas than others, but we shouldn’t duck the challenges but embrace them. That’s how move forwards, through healthy tension that drives productive change.

The tension that braces workplace pensions

My last few days have been spent considering how workplace pensions work and whether they can afford to be exclusive. From a commercial point of view, a workplace pension is successful if it delivers profit to its founders, usually its shareholders, or a benefit to the state (Nest) or to meet the needs of its membership (mutuals such as Peoples Pension and Royal London).  But in terms of their fiduciary duty, workplace pensions have a duty to deliver value for member’s money, a measure of success that is often at variance with the commercial aim. Less so, you might think, for mutuals and for the Government’s pension, but even these have a tension between the executive and the trustees. This is usually a healthy tension.

Of course you cannot exclude diversity from an inclusive scheme, but you can be selective about the demographics of your membership. In the next section I explore how workplace pensions have used underwriting of employer propositions and scheme design, to attract a chosen demographic. I am pleased to find there are still many schemes in the UK who offer opportunities for all  – including ethnic groups who have traditionally been excluded from pension saving.

History

Until the arrival of Nest in 2011, workplace pensions were exclusive. Most excluded the employees of other companies and excluded the self- employed. The 2008 Pensions Act established Nest as a scheme that had a public obligation to receive money from any employer qualifying under auto-enrolment and money from the self-employed. It became the first truly inclusive pension scheme as it could not underwrite terms for each employer to make it impractical for some employers to use it.

Once Nest was established, others followed. Most notably NOW pensions and People’s Pension which set out to compete with Nest. For a time Legal & General had a similar intent. These large multi-employer schemes were typically occupational rather than contract based (L&G however opened its GPP to everyone and were much more picky about who could use its master trust).  For a time , workplace pensions were highly inclusive.

Trusts like NOW pensions sort scale by taking on business from umbrella companies that employed itinerant workers from workforces as various as the seafarers to those working in the gig economy. Things didn’t always work out, one of its largest employers, the cleaning services company ISS split from NOW to set up its own scheme, complaining that NOW’s service wasn’t at the required level. But by and large, the big three met the demand of larger employers in the early years of auto-enrolment staging with the promise that where things didn’t work out immediately, they would be rectified over time.

The big three were joined by further workplace pensions who were inclusive, Smart and most recently Cushon, have accepted employers on a non-underwritten basis. Meanwhile there have been newer master trusts from BlackRock (now Aegon), Zurich (now Scottish Widows), Aviva and from a number of consultancies , all of which offer an exclusive service. Here terms are offered to employers who offer a commercially attractive covenant meaning that many master trusts behave as most GPPs do, cherry-picking opportunities. This is not a bad thing, it is commercially a very sensible thing, but it makes life harder for master-trusts that are inclusive.

So how does an inclusive scheme work?

Schemes such a Nest, NOW, Peoples , Smart and Cushon have a membership that is so heterogeneous that they could be said to mirror the workforce in the UK. They hold money for many people who are no longer with the employer who enrolled them so the total numbers of members in these large schemes (in this table 20m) overestimates the numbers who are paying into workplace pensions. Many people, especially those who do not have career jobs, find themselves being members of several schemes.

Some, because of schemes consolidating, may find themselves in the same scheme twice. There is a job of work to be done for the larger schemes, learning about the membership they have.

Inevitably, issues will arise within the schemes that should cause trustees concern, these usually involve cross-subsidies from one group of members to another. This has led to many schemes that had flat charging structures building in some form of tiered charging to protect larger pots paying the costs of smaller unprofitable pots (an example being People’s Pension). It may also mean some schemes  having to abandon some principles on which they were build.

NOW pensions was built around the idea of all people being invested in a single fund . This idea is based on the principles of pooling everyone for a common purpose. However, when it comes to investment, we do not always have a common purpose. Two examples of this are the movement towards investing sustainably (expressed most violently by Extinction Rebellion) but in workplace pensions by the rise of focussed funds like LGIM’s Fossil Fuel Fund. Another example is the muslim population in the UK, whose strong conviction is to have money invested in a Halal way, using the guidance of the sharia law.

Trustees may want people to invest in a single fund, but they may find that people want to invest their own way , so there is demand for the inclusion of specialist funds to meet specialist needs. Pension Bee and Atos put pressure on LGIM to launch a fund without exposure to stocks investing in fossil fuels

NOW pensions, are now under pressure to offer the 75% of Uber’s workforce, a sharia compliant investment option.

There are two ways that inclusive schemes (that accept anyone) can manage these pressures. They can either be reactive to the needs of their membership, or proactive. In my experience, a proactive approach to understanding membership needs, wins every time.

While Pension Bee and Atos actively sort out the views of their membership and got great kudos for introducing a fund option that met its membership’s needs, NOW pensions sat on the knowledge that they were not meeting the needs of their actual and potential membership – those of its 2m members, who are muslim.

An inclusive scheme “works”, when it meets the needs of its membership. NOW says that it is only now finding demand for a sharia fund, but that is a most reactive approach. NOW is finding that Uber, a much heralded new client is being sued by the Uber drivers scheme, for operating an inclusive scheme which excludes the needs of three quarters of its membership.

Knowing your members

Britain has changed as a country since the last war, my father grew up , the son of a Methodist minister in Hounslow in the late 40s and early 50s. I lived in Brentford for a time and he came to visit, I took him to his old haunts

53.3% of the borough’s population is White, 34.4% is Asian, and 6.6% is Black. The most noticeable South Asian populations in the borough are in Hounslow, Heston and Cranford, all of which also have considerable Eastern European populations.

Hounslow has changed beyond my father’s capacity to compute. He got out of the car and said he’d seen “little India”; he never returned. I learned from my Dad  – a lifelong liberal – the difficulty he had in understanding deep demographic change.

Adapting to the changing needs of a membership as large as Nest’s or NOW’s or People’s means understanding what it is like living in working in Hounslow or Bradford or Manchester as much as towns like Yeovil – with a strong white working class population or Lambeth – with a large Afro-Caribbean element. Ethnicity is particularly difficult because many ethnic populations do not traditionally participate in UK financial services. Land, property and families are the routes to financial security, insurance, pensions and investment in bond and equity markets are not.

So while the financial services industry has found ways to include women and diverse alternative sexualities (which are non-threatening), they may not yet done enough to reach out to ethnic communities (which many like my Dad- find threatening).  I don’t mind calling these communities BAME, though I suspect the issues of the muslim community are most urgent.

Challenges from BAME member groups

The BAME communities are easy to ignore as they themselves feel excluded from workplace pensions. Research done by People’s Pension and others suggests that opt-out rates from auto-enrolment from workers in BAME communities is much higher than from the nation as a whole.

Going back to my original “tension”. It is no bad thing – commercially – for a workplace pension to find itself with little exposure to BAME members. They earn less, move between jobs more and create a small pot problem. They are not profitable.

But for trustees and IGCs, the BAME membership needs to be treated with the same care as any other. So it is up to the trustees of schemes like NOW and People’s and Nest to ensure that their schemes are inclusive, offering an opportunity for the muslim community in particular (with its clearly defined need).

Promoting inclusivity where it exists

We may not be able to include sharia principles in defaults, for unlike ESG, these principles do not have universal acceptance. But we should be able to make a sharia compliant investment option, the obvious option for those who believe in Halal investments. The task of doing that – lies ahead. But it is one that should be on the agenda of all trustees who run inclusive schemes.