A precarious business

The HSBC master trust has teemed up with Andrew Clare of Bayes Business School and Hymans Robertson to produce a report that tells us we currently have no good way of turning the pots we build up through auto-enrolment into pensions. This is not a new observation though , if understood by savers – should horrify them, The costs involved with drawdown as a percentage of first year’s income drawn are horrific- and most of those costs are recurring. Drawdown from retail platforms is too expensive for most of us to rely on to replace our income from work.

This is an important observation and one that is being missed by the actuaries and lawyers who are working on alternatives. Much of the benchmarking of the innovative alternatives to drawdown are benchmarked v annuities but the FCA’s retirement income study tells us that where people are making an effort to turn pot to pensions , the majority are trying drawdown.

[the] report indicates that
the 205,641 drawdown plans sold in
2021/22 (source: FCA) brought with
them a detrimental rise in annual
management charges combined
with unavoidable transition fees –
some totalling the equivalent of 82%
of a first year income in retirement
and increasing the chances of pot
exhaustion when a member reaches
age 90 by up to 18%.

In addition to being fried by high charges, those using retail platforms for drawdown are risking a major depletion of their funds if volatile markets catch them drawing their funds at the wrong time.

The outlook for those who cash out is no more rosy

At the same time, those scheme
members who instead decided to
make a full withdrawal are already
likely to see a profound loss of
purchasing power, with the Bank of
England forecasting peak inflation at
around 13% by the end of 2022 and
continued “elevated levels” through
2023.

Help is at hand for savers prepared to keep their money in a workplace pension (of which the HSBC master trust is the chosen example.

As the value of pension pots
continue to rise, managing
sequencing risk and providing
a true “to and through” journey
into retirement is where the real
diversifiers are likely to emerge over
the next decade.

The three recommendations of the report all promote the workplace pension as the obvious platform from which to convert pot to pension

1. Extend auto-enrolment
provisions to cover retirement
solutions

2. Deliver more clarity and
guidance around the scope of
“value”

3. Provide examples of optimal
solutions and best practise for
trustees and employers

With more than a nod to Jo Gibson and the DWP retirement income consultation team, the report offers a “final note”

By implementing these
recommendations, we can not only
help drive better member value, we
can also create more innovative and
competitive markets – something
which, in turn, can only further
enhance value for members.

It’s a powerful pitch and behind each of the recommendations is the master trust as the chosen vehicle to deliver improvements. This might appeal to DWP/TPR but it suggests that a great deal of DC money (still in contract based plans) is in the wrong place.

The cost of transitioning GPPs into master trusts isn’t trivial and it is unlikely to be met by employer subsidy.

It should be noted that the HSBC master trust has everything an employer and member might need to benefit from the recommendations – except members.

To get members, I suspect that the architects of the master trust are going to have to look beyond current investment pathways as HSBC has commercial rivals who can offer what its untried master trust offers, with a track record.

Nonetheless, Andrew Clare’s analysis is really helpful in exposing the fragility of drawdown as a retail concept. What is needed is something altogether better, what I refer to as a pension pathway, about which I have written much and I am pleased to see – much more is being written.

My recommendation to HSBC

I went down to HSBC last week to visit the master trust team. It was a damp and cloudy morning and fog swept round the HSBC tower, obscuring the logo, I wondered lonely in the crowd, in a corporate threnody.

After scanning various qr-coders and navigating numerous security systems I found that relief in a conversation with the bank around these findings. I saw the hard work which has gone into building the platform but for all the perspiration, I saw no inspiration.

I recommend that having been late adopters of a master trust and the distribution system of auto-enrolment, HSBC become early adopters of retail CDC.

As they are unlikely to take advice from me, I would urge them to look at the research being carried out by WTW and Aon, at the statements put out by the IFOA and to read a recent article by Mike Jones in Professional Pensions, all of which address the missing link in the value chain – the needs of savers to use a ready-made product that provides an income for as long as its needed substantially better than can be purchased with an annuity.

Retail CDC is the obvious alternative market. With the FCA’s new consumer duty placing greater scrutiny on firms to provide good customer outcomes, there is improving governance, oversight and accountability in the retail and contract-based world and potential for independent governance committees (IGCs) to provide the level of governance and oversight required to operate CDC effectively.

The remit of IGCs is set to be bolstered by the FCA’s and TPR’s upcoming consultation on value for money which looks to formalise proposals for uniformity and consistency on value assessments across retail and workplace pensions. In our view, a key development will be to extend governing bodies’ assessment of value to and through retirement, which should help to improve the quality of decumulation products and reduce charges.

The HSBC master trust makes use of the Fidelity institutional funds platform (an insurance platform) whose investment pathways are the responsibility of Fidelity’s IGC.

But these investment pathways cannot be accessed from the Fidelity funds platform, only from a Fidelity contract based plan.

HSBC does have a life company (HSBC Life) but it does not offer investment pathways and it doesn’t have either an IGC or GAA – it is not in the business of offering qualifying pensions.

The language being used by Mike Jones in the Professional article is identical to that of the writers of HSBC’s “Converting pension pots into retirement incomes“.

Jones (a lawyer at Eversheds)

In our view, a key development will be to extend governing bodies’ assessment of value to and through retirement, which should help to improve the quality of decumulation products and reduce charges.

There is not a hairs breath of difference in the intent of Mike Jones’ article (advocating the use of retail CDC) and HSBC’s study. Both ask the question

Are current roads into retirement delivering member value?

Both conclude they are not. Both stop  short of the inevitable conclusion that what is needed is not an employer sponsored CDC scheme (Royal Mail style) but a pension pathway that can be accessed from existing choice architecture.

HSBC’s recommendation that the  auto-enrolment rules should be extended into retirement is justified in this way

This should include employers and
trustees being given the responsibility
to provide a cost-effective retirement
solution.

This would reduce the risk to
members at no extra cost to the
employer, enhance corporate models
by ensuring employees have an
intuitive and efficient pathway into
retirement, and enhance (at no cost)
the value of benefit packages.

Not to beat around the bush any further, what is needed is a default pathway that has a common purpose of turning pot into pension delivering more value than an annuity as a “made for you” product.

HSBC should adopt retail CDC as its preferred retirement solution. That really would move the conversation forward.

Best navigated without a skateboard!