Nigel Wilson, boss of Legal & General, said when asked about investment strategies at a parliamentary hearing into LDI,

“it may be that actually we want to spend more time on the DC pension schemes”

At a separate hearing , Charles Counsell, boss at the Pensions Regulator said the same thing. Leveraged LDI is an institutional crisis – “lifestyling” is the retail equivalent.

As David Fairs and Charles Counsell consider their next options, the Pensions Regulator produce new guidance to trustees, to the sound of swinging stable doors

We’ve published a guidance statement with the support of key industry bodies setting out how DC trustees should communicate with savers to help them understand what a fall in their pension means for them, while also strengthening their scheme governance. https://t.co/M5cdtCe9vs pic.twitter.com/qZoNzCxZrt

— ThePensionsRegulator (@TPRgovuk) January 12, 2023

The trouble with the document is , as with leveraged LDI, the Pensions Regulator hasn’t the data to know what the problem is. Nobody has.

This is because DC occupational schemes from the Nest to the tiniest EPP, do not have to report the outcomes of their schemes. The experience of “savers” is a total mystery, not just to TPR but usually to the trustees too!

My firm provides analytics which look at the internal rates of return achieved by savers and compares those returns with those of other savers, “what they would have got” in a benchmark fund. We know about the experience of millions of DC savers, can show how savers who use the lifestyle are doing against those in self select funds. We can show the achieved fund performance, against that advertised in factsheets and we can show who is getting value for money and who isn’t.

Some trustees find this useful and most find it at best a waste of money , at worse a truth they would rather not face up to.

So far, the Pensions Regulator has shown little interest in this kind of analysis, preferring to rely on top-down reporting from asset managers via factsheets and “net performance tables” produced by consultants showing how funds have performed, not how members have done.

The difference between factsheets and member’s experience is to do with factors beyond the member’s control, the application of contributions to funds(sequencing risks) purchase price of funds, transitional costs within lifestyle and the transactional costs of member activated fund switches. None of this reported or even recorded.

But this information can be found by comparing how members have done , compared with the “clean” performance data. Members may sometimes benefit from these idiosyncratic risks they take, though more often than not they come off worse.

The elephant that haunts the DC pension room

Lifestyling is the elephant in the DC room. But the elephant can be benign or can be rampaging around causing much destruction. Lifestyling is the process of moving from growth funds to funds that preserve value prior to money being taken by one or other investment pathway. Here are two preservation options offered by State Street

The preserve plan is used by lifestyle options targeting cashing out the DC pot (what most people do). The Pre-Annuity Plan is the fund used by lifestyle options where people intend to buy an annuity.  Both funds are considered low risk and it could be argued that if you invested in the pre-annuity fund and got 37% more pension from your pot you would be “even-stevens”. To some people, that makes it “low risk”. But if you had £100,000 in your pot in September 2021 and that became £63,000 a year later, you would be worried about why your pension pot lost more than you might have earned in that year.

Now we have no idea how many people have been in lifestyle funds that use pre-annuity style funds and how many use funds targeting cash-out , so as far as we know , there may not be a problem.

In L&G’s 2021 IGC report, published in September 2022, there is recognition that many mature pots were invested in pre annuity plans.

Has that promise been fulfilled? I have asked L&G twice, I haven’t got a formal answer – I hope upon hope that this was done in 2021 and not in 2022.

The difference for those 380,000 savers could be as much as 30% of the pot – but do they know what has happened, does the FCA or TPR (those pots could be in occupational schemes or GPPs).

The Pension Regulator’s problem

There are a huge number of occupational schemes with DC funds They range from executive pension plans, include DB plans with DC AVCs and hybrid DC sections. They include well-funded DC occupational plans and not so well funded auto-enrolment master trusts. There is no way that TPR can keep up to speed with the member experiences of all of these schemes.

It is not just those close to retirement who can have violently different experiences (depending on how the lifestyling works).  The work done by Corporate Adviser on the performance of DC defaults shows that those 30 years from retirement can have violently different results. TPR’s guidance rightly points out that this doesn’t matter so much as performance evens itself out over time but it’s interesting to know why (for instance) the BlackRock lifepath flexi has had such a bad year relative to its peers (hint – it hedges currency risk), Why has the Royal London GPP default done so well for savers 30 years and a day from state pension age?

What do trustees know about member intentions?

The Pensions Regulator wants DC occupational scheme trustees to know a lot about there members. But this is hard, L&G master trust has 1.7m members, Nest has over 11m. Most of the members of occupational pension schemes no longer work with the employer who chose or set up the DC scheme.

There are certain schemes (BSPS for instance) where there is a reasonably homogenous workforce but most large occupational schemes have such a variety of workers that it is a Herculean task for trustees to know their members.

Much of the Pension Regulator’s new guidance note is taken up with finding ways to explain to members what went wrong in 2023. Relative to inflation, there are virtually no winners, so the task is about sorting through the casualties and explaining how each got injured. In the preamble TPR explains

[The] statement sets out how trustees should communicate with savers to help them understand what a fall in their DC pension means for them, depending on their personal circumstances, and to avoid making hasty decisions that could lead to risks such as being scammed.

But , sound as this guidance is, can any trustee read this and believe they can deliver to the Pension Regulator’s expectation?

How savers make decisions and why they make them is important, as this should influence the design and implementation of the scheme. Trustees need to ensure they understand their savers’ characteristics, such as: age profile, saver type, pot size, their socio-economic demographic; as well as information on how and when savers are accessing (or planning to access) their benefits. Accurate information could lead to better scheme design and member outcomes, our guide on DC investment governance (Designing investment arrangements section) explains how this can be achieved.

Most trustees simply don’t have the detailed information on what has happened to the scheme’s membership, to know where to start.

Can savers really make decisions, fifteen years before some notional “retirement” date as to how they intend to spend their pot? Can schemes be designed around needs that even the members haven’t established?

The need for a  rethink

Reading TPR’s guidance “supporting defined contribution savers in the current economic crisis” I am saddened that there is so little that we can do for people young and old with DC pots.

People find themselves in defaults which grow at different rates with no information about how they are doing and  whether they are getting value for money relative to people in other workplace pensions. Starved of this information , many choose to transfer cash into their bank accounts or give their savings to a wealth manager who promises them some individual attention.

The workplace pension is unable to share its value with its members as it has no way of articulating the value it is creating and while the vast majority of modern arrangements have avoided de-risking lifestyles that funnel into gilts and bonds, there are clearly millions of people over 50 who have found their pre-retirement funds down over 20% in the year. And as Jo Cumbo asks

How is it not misleading for fixed income funds to still be marketed as “lower risk” when clients in these funds – including pension savers very near retirement – are nursing recent losses of over 30%?

— Josephine Cumbo (@JosephineCumbo) January 10, 2023

If you had lost over 30% in your DC fund and expected to retire this year, wouldn’t you feel a little scammed?

There is a clear way forward available to TPR and I can help them set it up. They should require trustees to commission reports on their membership which show them where they have problems and allow them to create an action plan that really does support defined contribution savers through this economic crisis.