What future for retail pensions? Darren. Nico and Des Healey get stuck in!

The Aspinall/Philp VFM Podcast extravaganza dialed up to 10 this week with an excellent episode that  you can listen to here.

One of the big issues under discussion in recent episodes is scale and the advantages that it brings.

Nico and I have clashed on this with over “institutional and retail” prejudices and I’ve ruffled feathers explaining why consultants should butt out on “forward looking measures” and keep VFM as a framework to help those who don’t use consultants. That Nico and I are chatting on Pension PlayPen (Tuesday 10.30) suggests there is more that unites than parts.

Nico’s explanation of performance fees, fund structures, asset classes and returns in the private and illiquid space dominate the last 10 minutes of the pod and show how advanced his thinking is. His phrase “DC is not a price-maker” is memorable and an example of the practical wisdom that dominates this episode.

Wisdom from experience

There is nobody who knows Des Healey who doesn’t see him as sane, funny, wise and experienced. His wisdom comes from his experience and it has informed this VFM consultation which is more than half way through now.

Des sees how scale joins the DWP’s agenda of “adequacy, fairness and predictability”. He talks here to the value of being able to purchase assets that smooth and improve returns to savers , offering them the advantages available to large open DB schemes (such as LGPS and USS). Very skillfully, he explained the agenda, not in terms of politics (building back or levelling up) but with the focus on better outcomes. The DWP is moving away from rhetoric and with good reason, the fiduciary trumps the political duty.

What hope for GPPs?

But scale is a big problem for many employers who find themselves with workplace pensions that seemingly aren’t scalable. Those with aspirations to deliver value – trapped in a retail framework.

Let’s take a few examples; British Telecom’s workplace pension is a Standard Life SIPP, Nationwide uses an Aviva GPP, SUEZ an Aegon GPP, Asda – a Legal & General GPP. Even the FT has chosen a Scottish Widows GPP (well a Zurich one originally).

The trouble for these organizations is that they are trying to deliver within the VFM Framework , using retail products, a personal pension – whether dressed up as a GSIPP, Stakeholder Pension or a common or garden GPP is a construct of individual policies owned not by trustees but by members. This structure is identical to that used by Pension Bee, AJ Bell , Hargreaves Lansdown and St James Place.

It is impossible for the VFM Framework to operate without including these “retail products” and the challenge to the insurers and SIPP providers (who generally do not use an insured platform) but can operate workplace pensions, is to beat thresholds designed for £20bn+ master trusts.

Here the question is where scale is being achieved (and this is precisely the question that should be being asked in the CDC consultation). The same Target Date Fund is the default for Aegon’s master trust and its GPP. That BlackRock TDF invests in publicly quoted equities and bonds and has token  exposure to commodities and property, it is to all intents and purposes a 100;0 fund that becomes a 40;60 fund. It is frankly all that can be afforded in the ruthlessly competitive world of DC selection exercises.

The same default fund can be used by a master trust , a workplace GPP and as a SIPP option.

So what happens if the fund decides to (further) diversify – it has scale from its wide use both at Aegon and elsewhere? The answer is the cost of the fund goes up and that price increase makes it too expensive to sit as default for many of its users where there is no mechanism to pass price increases on to end users (employers and savers). The problem with pooling is that unless the interests of all the unit-holders are aligned , unilateral decisions to increase the price of the fund will lead to multilateral outcomes with the risk that the fund is depleted of customers and assets and finds itself too small to achieve what it first set out to do.

But that problem is largely retail problem. Much of the price pressure experienced by wealth managers is because they are having to pay much more for their asset management than the institutional platforms that create economies of scale for small DB and DC schemes who can often buy cheaper on a platform such as Mobius than directly from the manager. The same happens with retail fund platforms but the end result is the same. Diversification costs and that cost needs to be shared by all participants in the pool , including those who don’t feel they have the ability to pass on those costs to their clients.

To an extent, the use of performance fees and the easing of the charge cap regulations means that these more expensive funds can find their way into workplace pensions whose defaults are already being offered at the 0.75% cap. But it is hard to explain to an employer who has negotiated a discount against the RRP of a workplace GPP that that discount is going to have to be given back.

Why Des is right to stress the importance of the FCA in this.

The FCA has rigorously pursued a price- cutting agenda through the IGCs and GAAs which has seen a cap on exit penalties for legacy pensions drawn from 55 and led to huge price disclosures in IGC and GAA reports. It’s work establishing the CTI tables has created more transparency on what we pay for fund management and there’s no doubt that the focus it has brought to the cost we pay for our money to be managed has benefited the consumer.

But a fundamental message from the VFM Framework is that what matters is better outcomes though bigger pots and better pensions, and lower charges do not necessarily lead to VFM.

Bringing the FCA into the VFM tent is critical to the success of the VFM Framework – if the FCA are onside , the Treasury part-own the Framework , that makes for it easier for the “Bill Bid” to succeed , meaning that we could get a Pension VFM bill and act this parliament.

A further word of explanation on retail/institutional

As I have tried to explain, institutional funds like BlackRock’s flagship TDFs , are available in workplace and non-workplace pensions, in master trusts , GPPs and SIPPs. The funds are managed institutionally  but sit on both institutional and retail platforms.

So – save for pricing – there should be no difference between institutional and retail products – other than the odd segregated default  offered by NOW and Nest. While other master trusts are moving towards unique defaults, most offer defaults that can be purchased by workplace GPPs and even non-workplace pensions.

Nico uses a helpful phrase “the value of choice”, which he sets against the cost of offering choice. Right now, the value of choice at the point you want to take your money rests with non-workplace pensions and will continue to do so until master trusts find a way to offer some kind of pension that is acceptable as a default for those who don’t or won’t choose.

The most interesting conversations about Phase 2 of the VFM project will focus on the value of choice – whether investment pathways are more valuable than a collective pension. Whether workplace pensions can prove they are inherently better VFM than non-workplace is an argument for another day.

Right now, we have to accept that to have the kind of drawdown we want, many of us have no choice but to move to retail products. The GPP and the SIPP have life in them yet, provided we can convince their purchasers that  prices can go up as well as down!

A really good podcast

I am reminded when I look at this picture by just how hard it is for people to work out how they are supposed to work out the value of their pension. There is no way that most of us can evaluate any of the factors pictured above.

In this podcast you can hear from Des Healy , a clear definition of what he thinks value for money is and you can listen to how the Government is going about giving those who need to judge it, a fighting chance of working it out!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to What future for retail pensions? Darren. Nico and Des Healey get stuck in!

  1. John Mather says:

    Why invent yet another measure when you could report net IRR
    This is what really has meaning in terms of outcomes

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