The UK puts an unusual burden on employers to offer workplace pensions to their staff. Employers, big and small have risen to the challenge they faced from auto-enrolment and now manage the payroll interface for their staff’s contributions as well as minding the pots into which these contributions are paid,
For the vast majority of employers, pensions auto-enrolment is no more than an act of compliance, similar to paying VAT, NI and Income Tax. Contributions are part of the cost of employing people. The idea that a pension is a form of deferred pay is as fanciful as that employer’s national insurance is underpinning the welfare state. Most employers don’t think that way – they just accept that the law is the law.
So expecting employers to assume a fiduciary duty for their staff in the selection and monitoring of workplace pensions is a stretch too far. For the vast majority of employers , all they want to know is that the place they send contributions is fit for purpose. For the DWP’s VFM framework, “fit for purpose” means passing three simple tests on whether the scheme the employer is participating in is invested well, allocates charges properly and provides a decent service. It is up to others to determine how the bar is set , so long as their pension scheme clears the bar, that is enough.
These quality tests are of course a huge step forward from the original test an employer ran. For most employers, the original test was that the scheme it linked to, could compliantly receive AE contributions, not much more.
The link to the employer
One of the few things I’ve said about pensions that everyone agrees with is that “work is boring, pensions are boring, there is a synergy in workplace pensions”.
We cling to the idea of the company pension because it is the way we organise voluntary saving. If you want to opt out – then don’t go to work or choose to be self-employed. For huge swathes of the population, especially those in the public sector, the jog comes with a pension.
In Australia, there are very few company pension schemes, the employers role is to pay into the pension the employee brings with them to the job and to start them off in a pension that the employer subscribes to – in a very loose way. There is no fiduciary duty.
In the USA there is a fiduciary duty on employers to choose the right options for staff and this is a matter of hot debate as staff have taken to suing employers who are seen not to have exercised due diligence in selecting these options. The 401K system is similar to the UK workplace pension though we have yet to see staff suing employers for bad choices.
There is a concept in the USA known as “safe harbour” that protects employers from civil litigation provided they have followed certain steps to ensure the 401K pension is ball-park right. I suspect that this is the direction we are heading towards in the UK with a combination of insurance and master trust regulation and the VFM tests being the equivalent of “safe harbour”.
However, I doubt that engagement levels among staff are likely to reach the levels in the US, partly because we do not have the litigation culture that persists in America but mainly because pensions are not sold as an employee benefit but as an entitlement. As we are all in this together, we expect broadly similar outcomes.
This is the Government’s blessing and curse. So far, the question has been “am I saving for my retirement”, the question the DWP would like people to ask is “am I saving in the right way for retirement?”
If the perception is that all workplace pension schemes invest in the same way, deliver the same results and that the pension provider is an accident of payroll integration, then neither employer of saver is going to be much bothered by the choice of provider. So far this has worked in the Government’s favor, we have had very few pension culture wars with employers rising up against providers who are failing.
But the Government now wants employers and their staff to pay attention to the pension and the point of the VFM framework is to enable choices to be made. The Government is promising to boot poor performing schemes and providers into touch – or at least into the arms of more successful arrangements. It is encouraging employers who have a mind to their staff’s outcomes to do the same. It is not yet encouraging savers to use VFM metrics to help them combine their pots though that has been mooted for the future.
The Government’s VFM measure is that outcomes of workplace pension are, and will increasingly be – different. All pensions aren’t the same and the Government is putting the onus on employers to work out whether their pensions are fit for purpose, whether they run the scheme under their own trust or participate in a multi-employer measure.
The unique circumstances of the UK
We are not the same as countries which allow savers to have a workplace pension for life (Australia
We are not the same as countries which encourage workplace pensions as employee benefits (USA)
We are not the same as most European countries where the state takes a much larger role in the provision of pensions.
We are the UK , unique in our pensions heritage and in the culture of saving that has developed out of it,
Which is why we cannot ultimately turn to any other pension system and say we should follow that. Indeed, in the maturity of our workplace pension system – with its deep history of paternalistic provision, we have the chance to develop a system of comparison which could be adopted the world over.