Do we need a secondary market for workplace pensions?

How TPR explained “employer duties (no mention of pensions!)

The auto-enrolment rules prescribe that if you run a company with workers you normally have to offer them the opportunity to join a workplace pension of your choosing, either on an opt-in but usually on an “opt-out” basis. As the screenshot above shows, the employer duties focussed on AE compliance and not the workplace pension

The choice of workplace pension does not need advice and – provided the choice is to an authorised workplace pension –  the choice puts the employer in a regulatory safe-harbour.

Judging by research done in 2015 by the CIPD, these are the main factors that influence an employers choice of workplace pension. “Good member outcomes” is not on the list.

It follows, that many workers are saving into a workplace pension chosen out of convenience to the employer, not the member outcome.  There is very little in this decision making,  that talks to VFM.

Part of the Government’s concern is that some workplace pensions are still set up to help the employer and disregard members.

There have been no prosecutions as far as I am aware of employers negligently or fraudulently using a workplace pension for gain, prosecutions have focussed on the non-payment of payroll deductions to pension schemes (aka theft).

Workplace pensions can go wrong and often do. To ensure that good money is not invested after bad, the Government has set up a system of governance of workplace pensions designed to spot pensions that have gone bad. Workplace pensions set up as GPPs are looked after by IGCs – those set up as occupational pensions , by trustees. The idea is that failing workplace pensions report themselves to the FCA and TPR respectively as not offering members value for their money. They then have to hand over the keys and walk away, the pensions are administered and invested by another provider.

There may be instances where this has happened but I have not seen one. Virgin’s IGC reported its stakeholder pension as not fit for purpose but the plan still exists under Virgin’s stewardship.  Some of the occupational pensions that have folded into master-trusts may have done so because they didn’t consider they were offering members VFM. But by and large, what consolidation that has happened so far, has occurred for commercial reasons. Employers don’t want to run their own pension schemes, commercial workplace pensions “want out” at an acceptable valuation.

The impact of the DWP’s proposed VFM framework is intended to change things. The Government has it in its head that many schemes are not giving members value for money. Either they are invested poorly, or they charge high  and retain charge as profit or they aren’t delivering a decent quality of service. There will be tests to ensure that schemes don’t rip-off members, invest productively and support members properly.

If they don’t , then the schemes may be required to hand over the keys.

If a multi-employer master trust is forced to cease trading, then the employers will find themselves in a new workplace pension, there will be no need for them to take any action , though they may be required or want to explain what’s going on to staff.

But there is a stage before closure – where workplace pensions are on a written warning to improve, where employers may be made aware that their scheme is in special measures. In such cases there may be an impulsion on employers to review the decision taken to choose that provider. This is where the comparative data that the VFM consultation envisages the Framework providing – becomes useful.

The idea is that employers will be able to compare what they have with what they might have with a view to switching providers. This is how the Government wants to create a secondary market in workplace pensions where the employer is the determinator of the ongoing arrangement and does not passively accept the new provider and the new provider’s terms.

This is what I and others see as the primary outcome of the DWP’s consultation. We think that the consultation response, due out in the next couple of weeks, will put an onus on employers to pay attention to their choice of workplace pension.

This will require a change in employer knowledge and understanding – not much has changed since the OFT wrote this ten years ago.

The VFM Framework is expected to address this issue.

By giving employers simple headline metrics by way of three RAG (red orange green) tests on performance, services and cost, it will excite interest in where the money is going by employers and ultimately savers.

If the Government is right, then this will create a new opportunity for providers with a good (green-green-green) story to tell, to promote themselves to a wider audience. I expect the vast majority of this promotion to be by direct offer, no provider will be involved. This may be the opportunity that banks like Lloyds and NatWest – which own  master trusts, could take to market their plans to bank corporate customers.

It might also be the opportunity for advisers active in advice to the top end of the workplace pension market, to digitalise their service and extend it to a wider group of employers. There is no “De Facto” for workplace pensions and there is certainly no pension aisle in the MoneySupermaket.

It’s been done before in the primary market and it may be time for a workplace pension choice engine for the secondary pension market

Sceptics may say that the disruption caused by switching providers, negates the VFM latent in the ceding provider and that purchasing may be on cost – or just on past performance. These are justifiable concerns that the VFM Framework needs to address.

But it looks likely that many small and medium businesses , who have previously avoided engaging in the workplace pension, will do so, not least for the sake of senior executives who will over time become major stakeholders in those plans (by dint of their pots).

And it seems to me inevitable that those who make decisions on behalf of their staff, are held accountable for those decisions, by their staff, by their representatives and ultimately by the regulators.

We will therefore need a secondary market in workplace pensions, one that caters for more than those employers who can afford to take advice from employee benefit consultants. That will mean a fresh opportunity for progressive advisers – keen to make a mark and help in the quest for better Value for Money.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Do we need a secondary market for workplace pensions?

  1. Kevin Bailey says:

    Perhaps the primary legislation could have been published to include VFM assessments as we now know them to be rather than believing low cost equates to value for money. I didn’t hear too many complaining at the time when I and many other IFAs highlighted this. Most employers providing WP pensions have less than 10 employees and had little choice in provider. And those that employed just one or two had no choice other than Nest. And as for investment employers used the default as the most appropriate route leaving employees to engage and adjust fund choice according to age and philosophy.

  2. henry tapper says:

    Agree Kevin, micro-employers are not being targeted – it’s the employers bug enough to have resource to do analysis but too small to take advice who are in the lines of site.

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