Waking up to a new pensions world

I am sorry to read arguments on social media and in Pension Age lamenting the loss of the competition we have today. The mess of GPPs, single employer DC schemes and the majority of master trusts are incapable of delivering pensions or of doing much more than invest in pooled funds. They are neither providing pensions or managing their investments. This article looks at things a different way. It comes from a bit of thinking over the past few years and from a cohesion of thinking with that of Government.

What exactly is David Brooks saying? I eventually got to the end of the article care of a download (72 pages long)

Here is his quote;

This is how the pension industry sees the prospect of the Government’s plan to rationalise our funded pension system, their view of what consolidation will bring us

What will happen if consolidation takes over is that we will have not much more than one provider of investment services for the national Local Government Pension Service and maybe eight providers of DC pension services for employers who pay a contribution but do not promise a defined benefit pensions.

Do I think this is what Torsten Bell and the DWP, the Treasury , the Chancellor and the Prime Minister want? Yes I do.

I see nationalisation in the game for LGPS pools so long as  Scotland , England and Northern Ireland have political reasons to maintain this but the emergence of one provider in time (probably Border and Coast) £400 bn or what it becomes in five or ten or twenty years is not going to need competition (see below). Small private DB plans will either fall into superfunds or into insurance arrangements. A very few will have the determination to continue but ultimately they will find their way to consolidate. The PPF will be used to sweep up those who are under-funded or unattractive, the PPF admitted on Wednesday they saw this as their future.

As for schemes paying pensions from defined contributions.

I see Nest, People’s Pension, Legal and General, Lifepath and  up to four others. Cushon and Smart may be able to consolidate their way there (using bank and PE money) , Standard Life and Aviva may have the determination but will be more interested in bulk annuities and frankly they may prefer to pack it in. The remaining consultancy master trusts and the flagging insurance master trusts will cash in their chips unless they are backed by a financial behemoth (who hasn’t thrown in its flag)

So what does this mean for retail workplace pensions, the GPPs of the insurers the small amount managed by Hargreaves Lansdown and other SIPP providers, the answer is that they will fold their AE businesses into the master trusts and focus on wealth management.

Do I consider this a problem? No I don’t.

The key thing for DC pension schemes to do , is to provide pensions. They will need to provide income to people for as long as it is needed, by way of invested pensions. The large DC pension schemes , mentioned above (I may have got the last four DC providers wrong) will have to become collective to do this. They will not remain “retail” at retirement (as they are now). They will need to offer pensions by default and people will have to reject the offer to draw-down, buy an annuity or take the pot as cash paid into the bank. Statistics show that no more than 20% will opt-out of pensions.

Will there be competition? Maybe there will be for the retail money but pension rates will become the same for everyone and there will be no reason to move providers for most people. Competition to pay pensions will be limited, pensions will be set at a rate that is agreed by Government with the trustees and that takes me on to investment.

As with LGPS, investment and administration will not be driven by competition but by competence. That is not what will drive the market at the fiduciary level. Infact it will be co-operative as it will become with the payment of pensions. If you think that is flabby then you will be wrong. It may be that management of the executives of these master trusts will change hands (for money perhaps) but this is not going to be a major consideration for savers (who are going to be pensioners).

The only determinator of success will be the return delivered to them from investments and these will indeed be very similar. Investment will not be subject to huge bets but will focus on ensuring that investments provide returns over long the long term. In 2050, companies will talk of their investors as pension funds and trustees and executives will explain how they are working with their investments to maximise pensions for their members. The adoption of technology driven administration will be everywhere and human intervention will be by exception (when there’s a cock-up or when people default out of pensions).

There will not be a lot of difference between pension providers

Of course there will be differences in outcomes but they will be insignificant compared to today and ultimately, the work of those who sit on executives and trust boards will be judged on their efforts in helping their assets deliver a return in an acceptable way. Think of Britain owned again by its pension schemes, think of investments abroad being justified for the right reasons. Think of British companies being invested by overseas pension schemes who – like ours – invest directly.

I was asked , along with 2,500 delegates on Tuesday to think of what the pension industry in ten and twenty years. I am not capable of managing the economy and don’t know whether we can afford to keep the triple-lock that long. But I know about pensions and I know that for most people, they are expected from pension savings. They are not concerned about minor fluctuations between pension funds, they want cash when they retire and pay after that – so long as they are around. From the member’s point of view, we need a default that they can opt-out of, funds that do the best they can and support to all members to explain how this works.

The wreckage we have created over the past thirty years will be a problem, to some extent this will be helped by the pension dashboard, the self-employed and the unemployed will be outside the system and must want to come in or find their own way.

David Brooks

Steve Webb