Stormy times ahead for personal pensions
The Pensions Investment Review opens with a section on “scale and consolidation” . I am sure it will get more attention when people take their eyes off the glamorous talk of intervention in investment.
Much of the Pension Investment Review is written about cleaning up the mess that the current Government has inherited and clearly wants to offer the same value as its star players.
It is not just about measures to make 20 “mega-funds”, it is about consolidating the chaos of our personal pensions where there are no visible trustees but instead contracts between an insurer and individual – sometimes funded by an employer, historically a result of financial advisers selling commission laden policies. There is variable value for money amongst personal pensions and a lot of what the report calls “fragmentation”.
We have a new entity “the Pension Schemes Bill whose name appears in this opening section which includes a new concept known as the contractual override.
I am not clear what the contractual override will mean for personal pensions but I suspect that the measure of “value” for these policies will be more than costs as this brief section suggests. This is directly pasted from section one of Jo Gibson’s ambitious review and seems to point at the shortly published Pension (Schemes) Bill.
Contractual override
1.19 To help address fragmentation, the Pension Schemes Bill will
introduce a contractual override regime, with strong consumer safeguards,
for the contract-based part of the market. This measure will help address a
longstanding issue and allow schemes to consolidate underperforming and
legacy arrangements, improving saver outcomes and helping the wider
scale objective. Furthermore, it will help create broad equivalence between
trust-based and contract-based schemes.
1.20 Consumer protection will be paramount to the working of this new
regime, and contractual overrides will only be permitted where it is in savers’
best interests, certified by an independent expert. Where savers are bulk
transferred internally, it must be into the arrangement offered by the
provider which provides the best value.
1.21 Providers will need to use objective metrics to inform contractual
override decisions. These metrics are intended to include metrics obtained
through the VFM Framework that the government will introduce in due
course.
1.22 The detailed rules on the use of the regime will be developed by the
Financial Conduct Authority (FCA) and consulted on in the usual way.
A new kind of intervention – the value for money measure
“Furthermore, it will help create broad equivalence between
trust-based and contract-based schemes”.
What we do not know, but much suspect, is that occupational DC schemes , especially the 20 or so anticipated “mega-funds” (aka surviving master trusts) will have defaults in retirement that will pay what ordinary people know as “pensions”. They may be annuities , they may be non guaranteed CDC pensions, they may be the shared ambition arrangements where pots are transferred and paid by DB pensions (perhaps capital backed or – as with LGPS – from the massive funds that sit behind promises).
“Defaults” makes a huge impact as a word in the Pensions Investment Review and “equivalence” between what savers get into – focuses on getting equivalent value for money from “accumulation” and we must suppose “decumulation”. The problem that personal pensions, most particularly group personal pensions is that though they appear to be collective, they are not. They are just a number of personal pensions grouped together and united by a single charging structure for all members and – if a workplace GPP – a single default.
Now we have a contractual override which looks very much a means for those in control of the groups of workplace personal pensions and older legacy pensions , to clean up the mess by transferring pots to get equivalence. My guess is that there will be a lot of consolidation using this contractual override and that the result will be the end of GPPs and equivalence for savers and spenders of their saving.
Take BT which for decades had a DB scheme, then an occupational pension and more recently a group personal pension with Standard Life. Is that going to have an equivalent GPP for long – or will the GPP be contractually overridden and transferred to the Standard Life GPP or a CDC run by BT or part of a multi-employer arrangement?
I see space, reading this review, for mega DC funds; I see CDC funds starting up and consolidating schemes which can’t meet VFM standards, and I see little space for GPPs or the legacy personal pension books that stand behind them. They will be consolidated into truly collective arrangements.
I think the outcome will be fertile ground for SIPPs, just as the enforced change to British Steel pension arrangements allowed the fraudsters to exhort those with little knowledge or experience to “take control of their own pension” and not to transfer to the replacement employer sponsored scheme.
The online SIPP providers are basically offering individuals the capacity to take control of their own pension, but at a minimal management cost (e.g. platform charges of £8.95 per month irrespective of the size of the pension pot and low transaction costs are advertised), offering full FSCS protection, in account decumulation options, and also optional default investment pathways similar to those in a GPP. Advertising campaigns and social media are likely to make the comparisons and the employer’s duty of care on scheme selection for its current employees becomes challenged and sidelined.
The benefit of a trustee managed scheme is not obvious to members and if master trusts are seen as being invested for the benefit of the Government rather than the individual, it is likely an ever increasing proportion of members will opt out of the collective master trust arrangement.
CDC will have to do a lot of heavy lifting to promote the relative benefits of a collective arrangement.
We cannot stop people doing what they want with their money and there will be an option to opt out of all that the Government wants. So long as that option remains, I see the argument that this is “nationalisation of pensions” as being weak. Let us hope that we have SIPP pensions for those who benefit from managing their own money and collective arrangements for those who want things done for them.
Few SIPP providers today are equipped to manage illiquid, long-term infrastructure investments. Since 1988, only a handful have endured, with even Capita exiting the market.
Opportunities for tailored investments still exist for sophisticated high-net-worth clients, but achieving both diversification and capping individual fund sizes presents a challenge.( opposing objectives)
Nonetheless, these investments will require higher margins than publicly advertised, given the significant due diligence costs, which can reach tens of thousands in legal fees alone. SSAS might be a solution.
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