The news through the FT yesterday that Lloyds Banking Group will consult on closing its defined contribution pension scheme and then transfer its benefits to Scottish Widow’s master trust is the end of the line for the private pension scheme. We suspect there is over £6bn in the plan, we know its trustees are headed by our old friend Michelle Cracknell who when she was in charge of TPAS was never short of something to say.
But not this time, nothing from the Trustee in the FT.
Put simply, Britain’s biggest defined contribution scheme run by a single company is folding and it tells a big story for all the smaller, but still huge schemes, mainly in the banking and pharmaceutical sector.
Regardless of where the money is going, the fact that Lloyds, so long a leading voice as an employer running a pension for its staff, has decided not to have its own scheme, means that it will be hard to argue for one in hundreds of corporate board rooms.
Lloyds of course still has a pension scheme for its staff, a defined pension schemes chaired by Harry Baines, but it is closed for new members and in run off. Its longevity depends on the bank’s willingness to manage the liabilities rather than transfer them to an insurance company. I suspect that it is rather indigestible at the moment, but again the idea that the pension scheme is critical to the company’s reward strategy has diminished.
This is the reminder to staff of what they are in and the answer is “Your Tomorrow” if you joined the company after July 1st 2010 – 15 years ago.
It is a mighty enterprise that has employed many pension experts and set benchmarks for many other companies.
I believe the end of Your Tomorrow will be the beginning of the end for the company pension as tomorrow’s benefit. Instead tomorrow’s future will be in hands of master trusts providing hybrids between DC and DB, possible through CDC, possibly through decumulation defaults which reintroduce some aspect of a defined benefit.
By 2030, you will need to have £10bn in a workplace pension scheme to promote it and by 2035 a pension scheme will need to have £25bn. The phrase “pension scheme”, described currently as the biggest lie in pensions by City of London Mayor Michael Mainelli, will be by then a reality. Though you will be able to opt out , most people will default into some kind of pension in retirement which will protect them with income for the rest of their lives.
I suppose that Lloyds had no wish to return to this world, laid out in the Pension Schemes Bill. It had no aspiration to grow its staff scheme to £25bn over ten years, no wish to convert Your Tomorrow to a hybrid – a proper DC pension.
I have no idea what value for money Your Tomorrow has given its staff since outset. Unlike Scottish Widows’ master trust, it is not subject to scrutiny by Corporate Adviser , nor league tables. I hope that it has done well as an accumulator, I have many friends who are in Your Tomorrow who will have relied on the Trustee’s skills to manage their pot as a default or fund choices. They have had massively subsidised charges and options to attract healthy company contributions through innovative structures.
That responsibility will end some time next year provided the consultation goes as expected over the summer and early autumn.
Although Lloyds describe the move to Scottish Widows as taking the pension “in-house” it is not. It is infact transferring the pension to an insurance company which it happens to own but could easily sell. Scottish Widows does not invest the money, it offers an investment platform for others to offer funds, right now its new investment strategy looks very much like what other master trusts are moving on from.
If we could describe a master trust as “de-risking” then Scottish Widows is “de-risking”, it is not going for growth in the UK, it is not talking of investing in the Accord , it is digging its heels in and demanding the right to invest as others have over the period of workplace pension domination. It is not part of the ABI initiative described here.
De-risking looks an appropriate phrase for the bank , but I’m not sure it de-risks retirement income for its current and former staff who thought they’d get “Your tomorrow”.
The decision of Lloyds Banking Group to walk away from running its own pension scheme for its current staff is limited to the few still accruing in the Lloyds Bank Pension Schemes. No one joining in the past 15 years has joined anything but Your Tomorrow and now, after its brief period of dominance, Your Tomorrow is going to end, meaning a new pension for 100,000 people.
If that isn’t meaningful, I don’t know what is – within and to the world of corporate pension organisation. I am quite sure that it spells the end for the employer run pension scheme for all but a tiny number of companies, determined to stand by the original aims of the corporate pension back in the 20th century.
The Scottish Widows instances raise important issues about the relationship between the pension provider and their parent or sponsoring company (particularly those in financial services):
1. How much investment freedom do the trustees of a mastertrust really have?
a. What options do trustees really have if they believe investing in the parent companies investment products would not be in the interests of their Members?
b. This may become particularly significant in the choice of a default accumulation product, because like an annuity, this may become an irreversible decision from the Member’s point of view.
c. Could there be reputational damage to the sponsor and its other financial products from Trustees’ decisions?
d. Similarly could the mastertrust become significantly less attractive (particularly in third-party employer selection decisions) and indeed suffer significant transfers out from adverse press, social media, advisor selection processes considering the sponsor’s prospects.
2. Mastertrusts and other DC products are now finding themselves subject to increased Government interference and cost loadings in the way that DB pensions suffered in the 1980s and 1990s and which was a major contributory factor to the demise of employer sponsored DB. Are employers seeking to further distance themselves from the outcome for their employees being adversely affected by disassociating themselves from the pension product?
a. While the addition of mandatory spouse’s pensions or Minimum Rate revaluations in DC products may not be immediately on the Government mind at present, the direction of investment policy and the increased and costly regulatory reporting requirements such as Implementation Statements, TFCD reports, dashboard connections are already in place.
3. Could Scottish Widows be considering reopening their DB Scheme?
a. The Trustees of any DB scheme are statutorily required to consult with the employer on their investment policy (as reported in the Statement of Investment Principles). This will give the employer an involvement in the investment decision of their pension provider.
b. The existing assets of the DB scheme can be investment to achieve long term returns and not to be invested to meet even a run out end game.
c. New contributions (both employer and employee) can be invested to generate surpluses which in turn reduce the employer’s future employment costs in a “balance of cost” arrangement.
d. The Regulation problem with DB pension schemes could be largely be regarded as being in the past, but currently regulatory pressures are mainly affecting DC arrangements.
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