Addressing Bill Sharpe’s “nastiest, hardest problem in finance”
This blog is about the reasons pension master trusts are struggling to pay pensions. The individuals above are Christoph Hirt and Laura Johns whose report for Pi Partnership can be read here.
The first workplace master trust to matter was Nest and it was soon followed by People’s Pension, NOW and then L&G’s. The L&G master trust was a reaction from an insurer to a demand from large employers such as M&S for an occupational pension scheme to let the retailer outsource it’s obligation under auto-enrolment. M&S and a few other large employers employed hundreds of thousands and they and Tesco were among the first employers to “stage” into an L&G master trust.
The promise of L&G became to run outsourced occupational as well as personal pensions for employers who didn’t want to do it themselves. Promises to do this job was quickly followed by others. Standard Life and Aviva, and BlackRock who became Aegon and Zurich who became Scottish Widows, all offered trustee based occupational schemes with continuity for employers and their pension departments to use occupational schemes.
Nest and People’s and NOW were to catch the second , third and fourth waves of smaller employers and sweep up the smaller employers who had no history of pensions.
auto-enrolment traffic (produced by Pension PlayPen at the end of 2012)
It was clear even in 2012 that the strain of AE would be caused by employer size early on and employer numbers towards the end of staging. The new names had no bars to employers and accepted anyone who came their way,
But the insurers were able to pick and chose their customers and underwrite. This meant that they could justify offering ridiculously low prices in return for employer covenant. This wasn’t just a price war for master trusts, (Standard Life offered 10bps to BT staff for a GPP), but as more master trusts sprang up (Smart, Cushon and a host of smaller master trusts), the price war really took off. Grabbing savings took over ,
What happened was a conversion from a pension culture in these schemes to a savings culture. This was accelerated by the announcement in 2014 and implementation after only a year of the pension freedoms. The insurers had underwritten on the basis that all their savers would become customers in retirement using their annuities. BlackRock and Zurich were always going to struggle having no annuity capability but pension freedoms was a challenge and an opportunity which would be faced but not in the AE staging rush and not in the troubles of 2020 when the pandemic bit.
Infact, the insurers had no replacement for annuities and Nest and NOW and People’s were so awash with new customers as the smallest companies staged, that they didn’t have time to get a decumulation in place. The decumulation problem was not solved in the early twenty twenties and this was picked up by a Labour Government with a pension minister with a clear idea of what a workplace pension was.
When Torsten Bell took over from Emma Reynolds he brought onboard Andrew Tarrant who had worked with Greg McClymont (a shadow pensions minister ten years before). Between them they brought out a Pension Schemes Bill which was presented to parliament last summer. It had at its centre a revitalisation of the workplace as a place where pension are created.
The CDC plans that had reached only Royal Mail, were extended to all employers who prioritise pensions over pension freedom and the workplace DC pensions are fast becoming consolidated into a hardcore which may be reduced to ten or less by the end of this parliament, but a hardcore that will have to deliver a lifetime retirement income as a default. The default will kick in at an age selected by the master trust, will provide real income and real protection either through a retirement income or some kind of flex and fix with the fix being an annuity.
So far only Nest have said they will adopt flex and fix with the annuity kicking in at 85, Esther Hawley of Standard Life told the VFM pod that Standard Life will fix when someone is 90 (this is anecdotal but Esther is reliable)
So far only Willis Towers Watson have said they will offer Retirement CDC as a default for its master trust -Lifesight. Aon are rumoured to be offering CDC and may even offer it as a workplace pension to compete against its own DC master trust. TPT are offering such a workplace version and will continue to run it against its DC master trust, perhaps extending its UMES CDC to be a retirement CDC for its DC members.
CDC is an alternative to a master trust with an exemption from the Scale rules for DC plans. Scale may mean some small DC master trusts convert into CDC plans to avoid losing control of its relationships with employers and members through consolidation.
Tomorrow’s challenge to master trusts is large employers offering workplace pensions through CDC. If these employers leave master trusts for better staff pensions, master trusts will face their biggest challenge since the inception of AE.
Finally, more than 10 years after the introduction of pension freedoms , workplace savings schemes are having to establish a way for people who don’t take decisions to spend the money they have saved.
The original idea (even at Nest and People’s) was a system of annuitisation but that has changed. Right now, the remaining retirement savings plans are looking at ways to become pensions again and it’s proving really complicated. I have listened to over an hour of explanation of Standard’s solution and feel sorry for the job of Esther Hawley in developing a proposition for those retiring. It is a mess for DC, the nastiest hardest problem of finance.
Against the morass that DC decumulation is becoming, CDC may be considered a clean and easy way of improving people’s pension prospects!