Folly in the Pensions Landscape

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Every month of every year I get a request from someone for information on the Pensions Landscape in the UK and where people can get reliable stats on where our pension savings go. The answer I give them is to access the Pensions Regulator’s remarkable DC-Trust; presentation of scheme return data.  The 2019 version was published yesterday.

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To impose one suggestion – it would help our understanding if tPR would split out the DC and DB elements of the two types of hybrid schemes (frankly it’s what the member get that counts). I would expect the  majority of the total active members of hybrid schemes are now DC – since these schemes are almost entirely private sector.

My guess is that around 1,000,000 people are accruing DB benefits in the private sector against about 15,000,000 saving into a pension pot under DC. This is not the whole story, in the private sector the ratio is the other way round.


The irresistible rise of multi-employer schemes

The vast majority of DC savers are now in master trusts. 10 years ago most people didn’t know such things existed, or if they did – they thought of Stanplan and other decrepit ruins of yesteryear.

The pensions landscape has changed dramatically.

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Master Trusts now dominate the pensions landscape but while they are mega-structures, they are asset-lite. Reported assets per member are tiny relative to the much smaller but better funded workplace contract and workplace trust schemes that preceded their ascendancy.

What multi-employer schemes do – in terms of governance – is distance employers yet further from the outcomes of members. Multi-employer schemes – a kind of masterful trust as their key feature.

It has become a commonplace that master trusts are superior because they provide governance in bulk. However just because something is grand and big – doesn’t make it useful.

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Are these big DC schemes really better

In the preamble to its publication tPR claims that governance standards generally improve as schemes get bigger. But in a report accessible to the press (but not sadly to this blogger), reporting on member value for money seems to be failing wherever you look.

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You don’t have to be a genius to work out what people value from a retirement saving scheme – it’s the retirement savings. If Trustees of DC pensions talked to their members they’d find what the IGCs found from the NMG surveys in 2017-18, that people are only interested in the outcomes of their savings – the money they get to spend as they get older.

Apparently master trusts are little better at learning this lesson than their smaller rivals

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The reason that the private  pension landscape has changed from the DB dominated vista (which still exists in the public sector) to the DC world pictured above is because employers no longer want to be responsible for these outcomes.

Trustees are not responsible for the outcomes of the pension schemes they run and are scared stiff of being held accountable for what member’s get from their pension saving.

Which is why the self-certification regime that tPR currently operates is flawed

Simply being aware of costs and charges is not enough to tell members they are or aren’t getting value for money from their savings. There has to be a quantifiable way of measuring whether they have got value for money and this means looking at outcomes relative to inputs (contributions) and benchmarking them against the average outcome for the same inputs.

The self-certification table above is a folly.

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In both senses, self-certification is folly and if we are to measure the quality of what we are building as our pension landscape against the measures required for tPR’s KGR2 test, especially from self-certification then we become part of the folly.

There is of course a much simpler way of testing if people are getting value for money and that has been outlined by me many times. Schemes need to analyse the internal rates of return achieved by their members and test them against a credible benchmark.

Only then will people start looking at the pensions landscape with the kind of engagement that they need to. After all – if employers have decided not to take the risk of ensuring outcomes, then the only people left are the employees.

Trustees may not be able to do much – but they should allow us to understand the value of our pension saving, the money that’s been committed and the outcomes of the saving to date.

I think that when trustees of DC schemes (whether large or small) think of governance, they need to think of member outcomes. When they talk of governance they need to talk in terms of member governance. When they write governance reports , member outcomes need to be at the heart of the report.

Everything else is just a big useless folly! Follies don’t have to be big and useless

I’d rather have something smaller and easier to use – like Folly Cottage at the bottom of Gold Hill in Shaftesbury!

Folly cottage

Rather more useful