Dear Next Government.....

I’m not sure that pensions will be one of the major battle grounds in this election, and if it is, it may tend to be around the ‘triple lock’ headlines.

That would be missing the point. We need clarity form the next government in terms of the communication of pension plans. I appreciate the initiatives towards one design for future benefit statements, but the sooner the better.

Clarity on the future management and promotion of auto-enrolment is key. As is confirmation of state pension benefits and ages.

All this should lead to a harmonised approach to communicating pension benefits. Too many benefit statements have reams of small print. Most of it is legislative. Some of it is pension lawyers having too strong a say in the look and feel of communications.

It doesn’t help that we have the dreaded statutory money purchase illustrations. Loads of caveats. Tons of small print. So unhelpful.

Dear next government…. Please simplify communications. Cut the small print. Clarify the main figures. Help people understand.

Ten Pension Predictions for 2015

1.       A lack of clear and detailed regulation relating to the new pension freedoms.

As April draws near, many will be shouting loudly for clarity on detail, but it won’t arrive. Political parties will be in election mode and the April ‘new start’ will be hindered by poorly thought out regulation.

2.       Increasing pension scams.

Inevitable with the new pension freedoms. And frequent too, until the new systems get bedded in and the new government knows what to do.

3.       Appalling pension headlines.

Probably led by the Daily Mail as usual. People defrauded of pensions. People confused by the new freedoms. Anything to sell a paper.

4.       Quiet success with new products offering good customer value.

Probably won’t make the Daily Mail, but many providers will successfully navigate the new legislation and come up with quality, innovative products at a reasonable cost.

5.       New quality systems.

This has been ongoing since auto-enrolment was announced, but providers are making good strides with new data management tools integrated to pension provision. Again, unlikely to trouble the Daily Mail headline makers.

6.       Covenant worries.

No predictions here on a Russia collapse, Islamic militants and all the rest, but whatever happens in the world affects investments. And with that in mind, trustee covenant concerns regarding the remaining DB plans will increase.

7.       Adverts relating to not cashing in your pension.

As the new freedoms kick in, how long before we see adverts and articles relating to the need to think before you spend?  In Australia (a country we seem to be mimicking re pensions) it’s called ‘double dipping’ - people who spend their pension and then live off the Sate.

8.       Strengthened DC governance.

Whatever government is in power, I expect some firmer legislation around DC governance and management, akin to trustee governance.

9.       Pension Apps that work.

With a continued move to everything being in front of you on a smart phone, pension apps will come of age.

10.   Closure of small and medium pension schemes.

Whether DB or DC, there will be closures, mergers and buy-outs of smaller schemes, as the new legislation and auto-enrolment continue to change the landscape.

NAPMI?

The announcement that the NAPF and PMI are likely to merge is an interesting one.

Both are citing improvements in management, pooling of resources and greater influence in the industry. But I guess it also reflects a decrease in DB schemes, traditionally the ‘bread and butter’ for the NAPF. They came to embrace DC rather late in the day and I’m guessing not so many DC schemes are interested in being part of (and paying a fee for) membership of the NAPF.

Of course, the NAPF gets a lot of support and income from consultants and providers as well, but if they can’t claim to be speaking for company pension schemes as well, there’s a problem.

As for the PMI, they came out of the Chartered Insurance Institute originally and have kept close to their original remit of maintaining and promoting pensions excellence through professional exams. I’m not so sure what’s in a merger for the PMI –unless of course they are low on volunteers which would be pretty essential for their continuation.

All in all, it’s a reflection of a decreasing profile for employer sponsored pension plans. And with auto-enrolment and the new proposed tax changes, that decrease will pick up pace as companies embrace standard industry products.

Not the happiest of backgrounds for the NAPF conference which starts today.

In Modest Praise of the Active Manager

There’s no doubt active managers are under the cosh right now. The Hymans Robertson findings show that active management, after paying fees, has achieved little or nothing for the Local Government funds. Michael Johnson of the Centre for Policy Studies sees no on-going active role in listed assets.

The problem is the solution. The solution seems to be passive management and passive management follows the herd. Down as well as up. The herd aren’t always right.

But it’s a hard job to convince the investor of that. In the age of defined contributions, it’s the member that needs convincing, not so much the company. And the individual investor is cautious. State Street research shows young investors, often new to pensions via auto-enrolment, are averse to risk. They don’t want to see decreases on their benefit statements -and they find it hard to rationalise that they should save at all if they can’t get the money until retirement.

Back to communications here. If the State Street conclusion was to be followed in practice, you end up with extreme caution, cash and bonds, lack of growth and potentially, a lack of pension. The long term investor needs to accept a degree of risk. Not to do so is to live in poverty in retirement. How we need that pension advice and education aimed at the member!

There is a role for the active investor in both defined benefit and defined contribution plans. They can add value, especially when everyone else is doing the same thing. Hymans results are disappointing but not conclusive to the demise of the active manager. Fees can be an issue. And communicating risk positively; even more so. But the demise of the active manger? Not while investment tactics can still produce superior returns when compared to a tracking computer.

Two Million Reasons to be Cheerful, One Country's Reason to be Careful

NEST has recently announced a landmark, as they passed one million members. Add to that approximately another million from other master trusts such as People’s Pension, NOW and L&G and you have two million reasons to be cheerful. Ian Dury and the Blockheads would be proud.

And it is a cheerful message. A majority of these members may well be new to pensions, thanks to Auto-Enrolment. Pensions that would not have existed had the legislation not changed.

A good start. But not enough.

Figures from Towers Watson Australia highlight the story over there:

 

So why is this relevant? The new announcements in the Budget means we are following the Australia example. Legislated savings but the ability to take cash at retirement.  So this means increased savings for sure, as the chart shows.  But not enough. Nowhere near enough.

And one other worrying slant on the Australia example. Double dipping. The ability to take cash and spend it has been too alluring to many. They spend it and then rely on the State to survive. Double dipping is more likely in the UK than a new Lamborghini. Or maybe it's both.

Strong and Direct

Great piece in Professional Pensions. Lee Hollingworth of Hymans Robertson is correct in saying ‘people need a strong, direct approach to tell them what ‘adequate’ is, what they need and how they’re doing against that target’.

The comment comes following analysis by Hymans Robertson via their Guided Outcomes platform which shows only 18% of over one hundred thousand defined contribution members are likely to build an adequate retirement income.

Apathy has done well for us. The new auto-enrolment approach relies on it for getting members into pension plans. But that’s just the start. If the employer stops with the minimum, then pensions at retirement will be inadequate, and as Hollingworth says, poor pension results will lead to ‘workforce management issues’.

We are going the right way with UK pensions. Auto-enrolment was needed. But that’s just the start.

Reshaping, Reforming, Refining - The Future of Pensions

A few interesting snippets in Professional Pensions this week, indicating changes to the pensions industry. The editor Jonathan Stapleton is quite right to identify Aon’s move to merge its pensions administration and HR processing businesses as the shape of things to come.

Pensions business is changing more rapidly today than ever. The large Defined Benefit plans are getting smaller. They’re all closed plans anyhow, so by definition, will decrease in importance. The admin, which might have been managed within a ‘package’ of fees covering the more lucrative valuation work, is now being exposed. Valuations are less and less big triennial events and much more ‘business as usual’ reviews at pretty much every trustee meeting. The complexities of yesteryear are lessening and the weeks of valuation calculations required of old have been replaced by pre written computer programmes with results at the touch of a button.

All this to say that Defined Benefit plans are not the monsters they once were and legacy administration merging with other processing makes sense. The administration of Defined Contribution plans is growing though, with an increasing numbers of members thanks to Auto-enrolment. Packaging is everything here. Simple plans, large numbers, computer processing, limited choice.

But behind the supposed simplicity of large Defined Contribution plans are hundreds of smaller ones, each with different rules, different needs and employers who often legitimately resist the pull to ‘merge’ with bigger plans and thus lose their identity.

With a combination of pressures on the pensions industry such as the recession and longevity, costs are a clearer focus than in the past. Providers will adapt. Providers will have to adapt, as Aon clearly are.

Admin is here to stay of course. And those plans too small for Aon’s radar will be picked up by smaller administrators. A changing pensions world. But not a decreasing one.

In (Modest) Praise of Pensions

We don’t always get it right. And it’s in our psyche to be critical of ourselves; disparaging even. But, actually, we’ve not done such a bad job with pensions.

We have a State system that works, that despite the recent changes, meets the needs of the poorer in society, and gives the rest of us a ‘not too bad result’ for our time in the workplace.

And we have an occupational pension system that is the envy of many. The Italians have had governments fall because of attempted pension reform. The French are in trouble- surely it is only a matter of time before their system collapses with the emphasis on PAYG and such low retirement ages? And the Greeks… Well, the Greeks.

We’ve made mistakes for sure. The day the accountants beat the actuaries at their own game and insisted on present market values. That was, to my mind, the death knell for Defined Benefits. But our Defined Contribution system works well if the employer is willing to put in a decent amount.

And the new Auto-Enrolment legislation is working. Lots more people in pension plans. A greater awareness of pensions. Less stress on the State as a result. I know… it’s only a start, not enough going in, etc, etc. But don’t be so hard on yourself! It’s a success!

Not only that, we have the longest standing Pensions Minister in history- and he actually understands his brief!

I do wish we would be more careful with the headlines we feed to the press (especially to the Express and Mail!) If we can get into the habit of presenting challenges in a more positive way, we may get a more positive slant on the problems we face in pensions.

Since Samuel Pepys had to pay a pension to his predecessor as Clerk of the Navy Board, we’ve done alright. Not great. Not fantastically. But just about alright.

Muddleware

Now why didn't I think of that?! Well done to Andrew Cheseldene for coining a new word in his Pensions World article.

And an appropriate word too.

Preparing for Auto-Enrolment is complicated. The various eligibility criteria see to that. And payroll providers were very slow to come up with integrated solutions. To my (slightly cynical) mind, this was because they wanted their clients to come to them and ask for the solution. The payroll provider could then charge for their solution rather than preparing a generic answer for all clients at their own cost.

That aside, I do think that the payroll provider will be the best route for most companies. Consultants have got in on the act, (initially, I think, because of the slowness of payroll providers to help), offering 'middleware'. But as Andrew points out, this can actually be 'muddleware' at best. And expensive muddleware at that!

Better to batter down the door of the payroll provider than go for expensive solutions that may well be inferior to an integrated payroll solution.

Second Rate and More Expensive?

There was an interesting article in Investment and Pensions Europe magazine the other day. Reporting on an OECD review of pensions in Ireland, the OECD recommended pensions compulsion. They indicated that their view of Auto-Enrolment was that it was second rate and more expensive.

My initial reaction was one of scorn. After all, aren't these OECD bods from Europe somewhere, clearly not British. But having set aside my Britannia prejudices, further thought on their comment suggests they may be right.

Let's deal with the easier one first. Yes, Auto-Enrolment is bound to be more expensive than mandatory plans. All the opting in and opting out results in complex administration and, I would suggest (well and truly wearing my Grumpy Old Pension Men hat), it produces a good income to a lot of providers and administrators. One compulsory system is definitely cheaper.

Now the more difficult argument. Compulsion or Auto-Enrolment? In the end, I think it is more to do with politics than pensions, as is often the case. Thatcher destroyed compulsion. Blair put Frank Field out to grass when Field 'thought the unthinkable' - and it proved to be just that!

Australia, New Zealand and Chile were the countries Field looked at. It works there. It could have worked here. But too late now I think. We have Auto-Enrolment for better or for worse. More expensive yes. But second rate? Not necessarily. We have to face up to extended longevity, to the fact that 'pensions' will never be top of a young persons shopping list and push on through. It has to work.

Politics in Pensions

Roger Mattingly, chair at the Society of Pension Consultants commented in the press that if Auto-Enrolment did not work, it would be the end to the careers of Steve Webb, the Pensions Minister, and his other pension colleagues. I think Roger has got it wrong. (Professional Pensions 11 March).

Steve Webb is a Liberal Democrat. He has no political ambition! It’s a surprise to him that he’s in power at all! His boss Iain Duncan Smith has been to the top of the party and back again- so he is a rare thing, an altruistic Tory!

It is to the pension industry’s advantage that we have two ministers involved in pensions policy  that are able for the most part to keep the politics on the side lines and do what’s right.

As for Roger’s comments, who’s the real one being political then?

Faceless Corporates or a Real Pension Plan?

The latest pontifications from the Pensions Regulator encourages employers to consider moving away from small-scale schemes on the basis that they are less likely to deliver good member outcomes. This is too broad a generalisation. Many (most?) small schemes are run well. They often have the touch and feel of the company to which they belong. They have been nurtured and promoted by local management and relate to the company, carrying something of the company ethos.

So to say ‘move to NEST or NOW or the L&G’ etc (which is what the Pension Regulator seems to imply) is effectively saying to the employer ‘wash your hands of your own scheme’ and let some faceless corporate entity take over.

A move may make some cost savings and reduce investment charges, but at what cost to genuine buy-in from the employees?