It’s Not Just About Costs

The announcement today from the Government with regard to cost transparency is welcome. It should not be hard for members to understand what they are paying – and what costs are being charged for both administration and investments.

There is one concern though- a rush to the lowest charges may not mean the best deal. There needs to be care involved in explaining costs. A higher administration charge in some cases may mean a local company DC plan can continue, rather than being swallowed up by one of the big providers, or by a master trust. And there’s a good reason for that additional cost if the result is a plan that is better suited to that company’s workforce, as well as it being better presented and explained.

As to investment costs being more transparent- about time too! But again, take care in explaining that lowest charges don’t always equate with best returns.

As employers and providers, we can’t just rely on costs being understood. Members need to understand the value of their pension plan, the fact that it’s tax efficient and that employer money is being paid in as well. These are basic things, but so often still misunderstood by a workforce that is apathetic to pensions. The employer and provider can’t afford the same apathy.

As always, pensions will remain complicated. And it's not just about costs. Good communication is key. Enthusiasm from the provider and employer sponsor is key too.

Regulator in Danger of Decreasing Pension Membership

At an SPS conference last week, the Regulator's spokesperson talked of the need to encourage consolidation of pension schemes and how to remove the barriers to consolidation.

At the end of her talk, I challenged her. Is she saying 'big is good'?

She assured me she wasn't saying 'big is good' but then went on to repeat what she had said in the talk- the need for lower fees and economies of scale.

There's a problem with this for the small and medium sized employers that value the pension plans they have. They have put the plans in place for a reason, they value them and they promote them to their staff, with a high take-up. they own the plan- it bears their name. It was designed by them.

The moment they are forced to consolidate into something bigger, they lose the 'family touch'. They lose the ownership.

We have seen over the years what happens when the MD or FD is excluded from the scheme they own as a company. Almost inevitably, they start to devalue the scheme and lose ownership of it.

The same will happen with the Regulator's plan for consolidation. Quality plans will be closed - squandered at the altar of spurious reductions in admin and investment fees.

Ownership is lost. Membership decreases.

An own goal for the Regulator.

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.

The True Colours of the NAPF

The true colours of the National Association of Pension Funds are showing through in their latest comments. They are recorded in Professional Pensions Magazine as saying that signposting members to the guidance guarantee could cost: ‘In the case of the largest schemes this could be in excess of £100,000 a year’.

And so, the NAPF is again exposed as thinking about their largest members. If a plan has millions under investment and the company is a multi-million pound enterprise, then £100,000 could be seen as quite reasonable.

What about the small and medium sized employers? Their costs of signposting may be less than £100,000 of course, but in real terms, a much higher percentage of funds under management or of the company’s value.

The NAPF are also recorded as questioning the need to signpost every time pensions are mentioned, especially if the member is ‘many years’ from needing it. Again, this is missing the point. If the member is in a guaranteed Defined Benefit plan, then maybe so. But if it’s Defined Contribution, then the more they can save at an earlier age the better. Again, the NAPF has shown its true colours. Not just a big company bias, but a DB bias.

House Moves and Pension Moves

Just recovering from moving house, so therefore catching up a bit with all that has been happening in the world of pensions.

(Incidentally, well done to all the various third parties, institutions and providers –and especially the Post Office- for responding so well to our house move. All except BT that is. Did you know you can’t order broadband if there is no recognised house phone? Actually there is a house phone- but it’s been offline with the house being empty. Anyway, BT rant over....)

The main pension move of course has bee CDC’s. Not new, but a new energy for the idea post Queen’s Speech. And Steve Webb linking it to his Defined Ambition project. Is it really DC+ (to use a Webb phrase)? Sort of.

Plus in terms of increased certainty by way of volume. Plus in terms of lower costs, again due to volume. But not plus in terms of additional guarantees. The pot can still go down as well as up. There’s no protection even on pensions in payment.

I remember managing a Dutch CDC for a large international company. The news was not good one year. There were going to have to be reductions in pensions in payment. It was a hard one for the local Dutch company to manage in terms of a news story that could get out to the press. No one wants their pensioners to suffer. The US parent company didn't like it one bit. How did we get to this, they were asking? It was a communications nightmare.

What looks good on paper and works logically for pension professionals is still hard to explain to a member. Especially a pensioner who’s just found out they are getting less in their bank account each week.

Nevertheless, I think it’s a good step forward so long as we can manage the message with the members.

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.

I Hate Bland

An excellent article from Robin Ellison in Pensions World says that ‘rules trying to cap costs are almost certain to have adverse unintended consequences by squeezing out competition from start ups, adding further regulatory and compliance costs, and moving costs to less transparent elements of the system.’

Sad but true.

I’m all for reducing costs, but to start to rule on it simply leads to bland same-as investment choices and large anonymous pension schemes.

Or, as Robin suggests, the costs get hidden, becoming less transparent in an age when we are trying to promote clarity.

There has to be room for alternative approaches. And those alternatives come at a cost. There will be small employers who are happy to carry more cost in order to provide a pension plan that is tailored for their staff. Higher costs to the member may well be outweighed by more generous contributions from the employer than would be the case were he to simply ‘abandon’ his staff to one of the big providers. Big providers can be a recipe not just for low costs but average service. And less interest from the member.

There will also be employers that want to offer genuinely different investment choices for what may be a particularly savvy financial group of employees.

To rule against these things in pursuit of low costs is to limit the market, reduce the choice and promote a generation who remain apathetic about pensions. Regulated low costs will lead to a bland pensions market.

And I hate ‘bland’.

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.

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.

The Pendulum Swings

It wasn't long ago that pretty much every in-house pension team you could think of was either moving to outside consultants or at least going as far as a tender for the business. And that included a number of in-house investment teams being disbanded.

As highlighted in Pensions Week, it looks like the pendulum may be swinging the other way again. Tesco and British Coal have both moved back to in-house investment teams, and in Tesco’s case, they went further in choosing to ignore the contradictory advice of their consultants.

Admittedly, with Tesco and British Coal, we are talking about two of the biggest pension funds in the country, but I predict more will follow their lead, for two reasons. Firstly, the blurring of investment advice with investment management. Consultants in some cases are trying to have their cake and eat it. And it’s pretty obvious that’s what they are doing.

Secondly, systems are far more superior nowadays. Even over the last five years, the sophistication of the IT systems behind the trades and the software used to measure and present investments have all improved exponentially.  It’s just easier to manage.

Look for the next lot of headlines. They won’t be far away.

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?

Oh Mr Miliband, You've Opened Your Mouth Again....

The Labour Party are finding a bit of leverage in the polls. But then seem to struggle the moment their leader opens his mouth…

Ed Miliband has been at it again- talking first, thinking later. The problem is he’s been talking about pensions this time. He may think he’s helping by criticising high administration charges, but sadly, when notable politicians criticise the pensions industry, the general public respond- by avoiding that industry!

People who may have invested in pension plans may not do so now because a senior politician has questioned an industry practice. Miliband may be partly correct- there are some high charges still, but generally charges are coming down. And just when we wanted some confidence in the industry with Auto-Enrolment rapidly approaching, Ed’s gone and put his foot in it- or should I say his mouth in it.