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.

Mergers - Who Really Benefits?

One of the things that intrigued me about the 20 year anniversary edition of Professional Pensions was the article by JonathanStapleton looking back at the names of the companies that were advertising in that very first issue.

Names that have now disappeared: Hill Samuel. GAN. Dibb Lupton Alsop. Kaupthing Singer & Friedlander. Capel-Cure Myers. Gartmore. Abbey Life. Hogg Robinson. Morgan Grenfell. Hewitt. Norwich Union.

All gone- and mainly forgotten in a plethora of mergers and takeovers over the years.

And now another one. Aberdeen and Standard Life are to merge.

I suspect the name Standard Life will survive. But then I thought that of Norwich Union before it gave way to the clinically globalised name Aviva.

Pensions Age Magazine quotes the marketing gobbledygook: ‘[the] merger would harness Standard Life and Aberdeen’s complementary, market leading investment and savings capabilities which would deliver a compelling and comprehensive product offering for clients covering developed and emerging market equities and fixed income, multi-asset, real estate and alternatives.’

They mention synergies. And surely there will be. In the way of job losses for the back-room functions mainly. But what about the investment managers- the individuals tasked with making the strategic decisions? Changes are not always welcomed to the people that do the work. They are used to a system, used to a style. When that style changes, so might their appreciation of the job they do. This in turn can affect returns for clients.

Synergies? Cost savings more like. And cost savings don’t always mean benefits for clients.

New Year Wishes

There will be a lot in the pensions press over the next few weeks relating to the New Year. A New Year goes along with New Year resolutions and wishes.

In pension terms, wishes are likely to revolve around simplified administration, easier investment access to difficult products and a plea to the politicians to be left alone. Some wishes may get granted- the current initiatives relating to data management are both welcome and likely to succeed. Investment products will simplify. And possibly – possibly – the Chancellor has enough on his plate not to interfere further in pensions.

The missing wish, though, is always there. Every year. Better communications. Too many people don’t know enough about their pension. Too many people without a pension are not concerned enough to do something about it.  

About now, with New Year resolutions in mind, the pension manager is returning to work and budgeting to communicate more efficiently. Maybe some focus groups. Maybe a survey. Maybe different methods of communicating including print and electronic.

Somewhere around mid-February, reality and the new budget process sets in and the dreams are forgotten. Another year of ‘doing what we’ve always done’ at as low a cost as possible.

So here’s a New Year wish. Please keep communications in your new year budget. Budget to use some pension communication experts. And change next years’ wishes.

Majoring on the Minors

My good friend Henry Tapper makes an interesting point in one of his recent blogs (where does he get the energy to write so much?!) He points out that we keep going on about investment freedom of choice when most people just need a good default choice.

That’s backed up by what we find on the Pensions Awareness Day bus. So many people come on board with pension questions. And so many more with a simple statement: ‘Tell me what to do.’

We are catering too often for the financial expert, and not enough for the man or woman on the street. It may feel uncomfortable to ‘tell’ people what to do but that’s what they want.

If we could just put as much energy into developing effective default options as we do into developing the next big investment idea that is only of interest to the minority, we really would be getting somewhere.

The Reason for Wrong Decisions

Well done to Darren Philp of People's Pension for the excellent presentation at this week's Pension Age Conference. He spoke on reasons people make the wrong decisions. So with some commentary of my own,  here's hoping I was listening properly:

1. Present Bias
This is simply the feeling that I can have the money now, take it out, use it, not save it.

2. Ostrich Effect
Head in the sand and the pension decisions may go away.

3. Optimism Bias
I really won't need to save that much as what I have will bring in loads of interest. Alternatively... I really won't need much in retirement...

4. Complexity Aversion Bias
Too much choice! What to do? Nothing.

5. Bandwagon Effect
What's everyone else doing? That must be right....

6. Confirmation Effect
Can someone please confirm what's best for me? Just tell me what to do!

The solution to these issues lies in clear communication at a simple level, good 'defaults' and a good deal of persistence from the employer/provider!

Belonging

There's some good thinking from LCP on the Brexit issue this week. In the end it may not be to do with economics, but more to do with 'belonging'.

Do we want to be part of Europe or not? To be on the outside may not be the best place for us in the long term, even if in the short term, the financials are not so bad as they are sometimes portrayed.

I prefer belonging to pulling up metaphorical drawbridges, but as the LCP article suggests, there's a lot of emotion and hot air in this debate. The Churchill quote is apposite:  “A fanatic is one who can’t change his mind and won’t change the subject”.

Common Sense and Efficiency

The latest research from Alliance Bernstein carries no surprises. It says that the consumer expects a common sense approaches to investment- a feeling of control but without certainty of outcome. A combination of good governance and a sensible default fund is expected. But consumer common sense also says it’s okay to expect a spread of outcomes at retirement.

What is also expected though is flexibility and freedom at retirement. That’s fine and good if we know what we’re doing. The NAPF tell us in Pensions Expert that we don’t know what we’re doing because the Government has failed to give us the detail. With 30 working days to go before the pension freedoms, what the consumer doesn’t want is someone telling them that ‘yes, the freedoms exist’, but ‘no, you can’t benefit from them because we don’t know what to do.’

Will we get the detail in time? Or has election fever already affected output?

Common sense and efficiency from the Government would be welcome right now.

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.

Giving it the Bird

Congratulations Pension Expert. You valiantly resisted birdie jokes alongside the article on the RSPBs underpinning of their pension scheme. Only three were in evidence: The RSPB ‘hatching a plan’ 'broader flightpath' and 'migrating assets'.

However, I have no such qualms. It seems to me the RSPB have avoided nesteggs, shunned feathering their nest, seen the wood from the trees in their flightpath and adopted an early worm approach with regard to the recovery period.

Their approach could act as a beak-on for other plans. I noticed Tom Dines was the author of the article. Trust he's eating chicken tonight. Okay, not the best bird jokes, I know. Guess I may not tweet this one. :-)

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.

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’.

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.

I Need A Picture, Any Picture....

DAY ONE:

Correspondent: ‘Hello. Is that the Incisive Media graphics department?’

Graphics Department: ‘Yea.’

C: ‘Oh. Well. Erm, a bit of a rush job. You see I have to fill two pages of the next issue of Professional Pensions, but, well, the article is only a page at the most.’

GD: ‘Yea.’

C: ‘It’s a feature. You know. One of the bits we try and fill the magazine with. When we’re a bit short of news.’

GD: ‘Yea.’

C: So, can you help? I need a couple of big pictures to fill the gaps. Kind of half a page each.’

GD: ‘Yea.’

C: ‘Great. The article is on where multi-asset managers invest. So there is reference to US treasury bonds. And to emerging economies. Does that help?’

GD: ‘Yea.’

C: ‘Great. But try not to just use pretty pictures. OK?’

GD: ‘Oh.’

C: ‘I mean, avoid the Taj Mahal when you’re portraying an emerging economy. You’ve done that quite a bit.’

GD: ‘Avoid the Taj Mahal pictures. Erm. Okay. That was what I was thinking though.’

C: Well think again. We go to press tonight so I will have to trust you….’

DAY TWO

C: ‘Hello, graphics department?’

GD: ‘Yea.’

C: ‘I thought we agreed to no pretty pictures? But for the US government bonds section, you’ve used the US treasury building.’

GD: ‘Yea.’

C: ‘And for the emerging economy picture, you’ve used the Golden Temple.’

GD: ‘It’s not the Taj Mahal.’

C: ‘Well at least the article is buried in the middle of the magazine. No one will notice the awfully trite pictures.

GD: ‘Oh dear.’

C: ‘What?’

GD: ‘Er. Well…. We copied the Golden Temple onto the front cover as well…’

C: *Sigh*. ‘No one will notice….’