A hard rain’s gonna fall?
Pensions: given just how much money is tied up in them, and how much they could impact the way we all live (whether we’re paying for them or living off them), it’s remarkable just how little airtime they get.
Which is a shame – because right now, in workplace pensions, millions of employees of small businesses are at risk of being put (unwittingly) into crappy or risky pension schemes. And they may not know they are crappy for a few years. It’s not a good situation – but it is avoidable if there’s some intervention right now.
I don’t know much about pensions. When I was much younger I worked for a company that provided one. I didn’t pay any attention to it – it was for older, much more sensible people than me. Over time – as I switched jobs and employers – I continued to pay no attention to whatever pension arrangements I could or should have been making.
My kind of complacency turns out not to be atypical. It seems around 30m Brits have inadequate provision for their old age. And of course we’re all living much longer, and having fewer kids, which means that there’s not really enough money, either in the public or private sector, to be able to sustain the kind of comfy retirement that previous generations have and continue to enjoy.
To address some of this problem successive UK Governments came up with the wheeze of “automatically enrolling” employees into pensions schemes, reckoning that the kind of complacency I suffer from would be much less harmful if the default position was being put into a pension, no matter what size of company you worked for.
It’s a good idea – and has been rolling out amongst bigger companies since mid 2012. So far around 5m employees have been put into workplace pension schemes.
2016 sees a change where much smaller companies are now going through the programme. Between now and mid 2018 around 1.8m employers will set up pension schemes for their staff – most of them only employ a handful of people. In total around another 5 or 6m people will end up in a pension scheme for the first time.
Trouble ahead – obligated buyers, complicated products, marketing gobbledigook, poor providers
Most of these small employers haven’t bought a pension before. The rules around automatic enrolment are really quite complicated – and there are fines for employers who “don’t comply” – so it’s quite scary for a small employer. They have to do it.
Buying a pension is not like buying a train ticket, or a flight, or a book, or a tin of beans. It’s complex – it’s really hard to understand the jargon, it’s even harder to know whether it’s a good one or not. The small employers can’t afford super duper financial advisers, and super duper financial advisers don’t (by and large) find it possible (economically or in terms of time) to help large numbers of small businesses.
So most, pretty much all, of these 1.8m small employers are in the depths of the deepest black forest about how to choose a pension scheme – and that matters a lot because they are choosing it for their staff.
A disorderly, unruly market poses risks for the savings of many individuals – who won’t have chosen the schemes they wind up in.
What makes the situation much, much worse is that there are a plethora of not very good pension schemes being marketed to these uninformed, but obligated, small employers. The weakness in the buyer side of the market (pointed out by the OFT in 2013) is about to get a whole lot worse. The chances of a well intentioned employer being taken in by a dodgy or unsustainable workplace pension provider are very high.
Most commentators reckon there is room in the workplace pension market for no more than 10 providers, probably fewer. The brutal economics of workplace pensions means it’s a scale game – the business models just can’t survive without high volumes. There are many, many more than 10 players in the market – nobody knows for sure how many, but it’s probably closer to 70 in terms of what’s being marketed, and 35 or so once you’ve peeled the labels off to see what’s underneath.
Of this lot – there are about 6 big ones and the rest are much, much smaller. We reckon at least 3 out of 4 employers are picking the big ones – but it looks like a proportion are ending up in the long tail of small, worryingly small, providers.
It’s just too easy to set up a master trust pension scheme
When the automatic enrolment policy was being set up all the politicos, all the wise heads, reckoned that the big danger would be that no pension provider would want to serve the mass market (too hard, too costly). So they did two things:
- they set up NEST with a hefty government loan, with a universal service obligation to accept any employer
- they tasked the Pension Regulator with a focus on making the policy work – education and encouragement around why workplace pensions are a good thing, and monitoring and policing whether employers comply (fines etc.)
What they didn’t do was give the regulator enough power over the quality of pension schemes. And that’s the root of the problem we’re running into – the mass market is faced with a supply side which seems to have far too many poor providers in it. There is a very high chance that employers will end up unwittingly putting their staff into bad schemes.
There are two problems – and they can’t be fixed quickly.
- it’s too easy to set up a master trust pension scheme. There are no real hurdles so any man and his dog can do it.
- the Pensions Regulator doesn’t have enough power over how they are marketed or sold.
The Financial Conduct Authority oversees contract based pensions – brands you’d recognise such as Scottish Widows, Aviva, Standard Life – and has loads of power and rules about protecting individuals, what can and can’t be said. They do a good job of protecting the consumer.
The Pensions Regulator oversees the Master Trusts – most of which are very new, brands you wouldn’t recognise. These providers don’t operate under the same rules – there’s no requirement for capital adequacy and if they blow up or go bust the money of the savers (that’s you and me) is unprotected and at risk. There’s little or no scrutiny over how they are sold – and as a result many of them are marketed in a way which would make Donald Trump blush.
For the most part these master trusts are bolted on to “quick’n’easy, sign up in minutes” front end websites for (ahem) peace of mind. Many claim to be big and secure when they are in fact tiny. Many say they are “free” (pensions really, really are not “free” – if you can’t see who is paying it’s probably you). Some come with “special introductory offers”, others with M&S or Asda vouchers. It’s marketing pixie dust – and it’s a problem.
Pensions are not like baked beans. They can’t be treated like retail products with buy-one-get-one-free tactics. Especially if they are not any good.
If you want an example of how uncomfortable retail tactics feel in the marketing of complex financial products have a look at Rocket Mortgages….
How does anyone know if a workplace pension is any good?
When we started Husky we prided ourselves on being pension provider agnostic – we’d feature any provider on our platform as long as we knew enough about them to put them there. We designed a tool that compared the features of each scheme – in much the same way that other comparison sites or star rating agencies might work.
It soon became clear that simply comparing features in this market was not appropriate – what small employers needed, and still need today, is much stronger and clearer signposting to what is “good”. It’s not enough to point employers to governance reports and investment factsheets, in the hope that they will infer what’s good and what isn’t.
Small employers aren’t financial experts – they are normal human beings. They need much more help to know what’s a decent provider and what isn’t. We couldn’t be agnostic – there’s too much risk of harm.
We quickly worked out that we needed only to showcase those providers that we were 100% confident were good. That meant erring on the side of caution and operating a guilty-until-proven-innocent approach to which providers we put on Husky.
We’re not pension experts – so we asked a group of smart, independent, well qualified people to form an independent panel, to determine whether a provider was good or not. The first step was a report that set out what “good” meant.
The three tests of “good”
The three areas that needed to satisfy our panel in order for a provider to be deemed “good” were:
- viable business model
- run with probity
- transparency of fees and where the money goes
Most failed to convince on the first point – very few could convincingly demonstrate any kind of scale (how many assets they had under management) nor how they would achieve it. Only the big ones could easily tick this box.
A handful failed to convince on the probity point – although supposedly independent trustees should make sure that there are checks and balances in how the pension money is handled and invested, in some cases there were and are too many unanswered questions around the same handful of individuals owning and controlling everything. In the absence of a good explanation of why the normal checks and balances aren’t being observed, it is hard to deem the scheme as good with any confidence.
A similar number had opacity around how and where the money went. There were a number of inexplicably complicated and multi-part investment approaches, some eyebrow raising connections to things like property speculation, and fee structures that were not easy to unearth and which fished money out of pension pots without making it clear in the headline charges.
Out of the 70 or so our panel could find, they ended up with 9 they were confident were “good”, and a further 8 that had enough financial depth to survive being small. The rest were either too small, or too dependent on a specific funding source (remember how fragile Kids Company turned out to be?), or too fishy, or too opaque for comfort.
If our group of experts had so much difficulty decoding the quality of the pension providers, a non-expert small employer barely stands a chance.
Inevitably – by operating a guilty-until-proven-innocent approach we filter out some decent schemes. That’s a shame but in my view a small price to pay when the alternative poses just too much risk for too many people.
Better signposting – right here, right now
I’ve been around the block a bit, and have been able to work in, and see up close, a few markets that don’t really function properly, where dodgy stuff happens. This is the first time I’ve come close to pensions and it’s in a different league – the lack of transparency, the pixie dust, the complexity mean the odds are stacked against the buyer.
What’s especially concerning about the workplace pension “not very good pensions” issue is that everyone in pension world knows it’s not right. Politicians are making noises, regulators are talking about it, journalists write about it, industry meetings are full of chatter about who is going bust, or who is a bit dodgy.
But nobody’s doing anything about it – and that means innocent people are at risk of losing their savings, and a well meant savings policy could get derailed.
What’s needed – urgently – is for regulators (both of them) and politicos and industry honchos to get some clear, unambiguous signposting out there now, to steer employers to the good pensions. And to do it now – today.
Because if employers care at all about the welfare of their staff – and most of them do, even the smallest – then they need to take great care in finding and choosing the right pension for them. And we need to take great care in helping them.