Auto-enrolment is on track to disappoint a generation of new savers
We don’t save enough. Generous pensions are a thing of the past, or the preserve of the lucky few. Some of the pension promises made in that past can’t be delivered. Many of us, maybe most of us, face an uncertain financial future.
Automatic enrolment into workplace pensions is a really smart idea. It gets millions of us on to the bottom rung of the savings ladder with the hope that we’ll learn to climb the ladder.
There are some challenges – the amounts we save through it don’t amount to much yet, and even when the minimum contribution levels go up (2019) it still won’t be enough for most of us.
But it’s a start – and the big prize here is that it will trigger a shift in behaviour for millions of us, helping us seize control of our own financial destiny rather than crossing our fingers and hoping our numbers come up in the mega-prize draw.
But unless something changes fast that’s not going to happen. It’s not working.
It’s all about outcomes, not box ticking
Read the reports and you’d be forgiven for thinking all is well. Millions of employers are setting up pensions for their staff, and thus far most of those staff have not opted out of the pension.
Thus far most of the employers who have set up pensions have been the bigger ones, with more employees and more experience of employee benefits. Now – and through until 2018 – it’s the turn of the much smaller employers. Most of them employ around 2 to 5 people. In total there are something like 1.8 million employing somewhere between 6 and 8 million of us.
Asking these small employers to choose, set up and maintain a pension for their staff is in many ways a mass market experiment for finance. Most of them have never bought a workplace pension before.
Pensions are complicated – I’m not a pensions expert at all, but I spend a lot of time with pensions people, and they find them bafflingly complex. Hardly any small business owner has the expertise or the access to expertise required to decode that complexity.
Choosing the right pension for their staff is a big deal, and a big responsibility. Getting it right is one of the most important things an employer could do for their staff. Get it right and they have a chance of ending up with a decent pension to save into, to get into the savings habit.
Get it wrong – put them into a pension scheme that’s no good – just to tick a box would short change a generation.
But that’s exactly what’s happening. Rather than focus on outcomes, on getting it right, we’re focused on inputs, on box ticking the “declaration of compliance” (which is how the Pension Regulator keeps score of the numbers of employers who have ‘complied’).
But filling in a declaration of compliance is not the same as choosing and setting up the right pension for your staff. And whisper it quietly – it may well be that many of these declarations of compliance are just and only that: declarations. Boxes ticked. But no pension set up, no staff saving. With a large number of small employers inclined to self serve, and to self certificate, there are persistent signs that they are getting it wrong.
Complying – i.e. ticking the box – but getting it wrong.
It’s much, much too easy to get it wrong
Choosing a workplace pension is not easy. There are a lot of different providers, some good, some indifferent, some poor. There’s a heap of incomprehensible jargon and nonsense. The language of pensions is like the rest of finance – not the same language normal people speak. Working out the differences between them, and what they are going to cost you and your staff is pretty much impossible. Do it to a deadline, and with a business to run, and the chances of screwing it up are high.
Workplace pensions suffer from many of the same ills that afflict the rest of finance…..
- jargon designed to confuse not clarify
- charging structures that are impossible to decode and penalise people with less money
- a host of middlemen taking your money without asking in management and administration fees. For some of the pensions this can end up wiping out the entire pot of money.
….and some very specific ills of their own – in that there are too many risky and unsound providers in the market.
- providers who are not by any stretch financially sound, with no financial protection for the savers in those schemes
- providers who are run incompetently, or in some cases, with criminal intent
- providers who are not straight about what it will cost, or what they do with your money
Nobody really knows how many providers are out there offering workplace pensions. Every day a new one turns up, sometimes it’s only a website and not even registered as a proper pension scheme. Most people reckon there are around 70, or at least 70 “fronts” – many of them have the same ultimate parent or are just “marketing” firms flogging a particular scheme. Some of them are bundled packages pushing a payroll or admin system with a pension attached somewhere down the line.
There’s not enough to protect unwitting employers choosing poor providers
Of the 70 providers there are a handful of really, solid, really good ones. There are a handful of really risky ones. And there are a swathe who are not going to make it – where, despite best intentions, the savings of the staff auto-enrolled into those schemes are at risk.
For a Government flagship savings policy to get to this point, the point of mass market adoption, with this level of risk beggars belief.
When we started looking at this market we assumed – naively as it turned out – that there was no way the Government and the regulators would be rolling out workplace pensions without some basic consumer protections in place.
We were wrong. There really isn’t enough protection. And what little is being done is too little too late. This policy has been in train since 2012, yet only now, late in 2016 is a tightening up of standards in the provider market mooted in a proposed pensions bill. If that does get enacted it will be too late for the many hundreds of thousands of employers, and millions of their employees, who had to choose a pension scheme without the benefit of the proposed protections.
Spelling out the risks around poor providers
A lot of the risks surround poorly run master trust pension providers. There’s nothing intrinsically wrong with the master trust system – in fact done well it can be a really economic and smart way for multiple employers to benefit from the same pension.
The problem is it’s too easy to set them up, and so there are too many out there that aren’t safe.
The biggest issue is financial strength. The economics of workplace pensions are brutal – low volumes combined with low contribution levels deliver wafer thin revenues in charges, not enough to cover administration and service costs. The cost of winding up a master trust seems to be somewhere around £600,000 to £800,000 and – irrespective of where the money is invested – there’s a danger that employees savings are used to meet the costs of wind up.
So if a master trust can’t meet the costs of winding themselves up there’s a risk to savings. We’re not at all confident that many of the 70 have anything like the necessary financial strength to survive an orderly wind up.
The next issue is fit and proper people. Well run pension schemes should be without conflicts of interest. There should be sufficient checks and balances, and oversight, to make sure that the interests of the savers are being looked after. The investment managers, the trustees, the pensions administrators should be unconflicted.
In far too many of the master trusts we see a crossover in all these areas. In some cases the same people are the administrators, the trustees and the managers. In some cases those people have no discernible expertise or experience in pensions. The more we looked the more conflicts we found. We resolved only to feature those providers where we were 100% sure that there was no risk.
Lastly we looked hard at where the money went and transparency of charges. In the world of mass market pensions there are four big investment propositions that end up actually investing the money. (I think it’s quite easy to end up believing that the pension provider you’ve chosen actually invests the money themselves – whereas in fact they are just at the head of a long chain of middlemen that more often than not ends up in the same place). For a master trust not to choose Aberdeen Asset Management, Blackrock, Legal and General or State Street raises the possibility of an investment practice which is non-standard, so worthy of a closer look. Some of those non-standard investment practices lead to properties in Cape Verde, or half built developments in the Caribbean, or even empty retail outlets near Reading.
It’s almost impossible to work out where your money is going when you look at a website or the blurb from a pension provider. Many of them don’t really talk about where the money goes, or who is investing it, at all.
None of them tell you about every single one of the charges, all the admin fees, the management charges that get netted off your pension down the line. Some of them still have the barefaced cheek to market themselves as “free”.
Pension providers are not charities. None of them are free. If you can’t see who is paying you should be very, very wary.
An absence of responsibility – Master Trust Assurance isn’t enough
We shouldn’t be here. Employers should not be unwittingly exposed to a market with this much risk. The regulators know many of the problems but don’t have enough power to stop dodgy providers peddling their wares.
Much too late in the day a pensions bill is mooted to tighten up master trust regulations.
In the meantime “Master Trust Assurance” (MAF) is being used as a proxy for “OK master trust”. The Pensions Regulator lists providers who are both open to all and either meet the criteria in “master trust assurance” (as well as non-trust based insurance based providers who are open to all and regulated by FCA).
“Master Trust Assurance” is a good start but it’s not sufficient. It’s a checklist of 31 good governance practices, and it is apparently costly to achieve, which means that only the master trust providers who have the resources available can attain it. So far around 10 have got it.
But good governance doesn’t mean good provider.
Achieving “MAF” doesn’t mean there’s sufficient financial depth. How many of the providers who have achieved MAF have sufficient financial strength?
Achieving “MAF” doesn’t mean there are fit and proper people who are unconflicted. In fact the framework recognises that “provider representation on the trustee board may result in non-trivial conflicts of interest”, yet only asks that such conflicts of interest are “identified, recorded and managed”. How many of the providers who have achieved MAF have people who wold pass a fit and proper test?
Achieving “MAF” doesn’t mean there are clear and transparent charging structures, and investment practices that are not risky. How many of the providers who have achieved MAF are clear about where the money goes and who is taking a fee?
All “MAF” means is that there’s a process and discipline around governance. The Mafia has very strong governance but that doesn’t make them angels.
The Pensions Regulator lists MAF providers in the full knowledge that there is a pension bill in the works that will insist on tighter criteria for master trusts. How many of the providers on the list would meet the new criteria? Not all.
Under the list the Regulator puts in a special caveat, of the “plausible deniability” kind, absolving it of responsibility should you choose a provider on the basis of their list.
It is – only – a list. It’s not an endorsement. It’s not a guide to what’s good. It’s just a list.
“The regulator takes no responsibility for checking that schemes’ claims are accurate.
The regulator cannot recommend, nor does it endorse, any particular pension scheme or any organisation. Inclusion of a scheme or mention of any organisation here does not guarantee their suitability.”
You’re on your own.
Employers need help now.
This is just not good enough. Employers are choosing pension providers for their staff now. They need help now. In the absence of strong enough, or quick enough, action from regulators or politicians we see ourselves as having an imperative to act.
Auto-enrolment has got to the mass market stage. Small employers, and their staff, can’t and won’t pay for expensive advisers to help them. Most, many of them, are going to self-serve. They deserve better protection and better signposting.
We’ll do what we can to act as a filter on behalf of the market. We’re not experts but we have the ability to ask questions on behalf of all employers. We have the ability to apply a higher set of standards, to demand a higher level of confidence, so that we only put pension providers in front of our clients that we’re confident are OK.
We’ve found 9 that we can stand by. Out of around 70.
There are probably more than 9 that are OK – and inevitably operating a “guilty until proven innocent” filter means that we omit some decent providers.
But for the moment there is just too much risk in this market. If the price of protecting employers, and their staff, from harm is that we omit a couple of good ones then so be it.
The big prize here has always been the opportunity to engage a whole new generation into savings – by giving them an experience so good they get the bug. After all, the aim of auto enrolment isn’t box ticking compliance. It’s to trigger a mass shift in behaviour. We owe the mass of employers, and employees a much, much better deal than they’re getting right now.