By Pensions Age staff
Our panel met for the first time this year to examine the key issues currently on the DC agenda. The forthcoming General Election, the introduction of auto-enrolment and NEST, corporate wraps and hybrid schemes, meant the panellists certainly had a lot to talk about
Chairman: Steve Delo is chief executive of PAN Governance, the independent trustee company, and is also an independent trustee himself. He is also a former chairman of the Pensions Management Institute (PMI) and qualified as an associate of the PMI in 1993. Prior to his current role, which he assumed in January 2008, he ran a multi-management investment business called Escher Teams, now Close Multi-Manager, one of the UK’s leading ‘manager of managers’ investment businesses. He is a regular media commentator.
Panellist: Nigel Clarkson is client service & marketing manager at Xafinity Paymaster. He has over 20 years’ experience across a broad range of the pensions industry, the last seven of which have been spent at Xafinity Paymaster in a client servicing and customer relationship management capacity. He specialises in DC transitions, risk management and servicing large DB and DC clients. Before joining Xafinity Paymaster he worked in operational management of financial administration and third party administration.
Panellist: Peter Cox is institutional business development manager for HSBC Workplace Retirement Services. He works in the defined contribution space at HSBC, which looks at bundled and investment-only DC propositions. He has also been instrumental in constructing the scheme promotion package at the firm, covering information and education. Cox joined HSBC Investments in June 2005 after more than 17 years’ experience in pensions. He previously worked for Zurich Employee Benefits.
Panellist: Martin Palmer joined Friends Provident in 1987 and has worked in a broad variety of roles in many of the firm's departments. Since 2001, his focus has been on the development of Friends Provident's Corporate Pensions proposition and strategy. In September 2008, Palmer was appointed as head of corporate pensions marketing, where he is responsible for the development and communication of products, services and technology. Palmer is also a Fellow of the Institute of Actuaries.
Panellist: Paul Macro is a senior consultant with newly formed consultancy giant, Towers Watson. He joined the firm when it was still Watson Wyatt in August 2007 as a senior defined contribution consultant and member of the company’s UK DC management team. This followed 17 years in senior DC roles at two other major employee benefit consultants. Macro's experience covers advice on all aspects of defined contribution plans. He also has significant defined benefit (DB) experience having qualified as an actuary in 1994.
Panellist: Dave Hodges is client relations director at Zurich Corporate Pensions, where he is directly responsible for Zurich's client relations and marketing. He began his career with the group more than 22 years ago in a variety of pensions sales and technical roles. After the Zurich merger in 1999, Hodges led the Zurich group pensions marketing team before taking up his role as head of group defined contribution in 2002. He took on his current role at the end of 2006. He is a widely respected industry commentator.
DC roundtable no.1 2010 The evolving DC landscape
Chairman: Could corporate platforms take the focus away from pension saving, rather than encourage it?
Hodges: They are the way forward and they will evolve, but we shouldn't think of them as a silver bullet. You have to be engaged before you get online to a corporate wrap platform. You are still going to have to find some kind of stimulus or incentive to solve the wider savings issue.
Clarkson: It is the way forward in conjunction with other methods. The point about taking the focus away from pension savings is a good one, but I'm not sure that we should just be thinking of pension savings in isolation. How pension savings interacts with the other investment choices on offer on the platform is important. The key to how successful they are will depend on how members are enrolled onto the platforms and the access they have to the platforms going forward.
Cox: If a corporate wrap is communicated in the right way, done holistically and administered on a platform that is easy to use and easy to understand, it is something that may encourage saving. It might take the focus away from the pensions element, but is that necessarily a bad thing? Saving for retirement is bigger than just DC; it's saving in different ways for different life events, and corporate platforms will go some way to achieving that.
Macro: Corporate wraps have been talked about for quite a long while, certainly over the last few years. So, if it was the way forward a couple of years ago, why have we not really moved on? We still don't really have anything we can properly use, although I expect to see a corporate ISA introduced this year – that's something we've been talking about for many, many years. It needs encouragement from a new government, whatever colour it is, to encourage people to save.
Cox: Building a compelling corporate platform requires a significant commitment from providers. The question at the outset is: do you build an off-the-shelf proposition using all of your in-house products, or do you build the framework and offer a solution that potentially contains products selected on a best-of-breed basis? The former may have better connectivity at the outset but it would be commoditised and less flexible and the latter would be capable of being tailored to suit the bigger end of the market with carefully selected products. However, this approach really has to be done in partnership with an introducer or a specific large employer.
Palmer: We have to move to a position where we provide employers the flexibility to offer a broad range of product offerings to meet the needs of all employees. Member engagement is crucial – the tools we provide, the language we use, the mechanisms that allow people to get information to allow them to make decisions are going to become more important as we move to an environment where we have more choices. Members are not particularly good at making choices at the moment, so we're going to have to think about how we can aid that process.
Hodges: Some of the elements of corporate wraps are difficult to consider and get right because these corporate wraps are very expensive items – there's potentially some fool's gold there and a lot of money could be wasted. You will start to see more group SIPP and corporate ISAs coming onboard, and then the 'Full Monty' type model that manages people's personal debt and shorter-term savings. But how do you wind in an advice model and make sure people don't stray into an area where they do need advice or regulated advice? It's a difficult thing to overcome.
Chairman: We talk about wraps being easy to use, but they are also easy to misuse, aren't they? How do we manage such concerns? Furthermore, we don't have a savings' habit in this nation, so isn't it a little 'chicken and egg' if we're coming up with products to feed a savings habit that doesn't exist?
Clarkson: There is a tendency for people to think of pension saving outside of other types of savings. The integration between the ISAs, SIPPs, share-save schemes, and all of the other financial savings products which are available from the employer on a wrap platform is crucial. That will, conversely, increase pension saving as people will see how it fits into their overall employee saving strategy.
Palmer: The workplace is a great opportunity to provide the engagement piece because if the employer is agreeing to make a matching contribution then this could result in the employee putting more contributions in, effectively encouraging the employee to recognise that there is 'free money' to be had.
Cox: It's going to be very much down to the type of employer, or at least their attitude to providing a workplace facility to save. If they are just doing it half-heartedly, because their competitor down the road has embraced this corporate platform culture, then there would be a risk of it failing. If an employer embraces the whole concept and spends a bit of time communicating the benefits of saving through different vehicles for different life events, then it will succeed, but it may be a slow burn at the outset, particularly as savings options grow.
Chairman: We’ve got an election coming up and may well have a new administration in power by the summer. The Conservatives are proposing to scrap compulsory annuitisation and to review NEST. What are the panel's thought on such possible changes?
Palmer: In terms of compulsory annuitisation, we think that this increases flexibility around the accumulation phase. It's certainly something that I would support. We've got to be careful with it to ensure that people do have some level of secure basic income – you don't want people completely deferring annuitisation and finding they haven't got any money at all at 85 and are then reliant on state benefits. In terms of reviewing NEST, if I was a new government minister coming in, I would want to have a look at it and understand how viable it is. It's a huge investment for the Government, so they are right to do a high level analysis to make sure it is going to deliver as promised. Would it be bad news if they deferred 2012? I'm not as concerned about that. It needs to come in quickly, but it needs to be thought through. If that means they need to spend a few months thinking about it then that's the right thing to do.
Macro: On the deferral point, they've said that they might defer the introduction of NEST following a review but bring forward the implementation of auto-enrolment. What I think they are trying to do is encourage employers with an existing arrangement to use that arrangement, and bringing in auto-enrolment should encourage that and ought to avoid the levelling down point. In relation to scrapping annuitisation, it's a slightly dangerous area. It's a populist approach – lots of people don't like insurance companies and annuities, but they don't fully understand what annuitisation is all about. Also, if healthy people stop buying annuities, annuity rates will go up, so you are on a potentially downward spiral. People are upset by the level of annuities as it is – this will simply exacerbate that.
Clarkson: I must admit my first thought when I saw that they were looking at scrapping compulsory annuitisation was: Is it there purely as a vote winner? How many people does it affect? It affects very few people – 95 per cent of DC funds are under £50,000. Annuities are an effective method of mitigating investment and longevity risk and although the markets are poor, or the rates are perceived to be poor at the moment, they probably are the best way forward for the majority of people. There is not a lot of detail in what they are planning on doing – they are just saying 'let's get rid of it' – and there are a lot of implications around that area of the market. And it's fair to say that income drawdown is not fit for everybody.
Hodges: I am a fan of flexibility and I like the idea of a minimum amount. You have to go back to the reasons why annuitisation is there in the first place. There's the cynical reason that the Government has got to get its tax back and there's the reason that you don't want people running out of cash and relying on the State. On the NEST piece, I'm very much in the camp of not wanting delay. I like auto-enrolment and it is needed, but I don't like NEST, although given we have a tendency to tinker, we should continue with that because it's going to happen anyway whether it's delayed or not.
Cox: I am very much pro-choice and flexibility. So in terms of compulsory annuitisation, yes, there should be choice. However, the fact of the matter is you run the risk of some people falling back onto means-tested benefits. Therefore there has to be some degree of certainty in terms of the level of income people have secured throughout the rest of their life. As for NEST, this is going to be such a big piece of legislation that any incoming government will be keen to conduct some sort of review and the interaction with means-tested benefits is the elephant in the room.
Chairman: What does the panel think about the sheer technical structure of NEST and where it's going? Do we see this working or do we see it being like Titanic hitting an iceberg?
Macro: It's a challenge. There is concern in many quarters that there now seems to be only a single possible administrator involved in the tender processes. It's difficult to see how you can get a competitive position with a single provider tendering. It will be interesting in some 30 years time when the papers get released as to why the three other bidders dropped out.
Hodges: If I suspected anything it's the problem we all saw a few years ago in so far as you have something that is quite difficult to build with a price that's almost impossible to meet. If people haven't got confidence in NEST then it just won't work. And let's face it, there is an old history of government computer systems that haven't worked properly here.
Palmer: When they set this up in the first place, the number one message seemed to be ‘low cost’. And that's been a really difficult thing to try and get away from.
Cox: It was a bit of a knee jerk response, wasn't it? They clearly hadn't looked at it in detail at the outset.
Macro: The difference in the marketplace is that you can drive prices down, but the quality and the level of service has to remain at acceptable levels. Otherwise, people would just move. Within the NEST arrangement, you drive the price right down, service doesn't deliver, where do you go? There is nowhere else to go.
Chairman: And what will that do to the reputation of pensions, say if a scenario where NEST falls over administratively early on in the piece were to play out, just at the point of which we're trying as a nation to drive up pensions savings?
Palmer: You can bet your bottom dollar that the moment this launches it's going to get such a huge fanfare, in terms of a) the promotional activity that will be put in behind it to try and encourage people to participate, but also b) the focus of the media, which will be enormous.
Cox: Inevitably, the media will be looking at NEST through a critical eye. Bad news stories and angst seem to sell more papers. The pensions landscape needs to be uncluttered and simple and the importance and benefit of saving (where every penny counts in your favour) need to be put across. Complication and uncertainty, which we seem to have at the moment, will unfortunately breed unhelpful cynicism.
Clarkson: We've seen over the years that that's the approach, and certainly on the back of the high scale, high impact errors within industry that have undermined its reputation already. You would hope though if it does all go off very well, that the pensions industry reclaim its credibility which would then lead to future engagement and the resolution of the issues at the moment.
Hodges: The interesting thing about the question is if it does go wrong who's associated with it going wrong? Would people associate it with pensions and the pensions industry or do they see it as a form of government compulsion or tax?
Clarkson: As the onus is on the employer then it would be reflecting only on the pension industry. We're in danger. I agree there are massive
pitfalls in all of this and the possibility of it going wrong is unthinkable, but are we not in danger as an industry in talking this down ourselves? Our own criticism does lead into the hands of potential bad news stories.
Macro: If you wanted to talk it up and then it does go wrong it comes back to you. A number of large employers I've spoken to have expressed the opinion that they would prefer not to use NEST because of the potential reputational risk. By using their own arrangement, whatever the consequences that might be, at least they have control over it, and if it does go wrong then they will hold their hands up and say 'we made a mistake and we'll put it right'. If you're going into NEST and something goes wrong, the employees will still look at the employer because they are the ones who have taken the money out of the pay packet, but there's actually little the employer can do to influence any changes.
Hodges: If there's a choice between using NEST and using that vehicle, albeit under auto-enrolment conditions, then personally I'd prefer them to use their own vehicle because I'm absolutely convinced it will be better than what NEST can offer.
Abolition of default retirement age
Chairman: Would the panel welcome the elimination of the default retirement age?
Clarkson: In terms of the pensions crisis, then yes, it might be a good thing, but there are much wider implications. Is it a good thing to have an ageing workforce? Will this further marginalise young people? Employees working longer will have a positive impact on the funding of pensions and we can see that clearly, but at what cost? Employers will obviously lose their flexibility and will presumably have to pay more for the older, experienced, employees than they would for younger people coming in. Where do you then have your continuity planning if you can't determine when people can retire?
Palmer: It could potentially have some issues for group risk products because the cost of providing any protection benefits for someone at 70 would be a hell of a lot higher than someone who is 30 or 40. I can see where they are coming from in terms of trying to do it, in terms of providing people with that flexibility at an individual level, but it does come with risks in terms of what it means for the employer.
Cox: About four out of every five employees who make a request to carry on working get their wish, so this is encouraging. There are various advantages for extending people's working lives and this should be recognised. Support for the abolition of the default retirement age is amplified by output from the National Institute of Economic and Social Research. This shows that extending working lives by 18 months would inject £15bn back into the economy in terms of tax-take and deferral of state benefits. So there are various advantages for extending people's working lives, but there has to be some regard for those employers who perhaps do need some flexibility in terms of bringing someone's working life to an end.
Macro: Not linking default retirement age and state retirement age is really indefensible – that's got to happen. But then the other issue is that the increase in state pension age is simply not quick enough to keep up with the cost of providing benefits and changes in mortality rates and other social aspects. But employers do need some flexibility to manage their workforce and if the default retirement age goes completely, it makes life a lot harder for them.
Hodges: A default retirement age helps planning on both sides – it helps the employer enormously in terms of planning their own workforce, but being in the pensions industry we need something to hang our hat on in terms of a target date for which to plan pension benefits. DC is clearly going to be the main vehicle going forwards and if people have not got a realistic retirement age to aim for we're going to go even further away from the ultimate objective of making sure people have got a decent income to retire on.
Palmer: I wonder if it will also have an impact on employer's desire to take someone on in their late 50s/early 60s, if they know down the line that they haven't got a default retirement age that they can retire that person at? So it might have unforeseen negative circumstances that can reduce the flexibility of people around their 50s and 60s to get the type of work they need at that stage in their life. The problem is that people tend to move around so frequently. If you've got someone in their 30s or 40s, what's the chance of that individual still being around with that employer at age 60? Pretty slim, I would guess. So as an employer you could say 'do I care?' It's not a great thing, and employers should care, but in reality they are not going to be the ones who are faced with the problem.
Cox: There has got to be flexibility on both sides. Some individuals may find a compromise with their employer in that they choose not to work a full five day week. They could gradually wind down in terms of the number of days they work, which would help both the employee and the employer.
Chairman: Of course we don't know what employment patterns are going to look like 20 years down the track. We don't know what jobs people are going to be doing, or what the
economy's going to look like, so it's difficult to plan at this point in time.
Hodges: You have to wonder what the driver is for bringing forward the review of DRA to 2010 from 2011. I strongly suspect it's the discrimination element that brought it forwards, which is the cart driving the horse. It's not the right tool to use to stamp out discrimination because you are likely to get into the territory of positive discrimination, which to me is just as bad.
Collective defined contribution (CDC)
Chairman: The Department for Work and Pensions (DWP) has announced that it will not be taking any further action on collective defined contribution (CDC) schemes. How much of a blow is this to the hybrid scheme lobby and what are the panel's views on the demise of collective DC?
Macro: It's not dead yet. The Conservatives' Nigel Waterson has said that they quite like the idea of CDC, and they will be adding it to the list of things they will be looking at if they come in. The legislation as it stands really doesn't allow anything in the middle – anything slightly to the left of DC is thought about as DB, where you have PPF and accounting issues, ie the stuff that has sent people packing from defined benefit, so there needs to be legislative change. One of my concerns about collective DC – where the employer and the employee have a fixed rate of contributions but there is a targeted benefit that can be adjusted if there isn't enough money, which sounds great in theory – is how do you get the concept across to the individual without them assuming that this benefit, which you are defining, is not a defined benefit?
Cox: It's the clarity of the whole approach that's concerned the DWP to a certain extent; the ability to communicate what the outcome might be to end-users is currently being seen as difficult. I agree, it's probably not dead yet, but it requires a lot of work particularly around potential benefits and risks.
Palmer: I wonder if it has effectively become too late because loads of companies have already closed their DB scheme, certainly for new members, and obviously many are now starting to close to existing members. What's the natural step for them? It's that most of them will put these existing members into the existing DC schemes. Why would they then take the step of setting up a completely new arrangement, which would be quite complicated?
Clarkson: Exactly, you've got to question whether employers would have any interest in doing that. In terms of the journey from DB to DC, are we at the stage where we've bypassed CDC? I thought it was interesting that the DWP said that one of the issues was intergenerational cross-subsidy. We're already doing that aren't we? We're doing it at the personal level. When people are really suffering because they haven't got any money and means-testing is increasing to such an extent – that would then possibly be the driver to get us back into this middle ground.
Hodges: On paper we've got this as a good idea as well, but the reality is it's impossible to explain to an individual how the thing reality works and therefore expectation cannot be managed. Having said that, I am quite a fan of risk sharing, but not in the sense of intergenerational risk sharing, so I do quite like the concept of finding out a middle ground between DB and DC in terms of employer and employee sharing the risk. But the reality is that employers, given the opportunity, will level down and we've been on this journey from DB to DC and most have taken the DC route and why is that? Because it takes risk away from the company and puts it onto the member.
Macro: The only thing that can happen – certainly in the short to medium term – is change to DC. There can't be any risk passed back to the employer. But there's a lot that can be done in relation to investment options in DC. One of the downsides of DC often quoted is the unpredictability of the outcomes. If you can provide slightly more predictability, both in terms of investment returns and the ultimate benefit, without it fluctuating wildly, then people can get a much better idea as to what the outcome's going to be and be more comfortable with it.
Chairman: But isn't one of the problems with DC the fact that to get decent enough investment returns over the long-term you need to be investing in things that will go down from time to time, and actually, you're better off investing in them when they've gone down than when they've gone up, but reverse behaviour always occurs. Isn't that a central flaw in everything in DC – this buy at the top sell at the bottom behaviour? And the fact that the moment markets go down investors assume that they've been ripped off.
Macro: The selling at the bottom point is not so much people opting out of equities because, at the back end of 2008 very few people changed their investment options. What happens is that more people will have opted out of pensions – 'it's just a black hole, I'm not throwing any more money into it' – and many more people will have chosen not to join a pension arrangement when they had the choice because of what had happened. That to me is a far bigger issue, and requires more predictability. In fact you could run a DC scheme where you never told people what their fund value was – that would probably be more successful than having online access 24 hours a day, when people
Hodges: The evidence of switching out was very, very low in reaction to the economic circumstances. I feel the damage was more done by reinforcing the cynicism around the value of pensions for those who received the benefit statement in April.
Cox: There doesn't seem to be any way back from defined contribution but that doesn't have to be a bad thing. I don't think employers have an appetite for taking on more risk or shared risk, but there is an appeal for offering funds that provide downside protection for members. Members can benefit from potential returns from equities whilst the employer could meet the explicit cost of protection to limit downside risk.