As another busy year in the world of pensions draws to a close, Marek Handzel compiles an end of year report for the major topics that make up the pensions curriculum
Given the background they are operating in, administrators have proved their mettle in 2013
Auto-enrolment has been the biggest challenge that administration providers have faced in many years.
In which case, the fact that so many people have been successfully enrolled in a relatively short period of time is testament to the efforts of administration providers, says the Pensions Administration Standards Association (PASA) chairman and JLT Employee Benefits director Margaret Snowden OBE.
“The process was made much more difficult than necessary with complex regulations on who could join and when, what earnings should count etc, but administrators have worked very hard to meet employer requirements, with many employers requiring tailored solutions,” says Snowden.
“An extraordinary amount of manual work has been carried out to ensure deadlines have been met.”
Administrators have also had to operate in an unfavourable climate. Scheme trustees still expect downward movement on fees despite the fact that developments such as pension liberation have heaped even more work on providers.
Notwithstanding all these converging pressures, the administration sector has managed to maintain some excellent levels of service. It has also continued along its path of self-reflection and improvement.
PASA, for example, has worked with the wider industry to develop and publish high standards for administration providers to aim for, and towards the end of 2013 the body launched an independent accreditation scheme to assess providers against those new benchmarks.
Mark: D –
Messages have not been getting through on the choices people have when they retire but steps are finally being taken to address the problem
The Pensions Regulator (TPR) and the government seem intent on building a better framework within which retirees can make decisions on their pensions.
Two factors have no doubt concentrated minds. Firstly, quantitative easing has hammered annuity rates, and cruelly exposed the importance of shopping around. Secondly, a growing number of substantial DC pots have meant this is no longer a peripheral issue for the authorities.
TPR has tried to issue some clarity on the area in its recent DC code of practice. The watchdog wants scheme members to be supported in making full use of the open market option (OMO), but is in danger of sounding like a broken record if it does not follow the rhetoric through with action, in conjunction with the Financial Conduct Authority (FCA).
Some commentators have questioned why TPR has not produced more material for trustees on drawdown, and the regulator is expected to produce more guidance in 2014.
The insurance industry has continued to come under fire for its part in the relative lack of OMO use. The ABI issued a code of conduct in this area back in March, but found its members being lambasted on national television eight months later by Pensions Minister Steve Webb. Speaking during an episode of Channel 4 Dispatches programme on pensions, he accused them of taking advantage of inertia and ignorance in order to make “excess profits”.
Webb has said that the FCA will be looking carefully at the area in due course and has promised action.
In the meantime, savers may have to rely on good advice and the growing area of small at-retirement specialists who try to make their voices heard above the giant insurers.
DB risk management
Companies are ready to offload scheme liabilities when the time is right
In September, Capita Employee Benefits urged FTSE 100 firms to use their corporate cash reserves to de-risk their defined benefit pension schemes. The consultancy said that the cost of de-risking exercises have moved to their advantage with increases in gilt yields.
Capita may have underestimated the appetite among companies to offload their DB liabilities. Widespread speculation of a capacity crunch in the buyout market proves that schemes have got to grip with de-risking and are ready to offload their scheme liabilities when the time is right.
A month after Capita’s pronouncements, Aon Hewitt, in its Bulk Annuity Market Monitor for October said many sponsors had shown higher levels of interest in a buyout or buy-in deal. The firm also warned that delays in transactions were likely if several large deals were to be processed in close succession.
Putting any concerns of providers being overstretched aside, the news that so many trustee boards have steered their schemes into prime de-risking positions is hugely positive.
However everyone’s least favourite subject, data, needs further work.
“Data has been steadily improving thanks to the regulator’s stance on record keeping and because of the recognition that better data makes it easier to buyout or buy-in or take other de-risking measures,” says Snowden.
“However, legacy data remains a problem, which very few are willing to pay for.”
Auto-enrolment may have finally given some schemes the impetus to tackle the issue.
“The key is for administrators [to work] closely with payroll professionals to get this right,” adds Snowden.
SPECIAL PROJECT: Auto-enrolment
Opportunities have been missed in the SME segment
Given the low opt-out rates recorded to date, it’s tempting to label auto-enrolment a success and therefore give its implementation high marks.
Government statistics released in October showed that fewer than one in 10 employees auto-enrolled into a scheme had opted out, leading to over a million people becoming pension savers out of the 1,000 or so employers who had completed their registration with TPR.
Such glowing numbers led Steve Webb to declare that a “quiet revolution” had started in retirement provision.
But Webb and his cheerleaders have ignored the bigger picture. Large companies with clued-up HR departments and enough cash to get the best advice were never going to really struggle with getting on board. It’s the SMEs that need to be walked through the staging date process, and many of them have not even put on their boots yet.
Specialist employee benefit consultancy Creative Auto Enrolment director David White says that far too little has been done to alert the wider economy about the work involved in meeting a staging date.
“In the real world, hoteliers and widget makers are running their own businesses and this is not on their radar screens,” he says.
“The ‘we’re in’ ads from the government have been good to get employees engaged but what’s missing is some communication with the people who have to comply with the legislation, and that’s the employers.
“Part of what the past year has been about is preparing the whole market for what’s coming ahead.”
And that hasn’t happened, he argues. His consultancy gets distress calls on a daily basis at the moment he says, and in November, his firm took two calls from companies due to stage in January and weren’t clear on all that had to be done.
With the vast majority of employers staging in 2014 doing so in the first half of the year, finding someone to help a company in the 2014 spring melee will be tough.
The resulting fall-out could have adverse affects on both immediate opt-out rates, and longer-term retirement outcomes.
DB and DC investments are getting more sophisticated
Both DB and DC investment strategies are becoming more highly developed.
According to statistics from the NAPF released in the summer, allocations to alternative assets by DB schemes, such as property, infrastructure, and hedge funds have increased substantially as they look to match liabilities and reduce risk. These backed up the Pension Protection Fund’s findings earlier in the year.
BlackRock head of UK strategic clients Andrew Tunningley says that this has become a natural progression for schemes, who have decided that many traditional fixed income assets will remain unattractive for too long. BlackRock, he says, has had to substantially expand its capabilities in the real estate arena as a result of demand in the area.
Another significant trend is the emergence of quasi-fiduciary management mandates.
“Things have almost gone full circle,” says Tunningley, “with funds leaving behind strict strategic benchmarks and coming back to allocating at the right time. So they want to be more sophisticated in their hedging and are giving managers the freedom to do that.”
Thanks to auto-enrolment, in part, DC schemes have been re-designing their default funds.
This has involved trying to calm investment volatility from the default in order to reassure members that their money is safe in a pension, but it has also seen the emergence of target date funds, which may supersede the lifestyle funds that have dominated DC in the UK for years.
Diversified growth funds (DGFs) have also gained in popularity, in both DC and DB schemes, as they make a good replacement for passive funds.
Government and regulation
The government and regulator have made some real progress but care needs to be taken that reform is not carried out too fast
In different circumstances, the government would be riding high on an auto-enrolment wave into the New Year, but its eagerness to radically change the face of DC provision has made the industry jittery.
For example, one of its big ideas, the ‘pot following the member’ automatic pension transfer plan has been attacked from many camps as it could lead to people’s savings being moved into worse schemes than the one they had just left.
And TPR expressed “deep reservations” when plans were unveiled to cap workplace pension charges by ministers, saying that value for money was not always about low cost.
But perhaps the grandest of its plans, the creation of defined ambition schemes, first touted in 2012, has split the pensions industry like no other. Some see it as a step too far at the moment for companies that are tired of having the pensions scheme arrangements tinkered with, while others see it as a possible long-term answer to the UK’s saving crisis.
Nevertheless, Webb is adamant that all three ideas are essential elements for a healthy pensions landscape, and with an election in the offing in a year’s time, will use his proposed reforms to highlight the government’s desire to improve member outcomes.
TPR has had more success in navigating a steadier path with its critics. Its DC code of practice has impressed many, with Towers Watson senior consultant Nick Cook describing the code as the kick start that was needed to “help make DC schemes better and get people further up the good outcomes ladder”.
Doing well, but fighting bigger and louder external messages
With the advent of auto-enrolment, scheme communication specialists have had their chance to shine, which in the main, they have done.
Communication and training provider Life Academy director Greg Thorley says that starting from scratch with a message on retirement saving for non-savers has not only been successful, but has also taught schemes and communication specialists some valuable lessons.
To start with, providers have learnt the importance of holistic planning and avoiding sending conflicting messages to members in legacy schemes.
“You have to look at the whole workforce, where the communication strategy is touching legacy schemes and then build the context to deal with that,” he says.
Scheme messaging has also become more sophisticated. With workforces segmented into different savings arrangements in the larger employer space, providers have become more targeted and considered in their approach.
And thirdly, consolidation has also sprung to the top of most communication lists.
“You’ve got maintain engagement,” says Thorley. “We’ve tried to become more interactive online with people, which has had some success.”
But there’s only so much you can do within a scheme. Prospective and current members can all bring baggage and prejudices from the mainstream media or elsewhere, negating the narrative that they have heard at work.
“We see people coming into seminars, who say that they don’t trust financial institutions. That’s an issue,” says Thorley.
Overall mark: B-
Some good progress made this year, particularly with the developments made within government, investment strategies and communication. Administration deserves a special mention for the excellent work achieved under pressure. However there are still areas of improvement to be worked on for 2014, particularly within the at-retirement market.
Marek Handzel is a freelance journalist