Our panel of experts met for the second time this year to discuss the current issues for defined contribution, such as what the new coalition government has in store for pensions, improving the outcomes in DC, and the IGG consultation paper and default funds


Biographies
Panellist: John Ashcroft is an independent consultant on pensions regulation and chair of the FTSE PensionDCisions DC Index Series committee. He specializes in issues relating to the good governance of pension funds and analyses of private pension regulation worldwide. He was a senior official in the UK Pensions Regulator (and its predecessor body) from 2003 to January 2008, and president of the International Organisation of Pension Supervisors from its foundation in 2004.

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. Cox joined HSBC Investments in June 2005 after more than 17 years’ experience in pensions having previously worked for Zurich Employee Benefits. He has predominantly worked in the DC 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.

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: Stephen Lefley is head of corporate distribution for Zurich Corporate Pensions and is responsible for every aspect of the distribution of Zurich’s corporate pension proposition including sales and marketing as well as relationship management with key distributors, employers and trustees. He joined Zurich in 2007 and has a wealth of experience in the corporate pensions arena having exceeded 22 years in the industry. Lefley's previous roles include working on DC strategies with consultancies and also practising as a corporate adviser.

Panellist: Lesley Carline is head of sales and marketing at the pensions administrator rpmi. Carline has spent over 20 years in the industry, gaining extensive experience promoting both defined benefit and defined contribution scheme solutions and joined the company at the beginning of this year. She has also worked for Xafinity Paymaster and Threadneedle in client development roles. A Fellow of the Pensions Management Institute (PMI) and an active member of its Council, Carline has also been an adviser to the Pensions Advisory Service (TPAS).

DC Roundtable 2010 No.2
New government
Chair (Marek Handzel): What can be made of the Emergency budget and the new coalition government's work on pensions so far?

Lesley Carline (LC): I'm glad that the Government has decided to review the tax relief issue for high earners and introduce a possible change to the annual allowance limit as the complexity of the proposals were phenomenal. The last government's set-up acts as a disincentive because the people who were making decisions about pensions were the very people who were going to be affected by it.

Stephen Lefley (SL): Before the Budget, as a high earner, you had to form an opinion as to how much you were going to earn, and also how much was being contributed by your employer; so you had to know two things. And if you were in doubt, you had the opt out situation. There was also a huge amount of higher earners with potential surprise tax bills, so the new simplification is really welcome.

Peter Cox (PC): What the Budget and additional output has done is put
pensions very much in the spotlight; hopefully, people will begin to realise the importance of saving. The Government is bringing big issues to the forefront of people's minds by talking about scrapping compulsory annuity purchase and highlighting the public sector pension's debate. However, what I particularly liked was the Secretary of State for Work and Pensions stressing the fact that people will have to work longer, so by the time they retire, their pension should be worth getting – a thinly disguised criticism of means-testing. Steve Webb is also saying that it's got to pay to save. That has to be seen as positive.

John Ashcroft (JA): If they mean what they say about means-testing, then for lower earners there's the potential for a better environment with auto-enrolment. If we can assist the Government by improving transparency in the industry and enabling better measurement, it will make it easier for people to save into pensions and understand whether they are getting a good return on their investment.

Nigel Clarkson (NC): We've got to give them the benefit: it's an improvement. They're going in the right direction, making the right noises about minimising the administration, minimising the tax complication and avoidance issue – whether it is voluntary or not.

Paul Macro (PM): The timescale for this review concerns me. It has to come into effect by next April, the consultation comes in the autumn, and needs to be implemented, so it's pretty tight. Nevertheless, it's nice to see some action.

Martin Palmer (MP): In the past everything has been tried to be done in a piecemeal fashion by government, without understanding the overall impact of everything they're trying to do. One of the refreshing things now is that the Government has opened up all the issues and all the problems that we've got to deal with and set out their views on how they may be reflected and amended. Effectively what they've done is recognised the fact the employers need to have life made easier for them to encourage savings and they've also tried to get the message out to people that they need to live longer.

PM: The problem of course is that we've had to 'think the unthinkable' before and the answers haven't been palatable. So if they can get a proportion of the things they've been talking about through then that will make a difference.

LC: There is a need to change the mindset and flexibility in the jobs market, that people should be allowed to have a phased retirement – whilst we've had the ability to do so in legislation, it's not really been utilised in practice. There is a growing view that people should be able to 'glide' into retirement rather than it being a cliff edge event.

PC: After years of muddled interference, there's so much to think about in terms of untangling the mess. But I sense this new government is travelling with one foot on the brake. They clearly want to give themselves more time in the interest of offering clarity in the end. They want to be convinced that auto-enrolment is right – not just for individuals and employers, but for the tax payer as well.

LC: We know now that pensions is getting increased competition from other retirement vehicles – we have to now have a holistic approach.

PC: Yes; saving for retirement is bigger than just DC and perhaps the Budget has shifted things in that direction, illustrating the importance or value of other savings vehicles.

JA: I’m slightly concerned about the review of NEST – it’s an opportunity no doubt, but it is unclear whether they are aiming to save employers a bit of money by scrapping employer contributions, or water NEST down, or are they looking at improving it in some way? What I would hope they would be doing is actually looking at the whole provision that would be through auto-enrolment - of which NEST is just one part and aimed at a specific membership profile. What needs to be done is a review of the whole DC market, to ascertain if it is fit for purpose or is it still looking like an add-on to DB. There are clear opportunities to aid asset allocation decisions and measurement as well as drive transparency, something which FTSE and PensionDCisions have addressed in their new index series.

MP: There is a 2012 deadline in their minds though, isn't there? The question is will they have the time?

PM: The review going on at the moment is certainly looking at the practicalities of auto-enrolment and how it's done – once they've got that sorted then maybe they can turn to the regulation and during the gap between then and 2012 – that window of opportunity might mean there is a lot for them to do in that timeframe.

LC: I'm sure the review committee will take the opportunity to talk to people in the industry, so we have to stand up and be counted and get our views across, but we could be looking at another A-day scenario where we got so far by the 6 April - but then it took how many years to straighten out all those nooks and crannies?

SL: The best thing that came out of the Budget was the increase in the retirement age. The more the working population sees the state retirement age being a more dynamic retirement age, then the more inherently engaged they'll be with their top up provision. The Government maybe could have even got away with raising the age to a higher level.

Improving outcomes
Chair: What else can done to improve DC member outcomes?

NC: When you talk about improving DC outcomes, well, all these things the Government is doing can make that happen. Making people understand that they're not going to be able to retire at 65 or 55 like previous generations, for example. They've got to actually understand what their outcome is going to be and that's probably the best thing for them.

PC: Individuals can't see the wood for the trees because the current pensions landscape is so cluttered. This is one of the reasons the NAPF put forward the idea of a Foundation Pension: a combination of the basic state pension and second state pension, which is non-means-tested, creating a known level of income in retirement if no other savings are made. Clarity is needed – people can't work out if it pays to save. If it does, then how much do I have to save to achieve my retirement goals?

LC: We always forget that there are a proportion of employees who shouldn't be in a company scheme as state and social secuirty benefits are currently structured. But you don't know in 20 years' time what's going to be there – so you could be saying 'actually paying into this company scheme, if you retire tomorrow you'd be better off not paying as you've this benefit, that benefit, etc. but we can't guarantee that they will be around forever'. If there was something really solid and fundamental that we knew people were going to get, then they could make some decisions.

PM: But you only get that if you take politics and the Government of the day out of the issue and that is not going to happen. A permanent pensions commission was roundly supported in the industry but government will not release that control.

MP: The coalition has come in at a time when you could argue that the way it acts has been affected by the state of the economy. In a way you could say that this allows them to take those tough decisions that they need to take – it's given them an excuse.

SL: There's also the retirement age issue. Why should the retirement age stay the same for 60 years? It's a no-brainer these days and how many people now want such obvious work-life balance changes, where your whole life changes in one day? You see it with people continuing their education these days – it's not a case of finish education and start work, so why should there be a different principle at retirement?

PM: Actually this is not so much a pensions problem but perhaps a wider economic one, in the way that people view their jobs and attitudes towards working, rather than retiring. All the flexibility is there but people can't fit it in with their working lives.

LC: Also, we have to remember how there are fewer young people entering the workplace. Once we are back to being a fully fledged growing economy, we're going to need older workers as there won't be enough younger workers coming into the workforce.

NC: And equally, they are going to have to work to support the younger people who can't actually get into the work market.

MP: There are so many inter-generational issues. Part of the problem is that many have the false expectation that there's a pot of money waiting for them when they retire.

SL: The removal of compulsory annutisation at age 65 seems to me to be an entirely sensible move. If you're to have a dynamic state age retirement, then why not? While DC pots are increasing, albeit slower than we would like, then why shouldn't people be allowed to withdraw funds from their pension as and when needed?

PC: There may still be some devil in the detail, but it will be interesting to see what happens to the issue around accessing pension benefits early because that is perhaps one if the disincentives to save – particularly with the current economic climate.

JA: A recent paper from the Centre for Policy Studies is saying that the 25 per cent tax free cash should be a resource that could be used to provide flexibility of access, and you can't really see any argument as to why it shouldn't be.

MP: The one thing with scrapping compulsory annuitisation and early access is that it improves the flexibility around pensions and removes some of the obstacles that people put up.

NC: But don't you think it's a bit chicken and egg with the flexibility? There might be some people who use it initially. But the key is to allow people to see that saving is relevant, and see what the outcome is for them. With DC, communication and engagement – when they can see the relevance, then they respond. All of the measures affecting the few will eventually add up.

JA: There needs to be a whole lot more transparency – people really don't know what their DC pension is going to deliver in terms of return, let alone a measure of risk that they can understand. The industry needs a widely recognized benchmark. Clarity around risk and return would better enable people to assess the value of their DC arrangement. Everyone has to grasp the opportunity to harness information that can benefit
all stakeholders.

PC: The problem with DC is that there's no tangible benefit at the other end to measure against each unit cost committed today. Contributions go in, fund values go up and down and a possible outcome is illustrated in a benefit statement as a 'snap-shot' figure that may or my not bear any relation to the actual end result. Perhaps there is a need for down-side protection and/or a mechanism to secure a set annuity rate?

LC: There are providers producing products with that sort of thing in mind but at the moment they're very expensive in comparison.

PM: One thing that could address this is mortality bonds from the Government but I can't see that happening.

MP: The public has a misunderstanding of how much it costs to give these guarantees to people.

SL: If we're talking about deferred annuities – then without the longevity issue, DC would be in the same place, without the longevity increases.

Governance
Chair: What do you make of the IGG consultation paper and claims that it was 'elitist' and only aimed at large trust-based schemes?

MP: My concern from a contract-based point of view is that I don't think the guidance really took into account the responsibilities the providers have in terms of their fund range, getting into the default fund, responsibilities through TCF, the DWP and the FSA. There's a lot that they currently take on which isn't reflected in the guidance. The other thing is that it doesn't take into account that many contract-based schemes are typically small in size. If the employer is expected to take on some of the responsibilities that are in that guidance then it's going to put a lot of employers off providing good schemes for everybody and push more people into NEST.

NC: Clarity is the major issue. They make a big point about responsibility. Clearly in DC the risk is with the member but it's also about understanding other people's responsibilities and what is required from them as well as yourself. In different DC arrangements there are clearly different responsibilities but the bottom line is cost, and to make these things work it's going to cost, and whether that's cost on the employer or on the individual through accepting a level of guarantee, they're going to have to pay for it.

SL: It's been two and half years since TPR had their first guidance on contract-based schemes and DC has become a whole lot more serious in that time and it's about to get six million people's worth more serious. The timing of this is excellent. The use of the words ‘ownership’ and ‘accountability’ have to come in when talking about the welfare of those people because otherwise it was always someone else's responsibility.

JA: These discussions always focus on the small schemes and such like, but I have to say if we actually focused on member outcomes, is there room for small schemes? If the employer or provider cannot put in the resources to monitor outcomes on behalf of the members, then maybe they should be in NEST. Is that a problem?

PM: No, not at all, there's mileage in that and one of the traps that we keep falling into as a industry is that being in NEST does not mean that you have to pay statutory levels of contributions. You can still pay reasonable levels of contributions in NEST. Separate the two of those and you'll get smaller employers happy to go into NEST with someone else doing the governance.

NC: TPR recognise the challenge is to increase employer engagement with no additional burden and that is all they're trying to put through in the
further consultation paper.

PM: The other problem with differentiating between trust and contract is that if you have an employer of the same size, then why should an individual employee be offered a completely different level of governance depending on what the employee has chosen?

LC: There is a misunderstanding of the degree of governance that providers do internally. They should make a lot more of this and make the minutes of their governance meetings available to employers so that there is a degree of confidence and understanding in what is being carried out.

JA: If you look at other big pension regimes, they don't have this distinction between trust and contract-based. Australia operates in a trust regulated framework even though many providers are commercial firms. A move to consistent regulation and performance measurement across trust and contract against independent industry benchmarks would provide confidence.

SL: Some DC trustees have 20 years’ more experience than their employer counterparts and any assistance like this provision of a nice neat framework is welcome.

MP: In certain schemes, people take different roles, so there are different governance responsibilities. It's good in that case to get clarity on who should do what.

PC: The IGG paper sets out the main components of 'best practice' and this, at least, highlights areas of attention. This has to be a good thing. A checklist of this sort does not necessarily mean that they expect schemes to score 100 per cent all of the time but they would like to see a measure of progress – raising standards is important. But at the smaller contract-based end it is the providers who have a larger part to play in helping smaller employers through that process.

NC: As they do in non-pensions areas. Many are moving away into other areas, so how about providers taking responsibility in those areas?

Default fund
JA: The key thing is that someone should be taking responsibility for the default fund and I would hope for a lot more innovation, so that we get default funds where the same sophistication comes in to DC that we have in DB. According to PensionDCisions, so far no alternative asset class has an allocation above 1% across the market as a whole. Hopefully the governance push will see a change in default, rather than saying ‘sling it all into equities until a few years before they’re out and then sling it into bonds and cash’. That’s the standard model in the UK, but only the UK. Has the rest of the world really got it wrong? Or is the UK wrong? I was recently in Colombia looking at their DC system and they have very sophisticated tools used by the pension providers, far ahead of what you generally see in this country. In the UK, the sophisticated products are there, but the use of them isn’t. It would be interesting to see what advisers and consultants’ views are on this.

NC: Within DC you have members who can take categories – 90 per cent fall into a default. There must be a lot there in the middle ground who don't want to do a full self-select, but they don't really want to go into the lifestyle. That middle ground needs
targeting for a proper default
mechanism.

PM: Take that a step further, and that 90/10 step might be across the board, but if you take any particular scheme, then the split could be 99/1 or 60/40, depending on the membership. I totally agree in the sophistication and thought that needs to go into default funds, but it needs to be relevant for whatever group you're looking at.

LC: There needs to be a recognition also that while it is generally held that the investment choice is down to the member, fundamentally they're relying on the trustee and employer to make the decision for them.

SL: We have to be careful with the whole concept of creating more diversification in the default with auto-enrolment. You have to enroll into something so maybe the traditional emphasis on trying to ensure that members make a sound investment decision at the point of enrolment is probably going to have to change. You can probably get the members into the default fund which is a dynamic one, so that once you're in those you can engage and then move onto and change components within the default fund. Why spoil the simplicity that auto-enrolment provides by muddying the waters with multiple defaults?

PM: And there's no rush. When someone joins a scheme they don't really have much in their fund in the early days so it doesn't matter where their money goes.

JA: That's what fascinates me about NEST's thinking on their default fund, which is that for the first five years let's have a conservative investment strategy – it makes no difference to the ultimate outcome and means the member is less likely to panic.

SL: And they don't want members looking at their first annual statement which gives them a negative return. I've not seen it yet, but something could work like a lifestyle profile which is a one-size-fits-all but once all the members are in, then your employee seminars are geared so that those who wish to do so can actually change their funds depending on their own specific attitudes to risk.

PC: There will be a need to review the appropriateness of all lifestyle funds as the vast majority of them are aligned to the purchase of an annuity. If the requirement to purchase an annuity goes then the importance of positioning pension assets in the run-up to retirement becomes more of an issue. Individuals will need to be more informed of about eventual outcomes and what that implies.

JA: The thing with these multiple defaults is that you're not just asking people questions about risk, you ask them questions such as 'do you own a house?' to help build up a profile. There are ways that you can use that information to actually make a choice for them. Alongside use of a benchmark, sponsors and trustees will have a robust way to calibrate and justify their decisions, especially in relation to what the rest of the industry is doing.

SL: The workplace education is becoming so much more important. There's the three stages of 'congratulations you've joined now let's look at your default fund piece’; the bit in the middle that says now you have to decide where to invest; and finally the real complexity is how you actually draw the real benefit and that's a worry, as although that piece is becoming more important, the people best placed to deliver the education are arguably going to start to withdraw from the market.

LC: We just keep talking about this need for workplace education but nothing ever really seems to happen, nobody is grasping it. Yes, we see pockets of innovation and some financial modeling on websites, but there's no sort of big drive as an industry to grasp this nettle.

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