The Pensions Regulator. Enabling good member outcomes in work-based pension provision. Response from The Pensions Management Institute

Transcription

1 The Pensions Regulator Enabling good member outcomes in work-based pension provision Response from The Pensions Management Institute

2 - 2 - The Pensions Regulator Discussion Paper: Enabling good member outcomes in work-based pension provision Introduction The Pensions Management Institute (PMI) is the professional body for people working in the pensions sector. The PMI s members (currently over 4,200) work as pensions managers, consultants and technical specialists in consultancies and insurance companies. Many are also actuaries, pensions lawyers or company secretaries. Their experience is therefore wide ranging and has contributed to the thinking expressed in this response. The PMI is greatly encouraged by the Regulator s approach to Defined Contribution workplace pension provision. This new initiative will promote improved member outcomes across the whole range of DC schemes. By addressing the quality of workplace DC schemes now, the Regulator is taking an effective step towards making auto-enrolment work for all UK employees. The PMI shares the Regulator s view that market forces alone will not always deliver good outcomes for members and that there is a considerable range of provision across the multiplicity of schemes in operation. The quality of members outcomes is often a function of the quality of the scheme that they find themselves in, particularly when so many members are inert or actively disengaged. Anything that can be done to promote responsibility amongst participants and good governance amongst fiduciaries is to be welcomed. The PMI s Response Question 1: Do you agree with the regulator s 6 elements of good DC provision? Yes. We d break these down into two groups with a few comments on each: 1. Elements that involve some direct action by the member: Appropriate contribution decisions There are very few decisions which need to be made by the member of a DC plan, but even those seem challenging based on evidence of widespread disinterest. The most important choice to be made is to actually join a scheme; the second to make adequate savings. By introducing auto enrolment and minimum contribution levels the need for individuals to make proactive choices in this regard should be significantly lessened. We welcome this and believe that it can only be for the good when we see so much inertia. The introduction of a universal flat rate pension should help further by reducing the means-testing argument against all prospective members joining a qualifying plan of some sort. We have some concerns about the low level of contributions under auto enrolment, but recognise that any saving should be an improvement for those currently with no retirement provision at all. Additionally we would welcome any developments that enable schemes and their members to be able to benchmark plan attributes such as contribution levels against each other. This - 2 -

3 - 3 - increased transparency will allow meaningful comparisons to be made and should ultimately lead to a flight to quality. The NAPF s Pension Quality Mark is helpful in this regard. Appropriate investment decisions We welcome the current market focus on sensible (and small) fund rosters after the arms race of ever more comprehensive open architecture offerings. Workplace pensions of all sorts should enable manageable choices for the majority of members; there are other options for those who wish to enjoy wider menus. We see no problem with the majority of members ending up in the default fund as long as it is appropriate, well-constructed and effectively monitored. We do have a concern however, that many of the defaults in place currently are undiversified, heavily equity orientated, subject to infrequent review and exhibit an unhealthy opacity as far as reporting performance is concerned. We believe that far more emphasis should be put upon the default option within plans and that, in response, the industry should develop more innovative solutions that answer the needs of members rather than the industry itself. One market failing we observe in relation to default funds is the inability of many record keepers to distinguish between individuals who have actively chosen the default (presumably because they feel it is suitable as well as, in some way, recommended or endorsed by the sponsor, trustees or provider) and those who are true defaulters. We would like administrators to be able to determine who has chosen the default and who has not chosen at all. We would see these two groups as distinct cohorts and believe that understanding the behaviour of the membership in this small way should help to build better choices for all. It is important to be able to treat these groups differently when the scheme management changes the default fund following a review. In concert with better investment choices being available to the member we would also advocate both clearer communication of those choices and better reporting at the member level thereafter. We welcome, for example, the work done by the ABI and IMA on trying to find an effective way of explaining risk to retail investors. Similarly, whilst we welcome the consultation on SMPI and understand that accuracy and regulatory adherence are essential, we believe the illustration remains unfit for purpose as far as communicating important progress information to an unsophisticated audience is concerned. There should be further encouragement to providers to find more effective ways to communicate the route to adequate retirement provision, perhaps by allowing more leeway in how reporting to members is undertaken. Appropriate decumulation decisions This will become ever more critical as the DC market matures and more individuals come to retirement with a larger DC pot and increasing reliance on it as their principal or sole source of retirement income. The current disconnect that treats the two halves of the equation saving money and then turning it into an income as somehow separate is unhelpful. It would be more appropriate to treat the process as involving one combined product, not two. Finding a way of communicating retirement readiness to members should educate them that the illusory pot is just a stepping stone to the goal of an adequate income for life. We need to avoid the - 3 -

4 - 4 - negative psychological impact of the annuitisation process that members face: Yesterday I was a millionaire, now I m living on 50,000 a year. We welcome the ABI guidelines on promoting the OMO. However, we would like to see OMO becoming the norm for most members where they could benefit from significantly better annuity rates than the host provider. Those with lower levels of accumulated savings, who you could argue are even more in need of the very best rates, must be given easy navigable choices that lead to better results. 2. Elements involving those charged with steering the plan (provider/trustee/sponsor/ adviser etc.): Efficient and effective administration Not only must record keepers ensure accuracy and security, but also efficiency in order to drive lower costs. Currently it could be argued that DC administrators make the running of what is really little more than a bank account look harder than it should. Much of this inefficiency is a result of legacy systems and processes. We look forward to NEST hopefully setting the standard as far as low cost effective management is concerned. Protection of assets Good governance and responsible oversight is the key to this. However, whilst advocating the increased involvement of the sponsoring employer, specifically in contract based workplace plans, it should be remembered that the sponsor has often chosen that route expecting a lighter touch in this respect. By insisting on a heavier burden of responsibility for the employer there could be a reaction whereby companies migrate to the simplicity of NEST and possibly the lower accompanying contribution levels. A balance should be sought that takes the minimum of employers time whilst ensuring adequate protection for members. Size of the sponsoring employer will also influence the amount of time that the employer can afford to devote to governance. Value for money All things being equal lower charges are better. However, we have seen the majority of plans either (at the larger end of the spectrum) invested in low cost equity trackers which offer little downside protection or (at the smaller scheme end) invested in old style, relatively high cost, managed funds offered by the bundled providers. We also observe increasing costs as consultants seek to generate fees by adding value in the asset allocation process, driving down the cost of passive components whilst adding another layer of costs as these are configured into white labelled or customised solutions for individual clients. Whilst not wishing to see higher fees, an increasing focus on cost alone, rather than value, may result in a flight to the bottom. It may also mean that a lack of margin for the provider may result in lack of innovation. Again we welcome the original ideas incorporated into the NEST model

5 - 5 - Paying adequate contributions and investing them well will have a greater effect on member outcomes than reduced charges. What additional elements, if any, are important? We welcome the useful way in which the Regulator has segmented the different types of schemes. Similarly, we mustn t forget that a DC pensions is a consumer-facing product that has to be chosen by the user and for which there are many substitutes, not least of which is opting out and spending the money on something that gives more immediate gratification. With this in mind, we need to understand that, as well as segmenting schemes there is the possibility of clustering various consumers into like-minded groups. TCF is important, but fairly doesn t necessarily have to equate to the same. It s important to understand that people are different and have varying needs. There is a tendency to treat members, either as an unthinking mass, best to be ignored or, at the other end of the spectrum, as each entirely unique with the only answer being bespoke individually targeted advice. It does them a disservice to treat the users of DC pensions in this way. We support those service providers and consultants who are starting to derive different treatment strategies for different cohorts and improving the offer to them accordingly. We would welcome approaches that help to ensure low opt-out following auto-enrolment: Make it easy to understand the plan and to give consumers an understanding of what is normal what should people like me do? Reassure people that they won t be worse off universal pension helps, but good communication of benefits is also essential. Cushion the ride there is an asymmetry in how gains and losses are felt by savers and evidence shows that many people react badly to interim losses in their accumulated fund. We would welcome innovation that helps to give people a smoother journey towards retirement. Question 2: Do you agree with the regulator s assessment of the strengths and weaknesses of each of the identified segments of pension provision? If not, please set out your reasons and any evidence. Yes it s a useful segmentation. Overall comment regardless of the legal construct, size of scheme and involvement of the sponsor, one of the crucial elements in a successful plan is appropriate governance. This starts with recognising the multiple entities and agents involved and then understanding, allocating and documenting roles. Ultimately, the question is this; who is the fiduciary? who is on the hook for what. We d also echo the Regulator s feelings that more time needs to be spent on governance. It is good for members and also good for employer, after all the majority of current employees are likely to be in a DC plan with many of the members of the employer s trust based plans (particularly DB) working elsewhere even for a competitor

6 - 6 - Regarding small schemes, we d question the definition used here. By grouping in this segment schemes of less than 1000 lives the Regulator includes most schemes. We see the real problems being with micro-schemes. These tend to have been set up some time ago and so suffer largely on two fronts: higher than average charges and out-dated default strategies. We believe there is much work to do on this largely unadvised sector. Without wishing to make it more complicated we might suggest a split within the small occupational segment into bundled and unbundled. Our belief is that charges are more equitable in bundled where the provider has the ability to spread the cost over many schemes. Question 3: What can be done to help those making decisions about DC pension schemes to better understand the regulatory safeguards that apply to different types of pension arrangement? Were you aware of these differences before reading this document? The regulatory framework is complex, especially as many employers will have numerous schemes across the different segments, each of which potentially will have a different regime to adhere to and a different regulating body to report to. The PMI would welcome harmonisation where possible and a continuation of good work in explaining regulatory responsibilities. The overarching byword should be simplicity. Question 4: How can costs be reduced and governance improved in small schemes to encourage better member outcomes? The industry needs to ensure that service providers and asset managers endeavour to price new and existing schemes fairly and accurately. Auto enrolment is a mixed blessing to providers. Those who have underwritten an existing DC arrangement based on a view of the likely take up, attrition, contributions and quality of membership may now find themselves with a very different animal post auto enrolment. Counter-intuitively, this may result in scheme charges having to be raised, possibly disadvantaging those already enrolled. Currently there is very little visibility between schemes with each having little context within which to understand if they are getting a good deal. More transparency and benchmarking of services and charges would be useful for schemes who wonder what is normal - what should I be paying and what should I expect for that? This should encourage a more efficient market. But we note that charges on the whole are low in the UK (certainly for larger plans) compared to Australia and even to US where the market is much bigger and you would expect market forces to have lowered fees, particularly on fund management. We should perhaps concentrate of ensuring good value in services rendered for the price currently paid, rather than a general dropping of prices. Governance can be improved in small contract based plans by the providers acknowledging that with RDR thinning out the number of advisers and more responsibility resting with them for the good stewardship of plans, they need to step up to the plate and become more involved

7 - 7 - Question 5: Given the evidence of the benefits of scale and good governance should small schemes be encouraged to migrate into well-governed large scale provision? If so, how? No. Market forces and increased transparency should achieve this effect naturally. Any encouragement at this stage is most likely to mean a move to NEST as the easiest option. This wouldn t necessarily be the best solution for all. Question 6: Do you agree with our assessment of the strengths and weaknesses of multiemployer occupational pension schemes with non-associated employers? If so, what additional action do you suggest the regulator should consider taking? Although there are some weaknesses in multi-employer arrangements in the UK, we would point to the large master trust arrangements that seem to serve their members well and at low cost in Australia. Perhaps union involvement of some sort is the key. Question 7: What are the most important product characteristics of DC pensions which determine good member outcomes? Clarity, simplicity, good choice architecture including good defaults, relevant and easy to understand member reporting. Question 8: How can the regulator, or others, best encourage suppliers to ensure the presence of these characteristics in their products? Market forces and stronger demand side (consumer) pressure will help. We have seen a revolution in the empowerment of the consumer on simple financial products such as general insurance. We should encourage a broader market in more complex savings products including pensions. Question 9: How can the regulator work with the pensions sector to ensure that for members, trustees and scheme managers, there is greater transparency and comparability of costs and charges? We see the industry as generally being reluctant to voluntarily publish data that might be helpful to the efficiency of the market. We believe that transparency will help drive better behaviours at scheme and provider level. We should consider mandating the publishing of scheme numbers along similar lines to the requirements to report publicly as in the US. Question 10: Is there sufficient understanding of, and attention to, the protection of assets, particularly amongst trustees? No specifically around influence and role of adviser on fund roster/default (80% are in the default fund). There is an elephant in the room the employer thinks the adviser of workplace personal pensions has responsibility; providers turn a blind eye to the influence of adviser as they are providing much needed distribution of products. We should consider what happens when - 7 -

8 - 8 - something goes wrong in the future and responsibility is required. It is critical to understand who does what and who is liable. Question 11: To what extent, and how, can employers be helped in choosing a pension scheme which will deliver the good member outcomes identified in this document? The positive influence of consultants in this regard should not be ignored. They can help point employers to good provision and this should be encouraged. The introduction of RDR should go some way to removing any market bias based on remuneration and lead to a more level playing field and a flight to quality. For those employers who cannot or do not wish to pay an adviser or be actively involved in selection or ongoing stewardship then Nest is a good alternative. This added competitive force should also mean that administrators/advisers/providers will be required to up their game. Question 12: How much further should the regulator, in conjunction with the pensions sector, focus on administration standards? What particular areas might complement the existing focus on record-keeping? Enforcement should be the next step. Running a scheme is not difficult and trustees and sponsors should put pressure on platforms and record keeper to improve accuracy and efficiency. The changing marketplace gives providers a great opportunity to update legacy platforms and schemes on them. NEST should again be a bellwether. Regardless of standards of administration it is important for schemes to consider insurance against maladministration and errors elsewhere. Question 13: What more can be done by the regulator, or those running schemes, to improve the outcomes for members at the decumulation stage of the pensions lifecycle? Education is essential though there are clearly pockets of apathy that will be challenging to influence. The lack of basic maths capability and its resultant effect of hyperbolic discounting and underestimation of required funding rate needs to be tackled. The artificial disconnect between accumulation and decumulation needs to be removed it s one plan. Ongoing measures of adequacy/retirement readiness should be included in regular communications to members. Those providers who make a lot of money from roll over need help in seeing the longer term advantage in treating their consumers better at this point. There are some notable examples of good practice where accumulation providers have made arrangements to offer all their customers annuities from another competitive annuity provider as well as the OMO option

9 - 9 - Question 14: What changes, if any, are required to achieve clear accountabilities in DC schemes? The IGG has achieved good progress in improving accountabilities. To balance the increased governance we must try to make sure that duties fall too onerously on sponsors who have day jobs otherwise there is the likelihood of migration to NEST as endorsed easy option, which may not be best for the membership. The role of the investment adviser particularly in blended/white labelled funds needs to be clarified. The lack of transparency in reporting of these strategies, coupled with some fuzziness about who is ultimately responsible for risk and return and a possible conflict of interest mean they deserve closer scrutiny. Customised/blended funds should be required to report performance and charges, just like other funds, as well as who is responsible for asset allocation. Fiduciary management / implemented consulting is developing in DC. The Regulator should ensure that if sponsors and trustees feel they have passed on responsibilities for certain duties then they have been fully assumed with the necessary liability accepted. Question 15: How can accountabilities for good member outcomes in DC provision be more clearly understood, particularly by members or employers? A simple statement of who is responsible for each of the various aspect of the scheme should be produced and be freely available. Question 16: Are there areas of occupational DC product design and governance risk where the regulator could do more to support trustee understanding of their accountabilities? The Regulator should ensure that the DC committee/investment subcommittee of the trustee board understands the complexity of DC it is more complicated and quicker moving than DB but tends to attract less time and effort. The trustee boards are often populated by extremely willing and wellintended individuals with a tendency to be more experienced in DB. TKU should help to increase the focus on DC. Question 17: Are there areas of administration in work-based personal provision where the regulator could do more to support managers understanding of their accountabilities? Reporting to schemes and members is generally poor amongst providers (particularly bundled providers) and can be self-serving. For example, over the financial crisis there was very little communication to members. Record keepers would be well advised to empower the consumer through better communication. **** **** **** - 9 -