Pensions: Size is everything
Regulation, government nudges and new technology could lead to fewer individual company schemes
The government wants UK employers to have fewer and better pension schemes. So it is putting pressure on employers and trustees of pension schemes to amalgamate into large multi-employer schemes such as master trusts.
The government is most concerned about small schemes with less than 1,000 members and assets of under £100 million. It has become aware that the quality of UK pension schemes is poor when compared to the giant multi-employer pension schemes in Australia, Canada, Denmark, Holland and New Zealand. A gauge of how big these giants are can be seen in that the AU$100 billion Australian Super owns a two-thirds stake of the 67-acre King’s Cross Project in London.
Such schemes can buy services such as fund management on a bulk basis. This means lower fees for members. Keith Ambachtsheer, one of world’s foremost thinkers on how to build the best pension scheme, and director emeritus of the Rotman International Centre for Pensions Management in Toronto, Canada, says that the world’s best pension schemes add an extra percentage point of return to a member’s pension savings each year. If that means a 6% return rather than a 5% return each year, it is big enough to impact the lifestyle of a member in retirement.
In a statement made by the Pensions Regulator in January, Andrew Warwick-Thompson, executive director for Regulatory Policy, said: “We strongly believe that it is unacceptable to have two classes of DC pension saver – those who benefit from the premium of scale and good governance and administration, and those who do not.”
The regulator points out that employers are using 730 schemes for auto-enrolment and almost half have fewer than 12 members. It is now planning regulation that will allow it to take action against trustees who “persist in failing to meet the required level of competence”.
Many providers of pension services to employers have already seen the writing on the wall. Most large pension consultancies, such as Aon, now offer membership of multi-employer master trusts to clients they currently help to run single employer schemes.
Among the largest master trusts offered to employers in addition to those offered by employee benefits consultants, there is the government sponsored Nest, the not-for-profit People’s Pension and those offered by large insurers such as Aviva, Legal & General, Royal London and Standard Life.
Will Wynne, co-founder and managing director of auto-enrolment provider Smart Pension, says: “In five years’ time, we won’t be fussing about pension providers or master trust vs defined contribution vs group personal pension schemes or any of that nonsense. Pension contributions will simply be a smooth, seamless process that happens in the background automatically via payroll software or HR platforms and smart APIs.” In this future, he sees much more of the interaction with employees happening directly with the outsourced scheme through their phone or a security enabled account.
One of the clients of Smart Pension is David Brackin, the founder of StuffUSell, a London-based business that helps those who sell through eBay, who has 15 staff auto-enrolled into pension saving.
“As an entrepreneur, I need to understand marketing, I need to understand company finances and how to deal with our suppliers – but I don’t need to know the ins and outs of pensions,” he says. “Small companies by their nature are time poor, so the faster, easier and less painful the experience, the better.”
However, for the time being, large employers are likely to continue running their own pension schemes.
John Chilman, group pensions director for First Group Plc, which has 25,000 UK employees, says the advantage of a single employer trust is the direct link between an employer and its members, but he sees no future for small single employer trusts: “Scale is everything in DC arrangements, both in purchasing power for admin/investment, and in being able to deliver the tools, education and communications vital to ensuring that members can retire with dignity at a time that meets their needs.”
Defined benefit schemes
A word should also be given to the future of defined benefit schemes. These generous pension schemes, many of which date back 50 to 60 years, were typically designed to pay two-thirds of an employees’ salary in retirement, for each year of service. These schemes have strong laws designed to protect the promise employers made to their staff when they joined the scheme, but they also have idiosyncratic rules that make them complicated to merge.
Deborah Cooper, an actuary with Mercer, says that for consolidation of defined benefit plans to work, some members would need to agree to a standardisation of terms which may well be less favourable than they are currently getting.
Recognising the difficulties in this area, the government is currently consulting on proposals to make it easier. A green paper issued by the Department for Work and Pensions in February 2017 entitled Security and Sustainability in Defined Benefit Pension Schemes has put forward proposals for DB consolidation. Its key recommendation is that in this space, DB schemes should be encouraged to voluntarily merge, rather than be forced to do so.