Pensions Bindweed - pretty and deadly
But if you are sponsoring a group of personal pensions, you can continue to do so, but you have no power to take your contributions away from them. That power vests with your employees and your ex-employees and we all know how hard it is to get us excited about pensions governance!
I gave an example last week of a scheme where the sponsors felt they were paying too much for the management of their pension plan. The story has a happy ending.
The existing provider was prepared to offer a better deal to new people joining and on the future contributions of those who weren’t. But there was no concession on the £ms built up over the past ten years – that money would have to be charged at an uncompetitive rate.
Fortunately those £ms could be moved (and will be) lock stock and barrel to another scheme. The money will remain in the same fund with the same manager but the members will pay 50% less for it. Youngsters will get 15% more pension and even those close to retirement will see healthy improvements.
We could not have done this if the company had sponsored personal pensions. Every member would have had to sign forms and taken advice. Many of the people benefiting from what we have done are no longer with the original company, we’d have had to track them down and get their attention. It wouldn’t have happened.
But because the company had established this pension as a proper company pension scheme and not a series of personal pensions, all that was needed to make the transfer was the consent of the trustees (based on a certificate we as actuaries supplied stating that this was in the member’s interest) and the consent of the employer to pay future money to a new provider.
Until recently, many people were predicting that personal pensions would drive out the occupational pension schemes. I spoke yesterday of Japanese Knotweed (as an analogy to the spread of passive defaults). I think the analogy might better be with “bindweed” that creeper you see taking over gardens at this time of years with its beautiful white flowers. The plant is not bad in itself – but when it takes over , the garden suffers.
Personal Pensions really are Japanese Knotweed! They don’t co-exist like bindweed, personal pensions and Japanese Knotweed just drive out everything else in the garden!
And both Bindweed and Japanese Knotweed are hellish hard to get rid of, you have to eradicate them (the root of eradicate is root -Latin ”radix“). Getting knotweed or bindweed roots out of your garden is the only way to ensure they won’t come back next summer. It can takes years to get rid of the things.
We have other clients with personal pensions that have gone wrong. In some cases thousands of these pensions have been closed to future contributions as employers move to new and better models. The problem is that the old contributions are stuck in small pots which do not get transferred to the new better arrangement.
The Government is anxious that we do have a better way of making sure these small pots don’t get stranded and get swept up into bigger pots. They should be looking at prevention not cure.
If we did not have these pesky personal pensions in the first place, we would not have small pots and companies like ours could go around consolidating large numbers of small pots into bigger pots with a shake of our actuarial wand.
Slowly but surely, companies are waking up to the fact that they may have carrots that can get personal pension providers to offer great terms, but they have no stick if the providers do not come up to scratch.
And companies ae recognising that not only does governance matter but it is an effecient way that they can exert any control over the pension outcomes of their staff. It’s certainly a lot cheaper than upping contributions or running financial education courses (good as both these ideas are!).
Given that companies are recognising the importance of good pension schemes and good governance to keep them that way. Why do so many simply think in terms of group personal pensions?
My earlier example showed that by transferring money from one occupational scheme to another, we could achieve savings that could never be achieved through stopping one group personal pension scheme and starting another. If I was starting up a new pension arrangement for my company, I would think long and hard about starting it as a group of personal pensions.
Even though I work for a firm of pension advisers, I know from our own scheme stats that we are not much better at individually managing our pension affairs than an equivalent bunch of plumbers.
The truth is that pensions are so hard that we need people to take decisions for us and we need those decisions to be taken by trusted individuals who we know are acting in our best interests. This is how pensions have worked over the years in this country.
As soon as we lose that sense of collectivism and shout every one for themselves, we lose that collectivism, we lose the stick to govern the providers and we allow the bindweed and knotweed to take root, which, if it takes over, may take years to get rid of.
Fortunately there looks like there is a happy ending, just as there was for my clients. Instead of driving out everything from the garden, personal pensions have been stopped in their tracks. There is a new breed of collective pension with collective governance that can be exercised over the employees of not my but of many other companies. It’s called a master trust. Old hands will tell you that master trusts aren’t new at all and that they’ve been around for ages but these new master trusts are genuinely different.
NEST, NOW, Blue Sky Pensions, Supertrust and the People’s Pension are trusts that have emerged to meet the needs of employers who are not used to providing pensions. But they are finding that employers who have provided pensions are now looking to them to help them upgrade their existing pension arrangements.
We expect more and more existing pension schemes to bulk transfer to these new arrangements (and the excellent insured equivalents).
They do a job that cannot be done by personal pensions and any pension search conducted by or on behalf of an employer that did not include them, would need to be very clear why.