Concerns over implemented consulting, predictions of a scaled down Nest, an annuity market on the verge of market failure and a new project proving the return on investment on pension spending are just a few of the issues occupying the mind of Dr Debbie Harrison these days.
As a senior visiting fellow of the Pensions Institute, a consultant to the OECD, DWP and Financial Services Consumer Panel, an adviser to a long list of financial services providers and a regular contributor to the Financial Times, Harrison occupies a unique position in the UK pensions landscape. It is no surprise then that in a world flooded by reports on pensions, hers usually carry more weight than most.
Her February report in conjunction with the NAPF, ’Treating DC scheme members fairly in retirement?’, gave a blistering account of the operation of the annuity market for members of contractand trust-based DC, pointed to evidence of internal and open market rates, cliff-edge rates bands affecting employee inertia and a lack of transparency around enhanced rates. And while Harrison agrees the bigger consultancies are now getting their act together, those further down the tail are not there yet. With auto-enrolment set to create millions of new small pots therefore, a state-run annuity service may be the answer, she argues.
She has been critical of the way the NAPF positioned the report as a criticism of life insurers, believing the true message was of failure across the board.
“The aim of the report was to raise the problems in as measured a way as possible because the problems are systemic. It is not just the insurance companies, not just the contract-based DC plans, its actually endemic. We found a lot of trust-based schemes doing a lot less well than some contract-based schemes,” she says. “The coverage in the press release took a narrower NAPF focus, versus the ABI. That is something I had attempted to avoid.”
She adds: “If I had been promoting it from a Pensions Institute perspective I would have led on the angle that we have got if not an explicit market failure, then something close to that. Auto-enrolment means swathes of lower earners who are not attractive for the industry need to be dealt with.”
While there are good examples of best practice developing at the top end, concerns about smaller players and smaller schemes mean government intervention may prove necessary, she argues. If it does, we may end up with a re-run of what happened with stakeholder and then Nest, with the government setting a benchmark and then the private sector eventually moving to meet it.
“I was involved in the early discussions around personal accounts and at the time providers said they didn’t want them. So the government said ’right, that’s a market failure, so we will have to intervene’. So the government had to launch Nest at great cost. But since then we have seen the private sector come in and say they can deal with this market. We have got B&CE coming in with the People’s Pension, and they know the target market better than any. And we have Now Pensions. If they can do it in Denmark, they can do it here,” she says. “But we are only finding out now that industry can do that, which is a shame and a bit of a waste of time. It’s a shame that has to happen.”
The same thing, says Harrison, will happen in the annuity arena should no market solution that can serve the entire market be found, she warns. Bigger players are putting in place solutions that, used properly, could become a blueprint for a wider solution, she adds.
“We have at least got a functioning open market. And we have got specialist annuity advisers to take on board the new business that is going to come through. But it is going to have to be done on scale. The government knows where these specialist advisers are, we know, trustees know, employers know. But the members don’t know. So we have got a bonkers system where the people who need to know aren’t being told where to go,” says Harrison.
“The assumption was Nest would get all this new business. It was a very naive assumption. As always, government intervention creates a new benchmark, as happened with stakeholder. Everyone says stakeholder was a complete waste of time, but I disagree because it created a new benchmark”
She cites intermediaries such as Mercer and Towers Watson and providers such as BlackRock and Fidelity with tie ups with the likes of Annuity Direct, The Open Market Annuity Service (Tomas) and the Annuity Bureau as moving in the right direction, along with Capita, a TPA, and JLT with its own service. Other deals are set to be announced shortly, Harrison adds.
But it is the tail of smaller intermediaries that do not have these deals which causes a major problem for government and regulator in her view. It is an issue she hopes can be addressed by opening up Nest’s annuity panel to non-Nest customers, something that could be achieved as and when the ban on transfers into the state-sponsored scheme is lifted.
“Currently while they can’t take transfers, peoples’ small pots can’t be funneled in, which is bonkers. There is a lot of pressure for that ban on transfers to go before 2017. If that happens Nest can sweep up a lot of these pots and make a big difference.”she says.
Given the challenges she has already described Nest as facing, and the fact that credible private sector alternatives seem to be emerging, could Harrison envisage a cash-strapped chancellor asking why he needs to spend hundreds of millions of pounds on the project?
“It has to be a possibility. The assumption was Nest would get all this new business. It was a very naive assumption. As always, government intervention creates a new benchmark, as happened with stakeholder. Everyone says stakeholder was a complete waste of time, but I disagree because it created a new benchmark.
“Whether Nest will end up as another empty box remains to be seen. It is too clunky at the moment. The caps on contributions mean you can’t put all your employees in Nest, so you have to split. Nest has been naïve thinking it can go in with providers in partnership. But in practice what is happening is the providers are keeping the business they want and giving the rubbish tail to Nest,” says Harrison.
The more factors that weigh against Nest, such as the pause in implementation of auto-enrolment and the entry of cheap mass market players, the more expensive it gets, as the 1.8 per cent contribution charge has to be payable for a longer period, she says.
“That Nest contribution charge matters, because while Nest correctly argues its equivalent to 0.5 per cent over the long term, actually for older people coming in it is going to be expensive. I would have thought the pause in auto-enrolment means the AMC has gone up. And ask what are those older people auto-enrolling in Nest in the first five or 10 years paying, and it is going to be a long way off 0.5 per cent, because the impact of that fixed contribution charge is going to be quite high. I hope Nest is going to succeed, but I think it may end up being something much smaller in scale.
“And from a market perspective that is no bad thing. If competitors are coming in and doing something better than Nest, that is fine. But we need to see the appetite of the new providers for the broad tail,” says Harrison.
Harrison predicts we will see more big players come into the market. “Like Now, I think the Netherlands could offer us some good players too. That will cause some upheaval in the provider market, and in the adviser market too,” she says.
But given the fact that traditionally providers have had to spend money to achieve distribution, is it possible for new providers to get scale while not spending, in a bid to keep their AMCs down?
“It’s an interesting question and I would like to think the answer is yes. One risk for advisers is they could price themselves out of the market. Now Pensions and Nest are going direct to the employer. That is one thing I would like to see more of, because if you have got the expertise of a Nest or a Now Pensions, they can do it. For a lot of SMEs they do not need a lot of the additional services EBCs offer,” she says, adding that advisers need to rethink their model.
But Harrison sees issues with the way some intermediaries are already starting to do so, with Mercer’s implemented consulting a problematic model.
“A lot of EBCs were closing DB schemes and doing a one-off DC scheme implementation. Now they are realising that is not keeping the clients. But I am not sure at the moment whether implemented consulting in DC is a bit too clever.
“That creates a conflict of interest in my mind. They are becoming asset managers. If you go to Mercer, I am not saying this is the only thing they will offer, but they have designed their platform, their core funds are BlackRock and they have Tomas as the annuity provider. There are other funds on the platform, but the core ones are BlackRock. So they are effectively their own scheme. If you are L&G you are actually competing with Mercer from the scheme point of view now,” she says.
“It is changing the market so the line between advisers and providers and asset management is blurred. And there are inevitably, as there are with any of these trends, unintended consequences. Already I am seeing cases where the big traditional providers are saying, ’we are up against Mercer itself’. They have got their own scheme they are selling. That will create problems in the market.
“Mercer is far from the only one that is doing implemented consulting. But it is being done in a way that to my mind is not as explicit as it should be. They are saying we are scheme providers, we are a benefit consultant, investment consultant and investment provider. Because they have only got one product,” says Harrison.
This could create confusion in the minds of clients she suggests, although other intermediaries will want to do something similar if they wish to compete.
“They would obviously sell other products, but their clients will come to them and think they have got the best thing. It is a bit like at the top end of the consultancy market you have a mirror image of what is happening with the RDR. You are starting to get ties, but under the RDR it has to be explicit. You are either tied or you are not. But that is also happening with the very big advisers. And that will make it difficult for the advisers who do not go down the implemented consulting route,” she adds.
Advisers also face more upheaval under the RDR, which, together with auto-enrolment, is set to change what being a pensions adviser is all about.
“For employers under auto-enrolment, having a pensions scheme is no longer a distinguishing feature. Employers need to see return on investment – it has always been swept under the carpet, but will be more pressing in future,” she says. The issue is the subject of her latest piece of research, due imminently.
“The research will show you can demonstrate return on investment. Advisers will be able to use this information. But it puts together measures that can create metrics that do not require an increase in contribution. Why is this important to advisers? Last year employers lost the right to introduce a default retirement age. Employers lost the right to get rid of employees at a default retirement age, so those people who would like to retire but they can’t afford it. They are going to have a cohort of reluctant workers. So they need to get control of the pensions issue,” says Harrison.
The project will be published in a report prepared for JLT Benefit Solutions that focuses on showing employers the return on investment they are deriving from contributing to employees’ schemes.
The report will call for governance solutions to be more DC-friendly, moving away from the DB approach of the past, the key finding being that employers can improve members’ pensions without increasing contributions.
Proving the value in pensions will involve marketing one of the most tarnished brands in financial services. Resolving the issues in Harrison’s in-tray could go some way to changing public perceptions of pensions.
