Active member discounts have always managed to attract controversy. New guidance from the Pensions Regulator and public statements from the pensions minister criticising them make it look like the government wants to consign them to the dustbin of history.
In a paper put out last month called The Role of Trustees in DC Schemes, TPR warns about transparent charging structures, and singles out active member discounts, or deferred member penalties depending on your point of view, for particularly harsh criticism.
The paper says: “Charging structures must be applied fairly to all categories of membership. Trustees must be able to demonstrate that they have assessed and concluded that the overall charging structures offer members value for money. The regulator does not view active member-only discounts (or deferred member penalties) as being fair and, therefore, acceptable.”
Launching the initiative, TPR executive director for DC, governance and administration June Mulroy said: “In DC schemes, it is members that bear the risk. If a scheme is poorly run it can directly impact the value of a member’s pension pot. Therefore it is vital that trustees have a firm grasp of the key issues for DC schemes that will assist members in receiving a good outcome from their savings – such as investment choices, costs and charges and decisions around converting pension pots into a retirement income.”
While TPR’s comments are specifically directed at the trust-based arena, and it currently does not regulate GPPs, it is expected to soon set out its vision of what a good DC pension looks like, for schemes of whatever creed, and charges will be an element of that.
Supporters of AMDs say from a shareholder point of view, it makes complete sense for companies to offer a better deal to people who work for them than for those who have chosen to leave, and suggest that if the departing member charge is also pretty low, then there should be no problem.
Robin Hames, head of technical, marketing and research at Bluefin says: “We are looking at schemes that go from 0.3 to 0.6 per cent and wonder whether that really is a bad deal for departed members. Even as a leaver you are getting a better deal than you might be able to get elsewhere, and if you move to a new employer with a cheaper deal, you can transfer across without penalty. The issue should not be that AMD is bad, but that a high charge is bad.”
Trustees have a fiduciary duty to all members, active or departed, so the argument often put forward in support of active member discounts, that employers sponsoring schemes are understandably more concerned about their employees, holds no weight in trust world. But with TPR likely to have an increasing influence over contract-based schemes in future as auto-enrolment gets under way, experts predict it reading across more of its regulations to the contract-based arena. Some would welcome that.
Tom McPhail, head of pension policy at Hargreaves Lansdown says: “The problem is you are robbing Peter to pay Paul. It is hard to justify penalising one group for the benefit of another. From the shareholder value perspective, you could argue you should give current employers no charge at all and put the entire cost onto departing members, who are then free to go elsewhere. But once the question of auto-enrolment comes into the equation, you have the employer co-opted into delivering a wider social solution. Active member discounts only work if inertia means departing members don’t bother to move on.
“Hargreaves Lansdown has put GPPs in on this basis in the past, and I don’t like it, but I am pleased to say we do not now. What I do not like is the element of presenting a proposition in a disproportionately favourable light by being able to rely on members’ inactivity. It just feels wrong.”
Trust-based AMDs are rare and ironically, it is often when schemes move from trust to contract that the AMD is introduced, typically so the active members’ low AMC can be preserved. That, and the government’s wider assault on charges in pensions that have to satisfy auto-enrolment criteria, as set out in the amendments to the Pensions Bill, could mean charges going up for active members, some argue.
“The fee that the employer was paying is effectively being loaded onto the AMC of the deferreds,” says Will Aitken, senior consultant at Towers Watson. “What we don’t know is what effect the amendments to the Pensions Bill that can effectively introduce a charge cap for will mean. They give the secretary of state power to say a scheme is not a qualifying one if its charges exceed a ’prescribed amount’. If this is so low that deferred member charges exceed it, that could ultimately meant that charges for current members ultimately have to go up.”
It seems inevitable that if TPR is to stamp down on active member discounts in the trust-based world, then contract-based schemes will also face a similar regulatory change. If that did not happen, it would create another reason to favour contract over trust, something the government would want to avoid.
Employers have been cutting their own pension expenditure through active member discounts for some time now. If the practise is outlawed, someone, somewhere will have to pay.