Enhanced transparency, governance and freedom are all designed to improve the public’s perception of pensions. But they also present reputational risks of their own to the pension brand. Gill Wadsworth reports
Workplace pensions have been pulled from pillar to post by politicians and journalists over the past decade but, while a series of initiatives is giving the pension system a much-needed brand refresh, these measures also present the media with new opportunities for attack.
The freedom and choice regime which came into force last April was designed to give pension saving a shot in the arm, transforming it from a stuffy and inflexible dinosaur to an accessible and attractive savings vehicle. Providers have been labouring to deliver all the Chancellor had promised, while at the same time protecting investors from self-inflicted damage at the hands of volatile stockmarkets.
Then, before the dust had settled, Chancellor George Osborne announced a new pretender on the pensions scene, the Lifetime Isa, which gives the under-40s a new way to save for retirement.
Providers, trust-based schemes and -asset managers have, at the same time, been coming to terms with demands for new levels of scrutiny through independent governance committees, trustees’ statements and new transparency requirements.
All this upheaval creates a raft of -opportunities for the pensions industry to show it is cleaner than ever but, as delegates found at a Corporate Adviser pension roundtable held in association with Standard Life, there are many reputational risks to manage simultaneously.
Capita Employee Benefits divisional head of marketing and research Robin Hames said that, with so many new issues on the agenda, the pensions industry will not be allowed to forget the billions of pounds of savers’ money still held in what the government describes as ‘high charging’ pension products.
Hames said: “It is important that we do not sweep the past under the carpet. The £30bn identified by the OFT [2013 workplace pension workplace study] is an awfully big absolute number, which feeds those who want to criticise pensions. I do not think we should underestimate the importance of getting this issue right.”
He added: “It is about exit charges, unwinding with profits, and all that will be a millstone hanging around the industry’s neck if it doesn’t deal with it. It will not be forgotten.”
To tackle this issue, last year each pension provider with a legacy book was obliged to set up an independent governance committee to ensure savers ‘benefit from stronger scheme governance, transparent and comparable charging information and pension charges that will not unfairly penalise savers’.
In the past few weeks, the IGCs have reported back for the first time, and the panel agreed the committees play an important part in protecting pensions’ position as a viable long-term savings product.
Hymans Robertson partner and head of DC consulting Lee Hollingworth said some IGCs are better quality than others. Hollingworth added: “There is mixed quality in terms of IGC independence from one provider to another. Some are struggling to demonstrate that independence.”
Delegates at the event also saw the challenge of dealing with the proliferation of small pension pots as another threat to the sector.
JLT Benefit Solutions client relationship director Stephen Coates said: “Small pots lead to small decisions. Members with £8,000 here and £7,000 there are not looking at their savings in aggregate and they are not making a holistic decision.”
Coates said the impact of small pots will only come to light in the medium to long term, adding that the industry needs to do more to ensure people in their 40 and 50s understand the importance of bringing their savings into one place.
He pointed to the master trusts as a possible solution to the small pots problem, but some panel members warned that master trusts constitute yet another in the long list of reputational risks to pensions.
Hames said: “A present reputational risk is the proliferation of master trusts and whether those running them are capable and capitalised sufficiently. If we see failures, we have to ask, who picks up the tab?”
The reputational threat posed by small pots is exacerbated, argued Sean McSweeney, proposition delivery manager at Chase de Vere, by the fact that advisers have less enthusiasm for picking up work with smaller, less profitable clients.
McSweeney said: “Advisers are still nervous about aggregation, especially at the smallest end as it is just not economic.”
According to McSweeney, more employers are willing to plug this advice gap, offering access to guidance that includes discussion about bringing disparate savings in one place.
“We have seen a big move by employers that see the value in helping employees through pension freedoms. We have been appointed with the primary objective of helping employees make at-retirement decisions, but that has developed into full education in the workplace, which includes a very specific trigger point – say, 15 years before retirement – where conversations about aggregation are included,” he said.
McSweeney expects this kind of workplace advice proposition to continue to grow, based on The Pension Regulator’s view that employers are best placed to facilitate financial advice.
Heralding the success of auto-enrolment – which has seen six million new savers join the workplace pension market since 2012 – panel members went on to warn of a number of risks posed by soft compulsion.
Standard Life head of investment solutions Jenny Holt said inertia – the basis on which auto-enrolment is built – creates a number of challenges for the pension industry.
Holt said: “If auto-enrolment is about people having to do absolutely nothing then that is a risk. If people paying in the statutory minimum contribution of 8 per cent believe that has been sufficient, and then they are sorely disappointed in the end, that is a risk.”
Holt also warned of the potential disappointment for those still invested in default strategies designed for pre-freedom goals targeting annuities, which are no longer appropriate.
She said: “People do not realise that it is down to them to do something about changing the default strategy because they went into the pension which was described as ‘a low involvement option’. They do not recognise that it may no longer meet their needs.”
The panel discussed the importance of education in ensuring members engage with their pension savings if they are to make the right financial decisions.
Standard Life head of pensions strategy Jamie Jenkins said people need only to be “nudged” into joining a scheme “without having to think about it”, but they must be encouraged to engage with retirement saving later on.
He added: “We need members to be engaged when they come to retire so they do not get involved in a scam, or taken in by someone trying to con them, or when they need to make a decision about retirement options. They need to be sure they are paying the right contributions and are not just invested in cash. At some point we have got to fill that void so they are ready to make the big decisions.”
This year’s Budget saw the surprise announcement of the Lifetime Isa, which targets under-40s as a tax efficient means of saving for a first home or retirement.
Panellists gave a lukewarm reaction to the Lifetime Isa, with some noting that unless savers were made aware of the drawbacks of the new savings vehicle compared with traditional pension saving, there could be reputational issues in the future.
LCP partner Andrew Cheseldine said: “We are in grave danger if we do not make the point to members that Lifetime Isas have negatives. If members have chosen a Lifetime Isa for pension purposes and then, two to five years down the line, they take the money out, they will lose the tax benefits and pay a 5 per cent exit penalty, and they will sue providers.”
Cheseldine said the industry needs to make “positive noises about pensions so members recognise they are a good deal”, particularly since they benefit from an employer contribution which is not applicable to the Lifetime Isa.
For other delegates, the Lifetime Isa offered a level of flexibility absent from the existing long-term savings market.
Hollingworth said: “Lifetime Isas and pensions are not mutually exclusive; they become part of a savings journey. Lots of youngsters, especially in the south east, cannot afford to get on the property ladder and combining a Lifetime Isa and pension has the potential for good outcomes for those people.”
While it is too early to gauge employer reaction to the Lifetime Isa, Hollingworth said companies supporting the new option will divert at least some of employees’ savings away from pensions.
He added: “It is early days yet in terms of employer response. The more forward-thinking companies will consider it. I can understand the providers wanting to build a Lifetime Isa but let’s see if there is demand. If it does take off, the flow of money into pensions will be hampered, so it is a defensive move to have one in the workplace that could capture that.”
But Coates said the Lifetime Isa’s purpose is unclear and, thanks to the tax relief and employers’ legal duties of auto-enrolment, pensions still have the edge over the new pretender.
Coates said: “It is not clear what the Lifetime Isa is. Even though it sounds attractive, not everyone is going to put money into one because they cannot be bothered, they do not know how to do it and they are not facilitated through provider platforms. Until Lifetime Isas are supported by a mechanism to help [people] save, I do not see how they are going to have anything like the traction that pensions have. We are still pension orientated.”
The extent to which the Lifetime Isa is a risk or an opportunity for the workplace pension may ultimately be absorbed in a wider debate around pension Isas, if the Chancellor returns to the subject in the future, possibly in the Autumn Statement. But whatever the many risks facing the workplace retirement sector, it is clear that a number of initiatives currently in play are moving the industry into a better place. n