The Government has introduced a raft of legislation in recent years, designed to improve outcomes for pension scheme members. But this could prove ineffective without legislative action to make it easier to switch pension savers out of poorly-performing default schemes.
This was one of the key conclusions of the debate at a recent roundtable event at the House of Lords to discuss the findings of Corporate Adviser’s Master Trust and GPP Defaults Report.
Trustees and consultants highlighted the problem facing workplace pension savers who are in older contract-based GPP schemes, which may be performing poorly or have inappropriate investment strategies. For example many are in defaults targeting annuity purchase at retirement, or with a fixed 25 per cent bond allocation. Consultants said they had even seen cases where members’ money has been kept in cash funds, potentially for decades.
Transfer consent
But providers cannot always simply switch these savers into more modern defaults without their agreement, if product rules do not allow it. Getting this explicit consent can be problematic given low levels of engagement and the fact many no longer work for the sponsoring employer.
“Allowing ‘no consent’ transfers in the contract-based pension space is the single biggest thing that could be done to improve value for members,” said Rachel Brougham trustee executive at BESTrustees.
Zedra Governance client director Richard Butcher pointed out that with a group personal pension scheme the contract is essentially between the provider and the individual, so consent is needed to make changes to the terms of this arrangement. “You need to fundamentally re-engineer contract law, which covers more than just pensions, which is why this has not been done to date.”
This will require changes to primary legislation and will be “a devilishly complicated process” he said, which is why it has largely been ignored until now.
Secondsight partner Matthew Mitten said the problem often comes to light when reviewing pension provision for employers. “It would be better if there was a simpler way of getting these employees in these legacy defaults into a more modern forward-looking fund, without having to move the whole scheme.”
Capita director of pensions policy Anish Rav added: “There are some poor legacy pensions out there and this remains a challenge for the industry.”
This problem is likely to be thrown into sharp relief by the introduction of the Value for Money regulations, designed to provide a range of metrics on whether a scheme is delivering for its members.
VFM challenge
Aon’s principal consultant Chris McWilliam said: “These VFM proposals are coming down the road, and will provide information which could indicate that schemes should be closed.”
He pointed out that those running schemes, be it trustees, IGCs or providers, will then have to consider efficient ways of transferring assets. But implementing scheme changes based on VFM comparison outcomes could prove difficult without consent from members on contract-based arrangements.
Willis Towers Watson director, new business Stuart Arnold said: “It’s going to put providers and some IGCs in a very difficult position. If they have a default that is poor value they’re compelled to take action — due to incoming FCA regulations. But at the minute they are legally not allowed to do anything without this consent.”
Could this be a spur for the government to legislate to tackle this issue? Some consultants through it might, with Martin Parish regional director Johnson Fleming pointing out that the government was clearly “very interested in getting its hands on DC pension funds to invest in the UK”, as evidenced by the Mansion House Compact. “Surely this is an opportunity to look at the whole relationship of pension fund assets in the UK,” he added.
Performance test
The issue could raise significant obstacles to the government’s objective of introducing Australian-style performance tests for defaults, a policy flagged by Chancellor Jeremy Hunt in his Mansion House speech earlier this year when he said pension schemes not achieving the best possible outcome for their members will face being wound up by The Pensions Regulator.
Questions were raised as to whether there was some “safe harbour” law change which could address this issue of contract law in pensions, without opening the “can of worms” of wider legal reform. But consultants and providers were not optimistic any ready-made easy solution existed. Many commented this issue was symptomatic of the wider and more fundamental issue in workplace pensions: there are different regulators and regulations for contact-based and trust-based schemes.
But pension providers attending the event said this did not necessarily impact all GPPs or legacy contract-based schemes. Aviva head business development, workplace savings & retirement Simon Ellis said much would depend on the terms of the original GPP contract. “While there are some old contracts which have got foibles within them, for the majority of our contracts you can do a change of strategy with ‘negative affirmation’.” In other words, the provider makes updates to the investment strategy of a default without requiring all members to physically sign a piece of paper authorising this change.
Advisers said this may be less of an issue with larger providers, offering both master trust and GPP options, than smaller providers. It is also more of an issue with much older pensions.
Butcher said: “There are small pockets of people who have had their money in cash since they took out the policy, which might have been the 1980s. The pots are quite small and we don’t know their individual circumstances, this could be offsetting huge equity allocations elsewhere. But we at the moment without consent can’t do anything about it.”
