Who is responsible for the low cost mindset that pervades the workplace pension sector, and is it ultimately self-destructive? This was one of the key value-for-money questions debated by delegates at a recent House of Lords round table hosted by Corporate Adviser.
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Jesal Mistry, interim head of DC investment, Legal & General Investment Management, argued that innovation was being stifled because of the continued challenge on price that providers experienced.
He said: “We have an opportunity with the consultation around value for money looking ahead to say actually now is the opportunity where we can do more for members, more in terms of delivering better outcomes, more in terms of generating better returns for them over the longer term and ultimately giving members a retirement they need.
“We feel that at the moment there’s some real pressure on charges and costs that means that we can’t do things within our investment solutions that we’d like to do. We want to change that.”
Tight market
Hymans Robertson partner Mike Ambery said it was important to understand the position the consultant was in, having been asked by the employer to do the market review, and to justify their costs for doing that review. He said: “You’ll get procurement asking the question, how cheap can you do that exercise? And then, beyond that, with that lens that follows through how cheap can you then do this. So we will speak to providers and say, ‘can you chop a bip off that?’ because it’s just got to be the cheapest that’s available because that’s what the procurement team are asking us to do.
“Can we, should we, explain what values and outcomes are? Yes, we should. We should be engaging employers to say yes you can pay more and get better outcomes. The problem is the buyer doesn’t believe in that. They have a procurement team that is saying I just want cheaper.”
Jamie Jenkins, director of policy and communication, Royal London, said: “Even if it was 10 bps, would that matter. Because there are variations in investment returns of thousands of bips in this [the Corporate Adviser Master Trust & GPP Report] report. So are we focused on the right thing? If that’s the conversation we’re having?”
Ambery argued that the government’s value for money consultation should re-lens what pension consultants do and also require employers to look at the outcomes their auto-enrolment scheme has achieved each year.
Moving client behaviour
Martin Parish, head of pension consulting at Aon Employee Benefits highlighted the need to distinguish between the attitudes of trustees and employers, and between different types of employers.
He said: “Cost is a tangible, measurable aspect of scheme design, but it is only one of four factors that influence outcomes, with the others being time, performance and contributions. We are moving to an education piece.
“But I don’t think we can wrap up employers with trustees. Trustees who have perhaps come from a consultancy or actuarial background, are very index led, they’re very cost driven because that’s been their experience. But you can speak to an employer, for example, in the asset management industry, where people on the governance committee are active investors. Cost isn’t such an issue. It’s more about fund choice.”
Contract versus trust
Parish also noted that the two providers in the report that had cited the highest proportion of members increasing contributions over the employer’s minimum were contract-based.
“Is it because those two providers are offering better levels of engagement? We know things like nomination of beneficiaries and app usage is probably higher within contract-based arrangements rather than master trust. That is critical information to share with employers. They want to have a scheme that people value and they can go back to their board and say, from a value employee value proposition, actually our pension ticks all the boxes.”
Richard Birkin, head of DC pensions at Isio said he had seen a mindset shift away from just charges determining selection. He said: “We will apply weightings to the nine broad sections that we assess as part of the research. Often we’re seeing the charges one removed from the weightings completely. Either you’re there or thereabouts. We’re not too fussed about what that range looks like because quite frankly, for the big stuff, it’s going to be good. We have had a call with the regulator recently where there’s a real concern about the TERs. We had a scheme recently that was a couple of billion pounds, where the range was 12 to 17 basis points for every provider on that list, and locking in further milestone reductions.
“But we’re definitely seeing for both trustee and employer where they’re far more open to a sensible conversation about the quality of the product and the potential outcomes for members.”
Investment costs
Parish added: “Is cost something that employees are overly worried about? I think if you showed them 10 per cent growth and a 1 per cent charge, they’d be more than happy to go for that.”
David Croker, head of pension consultancy at Mercer Marsh Benefits highlighted a sense of unease amongst HR directors as to the risks that DC schemes have placed on employees. “When HR professionals go through that experience of someone saying, ‘Oh, I want to retire, but I don’t think I’ve got enough money, so I will stay on in work’, that’s when the penny begins to drop. It has been masked recently because of DB benefits that people have, but this won’t always be the case.”
Lydia Fearn, partner at LCP said: “We talk about outcomes a lot. But this outcome, what is it? It’s as though we’ve got a crystal ball. We’ve put our assumptions and our thinking around it, but we’re not going to get it right because anything we say today is not going to be correct in 20 years’ time. So that’s why it’s really hard for employers and trustees to think about outcomes.”
Performance metrics
Fearn also cautioned that an unintended consequence of the strict performance disclosure requirements in the Department for Work and Pensions’ planned value for money framework could be a lack of innovation in investment strategy. “We could get everybody converging towards an investment median again, which we have tried to so hard to get away from.”
Iain McGowan, head of fund proposition, Scottish Widows highlighted the wide range of outcomes across the sector revealed in the report. “It shows that charges are largely irrelevant in that context – the variability of outcomes is so great. And I can’t tell looking at short term results, who has a better investment philosophy, who will serve members better in the long term. And that’s quite healthy because this draws attention to the need for providers, for investment managers, whoever’s involved, to explain their investment philosophy.”
Mistry questioned whether value for money framework’s league tables and rankings would create a herd mentality with no-one wanting to be at the bottom and therefore making decisions which means that they’re never going to really deliver anything at the top end. “The reports are great because they draw attention to certain things. But you do get that short termism coming out.”
Fearn said: “Often they [league tables] will stop members going in.”
Aussie concerns
Jenkins said: “I think the government is slightly obsessed with the Australian system which is broadly based around two strikes and you’re out. So in one year, if you deviate from benchmark, you have to write to members and tell them that you might not be providing good value for money. And you’ve got to take them out of the fund if you continue to underperform. It’s very, very short termist and could drive some really significant different and quite dangerous behaviours. There’s a danger that we just assume that everything that is done in Australia is a perfect model to follow.”
Jenkins also expressed concern at the government’s focus on how to use UK pensions assets to support the UK economy.
He said: “It’s really unclear what the aim is, to be honest, because it changes by the month. One minute you’re talking about infrastructure and net zero funding for 2050 and the next minute you’re talking about how do we fund tech start ups, and it’s venture capital. At the end of the day, it’s not the government’s money, it’s not our money, it’s member’s money for their retirement.”
Illiquids in DC schemes
While delegates supported the idea of bringing transformative UK investments into DC portfolios, some expressed
concern at operational obstacles to implementing this. But Mistry said that Legal & General was already managing to deliver illiquids through DC.
“Within LGIM the hurdle is cost. The hurdle isn’t operations, the hurdle isn’t daily pricing. It’s cost. On the platform we already operate schemes for private market investments over seven-year, ten-year and 15-year time periods on assets. So the operational capability is there, but they cost more. And these clients individually are able to take the view that they feel that’s good value.”
Russell Wright, senior vice president – DC, Redington pointed out that Nest was also doing innovative investments,
but was able to do that because of its size. “They’ve got scale, they have a huge amount of assets and maybe that’s what we need more schemes to have so they can do similar things,” he said.
Mistry said his three years at Legal and General had been “really interesting fighting those battles around charges, costs, value, asset classes and innovation.”
Birkin responded: “Trustees don’t like change – they are shying away from providers where they are consolidating, for example. And in the same way, if something is quite bold, am I going to put my neck out if we have something cheap and cheerful that does the job?”
Fearn said: “It’s a lovely idea [to spend more on investments] and some employers have done it where they pay the fees for members. But we need to see every provider come up together.”
Jenkins added: “Yes, I don’t think any provider wants to put themselves out on a limb and not win business. In the same way that the whole industry coalesced around auto enrolment and the charge cap and the default, do we need legislation to enable that.”
Fearn said: “I think having breadth of investment across your glide path through diversification and risk management is absolutely critical and in that means slightly higher pricing. I think that’s the right thing to do.”
Parish said: “For those that make the first move in business, whether you’re a Richard Branson or Elon Musk, the size of the opportunity is massive.”