For Alan Pickering, the new pensions regime is more 1984 than Brave New World. Having spent a lifetime fighting the corner of employers, trustees and scheme members against vested interests, hidden charges, poor practices and market risks, he is now adding ‘government policy’ to his to-do list.
“It is very strange as a trustee to find oneself as the second line of defence against public policy. It sounds more like George Orwell than George Osborne,” says Pickering. “It is very difficult for trustees and members of the public to distinguish between good liberation and bad liberation.”
With roles on the boards of the master trusts run by the People’s Pension and Mercer Master Trust, as well as a seat on the new independent governance committee (IGC) of B&CE’s Easybuild stakeholder scheme, the BESTrustees chairman is at the forefront of answering the many new, pressing questions being asked of those with high-profile governance roles. And with his own experience of overseeing a government review of simplification of pensions – for former Labour chancellor Alistair Darling back in 2002 – he is very critical of the chaotic approach being taken to reform this time around.
“When George Osborne said in his 2014 Budget speech, and I paraphrase, ‘No longer will anyone be obliged to purchase a toxic annuity,’ the rumour has it that only 11 people knew he was going to say it. And sadly I don’t think Steve Webb was one of them.
“And all those 11 people didn’t realise the ramifications that would flow from that one-liner. That really emphasises the disconnect between pensions timeframes and political timeframes.
“The 2014 Budget was the biggest shake-up the UK pensions industry has ever had and it was done without consultation or analysis of consequences. And we have spent the past 12 months trying to infill the thought processes and details that should really have been thought through in advance,” he says.
Pickering also regards the motivation for the reforms as misplaced. “The thing that is saddest is that parts of the Conservative Party and the chattering classes always had a bee in their bonnet about annuities and saw them as an infringement of civil liberties. Most people who had one were comforted by having an income stream that wouldn’t have pegged out before they did. And most members of the chattering classes could have used drawdown anyway, so they were not obliged to buy an annuity,” he says.
Taking a gamble
But we are where we are – so would he put the genie back in the bottle if he were in charge?
“It is a gamble, and being a horse-racing person I know that gambles sometimes pay off,” says Pickering. “In terms of numbers, there will be more winners than losers because of being able to cash out small pension pots. But the big losers could be those who reshape their pension benefits – sometimes because it helps them to get through a financial crisis and sometimes because they see getting everything tidy as the modern thing to do.
“There is often quite a high price to pay for tidiness,” he says.
Pickering believes the reforms offer opportunities for engaged employers to do better but could make unengaged employers even more detached.
“When I wrote my report for Alistair Darling, I wrote that those inside the DB pension fortress were getting better and better treatment. And I think we can see that happening again here, with the distinction being between those employers that want to get engaged and want to use it for recruitment, retention and incentivisation, and those that want to do nothing more than comply with the rules.”
So as a trustee, will he be recommending that members be given the banking flexibilities for their pensions that the Chancellor has suggested they have?
“It is not just a trustee perspective – we have to decide with the employer what their attitude is. Most plan sponsors I deal with want to keep it as simple as possible. They don’t want the expense or risk of providing full and easy access to all the new freedoms, particularly in respect of current employees.
“Few employers will want to take advantage of all the freedoms and, as a trustee, I wouldn’t want to be ahead of the plan sponsor. And I will be saying ‘Are we using freedom and choice as an excuse for house-cleaning and cost-saving?’ Because I don’t want the Government to come back against me for the misapplication of government pension policy,” says Pickering.
“Employers are going to want to impose restrictions on how many bites of the UFPLS cherry can be taken each year, what the minimum payment is and how much you should be allowed to leave in the pot. People used to leave £1 in their mortgage so that the building society would look after the deeds. It may be that, if you leave £1 in your pension scheme, you get death benefits. Employers won’t want that,” he says.
He does see the market adapting to provide flexibility, having come across single-employer schemes talking to master trust providers about transfers.
“We need to see whether we can find a conduit that is simple from a regulatory point of view, limits out-of-market exposure and reduces costs. So I would be interested in seeing how we can transfer while in decumulation and apply trust principles through decumulation, which employers do not want to get involved in.
“It could be for deferreds, for people who want to take advantage of freedom and choice, who can’t take it under their present arrangement because their employer may not want to offer it,” he says. “Some hurdles are regulatory and some man-made.
I am pleased there is a dialogue between the financial services industry and the regulatory authorities to see how we can modernise the system.”
And would that include a default drawdown, because surely that would carry a lot of risk for the master trust overseeing the proposition?
“Being protected isn’t the thing that helps me sleep at night. It isn’t what drives me as a trustee. Doing the best I can is. That means I am up to date with developments, getting the best advice and then communicating that in a user-friendly way that does not require a key features document of 500 pages.
“And while helping people to draw down their money, there will be things we want to do to protect the business and things to protect the members. As far as the business goes, you would have to worry about frequency and amount of payments,” he says.
“But I am not sure the master trust is going to be able to provide the advice component on drawdown. It can offer products and give a handy guide to our range of products but, in an ideal world, you ought to take independent financial advice to determine how our range of products meets your needs. I don’t want, as a trustee of a master trust, to call the odds between a master trust and drawdown,” he says.
Launch of IGCs
2015 is a massive year for governance, with the launch of the IGCs that are charged with ensuring scheme members get good value. Pickering accepts that the new committees will have to do more than professional trustees have done to date to get to the bottom of under-the-bonnet charges.
He says: “I was always active at the NAPF and we always campaigned for transparency and the abolition of soft commissions. Those who think charge caps are a way of dealing with hidden costs should then say ‘Make sure that the arrangements for which you are responsible are robust and there aren’t any backhanders going on under the bonnet’. I will put my faith in the layer of governance – the IGC or the trustee – that does a better job of making sure people get more value for money than a charge cap.”
But professional trustees have not yet got to the bottom of these charges – such as bundled research fees hidden within portfolio turnover costs.
“We can always do better – there are some trustees and consultants who have done a better job than others,” he acknowledges.
He is less concerned that the potential conflict of interest of vertically integrated master trusts or consultants-turning-provider may lead to consumer detriment.
“We have tried to deal with shortcomings in the past by creating polarisation so that you are either a provider or an independent operator. For most people, right product is more important than best in class. As long as governance is robust and not simply a figleaf, it is OK. The layer of governance has to weigh the need of the business to survive and the need of the customer not to be ripped off. And it is the role of the trustee to oversee that balance,” he says.
But we do have vertically integrated master trusts that, seemingly coincidentally, choose the in-house provider for the equity funds.
“We mustn’t get hung up with labels,” says Pickering. “There are phrases like master trust and fiduciary management that are used as though they describe one thing. But there are different forms of master trust. Whenever I am a member of an IGC or on the board of a master trust, I need to ensure that the customer is getting a fair deal. It is for the IGC member or trustee to decide whether the range of investment options is appropriate and properly described for the customer.”
But would these organisations in fact ever sack the in-house fund manager?
“We as trustees of the People’s Pension have the power to sack the administrator, which is B&CE, which has invested millions of pounds. It is a nuclear option that we hopefully will never have to use. If I was a trustee of a vertically integrated master trust, I would want to be able to have a dialogue about using guest funds if that was appropriate via a guest platform,” he says.
He takes a similarly pragmatic view of the evolving role of the EBC-turned-provider. “Now we have consultants who want to provide products, and product providers who want to give advice, particularly those in the LDI space. I don’t see anything wrong with that but it is challenging for me as a trustee to make sure I don’t sleepwalk into buying products from a consultant just because they happen to be my consultant.”
About Alan Pickering
-Newcastle University – Politics and social administration
-20 years with the electrical and plumbing union – now part of Unite
-16 years at Watson Wyatt
-2004: Awarded CBE for services to occupational pensions
-2008: Joined BESTrustees
-2002: Published the Pickering Review – A Simpler Way to Better Pensions
-Lives in Bromley, Kent. Runs twice a week and digs his allotment
“I plan to carry on working for at least another five years but my contract can be terminated at any time and I am fine with that”