Radical change, at least within the financial services sector, tends to happen slowly, and is often the response to external pressure being applied elsewhere.
This is particularly true when it comes to the defined benefit pension sector, which as a mature market, has seen little in the way of innovation in recent years, compared to the flurry of activity surrounding auto-enrolment, master trusts and pension freedoms.
But halfway into her tenure as chair of the Association of Consulting Actuaries, Jenny Condron is looking to drive significant change in the sector, although she admits that this is likely to be at an evolutionary, rather than revolutionary pace.
Condron, who is a partner and chief actuarial officer at Mercer is something of a radical change herself.
The ACA first opened its doors in the early 1950s, and in recent years has replaced its chair at regular two-year intervals. Condron is the first woman to take up this high-profile post.
She says that while the main focus of her role is on putting in place steps to simplify DB benefits, so paving the way for greater consolidation in this sector, she hopes her presence will encourage other women in the industry to have the confidence to take on such roles.
She says: “I am not the kind of person who would naturally push for positions like this. It has certainly taken me outside of my comfort zone.
“But it has proved to be a fantastic experience and I’ve learned a lot in the role. I’d like to encourage others to grab these opportunities when they arise.”
Thirty years ago Condron says that she was more often than not the only woman in the room. “Last week I went to a conference and there were around 20 to 25 per cent women. It is improving, but gosh it is slow. “More women are in our industry, but
it’s important they are also encouraged and supported into more senior positions. This visibility will hopefully encourage others.”
Condron has been chair of the ACA for a year, and says her priority is to encourage wider simplification of DB pensions. To this end, the organisation published a joint paper on this in conjunction with Royal London. She says: “This came about after a conversation with Steve Webb and Ruston Smith at an industry dinner. DB pensions are complicated for members to understand and for schemes to administer, and governance costs for sponsors are ever increasing.
“Simplification has to be the key way to change this, and could also deliver substantial benefits to DC members too.” As she points out simplification could lead to greater engagement and encourage wider pension saving. “If people understand these benefits and realise they are not adequate they may be more motivated to do something about it,” she says.
It should also improve the security of schemes, by focusing resources on this member engagement and deficit reduction, rather than complex and costly administration.
As Condron points out, many pension scheme can have 12 different tranches of benefit, simply due to the legislative changes that have occurred over past decades. “This is before any employer changes are factored in,” she says.
Sponsoring companies have finite financial resources. “Money spent on complex administration is not being spent elsewhere, whether it’s ensuring the DB scheme is secure or boosting contributions into replacement DC schemes.”
Condron gives the example of the PPF (Pension Protection Fund) as a scalable yet simplified scheme. “From day one there has been a simplified structure that has enabled it to absorb other schemes – it’s been incredibly effective, though it’s clearly not a consolidator anyone would choose to join!” She points out that members understand what they will get from the scheme.
Condron says the challenge is to simplify the DB regime while ensuring schemes provide an equivalent benefit. “I am not saying this will be an easy process,” she adds.
Condron says that the industry has talked about simplification for many years. But the recent ruling on GMP equalisation may prove to be an important catalyst for change. Following a court ruling schemes are now required to equalise GMP benefits between men and women. The opportunity to convert them creates the opportunity to achieve material simplification of DB pension promises, on which, as Condron points out, many people are still dependent
for retirement security.
There are a number of options available for schemes looking to equalise benefits. One is to maintain an additional pension record as if the member was the opposite sex, and keep running totals of the benefits which would have been paid to each. Condron says: “This is just adding to the complexity of scheme administration, which is already creaking under the weight of various legislative changes.”
Another option is to covert whole swathes of pension benefits into a simpler system. Given schemes have to grapple with the complex issue of GMP equalisation, Condron says it would better if this process could be utilised to achieve a real and lasting difference to the industry. It is also an opportunity for older closed schemes to effectively digitise records, with a view to making them ‘dashboard’ ready.
“This isn’t going to be a simple or quick process, but as an industry we have the collective responsibility to try to improve this.”
Such initiatives could pave the way to more significant consolidation in the DB pensions market, allowing consolidators to operate more efficient schemes to the benefit of members, and allowing employers to focus on their day-to-day businesses, rather that the legislative headache of operating a workplace pension scheme.
“DB consolidators like Clara and the Pension Superfund have been set up, but the regulatory environment is not established yet. However, you don’t need superfunds to get the benefits of consolidation. This is already happening in the market in lots of different ways.”
For example, she says there are numerous cases of employers merging existing schemes into one umbrella scheme, which can share actuarial and legal resources and has one trustee board. “This is a much better use of the governance budget,” she says.
Likewise the trend to delegate fund management is part of this focus on reducing costs through better purchasing power, and increasing efficiencies, with a view of delivering better outcomes for members.
As chair of the ACA she says her other main focus is the issue of pension taxation: another complex area which could be significantly improved by legislative simplification.
She points out that this issue is finally making headlines, with the knock-on effect tapered annual and lifetime allowances are having on doctors working in the NHS being writ large. Many are now reducing shifts so as avoid breaching complex earnings thresholds and a subsequent unplanned for tax bill.
She says: “The impact is far wider than the NHS. But it is good that this has helped raise awareness of this issue.
“This doesn’t just affect higher earners, but many who have been loyal and committed employees, and have built up long service within a DB scheme.”
This opaque tax system can lead to poor decision making she says. “We are operating in an environment where few of us can simply explain how the pensions tax system will impact an individual, now, or at retirement.
“Everyone expects to pay tax to support public services. But it is essential that the system is transparent for it to be considered fair.
“We would like a level playing field between DB and DC provision and a taxation regime that is simple to understand which allows people to be confident in saving for the future. This is not what we have today.”
She says that as an individual — and as an organisation — she hopes to work with the powers that be in implementing such changes.
This, she says, in many ways, relates to the day-to-day role of the ACA, engaging with regulators and government bodies to help shape and influence future pension policy.
Change is certainly on the horizon. On the regulatory front there has been increased action from The Pensions Regulator recently focused on ensuring a fairer balance between the interests of company shareholders and their DB scheme members.
Condron says that it is right that the regulator is shining a spotlight on this issue, though there are many other ways too that covenant can leak away. She points out that the issue may have worsened thanks to problems like pensions taxation.
She explains: “We find those running sponsoring companies do not have as much skin in the game when it comes to issues like DB pension security when compared to 20 years ago.”
The lifetime allowance limits mean that many executives will not be members of their company pension scheme.
“These can be difficult issues and it is important to get the balance between all stakeholders right. Trustees have limited ability to force more contributions from a sponsor. Once a dividend has been paid, the cash has gone from the business – we welcome a stronger lead from regulators on this.”
Elsewhere she says she would also like to see more discussion around contingent charging, which she acknowledges “may not result in the best behaviour across the industry”. But for Condron part of this problem stems back to issues of complexity within the workplace pensions market as a whole, and the DB sector in particular.
“When it comes to DB transfers, people need to get thorough and complete advice from a qualified and experienced adviser. But the cost of this isn’t trivial.”
Condron says that there is a real need for all of those who have touch points with members — be they advisers, administrators, providers or trustees — to ensure they are communicating better with members in plain English.
Given the number of DB transfers has rocketed in recent years, she says this is a problem that is not going away, and one that all parts of the industry must grapple with. Elsewhere, the other big change on the horizon is the emergence of collective defined contributions (CDC) schemes. The Government has said it will legislate for these, following the decision by Royal Mail to set up such an arrangement, although there is no clear timetable for this given the current Brexit paralysis.
These schemes aren’t without controversy, with many commentators concerned that they will not necessarily deliver better outcomes for members, and risk further muddying the waters by offering “benefits” that are not guaranteed.
Condron says there is an opportunity here, though she does not foresee many companies that have already switched from DB to DC changing again.
“They know what their current liabilities are under DC legislation. They may be reluctant to step into the unknown with CDC, particularly with the experience of DB legislation changing over time.
“There may be fears such changes could make CDC may less attractive from an employers’ point of view further down the line.”