The relationship between pension consultants and pension managers is a delicate one. With the day-to-day running of schemes taking up much of pension managers’ time, the need for the expert advice and assistance that pension consultants bring to the table is essential. But pensions consultants can also sometimes be guilty of having a ’one-size-fits-all’ approach to advising employers and trustees that can overlook the bespoke needs of individual schemes says James Churcher, pension manager at Telegraph Media Group.
The pension consultants Churcher has worked with over many years in the pension industry get a report card that is generally positive. But one area where he does see room for improvement is the ability to place themselves in the position of the pension manager, rather than delivering this month’s flavour of consulting advice.
This is not a criticism leveled at Lane Clark & Peacock (LCP), Telegraph Media’s current adviser, which Churcher says is better than most he has used.
“On the whole, the pension consultants I have dealt with are very good. And I have valued a lot of the help that we have had from LCP, and other consultants as well. But the ideal would be if consultants across the board had a really good understanding of our business, our scheme and came proactively from the starting point of ’we can see where you are, we can see what you are trying to achieve and here are some ideas that will help you’,” he says.
“There is a little bit of a trend that pensions consultants have their hot topic, so they see whether that’s of any relevance to us, whether it is the restrictions on tax of high earners, planning for the introduction of Nest or implemented consulting, or whatever this months great new bright idea is. The ideal would be if the consultant knew the scheme well enough to anticipate and understand that maybe document management isn’t relevant to us or implemented consulting isn’t relevant to us, rather than saying ’we are on this bandwagon, it might be relevant to you’.”
So to what extent do pensions managers such as Churcher, who is FPMI, ACII and a member of TPAS, need consultants to assist them?
“Nobody knows everything. The biggest part of my day-to-day job is operational. I oversee administration. Of course we need support. I have already benefited from attending seminars and reading what has been in the pension journals, but we will no doubt be consulting advisers,” says Churcher.
When it comes to one of the key areas on which consultants do advise, auto-enrolment, Churcher explains this is an issue that will not be taxing the Telegraph to the extent it will many other organisations because it already operates on such a basis.
Take-up is 90 per cent, and the biggest group of the 10 per cent who are not in the scheme is those on probation waiting to qualify. That suggests that for employers with a similar workforce profile who do not currently operate auto-enrolment, the requirement to do so could prove expensive.
“Like many employers we already have some very good, very key people still capable of doing a great job after default retirement age. But there is an issue for employers around what you do with somebody who can’t quite deliver what they could, where the mind is not as sharp and creative as it used to it and their pace of work has slowed”
Like all pension managers, Churcher is keen for more information on what it will take to become an exempt scheme following the implementation of pension reforms. So how much change is he expecting to have to implement to comply?
” I think it will be around the edges. I am aware of the proposals but I think they are going to shift a bit. We might have to change our procedures because the timings on automatic enrolment and the way that you document opting in and opting out may have to change slightly,” he says.
For businesses such at the Telegraph, with a large proportion of staff in sales who operate on a commission basis, the biggest issue is what constitutes pensionable pay.
“We have a lot of people who have fluctuating emoluments or bonuses. Only basic pay is pensionable but to be an exempt scheme under the new regulations we might have to make bonuses pensionable. Clearly for people with a basic that is above the upper earnings limit anyway, that is not an issue. For the others, we will probably need to make it so they get less bonus. The overall approach will be to keep the company
spend neutral. Rather than pay you £1000 bonus we may pay £900 bonus and put £100 into your pension. So while take-up in the Telegraph scheme is a responsible employer’s dream, what does Churcher think will be the experience come 2012.
“For a nation as a whole, I am very nervous. My worry is that the wrong people will go into it. The bigger worry is maybe millions of people who will join schemes in 2012 or 2013 will join and build up pots of a few thousand pounds and then be no better off. To get there will be really painful for them.” Churcher is not surprisingly welcoming the changes to the taxation of high earners that the Coalition Government has signalled.
“What was proposed was unadministerable and unworkable. What probably would have happened if we’d stayed with the old proposals is that all of the higher earners would have opted out of pensions all together, executives would have been disengaged from pensions and that would have created real undesired knock-on effects for pension provision,” he says “The original proposals were not thought through.
They just assumed that if everyone’s behaviour was unchanged, this is how much extra tax they would get. But everybody’s behaviour would have changed radically,” says Churcher. “A much lower annual allowance is much more sensible. It gives everybody an incentive for tax efficient pension saving up to a point. But they always say the devil is in the detail and we now have to wait for that detail,” he says. For Churcher that detail will relate to how the new rules deal with the spikes in tax where people get promoted, take early retirement.
The Retail Distribution Review will not affect the Telegraph scheme as it is one of the handful of schemes that are administered in-house. Commission is not an issue Churcher has to deal with. Nor do the scheme’s members have to concern themselves with annual management charges as the employer, unusually, pays all actuarial, administration and fund management fees, something that takes many IFAs looking to transfer benefits out of the scheme by surprise. Consequently, transfers out are rare.
“Most IFAs that we deal with are very professional about it. I wish I could say all. Saying that, we do get people transferring just because they want to consolidate everything in one place or want access to more than the 10 funds we offer.”
The Telegraph scheme went through a bulk buyout of its DB obligations in 2008, so as the organisation considered the next step down the line of pensions streamlining, but switching from trust- to contract-based? “We actually looked at it along with other options. There are some providers who will offer a very good administration service at a competitive price and moving to contract would remove the TKU issues from our trustees. So there is a lot going for contract-based schemes. But we decided to stay trust-based and I think we will stay trust-based for the foreseeable future,” says Churcher.
“The biggest worry is that the Telegraph is a trusted employer, a trusted brand. People know about the integrity of the company they work for, and they feel safe it is our company scheme and that the Telegraph will make sure it is running properly. They love the fact that there is an in-house pension scheme, run by people they bump into at the coffee shop. If they have any questions they can come and see us, they know that we understand them and they can talk to us in Telegraph jargon and we will understand them.”
Churcher sees potential problems in the at-retirement space for schemes that do not arrange for members to get the right deal when they etire, a problem he feels strongly about, having tied up with an IFA for at-retirement annuity advice for his members.
“A lot of schemes simply tell people they can buy an annuity somewhere else if they want to. People don’t know how to do it or don’t get around to doing because of their inertia. They don’t know whether they want a level pension or inflation linked pension because it is not their world,” he says.
“Most IFAs that we deal with are very professional. I wish I could say all”
But what of the third-way annuities that are being vaunted as the future for those facing lengthy retirements?
“For those people who have got a lot of money and who are savvy enough to do it, the income drawdown route is more attractive, because most people in retirement do not have the same financial needs every year of their retirement. But your typical modestly paid blue-collar person with low financial awareness needs a predictable regular income, so conventional annuities are actually still the right products for many people.”
Churcher sees the default retirement age challenge as more of an issue for the employer than the scheme. “Like many employers we already have some very good, very key people still capable of doing a great job after default retirement age. But there is an issue for employers around what you do with somebody who can’t quite deliver what they could, where the mind is not as sharp and creative as it used to be and their pace of work has slowed. It becomes difficult when somebody is 95 per cent effective, then 90 per cent effective, then 85 per cent effective.
How do you manage them out of the business if they do not want to go, without having a legal way of saying you are over retirement age?” he asks.
With a purely DC pension scheme, pension is not the problem. Instead it is the group risk benefits that Churcher is also responsible for that are problematic. He has put in place an income replacement scheme that goes up to age 65.
“We have not begun yet to address these questions. Our experience in this company is that far more people want to retire early than want to retire late. So at the moment it does not look like being a major issue,” he says. For Churcher fostering a scheme that will create pensions worth retiring on is the best way to help them to achieve it