I naturally agree with Stanley Baldwin’s statement that he would rather trust a woman’s instinct than a man’s reason. While this may not seem to have much to do with pensions, it does show that trust can come in many forms. Passions, if such a thing can be imagined in such a dull and shadowy world, seem to get inflamed, when you ask anyone whether trust or contract-based pensions are best.
Insurance companies and many financial advisers will tell you that the record of trust-based management has been weak to appalling. It is a point well made, particularly when it comes to small or archaic pension arrangements. Some of us, though, might ponder the occasional failing on the part of the life industry.Whoops there they go flying on yet another self-discarded banana skin.
So what is the truth? In theory, trust-based pensions offer superior governance, because an independent body stands between the employee, the employer and the pension provider. Trustees have a legal duty to act in the member’s best interests.
Call me cynical, but I don’t believe any of us will live long enough to see the day when an insurance company turns up at an employer’s door to indignantly protest that it is charging too much for its pension.
Ah you might say, but that is the role of a good adviser. And perhaps it is, and perhaps this is a role many conscientiously fulfill. But that must depend, surely, on who is paying for the advisory services.
So instinctively I am drawn to the idea of an intermediate buffer, that can ask tough questions, about investment strategy, contributions, charges, communication strategy and the rest.
But life is full of disappointments, so I know this is an ideal destined to fall short. Trustees are, in the main, lay men, some of whom entirely lack any aptitude to grasp the essentials of the incredibly complex issues put before them.
In any event, in reality, they lack real power to force the hand of a recalcitrant employer. They can be putty in the face of slick or patronising pensions lawyers or actuaries, who blind and bewilder them with advice they legally have little alternative but to accept.
Even when it comes to the most able of non-professional trustees, I often wonder if a little knowledge isn’t a dangerous thing. Who else would put someone in charge of potentially hundreds of millions of pounds after a couple of half-day online courses?
Nil desperandum. A recent survey of trustees by the Pensions Regulator, found high levels of competency among the trustees of big schemes, particularly those spun out of defined benefit arrangements.
Yet even these are not beyond question, given they might be the same individuals who nonchalantly waved through pension increase exchange offers. Again, while they can express distain, legally there is not much they can do to stop such programmes.
But alarm bells are ringing over charges. Here the regulator found fewer than half of DC trustee boards had an ‘extremely’ or ‘very’ good understanding of the main charges. Even more worryingly, fewer than one in five – 16 per cent – understood the impact on charges of portfolio turnover.
But I suspect reports of the demise of trust-based pensions are woefully exaggerated. The Department of Work and Pensions closely examined the various options for structuring Nest, seen at the time as the main vehicle for getting auto-enrolment off the ground.
It decided that the master trust offered greatest flexibility, combined with maximum oversight. In other words, DWP didn’t trust the insurance industry.
I am told that bulk “trust to trust” transfers are easier and cheaper than “trust to contract”, but advisers warn a group Sipp is easier to take from employer to employer. So it looks like the jury is still out.
It is certainly too early for a definitive verdict on the new master trusts. When we look back we can judge just how effective trustees have been at keeping charges down. If they are able to up their game, then millions may have cause to be glad their pension came with a middle man willing to fight their corner. If not, all those lunches and dinners will have amounted to… well…. just a hill of beans..
Teresa Hunter is a freelance journalist