Adviser to the Pensions Regulator, the PPF and virtually every large company in the country in one way or another, Pricewaterhouse-Coopers can claim a unique perspective on the nation’s pensions.
That perspective reveals a picture of recession-weary decision makers reeling from the Budget’s latest assault on workplace pensions. Employers’ patience has been stretched to the point that they are now ready to ask fundamental questions about the value their retirement benefits offerings are giving and if necessary, make some painful decisions, says PwC’s UK pensions practice leader, Marc Hommel.
The extra admin, expense and complication introduced by the Budget, coupled with the removal of the vested interest in pensions of senior directors, looks like being the last straw for many existing pension arrangements.
Hommel sees the emotional reaction of directors to the Budget in terms normally used by psychoanalysts to describe the seven stages of the grieving process – shock, denial, anger, bargaining, depression, testing and acceptance.
“At the moment employers are in the shock, denial and anger bit of the curve. When they get to acceptance, they say ‘right guys, there is nothing we can actually do about this so what are the opportunities?’ In this case, the opportunity is to tackle that pensions sacred cow,” says Hommel.
“Now vested interests no longer exist for senior management, and the pain threshold has been breached. We are in a recession and cutting costs. People are worried about job security to the extent that employers actually think it is a sensible long term decision to tackle its pension sacred cow, and now is the time to do it,” says Hommel.
Hommel argues employers are now prepared to ask significant questions about whether the money they are spending on workplace pensions is well spent. In many cases, the answer is likely to come back negative.
“Are we spending it on the right people? Are we spending it on the people we want to keep or the people we want to lose? These are the questions employers want answers to,” says Hommel.
“A very good example is retail banks. Historically they have provided very good quality final salary pension schemes. Traditionally branches have been overmanned and it has been very hard to get rid of people because they have got this great pension that they can’t get anywhere else. The pension is acting as a retention device, and the organisation is getting negative value from it,” he says.
Hommel adds that if you look at those organisations who have tackled their existing pensions arrangements by taking out cost and risk, the shareholders have usually reacted positively.
“We are speaking to people in the boardroom and analysts and it always comes back to this hard to measure question of what dividend are they getting for their money,” he says.
Hommel says employers are now seeing pensions as a hindrance to their business objectives rather than a benefit.
“Business leaders understand you do better as a business if you have a well motivated workforce, but you have to be motivating the right people. In many organisations the pension scheme has become disconnected from the behaviour it is meant to be motivating,” says Hommel. “Lots of organisations will say they have a performance culture and they pay for performance. You then look at the pension scheme and it pays for service. So it is going against the behaviours that the organisation is trying to motivate.”
He sees a number of things that are conspiring to reduce employers’ motivation to offer quality workplace pensions. Most companies are questioning the cost and the risk of providing defined benefit pensions and the amount of management time they’re having to devote to it.
“You also have the impact of the Budget, which given that it is now going to be marginal value for many, and negative value for some high earners to have a pension in the workplace, means a loss of vested interests within companies’ leadership in retaining pension provision. Given how painful and distracting providing pensions has been, this is going to further demotivate employers to want to offer them,” he says.
“What a lot of people don’t understand is if you’re in a defined contribution arrangement, not only is tax relief limited on your own contributions, but you will be taxed as a benefit in kind on defined benefit pensions too. If you are a 50 per cent taxpayer and you are earning over £180,000 you are only going to get basic rate tax relief of 20 per cent, so you are paying 30 per cent.” he says.
“It would have been a lot simpler had they just reduced the annual allowance. It probably would have raised more money. What they are proposing fundamentally impacts how you reward high earners. It impacts your admin systems, payroll, tax returns. It is a huge amount of additional process,” he adds.
With Personal Accounts looming just three years down the line, he believes the temptation to switch over will be too attractive for many employers to resist.
“Employers will say ‘we do not need to worry about selecting a provider or which investment funds get offered, it’s all going to be done for us at a price that is not punitive for our employees, and if it goes wrong it is not our reputation – it’s the government’s. We never need to deal with advisers and trustees, we have to auto enrol because that’s the law, so this is going to be the least reputation damaging way’. A lot of firms are going to conclude that personal accounts represent a relatively easy cost-effective and simple way to meet their legal obligations,” says Hommel.
So does Hommel see any FTSE100 companies going over to Personal Accounts? “Yes. Retailers, construction companies, hotels and leisure – those companies with lots of transient, low paid temporary contract workers, where margins are very tight.
“Some of those organisations already offer access to pension schemes, and people choose not to join them. There are the staff from Eastern Europe who have no interest in parting with money to spend on a pension arrangement.
“I think Personal Accounts will represent a good quality vanilla low-cost company pension solution and employers will then ask what do we want to do on top of it? Do we want to pay more than the minimum? A lot of big organisations will. They can elect for Personal Accounts but there is a £3,600 a year contribution limit. Employers are going to be frustrated that this limit is in place and when the review of Personal Accounts takes place in 2017 I predict that it will be removed. It is there as a concession to the financial services industry. Similarly you are not allowed to transfer benefits into Person Accounts and I predict that that restriction will be lifted too.”
Hommel’s opinions are squarely at odds with Punter Southall’s view that Personal Accounts will be a failure because most employers will retain their existing scheme. Last month Punter Southall published research that indicated low take-up will mean the new scheme’s annual management charge would be unable to achieve economies of scale, forcing up its annual management charge to above 1 per cent.
Punter Southall’s survey of HR directors, finance directors, and pension managers from over 300 companies found 80 per cent of employers intend to keep their existing pension scheme in place with only 2 per cent planning on offering a pure Personal Accounts pension scheme. It argues that such a take up rate is far below the economy of scale needed to deliver the proposed low costs.
“If you survey pensions managers and ask them whether they are going to have a job in five years’ time you get a different answer. We are talking with the boardrooms of many major organisations who are asking these fundamental questions about how much we are spending and why are we spending 90 per cent of our pension on 5 per cent of our population. People are going to use auto enrolment and the Budget as an opportunity to review their whole workplace pension philosophy and look at their whole reward strategy,” says Hommel.
So will Personal Accounts achieve its critical mass? “I think it will, provided the operations of Personal Accounts don’t fall over, because it’s not a trivial exercise taking on X million pension account holders all at the same time, getting the money invested in individual accounts,” he says.
Provided it works, Hommel sees Personal Accounts as a real threat to today’s life and pensions providers.
“Personal Accounts will be a very formidable competitor to the financial services industry. There is legitimate fear amongst pension providers about what a formidable competitor it will be because it will be a relatively simple and reasonably priced retirement savings vehicle. A lot of what the pensions industry and providers have promoted to the market is mired in complexity, hidden charges and bells and whistles, which most people do not need, don’t value and don’t understand,” he says.
Performance of default funds is coming in for greater scrutiny as Pada consults on its investment process, so does PwC have a house view on what is the best way to grow defaulting employees’ pension pots over the long term?
“We do not have a house preference. But we do think that the default should have some recognition about the day the individual expects to retire so the investment strategy should be geared towards that target retirement.”
Hommel thinks Pada should avoid over-elaborating the investment choices on offer just to please special interest groups.
“There is a danger that in trying to be too politically correct that you introduce complexities and additional options that you’re trying to get away from. If you start trying to cater for all of the various interest groups, by definition you bring choice into the equation and that brings in extra costs. But Pada faces a difficult balancing act because this is something that is under public scrutiny and good governance is absolutely critical,” he says.
Getting to the role of head of pensions at PwC has been a long journey for Hommel, who moved from South Africa to the UK at the age of 12. “I’m British and proud of it,” he quips in an exaggerated version of his now significantly diluted South African accent.
Ask Hommel whether PwC’s accountancy culture informs the way it advises on pensions and he is quick to point out that only a quarter of the organisation’s revenue comes from accountancy.
“We think of ourselves as a multi-disciplinary professional services firm. While we are the fourth-largest UK pension consultancy, we are only 5 or 6 per cent of PwC in the UK, so we are pension experts working in an organisation that advises clients across the spectrum of their commercial challenges and opportunities,” he says.
“We therefore advise with experts from a huge range of fields together on client problems helping clients address pension problems in the broadest context, as opposed to where I started my career at a niche pensions consultancy. We have relationships and consult with virtually every large organisation in the country, often into the boardroom.
Under Hommel’s stewardship the PwC pension practice has moved into fourth position in the league table of pension consultancies in terms of revenue, doubling its income on the way. So does Hommel see himself getting to number three any time soon?
“I believe we will continue to win market share and grow faster than our competitors. Our business is very different from what the three niche actuarial firms do. A huge proportion of their revenue is providing ongoing actuarial advice to trustees.
“About three-quarters of what we do is advising corporates on their pensions strategy and financial risk management of their pension arrangements, and a quarter of what we do is helping trustees.”
“Where there has been a big growth has been from corporates wanting advisers who are independent from those advising their trustees.
Third spot may be a way off at present, but PwC’s business-centric proposition talks in the language that finance directors understand. For some employees, that will mean less pension – for shareholders, it will mean pensions that generate the behaviour they are supposed to.
All about Marc Hommel
Born Johannesburg.
Moved to London aged 12.
University Southampton, graduated 1983.
1983 Joins Towers Perrin, where qualifies as an actuary. Ultimately responsible for client relationship management across Europe. Spends part of his time there working in Germany. “When I graduated the role of an actuary was advertised to me as financially sophisticated, well-paid and varied. Had I graduated three years later at the time of the Big Bang I might have gone into investment banking.”
1996 Joins Liberty International, a FTSE100 financial services start-up pensions subsidiary as chief executive. Sets up a pension and asset management company.
2000 Joins PwC, starting in the human resources department. Moves to head up pensions practice three and a half years ago, since when revenues have doubled and PwC becomes fourth largest pension consultancy by revenue. “I came back into pensions full-time when pensions got exciting again. The Pensions Act 2004 made the world of pensions very challenging, very exciting and very significant.”
Fellow of the Institute of Actuaries (England), Fellow of Society of Actuaries (Ireland) and Associate of the Society of Actuaries (USA)
Career high “Being involved in some of the most financially significant and fundamental pension challenges facing this country and solving them. We have acted as lead adviser to the regulator and to the Pension Protection Fund. We have been at the centre of the pensions industry for the last three or four years and I believe we have fundamentally and positively impacted and influenced it and made it more functional.”
Lives London. Has four daughters.
Enjoys Football, plays twice a week, and mountain biking. In November completed a 400km charity cycle up mountains in South Africa. Learning the guitar.