Blog: Passing the buck
31 May: Where will the buck stop for auto-enrolment?
Another month, another set of worrying auto-enrolment statistics. According to research by Aviva, 68% of employees have little or no knowledge of auto-enrolment, despite it being a matter of months until the first group will begin automatically saving into a pension.
Surveys of consumers rather miss the point. After all, auto-enrolment is happening whether they are ready for it or not. What really matters is how ready employers are. Here, the numbers are better: 70% of employers are at least aware of the upcoming pension changes, according to Aviva.
Yet the very real danger facing employers is that the buck will be passed from department to department, from the human resources team to the trustee board, with nobody prepared to take ultimate responsibility. Even more worrying is the possibility that Department A will assume Department B is looking after auto-enrolment and vice versa, only for panic to set in at the last minute when the due date suddenly looms.
Anecdotally, it is clear that this is happening. At Engaged Investor’s recent annual conference, one trustee confided that he had assumed the HR team would be taking care of auto-enrolment. After the session, his feedback form read: “Now I’m worried!”
Another trustee hesitated outside the conference hall, trying to decide whether to join the auto-enrolment session or an alternative workshop on investment. He asked in a hushed voice: “I know this might be a stupid question, but what is auto-enrolment? Is it something I should learn more about?”
“The very real danger facing employers is that the buck will be passed from department to department, from the human resources team to the trustee board, with nobody prepared to take ultimate responsibility”
Contrast this with schemes such as those at Bank of America or Heineken, which second-guessed the process some time ago – 20 years ago in Bank of America’s case – and already auto-enrol their employees. Both schemes are ironing out the final details to make sure their visions for their saving vehicles are compatible with that of The Pensions Regulator.
The picture is mixed. Most employers are aware of auto-enrolment, but many are not sure what steps they need to take. Perhaps they are hesitating because auto-enrolment still seems vulnerable to regulatory threats from the European Union.
For instance, the Association of British Insurers recently raised concerns that auto-enrolment will be hampered by the EU’s packaged retail investment products (Prips) directive, which aims to create a clear and consistent disclosure regime for all retail investment products.
If occupational pension funds are included in Prips’ reach, which is a possibility, it might mean individuals will be required to consult a financial adviser before opting into a pension scheme, completely undermining the point of auto-enrolment.
If 70% of employers are already conscious of auto-enrolment, the Pensions Regulator and the Department of Work and Pensions are making a success of building awareness.
This percentage will grow quickly when the process begins in earnest. But employers will need to convert thought into action to ensure autoenrolment doesn’t turn into a hasty compliance exercise. Meanwhile, the government must not allow its sensible auto-enrolment regime to be sucked into a quagmire of EU regulation, no matter how well meant.
Blog: ‘Granny tax’ conceals inconvenient truths
19 April: We should be trying to make pensions better instead of playing for cheap headlines, argues Louise Ashford
There are some unfailing tear-jerkers in life. Among them are RSPCA adverts, occasionally the X-Factor, and the articles that pop up in national newspapers every Christmas about pensioners who can’t afford to heat their homes.
These stories evoke visions of lonely grannies huddling under blankets, cold and alone. I’m sure I’m not the only one who ends up tearfully donating whatever money I can to the charities which promise to end fuel poverty.
Yet as sympathetic as I feel towards poor grannies, recently the work of a powerful grey lobby has been taking over the media, most notably in the form of the headline-grabbing granny tax.
The granny tax was an ingenious headline and an attention-grabbing campaign. The story had all the vital components needed to attract mass attention: a vulnerable group of people being preyed on by a cost-cutting government seeking to save money, whatever the ultimate price.
“The most troubling aspect of the granny tax circus was the implication that one entire section of the population should automatically be considered more financially vulnerable than another”
Much of the media cottoned on to the cause of poor grannies being exploited and the public responded by jumping onto the bandwagon with righteous indignation. On Pensions Insight’s website, any granny tax-related stories immediately leapt to the top of the most-read list.
But some commentators pointed out the fact that asking pensioners to pay tax at the same rate as the rest of the population – stretched low-income families and young earners desperately trying to save for a house all among them – is hardly outrageous.
The most troubling aspect of the granny tax circus was the implication that one entire section of the population should automatically be considered more financially vulnerable than another. Poor grannies are more commonly featured in the media, but there are also plenty of rich grannies, who we do not hear about so often.
There are certainly other financially vulnerable sections of society which do not receive tax breaks. What about generation Y, the generation that is likely to be paying back the previous generation’s pensions deficits for the rest of its life while impoverished by student debt? What about today’s babies, who may only retire when they reach eighty, if indeed a state pension still exists towards the end of the century?
The government is right not to give special treatment to the elderly without means testing them first. The grey lobby is wrong to campaign for tax breaks when there are other sections of the population that are just as vulnerable and arguably deserving of help.
‘Divide and rule’ may apply in some situations, but when it comes to ensuring a fair outcome for past and future pensioners, we should unite for a common purpose instead of wasting valuable time and effort playing for cheap headlines.
7 March: Only new ideas will save Generation Y
For those who have never had the fortune (or misfortune, depending on how you look at it) of delving into political philosophy, ‘intergenerational equity’ might sound like some sort of new-fangled financial product.
In fact, the phrase refers to the legacy that today’s society leaves to future generations.
The growing gulf in wealth between today’s older and younger generations is a subject that has been well covered in the press, but no satisfying conclusions have been reached.
Typically, it goes like this: members of Generation Y – today’s twenty-somethings – have lambasted baby boomers for their good fortune, citing the great inequalities between the opportunities and advantages of their parents’ generation and their own.
“The inference that the older generation is merrily hoarding its wealth, going on endless Saga cruises and bathing in general latter-year hedonism is unfair”
Baby boomers’ gold-plated defined benefit pension schemes, light mortgage commitments, huge house-price appreciation and lack of student debt are popular fodder. The baby boomers guiltily respond that their sons and daughters have fallen victim to economic circumstances beyond anyone’s control or imagination.
Speaking as a member of Generation Y, I think that castigating the baby boomers is a lazy and rather unconstructive way to grab the headlines. The inference that the older generation is merrily hoarding its wealth, going on endless Saga cruises and bathing in general latter-year hedonism is unfair.
Many baby boomers have children who are struggling to find employment, pay anything at all into a pension – let alone a sufficient amount to permit a comfortable retirement – or cobble together a sufficient deposit to buy a house.
Findings from researchers GfK reveal that 40% of Generation Y rent, rather than own, their own homes and are put off saving for a pension because their primary financial goal is to afford to be able to get onto the housing ladder.
Faced with today’s pressing financial problems, locking up vast sums of money until a vague date perhaps 30 or 40 years away just doesn’t seem worthwhile to many.
“Castigating the baby boomers is a lazy and rather unconstructive way to grab the headlines”
Seeing their children faced with such dilemmas, most parents would do everything possible to provide financial help. Looking around me, there is certainly anecdotal evidence that this is happening.
Even flicking through the pages of Engaged Investor, it is clear that there are people within the pensions industry who are determined to find equitable solutions for future generations.
There are trustees who are committed to reviving defined benefit pension schemes, or at least finding a better alternative to today’s defined contribution propositions. In his Independent Thinking blog, Richard Butcher argues that DC doesn’t work and will not provide members with a sufficient pension.
It’s a cause of which pensions minister Steve Webb is all too aware. Speaking at an event organised by NEST, he challenged the pensions industry to abandon some of the “rigid thinking” around scheme design and provision and embrace more original ideas.
It is easy to roll our eyes at people who refuse to accept the status quo, who have different ideas about how to make the system fairer that we may not always agree with (Vince Cable’s mansion tax proposal is a wider topical example). But if clever people stop coming up with new ideas, when it’s fully grown, Generation Y will well and truly have something to shout about.
23 February: Underestimate auto-enrolment’s complexities at your peril, warns Louise Ashford
This week’s trustee briefing examines the latest tranche of auto-enrolment guidance from government. Digesting this guidance is a time-consuming process for advisors, trustees and employers alike.
Yesterday, pension consultants Bluefin held an auto-enrolment seminar for employers, illustrating auto-enrolment’s grey areas with specific examples.
For instance, case study Catherine, a secondee from an overseas parent company, would not at present be subject to auto-enrolment. However, a current Department for Work and Pensions consultation may change this rule. The current guidance concludes, somewhat vaguely, that “employers should examine the contractual and remuneration arrangements for secondees to ensure the correct party carries out the employer duties”.
Another case study looked at a part-time worker, Mary, whose earnings fluctuated, at first taking her earnings over the limit for auto-enrolment, and then under, and then over again… to cut a long story short, Mary would have received seven pieces of correspondence from her employer in a year. She and her employer would have begun contributing to a pension, and then stopped, and then started again.
In such circumstances, is she likely to stay engaged with her pension? Or will she - and most likely her employer - end up hopelessly perplexed by the complexities of the process?
Employers and trustees are in for a complicated journey and should start planning for auto-enrolment as soon as possible. Staging dates may seem distant for some schemes at present, but employers and trustees will need to iron out problems with individual workers as early as possible to ensure they are fully compliant in time. Many companies will have to approach auto-enrolment on a case-by-case basis, especially those with secondees, freelancers, contract workers or overseas and offshore workers on their payroll.
By using such case studies, the Pensions Regulator is doing its best to iron out uncertain areas, but the sooner it publishes final, full and unequivocal guidance, the better.
The experiences of some companies which have already started to pilot auto-enrolment will be included in the next issue of Engaged Investor. Pick it up to see what lessons your own scheme can learn.
31 January: Just 5% of employers plan to engage with NEST
Just 5% of defined contribution (DC) pension schemes intend to engage with NEST, the state-designed workplace pension scheme.
The stark statistic, from pension consultants Punter Southall, is a blow for the Government and the auto-enrolment process.
Punter Southall says that companies remain very unsure about how auto-enrolment will affect them, with over half believing their current pension scheme will meet the new requirements when in reality it is below the minimum standard. “It’s alarming that companies believe they are prepared”, said Alan Morahan, Punter Southall’s head of DC consulting.
NEST’s rivals may also have cause for concern. If only 5% of DC schemes intend to talk to the state-backed savings vehicle then how many will engage with its challengers, such as the Danish saving vehicle NOW: Pensions?
NOW has always publically said that it has set no definite targets for the UK pension market and that its model is fully scalable. However, a vehicle that has seen great success in Denmark would not be investing time and effort into the UK market if it did not believe it would gain traction.
Perhaps awareness of NEST and its rivals will improve over time as employers and trustees come to terms with the impact auto-enrolment will have on pension schemes and start to look for answers. But the recently announced delays to the already protracted process of auto-enrolment do not help its credibility. The hold-up will push auto-enrolment down the priority list for many employers and trustees, to the ultimate detriment of savers.
Engaged Investor’s conference on 29th February will give trustees an opportunity to discuss the auto-enrolment process with pensions minister Steve Webb and a host of other experts. Click here to sign up for a free place.
25 January: Further delays to auto-enrolment announced
The Department for Work and Pensions has published a revised timetable for auto-enrolment. It confirms the delay to the commencement date for small businesses and adds a delay for medium-sized employers of up to nine months.
“This is a deeply disappointing delay,” said Brendan Barber, general secretary of the Trades Union Congress. “Successive governments have delayed the introduction of auto-enrolment and the new system will not now be fully in place until three years after the next general election.”
““We are pleased that the Government has spelled out a new timetable for auto-enrolment. Now [it] needs to stick to the new timetable and avoid last minute changes that will undermine the success of the reforms. There have been too many delays already”, said Joanne Segars, chief executive of the National Association of Pension Funds.
Morten Nilsson, chief executive of NOW: Pensions, the multi-employer trust that is set to challenge NEST, said: “It is good to have clarity on dates and confirmation that auto-enrolment going ahead with no further disruption. However, whilst delay for the medium and smaller companies is helpful from those companies’ perspective in the current economic climate, the delay is certainly not helpful from the perspective of their employees in the long term.
Although the ministerial statement reaffirms the Government’s commitment to beginning auto-enrolment on time, these piecemeal delays undermine the whole process. If the timeframe continues to change, businesses will start to doubt the Government’s commitment to pensions reform. As Nilsson says, employees will lose out in the long term because of these delays.
5 January: What are your New Year’s resolutions?
Unless you’re Father Christmas (who probably goes on holiday), January is the least fun time of year. We solemnly resolve to change the habits of a lifetime and morph overnight more virtuous, healthy and generally efficient individuals. If you are anything like me, your list of personal resolutions will not differ much from year to year.
However, January is a good time of year to take stock of what is in store for the next twelve months professionally. The next year is set to be a time of considerable change for many trustees, so it’s a good time to sit down as a trustee board and work out your main priorities and objectives.
Some companies have cottoned onto this idea, too. Consultancy firm Mercer has put together a list of 2012 resolutions for trustees and employers.
Sitting down to set key objectives for the year is Mercer’s first suggestion. Most consultants and lawyers recommend involving as many parties as possible in this initial discussion – as Mercer says, this allows “any conflicts to be identified and managed, and success to be measured.” Setting key performance indicators for individuals or sub-committees is one way of ensuring everyone understands and meets their objectives.
Ensuring your scheme is auto-enrolment compliant is another worthwhile resolution. As their deadline for compliance is later this year, most large schemes will already be underway with this, but even if you have a small scheme, it is a good idea to speak to your advisers and get started on preparations.
Related to this is a resolution to provide members with better education and more effective communication. Most pension schemes are expecting an influx of new members at the onset of auto-enrolment, many of whom will never have contributed to a pension before. They will need to be introduced to the logistics and principles of saving into a pension.
Some schemes, Mercer says, might want to take the start of a new year as an opportunity to review their investment options. Trustees should ensure a wide range of funds is available in order to make sure every employee, no matter what age or personal situation, can find an option to suit their needs.
At this time of year, trustees and sponsors should also consider re-negotiating their pension scheme’s annual management charge. With auto-enrolment approaching, an influx of new members will give asset managers a higher level of contributions. Accordingly, sponsors might be able to negotiate a lower rate, ultimately bringing members better returns.
With all this to consider, December 2012 will be upon us before we know it!
19 December: Confessions of a young pensions saver
Leaving the office on Friday night, I solemnly promised myself that this weekend I would finish a job I’ve been putting off for months. My pension pack has been sitting, half filled out, in a kitchen drawer since October.
As a pensions journalist, the question I most often get asked by the trustees I meet is, ‘Are you a member of your company’s pension scheme?’
Abashed, I’ve replied, ‘I only joined my company quite recently [which is true; it was late this summer] and am still filling out the forms.’
The problem is that every time I’ve thought about those forms, like some kind of Pavlovian reflex I decide to mop the floor, do some filing, or pay the gas bill.
You name a tedious chore; I have done it in an attempt to avoid those forms.
I have no excuse not to engage with my pension and in some ways this is what is putting me off. I know that making thoughtful financial decisions does take some time and effort. I understand more about the fund choices than your average scheme member and know that as a saver in my twenties, I can afford to take some risks.
I’ve already looked at the default fund and realised its performance isn’t as strong as some of the other funds on offer. I’d definitely be better off looking at the other twenty or so funds and choosing a few good performers across the risk spectrum.
You name a tedious chore; I have done it in an attempt to avoid those forms.
This means spending a couple of hours on fund analysis websites on a Sunday afternoon when frankly I would rather be reading a book, going for a walk or making some soup.
The other sticking point is the expression of wishes form. As a twentysomething, my mortality is not something I often dwell on. Besides, without a husband or children, there is no obvious solution. I prevaricated philosophically over this for months. I discussed it with a trustee recently, who said, ‘You should consider it carefully but remember you can always change it.’ Sound words.
Eventually I did sit down on Sunday afternoon and finish the forms. But I confess I was planning to write this blog today and it needed a satisfactory ending!
Auto-enrolment is around the corner for some schemes, but for others it’s still a while away. In the interim, what can trustees do to help people like me – and people who are considerably less interested in finance – overcome inertia? Here are some straightforward tips:
1. Include a stamped addressed envelope in your pensions pack. Most twentysomethings communicate by e-mail these days; I had to dig a battered envelope out of an ageing file.
2. Allow new joiners to send all their forms to one address. Sending lots of forms to different addresses is confusing and expensive.
3. Make sure the funds are labelled clearly and that there aren’t too many of them to choose from. It’s easy to get bogged down with choices and overwhelmed by jargon.
4. Give carrots. My employer’s scheme gives you an added incentive if you join the scheme within your first six months. This could be extra life insurance, a one-off extra employer contribution; whatever you and your sponsor can agree on.
5. Don’t ask for too much information. Keep forms as streamlined and un-daunting as possible. If you really need to ask joiners for their national insurance number, employee number, and so on, speak to your employer to make sure these details are prominent on payslips.
6. Make it easy to change the expression of wishes form. Forms should be readily accessible in the office and quick to fill out. The knowledge that it can be easily changed makes the initial decision far less daunting.
9 December: Against all odds, trustees are more confident than ever
The confidence of trustees has greatly improved in 2011. Today, three quarters are confident about questioning their advisers when faced with difficult decisions compared with this time last year, when almost half admitted they were too unsure or embarrassed to question their advisers.
The mood was broadly positive at yesterday’s RPMI conference when trustees, administrators and advisers met to discuss the state of play for 2012.
RPMI, the administrator, polled over 450 scheme managers, administrators, trustees and scheme secretaries on three very important D’s: defined contribution (DC), de-risking and decision-making, presenting the results yesterday.
To take DC first: over three quarters of the survey’s respondents expect auto-enrolment to have a positive impact on DC schemes. With auto-enrolment, DC schemes’ memberships will grow, encouraging greater knowledge and acceptance of the important role that pensions play.
Respondents expect the new pension scheme members will challenge conventional wisdom; a growing focus on the default fund is anticipated.
Yet concerns remain over whether employers will use auto-enrolment as a race to the bottom, downgrading their pension scheme to the cheapest possible option in anticipation of an influx of members.
A significant number of trustees who responded to the survey – 40% - have been involved in a de-risking exercise. Three quarters of this group said de-risking had delivered the outcome they expected, demonstrating how worthwhile the process can be.
Well over half of respondents were concerned about enhanced transfer values (ETVs), with some voicing fears about mis-selling and others saying, plainly, ‘I would not use ETVs.’
Trustees are becoming confident decision-makers, with over three quarters saying they understand what is meant by good governance. Over three quarters also said they felt able to carry out their trustee duties. Given the political and regulatory challenges trustees face, this was a welcome and rather surprising statistic.
28 November - Is Tobin such a catastrophe?
Many commentators have greeted the concept of a Tobin tax with dismay. If adopted across Europe, there are fears that the proposal could threaten London’s position as a financial centre and drive traders towards Paris, Frankfurt, or even so far as Asia.
Earlier this week, a House of Lords committee met with the Trades Union Congress (TUC) and the Confederation of British Industry (CBI) to debate the effect a financial transactions tax would have on the British economy.
Advocates argue that such a tax would discourage automated high-frequency trading, which has become endemic within London’s complex derivatives world, in favour of a longer-term approach to investing.
“Pension funds invest small but significant amounts of money in high frequency trading vehicles,” Owen Tudor, head of European Union and international relations at the TUC, told the committee.
“That would become less remunerative if a transaction tax were introduced – they’d need to switch to more long term financial products, which comprise 95% of most pension fund portfolios,” said Tudor.
It could be that such a tax would encourage asset managers to consider their portfolio more carefully before adjusting their asset allocation.
By lowering the current volume of automated high frequency trading, we might experience less wild fluctuations in markets, which have threatened annuities for current retirees and led to grey hairs and sleepless nights for trustees and pension fund managers alike.
The cases for and against the Tobin tax are complex and range far beyond this simple point. But perhaps pension funds should not feel threatened by a tax with a mandate of promoting long-term financial stability – watch-words for a successful pension pot.
The biggest challenge facing pension funds is the state of the economy - NAPF Conference Day 1, 19 October 2011
The biggest challenge facing pension funds is the state of the economy, outgoing NAPF chairman Lindsay Tomlinson said in his valedictory speech.
Tomlinson opened proceedings at the National Association of Pension Funds’ (NAPF) annual conference with an outspoken final speech, commenting wryly at the outset: “Never underestimate someone who has nothing to lose!”
Tomlinson was blunt about the causes of the recession: “It’s clear that the West has lived on credit for the last 20 years and it can no longer do so. We are going to experience a double dip recession.”
He was also scathing about the Government’s attempts to solve the crisis, calling quantitative easing “a new variant of printing money,” and predicted it would be a “very good recipe for destroying the nation’s retirement savings.”
Quantitative easing will also lead to pension fund deficits growing, at least in the short term, Tomlinson warned, saying, “the authorities need to be ready for this.”
Tomlinson also warned about new waves of European regulation due to hit pension funds. He urged the pensions industry to “look very carefully at Solvency II“, the incoming insurance industry directive.
Policymaking as a result of the recession has only just begun. “We’re still in the early stages, so brace yourself for more,” he said.
The situation is made even worse by “excessive financial intermediation, which has run rife,” Tomlinson said.
Only political solutions will solve these profound economic problems, Tomlinson argued. “We must work out how to divide the economic cake across the generations.”
Collective action is vital to this process, concluded Tomlinson. “As chairman, I’ve been struck by the reluctance of pension funds to work together to demand more from the NAPF, which of course exists for precisely this purpose.”