Compare the pension.com?
12 May 2018
This article was featured in the June 2018 issue of the magazine.
Henry Tapper, director of First Actuarial, previews the rise of online pension comparison sites for workplace pensions
Most employers think all workplace pensions are the same and are not going to pay financial advisors to know how well their workplace pension is doing and whether it’s worth keeping or swapping for a better model. Generally, it’s not worth swapping financial products as complicated as workplace pensions, as it’s disruptive (not least to payroll) and the cost of moving is seldom justified by improved outcomes.
But – to use a finance term – there’s considerable ‘value at risk’ in a workplace pension. If a workplace pension did get into trouble, employees could lose their later-life savings and an employer who had been deemed negligent in ‘due diligence’ could be held liable for the ‘value’ risked and lost.
Which is why large employers put workplace pensions on their risk registers and pay extravagant sums to employee benefit consultants for reports. Smaller companies can’t and don’t indulge in such risk-mitigation. For most, the strategy could be described as ‘in NEST we trust’. Small- to medium-size employers are now being told to “get to know their workplace pension” – which would be fine if their first and only impression of what they were buying was a technicolour monster called Workie wondering around a park.
In my experience, asked to explain what they bought and why they bought it, most employers would be able to talk about their office lease, van fleet, commercial insurances and photocopier lease agreement. But they’d be stumped by their workplace pension and things get difficult when employees ask tricky questions such as “is this workplace pension any good?”
...there’s considerable ‘value at risk’ in a workplace pension
Back in 2014, however, the government commissioned the Office of Fair Trading (OFT) to look at workplace pensions. The OFT concluded that the buy-side for such things was one of the weakest they had investigated and that employers knew little more than the employees they were supposed to be acting as fiduciaries for. The upshot was to get the Financial Conduct Authority to set up independent governance committees (IGCs) to report to employer and employee on whether the providers were getting value for money (VFM). Unfortunately, the IGCs despite being up and running for three years have failed to come up with a uniform definition of VFM or act in a concerted way, to benchmark their providers against each other in a meaningful way.
Which is leaving many people (not least your writer) a little frustrated. Organisations such as Sage, that run pension modules as an adjunct to payroll software, are conscious that for members the workplace pension is what it’s all about and that there is, at present, no coherent narrative for employers to give their workforce about Workie and how their chosen workplace pension is faring, benchmarked against the other choices in the market.
Those of us on the pension side of the line, are now pushing government to allow us to publish VFM comparisons, based on the work of the IGCs and the trust boards of the master trusts that comprise the workplace pension governance universe. VFM scoring needs to be based on accurate data on the true cost of a workplace pension against its value. This may sound easy, but it’s now becoming clear that the true cost can be rather more than previously disclosed. Fidelity revealed this month that members were paying last year over 0.3% of their fund in hidden charges. Since the overt cost of many Fidelity pensions is 0.3% or less, this represents a significant disclosure.
On the ‘value’ side, the most obvious measure is past performance, but this varies not just by hidden charges but by the aims of the investment fund. A fund aiming for steady growth with no surprises should be judged by low volatility, whereas a fund aiming for good long-term returns with little eye to short-term volatility should be measured by eventual outcomes. It’s possible to compare both investment objectives using ‘risk-adjusted’ returns though this creates a degree of complexity that is likely to throw many employees.
Increasingly, there is consensus that to display VFM, the complexities surrounding ‘value’ and ‘money’ should be simplified and that VFM should be shown as a single score (out of 100). Not only would this have the advantage of simplicity, it would also enable people to compare one pension provider with another, by means of league tables.
There remains a big question about who would finance such work. With no requirement on employers to measure their workplace pensions, it is unlikely that employers will voluntarily pay for ratings. In any event, most employers are now used to getting ratings on suppliers for free via the various comparison services operating in the business to business market. But in a digital age, where there is a need there is likely to be a commercial application…so, look out for a meerkat, action man or obese opera singer.