Pensions World

Ceri Jones, financial journalist, reports on the PMI spring conference and the staying power of the Pensions Minister, Steve Webb

Pension Minister Steve Webb gave the keynote speech at the PMI spring conference in March. It was aptly entitled "Pensions – always a marathon, never a sprint" and delegates seemed to appreciate having a minister in charge who himself is on a long haul mission, rather than seeing his pensions post as a quick stepping stone to another ministerial position.

Mr Webb outlined the need for a flat rate, simple state pension and the removal of the "baffling state second pension calculations and the lingering contracting out legacy", followed by the auto-enrolment of 10 million people currently without any pension provision, but warned that workers cannot be coerced to save against their will or they will simply see pension contributions as a tax.

In his inimitable optimism, Mr Webb then sketched out his dream for a new model of risk sharing, holding up the Tesco pension arrangement as an example of what can be done. He said he has been travelling the country in a "prawn cocktail offensive", meeting managements to gain a sense of UK plc’s appetite for risk sharing and was optimistic that many employers have a paternalistic attitude to staff. "While the decline in DB membership cannot be simply reversed, does the industry have to swing all the way to pure DC?" he asked. "Pendulums have an annoying habit of not stopping in the middle, but swinging right back. We are trying to find out what sorts of models will appeal and then we will try to facilitate that." Cash balance schemes, capped defined benefit (DB) schemes or some variety of "defined contribution (DC) plus" arrangements where the employer can bear some investment or inflationary risk on behalf of the member are just some of the options, he said, and a White Paper on the topic will be issued in late spring. There was, however, less enthusiasm from the floor that sponsors will be prepared to put risk back on the table.

Consistency

Before Steve Webb’s appointment, pensions ministers rarely took questions from the floor, but Mr Webb has changed all that and allowed Mark Anthony of Capital Cranfield Trustees to challenge the proposal to equalise guaranteed minimum pensions (GMPs) and the inordinate time and money that will involve. Mr Webb said he appreciates this will be a huge hassle, but explained that he had sought the very best counsel to look for ways round this and counsel advised there was no option but to make the change. "When you take top legal advice and challenge it and they still come back and say the same thing, then I am in no position to ignore it," said Mr Webb.

Jeff Neate for MN asked the minister what will be done about means testing in respect of long term care and Mr Webb agreed there is an issue here, but said the most fundamental issue is the pensions credit and they have been trying to address it.

Mr Webb also believed there was now a chance of consistent policy in pensions. "Consistency has been difficult to achieve with five year governments and a new pension minister every five minutes, but we now have a chance of this," he said, pointing out that auto-enrolment is being implemented by the Coalition, but that the principle was set up under Labour.

Replacement ratios

Crispin Lace, director of consulting and advisory services at Russell Investments, then gave a presentation on the impact of savings rates in DC and in particular how significant the post-retirement years are on investment performance. He explained that for every unit of pension in a DB scheme, 10% comes from contributions, 30% from pre-retirement returns and some 60% comes from post-retirement returns, a finding that should be harnessed in DC schemes.

Mr Lace then looked at projections of the replacement ratios generated by different savings levels.

A low earner on £15,000 who enjoys a joint contribution rate of 6% will generate a replacement ratio of 61%, with the state benefits element contributing 45% of the whole pension. In comparison, someone earning £50,000 with a replacement ratio of 55% will find that the state benefits comprise just 7% of the whole. There is therefore an argument that a lower paid person should be able to take a high risk strategy with their private pension contributions because a high percentage of their pension is provided by the state and is therefore risk free.

Communication technology

The next session was a candid portrayal of what can be achieved in pension communication by using modern technology. Grant Lore, group pensions director at Thomas Miller, talked the delegates through the tools the scheme has developed, such as online planners. Greg Thorley, director, Face to Face Consultancy, then demonstrated how the different generations use various technologies and social media and the potential for use in a pensions environment. For example, 59% of a recent sample said they would be interested in a smart app on pensions for their mobiles. British Airways was used as an example of how the iPad and iPhone can be harnessed to engage employees with pension schemes.

Mr Thorley also cited a survey which revealed that only 10% of employees think that hard copy material from an employer is useful.

Mark Adamson of JLT Benefit Solutions developed the theme of using technology effectively in his session "Making administration fun for members", showing what can be done by way of developing pensions apps for phones, ranging from member self-service to cost of delay calculators, and using social media such as Facebook and Twitter.

Behavioural bias

This was followed by Paul Craven, head of EMEA institutional business at GSAM, who had the delegates enthralled by his insights on behavioural biases. He described how every one of us tends to follow the herd, anchor information to the last set of data and be over-confident.

Contrary to popular belief, markets are not efficient, he said, and warned that traditional indices are by definition stuffed with overvalued assets. He demonstrated that portfolios holding low and medium beta stocks can generate better risk adjusted returns than portfolios with volatile stocks.

A wise chairman will, for example, always ask first for the opinions of the introverts, while boards with diverse backgrounds are more likely to include more than one dissenter which gives others more confidence to express their real views.

Staying auto-enrolled

Jamie Jenkins, head of workplace strategy at Standard Life, took the podium for an interesting session on the growth of corporate platforms and what different replacement ratios could really mean in terms of standard of living in retirement. Mr Jenkins revealed research which showed that people are, in fact, more likely to stay auto-enrolled if the information they are given is clear, but that they will not be frightened into doing so by, for example, unfavourable peer comparisons. Counterintuitively, they are also more likely to stay auto-enrolled if there is auto-escalation in the contributions, as they tend to feel that the whole retirement income issue has then been sorted.

Jeremy Goodwin, partner at Ever sheds, then gave the delegates an update on important legal developments. On employer debt, he outlined the easements such as where a new employer takes over the liabilities of a previous employer and the longer grace period changes. He warned that GMP equalisation is a statutory duty, but that a court case may be required to work out how to achieve it.

The definition of money purchase has also given rise to some legal difficulties as its original definition covers any scheme that can give rise to a deficit and is being amended retrospectively from 1997, presenting many issues such as a need to revise GMP indemnities given in previous merger and acquisition deals.

Financial advice

Another important issue for the industry is the Retail Distribution Review and Dominic Lindley of Which? examined investor views about financial advisers. The majority do not understand the amount of commission payable, which is scarcely surprising since Which? mystery shoppers revealed that advisers sometimes gloss over the reality of how commission is funded. Mr Lindley envisages a future where investors will shop around, getting estimates as they now do for a builder. However, there is no requirement on product providers to ensure that deductions are reasonable and the Financial Services Authority says consultancy charges of up to 35% of the first year’s contributions can be levied.

Many delegates have also been directly involved in DB scheme closure – the topic of an interactive discussion between Jeff Neate of MN, Tim Banks of AllianceBernstein, Chris Tagg of Barnett Waddingham and Emily Forrest of Sackers. Delicate and wide ranging negotiations between the employer and trustees are required on matters such as the contractual issues involved in closing a scheme and changing contracts of employment, while trustees should be aware of the tools and strategies at their disposal.