PENSIONS INSIGHT
The peril of pensions
Henry Tapper, founder of Pension PlayPen, offers a word in payroll’s ear
C urrently, the majority of workplace pensions ‘don’t matter’; so long as contribution rates are set at current levels, their impact feels like an adjustment to National Insurance and neither corporate nor private cash flows are in peril. This changes as the phasing of contributions under automatic enrolment (AE) unwinds in 2018 and 2019. Experts have cogitated on what the increase in minimum employee contributions (from 1% to 4% of the band) will mean in terms of opt-outs. But payroll should be braced for a different challenge. The questions that many staff will be asking are just where all this money is going and how did someone decide on the workplace pension in the first place. I ran a series of very interesting training sessions on this question in December. One of the objectives was to flush out how payroll people and accountants explain the pension decision to their clients. Below are the top ten messages they fed back: ● We just use NEST (National Employment Savings Trust) ● We know and use an independent financial adviser ● Our clients are too small to think about this ● We don’t want to be involved in giving advice ● Pension advice is too expensive ● I don’t have anyone to help on this ● We can’t afford to use third parties ● All pensions are the same ● How can anyone predict what is best in the future? ● All my client wants to know is how much AE will cost. Though I am sure that a lot of the above statements will resonate with readers, do you – in your heart of hearts –
feel comfortable about pensions? The Pensions Regulator states that “employers must choose their workplace pension”. The dictionary definition of choice is “an act of choosing between two or more possibilities”. It is actually quite hard to find a word for the opposite of ‘choice’. We are used to the phrase ‘you have no choice’; it is one that The Pensions Regulator uses a lot, as in: “you have no choice, it is the law”. If we had no choice, there would be no peril in pensions. The original conception for the earnings related top-up pension, involved ‘no choice’. ...what is good for payroll is not necessarily good for pensions I am sure that there are many people reading this who happily work with NEST and would gladly put all future workplace pensions with NEST. But putting all your eggs in one basket is known as ‘concentration risk’. One-horse races don’t make for good viewing nor are they good for the one horse. NEST has to compete for its business which is not only good for its competitors, it’s good for NEST. So, what is good for payroll is not necessarily good for pensions. Choice is perilous, even in pensions. Anyone familiar with contracting-out decisions and the complexity of guaranteed minimum pensions will understand where I am coming from. Back in 2010, when the ‘go/no go’ decision was being taken on AE, I sat in a room where the then pensions minister (Steve Webb) addressed a group of pension providers who expected to be
offering workplace pensions in 2017. Only the NEST representative put his hand up. The Government may have considered that the peril of genuine choice would have become the rather easier decision we know as Hobson’s choice, a choice of one. But this has not turned out to be the case. There are a number of good pensions that rival NEST and when the Government ask employers to choose, they need to think not just of NEST but of other options. A colleague of mine (who used to be a teacher), put it well in the session: “When you do your maths exam, you’ll get a mark for being right but two marks for showing your working”. The peril of pensions is not in the answer. (It is unlikely that, post the 2016 Pension Schemes Bill coming into force, we will see a workplace pension fail.) The peril is in not being able to show the working. We know exactly what happens when an intangible product is sold without a proper recorded explanation (i.e. an audit trail). There may have been ‘proper’ sales of PPI (payment protection insurance), but the banks had no way to prove that the customer understood what they were buying and the risks of purchase. The same story is familiar to old pension lags like me. When I sold my business in 1992, its value was impaired by 50% – not because I had given bad advice, but because I had no documentation to show that the advice was good. Your clients may not know about pensions and many of them do not care to know. As payroll people, you may not know (or want to know) about pensions, but you need – urgently – to know a man who does. n
| Professional in Payroll, Pensions and Reward | February 2017 | Issue 27 36
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