Malcolm Small is a man of many roles. But his positions at the Tax Incentivised Savings Association (Tisa) and the Institute of Directors give him a unique perspective on the current pensions landscape. John Greenwood finds him in forthright mood.
As employers come to terms with the complexities of demonstrating compliance with the auto-enrolment process, they may come to regret their opposition to compulsory pension contributions. That is the conclusion that Malcolm Small, director of portfolio and retirement planning at the Tax Incentivised Savings Association (Tisa) has drawn.
It is a conclusion that has been informed by his experience as senior adviser on pension policy to the Institute of Directors, a role he still holds, in which he has witnessed at first hand directors’ appalled bafflement at the whole process.
“I think in retrospect we should have gone from compulsion from minute one, and that compulsion should have been on the employer,” ” says Small. “But that is as a result of my working with boards who say the process is so complicated they have trouble getting their head around it. There were howls of pain from employers in Australia in 1994 when compulsion went in. Within a year it was just business as usual.”
Given the glacial pace of UK auto-enrolment – it will be 13 years since the policy was formulated before it will be fully implemented – the idea of a short-sharp shock may become increasingly attractive. But auto-enrolment is what we have, and for Small it is the complexity it foists on employers that is more burdensome than the actual cost of increased contributions.
“I have taken about half a dozen boards through the process as it stands and after about 10 minutes you can see them starting to lose the will to live. Particularly for boards that have not engaged with pensions before, the rules as they stand right now are dauntingly complex.The number one priority for the Institute of Directors is to simplify the auto-enrolment process.
“The timetable is still yet to be fully understood by many businesses, particularly the smaller ones. IoD members’ look at this and their brains fry with the complexity. Opting people in and out, dealing with the payroll providers, you have to re-enrol people.
“The view of all the boards I have taken through this process is they end up holding their heads in their hands and saying ‘why didn’t they just make it compulsory and get on with it?’,” says Small.
Small is expecting higher levels of opt-out than many in the industry because of the scarcity of cash in households today.
“We have had four years of effective pay cuts for workers. The pips are really squeezed. One of my friends is a small businessman. He is paying for his food on his credit card,” he says.
“We have £206bn of unsecured personal debt out there. That equates to £3,400 for every man, woman and child in the country. If we take out children and the elderly, we are looking at an average of around £9,000, and many more people will have more than that. So affordability will be a big issue.
The IoD is in the process of retesting what members think about opt out and the indications are that attitudes will have hardened over the last 12 months.
“There is a skew towards the smaller companies in our sample, but we ask them why their employees will opt out and all of them, without fail, said affordability,” he says. “There was a comment from one, which said ‘anyone on national average wage or less simply won’t be able to afford to put any money in’.”
When the IoD asked members who they would turn to for help with auto-enrolment, the majority of those who already have a pension scheme said they would turn to their accountant, with IFAs coming a very close second.
“For those who have not got a scheme in place now, they expect to turn to an IFA first and foremost, with accountants a close second. But accountants feature strongly in both, and where a small business owner has a relationship with their accountant it is them they tend to turn to.”
So where small business owners turn to accountants, does Small expect they be more likely to tell employees to simply go to Nest?
“We have no evidence of that. Some people say we like Nest because the government is behind it. Others say that is precisely why we are not going to go near it. `but I think the number of full-service new entrants to the market is interesting,” says Small, who is a non-executive director of The People’s Pension.
“If we rewind, Nest was built because providers said they did not want to play. Now we have Now: Pensions, The People’s Pension and L&G, who are a full-service pension player. There are organisations from around the planet, Dutch and American organisations, looking at the UK again. So what is the effect of this going to be? In some ways it is good to have the competition. But in other ways it dilutes the volume that Nest can expect to achieve, which may have implications for the financial viability of the scheme to repay the loan,” he says.
Small points out that while smaller companies will, not surprisingly, be less inclined to want to pay a fee, the direct service offerings of new providers will promote a new level of self-service in financial products.
“We can expect smaller companies to seek to sign up and maintain their pensions online. Now: Pensions and B&CE are fully web-enabled, so employers will be able for the first time to be able to engage with pension saving direct online. I think this is a major development that will spill over into financial services in other areas. If as an employer I am able to establish, set up and maintain my pension scheme online, why can I not deal with my Isas, insurance needs online? I believe we will see an increase in self-direction in pensions and it will have a read-across to other areas,” he says.
And does Small think platform players will want to promote this channel, and if so, will it threaten intermediaries?
“Possibly they will do. They are at the moment in the position of saying that they are for the most part working through advisers. An exception to that would be Hargreaves Lansdown who are happy to deal direct. I would expect others to start doing the same.
“But the biggest single question for any platform provider or investment house going forward is ‘what is my route to market post 2013?’ Because the effects of the RDR are unknown but we can see that the mass market are unable or unwilling to pay fees. And the real effect will not be seen until late 2013 or early 2014 when for the first time companies and individuals will have very clear and full disclosure across the piece of just how much they are paying for their investments and their advice,” he says.
Small believes a lighter touch regulatory regime would help DC pensions to be more affordable.
“Pensions are high cost in part because of the regulatory environment. If you look at the GPP, we have the FSA, TPR, HM Treasury, DWP and others. GPPs have done pretty much what they said they would do for years. I am not seeing systemic failure in GPPs, and yet there are all these bodies making interventions on them. Change is constant,” he says.
One of Small’s big preoccupations is the state of the nation’s savings – he is currently writing a paper on the subject for Tisa.
“We don’t have a policy that says its good to save. We have junior Isa, deposit account, stocks and shares Isa for saving for 10 to 15 years. And then we have a gap. I remember people voluntarily coming into the counter at Norwich Union and saying ‘can you send a man out because we want to put some rainy day money away’ and they would cheerfully buy a 20 or 25 year endowment. We have gone from a savings culture to a debt culture,” he says. Small is working on some product development in this area.
Two years ago 18 per cent of our members expected the majority of their retirement income to come from something other than pension. Today that is 28 per cent, with Isas and buy-to-let being the main alternatives.
And where does Tisa sit on the small pots debate? “Pot follows member is the only solution that solves the problem, provided you think it is a problem. If it is a problem, then pot follows member is the only solution. However, there are risks with it. Those who oppose it would point out that there are problems with fund charges and concentration risk. So having all your funds in one large pot is fine, but what happens if your company fails? There will be win some, lose some, provided you stay in the game. In the long game it should be neutral,” he says.
So what does that do to employers’ engagement with their scheme, given that employers tend to get credit for the value a pension is set to deliver? “The value of the pension relationship of the pension by the employee is predicated on the amount your employer is putting in today. With an average combined contribution of 9.2 per cent, how do we get people paying in enough?” he says.
So does Small think we should have a lighter touch regulatory environment for increases in pension contributions, for example, to facilitate this?
“Some areas of pension have five or six different governmental or regulatory bodies intervening and with TPR turning to contract-based DC in terms of outcomes, this is getting very dense for a sector that has not as far as we can see right now done any harm to the people using it. So we need to be talking about a lighter touch regulatory regime. And I think there is a sense of this in regulators not responding negatively to pot follows member. That sense of the greater good being the lead regulatory thought.
“The other thing we are working on is the pensions transfer process, how that can be done cheaper, faster, more effectively. Because if we do have pot follows member we will have a huge increase in transfers, because when an employee leaves, part of the employer’s job will be to make contact with the new employer and transfer the pension across. So there will be a vast rise in the number of pension transfers happening, which means the transfer process has to be as simple as possible. There has been of course a lot of good work already done on this by Origo and the ABI that I would like to pay explicit tribute to,” he says.
And what does he make of the IBM proposal for a people’s pensions portal.
“I have been involved in looking at this proposal. The pensions portal idea could well happen in parallel to Operation Big Fat Pension Pot. There will be a lot of pension pots that remain residual. I don’t think the exploration work is in any way wasted, but it is up to the industry if they want to develop this,” he says.
As to the tax structure, he does not predict any changes to the lifetime or annual allowance any time soon.
“Once you have taken tax-free cash you are looking at between £30,000 and £40,000 which is not earth shattering,” he says. But he does see employers desperate for ways around the problem.
“We are hearing about directors taking remuneration outside of pension in two separate ways – one where they have an older employee who they want to remunerate out of the business, and the other for higher earning directors who are up against the lifetime allowance or annual allowance.
“Employers are having discussions saying here is some money in a general investment account you can draw income from if you agree to retire now.
“I expect to see new retirement saving provision vehicles emerge in the next two or three years that will have nothing to do with a pension. There are different solutions around the world. In Germany for example they use a cash reserving system. We wouldn’t call that a pension over here because it falls outside the pension regime. It is more like defined ambition – there are no promises made to guarantee a certain income,” he says.
As to the effects of the RDR, he believes it will fundamentally change the dynamics of the market in a way that could damage corporate intermediaries.
“There will be an increase in self-direction by employers. When the cost of advice, investment and product provision are laid bare by consultancy charging there will be price pressures. Employers are going to negotiate. So the proposition from EBCs and corporate IFAs will need to be much more clearly articulated than I observe it today.”
All about Malcolm Small
has a background in law, heavy engineering and public administration
spent 14 years with Norwich Union, 5 years with Merchant Investors
retains a number of directorships in financial services
senior adviser on pension policy to the Institute of Directors
Future projects include a paper on the state of the nation’s debt and a new long-term savings product