Denmark’s state pension provider is placing governance, charges and flexibility at the heart of its UK proposition. Now: Pensions chief executive Morten Nilsson tells John Greenwood his plans
Launched with a press release that proclaimed “the Vikings are coming”, no one can deny Now: Pensions, the fledgling pension provider son of Danish giant ATP has not brought a fresh approach.
The theory of a clean, simple pension provider, with near-Nest charging but none of the restrictions on contributions or transfers, and with innovative investment expertise delivered at scale prices has certainly attracted attention.
So too has the provider’s structure – majoring on governance just as employers are coming to the realisation that they are going to be nudging employees who perhaps don’t want pensions into schemes. In fact, in fantasy football terms, you would have to fancy the chances of Now: Pensions’ trustee board, including the former Government Actuary, shadow pensions minister, head of the TUC and HR chief of one of the country’s favourite shops, over that of Nest – in terms of profile at the very least.
But while the Vikings came to these shores, so too did they eventually return home. And it is this concern that is probably top of the agenda of any intermediary thinking about putting their clients’ workforce with them.
Advisers see a conundrum, which any provider faces, but which is all the more pressing for Now: Pensions, given its short history in the UK – how to achieve the scale necessary to deliver high quality service at a low cost, while spending next to nothing on marketing and distribution?
It is a dilemma Now: Pensions chief executive Morten Nilsson is well aware of. So how will he square the circle?
“We are a lean organisation, with a lean trustee board and management board and we will keep on being lean,” he says. “And we are moving extremely quickly. Time matters. If we had been planning this for years it would have cost too much. We have done this before, and we know what to do, so we are designing it quickly. Moving quickly brings down the cost.”
That speed to market means few intermediaries have yet seen the system in operation. Nilsson admits it needs some tweaking, but testament to the speed of implementation is the fact that from launch as a separate entity barely several weeks ago, he is looking forward to the first clients coming on board in January. Intermediaries will be able to see the proposition, however, from this month.
“We are a bit behind the curve on the look and feel of it, so it doesn’t look very pretty at the moment. It works, but we are working on making it look more attractive now,” he says.
Charges will be a combination of £1.50 per month for administration plus a 0.3 per cent annual product investment management charge. The provider says the difference between its charges and 1.5 per cent over the life of a 40 year pension makes up to a 31 per cent difference in the final pension pot.
Observers point out that given what Xafinity charge for trustee services, £18 is a pretty keen price. So are people getting a scaled back service, and will it be able to maintain this charging structure over the long haul?
Nilsson believes there is still room for manoevre. He says: “If we are not getting the traction we expect we would have to revisit our cost structures again but the £18 a month covers the administration fee and some overhead costs. And we can work within that. So Xafinity are not getting £18 a year.”
And how patient is the sponsor back in Denmark? Does he have a time limit by which time he must make the organisation profitable? “It is more than five years. We have a patient sponsor,” he says.
Nilsson explains that when there is a profit, half goes back to ATP and the other half goes to the trust for the benefit of the members.
Asked how close to Nest’s £600m-plus loan agreement are Nilsson’s set-up costs, he laughs, and says: “We are not publishing that cost, but we are ridiculously low compared to that.”
But surely it will have to spend some money on distribution to get scale? Yes, but not much, says Nilsson.
He says: “We have a set up where we realised very soon we couldn’t spend as much as our competitors would do on marketing because the members would have to pay for it. We don’t have the luxury of spending millions on marketing. That means we have to be different in the way we are doing this.
“But a guy told me pensions in the UK have been sold and not bought. We think our product will be bought not sold. People we are talking to are buying the product. The trigger is these people have to do something because of auto-enrolment.”
Nilsson says the provider has actually received many enquiries without even having to go out with a drum beating up trade.
He says: “In September we were planning outbound activities, but we have actually had quite a lot of inbound activities that has driven business. We have a nice pipeline of people calling us, businesses of all sizes. Some have schemes already, others do not. So this big outbound activity we were planning on hasn’t been necessary. We will need it, just not right now. But we also want to work with IFAs and consultants if we can. But it has to be fee-only.”
So where is Now: Pensions’ natural target market? Pay in £1,000 a year and Nest is cheaper, critics point out.
“If you put in £100 a month then we are cheaper. Our prices are what it costs and from that point of view we think it is a fair model.
But we think we are providing something different. We have a track record on the investment side and we have experience in managing multi-employer schemes. So we are doing a lot more than other schemes,” he says. But he admits deferred members are worse off because of the £18 a year ongoing charge, and hopes the auto-consolidation consultation on small pots will resolve this.
The provider is also in talks with partners to offer other products. “We are offering life insurance solutions, where we are just passing it through and not taking a margin. We are currently finalising talks with a provider about this,” he says.
Now: Pensions’ website contains a link to David Pitt-Watson’s report – Tomorrow’s Investor: Building the consensus for a People’s Pension in Britain, which painted a controversial picture of the UK pension system in comparison to those in continental Europe. So does he fear alienating an adviser community that was largely critical of the report, accusing it of inaccuracy?
Nilsson stands by his assessment that UK savers pay too much. “In our analysis Danish savers get a lot more out of their savings than UK savers. That is based partly on having a lot of clarity on what they are charged. This is something the employers and advisers are focusing on. From a charging perspective there is a lot to be learned here. And in my view people are underestimating what they are actually paying here.
“When we start to drill into what is behind the charging structure there actually are we see there are still spread charges, we still see other investment charges that people will not understand, and stock lending where the gains on it don’t go back to the members – what is going on in the funds themselves. The other element is the annuity set up. Too many people are choosing the wrong annuity. The overall message is we believe you get less out of your pension than we do,” he says.
But considering for example Aviva’s declaration that its average AMC is 0.63 per cent across its corporate book, is someone in a 0.63 per cent AMC pension getting the right annuity still worse off than the average Dane?
“I think they are, but I don’t know how much worse off they are. It is not scientific, but being here I am seeing the amount of charges being taken out on all different levels. So I think there is something on the charges where there are definitely no free lunches here. Either people are not getting a very expensive product for what they are paying or they are actually paying for a lot of other things behind that, in our view,” he says.
Investment returns is an area where the provider is seeking to differentiate itself.
“Things have been quite bad for a long time and still people have an incredible equity risk in their portfolio, even close to retirement. That is another area where, if you look at the Danish pension industry as a whole, funding issues are not that problematic. We have these traffic lights that make sure how you are getting on track. So there is a lot more regulation around investment choices in Denmark. They are telling pension funds they have a risk of losing too much money in your current strategy, so what are you going to do about it.
Now:Pensions’ investment strategy is based on three funds – a managed diversified growth fund, a retirement protection fund and a cash protection fund.
The managed diversified growth fund is spread across five risk classes – rates, credit, equity, inflation and commodities, with overall risk controlled by a target risk level.
Nilsson believes this is an area where the UK can definitely learn from the Danes, and with auto-enrolment just around the corner, his argument may chime with the Pensions Regulator.
“We have been looking at how much money people have lost on default funds here and we think perhaps there should be some sort of shock-testing of your default funds. How resistant are they?
“Because again, one thing I feel strongly about is, go from a DB environment where the pension fund holds all the risk to the DC environment, the innovation has been around how the company can get rid of any thinkable risks and the only way that has been done is to place it with the individual. But if 90 per cent or so end up in the default fund, if that default fund isn’t suitable, that is a big issue.”
Member outcomes is set to rise in significance, and Nilsson will hope that Now: Pensions’ positioning, with its high profile governance team and bulk buying costs on DC defaults will give it the scope to pick up at least some of the employers grappling with their auto-enrolment obligations. This new entrant into the market has certainly given the competition something to think about.