Setting up the body that will deliver what is the most fundamental structural change in UK pensions for a generation was always going to be contentious and Tim Jones’ project has been eating up column inches in the press since
Understandably for somebody whose full time job is to bring personal accounts into the world, Jones has a very clear idea of what they are and what they are not. Though personal accounts have in the minds of many become shorthand for the disincentive to save, this is a misconception that Jones believes must be put straight if the industry and the wider political community is to have a sensible discussion on the industry.
Jones believes the core of this misconception is summed up by the way the phrase ‘personal accounts and means testing’ is often used to describe the interaction of state and private benefits. “You may say the issue is personal accounts and means testing. I say the issue is workplace pensions and means testing,” says Jones, pointing out that there are already millions of lowto middle-earning workers in workplace pensions who are in exactly the same position of not receiving 100p in the pound for their pension savings as the future victims of auto-enrolment.
He has a point. “‘Personal accounts and means testing’ has in many quarters become industry shorthand for the wider issue of the disincentive to save, yet it is auto-enrolment itself that is the cause of the problem.
“This is not about personal accounts – it is about workplace pension provision. There are already existing workplace pensions such as local authority schemes where low earners are auto-enrolled into pensions. This is nothing new. It is an issue for society to discuss, and for the Department to deal with,” says Jones.
Indeed if Jones had wanted to be more confrontational and less diplomatic about the issue he could have pointed out that many of those pension companies criticising the pension reforms because of the disincentive to save are currently happy to receive premiums from low earners rather than flag up to them why it may not pay to save. Those providers could counter that at least those low earning members who are existing schemes have elected to join, but few have made any attempt to tell them they should leave.
While Jones bats off questions about the interaction with state benefits on the basis that its not his job to comment on them, detail around other issues is withheld on the basis that he needs to keep his cards close to his chest for his procurement dealings with potential service providers.
One such question is how many people he expects to remain in the scheme.
The target market is 9 million or more, and Jones has publicly mentioned the figure 6 million joiners, but he is refusing to be specific at this stage because opt-outs will affect the cost of the services he buys in.
One of his biggest challenges is cost, with the Pensions Policy Institute putting Pada’s borrowing requirements somewhere in a range between £1.7bn and £4.5bn depending on the charging structure opted for, leading some to depict the new body that will be born from Pada as a huge unwieldy monolith. The scale of the challenge is immense. Standard Life, for example, has 400 people looking after 1 million employees with big employers who want to engage with pensions. For six times as many members, across hundreds of thousands of tiny employers surely isn’t the operation going to be an enormous one?
Jones’s vision is one of a stripped down business outsourcing virtually everything other than trustee operations. “We distinguish between people in Pada, which is this transient thing that will disappear when the Trustee Corporation has been set up. We don’t have a name for it yet but this is a helpful label. The Trustee Corporation will have a staff, but I do not anticipate that being very big. That Trustee Corporation will be procuring the people and the admin and everything else through the procurement of a series of business services. It will not be buying its own call centre or data centre.”
He accepts the challenge of getting hairdressers, scaffolders and other businesses not currently offering pensions on board will be a big one, and sees technology as answering many of his problems. “For this project to work for the target market it has to be a simple and easy to use and as automated as possible. We completely accept that there are different technical backgrounds amongst the employers that we will be interacting with. But if the system is as good as the DVLA website, and you simply pop in the gross pay and NI number, and we calculate the contributions and you nominate a bank account, then wouldn’t that be an easy way to do it?” he says. Cost is clearly at the fore in all stages of the process and Pada’s spartan offices in pleasantly down-at-heel Borough High Street reflect the Authority’s mission to create a cheap and cheerful pension for the masses. On charges, Jones is saying nothing more than the 0.3 to 0.5 per cent previously mentioned, not wanting to pre-empt the consultation which comes out later this month which will set out the latest thinking on charges.
But there is suspicion in the industry that however well Jones addresses his task, the Government can move the goalposts to make sure its policy is a success. Some in the industry worry that Jones’ target is to get as many people in the scheme as possible, whether from the pool of current non-savers, or through leveling down of existing schemes.
So is his personal performance benchmarked against the number of members the scheme gets or the wider take-up of pensions across those who currently do not have pensions?
“Neither. My performance benchmark is to launch in 2012 a successful personal account scheme that makes the policy objectives set out by the legislation and that focuses on the target market of low to medium earners,” says Jones. “We are not here to maximise participation in it. We are here to say, look the government is introducing obligations for qualifying employees to be enrolled into qualifying schemes. If you put yourself in the position of the government and introduce a duty that applies to all employers then you have to offer a way for all employers to comply. Our advice to government is that it needs a certain number of people to be viable but there is absolutely no sense that the objective is to maximise its numbers.”
But what about the fact that the way the regulatory framework that sits will affect vision numbers of people who go into personal accounts. Surely it will be a success if it has lots of members but will be deemed a failure if nobody joins it. By making it hard from a regulatory point of view to go into private sector schemes, can PAda not facilitate the success of personal accounts?
“I accept that the relationship that we have with the regulator will be very important. The idea is to give all employers an opportunity to comply with a minimum burden. That means the way the Pensions Regulator implements this will impact the way personal accounts runs.”
“I would accept that the relationship with the regulator is important. But I would also say that the conversations that are being had here are fully respectful of the fact that the regulator needs to maintain its independence. I am head of Pada, Tony Hobman is the chief executive of the Pensions Regulator. He has a relationship with the DWP and so do I but it is the Department that is even-handedly in charge of that. It is not for me to tell Tony Hobman how to comply with the regulations so that it will benefit personal accounts. Tony doesn’t say ‘these are my new regulatory powers, this is what I intend to do with them, how does that work for you?’ There are all of the proper checks and balances that there should be,” says Jones.
Qualifying earnings has been another thorny issue that can make life difficult for existing schemes, potentially forcing the pace of leveling down. “This is a topic where we can only speak for the way it will impact on personal accounts. It is not our job to talk about this more generally and it would be presumptuous of us to do so. While I recognise that the earnings definition is difficult I understand why the government wishes to do that. Because of the way we anticipate personal accounts interacting with employers in terms of collections, for example, where we hope to be almost entirely electronically engaged, we are confident in conjunction with the payroll industry and providing a direct interface for those that do not run payroll, that we can enshrine the calculations implied by the earnings definition in the legislation,” says Jones.
“The fundamental thing going on is new duty on employers to make contributions to all schemes. That applies to all schemes. It is nothing to do with personal accounts – it is to do with encouraging, through contingent compulsion, a strategy for workplace saving that applies to all schemes. We don’t anticipate being treated differently from other schemes. Personal accounts will be effectively regulated by the Pensions Regulator so we will be a scheme complying as other schemes do,” he says.
Jones sees the role of media as critical for the success of personal accounts. “It will be a different world launching if the media is saying this is sensible, rather than we don’t like this. I hope it will not be the latter,” he says. Personal accounts have benefited from at least a basic level of political consensus for two years so far. Jones will be hoping that consensus will still be holding four or five years from now when the project goes live n
Chunky business How Pada sees the new system operating
Pada has split its view of the world into what it describes as ‘chunks’. “Chunks is an odd word, but we chose it because it has not got any meaning whatsoever in the world of pensions,” says Jones.
Chunk 1 whatever we do marketing or customer interaction, this could be info on scheme, branding, tone of voice.
Chunk 2 scheme administration. US providers call it the record keeper. Holding account details and member details. This is the biggest single part of the work.
Chunk 3 may be absorbed into chunk 2. Collections and reconciliations. We had thought of doing that separately, but we are now minded to do it together.
Chunk 4 decumulation.
Chunk 5 the Trustee Corporation and its set of roles – this includes investment advisers, legal advisers, support staff, a building.
Chunk 6 investment administration and custodianship of assets. We will be consulting in the autumn over whether it will be sensible to procure those things separately or not.
Chunk 7 fund management. This will form the basis of a consultation paper to be issued this autumn.
Investment matters the autumn consultation
This autumn PADA will be consulting on the wide range of issues presented by Chunk 7. “The consultation paper – its more a book than a paper, running to 10 chapters – is a very important document for the whole process. There is clearly going to be a debate about active versus passive, and also the different approaches to lifestyling. Our current view is that we expect to do lifestyling, but we are canvassing views about how.”
Jones does indicate that a low cost tracker approach is winning the argument so far. “AMC is obviously important in a low cost scheme. Some people say your objective should be to generate good returns rather than just focus on cost. When you come to investment there is the usual active versus passive debate and we will hear what people say in the consultation,” says Jones. “The preponderance of informal advice we are getting so far is that this feels much more passive than active, given you have a significant proportion of people in the fund are going to be there for decades. Given the length of time people are investing some people are telling us that an asset strategy is more appropriate than an active one.”
“There is also the issue of the default fund. We expect the vast bulk of people will go into it, as many as 80 or 90 per cent, and we think that is fine. We think the construction of the default fund is very important. We expect in parallel with that discussion to consult on decumulation, because they are in a sense related.
“Outside of the default fund there will be a small or very small number of extra funds, covering religious beliefs such as Sharia funds and potentially other religious groups, and also around social and ethical matters which is a separate issue from the wider ethical investment issues. Our fundamental view is that this is more an issue for the Trustee Corporation than for ourselves because it is members’ money that is being invested. Where I believe we are not headed is towards a broad sophisticated 300 fund choice approach. Partly because that is not what the target market looking for and also the cost, but we will be consulting on it.”