Moving the water cooler conversation away from high charges and poor annuity rates to saving more for longer is a top priority for Dr Yvonne Braun, head of savings and retirement at the Association of British Insurers. John Greenwood reports
Getting the savings industry in shape for the arrival of several million reluctant new customers is no small task. Despite the continued bad headlines around pensions, Dr Yvonne Braun, head of savings and retirement at the Association of British Insurers, believes the building blocks are now more or less in place for the transformation of UK financial services by auto-enrolment.
Braun argues that big steps have been taken to heal many of the open wounds in the financial services system, most notably around charges, transparency and the open market option. By addressing these key challenges Braun, who comes from near Frankfurt and arrived at the ABI by way of a Wall Street law firm, Goldman Sachs and the FSA, amongst other roles, is hoping workplace conversations about financial services will shift from the negative to the positive and proactive.
“It is important for the industry to get away from these sorts of debate, because they distract us from the really important issue of saving. If we can get to a place where we, for example, we don’t need to have the debate around charges any more, we can talk about people starting to save earlier, and whether or not people should opt out, and how people can engage with their pensions. We need to get to that water cooler conversation being about saving, not about high charges.”
Pension charges have certainly been the biggest thorn in the reputation of the industry, with Labour’s Ed Miliband and Gregg McClymont ratcheting up the pressure earlier this summer.
Braun did not appreciate the tone or accuracy of Labour’s assault, but accepts its core message was correct.
“We were unhappy to be put in the same breath as phone hackers and Libor fixers, and we are on the record as being disappointed with some of the inaccuracies in what was said. But some of the things identified were correctly identified, and we can’t be in the position where people say all this stuff is hidden,” she says.
Labour’s intervention and the media coverage that followed it seems to have been the final straw for the ABI, which at the end of August wrote to the FSA and Pensions Regulator calling for a four-point strategy to improve cost disclosure: simple charges disclosure for employees in contract and trust-based schemes; disclosure of transaction costs such as broking fees; regular communication with employees on charges as their funds build up; and ensuring workplace schemes provide employees with clear and comprehensive charges information.
Director general Otto Thoresen has said he wants a draft disclosure agreement in place by the end of the year.
Having a protocol by Christmas seems an awfully tight timetable. “I don’t think we will have it in place by then, it will be guidelines. We have said we will have a protocol by the end of the year. That stands. That will tell us what the timelines will be going forward. We also need to consider how European regulations dovetail, because we can’t pretend it is all happening in a vacuum. But clearly this cannot be put on some back burner.”
And has this drive to transparency by the ABI been met with resistance, or at least the need for some soul searching by providers on this, given that some pension providers responded to enquiries about their portfolio turnover charges by refusing to say anything at all?
“Did they say they can’t tell you, or that they wouldn’t tell you? Maybe they thought there would be some competitive reason not to. But we did a survey in June of 95 per cent of our market, 120,000 pension schemes, and we found an AMC of 0.52 per cent for new schemes and 0.77 per cent for schemes overall. The worst thing we found was 2.11 per cent, affecting six schemes, and they are being renegotiated. Charges have been coming down rapidly,” says Braun.
“At the moment we are in a ridiculous situation where we are at the centre of these accusations when at the same time charges are coming down. That is a bewildering position to be in, but we can see why and we need to fix it.”
For Braun, disclosure is not just an insurance company issue but something the trust-based sector needs to address. The NAPF started work on raising charge transparency in October 2011.
“We think we need the same disclosure regime across both trust and contract – the individual member doesn’t know whether they are in a trust-based scheme or a contract-based one. Our members also provide trust-based schemes and they disclose to the same standard. But you don’t have a single regime that goes across the piece, and you don’t have any rules around disclosure of transaction cost,” she says.
“And while conventional regulatory wisdom is that transaction costs are not that interesting to people because that is part of the costs of investing in the fund, we have now arrived at a time where not disclosing that information appears intrinsically suspect, because people think you might have something to hide there. And we want to get away from that because we have got nothing to hide.
“We also believe that information should be given not just at the outset but also on an ongoing basis. So you can see each year that you have lost X pounds on charges,” she says.
And are providers ready for auto-enrolment? Braun believes so.
“Yes. A lot of work has been done over recent years to deal with the complexity of the legislation. So all the regulatory complexity lies with employers and our members have been working to help employers with that.
So does she detect a fear amongst providers that it is employers who need to be hauled over the finishing line?
“In the early phase, no. The sheer numbers of employers is going to get quite crunchy as time goes on. We are still talking about large employers with sophisticated processes and HR departments. But when you get to one or two years down the line, then we will have to see.”
And how concerned is she that ABI members may be running schemes in to which people will be automatically enrolled which have default funds that are, in some cases, 100 per cent default funds, right up to retirement?
“These are not auto-enrolment compliant. And there are DWP guidelines that are very clear. The DWP did not want to say ‘it has to be target date funds’ or some other prescriptive statement of one model. But they have said that you need something that moves people out of the more risky assets as they are approaching retirement. So I would be very surprised if our members were enrolling people into 100 per cent equity up to retirement age,” she says.
One of the ABI’s other big projects to restore consumer faith in financial services is its annuity code, due to come into effect from March, which will require providers to prominently highlight the open market option, enhanced annuities and other alternatives, as well as directing consumers towards advice. Is that still on track for implementation?
“We know we are on the hook for that – to be ready by March. It is quite a pressure for members given all the other things going on at the moment, but they know they have to do it by March. Then there is the question of the trust-based sector, which we would like the NAPF and TPR to address. And the NAPF is looking at that,” she says.
And does Braun think there should be a read-across of what the ABI is doing with its annuity code to the trust-based space.
“If you are an individual you don’t know what the difference is between the two, and you need to be able
So will we be able to say, once the ABI’s code is in place, that contract-based members approaching retirement are actually better served than trust-based ones?
“I am not sure you can say that. Because we have this huge disparity in the trust-based market between very large schemes where the trustees are incredibly professional, and then the smaller end where as we know from TPR that the service is ropey and the trustees don’t even meet every year. But we would like to see the same standards across the piece. So many trust-based schemes will have to up their act,” says Braun.
But it is not all plain sailing on annuities, with the gender pricing ban a matter of weeks away.
“It is not pretty. But the most important thing with this issue is not to lose sight of the woods for the trees. A lot of column inches have been used up talking about Test-Achats and the injustice done to us by the European courts. But for an individual for an annuity purchase there are many more decisions that need to be made that influence the price you get. If you don’t take advantage of the open market option, for starters. If you don’t get an annuity based on your health condition or smoke. But yes, it is another factor,” she says.
And does she think the court decision is the right one?
“We have always said we want to be able to price the risk as it is, but now that it has happened there is no point being enraged about it.
And what does Braun make of the fact that while the sale of insurance products is covered by the Test-Achats decision, those distributed through occupational schemes are covered by a different EU directive and therefore can continue to be underwritten on grounds of gender?
“The loophole is not great. And we wonder how long that will be in place because we can see the same sort of test case being brought there, so we will end up back where we started,” she says.
The other piece of the jigsaw in the auto-enrolment reform is the small pots conundrum, an area where the ABI’s small pots vision seems to be winning ground over the NAPF’s aggregator model.
“It’s not a competition. We did this research and asked 2,500 people what they would like to see happen and they said they would like to see this thing follow them around. That is not to say that pot follows member is not without its complexities. None of the proposed alternatives were without complexity. Getting it all to an aggregator is complex. Doing a virtual aggregator is complex. And similarly pot follows member is complex. But it is really good the government is trying to address this. But you have to do it in a way that is cheap, and good for consumers and allows opt-outs. But there is still a lot to be done,” she says, predicting it may take three years for full implementation of a solution to be implemented.
All about Dr Yvonne Braun
Born – Germany, between Frankfurt and Cologne.
Lives – St Albans, with British partner and children. Has lived in the UK for 13 years
Enjoys – Playing the piano, spending time with her young children
Previous career highlights – German investment banking, Wall Street law firm, Goldman Sachs, FSA
On UK financial services – “Germany and the UK are both northern European, so the cultures are not that different. And German investment banking is mainly Anglo-Saxon practice and much of the documentation is done under New York or English law anyway. So investment banking is an Anglo-Saxon enclave within Germany. I was first attracted to the US firm for that very reason, because it was much less formal and more flexible.”