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Leap of faith: Danish firm ATP launches Nest rival

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Persuading UK employers and the intermediaries that advise them that they should throw in their lot with a provider that is unknown and untried in this country is a big ask.

Overcoming these preconceptions is the challenge facing Now:Pensions chief executive Morten Nilsson, the man at the helm of the new UK arm of Danish pension provider ATP.

The UK pensions sector is a congested place and with workplace distribution controlled by benefits consultants and corporate IFAs that generally want to see a track record before trusting their clients with a provider, you could be forgiven for seeing the challenge ahead of Now:Pensions as a difficult one.

For Nilsson, there are two ways in which his fledgling provider will be able to differentiate itself from the competition when the provider goes live at the beginning of next year cheaper, better default funds and a credible trustee offering.

Investments will be relatively low cost but more sophisticated than what Nest will offer and what much of the rest of the UK system typically offers to workers, says Nilsson.

He says: “We are focusing on offering what is at least on the surface a simple product that is going to be very cost-efficient because cost really matters and the compounding effect of cost is important.”

Nilsson is unafraid of ruffling feathers in the intermediary community by suggesting cheaper outcomes are achieved on the continent, echoing the views expressed in last year’s controversial Royal Society of Arts report, in which author David Pitt-Watson said systems such as the Dutch generated 50 per cent more income for pensioners because charges were lower.

Many in the industry have rejected the accuracy of the RSA report, pointing out that workplace AMCs are typically lower than the 1.5 per cent cited in the RSA report. Aviva, for example, says its average AMC on corporate schemes is just over 0.6 per cent.

But Nilsson says charges in the UK system go beyond what is revealed by the AMC, adding that commission is partly to blame. The provider will be fee-only on launch and will not be offering a consultancy charging option to pay for advice.

Asked how the provider will achieve its distribution goals if it will not pay commission, Nilsson says: “When you look at some of the analysis showing British savers get 50 per cent less than Danish savers, part of that reason is commission. There is a lot of money being taken out of people’s contributions. You don’t get anything for free and there is a huge difference between our market and the UK market.”

He accepts that bigger schemes get lower rates but says the UK is an opaque market that is tough for trustees, employers and members to navigate. “As I interpret the market, if you are a big scheme, you can negotiate good rates. And so my assumption is that many of the large companies have some pretty good deals. But I have looked at the details of some schemes, where people have shared them with us. Good deals can be negotiated but you have to keep on negotiating because otherwise fees can be raised in some cases without notice or notification. And you have this range of funds where some are good value but some are not. Charges might be deep down in the fact sheet but as a member, you have to make an effort to find the figure.”

Charges are a big influence on retirees out-comes. How investments are made is another field in which Nilsson believes his company’s expertise can win out.

’We think there is a need for a highly diversified portfolio’

He says: “During the current crisis, we are seeing that people are losing too much of their pension savings. So we have got to have an investment approach that adjusts to the volatility in the market but is also diversified enough to give you long-term, stable returns. So you are not just falling down when times are difficult.”

Diversification within the default is, for Nilsson, the key to hedging out the dips in the market that corrode returns as well as members’ confidence.

“In our approach, we think there is a need for a highly diversified portfolio and that means using commodities and credits and interest rates, inflation and equities, so you adjust for the volatility of the market, and offering a smoothing into retirement.”

Key to Nilsson’s offering is a belief that parent ATP does have the investment expertise and low cost base to enable it to achieve better performance than those in the UK are currently delivering for default funds. Cynics would say it is easy to claim you are going to beat the market achieving such an outcome is another matter.

In defence of his position, he cites figures from the Danish equivalent of the FSA that show ATP coming top of all the country’s pension fund managers, with annualised returns of 6.3 per cent net of charges in the decade from 2001 to 2011. These are numbers that most funds in the balanced managed sector would be more than happy with.

Nilsson says he is yet to decide whether there will be more than one fund available through the provider and will not be drawn on costs just yet.

Cost will in part depend on exactly how the default fund is constructed, something that Nilsson admits is yet to be completely determined, even though launch is only a matter of months away. But whatever shape it finally takes, risk management will be key.

“People have three risks in defined contribution. One is investment risk and that is what we are trying to handle by offering a really good default. The second is the interest rate risk in buying an annuity and we want to hedge that risk as you go closer to annuity. We will do that by buying gilts and interest rate swaps. And the third risk is longevity risk.”

Nilsson explains that the difference from a standard lifestyling offering is that the underlying growth fund is not bound by benchmarks. “The growth fund has the flexibility to act according to the volatility. So the trustees can take as much or as little risk as you think is right during the saving period. And you can smooth into retirement and decide how long that is going to be.”

Dealing with longevity is something of a work in progress although Nilsson believes Now:Pensions has time to figure out how to deal with this one within the UK’s regulatory system.

He says: “Longevity risk is still being handled by the annuity providers but we have seen that in January 2009, a lot of people were still 60 per cent equities and 40 per cent bonds a year before retirement, which is not good. But even if they had been following a lifecycle process, the interest rate was and still is very low. So it can’t be right that just because you happen to retire at a time when interest rates are low that you lose so much of your future earnings.”

So how will Now:Pensions deal with longevity risk? In Denmark, it manages this risk by buying tranches of income as the individual’s pot grows.

“We are not offering our lifelong guarantee product yet in the UK because the regulatory regime is not clear so we cannot be in a position where the employers will risk having unknown liabilities going into the pension. It needs to be very clear that they are not. It will be a while before we have to offer our clients an annuity but we will be looking at options as to how we can give them the best annuity products,” he says.

’We would love to become big, of course, but we do not need that many members to be a viable business. But the more the merrier’

Now:Pensions is also still working on managing interest rate risk. “When you are 20 years from retirement, you could be hedging against interest rates, buying the rates so you protect your fund against the interest rate development. But we are still finessing how this will be done. We have some good ideas that we can hedge a lot of that risk out. But for us, if we can get rid of most investment risk and handle the interest rate risk as well, then we are doing more than most other providers.”

All these risks, interest rate, longevity, investment performance and the potential to fall victim of high charges, will shoot up the agenda in the minds of employers and employees once auto-enrolment kicks in, which is why Nilsson believes the prov-ider’s multi-employer trust structure will also attract business.

When millions of Britons start seeing pensions contributions automatically deducted from their pay packets, we will begin to see trust become an increasingly significant issue,” he says.

Now:Pensions has been compared as a competitor to Nest and the one way in which Nilsson would like to be perceived as mirroring Nest is in its strongly defined independent trustee board designed to give members the confidence that someone is fighting their corner.

With former Shadow pensions minister Nigel Waterson, former TUC general secretary John Monks, ex-government actuary Chris Daykin and ex-Sainsbury’s HR director Imelda Walsh on its board, Now:Pensions can claim a trustee entity that has gravitas across key areas of expertise.

Nilsson says: “Our view is that choice has not always been made in the best interests of the members so people are realising they have lost on the charges and on the investment because the times are not good. And that is a problem for the trust. It is a big problem for auto-enrolment because when people are being automatically enrolled, they have to opt out not only once but several times. So if the schemes are not delivering value, it is a big issue.

“I know in the UK there is a lot of cynicism about independence but it is independent. It is owned by the members and governed by a board of trustees that is independent from ATP. In Denmark, we have 4.7 million members so we know how to run a large-scale pension. In our set-up, we are focusing on making sure trust is protected, so there is no economic risk in the trust. We have the track record of doing this for 45 years.”

Achieving distribution will be crucial to success, however. If Nest needs two million members to be viable, as has been suggested in some quarters, how many does Now:Pensions need?

“We have been focusing on a scale business model. We are leveraging our scale from our Danish operation, with our £80bn of assets under management there, and we are leveraging the scale of Xafinity Paymaster in the UK, where they run I believe three million policies. So we have already achieved scale. Our business model is quite scalable. We would love to become big, of course, but we do not need that many members to be a viable business. But the more the merrier,” he says.

But it is a big leap of faith for advisers to recommend an as yet untested group pension provider. Doing so with a provider that has no track record at all in the UK is an even greater step. So how will Nilsson persuade employers and intermediaries that Now:Pensions is not going to pack up and go home in a few years if things do not work out?

“We are setting up an independent trust that is based in the UK and that will be here going forward. We have the track record of delivering investments and that is global. And we have the track record of handling employers and members,” he says.

Now:Pensions is not looking to partner with Nest formally, as some providers are. It will run UK call centres and admin will be handled in the UK by Xafinity Paymaster. Charges are yet to be determined, but will have two components a per member admin charge and a fund-based charge for investment management. Adding a corporate Isa to the offering is currently an aspiration rather than a plan.

These are exciting times for Nilsson, who has been living in London for a year and who sees a big opportunity for his new proposition. “We see a big market. Seen from the outside, there are too many small pension funds in the UK. There are over 46,000 DC funds and that is simply too many.”

’We would love to become big, of course, but we do not need that many members to be a viable business. But the more the merrier’

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Readers' comments (1)

  • ATP untested?
    I think not. They have been industry leaders in providing corporate pension services in what is effectively a compulsory regime for over 30 years.

    The better question for me is "why trust NEST?"

    It is a new quango funded by tax payer loans with no experience in any market that has contracted the IT development to an Indian conglomerate with limited experience in developing systems for the UK pension sector.Untested systems and untested administration look like a high risk venture to me.

    NEST of ATP?

    Experience and proven systems work for me!

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