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John Greenwood: The problem with closed book providers and auto-enrolment

A lack of engagement with auto-enrolment should raise concerns about closed book pension providers

The pressure auto-enrolment is piling on UK pensions is leading to increasing opacity among providers, whose silence in response to simple questions about their propositions leaves one pondering whether they have something to hide.

The latest example I have come across is from Phoenix Group, the organisation that holds the policies of 6m Britons with a combined value of £71bn.

It, like other closed book providers, and open ones for that matter, has many group pension schemes that will become auto-enrolment schemes at some point in the future. Asked what it intends to do about making these schemes compliant with The Pensions Regulator’s auto-enrolment guidelines for workplace pension plans, Phoenix’s response is effectively that it does not have to deal with the issue yet because it will not be affected for some considerable time.

Fair enough, you might think. So when do the employers behind Phoenix’s group schemes hit their staging dates?

‘Er – we don’t know,’ is the conveniently unhelpful answer.

So let us make it as easy as possible to figure out. When, at the very latest, will Phoenix have to do what all other providers have to do and review auto-enrolment suitability for legacy issues or advise its employer clients they should go and find another provider? Or in other words, how big is the group scheme with the biggest number of members across Phoenix’s book, which includes Royal Sun Alliance, Pearl, NPI, London Life and Britannic?

‘We don’t know that either,’ says Phoenix. Nor does it have figures of the number of its schemes that have members 100 per cent in equities right up to their nominated retirement date, apparently.

How can a £71bn financial services provider not know the size of the largest group pension scheme it administers?

It is hard to square its position with its claim on its website that it ‘manages closed life funds in an efficient and secure manner, protecting and enhancing policyholders interests’. It really should know the answer to these questions.

Phoenix is not the only provider with a legacy book of business that includes workplace schemes that will have to comply with auto-enrolment guidelines on charges, default fund options and governance by the sponsoring employer’s staging date. But auto-enrolment does seem to present more challenges to closed-book providers.

Providers out writing new business at least have the advantage of striving to be best of breed to win market share today. That means apportioning resources towards developing up to the minute auto-enrolment compliant solutions. For closed book providers the game is all about running the business off with as little expense as possible.

I predict more Phoenixes with their heads in the sand in future. As auto-enrolment cranks up the scrutiny on our pensions system, I have detected a marked increase in the number of providers thinking they can get away with holding back information, as evidenced by Legal & General’s blunt refusal to disclose portfolio turnover rate charges on their biggest default fund two weeks ago. And this reverse glasnost is not just a problem faced by journalists.

Last week, Lane Clark and Peacock published a report that revealed about 30 per cent of DC investment providers it spoke to were unwilling to provide details of the indirect costs associated with their funds.

LCP argues that diversified growth funds, often used as the default option for DC schemes, can have total costs as much as 50 per cent higher than the headline direct annual management charge because fees charged by external holdings in these funds are not disclosed.

Taking into account trading costs as well, these additional costs combined can be more than 100 per cent higher than the quoted annual management charge, in some instances.

I am not against paying for fund management, but if providers are not prepared to disclose indirect costs to advisers who work on behalf of employers and trustees, how can we be expected to trust them? Unfortunately for the majority of providers who play with a straight bat, it is the industry as a whole that gets a bad name.

John Greenwood is editor of Corporate Adviser


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