Ian Naismith The Expert
There is a myth among consumer groups and many Government departments that contract-based pensions – mainly personal and stakeholder pensions – exist solely for the benefit of providers and advisers and are intrinsically dangerous and of poor value.
Trust-based occupational pensions, on the other hand, are thought to be run entirely in the interests of the scheme members and, as such, are regarded as much safer and better value.
The reality, of course, is that occupational pensions vary widely. Very large companies with self-administered occupational schemes run these at low cost because of economies of scale and may even fund the administration costs themselves.
They generally have efficient administration infrastructures and well trained trustees committed to doing their best for the members. It is these schemes that people tend to have in mind when they extol the virtues of occupational provision.
Smaller occupational plans may share few of the good characteristics. They are usually invested with insurance companies, with charges at least as high as for personal pensions.
In-company administration can be an added extra to someone’s job and trustees can be poorly trained and have limited awareness of their duties. The efforts of The Pensions Regulator should have improved that but improvement is by no means uniform.
The much-maligned personal pension, by contrast, stands up well under scrutiny.
The market is highly competitive and pricing is keen. Administration is far from perfect but has improved significantly over the years, and companies that fail to deliver a good service will rapidly lose business.
Providers and advisers are unashamedly commercial organisations but treating customers fairly imposes many similar responsibilities to trustee duties and is closely monitored by the FSA.
Group personal pensions offer positive advantages over occupational schemes. For example, they incur much lower employer administration overheads while still being recognisable as a scheme provided by the company. For members, they offer greater confidentiality and are portable if they leave the company. These are benefits that are all too often ignored.
However, the burden of regulation is still significantly heavier for personal pensions than for occupational schemes and the retail distribution review could increase the difference.
In addition, the ability to refund member and employer contributions to occupational schemes where individuals leave with less than two years’ service is sometimes seen as a way to mitigate the burden of automatic enrolment after 2012.
All this has led to a resurgence of the occupational pension that acts like a personal pension – the master trust arrangement.
It is easy to understand the attractions of this change but if its purpose is simply to circumvent unpopular regulation, it is the wrong way to go and may well have no long-term benefits.
When clever schemes are devised to exploit loopholes, these loopholes are generally closed pretty quickly.
Much better is that we highlight the imbalance in regulation and fight for a level playing field. This is undoubtedly an uphill struggle, this is a battle worth fighting.
We are doing our industry no favours in the long term if we put our efforts into creating schemes that go against the principles of regulation rather than working to achieve fairness for everyone.
Ian Naismith is head of pensions market development at Scottish Widows