Steven Dignall talks to LogicaCMG chairman of trustees Simon Baynes about how one of the oldest defined contribution (DC) plans in the UK has evolved over the years
Steven Dignall: What was the rationale behind the employees’ choice to opt for a DC arrangement rather than a final salary scheme?
Simon Baynes: Back in 1975, many schemes were considered as very conservative, even pedestrian. However, there was beginning to be some momentum towards the portability of pensions. It was quite difficult to take a defined benefit (DB) pension with you in those days and transfer values were particularly poor.
Those early Logica staff were unlikely to be with the company all their careers and they wanted to take their pension with them when they left – so portability was a key issue for them.
The rationale for their choice was that they would get better investment opportunities and increased portability if they moved to new employers. To be honest, they were also a little suspicious of the company’s covenant – which in those days – was a high growth fledgling company in a new industry sector backed by venture capital.
Steven Dignall: The LogicaCMG DC Scheme is one of the oldest DC schemes in the UK. How has it evolved over the years to keep up with changes in DC provision?
Simon Baynes: Over the years, it has been involved in just about all the different dimensions there are. In terms of admin, it started off being in-house, and then it moved to an external administrator who one would say was not particularly sophisticated. It is now with an administrator with very good electronic access for the members online.
In terms of the investment, Logica started with a single balanced fund and gradually more funds were added.
We now have about 13 funds – active and passive invested in UK equities and global equities. There is also a property fund which is unusual for DC so there has been an evolution there.
There has been an evolution among staff as well. In the early days, they were high powered, highly educated science or IT graduates, all working in a very small part of London within three streets of each other. Now, they are spread right across the UK and indeed across the world and cover a whole range of disciplines.
Most interestingly, there has been evolution in terms of the sophistication of the trustee. They have learned a huge amount. In the old days, we were told it was a job that entailed about ten days work a year – you attended the four quarterly meetings and that was about it.
Steven Dignall: How has the financial crisis affected the scheme? How have you/the members reacted?
Simon Baynes: The financial crisis has had a huge impact on the pension scheme and has resulted in a big fall in pot values for the members. Those who were invested in equities have lost around 30% of the value of a year ago. This has very serious implications for someone who is close to retiring and has remained in equities.
We have also noticed a considerable slide to cash. As trustees we are not saying that is a good thing, but it is something that has certainly happened.
We have had a lot of questions from members about the security of the different funds, how much they are protected and how diversified they are – questions which they had never bothered to ask in the past. We even field questions concerning the security of the cash fund.
Steven Dignall: Much is being made in the pensions press about the impact of the crisis on DB schemes, do you feel the impact on DC has been/will be greater in the long run?
Simon Baynes: I think the impact is bound to be greater on DC schemes. If you are in DB and the employer stays solvent, you are going to get your pension. Even if your employer goes bust, the Pension Protection Fund will pay out the majority of your pension
However, if you are in DC, then you are on your own. It’s an issue which is going to be very serious for DC members and it will become more serious as the proportion of people retiring on DC pensions grows.
Steven Dignall: Communication and member education are frequently pinpointed as fundamental to the success of a DC scheme. How do you ensure your members are getting both enough information and the right information?
Simon Baynes: Most notably, we have been running a series of road shows around the country and the turnout has never been so high. This is where people can meet the fund managers and the administrators. This time we have been running a series of videos specifically aimed at different age groups of members.
We introduced a glossy newsletter 11 years ago and we have a member engagement group – which looks after all pension aspects.
Steven Dignall: One of the problems most frequently associated with DC is that people do not save enough for their retirement. How do you avoid this?
Simon Baynes: Even the most sophisticated do not save enough. One of the messages I try to get across to people is – you are going to work for about 40 years and retire for 20, therefore every month when you get a pay cheque – you should accept that has got to last for six weeks not four.
When people first hear this they think this is a step back. It is vital that we get the message over – that your income during your working life must cover the rest of your life.
Steven Dignall: How much do you oversee how members are investing? How involved can you get in their decision-making process?
Simon Baynes: We cannot watch over members’ investments. You can provide information, you can provide the catalyst, but you cannot instruct people on what they should do.
Educating members is a bit like advertising. Everybody knows that 50% of all advertising is wasted but no-one knows which 50%.
We could actually think that three-quarters of education on pensions is wasted.
However, people need advice – it is probably the biggest financial decision that they will make in their life – particularly when it comes to buying the annuity. If they buy the wrong annuity, they cannot back out – that is why it is such a critical decision.
Steven Dignall: Choice seems to be an issue with DC investment. On the one hand, members are often presented with too many choices in terms of which funds to invest in, but on the other hand, DC members will often not gain access to some of the more innovative, alpha-
generating asset classes and investment opportunities – is this something that you see being an issue for your scheme members?
Simon Baynes: For quite a while, some of our more sophisticated members have been pressing for a wider variety of funds. Around 15% of our members own 60% of the fund. Some of these people have pots that are around £1m or more and they have been pressing us for more options in terms of funds.
However, at the same time, we do not want to confuse the less sophisticated members with small funds with such a huge selection that they end up making no selection at all.
We introduced the property fund a few years ago and that certainly helped. It is a balance between meeting the needs of those sophisticated members with very big pots and helping the people who are making the standard contribution on a very low salary.
Steven Dignall: What percentage of Logica scheme members sit in the default scheme? Are you behind the school of thought that believes in just accepting people will naturally lean towards the default scheme and therefore investing money/time into making that default scheme as good as it can possibly be?
Simon Baynes: Our lawyers have steered us away from having a default fund. We do have a lifestyle option and that has, to all intents and purposes, become the default. It is probably somewhere around three quarters of members that would be in that.
Historically, most people would just tick the box and lean towards the default scheme. However, it is quite common for people to start in the lifestyle fund and when they get an eye for the pot and begin to understand how pensions work – they then go freestyle. That is probably no bad thing.
Steven Dignall: The demise of DB is often lamented, with DC being seen as an inadequate alternative. Is this something you disagree with?
Simon Baynes: I don’t have a problem with DC versus DB – I have a problem with people’s perception on the contribution rates. If you have got a contribution rate that is offered to you by your employer, then over a full career, you should be just as well off in a DB or a DC scheme.
It is true that in DC you carry the risk, but if someone offered you an option of a DC contribution rate of 25% or 30% then you would be very happy. The issue isn’t DB or DC – the issue is where most schemes have gone from being DB, the overall standard contribution rates have been cut roughly in half.
When the Logica staff all those years ago were offered the option of DB or DC, the company was expecting to contribute 8% and the employee 4% – regardless of whether it was DB or DC.
Steven Dignall: What are the biggest challenges for you as a DC scheme trustee?
Simon Baynes: I think the biggest issue for a trustee is to focus on what they are there for – to secure a decent retirement for our members.
It is not about ticking the boxes to say, “We’ve got a good newsletter” or to say “we have funds invested here or there”.
It is all about the final objective – funding a decent retirement. We could run the best scheme in the world – but if people are going to retire in poverty, we haven’t done our job.
This week's top stories included Cardano announcing plans to acquire Now Pensions from a Dutch pension fund later this year.
Royal Bank of Scotland (RBS) faces a £102m impact on liabilities as a result of equalising guaranteed minimum pensions (GMPs), according to its annual results.
Malcolm Mclean says getting the channels of communication right and engaging more openly is a good starting point