Alan Pickering says we have been blindly pursuing cost reductions in pension administration without really appreciating the consequences
There has been a spate of infrastructure failings around the world in recent months. Many of these have had tragic consequences. While the actual causes may vary, there is a suspicion that, in many instances, price may have had a disproportionate effect on the cost benefit analysis conducted at outset or in connection with regular maintenance.
Those of us who work within the worlds of financial services and employee benefits have seen at first-hand how the asymmetry of knowledge can often result in providers making a fast buck at the expense of their consumers. Naturally, this has led to regulatory and political intervention which has encouraged trustees and other intermediaries to up their game. This is particularly important in a pensions world that is increasingly defined contribution in nature. Sadly, however, there has been a failure to differentiate between good costs and bad costs.
This failure has had unintended consequences in the market place for pension administration services. We have scored an own goal by blindly pursuing cost reductions without really appreciating the consequences.
In the short term, we may have made significant savings. In the long term, we may have reduced the choice available and even resulted in a market that suffers from severe capacity constraints.
There are some interesting parallels in the retail market. Many of us have benefitted from free banking although this easy ride may have excluded less well-off folk and led to cost recoveries in other areas that have been opaque at best and toxic at worst. We now see some marketplaces around the world where asset management is being provided free of charge to certain customers. Labourers, whether by brain or brawn, are entitled to a reasonable return on their endeavours and capital providers, some of whom may be pension schemes are also entitled to returns on their investment.
In defined contribution (DC) land, member outcomes are obviously dependent on the level of contributions and the investment returns these inputs generate. However, one must not underestimate the impact of poor administration. Members are likely to spot shortcomings in customer service long before they are able to measure outcomes. Bad service may taint the member journey to an extent that pension saving is discontinued.
The demise of defined benefit (DB) provision was not the result of tax changes introduced by Norman Lamont and Gordon Brown. It is the well-intentioned succession of social policy imposts that have really done for the DB jewel in the crown. Some of these impositions have affected benefit design while others have increased running costs because of statutory or regulatory intervention. If DC is to do the job we want it to, we must avoid repeating mistakes made in DB land. The prescription should be kept to a minimum. Trustees and other intermediaries should concentrate on value for money rather than the desire to get pensions on the cheap. The powers that be should think long and hard before increasing running costs for commercial providers and sponsoring employers. In an era of lower for longer, avoidable costs will directly impact member outcomes. Excessive administrative burdens will result in employers regarding pension provision as a compliance obligation rather than a valuable and valued employee benefit. Just look at the amount of administrative grief that is resulting from the reduction in lifetime and annual allowances. These are affecting folk that are saving for retirement and not seeking to save tax. Similarly, we are all grappling with the interaction of open banking and the pursuit of dashboards on the one hand and GDPR on the other. George Orwell would have some colourful language to describe the interaction between these awkward bedfellows.
Being a Yorkshireman, I hate spending anybody's money, not just my own. However, as a boy, I could differentiate between good costs and bad costs. Buying a quality bike was the fulfilment of an aspiration while the purchase of a rickety second-hand wreck was a potential death sentence.
Alan Pickering is chairman of BESTrustees
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