Clock ticking for managers in changing U.K. defined contribution market

Global money managers operating in the U.K.'s defined contribution market are running out of time to get their strategies in line for a world where savers have more freedom than ever before.

That, along with sympathy for their plight, was the overwhelming message from a representative for the National Association of Pension Funds as well as from regulators during the NAPF's annual conference, held Oct. 15-17 in Liverpool, England.

Beginning in April 2015, defined contribution plan participants in the United Kingdom no longer will be required to purchase an annuity to fund their retirement. These changes were announced in the U.K. budget in March, and reinforced in this month's publication of the Taxation of Pensions Bill. The bill outlines legislation that will enforce changes announced by the U.K.'s Chancellor of the Exchequer, George Osborne, in the budget.

The pressure is now on DC plan providers to come up with strategies and funds to potentially fill that space.

“There's no denying that the proposition is exciting and compelling for savers,” Ruston Smith, chairman of the NAPF, said during his opening remarks. “But for those of us at the sharp end who have to deliver this, April is not far away.”

Mark Boyle, chairman of The Pensions Regulator, which regulates workplace pension arrangements in the U.K., voiced his concerns. “Even before the budget, changes were happening at great speed,” Mr. Boyle said in a speech at the conference. “DC assets are to double in the next 15 years to £800 billion ($1.3 trillion). Pension reform announced in or since the budget has created a dramatically changed landscape.”

“I'm acutely aware of the amount of change that the industry is having to deal with,” said Mr. Boyle. He also referred to the budget's requirement for a guidance guarantee for savers, with plans for every participant to receive free and impartial guidance in the run up to retirement.

The NAPF's Mr. Smith called on the government to communicate with the industry and clarify issues around next year's changes.

“The problem is, we just don't know enough about the detail. This lack of detail and clarity is severely limiting our opportunity to get things right for our members. And it's increasing the risk of failure,” he warned.

While the government has “rightly” set high expectations of the industry to deliver on these changes, “it is closing down the time we have to respond to make this a real success,” Mr. Smith said.

Mr. Smith asked the government to “help use to give freedom and choice, not fear and confusion.”

The pressing nature of the call from the NAPF was reinforced by Mr. Smith in his speech. He said that after April, 4.2 million savers over the age of 55 will have the right to choose how they access and take their retirement savings. At the same time, providers will have to contend with a new charge capbecause defined contribution default funds will be subject to a maximum charge of 0.75% of assets.

Steve Webb, pensions minister in the U.K. — under whom the charge cap was introduced — said some suggest the government should postpone its introduction. However, he repeated former U.K. Prime Minister Margaret Thatcher's mantra, saying “no, no, no” and insisting that the charge cap change will be implemented as planned.

He also reiterated that changes effective next will mean trustees and governance committees will have a legal duty to obtain information about all transaction costs. Mr. Webb introduced the government's response to its consultations on minimum quality standards for DC arrangements, known as a "command paper,' on Oct. 17. It also included proposals to ensure participants enrolled in plans that have low and fair charges, good governance and increased transparency.

The paper features proposals to improve governance in DC workplace plans, such as in administration standards, charge caps on default plan and transparency, as well as an implementation timetable.

“Transaction costs are, for me, the murky secret in the cupboard of the industry, because trustees don't know, by and large, what's happening to their members' money, and what is being sliced and diced and how,” he said. “This document asks them to find out where money is going out of a pension fund and where to.”

He confessed that the government had wanted to include transaction costs in its charge cap of 0.75% “and we realized that we don't have a clue. Next April we will be throwing a light into the murky corners of the industry. Data will be gathered.”

The issue of transaction costs also came up in a session discussing the case for independent governance committees. The U.K.'s financial regulator, the Financial Conduct Authority, has consulted on and is designing proposals that would require workplace defined contribution plans to have independent governance committees overseeing them.

“I would like to see a requirement for the providers (of DC products) to have full disclosure on their costs, both implicit and explicit, to the (independent governance committee), and the (committee) has to have the expertise to act on that,” said Debbie Harrison, visiting professor of the pensions institute at Cass Business School, the business school of City University London and member of the Financial Services Consumer Panel. The panel is an independent statutory body that represents consumers in the development of financial services policy.

She also brought the conversation back to the pressure on DC plan providers.

“One issue that concerns me is provider covenant. We know that there are far too many participants in the market, and they are not all going it survive. What happens in 2018 when they look at (the business) and cannot continue at that price? In my mind there will be a lot of withdrawals” by providers, she said. n