Why did the pension trustee cross the road? To catch a bus, but also to demonstrate attitudes to risk, as Maggie Rodger of the Association of Member Nominated Trustees explains.
I find it much easier to think in questions than answers, but perhaps that is actually my role as a member trustee.
Just like a new government minister, member trustees are not expected to be the experts, but we have a duty to take advice and give it due consideration before making a decision.
In the case of a pension trustee, this must be guided by the best interests of the beneficiaries. Making a decision involves asking questions to clarify, to challenge assumptions, and to assess relevance to the scheme.
Why did the pension trustee cross the road?
At the moment we are being invited to think much more about risk and return, particularly through Value for Money (VFM) in defined contribution (DC) pensions where there is no guarantor, so all the risk is held by the scheme member.
We spend most of our lives assessing risk without consciously thinking about it. As I stand waiting for a gap in the traffic to cross the road to catch my bus, I’m actively looking for the safest moment to cross.
But if I think my bus is about to arrive, rather than miss it and risk being late for a meeting, my tolerance for risk increases and I cross through the traffic – making eye contact with the drivers to get them to slow down.
Sometimes, however carefully I assess this decision, it is futile because the bus is delayed and I am late for the meeting anyway.
When it comes to DC pensions, what constitutes good value for money? Selecting investments with a good return is the easy part of the problem; the difficult part is about risk (or volatility) and its effect on an individual saver and their retirement timescale.
By its nature a DC pot must be ready for the owner to exercise their choice what to do with it after a maximum of 40 years of investment, but often much less. Since savers seem uncertain how they can best use their pot at retirement, how much less sure are they 10 or 15 years before this when the risk reduction questions are being asked?
Are they willing to run across the road now, or do they want to wait until all the traffic has stopped?
Risky business
When we think about value for money, have we become too risk averse – meaning we could miss out on potential returns? Or is it a structural issue of DC design because it has a shorter term than defined benefit due to each member’s retirement date? How do we assess the value of reduced risk, or when risk reduction has gone too far?
The other perspective of the value-for-money equation is for the sponsor or master trust. For these, it is not only the measurement of the return that will matter, but also how it compares to other schemes.
Returning to my journey to catch the bus, I could change the risk situation if I moved house to somewhere with a less busy road to cross, or even over to the other side with the bus stop. This would reduce risks, but not remove them entirely.
This option also takes a lot of time and consideration to implement, and probably some costs, too. Stretching the analogy, this change in risk profile could be a collective DC (CDC) pension regime.
A CDC journey plan
The proposed CDC model has been supported by the Conservative and Labour parties and the preparatory work to introduce multi-employer CDC schemes has continued since the change of government.
There is a consensus in government that people in CDC schemes are most likely to end up with a better pension for the same money than those remaining in traditional DC schemes. This is because the investment horizon is longer and risk is shared, so the precise retirement date, or longevity of one member, does not make a significant difference.
Another positive effect is that the cost to the saver of the move from pre- to post-retirement – and the risk of making the wrong decision – are removed.
Perhaps in my journey plan, instead of just crossing the road, this would be moving closer to the train station, cutting out one highly variable individual leg of the journey. My travel time, while still not risk free, is shared with lots of others. The only problem is that these houses are still in the planning stage.
My real question is for the government. While they are thinking of how to improve or move people from poor-value DC schemes, have they considered whether there are better options available than just a different DC scheme with the same problem?
If there was strategic coordination of these two policies – Value for Money and multi-employer CDC schemes – then as the VFM criteria begins to push poor quality schemes towards consolidation, there would be a scheme with a far superior offering for members to move to, rather than just a slightly better version of DC.
Maggie Rodger is co-chair of the Association of Member Nominated Trustees.
