 Actuarial Post Editor Ellie Burns sat down with JLT Employee Benefits’ newly appointed Chief Actuary, Hugh Nolan, to discuss his role at JLT EB, current pension provision, Defined Ambition and what 2014 has in store for the pensions industry.
EB: What will your main focus be as JLT EB’s Chief Actuary? What are you going to do differently?
HN: I think it’s a case of evolution rather than revolution. I worked closely with Phil Wadsworth, my predecessor, and we had the same kind of thoughts and approach but with a different nuance. I think where there is going to be change is how we put the pensions message across, and how to put that message across constructively. I want JLT EB to not only look at our own concerns, but what is good for the wider society we live in. For example, pension liberation is an area JLT EB is interested in, but it’s a problem the whole industry faces. We want to think about and develop solutions for the industry as a whole, rather than selfishly looking at what is best for our clients. That’s how I want JLT EB to position ourselves in the market, and I think that advocacy stance is something which will drive the industry onwards and upwards.
EB: How do you plan to get that message across?
HN: We have always engaged with various trade bodies, such as the ACA, but we want to try and be a more prominent voice. I think the key is making our opinions and voice more accessible. JLT EB is currently involved in the Defined Ambition consultation document, and we are trying to write a response which will immediately convey what it means so that government bodies do not need to wade through paragraphs of turgid text. We want to be imaginative, but also not shy away from saying things which are not always popular. I see nothing wrong in challenging government departments in key areas and saying that they are going in the wrong direction, this is where we think you should go, or that you have missed the point. They still might not listen to us, but when they do there will be an impact on public policy which will be beneficial to society and the economy. Communication, again, is key. We want people to own their pensions, and need clear communication and good advice in terms of clear options and alternatives available, with the pros and cons, in an easily digestible form.
EB: You mentioned challenging government departments – what stance will you take with the Pensions Regulator? What do you think their challenges are?
HN: I do think there is scope for more of a challenge with the Pensions Regulator. Whereas Phil, quite rightly, had always been slightly deferential with his approach to the regulator, I have been more forthright in putting forth my pension pet peeves. Typically, I think the regulator sometimes takes an unfortunate tone with public communications and shouts at the industry about issues that a few people are not doing right. I think what has happened in practice is that good schemes take note of what the regulator is saying, they incur the extra costs and are distracted from the more major issues facing them. The badly run schemes do not take any notice and only act when the regulator knocks on their door. So it seems to me that the regulator spends their time preaching to the choir, whilst those who are not doing a good job are getting away scot-free. The communication needs to be clearer and directed at the correct people.
EB: Talking about pension provision, what are your thoughts on the rise in state Pension Age?
HN: The rise in the state pension is a vital pensions issue, and there are two schools of thought about it. One, it’s a complexity we don’t need, and two, it is a perfectly reasonable due to people living longer, retiring later and so therefore drawing pensions for less time. I suspect, personally, that the rise is missing the point about people not saving enough for retirement, and that there is a lack of understanding. People are going to get towards retirement age and realise how inadequate their retirement income is going to be, and therefore will have to work harder and longer past those extra two years. All the studies and member surveys show that members of pensions do not fully understand what they are going to get when they retire. This is going to be the real drive at JLT EB for 2014 – to ensure members understand the decisions they make now, and how that will impact them thirty to forty years in the future. To personalise this, my father said to me that the best thing that happened to him was being forced to join a pension scheme. He was 21 years old, had a family to feed and if he had had a choice would have taken the extra 2 shillings and not been in the scheme. Forty years later he had enough money to actually live and did not have to worry. This just highlights how many 21 year olds would have the foresight to save for retirement. Either they are faced with a retirement with no money for the standard of life they are accustomed, or having to work another 10 years because they were late to sign up. It’s not easy but this is the message we have to get across, and it has to go to policy makers in terms of the state pension but also to people in occupational pension schemes. There are some positive initiatives taking this issue on - auto-enrolment has had a great impact. There are, however, some hard decisions down the line with contribution rates and soft compulsion not being good enough.
EB: Following on from the State pension, how do you currently view existing occupational pension schemes? Could Defined Ambition make an impact and what are employer’s appetites for it?
HN: We really want to be supportive of Defined Ambition but it is, undoubtedly, dangerously late in the game to be becoming available. This means the appetite is very much diminished, and I think we have missed the boat for a lot of employers. We are seeing employers running DB schemes and DC schemes for employees alongside one another, and these employers will have to harmonise those benefits at some point. At the moment their only option is to have all of one or all of the other. Giving these employers a half-way house enables the level of benefit to be equalised so everyone is getting the same benefit. Defined Ambition is about making that equalised benefit the right level, so it doesn’t have to be just defined contribution where all the risk falls with the members. Defined Ambition seeks to find a half-way house where the risk is shared in a more effective way, and this is something I believe passionately in. I believe that just doing a better DC scheme is a fundamental breach of what I like to view as an ideal society rule of sharing between employer and employee. I don’t aspire to the days of defined benefit, when the employer had to put all of the onus onto themselves, but neither do I think it is right for employers to put all the onus onto employees. Putting all the responsibility onto the employee results in bad decisions and a negative impact on society, as people are being constrained to do basic easy things on an individual basis. It would be far better to have collective sharing where people can pool their funds, and do good things with it collectively, without being locked into something that they themselves cannot get out of. The attitude nowadays is that a lot of employers think they can say ‘it’s not our fault’. They think that if they paid you, and you didn’t make any provision for your pension, then that is your fault. I think that lack of care for employees is not sustainable in the long term. If employers ran a good pension scheme they would get a competitive advantage in the market place, be able to recruit better staff and have better retention. We want employers, members and government all working together, all sharing the cost, all sharing the burden, administration and risks. Not just leaving it to members and saying you have to do it all on your own.
EB: How would Defined Ambition be implemented?
HN: That is one of our key concerns. There are a number of initiatives, all of which have some merit but some of which are more complex from a regulatory and legislative position. We would much rather have something that is good put in place quickly, rather than something which is perfect put in place slowly. We want to see things that fit within the current framework implemented ASAP with a strong steer. I think the uncertainty is unhelpful for UK employers, they are having to decide now what they are going to do about their pensions, and more and more of them are going to be biting the bullet and moving to full DC. That is going to be a hard thing to unwind two years down the line. What we want is clarity on the way forward, a quick answer to what’s going to be done. Flexibility needs to be given to employers to run a pension scheme which is good for their employees and in a way the employees will respect and really value. So, good employers can offer good pension schemes and get the benefits of that in terms of staff loyalty, motivation, retention and so on.
EB: You previously mentioned auto-enrolment. Has it been a success? What challenges can we expect to see going forwards?
HN: Auto-enrolment is an unqualified success, and ties in well with what we have talked about with Defined Ambition. When AE was brought out there was a chorus of industry voices saying that all we were doing was giving people a choice to opt-out. Yet we have millions of new savers in pension schemes with more to come. I have spent 25 years witnessing how people cannot be bothered to fill out forms, and so having to actively opt-out of AE was always going to be a silver bullet solution. It has been well received, very successful and a great way to get some basic pension provision in the UK. It is, however, the thin end of a wedge and I say that in a positive way. It has to be the thin end of the wedge because with the rates that are currently being paid, and with the state pension currently being mooted, it is not enough for a comfortable retirement. People aspire for better in retirement, and if they understood the consequences of what they are saving now they would probably put more aside. But competing for that attention, competing for that education, is difficult and that’s our mission to make sure that that message gets across.
EB: What do you think 2014 has in store for the pensions industry? What will be the main challenges?
HN: I think the main challenge is going to be auto-enrolment. We have people talking about a ‘tsunami’ of cases coming through of a number of employers who have to get auto-enrolment up and running. Dealing with these cases is going to be incredibly difficult for the industry and I think incredibly challenging for people going through it. There will be employers who failed to do what they were meant to do on time, who come running to advisers too late, who miss deadlines and who don’t comply with all the technicalities. We need to be gentle with these people to make sure their experience with the scheme is not a horrible drag, but is something that is actually a benefit to their members. Tsunamis is challenge one.
The second one is Defined Ambition or, in particular, the closure of DB schemes. We have to see how that goes through. At the end of the day, whilst a lot of people have already moved there are still people who are not in that situation that can still be protected by these changes.
The third one is how we can start to get proper contributions into defined contribution schemes. We need to make sure people are paying enough for their retirement to be what they want it to be, or at least making an informed choice about working an extra couple of years. Those are the three main challenges which jump out. You can add the continued fight on pension liberation, which again is another hot topic for us – I think the more you look at it the more you have to be impressed by the professionalism and imagination of the fraudsters. The way they put their case across is very effective and the challenge for us as an industry, is that we are trying to look after members’ pots of money at as low a cost as possible so it can be hard to engage enough to rebut the fraudulent sales pitch.
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