Danish giant enters UK auto-enrolment pension market
The entry into the UK’s auto-enrolment market of a new specialist called Now:Pensions, backed by ATP, a Danish pension scheme, signifies the emergence of a new breed of defined contribution (DC) “super providers” that claim to deliver improvements in cost, governance, investment, and decumulation strategies for delivering retirement income.
ATP is the largest provider in Denmark, serving 160,000 employers. Group assets are valued at £56bn ($87bn), with reserves of £9.2bn.
Now:Pensions, which opens its doors for business in the UK early in 2012, is a multi-employer DC trust that claims to be the antidote to the “high costs, lack of alignment of interests and poor performance [that] has been bad for the [UK] financial industry’s reputation”.
It is a scathing but accurate observation of a market where the contract-based group personal pension and stakeholder scheme – the most common choices for employers in the private sector – still bear the hallmarks of their origins as products designed for the retail market.
Critics of the model argue that it suffers from high costs, poor long-term investment returns, weak governance, and inefficient decumulation processes. In a recent RSA report David Pitt-Watson, chair of Hermes Focus Asset Management, said that as a result of these failings UK retirees get pensions worth about 50 per cent of their Danish and Dutch counterparts.
Morten Nilsson, chief executive at Now:Pensions, argues that low-cost sophisticated asset management cannot be delivered via the UK’s single-employer contract-based DC model. “At present there are about 46,000 separate schemes, many of which do not have an effective governance structure. There is an urgent need for consolidation in order to deliver better pensions to employees in companies of all sizes,” he says.
One aspect of governance that concerns Mr Nilsson is the mismatch between the investment strategy of default funds and the members’ liabilities. “The typical default fund invests approximately 60 per cent in equities and 40 per cent in bonds. This is a high-risk strategy that lacks diversification and represents a poor match for members’ retirement income needs.”
Now:Pensions has yet to unveil the details of its UK model but Mr Nilsson says the scheme will be competitive on cost, compared with the benchmark established by the National Employment Savings Trust (Nest), and will offer long-term risk management solutions through diversification across five core asset classes: equities, interest rate (bonds with low or no credit risk), credit bonds (bonds with a dominating credit risk component), commodities, and inflation assets, for example index-linked bonds and infrastructure.
Experts suggest the entry of ATP authenticates the trust-based, multi-employer DC model established by Nest and may prompt UK providers to consolidate in order to compete.
Paul Geeson, pension partner at Deloitte, says: “The result should be a broader choice in a market where low costs and sophisticated asset management strategies will be key differentiators.”
To date, DC in the private sector has been predicated on the assumption that employers want bespoke arrangements. “This retail-based model does not necessarily deliver the economies of scale demanded by auto-enrolment,” Mr Geeson says. “The entry of major overseas players with an established track record in huge multi-employer schemes offers an alternative model.”
But Peter Woods, partner at PwC, says there are significant challenges for new players. “They will have to compete explicitly with the likes of Nest and L&G’s master trust on charges, governance and investment strategy, but to gain a foothold they will need to do more than this, for example in the area of service and communications.
“Employers selecting a new name will need to be convinced that they – and their scheme members – can put their trust in the new provider.”
Mr Woods believes there is a growing appetite for “alternatives to Nest” – providers that can cope with the low contributions and high turnover of auto- enrolled employees.
“This does not necessarily exclude smaller providers or niche players,” he says. “Many employers have long-standing and well-developed relationships with quality incumbent providers and will be unwilling to disrupt these.”
If the Now:Pensions model takes off, the government may consider other benefits offered by the Danish system, in particular the way it delivers retirement incomes. In Denmark ATP operates an integrated DC accumulation and decumulation model, which avoids members having to buy individual annuities – arguably the weakest aspect of the UK model at present in terms of cost-effective and efficient outcomes.
This issue is also on the agenda for SuperChoice, Australia’s leading superannuation data exchange, which has teamed up with UK technology company Logica to enable employers’ online contribution processing systems to accommodate multiple schemes in the workplace. Major providers are likely to buy in or emulate this type of system but similar facilities are already available through the consultant JLT’s benefit management system BenPal.
SuperChoice-Logica also aims to enhance portability and, in due course, to facilitate consolidation and transfers of members’ defined contribution pots. Peter Philip, chief executive of SuperChoice, which works with more than 40 per cent of Australia’s largest pension providers, says managing multiple DC pots is a major issue for Australians and will be a key focus for the UK under auto-enrolment.
Debbie Harrison is a senior visiting fellow of the Pensions Institute at Cass Business School. To contribute to the debates raised in this series go to discussions.ft.com/alchemy or email firstname.lastname@example.org