Will a new era for pensions put the consumer first?

Consultation on DC schemes examines costs, information and oversight

The Pensions Board last year embarked upon a review of the structure of Ireland's defined-contribution (DC) pension schemes. The process saw 44 submissions made to the regulator,with a view to the future regulation of DC pension provision. But what did they say? And what happens next?

A DC pension scheme is one in which your own contributions and your employer’s contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement.

Unlike a defined-benefit pension scheme, which pays you a pension based on your final salary, the value of a DC pension depends on the amount of contributions paid, the investment return achieved, less any fees and charges, and the cost of buying the benefits.

In other words, a lot of the responsibilty for providing for a pension rests with the individual.


DC schemes currently account for about one-third of the private pension provision in Ireland, with assets of about €30 billion under management, according to the Irish Association of Pension Funds, which represents those who invest the money on behalf of investors.

Given just how important the structure has become in Ireland, reviewing the DC system is an important process. As the consultation document notes, “Future occupational pension provision in Ireland is likely to be predominately DC.”

John Tuohy, the chief executive of Acuvest, agrees, noting that "the vast majority of people will have some element of their pension in DC schemes".

And this will only continue to grow, with the days of DB schemes pretty much dead and gone for new entrants outside of the public sector.

“DC schemes no longer apply to a small percentage of people, it applies to everyone,” he says. “In the private sector this is it – this has become the relevant form of retirement savings.”

So far, the Pensions Board, which regulates pensions in Ireland, has published a synopsis of the submissions it has received, with David Malone, its head of information, noting that it decided not to publish individual responses, on the somewhat puzzling grounds that you may not get the same "breadth and depth" if you did so.

For Samantha McConnell, the chief investment officer with IFG, the process was “a useful exercise in terms of highlighting some concerns the industry and general public had”, but she questions what might happen next.

“There is no clear line as to what will be done; when it will be done and how much of the feedback will be taken on board,” she says, adding that a new code of governance for DC schemes will require legislative change “and it’s hard to see that anything will happen in the short term”.

According to Mr Malone, the board is working on formulating a report for the Department of Social Protection, but there is no firm timeframe on this. And whenever that happens, it will be up to the Government thereafter to proceed with the recommendations or not.

But what were the recommendations?

Too many trustees
A major issue highlighted in the report was that the number of trustees – about 200,000 people at present – is too high, and that it's not "realistic to expect that all of these have enough knowledge and commitment and will fulfil their duties in a way that optimises the outcome for the members whose savings they are responsible for".

But, while there was broad agreement on the need to improve standards among trustees, mixed views were expressed as to whether the self-certification approach, as proposed by the Pensions Board, would actually achieve higher competence levels and whether or not it could prove to be a “box-ticking” exercise which still misses key issues.

A code of governance received a high level of support, while other suggestions included a template governance framework and template controls and processes to encourage good practice.

Another option could be outsourcing the trustee role, but for Tuohy, to make this happen, “a strong alignment of interest between trustees and members is needed”.

“For it to be suddenly outsourced to professionals who have no connection with the employees – I’d worry about whether or not they truly have their [employees] interests at heart,” he says.

Too much information offered in too legalistic a style can put pension investors off. Too little, however, and they are at risk of being ill-informed. So how to strike the right balance?

For McConnell, the communications people receive from their pension providers at the moment are “substandard”.

“The statements people get don’t give a clear view on what they will get in retirement; they’re too legalistic rather than being useful statements,” she says.

Respondents to the consultation agreed with this view, noting that “the quality of member information generally needs to be improved, made more user-friendly and that current regulatory requisites are inadequate”.

A point made was that submissions should be “clear, concise, written in plain English, layered, easy to understand, focused on key information, designed with the member reading it in mind and to enable them to make decisions”.

One suggestion was to introduce the use of templates, more visual information and the ability to provide information electronically.

Default option
If you are a member of a DC pension scheme, it's likely that you will be familiar with the "default" option – typically offered based on your age and risk appetite.

This means that if you are in your twenties, for example, with a strong appetite for risk, you might find your funds allocated disproportionately to equities.

On the other hand, if you are older and more risk-averse, a higher proportion of your pension will be invested in bonds and cash.

But how can DC providers ensure that the defaults offered are appropriate and do not expose members to unnecessary and unexpected amounts of risk?

Some of the responses received by the Pensions Board propose that it should provide templates and best-practice guides which “encourage the use of plain language, clearly explain risks, use graphics and give practical examples”.

It was also proposed that the regulator could produce a leaflet setting out the different categories of investment choice and the details that members should consider, pitched at a very basic level.

Assessing investment risk in annual statements was also suggested, while others proposed that default funds should be lower risk, aiming for typical growth of 4 per cent a year and with a more balanced 50:50 allocation to bonds/equities, as opposed to the current investment of about 75 per cent in equities, which is seen in many Irish funds.
If you buy a fund, you will know how much you have to pay in charges by the annual management charge given. If you buy an exchange-traded fund, the total expense ratio (TER) will give you this information.

But pension charges can be much less transparent, making it difficult for investors to figure out just how much of their hard-earned savings are being eaten up in charges. “How do you articulate it in a way that makes it understandable for people?” says McConnell, adding that it’s important that people are clear about what is included/excluded from the charges.

Options to address this as proposed during the consultation include creating a standard means of disclosing total costs, such as using a TER or a percentage of the fund. But, as McConnell notes, life companies are not under any obligation to disclose the TER of a fund, which means it can be difficult to create a level playing field.

The Department of Social Protection previously suggested a “reduction in yield” approach, which shows how the return of a fund is affected by the charges levied on it, but as McConnell says, people may “struggle to understand” this.

Another option is to develop a publicly available register of charges, which could be broken down by administration, investment, advice and compliance, and colour coded against an average.

Or you could create a universal ‘retirement benefit calculator’, like the Department of Social Protection’s redundancy calculator, which could be updated if and when legislative changes occur.

Fundamentally, it is important that consumers – who are not averse to shopping for value in other areas – can clearly compare charges across funds. Any template for clarity on costs needs to be formulated with the needs of the pension saver, not the pension industry, in mind.

While the DC consultation covered many issues, it omitted one extremely pertinent point which didn't fall within its scope – whether or not DC schemes will prove to be sufficient to fund people's retirements. After all, an improved DC structure may enhance the product but it will be worthless if people simply aren't saving enough.

“No matter how good a retirement savings scheme is, if you’re not putting enough in, it won’t pay for your retirement,” says Tuohy.

Given that the average employee contribution to a DC scheme is of the order of 6-7 per cent, while the average DB scheme contribution is 22 per cent, this may be a major issue. “My hope is that there will be paradigm shift, with contributions going up,” says Tuohy, adding that as part of that shift, employers have started to increase contribution rates.

Ensuring adequate pension coverage will also likely require an improved communication approach among individuals. Take your average employee of a multinational for example. Their employer puts 7 per cent into their DC fund, which they match, and from their perspective, that's enough. Understanding how the fund is performing, assessing whether or not they need to increase their contributions, is not typically on their radar. But it should be.

MySaver to the rescue: Plans for mandatory pension take shape
With a name that could be misinterpreted as "my saviour" (intentional perhaps?), the Government's plans to introduce an autoenrolment scheme, through which individuals will automatically be enrolled in a pension scheme, are slowly starting to take shape.

Last month, Minister for Social Protection Joan Burton outlined her plans for such a scheme, noting that she favoured a "soft-mandatory approach", such as the UK's autoenrolment system, whereby you are automatically enrolled into a pension scheme by the government, but you also have the option to opt out.

This compares with a compulsory approach, which has been used with some success in Australia, following its introduction there in 1992. The Australian scheme requires employers to pay contributions of 9 per cent of salary – rising to 12 per cent by 2020.

A compulsory approach was recommended by the Organisation for Economic Co-operation and Development in its report on Ireland’s pension regime last year, saying that “automatic enrolment is a second-best”. The UK is already considering moving to compulsion in 2017.

Nonetheless, Ireland now appears to be pursuing the former.

Speaking in the Dáil last week, Ms Burton said that “an opt-out approach, such as that envisaged by an autoenrolment scheme, using scale to achieve greater cost efficiencies for members, is a very proactive way in which we can increase supplementary pension coverage”.

Such a scheme would most likely be operated as a DC type scheme, with the funds collected not going into general Exchequer funding, but rather ring-fenced, operating as a normal DC.

However, whichever approach is adopted, it’s unlikely to happen any time soon.

Noting that “such an initiative would be best supported by a more favourable economic environment than is currently the case”, Ms Burton said that a “go-live date” for autoenrolment, will depend on “certain criteria of economic recovery and stability”.