Malcolm Delahaye blog: Should employers with contract-based schemes be worried about 2012?

Malcolm Delahaye, director 21CP Retirement Trust: Should employers with contract-based schemes be worried about 2012?

The simple answer is yes.

Matthew Giles a leading pensions lawyer is advising against employers setting up any more contract-based schemes because of the uncertainty over what obligations are going to be placed on employers in the run up to 2012.

Employers have been sold contract-based schemes on the basis it releases them from all the responsibility traditionally associated with company pensions. Employers with contract-based schemes may be in for a rude awakening but this cannot come soon enough because new thinking is needed.

The idea that there is no alternative is far from the truth. There is an alternative that solves the employers’ problems, the government’s concerns and gives greater protection to employees and reduces costs – it is the master trust model; the same model which underpins Personal Accounts.

It mirrors the collective models which emerged in the US, Australia, South Africa to name a few.
The big problem for the industry is that if, say 10,000, individual companies made provision through a single master trust then 9,999 streams of revenues to intermediaries, consultants and service providers disappear. And these cost savings are passed through to benefit employees.

So why are master trusts are not being talked about? Employers have to buy into the idea of a master trust, it cannot be marketed in the way retail pensions can.

What’s in it for employers? Well peace of mind and a future proof solution for starters. More importantly, the knowledge that their employees will benefit from the governance of a tried and tested trust regime with an independent body looking after their employees’ wider interests. The management of the trust is entirely divorced from the employer’s responsibility, no MNT or trustee training issues to worry about, in fact no more involvement for the employer than is associated with a contract-based scheme.

Employers need to know what is actually open to them in terms of choice rather than be restricted to the products on offer which support the current fragmented, inefficient pension system which is in imminent danger of collapse.

It has been known since the earliest designs for Personal Accounts were being drawn up, that contract based schemes did not meet the criteria to offer a satisfactory alternative to low cost, trust governed, automatically enrolled workplace Personal Accounts.

These problems have been largely ignored in the hope that they will go away. Unfortunately they are not going away. First there is uncertainty over how auto enrolment will be permitted – how can it be right to force commission-based products on employees and sideline all the retail selling rules. The other major obstacle will be satisfying the Pensions Regulator that sufficient governance is being applied to contract based schemes to allow them to qualify as opt outs from Personal Accounts.

I would like to learn of any reasons why an employer would be recommended to set up a contract-based scheme in preference to participating in a master trust. (Apart from it making more money for the introducer).