You have to say this for the British: When it comes to nationally run retirement plans, if one idea doesn’t work out, they go back and try again. And so it happened that the goal of enrolling nearly every worker in the U.K. into a pension scheme became a reality — and for asset management firms, a dream.
Not that it has been easy. After failing to get much traction in 2001 with an expensive, optional stakeholder pension scheme design, the U.K. returned to the drawing board in 2002, appointing the now-defunct Pensions Commission, headed by U.K. businessman and academic Lord Adair Turner.
In October 2012 the U.K. Department for Work and Pensions came out with a new system, dubbed auto enrollment. As the program’s name suggests, eligible employees are automatically placed in a retirement savings plan, with a three-month window allowing workers to opt out. The nationwide rollout of these schemes is on track to create a massive new pension pot estimated to grow by between £8 billion ($13.3 billion) and £12 billion, according to the DWP (see “Top Danish Pension Fund ATP Is Making Headway in the U.K. Market”).
With some 8 million new savers targeted to hand their money over to insurance, mutual fund and other pension management companies, the battle to manage a piece of this windfall is well under way. Between April and July of this year, 40,000 employers are expected to automatically enroll their employees in new pension schemes. But first they have to select the entities that will oversee the assets.
“Are we going to be able to serve the needs of a million employers coming into the market?” asks Henry Tapper, a principal at First Actuarial in London and founder of the 5,000-member Pension PlayPen affinity group. Tapper’s firm has designed an automated system to help vet providers.
The race is on. More than 50 master trusts are being set up, but not all of them will survive, cautions Sorca Kelly-Scholte, head of client strategy and research for Europe, the Middle East and Africa at Russell Investments in London. She expects only about ten to 20 large auto-enrollment schemes to survive this newly competitive landscape. Kelly-Scholte hopes the winners will help create scale in the plans — mostly defined contribution schemes — that will translate to lower costs and better benefits for members.
An array of scheme providers are jockeying for position. Some plans have already enrolled large numbers of new members. Victory, however, will most likely come to those who best serve a particular market niche.
With 1 million members already enrolled, the biggest provider is the National Employment Savings Trust (NEST). As part of the reforms mandated by the U.K. Pensions Act 2008, the Pensions Commission established NEST, a government-sponsored program, to ensure there would be adequate capacity to handle the incoming flood of new savers, and to provide a low-cost scheme with solid investment options. It was designed to charge only 30 basis points— a 0.3 percent fee — on assets. That changed when the cost of setting up the scheme made a 20-year government loan necessary, driving fees up to approximately 0.5 percent of a member’s NEST assets. A 2001 law that tried to bring people into so-called stakeholder pensions, a type of defined contribution plan, set a ceiling for plan fees of 1.5 percent. This is one reason that very few workers signed on to plans at that time. On March 27, Pensions Minister Steve Webb announced a new fee cap of 0.75 percent, due to become effective in April 2015.
Another low-cost scheme was created when the opportunity to broaden the reach of its pension plan inspired officials at the multiemployer Building & Civil Engineering (B&CE) Benefit Schemes, which serves workers in the U.K.’s construction industry, to establish the People’s Pension, an auto-enrollment plan for low- to moderate-wage earners working in industries that have high employee turnover — such as construction. Before the inception of NEST, the People’s Pension was the largest stakeholder pension scheme in the U.K.; with auto enrollment it has grown to roughly a half million members.
As at NEST, the People’s Pension’s all-in costs are 50 basis points. Not an asset management platform, the B&CE pension scheme, founded in the 1940s for union members, was redesigned in the past decade as a contractual auto-enrollment pension. With the advent of auto enrollment across the U.K., the new People’s Pension established a master trust with one default fund, using a passive index from Legal & General Group, the U.K.’s largest provider of “tracker” funds. With 99 percent of its members in the default fund, People’s Pension offers the remaining 1 percent a menu of seven other fund options, including cash and so-called adventurous or cautious funds. These are funds of funds, similar to U.S. “lifestyle” funds, that guide investors to choose an option based on their risk tolerance.
“Pensions are far too complicated, and we need to make them simpler,” says Darren Philp, head of policy at B&CE, located in the village of Crawley, in the southern county of West Sussex. Philp, who had been director of policy at the National Association of Pension Funds, notes that opt-out rates for auto enrollees are running at a scant 6 percent. “We’re not doing this for the buck or for shareholders,” he adds. “You had to take the profits out of the whole process.”
Providers that charge higher management fees have yet to see those earnings, as auto enrollment is moving glacially toward its 2017 goal of an 8 percent total contribution rate from employers and employees. For now it is only 1 percent each, a decision made by Parliament to keep from scaring off new savers.
“At the moment, it’s a flood of people rather than money,” confirms Adrian Boulding, pension strategy director at Legal & General in London. “We’ve taken on a half million new customers. The big money, we hope, comes later on down the track.”
Legal & General is positioned on the higher end of the pension market in terms of fees and does not accept small or otherwise unattractive employers — for example, those with low-wage workers who would contribute fewer assets to the scheme. “A big, successful company doesn’t want a government scheme,” Boulding points out. “It wants something that makes its employees feel special.”
New York–based BlackRock, the world’s largest asset management firm, also has seen its U.K. defined contribution business swell under the new pension guidelines, from 205,000 scheme members at the start of auto enrollment in October 2012 to 272,000 at the end of February. This shows how a brand-new provider from outside the U.K. can make a splash if it provides a low-cost, high-quality investment program. Another case in point is NOW: Pensions, the subsidiary of giant Danish pension fund ATP, which gathered 250,000 members in 18 months.
Will the U.K.’s new auto-enrollment program deliver as promised? “The reason it works is because it was an independent consensus with the Turner commission,” explains B&CE’s Philp. “There are still massive debates about the level of contributions, rip-offs by insurance companies” and other issues, he says. “But the consensus is that we needed a government-supported national savings scheme. The disagreement is on detail, not concept.” That is something for other large Western pension-challenged nations to think about.
Follow Frances Denmark on Twitter at @francesdenmark.
