Trying to build trust in the market is a misdirection of energy. The same does not apply to building trust in trustees, such as:
"'Our primary focus has to be to get trustees into the position where they can ask the right questions and take the necessary independent advice,' said Charles Massey, the watchdog's head of strategy." x
Members of occupational pension schemes can have an influence on the running of the scheme especially through member-nominated trustees. On the other hand schemes run by life assurance companies can be passed between companies like sacks of potatoes and members are powerless: For example following the sale of Royal & SunAlliance’s closed life business to Resolution Life one policyholder complained:
"My concern is primarily that in common with tens, or even hundreds, of thousands of others, we are being sold on to we know not whom." x
But there has been a decline in the proportion of assets held by occupational pension schemes, as can be seen from Table 1a and 1b. x "Pension funds" in Table 1a are the funds of self-administered occupational pension schemes, that is "in-house schemes" in Table 4. The 22% of the UK savings market in these schemes has apparently been declining.
Table 4
UK savings market (as at end 2002)
| Type of saving | £ billion | % |
|---|---|---|
| Occupational pensions: insurance schemes | 196 | 7% |
| Occupational pensions: in-house schemes | 588 | 22% |
| Personal pensions | 333 | 13% |
|
Medium and long-term savings: insurance company products (e.g. bonds) | 226 | 8% |
|
Medium and long-term savings: other products (e.g. unit trusts) | 576 | 22% |
| Deposits and cash | 743 | 28% |
| Total | 2662 | 100% |
| Source: Treasury Committee x |
The government's partnership with the financial industry seems to be at the expense of occupational pensions. An article in Money Management by Will Hadfield The forecast for group money purchase (September 2003) says:
"Final salary provision has been eroding for years. Now, the rot is spreading to occupational money purchase schemes as employers increasingly switch to GPPs and group stakeholder." (Supplement Group schemes under the spotlight, page 2)
The First Report of the Pensions Commission x says:
"Personal pension contributions increased even relative to average earnings, during the 1990s, but most of this increase is explained by the GPP contributions already discussed, which are largely replacing previous occupational pension scheme contributions [Figure 3.37]" (page 50)
The decline of defined benefit pension schemes and growth of defined contribution pension schemes is providing opportunities for the financial industry to sell savings "products". There seems to be a similar trend in the US with the growth of 401(k) plans. These are largely invested in mutual funds.
"In a 401(k) plan the employee will usually be offered several investment options from which to choose. Almost always these options are mutual funds. Mutual funds charge retail management fees for 401(k) accounts, usually from 100 to 300 basis points--1% to 3%--of the assets in the employee’s account every year! These are truly exorbitant fees compared to fees charged to traditional defined-benefit pension plans: 7 to 20 times higher.
It is these exorbitant fees that make Wall Street so enthusiastic about converting the employer financed defined-benefit pension system into an employee financed 401(k) savings system." x
The average portfolio turnover for mutual funds in the US is over 100%. It is surely unwise to save towards a pension in funds with such high turnover.
There are about 100 thousand occupational pension schemes x which all have trustees. In evidence to the Treasury Committee Paul Myners said:
"At the heart of the system, we often make wholly unrealistic demands on pension fund trustees. They are asked to take the most crucial investment decisions setting objectives, selecting benchmarks and appointing advisors and managers yet many lack the necessary resources, expertise and capacity to challenge effectively the advice they receive. They are often unsupported and are normally unpaid." x
It is reported by Simon Targett in the Financial Times:
"Ministers are concerned about the failure of trustees, who oversee pension funds and charities to sign up to the government's code of best practice established three years ago by Paul Myners," (15th March 2004, Fund Management section page 1)
The reason why the trustees of pension funds are not signing up to this code of best practice x may be because is makes "unrealistic demands" because schemes are too small to have the resources to comply with the code.
This is an argument in favour of large schemes. Another advantage of large schemes is that they can provide a pension without requiring members to purchase annuities when they retire. Annuity rates are calculated based on declining capital. A pension fund can accumulate capital to provide a more generous pension, one in which pensioners keep their capital in the fund and receive all the investment income from this capital, rather than investment income based on declining capital.
The government should be promoting large industry-wide and national pension schemes run by new institutions. It has instead been promoting stakeholder schemes which are a large number of small schemes which are "products" of the financial industry, and where there is an obligation to buy an annuity. The ABI says that: "Annuity sales are set to increase dramatically over the next ten years and beyond," x
John Chapman reports in Money Management (October 2003) that most stakeholder schemes do not even have any members:
"The fact that 82% of the 350,000 employer-designated schemes, that is 287,000 schemes, have no members and are, in effect, shams is a disgrace." (page 56)
Few stakeholder schemes have trustees. The largest stakeholder scheme is the Building and Civil Engineering Scheme which does have trustees. It submitted evidence to the Treasury Committee. x The TUC Stakeholder Pension Scheme x also has trustees, but it is administered by the Prudential, and seems to be little more than the Prudential Stakeholder Scheme endorsed by the TUC. The green paper Partnership in Pensions (1998) says that:
"Stakeholder pension schemes will develop in a number of ways. All are likely to involve a partnership with financial service companies," (paragraph 64)
The trustees of unit trusts are not comparable with those of occupational pensions. They are generally appointed by the asset management company for the trust. But it is not paying for the trust, in the same way that employers are paying for occupational pensions. Many unit trusts are converting into the sub-funds of open-ended investment companies (OEICS).
In the web pages we advocate the establishment of new institutions. Without new institutions we are just going round in circles. As Jim Cousins MP put it:
"Yes, we have partnerships and strategies and stakeholders and working groups and important meetings here, there and everywhere." x
One advantage of such institutions is that they would be administered for the benefit of members and be directed by properly appointed boards, who would be acting as trustees, or actually be trustees - depending on the legal framework. A limitation of the pay of the directors of the institutions could be part of their constitution to avoid fat cattery. An enquiry has been set up under Paul Myners to report on the governance of mutual life assurance companies. x This enquiry resulted from the report of Lord Penrose into Equitable Life. He said that the board was a "self-perpetuating oligarchy" (chapter 20, paragraph 51).
The need for new mutual institutions is discussed in general terms on this website. The Chancellor of the Exchequer the Right Honourable Gordon Brown MP said in an interview in New Mutualism, the magazine of the Co-operative Party:
"The Treasury ... has become far more supportive towards mutuality ... We stand for a view of society in which people working together clearly achieve more than through acting alone." (Spring 2003, page 16)