Why are Company Personal Pension schemes allowed to have such rubbish governance?

During last week’s TUC Pension Trustee conference, Robert Laslett, Chief Economist, Department for Work and Pensions was responding to questions after the Minister, James Purnell had to leave. I asked him the question “Why is it that company Personal Pensions schemes don’t have decent governance arrangements in the same way as other workplace schemes? If member nominated representatives in Trust pensions are recognised as being so important in making sure that pension funds are run properly than why not the same for other schemes?”

Robert batted back with the factually correct answer that Company Personal Pension schemes are individual contract based schemes belonging to the pension contributors.

Let me now try and “ungeek” this question and explain why I think this is a really important issue and one that will become even more important in the future.

Traditionally, company pension schemes in this country have been set up on a “trustee” basis. In well run schemes trustees are elected from workers and management to supervise the scheme and make sure it is safe, well invested and properly funded. In recent years trustees have been given more powers and responsibilities. This is not only because of rogues such as Robert Maxwell and the collapse of some pension funds when employers have gone bust. But, due to the size of pension funds and their impact of their investments in the economy as a whole, it is vitally important that that their investment decisions and strategies are properly thought out, managed and implemented. For example the Local Government Pension scheme alone is worth over £130 billion nationally, mostly invested in British companies. Check out the Myners Report.

There is also the principle that pension funds are owned by workers, it is their deferred pay. Since they are owners of this capital they need to exercise their responsibilities of ownership. They will want their representatives on the trustee board to make sure that their money is invested in companies that not only give good financial returns but are also properly run. People do not want their money invested in companies that employ child labour, ban trade unions and destroy the environment. Equally they want to make sure that the companies that they invest in do not reward greedy executives for failure, buy or merge with other companies that do not create value and are generally run in the true interests of the owners (pension members) not the senior management or their City advisors.

In recent years for a whole range of reasons (to my regret – but this is a different matter) traditional trust schemes have been in relative decline and most companies today offer so called Contract based Group Personal Pension schemes or stakeholders. Members of such schemes generally invest via payroll in the pension funds of large insurance companies and usually the company also pays into the holding. There are no trustees or member representatives to check on the administration of the scheme and more importantly, to look after what happens to this money once it reaches the insurance companies.

How do workers know that their money is being invested safely, properly and responsibly? There are now hundreds of billions of pounds invested in companies all over the world by these insurance companies. The market is getting bigger every year.

So, if it is a recognised “good thing” (the “unsung heroes” of financial services) that you have member trustees looking after trust based pension investments then why should we not have member representatives looking after contract based pension investments? Why is one “good” and the other “bad”?

The good(ish) news is that afterwards I attended a workshop run by the Pension Regulator. They regulate such schemes (“approved workplace pensions”) and have published a good practice guide on “Management committees” for administration and governance issues for work based contract pension schemes. These committees would involve employers and employees. So far this is voluntary and does not really address ownership issues. But I suppose this is a useful start. We need to change pension law to address this. This is in the interests of pensioners and the economy.

Have a look at Tom P post on “Investor Suffrage” which I think is a possible way forward. I’ll hopefully also post soon on David Pitt-Watson’s thought provoking speech at the conference which is also relevant.

Hopefully, I have explained the things properly and you release that this is a huge issue. If not, then it is my fault for not explaining it adequately. If you do understand then you are well on your way to becoming a Pension Geek!