Examination of Witness (Questions 40-55)
MR TIM
JONES
7 JULY 2008
Q40 Tom Levitt: Obviously simplicity
is something you want to go for, but would you concede that giving
members the option of choosing a charging structure would—
Mr Jones: I think that is highly
unlikely because of wanting it to be simple and wanting people
to feel that they are being treated the same. If you gave members
a choice, you would probably—I am sorry, I know I am busking
slightly here and I should not do that—it is just years
of ... background—my hunch is that the cash flows for different
people would be differently advantaged; in other words, it would
be an easy choice rationally. I do not think it is somewhere we
would go. For marketing simplicity what we have been looking for
is a single universal charging structure. We have market researched
charging structures with prospective members, and this is not
a high-interest topic for them. It takes a lot of engagement with
them before they have got their heads around what this is all
about because this is paying for the scheme. They do not really
understand. They know it that has to happen, but this is a low-interest
topic, and getting them to engage on a choice between different
charging structures, in my view, is a bridge too far for the target
market here. I think we will end up with a single charging structure,
but it is something that significantly affects the funding programme.
Q41 Mrs Humble: Can I ask you some
questions on contributions. You have covered this area in detailed
answers to earlier questions. You have outlined already the contributions
mechanisms that you are looking at, and they tend to be Internet
based. When do you anticipate reporting to Government on your
recommendation?
Mr Jones: I am afraid this is
going to be a slightly long answer as well! When I arrived there
were a number of things I wanted to do to understand the challenge
here. One of the things we did was to take the business processes
in a large occupational DC and set them out; and then we chunked
them up because people were using jargon terms from the industry
to mean overlapping and different things, and in order to get
clarity about what we meant by each set of activities—we
broke them out into about 50 or 60 elements in total. Then we
grouped those elements into chunks. What we call Chunk 2 is member
administration. It became clear to us that collections from reconciliations
was an integral part of Chunk 2 and that we would let it as one
administrative let; in other words we would procure it as a monolithic
structure of business process. The reasons for that are rooted
in minimising costs—and contributions are a great example
of this—so if I got a contribution record coming in, I will
need to be able to interrogate it against people who have decided
to opt out or against people who we are notified as dead and all
the rest of it; so I can strip out and cleanse if I want to interrogate
it against invalid National Insurance numbers and all sorts of
things, before I then go and pull the money. So I have to have
my database sitting behind me that has got the most up-to-date
position for all those members, and I have got to then see this
data record coming in from the employer, interrogate, cleanse
and then agree the net by e-mail with the employer if there is
a difference, and then go out and pull that from a bank account.
Collections and reconciliations, as a business process, is not
sensibly separated from member administration. That means that
I then had to think how we would procure it. So we then went out
and we have done an enormous amount of market engagement. I personally
met with over 20 different companies. We had an industry day last
week at the delivery authority, where we had around a hundred
people representing over 50 companies attend, and we have been
talking to those companies about their approach to a range of
tasks—not just collections and reconciliations—within
member administration. They are all saying to us similar things
about this basic approach to collections and reconciliations and
leading through to how you handle their payments and all the other
things that have to be dealt with. That is where we are. Different
of those corporations—and this is where I need to respect
their confidences—are proposing different architectural
solutions for the whole thing. Some of those embed different approaches
to collections and reconciliations. By setting up a competition
to procure those member administration services as a coherent
set of activities is the best way that I, as accounting officer,
can achieve value for money for the taxpayer to get the job done.
Q42 Mrs Humble: Do you anticipate
then one solution or that there might be more than one recommendation
that you are making to Government?
Mr Jones: My guess is that there
will be half a dozen solutions. Because our target market is people
that change job reasonably regularly and are on low to middle
incomes, that does not limit us to micro-enterprises even though
naturally, for good reasons, we spend a lot of time talking about
micro-enterprises. We may, and are likely to have, in our model,
a number of very large enterprises, and they will have their own
HR systems and they will expect us to deliver to them a specification
to hit, and they will use products like enterprise resource planning
software suites sold by vendors such as Oracle and SAP and others;
and they will expect us to provide to them a specification that
they will embed in their enterprise resource planning systems,
as they would any other occupational pension, and they will remit
across from them. If we go right down to the other end of the
scale, I have talked to some suppliers about the Personal Accounts
Scheme having its own website allowing micro employers that do
not even do any payroll; they just work it out every week manually,
to come on to the website and enter their gross amounts of earnings
and their percentage, and then we will calculate what their contributions
are and then when everybody is happy we will just do the pull
from the bank account. In the middle, there will be lots and lots
of companies that use payroll bureaux or some payroll package
that will want to see the approach embedded in that. That is the
reality of fitting in with the way different businesses work today,
and that is what I expect to see.
Q43 Mrs Humble: I would flag up one
little warning. As a Member of Parliament, I do get people come
to me who have spent the whole of their working life with one
employer and still their pensions come out inaccurately calculated;
so good luck on that!
Mr Jones: I am not pretending
it is easy.
Q44 Mrs Humble: In early questions
from Oliver Heald on qualifying earnings, you referred to the
possibility of the risk that employers will level down their contributions
from existing quite generous employment based pension schemes.
Do you think that that is a real risk? Is there anything you can
do to mitigate it? Do you have any evidence that it is already
happening?
Mr Jones: I will try to be as
helpful as I can in that I am not sitting here as an expert on
the pensions industry—I am learning as best I can. The pensions
industry is clearly changing. There have been two or three reports
out in the last month that evidence shifts away from DB, et cetera.
What I see is a range of data points, so although the mix is continuing
to shift, I also see things that say that overall DC contribution
rates are rising slightly at the moment. I think the position
is mixed as to what is happening out there at the moment. I am
glad you raised it because it was something I failed to answer
to Mr Heald. One topic that you have alighted upon is what happens
beyond this £33,000, back to the employer duty thing. It
will be interesting to see the extent to which this set of legislative
changes prompts a review of reward strategy in firms because there
is nothing to stop a firm creating a tiered provision which has
either a Personal Accounts or Personal Accounts-like structure—something
that works against the employer duties as a base, if you like,
of pensions provision. Then layers of pensions provision on top
of that that might include self-invested personal pensions and
share incentive plans and a variety of other things so that you
have a base load of workplace pension provision and you accommodate
your higher earnings with separate schemes that are tax-efficient
and sensible. We should in a sense perhaps move away from this
binary thing of it is either Personal Accounts or it is something
else, and if it is Personal Accounts we are going to run out of
steam at £33,000. I just think that is a miscasting of what
might happen. Remember that although the duties fall to £33,000,
you can go much nearer £50,000 on an 8% of qualifying earnings
to get to the £3,600 at 2500 prices contributions. Again,
it is the difference between the band of earnings duty and the
contributions gap. They are not exactly the same thing.
Q45 Mrs Humble: The complexity that
you have just outlined also goes back to the questions that Oliver
asked about lack of information because very few people understand
pensions. All they want to be told is a rough idea of what they
are going to get when they retire. Given that now people do move
around in different jobs, unless they stay with a scheme that
is then transferable to different employers, but if they move
to employers who want to operate it in a different way, and if
they then are in that position of say rising up the managerial
ladder and their earnings are going to take them outside of their
traditional personal account, it can be horribly complicated for
them.
Mr Jones: I think you are helping
me to engage with my marketing pitch here, which is that if you
are the sort of person who moves from job to job, then we hope
that more and more and more of your employers will elect to use
Personal Accounts as part of their pension provision, because
that is the thing that will be able to be reactivated in each
of these employments as you go. It will be your personal account;
you will apply every time you engage with an employer that offers
Personal Accounts. As we look and think about this—and we
asked ourselves marketing strategy questions—is this more
a member-focused product or more an employer-focused product—we
think strategically that it looks more and more like a member-focused
product because here I am in my fifth or sixth job, and it is
my personal account. The employers contributing with me at the
moment cannot see the rest of my history; that is none of their
business; that is my money; they can only see the stuff that relates
to my contributions in the context of that particular employment.
It becomes more and more my product, but to get there we have
obviously to engage with employers, because employee members do
not sign up; it is the employer that signs up. This is an interesting
marketing challenge for us. We think the destiny of this scheme
is to be the scheme that is increasingly there for people who
tend to have multiple jobs and low to middle-income earners; but
it can play that base load job as well, to be complemented by
other provision on top. My sense is that people who are successful
and go on to more successful careers can handle the complexity
of those extra products as they get to those higher earning positions.
Q46 Harry Cohen: I want to ask some
questions on investment choices, but before I do I want to ask
about investments because I have just been reading this book on
the credit crunch and they have a very interesting section where
it talks about all these debt-ridden finance vehicles. It asks
if there is some strong capitalist or hedge fund or something
out there that can take them and get income from the money stream.
They say they did an investigation and asked: "Did the hedge
funds take these?" "No." "Did the private
equity or a strong capitalist take them?" "No."
So they said: "Well, who did take them?" They said:
"The state pension funds." That is obviously in the
United States, but the question I want to ask is that you are
operating here in effect as state pension fund. What arrangements
are there that your people do not follow that practice?
Mr Jones: I am just going to row
back, Harry, from this "you are operating a state pension"
so I will just repeat my mantra that this is going to be a member-funded
occupational pension scheme.
Q47 Harry Cohen: I understand that.
Mr Jones: The good news for all
of you—as I am not an investment professional—is that
it will not be me! I am the Chief Executive of PADA and I have
to procure that a trustee corporation comes into existence which
will have trustees. Those trustees will be recruited by fair and
open competition, and I expect that, given the nature of this
scheme, they will be people of the highest standard. Those trustees
will then take expert advice and they will end up with a statement
of investment principles against which they will procure. This
is an area I am learning about. Because it is not me I do not
have to become the investment professional; but what I have got
to do is organise a consultation across the range of investment
issues, which we are hoping to launch this autumn; and so that
consultation will be quite detailed. One of the most important
issues in it is what is an appropriate risk appetite for the trustees
on behalf of those members. Then there will be lots about default
fund construction because what people say to me is that they expect
80-90% of the member contributions to be in the default strategy.
That is not me telling you—I am relaying what is being said
to me. That says to me that default fund asset allocation, to
use some jargon, is critically important, and so we are going
to consult on that. We will ask the industry to tell us what they
think. I know what they are saying to me—"you are a
long-hold DC"—you know, a 25-year-old is looking to
have an investment that has 40 years plus in duration before it
would decumulate at state pension age—and there is a strong
argument, people say, for having higher volatility equity index-based
funds in such a thing. There are all sorts of debates about the
construction of different indices from time to time and all the
rest of it. We have been listening to all of this over the last
six to nine months and we are going to play it straight back in
the consultation document and say that people have said this or
that to us—"what do you think?" We will be talking
about the default fund and about the risk appetite for the default
fund. That leads on to construction for the default fund. We will
then go and talk about some issues beyond the default fund, as
people have made representations to us that there should be a
small range of other choices. There are some religious and ethic
elements of choice and we will invite people to tell us what they
think should be our set of offerings. Given that some of those
offerings in the private market come with higher management fees,
we will ask if we charge differentially for those. The trustees
may have a problem if you do not, given that the trustees have
a difficulty with cross subsidisation in the sense that if their
members' money is in trust, it is not their money to decide they
can cross-subsidise. There is also another term, which you may
have heard, which is called "reckless conservatism",
which means that if you say to somebody "here is a safe fund",
a lot of people choose it; but if you choose a safe—and
sometimes the word "guarantee" is used—so we might
offer a safe or guarantee or low-risk fund. That is appealing
to lots of people and a lot of people might choose the safe guarantee
low-risk fund. The problem is that historically it is poorly correlated
with good investment performance over a long period of time. It
is in low volatility assets and it just does not take advantage
of the growth in value of higher volatility assets over the longer
period. What should our stance be—because people then call
that "reduced outcome"—reckless conservatism?
People have been overly conservative and they are getting bad
outcomes as a result. There is a whole range of fascinating topics
for us to consult on. We do not claim to have the answers, but
because of the amount of money in prospect here for the investment
community, we do have their attention. I am expecting a strong
response to our consultation.
Q48 Harry Cohen: Bearing in mind
that my two Conservative colleagues have left, "reckless
conservatism" sounds like a splendid election term to me.
That is by the way. You are going to go for a straight consultation
on the type and number of funds there should be, and the investment
policy that underlies those funds. Is that what you were telling
me?
Mr Jones: Yes. We are going to
consult on those issues. The process is that we will consult on
those issues and get responses, and we will issue a response to
the consultation. That takes us into the early part of 2009. We
then have to procure a trustee corporation and appoint trustees
to it. Those trustees are people that make the investment decisions,
not PADA. We will offer to them the fruits of our labours in consultations,
but it is not clear to me how wise it would be for us, as a delivery
authority, to seek to constrain them as they, as trustees, create
their statement of investment principles and on the back of that
go out to procure technical products to manage the money. We see
that our work will hopefully inform the debate about what their
statement of investment principles might be, but I would be very
surprised if we would seek to bind them to it. I do not know yet
because we are not at that stage. You employ trustees to act as
trustees, and so you would expect from a scheme of this scale
that they would be senior people who would want to make up their
own mind on the statement of investment principles. They will
treat our consultation responses as an input to them.
Q49 Harry Cohen: All on trustees.
Mr Jones: Yes.
Q50 Harry Cohen: Can you give an
assurance that there will be an across-the-board representatives,
not just business or bosses—perhaps trade union representatives?
Mr Jones: I am not in a position
to give you assurances about the composition of the trustee body.
This is an area that I hope by the next time I come and talk to
you I will know a lot more about. We have an extremely able team
now, crystallising the different parts of the job of creating
the trustee corporation, and there are some legal things around
member panels and constitutions of the trustee membership altogether.
It would be wrong for me to claim to be an expert just yet in
that, but I hope I will be more expert next time.
Q51 Harry Cohen: How many funds are
you thinking of or looking at the moment?
Mr Jones: We might end up with
just about in to double figures, but it could be that six, seven
or eight of that 11, 12 or 13, actually are the default fund,
because the default fund comprises different funds itself of different
volatilities. One topic we have not spoken about yet is life styling:
if you do go for a higher volatility strategy for the first 30
years of a 40 year term, then typically you move towards lower
volatilities as you approach decumulation so that people do not
get overly affected by a spike in the market, as we have seen
in equities in the last three months. That is called life styling,
and that is another thing we will be consulting on, because there
is more than one approach to life styling. People want to talk
to us about different forms of life styling, so you would expect
the investment consultation—there is a presumption we will
do life styling, but what is less clear is how we will do it,
how we will move people to lower volatility as they get to the
end of the accumulation phase and get ready to decumulate, to
turn it into the income, which is the whole point.
Q52 Harry Cohen: Tell us a little
bit of what is being thought of in relation to the ethical or
green funds, because there are a lot of different areas in relation
to people with green interests—one animal rights, one against
the arms trade—a lot of different green aspects. What are
you thinking of?
Mr Jones: We are just thinking
to ask the question. We are going to ask the question and we are
going to make it very clear that we are interested in what people
think is sensible. What I am looking for is a balance between
choice and the administrative costs that the choice implies, and
a fair response to the desires of members for choices. It is a
truism that the more funds you have under management, against
whatever mandate, the cheaper it should be to do the funds under
management; so in order to get value for money out of your investment
you do not want to have a very large number of very small funds
running; you want to have a relatively small number of thumping
great big funds whatever their individual construction, because
it is just cheaper and you get a better price. Part of what we
are trying to do here is get a really excellent outcome for a
very large number of low to middle-income earners by consolidating
their wealth and presenting that in big lumps to people who will
do it to a very high standard for a low percentage, overall rate—it
need not be a percentage at all. We will see what we have to pay
for the funds' management.
Q53 Harry Cohen: You touched on charging.
Presumably some of the choices—10-11 funds and the administration
of all that could affect the charging; it could adversely affect
the charging.
Mr Jones: Yes.
Q54 Harry Cohen: What sort of thinking
have you got in relation to the charging? Let me put a second
question to follow on from that. One of the things the Minister
talked about was keeping it simple. That was one of the key factors
he presented in relation to Personal Accounts. Is there a danger
here of not keeping it simple?
Mr Jones: There has been a great
deal of debate about the overall charge structure 0.3, 0.5% AMC
have been the public face of that debate. I take the 0.5, which
is where we are, as a goal in terms of my cost thinking, and that
includes any fund management charges that are there. The way I
am internalising that is to see it in the context of the default
fund, and not necessarily see it in the context of funds outside
the default fund if those funds are more expensive. Because it
seems to make sense to me that if there are differences and those
choices are still sought by people, the people who are left to
go into the default funds should not be subsidising the people
who make other elections; but those people who make other elections
should have the freedom to make those elections. I expect that
if you take the default fund here and then ask me the question:
if that is now, however it is constructed, what we call one fund—how
many funds are there? I think we are in single figures. We are
not in fund swapping, fund supermarket land here; that is just
not our target market.
Q55 Chairman: Thank you very much,
Tim. You correctly anticipated you might be seeing us again! When
this was all kicking off we thought, "Why does it take six
years?" We are beginning to see why it takes a long time.
We appreciate you have been as open as you can be. There are lots
of challenges still ahead and we look forward to seeing you again
perhaps in a year and seeing how it is going.
Mr Jones: I look forward to it.
Thank you very much.
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