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Trustees should drive reform of pensions industry

The retirement savings industry is in the “last chance saloon” of public opinion, a leading pensions’ analyst has claimed.

15 June 2012

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Michael Johnson believes that the financial services industry is “widely, and justifiably, distrusted” and that public hostility towards it contributes to Britain’s lack of a savings mentality. In his report, ‘Put the saver first: catalysing a savings culture’, Johnson concludes that the interests of the nation and the industry are “not aligned” and that reform is critical.

Johnson makes 104 recommendations for reform, including 19 primary proposals. All are based on the guiding principle that change would be more lasting if it were driven by the industry itself, rather than through intervention from another key stakeholder, such as the state.

“The industry’s ability to redeem itself rests on remembering that its customers are providing the scarce resource upon which it relies; their savings capital. The industry should give customers what they want,” says Johnson.

“Over 90 per cent of the population has very simple requirements of the industry: the industry is not meeting them. People crave simplicity, including a single savings account that serves two basic needs: discretionary (rainy day) savings and retirement savings.”

This objective would be met by the creation of a ‘Super ISA account’, an enhanced form of today’s individual savings account (ISA), Johnson believes.

“All newborns should be allocated a Super ISA, identified by their National Insurance number,” he says.

“In the meantime, today’s ISAs could be linked to NEST accounts (to become Super ISAs). In time, every citizen would have one seamless savings vehicle from cradle, via employment and into retirement.”

The Super ISA is one of Johnson’s 19 principal proposals for reform. Others include:

  • the government should establish an independent, standing body to monitor pension saving levels, and the effectiveness of pensions policy, including tax-based incentives. This remit could be extended to include producing a suite of proposals that would ‘shove’ the industry into putting the customer at its centre; and

  • the majority of the population should be encouraged to set themselves one simple goal at the point of retirement; to be a debt-free home owner (i.e. no mortgage and no consumer debt).

Johnson also believes that trustees need to raise their game.

“Not all trustees can be trusted. Some need to free themselves from the corrupting influences of so-called ‘corporate entertainment’. Others are unmotivated to study the relevant data, so they are uninformed and do not ask the right questions.

“More serious, however, are conflicts of interest between some trustees and service providers; trustees’ purchase of services from sister companies, and reciprocation, should be banned. All trustees should be licensed and regulated, and held to account in respect of their individual legal liability. Professional trustees looking to demonstrate that their interests are truly aligned with their beneficiaries should consider adopting mutual status,” says Johnson.

“A leap of faith is required by the industry, because while profits may diminish in the short term, the long-term outcome could be a rejuvenated reputation and business growth. Finally, and crucially, trustees need to start behaving as the principals they really are, helping to drive the reshaping of the industry. Indeed, trustees ought to be the catalysts for change.”

For the longer version of Michael Johnson’s report see http://www.cps.org.uk/files/reports/original/120613094539-Putthesaverfir...

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