Perhaps the greatest risk to pension scheme trustees and members is the low rate future currently being carved out.
It is odd to suddenly be talking about low rates when they’ve been with us for over a decade, but the fact is that the full peril of the environment is only really coming to the fore because of the current financial crisis.
With each lockdown comes another multi- billion pound Government bailout, adding to the ballooning national debt, more quantitative easing and the necessity and likelihood that almost-zero gilt yields are going to be here for an awfully long time yet.
Generating returns and retirement income has just turned from an awful headache into a living nightmare.
So into this world of near zero comes two bits of regulatory changes being proposed: alterations to the retirement pathway of savers, and demands for greater investment flexibility. The first of these is from the Pensions and Lifetime Savings Association and its big idea to signpost certain choices for members along the course to retirement.
This is a sound principle but is based on the premise that there is something fundamentally flawed with the current system, which I’m not sure exists.
Since the pension freedoms, prudent savers have turned out to be prudent in retirement. The savvy have been able to plan their own incomes and those without the confidence to go it alone have more or less ended up with an annuity from the insurance company that they saved with.
The problem has not been signposting choices, it has been the failure to highlight how to shop around.
That is going to become an even greater issue in a world where rates are so low that financial products seem pathetically poor value. After all, we already have annuities priced so that savers will, in all probability, die before they have received as much as they paid in.
Signposting without the necessity of advocating advice can easily lead savers down the wrong path. More than this, savers need to know how challenging getting an income can be.
General help is almost as good as no help, but comes with a mountain of more regulatory risk. Information is key, not a pathway in any given direction, but for some reason schemes have always been reluctant to talk about shopping around.
If this aspect of helping savers negotiate low rates is a challenge, then the proposal by the Business Growth Fund that pension schemes should be allowed to ditch a cap on fees in order to plough money into start-ups is hugely troubling from a consumer and trustee point of view.
This rhetoric – that pension schemes should serve a social purpose – is growing daily, and it can be damaging.
The Business Growth Fund advocates the creation of a UK National Renewal Fund with £15bn to be channelled as patient capital into new enterprises. The capital would come, partly, from pension funds.
Most trustees would freely admit how heavily they rely on the investment advice they receive, but I bet most investment advisers are not prepared to admit the limitations of their own expertise.
They rely just as much on experts as the rest of us when it comes to specialist investments such as start-ups. These are niche high-risk strategies designed to kick-start the economy not to assist pension funds in navigating a low rate world.
Sticking them in a fund makes them a little less risky, but does not mean schemes cannot invest without due diligence.
The danger is that the pressure on trustees to generate returns in this environment will force rash decisions. And higher-risk start-up investments also come at a cost, because in order to invest pension schemes would have to increase fees, which seems a retrograde step in a market where competitive pressures have lowered them.
Plus as we know, excess cost in a low rate world is a killer.
Pension schemes should resist the social pressure to help the country recover and focus on doing what is right and safe for members. Scheme members want solid returns and they also want diversification, but they also demand security.
Helping provide patient capital may be the right answer, but any decision has to be based on risk and cost.
Trustees need to accept that low rates are going to mean delivering returns is that much more challenging, but the first step is communicating this to members, not holding their hand towards increasingly high risk strategies. Members won’t thank you for trying to rescue the economy if their own economic future is damaged.