This is the second of three reports following the IBC 3rd Annual Defined Contribution Conference, recently held in London, England.
Many readers have asked a) why an otherwise well-adjusted Californian would WANT to travel to London in mid-Winter? and b) What can they sell to the UK market? Good questions, both.
First of all, the weather is better. Yes, I know the stereotype of English weather, but like most stereotypes, it is inaccurate and unfair. Being a Seattle native, Iím something of an expert on bad weather. In the last year, Iíve spent more time in the UK and the Irish Republic than I have visiting clients/friends in the Pacific Northwest. The UK is a good place to be, regardless of season and itís a good place to do business.
Further, the people are polite, smart, creative, funny, warm and proud. Not a bad combination. They know who they are and they can (and do) laugh at themselves. We can learn from them. They do not all look like John Cleese or Emma Thompson.
As to Part B, they donít need anyone stomping through their patch telling them what to plant or how to cultivate the crop. Some large US vendors have graced the UK marketplace with their presence and the results have not always been mutually gratifying.
There is a "special" relationship existing between the UK and the US based upon a common heritage, a long history and continuing mutual interests. There are two enduring tokens of the US presence in Britain during World War II. The first, a statue of Dwight Eisenhower near the site of his London headquarters. The second, a saying that "the Yanks are over-paid, over-sexed and over here". Some things donít change. The Brits respect us, like us and sometimes, will even let us have a role in their businesses if we can bring something of value.
Enough opinions. Here are some facts:
- The retirement marketplace in the UK is in a period of adjustment, generally reflecting the environment of the mid-'80s in the US. The two-tiered National Insurance pension scheme is reasonably sound, but the aging workforce heading to retirement will place an increasing strain on the system.
- In the last three years, more than 90% of all new retirement plans in the UK are defined contribution. As in the US, smaller employers favor DC plans that do not carry significant, long term funding obligations.
- Tax incentives for 401(k) type retirement savings already exist under UK legislation. Legislation in the UK, just as it did in the US, has made sponsorship of defined benefit plans increasingly burdensome for employers. A recent court case, effectively ruling that defined benefit surpluses are the property of members (plan participants) could, if upheld on appeal, be the final nail in the defined benefit coffin.
- For Plan Sponsors, the US-style of broad choice, relatively efficient distribution systems and high levels of participant support are not the norm in this marketplace. Insurance companies and investment firms are the major players and unlike the US "supermarkets", these vendors generally sell only their own management services. The actuarial profession is alive and well in the UK, its members retaining a premier position of trust and influence. Plan sponsors appear to rely quite heavily upon this group, apparently more so than in the US in recent years.
- A wide range of past (PEPs, TESSAs and ISAs), current (Personal Pension Plans) and future (Stakeholder Pensions) alternatives have been, and will continue to be, "participant directed" in stateside terminology. Several newly introduced, tax advantaged investment vehicles are available to help workers plan for their retirement. Some of these are made available through employers, some are not.
|Author's Note: Readers scratching their heads at some of the terms used in this article may visit our Industry Link Center at www.mchenryconsulting.com. Links are available there to many fine sites that will provide an overview of the concepts and definitions of the international pension arena.
- As with the US markets for 403(b) and smaller 401(k) sales, many products sold to individuals in the UK are sold only through financial advisors that are commission compensated, both at time of sale and on a trailing basis. Some discounting takes place, but the idea of a no-load marketplace is not the common distribution model. Both Schwab and e-trade are in the marketplace, but the norm is the old-style brokerage structure. Even Fidelity sells its retail products through commissioned advisors in the UK.
- The pension marketplace is an extremely compressed market for investment management. Over 80% of all pension assets are managed by 20 organizations and more than half is managed by just six of those.
- Rather than just rolling over their balances at retirement, a participant must purchase an annuity contract that provides a monthly pension benefit. In most cases, they may withdraw up to 25% of their accumulated fund as a "tax-free cash lump sum". Variations on the basic annuity contract exist (joint life options, equity participation, etc.), but the decision is personal and it is usually made in a retail environment, through the purchase of an individually issued, health underwritten insurance contract. Sound like the Ď80s to you?
- Several of the personal pension issuers are under pressure for depriving pensioners of high retirement incomes promised in Ď70s and Ď80s. Guaranteed pensions promised up to 12% as guaranteed rate to protect against a drop in returns. With rates down, this feature is costing insurers £10 billion to meet contractual promises. One such issuer has over 50,000 guaranteed pensions and is imposing a charge on policyholders that wish to opt for the promised guaranteed rate. Even that cost is hidden in the form of a reduced transfer value should the pensioner wish to pull out and move balances to another provider.
- Additionally, the government is making quite a fuss over miss-selling of personal pension policies to individuals without adequate counsel, to their detriment. This happened years ago, but the regulators are beating drums and heads.
- Competition for investorís investable income is fierce. As an alternative to buying a PEP, another vehicle for tax-favored saving is the Venture Capital Trust. Workers may invest in as many as they like up to £100,000 per year. If they invest in newly issued shares and hold for a minimum of five years, investors receive a first year tax rebate of 20%. Dividend income is tax-free and after a five-year holding, gains are free from capital gains tax. They can also use the purchase of a VCT to defer capital gains from other sources.
Overall, the environment is favorable for a continued expansion of DC-style investment flows that put many decisions in the hands of the workers. The people are trying to be savers, the government supports a partial shift in responsibility for retirement security and many employers are supporting them both with DC plans to facilitate the savings process.
Employee education is on a par with US efforts, as adapted to local needs and preferences. Employee access via electronic means is spreading. The UK telecom market is fully deregulated, making it one of the most liberal in Europe. UK Internet Service Providers (ISPs) do not charge by the minute as many in Europe, but on a flat-rate basis as in the US. PC market penetration is growing nicely (home use of PCs up 28% in 1998) but the UK still lags the US by half (99.5 Internet users per 1,000 inhabitants vs. 203.4 for the US). The trend toward such use of such technology for plan purposes is clear, but barriers remain, such as those pesky "advisors" who seek a role in many sales.
Some interesting contrasts and corollaries between the US and UK business cultures:
- The new chairman of Barclays Bank is a California import earning significantly more than his British predecessor. Tongues wag and London is aflutter at his compensation package.
- As the DOL studies 401(k) fees in the US, the primary market regulator (the Financial Services Authority) commissioned a study of UK unit investment trusts and their expenses. The unpublished report found that UK investment vehicles were significantly overpriced compared to US mutual funds. Following the circulation of the draft report for comments, the UK trade group for such investment vehicles took umbrage at these claims. To quote one of their officers: "I would have thought they would have better things to do than let an American loose with a calculator." Our own research on this topic is inconclusive and one should not assume the veracity of the results of this reported study until all the facts are in.
So what can we take away from this odyssey, our Magical Mystery Tour of UK pension schemes?
I strongly believe that:
- There are currently unmet needs for certain products and services in the UK, although the market there may not yet have much appetite for them.
- Some US vendors will be able to localize their offerings to meet those needs.
- Three possible paths to success in the UK market are:
- Build (the way Fidelity did it)
- Buy (the way Merrill did it)
- Borrow / Joint Venture
The next and final installment of this series will drill down on the specific products, services and components that just might have some appeal in the UK and Europe. More importantly, I will ask and answer an even more important question Ė "What may we learn from them?" Please stay tuned.
Ward Harris is Managing Director of McHenry Consulting Group that helps to create and deliver successful products and services. They serve investment/benefit vendors, corporate clients and employee groups. His e-mail address is email@example.com
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