President-elect of the Pensions Management Institute (PMI), Steve Delo, will be soon be leading the way in educating and guiding an industry that must contend with, what he calls a "mish-mash" of pension arrangements.
Having worked in the pensions field since graduating from university in 1989, Delo is aware of the challenges facing an industry that is in a period of change. "The pensions industry is in a state of flux, it's a mish-mash of closed defined benefit (DB), open DB, different defined contribution (DC) arrangements - some generous, some poor - and a lot of it remains poorly communicated to members," he explains.
Delo, who will take over the reins as president of the PMI from Penny Green in July, is managing director of the Close Investments Group, a manager of managers company that selects and monitors investment managers on behalf of trustees. He is currently vice-president of the PMI and, in his new role as president, will be ensuring the institute's line of training and qualifications for pension professionals and trustees matches industry requirements.
The changing pensions landscape will make this task increasingly demanding. "Certainly over the last five years or so - since the dawn of stakeholder, the move to contract-based DC, more schemes closing, quite technically demanding situations where you've got schemes to wind-down, wind-up or run-off - there have been increasingly difficult and specific skills required. For us to keep course material up-to-date is quite testing."
The trend for organisations to move from DB to DC schemes, says Delo, is the result of a combination of events. First came Gordon Brown's abolition of advanced corporation tax relief from share dividends which starved DB pension funds from a key source of funding, followed by a stockmarket crash and the introduction of other pieces of legislation.
Delo says the result was large pension scheme deficits and worried employers. "When employers panic, it is a good opportunity for advisers to come up with creative solutions, but those tend to involve moving away from DB. This change of approach was difficult for [scheme] members to understand, which gave employers the opportunity to cut costs, so some of the behaviour at that point in time was probably counter-productive."
Delo believes that the much-publicised closures of many DB pensions have added value to the final salary plans that remain open. "Final salary schemes have suddenly become a fantastic retention tool for staff. Perversely, they never used to be when everyone had them, but now there are a limited number of open schemes, they are a fairly good tool to use in an employee benefits strategy," he adds.
Where DB schemes are in place, however, Delo foresees various complexities arising from the increasing trend to move away from equities, with trustees instead trying to match liabilities and protect the scheme against the risk of falling interest rates. He explains that, by locking out the risk of interest rates falling, trustees could also face a backlash from employers should interest rates rise.
Due to such investment complexities and increased regulation, Delo predicts a more prominent role for professional trustees in the future. "They bring a seasoning within the industry that lay trustees - however financially astute - will never have."
Where employers have moved to DC schemes and passed on the risk in relation to investment strategy to scheme members, Delo says communication of this is key. For example, employees could end up experiencing a period of poor investment returns and be faced with a benefits statement that delivers an overall figure at the year end that is lower than the previous year. "I've been saying for some time that there is going to be widespread negative press coverage regarding DC schemes come a period of poor equity returns," he adds.
Hence, the position taken by the PMI and Delo promoting the importance of financial education in the workplace, but only if it is comprehensive. "If you simplify these issues down to something that can be communicated by an employer in a bulletin or a one-hour seminar, then that can become meaningless, to the extent that I think it becomes positively dangerous."
In Delo's opinion, financial education will be key when the government's new system of personal accounts launches. Under the scheme, which is due to take effect from 2012, employees will be automatically enrolled into either the new system or an existing occupational scheme, provided it meets set standards, and employers will be obliged to make pension contributions of 3% and employees 4%.
However, the government's proposals for generic financial advice to be made available alongside personal accounts, via methods including a website and helpline, does not sit comfortably with Delo. "Financial advice has to be put in the context of an individual's financial circumstances, and there's no one-size-fits-all situation."
While he admits there is a danger that some employers will use the new system to lower their current contribution levels to the minimum expected standards, or to even close their schemes, he says he is not ready to form a definitive opinion. "There's definitely a strong argument that it could give employers an excuse to level down. Contractually though implementing a levelling down could be very difficult to do, and if you are an employer that is paying in the employee's 10% employer contribution, it's difficult to take that away."
He adds a positive aspect of DC schemes, and particularly the move towards contract-based arrangements where the member has a direct pension contract with a provider, is that employer contributions get enshrined into employment contracts. Therefore taking contributions away can be likened to reducing salary and so an unlikely move for employers to make. He says in the heyday of DB, where contracts were looser, it was easier for plans to be closed and changed.
He also realises there are other employers for which the contributions they are expected to make under the system of personal accounts far exceed what they have previously had on offer. "At the end of the day, you are introducing an additional cost to [some] employers that wasn't there before. For larger employers they should be able to absorb and model it, but it's the small employer that it's going to be an issue for."
For the new system to be a success, Delo believes that employees will also need to increase their own contributions, but he realises that general debt and high living costs could be a barrier.
One thing is for sure, Delo will be urging employers to be prepared to invest money, time and resources into their pension provision. "Employers need to be aware that there are no quick fixes on pensions. We are entering a very complicated period where many employers will have a mish-mash of different pension arrangements that will be labour intensive. When it comes to administration, management [and] communication, they are going to absorb quite a lot of advisory costs and it isn't something that's going to be managed as a sideline," he adds.
CAREER HISTORY
- Steve Delo graduated with a statistics degree from the University of London in 1989. After this he landed a position as a graduate trainee at consulting actuarial firm Noble Lowndes and Partners.
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Q&A
Have you always wanted to work in pensions?
"I would love to lie and say I had always planned on going into pensions but as with most people in this industry, I drifted into it." At a student careers fair in Islington, the last organisation Delo talked to that day was [actuarial firm] Noble Lowndes.
Any words of wisdom?
"Beware of drawing too many conclusions from things that happen in the short-term. I believe that most behaviour in pensions is unduly swayed by what happens in the short-term and you need to learn a little bit from history when it comes to looking at investment situations and pension situations. Think long-term, the industry doesn't think long-term enough. Pensions are by their nature long-term, so why are we thinking short-term?"
Are you looking forward to becoming president of the PMI?
"Making strides with the PMI and leading it to the next stage of development while also holding down my day job will certainly be a challenge, but one I am relishing. There is plenty more out there for me to achieve in the next couple of years."