Examination of Witnesses (Questions 140-159)
MR CLIVE
BRIAULT AND
MR DAN
WATERS
3 MAY 2006
Q140 Kerry McCarthy: Do you think
that the NPSS would place an increasing burden on you in terms
of that objective? Obviously it depends which model is adopted,
but are there concerns?
Mr Briault: As I say, I think
one aspect which it would certainly require us to increase our
attention on is providing the sort of information and materials
to help consumers make whatever choices they might need to make
and, as I say, the most basic one is whether to opt out of auto-enrolment.
I also, indeed, very much hope that the introduction of some form
of national pension scheme would indeed increase interest in,
and awareness of, financial services in the workplace. One of
our major priorities under the Financial Capability Strategy is
to do far more in the workplace by way of getting information
to employees, running seminars about money advice in the workplace,
so actually we think that a combination of the introduction of
this and the increased emphasis on financial capability may actually
generate quite a lot of interest which would help us get broader
consumer awareness and consumer understanding messages across
in the workforce.
Q141 Kerry McCarthy: Do you actually
think that choice might be a desirable aspect to having a scheme
then on the basis that it would encourage people to take more
of an interest in their financial affairs?
Mr Briault: Not so much for choice,
no. I think they will be encouraged to take a greater interest
merely through the introduction of the scheme because they will
read a lot about it in the press, they will hear a lot about it
in the workforce, they will speak to their colleagues about it
and I think it will engender a lot of interest which is a good
thing because really that is a starting point to get people engaged.
I think in terms of choice, there is just a very, very difficult
trade-off. As I say, it would be nice to think that people were
sufficiently aware, sufficiently well informed to exercise sensible
choices of this type. In practice, of course making provision
for pensions is a very difficult thing for most consumers, we
know that, and, therefore, the trade-off, I think, is between
choice and complexity, on the one hand, which will bring with
it all sorts of questions about what the most suitable thing is
for people to do, what advice they need to help them make that
choice, how that advice is then regulated, and, on the other hand,
I think coming back to a much earlier question, whether you can
design a much simpler scheme with far fewer choices which enables
the delivery of widespread personal pension provision at a much
lower cost.
Q142 Kerry McCarthy: Do you support
the concept of a default fund within the NPSS?
Mr Briault: Yes, I think a default
fund is probably a very necessary part of it, some form of default
fund, because I think there will be a large number of people who
do not necessarily think very hard about whether they should be
a member of a scheme or not and may not think very hard about
which fund they should go into, so I think having a reasonably
straightforward default fund is a very important aspect of it
because experience in other countries, and a likely result here,
suggests that the majority of employees actually will end up in
the default fund.
Q143 Kerry McCarthy: Based on your
research, what proportion do you think are likely to end up using
the default fund?
Mr Briault: Well, I think that
depends again on what choices are offered, what is available in
addition to the default fund. We have not done any research which
tells us the answer to that because it is a hypothetical question,
but, as I say, I would expect more than half, and possibly a much
higher percentage, to end up in the default fund.
Q144 Kerry McCarthy: I think we were
quoted figures of maybe 90% by the industry, that they expected
about 90% for that. Does that surprise you?
Mr Briault: That would not surprise
me, no. I think the simpler the scheme and the less choice available,
then the more likely it is that people will simply end up in the
default fund.
Q145 Kerry McCarthy: If there was
an ethical investment option as part of the scheme, would that
create any additional regulatory demands?
Mr Briault: No, I think it would
still require that fund to be properly explained to the employees
who had the choice of going into that fund. There are already
ethically based unit trusts in existence. The important thing,
I think, as with all funds, is that the key characteristics of
the fund and the sorts of things in which the fund invests and
how it does it are properly explained to potential investors.
Q146 Mr Newmark: We have heard that
really most investors are not particularly sophisticated, that
they are not particularly good necessarily at making choices and
that perhaps only 20% of people actually get some form of independent
advice in deciding what products to actually invest in, and 50%
are completely ignorant of particular product features or the
cost of actually investing in a particular asset or fund. Turning
to actively managed funds as opposed to passively managed funds,
it seems that obviously the fee structures are higher there, but,
I am curious, are there any regulatory implications with regard
to consumers being provided with more actively managed funds within
the NPSS?
Mr Briault: I think again not
in addition to those which I have already covered. The important
thing, if people are being offered such funds, is that they understand
the basis on which those funds operate and indeed the charges.
The interesting question, I think, that raises is whether or not
you can have a range of funds within the NPSS with considerably
higher charging structures than, for example, the default fund,
but again I think that is a very important design aspect.
Q147 Mr Newmark: But, if there are
charges with respect to actively managed funds, there are cost
implications to that. Is there an assumption behind that or is
there any evidence to this effect, that actively managed funds
actually make better returns for those investors which outweigh
the costs of having more actively managed funds?
Mr Briault: Well, the research
which we have undertaken shows that there is no evidence that,
on average and over time, actively managed funds out-perform tracker
funds, taking account of the differential in charges across the
two.
Q148 Mr Newmark: So it is sort of
a wheeze for active fund managers really to make more money and
actually those whose funds are being managed really do not get
a better bang for their buck, so to speak?
Mr Briault: Well, on average,
if you are fortunate enough to choose the fund that happens to
perform extremely well over a time period, and some of these funds
do perform extremely well for quite extended time periods, then
you are better off, or you may have a particular preference that
you want to invest in particular things which do require more
active management.
Q149 Mr Newmark: Is it really an
element of luck? Is it really random in some sophisticated consumers,
which we understand most people are, that it is really stick the
pin in the donkey and hope you get the tail and make some money?
Mr Briault: Well, the conclusion
of our research, which we have publicised quite widely, is that
we do not believe that past performance is an accurate guide to
future performance.
Q150 Mr Newmark: That is said about
every fund though. I am just trying to understand, is there an
advantage to going into actively managed funds and do those people
whose funds are being managed benefit from more actively managed
funds or is it just a means for active fund managers to make more
money because the average consumer is not benefiting from that?
Mr Briault: Well, when you say
"make more money", of course there is also a cost to
the firm of actively managing the fund and it is a question of
how those costs are then reflected in the charging structure.
In competitive markets, you would not expect the firm necessarily
to make a lot more money—
Q151 Mr Newmark: No, I understand
that, but is there any evidence that actively managed funds are
performing better than tracker funds?
Mr Briault: No.
Q152 Mr Newmark: You are saying no?
Mr Briault: Yes, absolutely.
Q153 Mr Newmark: So the only people
benefiting from this are the fund managers?
Mr Briault: Well, depending on
the charging structure related to the costs of running the actively
managed fund, yes.
Q154 Mr Newmark: Well, if they are
making 25 base points versus ten, the answer is yes.
Mr Briault: But there is also
a cost to managing the fund, so the economics is not simply the
difference in the charges because it is costing more money to
make—
Mr Newmark: But the fund managers are
not running charities. It is about making a margin. Anyway, that
is enough, thank you.
Q155 Mr Todd: To what extent has
the FSA looked at the administrative infrastructure supporting
the existing pension providers and whether that is sufficient
to provide a sensible basis for administering the NPSS?
Mr Briault: If I interpret your
question correctly, we have not asked that question as to whether
any existing fund takes on the magnitude of running the entire
scheme.
Q156 Mr Todd: I am not suggesting
that. I am suggesting that perhaps you have examined the capability
of pension providers at large to offer administrative services
which would be appropriate as the basis for the NPSS.
Mr Briault: Certainly.
Q157 Mr Todd: Do you think they are
good enough at doing their existing jobs to offer a substantial
indication of success in the future because of course that is
what they are saying? They are saying, "You can build from
what we have".
Mr Briault: I think in terms of
running funds which both have large numbers of members and, therefore,
meeting what I was talking about in terms of the administrative
requirements of collecting the money, putting it in the right
accounts, making the right payments at the right time, certainly
yes. In terms of managing very, very large funds, again yes. There
are some very, very large funds managed out there which certainly
would be proportionate to the NPSS.
Q158 Mr Todd: There are two measures
which you might have looked at, but I do not know whether you
have. One is the cost ratios of the administration that they are
offering and the second is any qualitative indicators as to whether
they are actually doing it satisfactorily in the view of pension
members.
Mr Briault: Well, cost ratios,
no, we have not studied that in any detail at all. In terms of
the qualitative, yes, in the sense that, if you are running a
fund and if you are running a fund which is supporting a pension
fund by investing the assets of that fund, then clearly that is
a regulated activity and we do keep an eye on whether or not people
run that effectively in the sense of whether they are keeping
good track of monies and whether those monies are invested in
what they say they are going to be invested in, so yes, confident
in terms of the qualitative aspects. The administrative aspects—
Q159 Mr Todd: You are aware that
the debate is between a group of providers who are saying, "We've
got a lot of skills to offer and we should be the building blocks
of any new scheme", and others who say, "To be honest,
they are not terribly good at what they do. We would do better
to start from scratch". My line of questioning is to try
and force you into taking some sort of view between those two
or merely making appropriate comments.
Mr Briault: The view I would take
is to ask whether they are capable of running it and the answer
is yes. There is a separate question, I think, about whether it
would be run more cheaply or not through different types of scheme
and that is something we have not studied.
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