Will the Pensions Review lead to more joined-up policy?
The new government has laudable ambitions, but will it do more than simply “firefighting”? Pensions are a priority, judging by its speed in launching ‘a landmark’ review to boost investment, increase pension pots and tackle waste.
Led by the first ever joint Treasury and DWP pensions minister Emma Reynolds, it is initially investigating scale, consolidation, the role of the single employer trust, master trusts and GPPs with their different governance structures of trustees and IGCs.
The call for evidence for this, the first stage in the government's review, lasted just 3 weeks, from 4 September to 25 September, and initial findings are promised "later this year", ahead of the introduction of the Pension Schemes Bill.
A second phase will start later this year and alongside investment will consider further steps to improve pension outcomes, including assessing retirement adequacy.
Despite this, defined benefit schemes, are out of its scope, except for LGPS asset pooling, and will, the government says "remain separate from the review". The focus is on workplace DC pension schemes and ‘tackling waste' in the pensions system.
Proceed with care
Some of the pensions industry's attitude may be summed up by the famous dictum: ‘Reform? reform? aren't things bad enough already?' attributed to Lord Melbourne. Or, as Sackers partner Georgina Jones, highlights: "The pace and breadth of pensions reform is a constant challenge for schemes. Dashboards are on their way; DB schemes are dealing with the new scheme funding regime and all schemes formerly contracted-out on a reference scheme test basis are grappling with the fallout from the Virgin Media decision."
She adds: "There is only so much time and resource and decision makers need to be alive to this when considering the timing of the next round of changes."
UK first, a pension policy that works?
The government aims to encourage pension investment in the UK. Carrots, rather than sticks are preferred to help trustees and independent governance committees (IGCs) overcome conflicting needs of members and the nation.
Attendees at the recent Society of Pension Consultants' annual conference in September backed incentives (tax relief) with almost three quarters (74%) needing that carrot for domestic investment while 8% backed compulsion. A further 8% suggested that driving further consolidation and scale was the best solution, followed closely by 6% who said there is no best approach because the policy initiative was fundamentally flawed. Just 4% backed the idea that run-on surpluses should be more easily diverted to support DC contributions. No-one chose the option of creating a narrower, performance driven Value for Money framework.
Aon market development lead Nigel Aston calls for a broadening of "the definition of fiduciary duty to include ‘double materiality'" (not taking investment decisions in isolation in a similar way to ESG factors) with a safe harbour or back stop, to take away perceived risk.
More value but still high legacy charges
One positive sign is that investment charges for workplace DC schemes have fallen. These now average 30 basis points (bps), down from 37bps in 2020. The lowest charges are enjoyed by master trusts (26bps) and large employer schemes (28-30bps). Many retail pension savers such as the self-employed face charges around 1% for equity funds, three or four times as much - it is just not a level playing field. Could the government mandate change here?
"There are too many DC schemes that are still sitting on high legacy charges for simple equity or fixed income funds, which should be reduced," declares WTW head of DC Consulting Helen Holman. "But once those savings have been made, there's a good argument for using it to create space for other diversified asset classes, such as private markets and illiquid assets."
Despite this, she cautions: "These usually come with slightly higher charges but can reduce concentration risk and provide strong returns for savers over the long term."
Focusing too heavily on achieving the lowest possible charges can also restrict investment options and returns for savers.
Is big always best?
More consolidation could lead to more social housing and productive finance investments with, larger providers better placed to use AI, technology and improve, member communications and tackle post-retirement.
But much consolidation has already happened, at least in master trusts. On the retail front, the proliferation of pension pots continues. For master trusts, Aston, notes: "If we take out the niche, non-commercial, and ‘duplicate' structures, there are only 15 master trusts. We are already close to the long-stated ambition of the regulator to get to around 12. We need to concentrate on where the real issues are, not stifle choice and innovation in multi-employer arrangements."
Sackers partner Georgina Jones confirms: " According to TPR's Occupational defined contribution landscape in the UK 2023, since 2012 the number of non-micro schemes and hybrid schemes has declined by 70%, despite the backdrop of significantly increased scheme membership. In addition, according to TPR, master trusts currently account for over 90% of non-micro memberships and 78% of assets."
Currently, there are around 1,000 single employer schemes, other than micros and this figure has been falling at roughly 10% a year for a decade.
People's Partnership head of policy Tim Gosling expects this to continue, "with the main driver being the increasing regulatory overhead".
Irwin Mitchell partner Penny Cogher points out: "The pace can be slow due to the need for careful oversight and compliance".
She says initial consolidation efforts can also be costly due to the integration of systems and processes – noting that smaller schemes often struggle with governance.
Despite this, she notes that consolidation can lead to better oversight and management – saying immediate benefits can include reduced fees and improved investment options for members and better at retirement options and better communications.
Consolidation can also enhance long-term sustainability of pension schemes, ensuring better retirement outcomes for members.
Despite this, Cogher warns: "A gradual, market-driven approach to consolidation is often more effective than forced consolidation."
An easy win?
An easy win to improve consolidation at the scheme level, would be, as Aston notes, reform to smooth GPP transfers: He says the face "these transfers have to be member-led is an unnecessary barrier to the free movement of assets to better value plans".
Cogher agrees: "The legislative framework does not assist the consolidation of very small old insured DC occupational pension schemes. Their trustees still have to comply with the full regulatory framework, including the chair's statement but the cost of doing so is completely disproportionate to the size of the scheme and the insurer is often not set up to provide this information. The administration of the insurers can be poor. Yet because of with profits or guarantees, the trustees cannot easily move from the old insured schemes to a state of the art master trust."
This is both a short term and longer term problem. These schemes have been overlooked. Cogher notes: "The initial emphasis on the master trust consolidation was for mid to larger DC occupational pension schemes to move to master trusts but there is no facilitation in the pension transfer legislation for the small DC occupational pension scheme to be transferred over without member consent to the master trust. The legislation prohibits this type of transfer – trapping members of these schemes in small poor performing schemes run by insurers."
The stick approach of penalties for trustees of these schemes just causes a problem with no solution. Cogher explains: "This is because no one wants to be their trustee and without trustees, the schemes themselves cannot function."
Single employer trusts still have a place
But large single-employer DC trusts still have a place and can thrive. Cogher points out: "They can maintain a strong link between the employer and the pension scheme. This can boost member engagement and tailored benefits as well as more customized investment options and member services that align closely with the specific needs of their workforce."
Aston too, says there is a place for them if they "have high levels of parentalism, quality governance and personalisation". But he forecasts: "a continued mass migration of smaller plans from own-trust to master trust. This is especially the case as DB plans accelerate towards their endgame and sponsors start to question their resource and budget allocations to the governance and management of smaller DC schemes".
A spaghetti alphabet
Some think there are too many types of schemes. People's Partnership's Tim Gosling believes "the master trust model as superior, which is why we closed our own stakeholder scheme and consolidated it into the master trust".
Despite this, contract-based schemes still hold a greater share of retirement assets.
Not surprisingly, Jamie Jenkins, director of policy & communications for Royal London, a GPP provider with a surprising lack of a master trust in its extensive product range, notes: "Many employers favour an Financial Conduct Authority-regulated environment with the comfort of the Consumer Duty. From a member perspective, there is little difference in the experience in either type of scheme."
Aston, adds: "Having both GPP and master trust is somewhat confusing for everyone, but we are where we are! We see a place for the continued two-tier system, rather than have the regulators and industry burn time trying to rationalise the differences. There are bigger fires to fight."
What's next?
So, what are these bigger fires? The glaring gap of in phase one of the review is that there is no reference to the work on auto-enrolment (AE) by the previous administration.
It is a long time since the 2012 reforms came into being. Will phase two extinguish the AE flames?. Detailed terms of reference for phase two have yet to be announced at the time of publication [October 2024].
Latest recent research from Aon shows just how much needs to be done on DC workplace pensions:
· Two-thirds (65%) of those running pension schemes do not know how much a typical member can expect at retirement;
· Some 70% percent monitor investment fund performance against benchmarks, but only 29% monitor what this means in aggregate for a member invested in a default arrangement;
· The most common default retirement age remains 65 despite the increasing state pension age and possible further rises.
The DWP has already found that 38% of working age people (equivalent to 12.5 million people) are not saving enough for retirement. Increasing the minimum pensions contributions for AE could largely solve that problem. The Labour party supported the idea in opposition but appear to have cooled on the idea now in government.
DWP minister Sir Stephen Timms , speaks for many when he said at an Institute for Public Policy Research and Centre for Social Justice (CSJ) event that he wants the government set out a timetable for increasing the minimum AE pension contributions from their current 8% minimum, a (5% employee contribution and a 3% employer contribution).
He said: "I am not the pensions minister and I realise we are living through a cost of living crisis but as I said when I chaired the Work and Pensions Select Committee, I think we have got to have a road map so people can see we are committed to doing this and when."
And as Centre for Social Justice deputy policy director Sophia Worringer so rightly said at the same event: "This is a huge problem that we can't just keep kicking down the road."
Pension doomsters abound
A chorus of studies all show the same thing. Indeed, WTW research revealed that only a quarter of employers think their DC pension provision will leave workers with a comfortable retirement.
Employees are also concerned. The Global Benefits Attitudes Study found that a third (31%) do not now think they will be able to retire before the age of 70, which is up from 16% in 2019. Little over half (56%) of the employees surveyed are confident about their retirement and 8-in-10 (79%) believe that they are under-saving for retirement.
Indeed, WTW has previously called for employers to auto-enrol new employees at the highest matching contribution level in their scheme, as an effective way to significantly improve retirement savings. However, in reality, the majority of employers (86%) with matching contribution schemes auto enrol employees at the minimum contribution level.
The Institute of Fiscal studies in its report ‘Adequacy of future retirement incomes', has found that one in three people will fail to meet the minimum retirement living standard of £14,400 per year in retirement. As Harding stresses: "This generation will also face the additional challenge of paying for rent or mortgages which extend beyond retirement and would need broadly double the pot size of someone that owns their own home."
Many pension systems, including the much-lauded Australian superannuation approach, struggle with how to extend coverage to self-employed individuals. As the gig economy continues to grow, and ‘portfolio careers' become more popular, this must be tackled too.
Joined up thinking?
Perhaps the government should also look at equalities issues. As People's Partnership's Gosling declares: " If workplace pension saving isn't working for women and some people from ethnic minority backgrounds, then it isn't really working." Equalities issues are difficult, though, as most of the problem sits in the labour market, outside of pensions.
The core problem is the gender pay gap, as pensions are so strongly related to pay. Gosling says: " It's hard to see a solution to the gender pensions gap that doesn't start with addressing the gender pay gap." The conversation may turn to "labour market progression for women returning to the labour market, about childcare and about flexible and part time working." Gosling warns: "It's unfamiliar territory for pensions people but we are going to have to learn."
Digitalising pensions with the advent of the dashboard will also present new challenges and opportunities. But the government's over- arching pension priority must be, as Nest, urges to make "progress towards lifelong financial security for households, as part of a wider strategy for economic security and growth at the national level."
Long overdue integrated policy making is coming. The appointment of Emma Reynolds MP Minister for Pensions with her joint Pensions and Treasury brief (a ‘first' ) is a start. Join up the dots, for example, by encouraging short term savings via AE side cars to long term retirement planning. That could not only end living hand to mouth for many but also at the same time, ensure a comfortable future, ultimately for the nation and all its people. Minister, this ‘Holy Grail' is within your grasp.
Stephanie Hawthorne is an award winning journalist and former editor of Pensions World (1989 to 2017)
