Daniela Silcock: Will members end up bearing the all the costs?
I am concerned about the cumulative costs of reform, and who will pay for it. There is a lot of reform being considered and implemented which can be broadly defined as intending to promote value for money (VFM). One could argue that reform is also aiming to boost national economic growth, but the government will tell us that this also aids member VFM.
What I would really like to see is a proper breakdown of costs from all of the reforms and a definitive statement about who is expected to pay for it. I suspect that industry is expected to pay for all or at least the majority, and this essentially means that members will end up bearing the costs. Will any increase in member charges be balanced out by VFM improvements? I would argue that it is important to know the answer to this question before proceeding, and if the answer is no, then can we build something into the reforms (e.g., timelines or government sponsorship) which ensures that at the end of the day the member still wins?
What do we know about the costs? I'm going to start with the dashboard, as pretty much everyone is having to change the way that they collect and report data to comply with dashboard requirements. Establishment costs for small- to medium- sized schemes can range from £30,000 to £100,000. Larger schemes will incur higher costs, and then there are expenses for continued compliance and the additional cost of setting up their own dashboard for some schemes. In 2022, the Department for Work and Pensions estimated an industry cost of around £850m over 10 years. Certainly nothing to sneeze at!
Speaking of VFM, schemes are waiting to see the requirements for reporting VFM to the regulator through a complex system of metrics. This will involve regular self-assessment activities by schemes as well as development so that the required data is produced in the format required.
We know that schemes will soon be required to offer "targeted support" as defined by the Advice/Guidance Boundary Review, and default retirement income options to members. There will be increased legal and research and development (R&D) costs associated with developing these. Alongside these requirements, we can reasonably expect that the government will pursue a pot consolidation policy at some point (with multiple default consolidators their current favoured model), which is likely to also require significant development by schemes in order to ensure compliance. The government said it intends to set up a clearing house to support this model. Who will pay for the establishment and ongoing maintenance of this?
I have struggled to find much public data on research and development (R&D) spending by defined contribution pension schemes generally, which may make this difficult to track. NEST publishes helpful accounts though which show R&D spending decreasing over time. I wonder whether this spending will increase?
Let's also take a minute to reflect on the research and development taking place behind the scenes. Investigation into, say, potentially converting a multi-employer scheme to collective defined contribution (CDC), or opening a new one, can't be cheap!
I'm certainly not anti-reform. The way we save for retirement has changed dramatically as a result of automatic enrolment, pension freedoms and a series of demographic and economic developments. Reform is sorely needed and members are not currently receiving sufficient VFM. My message is merely this: in the pursuit of VFM we must not lose sight of the intended beneficiary, the member, and the long-term impact on retirement outcomes should be estimated as part of each policy reform in isolation and as a whole.
Daniela Silcock is director of Daniela Silcock Pensions Research (DSPR)
