Pension reforms include major steps forward, but other elements require careful scrutiny
11 July 2023
The comprehensiveness of the package indicates the importance of getting the pensions system right for the long-term financial well-being of the UK population.
The UK’s pension system has been transitioning from DB to DC for some time, and this means that over the coming years retirees will increasingly be required to take pivotal financial decisions themselves. This is why we have been advocating for our Guided Retirement Income Choices framework, which would place an obligation on trustees to support their members in retirement, through a range of hybrid products. We have engaged extensively with officials over the past year, and are delighted the Government plans to move in this direction – it is only with a statutory obligation that all savers will be able to count on access to good value products that will cater for their diverse needs.
Without remedy there are expected to be 27 million small pots by 2030 – an outcome which would not be in members’ best interests or support effective decision making. It is a complex problem but one that must be solved.
The PLSA welcomes the DWP’s intent to legislate on the small pots solution(s). The PLSA continues to believe that multiple solutions, working together, are likely to achieve the best outcome for savers, and it will be important to continue to minimise the operational and administrative complexities represented by any future model. Savers’ understanding of the model should also be forefront of policy makers considerations.
Value for Money
The PLSA supports the Value for Money framework which will make possible more meaningful comparisons between pension schemes to the benefit of savers. We have previously raised concerns that the volume of proposed disclosures, combined with the significant existing reporting requirements schemes face, would come at significant cost and effort, so we are pleased that government plans to simplify VFM metrics. We also agree that a central regulator-hosted database would provide the most efficient and effective means for comparison.
We are, however, disappointed that non-workplace schemes – and decumulation offerings – are still excluded from scope. We have highlighted before that members can often be vulnerable to marketing for transfers from workplace schemes to considerably higher-charging consolidators, so these products need to be within scope if we are seeking a comparison across the whole DC market. Likewise, as DWP acknowledges in its work on decumulation, considerable variety exists across the market in terms of schemes’ retirement offerings. Given the detrimental effect that poor or no support can have, we would like to see this included in VFM assessments.
Collective DC pensions
The PLSA welcomes the publication of the Government’s proposals for multi-employer CDC schemes. CDC requires significant scale in order to benefit from the benefits of investment and longevity pooling, so the number of employers large enough to establish their own scheme will always be limited. Therefore, multi-employer and master trust CDCs are a logical structure through which a greater proportion of UK workers could benefit from the enhanced outcomes CDC has the potential to deliver.
Defined Benefit schemes support introducing additional paths to endgame. Superfunds, which were a key recommendation of the PLSA-led DB Taskforce in 2017, provide an affordable option for employers, creating an incentive, and achievable goal, for them to make a one-off payment to reach self-sufficiency funding levels without having to pay for the more expensive – and in many cases unachievable and capacity constrained – insured buy-out option. Once they have achieved sufficient scale, superfunds could have more opportunity to invest in more productive investments such as unlisted equity and fixed income.
Options for Defined Benefit schemes
Given the robust health and improved funding position of DB schemes in a higher interest rate environment, it is sensible to review the DB regulatory landscape to ensure the right balance is struck between protecting members’ benefits and investing productively. This may include introducing additional flexibility for schemes. We believe this could be particularly beneficial to the 10% of private sector DB schemes which remain open to new members and/or new accrual. Across the package of DB reforms, a broad range of changes have been proposed, including altering the role of the PPF, which provides such a vital safety net for members, in several ways. It will be important to consider how the combinations of potential reforms can work seamlessly together across the entire DB framework. We look forward to engaging with the Government’s proposals.
Good governance and knowledgeable, skilled trustees are vital to ensuring well-run schemes and achieving good member outcomes. Pension schemes are currently dealing with a significant amount of regulatory and industry change, and any new trustee requirements must therefore be purposeful, proportionate and pragmatic. It is important to also recognise that trustees’ investment decisions are influenced by employers and informed by recommendations from corporate IFAs, employee benefit consultants and investment consultants. The PLSA therefore welcomes the Government’s call for evidence to help determine the best policies to support trustee skill development and decision making. In time, it will be important to extend the same consideration for S151 officers for the Local Government Pension Scheme (LGPS).
Pooling in the LGPS has allowed funds to achieve economies of scale on some of their investments, while cutting costs. However, as it is only five years since the first pooling reform, we believe it would be prudent to allow the existing structures more time to imbed, to maximise value from the changes. Many of the pools already have assets of £30bn to £40bn so, as contributions are made, many will reach the Government’s target size of £50bn in the near future. Government should instead provide more resources and guidance to help make the most of the existing pooling structures rather than reducing the number of pools at this time.
Proposals to require funds to have a plan to invest up to 5% of assets to support levelling up in the UK as well as new proposals to increase allocations to unlisted equities to 10% must be considered in the context of funds’ duty to invest in the best interests of savers, to have a balanced portfolio that also takes into consideration government’s objectives on responsible investment, and the available pipeline of investible opportunities for schemes.
Nigel Peaple, Director of Policy and Advocacy at the PLSA, said: “Today’s ambitious package of proposals mark a major step forward for UK pensions policy. The introduction of regulatory standards to support savers achieve good outcomes when accessing their DC pension pots at retirement and the commitment to increase the range of options for DB schemes, including a legislative framework for DB superfunds to ensure saver protection, are especially positive developments.
“As the UK’s largest funded defined benefit pension scheme, the LGPS has a vital role in providing good retirement outcomes for millions of savers. Pooling has been successful so far, and we understand the proposals to speed up the pace of consolidation, however, the priority now should be on making the existing structures work better. The LGPS is also being encouraged to both invest locally and to place a greater allocation to unlisted equity. Many pension funds are comfortable with this, but it is essential that the fiduciary duty to only invest in the interests of scheme members remains paramount.
“The DC proposals build upon the Government’s very welcome commitment earlier this year to increase the amount of automatic workplace pension contributions, which are vital to ensure people have a good retirement income. We look forward to exploring the detailed proposals with our members over the summer, to assess which elements are feasible, and which might need further refinement, and working with the Minister for Pensions on these important issues.”
Mark Smith, Head of Media Relations
020 7601 1726 | [email protected]
Cali Sullivan, PR Manager
020 7601 1761 | [email protected]