Next year will be an intense year for defined benefit, defined contribution and local government pension schemes, with no let-up in new legislation or expectations for improved governance. We asked members of the PLSA’s policy team for their views on what next year has to offer.
Plugging the pension savings gap
The pension savings gap is a big societal problem. The current amount of money going into long term savings, even with auto-enrolment at 8%, is inadequate for most and we are walking into a pension crisis. For DC pensions, auto enrolment has been the real game changer. With more than 10 million people saving and the opt out rate low despite a gradual increase in contributions, it's an undoubted policy success. But I see it as a great start rather than job done.
The 2017 review came up with some important recommendations for broadening and deepening auto enrolment. A lot of workers, in particular part time workers, many of whom are women still aren't covered by the auto enrolment regime. It's not yet fully inclusive, and we need it to be. The PLSA supports removing the lower earnings limit, so that contributions are paid from the first pound of earnings, and reducing the auto-enrolment minimum age to 18. We also need to resolve the net pay anomaly to ensure that some low earners don't end up paying more for the same benefit.
These reforms will help us to address the gender pensions gap. It’s a terrifying statistic that 50% more women than men are heading towards retirement without any savings at all.
The government are talking about implementing the 2017 reforms in the mid 2020s. They will need to be introduced in a staged and measured way rather than a big bang. But we must make sure they happen.
This piece is an extract from Emma Douglas’s speech at the PLSA Annual Conference 2021.
Deputy Director, Policy
There are a great many things for schemes to be thinking about in the year ahead. Whether it is the spectre of rising inflation, employer covenants, a recovering economy, or the long-list of regulatory ‘must dos’, such as TCFD reporting, Pensions Dashboard preparation or GMP equalisation, schemes will have plenty to occupy their time in 2022.
For DB schemes the item that is probably looming largest in mind is The Pension Regulator’s new Funding Code. Where the new Code ends up will likely determine the next – and critical for many – five to 10 years of scheme management. It will also shape many schemes’ discussions with their employer and sponsor. The first consultation generated a lot of commentary on the balance between fast track and bespoke approaches, as well as the treatment of open schemes.
Recent research from the Association of Consulting Actuaries found that 96% of its members were adamant that the ‘bespoke’ option really does need to be flexible, and 72% do not want to benchmark that bespoke option against fast track.
The consultation process for the new Funding Code was also launched at the beginning of the pandemic, and it is likely to be operational towards the end of 2022. It feels like much has changed for employers and schemes over this unprecedented period.
The government’s appetite for pension funds to invest in productive finance much more also adds a fresh dynamic to it all. Getting the right outcome will be key for all those with an interest in DB.
Head of DC, Master Trusts and Lifetime Savings
With defined contribution now firmly in the driving seat of workplace pension saving, 2022’s priorities will include strong governance, investment innovation and good outcomes for members. Access to illiquid assets, value for money and small pot consolidation are three trends that are of personal interest and will be high on our watch list at the PLSA.
To date, the bulk of DC default fund investment has been focused on liquid, daily-traded assets. There are many historical reasons for that – but given the long-term focus of pensions, investing in a wider range of asset classes could deliver real benefits for DC. In particular, access to illiquid, private market investments such as real estate, infrastructure and private credit offer diversification, higher returns and inflation protection. As ever, schemes will have to think carefully about balance between risk and return, the profile of their membership and more – but greater diversity in DC investment is important trend for the future.
The FCA and Pension Regulator’s September 2021 joint discussion paper Driving Value for Money in DC Schemes, outlines a framework for consistent reporting on core components of value for money such as investment performance, scheme oversight (including data quality and communications), and also costs and charges. It’s positive to see both regulators working together on this crucial topic. We’ll expect to hear more on the next steps in 2022 and will be playing in our views as their thinking develops.
Auto-enrolment is now nearly 10 years old and part of the fabric of UK pensions. One of the side-effects of the highly effective policy initiative over time has been the increasing volume of ‘small pots’. These are difficult for individuals to track and manage, and have cost attached for providers that affects value for members, both past and present.
By 2035 there could be as many as 27 million pots with less than £2,000 in them, unless we make changes to the way that small pots are managed. We’re pleased to be part of the Small Pots Cross-Industry Co-ordination Group which is working to find solutions to this challenge that will benefit both savers and providers.
Head of DB, LGPS and Investment
The PLSA is keeping its ears close to the ground on how some important policy areas are developing for our LGPS members, and will continue to engage and intervene with stakeholders where appropriate.
We are carefully monitoring the progress of the Public Service Pensions and Judicial Offices Bill, relating to equal treatment of all members of public service pension schemes. The bill is set to receive its third reading in the House of Lords in December. We sent a briefing note to Peers for its second reading in September, highlighting the requests from our membership on implementing the McCloud Judgement.
TPR’s Single Code of Practice is another priority. Clarity is still urgently needed around various issues, including how the term “governing body” will be applied to the LGPS, as it could refer to multiple entities.
Given the prominence of responsible investment within the overall pensions landscape, it will be interesting to see how the Department for Levelling Up Housing and Communities proposes that the Taskforce on Climate-Replated Financial Disclosures (TFCD) be applied to the LGPS. The expected consultation on Asset Pooling Guidance will also have important implications for LGPS pooling governance arrangements.
As the regulatory landscape becomes ever more complex, achieving clear communications with both current and deferred members of the LGPS will also continue to be a priority. Additionally, the reality of pension dashboards continues to drift closer, with implications both for schemes and members.
Lastly, LGPS funds have received an increasing number of difficult and unreasonable audit requests, to very difficult timescales, in the last few years. Much of the frustration from our members stems from a very basic misunderstanding from auditors of how the LGPS operates. We will continue our work with the ICAEW to try and improve processes within audit requests, to ease burdens.