With the Pensions Regulator expecting DC assets to overtake DB assets in the next 15 years, it was hardly unexpected that in her first major speech as Pensions Minister, Laura Trott, announced a raft of proposed changes designed “to help close the pensions inequality gap” and deliver better retirement outcomes for DC members. Speaking to an audience at the Pensions and Lifetime Savings Association (PLSA) on 30 January, the Pensions Minister unveiled her three pillars of DC pension reform, being to improve fairness, adequacy and predictability.
This led me to think about another three pillars - the three pillars of society (state, market and community) and how, in a recession, the imbalance of the market leads to instability, which can only be restored by leaning on the other two pillars. Currently, the state has limited ability to act as prop. To that end, the Government is looking to the pensions community to help restore stability and assure DC members that their scheme is doing its utmost to deliver them a fair and predictable income in retirement. The measures announced on 30 January to help the community deliver this will not come as a surprise – the PLSA has been calling for many of them for years which is perhaps why the Pensions Minister chose their office as the venue for her announcement. It includes:
- requiring the vast majority of DC schemes to complete a value for money assessment that focusses on investment performance and quality of service as well as costs and charges,
- extending collective defined contribution schemes to enable decumulation only vehicles,
- broadening the investment opportunities for DC schemes, so that the pensions community can help support the state and the market by investing in “green projects, property, infrastructure, and start-up businesses that have the potential to deliver longer term positive returns which are key to successful savers’ retirement outcomes.. and can also support the UK’s transition to net zero and help to stimulate wider UK economic growth”, and
- introducing a solution to the growing problem of small pots (interestingly, the previously discounted suggestion of a default consolidator model, where eligible pots would transfer automatically to a consolidator, with members being given an opportunity to opt-out, is now up for consideration).
Whilst a welcome first step, will this be enough to secure stability in the longer term? More is likely to be needed - in particular the introduction of a clear framework that enables the pensions community to provide good quality financial advice and support to all members throughout the accumulation and decumulation stages of their retirement planning journey. Trott said work was "ongoing" in this area, noting that the DWP would have more to say on this issue "later this year".
What won’t be coming later this year, however, is an increase in the minimum rate of automatic enrolment contributions, even though it is widely acknowledged that the current 8% will not provide DC members with an adequate income in retirement. Even the 2017 reforms (removing the lower earnings limit against which minimum contributions are measured and lowering the automatic enrolment threshold to those aged 18 and over) will not be with us until “the mid 2020s”.
It is not surprising that the Government has chosen to focus on making existing DC savings work smarter as opposed to focussing on increasing savings in the current economic climate. The question is whether community support now will result in stabilisation of the market in the mid-term so that longer term, greater state support will not be required.
Millions more people are now saving into a workplace pension – with 10.8 million workers enrolled so far and £33 billion more saved in real terms in 2021 than in 2012. But as well as coverage, we also need to focus on quality and outcomes. Having created a new generation of savers, it’s only right that we help them maximise the value of their hard-earned retirement in later life.