Once again, the pensions industry is braced for a raft of changes for DC schemes. The Pensions Schemes Bill, introduced to Parliament last week, contained a host of measures covering small pots, the value for money framework, a new ‘guided retirement’ duty, minimum size requirements for DC schemes and a contractual over-ride for bulk transfers.
The demise of DB provision means that most UK pension savers are now reliant on DC. In DC arrangements, the employer promise centres on the level of contributions, with the ultimate emerging benefit to a large degree a hostage to prevailing market conditions. As such, Government policy naturally looks to ensure members know where their pensions are, how they are invested, that the schemes are offering good value, and that members’ decisions are supported.
Unsurprisingly, therefore, the Government has targeted its efforts on:
- dealing with small pots – with the average UK individual currently expected to hold 9 jobs in their lifetime and to work for 6 different employers, without intervention the number of small pots will only increase. Plus, it’s not just an issue for members who risk losing track of their overall benefits, as small pots are expensive for schemes to administer.
- demonstrating VFM – while the industry expressed reservations about the FCA’s proposed VFM framework (which is expected to be mirrored in the trust-space), ensuring that savers receive optimal value for money regardless of the nature of their pension arrangement, and that investments by trustees and providers are in savers’ best interests, is to be welcomed and supported.
- decumulation support – recent reports indicate that most workers cash out their pensions savings as soon as they can, which cannot be the best option for all. A two-pronged approach of imposing decumulation duties on trustees and improving the support that can be provided should help to ensure members are either defaulted into a decent solution or have the tools available to work out what is best for them.
Unfortunately, legislation has its limitations. For the latest measures to hit their mark they will need to be clear, consistent and carefully timed.
If there is not clarity then this could cause confusion. (Although in some cases a lack of clarity can provide for some flexibility). We can see some of the problems caused by this lack of clarity when looking at the current advice / guidance boundary. The difficulty of distinguishing between the two tends to result in a risk-averse approach to retirement support. Schemes err on the side of caution, choosing not to provide guidance for fear of straying, unlawfully, into regulated advice.
It should also be noted that while change can help accommodate innovation, constant modifications take their toll on the pensions industry. Adapting to developments inevitably bears a cost, one that is ultimately passed on to savers in DC schemes. It also absorbs time. All schemes, even the largest, have finite resource. If trustees and providers are continually focusing on how best to meet the latest regulatory requirements, they will have less time to, for example, work on member engagement.
There is also a need for these rules to be carefully timed. If too many changes take place at the same time, this risks a capacity crunch. Schemes are already under pressure. Over the last decade, DC regulation has gathered pace, and trustees dedicate considerable time to meeting current governance requirements. If all the proposed changes are to be assimilated well, they must be scheduled appropriately. First, we need sufficient time for industry scrutiny, to ensure they are workable. In an ideal world, this would also remove the need for future tinkering, at least in the short term. Next, there should be sufficient lead time to allow systems and processes to be adapted.
So, once more we await a deluge of DC changes raining down under the Bill. Let’s hope there are no unwelcome surprises!