It is perhaps something of an understatement to say 2021 has been an exceptionally busy year for pensions policy.
Many of the policy changes being talked about, like pensions dashboards, will be difficult to implement but will bring real improvements for savers. We have more questions about some other initiatives but no one really doubts the Department for Work and Pension’s (DWP) good faith or dedication when it comes to trying to improve the UK pension system.
In terms of big projects, we have seen major progress this year with the pensions dashboards. The Money and Pensions Service has issued the main contracts for the systems that will make dashboards work and is progressing towards staging schemes onto dashboards from early 2023.
There is still much to do. Most of the law and regulatory rules that will underpin how dashboards work have yet to be published. Similarly, we have not yet seen the application programming interface (API) that will be used to link together pension scheme member databases and the dashboards information architecture. It’s really important that schemes get a clear idea of what the final requirements are as soon as possible so that preparation can begin in earnest.
There was also a deeper dive on the small pots issue, following on from the government working group that ran and reported in late 2020. The DWP working group produced a report recommending that the industry look at the policy and administrative issues around automatic consolidation of small pots. With the Pensions and Lifetime Savings Association (PLSA) and Association of British Insurers (ABI) working group having also now produced a decent report, there is the need for further action by policy makers. It is likely that we will need legal changes and potentially primary legislation in order to make small pot consolidation a reality. We hope that both government and the industry return to the table in 2022.
On the communications and engagement side, we now have final regulations for the simpler annual benefit statement and a strong indication from the Pensions Minister that a “statement season” is likely along with proposals for a “stronger nudge” to Pension Wise guidance.
The statement is now a known quantity. It’s a clear document and, for most people, it will be a standard comparable document. For some, potentially those with more than one job or a protected pension age, it may look a little different but not significantly so.
The statement season idea is less well understood. There is a rough proposal that, as in Sweden, all annual benefit statements should be sent out in a short window. There’s a DWP working group looking at this, and we as others in the industry are represented. But there’s a real need for a proper consultation so that the supporting evidence and impact can be discussed publicly. The operational consequences for schemes are massive, while the benefits in terms of engagement are unclear. A formal consultation process would shed more light on both.
On the investment side, we have seen a renewed focus on investment in less liquid assets. Many parts of government see rapidly growing DC funds as an easy source of capital for national economic priorities, such as levelling up.
We are seeing measures, like changing the charge cap being suggested, which we see as ineffective. But we’re also seeing measures, like a new fund structure, that are more
likely to enable greater diversification in how DC funds invest. More generally we see investment in unlisted assets as potentially desirable given the large body of work showing an illiquidity premium for the schemes capable of capturing it.
The market for workplace DC is, though, very price sensitive. Investing in unlisted assets is typically much more expensive than investing passively in listed equities and changing
scheme asset allocations to invest in unlisted assets would most likely pass through to member charges.
Which brings us to The Pensions Regulator and Financial Conduct Authority framework for value for money. Making the workplace pension conversation about value, rather than just charges, is a sensible objective. Initially, the regulators’ value for money framework is intended to help pension professionals assess value but, in time, we expect metrics to be developed that are consumer facing.
Our own view is evolving. The focus in the proposed framework consultation paper in judging the quality of scheme oversight, investment and costs and charges is basically right. We note that the Pensions Policy Institute’s recent piece on the international experience of value for money also highlighted the importance of governance as a theme. It’s something we hope both regulators will return to.
So, while we expect 2022 to be equally busy, the hope is that policymakers keep the bigger picture in mind.