A wish list for the pensions industry

'Tis the season for more than just decking the halls and trimming the tree – it's the time of year when wishes are made, both for the holiday season and the dawn of a new year. While people from around the country are drafting their Christmas lists and setting resolutions for the upcoming New Year, let's turn our attention to a wish list of a different kind – one that revolves around the future of pensions and what I want for the industry and savers over the upcoming year.

1. Deliver on existing projects

Parents will know to expect the latest, must-have product scribbled atop of their children’s Christmas list. (Based on the long, snaking queues at my local shopping centre, I would guess that, for many, this is a new pair of Nike trainers this year!)

At times in recent years it has felt like those in charge of defined benefit (DB) regulation have similarly had their heads turned by the latest issues of the day. This would at least explain the stalled progress on a number of big-ticket items, including the new Funding Code, the General Code, Notifiable Events Regime and new Employer Covenant guidance. This has been a source of frustration, leaving pension scheme decision-makers in limbo in a number of key areas. 

Similarly for Defined Contribution (DC) pensions, we also have the implementation of the Private Members’ Bill on the extension of Automatic Enrolment. This has now received Royal Assent and will help many savers, particularly the young and lower paid so why wait to put it into practice?

So, what I really want for pensions in 2024 is the completion of all the major projects that have been outstanding for a number of years. To put it another way: I am not asking the Department of Work and Pensions (DWP) and The Pensions Regulator (TPR) to get us all the newest, shiniest pair of trainers – but please can they ‘Just Do It’ when it comes to getting regulation and guidance over the line in 2024. 

2. Take the time to get the Mansion House proposals right

While I am wishing for more haste when it comes to regulation that has been in the works for many years, I would like to see Government take its time over the next year in developing the wide-ranging details of the Mansion House proposals. 

Further details of the Government’s intention in this regard were provided in the recent Autumn Statement. While there is potential for the changes to be a win-win-win for companies, savers and the UK economy more generally, if the details of the announcements are not carefully worked through, then it is equally possible to imagine lose-lose-lose scenarios.

A key component of the Mansion House proposals is greater levels of consolidation, which, in theory, should result in benefits for savers. This is particularly true for DC members, where individuals often have lots of small pots due to changes in their employment over their working lifetime. These small pots don’t help anyone – they are unprofitable for providers and are hard to keep track of for members. 

However, while it is encouraging that the DWP is committed to addressing the issues of small pots, my wish is for the Government to think carefully before implementing its mooted pension ‘pot for life’ proposals, which would give employees the option to require employers to pay pension contributions into their existing pension pots, rather than the employer’s own scheme. 

Such a proposal is laden with design issues – many employers struggle with making accurate contributions to their own schemes as it is, so requiring contributions to be paid to different schemes (each of which may operate in slightly different ways) could be an administrative nightmare. This is not to say that solutions do not exist – rather, given the wide-ranging impact of the proposals, it is best to take the time to consider all the options and get the points of finer detail right first time. 

3. Continued evolution of the superfund market

How will the pensions industry remember 2023 when looking back in future years? The record-breaking risk transfer market activity and the Chancellor’s Mansion House proposals are sure to feature in any retrospective – though my more outsider pick is that 2023 may come to be seen as the year in which the alternative, risk transfer market took a big leap forward. 

Not only have the suite of innovative capital backed funding arrangements continued to grow, the first ever superfund transaction was completed by Clara Pensions in November – a real landmark for the industry. The completion of the deal is even more impressive against the backdrop of the current regulatory challenges for the superfund market, with The Pensions Regulator operating an interim regime in the absence of formal regulations. 

My hope for 2024 is that the recent momentum is maintained. This would involve TPR releasing refreshed interim guidance, that includes permitting capital providers to extract profits (with appropriate safeguards), to allow and encourage more participants into the market, with a permanent regulated regime to follow to provide even more confidence to sponsors and trustees interested in these deals.

4. Plan to increase automatic enrolment contributions

“At this festive season of the year, Mr. Scrooge,” said the gentleman, taking up a pen, “it is more than usually desirable that we should make some slight provision for the poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessities; hundreds of thousands are in want of common comforts, Sir.” - ‘A Christmas Carol’ by Charles Dickens.

While it would be silly to suggest the situation is as bleak as a Dickensian novel, the adequacy of DC contribution levels remains the elephant in the room. 

The recently published PPF Purple Book suggests that 91% of DB schemes are now closed to new members, further underscoring, if needed, the major generational challenges facing society. That is, is it realistic to expect future generations who will be relying primarily – or even solely – on DC schemes to have the same level of security and comfort in retirement as those who retired more recently with significant DB pensions?

Despite the best efforts of the industry to maximise the value for money for DC savers – whether that be through greater consolidation or lowering investment fees – the answer is surely going to be 'no' unless DC contributions are very significantly increased. So, my hope for the upcoming year is for the recommendations of the Work and Pensions Committee to be followed in this regard: we urgently need a clear plan for how and when Automatic Enrolment contributions increase. 
 

5. Allow retrospective Section 37 certification

June 2023 saw a landmark judgement handed down in the High Court that concerned whether an amendment to a scheme’s rules was invalid in the absence of a confirmation from the Scheme Actuary under Section 37 of the Pension Schemes Act 1993. The Judge ruled that it was, in a decision that could have significant implications for some DB schemes. 

The decision is being appealed, with many trustees and sponsors holding their breath as they wait on further developments. If the appeal is unsuccessful, many schemes may find that they have unexpected additional liabilities simply because an actuarial certificate may not have been considered necessary or was overlooked (or, worse, because evidence of a certificate no longer exists, even if one was produced). 

The last thing that the industry needs in 2024 is more benefit rectification exercises, especially given the 'windfall' nature of the vast majority of benefit uplifts that may be due as a result of this ruling. Curiously, Section 37 includes a power to retrospectively amend the regulations – my wish is that DWP uses this power in 2024 to enforce the ‘spirit’ of the regulations, avoiding amendments being deemed voided where certificates could have reasonably expected to have been provided at the time. 

6. Functioning CDC regime, especially for decumulation vehicles

As discussed above, the lack of adequate contributions is the key issue facing DC schemes at this moment. Another key issue, which compounds the problem facing DC savers, is the lack of investment and mortality risk sharing at retirement, which leads to lower benefits and difficult financial decisions for individuals. 

The good news is that there is a solution to this problem, namely Collective Defined Contribution (CDC) schemes. So I wish for Government and the pension industry to explore and develop CDC options further. In particular, decumulation solutions should be prioritised, so that the benefits of CDC can be accessed by all DC savers as soon as possible, not just by those members of sponsor-led CDC schemes (currently just the Royal Mail). 

7. Keep an eye on costs of regulation

Some list items at this time of year are seemingly evergreen – a new pair of socks for Christmas never goes amiss, and I am sure that most of us will resolve to exercise more over the next year. So, analogously, you won’t be surprised to hear that I want those in charge of regulation to be wary of introducing further requirements in 2024 that increase costs without adding real value for pension savers. 

It seems the costs of regulation increase year on year. This is perhaps most simply illustrated by the ballooning size of annual reports and accounts – now around 50% larger than a decade ago by my fairly unscientific survey of the schemes that I advise – that no scheme member is likely to ever read in practice. 

There are already concerning signs that this request will fall on deaf ears: the Government recently consulted on changes to the General Levy, in which one proposal was to increase the levy to £10,000 for schemes with fewer than 10,000 members, including Small Self Administered Schemes (SSASs). The proposed changes to the DB funding regime also risk introducing a compliance burden for the now many well-funded schemes.

8. Practical and proportionate alternative to GMP equalisation

And, finally, no list at this time of year would be complete without a more outlandish request that almost certainly won’t happen in practice. My ‘can I have a pony?’ dream for DB pensions is ‘does GMP equalisation really need to be this complicated’? (Or, whisper it, do schemes even need to do GMP equalisation at all?)

For the vast majority of DB members, uplifts will range from nil to tiny. Yet, determining the precise uplift due on an individual basis is not a straightforward exercise, not least due to data challenges where service records and payments going potentially as far back to 1990 need to be recreated. The ‘default’ method for equalising benefits also requires schemes to check the equalisation position on an ongoing basis, increasing future administrative complexity. 

This all means that the costs of completing these exercises often appear disproportionate to the additional benefits for members. Perhaps just as annoyingly, GMP projects are taking up time on trustee agendas, at a point when there are already lots of other more important projects to be getting on with. 

So, is it really too late to ask whether we are sure that this all makes sense? While it might seem fantastical, is it too much to hope that the Government come to the industry’s rescue in 2024 and simplify the whole process in some way? Easy wins would be making the simplest equalisation method (the actuarial method known as D1 in the 2018 Lloyds case) allowable, as well as introducing a statutory de minimis limit of sorts.

Summary

With so much going on in the industry right now, a clear theme from my list above is the wish to provide more certainty, time and money to pension scheme decision-makers and savers over the next year. If Government and the industry can manage to do that, it is clear that there are lots of reasons for the pension industry to be optimistic as 2024 approaches, with several exciting options to improve outcomes for savers potentially on the horizon.