UK: DC in the spotlight
Britain seems to be perpetually updating its pensions rules despite the preoccupation of lawmakers and businesses with Brexit
• Regulators and government are continuing to review and tighten up rulebooks for both defined benefit and defined contribution schemes
• Innovation is also being encouraged for individuals at retirement and for schemes with collective defined contribution on the cards
Automatic enrolment is fully bedded into the UK pension system with over nine million more people saving for retirement. The attention of government and regulators has now been drawn to the dozens of defined contribution (DC) master trusts that have appeared to cater for thousands of small employers.
From October, these multi-employer schemes will have six months to comply with a new authorisation regime that includes minimum capitalisation measures, qualification requirements for management, and standards for systems and processes.
The Department for Work and Pensions estimates that the number of master trusts could shrink by more than a third, with providers exiting for reasons of scale and the additional regulatory and governance burdens. Meanwhile, some in the industry have called on the government to review its minimum contribution levels amid concerns that current rates will not be sufficient to ensure DC savers have adequate pension pots at retirement.
Under the auto-enrolment system, each employee pays in a minimum of 3% of their salary, while their employer pitches in 2%. That is set to rise to a total of 8% in April 2019, of which at least 3% must be covered by the employer.
However, the Pensions and Lifetime Savings Association, which represents UK pension schemes, estimates tens of millions of people are not saving enough for their retirement. It has called for a further increase for DC contributions to 12% of salary between 2025 and 2030.
When George Osborne, the former chancellor, announced a series of changes – known as ‘pension freedoms’ – to the at-retirement market in 2014, some industry commentators predicted a surge in product innovation for retirees.
Three years after the implementation of the freedoms there is little sign of such fresh thinking. The Financial Conduct Authority (FCA) published its Retirement Outcomes Review in June criticising weak competition and poor innovation from providers of drawdown products.
The FCA has proposed introducing ‘wake up’ packs to be sent to DC savers at age 50, and again every five years until DC pots are withdrawn. These packs would include details of the options open to retirees, as well as risk warnings and fee information.
It also proposed offering all UK savers three investment pathways to help them choose how to access their savings. These would be based on whether an individual wanted to remain invested for a long period, access cash over a short period, to have a steady income in retirement.
The consultation on the proposed measures closes on 6 September with the FCA due to set out its policy early in 2019.
• The pension dashboard: An industry-led project to promote engagement with pension savings, the proposed pension dashboard, has gathered remarkable support from a range of organisations.
However, in July The Times newspaper reported that Esther McVey, the state secretary for work and pensions, was considering abandoning the project.
Within hours of the article’s publication the Association of British Insurers – which has been working on a prototype for the dashboard for over two years – warned that a lack of government support could expose millions of people to fraud and lost savings.
Pensions and financial inclusion minister, Guy Opperman, last year promised government support for the project, and stated an aim of having it up and running in 2019.
However, Baroness Peta Buscombe, parliamentary under-secretary for work and pensions, appeared to backtrack on this support in July when questioned in the House of Lords, the UK parliament’s upper chamber: “The more we look at it, the more questions we are asking ourselves and the industry.”
An online petition calling for the government to back the project has been signed by over 100,000 people.
• Collective DC: Following a landmark agreement between Royal Mail and the Communication Workers’ Union in February, collective DC (CDC) has been a hot topic. Politicians on the UK parliament’s Work and Pensions Select Committee have suggested that the introduction of CDC “could transform the UK private pensions landscape”.
But there are several hurdles before such a model can become a reality. Most importantly, there is the regulatory framework: at a minimum, accounting rules would need to be adjusted to allow CDC schemes to be correctly expressed on company balance sheets.
Advocates of CDC have been discussing how these and other regulations might be changed to accommodate the new model without requiring legislative action from government – politicians’ time is short owing to the volume of Brexit-related discussions.
Another stumbling block is the lack of support from other schemes. Two of the UK’s largest pension funds, BT and the Universities Superannuation Scheme, have recently undergone major consultations about their future, and in both cases CDC was rejected as an option for future benefit accrual.
Some responses to the committee’s call for evidence urged the government to commit resources to improve the existing DC landscape rather than experimenting with a new system with the support of just one pension fund – so far.
But the committee’s report into CDC’s potential, published in July, struck a positive tone: “CDC may also be an opportunity to provide more attractive pension options to self-employed people and gig economy workers. The government should seek to encourage such innovation, and its great potential gains, in establishing a framework for a new wave of collective pensions.”
• Consolidation: The pooling of assets among Local Government Pension Schemes (LGPS) in England and Wales is well under way, with an estimated £59bn (€65.7bn) managed in collaborative investment structures – just over a fifth of the £261bn of total assets.
Scotland’s 11 LGPS funds are considering whether similar collaborations could help cut costs and improve returns – although their performance and funding levels are generally healthier than their peers in England and Wales.
Following the government’s white paper on the future of private-sector defined benefit (DB) schemes published in March, attention has turned to consolidation of other types of pension funds. Two commercial consolidators have emerged: The Pension SuperFund – backed by private equity firms Warburg Pincus and Disruptive Capital – and Clara Pensions, established as a ‘bridge’ towards insurance buyout.
The Pension SuperFund – led by former Pension Protection Fund (PPF) chief executive Alan Rubenstein – is talking to schemes about taking on their assets and liabilities and severing ties with the sponsoring employers.
The government has promised a consultation on regulations for commercial consolidators by the end of the year, and the PPF is considering how such vehicles should be assessed for the purposes of charging its industry levy.
The Pensions Regulator toughens up
“Clearer, quicker, tougher” – that is the soundbite on the lips of every senior staff member at the UK’s Pensions Regulator (TPR). It came in for vociferous criticism in the wake of high-profile company bankruptcies that exposed employers’ questionable practices towards their pension schemes.
Chief executive Lesley Titcomb – who will leave her post in February 2019 at the end of her current contract – wrote in TPR’s annual report that the regulator was “a very different organisation than it was five years ago”.
It recently completed a “wholesale review” of its operations and is rolling out new methods and models in an attempt to be more proactive. It has also hired enforcement officers with powers to seize company assets if they refuse to pay fines.
In addition, the government has consulted on new powers for TPR. These include fines of up to £1m (€1.1m), and even criminal charges for individuals found guilty of “wilful or grossly reckless behaviour” in relation to a defined-benefit scheme. It also wants companies to give TPR more information about a wider range of corporate actions than is currently required.
The consultation was scheduled to close on 21 August, with feedback expected later this year.