UK: Pace of reform slows down
Following the relative success of auto-enrolment, the UK has turned its attention to ensuring its pension system is fit for purpose
Regulation in summary
• Plans for defined ambition pensions, championed by a previous pensions minister, were quietly shelved after the government declined to draft enabling regulation.
• Stricter regulation of the growing master trust industry is planned, with capital requirements to protect savers from losses should providers wind up.
• Reform of the Local Government Pension Scheme (LPGS) is taking shape, with the establishment of eight asset pools of up to £35bn (£40.7bn).
• The reform is part of the government’s attempt to encourage the LGPS to increase exposure to infrastructure, and a national infrastructure platform is being considered.
After years of radical changes, which included the introduction of auto-enrolment and implementation of pension freedoms, 2016 was a time of relative calm for the UK pensions sector.
It is fair to say that former pensions minister Ros Altmann was keen to focus on bedding in already announced changes and ensuring the system worked for consumers. As a consequence, Altmann’s year in office saw her predecessor’s defined ambition agenda postponed indefinitely, as the drafting of regulation for the Pension Scheme Act 2015, necessary for launching collective defined contribution schemes, was put on hold.
Altmann preferred to focus on auto-enrolment and its rollout to millions of small employers. However, she also lobbied for further regulation of the growing master trust sector – including the People’s Pension, the National Employment Savings Trust, and others – and won a concession as part of the government’s legislative programme announced in the 2016 Queen’s Speech.
While details of the reform were not published before Altmann left office following Theresa May’s appointment as prime minister in July, the Pensions Bill is expected to include minimum capital requirements for master trusts. The required capital would be used in the event of a trust’s disorderly wind-up, ensuring members are not charged for the cost of transferring to a new, solvent provider.
The Pensions Regulator (TPR) – keen to create barriers of entry for master trusts over concerns that too few of them will manage to reach critical mass – has also advocated stricter market regulation.
While a stricter licensing regime is not expected, entry barriers and capital requirements should guard members against losses when the almost inevitable consolidation within the sector occurs.
Looking ahead, the defined benefit (DB) sector may soon have a stronger regulator, as the collapse of retailer BHS raised questions as to the Pension Regulator’s ability to oversee sponsors. The collapse, which led to former BHS owner Sir Philip Green being criticised for the company’s sale to an owner previously bankrupt, has led the parliamentary work and pensions select committee to question the regulator’s staffing levels and powers of intervention. The committee also plans to look at the sustainability of the DB sector, damaged by ever-falling Gilt yields and weakened sponsors.
The committee’s pledge to examine the market as a whole came after the government announced a consultation on the future of the British Steel Pension Scheme (BSPS), whose sponsor Tata Steel has warned that it would be unable to sell its UK business unless pension liabilities were addressed.
In an attempt to avert the fund’s entry into the Pension Protection Fund, BSPS is likely to see the link to its sponsor severed and continue without support from a company – under the assumption that it will, over the long term, be able to pay out benefits higher than those offered by the PPF.
Altmann also launched a consultation on the future of the National Employment Savings Trust (NEST) and whether the fund should be allowed to provide drawdown products following the end of mandatory annuitisation.
Further liberalisation of NEST’s mandate, which comes as restrictions on the level of annual contributions and a ban on bulk transfers into the fund are to be lifted, will bring it into line with its master trust rivals, which have been designing their own drawdown solutions for members.
However, it will be for her successor to work out key details of the reform. Specifically, the new pensions minister, Richard Harrington, will be required to agree on the funding of the drawdown product – whether it should benefit from the government’s loan arrangement to fund NEST’s running costs and whether the product should be available only to pension savers who have previously saved with NEST, or to anyone wishing to transfer in, even after retirement.
Building on this is the Financial Conduct Authority’s Retirement Outcomes Review, which will see the regulator examine the market’s response to the pension freedom reforms, how easily products can be compared and how well consumers can navigate this new market when not drawing on regulated advice.
Elsewhere, reform of the Local Government Pension Scheme (LGPS) continues with the launch of eight asset pools. The pools have been established to improve governance and performance across the sector in England and Wales. While pooling has seen the Local Pensions Partnership – comprising the London Pensions Fund Authority, the Lancashire County Pension Fund and the Berkshire Pension Fund – emerge as the smallest venture at £13bn (€15.2bn), well short of the £25bn target, the government’s other aim of increasing infrastructure investment appears to be working.
All pools are required to set out a plan to grow infrastructure exposure, and the majority are working towards a national infrastructure platform to co-ordinate their efforts.
Several funds, including the Greater Manchester Pension Fund (GMPF), have already clubbed together to launch a £1bn, UK-centred infrastructure vehicle. The GMPF is hopeful that its venture will develop into the national platform that the government hopes for.