Multiple changes to the regulations governing the UK pensions landscape were announced in 2014. The most positive of these changes, in my opinion, related to the issues of transparency and governance. The ‘charges cap’ enjoyed the greatest prominence of this group of changes but is, ironically, the most flawed of the measures put forward. I have previously detailed my reservations around the issues related to transaction costs, including their definition and their exclusion from the cap. Unfortunately, another avenue for the redistribution of savers’ capital to providers has now been opened up too.
The Department for Work & Pensions has recently responded, in the form of a third Command Paper, to the consultation on ‘Better workplace pensions: Putting savers’ interests first’. This Command Paper, and related regulations, has largely re-affirmed the Government’s position on many of the measures previously proposed. There is, however, one change that stands out to me – and not for the better. Buried deep within Chapter Three, at the bottom of p48 in paragraphs 136 & 137, lies the change of heart that permits death benefits to be provided without members explicitly opting for this cover.
The change in approach on this issue is excused with the claim that “a process of requiring members to opt in may not be appropriate because these are currently offered within schemes on a ‘pooled risk’ basis and underwritten as a bulk policy. Where members actively opted to take up these services they would be considered ‘self-selectors’, and their death benefits would need to be individually underwritten, which would be likely to result in more costly cover”. I agree that bulk policies deliver economies of scale as far as the overhead costs related to pricing are concerned. However, underwriting is likely to result in pricing that more accurately reflects the risk involved. Whether this pricing is more costly is a questionable assertion.
Inertia is one of the principles on which Auto-Enrolment is based. Permitting death benefits to be offered without an opt-in is likely to result in a high degree of savers paying for this cover, whether they want it or not. Is an opt-in not more consistent with the overall approach to putting savers’ interests first than this new approach of not requiring member agreement?
I suspect that we will see an uptick in the number of Auto-Enrolment schemes, supposedly savings vehicles, that include bundled death benefits. There is no easy way to compare the cost of death benefit cover except by obtaining bespoke quotes for the group of lives concerned. How much value comparison will realistically take place, even where permitted by the terms of the scheme? The very set of measures that were intended to put savers’ interests first, in part by mandating transparency, have dealt these interests a severe blow. The already-flawed charges cap has suffered another reduction in materiality. Why have savers’ pockets been jammed open for picking?