This week marked the coming into force of a large number of changes to the UK pensions landscape that were announced in 2014. Some of these changes will have a greater impact than others, although not necessarily in proportion to the headlines generated.
The most significant long-term change, to my mind at least, is on the governance side. Independent Governance Committees (“IGCs”) are governance bodies that are intended to protect the interests of workplace personal pension scheme members from potentially harmful action by workplace personal pension scheme providers. This protection role is analogous to the protection aspect of a trustee’s role in a trust-based arrangement. IGCs do not, however, have the same decision-making powers as trustees. Many IGCs have started life with an existing ‘to do’ list, following from the work of the Independent Project Board (“IPB”) related to high-cost legacy products. The way the IGCs address the issues raised by the IPB might give an indication of the likely future effectiveness of the particular IGC in dealing with its associated provider on behalf of members.
Savers accumulating their pensions through trusts, including master trusts, will enjoy enhanced oversight from their trustees, mirroring the duties of the IGCs. In particular, trustees can no longer be constrained in their choice of service providers.
The increased focus on transparency and disclosure of costs is a welcome development too. However, the ability to assess costs is constrained by legacy market conventions for many instruments, in particular those markets that trade on a ‘spread’ basis. The task of reforming these legacy markets will require a significant long-term investment of effort, time and financial resources. However, these reforms are necessary to protect providers of capital, such as pension savers, from the insiders in these markets and are consequently worth the investment.
The charges cap of 0.75% per annum applied to the default arrangement of Automatic Enrolment (“AE”) schemes, which has also taken effect this week, is well-intentioned. However, the cap is fundamentally flawed – not just by the legacy issues mentioned above but also by the exclusion of certain charges (e.g. related to securities lending). These flaws have been compounded by providers being allowed to bundle death cover into their AE default offerings without savers electing to purchase this cover. The total level of deductions from affected savers’ retirement capital has not been limited by the charges cap – the means of deduction have been incentivised to change.
The most widely reported of the changes that have recently kicked in are those around the freedom and choice that defined contribution pension savers over 55 now enjoy to spend their accumulated savings. These savers have a State-sponsored resource, in the form of Pension Wise, to inform their decision-making. However, under-provision for retirement is the key issue confronting many (older) members of our society rather than constraints as to how accumulated savings may be used. The recent changes do not directly address the issue of inadequate saving. However, the increased attention that these changes have focused on pensions might lead to more effective savings programmes being set-up over time.
There is no doubt that the changes that have taken effect this week have shaken up the UK pensions landscape. The impact of the changes will take some time to become evident. Hopefully, the positive intent behind many of the changes will manifest, leading to better experiences and outcomes for savers. More of what has gone before is not tenable. Here’s to a new dawn rather than Groundhog Day.