What the Pension Bill means

The 2016 Pensions Bill was published this week and it will have serious implications for single employer occupational schemes, small-mostly insured executive arrangements and for the burgeoning market for commercial mastertrusts. The Bill will also ensure that occupational schemes cannot short-change consumers through early redemption fees (bringing these schemes in line with personal pensions).

Measures outlined in the pensions bill will see the Pensions Regulator given tough new powers. Master trusts will need to be authorised by the regulator before they can open for business, with those running the schemes subject to “fit and proper” person tests.

Master trusts will also be required to hold a capital buffer to cover wind up costs, if required, to ensure members’ pots are protected.

In short the pensions bill will lead to rapid consolidation, a lot of work for advisers and a new landscape which will be more manageable, easier to regulate and better able to provide value for the consumer’s money.

Taken together with the work being done on transaction costs and charges, the forthcoming review of the charge cap and the more general review of auto-enrolment (all due to complete in 2017), this represents a substantial intervention by government in the market economics of UK DC pension provision.

“What took them so long?”

There is frustration , well articulated by a friend in the phrase “what took them so long?”. There could be further frustration as we can be sure that much of the impending change will be compromised by vested interest groups. We might be better ask “what’s taking so long”.

What is worrying is that most of the decisions of employers and individuals to send their money to master trusts goes undocumented. While the master trusts may be able to tell us who their participating employers are, the employers have difficulty explaining why they made the choice they did. As for individuals using small master trusts to liberate their pensions, the chances are that the decision was taken inadvisedly and the money taken with the express intention of it never being returned.

Jo Cumbo, commenting in the FT asks

But why has the government allowed so many people to join schemes that may not be safe?

The fine line between a Government taking into account the interests of all stakeholders and a Government in the pocket of the IA and ABI, has frequently been crossed . The IA and ABI are to be congratulated for their effective lobbying on behalf of shareholders but not thanked by their customers. It is too early to say whether the May incarnation of this Government is more consumer than shareholder focussed , but my guess that it is – not least for the choices of advisers within the cabinet office.

We are more rather than less likely to see intervention from this May Government than from the Osborne/Cameron incarnation, which proved itself rather more interested in self preservation than government (with disastrous consequences).

The frustration expressed by my friend will continue but not unabated, I believe that the move towards less intermediation and more transparency (of which the transparency task force is a product) will ensure we have the governance framework to make the changes envisaged in the Pension Bill happen.

Specific issues.

If you want a quick synopsis of the Bill, read the DWP press release, I have read the Bill to make sure it does what’s said on the packet and it does.The five key areas where the Regulator will be given new powers will be to ensure that

persons involved in the scheme are fit and proper
that the scheme is financially sustainable
that the scheme funder meets certain requirements in order to provide assurance about their financial situation
systems and processes requirements, relating to the governance and administration of the scheme are sufficient
that the scheme has an adequate continuity strategy

There has been disquiet among the larger master trusts (most notably NOW pensions) that these measures stop short of requiring master trusts to put up initial capital (a pure barrier to entry) and that the adoption of the Master Trust Assurance Framework is not mandatory (the bigger master trusts would win here as they already have it).

I don’t share this disquiet. There is quite enough devil in the detail behind these requirements to make life hard to impossible for the flakey master trust.

How will change happen?

I see the majority of change being organic within the market. Those master trusts comfortable with operating within the new environment will scale up their sales teams and make it easy for those who aren’t to pack it in. They will probably get the support of IGCs who – while not officially responsible for insured occupational schemes, have a responsibility to consumers to ensure their insurers are treating customers fairly. The obligations on small schemes resulting from the new DC Code of Conduct have made master trusts look the obvious recipients of money from single occupational schemes.

There is a win-win here for the Regulator who simultaneously loses a lot of small problems and sees his few remaining big problems, funded to a level that makes them sustainable and capable of paying for the ongoing governance required.

The impact on the consultancy market will be positive. In the short term there will be plenty of work (even for actuaries!) but certainly for consultants. IFAs have more or less given up on corporate pensions or turned into corporate consultants specialising in this work. The loss of commission has made most IFAs seek solace in wealth management where their skills can still be rewarded.

When will change happen?

The controls will apply to those who are already in the market, as well as new entrants, and are expected to be in force by 2018. But interim measures should see savers protected until the new rules come into force.

The writing has been on the wall for many small master trusts and most small occupational schemes for some time. The Pensions Bill will be a catalyst for change and I would expect to see consolidation from now on. This is the organic change that I spoke of in the past section.

We can expect to see the Bill enacted from April 2017 and enforced immediately afterwards. The Pensions Regulator is already making noises about wanting to have more resources to go with her greater powers, the speed at which she gets them depends on the willingness of the Cabinet Office and Treasury to give the DWP the funds.

But the enforcement of the Bill will only be needed for that part of the market which has not organically changed.

I am intending to devote a considerable amount of my personal time to ensuring that organic change happens, for I know that it is long overdue. The underfunded master trusts are a menace, At best they represent a significant risk to consumers and regulators if they fail, at worst – they are the habitat for scammers who use “trust” as a front for fraud.

The small occupational pension schemes that abound (the Regulator reckons that – including small executive arrangements there are 46,000 of them) would be better off within the sustainable master trusts. There original purpose has long since been lost, their trustees are all but forgotten and their outcomes are dependent on fund structures that desperately need overhaul.