The new regulatory framework results from the PLSA’s call for evidence
The Retirement Living Standards were an initiative that the PLSA should be proud of and I’m glad to see WTW’s Lifesight integrating them into its modelling tools for its savers (announced yesterday).
The difficult second album is to find a way for occupational DC schemes (including master trusts) to convert consumers from diligent savers to responsible spenders.
It’s conclusion is to call for a new regulatory regime – just for the diminishing numbers of PLSA members left running not for profit DC schemes and herein lies the problem. We suffer from a surfeit of rules but a deficit of learning making pensions a bit like the Latin textbook with answers to the questions we aren’t asking.
To get traction for its own rules, the PLSA needs to demonstrate there is a problem with the old ones as well as making a case for why occupational schemes can do things better.
The three card trick is to continue the nudging of consumers through the “Strait of Hormuz” without them even noticing that they are confronting one of the nastiest hardest problems in finance.
The economic rationale is about the growth in pot size, once there is enough money in these DC pots, (it is hoped) there is scope to pay the pots a lot more attention. Currently the annuity value of the average pot is around £1,000 a year. Seeing this double over the next twenty years does not sound like a great achievement for DC pensions. We only need the triple lock to survive a couple of parliamentary terms for it to have achieved more.
The paper asks for a new regime considered
- To provide more support to savers who do not engage with their options – utilising the lessons from Automatic Enrolment and the Open Market Option – as well as supporting freedom and choice for those who do;
- To facilitate and influence future product development with a view to managing the risks for savers as Defined Contribution (DC) pots grow and dependency on DC derived incomes increases;
- To utilise the benefits of scale and mechanisms such as the trust-based fiduciary duty within Master Trusts and Trust-based schemes and the responsibilities of Independent Governance Committees (IGCs);
- To support similar saver experiences across the market, whilst enabling innovation to flourish;
- To mitigate or help manage some of the risks savers are facing; and
- To mitigate some of the key risks schemes are facing – including litigation, financial and operational risks.
As with most lists, you scroll to the bottom to get to the killer point.
The issue that PLSA DC pension schemes face is that they don’t pay pensions and were they to, they would be embracing all the risks that they jettisoned by not being DB occupational pensions.
Although the PLSA paper suggests the risks arose from the introduction of pension freedoms, the risks are inherent in DC and the wholesale shift to DC predates freedoms by some 20-25 years.
The paper assumes that employers want their pension schemes to pay pensions but for the risk of that happening to be mitigated by a new regime that absolves them from blame when the proverbial hits the fan.
How the risks will be mitigated is laid out in the user journey the member takes as they enter the Strait of Hormuz, pass through it and sail away into the sunset.
There is passing mention as to how this user journey will be delivered with a nod to the Fintech community and with perhaps an intentional typo,
54. The development of rob advice and guidance (sic)
Product development (rabbits out of hats)
Meanwhile , it is hoped that proper product innovation will come to the saver’s rescue. There is , in the paper , some talk of what that innovation might be and it sounds remarkably like the Defined Ambition agenda, where Steve Webb stood in a garden of innovation watching many flowers bloom – only to see the garden turned to a parking lot when he left office.
Strangely, and I don’t understand the reasons why not, the PLSA have almost totally ignored the obvious solution to the problem of getting saved money spent
Collective Defined Contribution schemes, deferred annuities, guaranteed drawdown, and individual mortality underwriting get lumped together as “potential products that might facilitate better or more sustainable outcomes” .
But having given it an airing, CDC is returned to the box and the lid shut sharply down
Stakeholders saw potential value in decumulation-only CDC arrangements, which will not, initially, be permitted under the Government’s legislative regime.
Instead we get a new regulatory framework bookending a requirement on DC schemes to nudge members into the right options.
I can see no reason for this model to need a new regulatory framework, it is essentially an extension of the investment pathways to occupational schemes with fiduciary oversight resting with trustees rather than IGCs and GAAs.
The DWP’s proposals for the partial demolition of the DC occupational framework (envisaged in its latest consultation on good DC outcomes) suggests that all will remain will be schemes operating under the master trust authorisation framework and a few mega employer schemes like Lloyds Banking Group’s Your Tomorrow.
These schemes are either working under a new regulatory framework of are big enough to make their own rules.
Conclusion
Five years on from the introduction of pension freedoms and with precious few DC schemes offering anything like a scheme pension , this looks like a last throw of the dice.
Frankly, the business case to throw a lot of regulatory resource at the decumulation of occupational DC pensions looks pretty thin. There are other options, such as getting CDC into these large schemes.
The PLSA cannot ignore the trend to consolidate. Soon it will be left with only a rump of single occupational schemes and the commercial master trusts.
This paper looks like a text book giving answers to questions we are no longer asking. The world is moving on and the solutions to the problems posed in this paper are going to be answered elsewhere.
