We need to sort out pensions and we pensions need to sort out the climate. These are the challenges we face and I’m pleased to see Government is on to them!
Over the weekend , I tried to put the Pension Schemes Act 2021 in some kind of context. Its big ticket items, dashboard, CDC, powers to the Regulator are nuancing what we have before, the mandating of TCDF reporting is new and not introduces the idea of a pension fund as a responsible investor. There really isn’t time for us to have the debate (which should have been had long ago) , the Government has decided that making our money matter (in terms of reducing carbon emissions) is not a discretionary task for trustees, it is what they are gong to have to do over the 30 years leading to 2050.
There is a secondary agenda to the reforms and it sits behind almost all of the measures outlined above. The Government is well aware that pension wealth and pension income are too fractured, complicated and inaccessible to make sense to ordinary people. They are told they need to take financial advice but financial advisers don’t want them as clients. People are told they can see their pensions online but struggle with government gateways, logins and passwords and often the information they need isn’t even online.
There is so much money, so many pots , so many schemes and such little help that many people struggle knowing where to start and how to construct their living wage in retirement.
“Targets” miss the point
For as long as I’ve been advising, and it’s getting on for 40 years, we have seen retirement planning as a process where you start by working out what you need , find out what you’ve got , calculate the shortfall and work out what you need to save to hit your target income.
This is still the best way of going about things, but it’s very hard. People’s older pension pots are with insurers under new owners, new names and the chances are they know less about you than you do about them.
Savings you made through your employer need you to trace the employer and often who they gave your money to. If you can remember and locate your pot, you have still to go through the process of finding out what you can do with your money, which is neither consistent or easy. Most employers don’t pay pensions and have little interest in you, if you’ve left them.
Add to this the lack of certainty around defined pension schemes where inquiries are now likely to be met with a barrage of warnings not to transfer and caveats about the pension promise that might be impacted by obscure adjustments to do with “GMP equalisation”
There is too much choice, too many schemes and not enough information and advice to go round.
Will the Pension Scheme Act help?
I predict that consolidation will happen at three levels – “scheme”, “pot” and “retirement income”. The need to combat Climate Change will accelerate this change
Pension schemes will consolidate
The Government seems to be losing its patience with the pension industry that shows no interest in getting its act together and helping the consumer out.
Conversations I’ve had in Whitehall, Stratford and Brighton suggest that the secondary regulations that will follow the Act will make life uncomfortable for those providing pensions that cannot demonstrate they are offering “value for money”.
With the inclusion of the new purpose of saving the planet, that now includes compliance with TCDF and probably a number of further interventions as trustees, fund managers and platform providers are required to steward the assets they invest in with ever greater vehemence. This will drive consolidation of pension schemes.
The proposals in the FCA’s CP20/9 consultation on value for money introduce the idea that employers have the right to know the value they are getting for their and their staff’s money and while the proposals so far focus on employer sections of GPPs, GSIPPs and Group Stakeholder Plans, it looks inevitable that these proposals will spread to the master trusts whose assurance framework is getting tougher. VFM reporting , and especially VFM benchmarking, will drive consolidation of pension schemes
Pension pots will consolidate
And it seems certain now, that we will have the infrastructure in place for pension dashboards to happen. By infrastructure, I mean “open pensions”, that system of data flow that replicates open banking and allows people to see information about their personal assets and future promises from the people who keep your records and manage your money. The question is not whether but when, and when we can see this information, we need a means to act upon it, managing our pots for ourselves, seeing our pension rights in one place and maybe even getting to the point where we can do the shortfall calculations in real time. The pension dashboards will drive consolidation of pension pots
And the Government are looking to the future to create new primary legislation that will reduce the number of very small “micro-pots” through simple ideas like “member exchange” where pots below a certain size are transferred in bulk from one provider to another so that in time , people start thinking of one provider as managing their money.
If this works for micro pots, the Government looks likely to create more ambitious schemes where money moves when people move jobs either to a “master pot” or to the next employer’s scheme. This will drive consolidation of pension pots
Retirement income will consolidate
Most of us spend our working days dependent on income from one or two sources and it’s odd that we expect people to manage in retirement getting paid income from a variety of sources. Those who have a portfolio of DB pensions are few (and lucky!) but those with multiple pension pots are many (and unfortunate).
Pot consolidation is likely to be driven by the need for income from a single source. We see annuity brokers consolidating many pots into a single annuity plan paying one stream of income and I suspect there is demand for this service elsewhere in the system. Typically this is where advisers have scored with their capacity to find , advise on and ultimately manage the income through vertically integrated wealth management.
But there is not capacity for advisers to do this for people with smaller pots which in total aren’t worth more than £100,000 (most people).
So far master trusts have focused on consolidating themselves and more recently consolidating occupational pension schemes. But they have not yet focused on consolidating member pots. This is because master trusts so far have been focusing on building pots up , not on providing pensions to people who want their money back.
But they are uniquely placed to offer scheme pensions (rather than collective drawdown) by pooling people’s retirement pots into one big pot and paying pensions from that pot based on the collective life expectancy of those choosing to be in the pool. This is the most likely application of the CDC legislation , in my opinion.
Curiously this puts master trusts into the same role for individuals , as the new DB superfunds are for DB schemes, leveraging the opportunities to bulk administration, investment and advice into collective arrangements with much lower capital requirements than bulk or individual annuities.
These super consolidators can take advantage of the opportunities they get from being occupational pension schemes rather than insurance companies and become a new kind of mutual, whose principal function is to pay pensions, with varying degrees of guarantees surrounding the pension promise.
The current legislation for CDC and the secondary regulations which are to follow will see DC consolidation at the point of retirement. Meanwhile the emergency regulations for superfunds and the likely primary regulation in the next pension bill , will see consolidation around retirement income
The long term direction of UK pensions is towards a simpler framework where people get a better understanding of what they will get and find it easier to get their money paid back to them as a pension.
Many people will choose to opt out of this simplification and into the flexibility of pension freedom, especially where they have the capacity to afford advice. The wealth market is already fully formed , driven by firms such as SJP and Hargreaves Lansdown and strengthened by a large number of IFAs using platform technology to manage individual wealth to individual specifications.
Mass market solutions will emerge and (as this blog is showing) are emerging with schemes , pots and retirement income all set to consolidate in the next few years.
Right now the mass- market is only semi-formed and the Government’s task for the remainder of this parliament is to create the conditions where consolidation increases to a point that ordinary people get back confidence in pensions.
We will not go back to employer sponsored DB pensions, but scheme pensions paid by master trusts, small pots consolidated by master trusts, wealth management and insured workplace pensions and small schemes , consolidated by master trusts and superfunds, should make for a less complex and easier pension landscape as we move towards 2050.
Footnote; Climate Change is the final driver of consolidation
2050 is the new pension horizon and over-arching everything else is the need to get the trillions in UK pensions moving the dial on climate change. The final driver for consolidation is the need to create leverage on the assets that determine our carbon footprint and this will also drive consolidation – this time around a common desire for change
I’ve always thought that for most people the better process is where you start by working out what you need , find out what you’ve got , calculate the shortfall and work out that we ought to have a better State Scheme.