For most of us, June 21st has been the day when we return to normal ever since the Prime Minister announced the timetable to lift lockdown – the long day coming.
But today is not going to see further easing, we’re going to have to wait some time for that, and the idea of “normal” will be heavily caveated, things are not going to be the same – again.
This idea of progress is critical to hope. We best deal with the pandemic’s consequences by deriving good from them and one of those positives is that we have a new and decisive Government policy on pensions which will go ahead today.
A long time coming
For as long as I can remember, the idea of the individual taking responsibility for their retirement affairs has been assumed critical to the UK pension system. Words like “engagement” and empowerment , phrases such as “financial education” and concepts such as the personal pension have dominated thinking.
But lurking in the background has been the muted voice of the collective, the mutual responsibility for provision to the many through the delivery of value for our money, through strategies that don’t require engagement, empowerment, financial education.
Today marks an important “milestone along the journey”, to coin a wretched cliché.
The milestone is the step change to collectivization promised by the DWP’s further guidance on consolidation and its consideration of further steps that can be taken to improve member outcomes.
The journey is one that began with the mass-enrolment of the pension excluded into workplace pensions, through auto-enrolment and which will end, God-willing, in a return to sanity and the provision of wage for life income to the tens of millions of Brits who will currently be taking a massive pay cut in retirement.
The change that’s going to come
The DWP’s consolidation agenda is supported by both pension regulators, both rPR and FCA. The FCA in particular have accepted that the solutions for mass-market income replacement in retirement , rest with occupational schemes and in particular multi-employer schemes.
Their instructions to IGCs to promote the concept of the employer scheme within the HMRC definition of a group personal pension (GPP) , allows employers who have opted for a workplace pension within such a structure, to understand what they have chosen through a benchmarking of charges and value for money.
Employers are being asked whether future money is best sent to personal or collective pensions and this prompts the question , what can a master trust do that a personal pension can’t.
In practice, there is little difference for the retirement saver between a well-run default fund within a GPP and the equivalent in a master trust but what is going to be different is the way that money within occupational pensions is returned to savers. The personal pension offers investment pathways while the natural evolution of occupational schemes is into paying scheme pensions under the new CDC regulations.
This evolution has five profound beneficial consequences for the ordinary pension saver
- They benefit from a mutual approach to investment management, longevity pooling and pension administration. They will get more value for their money
- They are not forced to take decisions they do not understand and do not want to take, in particular the conversion of capital into lifetime income (pot to pension).
- Their money is invested in a regenerating pool that allows it become part of the patient capital initiative – with positive benefits to society – particularly in terms of environmental and social issues.
- The economies of scale of these large multi-employer pension schemes lends itself to better governance , improving confidence in pensions and reducing opportunities for scammers (who prey upon people’s lack of confidence).
- This can be achieved without compulsion, by allowing opt-outs of workplace pensions where there is advice in place or where people are genuinely empowered to self-invest.
The end of a forty year cycle
The forty year cycle for pensions began in the early 1980s with the Fowler reforms that took root in the 1987 reforms of financial services legislation, the introduction of personal pensions, opting out of occupational pensions and of SERPS.
Since then we have seen a retrenchment. The opting out of occupational pensions into personal pensions (latterly rechristened SIPPS) has twice led to national scandals and is now something that is subject to intense regulatory scrutiny. The tap is being turned off.
The tap on SERPS/S2P rebates has been turned off for some years as people move to a single state pension bolstered by the triple-lock. This is another profound shift back towards collective provision and inter-generational solidarity.
Now the introduction of CDC as an option for occupational DC schemes and the DWP’s progress on advancing occupational DC consolidation speeds up the rate of change.
I predict that by the end of this decade, we will have moved towards collective provision of scheme pensions through large multi employer CDC schemes and that we will trace the progress of that evolution to the Pensions Schemes Act 2021, the secondary legislation that will be announced today and the continued pressure from FCA and TPR to promote the employer as the key to unlocking value for money for its staff.