Clearly the DWP has looked at the state of our DC workplace pensions and decided things must change.
Laura Trott is inviting a group of stakeholders to a meeting early next week to ask questions about a package of reforms she will be rolling out. The invite states;
We are conscious of the cost of living challenges people are facing and the impact this has on their ability to save for retirement. The Department is launching a package of measures to ensure for those who are able to put away some their hard-earned cash, pension schemes are providing them with the best value for money.
Having been told earlier in the week that the DWP does not intend to solve problems with adequacy by demanding higher contributions from employers and savers, it looks as if the emphasis will be on making more of what we’ve got. Which is fine by me. Asking people to save more when they are earning less is madness, finding ways to pay better pensions from the money they’ve saved – makes a lot of sense.
I hope in confronting the question of adequacy, Laura Trott will focus first on those who are lowest paid , for whom the state pension is easily the most important part of their financial plan. I hope too she will continue the work of her predecessor, in driving up levels of take-up of Pension Credit. Pension Credit will become less important over time as more people get a full state pension but it remains an important part of the low-paid’s financial plan – it is the “door to more” benefits, particularly for housing and healthcare.
For those with savings – whatever the level, we need to get better value at the point we turn pots to pensions. Most small pots are simply used as a parachute payment as people move beyond the normal minimum retirement date. That’s not helpful to them (it involves paying tax like a Muppet) and it’s not helpful to the economy. If the tax-relief invested in auto-enrolment results in an extended sabbatical for those in the decade prior to state pension , then Government needs to rethink “choice architecture”.
We need a default means of converting pot to pension and the obvious answer is CDC, whether organised by master trusts – becoming CDC schemes or any occupational pension scheme offering a pathway to a CDC fund. We might add to this list, the possibility of commercial occupational DB schemes offering scheme pensions on a guaranteed or non-guaranteed basis. All of these options should be in the mix – and if this package of reforms offers opportunities to risk-share in any of these ways – I will be clapping next week.
I will also applaud any sensible way for us to measure value for money in a way that ordinary people can understand. To date it has been an unspoken rule of the pension industry that nobody should declare they haven’t been giving value for money. This is down to the lawyers who tell us that such an admission is opening the door to a class action.
If the Government is serious about a VFM system that tells people what they are actually getting – even if its poor value – then it should indemnify those fiduciaries given the task of delivering the news against individual or group claims. Accountability is everything, people should have a clear view of how their pension money is doing and that includes performance and the work it is doing to sustain the planet. TCFD and VFM need to be brought together.
For too long we have had too classes of savers in the UK. Those who get the promise of a secure pension guaranteed by a sponsor, and those who get a pot with minimal help as to what to do with it.
We need a clear default mechanism to turn pot to pension and we need a VFM standard that makes sense to people.
We can compare many things we use, but not our workplace pensions. Let’s make sure that this time , we nail VFM and nail the pot to pension problem too.