The give and take of workplace pensions (it can’t all be “done for us!”)

computer says yes!

“Done for you” has become an over-worked phrase in a very short time. I started using it to refer to the CDC decumulation solution discussed by Simon Eagle and others where CDC becomes another investment pathway – with the pension “done for you”.

But the pensions industry has had projections for future revenue streams “done for them”. Since they stopped having to pay for distribution in 2012 , auto-enrolment has offered them contributions done for them by payroll and enforced by HMRC and TPR through RTI and the big stick of the Regulator’s powers.

Since 2017, workplace pensions have been promised a second windfall in terms of cost-free distribution – the AE reforms that mean they will get more members paying bigger contributions. The assumptions of future contributions are baked into business plans.

But time is running on , we are in the middle of the 2020s with no timetable for implementing these increases. The workplace pension industry is now getting alarmed that they look to be implemented in the DWP’s own sweet time. Here’s the DWP playing hard ball with the Work and Pensions Committee – which has been trying to extract a promise on when implementation can be expected

Not only did the DWP not promise a timetable to implement the big reforms but they did not increase the band of earning against contributions are taken. So an inflation linked increase in revenues to AE providers was exchanged for a relatively few low earners whose pay rises will tip them over the minimum threshold.

This is (privately) making AE providers angry. Their projections drive their pricing and it looks as if the break-even point of many master trusts and other workplace pensions will be pushed back further by

  1. Not getting the 2017 windfall for the foreseeable
  2. Not getting any inflation uplift to the upper threshold
  3. Getting the dubious privilege of more small pots from savers creeping over the lower threshold

Predictably, the pensions industry is dressing up its concerns in a shroud of despair for a future generation of savers.

and indeed there is little since Pete Glancy wrote the above article that suggests any “done for you” distribution windfalls – quite the opposite as this Pension Expert headline makes clear.

With this announcement came explanation from the DWP which angry AE providers would do well to read

I had seen this coming and my blog  was quoted in Thursday’s Pension Expert

“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.”

The good news for savers worried they won’t get enough pension to top up state benefits will be announced on Monday. Just what rabbits Laura Trott has in her hat we’ll have to wait and see but they are likely to focus on improving the value savers get from their money

This is unlikely to put workplace providers in any better state of mind. They will argue that they will be asked to improve service, improve investment opportunities and reduce the frictional drag of charges without the promise of souped-up contributions.

Auto-enrolment – the great success story?

Every DWP speech has started since around 2015 “auto-enrolment has been a success story”. It has – it has completely transformed retirement saving – bringing 11m new savers and massively increasing funds under management

Analysis published concurrently by TPR on occupational (rather than contract based) schemes suggests that occupational DC assets increased 26 per cent since last year, and 546 per cent since the beginning of 2012.

The data published by TPR also revealed that there are 26.3mn memberships in occupational DC schemes, up by 1,069 per cent since 2012.

All of this should mean that commercial master trusts – who have had their distribution “done for them” by auto enrolment should have money to spend on better quality of service, better investments and lower retained margins.

The principal service that is lacking is a means to turn pots to pensions and it is high time that master trusts started offering members a better way of doing this than from investment pathways.

As was brilliantly demonstrated by Debbie Fielder of Cllwyd LGPS this week, there is a strong evidence base that investing in illiquids will deliver more value for savers over time. This initiative from Hymans Robertson is well worth reading. Callum Stewart was the driving force behind Debbie’s appearance at its DC conference and Illiquids Hub referenced below.

We are seeing more such growth assets in our workplace pensions and they are being introduced without a notable increase in price (see Nest Smart and Cushon announcements this week) but the pace is slow. The defaults of many leading master trusts are showing signs of neglect.

The workplace pension dilemma

While increased scale should be driving greater efficiency, you can have the “wrong kind of scale”

Average assets per membership have fallen by 66 per cent since 2012. In January 2023, the figure stood at £5,700, compared with £17,200 in 2012.

Master trusts are bigger but they are not necessarily better – in terms of VFM.  The workplace pension dilemma is that membership of schemes is not sticky and most of us jump from one workplace pension to another as often as we move jobs leaving behind us a trail of small pots.

Despite Government promotion, consolidation is not going well. At the retail level, pot consolidation is bogged down by red and amber flags, scheme consolidation is floundering over similar protections on post (think GMP, with-profits and all the issues of “hybrid benefits). The consolidation agenda is currently controlled by lawyers so small pots continue to proliferate. The most desperate disappointment is that “member exchange” is still to happen, a result of a technical dispute over the minimum retirement age and the failure of the Government’s own master trust to offer a bulk-transfer option.

While all these challenges can be overcome, they are currently holding up the profitability of schemes to no great advantage to the consumer and ultimately they are slowing what should be a general improvement in VFM from our retirement savings.

A way forward

In a commercial world , there will always be battles between consumer and shareholder interests, Government must manage the interests of both. It has delivered a “done for you” distribution plan for workplace pension providers which has worked – auto-enrolment is working.

But those who have come to rely on AEconomics to meet profit targets are now upset that the tap to more money is temporarily turned off. Government is essentially saying, deliver better service, better investments out of your margins before you get the 2017 reforms.

What’s more, sort out the issues between yourselves and consolidators and get pots moving , as bank accounts are moving.

The way forward is for the ABI and PLSA to demonstrate that their commercial workplace providers have delivered more VFM without the 2017 windfall ,  if they can show that, then both sides have a way forward.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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