Bigger pensions for smaller savers – Trotting out reform

Yesterday was billed as a major shake up of DC pension provision in the UK. Whether it turns out that way will depend on the capacity of those providing pensions to embrace the reforms in a positive way and to an extent, the capacity of Government to listen to experts pushing back where reform is impractical of could bring more harm than good.

A package of reforms – headlined by a new Value for Money Framework – with three VFM tests

The UK is to set out plans to introduce value-for-money tests for pensions funds, aimed at raising disclosure standards, driving better outcomes for retirement savers and boosting economic growth.

The measures are aimed at commercial master trusts and other workplace pensions. The tests mirror measures put in place by the Australian Government to get Australian savers to pay more attention to their pension.

Currently, employers choosing a pension scheme for their staff cannot easily scrutinise and compare the options available. Schemes that fail to meet the planned value tests will need to improve or potentially be forced to wind up or merge with those that are better performing.

Value for money from DC savings

This is the keystone to the package of reforms being announced and the DWP make its intention clear from the start.

We think the time is right to encourage a more consistent and structured approach to VFM assessment that drives long-term value for pension savers.

And it’s clear that what matters to the Government is the investment outcome from people’s savings

we consider ‘Value for Money’ to mean that pension savers’ contributions are well invested in the best interests of savers, and savings are not eroded by high costs and charges in the context of the market today.

There will be a new VFM framework which will be used by schemes to report on themselves

 The VFM framework intends to build on, and in time, replace the value for members assessments by requiring all occupational pension schemes to report on wider value metrics and use this data to assess the value of their offering against market comparisons.

This goes much further than before

we are considering whether the VFM framework could place a statutory requirement on trust-based occupational pension schemes to consolidate following repeated ‘underperforming’ assessment results, where this is in the best interests of savers. We are considering a related requirement in FCA rules on contract-based providers to improve or consider transferring savers, where this is in the best interests of savers.

The VFM framework will apply to all workplace pensions

we propose the VFM framework applies to “default arrangements”, as defined in regulation 1(2) of the Occupational Pension Schemes (Investment) Regulations 2005[footnote 13] and “default arrangements” as defined in the FCA Handbook[footnote 14].

and enable comparisons

We expect employers to use VFM assessment results when deciding which scheme to automatically enrol their members into, or when considering whether the pension scheme their employees are in continues to provide value for money to their employees.

Engaging people to manage their pension pots

The DWP is also looking to make it easer for individuals to combine their pension pots – it has published a paper on how people engage with their pension pots.

which found attitudes to pensions were characterised by detachment, fear, and complacency, which acted as barriers to engagement.

But independently, there has recently been a surge in demand for digital information on pensions as savers look to take control of their retirement affairs.

chart shows number of google searches for pensions since Jan 2019 (source Phoenix)

The number of times the word ‘pensions’ was searched for online increased dramatically last year, with searches up 16%, according to analysis from Standard Life, part of Phoenix Group. There were 654,000 searches for pensions in 2022, compared to 562,000 searches in 2021.

There was a 40% increase in ‘state pension’ searches throughout the whole of 2022, with 1,390,000 searches compared to 993,000 in 2021. It’s probable that the volumes were driven by uncertainty surrounding the future of the state pension triple lock which was an ongoing source of speculation in 2022 against the backdrop of high inflation.

Research on “engagement” continues to be confused and patchy.

Boosting productivity in pension capital

The DWP has updated its consultation on illiquid investments  “Broadening the investment opportunities of defined contribution pension schemes”

The government said it has replaced its previous definition of ‘performance fee’ with the conditions-based definition of ‘specified performance-based fee’ that trustees or managers of DC schemes must adhere to if they want to exclude these performance-based fees from their charge cap calculations. This is likely to be a matter of legal debate – not of consumer interest

The DWP also set out new draft regulations and guidance that will require schemes to disclose and explain their policies on illiquid investment as well as their full asset allocations. This should be helpful to some purchasers of workplace pensions, keen to understand if illiquid strategies are serious or simply a marketing ploy.

Extending Opportunities for Collective Defined Contribution Pensions

One aim of consolidation remains to create economies of scale that can empower those funding workplace pensions to invest on savers behalf’s in more productive , illiquid markets which can produce better outcomes for savers while benefiting the wider economy.

This aim would be further served if the Government can find a way to extend investment in workplace pensions to and through retirement so that people get pensions backed by real assets. The Government are launching a new consultation on how the concept of CDC can be used to help people turn pot to pension through investment in real assets (rather than gilts).

We know this as “CDC” but the options for risk sharing are much wider. “DC pensions” can variously be described as non-guaranteed annuities, flexible scheme pensions and CDC funds and could be paid from  a contract-based personal pension, a dedicated CDC scheme or a DB scheme used to convert DB pots to a wage for life. All are able to extend the investment duration available for those managing illiquid assets.

Further consultation on small pot consolidation (Scheme level)

The DWP are looking at two longer term solutions to the small pots problem (estimated by the ONS to be increasing by 2m pots a year). The short-term solutions (cleaning up duplicate records and member exchange) don’t get much promotion though they appear to be continuing in a desultory way

Solution one is a small pot consolidator, determined either as the first provider you were auto-enrolled into or on a carousel basis. This includes my favoured “master pot” solution where a register could be held of each saver’s original provider. Administration would not involve payroll but would be from provider to provider (like member exchange)

Solution two is the Steve Webb promoted pot follows member approach where employers would send money to a variety of workplace pensions depending on staff’s previous pension, this would involve a hub-approach.

Both systems have their advantages but both would require considerable investment either in payroll clearing technology or in a DWP managed clearing system between providers.

What is the focus for the Minister for Pensions?

Speaking to the Financial Times, Minister for Pensions Laura Trott continued to stress that what matters most to savers is the outcome of their savings – the money they have to spend in retirement.

“What is important . . . is the person who’s receiving that pension. What will matter to them is whether they have a decent pension which is going to provide them the standard of living that they want in retirement, and returns are going to be the thing which is most important to them.” She added: “We are not saying costs are negligible.”

Laura Trott spoke to and answered questions from a number of “experts” at the PLSA. You can read the text of her speech here.

Laura Trott at PLSA


Further Information

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Bigger pensions for smaller savers – Trotting out reform

  1. John Mather says:

    Henry This must be a great opportunity for Age Wage

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