Supporting innovation in savers’ interests: new DB models must offer both clear benefits and proper protections
The Pensions Regulator has published a new blog. It is republished here with kind permission of its author and its CEO.
At The Pensions Regulator (TPR), we are committed to protecting savers’ money, enhancing the pension system and supporting innovation in the interests of savers. Innovation is something we are increasingly seeing in our evolving pensions landscape.
One innovation hot spot is scheme consolidation. In both the defined contribution (DC) and defined benefits (DB) arenas we are moving towards fewer, larger pension schemes. We believe that the benefits of economies of scale, strong governance and access to investment expertise in larger, better-resourced schemes will help to drive stronger outcomes for savers.
And, reflective of the improved funding positions many DB schemes find themselves in, new models and propositions are making their way into the market in response to increased demand for consolidation options.
We are pleased that in the past few months the superfund market has gained traction with the first two transactions to Clara Pensions. We want to see an emerging competitive superfunds market that offers enhanced security for savers. Ultimately, these are commercial vehicles. We will shortly be publishing our approach to the profit release mechanism in superfunds to provide the right balance between commercial incentives and saver protection.
In a blog post last November, we told you to expect to hear more from us in relation to innovation in the DB market. We continue to develop our regulatory approach to DB alternative arrangements, including capital backed journey plans (CBJPs), which are being proposed as an option in scheme rescue scenarios. We are looking at this area with our focus being on savers receiving their full benefits. We also plan to publish new DB alternative arrangements guidance later this year to help trustees (and employers) navigate alternative arrangements, including CBJPs.
We and government believe that innovation is fundamental to delivering better outcomes for savers. We are keen to support new market propositions where they provide both a clear benefit to savers, and also have the right protections around them. One cannot come without the other. That is why sometimes we have to sound a note of caution.
One potential innovation proposition – which straddles both DB and DC – needs very careful thought: a possible new offering to pay DB pensions to DC savers who transfer into it. We can see the potential in supporting the development of a new option for DC savers at retirement. Savers need new products to sit within appropriate regulatory and supervisory frameworks, and our priority is to make sure protection is balanced with innovation in saver interests. We, other regulators and government are continuing to consider whether a solution like this one could be supported, and we would not expect the market to develop further until this question has been resolved.
Enhancing the pensions system and supporting innovation in savers’ interests are foundations of our strategic approach. TPR is ready to engage positively with pension providers considering bringing new propositions to market and welcome options that offer trustees greater choice, while ensuring appropriate protection for savers. We also expect trustees considering transferring savers into a new type of scheme to engage with our market oversight team to make sure that they are meeting our expectations to protect savers.
We want to work with the industry, government and other regulators to realise this vision. Ultimately, we owe it to savers to ensure they are protected and that new market innovations bring improved outcomes and security in retirement.
By David Walmsley, Interim Director of Supervision – Market Oversight
Is not the most efficient way to provide individuals with a pension for life getting the benefits of consolidation, investment policies not having to consider accumulation and decumulation phases separately, the removal of vital financial decisions from individuals who are ill-equipped and or do not wish to take the responsibility for those decisions, and demonstrates clearly greatest value for money for contributions paid in is not a trust based defined benefit pension arrangement?
I believe the original concept behind CDC (I believe originally called Collective Money Purchase) was for a mutual trust based scheme to provide a targeted but potentially variable annual pension benefit for the contributions paid in each pre-retirement year. It was only to effectively shoe-horn the Royal Mail’s desire to contribute to such a scheme into existing regulatory structures surrounding occupational pension schemes that it was forced into legislative and regulatory structures as if a personal pension scheme under s5(3)(b) of the Pensions Act 2004 as “a personal pension scheme where direct payment arrangements exist in respect of one or more members of the scheme who are employees”. The consequence being that the CDC concept has lost many of the advantages of a defined benefit arrangement and now appears to be unworkable (apparently to date even for the Royal Mail employees).
I am happy that the Pensions Regulator is expressing its willingness to embrace innovation and presumably to reflect demands from the legislature “to protect future, as well as past, service benefits TPR should work with the pensions industry on what the change would mean in practice and what capabilities it will need to deliver on it effectively” House of Commons Work and Pensions Committee – Defined benefit pension schemes – Third Report of Session 2023–24 para 28. However the comment that the unnamed potential innovation proposition straddles both DB and DC suggests to me a rabbit caught in the headlights type reaction – how does this fit into the existing regulatory framework? Only time will tell whether TPR (and probably the Treasury) are really willingness to promote such innovations or will the issues with Collective Money Purchase and Superfunds other than those targeting buy-out (although Clara itself has indicated that it is unlikely to be in its interest to buy-out the Debenham’s pension scheme liabilities for at least 10 years) be continually repeated.
In the meantime it appears the one target that is entirely within the existing powers of TPR and other regulatory bodies is to protect future service benefit is to increase the availability of DB pension benefits to the current workforce. This could be most quickly achieved by re-opening existing closed DB pension schemes to new Members. Why is this not being promoted by the Regulator as an alternative to an “end game”,
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