Within three weeks from taking power , the new Government has
- Announced a Pension Schemes Bill
- Created a review of workplace pensions
- Re-written the rules for capital backed pensions.
The consistent theme throughout is “capital”. Pensions are considered a store of unlocked capital that can be unlocked by priming schemes to run on, release surplus and invest productively. The Pension Schemes Bill will enable this to happen by (at last) setting in place lasting rather than interim legislation.
But the thought of over 5,000 occupational schemes running on, all with the full cost base of their own administrative, investment and advisory infrastructure is unappealing. The capital that is needed to release capital, is also needed to consolidate DB schemes by creating superfunds.
£600bn was sucked from private sector DB pensions in 2022. £166bn of it lose in collateral payments to maintain LDI in that October. Although notionally better funded , DB pensions are materially weaker in terms of payment coverage. Many smaller schemes are now unhedged, for many deficit contributions continue to trouble sponsors, scheme liabilities remain on the balanced sheet, restricting corporate strategies – especially growth strategies. There is insufficient capital to release sponsors from its obligations to schemes typically close to future accrual.
Last (but not least) , the Government envisages a new kind or pension which converts DB pots into DB pensions using the same sources of capital. This looks the most exciting opportunity for innovation of the lot. 80% of savers surveyed recently by Scottish Widows told the master trust provider they would prefer a lifetime income to a pot. If capital backing can turn pots to pensions (as the Government considers they can) then a resolution to the challenge of the pension freedoms may be at hand.
We may wonder that a Left-leaning Government should be putting capital at the hear of its pension strategy, even more that pensions are at the heart of its economic strategy. But it is so. The speed at which they have brought the Bill, the Review and now Guidance for Pension Superfunds makes clear that they intend to get all this done.
In backing superfunds and more general capital backing, the Government is moving towards pension solutions and diversifying away from reliance on insured consolidation through bulk annuities. Clearly the annuity market is finite because it is capital intensive and because bulk annuities only meet a part of the problem. As is increasingly becoming clear, the revised version of TAS 300 is requiring funding advisers to consider alternatives to annuities. Finally, there is capital lining itself up to back occupational schemes to run on , on terms that make sense to sponsors and trustees.
The Government has also recognised that capital can as easily back a DC as a DB pension promise. DC pots can become defined benefit pensions through the conversion of a pot to a guaranteed income stream. This need not exclude insurance. Just as Clara provides a bridge to buy-out , so a scheme pension can bridge to buying in an annuity or lay off unwanted longevity risk using the reinsurance market.
Capital is lined up to back both DB and DC pensions and it is now the job of Government , through its Pensions Regulator, to make this happen. There is no obligation on the private sector to participate, there needs to be a compelling business case for it to do so and the production of DB superfunds guidance suggests a willingness to work with capital providers that has hereto now been lacking.
The challenge to the Pensions Industry
After 40 years working in pensions, I know that vested interests are strong and resistant to change.
I spent the first 20 years working in an environment where it was assumed that employers would provide staff with pensions through occupational pension trusts. The second half of my career has seen the obligation to provide pensions pass from these trusts to pension savers. This hasn’t worked, the Government recognises this. While it is showing no inclination to return to an annuity culture where savings are insured by default, they have made it clear that it expects trustees to pay pension from pots.
We are now on a brink of a new era where DB and DC pensions are paid with the backing of private capital. This is not yet properly understood and there is a job of work, not least by people like me, to help people feel comfortable that change – challenging as it is – is for the good.