The change to people’s pensions resulting from the Pension Schemes Bill/Act will not come from the major changes in DB and DC consolidation or the requirement of legislation to ensure money is invested in a certain way. It will come from the way the money they save is paid back to them.

If they have saved through workplace, whether through occupational pensions (particularly master trusts) or through group personal pensions, then your money in later life will transfer into “default pension benefit solutions” which will pay income for the whole of life in retirement.

Since this blog is mostly read by experts, I will share this morning my reading of the pages of the Pension Schemes Bill which is either page 55 of the legislation or page 63 of the document (the first 8 pages of which are introductory)

I am going into more detail about “default pension benefit solutions” because they are radically different to anything that I have see my or your money purchase, if you do not choose your own way to spending your money. I am quoting from

Pension Schemes Bill 
Part 2—Defined contribution pensions
Chapter 5—Default pension benefit solutions

These pages of the Bill are covered by the Roadmap and I will start with that document

What is needed is a default pension benefit solution which allows those at a default time to take a retirement income for their retirement until they die. What the legal pages from the Bill spell out is the framework not the solutions themselves. We can expect secondary legislation about what these can be and then regulation from the Pension Regulation, mirrored by the FCA.

The pages kick off chapter 5 – page 63/114/

I find it hard to work out how there can be more than one default solution unless trustees can make quite determined decisions about who gets what. (1 a). How you get different types of pension need I don’t know unless we go back to having sections for white and blue collar workers (or similar).

There needs, for default payments to be made, to have a default retirement date which people can defer taking benefits or take benefits early. There must be a default date if they take no decision. In my view the most common retirement date is the state retirement age.

If you are to have anything else.  it needs to be justified. There is a lot to be written into second legislation about the taking of tax free cash (will it be a separate payment or will it be part of the default UFPLS),  in a pure world , it would enhance the efficiency of the pension but in reality most people will take up to 25% of the pot (or however it is worked out from CDC).

This page spells out what will be the job of the Regulator. The argument that the members of a scheme are different from those of other schemes becomes less credible, the larger the scheme. Nest has more than 14 million accounts. It has one in three of the working population. If DC schemes are to be bigger than £25bn within ten years, all these big schemes will have pension forces that are broadly the same. There will not be scope to build radically different pension benefit solutions.

Transferable members may be better off elsewhere but I find a process that puts the onus on trustees to establish someone being transferable, very odd – this sounds like legal talk to avoid objections that fiduciary duties aren’t being met, but how can trustees know their membership in depth?

The transferable members are those accommodated by these defaults that have accumulated elsewhere (in perhaps contract based plans) but who default into mega-default pension funds.  The following explains from earlier in the document.

For the purposes of subsection (4) a group personal pension scheme is “qualifying” in relation to a relevant Master Trust if the group personal pension scheme and the relevant Master Trust are provided by the same service provider. (28a relevant master trusts)

I take it that members of a scheme are the responsibility of the trustees and if the trustees think they are better off elsewhere, they should put it to the transferring members who have every right to stay where they are and override the trustees, the member is always able to intervene.

This is radical stuff and is going to cause a lot of discussion amongst trustees. There will be demand for multiple defaults with people going into various sections but in the end I think that schemes will not offer multiple defaults – any more than they do in accumulation. It is after all, only activated if the saver turns down the offers to spend their moneys other ways.

The idea of the “rate of decumulation” is a reference to a very simple means of running a pension, it could be the rule of 4 where 4% of the original fund is distributed – perhaps uplifted by inflation or capped inflation with a hope that what is left in later life is meaningful enough to buy an annuity (float and fix). There will be other approaches, Nest are considering a basic pension offered by the scheme with CDC style payments of conditional index. Our approach would be to pay Christmas payments as well as a lifetime income, an annuity will pay an income till death through an insurance company.

The prospect of offering those determining the level of their drawdown advice on the right level going forward will be tough for trustees. A more collective approach is likely to be adopted with the onus of rates paid being determined by the trustee and not by the member (especially as schemes grow in size).

Here the role of the Penson Regulator is laid out and a big role it is. TPR will determine whether these default benefits solutions are compliant with the requirements first of the Bill and second with secondary legislation. We do not know what restrictions will be placed on trustees or what will need to be included but it is clear that longevity protection will be required and some form of protection for members in the default must be in place.

This is the grist of the work needed to be carried out between TPR and trustees . It  is clear that the numbers of defaults that are in action must be dramatically reduced so that we do not have TPR overwhelmed and incompetence slipping through the crack.

The transferable members are those accommodated by these defaults that have accumulated elsewhere (in perhaps contract based plans) but who transfer into mega-default pension funds.

I haven’t included the enforcement details but they are important, this is in earnest.

A note about affirmative and negative procedures are for the house of commons, affirmative procedures require active consent by both houses (Lords and Commons), negative assent means that the statutory instrument has to be kicked out by an opposition out voting the Government.