What is happening in the world of workplace pensions?

While the IFA may be interested in wealth management, the Government has moved to get workplace pots that turn into pensions.

There are two changes that they have introduced. The first is the promotion of retirement income from existing workplace pensions. This is through  the Pension Schemes Bil and the second is legislation that enacts CDC as a multiple employer workplace Pension.

There is also legislation on the books now that will mean that pots that haven’t turned been turned to an annuity or a CDC or DB pension will become part of an estate on the potholder’s death. This will be from April 2027.

You might well ask what is a CDC pension? The answer is that there is no personal pot in a CDC anymore than there is an annuity. There is not even space for an AVC style DC pot.

By comparison, DC plans will continue to hold a DC pot for savers. These pots can be transferred into pots relatively easily compared with a transfer the CETV pensions of a deferred pension.

We are much more likely to see DC pots transferring to CDC schemes, to annuities and to public sector pension (which can accept DC transfers in a member’s first year of service).

With gilt rates at their current level, the transfer from deferred DB and CDC pensions to wealth management “pots” is unlikely to be very high.

We have seen the levels of CETV transfers fall off a cliff, partly for regulatory but mainly for commercial reasons, pensions are better value in the pension holder’s eyes than they were when they could be exchanged at up to 40 times the deferred pension income pay-out.

Here there is a major conflict for master trusts and non-commercial trusts set up on an own occupation basis. These organisations, to operate in future will need to provide a default retirement income with protection later in a saver’s life so that the income does not run out. This has led to the concept of default “flex and fix” with Nest being the first to disclose its version. With Nest the member will remember in drawdown until 85 and then move to annuity via a bulk scheme with specialist insurer Rothesay.

Another £30bn + master trust, WTW’s LifeSight has opted for what will be a Retirement CDC scheme; let’s call it a stage 3 CDC scheme (Stage 1 being the individual company scheme – as used by Royal Mail, Stage 2 being whole of life CDC for multiple employers and Stage 3 being a CDC pension for those at retirement and in a DC workplace scheme). This third type of CDC scheme will go a different route from “flex and fix” converting pots to CDC pension by default at retirement.

The legislation for Retirement CDC has yet to be drawn up but it looks as if flex and fix and retirement CDC will be the main choices for master trust schemes. It is likely that for retirement, workplace GPPs will be rolled into master trusts (not least to ensure that insurer’s workplace pensions are at least £25bn in size by 2030 – which they’ll ned to be).

There are some large GPPs out there, BT has a BPP with Standard Life, the FT has one with Scottish Widows and the Daily Mail use Fidelity.

So, a combination of the Pension Schemes Bill (and soon to be Act) and the enacted and “being drafted” CDC literature will change workplace pensions – primarily in retirement but in the case of whole of life CDC, at any age.

What will this mean for IFAs?

I suspect that all this will legislative change will lead to reviews of pension planning for individuals taking advice. For many who do, wealth rather than income is most important and for them whole of life or tapering insurance appears the obvious way of protecting the estate from an IHT liability from a pension pot. Some wealthy people will buy annuities and a few exchange pots DB and CDC pensions but it looks likely that most will prefer the freedom of a SIPP or similar.

Meanwhile, the older generations who are retiring now, may give way to a younger generation without the wealth who over time will look at their workplace pensions as lifetime income rather than pots. This will be backed up by a Pensions Dashboard which will display pots as pensions.

IFAs are going to have to speak to the current retirees and those close to retirement about the changes but their children will need to be reminded of pension freedom in a world where pensions mean retirement income with some cash when deferred income comes into payment.

There will be a generation of IFAs that will remember an old adage “pensions are an insurance against living too long”!