By Dale Critchley, Workplace Policy Manager, Aviva
The government wants to see bigger, better pension schemes delivering bigger, better pensions for savers. While at the same time helping the UK economy, by investing in UK growth. The policies to enable it echo the idea of “radical incrementalism” - policy changes that address today’s issues and take us toward a longer-term goal, rather than a great leap forward that may just be wishful thinking.
The most obvious policy idea to drive scale, is the proposal to set a minimum threshold size for default arrangements. The policy objective is that schemes invest in defaults, with the scale required to make direct investments in property and infrastructure, or to negotiate the best terms to access asset classes that might deliver more diversified returns. We should see primary legislation for this in the Pension Schemes Bill within the next few months.
Scale may also be driven by the new value for money framework, which will be another feature of the Bill. This will see individual schemes compared with large schemes, and large schemes compared with each other. It will highlight where employers, or groups of employers, might get a materially better deal for their employees within another pension scheme. Schemes rated red, for some or all employer cohorts, will need to improve, or look to move their savers to better performing schemes or default arrangements. Over time, we may see fewer larger default arrangements and improvements in the support provided to savers, as underperforming defaults are closed and assets are moved to better schemes.
Expectations around the support provided by schemes are also being increased. This will have a positive impact on savers but may make it harder for smaller schemes to sustain the level of investment necessary to match large schemes. One of the biggest challenges for savers within DC pensions is how to turn their savings into a retirement income. The “nastiest hardest problem in finance” according to Nobel prize-winning economist William Sharpe. This issue will become the responsibility of trustees once new legislation and regulations mandate that all occupational pension schemes provide suitable income solutions for their members.
Trustees will also need to ensure their governance processes are documented and meet the expectations of The Pension Regulator’s General Code of Practice. This will include carrying out their Own Risk Assessment within 12 months of their scheme year ending between 28th March 2025 and 27th March 2026 (5th July 2025 to 4th July 2026 in Northern Ireland). While The Pensions Regulator no longer refers to this as being “onerous”, it may bring home to some employers just how much is expected of their scheme trustees.
Another anticipated measure in the Bill is to facilitate the extraction of DB surpluses, where it is appropriate and safe to do so. While the specifics are still being finalised, this may mean employers could utilise these surpluses to expand their businesses or potentially encourage them to allocate the surplus to their DC scheme members.
Consolidation on its own will not drive bigger pensions for DC savers. Employer scheme design and contributions have a significant impact, but better individual decision making, and bigger returns, delivered by bigger and better pension schemes, can make a huge difference to the retirement prospects of UK savers.
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