Matthew Arends said: “Both society at large and the pensions industry have had to face up to real and present dangers in the last few years. The pandemic still casts a shadow from an economic point of view, while other global events have brought fresh problems and new forms of volatility that every company, scheme and individual must navigate - notably around the cost of living.
“The rise in inflation is of course key to this, so perhaps our greatest hope for 2023 is it that it can come down to a more reasonable level. If not, aside from the day-to-day issues it presents, there is the prospect of retirement savings adequacy being significantly impaired for many years to come.”
Matthew Arends continued: “While it’s clear that many pension savers are likely to feel they need some flexibility to ride out difficult times, the full effects of opting out of pension saving can be significant. The Aon UK DC Pension Tracker has shown that if each of its sample savers were to opt-out for the next three years, they would ultimately see an expected reduction in retirement income of around £2,075 p.a. (a 30-year-old), £1,750 p.a. (a 40-year-old), £1,775 p.a. (a 50-year-old), and £1,250 p.a. (a 60-year-old).
“If they wanted to try to make up this shortfall, individuals might consider increasing their future pension contributions when they re-enrol. Our sample savers would need to increase their contributions by 1.25 percent p.a. (from 8 percent to 9.25 percent), 2 percent p.a. (from 10 percent to 12 percent), 4 percent p.a. (from 15 percent to 19 percent), and a somewhat unrealistic 21 percent p.a. (from 20 percent to 41 percent), respectively. To make up the shortfall, this increased contribution would need to be paid each and every year until retirement. In the case of the youngest member, that will be for over 30 years - just to make up for the three years of missed contributions.
“Finding solutions may be beyond the pension industry’s direct control but any movements in the rate of inflation will have a key effect on individuals’ incomes – and therefore both on their ability to spend or save. Our hope is that the wider economic environment improves, and relatively quickly – but it is a hope rather than a firmly held belief.”
The Pensions Dashboard
Matthew Arends said: “While other - non-macroeconomic - matters may appear to present a less fundamental threat to pensions in 2023, they may prove to be every bit as important to how retirement income is both understood and accumulated in the years that follow. Will 2023 be remembered as the year of the pension dashboard?
“The hope for the year is for a successful introduction and connection for the country’s largest pension schemes. One hopes that if all goes well, it will pave the way for others to come – but fears for dashboards run alongside the hopes. Will there be just one opportunity to gain trust from both the industry and scheme members? Will an early misstep set back the project for years? The industry’s recent record on delivering big projects is good, so there are grounds for cautious optimism.”
Collective DC (CDC)
Matthew Arends said: “CDC has been a genuine cause for hope in the last few years – and is again an example of the industry working effectively together.
“We have seen some significant milestones in CDC’s development in the past couple of years and 2023 should follow that pattern. We hope to see the launch of the Royal Mail scheme and the development of the next phase of regulation. These are both significant steps in bringing these new schemes into reality and of exploring their full potential.”
Defined Benefit (DB) Funding Code
Matthew Arends said: “It would be a rare year in UK pensions when a significant regulatory issue didn’t feature in a list of hopes and fears. For 2023, the focus will be firmly on the DB Funding Code and its wider implications. The challenge is to make it easier for The Pensions Regulator to act against schemes where the funding plans are clearly inadequate. But in doing so, there is the risk that the vast majority of schemes with perfectly sensible funding plans may find themselves affected too. And that would, of course, be a backward step.
“The Department for Work & Pensions draft funding regulations left many in the pensions industry uneasy, with Aon’s survey of pensions professionals showing 80 percent of respondents concerned or very concerned by them. The hope is that the wording of the final regulations reflects a more pragmatic approach.”
Reassessing DB journey plans
Matthew Arends said: “DB schemes were subjected to a high period of volatility in the autumn, potentially leading to significant changes in asset allocations. As the dust settles, trustees and companies will need to reassess where that leaves the journey plan if, for example, return expectations are reduced as a result. Does an improved funding position bring forward the target, or change the destination entirely? Or, alternatively, does a lower expected return put more focus on contribution levels? I expect most DB schemes will need to re-evaluate their long-term strategy in 2023.”
Much to do…
Matthew Arends said: “The issue of the sheer amount of activity surrounding pension schemes and a talent ‘crunch’ across the industry did not go away during 2022 – if anything, it’s got worse. The list of big initiatives to be tackled has not shortened, so schemes and providers need experienced people to understand what’s needed and to make major projects happen – whether that’s dealing with GMP equalisation, the dashboard, changes to the funding regime or several others. The fear is of ineffective implementation of too much change, done too quickly. In Laura Trott, we have a new Pensions Minister who undoubtedly has much to get up to speed on – but this over-arching issue should certainly be an area of concern.”
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