Given the introduction of the concept of the lifetime pension pot system, what does the future hold for the UK pensions system? Let's take a leaf from the book of Charlie Brooker, and take a Black Mirror-esque leap forward. The world a decade on. Truss is back, and Trump has taken it upon himself to abolish the two-term presidency rule. Society is fully cashless, physical bank branches are a distant memory and crypto is king. The NHS collapsed at the turn of the decade, the Westfield centre is social housing, and kids think terrestrial TV was something to do with aliens. |
By Paul Leandro, Partner at Barnett Waddingham Drastic changes have also been made to the UK’s pension system, and we have now adopted the lifetime pensions pot model. But how does this look – and have we learnt anything from the Australian system?
Employers However, the workforce is increasingly made up of workers over 50, providing businesses with a challenge to recruit and retain older employees. Pensions are at the forefront of people’s requirements when considering remuneration packages. As a result, good employers see pension provision more as a strategically important employee benefit and pay higher contributions as a result, and the best use auto-escalation – that is, an automatic increase in contributions with length of tenure - which we took from the success in the US. Alongside this natural shift, there’s far greater regulatory pressure, which has made employers address pension gaps, across gender, ethnicity, disabilities, and anything that could be a discriminating factor. As a result, contributions are higher for things like parental leave.
Providers
"There has been a huge increase in direct-to-consumer marketing activity, as each provider spends millions on advertising, branding, and sponsorship – Liverpool FC has one master trust on its kit, and Manchester City another." We now also see providers doing more – beyond financial performance and marketing – to hang on to clients for as long as possible. Virtual reality retirement communities have launched, where people have access to forums and advice, and can interact with other users and experts. Retirees have access to flexible benefit schemes via their pension plan membership. Master trusts have taken advantage of economies of scale to source insurance and other benefit products at competitive prices, so people can continue to be covered after they leave employment.
Beyond master trusts SIPPs offer a place for people who like to invest outside of the homogeneous master trust market. SIPPs still have a role to play, due to the loosening of shackles which previously bound workplace pensions to employers. They are largely attractive to affluent individuals and people looking to invest on behalf of their family, especially where platforms allow individuals to manage wealth holistically across tax wrappers. However, this is predominantly in the at-retirement space; SIPPs have far less traction with members in the accumulation phase. The exception here is the self-employed - as casual working patterns have evolved, SIPPs provide an invaluable outlet to self-employed savers looking to build a healthy retirement pot.
Markets Separately, we’ve finally seen the “death of ESG” – no, not the way the wealth managers have been hoping for. It’s no longer talked about as a ‘concept’ - it’s the bare minimum industry norm. Default funds all have ESG foundations that have to comply with stringent regulations. ESG investment solutions make up a significant proportion of funds, and increased visibility on a smaller group of pension providers has left nowhere to hide. These are of course positive shifts, but they come with a cost – literally. The days of defaults running with a sub 0.3% annual management charge are a distant memory – given the added complexity and higher costing assets, we’re looking at annual fees of 1.2%+ across the industry. But at least this has come with better measures of value for money; individual consumers have, mostly, been happier to bear the higher charges because these have been commensurate with the long term returns the illiquid investments produce.
At retirement Solutions at retirement are now a lot more sophisticated as well as user-friendly, putting the consumer at the forefront of thinking. With the pensions dashboard launched and embedded at last, we’ve seen much more effective, transparent, and accessible ways developed for people to visualise their income shape. Medical testing at retirement is commonplace, giving people indications of their longevity. And the State Pension … the current format is now untenable, and the Government has introduced a purely means tested system. 50% of the population is ineligible for the full amount.
Tech and regulation As part of this, and as a result of the Advice Guidance Boundary Review, we now see loosened regulation on guidance versus advice, although this still needs to balance with Consumer Duty. Pensions information is now much more accessible for all users, with a focus on what retirement means from an overall perspective (health, wealth and purpose), not just limited to specific products. This requires more flexibility and easy access to all relevant communications material, as well as better safety nets for people unwilling or unable to make decisions without support. Information is provided in real time and people who want to make changes simply need to speak instructions into their phone - gone are the days of staring at incomprehensible graphs on screens. Of course, some more confident - or less informed - savers have delegated planning for their future entirely to their AI assistants. Financial services providers are equipped to have decision-making conversations entirely in virtual reality, and with AI-driven avatars. Only advisers who have innovated to operate in that space have survived; laggards have been replaced.
Products And in good news, pension schemes now include more creative benefits for members at retirement. For instance, corporate life insurance and critical illness policies are usually lost when employment ends, but these often now come included as part of new inclusive pensions products. As a result, the select providers in the lifetime model have had to massively ramp up scale in order to provide the best and most competitive insurance costs for customers. We also have more inclusive default investment funds. Gone is the sole option of default funds built as a catch all, which assume a linear working pattern for all - now funds better serve people on lower-incomes and those who take career breaks. There are even default vegan funds, LGBTQ funds, and FIRE funds - high risk, high reward. The use of alternative assets providing stable, longer term returns without the need to de-risk is much more prevalent, ideal for those having fewer regular contributions and an unknown retirement date.
Has it worked? "Even with the right clearing system, new products, worthy providers, and better investments, the ‘pots for life’ model hasn't tackled the core issues which made up the UK’s looming pensions crisis." DC contributions are still much too low, by several percent per person. Huge numbers of people in their 40s and 50s are still renting, leaving them set for extremely high costs in retirement and no home equity to lean on. People are starting to retire on a DC pot of next to nothing, and we still suffer from apathy in the face of the ticking time bomb that is mass pensioner poverty. The ‘pots for life’ solution has directly solved none of these problems – and the Government has no real moves to solve them independently either. There was an opportunity in 2024 to go all-in with pension reform. To regulate for higher contributions, including auto-escalation as standard. To ensure that people could afford homes, and be able to afford to save in retirement; this was no mean feat with the cost of living crisis barely cooled. And to inspire a solution to apathy, creating genuine engagement and enthusiasm about saving for retirement. Alas, despite putting many eggs into the ‘pots for life’ basket, the decision-makers of 2024 failed to put a stop to the ‘ticking pensions timebomb’. The timebomb has exploded, and the industry is asking the same question: will the 2035 Government Budget legislate at last to increase contributions? |
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