By Steve Webb, Partner at LCP
And the last five years have certainly seen progress on a number of fronts.
After much debate and discussion, pensions dashboards are now finally set to become a reality, backed by legislation. Although we are probably still a couple of years away from the public being able to log on to a dashboard, the wheels are now in motion and a reform which has the potential to be a game-changer for pensions engagement is now closer to fruition.
Another ‘slow-burn’ policy which is now much closer to fruition is the development of ‘Defined Ambition’ pension arrangements such as the Collective DC scheme shortly to be implemented by the Royal Mail for its workers. Although the details are still to be finalised, this is an important milestone and one achieved with cross-party consensus. Attention now needs to be turned to expanding this model, for example to multi-employer schemes or to ‘decumulation only’ varieties, so that workers and firms can consider different risk sharing models between the extremes of pure DB and pure DC.
The last five years has also seen a growing focus on how pension money is invested, with increasing regulatory attention on the impact of pension investments on tackling climate change as well as a drive to remove barriers to investment by schemes in illiquid assets and other forms of longer term investments. There is still a long way to go in these areas, and policy is sometimes slightly more driven by headlines than substance, but given the vast amounts already invested in funded pension schemes and the billions more set to flow in as automatic enrolment becomes more mature, there is certainly a case for paying more attention to exactly how that money is being invested.
Perhaps the biggest disappointment of the last five years has been the almost total lack of progress on automatic enrolment. A year-long review of automatic enrolment reported at the end of 2017 with some modest proposals for incremental improvements to coverage and contribution levels. But here we are, nearly five years later, with no sign of progress and increasingly vague talk of implementation in the ’mid 2020s’. There is very little sign in government of any recognition of the urgent need to get serious money flowing into DC pensions and every year of delay means more people either facing poverty in retirement or not being able to afford to retire at all.
On the DB side, the big focus of the last five years has been a reaction to high profile cases such as BHS and Carillion, where a distressed employer (and an insolvent one in the case of Carillion) was coupled with an underfunded pension scheme, raising doubts about the security of member benefits. The result was the 2021 Pension Schemes Act which includes criminal sanctions for those who wilfully underfund their pension schemes, alongside a proposed new funding code from the Pensions Regulator which was promoted as cracking down on employers who give insufficient attention to their company pension.
The big problem is that regulation can always end up ‘responding to the last crisis’. Before the 2021 Pension Scheme Act is even fully implemented we are now in a world where the FTSE-100 firms are reporting a collective £100bn plus pension scheme surplus in their company accounts. Whilst we cannot afford to be relaxed about making sure that past pension promises are honoured, it is hard to avoid the feeling that current policy is several years behind the curve.
It may seem odd to have reviewed pension policy for five years without mentioning the elephant in the room – pension tax relief. The reason for this is that – bizarrely- the pensions minister is not responsible for this crucial feature of the system. Tax relief policy is tightly controlled by the Treasury and is dominated by the goal to raise additional revenue (through things like a long-term freeze on the lifetime allowance and the tapering of annual allowances for high earners).
We clearly need a rational, stable and simple system of pension tax relief and a big step forward on automatic enrolment. But both are currently blocked by the Treasury. The sad truth is that the real powerhouse of pension policy in the UK no longer lies in the Department for Work and Pensions (despite the many committed and excellent people who work there) but is instead subject to the stranglehold of the Treasury which shows little interest in promoting pension saving. Against that backdrop, regrettably, the ability of the present or any future DWP pensions minister to really shape pensions policy seems to be diminishing by the year.
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