Although the Chancellor’s Budget in November brought a collective sigh of relief from the long term savings industry, the question is now whether this period of stability will continue and what new challenges are ahead.
White Paper
Early in the New Year, thoughts will turn to the Department for Work and Pensions' (DWP) White Paper on defined benefit (DB) pensions, with its potential as a source of uncertainty that could disrupt the pensions landscape once again. The Green Paper explored the potential for change across all aspects of DB pensions and it is unclear exactly what will be carried through into the White Paper. Aon’s hope is that any changes are kept to a minimum and are confined, for example, to dealing with distressed situations.
Matthew Arends, partner at Aon, said: "One potential double-edged sword that could appear in the White Paper is some over-arching power to remove the pension increase anomaly. Some pension schemes switched immediately from RPI-based increases to CPI-based when the Government changed the basis for statutory increases to CPI. Others remain hard-coded to RPI.
“The White Paper could consult on bringing in a power to allow all trustees the discretion to move away from RPI-linkage regardless of scheme rules. While this might be appealing to the sponsoring companies, it might leave many trustee boards in a difficult position to weigh up the competing interests. In any event, if the Debt Management Office were to issue CPI-linked gilts it would help with hedging strategies."
Consolidation
Matthew Arends said: "The White Paper is sparking debate about consolidation in DB pensions, but consolidation has the potential to be an even bigger issue for DC pensions. The DWP's consultation on DC bulk transfers without consent may pave the way for easier and more efficient consolidation.
“For example, the requirement to have an actuary involved when transferring pure DC funds has drawn debate - there is a concern that simply replacing the actuary with another adviser moves the problem rather than solves it. We call on the DWP and the Pensions Regulator to issue guidance on what considerations need to be covered in providing the advice. The lack of guidance for actuaries has been a stumbling block for DC consolidation so far."
Regulation
Matthew Arends said: "There continues to be external factors creating challenges for all those involved in pensions. General Data Protection Regulation (GDPR) - in conjunction with cyber risk - is one example, and is leading to significant activity to review communications, data processes and security, as well as supplier contracts. Additionally, the Pension Regulators' drive towards better governance standards and better implementation of Integrated Risk Management in DB schemes is sure to be felt throughout 2018.”
"After more than two decades of waiting, 2018 could be the year that Guaranteed Minimum Pension (GMP) equalisation finally comes to fruition. That would mean that just as schemes are beginning to come to terms with GMP reconciliations, they would need to start all over again equalising GMPs. Trustees will need to plan with their actuaries and administrators how the member records will be corrected – it is likely to be a significant undertaking.”
Collective DC (CDC)
In autumn 2017, both the Labour Party and the TUC endorsed CDC pensions and called for the government to draft the missing regulations to bring them into being. This was followed at the close of November by the Work and Pensions Committee’s announcement of an inquiry into CDC to explore whether CDC designs offer tangible benefits compared to traditional DB and DC designs.
Matthew Arends added: “2018 could be the year when collective DC pensions finally become a reality. CDC designs have the potential to offer members an income for life and allow them to avoid needing to make complex financial decisions. The primary legislation already exists to enable CDC – the Parliamentary work is done. All that is left is the writing of the regulations. It is high time we had this third pension design option in the UK.”
Matthew Arends concluded: "Our clients were asking for pensions to be left alone in November’s Budget and – perhaps surprisingly - the Chancellor did just that. The flipside was that one of our hopes for 2017 – the abolition of the Lifetime Allowance – was not announced, so we continue to live with twin allowances and ones that are particularly penal for DC savers.”
"Some of the potential threats to pensions, such as tax reform, appear to have receded in the short term, but there are many other uncertainties around. All those involved in pensions need to remain alert because further change seems inevitable."
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