The pensions industry continues to undergo significant change. The overall direction of travel is to ensure pension schemes are well-funded, well-governed and deliver the expected benefits to members. However, the mechanisms and structures by which this takes place are evolving. The 2019 Pensions Bill, which could yet be delayed by the weight of Brexit-related legislation, is likely to crystallise many of the upcoming developments while addressing challenges for the industry and pensioners alike.
Here, we outline three key themes set to dominate discussions during the rest of the year: increasing pension engagement, the evolution of Defined Benefit (DB) and enhanced regulatory scrutiny.
One of the main challenges facing the industry is the need to encourage individuals to engage with their pensions and save more for their retirement.
“Today’s 25 year olds have a life expectancy of over 91. To generate what is regarded as an adequate pension pot, individuals would have to save approximately £250,000.”
In the long term, there is a critical need to give people, particularly younger generations, sufficient information and the tools they need to make well-informed decisions. Few people joining a scheme today realise just how much they will need to save to fund their retirement. Today’s 25 year olds have a life expectancy of over 91. Based on an average salary of £27,000 a year and the standard expectation of a pension income equivalent to two-thirds of employment income, individuals would need £10,000 a year after an annual state pension of approximately £8,000. Multiplying this by 25 to generate what is regarded as an adequate pension pot, individuals would have to save approximately £250,000. Without this knowledge, and sometimes even with it, most people fail to plan adequately.
Encouraging greater public engagement with pensions will be tough. The industry is under pressure to rebuild trust, which remains brittle following the financial crisis. One possible solution is greater democratisation of pension schemes so that members are more involved in governance and trustees reflect a broader range of opinions. This would counterbalance employers and advisors, improve governance, and might help to prevent pension transfer scams. It would also focus attention on driving down costs, such as management fees and administration costs, which is especially important given the continuing decline of returns on all assets. Improving member representation may be at odds with broader trends such as pension fund consolidation, however. Member representation is not practical for multi-occupational schemes. In such circumstances, there ought to be an emphasis on greater accountability and transparency.
While defined contribution (DC) schemes now account for the majority of new pension savings, the defined benefit (DB) sector is also grappling with new challenges and structures.
“As most DB schemes are closed to new members and future accruals, they must now plan for a run-off of 20-30 years, which requires a different mind-set and skills.”
It also necessitates vigilance. There are a significant number of schemes that are currently at or approaching self-sufficiency and so have no immediate need for increased sponsor funding. But this could change quickly – and dramatically – given the rising interest rate environment and mature bull markets/emerging bear markets. Moreover, the viability of closed schemes can be affected by changes in accounting or other standards.
There are, however, changes underway in the DB space that could lower costs and potentially improve outcomes for members. Firstly, consolidation is expected to accelerate via vehicles such as the new Pension SuperFund, spurred by the announcement of new plans unveiled by the Department for Work and Pensions to regulate DB consolidators. Superfunds are expected to face stricter ‘fit and proper persons’ criteria and financial adequacy tests. Secondly, there is the prospect of the emergence of a new type of scheme – collective defined contribution (CDC) – that blends aspects of both DB and DC plans. CDCs have been in the headlines recently given the agreement struck between Royal Mail and the Communication Workers Union to replace the company’s DB fund. The government has announced that it supports CDC schemes as an alternative way to support members in retirement.* For more details see The Shift to DC.
Regulators are likely to continue to focus on improving governance using a number of tools. Over 50 schemes are now seeking Master Trust authorisation from the Pensions Regulator. Existing schemes have until the end of March 2019 to apply for authorisation to continue operating. The outcome for schemes is binary: trusts will either be authorised or wound up. More generally, the regulator plans to use the threat of forced conversion to Master Trusts to press trustees to improve governance. Meanwhile, the supervisory regime is changing with the introduction of one-to-one supervision for trustees and employers of the 26 largest schemes; a more flexible regime will be implemented for smaller schemes. Overall, there will be a greater level of scrutiny and intervention with a clearer, quicker and tougher approach to all schemes.
*UPDATE: In March 2019, the Department for Work and Pensions outlined a framework for the introduction of CDC schemes in the UK.
BNY Mellon assumes no liability for the content, including statistics, herein. All content, including statistics, was derived from discussions and presentations that took place at the BNY Mellon Pension Summit in London on 14 November 2018.
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