In the Pensions and Lifetime Savings Association’s (PLSA) regular column for Professional Pensions, the trade body’s director of policy and advocacy takes a look at defined contribution (DC) reform.
It is hugely positive that pensions minister Laura Trott has wasted no time in setting out her vision for DC pensions.
Her recent support for the Gullis Bill on reform of auto-enrolment to increase the amount of saving into workplace pensions is an important step towards achieving pensions adequacy and has a very good chance of passing into legislation quite soon.
The industry has also just had the chance to present its views on a package of proposals for DC including establishing a value for money framework, considering how to resolve the small pots issue, and expanding the collective DC (CDC) market.
The PLSA team has been busy gathering the views of our members and made detailed submissions to each of these consultations.
These are all complex issues, so it is important that the government gives careful consideration on how they interact, and how they relate to other major initiatives at this time, such as the pensions dashboards project.
With most people in the private sector saving into a DC scheme, and total DC asset values expected to double over the next five to ten years, getting the right regulatory environment now will be of huge benefit to DC pension savers in the future and will provide important protections against market failures.
Value for money
PLSA members support the intent to ensure savers are getting the best possible value out of the pension system. However, for the framework to be effective and for all savers to be protected, it must bring into scope all schemes and providers in the market, including non-workplace schemes and consolidators, which tend to have higher charges.
In our submission, we also raised a question about the total number of data points schemes and providers may have to disclose in relation to charges and net performance under the proposals, the extent to which this is already covered by existing requirements (e.g. the chair's statement) and how useful these will be in assessing value.
Another key issue is the practicality of the proposed assessments. Within such a diverse market, rigid assessments against regulator-defined benchmarks may make meaningful comparisons impossible or lead to herding. Schemes should be assessed against similar well-performing schemes, rather than abstract benchmarks.
Multiple solutions are needed to resolve both the existing legacy pot problem and address future small pot creation. It is equally important to address both issues. A combination of different options is needed. The same scheme consolidation and member exchange solutions will be necessary in the short-term. Then a combination of solutions, including either a default consolidator model or a pot follows member, as well as improved saver engagement through pensions dashboards, will be required to resolve the whole issue in the longer-term.
We were slightly surprised to see the call for evidence define a small pot as between £1,000 and £10,000. There are many, many pots smaller than this that also need to be brought within whatever solution is agreed.
At the higher end of the range, the PLSA and Association of British Insurers convened Small Pots Co-ordination Group has previously considered solutions for pots in the range of £0-£500.
CDC pension schemes
With the CDC in its infancy, it is important to establish a regulatory regime that prioritises saver protection, whilst also remaining flexible enough to allow new providers and innovative solutions to enter the market. Once established, there will be the basis from which to build employer and saver awareness in the CDC model.
The PLSA supports the proposals to extend much of the existing regulations from the single-employer CDC regime to the multi-employer model, with some added components to ensure a reliable and safe market, e.g. capped target increases.
PLSA members welcome the consultation's consideration of decumulation-only models, which could provide a viable retirement income option for DC savers which is also compatible with the PLSA's guided retirement income solutions proposals.
Now is the time for potential providers to come forward with detailed models and demonstrate they can achieve the requisite scale to deliver a decumulation-only solution.
Nigel Peaple is director of policy and advocacy at the Pensions and Lifetime Savings Association