The surprise Pensions Review Bill in today’s King’s speech in the UK’s Houses of Parliament for the new Labour government has already produced plenty of early stage comment from industry experts across the financial services industry.
Simon Kew, head of market engagement at leading independent consultancy Broadstone, said: “The Pensions Bill was a surprise inclusion in the Kings Speech but largely continues the direction of travel from the previous government in various areas such as the consolidation of small pots and a Value for Money framework.
“The problem of small pots is likely to take years to solve so it is good to see that there is an urgent desire to fix this issue. While there is a mention of commercial superfunds, which have already completed their inaugural deals, the public sector consolidator idea is conspicuous by its absence.
“The Bill also contains measures for the trustees of pension schemes to offer savers retirement products so they have a pension and not just a savings pot when they stop work which can help drive up engagement. The challenge of retirement income from Defined Contribution funds is massive and adding some paternalism back into the system seems to be the only way forward.
“The government’s analysis suggests that it will increase pot size at retirement by as much as 9% for the average earner contributing to a pension over the course of their career which will be a major boost for savers. There is a strong focus, as expected, on the productive investment of pension capital but that may be a tougher nut to crack in the short term.”
“The legislative direction of travel outlined in the Kings Speech is understandable as a smaller number of larger pension schemes brings efficiencies for providers, investment opportunities for the government and easements for regulators. The hope is that the combination of these will lead to better outcomes for members while these goals clearly remain consistent with the terms of any deeper review of financial services and pensions.
“It may clear the way for the wide-ranging Pensions Review to tax reliefs, the state pension and advice/guidance – all areas which could benefit with from longer and considered consultations.”
Stephen Jones, CIO at Aegon Asset Management said: “It is good to see pensions as part of the areas of focus for this new government. Thoughtful, consistent, evolution of the structure of saving for an income in later life is to the benefit of working people and the UK economy. The fact remains though, that contributions from employees and employers need to rise to meet the challenges of providing adequate incomes for retirees.”
Tom Selby, director of public policy at AJ Bell, said: “The Pensions Bill will put millions of people’s pension pots at the heart of the new government’s drive to boost investment in the UK and ultimately drive long-term economic growth. The claim that the measures in the Bill could deliver bigger pensions needs to be taken with a pinch of salt, as ultimately this will depend on the performance of your investments. It is, of course, possible that this package of reforms will result in better investment returns for members – but this is never guaranteed. Investing in private equity, in particular, can come with significant costs and risks, so it is crucial trustees choosing to move in this direction are focused on delivering good retirement outcomes above all else.
“Savers rightly expect to receive good value for money from their schemes, so the emphasis on fund performance – in particular the difference between the best and worst performing default funds – effectively puts the worst performers on notice that they need to up their game.
“The government is also intent on pushing forward with greater consolidation of pension schemes, in part to improve the value members receive and in part to help deliver greater levels of investment into UK Plc. For individuals, there can also be benefits to taking control and combining your retirement pots, including potentially lower charges, more choice and easier administration. AJ Bell has a free tool (Find My Pension | How to Find Old & Lost Pensions | AJ Bell) which can help you find and combine your pensions.
“Reforms not mentioned in the Bill to create Pensions Dashboards in the next few years will make it considerably easier for people to track down lost pensions, and we need the government to get fully behind this initiative to make it a reality. At the last count, there was over £26 billion sitting in pension pots that had become disconnected from their owners*, meaning savers could potentially have thousands of pounds they are completely unaware of.
“When it comes to turning your pension into a retirement income, the government says it plans to require all occupational pension schemes to offer a retirement income solution to members. While we don’t have detail on exactly what this will mean, there are many occupational schemes that do not offer drawdown to their members, meaning lots of people will need to transfer in order to take a flexible income.
“With many of these measures, the development of new guidance options is going to be essential, to provide the superglue binding these together to be able to effectively communicate changes to pension savers. It’s important therefore the FCA and Treasury continue apace with their development of targeted support and reform of the advice guidance boundary.
“One key thing missing from this Bill is any mention of scaling up automatic enrolment. There is wide agreement that minimum contributions under auto-enrolment will need to rise, and a 2017 review recommended removing the lower earnings band and reducing the minimum qualifying age to 18 as a starting point. The legislation for these changes is already in place – but the big question is when will it be put into practice? By removing the lower earnings band, savers will benefit from an extra £500 a year into their pension, which would make a big difference over the course of a person’s lifetime.”
Kirsty Anderson, retirement specialist at Quilter said:
Small pots:
“In today’s King’s Speech, the Labour party has included the consolidation of defined contribution small pots in their legislative agenda, addressing a crucial issue in modern retirement saving.
“Our working habits have drastically changed over the last few decades. Previously, individuals might have had one or two jobs during their lifetime, resulting in one or two pensions. However, with the rise of auto-enrolment and more frequent job changes, people are now accumulating multiple small pension pots. This unintended consequence can complicate retirement saving and may even cost savers money.
“Labour is picking up the baton from the previous government, which had already consulted on this issue. It’s important to push ahead with this legislation to ensure the market works best for savers and it also helps to lay the groundwork for a shake-up to auto-enrolment.
“A big issue for pension providers is dealing with small pots, especially those less than £1,000. These can actually lose money for providers due to administrative costs. On average, it costs about £20 annually to administer a deferred pension pot. For a pot of £350, if a provider is only recouping £1.40 per year through a 0.4% annual charge, this can quickly turn into a loss.
“If you have multiple small pots, you could be paying unnecessary administrative costs. Some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots. Consolidating your small pots can save money and simplify your retirement planning. It reduces the administrative burden of managing multiple pots and minimises the chance of losing track of your pension funds. In 2022, the value of lost pots was estimated to have reached £26.6 billion, which could have been avoided.
“There are three main options being considered for managing small pot consolidation:
• Pot follows member: Your pot moves with you from job to job. This option is slower and requires more transfers, which might mean higher costs, but it keeps your pot linked to your current employment. Businesses may also be reticent to approve this as it could put an additional administrative burden on them.
• Single default consolidator: All small pots are transferred to a single entity. This could lead to substantial initial costs but provide benefits such as economies of scale and simpler administration in the long run.
• Multiple default consolidators: Small pots are divided among multiple consolidators. This might mean less administrative burden as many providers already hold a high concentration of small pots.
“A move to any of these proposals would represent a significant shift in the workplace retirement saving arena and pave the way for further reform to come.”
The need for schemes to offer retirement products and value for money:
“By placing duties on trustees of occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, the government hopes to improve outcomes for savers and lead to more funds being invested for longer. This has the potential to boost economic growth through investments in productive assets.
“With the growing dominance of defined contribution pension schemes and the freedoms they offer, people’s strategies for taking income from their pensions are now of paramount importance. Decumulating from a pension can be treacherous, particularly without expert help, and savers can easily see their retirement pots run dry before they pass away.
“While the work under the previous government has not proposed exactly what products and services should be offered by providers, it intonated a framework to improve the market. One area it is heavily encouraging is the inclusion of Collective Defined Contribution (CDC) plans. CDCs aim to provide a halfway house between defined benefit and defined contribution pensions by offering a regular income and addressing issues related to market volatility and sustainable withdrawal rates. However, CDCs are largely unproven, and no market currently exists.
“The government is also keen to ensure savers get value for money from their pension schemes. This includes clear disclosure of investment performance, costs, and service quality.
“While this focus is welcome, there remains the problem that too many people are not accruing enough into their pensions in the first place, so their decumulation plans already start from a difficult point. According to the 2022 Financial Lives Survey by the FCA, just under half of people aged 18-54 have reviewed their pension pots in the last year, compared with 65% of those aged 55-64. This isn’t surprising for those in their early 20s or 30s given the competing demands on their pay, but as people move from their 30s to 40s, it is important that they at least understand where they stand.
“We need to view the retirement market holistically and ensure that more savers are engaging with their pensions earlier in life. Giving more people access to advice or guidance in differing formats throughout their financial lives will improve the market immensely.”
