Looking back over 2018, member protection and collective provision have been two themes connecting a handful of key developments in pensions. What the White Paper on protecting defined benefit schemes, consolidation, master trusts and Collective Defined Contribution (CDC) schemes all have in common is that coming together delivers better results.
It used to be a given that pension provision was a collective enterprise. Emerging from the paternalistic era in the 1980s, fixed-term employment contracts and self-employment (quasi or genuine) became more common. Individuals gradually acquired more options with the advent of contracting-out via protected rights, self-invested personal pensions (SIPPs), automatic enrolment and flexible access.
‘Taking back control’ is appealing, but with advantages also come responsibilities. Pensions professionals understand the concept of risk. The average citizen though, asked by a financial adviser ‘how much risk do you want to take with your pension?’ might well respond ‘risk?!! I don’t want to take any risks with my pension! Why would I put my savings at risk?’
Awareness is growing though, however slowly, that in the modern world where money purchase rules dominate, individual members bear all the uncertainties and risks associated with inflation, investment, longevity and so on. As awareness grows, so does the level of discomfort – and complaints. The desire for better member protection has become a major driver of government legislation and regulatory activity.
The DIY way of pension saving is also quite costly. Charge caps and the like are all very well, but significant economies of scale are realisable if money and risks are pooled.
Since October 2012 when, for the first time ever, employers had to start paying into pension schemes for their workers, automatic enrolment has driven the growth of master trust schemes. Contributions so far have been small though, threatening the survival of many of the schemes that responded to the demand as start-ups. Even when minimum contributions step up next April to 8% of qualifying earnings, the maximum for a full-time worker on minimum wage will be less than £75 per month.
The Pensions Regulator (TPR) is now putting master trusts through the wringer: ‘secure authorisation by next April, or throw in the towel’, is their challenge. Two months into the six-month window for authorisation, only one master trust has come forward. How many of the ninety in existence earlier in the year will follow? TPR might find it has been too demanding.
The pooling principle underpins the government’s flagship policy for smaller defined benefit schemes too. Additional legislative and regulatory obligations have made these very expensive to run. Sponsoring employers had shoveled in billions of extra contributions and yet many are still in deficit. Step forward ‘superfunds’: consolidation is the way ahead. Bigger is better; problems shared are problems solved, thinks the government.
There’s a fundamental difference here though, from the money purchase master trusts. Mostly the latter are starting from scratch – indeed, until this year there were no special regulations governing how they operated. The advantage is that a single modern legislative framework can be set up. Their disadvantage is the lack of money to begin with, absent a scheme founder with very deep pockets.
Smaller defined benefit schemes, on the other hand, have been running for decades. Most were set up in the days when the Inland Revenue had discretion over scheme approval. Many idiosyncratic benefit structures were approved. Complications multiplied over the years with companies acquired by the sponsoring employer bringing their own varieties of pension scheme with them. Often it was easier to create a separate section for each one, than attempt a merger.
The big challenge for superfunds, rather skated over in the new government consultation, is going to be how to achieve a viable unifying scheme architecture in the face of their seemingly inevitable sectionalisation. To attract schemes in the first place, superfunds will have to overcome trustees’ reluctance to cede control. Members too will have less influence: there are to be no member-nominated trustees.
Coming together does not necessarily mean ceding control, however. The concept of a pensions dashboard, finally beginning to crystallise, could be a win-win development next year. Individuals could easily find out and monitor what pension savings they have, and providers would have new opportunities to communicate and engage with scheme members.
Ian Neale, Director, Aries Insight
