They review the three key themes set out by the Chancellor, being:
- better outcomes for savers and the idea of a “pot for life”;
- driving consolidation; and
- enabling pension schemes to invest in a diverse portfolio.
Transcription
David Gauke: Hello, welcome to the second of our Policy in practice Autumn statement specials. This is David Gauke, Head of Public Policy at Macfarlanes. I’m delighted to be joined by Faye Jarvis, Pensions Partner here at Macfarlanes and we are going to talk about all things pensions and the Autumn Statement. Not every fiscal event is that exciting for pensions reforms although I can remember a couple I was involved in in 2014 and 2016 but this was one of those. Everyone of course will recall Jeremy Hunt’s Mansion House speech and the reforms he announced back in July and this is the Autumn Statement where he takes these forward but that’s enough of me because we’ve got a proper expert on pensions here. So, Faye, what are the big headlines from what Jeremy Hunt said on Wednesday?
Faye Jarvis: Thanks David. There’s actually quite a few. You’re right, this was a big statement for pensions this time. You’ll remember that Jeremy Hunt in the Mansion House is looking to do two things. He’s looking to unlock some of the capital that’s held by our pension schemes and also to increase the terms for savers given that the majority of savers these days tend to be in defined contribution schemes. and so there are three key themes running through the package of reforms that were announced yesterday in the Autumn Statement. The first one is around providing better outcomes for savers and there’s a couple of different things the Government are looking to do here. The first is to deal with small pots, because you have lots of people being auto enrolled into pension schemes, sometimes on fairly low wages and they move around a lot, they end up with lots of small pots in different schemes and that’s not good to savers. So the Government is proposing that there’ll be some automatic consolidation of those parts into a few authorised pension schemes. On a similar theme, the Government is also proposing, it’s going to explore looking into people having a pot for life. So rather than their employer deciding which pension scheme they’re going to put their employees into, an individual will be able to say to their employer, I want you to pay into this pension scheme for me and that would be quite a different proposition from what we currently have in the market.
David Gauke: Sorry, just to interrupt, is that going to be difficult for employers in terms of administration, is there much for concern about the costs from an employers’ perspective?
Faye Jarvis: There is. Lots of people, in fact this is probably the most controversial of the announcements from yesterday. There are concerns as to how this will work from an employer perspective and this sort of arrangement where you’ve got, you know, hundreds of employees who are potentially paying into, you know, 10, 20 different pension schemes so there will be a cost to employers and there will be some complexity around that. I think there’s also some concerns that actually is this the right thing for individuals. It’s felt that employers picking a pension scheme, they have more buying power, they can also make sure that people don’t pick the wrong type of scheme. We’ve had so many scam arrangements in the UK around pensions, it’s a big issue and there is a risk of individuals picking the wrong type of pension scheme and ending up with limited savings. So there are some concerns around this particular announcement.
David Gauke: No doubt that’s why there’s quite a lot of consultation to come on this one?
Faye Jarvis: There is going to be a lot of consultation on how that will work in practice. I think it’s also such a surprise because the Government seem to have previously dismissed this as an option when they were looking at how to deal with small pots, one option was you could have the pot follow the member and they were quite dismissive of that. I think the reason they’ve changed their mind is because they are very keen on something called collective defined contributions schemes and they are keen to get these off the ground because they feel that it might give savers a better outcome but it also helps with their unlocking capital and having large pensions schemes with the ability to invest in perhaps a broader range of assets and so just a reminder, collective defined contribution schemes, it’s where employers and members all contribute, it all gets into pooled into one collective pot. It’s not, individuals can’t pick and choose how they’re invested, it’s all pooled into collective pot and the idea is that then that can be invested in a broader range of assets. Hopefully then generating better investment returns and producing higher pensions at the end, but for CDC to work, you need scale, so you need scale and you also probably need members not to be transferring in and out a lot and not lots of membership movement, and so I think perhaps the idea of a pot for life is partly being driven by the fact that the Government’s really looking at how can they get these CDC schemes off the ground.
David Gauke: Yes, I suppose given that with pensions, there’s very often a lot of inertia from policy holders isn’t there. But if people move jobs, then obviously, you know, that, up until now, has always meant ‘well that’s another new pot’ but presumably if people kind of commit to a pot and then that’s going to be it, you know most people aren’t going to be bothered to change their pension pot very often.
Faye Jarvis: Exactly, and you know there are some countries that have this sort of model, Australia’s one of them. So there are, you know, countries around the world we can look at to see how this works in practice but it is a very big change from what we have at the moment and equally with CDC while there’s lots of talk about it and I know Laura Trott, who is obviously no longer the Pensions Minister, was very keen on it and I think others in Government are as well, we currently only have one CDC scheme and that was the Royal Mail scheme so, you know, there’s quite a lot of work to do to get those off the ground, I think.
David Gauke: Very good. Okay, so sorry, I interrupted you earlier Faye, so apologies for that so that was, so sort of the first big theme is about better outcome for savers.
Faye Jarvis: Yep.
David Gauke: And then we’ve also got this issue of consolidation as well.
Faye Jarvis: Yeah, so consolidation has been a scheme for some time. The regulators are concerned that there are lots of small pension schemes and are they really providing value for members. Equally, obviously small schemes, they have less ability to invest in a broad range of assets, so I think the Government wants to have, really lots of savers in big schemes. So I think it wants something like 80% of savers in sort of very large schemes by about 2030, so there’s a real focus on driving consolidation in the pensions market. And one of the ways it’s going to do this which has already been touted is by introducing a value for money framework.
So every defined contribution scheme is going to have to do an assessment by comparing itself to other schemes using a range of different metrics to say are we providing value for our members and if they’re not, if they conclude they’re not, then they will have to wind up and transfer their assets to another pension scheme. And so this has quite a lot of implications for lots of people in the market, because if you are an investment manager responsible for investing monies from other defined contribution scheme, you’re going to need to be providing some data to your scheme, your client, so that they can do this assessment and compare, you know, how they’re performing so they’ll be quite a bit of work there.
Now the FCA is currently in the progress, I think, of designing the rules for their value for money framework, for those pension schemes that are set up under trusts, that are governed by the Pensions Regulator, that’s going to need some legislation and there has been some concerns already raised. You don’t want a sort of two-track system here. We need both contract-based schemes and trust based schemes to have to comply with this framework at the same time and so, you know, if the FCA is getting on with it, we need to see some legislation on the trust based side. So that’s one area that the Government’s hoping will drive consolidation. In terms of DB pensions schemes, Defined Benefit Pension Schemes, we’ve obviously had the news that "Clara" which is a commercial consolidator has done its first transaction, but Clara is only available to a certain type of scheme. I think you’ve got to be a certain size and also have a certain funding model and the Government is suggesting that the Pension Protection Fund might be a public form of consolidator for perhaps smaller schemes or schemes that are less well funded, so that they can consolidate into the PPS.
Now how that will exactly work is not clear. There’s a lot of debate about whether this is a good idea, you’ve got to think about does this give employers the opportunity to off-load their pension scheme in some way and is that fair to compare to other employers who have perhaps done the right thing and funded theirs properly. There’s all sorts of debate to be had around that and we don’t have any of the details so that’s a bit of a watch this space. They’ve also announced some decisions on surplus as well, rules. So ability for employers to do something with surplus in their pension schemes and then finally the LGPS, just on the theme of consolidation, this isn’t a consolidation of schemes but more of investments. They’re looking to change the way the Local Government Pension Scheme, the LGPS, pools their investments and they also have a 10% allocation ambition for the LGPS to invest in private equity and that sort of thing.
David Gauke: Yeah, and this sort of issue of getting more money into private equity and higher risk, more productive investment, it’s a big part of what the Government is trying to do or have quite big implication for quite a number of our clients, I suspect, in various guises. Where are we going to see that develop in terms of this issue of, you know, diversifying the assets that have got to be held by pensions funds?
Faye Jarvis: I mean that’s, that is it, that’s a good question and we’ve got some proposals around some of that. I mean, they’re looking to the British Bank to develop a growth fund and I think that’s one area and opportunity for development here. We’ve had a long-term asset fund, the LTAFs and that we’ve obviously been involved in developing on the DC side, so there is an opportunity for, I think, innovation and looking at how these more illiquid, perhaps riskier assets can be brought into an appropriate diversified portfolio of investments and pension schemes, but there are some concerns that go with that. It’s not without its challenges. Liquidity being a key one for defined contribution schemes and indeed defined benefit schemes and also there is a slight conflict between: on the defined benefit side, between on the one hand wanting schemes to invest in perhaps these more diversified range of assets and then on the other hand, the Government continued drive to ensure that member’s benefits are secure and you don’t have deficits in these defined benefit pension schemes and the regulatory regime that we’ve had over the last 10-15 years has all been into driving defined benefit schemes to de-risk their investments. You know, to ensure that they’re not running a deficit in the scheme and so the difficulty is balancing off those two conflicting aims.
David Gauke: Yeah, and there has been some criticism of this push isn’t there, that this is, you know, essentially trying to get pensions funds to boost productivity, take greater risks and, you know, deliver higher economic growth but potentially, you know at the expense of their members who might end up losing out and, you know, that’s going to be quite a live debate. But I suppose that raises the question, is there a consensus for this? We’ve got a general election next year, probably not for us to hazard a guess as to what the result is going to be next year, but if there is a change of government, is this an agenda that will have cross party support?
Faye Jarvis: Well I think that, certainly on the drive for getting more investments into, sort of the, the UK economy and utilising, ensuring that pension funds are investing in a way that perhaps generate growth for the UK. That is something that I believe Labour are very supportive off and I think they’ve made their own announcement in the last few weeks on that. So quite a lot of this around, you know the British Bank and the growth fund that was announced on the local government pension scheme and on consolidating in the pensions market, I think probably would have broad support, whether they’ll do it exactly in the same way, but I can see those themes continuing irrespective of who’s in power.
Similarly, you know, the issues around protecting savers and improving outcomes at retirement, I think that there are lots and lots of surveys that show that people who just have a defined contribution pension, a lot of them are not saving enough to have a comfortable retirement and we are going to have some issues and that’s one of the reasons I think, the Government has been keen to explore I collective defined contributions schemes, in the hope that that might be a way to generate better retirement amounts for individuals and again I think, Labour are supportive of that concept, so I think broadly the detail may be different but I think that the sort of concept and themes could well remain even if we have a change in government.
I think the only thing that where there is a real difference would be used between the two parties, its’ something and we’ve not touched on it but the lifetime allowance, which Jeremy abolished at the last, at the budget, earlier this year, which is the maximum amount you can save in a pension scheme in a tax efficient way and there was a cap on that and that’s been removed. I think Labour are anti that policy decision and they have said they would reinstate the lifetime allowance which does cause issues if you are trying to advice people on what to do with their pensions.
David Gauke: Yeah, that’s absolutely right. There is a difference between the parties there, of course the challenge for Labour if they are going to bring back that lifetime allowance, is what do you do with some of those better paid public sector workers. You know, the argument the Government gave for scrapping it was very much focused on hospital doctors and GPs and what have you, and they had some quite tricky issues there because that’s where quite a lot of the money comes from in terms of that particular restriction. So, Faye, sort of more generally, we’ve obviously seen progress on the Mansion House proposals in this Autumn Statement. A number of consultations. We’re still, I think waiting to hear quite a lot of the details about what has been announced. What are the next steps? What are the things to be looking out for, for those in the industry.
Faye Jarvis: Well I think, as you say, lots of consultation, and I think it will be important to the industry both, you know, from the investment side, from the pension provider side to really engage with those consultation to ensure that we get, you know a regime that works for everybody in the best way, and at the moment, the next step is really lots of consultation and we need draft legislations, for a lot of this we are going to need some legislation. I think everyone was waiting with bated breath at the Kings Speech to see, you know, what was going to be announced in terms of a pensions bill or not, obviously nothing was forthcoming so it’s not clear when all of this will come about. For example, if the pension protection fund is going to be a consolidator, that needs legislation, the value for money framework for occupational pensions schemes anti-trust, that needs legislation and this pot for life proposal would need legislation, as would the ability to move pots around so that you can consolidate these small pots, so there’s quite a lot that requires actually primary legislation as well, not just regulation and that, as we know, takes time. And so I think there’ll be lots more consultation, lots of people writing written responses, but actually when we will see all of this come to fruition, it’s still very hard to say, other than, I think, the accelerated consolidation of the local government pension scheme investments, so that they’re pooling their investments ,the Government set a deadline for that of March 2025 and obviously things around the growth fund with the British Bank, that can all be done more quickly I would have thought.
David Gauke: Very good.
Faye Jarvis: The other, I think the other point I would just flag as well, is that some of this needs IT structures, and we know from the pensions dashboard which is this concept that you’ll be able to log in and see all of your pension arrangements in one place on a dashboard, with every single pension provider in the country having to feed in, we know from that proposal which is ongoing, that they’ve had all sorts of issues getting that off the ground and its been delayed and we are now still waiting to know exactly when pension schemes are going to have to sign up to that, for the pot follows life, and the small pots of their suggestion that we will need some sort of clearing house and obviously establishing that getting the IT infrastructure in place is also going to take time and can be delayed as has been seen with the dash-board so, it could be a good number of years before we see any of this come to fruition.
David Gauke: Very interesting. You know I can remember the pensions dashboard as a policy when I was working as Pension Secretary six years ago so these things do take some time but by the sounds of it there’s a pensions bell at some point.
Faye Jarvis: Well, let’s hope so.
David Gauke: Let’s hope and no doubt we’ll return to this subject with another podcast as and when there’s a pensions bill. I suspect we might return to the subject before then. Faye, thank you very much for that. I should also mention that as Faye talked about the LTAF, we will be discussing the LTAFs further in our financial services podcast in this series so a little plug for that. But Faye, thank you every so much for your thoughts on pensions – really quite a lot there in that Autumn statement on pensions policy and certainly we at Macfarlanes will be keeping a close on that. Many thanks to our listeners, as I say, we are doing a series on the Autumn Statement and we’ll pick one or two of these themes in our financial services podcast too. Thanks to Faye, thanks for listening and do tune in again.
