Five questions that need answered on pensions
Pensions is the first big issue that ICAS is going to debate as part of our Challenging Conversations initiative.
Not many of us know how much we will have to live off when we retire. Fewer still can say with any confidence that they will be able to maintain their desired standard of living.
To this end we have identified five key questions for government, regulators and industry, to help build trust in UK pensions.
Join Sir Brian Souter and a panel of pensions experts on the evening of Tuesday 11 September to debate the need for a change in approach to pension policy-making by current and future UK Governments.
1. How can politicians help restore trust in UK pensions?
The UK needs a pension system and a savings culture which will enable people to save adequately for their retirement over the course of their working lives.
There is more work for the Government to do in this regard, particularly as defined contribution (DC) pension arrangements become the norm. Pensions cost a lot to provide: an inconvenient truth with which we must all come to terms.
There is plenty scope for the UK Government to take a long-term strategic view of pensions policy which can provide more stability and certainty for both savers and pension providers. For example, policies designed to support better outcomes for pension savers and policies on pensions taxation should work in tandem.
To this end, we hope to see a willingness among political parties to sign-up to a shared vision and objectives for the UK pension system.
Wishful thinking perhaps as political parties seem more divided than ever on the big issues of the day.
Read about the role politicians could play to help restore trust in UK pensions.
2. Is consolidation the solution to Defined Benefit funding challenges?
Many defined benefit pension (DB) schemes are facing significant funding challenges, in large part due to low interest rates, which impact on the measurement of pension liabilities, and increases in longevity.
Larger schemes in some respects can manage funding challenges more easily than smaller schemes through having economies of scale, which means, for example, they are better able to afford professional advice.
Many DB schemes are facing significant funding challenges due to low interest rates and increases in longevity.
Concerns over DB scheme funding is a key driver behind the Government’s White Paper published last month. Protecting DB pension schemes is the theme of the Paper and includes plans to consult on proposals for:
- a legislative framework and authorisation regime for new forms of consolidation vehicles; and
- for a new accreditation regime to build confidence in and encourage existing forms of consolidation.
Both avenues towards encouraging the consolidation of DB schemes are underpinned by an ambitious aim “to increase efficiency and facilitate consolidation for the improvement of outcomes for members and employers, while ensuring sufficient safeguards are in place”.
Much has been said to date about DB consolidation and the Government still has much to do before it is in a position to publish the promised consultations.
Meanwhile, the first commercial consolidator of UK DB schemes has already launched: the Pension SuperFund is to accept bulk transfers of DB assets and liabilities and consolidate them into a single scheme.
3. Should pension investment strategies evolve beyond traditional concepts of risk and return?
Those investing pensions savings have a fiduciary duty to act in the best interests of savers but the idea of how this duty is met is changing. Pressure on public finances and concerns over the slow rate of economic growth, has led to calls by Government bodies for more pension money to be invested in the country’s infrastructure.
Also, concerns about climate change and a renewed focus on the ‘public good’, is fuelling a debate about the role of environment, social and governance (ESG), or sustainability, issues in pension investment.
This question is perhaps best illustrated by the report and recommendations of the EU’s High-Level Expert Group on Sustainable Finance, covering specific sectors of the financial system.
One of the Group’s stated purposes is “to ensure that asset managers, pension funds and investment consultants grasp the sustainability preferences of their clients.”
Concerns about climate change and the ‘public good’ are fuelling a debate about the role of sustainability issues in pension investment.
There has been industry push back from umbrella bodies representing pension funds on the notion that ESG considerations can be pre-defined in law or that consultation with beneficiaries on sustainability issues should be the subject of regulation.
While we cannot know the extent to which the EU will have a bearing on the UK in the long-term, ESG considerations are very pertinent to the investment strategies of UK DB schemes, DC schemes and other DC arrangements. Ignoring them could well impact on the financial performance of investments.
In fact, the UK Government has just announced that it is to publish a consultation to clarify legislation on the reporting of long-term investment risk by pension trustees: this will encompass ESG aspects of risk.
4. Can people make truly informed decisions about what they need to save for retirement?
This question presumes a future where pensions savers, working in the private sector, will be largely reliant on DC savings. It prompts a further question: should default options be designed so that only those that wish to make decisions actually do so?
Saving for a pension through a DC arrangement means that risks, for example longevity risk, are borne by the individual saver and not by the employer as would be the case with a DB scheme.
That being the case, the obvious conclusion may be that more financial education and more engagement by individuals with their own pension saving is needed.
However, evidence about how people make decisions about pension saving suggests that these are made when people are nudged or asked to opt out rather than opt in.
Saving for a pension through a DC arrangement means that risks are borne by the individual saver and not by the employer.
Should at retirement default options be designed so that only those that wish to make decisions actually do so?
If people are not actively engaged in making decisions about pension saving, this should be a major factor in how policy is made and how products are designed.
The freedom and choice reforms now mean that, at retirement, DC savers must decide whether to take their pension pot as cash, purchase a guaranteed income or keep their savings invested.
There is a question mark over how equipped ‘non-experts’ are to make this decision in a truly informed manner.
5. How can we drive quality and competition in the DC market?
This prompts a wide-ranging debate on how policy-makers, regulators and the pensions industry respond to the needs of savers who aspire to retire with a reasonable income and their employers who are likely to decide on the savings vehicle.
Savers therefore need to have the confidence to save and, also, confidence in the options available to them at retirement.
Ensuring quality and competition in retirement solutions is perhaps the area where the greatest challenge lies.
If defaults are the way forward in the decumulation space, then regulators need to be more robust in ensuring that competition and product quality are sufficient so that, ultimately, consumers, get the right deal.
What do you think?
Leave your thoughts on these five key questions in the comment box below.