Five key questions about pensions revisited
As part of its Challenging Conversation on pensions, ICAS identified five key questions at the heart of the savings crisis in the UK. Christine Scott summarises the outcome of the debate.
Sufficient pension provision is a significant and enduring societal challenge for the UK at a time of political and economic uncertainty and when the rapid advancement of technology is proving to be a double-edged sword. This is why ICAS selected pensions as the first topic for debate as part of our Challenging Conversations series.
We identified five key questions as a means of exploring how the UK pension system could improve. The pensions system needs to deliver good pensions outcomes for both members of DB schemes which, in the private sector, are mainly legacy schemes and for consumers of DC products which are the present and future pension savings vehicles for most of us.
The questions focused on pensions policy, law and regulation as they provide the foundation for the UK pension system.
Q1: How can politicians help restore trust in UK pensions?
The FT’s Jo Cumbo pulled no punches at our London pensions debate, as she unveiled her five point plan to transform the UK pension system. Jo listed a litany of failures and abuses she believes have been carried out by government, regulators and the pensions industry, including cases of people being cheated out of their lifetime savings.
With trust being hard won and easily lost, Gregg McClymont from B&CE, pitched an innovative idea around improving governance in savings vehicles used for pensions auto-enrolment. He called for all auto-enrolment savings to be governed solely by trust law so that savers' interests are always put first by those managing their pension.
If savers are to have confidence in the new system, those managing their money need to be fiduciaries.
Gregg said, “Once Government decided on a quasi-mandatory basis to default 10 million people into pension saving the case for member-first governance became overwhelming.
“This was the Office of Fair Trading’s conclusion in its recent study of the DC market. And no wonder. If savers are to have confidence in the new system, those managing their money need to be fiduciaries."
Will the UK Government be up for anything quite so radical? This is unlikely in the foreseeable future but Gregg’s point on good governance is well made. The pensions industry is highly intermediated and there should be no weak links in the chain.
From my own perspective, employers have a vital role to play in the selection and oversight of auto-enrolment vehicles. Employer oversight of default funds is especially important for contract based arrangements.
Q2: Is consolidation the solution to defined benefit (DB) funding challenges?
David Davison of Spence and Partners explored the options for consolidation and highlighted the potential benefits and barriers to success. David defines the DB superfund model as a possible “middle way between own-scheme funding and buy-out with an insurer”.
Consolidation won’t be appropriate in every case and it will be incumbent on trustee boards to ensure that transfer to a DB superfund is in scheme members’ interests.
The Pensions Bill in 2019 is vaunted as the last hurrah for DB reform.
The UK Government has signalled its strong support for consolidation in the DB sector favouring the scale which could be afforded by DB superfunds, also known as ‘commercial consolidators’.
Guy Opperman MP, Minister for Pensions and Financial Inclusion, is seeking to introduce a Pensions Bill in 2019. Rules to ensure DB consolidation activity is properly regulated are set to be a cornerstone of the Bill, along with provisions to facilitate the establishment and regulation of collective defined contribution (CDC) schemes and to strengthen The Pensions Regulator (TPR).
The Bill is important in two other respects.
First, it is vaunted as the last hurrah for DB reform and should, therefore, bring an end to the ‘tinkering’ of the past, giving stability at least in one area of pensions policy.
Two, it harks back to the political consensus which existed around pensions auto-enrolment by bringing a CDC model to the UK – developed by a Conservative Government working with the Labour Party.
Q3: Should pension investment strategies evolve beyond traditional concepts of risk and return?
The United Nation’s Intergovernmental Panel on Climate Change reported that the world has 12 years to restrict global warming to 1.5°C above pre-industrial levels, with stark warnings about the consequences of a 2°C rise.
The extent to which investors should take account of environmental, social and governance (ESG) issues when placing funds is the subject of on-going debate.
Writing for ICAS, award-winning journalist Stephanie Hawthorne, posed the question “Could my pension save the planet?”. Several pensions experts responded, with Andy Scott of pension trustees Capital Cranfield saying that trustees “may lose some return over the short to medium term.
However, it is likely that over the longer term they will benefit, as intuitively ESG investments are likely to do better than other investments which will become less popular and where social, legal and financial barriers will start having an effect on the profits they can generate.”
New investment regulations will focus on schemes being more transparent about their approach to ESG investing.
To date, the UK Government’s focus has been on the extent to which the trustees of DB and DC schemes consider ESG issues as part of their investment strategy. Its attention, however, is likely to turn to contract based arrangements in time.
The Government’s response to its 2018 consultation on clarifying and strengthening trustees’ investment duties is at pains to point out that, “It remains Government policy not to direct the investment decisions or strategies of trustees of pension schemes. We will never exhort or direct private sector schemes to invest in a particular way. Trustees have absolute primacy in this area.”
New investment regulations will, therefore, focus on schemes being more transparent about their approach to ESG investing. For trustees, scheme investment strategies will continue to focus on risk in the broader sense, limited by the extent to which they can afford professional advice.
Q4: Can people make truly informed decisions about what they need to save for retirement?
The efficacy of financial education and the value of member and consumer engagement are truly the hot potatoes of the day.
An understanding of behavioural economics and also of human decision-making are now essential for the pensions professional. Yet without consensus about whether, when and how to engage with savers, what should happen in the meantime?
In October, the Financial Conduct Authority (FCA) and TPR launched their first-ever joint regulatory strategy aimed at strengthening their relationship and taking joint action to deliver better outcomes for pension savers and those entering retirement. One goal is for people to have access to helpful information, guidance and advice which enables them to make well-informed decisions.
The strategy states that “This requires that people should understand their pensions and what is in them, are engaged when they need to be and feel confident in making decisions about what to contribute when to transfer and when to withdraw funds.”
By focusing on people being engaged when they need to be, FCA and TPR are recognising that engagement per se is not a panacea which leads to better pension outcomes, something which Gregg McClymont explored in his Challenging Conversations piece, Engagement is no solution to the savings crisis.
Q5: How can we drive quality and competition in the defined contribution DC market?
Quality and competition in the DC space are vital for good pensions outcomes during the accumulation (savings) and decumulation (spending) phase.
The emphasis on achieving quality and competition in the savings phase sits squarely with the employer.
KPMG’s Iain McLellan and Jennifer Shaw in their article DC pension market competition: is the Master Trust the answer? highlight that the DC market has evolved significantly over the past decade, leading to a much greater emphasis being placed on the need for a quality DC pension scheme. They go on to state that:
“Different providers vary significantly across their entire offering including member charges, investment offerings and access to at-retirement flexibilities and wider savings.
“It is important that employers assess these against their key objectives in order to put in place a quality arrangement that fits their specific membership and objectives for the long-term.”
The emphasis on achieving quality and competition in the savings phase sits squarely with the employer. However, the asymmetric information problem presents the greatest risk for people as they move from saving to spending. There is increasing recognition that some savers will treat their DC pots as capital rather than using them as income, which is yet another story.
Join in the Conversation
Trust; governance; members’ interests; consumer protection; and better engagement. These words and phrases encapsulate, for me, our Challenging Conversation on pensions.
These are also the themes picked up by the Financial Times, New Model Adviser and Pensions Expert when reporting on our Edinburgh and London debates. AccountingWeb, meanwhile, focused on younger savers and has challenged CAs to debate whether pension arrangements can be combined with help-to-buy to support first steps on the property ladder.
We will, through the ICAS Pensions Panel, continue to engage in all things pensions through the lens of the accountancy profession. You can join this pensions debate and follow our next conversation on Twitter @ICASaccounting, LinkedIn or on icas.com via the Challenging Conversations button. Alternatively, you can sign up to CA Today, our daily email, to receive news of the latest conversation straight to your inbox.