Money

What a time to be working in pensions

Published

3 days ago

September 17, 2024

What an exciting time to be working in pensions. A new government. An upcoming Budget. A pensions review. Not forgetting legislation already underway from the previous party.

Consolidation is on the agenda – at the large and small end of town. The government proposes to consolidate individual defined contribution (DC) small pots, to reduce the number of those lost and forgotten, and to prevent further proliferation.

It also proposes to consolidate small deferred pots, which can result in economic problems for both members and schemes. With over 2.8 million lost pots in the UK and 20 million deferred pots under £10,000, this would be a significant undertaking.

Then there is the discussion of whether and how to increase consolidation within the Local Government Pension Schemes. This is the UK’s largest funded set of defined benefit (DB) schemes. With assets totaling more than £425bn, it presents a complex proposition for investment and governance decisions.

Meanwhile, a new approach to the upcoming pensions review work includes the creation of the first ever joint Treasury and Department for Work and Pensions minister, a position held by Emma Reynolds, who will have responsibility for the review.

The review will be in two stages. The first phase will focus on investment, looking at ways to increase DC scheme’s investments into productive assets, with a particular focus on the UK economy. The second will cover member outcomes, as well as assessing retirement adequacy.

Our pension framework will be helpful here. It defines adequacy as, ‘A clear system that enables people to plan reliably for a retirement, which provides protection against poverty and the ability to maintain their living standards from working into later life.’

The framework includes indicators to measure adequacy under the separate areas of labour markets, state support, private pension saving, non-pension wealth, retirement living costs and retirement outcomes.

A key finding of our latest report on adequacy was that the overall outlook was negative. This was due to low levels of DC contributions among those who need more than the state pension in retirement, slow earnings growth, low financial resilience and limited support for decision-making, as well as the relatively low level of the state pension and benefits for those who depend on them.

Then we have the Pensions Schemes Bill. As well as small-pot consolidation, noted above, this introduces a value-for-money framework determined by a standardised test for DC schemes.

It also requires occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, to their members.

Less certain are potential changes to the current tax relief on pensions contributions. Next month’s Budget is expected to provide clarity on this issue.

As is always the case with policy changes, we must consider the potential for unintended consequences and the broader external environment.

There are many perspectives that can be brought to the discussion and government, industry and the wider research and policy community will all have important roles to play.

Clarity on the objectives sought by the changes will be essential in the decision-making process, along with utilisation of the evidence, data and analysis, to understand the full impact of any changes.

Dr Suzy Morrissey is the new deputy director of the Pensions Policy Institute

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