Long read: Pensions industry sets to work getting to grips with 'ambitious' Mansion House reforms

The pensions industry has been working to get to grips with the “avalanche” of pension developments announced in the past few days, with industry experts warning that the government is committing to an “ambitious timetable".

The measures were announced as part of the Chancellor’s Mansion House speech on Monday (10 July), with a “wave” of documents and consultations published the next day from a number of government departments.

This included a consultation on the Local Government Pension Scheme (LGPS), updates on the Mansion House Compact, a call for evidence on defined benefit (DB) options, a call for evidence on trustee capability, proposals to address the small pots problem and an update on the proposed value for money framework.

Speaking to Pensions Age, Pensions Minister, Laura Trott, emphasised the ambitious nature of these reforms, arguing that they will make an "enormous" difference to people's lives.

"I think it's really important to take a step back and look at the impact that this is going to have on the average worker and that is huge," she stated.

"If you look at the analysis, just as a result of these reforms we are looking at a 12 per cent increase in the average workers annual income, that's another £1,000 a year. That is enormous, and it's going to make such an enormous difference to people."

This sentiment was echoed by Independent Governance Group trustee director and head of sustainability, Tegs Harding, who suggested that it is "time to stand back and acknowledge the ambition behind the Mansion House reforms and the wave of Department for Work and Pensions (DWP) consultations that have followed".

“It is energising to see the Chancellor and Pensions Minister getting to grips with measures which put member outcomes front and centre," she stated.

“Industry has some significant challenges to work through, but there is no denying the prize on the horizon is a pensions system that will be better equipped to deliver for individuals and the UK as a whole. Personally, I can’t wait to crack on.”

Diving into the detail

Sackers partner, Helen Ball, also said that pension schemes and their advisers have already been busy digesting the "avalanche" of pensions developments announced.

Adding to this, Nest director of strategy and corporate affairs, Zoe Alexander, said that the documents set out a "clear and coherent direction of travel for the sector", arguing that the focus on driving scale and consolidation is right.

Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy, Nigel Peaple, also highlighted the “ambitious” package as a “major step forward for UK pensions policy”.

“The introduction of regulatory standards to support savers achieve good outcomes when accessing their DB pension pots at retirement and the commitment to increase the range of options for DB schemes, including a legislative framework for DB superfunds to ensure saver protection, are especially positive developments,” he continued.

"We look forward to exploring the detailed proposals with our members over the summer, to assess which elements are feasible, and which might need further refinement, and working with the Minister for Pensions on these important issues.”

Echoing this, Aegon head of pensions, Kate Smith, pointed to the Chancellor’s Mansion House speech as evidence of “just how important pensions are to the UK economy”, highlighting the Mansion House Compact in particular as a key step in “unleashing the superpower of DC pensions”.

However, Smith said that it is "crucial" that this is done in a way that improves member outcomes, emphasising that increasing the future value of members’ pensions must be the top priority.

"It’s right that trustees and others governing pension schemes remain focussed on acting in members’ best interests and this should include considering a wide range of investments, without being overly swayed in any particular direction," she stated.

“Clearly the Chancellor is looking at a range of government pension initiatives through a dual lens of improving member outcomes and supporting UK economic growth."

This was echoed by the Assocation of British Insurers director of policy, long-term savings, Yvonne Braun, who said: “We want to see successful, enduring pensions policies that help deliver better returns for savers as well as boosting the UK economy, and we fully support the government’s ambition to achieve this."

Association of Consulting Actuaries (ACA), chair, Steven Taylor, agreed, stating that the association has “long supported organic ways to evolve UK pensions policy that align with this goal and that can harness existing governance structures that are a cornerstone of savers’ hard-won trust in their pension schemes”.

However, People’s Partnership director of policy, Phil Brown, argued that while the provider is “incredibly supportive” of a wider range of investment being considered by trustees, “investments must be made in the members' interests and at a fair cost".

Given this, he argued that it is now "vital" that the asset management sector brings forward quality investment options that work in the best interests of consumers.

These concerns were echoed by PensionBee director of public affairs, Becky O’Connor, who argued that “as far as generating higher returns for pension savers, the Chancellor’s reforms are a shot in the dark”.

“The government suggests that the approach will lead to an ‘everyone’s a winner’ scenario, in which retirees get bigger pension pots and innovative UK companies get the capital they need to grow. But there are no guarantees this win-win result will play out,” she continued.

“The government has made some punchy claims about what the benefit to pension savers could be from the many consultations and reforms outlined today. Yet the government’s own analysis admits these returns will only be ‘slightly’ higher with the 5 per cent component of private equity.

"This suggests that the measures are less about increasing returns to savers and more about generating additional capital from pension funds to invest in UK businesses."

AJ Bell head of retirement policy, Tom Selby, also suggested that the estimates that the new approach will boost the average pension pot by 12 per cent should be treated with a “huge handful of salt”, clarifying that while it is possible that the changes could boost member returns, “there are absolutely no guarantees”.

Taking the time to get it right

Adding to this, Institute and Faculty of Actuaries pensions board chair, Debbie Webb, stressed the need to remember that the primary purpose of a pension fund is to provide a retirement income for its members.

“It is important that these measures are carefully calibrated to match both growth requirements and policyholder protection concerns, and we would not be supportive of any initiatives that sought to compulsorily require schemes to invest in particular asset classes, or to consolidate," she stated.

Indeed, Association for Professional Pensoin Trustees (APPT) chair, Harus Rai, stressed the need for careful thought and policy actions, warning that “a rushed approach could easily create new financial risks to members’ benefits which would undermine the UK’s growth agenda”.

“We support the Chancellor’s tone when he calls for ‘evolutionary not revolutionary’ change in the pensions market,” he stated.

“The APPT wants to see the further development of a vibrant, diverse and dynamic community of highly qualified and experienced trustees doing their best for members and pension schemes. We are keen to work constructively with the wider industry and government to deliver this goal “.

ABI's Braun also stressed the need for any "market-shifting reforms", such as proposals around collective defined contribution (CDC), superfunds and the PPF, to be "thoroughly considered so that they put savers first and don’t undermine policies and markets that are working well".

“Any successful pension reform must work for the long-term, be evidence-based and have savers’ interests at its heart," she stated. "We look forward to working closely with government over the summer as it develops its plans.”

However, Spence and Partners senior investment consultant, Mark Clews, pointed out that the consultation window for responses has been “accelerated”, arguing that “this momentum can generate real change, and it’s crucial that the industry engages fully in the opportunity to respond”.

Ball also pointed out that the Chancellor is setting an "ambitious timetable", with all final decisions to ‘be made ahead of the Autumn Statement later this year’.

“While it is good to see that pensions have risen up the agenda, so many changes seemingly happening everywhere, all once, may not be universally welcomed by already busy trustees, employers and pension providers," she stated.

"Those who rise to the challenge will be giving some serious thought in the coming days to how the changes could impact on their own plans and projects.”

A red herring?

Broader queries are also emerging, as RSM UK head of pensions, Ian Bell, suggested that pensions could be a “red herring” in the drive to secure better growth funding for UK businesses.

‘Widening the investment opportunities for DC members is clearly a positive proposal, and will be particularly relevant for the younger generation with a longer investment horizon," he stated.

"But we wait to see the results of the DWP consultation on the Value for Money framework, as, despite the listing reforms, the costs of investing in private equities will undoubtedly require changes to auto enrolment investment fee caps."

However, when asked whether the government was looking to make any changes to the auto enrolment investment fee caps, Trott told Pensions Age that the immediate priority on auto-enrolment is the 2017 reforms.

“We’ve got to get those through," she continued, "there's a large degree of consensus with them and they are big reforms and they will make a big difference for people."

This has not been the only area where some industry experts had been hoping to see broader change, as Isio investment partner, Ed Wilson, argued that while there are many positives to be welcomed from the Chancellor’s speech, “an opportunity has been missed to truly define the future of pensions and set out a more transformational vision”.

“It was encouraging to see such a focus on growth and value but there was no reference to how pension schemes incorporate environmental, social or governance (ESG) or how further incentives for employees to save could be created, and how employers help them to do so,” he continued.

“Financial education sits at the heart of this - the Chancellor should make wider employee financial education exempt from tax in the way that pensions advice currently is. He should also raise the limit.”

However, when asked about these concerns, Trott told Pensions Age that a "lot of the exciting infrastructure products that are available for investment are ESG related".

"My predecessor did an amazing job on pushing that forward and I think everything we've done today is absolutely compatible with that," she added.

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