Pensions are becoming one of Labour’s biggest priorities

While pension reforms have been brewing for many years, they are now one of the Government’s biggest areas of action, Paul Montague-Smith, senior counsel – public affairs at MRM, writes.

While it’s not one of the Government’s core missions, reforming the pensions landscape has been one of Labour’s most active areas of policy development.

Building on the previous Government’s work, Labour has moved forward at pace with Phase 1 of the pensions review. The Phase 1 review’s recently published final report, along with the Government’s response to its consultation covering defined benefit schemes’ surpluses, confirms its intention to drive further consolidation in the sector and deliver more investment into UK assets. The Pensions Schemes Bill to implement the report will be published before Parliament breaks for its summer recess in July.

The Government’s view and ambitions are clear. It wants to see an acceleration of the trend for consolidation of schemes, whether they are defined contribution (DC), defined benefit (DB) or local government pension schemes (LGPS). It believes that fewer, bigger pensions schemes mean better outcomes, because they can invest in more productive asset classes, reduce costs and build better investment capability, all improving returns and supporting economic growth.

While it wants to put extra wind into the existing consolidation trends’ sails, it’s already the case that our top twelve master trusts and insurers have 95% of assets. We’ve seen a 40% reduction in the number of DC schemes in the last five years – a 15% reduction just last year.

Although the trend doesn’t suggest much extra wind in the sails is needed, the recent announcement of the creation of megafunds for multi-employer DC schemes, and local government schemes, shows that further and faster consolidation is on the way.

In its chase for growth, the Government is using sticks and carrots to get funds to invest in UK assets. The recent voluntary industry led Mansion House Accord, signatories to which manage around 90% of active savers’ DC pensions, is hoped to deliver £25-£50bn investment into UK assets by 2030. With UK businesses investing some £265bn in themselves each year as part of our £2.56trn economy, it may not make a huge difference to growth, but every extra pound helps.

Ministers accept that higher investment from the industry depends on investable propositions being available. The Government is also expected to set out its 10-year infrastructure strategy next month to try and give industry more visibility and confidence in its infrastructure pipeline.

But the threat of Government mandating fund allocation still currently hangs over the sector. The Pension Schemes Bill will include a backstop power for ministers to be able to mandate investment allocations. The industry is clear that mandating would be a mistake, could have unintended consequences, would undermine trust and would be difficult to implement. If investable propositions turn out to be in short supply, this could easily become a contentious battle between industry and government.

The Government of course also has its eyes on the £160bn surpluses currently in DB schemes, which the upcoming Pension Schemes Bill is set to pave the way for possible release. Here ministers accept that release of surpluses should only be done where it is safe to do so and where the scheme trustees agree. But what is safe – a valuation beyond a buyout threshold, or over a certain buffer?

While surpluses have been stable for a while, given recent events and historical perma-deficits, how confident can trustees be that things won’t change for the worse again? The Government’s imminent response to its consultation and the passage of the Pension Schemes Bill through Parliament might provide some guidance on its thinking. Clarity will certainly be needed if the Government’s hopes of seeing surpluses invested here are to become a reality.

In giving evidence to the Department for Work and Pensions Select Committee recently, industry representatives were clear that surplus extraction should be approached with extreme caution.

Alongside these macro landscape developments, a host of other important issues with big implications for firms and consumers are also progressing – implementation of the inheritance tax changes, the advice guidance boundary review, pensions dashboards, small pot consolidation, default retirement solutions etc.

The big one for Phase 2 of the pensions review is of course adequacy. While the Government’s focus on value for money and higher returns is understandable, there’s no getting away from the fact that we are facing an adequacy crisis, which looks set to be made worse by declining levels of home ownership.

This is a very big legislative and regulatory agenda for the pensions sector. Having worked in a bank I know how complex and expensive it can be to make your systems compliant. There is only so much bandwidth any organisation has for implementing change.

Proper prioritisation, sequencing and time for implementation is critical. But with pensions adequacy probably being the most important issue for us all in the long term, Phase 2 of the pensions review shouldn’t operate on a ‘go slow’. The debate urgently needs to be had and solutions to tackle it agreed.