Monday 27th March sees the closure of the call for evidence period of three critical consultations into the future of the UK pensions system. Two Standard Life experts share thoughts on what they think should come out of them and why.
Value for Money consultation represents an opportunity to bring consistent measures to a complex market but careful thought is needed around implementation and in providing meaningful measures
Commenting on the closure of the consultation, Neil Hugh, Head of Workplace Proposition at Standard Life said: “The Value for Money framework represents a huge opportunity to empower both pension professionals and savers. By introducing consistent measures across a complex market, there’s scope to create greater comparability and transparency of outcomes.
“The implementation of the framework does however require careful thought. For example, rather than a two phase approach, we would recommend rolling out the framework over an extended period in a similarly staged way to the introduction of auto-enrolment. Doing so would derisk implementation while still ensuring that the most active parts of the market were brought into scope first.
“One area where we think more focus should be given is to assessing service and engagement metrics. The proposed metrics look at the lowest common denominator and need to be brought into the 21st Century to take account of digital journeys and broader financial wellbeing. Measuring the success of engagement campaigns or customer Net Promoter Scores for example are two measures which provide a good indication of value.
“Ensuring comparability of investment performance is one of the most complex areas and care will need to be given to ensuring appropriate benchmarks are selected and in comparing performance at different stages of the saver’s journey.
“Rather than a RAG (Red, Amber, Green) status for schemes, we believe something which allows a bit more nuance would be better. A five star rating, or something more equivalent to exam ratings like an A+, A, B,C etc would avoid oversimplifying value.”
Standard Life supports ‘Pot Follows Member’ solution to crucial small pots issue
Neil Hugh said: “With every year that passes the idea of a ‘job for life’ seems more antiquated – the post-pandemic ‘Great Resignation’ has also accelerated the number of people switching jobs. This coupled with auto-enrolment bringing 10m more into the pension system is quickly increasing the risk of lost pots and amplifying engagement issues. It’s crucial that this consultation leads to an effective solution that can be implemented in a reasonable timeframe.
“The industry has been debating a number of possible solutions and we would like to see the introduction of a ‘pot follows member’ approach whereby pensions under a certain size automatically transfer when people change jobs.
“If implemented efficiently this will have the advantages of not requiring any action from the member. It is also an easy concept for consumers to understand compared to other more complex approaches. In a charge cap environment concerns about the value for money offered by receiving schemes are greatly lessened.
“Parliament is currently considering the ‘Pensions Contributions Bill’, which proposes a ‘pot for life’ model, allowing employees to choose their pension scheme and direct their employer to pay its contributions into it, as they would do with their bank account for their salary. This could be a long-term solution sitting alongside ‘pot follows member’, however in the short-term it’s hard to see member engagement justifying the implementation time and cost. Alternatives outlined in this consultation such as a Default Small Pot Consolidation option, in which any small deferred pots would be transferred to a pre-determined consolidation destination look less practical as this runs the risk of distorting competition, and gives consolidators little incentive to invest in their proposition.”
Claire Altman, Managing Director of Individual Retirement at Standard Life, part of Phoenix Group, comments on the closing of the DWP’s Consultation on Extending Opportunities for Collective Defined Contribution Pension Schemes:
“We support the Government’s desire to extend CDC to multi-employer arrangements. This is a timely consultation as we are all thinking about how we can deliver better outcomes for savers. Opening up space to allow schemes and providers to innovate more generally on behalf of their savers is clearly welcome.
“We think that the government is right to tread cautiously, not least to ensure that CDC schemes will be sustainable and that proper protections are in place if things don’t go as expected given the expectations CDC schemes could raise with savers.
“It’s important to think about CDC in the context of the wider range of options and what these can achieve – there is a lot happening in the at retirement space. The end of the era of low interest rates has made annuities a more attractive option for those looking to secure a guaranteed income and this is a welcome development, since over three quarters (78%) of people tell us they want income certainty in retirement.* Furthermore, thinking has moved on in favour of a more blended approach that allows people to achieve the best of an annuity and drawdown. We expect to see significant innovation and product development over the next couple of years, and welcome CDC being part of the pensions saving toolkit.”