As the government unveils its latest proposals for reforming defined contribution and defined benefit pensions, financial advisers face a shifting landscape. Rachael Healey, Partner at RPC , an international law firm based in Bristol, explores what these changes mean for adviser firms – from increased consolidation and reduced choice to greater scrutiny under the Value for Money regime. She also considers the practical implications for those supporting clients through retirement planning in the following analysis for IFA Magazine.
The government has just announced its latest stance on pension investments, with changes affecting both defined benefit and defined contribution schemes. But what are the implications of these proposed reforms for the financial advice industry?
Defined Contribution
Over £2trillion of assets is managed within the workplace pensions systems – defined contribution schemes – with auto-enrolment playing a key role. Looking at this market, it’s clear the government’s focus appears to be on scale, premised on the belief that bigger pension funds will drive higher returns for savers. As a result, this is adding momentum to consolidation across the defined contribution market and shifting focus to value over cost. Proposals include (and add to the Value for Money Framework the government is already going to legislate for in the forthcoming Pension Schemes Bill):
- Pension providers and master trusts are required to have £25bn assets under management by 2030. This £25bn threshold is to be tested at the “arrangement level” – at the point contributions are collected. For smaller schemes, there will be a transition pathway for with at least £10bn in assets under management in an arrangement who are able to show they have a credible plan to have £25bn in assets under management by 2035. To assist with consolidation efforts, there will be a contractual override regime over existing arrangements.
- Legislating to prevent new default arrangements from being created and operated. However, the government will not go ahead with proposals to (1) set a maximum number of default arrangements or (2) introduce standardised pricing for default funds.
The government states that it expects providers and trustees to take proactive steps to assess whether savers should be moved into a main scale default arrangement. And as previously mentioned, these proposals are in addition to the Value for Money Framework which aims to establish a consistent disclosure regime and make publicly available a range of data and metrics of scheme quality – including investment performance and consistency of returns. This new regime is set to be implemented in 2028.
At this time the government is not proposing to require pension providers to invest in certain assets, but whether the government revisits mandatory investment obligations (and it proposes a reserve power in the Pension Schemes Bill to do so) may well depend on whether pension providers stick to the Mansion House Accord. Under the Mansion House Accord 17 of the largest pension providers have agreed to invest 10% in default funds in private markets, including 5% in the UK specifically.
The proposals do not mark the end of the government’s intervention in the pensions market with the government looking to the next stage of its review where it proposes to focus on the question of adequacy of pension outcomes and under-saving for retirement. There will also be an assessment starting in 2029 looking at the market impact and operation of the contractual override and Value for Money Framework to inform further consideration of default arrangements. The government is aiming this at targeted support within the pensions market.
Defined Benefit
Perhaps of less direct concern to the advisory market is the government’s proposals for defined benefit pension schemes, which continue to enjoy high levels of funding with approximately 3 in 4 schemes in surplus (on a low dependency valuation basis) and with around £160bn of surplus assets. In the defined benefit market 70 schemes hold c. 50% of defined benefit assets, compared to the smallest 2,000 schemes holding collectively c. £10bn, or 1% of defined benefit assets.
The substantive proposals are (1) a statutory override in the event a defined benefit scheme’s governing documents do not provide for a power to return surplus and (2) continuing to consider a consolidator for smaller defined benefit schemes.
Impact for advisers
The starting point is that the proposals are of interest for advisers but arguably not game changing. There are no alternatives to the types of pension schemes available , nor do they address the complex issues of pension tax.
However, what the proposals appear likely to do is reduce choice in the pension market. Consolidation among providers is likely to limit option, and choice is further reduced with the proposal to prevent new default arrangements (without regulatory approval). Coupled with the Value for Money Framework shining a light on value, this may make the role of the advisory market easier in that there will be less choice and more transparency over performance. However, the fact that the performance of pension providers will be readily available also means consumers can question advisers over any recommendations made.
For those advising on defined benefit transfers, there is the added complication of factoring in return of surplus when advising on a transfer in case a customer inadvertently gives up a right to share in a surplus having transferred their pension elsewhere.
Overall, the area of pension investments and what’s going on for the pension market is one to watch, but for most advisers its likely to be business as usual and the bigger issue may be access to the market, with the government putting more and more onus on pension providers to assist savers to the potential detriment of the advisory market.