As the pensions industry digests the impact of Chancellor Jeremy Hunt's announcements in his Mansion House Speech, there are already concerns being voiced over the speed and scope of the proposed and planned changes.
Jeremy Hunt, the UK Chancellor, made a series of announcements in his Mansion House speech that are expected to have a significant impact on both DB and DC pensions and the investment world but could the planned reforms be too much of a burden for the pensions industry to take on at once?
Up until this week there had been a raft of regulatory changes affecting DC pensions – stronger nudges, tackling pension scams, and the abolishment of thelifetime savings allowance (LTA).
Kim Nash, managing director of Zedra Governance, said in isolation these were all good initiatives with the aim of protecting scheme members from harm. She said: “Taken together, these changes have had the unintended consequence of forcing providers to direct resources away from innovation in member experience and journeys to ensure that their systems, processes, and documentation meet all of the new regulatory requirements.
"I am concerned this latest round of consultations will stifle innovation by focussing resource elsewhere, rather than supporting faster innovation as intended.”
Her colleague Dan Richards, client director, agreed and added that regulation was still settling. He said: "Innovation occurs best in a predictable and stable operating environment because time and resources need to be spent assessing where the system is not working and developing new approaches to improve the situation."
"If our regulatory framework is in a constant state of flux then it becomes harder and harder to focus on “out of the box” ideas, both through resource constraint, and because theoretical opportunities might be closed by new regulation before they can even be explored properly.”
Change versus risk
John Harvey, a partner at Aon, said some of the proposals offered exciting opportunities but also came with major risks that needed careful consideration.
He said changes in the investment remit of schemes must put member first: “It is important that members see an upside and an appropriate share from any additional economic value delivered through a more growth-oriented investment approach – and particularly during a period when cost of living increases can significantly erode pension purchasing power for many.
“We will be responding to the consultation to support current and future retirees receiving a balanced outcome and the protection they deserve for the pensions they have built up.”
Harvey also questioned the proposed use of the Pension Protection Fund (PPF) as a potential master super fund consolidation vehicle.
"The PPF is not government-guaranteed and is sponsored by the wider pool of UK DB schemes. So, changing the way the PPF fundamentally operates needs to be done in a way that does not risk the benefits of its 300,000 members or increase costs for other UK pension schemes. We think it also needs to be targeted at specific segments of the market to avoid conflicting with other DB consolidation options such as commercial consolidators and insurers.
"We will be interested to see how the government and regulators segment the DB landscape or whether there is free choice between buy-out, superfund exit, PPF consolidation and run-on for surplus solutions. To date they have segmented superfunds with the gateway test - that is, if close enough to buy-out you are not allowed to use a Superfund - but the speed of movement of DB funding levels has made it difficult to plan to use this route.”
Nash said it was great to see the Mansions House Compact getting off the ground with an objective to allocate at least five per cent of default funds to unlisted equities by 2030, but it may not be enough.
“A five per cent investment in unlisted equities is unlikely to move the dial in terms of member outcomes, and so we must think bigger to solve the looming pensions crisis for those who have been under-saving.
"Trustees should be examining a broad range of asset classes when considering how their default strategy should be designed and further innovation in this space will be very welcome. However, we can’t solve this issue via investment returns alone, and need to encourage members to save more to deliver the outcomes they will need to retire comfortably.”
