Talking Head: There are few things in life we can be sure of except that things change. The same can be said of pensions – every new idea from government seems to suggest further change for the sector.
In 2016 we will see the end of contracting-out and the possibility of further radical changes to pensions tax relief.
The former means increasing costs and complications, for defined benefit schemes in particular. The latter, in its most extreme form, could completely undo the most positive change of recent years: automatically enrolling more than 5m new savers into pensions.
Switching to a taxed-exempt-exempt system would mean additional administration charges of £1m for the largest schemes and up to £800,000 additional costs for employers.
Switching to a single rate would mean average costs of £110,000 for updating payroll systems.
While we are certainly not out of the woods on possible tax relief reform, and while we still have contracting-out to deal with we should continue to be wary of more change on the horizon
So it is perhaps with relief that in this continued period of change there is at least some stability to be found. The 41st edition of the Pensions and Lifetime Savings Association’s annual survey paints a reassuring picture – a picture in which some aspects do change but the long-term trends remain the same.
Alongside our annual survey we have published a five-year trend analysis based on 63 fund members (representing 2.8m members and £243bn in assets under management in 2015) who responded to our annual survey every year between 2011 and 2015.
Shift from DB to DC
These trend data highlight the continued shift from DB to defined contribution pension provision over the five years, with 60 per cent of this sample’s active scheme membership in DC compared with just 32 per cent in 2011.
Today almost half (48 per cent) of DB schemes are closed to both new employees and future accrual, compared with 31 per cent in 2011.
And DB is becoming more expensive to provide. For those large schemes average employer contributions increased to 23 per cent in 2015 from 17 per cent in 2011, while employee contributions remained stable.
An encouraging trend is the rise of good DC governance with growing oversight of contract-based arrangements. The existence of a management or governance committee grew to 78 per cent, from 60 per cent of contract-based schemes among these respondents over the five years.
Looking at DC default funds, in the growth phase passive tracker has remained the most common investment approach since 2012 but the at-retirement phase has seen a very recent shift away from a focus on fixed interest, in direct response to the pension freedoms.
So there has been some change but also some stability. While we are certainly not out of the woods on possible tax relief reform, and while we still have contracting-out to deal with we should continue to be wary of more change on the horizon.
The PLSA will be lobbying on members’ behalf to make sure future changes work for UK pension funds.
Joanne Segars is chief executive of the Pensions and Lifetime Savings Association
