Trade-offs, dependencies and unintended consequences

Recently, I’ve noticed an uptick in use of a particular phrase: athletes at the Olympics and Paralympics were “leaving everything on the track” – or court, or skate park – in their efforts to succeed.

US vice-presidential nominee Tim Walz urged the Democratic Convention to “leave it all on the field” ahead of this year’s election.

The pensions industry and anyone in pensions policy will be leaving it all on their desks this autumn as we scramble to get our heads around what could be a huge set of changes. We have an important job to do to help government get it right and help savers make sense of it.

With pensions policy at multiple intersecting inflection points, there is a real risk of overload.

We have the first phase of the Pensions Review on investment, the prospect of pension tax relief changes, all aspects of the Pension Schemes Bill, the adequacy challenge in the second phase of the review, plus policies in train such as targeted support and pensions dashboards.

I said in my last column that these policies are at different levels of readiness. But it is sensible that all of the developments are considered together and in quick succession.

Interconnectedness

It has struck me this week how interconnected these things are: there are trade-offs, dependencies and risks of unintended consequences. It’s incumbent on the industry to point these out.

The Pensions Review asks some big questions about the future shape of the industry. Scheme-level consolidation is a stated goal of the government. Consolidation already continues apace without intervention, and this is enabling an increase in some types of investments.

Recently, however, I have heard managers of smaller, specialised investments and their prospective end investees note that rapidly consolidating firms already see themselves as too big to invest in them. Scale doesn’t prohibit such investments, but it is a pattern.

Linked to this, super-size schemes could lead to some disintermediation in the value chain. The government should at least be aware of this as a consequence of scale.

Similarly, depending where the Financial Conduct Authority’s (FCA) consultation (and the Pension Schemes Bill) lands on value for money proposals, it could pull in the opposite direction to the government’s wish to boost UK investment.

From conversations with players in the Australian market, the lessons from their performance measures include that there’s no right answer – measure value over a long period and it’s hard to shrug off poor past performance; measure it over a short period and it encourages short-termism.

There is a risk of herding to avoid poor outcomes rather than driving for good long-term results. The FCA is seeking detailed feedback at this stage, which is a helpful way to navigate these challenges.

The Budget

The speed of the Pensions Review may be partly due to the Budget, and we all know that we could be facing pension tax changes.

The review’s consultation questions explicitly ask about the case for incentives (as well as requirements) to invest in the UK. We could well face near-term changes, whether investment incentives or a ‘raid’.

It’s hard to reach the £22bn that the government is seeking without touching pensions – though it has acknowledged the downsides of doing so.

Pension tax changes, and new allowances and new protections that hang off them, tend to be complex, tying industry up in implementation and potentially damaging consumer understanding and trust. That’s not to mention the political difficulties.

At the extreme, a misstep on pensions tax relief could harm future flows into defined contribution schemes, and therefore into UK assets. The industry is best placed objectively to point out the practicalities.

System structure

The review’s terms of reference included a look at the structure of the pensions ecosystem, and the call for evidence asks about the relative role of master trusts and group personal pensions.

The simple answer is that they both have a big role and there’s little difference from a saver’s perspective. The broader answer is around the difference in their regulation and their legal basis – but even this can be overstated, and policy developed jointly can take the best of both.

For example, there is a lot that the Department for Work and Pensions and the Pensions Regulator could draw upon in FCA-regulated firms’ implementation of the Consumer Duty in relation to customer understanding and customer support.

The importance of adequacy

Finally, adequacy is clearly a precondition to all current policy goals. (The following is my interpretation, with thanks to Tegs Harding of Independent Governance Group for articulating this clearly in a recent industry meeting.)

• Alongside consolidation, putting more money in is the best way to achieve scale and increase the likelihood of flows to UK assets, especially illiquid assets.

• Some schemes will continue to de-risk, on the assumption that their members will take cash, for as long as their pots remain small.

• Since 2015 it’s been apparent that pension freedoms are helpful for people with small pots who want to encash, but it takes more money to make flexibility meaningful. Guided retirement and ‘to and through’ solutions will be of limited use without bigger pots.

• It will be confusing and inefficient for savers to go through multiple guided retirement journeys for each of their pots. It makes more sense for them to consolidate first. Small pot consolidation will go some way to do this, but making dashboards and Targeted Support work well will help further.

It is right to tackle these issues together, assessing of which policies act as a constraint or are dependent on other policies. This can then inform implementation, sequenced in a gradual and logical way.

There are a number of risks, but this is the long-sought opportunity for a long-term and holistic strategy. We’ll be “leaving it all” in our roundtables, workshops and consultation responses, probably until the next Olympics, Paralympics and US election come around.

Rob Yuille is head of long-term savings policy at the Association of British Insurers.