Trott: Underperforming schemes to ‘improve, consolidate or exit’

Speaking at the Pensions and Lifetime Savings Association’s offices on January 30, Trott discussed the raft of measures announced as part of a shake-up to private pensions.

She said the move from defined benefit to defined contribution schemes means it is individuals who now shoulder greater responsibility for growing their pension pots, and it is important to create fairer, more predictable and better-run pensions.

“It is a structural shift between those people who expect a predictable level of retirement income guaranteed by their employer and those for whom there are no such guarantees,” she said.

There’s more that we can do to help and my plans for reform focus on three pillars: increasing fairness, adequacy, and predictability

Laura Trott, Department for Work and Pensions

“There is increased risk and uncertainty compared with decades previously, and often less adequacy.”

As part of the changes, Trott announced a newvalue for money framework, which will require pension schemes to disclose investment performance and the introduction of legislation for multi-employer collective defined contribution schemes, since these could help “improve member choice and outcomes”.

The government also proposed the broadening of investment opportunities, such as illiquid assets, to “unlock” pension cash to help economic growth.

Discussing the value for money framework, Trott explained that the variation of the prediction versus the reality is too large and bringing that closer together will be very important.

“For schemes, if they’re not for performing for their members, they need to either improve, they need to consolidate or exit the market,” she said.

Although it is still at the consultation stage, Trott hinted at potentially legislating it at a later date, stating that “it is important that the regulator has the powers to be able to act”. 

Reform based on three pillars

Trott, who became pensions minister in November, said her plans for reform focused on three pillars: increasing fairness, adequacy, and predictability. 

The introduction of auto-enrolment in 2012 was a “game-changer”, she explained. 

“For over 10 years, it’s been embedding a culture of retirement saving for a new generation within the new pensions landscape.”

Trott said millions more people are now saving into a workplace pension, with 10.8mn workers enrolled so far, and £33bn more saved in real terms in 2021 than 2012. 

“But as well as coverage, we also need to focus on quality. Having created a new generation of savers, it’s only right that we help them maximise the value of their hard-earned retirement later in life,” she said.

Trott explained that pension freedoms have provided more flexibility for people to choose how and when to access their savings, alongside a record number of workplace pension savers and assets.

“But with more choice comes increased variability in terms of the retirement outcomes the scheme is delivering to members,” she said.

“There’s more that we can do to help, and my plans for reform focus on three pillars: increasing fairness, adequacy, and predictability.”

On fairness, if a scheme is underperforming and the member doesn’t know about it, they could be losing out on thousands of pounds.

“Bringing fairness to the new system is the first pillar of my vision for pensions,” she said.

“All savers deserve to be confident that their pension scheme is working hard on their behalf and on track to deliver fair and predictable outcomes.”

The value for money consultation, which has been jointly developed by the Pensions Regulator and the Financial Conduct Authority, imposes a “framework that will increase transparency, comparability and drive competition across the pensions market”, she noted. 

“It aims to deliver long-term value for hardworking savers, and it proposes giving the regulator the powers they need to tackle underperforming schemes,” she said.

“To help boost returns, I also remain committed to opening up the scheme’s investment to illiquid assets.”

On adequacy, Trott explained that auto-enrolment has created a record number of savings and assets in the DC pensions system. 

Both the number of participants and the size of pots are growing every day. However, that is not guaranteed to give members “an adequate income” in retirement.

“The success of AE was coverage, and it gives us the foundation to begin to solve this adequacy issue,” she said. 

“But everybody – I don’t just mean ministers, I mean trustees, employers and individuals – needs to do more, and that’s why we must go further and expand the model of automatic enrolment.

“Today I’m also announcing that we will address another challenging legacy of AE introduction: the challenge of deferred small pots.”

As part of the reforms, the Department for Work and Pensions has narrowed down the solution to the small pots issue to either the creation of default consolidators or the introduction of pot-follows-member legislation.

This article first appeared on FTAdviser.com