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The UK pension system is not yet sure what it wants to be when it grows up.
That is the impression left by the barrage of talks, requests for evidence, government responses and reports released after Jeremy Hunt’s Mansion House speech. Desperately presenting ideas and soliciting opinions does not inspire confidence that there is a clear “direction” as promised by the prime minister.
It is most evident regarding the future of defined contribution plans, the most important area in terms of inadequate pension benefits and ultimately opportunities for more adventurous investments.
DC schemes, where workers and employers put money into their personal pots for retirement, are poised to become the largest part of the pension market.
Traditional private-sector defined-benefit schemes will increasingly be bought out by insurers, thanks to improved funding levels from rising interest rates. By the end of the decade, the UK will (very roughly) have £900bn of pensions in the insurance industry, £800bn left in defined benefit schemes, and auto-enrollment rules introduced about a decade ago. £1 trillion in pensions could remain thanks to Defined Contribution.
In all fairness, the government is making a smart move to clean up small DC pots, give savers easier options for retirement, and encourage trustees to focus on value for money. Is going.
The long-term goal is to hold more money, manage it better, invest it in higher-yielding assets, and deliver better results for savers. The government said it would “promote” integration. However, it is overstated to say that the simple integration of sub-scale schemes is easy. The number of DC schemes has already fallen from 55,000 in 2008 to about 27,000. According to the British Insurers Association, 95% of members have fewer than 12 members, 84% of which are executive pension schemes rather than workplace schemes.
One of the lessons to be learned from the much admired Australian market, the DC system with a high allocation to private equity and infrastructure investment, is that progress is faster when larger schemes are linked. Australia’s occupational system has created a unique means of pooling investment management, reducing costs and avoiding multi-layered fee payments.
The UK’s largest DC scheme has announced a voluntary ‘compact’ to allocate 5% of its default funds to unlisted equities by 2030, but has taken additional steps with broader powers to limit such measures. It is a pity that it did not form. . Even the UK’s largest and most expert plan simply does not have the gravity to compete globally with funding from university endowments in Canada, Australia and the United States.
The government is instead trying to adopt a completely different model, a version of the Dutch model of collective defined contribution schemes. This is not a new idea. The concept of a halfway point between the DB and DC worlds has been circulating since (at least) 2013, and Steve Webb, who was Pensions Minister at the time, called it a “definite ambition”. The idea is that by sharing the risk with many people, we can offer savers a ‘target pension’ rather than just money, and ultimately a higher retirement income. A UK scheme specifically set up to facilitate Royal Mail flotation (which has yet to launch a scheme) has been designed to allow for multi-employer and industry-wide schemes such as those found abroad. May be extended.
It seems quite difficult to actually do this. After several issues, the Netherlands withdrew from the collective nature of the plan. The CDC suffers from delivering what appears to be guaranteed but isn’t. Benefits vary based on performance. Already he has questionable appeal to employers entering the DC world, as well as the merits of simply introducing another complex model into an already fragmented and poorly understood market.
Of course, there is general agreement on the simple point that it improves retirement outcomes and means more money to invest. It’s an increase in contributions from employers. The average employer contribution rate to private-sector DC pension plans was 3.5% last year, compared with 22.2% for defined-benefit plans, according to the ABI. The UK automatic registration contribution is 8% of salary, mostly from employees, compared to 12% in Australian schemes.
Here, the avalanche of paperwork by the government was fairly quiet. Perhaps that’s because the government has only just started implementing the 2017 automatic admissions recommendation to lower the entry age to 18 and start contributing from the first pounds you earn. Rather, it summarizes the lagging and confused state of UK pension policy, and the latest efforts have not changed that.
helen.thomas@ft.com
