It’s fair to say 2021 was not a vintage year for many things, but for consultations it was a bumper twelve months. A bumper twelve months for consultations – not only in quantity, but in complexity and the operational demands that policymakers intend to make of pension providers.
It would be tempting to imagine this was mere chance and that this level of activity might reduce – but this, I think, would be extremely optimistic. It is unlikely that we have even reached the highest tide of intervention yet.
This is because workplace pensions are starting to become genuinely significant. Not just for the delivery of future income in retirement but also as flows of investment. Government departments other than the Department for Work and Pensions (DWP) are eyeing up what pension funds could be used to achieve. So far, we have seen a tentative move to encourage pension funds to increase their investments in infrastructure by amending rules relating to performance fees and the price cap. We’ve also been required to help combat climate change by putting in place processes to identify and mitigate climate risk.
Reforms on the horizon
At the same time, the UK continues to pursue a raft of reforms designed to increase engagement with pensions and the value for money obtained by savers. These reforms could be seen as gradually retro fitting the UK pension system while in-flight. Gradually taking us to the place it would, in an ideal world, have been rational to start from, when designing a mass DC-based pension system more than a decade ago.
These reforms include the continued promise of contribution increases, requirements around annual statements and dashboards, pursuing an efficient system for the consolidation of small pots, and the push for smaller schemes to consolidate unless they can demonstrate that they deliver value for money.
There are many wider government policies which could have some degree of impact on workplace pensions, meaning it is very important that the bigger picture is considered with retirement savers’ needs at the heart of any long-term strategy.
The consequence of not having a longer-term strategy in place is less civil service resource being applied to testing a proposition, and thus a greater likelihood of ill-thought through policies. In the pursuit of the short-term advantage drawn from newspaper headlines, there is every chance a policy designed to achieve something else altogether, may be casually allowed to damage the first objective of pensions – which is to provide retirement income.
The interest of departments other than the DWP in the sums held by pension schemes is unlikely to abate. A consequence of Brexit is historically low flows of foreign direct investment. The long-term consequence of Brexit is also lower government revenues than would otherwise have been the case. Simultaneously, the pressures on the UK government to do more to deliver on net-zero will also increase. This is because there is currently very little substance behind its ambitions to deal with the two main causes of UK carbon emissions and deliver either a full roll out of electric vehicles or to deliver a replacement for the domestic use of natural gas. It’s difficult to predict what it will do if it has to deliver last-minute crash investment programmes.
The growing importance of DC pension pots
We are also inexorably moving towards the time when retiring generations are no longer relying on defined benefit (DB) pensions. This will inevitably mean that defined contribution (DC) pensions will become more salient for individuals as part of their pensions. We already know how powerful the politics of the State Pension are in the UK. The intention behind workplace pensions was that mass DC would become the vital bolt-on to the State Pension. We can suppose that in a similar fashion, mass DC will come to hog the headlines too; unsurprisingly, as for most of the population, the DC pension will become the difference between something better or retirement on the poverty line.
We are not yet at the stage where workplace pensions feature as the centrepiece of electoral platforms. More established workplace DC regimes, like that in Chile, are already there. However, we can already see the forces that will propel us in that direction. 2021 was busy, the rest of the decade will be too.