Pension hopes for the Autumn Statement

Experts from Hymans Robertson comment on what they hope the Government will say about pensions in the Autumn Statement, especially as the Mansion House Reform consultation responses are expected to be published and TPR’s DB Funding Code confirmed:

• Overall: We hope the Chancellor is bold and creative towards forging a better saving and investment environment aligned with wider societal aims

• DB: TPR’s statutory objectives should be updated to balance security of accrued rights with current and future pension provision

• Decumulation and CDC: Government must encourage clear action from the industry to ‘solve the decumulation puzzle’ facing both DC scheme members and Trustees

• Small pots: On small pots, we prefer to see a ‘pot follows member’ model, but otherwise we support the idea of default consolidators with a central clearing house

• Trustee skills: On trustee skills, we’re keen to see the publication of the delayed General Code, and regulation and guidance to encourage effectiveness reviews

• TPR’s Funding Code: Hoping the Chancellor will provide clarity about TPR’s proposed DB Funding Code, and its alignment with the Mansion House reforms

Commenting on what Hymans Robertson hopes to hear overall in the Autumn Statement, Leonard Bowman, Partner, said:

“We hope the Chancellor is bold and creative about long-term policy that would deliver pension promises, support workers and build prosperity throughout society. There’s a significant opportunity here for the current government and its successors to take, or at least take steps towards creating a better saving and investment environment that aligns with wider societal aims. Past pension policies have led to unintended outcomes that aren’t good for businesses, savers, or society. The regulatory environment is not yet geared towards innovative retirement saving designs, and it’s important that the right regulation is in place, including the DB funding code. Policy support could foster a spectrum of retirement designs ranging from pure DC, collective DC, pooling of longevity risk solutions and new types of DB schemes which could reinvigorate retirement saving and create a larger pool of assets.”

Commenting specifically on the Options for DB schemes consultation, Leonard said:

“Many DB pension schemes have closed or invested their assets defensively, partly as a result of the Pension Regulator’s (TPR’s) statutory objectives, which maximise the security of accrued benefits. If TPR’s statutory objectives were updated to balance security of accrued rights with current and future pension provision, they’d help DB pension schemes to realign with wider social interests. But future retirement provision, savers’ exposure to financial and longevity risk and lack of financial education can’t be solved through DB schemes alone. Innovation like collective DC can lead to better member outcomes, but a narrow focus on collective DC risks missing the bigger picture. The Government should encourage innovation in saving more broadly and work with the pensions industry to design the best solutions for all savers.”

Commenting on what she wants to hear on decumulation in DC as we expect the response to the Helping savers understand their pension choices consultation, Kathryn Fleming, Partner, said:

“We’d like to see the Government propose putting clear actions in place to ‘solve the decumulation puzzle’ facing both DC scheme members and Trustees. It should encourage the industry to think innovatively to offer support for scheme members at the point of retirement. Many savers find the decisions they need to make at this point daunting. Trustees also need help in being able to provide less engaged members with default options.

“The key channel to achieve this will be through establishing a ‘broad alignment’ amongst what is offered by different providers, compelling them to provide decumulation solutions for their members through all pension schemes. The first step will be a requirement from the Government for all DC trust-based schemes to support members in accessing the full range of the pension freedoms. Secondly, Master Trusts and Pension Providers should be asked to design default solutions for members that don’t wish to make an active choice at retirement. Finally, DC Trusts and Hybrid scheme trustees must be compelled, through legislation, to put in place a default decumulation solution.

“With these requirements in place, innovation from the wider industry would not only be encouraged but would also provide a backdrop for ideas to have a credible chance of success. It is important, for that innovation, however, to recognise that CDC is not the only new decumulation option that can be delivered by the industry. There’ll be a need for a range of risk sharing approaches including longevity pooling and drawdown followed by later life annuitisation. The approach must fit with scheme membership needs and what the market can actually offer in the timescales the Government will set.”

Commenting on what she wants to hear on the small pots consultation, Alison Leslie, Head of DC Investment, said:

“While we’d like to see a ‘pot follows member’ model, and hope that it will prevail given industry feedback, of the two options currently proposed we support the idea of default consolidators, with a central clearing house to support the transfer of small pots to the appropriate place. A framework for authorisation is required though and we would welcome introduction of this as part of the Autumn Statement. The detail of this framework isn’t clear right now. A robust system of safeguards is also required for providers to ensure that the rules and processes are clear and don’t leave them open to challenge. Details of that system in the Autumn Statement would also be very welcome. Finally, when you put this approach through the lens of DE&I, there’ll need to be some form of filtering mechanism, so there aren’t detrimental unintended consequences on minority groups. Details of how that will work is also needed through the Statement.”

Commenting on what she wants to hear on the trustee skills consultation, Laura Andrikopoulos, Partner, said:

“Pensions regulation and guidance could more strongly encourage effectiveness reviews as is common in the corporate governance world. The lack of focus on this in current regulation means many schemes can continue without evaluating their performance on a regular basis.

“The continuing delay to the General Code of Practice means that governance issues may be put on the back burner for a while. This would be a shame, given the progress schemes have made since the draft Code was published. Many have already completed a gap analysis and are simply awaiting the final Code to implement identified actions. The longer the delay, the greater the risk that energy for the governance overhaul the Code could stimulate will abate.”

Commenting on her hopes around the DB Funding Code, Laura McLaren, Partner, said:

“We hope the Chancellor’s Autumn Statement will include more clarity about the Pension Regulator’s (TPR’s) proposed funding code for DB pension schemes. The industry needs clarity, and soon, so that decision-making isn’t stifled. Trustees and sponsors are in a difficult position, with the tough job of trying to plan for new rules that are still unclear. With less than four months to go until the Funding Code is due to come into force, the Regulator must communicate any developments or further delays in a timely way, so that schemes have time to plan for upcoming valuations.

“We’d also like to see how the Government and the Regulator are responding to industry concerns about the Funding Code. Concerns have grown since the ideas for the revised DB Funding Code were first set out in 2020, given that the pensions landscape has changed since then. The Funding Code was devised when schemes were generally less well funded than they are now. If left unchanged, it might bring a diminishing minority of schemes into line with good practice, but it could heighten systemic risks and negatively affect open schemes. It would be disappointing if the Funding Code distracts focus or disrupts well-planned scheme-specific approaches because it’s not flexible enough, or because it places a disproportionate compliance burden on schemes already doing sensible things.

“One concern is that the DWP’s draft regulations and the Funding Code could drive schemes towards low-risk investment strategies that are too narrowly defined to be optimal for all schemes. We’d prefer more flexibility for trustees and sponsors to make the right investment choices for their schemes. And the Funding Code also needs to be aligned with other emerging policy initiatives, such as the Mansion House reforms, which seek to encourage schemes to invest more in productive assets. It is important that all regulations pull in the same direction.”