I have been pondering the fact that we are coming up to a quarter of the way through the century. When Big Ben chimes in the new year, it will be 2025. How did that happen? And what has changed in the pensions industry so far this millennium?
- In the first week of the year 2000, the pensions industry was relieved that the “millennium bug” that we feared would plague our computer systems turned out to be a damp squib among the new year fireworks. We began the new century grappling with issues such as access to stakeholder schemes and the implications of pension sharing on divorce.
- A few years later, we had the Pensions Act 2004, which unpicked some of the issues introduced by the Pensions Act 1995 that were not working well. For example, the scheme-specific funding regime replaced the unsatisfactory minimum funding requirement. The 2004 Act also introduced The Pensions Regulator − replacing OPRA, which did not have enough powers to have any real impact.
- The Finance Act 2004 brought in a new tax regime to replace Inland Revenue Limits from 6 April 2006. It was dubbed “tax simplification” but felt more like complexification. And, indeed, the Lifetime Allowance has proved even more complicated in its demise than in its inception. We had originally expected tax simplification to come into force in 2005, and although the delay was necessary and welcome, there was still a last minute scramble for trustees to execute amending “A-Day” deeds before the deadline.
- From April 2011, the government decided to use the CPI rather than the RPI as the basis for calculating statutory minimum increases for pensions in payment and deferred pensions. This resulted in a scheme-rule lottery, as some schemes had references to the RPI hardcoded into their rules, while others linked directly to the relevant legislation. Much case law has ensued to help establish whether rules could be amended to adopt a different index.
- 2012 saw the beginning of automatic enrolment, which has been hugely successful in bringing about a culture change in pensions savings (even though savings adequacy remains a concern). Master trusts have emerged, together with a regulatory framework for their oversight. In the meantime, we are currently battling with some of the aftermath of the success of auto-enrolment, such as the plethora of small pots and the need for a consolidation solution.
- 2015 was a year of change for defined contribution schemes. The “freedom and choice reforms” (which took the industry by surprise in George Osborne’s 2014 budget) took effect from April 2015. The complex governance and charges regulations also came into force, introducing the unpopular chair’s statement and charge capping regulations. Value for Money (VFM) has been a hot topic ever since then. The original focus of VFM was to drive down costs, but a whole science is emerging around a new framework to introduce a standardised, transparent system of measuring costs, investment returns and service. I hope that the industry does not get so engrossed in the detail, that we forget what is important to the members – i.e. the best financial outcome accompanied by efficient service.
- We have had 16 pensions ministers since the turn of the century. Some came and went very quickly; others added a great deal of value. Sir Steve Webb’s plain speaking was refreshing and some of his parliamentary speeches amusing, such as his determination to explain the concept of defined ambition schemes in the House of Commons: “I am going to persevere with this if it kills me.” Defined ambition/collective benefit schemes were included in the Pension Schemes Act 2015 but a change of government saw proposals put on hold. More recently, risk sharing has re-emerged with the Collective Defined Contribution (CDC) framework and looks set to develop further in the form of multi-employer arrangements and, potentially, decumulation vehicles.
There are many more recent developments that I could highlight, but it is not my intention to provide a full history. I am aware, for example, that I have not focused on the growth of ESG in investment decision making, which merits much more than a passing sentence. And I have not highlighted the significant changes introduced by the Pension Schemes Act 2021, as I imagine that this legislation will be familiar territory to readers of this blog.
If I were to pick out the main success story of the first quarter of this century, my personal choice would be the introduction of the Pension Protection Fund (PPF). I did not anticipate how much we would need to rely on the PPF in the 20 years that have followed its introduction. I also did not anticipate that my late dad would become a PPF member following the failure of his own pension fund.
Predictions For The Next 5 Years – Definitely Maybe
If we look back 5 years from now, what will we see? Here are 10 of my “hopes”, listed in order of decreasing likelihood.
Hopefully:
- Automatic enrolment regulations will have been introduced to reduce the trigger age to age 18 and to expand the earnings on which contributions are based.
- There will be more consolidation options for defined benefit schemes with an end game plan, and more certainty for ongoing schemes (once the funding code beds down and new rules for surplus extraction have been thoroughly debated).
- CDC will have expanded beyond single employer models.
- Pensions dashboards will be successful and well used by the general public.
- Industry, regulators and law enforcers will have slowed the flood of pension scams.
- The value for money framework will be starting to prove successful, with the right amount of emphasis on what members truly value and the right amount of pressure for poorly performing schemes to exit the market.
- We will no longer be grappling with historic issues relating to contracting out (guaranteed minimum pensions and the reference scheme test).
- There will an automatic solution for pooling small pension pots, which will solve problems for members and master trusts.
- There will not be discord between government and industry in terms of how trustees should invest (although I am unsure how this is likely to play out).
- There will not have been any significant tinkering with the pensions tax relief system.
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