Article Thinking ahead to 2024 part 1: pre-election pension plans

In this two-part series, Pensions Director, Steven Cameron, discusses his expectations for 2024 and what these could mean for advice opportunities.

Part 2: Thinking ahead to 2024 part 2: more pension plans and FCA priorities.

Recent worldwide events and economic volatility show just how hard it is to predict the future, so thinking ahead to 2024 in terms of UK pensions, savings, investments and the wider financial services world isn’t without its challenges. Added to that, it’s very likely 2024 will be an Election year, so I along with our industry will be on Manifesto watch.

A re-elected Conservative Government would continue its plans to reform many aspects of pensions and investments linked to its economic growth agenda and its focus on defined contribution (DC) schemes investing more in private equity.  An incoming Labour Government might support a similar direction of travel but is likely to want to revisit some of the detail and could have a raft of new priorities.

In part one of this series, I’ll look at the latest from the current Government on a range of topics and what I expect to be advanced, albeit not implemented, pre-election:

1. Mansion House package of reforms
2. Value for Money (VFM) framework – next level of detail
3. Solutions for small, deferred pots
4. Pension freedoms for trust-based schemes
5. Collective Defined Contribution (CDC) schemes – next steps

As always, the greater the pace and volume of change, the more opportunities there are to show the value of advice.

1. Mansion House package of reforms

The Chancellor is going to great efforts to encourage DC pension schemes to revisit their investment strategies and use their ‘investment superpower’ to invest more in UK private equity. This led to the Mansion House Compact, of which our business was one of the founding signatories. We’ve committed to invest 5% of our workplace pension default funds in private equity (not UK specific) by 2030, with the important caveat that this must also be in member interests.¹

The Autumn Statement included new plans to make sure trustees have a minimum level understanding of all asset types to help them make the most appropriate investment decisions. And for employers, selecting a workplace pension to consider the best value and long-term outcomes, rather than focusing purely on cost and charges. The Chancellor also gave recognition to the key role advisers play in supporting both employers and trustees.  We could see new regulations requiring advisers to consider wider investment options as part of a value for money assessment.

Whether through Government encouragement, regulatory initiatives like Long-Term Asset Funds (and their extension to retail investors), the British Business Bank’s offering or other industry developments, the interest in private equity investment is likely to grow over 2024. This is a complex area with a strong need for professional investment advice.

The Autumn Statement picked up the threads from the Mansion House package, pointing to likely next steps for a range of initiatives including those covered in the following sections.

2. The Value for Money (VFM) framework

This is a joint initiative from DWP, TPR and FCA, to create a common and transparent VFM framework. It would initially be for workplace default arrangements, but longer term will cover all DC pensions both in accumulation and decumulation stages. The three mandatory elements which will be compared are gross investment performance, charges and customer service including communications.

The Treasury will want to make sure that the investment performance metrics don’t discourage trustees and providers from venturing into new investment areas, such as private equity, or responsible investments. They might fear performance could compare unfavourably with other pension schemes over shorter time periods. Further consultation is likely ahead of firm assessment criteria emerging over 2024. Thereafter, those who repeatedly can’t demonstrate good VFM will be required to wind up and consolidate into larger better performing schemes. The Chancellor went as far as to say in his Autumn Statement speech that by 2030, the majority of members of DC schemes will be in schemes of over £30 billion.²

The concept of a set of consistent comparable metrics supporting better member outcomes doesn’t appear ‘political’. I see no reason why a Labour Government wouldn’t support the continued development of this.

In terms of advice opportunities, trustees will want to understand how their scheme is stacking up. Longer term, all advisers will have new sources of data and insights when recommending particular pension solutions.

3. Solutions for small, deferred pots

The Mansion House package included a proposed solution to deal with the exponential growth in the number of small, deferred pension pots. I agree that something needs to be done to sweep up the millions of pots under £1,000 which are expensive to administer, and which consumers risk losing track of. In the Autumn Statement, despite widespread industry cynicism, the DWP confirmed it will proceed with its ‘multiple consolidator model’. But in addition, it launched a call for evidence on another new initiative – the Lifetime Provider model or ‘pot for life’.

Multiple consolidators

The plan here is to authorise a small number of existing schemes, primarily master trusts, to become consolidators for eligible small, deferred pension pots. An automated consolidation process, supported by a clearing house, will match the deferred pot with the member’s chosen consolidator, or allocate one. The FCA is expected to develop a separate regime for contract-based schemes, but surely it would be better to find a way to join these up?

Lifetime Provider Model – ‘pot for life’

Alongside this, the Government has just launched a Call for Evidence on a ‘pot for life’ approach as a means of limiting the creation of new pots when people change employers. This would allow individuals to have their own and their employer’s contributions paid into an existing pension scheme when they change employer. This too would require a clearing house so employers don’t need to forward money to an ever-growing number of schemes. The plan is to introduce this initially on a voluntary basis for engaged savers, but potentially as a stepping stone to making it the auto-enrolment default model.

On the positive side, pot for life would offer more control to engaged savers. But it’s not without its risks. If employers see their engaged employees choosing other pensions, this could weaken their interest in promoting their chosen pension scheme, or worse still their willingness to pay employer contributions above the minimum. This could be bad news for the unengaged majority, potentially leading to poorer outcomes.  

Both the consolidator model and pot for life will require extensive infrastructure. So will pension dashboards, which will allow individuals to see all their pots, however small, all in one place. I’d favour getting dashboards in place first and then building on their infrastructure to support any future small pot initiatives.

This is one candidate for an incoming Labour government to look at alternatives.  

4. Pension freedoms for members of trust-based schemes

The Mansion House bumper pack also consulted further on 'helping savers understand their pension choices'. This aims to offer all trust-based members a wider range of options, building on the pension freedoms which those in contract-based pensions already enjoy.

The initial focus, reinforced in the Autumn Statement, is to offer all trust-based members access to income drawdown, either within the scheme or by partnering with a scheme such as a Master Trust which offers drawdown. In 2024, I expect there to be much more focus on doing so voluntarily ahead of any legislative requirement.

Another proposal is that trustees must put in place a default or ‘backstop’ decumulation solution for non-engaged members. Decumulation is far more ‘personalised’ than the accumulation phase. In our response over the summer, we suggested the focus should be on improving engagement first, with the ‘default’ being truly a last resort. The latest DWP update acknowledges some of our concerns, but they’re proceeding largely as consulted on, encouraging trustees to take forward not just drawdown but also the backstop proposals on a voluntarily basis. One new indication is that over time, the DWP is minded to make the backstop decumulation solution the default unless members opt out and choose their own approach.

The third strand is to offer access to decumulation-only CDC but as these don’t yet exist, that will be a longer-term development. I’ll touch on that in the next section.

If you advise trustees of workplace pensions, they may well want to get on the front foot regarding how to make sure they offer access to drawdown, with appropriate support including advice where required.

Again, I see no particular reason why a Labour Government would be against these proposals.

5. Collective Defined Contribution (CDC) schemes – next steps

As the Autumn Statement confirmed, the Government remains committed to extending these from the current single (or connected) employer model to a multi-employer variant, and then to a decumulation only CDC vehicle. One aim is to boost member outcomes. But this also links to the Mansion House private assets agenda, as such schemes operate a single pooled investment fund without member earmarking. As a result, CDC schemes should be able to invest for growth for longer, including in private equity.

While I remain sceptical of any significant demand for multi-employer arrangements, I’m interested in how the ‘decumulation only’ variant will develop. Aegon and AON produced a White Paper on possible consumer demand. This showed that around 50% of those who'd currently favour annuity and 21% of those who might currently opt for drawdown expressed interest in a decumulation only form of CDC.³ This was 30% of the overall sample. While much depends on the assumptions around target income levels, this is something worth exploring further, although any advice opportunities won’t emerge for a couple of years.

I believe a Labour Government would support CDC as a collective pooling of risk across members.

Conclusion

The potential to have a new political party in power in the not-too-distant future adds to the uncertainty as we look ahead to 2024. But change is coming – whether from a new Labour Government, or the continuation of a wide-reaching Conservative change agenda around pensions and their investments. 2024 will be a busy period of change, and one which will deliver a whole range of opportunities for advisers.

Read part 2 of this series here: Thinking ahead to 2024 part 2: more pension plans and FCA priorities.