This month the Pension Minister, Torsten Bell published a long Bill concerned with Pension Schemes. Intermediaries in the retail market may consider it has little impact on them, and it may yet be amended before becoming an Act to make it impotent, but right now it has the look of an Act that that will change pensions over the next 10 years.
I say 10 years because the “scale” requirement on pension providers requires them to show they have a pension scheme or “equivalence”, in terms of a consolidated GPP offering that gives it silence of £25bn by 2035.
The emphasis is not the wealth market but the workplace pension market and the chief features of these new mega-funds is that they will default to pensions rather than promote pension freedom, advice and choice. In short, people will be given a default which will look very much life a defined benefit pension or a similar pension issued without a guarantee – known as a CDC pension.
This will mean a lot of consolidation. Occupational pension schemes sponsored by a single company may choose to become part of multi-employer master trusts.
There is unlikely to be a multiplicity of defaults, there are likely to be a small number of providers operating in the pension schemes regime and it looks as if the default will have to provide protection against living too long and a regular income to that point, that does not give a lot of capacity to do cashflow management from the drawdown, if that is required then people will have to opt-out of the default. The pension minister has suggested the Government expects defaulting away from defaults in decumulation will be similar as percentages of the population to in accumulation. Around 90% of savers do not opt-out of their accumulation strategy set for them by the providers of workplace pensions whether contractual or trust based.
This will mean a lot of consolidation. Occupational pension schemes sponsored by a single company may choose to become part of multi-employer master trusts. We have seen Lloyds Bank announcing its intention to take its staff DC scheme into the Scottish Widows Master Trust, coincidentally owned by the Lloyds Banking Group. We are likely to see GPPs being moved using new powers given to their providers, into master trusts. This will not require permissions from policyholders (as it does today). We are likely to see smaller master trusts merging with larger ones so jointly they can meet the scope requirements which start at £10bn in 2030 and hit £25bn five years after that.
Once schemes are of a size to invest in private markets, it will be required of them to do so. If allocation targets are not met by schemes, the Government, through its regulators may use backstops. We don’t know what these will be; Ros Altmann is suggesting taking away tax-relief from schemes who aren’t meeting Government set targets for allocation to the UK and private markets, it is more generally than fines and closure might be used where “mandating” is needed. Whether you call it incentivisation or mandating, this is proving controversial.
So where does this leave the retail “advised” market? We will no doubt see replication of some of these strategies in wealth management. The emphasis of the Government on “value for money” rather than analysis of charges to the expense of everything else will probably be welcome to IFAs but the cost of achieving the kind of strategies available if you have £25bn to invest, may prove to replicate at reasonable cost. The FT ‘s editor Toby Nangle has recently estimated that what might cost less than 1% though the direct investing of schemes like USS and LGPS will cost 3-5%pa , if using fund of funds structures which are generally the means with which most open ended structures operate.
The question for wealth managers and financial advisers is whether they can argue within their consumer duty that the new style “mega funds” which most people will be in, can be transferred out of. We have seen this in the past where the funds being transferred from were defined benefit. Ironically, the new DC schemes the Government are proposing, will look increasingly like DB plans when paying pensions and more unlike the accumulation schemes that workplace is today. The shift from fragmented pensions to a few mega funds will present advisers and wealth managers with new challenges. I expect they will rise to those challenges; they always have done so far.
