Thank you all for joining me today and thank you to the Professional Pensions Investment Conference for hosting me so generously. My job as Minister for Pensions is to ensure that our pension system operates to the highest standards – securing the best possible outcomes for savers. This is my duty and I take it seriously.
There needs to be a significant, transformative shift in that market. The announcements made yesterday, build on the Mansion House reforms and will:
- shift the focus of trustees, managers and employers from cost to value;
- aim to boost returns in and throughout retirement; and
- increase opportunities for investment in productive finance assets.
Through this, we aim to benefit the UK economy and give everyone a better chance of meeting their aspirations over the course of their retirement.
There’s an important agenda ahead and much more to do. With £2 trillion of assets held, private sector pensions can play a major role in boosting UK productivity and growth.
Today, I am pleased to be talking about what more we will do to deliver the long-term reforms that pension savers need. One that could potentially help an average earner have £1,000 more a year in retirement when saving across their entire career.
Automatic Enrolment has transformed workplace pension saving. It has embedded a new culture of saving for retirement at a national level.
But around 2-in-5 working age people are still under saving for their retirement. There is more to do to ensure people are saving into schemes which are helping them get the most for their retirement.
Every pension saver deserves to be confident in their workplace pensions. They must be sure that it is making the most of their hard-earned savings, is fit for purpose and offers them suitable choices that meet their needs – whichever pension scheme they are putting their money in.
To do this we need to tackle the biggest challenges facing savers today.
Many employers are still choosing their pension schemes based on convenience and fees. But investment returns need to be factored into these decisions – as we know they are critical to long-term outcomes. For example, a pot of £10,000 invested into the highest performing scheme would be worth nearly 50% more 5 years later than one invested in the lowest performing scheme.
And considering investment growth does not end when people access their savings – we want pots to grow and pay out sustainably throughout retirement.
For Defined Contribution (DC) savers, this involves making complex choices and decisions they may not understand or feel equipped to make.
Finally, we need to unlock more opportunities for schemes to invest in productive finance, supporting the UK economy and boosting member benefits. In the Defined Benefit pension market alone, there is huge potential for its £1.4 trillion in assets to work harder for members and the economy.
Our reforms will confront these challenges and help improve retirement outcomes. They place value for savers at the heart of decision-making, helping to boost returns in retirement, and contribute to the growth of the UK economy.
Together with the Government’s commitment to expand the benefits of Automatic Enrolment to younger people, our pension reforms could help an average earner who starts saving at 18 see their pension pot increase around 50% and by over £50,000 if saving across their entire their career.
Automatic Enrolment has been a huge success with over 20m employees now saving into a pension. Our publication yesterday showed pension saving was holding up despite the challenges over the last few years through Covid and increased cost of living.
I recognise though that greater investment by schemes requires even greater scale. And I am committed to the implementation of the 2017 Automatic Enrolment Review measures as a first step.
This Government supported the recent Private Members Bill, and we intend to carry out a consultation on implementation at the earliest opportunity.
Alongside this, we need to see a clear shift in the market. From consistently focusing on low-cost to centring on overall value and returns for members.
For too long, short-termism and low costs have dominated decision-making. This has meant savers potentially losing thousands from their retirement pots. Just a small increase in investment returns can lead to £1,000s more at retirement.
We want to change the tide on this.
In July we responded to the Value for Money Framework consultation and set a clear direction of travel.
The Framework will increase comparability, transparency, and competition across DC schemes. It aims to drive up standards, consolidating the market around a smaller number of well-performing, better value schemes.
It will ensure Regulators have the power they need to tackle consistent underperformance. – meaning savers do not have to remain trapped in poor performing schemes.
The statements made yesterday on Value for Money by both Regulators reaffirms our commitment to implement a Framework that drives value for savers. We are maintaining momentum in this vital area.
The Department and The Pensions Regulator (TPR) are working jointly on progressing this with the Financial Conduct Authority (FCA) and with input from across the pensions industry.
The FCA intends to consult over the detailed design and rules relating to the Framework in Spring. And as this will be a holistic framework, trust-based schemes should engage with this consultation and start to plan for implementation.
Taking this approach of evolving the framework means savers can be confident that we are building a pension system that will deliver real value – providing them with the best returns for every hard-earned pound they save.
This will go a long way towards moving from cost to value, maximising the returns for DC savers and generating the scale for investment in productive finance that will support the UK economy.
To further drive value, we must definitively tackle the issue of deferred small pots.
Currently there are at least 12 million deferred pots worth less than £1000, resulting in annual industry-wide losses of up to £225m.
Without action this problem – of wasted administration costs and inefficiency at the heart of the pension scheme business model – will only worsen.
And for savers, multiple small pots make it more difficult to engage with their overall pension, limiting and reducing their options at retirement. Or in the worst case being lost altogether.
We have taken important steps to resolve this. In the summer, we consulted on the proposed multiple default consolidator approach to address this growing problem.
Yesterday, I published our response to the consultation which confirms our intention to proceed with this approach, ensuring that eligible pension pots are automatically consolidated into a small number of authorised default consolidator schemes.
Bringing members’ eligible deferred pots together into a high-quality pension scheme that could benefit the average saver by £700 at retirement. This will help generate the scale to invest in productive finance, providing further opportunities to invest in the UK.
This is a complex and challenging policy to implement.
We will bring together experts in payroll, data specialists, and leverage knowledge from dashboards, to get the transfer and consolidation system design right.
My aim is that this will support the development of a viable and cost-effective automated consolidation process; while continuing to ensure that members interests are put first.
By complementing these reforms with a robust regulatory regime, we will ensure savers are protected.
I want to enable a more assertive, influential regulatory approach, that drives meaningful behaviour change from those looking after savers’ assets.
This starts with regulators being absolutely clear about the primacy of investing for good returns in their supervisory and enforcement approaches.
It also extends to offering greater support and expectations on trustees to fulfil their key responsibilities, including through voluntary accreditation.
And we will embed this regulatory approach for new types of schemes like Collective Defined Contribution (CDC) schemes and Defined Benefit Superfund (DB) consolidators.
This also means ensuring the regulatory environment for Master Trusts is future-proofed. Master Trusts are the engines of growth of the DC pension market in the UK. We estimate that 80% of trust-based members will be in the largest 5 Master Trusts by 2030.
Building on the work done by Mary Starks in her recent review of the Regulator, we are
working with TPR to propose a different approach to supervision, using its existing powers.
This includes investigating investment decision-making, demanding greater transparency of schemes when it comes to their investment strategies, and raising standards of trusteeship.
TPR’s approach to regulation will need to evolve with this changing market. And we will work closely with them to protect savers as schemes reach important sizes.
I am confident these changes will help drive up performance and returns, protecting member outcomes form the risk of low cost through a robust regulatory regime.
Members’ journey to retirement and what they want out of their financial provision varies. But maximising value and investment growth should not end at this point.
How pots are utilised and sustained in later life starts with the choices members make when they access their assets.
Six in ten individuals who are yet to access their DC savings do not have a clear plan for doing so. Over half of those who do access their pots take cash. Without a clear plan, this may leave future retirees at risk of doing the same where their pots could be better off invested.
We want to change this and expect more of trustees. I am pleased to confirm that our response to the consultation ‘Helping savers understand their pension choices’ reflects the strong consensus for schemes to adopt retirement products and services, configured to their members’ needs.
For those savers who can and do engage with their pensions, we will require trustees to provide a retirement income service, which will include the wrap around communications and engagement that is essential for a good service.
We will also require trustees to design and offer a pre-defined default retirement solution, informed and built around the needs of their members.
This would work for the generality of members of the scheme and be available as a choice for those that wish to select it. So that every saver can get the most out of their pension savings.
This way members will benefit from greater opportunities for their assets to stay invested in the scheme for longer, increasing the available funds for schemes to invest in UK productive finance.
And over the long-term, our ambition is that decumulation only CDCs be offered as a potential access option by schemes.
CDCs could be a big part of the future for pensions. A new type of scheme that can provide better returns for savers, allowing them to remain invested in high-growth assets for longer and better support growth.
At the same time offering members the assurance of a regular income in retirement and more predictable outcomes.
CDCs are new, but the Government is committed to working with industry to facilitate its development and expansion, unlocking CDC offers for many more savers.
A regulatory framework for CDCs is already in place. And we intend to consult on draft regulations early next year to extend this to whole-life multiple employer schemes, including Master Trusts.
Looking into the future we want to understand how we can go further to deliver better outcomes for individuals.
Our solution to deferred small pots is the first step to a simpler pension system.
A single pension saving experience, where savers are linked to a ‘pot for life,’ could bring a variety of benefits.
A Lifetime Provider Model would reduce the number of pots and could support members engagement with pensions.
It could also make decision-making easier where needed and, if combined with broader CDC provision, help bridge the gap to DB schemes.
I recognise this is a complex terrain. But we need to start the conversation now and build on the other reforms that are already in train. As the Chancellor announced yesterday, as part of our call for evidence we will explore giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose to bring their pensions savings together.
Moving to such a system would take time but bringing pensions savings together will have advantages for savers, our ultimate focus.
We want your input on what elements would need to be in place to support such as system and what are the benefits and challenges in doing so.
This comprehensive package will result in fewer, better run schemes – and we expect this to unlock further opportunities for pension scheme assets to support the UK economy.
For DC schemes, where improvement in returns clearly boost incomes, the measures I have just outlined provide clear reasons for trustees to ensure they are focussed on value over cost.
In the DB market, which holds £1.4 trillion in assets under management, costs are borne by sponsoring employers and there is less opportunity to boost member benefits.
However, there is still a clear opportunity for these assets to work harder to benefit members, employers and the economy as a whole.
As part of the Government’s drive to deliver greater economic growth, we are committed to ensure that there are options in the DB regulatory regime which reward productive investment behaviour and move the focus on DB schemes from purely downside risk protection.
The revised scheme funding arrangements will make it clearer that trustees can continue to invest in a wide range of assets, including productive finance, while ensuring members benefits are protected.
They also provide additional flexibility for pension scheme surpluses to be used and managed more efficiently.
Many DB schemes have become better funded over the last decade and have moved closer towards buy-out or a surplus funding level that allows them run on comfortably. But these options aren’t appropriate for every scheme or every sponsoring employer.
We need to provide other options that allow sponsors of closed legacy schemes to focus on their core business, while protecting the pensions members have worked so hard for.
The Superfund framework, which was announced earlier this year, will provide an efficient way of effecting consolidation of these DB schemes and I was delighted to see the recent historic announcement of the first transfer of its kind in the emerging Superfund market.
Thanks to responses received from the DB Call for Evidence – today – I am pleased to announce that we intend to establish a public sector consolidator, run by the Pension Protection Fund.
This will offer an alternative for schemes which are unattractive to commercial providers. It will help unlock access to higher-growth assets in which some schemes would struggle to invest on their own.
And for schemes looking to run-on, we will look at the mechanisms for surplus extraction. We believe if it was easier and cheaper to take back funding over certain levels this would encourage more schemes to invest more in productive finance.
We understand the concerns around safeguards for members, and the opportunity to share benefits. So, we aim to launch a public consultation addressing these questions in the winter.
These options could allow members to benefit from increased pension returns and support the UK economy – both through unlocking further opportunities and access to more illiquid investments, and by enabling employers to re-invest in their own businesses or DC pensions obligations.
Today, I’ve set out the direction of travel for the future of the UK’s pension market.
I want to thank the Chancellor for his commitment to delivering these reforms and industry for their continued engagement and support.
We are strongly committed to building on these reforms to make a real difference. We estimate these changes will potentially help a median earner have over £16,000 more in retirement when saving across their entire career.
Building the path to a pension system that puts savers at the forefront and supports the UK economy.
