Keynote speech PensionAge autumn conference 19 September 2019
Good morning. It’s a real pleasure to be here to kick start the conference.
In the next 15 minutes or so, I will speak about what our sector needs to do to earn the public’s trust, and to live up to our purpose of securing people’s retirement. I will touch on pension dashboards, the freedom and choice reforms, DB consolidation, and where next for auto-enrolment. I hope that we can then have some questions from you.
Do we have a trust problem as a sector?
We certainly do – NEST surveyed working people eligible for auto-enrolment and found a quarter do not trust pension providers. The Wisdom Council’s research last year found that the word pension scares people, that pensions feel like a minefield, that they give people a bad feeling and are perceived as unreliable.
Some might of course feel that there is a world of difference between a contract-based defined contribution pension scheme run by an FCA-regulated provider, and a trust-based final salary pension scheme, and so attitudes and trust should be very different.
But in reality, consumers see a single pension sector.
To underline this, the Atlas Master Trust released an interesting report just a few days ago. Of the 2,000 employees they polled, three quarters did not know the difference between defined contribution and defined benefit pensions.
The same report found that six in ten savers find pensions confusing, are unsure how much to save, and don’t have a specific retirement goal. Three quarters said they don’t know enough about pensions to make informed decisions.
And a massive 96% called for more transparency from employers about pension shortfalls and the realities of retirement.
And transparency is key here.
We have a long history of pensions being done to people, rather than people taking active decisions about their financial future.
In the past, this system has worked beautifully for many, especially those enrolled in final salary schemes by paternalistic employers who had long tenures and a lot of career progression. It did require next to no engagement from scheme members and better still, delivered fantastic outcomes.
But we all know that other than in the public sector, final salary schemes will be the exception, not the rule. DC will be the typical experience of those now in their twenties and thirties, and those who have yet to enter the workplace. In fact, fewer than one-in-five under 29s have any element of final salary in their savings.
Workers are not likely to stay with a single employer either.
Not only are people projected to have 11 jobs during a career, if you read some of the predictions about the future, we can also expect to spend more time retraining and taking different jobs as our working lives extend much further and artificial intelligence and robotics shake up the labour market, further disrupting our pension journeys.
So people will definitely wind up with quite a few different pension pots from different employers. And that is a big problem unless we radically change the way we go about communicating with scheme members, because people do lose touch with their pensions.
We commissioned the Pension Policy Institute to estimate the number of pension pots lost to their owners – lost in the sense that individuals have lost touch with their pension, and providers struggle to find them. The scale of the lost pension mountain is huge.
The PPI estimated that 1.6 million pension pots could remain unclaimed, amounting to almost £20billion.
The real figure is likely to be even higher as the research did not look into defined benefit schemes.
The Government have also predicted that there could be as many as 50 million dormant and lost pensions by 2050.
That is an unacceptable position, and one of the reasons why pensions dashboards are so critical - to citizens but also to how our sector is perceived. Once all pension schemes are connected to an infrastructure that allows people to find all their pensions easily by inputting minimal information about themselves – their name, date of birth and national insurance number, engagement with pensions will change fundamentally.
Having led the development of the pensions dashboard prototype for Government three years ago, I am delighted this project now sits with the Money and Pensions Service and will be a co-creation between them and the industry.
Next week we should know who is involved in the Industry Steering Group, and the Money and Pension Service is taking applications to get involved in working groups as well. I would urge you all to help this process and contribute your expertise so that we make dashboards a reality and give people the ease of engagement they deserve.
All we then need is a Queen’s Speech so that a Pensions Bill can actually make its way through Parliament in order to provide clarity that all schemes have to supply their members’ pension data in a standardised format.
Pension dashboards will deliver transparency, allowing people to finally know what pension entitlements they have, where they are, and what they amount to in total. Perhaps most importantly, conveying the sense of ownership that we all feel about the money in our bank accounts.
Building up trust is not straightforward – but transparency is an important enabler.
We also need to make sure we don’t squander the modest trust there is. And in that context, the long-term consequences of the freedom and choice reforms really matter.
We have been looking at what people do with their pension pots ever since the freedoms were introduced.
The data from ABI members initially suggested that consumers were making sensible decisions. Broadly speaking, they were accessing small pension pots as cash, and leaving larger pension pots untouched.
However, more recent data shows a trend towards people taking larger proportions of their pot through regular withdrawals: 44% of customers took more than 8% per annum in the year to March 2019.
At the same time, a growing number are unadvised. Other evidence shows consumers are making complex choices in drawdown without fully understanding how it works.
Freedom and Choice has also led to a surge of transfers from defined benefit to DC schemes which has exposed huge flaws in the advice market.
The FCA has sought to reduce the risks with its Retirement Outcomes Review, and a recent consultation pension on transfer advice. But risks remain, especially around unsustainable withdrawal rates in non-advised drawdown; the large number of withdrawals as single lump sums, particularly at early ages; and customer vulnerability, particularly in later life.
This has led us to think again about Freedom and Choice – the principle of giving people ownership and choice is right, but have the right parameters been set?
We believe that four safeguards should be put in place now to help customers manage those risks more safely.
Firstly, the minimum pension age should be increased from 55 to 57 over the near term. This was already part of the Government’s original plan in 2015, but has not been legislated for. Government should then review the minimum age regularly.
Secondly, a later life review of retirement options should be introduced at age 75.
Thirdly, providers should be enabled to provide more help to customers without giving advice.
Finally, employers should be required to give standard information about their DB pension scheme before someone is able to transfer out.
We will do more detailed work on these and other consumer protections at and during retirement which we are planning to publish next year.
Still on the theme of shoring up the modest amount of trust that we actually have with the public, rather than squandering it, I also want to touch on DB consolidation.
We have been very actively engaged with Government on this. We agree that scale and consolidation in pensions are desirable, and that solutions need to be found for small under-funded defined benefit schemes.
However, the so-called “Superfunds” structure proposed by DWP in its consultation earlier this year creates four very significant problems.
Firstly, as proposed, the risk of a failed superfund would stay with other employers through the PPF and ultimately the Government. This increases the risks compared to the status quo, where DB schemes don’t have to meet any return on capital or deliver a profit. It means that a SuperFund would be in a “Heads I win, Tails you Lose” position where it keeps the earnings it extracts, but socialises the losses through the PPF.
Secondly, the policy would embed moral hazard by reducing the employer’s incentive to improve scheme funding. The way the Gateway is currently constructed would drive employers towards starving the scheme to get it off their hands as soon as possible, rather than patiently increase funding, engage in ongoing risk management, or use partial or full insurance buy-out.
Thirdly, the policy is not targeted at the most badly under-funded DB schemes whose members need assistance the most. It will do nothing to tackle the biggest risks, while allowing SuperFunds to pick up better-funded schemes that are nowhere near the point of crisis. And indeed, at least two of the new SuperFunds have said they will target only well-funded schemes.
Finally, employees past and present are exposed to more risk without any say. In particular, the policy did not propose any restrictions on the investment strategy SuperFunds can pursue, with only the PPF addressing this through its levy. This means consolidators would choose higher-return, higher-risk investments that deliver profits and dividends to their capital backers but expose scheme members to more volatility and risk. This is in marked contrast to an insurance-backed scheme, where the employee is guaranteed the pension and the investment choices are highly regulated.
As a result, the policy as originally proposed offers huge opportunity for regulatory arbitrage: it would allow consolidators to manage pension liabilities not only without making any firm pension promise to scheme members, but also without the safeguards involved in Solvency 2 capital and governance standards, the Senior Managers Certification Regime, and close regulatory supervision.
The Bank of England, through the Prudential Regulation Authority, has equally expressed considerable concern about the risk of regulatory arbitrage. Needless to say, it’s pretty unusual for the Bank to step in when Government departments consult. The PRA said the Directors of consolidators should be subject to requirements that mirror the regime for financial institutions, that the methodology for determining the financial adequacy of consolidators should be comparable to insurance, and that the reporting requirements and that supervision should be similar as well.
We take some comfort from the fact that no decisions seem to have been made yet. The Bank of England has said it is critical that this new regulatory regime is well thought through, and that they “encourage a measured pace for policy”.
We couldn’t agree more – we have just automatically enrolled millions into workplace pension savings and begun to normalise workplace saving again. We simply can’t afford another pension scandal five or ten years down the line with a consolidator failing.
Finally, a few words about where next for auto-enrolment.
I won’t repeat here that this has been a huge success. But we need to ask ourselves the question: does our pension system actually serve the needs of all citizens? We are already well aware that the growing number of self-employed people does not benefit. But there is another very large group missing out. In fact, 50% of the population!
Women in their late 50s currently have around half the private pension savings of men of the same age. Worse still, with no policy change, the pension gender gap will narrow by only 3% over the next 40 years. Even with auto-enrolment!
So we need to look very closely at how we can change the system to serve women better.
The ABI is heavily engaged in a cross-sector initiative with the Chartered Insurance Institute called “Insuring Womens Futures”. As part of this, a cross-sector group I chair have been looking at policy change to plug the gender pensions gap.
Clearly a lot of the factors behind the gender pensions gap are wider than pension policy and relate to employment law, societal expectations and gender stereotypes.
Nevertheless, it is also important to examine the auto-enrolment parameters. If we look at the auto-enrolment trigger of £10,000, over three quarters of employees earning less than the trigger are women. Equally, over 50% of part-time workers earn less than the auto-enrolment trigger, and 80% of part-time workers are women.
We call on Government to look forensically at women’s experiences with pension savings, and to reduce the auto-enrolment trigger to help more women build up retirement savings of their own.
The trigger could be reduced to the national insurance primary threshold, which would capture around 400,000 more women.
This is one of the recommendations we will be putting forward – and there is much more to follow when the initiative is launched in November.
To sum up, there are no simple solutions to rebuilding trust in our sector. The UK pension system is constantly changing and is also very complex – both in term of its rules and the changing needs of savers.
But we can do three things:
- We can embrace transparency through getting behind pension dashboards
- We can avoid making matters worse, by addressing the risks of freedom and choice, and proceeding thoughtfully on DB consolidation
- We can work persistently across many different fronts to improve the options available, including those for women and other excluding groups.
Patient and hard work on all these issues may not be glamourous but it is the only approach to deliver a pension system that truly serves all citizens – because their retirement depends on our sector.
ENDS