Let’s talk about the Pensions Bill

The Pensions Bill is bringing change, but it’s just the tip of the iceberg.

On the day the new Pensions Bill was announced on 5 June, guests at our regular London town hall event for EBCs and advisers had come along to hear about pension policy developments and talk about the big issues facing industry, along with their peers.

As it turned out, the timing could not have been better. The agenda quickly pivoted to what the long-awaited Bill set out, with our Head of Pensions Policy, Pete Glancy, going into the deeper details and explaining what it’s all going to mean for providers, employers, advisers and, of course, members.

While the government had signalled its intentions for the Bill, Pete had been keeping close to the detail as it was falling into place, meaning he was able to delve into the details straight away. He was able to outline the likely impacts and answer the pressing questions which everyone in the room wanted to ask over the course of the evening.

Unsurprisingly, confirmation that providers will need to pass a £25bn scale test was one of the major discussion points. Whilst we all knew that the scale test was coming, everyone wanted to know the benchmark and the mechanics.

To survive beyond 2030 operators of auto-enrolment (AE) schemes will need to have at least one investment default arrangement which is at least £25bn in size. Where more than one pension product (GPP, GSIPP, Master Trust) points into a default of that scale, these will all be considered to have passed the scale test.

There is a path for the ‘second tier’ of operators who can’t meet the £25bn test, but which have at least £10bn in their largest default by 2030. They will be able to apply for a ‘transitional pathway’ which means they could potentially be formally authorised in 2035 provided they reach £25bn by then, but also satisfy a number of other, more subjective, assessments to be made by the relevant regulators.
 

Addressing fragmentation will also be key

Although some of the largest operators of workplace pensions have significant assets under management, each product can have its own default fund and often large clients have their own employer default arrangement.

Government is taking three actions to address this fragmentation:

1. Through the new FCA Value for Money (VfM) framework, providers will be ‘encouraged’ to consolidate multiple defaults into a single ‘megafund’.
2. New investment defaults will require a regulatory permission from a date which is to be confirmed in the near future. It’s unlikely that new bespoke defaults for individual employers or advisers will be permitted.
3. The £25bn scale test will often require that products are migrated and/or consolidated into a single ‘mega fund’ in order to satisfy the initial scale test. For example, where the GPP and Master Trust are invested in separate defaults.

While there are worries that fewer providers could result in less competition in the market, I’m of the belief that fewer, bigger, scale providers can be more innovative, with the resources to trial new ways to engage, and invest in digital services and innovation in new areas such as AI – as well as offering economies of scale.

Those providers who have yet to address the fragmentation of their products, platforms and default arrangements could face years of development work which could be a major distraction at a point where clients and prospective clients need a considerable amount of support, helping them through the complexity and breadth of the regulatory and legislative changes, and benefiting from advances in technology.

Change… and more change

The reality is that the Pensions Bill sets out its stall to improve retirement outcomes for around 20 million workers, which is a very welcome ambition that we share, but it means a lot of change for the industry, and very quickly, including:

1. A new VfM framework.
2. The introduction of default decumulation arrangement across both Trust and Contract.
3. A new ‘Contract Over-ride’ facility to allow the modernisation of legacy products within the Contract Based world.

Closely linked in to all this is small pots consolidation, another aspect of the busy Pensions Bill. A small number of scale providers are likely to be successful in applying for a new permission to become a pot consolidator. The effort required to become a consolidator and to build the national ecosystem required to support all of this is likely to dwarf that of Pension Dashboards and so, in reality, the go-live date, could be some way off.

Aside from the Pensions Bill, the new ‘Targeted Support’ regime from the FCA introduces new possibilities, and the expected Open Finance Roadmap will set the direction of travel for all things digital. The second phase of the Pensions Review could result in a swathe of new opportunities to address adequacy, coverage and fairness across our pensions system.

So, demonstrating £AUA scale is only the tip of the iceberg, where lack of funding, capability and access to sufficient scarce expertise could be the catalyst for many schemes and also some providers to execute their ‘end game’ strategy of wind up and consolidation.