With a general election approaching, both the chancellor and the new minister for pensions have expanded on their ambitious agenda for workplace pension reform.
Prior to Wednesday’s Autumn Statement, they had outlined a range of measures intended to consolidate the market, deal with the small pots problem, drive better value for money and encourage pension schemes to invest more in less liquid assets.
These things are all interlinked – consolidation is seen as a quick route to building bigger pension funds, Scale is seen as key to driving better value for money and enabling schemes to invest less liquid assets.
Value for money metrics are seen as desirable in their own right but also as key to shifting the workplace pension market off its strong focus on charges and thereby enabling investment in more expensive illiquid assets. It’s all intended to fit together as part of a coherent whole.
The lesson from Down Under is that policymakers build an administration system that allows the consolidation of small, deferred pension pots.Chancellor Jeremy Hunt then threw two further things into the mix. First, he said that he thought the majority of people should be saving in schemes with more than £30bn assets under management by 2030.
That’s the first time we’ve seen numbers and a timescale for the consolidation drive. Second, he announced a call for evidence on “pot for life”. In loose terms “pot for life” implies that people could choose their pension provider and that it would follow them from job to job.
We think that asking whether this is a good or bad proposal is much less useful than asking whether or not it’s inevitable. And here, we think it’s worth looking at the journey Australia has been on over the last decade, noting that they are about 10 years ahead on their DC journey than we are.
For us, the lesson from Down Under is that policymakers build an administration system that allows the consolidation of small, deferred pension pots.
They then realise that the system can do a lot more than just consolidate small pots, it can also potentially enable “one pot per person” and enable choice of provider.
They then decide to use all the functionality they’ve built. Once you start down the road on small pot consolidation, the Australian experience suggests that pot for life is where you end up.
Second question
Given that, we think the second question to be asking is how Hunt can make this agenda consistent with his other ambitions. On the one hand, he’s looking to build much bigger pension funds, deal with the small pots problem and get more money into domestic illiquids.
On the other, he’s trailing a radical proposal that could fragment the market, potentially by allowing people to choose from a very wide list of providers as the recipient for their workplace pension contributions.
That would cut across his other objectives.
We don’t see the “build bigger pension schemes, encourage them to invest in illiquids” agenda as derailing pot for life but we do see it as running counter to some of the more radical suggestions – like allowing non workplace pensions into the workplace pensions market.
We need to remember that this new agenda is going to take at least one Parliament of massive legislative, regulatory and administrative reform to implement and there’s an election coming.
Nobody has a pensions crystal ball.Broadly, we think that the challenges facing Labour and the Conservatives are similar, their policy stated objectives are quite similar and this may mean that they get themselves to a similar place on the detail of policy.
Labour has yet to lay out a full agenda for workplace pension reform. The report of Labour’s National Policy Forum to the 2023 conference contained a few references to pensions and, particularly, pension fund investment.
Building on last year’s O’Neill review, the Labour view on pension fund investment in illiquid assets is quite similar to the Conservative version.
They want to see greater pension fund investment in infrastructure that’s critical to the net zero transition and they want to encourage pension funds to invest more in growth phase equity.
So the detail of what Labour thinks on workplace pensions isn’t clear. But, as it is saying similar things to the Conservatives on pension fund investment in illiquid assets, it’s possible that the party will get itself into the same place on the mechanics of workplace pension reform.
That would imply a similar path on pension scheme consolidation. Beyond that, things get much less certain, and nobody has a pensions crystal ball that sees that far into the future.
Phil Brown is director of policy at People’s Partnership, provider of The People’s Pension
