PensionsJan 26 2023

DWP to announce DC reforms amid cost-of-living crisis

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DWP to announce DC reforms amid cost-of-living crisis
Photographer: Chris Ratcliffe/BloombergPedestrians walk along Whitehall, past the gated entrance to Downing Street in London.

The Department for Work and Pensions will be announcing a series of reforms to defined contribution saving, in an attempt to curtail the impact of the cost-of-living crisis.

Pensions minister Laura Trott has invited a number of pensions professionals to attend a meeting on 30 January, where she will be presenting the measures.

In an email seen by FTAdviser, Trott said: “We are conscious of the cost-of-living challenges people are facing and the impact this has on their ability to save for retirement.

“The department is launching a package of measures to ensure for those who are able to put away some their hard-earned cash, pension schemes are providing them with the best value for money.”

Despite auto-enrolment opt-outs and cessation rates remaining stable, according to the latest figures from DWP, pensioners and savers approaching retirement are facing economic challenges.

According to the Pensions and Lifetime Savings Association’s retirement living standards update, published on January 12, retirees trying to achieve a basic standard of living will have seen their expenditure increase over the past year by almost 20 per cent due to high inflation.

This is due to a higher proportion of their budget going towards the things that have risen the most in price: food and energy.

The Pensions Regulator itself has said savers must be supported during current economic volatility amid concerns the value of some DC has fallen.

The watchdog published guidance earlier in January where it stated that while those who are early in their saving journey can take a longer-term view on their investments, savers who are close to retirement could be impacted, depending on the investment strategy of their scheme.

What to expect from the reforms

The new reforms will be announced after DWP refused to commit to increasing minimum auto-enrolment contributions, despite acknowledging that the current statutory contribution of 8 per cent is “unlikely to give all individuals the retirement to which they aspire”.

In its response to recommendations made last year by Work and Pensions committee in its report on savings for later life, DWP said it is committed to its current timeline and will bring forward legislation “at a suitable opportunity and when parliamentary time allows”.

AgeWage chief executive Henry Tapper said: “Having been told earlier in the week that the DWP does not intend to solve problems with adequacy by demanding higher contributions from employers and savers, it looks as if the emphasis will be on making more of what we’ve got. Which is fine by me.

“Asking people to save more when they are earning less is madness, finding ways to pay better pensions from the money they’ve saved – makes a lot of sense.”

Industry sources have told FTAdviser the reforms to be announced by the government should include several consultations tabled for 2023, such as multi-employer collective defined contribution schemes.

This consultation, which was supposed to be launched at the end of 2022, will look to introduce secondary legislation to provide a route to CDC for multi-employer schemes and master trusts.

Under these schemes, employers and employees pay a fixed rate of contributions, collected in a manner similar to defined contribution schemes. 

Benefits are paid with a target in mind, similar to defined benefit schemes, but with the prospect of variable increases — and the possibility of decreases. 

Broadstone head of policy David Brooks said the reforms announcement "hints at work that is already being considered via TPR and [Financial Conduct Authority] to establish a standard definition of value for money against which schemes could be assessed, it is highly likely that there will be work here for government to ensure high quality schemes with a consistent definition and assessment process".

Chancellor of the exchequer Jeremy Hunt announced the launch of this consultation in 2023 when presenting the “Edinburgh reforms” in December, where he said it “will set required metrics and standards in key areas such as investment performance, cost and charges, and quality of service”.

The removal of performance fees from the charge cap applied to DC schemes could also form part of the new reforms package, with Hunt noting in December that the government “has consulted on reforms to remove well-designed performance fees from the pensions regulatory charge cap and will lay regulations early in the new year”. 

“This will provide clarity for industry and ensure pension savers can benefit from investing in UK innovation,” he continued.

Brooks is also expecting this measure to be part of DWP's package. However, "it remains to be seen if members or default funds will take the plunge into these funds," he noted. 

The proliferation of “small pots” is another source of concern for the government and the pensions industry, with members losing track of their pots and providers incurring the cost of maintaining them. A 2018 Pensions Policy Institute study revealed that there were more than £19bn of savings in lost pots.

The government “is committed to accelerating the pace of consolidation so that no pension savers are left in poorly governed and underperforming schemes”, Hunt said at the time, with industry experts expecting some movement in this area in the announcement on January 30.

Lastly, but not least, Brooks would like the minister "to give some consideration to members who are torn between saving for their retirement and meeting their immediate costs of living".

He said: "Members should be given the option pause their own contributions while the employer maintains theirs, and so not completely surrendering the long term savings that a pension provides.

"Government could insist on some standard risk warning to the long-term savings and that take home pay as a result may not be significantly increases. However we all appreciate that in times like these it may just help.

"Employers and providers should be assisted by being given leeway over some the strict auto-enrolment rules perhaps for a finite period to ensure there aren’t unreasonable barriers to this easement."

maria.espadinha@ft.com