Pensions changes in the Chancellor's Mansion House speech

On 10 July 2023 in his Mansion House speech, Chancellor Jeremey Hunt announced the government’s plans to transform the UK’s financial services sector. The announcement was followed the next day by a raft of consultation documents from the DWP addressing a range of pension reforms aimed at boosting outcomes for pension savers and supporting growth across the wider economy.

Pensions proposals

The proposals from the DWP focus on three broad areas:

1. Delivering better outcomes for (DC) savers
2. Consolidation and other options for defined benefit (DB)  
3. Trustee skills, capability and culture 

Whilst each proposal relates to a specific issue, investment is the reoccurring theme and, taken together, the proposals are designed with the aim of delivering better outcomes for all pension savers, regardless of the type of scheme they are in, and unlocking capital in the private sector. 

Delivering better outcomes for DC savers

Delivering better outcomes for DC savers has been a hot topic for the DWP for a number of years, and the Mansion House proposals only reinforce the importance of this issue to the government. A significant proportion of the documents published by DWP on 11 July relate, in some way, to improving the DC experience and ensuring that members get the most out of their pension savings. 

The specific changes proposed:

• Value for money (VFM): the DWP intends to replace the existing VFM requirements in the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 with a joint VFM framework (between the DWP, the Pensions Regulator (TPR) and the Financial Conduct Authority). 
  
  The framework is designed to standardise reporting across the pensions industry to increase transparency and enable comparison. It is also intended to drive consolidation where schemes are not providing value.
  
  The DWP proposed the framework back in September 2021 and formally consulted on it in January 2023. The response was published on 11 July but the DWP is not consulting further on specific questions at this stage. However, responses to some of the other consultations published on 11 July will influence the VFM proposals as they progress. 
• Support and products at the point of access: the DWP intends to introduce a broad framework of trustee duties requiring them to offer support and decumulation services suitable to their members. The DWP says these obligations will create a minimum offering for all members, regardless of scheme, and enable members to receive a later life income through a produce that best meets their needs. 
  
  The question of support and products at the point of access was raised as part of the DWP’s June 2022 call for evidence on helping savers understand their pension choices. The DWP is consulting further on this specific point, inviting responses by 5 September 2023. The DWP will address the remaining issues raised the 2022 call for evidence, namely information, guidance, communications and engagement, later this year. 
• Collective defined contribution (CDC) schemes: the DWP confirmed plans in its consultation response to press ahead with its January 2023 proposals to extend the availability of CDC schemes to unconnected multi-employer whole life schemes. The DWP is working to progress its proposals in this area, in particular in relation to decumulation only options, and is not consulting further at this stage.
• Small DC pots: The DWP is planning to introduce a default consolidator model to address the proliferation of small DC pension pots arising largely from the introduction of automatic enrolment,
  
  In January 2023, the DWP issued a call for evidence asking for views in two large scale consolidations solutions: the default consolidator model, under which small pots are transferred to a consolidator scheme, or the pot follows member, under which a member’s savings pot follows them to their new employer’s scheme when they move jobs. 
  
  The DWP concluded, based on responses it received, that the default consolidator model has the potential to provide greater net benefits to members and is consulting further on the proposed framework. Again, the consultation closes on 5 September 2023.

Consolidating DB schemes and other options 

In December 2018, the DWP consulted on a legislative framework for authorising and regulating DB consolidation vehicles, more commonly referred to as DB superfunds. More than four years later, the DWP has published its response confirming the government’s support for DB superfunds and has committed to implementing a permanent legislative regime to ensure their development. 

The DWP says that DB superfunds will be helpful to employers, members and the wider economy alike. They will help provide greater security for member benefits whilst enabling employers to step away from their DB scheme obligations and focus on their day to day business, to the benefit of the economy as a whole. 

The DWP will continue to progress its DB superfunds proposals, and in the meantime has issued a call for evidence on other options for DB schemes. The government wants to ensure that pension scheme funds are working as effectively as they can, both for members and the wider economy, and so the call for evidence focuses on:

1. DB asset allocation and incentives around investment strategies, in particular whether DB schemes are underinvested in productive assets and if so, what can be done to encourage change.
2. Current rules and barriers around surplus, how surplus could be effectively utilised and how the law might need to be changed to facilitate that.
3. The potential for consolidation options, looking specifically at the development of a public consolidator.  This could, for example, see the PPF’s function extended.

The call for evidence closes on 5 September 2023.

Trustee skills, capability and culture

What is clear from the wealth of changes in proposed in the documents published on 11 July alone, is that trustees are expected to operate in an increasingly complex and ever-changing environment. It is vital, the DWP says, that they are properly equipped and supported to meet the demands of their role. For that reason it has issued a call for evidence looking at the role of trustees, the role of advisers, and barriers to trustee effectiveness.

There is a particular focus in the consultation on investment decision making.

The call for evidence closes on 5 September 2023.

What does it all mean?

For pension scheme members, the Chancellor claimed in his speech that the suite of reforms proposed could increase the pension pot for an average earner, who starts saving at age 18, by 12% over the course of their career, with an attached value of over £1,000 more per year in retirement.  The Chancellor also highlighted that the reforms have the potential “to unlock an additional £75 billion of financing for growth by 2030”.

Are the changes (which will inevitably come at a significant expense to many schemes) going to be worth it for an individual member gain of less than £100 per month 50+ years from now? That remains to be seen, and the DWP has raised the issue of implementation costs across the new consultations.

What we know right now though, is that value for money and consolidation, in both the DC and the DB sphere, remain high on the government’s agenda. Although none of the documents published on 11 July address DC consolidation directly (in contrast to DB), it is a recurring theme of the proposals. Both the VFM framework response and the consultation on decumulation support and products acknowledge that where schemes are unable to meet minimum standards, it may be appropriate for those schemes to consolidate into larger schemes. The devil will of course be in the detail on this, and importantly it is not yet clear from the documents published exactly what powers TPR will be given to enforce consolidation (or how strictly TPR will use them).

Industry responses to previous consultations on these topics have been plentiful and insightful, and no doubt the industry will have much to say (and give the DWP much to think about) between now and 5 September.