Industry experts predict 2023 to be a busy year for pensions with the Department for Work and Pensions (DWP) signalling its intention to publish new value-for-money metrics.
The People’s Partnership director of policy Phil Brown expects that this could fundamentally alter how defined contribution schemes and products are viewed by customers in the long run. For this reason, he says, it is critical that the resulting information is readily available to those who will be most impacted.
In 2022 new regulations stated that trustees and administrators of DC schemes with assets under £100m must determine whether their present pension plan provides value to its members.
Buck head of DC & wealth Mark Pemberthy says: “The enhanced value for money assessments for smaller pension schemes is starting to have an impact on trustees attitudes and objectives and do we expect 2023 to continue to see lots of trustees and sponsoring employers looking to consolidate single employer trusts with master trusts.”
Punter Southall Aspire chief commercial director Alan Morahan agrees that there will be a move towards master trusts.
He expects consolidation to continue, especially in occupational DC. According to Morahan, employers and trustees are reevaluating why they are operating inefficient occupational DC schemes and whether they can demonstrate value for money to their members in light of all the expenses involved in running them, leading schemes to wind up and move to master trusts.
The resilience of auto-enrolment is also on the agenda this year, especially against the backdrop of the cost-of-living crisis.
According to Brown, it is difficult to see how the government can increase the scope of auto-enrolment eligibility during the current economic crisis but suggests that the government and the pensions sector can take advantage of this time to lay the groundwork for reform after the crisis is resolved.
Brown says: “The anticipated increased financial pressures on millions of people could lead to a significant increase in those stopping paying into their pension. While the cost-of-living crisis has not yet affected the running of auto-enrolment, it is likely to have impacted its future development.
“There is no plan for the implementation of the 2017 review reform package; reducing the age threshold for automatic enrolment from 22 to 18 and removing the lower earnings threshold on contributions.”
Morahan adds that these recommendations are relatively minor changes compared to the necessary step of raising contributions in the coming years.
He says: “We can’t continue with a situation where pension contributions on an auto-enrolment environment are just woefully inadequate. We’re just building up problems for the future if we don’t address that issue. The industry will continue to call on the government to ratify the recommendations that are already on the table and then do something about future pension increases.”
Meanwhile, the performance of investment funds, especially pre-retirement investment strategies, was a major factor in 2022. Many of these strategies were adversely impacted by the sudden decline in bond values.
According to Buck head of DC & wealth Mark Pemberthy this will probably reverberate for a few years to come, both in terms of the effect on members and the motivation for pension providers to reevaluate their default investing strategy.
Pemberthy also highlights financial wellbeing and the trend toward employers considering their employees’ overall financial wellbeing rather than just having a narrow focus on retirement planning.
He says: “Some research that we did recently indicates that 97 per cent of employers are now wanting to proactively help members achieve good all-round financial wellbeing and not just focus on retirement. Not that retirement is now a secondary issue but universally employers are looking to support employees with short, medium and long-term planning and not just retirement.
Pemberthy, therefore, anticipates that the cost-of-living problem will significantly speed up the creation of shorter-term workplace savings solutions alongside pension schemes.
Additionally, many businesses are seriously questioning their CSR and ESG initiatives and beginning to explore how it is reflected in their working environment, particularly the employee benefits they offer says Pemberthy.
He says: “This isn’t just about ESG investment in default funds and pension schemes but also the capabilities and behaviours of the providers and the sustainability and responsibility of their principles and objectives.”
Morahan concurs that employers and providers will continue to place a lot of emphasis on ESG in relation to DC and investment.
He says: “There might be more responsible for employers and sponsors to start making decisions as to whether they move default funds to a more ESG focus approach because I don’t think the general public really get it and they’re generally not that engaged with their pension funds anyway. They may look at fund value but not where their money is invested other than perhaps when they notice it go down in value.
“If progress is to be made on ESG then the responsibility will sit on the provider, adviser and employer side more than it will with the members themselves.”