The Most Innovative Law Firm in Europe. DC Conference Dystopia or Utopia?

Transcription

1 The Most Innovative Law Firm in Europe DC Conference 2015 Dystopia or Utopia?

2 Introduction Freedom & Choice has prompted a wave of headlines harking back to the great dystopian novels whilst also breathing new life into pensions saving. The repercussions of the dramatic changes to pensions policy are only just beginning to be felt, and will only be compounded if the government presses ahead with possible fundamental changes to the pensions taxation system. At our recent DC conference we explored the practical things we could all do now to lead the UK workforce to a sound and secure retirement future. We also wanted to think about how the potential for further changes to the system could impact on that future. Optimism is the obstinacy of maintaining that everything is best when it is worst. Voltaire, Candide

3 Pinsent Masons DC Conference 2015 Contributions Given the impact of automatic enrolment on pension saving amongst the lowest earners, it was not surprising that the government s latest figures showed average pension contributions falling. Plans are in place (albeit now delayed) to increase the minimum that automatically enrolled individuals and their employers must contribute to their pensions, from 2% now to 8% by April But increasing contributions by too much, too quickly, could increase opt-outs among members and lead to protest by employers. The quote from HG Wells implies that education is the answer to the problem of individuals not contributing enough and so it may be. But how much education, and is it realistic to think that we can change understanding of the link between contributions and good pension outcomes to a degree where it will really make a difference? Perhaps we must accept that helping employees to work things out for themselves is not yet viable and that we should be much more directional in the way in which we design workplace pensions and retirement options, at least in the short to medium term. Understanding the requirements of your specific workforce is key: for some with very low incomes, the level of the state pension and interaction with state benefits can mean that contributing more, even if affordable, does not make financial sense. Lesley Williams, Whitbread David Astley, Trinity Mirror Stephen Nichols, AHC Carolyn Saunders Partner National Head of Pensions T: +44 (0) M: +44(0) E: carolyn.saunders@pinsentmasons.com Human history becomes more and more a race between education and catastrophe. HG Wells, The Outline of History 1

4 Driving Member Outcomes Automatic enrolment has lowered the average age of pension scheme members. This new generation of savers, who have grown up with smartphones, apps and internet technology, will expect to be able to manage their financial affairs online. Easy to use, innovative tools developed by providers which provide online access will also have the bonus of increasing engagement and allowing individuals to take more control of their retirement saving. Engaging with our pension savings should be no different than the way in which we engage with our money generally, and IT solutions will provide a means by which members can take ownership of their savings. Lee Hollingworth, Hymans Robertson Tom Barton Partner Pensions T: +44 (0) M: +44(0) E: tom.barton@pinsentmasons.com It stands to reason that he who would cure a moral ailment must be practically acquainted with it in all its bearings Samuel Butler, Erehwon 2

5 Pinsent Masons DC Conference 2015 Investments This time last year trustees and employers were rushing to update their default fund design in preparation for freedom and choice. A year on, what are the longer term pointers on investment defaults? Do some schemes already feel the choices they made before April will need refining? Crucially, schemes should focus on the changes that are most important for their membership profile. In many schemes the members in their 50s and 60s have small pots which they are likely to take as cash. So if your scheme has three strands to its default fund (targeted at annuity, drawdown and cash) there s probably room to refine the drawdown option over time, because relatively few members will be using it right now. In the same way, for scheme members in their 20s there is arguably little to be gained by explaining the way the lifestyle strategies work as you get older, because they are years away from making these decisions. So, some reassurance for employers and trustees who are trying to break fund design into manageable steps. Looking ahead to future developments: Understanding what your members are targeting is key to designing a default that works well for them. For example, this can be done using tools to assess their target replacement ratios and project future fund values across the membership When setting a new strategy, trustees can measure the upside of the strategy against the value at risk for the member. This enables you to get the balance right by increasing the upside while keeping the risk at a proportionate level There will continue to be innovations in fund design, for example funds that are structured to limit volatility. Trustees and employers should make sure they keep these market changes on their radar. Sophia Singleton, Aon Hewitt Mark Baker Legal Director Pensions T: +44 (0) E: mark.baker@pinsentmasons.com What really matters is what you do with what you have. Samuel Butler, Erehwon 3

6 Charges & Governance Nearly 10 years ago, defined benefit (DB) schemes were required to conduct mandatory employer covenant assessments for the first time. In the early days, there was a great deal of variety in what these assessments looked like; many trustees viewed them as a mere compliance issue a box to tick. Over time, the value of the exercise has become clear and the covenant assessment now provides a lot of the context for some of the most important decisions DB trustees have to make. There s a lesson there for those involved in DC governance, who are now required to conduct regular value for money (VfM) assessments. Under the DC model of retirement saving, where the outcome risk falls on the member, isn t it vitally important that someone is responsible for checking that the scheme represents good value? Like the covenant assessment in DB, the VfM assessment in DC will provide a lot of the context for big decisions in relation to investment, third party supply, communications and many other important governance and administration requirements. Are we on the road to utopia? Well, we re headed in the right direction. But, to take a dystopian stand for a moment, the DB covenant assessment requirement is nearly a decade old and the regulatory material on how it all works keeps coming through. This means that we can expect VfM to develop over time but the pensions industry should aim to make sure that it gets it right as early as possible, to make sure that VfM assessments actually deliver something for members rather than just take the form of a box-ticking exercise. Andy Cheseldine, LCP Tom Barton Partner Pensions T: +44 (0) M: +44(0) E: tom.barton@pinsentmasons.com Sanity is not a statistic. George Orwell,

7 Pinsent Masons DC Conference 2015 Retirement Choice Through workplace schemes, individuals are taken through a passive journey of enrolment, contribution collection, default assessment and, in the run up to retirement, default disinvestment. It s all done for you. However, at retirement, you are transported to the wild west, where cash-out, stay invested, annuitise or a combination; when to annuitise; basic asset allocation in drawdown, sustainable withdrawal rate; managing sequencing risk; and inheritance planning are complex concepts and decisions must be faced on your own, with no training. Much of the squeezed middle, with pension pots of between 30,000 and 200,000, cannot afford financial advice. Some help is at hand from providers, which have the tools and science to guide people through these decisions even taking into account the individual s wider circumstances. However, providers are constrained from offering these tools as to do so risks being found to have provided regulated advice, with all the risk and regulatory costs that comes with it. The most important change regulators can make right now is to sort out the advice gap. This could take the form of a combination of: creating a regulatory risk-lite form of advice, with lower fact find requirements and limited culpability; providers deciding to proceed with offering the tools anyway; offering such tools through the workplace with safe harbour protection for the employer; and advancements in robo-advice and consequent lower costs. A link somehow needs to be forged between the workplace, where accumulation is managed for the individual; and retirement, the most complicated part of the pensions life cycle, where currently individuals are cut loose to fend for themselves. John Lawson, Aviva Abraham Okusanya, Finalytiq Simon Laight Partner Pensions T: +44 (0) M: +44(0) E: simon.laight@pinsentmasons.com Those two, in paradise, were given a choice: happiness without freedom, or freedom without happiness. There was no third alternative. Yevgeny Zamyatin, We 5

8 Blue Sky DC pensions are headed in the right direction. Membership is broadly mandatory, investments are under more scrutiny than ever, governance standards are going up and member-borne charges are coming down. This bodes well for our savings future. But not all is well Low earners, those in multiple low-earning employments and the self-employed have not yet felt the benefits of automatic enrolment. To avoid a two-tier society, we need to bring the benefits of retirement saving to a wider audience. Thinking more broadly, the pensions and savings crisis dwarfs the more high-profile problems faced by the UK. We need to strengthen the incentive to save but we also need to help people to understand that they really can save. Financial education is the solution. There remains a great deal of work to do before we can be confident of averting a dystopian future. There is a role for everyone in this. Industry is in the privileged position of being able to help both savers and the policy makers to head in the right direction. Adrian Boulding, TISA Robert Gardner, Redington I enjoy talking to you. Your mind appeals to me. It resembles my own mind except that you happen to be insane. George Orwell,

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