New era, new expectations
A speech given by Emma Douglas at the Sackers Pensions Conference
About twenty five years ago I found myself working at a large investment bank.
I was part of team developing a product that was then fairly obscure: defined contribution pensions.
Companies were just starting to set up DC schemes for new joiners, but the overall contributions were tiny in relation to the assets in DB so the department was considered very unimportant at the bank, situated between the stationery cupboard and the lost property office.
I became used to presenting to trustees, right at the end of their four-hour DB meetings.
I’d be lucky to get ten minutes on DC while everyone was packing their bags and checking the train times.
I also did a lot of presentations to members.
Generally, they weren’t interested in the asset allocation or investment strategy of the default fund but they did want to know what kind of retirement they would have. When they might be able to retire. And what they could expect to live on.
That taught me an important lesson early in my career. People don't spend time thinking about how a pension is constructed. They think about the life their pension can support. Most people want a sustainable income in retirement. Financial security when they can no longer work. An income that gives them options in later life.
Everything else, including regulation, should exist to support that goal.
We now have a chance to shape the pensions system
Today, twenty five or so years on, DC is the primary way private sector workers will support themselves in later life.
We now have more than 24 million members saving into a workplace pension.
And UK pensions as a whole is responsible for £3 trillion (in 2023).
But in many ways, we are still at the early stages of shaping it and answering those basic questions.
Over the next fifty years, the number of people aged 75 or over is projected to double.
In the coming decades, millions more people will rely on the pensions system.
And the decisions we all take – government, TPR, the FCA, and industry – about how to implement the changes from the Pension Schemes Act will shape norms for a new era of pensions.
Not least with the Second Pensions Commission soon to bring forward new recommendations on adequacy and participation, and the launch of a new strategy for the Pensions Regulator, which will take us to 2031.
So today I want to put the conversations and debates we will be having today in context by saying a few words about our regulatory expectations on value for money and default pensions, and ending with some thoughts on the direction of travel for the system as a whole.
Where we are now: TPR vision and strategic objectives
At TPR, our starting point is that today the pension system is unfinished business.
We have:
- almost 15 million people under saving , and 43% of working-age people still not on track to a secure retirement
- too many not getting value for money
- too many not being supported to make informed choices at retirement
- too many unable to see reliable and easily comparable data about what they have
This is the context for the reforms which, taken together, are the start of a new chapter for workplace pensions.
As a regulator, our north star is a pensions system that provides a sustainable income in retirement.
That means savings are secure and delivered as promised.
It means better performing schemes, more transparent information, and clear default options at retirement.
It means members who benefit from world-class investments and services.
And it means a system that not only delivers security and value for all, but also contributes to growth in a way that serves members' interests.
And as with any long term public policy change, there are headwinds.
Cost of living pressures make saving more difficult than it was in a previous generation.
Home ownership has fallen since the early 2000s.
And we have a generation who missed out on defined benefit pensions and have only been automatically enrolled into a defined contribution pension much later in life than many of their parents.
But there are tailwinds too.
The good news is that we have a broad consensus amongst a coalition of policymakers, government, and industry about the direction of travel in DC, and we don’t take that for granted.
A key part of my role as Chair of TPR is to provide clarity on what that means as part of our ‘no surprises’ approach.
TPR expectations: Value for money
What constitutes value for money has been an ongoing debate for much of my time in DC pensions.
We know that it is contributions that make the most difference to member outcomes – how much you pay in does matter – followed closely by performance net of fees.
However, in a world where past performance is not necessarily a guide to the future and where you won’t fully know whether you’ve been investing in a good default fund until you start to take the money, then it’s understandable that many of the decisions in the commercial DC market are taken on fees as fees are a known factor – and it is true that high fees can erode value over time.
However, my experience was that providers generally priced within one to five basis points of each other, so the danger was that the focus was on the pennies of difference in charges rather than the many pounds difference in overall returns.
The value for money framework puts performance net of fees back at the heart of the conversation and includes forward looking metrics, so we are not entirely focused on the rear view mirror.
If the framework leads to a 1% improvement in investment returns for the average saver who started saving at 22, it could lead to a 30% bigger pot.
Or to use some of the current performance data on defaults; over a five year period, a £10k pot could end up worth 46% more in a high-performing scheme than a poorly-performing one.
That's a huge difference. While we were looking after the pennies the pounds weren’t necessarily looking after themselves.
So the value for money framework will be one of the most important levers to affect outcomes. And at TPR, working with FCA, we'll be setting the homework, asking trustees and IGCs to rate themselves but we will be checking their answers and we'll be consulting on a code of practice as to how we expect the assessments to be conducted.
TPR expectations: Default pensions
To make sure more people have a sustainable income when they retire, we also need to make sure the system sets the right defaults.
After all, most members don’t make an active choice; they follow the path set for them.
I’ve often talked about the ‘triple defaulters’ in DC – the members in the default investment option, at the default contribution rate, with the default retirement age.
I've been one of these triple defaulters in every DC scheme I’ve been in! I did switch out of the default fund once, but it was a disaster, so never again!
About 75% of DC pension holders aged over 45 don’t know they have to make a choice on how to take their money at retirement, and face the risk of running out of money in later life.
Only one in four people have a plan for how they will access their funds.
A recent Hymans Robertson survey found that 75% of the over 55s would like their income to start automatically at retirement.
Our strategic objective – more people on track for a secure retirement – means well-structured default pensions that provide better value for members.
It also means trustees asking the right questions.
Housing, health, family circumstances and other sources of wealth can all influence which default pensions are likely to work best for different groups of members.
Understanding these factors can help trustees design default pensions that are better suited to the needs of their members.
As people age they tend to accumulate both assets and differences so we don’t expect one size to fit all in terms of defaults. Getting members into the right cohort so that they are offered a suitable default pension is a joint effort between the trustee who is designing the defaults and the member who has the information about their own circumstances – Trustees are generally great people but they are not omniscient – if members answer some key questions it will enable better outcomes.
As we enter this new chapter for pensions, the benefits of default pensions – a glidepath that is right for the member – should be available for millions more.
And we will continue to work with DWP and FCA on the communications that will support this.
Looking ahead
To finish, I would like to say a little about what we expect the UK workplace pensions system to look like in ten years’ time. Once the reform agenda has played out.
Most importantly, we can expect more people on track for a secure retirement – for the system to deliver more value for members and put more money in their pocket at retirement.
Well-structured default pensions will offer greater certainty and security.
There will be greater transparency and trust for members, thanks in part to dashboards and better communications.
Defined contribution pensions will be the dominant form of workplace saving.
The value for money framework will be a familiar source of comparative data for employers, and will likely be evolving to meet the needs of a changing market.
In ten years’ time we can expect the workplace pensions market to be much more consolidated – with fewer, larger well-run schemes, offering broader investment opportunities.
With the Treasury’s pensions investment review setting the standard for the minimum size of DC scheme’s default funds to be £25 billion by 2030, this consolidation has begun.
Already, nine out of ten trust-based DC pots are already in master trusts, which hold 92% of memberships.
In ten years’ time, these megafunds will have the scale, governance, investment expertise and operational resilience to invest more effectively and deliver better long-term value.
We also expect them to have the investment governance and risk management systems in place to be able to invest in more productive assets and support UK growth where it is in members’ interests.
And last month we published our report into schemes' appetite and expertise with private market investments, which found there were still a number of hurdles holding schemes back from considering the full range of investment options across the private market landscape.
Technology will underpin many of the market developments. Better data will feed into the dashboard, and the responsible use of artificial intelligence will have the potential to improve decision-making, member engagement and regulatory oversight.
Of course, artificial intelligence brings risks too; so they will have to be matched by strong governance, accountability, cybersecurity and vigilance to make sure decisions are being made with the best interests of members at heart.
TPR welcomes all innovation that serves the interests of members. If you are considering new ideas or uses of technologies, our message is: please talk to us at an early stage via our innovation service.
Conclusion
When I think about the people I gave presentations to years ago, who told me about their hopes for life in retirement.
Looking back, they were part of a generational change – automatic enrolment – which has increased incomes for millions of people in retirement.
Policy action has made a difference, and can do again.
Here is a chance to do something that will make a real difference for a new generation.
Our task now is to get better outcomes for everyone who participates – and the prize will be millions more people having a happy retirement, which as we know from google images, should be spent on a beach, in the sunshine, with a significant other, possibly doing yoga, or punching the air with joy for extra bonus points...
...and of course wearing white linen, the uniform of successful retirees the world over.
Thank you.
