With the UK now firmly out of the European Union, what does Brexit mean from a pensions perspective? It is likely in the short term that the UK’s departure will not have a significant impact on the legislation and rules governing pension schemes. However, any long-term impact on the legal framework for pensions will largely depend on how policy in this area develops and whether there are any implications for pensions under the trade deal.
Pension schemes bill
Anticipated to come into law in the early spring, significant changes in the bill are likely to be around The Pensions Regulator's ‘moral hazard’ powers that relate to companies and their financial dealings.
There will also be a new pension dashboard that will offer users an online system to view information about their pension on one platform, as well as any collective defined contribution schemes, which are risk-sharing initiatives widely used in other countries, including Canada and Holland.
Under these schemes, employers and employees contribute to a collective fund from which the employee (the scheme member) would draw an income at retirement. The inherent financial risks would not lie entirely with the members (employees), but would be shared between them collectively. This is in contrast to defined benefit schemes, where the employer bears the funding risks, and defined contribution schemes, where the risks (associated with investment returns and decisions made at retirement) fall on the members.
Environmental, social and governance
Environmental, social and governance (ESG) is increasingly becoming a buzzword in pensions as the coronavirus pandemic has thrown an even greater spotlight on to such investments. Regulations have required trustees of defined benefit occupational pension schemes to update their statement of investment principles (SIP) to take account of financial material considerations, stewardship and any policy on non-financial matters. Trustees of defined contribution occupational schemes must also publish their SIP.
The feeling in the industry is that pension schemes, with their huge underlying funds, could be a significant driver of tackling climate change and all that is green investment and ESG. We believe employees will start to engage with this and, for those with contract-based schemes, many may actively look into the default fund option and compare this with exposure to different greener funds.
Large defined contribution providers (in particular for auto-enrolment schemes), such as The People's Pension, have expressly declared that their investment policies will follow ethical principles, with a push to ‘screen out’ investment companies that “do not meet certain minimum ethical criteria”.
The auto-enrolment regime requires a minimum 8 per cent contribution on a range of earnings, with the employer paying at least 3 per cent and the employee making up the difference. For the 2020-21 tax year, this range is between £6,240 and £50,000 a year. The government reviews these figures each year and we expect a notification soon for the next tax year of 2021-22.
The government review of auto-enrolment in December 2017 set out reforms to increase the amount being saved (in particular, by removing the lower earnings limit). A ministerial announcement followed, confirming the government's ambition to implement this change by the mid-2020s. Given that the mid-2020s are not far away, a current work and pensions inquiry will look at what should be done now and we shall report any developments.
Master trusts and consolidators
Continuing the trend of recent years, we predict that the prevalence of master trusts will continue to increase, with more employers seeking to modernise their defined contribution pension provision and outsource delivery and governance to reduce the costs and risks. Master trusts are a form of occupational pension scheme, set up under a trust as their name suggests. However, they are available for non-associated employers that may join to take advantage of economies of scale for administration, as well as wider options and reach for investments.
As the continuing Covid crisis prompts employers to look more closely at efficiency savings, we think there is likely to be increased streamlining of trust-based processes. There are many factors for employers to consider when approaching this issue, including investment options and pension flexibility offered; quality of governance; quality of communication; administration provision and costs; and charges for members.
Continuing the theme of consolidating pension provision, possibly hastened by the pandemic, we are now starting to see the rise of ‘pension superfunds’ in the defined benefit field. These are commercially run entities capable of pooling defined benefit schemes from different employers and running them as one large fund. With UK regulators having given the green light for the creation of these consolidators, we expect that 2021 will see interesting deals and developments in this area.
Verity Cruse is a senior associate at Dentons