UK. 2023’s pension proposals need political consensus
At a technical level, not an awful lot changed in the world of pensions in 2023, but a huge number of changes have been proposed – and some of those are seismic.
Perhaps the most significant of those in the first half of the year was the announcement by chancellor Jeremy Hunt that the lifetime allowance would be scrapped, followed within minutes by the pledge from the opposition that it would be reinstated should they gain power.
As it was, the charge was set to zero and it will now be scrapped in 2024, although the complexity of its legacy really should not be underestimated.
If it was intended to be a simplification, the transitional arrangements themselves will likely undermine that ambition – as is so often the case with pensions.
In practice, the LTA only affects a very small percentage of pension savers, so it is largely confined to advisers who deal with clients who are fortunate enough to be in its scope.
Time will tell whether the opposition becomes the government, and then if that happens, whether the government sees it as a priority to overturn it.
But the second half of 2023 was arguably more significant in pensions world.
Despite several years of discussion about ‘productive finance’ and how pensions could invest greater amounts in illiquid assets, it was not until the Mansion House speech in July that this ambition started to acquire national interest.
The chancellor set out a much clearer link between the role of long-term investment in pensions and the need for long-term capital to help fund growth in the economy.
Specifically, the role of pensions money in unlisted companies, the tech and life science sectors that the UK has been superb at incubating, but less good at retaining.
Further details were announced in the Autumn Statement, with various initiatives launched to encourage investment in these and other related areas.
Provided we retain a clear focus on the need to ensure such investments work first and foremost for savers – whose money it is – then this is a welcome step in the right direction.
And it has certainly elevated pensions in political terms.
Alongside this drive for increasing productive investment, there have been several other announcements on pensions in recent months.
They are not unrelated, in that most of them are themed around consolidation of pensions, and the assumption is that consolidation drives greater scale, which in turn provides more scope for productive investment. There are other reasons, but this appears to be the central premise.
Collective defined contribution schemes is one such idea, whereby there would be greater pooling of investments between members and, under some models, income in retirement would be smoothed between different generations, removing some of the volatility experienced.
The idea certainly has merit, but in practice offers neither the guarantee of defined benefit pensions, nor the flexibility of defined contribution pensions. It may be challenging to develop this concept in a post-pension-freedoms world.
The government has also confirmed that it intends to proceed with the multiple default consolidator model, whereby existing small pension pots (probably those under £1,000), will be swept up between a small number of large pension schemes.
Exactly how this will work is still to be determined, but it seems likely it will depend upon much of the architecture planned for the pensions dashboard.
The very fact that the dashboard development is running behind schedule perhaps points to the complexity of this build, so it would be sensible to ensure the two things are considered in unison.
The complementary piece to this is the proposal that employees will be able to choose their own pension scheme – the so-called ‘pot for life’ idea.
While this sounds popular, it is not entirely clear what the benefits are for anyone other than those who are already savvy enough to make their own pension investment choices and feel they need more.
And it is also unclear why the more intuitive ‘pot follows member’ proposal was dropped, but the consultation is deemed to be a genuinely open one, so perhaps we have not seen the last of that yet.
It remains to be seen whether all of this will drive greater investment from pensions in the UK economy, and of course better outcomes for members.
In the absence of a pensions bill, it seems likely that 2024 will be a year of debate rather than implementation.
Arguably, the most successful policy intervention in the world of pensions was auto-enrolment. This thrived on political consensus. Whatever we do next, let’s hope it benefits from that same hallmark.
Jamie Jenkins is director of policy at Royal London
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